4th Cir. Holds Express Demand For Payment Not Required to State FDCPA Claim Against Foreclosure Firm

In McCray v. Federal Home Loan Mortgage Corp., the U.S. Court of Appeals for the Fourth Circuit determined that a borrower stated a claim under the Fair Debt Collection Practices Act, 15 U.S.C. §1692 et seq., (“FDCPA”) against a foreclosure law firm, noting that the definition of a “debt collector” does not require an “express demand for payment.” Rather, relying on its prior holding inWilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 374-76 (2006), the Court determined that Borrower sufficiently alleged that a law firm and substitute trustees were engaged in conduct regulated by the FDCPA, because their foreclosure activities were “in connection with” the collection of a debt or “an attempt” to collect a debt. 

The Court also determined inapplicable the FDCPA’s exclusion from the definition of a “debt collector” for  collection activities “incidental to a bona fide fiduciary obligation” noting that foreclosure is “central to,” not incidental, to the trustees’ obligation under the deed of trust.   

A copy of the opinion can be found here.

Background

Shortly after foreclosure proceedings commenced against her Maryland home, Borrower brought an action for damages under the FDCPA in federal court against the law firm (“Law Firm”), and attorneys within the firm who were appointed as substitute trustees under the deed of trust securing her mortgage loan (collectively “Substitute Trustees”).   Borrower also sued the owner of the loan and her loan servicer, claiming, among other things, that they violated the federal Truth-in-Lending Act (“TILA), 15 U.S.C. § 1601, et seq.  As to all defendants, Borrower alleged that defendants failed to provide her with certain notices and requested information purportedly required by these statutes.  Regarding the owner of the loan, she claimed that it failed to provide her notice when it purchased the loan, as required under TILA, 15 U.S.C. § 1641(g).  As to her loan servicer, she asserted that an assignment of her deed of trust also required it to afford her notice under TILA.

The district court dismissed the FDCPA claims against Law Firm and the Substitute Trustees, distinguishing their role in initiating foreclosure proceedings, from a role focused on collecting the debt.  The district court noted that, even where a communication included a provision indicating that it was “an attempt to collect a debt,” it does not qualify as an attempt to collect a debt under Blagogee v. Equity Trustees, LLC, 2010 Wl 2933962 at *5-6, “unless there is an express demand for payment and other ‘specific information about the debt, including the amount of the debt, the creditor to the debt is owned, the procedure for validating the debt, and to whom the debt should be paid.” Id.  Applying the Blagogee factors, the district court concluded that Borrower had failed to “allege any facts indicating that [Law Firm] or the [Substitute Trustees] were engaged in any attempt to collect a debt.”  Op. at 7.

The district court also either dismissed or granted summary judgment as to Borrower’s remaining claims against the lender and loan servicer.  Borrower thereafter appealed.

Discussion

Reversing the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees, the Fourth Circuit concluded that Borrower had adequately alleged that they were debt collectors, and that their actions constituted debt collection activity regulated by the FDCPA.  Op. at 16.

Citing the definition of a “debt collector” under Section 1692a(6), the Court determined that such definition does not include any requirement that a debt collector be engaged in an activity by which it makes a “demand for payment.”  Op. at 11.  Rather, to be actionable, a debt collector need only have used a prohibited practice “in connection with” the collection of a debt or in an “attempt” to collect a debt.” Op. at 12 (citing Powell v. Palisades Acquisition XVI, LLC, 782 F. 3d 119, 123 (4th Cir. 2014)).

The Court found dispositive its prior holding in Wilson, in which it determined that a law firm that sent the borrower notice that it was preparing foreclosure papers, and who later initiated foreclosure proceedings, could be a debt collector under the meaning of the FDCPA because those foreclosure actions constitute attempts to collect a debt.

Thus, here, the Court concluded that “[i]t is clear from the complaint in this case that the whole reason that the [Law Firm] and its members were retained by [the creditor] was to attempt, through the process of foreclosure to collect on the $66,500 loan in default.”  Op. at 14.  The Court observed that documents furnished by the Law Firm and/or Substitute Trustees to Borrower indicated that they were pursuing foreclosure because she missed one or more payments; indicated that if she did not bring the loan current, such as by repayment, a foreclosure action may be filed in court; and provided Borrower with the nature of the default and the amount necessary to cure.  “Thus, all of the defendants’ activities were taken in connection with the collection of a debt or an attempt to collect a debt.” Op. at 15 (Emphasis in original).

