Legal Bulletins

Wilson v. Draper & Goldberg, P.L.L.C., 2006 U.S. App. LEXIS 8243 (4th Cir. April 5, 2006)

Some bad facts

In 2003, Chase Manhattan Mortgage Corp. hired the Virginia law firm of Draper & Goldberg, P.L.L.C. ("Draper") to foreclose on Karen Wilson's Maryland property because of her alleged failure to make mortgage payments. Draper wrote to Ms. Wilson to advise her that she was in default on her loan and that Draper was preparing to commence foreclosure proceedings. In its correspondence, Draper advised Wilson that "federal law requires us to advise you that this letter is written pursuant to the provisions of the Fair Debt Collection Practices Act" (Act), and that the letter was "an attempt to collect a debt." Draper also sent Wilson a validation of debt notice, as required by the Act, but stated in the notice that Draper was not a debt collector and that it was not acting in connection with the collection of a debt.

Wilson disputed the debt and requested verification. Shortly after, Draper commenced foreclosure proceedings. Wilson retained counsel who advised Draper that all communications regarding the dispute should be directly with him. Nevertheless, Draper's "sales department" subsequently wrote to Wilson directly to inform her of the date of the scheduled foreclosure sale. This letter included a statement that it was an attempt to collect a debt. Wilson's attorney responded by requesting a complete statement of her account, a response to which was sent directly to Wilson. Prior to conclusion of the foreclosure, Wilson settled the underlying dispute with the lender.

Wilson brought suit in the U.S. District Court for the District of Maryland, claiming that Draper failed to verify her debt, continued its collection efforts after she had contested the debt, and communicated with her directly after being notified that she was represented by counsel. Draper moved to dismiss, arguing that it was not acting in connection with a "debt" and that, even if it was collecting on a debt, Draper was exempt from the definition of "debt collector" because it was acting in its role as a bona fide fiduciary (i.e., as substitute trustee under the deed of trust).

A debt is a debt

Draper argued that foreclosure on a deed of trust is not the enforcement of an obligation to pay a debt but, rather, the termination of a debtor's equity of redemption in the property. The firm cited to case law supporting the argument that foreclosure on a deed of trust is different from a debt collection effort because the objective is to foreclose on the debtor's interest in the real property, not the payment of funds. Although the trial court was persuaded, the U.S. Fourth Circuit Court of Appeals soundly rejected this argument, concluding that a debt remains a debt, even after foreclosure proceedings commence. In rejecting Draper's position, the court expressed concern that, if accepted, such an argument "would create an enormous loophole in the Act immunizing any debt from coverage if that debt happened to be secured by a real property interest and foreclosure proceedings were used to collect the debt."

Trustees and other fiduciaries can be debt collectors

Draper also argued that, even if its collection activities concerned a debt, it was exempt under the Act because the firm was acting in its role as a fiduciary to the lender when it commenced the foreclosure proceedings. The court rejected this argument as well. Looking at the language of the exemption for bona fide fiduciaries, the Fourth Circuit reasoned that the critical inquiry is whether a trustee's actions are incidental to a bona fide fiduciary obligation. On the contrary here, the court concluded that Draper's foreclosure activities were central to its role as fiduciary. "Thus, to the extent [Draper] used the foreclosure process to collect Wilson's alleged debt, they cannot benefit from the [exemption]." The court also dismissed the relevance of the fact that Draper was a law firm, finding it well established that lawyers can be debt collectors even if conducting litigation. The court also noted that Draper instituted more than 2,300 foreclosure actions in Maryland in 2003, and rejected any claim that a law firm with such a volume of foreclosure activities would be less able to comply with the Act than a more "traditional" debt collection agency.

Finally, the court dismissed Draper's argument that it was a debt collector only under certain provisions of the Act, concluding that once a party meets the statutory definition of debt collector, it is subject to the Act in its entirety.

In a dissenting opinion, Judge Widener reasoned that Draper was a fiduciary as a matter of law and exempt from the definition of debt collector, regardless of whether its actions were central to its fiduciary duties. He argued that the majority's analysis renders superfluous the exception for bona fide fiduciaries.