Property Management Companies May Not Be “Debt Collectors”
Property Management Companies May Not Be “Debt Collectors”
But Must Still Be Wary of The FDCPA
By: David Weinberg, Esq.
A property management company collecting assessments is almost always going to fall into the definition of “debt collector” as defined in the Fair Debt Collections Practices Act (“FDCPA”). Falling into this category can make your property management company an easy target for an expensive FDCPA violation lawsuit.
The purpose of this article is to discuss a recent 11th Circuit United States Court of Appeals decision holding that, under certain circumstances, a property management company is exempt from the requirements and penalties of the FDCPA. I will also address how this case affects the way you or your organization operates its business.
The FDCPA: a Brief Overview
The FDCPA is a federal statute that strictly regulates the collection of consumer debts. Penalties for violating the FDCPA are harsh, including damages, penalties for each violation, and an award of attorney’s fees and costs of litigation. There are attorneys who make a very good living specializing in suing people for violating the FDCPA.
In general, the FDCPA applies to anyone collecting a consumer debt on behalf of someone else where the debt arises from a personal, family or household purpose. All Courts agree that community association assessments are a consumer debt. Ordinarily, a property management company collecting a property assessment on behalf of the association is subject to the FDCPA unless one of the few exemptions to the FDCPA applies. One exemption provides that the FDCPA does not apply to persons or entities “collecting or attempting to collect any debt owed . . . another to the extent such activity is incidental to a bona fide fiduciary obligation.”
The issue in the case below was whether this exemption applied to a property management company attempting to collect unpaid assessments on behalf of a homeowners association. The Court had to determine whether there was a bona fide fiduciary obligation and whether the collection of assessments was “incidental” to that obligation.
The Case: Harris v. Liberty Community Management, Inc.
On December 19, 2012, the 11th Circuit Court of Appeals held that Liberty Community Management (“Liberty”) was not a “debt collector” under the FDCPA when it sought to collect assessments on behalf of the Little Suwanee Point Homeowners Association (the “Association”) “so long as the collection of such assessments from homeowners was not central to the management company’s fiduciary obligations.”
The Court based its reasoning on very specific facts about the relationship between Liberty and the Association. In finding that the collection of assessments was not central to Liberty’s fiduciary obligations, the Court noted the following facts:
(1) Under the management agreement, Liberty acts as the Association’s “sole and exclusive agent.”
(2) Liberty enters into contracts on behalf of the Association for common area maintenance.
(3) Liberty negotiates contracts in the name of the Association for electricity, gas, fuel, oil and water.
(4) Liberty purchases and maintains property insurance and other liability insurance for the Association, board of directors and members of the board.
(5) Liberty investigates all accidents and claims and makes all necessary reports to the insurance company.
(6) Liberty prepares a budget for the Association.
(7) Liberty maintains the Association’s books and records, including making deposits and drawing checks in the Association’s name.
(8) Liberty prepares monthly financial reports.
(9) Liberty assists the Association with its yearly tax filings.
The Court also noted that only one of Liberty’s specific duties involved the collection of assessments as they become payable and the management agreement provided that everything done by Liberty was done as the agent of the Association.
The suit was based on Liberty performing a task that many property management companies do to collect assessments: Liberty sent warning letters to several homeowners threatening to disconnect water service if the homeowner did not pay past due assessments.
The homeowners sued Liberty contending that Liberty violated several of the FDCPA’s provisions. Liberty argued that it was exempt from the FDCPA in that it met the requirements of the above referenced exemption.
The trial Court and the 11th Circuit Court of Appeals ultimately held that Liberty met the requirements for the exemption. The Court of Appeals reasoned that the collection of unpaid assessments was “incidental” to Liberty’s “bona fide fiduciary obligations” to the Association. Liberty did much more for the Association than collect assessments. In short, Liberty did not act “primarily” to collect past due assessments for the Association.
What Does This Case Mean For You?
If you are a property management company that collects debts for an association, you might be thinking that this case gives you the proverbial “green light” to ignore the FDCPA. You may have already gone through the Court’s checklist above and determined you have a fiduciary duty to the association, and you do not act solely to collect debts for your client. And, you may be right that you and your organization are exempt from the FDCPA. But, take caution! Whether a property management company meets the requirements of the exemption is a question of fact in each case. Furthermore, even if you meet the requirements of the exemption, you are not immune from getting sued by zealous plaintiff’s lawyers who make their living going after people just like you.
A better strategy is to make sure you fall within the Court’s checklist and are also FDCPA compliant, to avoid getting sued in the first place. The cost of defending a FDCPA claim through trial and an appeal could easily be in excess of $100,000.00. Unfortunately, the FDCPA does not contain a loser-pays attorney’s fees provision. So, even if a defendant ultimately prevails, it can be at a devastating cost.
The final lesson to take away from this article is that employing a good FDCPA compliance policy, at a minimal cost, can save you the much greater cost of defending FDCPA lawsuits. To stay in business and out of the courtroom, ensure that your collection practice is FDCPA compliant by consulting with an attorney familiar with the FDCPA.