The Fourth Circuit also found inapplicable the fiduciary exclusion to the definition of debt collector under Section 1692a(6)(F)(i) for collections activities “incidental to a bona fide fiduciary obligation.”  Op. at 15-16.  The Court noted that foreclosure was “central” – not incidental – to the trustee’s obligation under the deed of trust.

As to the TILA claim regarding allegations of failure to provide notice of the transfer of ownership of the loan under 15 U.S.C. § 1641(g), the Court noted that Borrower failed to challenge the trial court’s determination that she was required to allege that the loan transferred after 2009, when the subject provision was enacted.  Further, the Court also determined that, because Borrower conceded that she had notice of the transfer to the owner of the loan more than one-year prior to filing the lawsuit, the claim was barred by TILA’s one-year statute of limitations. 

The Court also affirmed the district court’s dismissal of the TILA claim against her loan servicer, determining that allegations of assignment of the beneficial interest under a deed of trust (as opposed to legal title) did not implicate the statute.  In addition to failing to challenge such ruling, the Court observed that her allegations were inconsistent with her claims against the loan owner.

Consequently, the Court reversed only the dismissal of the FDCPA claims against the Law Firm and Substitute Trustees and remanded the case for further proceedings, expressly stating that its conclusion “is not to be construed to indicate, one way or the other, whether they, as debt collectors, violated the FDCPA.”  Op. at 20.

Va. Supreme Ct. Holds 3rd-Party Has Standing to Sue Attorney For Malpractice

In Thorsen v. Richmond Society for the Prevention of Cruelty to Animals, the Supreme Court of Virginia held that a named contingent remainder beneficiary to a will has standing to sue an attorney for legal malpractice as an intended third-party beneficiary of the attorney-client relationship created by the contract for legal services between the decedent and the attorney.  Specifically, the Court concluded that a contingent remainder beneficiary is an intended beneficiary of the attorney-client relationship between the decedent and the attorney drafting the will.   Therefore, the third-party could sue the attorney who drafted a will for legal malpractice arising from a scrivener error that resulted in a smaller bequest, if it was a “clearly and definitely intended beneficiary” of the decedent’s oral agreement with the attorney for legal services.  According to the Court, for the third-party to have standing, “one of the primary purposes for the establishment of the attorney-client relationship [must be] to benefit the [third-party]. . . .”  Op. at 12.  Moreover, the Court held that the statute of limitations did not begin to run until the decedent died.

A copy of the opinion can be found here.

Background

In 2003, Decedent hired Attorney to prepare her will.  Decedent instructed that, upon her death, she wanted to convey all of her property to her mother or, if her mother predeceased her, to the Richmond Society for the Prevention of Cruelty to Animals (“Third-Party”) as contingent and residuary beneficiary of the will.

Decedent died five years after Attorney prepared the will, whereupon Attorney notified Third-Party that it was the sole beneficiary of Decedent’s estate.   Due to a drafting error, the operative language of the will limited the bequest to Third-Party to only Decedent’s tangible property, rather than the entirety of the estate, which included real property. 

Third-Party filed a lawsuit to correct the “scrivener’s error,” based on Decedent’s clear original intent.  The trial court rejected the Third-Party’s claim, holding that the will was unambiguous, and determined that the bequest to Third-Party was limited to only tangible property. 

Thereafter, Third-Party sued Attorney for legal malpractice, asserting that Attorney and his law firm were liable for breach of the legal services agreement, and claimed to be an intended third-party beneficiary of such agreement.   In defense, Attorney filed a demurrer (motion to dismiss), asserting, among other things, that Third-Party was not an intended beneficiary of the legal services agreement, and further plead that a such claim was barred by a three-year statute of limitation applicable to oral agreements, which according to Attorney, began to run upon accrual of the breach of contract cause of action (i.e. when the breach occurred and when the erroneous will was drafted and executed).

The trial court rejected such defenses, and ultimately, judgment was granted in favor of Third-Party.  Attorney thereafter noted this appeal.

Discussion

The Supreme Court first determined that under the common law, a third-party could sue upon an oral contract, and that certain statutes authorizing unnamed persons to sue on an instrument, i.e., Va. Code § 55-22, did not alter the common law.  Op. at 4-5. 

