Does a judicial foreclosure action constitute “debt collection activity” under the Fair Debt Collection Practices Act (“FDCPA”)? The answer depends on whether the creditor attempts to recover the unpaid mortgage balance or just the property, according to the U.S. Court of Appeals for the Ninth Circuit in Barnes v. Routh Crabtree Olson, P.C.
Due to a mortgage borrower’s payment default, Federal National Mortgage Association (“Fannie Mae”) filed a judicial foreclosure action in Oregon state court, seeking to force a sheriff’s sale of the property. The borrower then filed an action in federal court, claiming that an assortment of alleged misrepresentations in the foreclosure case constituted violations of the FDCPA. The federal court dismissed the borrower’s complaint for failure to state a claim based on its determination that a judicial foreclosure does not constitute “debt collection activity” under the FDCPA.
In affirming the dismissal, the Ninth Circuit focused on the relief sought via the foreclosure action: “We do not agree that, as a categorical matter, a person who initiates a judicial foreclosure proceeding is attempting to collect a debt. Our cases make clear that a plaintiff must identify something beyond the mere enforcement of a security interest to establish that the defendants are acting as debt collectors subject to the FDCPA’s broad code of conduct. That additional debt-collection ingredient can be present for judicial foreclosure, provided that state law permits a creditor to recover money from the debtor after foreclosure if the property sells for less than the debt. That remedy, called a deficiency judgment, is often available in judicial foreclosure proceedings . . . But unless a deficiency judgment is on the table in the proceeding, a person judicially enforcing a deed of trust is seeking only the return or sale of the security, not to collect a debt.”
Oregon law contains an anti-deficiency provision that extinguishes the borrower’s personal liability upon judicial foreclosure of the security instrument. Thus, because a deficiency judgment was impossible in the foreclosure action, Fannie Mae necessarily was not seeking to collect a debt. Therefore, its filing of the judicial foreclosure action did not constitute “debt collection activity” under the FDPCA.