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  • January 18, 2013

    Federal Appellate Ruling: Management Companies Are Not Subject To Fair Debt Collection Practices Act

    Written By: Ronald L. Perl and Jonathan H. Katz

    A Federal Appeals Court has ruled that the Fair Debt Collection Practices Act (FDCPA), which imposes civil liability on debt collectors for certain prohibited practices, does not apply to community management companies which provide a variety of services to common interest communities. In Harris v. Liberty Community Management, Inc., the U.S. Eleventh Circuit Court of Appeals held that management companies are protected by a provision in the FDCPA that exempts individuals and entities whose collection responsibilities are “incidental to a bona fide fiduciary obligation.” This exemption would not apply to management companies whose central or primary obligation is the collection of assessments.

    The homeowners association in the Liberty case faced severe financial difficulties due to enormous delinquencies. In 2009, it amended its declaration to suspend water service to any home owing more than $750 in delinquent assessments. The amendment required at least three separate written notices of the intention to suspend service prior to the actual suspension. Shortly after the amendment was passed, Liberty sent the appropriate notices to the nineteen homeowners whose delinquent balances exceeded $750. Twelve homeowners made payment plans but seven, including Harris, had their service suspended.

    Harris went to Georgia state court in an attempt to force the association to reconnect the water service but failed. She then filed suit in Federal court against the association’s managing agent, Liberty Community Management, Inc. (“Liberty”), alleging, among other things, that it had violated the FDCPA by sending the notices threatening to shut off the water service. Liberty moved for summary judgment on the grounds that it was not a “debt collector” covered by that Act. It specifically cited 15 U.S.C. § 1692a(6)(F)(i) which states that the definition of “debt collector” shall not include “any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity (i) is incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement.”

    The court reviewed Liberty’s management contract in detail. It contained the usual scope of work for managing agents, including arranging for the maintenance of the common areas and facilities, negotiating contracts for utilities and insurance, preparing a budget, maintaining the books and records of the association, managing the banking relationship, and the like. The collection of assessments was a specific duty contained in the contract. The court had no difficulty finding that Liberty owed the association a fiduciary obligation as its agent. Every function it performed, found the court, was as a fiduciary of the association.

    The next question was whether the assessment collection responsibility was “incidental” to that fiduciary obligation. The court applied the dictionary definition of “incident”—something casual or of “secondary importance”—and determined that Liberty’s collection duties were incidental considering its broad scope of other responsibilities. The court said: “. . . Liberty did much more than just collect assessments for the Association and its homeowners; it also contracted for maintenance of the community’s common areas, obtained utilities (including gas, electricity and water), purchased insurance, investigated claims, made reports to insurance companies, kept and maintained ledgers and bank accounts, deposited money and wrote checks, reconciled monthly bank statements, and assisted the Association with its yearly tax filings.” These activities are not significantly different from those generally undertaken by full-service management companies in New Jersey and Pennsylvania. The court made it clear that the result would be different if assessment collection were management’s primary responsibility.

    It is important to note that this case comes from the U.S. Eleventh Circuit Court of Appeals. Since New Jersey and Pennsylvania are within the jurisdiction of the Third Circuit Court of Appeals, this case is persuasive, but not binding. The Third Circuit could conceivably make a contrary ruling. However, the case is significant because both the District Court (trial level) and Court of Appeals ruled in favor of the managing agent on this issue.

    For more information on this case or other issues concerning your community association, please visit our Condo and HOA Law Blog.

    About Hill Wallack LLP

    Hill Wallack LLP has built a reputation for problem-solving and aggressive advocacy. With offices in Princeton, N.J. and Yardley, Pa., the firm has comprehensive commercial capabilities and deep experience in a number of industry sectors. Our attorneys have extensive government experience, and the firm represents businesses and public entities in many areas in which public and private interests intersect.

    Called upon to tackle some of the toughest legal and business challenges, we work to do more than advise on the law − we create real-world solutions.

    For more information, contact one of the attorneys in our Community Associations Group:

    Ronald L. Perl, Esq.
    609-734-6349

    Michael S. Karpoff, Esq.
    609-734-6376

    Terry A. Kessler, Esq.
    609-734-6350

    Jonathan H. Katz, Esq.
    609-734-6393

    This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to the authors or to your contacts at Hill Wallack LLP.