The Court next considered whether Third-Party had standing as a third-party beneficiary in a legal malpractice action under the facts of this case.  The Court noted that in Copenhaver v. Rogers, 238 Va. 361, 384 S.E.2d 593 (1989), it previously determined that “[i]n order to proceed on the third-party beneficiary contract theory, the party claiming the benefit must show that the parties to a contract clearly and definitely intended to confer a benefit upon him.”  Op. at 7-8.  The Court emphasized that the third party must be an intended beneficiary of the contract between the attorney and client, not merely an incidental beneficiary of the estate.  Op. at 8-9.  Accordingly, the Court stated that to have standing to sue, a nonparty to the contract for legal services must allege facts sufficient to support the conclusion that it was a “clearly and definitely intended beneficiary” of the contract for legal services.   Op. at 12. 

Under the facts of this case, the Court concluded, the Third-Party sufficiently alleged that it was a “clearly and definitely intended beneficiary” of the attorney-client contract between the Decedent and Attorney.  Notably, the Court observed that the Decedent wanted to confer a benefit upon the Third-Party upon her death, and sought Attorney’s professional services to do so.  Op. at 13.  When Attorney “accepted the contract to prepare Decedent’s will as she specified, the [Third-Party] became not only the intended beneficiary of Decedent’s will but also the intended beneficiary of her contract of employment with [Attorney].”  Op. at 13.  Therefore, the Court concluded that the Third-Party had standing to allege a cause of action for breach of contract/professional negligence as a third-party beneficiary of the contract between the testator and her attorney.  Op. at 14.

Attorney argued that Third-Party, as a contingent, residuary beneficiary, as a matter of law could not qualify as a “clearly and definitely intended” beneficiary of the will because its interest under the will was contingent, as a residuary beneficiary.  Op. at 14.  The Court rejected such proposition, explaining that whether a residuary beneficiary is a third-party beneficiary of the contract for legal services is a fact intensive inquiry.  Op. at 14-17.  The Court noted that depending on the facts of a particularly case, both contingent and residual beneficiaries may be considered third-party beneficiaries to an attorney-client contract between the testator and drafting attorney.  Op. at 14-17.

Attorney also argued that Third-Party’s claim was barred by the three-year statute of limitations under Virginia Code § 8.01-246 for breach of an oral contract.  Op. at 17.   Notably, Attorney argued that the three-year limitations period had expired because it began to run at the time of breach (i.e. when the Attorney drafted the will in 2003).  Op. at 18.  The Court rejected this argument, determining that the three-year period “cannot begin to run as to the testamentary beneficiary until a cause of action accrues, after the death of the testator.”  Op. at 19.  Acknowledging that under Virginia Code § 8.01-230, a right of action for breach of contract accrues when the breach of contract occurs and not when the resulting damage is discovered, the Court held that for a cause of action to accrue for breach of contract, “some injury or damage, however, slight, is essential to a cause of action.”   Op. at 18.  In the case of a testamentary beneficiary, the Court concluded, no injury, however slight, can be sustained prior to the testator’s death.  Op. at 20.  “This is when the attorney’s negligence becomes irremediable and the impact of the injury occurs, . . ;  before a testator’s death, the potential beneficiaries possess no recognized legal interest in the estate.”  Id. (citations omitted). 

Finally, the Court determined that the evidence as to the Decedent’s and Attorney’s intent sufficient to uphold the judgment in favor of Third-Party.   The evidence demonstrated that Decedent specifically intended to benefit the Third-Party when she hired Attorney, and that by agreeing to draft a will for Decedent, Attorney impliedly agreed to comply with her specific directives.  Op. at 23-24.

Accordingly, the Court affirmed the judgment in favor of Third-Party.  Op. at 25.

Dissent

One Justice dissented, concluding that Third-Party lacked standing to sue Attorney because “the common law has long provided that [a legal malpractice action] requires the existence of an attorney-client relationship as a threshold requirement.”  Op. at 25-26.  Criticizing the opinion, the Dissent warned that “[f]rom this date forward, attorneys will owe a legal duty to nonclients by virtue of legal services agreements with their clients whenever ‘a lawyer knows that a client intends as one of the primary objectives of the representation that the lawyer’s services benefit the nonclient.’”  Op. at 32.

The Dissent noted that the determination of whether to abolish the common law strict privity requirement is a policy decision that should be made by the General Assembly, and not the Court.  .  Op. at 25.  The Dissent cited several policy concerns in favor of the strict privity rule, particularly the “preservation of the sanctity of the attorney-client relationship,” protection against “the potential for conflicting duties owed to clients and third parties by the attorney,” and concerns over uncertain or unlimited attorney liability.  Op. at 28-30.

