The U.S. Court of Appeals for the Third Circuit recently ruled that foreclosure complaints can be the basis of Fair Debt Collection Practices Act (FDCPA) claims. This decision continues the Third Circuit's expansive interpretation and application of the FDCPA.

The case was filed as a putative class action by a mortgagor who alleged that a law firm had violated the FDCPA by filing a foreclosure complaint that stated amounts for attorneys’ and other fees that were already due and owing when such fees had not yet actually been incurred (because they related to not-yet-performed services). According to the plaintiff, the complaint violated FDCPA provisions that prohibit debt collectors from using any “false, deceptive, or misleading representations or means in connection with the collection of any debt” or attempting to collect amounts not “expressly authorized by the agreement creating the debt or permitted by law.”

In addition to rejecting the law firm’s argument that FDCPA claims cannot be based on formal pleadings, the Third Circuit also rejected the firm’s arguments that:

  • a complaint is not a communication to the consumer subject to such FDCPA provisions because it is directed to the court; and
  • a foreclosure action cannot be the basis of FDCPA claims because the mortgagor is entitled to other protections under Pennsylvania’s Rules of Civil Procedure.

Reversing the district court’s dismissal of the FDCPA claims, the Third Circuit found that, because the foreclosure complaint plainly indicated that the disputed fees were due in specific amounts on a particular date, the plaintiff had stated a claim that the law firm had misrepresented the amount of the debt in violation of the FDCPA. It also found that the plaintiff had stated a claim that the law firm had attempted to collect unauthorized amounts because the mortgage only allowed the mortgagee to charge for services “performed” in connection with the mortgagor’s default and collect expenses “incurred” in pursuing its lawful remedies.

The plaintiff also alleged that, by misrepresenting or overcharging fees in the foreclosure complaint, the law firm and mortgagee had engaged in deceptive conduct in violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL). Under the UTPCPL, a plaintiff must show “ascertainable loss of money or property, real or personal” to establish a claim. According to the plaintiff, because the disputed fees inflated the mortgage lien on his property, he would have had to pay them for a period of time before any services were performed to avoid foreclosure.

Predicting how the Pennsylvania Supreme Court would interpret “ascertainable loss,” the Third Circuit ruled that a plaintiff must show that he or she suffered an actual loss of money or property. Affirming the district court’s dismissal of the UTPCPL claims, the Third Circuit found that the plaintiff had not suffered actual loss because the alleged misrepresentations in the foreclosure complaint never deprived him of his property and he never paid the disputed fees. The Third Circuit also observed that it was speculative whether the plaintiff would have cured his default but for the disputed fees.

The plaintiff also alleged that the lender had violated the UTPCPL by virtue of violating Pennsylvania’s Fair Credit Extension Uniformity Act (FCEUA). (A FCEUA violation constitutes a per se UTPCPL violation.) Affirming the district court’s dismissal of the FCEUA claim, the Third Circuit found that because the FCEUA could be enforced only through the UTPCPL’s private remedy, the plaintiff’s inability to show ascertainable loss meant he could not state a FCEUA claim. Treating the plaintiff’s inability to show ascertainable loss as a failure to plead resultant damages, the Third Circuit also affirmed the district court’s dismissal of the plaintiff’s breach of contract claim against the mortgagee.

In holding that the plaintiff had stated an FDCPA claim based on the foreclosure complaint, the Third Circuit relied on its 2014 decision in McLaughlin v. Phelan Hallinan & Schmieg, LLP. In McLaughlin, the court held that attorneys’ fees and costs in a demand letter that were not clearly disclosed as estimates constituted actionable misrepresentations under the FDCPA. The court also concluded the demand letter constituted a debt collection communication, defining “debt collection” as “activity undertaken for the general purpose of inducing payment.” In its new decision, the Third Circuit applied that broad definition in concluding that a foreclosure complaint can be the basis of FDCPA claims.

Attorneys in Ballard Spahr’s Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. To assist clients in responding proactively to the documentation-related challenges being faced by the debt collection industry and creditors attempting to collect their own debts, the Group has formed a Collection Documentation Task Force. Attorneys in the Group also prepare clients for Consumer Financial Protection Bureau examinations.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, Collection Documentation Task Force Chair Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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