When an apartment owner is in arrears/default with regard to his, her or its financial obligations to the co-op housing corporation or condominium association, boards and managers typically turn to counsel and request that a “lawyer's letter” demanding payment be sent to the apartment owner (the Lawyer's Demand Letter), in the not unreasonable belief that such a Letter would likely signal the board's seriousness and commitment to collecting the unpaid and past due amounts and therefore produce a prompt payment by the apartment owner. This column discusses the impact of and guidance recently provided by the Supreme Court of the United States (SCOTUS) on the use of such Lawyer's Demand Letters, and the issues which nonetheless remain. This column also discusses other steps that boards and managers can take when an apartment owner fails to pay its financial obligations to the co-op or condominium.

Lawyer's Demand Letter

For lawyers who receive requests from boards to send, Demand Letters to apartment owners for payment of arrears, and further stating that if payment is not received within a certain number of days, legal action to recover the arrears may be taken and legal fees sought from the apartment owner, federal law has presented certain concerns.

In September 1977, Congress enacted The Fair Debt Collection, 91 Stat. 874, 15 U.S.C. §1692 et seq. (the Act), regulating “debt collectors” by imposing a myriad of regulations on such persons and liabilities should they fail to abide by the same. The Act defines a “debt collector” as “any person … in any business the principal purpose of which is the collection of any debts or who regularly collects or attempts to collect, directly or indirectly, debts.” §1692a(6). The definition further goes on to say that “[f]or the purpose of [a separate provision of the Act]” the term debt collector “also includes any person … in any business the principal purpose of which is enforcement of security interests.”

The issue posed by the Act for a lawyer sending a Demand Letter is whether sending it renders the lawyer a “debt collector” under the Act and therefore subject to numerous procedural requirements and potential liability to the Letter's recipient. Lawyers working in firms having varied practice areas have treated the Act as inapplicable to them because their firms are not in a “business” the principle purpose of which is the collection of debts,” and continued to send Lawyers Demand Letters on behalf of boards. However, this position does not address the second part of the Act's initial definition—“or who regularly collects or attempts to collect, directly or indirectly, debts.” Query: If only a part of the law firm's business is the representation of co-op's and/or condominiums but, as such, it “regularly” sends Lawyer Demand Letters, is the law firm a debt collector within the meaning of the Act?

For single practitioners, and law firms whose sole practice is the representation of co-ops and/or condominiums, or engage in only nonjudicial foreclosure work, the Act obviously posed a clearer concern. While the final part of the Act's definition could be interpreted as largely carving-out from the Act's requirements “any person” in a “business the principal purpose of which is the enforcement of security interests', and could thus provide such lawyers with a safe harbor—because enforcing a co-op or condominium's rights against an apartment owner for arrears is the enforcement of a security interest/statutory lien which the entity has for the payment of maintenance/common charges—the safety of that harbor was not clear. Specifically, a number of federal circuit courts had held to the contrary. See, e.g., Kaymark v. Bank of America, N.A., 783 F.3d 168, 179 (3d Cir. 2015).

SCOTUS Speaks

On March 20, 2019, the Supreme Court issued its decision in Obduskey v. McCarthy & Holthus, 139 S.Ct. 1209, which the legal community hoped would clarify the Act's applicability. While Obduskey clarified certain applicability aspects of the Act, questions remain.

In Obduskey, the plaintiff/borrower defaulted on his home loan and his lender retained defendant, the McCarthy law firm, to carry out a nonjudicial foreclosure. The McCarthy firm sent Obduskey a letter providing notice “pursuant to, and in compliance with” both the Act and Colorado law. Importantly, the parties did not dispute and the court proceeded on the same assumption—that the letter and other correspondence from the McCarthy firm was required under state law as a predicate for commencing a nonjudicial foreclosure.

Obduskey responded with a letter invoking §1692g(b) of the Act, which provides that if a consumer disputes the amount of a debt, a “debt collector” must “cease collection” until it “obtains verification of the debt and mails a copy to the debtor.” The McCarthy law firm did neither—instead, it initiated a nonjudicial foreclosure action for the purpose of selling the home and paying the debt. Obduskey filed a lawsuit, claiming that the McCarthy firm had violated the Act by sending the letter, and his case was dismissed by the District Court, holding that the law firm was not a debt collector within the meaning of the Act. Obduskey v. Wells Fargo, 2016 WL 4091174 (D. Colo. July 19, 2016). The Court of Appeals for the Tenth Circuit affirmed the dismissal, concluding that merely “enforcing a security interest through a non-judicial foreclosure proceeding does not fall under the Act. Obduskey v. Wells Fargo, 879 F.3d 1216, 1223 (2018).

The Supreme Court agreed to hear Obduskey's appeal because of differing views among the Circuits about application of the Act to nonjudicial foreclosure proceedings and, in a unanimous decision, affirmed the Tenth Circuit, holding that the McCarthy firm should only be treated as a debt-collector under the last part of the Act's definition—for only a limited-purpose, subjecting the law firm to none of the myriad requirements of and potential liability under the Act. However, the stated premise of the Supreme Court's holding is that the McCarthy firm's correspondence was required under state law in order to initiate foreclosure proceedings. And therein lies the rub for the Lawyer's Demand Letter to co-op or condominium apartment owners—this writer is aware of no New York law which requires that such a Letter be sent as a predicate to recovery on a co-op or condominium's security interest in an apartment for maintenance/common charge arrears.

Issues Remaining

For New York lawyers representing co-ops or condominiums, a number of issues remain. First, Obduskey on its face only applies to nonjudicial foreclosures. Does the Act apply to predicate acts when dealing with judicial foreclosures? It would appear that this issue is unresolved.

In addition, in New York, co-op governing documents generally require that a Notice of Default be given to an apartment owner before lease-termination/foreclosure proceedings are initiated. However, a Lawyer's Demand Letter is not required, nor is such a Letter required to enforce a condominium's security interest. Further, how does Obduskey impact on the Act's applicability to a law firm's recovery of apartment owner debt remaining after the apartment is sold—seeking a deficiency judgment against the owner which is not secured and therefore would not constitute enforcement of a security interest?

The Obduskey decision invited Congress to clarify the Act if the Supreme Court's interpretation was mistaken and reiterated that even security-interest enforcers may not engage in abusive debt collection practices. However, absent further word from Congress, these open issues remain and perceived safe harbors for law firms representing co-ops and condominiums may not be so safe.

Recommendations

In light of the remaining issues surrounding whether the Lawyer's Demand Letter is covered by the Act, prudent boards and managers should be vigilant in remaining informed in a timely manner as to the status of apartment owner maintenance payments. Monthly arrears reports should be provided to boards, and managers should promptly follow-up with apartment owners who are in arrears. If owners are not responsive, a Notice of Default—which is generally a required step in enforcing a co-op or condominium's security interest—should be sent to the apartment owner. If the owner pays the arrears upon receipt of the Notice, no legal proceedings need be initiated. But the Notice of Default, unlike the Lawyers Demand Letter, would appear to protect the board, its managers and its counsel from claims/liability under the Act.

Eva Talel is a Senior Counsel at Stroock & Stroock & Lavan and an adjunct professor at New York Law School. Margaret Jones, a legal research analyst at Stroock, assisted in the preparation of this column. Stroock is counsel to the Real Estate Board of New York.