4th Cir. Holds No FDCPA Violation For Filing Proof of Claim on Time-Barred Debt

In Dubois v. Atlas Acquisitions, LLC, a majority panel of the Fourth Circuit recently held that, while the filing of a proof of claim in a borrower’s bankruptcy proceeding constitutes “debt collection”, filing a proof of claim in a Chapter 13 bankruptcy based upon a time-barred debt does not violate the FDCPA or state collection laws so long as the statute of limitations itself does not extinguish the debt.  The Court noted that under Maryland law, the statute of limitations does not extinguish the debt itself, but merely bars the remedy. 

Consequently, the Fourth Circuit rejected the Eleventh Circuit’s holding in Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1259-60 & n.6 (11th Cir. 2014), noting that the “[t]he Eleventh Circuit in Crawford is the only court of appeals to hold that filing a proof of claim on a time-barred debt in a Chapter 13 proceeding violates the FDCPA.”

A copy of the opinion can be found here. 

 Discussion

At the outset, the Court determined that filing a proof of claim is debt collection activity subject to the FDCPA.  The Court explained that “[d]etermining whether a communication constitutes an attempt to collect a debt is a ‘commonsense inquiry’ that evaluates the ‘nature of the parties’ relationship,’ the ‘[objective] purpose and context of the communication[],’ and whether the communication includes a demand for payment.”  Op. at 9 (citations omitted).

In the bankruptcy context, the “only relationship between [the parties] [is] that of a debtor and debt collector. . . . [and] the ‘animating purpose’ in filing a proof of claim is to obtain payment by sharing in the distribution of the debtor’s bankruptcy estate.” Op. at 9-10.  Consequently, “[p]recedent and common sense dictate that filing a proof of claim is an attempt to collect a debt.  The absence of an explicit demand for payment does not alter that conclusion, . . . nor does the fact that the bankruptcy court may ultimately disallow the claim.” Op. at 10.

Nevertheless, in an explicit departure from the Eleventh Circuit’s holding in Crawford, the Court determined that filing a proof of claim based on a debt that is beyond the applicable statute of limitations does not violate the FDCPA. 

To that end, the Court considered whether a time-barred debt fell within the definition of a claim in the bankruptcy context.   The Court observed that “while the Bankruptcy Code provides that time-barred debts are to be disallowed, see, e.g., 11 U.S.C § 558, the Code nowhere suggests that such debts are not to be filed in the first place.”  Op. at 16.  Rather, recent amendments to Rule 3001 suggest that “the Code contemplates that untimely debts will be filed as claims but ultimately disallowed.”  Op. at 16-17.  As such, they fall within the definition of a claim within the bankruptcy context.

Further, the Court determined that excluding time-barred debts from the scope of bankruptcy “claims” would frustrate the Code’s intended effect to define the scope of a claim as broadly as possible, and provide the debtor the broadest possible relief.  The Court also observed that under applicable Maryland law, the statute of limitations does not extinguish the debt, but merely bars the remedy.  Accordingly, the Court concluded that “when the statute of limitations does not extinguish debts, a time-barred debt falls within the Bankruptcy Code’s broad definition of a claim.”  Op. at 17.

Moreover, the Court noted a unique consideration in the bankruptcy context: “if a bankruptcy proceeds as contemplated by the Code, a claim based on a time-barred debt will be objected to by the trustee, disallowed, and ultimately discharged, thereby stopping the creditor from engaging in any further collection activity.”  Op. at 18.  Alternatively, “[i]f the debt is unscheduled and no proof of claim is filed, the debt continues to exist and the debt collector may lawfully pursue collection activity apart from filing a lawsuit.”  Op. at 19. 

The Court rejected the borrower’s claim that trustees and creditors fail to object to time-barred debts, noting that “for most Chapter 13 debtors, the amount they pay into their bankruptcy plans is unaffected by the number of unsecured claims that are filed.”  Op. at 20.  “As additional claims are filed, unsecured creditors receive a smaller share of available funds but the total amount paid by most Chapter 13 debtors remains unchanged.  Thus, from the perspective of most Chapter 13 debtors, it may in fact be preferable for a time-barred claim to be filed even if it is not objected to, as the debtor will likely pay the same total amount to creditors and the debt can be discharged.”  Op. at 20-21 (emphasis in original).

Moreover, the Court noted various other considerations that differentiate filing a proof of claim on a time-barred debt from filing a lawsuit to collect such debt.  Op. at 21-23.  Consequently, the majority concluded that “filing a proof of claim in a Chapter 13 bankruptcy based on a debt that is time-barred does not violate the FDCPA when the statute of limitations does not extinguish the debt.”  Op. at 23.  Accordingly, the Court affirmed the dismissal of the Debtor’s FDCPA and state law collection claims.