Sixth Circuit holds that the failure to bring foreclosure action as counterclaim in FDCPA suit did not preclude the lender from later foreclosing in a separate action

The Sixth Circuit recently confirmed that a servicer and the lender that did not bring a foreclosure action as a counterclaim to a federal FDCPA lawsuit did not waive their ability to foreclose in the future. In Bauman v. Bank of America, 15-3106 (Dec. 23, 2015) 808 F. 3d 1097, the plaintiffs-borrowers sued their lender for FDCPA violations after the lender voluntarily dismissed its state court foreclosure action claiming the lender falsely stated that it was the holder of the note. The FDCPA claim was thrown out because the court found that the lender was not a debt collector under the Act. Although the lender prevailed in the FDCPA action, it did not bring a foreclosure action as a counterclaim. This prompted the borrowers to file a new complaint to bar the servicer and lender from bringing a future foreclosure action and to quiet title on the theory that a foreclosure was a compulsory counterclaim to the FDCPA action. The district court dismissed. On appeal the Sixth Circuit said that in order to prove that a foreclosure action is a compulsory counterclaim to an FDCPA action, Fed. R. Civ. P. 13(a)(1) requires the borrowers to show that the two claims ”arise” out of the same transaction or occurrence. Under this test, the court must determine whether the issues of law and fact raised by the claims are largely the same and whether substantially the same evidence would support or refute both claims. In a prior decision the Sixth Circuit found that a counterclaim on the underlying debt in a Truth in Lending Act (”TILA”) action was permissive rather than compulsory and concluded he same result applies here. First, the FDCPA claim raises different issues of law than a foreclosure. A foreclosure alleges that the borrower has defaulted on a private loan contract governed by state law while a FDCPA action requires interpretation of federal law and regulations designed to ”eliminate abusive debt collection practices by debt collectors.” Second, the factual issues presented by the two cases are not largely the same. Notably, the date the Defendants’ interest in the debt is acquired entirely irrelevant in a foreclosure. Further, while a foreclosure requires the lender to prove the default and the default amount, an FDCPA claim focuses on the use of unfair methods to collect the debt. Policy considerations also supported this conclusion. Such a rule could systematically usurp state law debt claims for adjudication by state courts and would require lenders to initiate foreclosure proceedings as a counterclaim when they otherwise may not have done so – frustrating the purposes of the FDCPA by creating a disincentive for debtors to sue. The district court’s decision was affirmed.

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