January 1, 1900

Michael S. Karpoff

When we last reported on the Federal Fair Debt Collection Practices Act (FDCPA) eight years ago, the majority of trial courts who had considered the issue had ruled that community association assessments were not debts as defined by the Act and therefore were not subject to the Act. Thus, attorneys and others seeking collection of assessments may not have been obligated to comply with the Act. However, there was enough confusion on the issue to prompt a warning that property managers and attorneys who are involved in assessment collection comply with the requirements of the Act to protect themselves. That premonition has proved justified as the tide has turned. The majority of appellate and trial courts have since held that community association assessments are covered by the FDCPA.

Act Applies to "Debt Collectors"

Although association governing boards are not directly affected by the FDCPA, it is important for them to understand the procedures required, in order to avoid frustration over the timing of collection efforts. Congress adopted the FDCPA in 1977 to end abusive debt collection practices. It defines a "debt collector" as a person who conducts a business primarily for the collection of debts or who regularly collects debts owed to another. A "debt" for the purposes of the Act is "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." A "consumer" is "any natural person obligated or allegedly obligated to pay any debt."

The Act establishes certain restrictions and requirements for debt collectors. It limits what debt collectors may communicate to third parties while attempting to locate debtors, when and where a debt collector may contact a debtor, and where a debtor may be sued for collection. It also bars harassment or abuse, false or misleading representations, and unfair practices.

Notice Requirements Important

Of particular concern are the statute’s notice requirements. It mandates that a debt collector provide a debtor with a written statement of the debt and the creditor’s name within five days after the first communication. The debtor also must be advised that: (a) the debt will be deemed valid unless the debtor disputes the debt within 30 days after receipt of the notice; (b) the debt collector will provide verification of the debt if the debtor disputes the debt in writing within 30 days; and (c) the debt collector will provide the name and address of the original creditor, if different from the current creditor, upon written request made within 30 days. Each communication to the debtor must also disclose that it is from a debt collector, and the initial communication must state that the debt collector is attempting to collect a debt and any information obtained will be used for that purpose.

If within the 30-day period, the debtor notifies the debt collector in writing that he or she disputes the debt, requests verification, or requests the name and address of the original creditor, all collection efforts must cease until verification and the name and address of the original creditor are mailed to the debtor. The statute is liberally construed to protect the debtor, and alleged violations will be judged as viewed by the "least sophisticated consumer." Any statement by a debt collector which contradicts the required notices or which is likely to confuse the "least sophisticated consumer" constitutes a violation of the Act.

The actual creditor itself is not subject to these requirements. However, attorneys who regularly seek collection of debts are. Whether property managers are subject to the Act is still in dispute. The Act exposes violators to payment of actual damages suffered by the debtor, additional damages of up to $1,000.00, and the debtor’s costs and reasonable attorneys’ fees. Mere negligence is not a defense. Rather, to escape liability, a debt collector must prove that the violation was not intentional, and that it resulted from a good faith error notwithstanding the maintenance of reasonable procedures to avoid such error. Therefore, whether community association assessments are debts covered by the Act is important to attorneys and property managers engaged in collection and shapes the procedures they must use.

Case Law Regarding Assessments Evolved

In 1987, the United States Court of Appeals for the Third Circuit, which encompasses New Jersey, Pennsylvania, Delaware and the Virgin Islands, held in Zimmerman v. HBO Affiliate Group that a debt within the meaning of the FDCPA is one involving the offer or extension of credit. Under that reasoning, where there has been no offer or extension of credit, the strictures of the Act do not apply. Relying upon that holding, several District Courts held that community association assessments were not debts subject to the FDCPA because the associations did not offer or extend credit to the homeowners. Other courts held that assessments were not debts because they did not involve a transaction for personal, family or household goods.

However, in 1997, in Bass v. Stolper, Koritzinsky, Brewster & Neider, S.C., the Seventh Circuit Court of Appeals disagreed with the Third Circuit’s holding in Zimmerman, concluding that no offer or extension of credit is necessary for a debt to be covered by the Act. Later that year, the Seventh Circuit held in Newman v. Boehm, Pearlstein & Bright, Limited that homeowner association assessments are debts within the meaning of the Act because they arise out of the purchase of the homes which are transactions for personal, family or household purposes. Since that time, the Eighth and Ninth Circuits also have rejected the Third Circuit’s analysis, in Duffy v. Landberg and Charles v. Lundgren & Associates, P.C., respectively. Furthermore, the Tenth and Eleventh Circuits, in Ladick v.Van Gemert and Shimek v.Weissman Nowack, Curry & Wilco, P.C., respectively, have held that community association assessments are debts covered by the Act. So, too, have numerous District Courts throughout the country.

New Jersey Exception Unlikely

Because New Jersey is part of the Third Circuit, that court’s holding in Zimmerman provides a potential argument for New Jersey practitioners that in the absence of an offer or extension of credit, there is no debt under the FDCPA. However, in light of the overwhelming contrary decisions throughout the country, that argument is less persuasive. Moreover, in 1999, in Loigman v. King’s Landing Condominium Association, a New Jersey Superior Court judge held that condominium assessments are subject to the FDCPA. Therefore, the safest practice is to assume that assessment collection is covered by the Act and to comply with its requirements.

Property management companies may have an additional argument they are not bound by the FDCPA. Three published U.S. District Court cases- Franceschi v Mautner-Glick Corp.; Alexander v. Omega Management Co.; and Berndt v. Fairfield Resorts, Inc.- and an unpublished California appeals court case, Bouzan v. Diedel, have held that property managers are not debt collectors because they qualify for exceptions to the definition of debt collector. That is, debt collection is not the primary purpose of their business; they serve in a fiduciary capacity as the creditor’s agent; or they acquired the right to collect the debts pursuant to contracts entered into before the debts were in default.

However, no New Jersey court has exempted property managers from the Act. Therefore, a property management firm who does not comply with the FDCPA in its collection efforts runs the risk that another court will disagree with these holdings. The better practice therefore is to avoid that risk by complying with the requirements of the Act.

Michael S. Karpoff is a partner in the Community Association Law Practice Group. He is a member of the national College of Community Association Lawyers of the Community Association Institute (CAI).