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Court Rules Management Company Not a Debt Collector Under FDCPA

A few days ago, the Federal District Court for the District of Hawaii ruled that a management company is not a debt collector under the Fair Debt Collection Practices Act (“FDCPA”).  Although the legal principles in the decision are not particularly new, it does provide an opportunity to discuss the FDCPA and management companies.

The FDCPA requires debt collectors to meet certain requirements in the collection of a debt, including a requirement to provide the debtor with a very specific notice that you are debt collector and the debtor has certain rights.  Failure to follow the requirements can result in a significant award in favor of the debtor.  The primary target of the FDCPA was collection agencies.  However, the FDCPA was written broadly so that it could apply to management companies and even attorneys under certain circumstances.

Management companies have two possible arguments that they are not a debt collector under the FDCPA.   The FDCPA contains an exemption for:

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; (ii) concerns a debt which was originated by such person; (iii) concerns a debt which was not in default at the time it was obtained by such person; or (iv) concerns a debt obtained by such person as a secured party in a commercial credit transaction involving the creditor.  [Emphasis added.]

The first exception (incidental to a bona fide fiduciary obligation) sometimes applies because the management company owes a fiduciary duty to the association.  See, Hawaii Revised Statutes §514B-132(c)Therefore, if the collection of the association’s debts is not central to the fiduciary relationship, a management company would not be a debt collector under the first exemption.  In Beckman v. Maalaea Surf Association of Apartment Owners, the Hawaii Federal District Court recognized that the management company’s duties included:  (1) maintaining a record of all income and expenses related to the Property; (2) preparing an annual budget; (3) maintaining the common elements of the Property; (4) negotiating various utility related services contracts; and (5) collecting all monthly and other assessments and fees that are due the Association with respect to the Property.  The Court ruled that all these duties meant that the the collection of assessments and fees is “incidental to” [the management company’s] overall fiduciary obligation to manage the Property.

The third exception (a debt which was not in default at the time it was obtained) sometimes applies because often the unit owner may not be in default at the time the management company is hired by the association.  In Turner v. Hawaii First Inc., the Hawaii Federal District Court ruled that the management company was not a debt collector because the account was not in default at the time the management company was hired by the Association to collect the Association’s debts.

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