U.S. Court of Appeals Rules That Community Association Practitioners Act as Collectors

Published on: March 22, 2001

In July, the Seventh Circuit of the United States Court of Appeals, in a case of first impression, decided that community association practitioners who collect common expenses for condominiums and homeowner associations are debt collectors under the Federal Fair Debt Collection Practices Act. It should be noted that the Eleventh Circuit has affirmed without a published decision a decision which stated that the collection of community association fees is not the collection of a debt under the Fair Debt Collection Practices Act. However, community association practitioners and more importantly, community association managers, would be better served following the Seventh Circuit decision since compliance with the Act is far safer when two circuits are split on a matter. Essentially, the Federal Fair Debt Collection Practices Act (“FFDCPA”) applies to persons collecting consumer debts arising from a transaction which are for personal, family, or household purchases. Since the FFDCPA arose out of the Fair Credit Reporting Act, most practitioners believed that in order to be a debt collector under the Act, there had to be an extension of credit (e.g. a loan). The Seventh Circuit, citing a recent ruling on a bounced check which did not involve an extension of credit, had recently ruled in April that an extension of credit was not necessary for the Act to apply. Applying that decision to the collection of community association dues, the Court stated that an extension of credit was not a prerequisite to being a debt collector under the FFDCPA.

In order for there to be a debt under the Act, the debt must arise from a transaction and community association practitioners argue that no transaction was involved in the statutory obligation to pay common expenses. However, the Seventh Circuit ruled that there was little doubt that the purchase of the home was the transaction even though the assessments were not determined at the time of the purchase of the home and even though the home was not purchased from the association.

Community association practitioners also argue that the debt was not for personal, family, or household purposes since the common expenses related solely to the common areas and facilities of the association and not to the home themselves. Since the common expenses are typically statutory, most U.S. District Courts that have decided the issue have held that these amounts were analogous to taxes and not for personal, family, or household purposes. However, the Seventh Circuit disagreed and found that common expenses are for personal, family, or household purposes.

It should be noted that the FFDCPA applies to those collecting debts on behalf of creditors but does not include the creditors themselves. Therefore, while attorneys collecting debts may be subject to the Act, the community association is not (although it may be subject to state statutes in some cases). More importantly, community association managers typically have as a function to their rule a requirement to attempt to collect common expenses and to send out routine notices relating to amounts owed by unit owners. Unfortunately, it appears to be fairly well settled that the community association manager could be considered a debt collector under the Act since part of their job involves collecting debts for the community association. Whereas, attorneys collecting debts typically are specifically compensated for their debt collection and lien enforcement actions, the community association manager while receiving a fee typically does not receive any additional fee for sending out delinquent notices. Notwithstanding the foregoing, the community association manager is still subject to the penalties provided for under the Act. These penalties can be severe in many cases.

What appears to be very unfortunate about the ruling of the U.S. Court of Appeals in this matter is that the entire issue could have been easily avoided. The Act provides that certain language must accompany the first correspondence to the debtor as well as additional language in subsequent correspondence with the debtor.

The language which is suggest in the first correspondence is as follows:

To the extent that the Federal Debt Collection Practices Act applies, the following notice is required to be given:

NOTICE OF IMPORTANT RIGHTS

Pursuant to the Federal Fair Debt Collection Practices Act (15 U.S.C. § 1692), a consumer debtor is required to be sent the following notice: (1) unless the consumer, within thirty days after receipt of this notice, disputes the validity of the debt or any portion thereof, the debt will be assumed to be valid by the debt collector; (2) if the consumer notifies the debt collector in writing within the thirty-day period that the debt or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and (3) upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor. XYZ Management Company is acting as a debt collector, pursuant to the Federal Fair Debt Collection Practices Act. Any information obtained will be used for that purpose. The Federal Trade Commission has ruled that the Federal Fair Debt Collection Practices Act does not preclude the institution of legal action prior to the expiration of the thirty-day period.

Subsequent notices should state the following:

To the extent that the Federal Debt Collection Practices Act applies, the following notice is required to be given:

XYZ Management Company is acting as a debt collector. You are advised that this correspondence is an attempt to collect a debt and any information obtained will be used for that purpose.

As we went to press, the Chicago firm involved in the Seventh Circuit decision was deciding whether to attempt to have the case heard by the United States Supreme Court or to have it heard on en banc by the Seventh Circuit. We will keep you posted if there are any new developments in this case. Otherwise, community association managers and attorneys are advised that they are well served to include the appropriate language in all correspondence and to be aware generally of the requirements and restrictions under the Act.