The United States District Court for the District of Arizona has ruled in a case brought under the Fair Debt Collection Practices Act (“FDCPA”) that a law firm that submits a demand for payment of unawarded post-judgment attorneys’ fees in a judgment-debtor’s refinance violates the FDCPA.

In March 2016, the law firm representing a homeowners’ association obtained a judgment against the debtor for $7,373.57. Although the law firm had included language in the judgment purporting to entitle the judgment-creditor to post-judgment attorneys’ fees and costs, the justice court that entered the judgment specified that any fees and costs would only be awarded “after submission and approval by the court.” In April 2016, less than one month later, the law firm claimed that the amount owed under the judgment was $8,760.09, which included an additional $1,053.88 in post-judgment attorneys’ fees and costs incurred after entry of the judgment. In May 2016, the law firm claimed that the post-judgment fees and costs had grown to $1,655.88 and that the total amount of the judgment was $9,162.26. And in June 2016, the law firm wrote the lender refinancing the debtor’s property (so that the debtor could pay off the judgment) that the balance due was $9,476.21. The law firm collected the full $9,476.21 out of the refinance proceeds, including approximately $2,000.00 in post-judgment attorneys' fees and costs.

The debtor filed an FDCPA action, claiming that the law firm violated the FDCPA because its representations in collecting the judgment were “false, deceptive, or misleading” and the firm had used “unfair and unconscionable means to collect or attempt to collect [a] debt.” The District Court ruled that the law firm violated the FDCPA by demanding and collecting almost $2,000.00 of post-judgment attorneys’ fees without ever submitting those fees to the court for approval.” The Court explained:

Essentially, [the law firm] saw an opportunity to recover all the fees they wanted without the trouble of justifying the amounts to a court, and they took it. This is precisely the type of exploitative behavior the FDCPA was enacted to prohibit. Therefore, the Court concludes that Defendants violated [the FDCPA] by misrepresenting to Quicken Loans that these feeds were legally due and owing... The Court also concludes that Defendants violated [the FDCPA] by collecting an amount that was not expressly authorized by law because the Judgment specifically required approval by the justice court of additional attorneys’ fees.

The case is Jason v. Maxwell & Morgan PC. DLG represented the Plaintiff.

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The Ninth Circuit Court of Appeals in McNair v. Maxwell & Morgan, P.C., recently held that a law firm that files a judicial foreclosure action to collect unpaid homeowner association assessments is acting as a "debt collector" and engaging in "debt collection" activities subject to the Fair Debt Collection Practices Act ("FDCPA").

The FDCPA applies to "debts" and regulates the conduct of "debt collectors." A "debt" is defined in the FDCPA as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” 15 U.S.C. § 1692a(5). A debt collector is any entity or person who "regularly collects or attempts to collect ... debts owed or due ... another.” The district court had concluded that filing a judicial foreclosure action was not "debt collection" activity and the law firm that filed it and a subsequent writ of special execution to conduct the sale of Ms. McNair's home was not engaged in “debt collection” activities.

The Ninth Circuit rejected this conclusion. In holding that judicial foreclosure actions constitute debt collection activities, the Court distinguished judicial foreclosure actions from non-judicial foreclosure actions. Because the object of the action is "to retake and resell the security," not to collect money, and deficiency judgments following non-judicial foreclosures are prohibited in many states, the Ninth Circuit held that the latter is not debt collection activities subject to the FDCPA.

Judicial foreclosure actions filed over unpaid homeowner associations, by contrast, principally seek to collect unpaid homeowner association fees. The Ninth Circuit rejected the argument that such fees are not "debts," holding that they constitute obligations "to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes[.]” Thus, the Court found that the record was clear that the law firm and its lawyers "were in fact 'debt collectors' collecting 'debt.'”

Having established that homeowner association assessments were "debts" under the FDCPA and the law firm and its lawyers were "debt collectors" subject to the FDCPA, The Ninth Circuit held that the law firm and its lawyers violated the FDCPA by including $1,597.50 in unawarded post-judgment attorneys' fees in a writ of special execution filed to complete the sale of McNair's property because "no court had yet approved the quantification of the 'accruing' attorneys' fees claims in the Writ."

The Ninth Circuit held that the law firm "falsely misrepresented the legal status of this debt, by implicitly claiming that the accruing attorneys’ fees of $1,597.50 already had been approved by a court."

The case is McNair v. Maxwell & Morgan, P.C.

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