Community Association Collections and the FDCPA

After initial opinions finding that the Fair Debt Collections Practices Act did not apply to collection of Community Association Assessments, the Courts reversed their position in those initial opinions and have expressed a strong and generally accepted position that homeowners and unit owners are protected by the FDCPA in efforts to collect unpaid assessments.

In NEWMAN v. BOEHM, PEARLSTEIN, & BRIGHT, LIMITED, 119 F.3d 477 (7th Cir. 1997), the court stated the issue up for its consideration as follows: “The question presented by these appeals…is whether an assessment owed to a homeowners or condominium association qualifies as a ‘debt’ under the Fair Debt Collections Practices Act…”

In NEWMAN the Court discussed the lower court’s finding that community association assessments did not meet the definition of “debt” under the FDCPA.  The lower court based its ruling on the fact that the definition of debt under the FDCPA had been interpreted to require an, “offer or extension of credit to a consumer”.  See RITER v. MOSS & BLOOMBERG, LTD., 932 F.Supp. 210 (N.D.Ill. 1996) and ZIMMERMAN v. HBO AFFILIATE GROUP, 834 F.2d 1163 (3d Cir. 1987).  The NEWMAN Court noted that between the lower court ruling and its consideration of the current appeal the 7th Circuit in BASS v. STOLPER, KORITZINSKY, BREWSTER & NEIDER, S.C., 111 F.3d 1322 (7th Cir. 1997), rejected the credit requirement under the definition of “debt” in the Act.  “All that is required…is a transaction creating an obligation to pay.”  Id.

The NEWMAN Court went on to note that all Federal Court decisions finding that an association assessment is not a “debt” under the Act relied on the reasoning in ZIMMERMAN.  And, concluding that all said decisions are now rejected allowing the NEWMAN Court to, “write on a clean slate”.

The NEWMAN Court considers whether the requirement of a transaction establishing the debt, and whether the debt incurred was primarily for personal, family, or household purposes is met under the circumstances of association assessments.  The Court reasons that, “[b]y paying the purchase price and accepting title to their home, the [Owners] became bound by the Declaration…, which required the payment of regular and special assessments imposed by the association.  The purchase of the home or unit constitutes the transaction whereby the Consumer voluntarily takes upon themselves the debt obligation, which is payment of assessments as imposed by the Association.  Further, because the subject of the transaction is the purchase of a family home, the court concludes that, “there can be little doubt that the subject of those ‘transactions’ had a personal, family, or household purpose”.  But, beyond consideration of the nature of the “transaction”, which is the purchase of the home, the Court finds that the assessments themselves meet the requirement of being for personal, family, or household purposes, because they directly benefit the household through such activities as repair of common roofs, or maintenance of common walkways, yards, or landscaping.  NEWMAN, 119 F.3d 477.

The Tenth Circuit specifically cited the NEWMAN Court’s reasoning in reachin the same conclusion in LADICK v. VAN GEMERT, 146 F.3d 1205 (10th Cir. 1998).  See Also SNOW v. RIDDLE, 143 F.3d 1350 (10th Cir. 1998).  “The assessment at issue in this case therefore qualifies as an ‘obligation of a consumer to pay money arising out of a transaction'”.  LADICK. Citing 15 U.S.C. Sec. 1692a(5).

The Middle District of Florida addressed this issue in FULLER v. BECKER & POLIAKOFF, P.A., 192 F.Supp.2d 1361 (M.D. Fla. 2002).  The Collector argued for the Court to follow the Northern District of Florida’s decision in AZAR v. HAYTER (citiation omitted in FULLER), which relied on the previously overruled decision in ZIMMERMAN v. HBO AFFILIATE GROUP, 834 F.2d 1163 (3d Cir. 1987), in finding that an assessment is not a debt.  The Court in FULLER notes, “…Defendants urge this Court to accept the reasoning that maintenance assessments are not debts. However, Defendants fail to acknowledge that…in subsequent decisions the Eleventh Circuit expressly rejected the notion that a debt under the FDCPA must involve an extension of credit”.  See BROWN v. BUDGET RENT-A-CAR, 119 F.3d at 924.

The FULLER Court goes on to rely on the reasoning in the line of cases from the Seventh Circuit discussed above in finding that, “the maintenance assessments that the Association sought to collect…are debts subject to the FDCPA.

The generally accepted principal, based on the NEWMAN and BASS line of cases, is now that community association regular and special assessments are debts, the collection of which is subject to the FDCPA.  The attorney or collector seeking to collect these past due assessments must ensure its compliance with the FDCPA to avoid liability for damages pursuant to the Act.

FDCPA Applied to Foreclosure Actions

The Courts have ruled that the Fair Debt Collection Practices Act (FDCPA) does not apply to actions that merely seek to foreclose a lien on a security interest.  But, when the analysis of when the foreclosure of a lien becomes an effort to collect a debt is looked at, it becomes apparent that most foreclosure efforts will actually be viewed as debt collection, thereby invoking the requirements and formalities of the FDCPA.

The issue was addressed in PETTWAY v. HARMON LAW OFFICES, P.C., 2005 WL 2365331 (D. Mass.). In PETTWAY the consumer alleged that, “the form letter that [the debt collector] uses to transmit payoff and reinstatement terms to homeowners…systematically overstates the amount [due].”  In the action the debt collector moved for summary judgment contending that the FDCPA did not apply to his actions because, “its business is not collecting debts, but rather perfecting client security interests.”

In its analysis the court in PETTWAY reconciled two lines of cases that disagreed as to whether the FDCPA applies to foreclosure actions.  In BEADLE v. HAUGHEY, 2005 WL 300060 (D.N.H. Feb. 9, 2005), relied on by the debt collector, the Court held that, “a mortgage forclosure is not governed by the FDCPA because a foreclosure is not a debt collection practice, but instead a legal action undertaken to return property to its rightful owner.  Security enforcement activities fall outside the scope of the FDCPA because they aren’t debt collection practices.”  BEADLE quoting ROSARIO v. TAYLOR, 324 F. Supp. 2d 917, 924 (N.D.Ind. 2004).

The consumer relied on SHAPIRO AND MEINHOLD v. ZARTMAN, 823 P. 2d 120 (Colo. 1992).  SHAPIRO held that, “[s]ince a foreclosure is a method of collecting a debt by acquiring and selling secured property to satisfy a debt, those engaged in such foreclosures are included within the definition of debt collectors…”

The PETTWAY Court decided that the BEADLE and SHAPIRO cases were not inconsistent with each other.  The Court ruled that in cases where the foreclosure action is only “tangentially” related to payment of the underlying debt that BEADLE did control and the FDCPA did not apply.  However, the Court continues,BEADLE and similar cases do not preclude the possibility that law firms whose foreclosure activities include efforts to compel the payment of the underlying debt might be liable under the FDCPA.

Seeking to foreclose a security interest in addition to seeking to collect moneys owed does not shield a collector from liability.  In fact the court reasoned that the FDCPA would be invoked if the firm merely sought to collect costs in connection with the foreclosure, including legal fees.  This ruling creates the circumstance alluded to above where the range of foreclosure actions to which the FDCPA does not apply is minimal.

In a footnote the PETTWAY Court provides the moral to this story.  “…law firms should stay out of the debt collection business and debt collection agencies should not attempt to hold themselves out as law firms.”