Monday, April 22, 2019

FYI: 9th Cir Holds That Citizenship of Bank Acting as Trustee Controls for Diversity Purposes

The U.S. Court of Appeals for the Ninth Circuit held that the Supreme Court of the United States’ decision in Americold Realty Trust v. ConAgra Foods, Inc. did not upset the Supreme Court’s prior holding in Navarro Ass’n v. Lee, and that “when a trustee files a lawsuit or is sued in her own name her citizenship is all that matters for diversity purposes.”

Accordingly, the Ninth Circuit held that the trial court properly exercised its jurisdiction over the matter where the bank - acting as trustee - was sued in its own name, and along with the other named defendants, was of diverse citizenship with the plaintiff. 

A copy of the opinion is available at:  Link to Opinion

The plaintiff borrower (“Borrower”) took out a loan, and the loan was later securitized and the deed of trust was assigned to the bank (“Bank”), which acted as trustee for a trust (“Trust”).  The Trust was governed by a pooling and servicing agreement, which provided that all “right, title and interest” in the Trust were conveyed to the Bank “for the use and benefit of the Certificateholders,” and the Bank was given the power to hold the Trust’s assets, sue in its own name, transact the Trust’s business, terminate servicers, and engage in other necessary activities.

In her complaint, the Borrower asserted various causes of action under California law, including wrongful foreclosure.  The Borrower named, among others, the Bank.

The defendants removed the matter to the trial court based on diversity jurisdiction.  The notice of removal specifically stated that it was filed on behalf of, among others, the Bank as trustee for the Trust.  The notice further stated that the Bank was incorrectly sued in its name only, without referencing the Trust.

The notice asserted that the Bank was a national banking association organized under the laws of the United States, with its main office in Virginia, and was therefore a citizen of Virginia for diversity purposes.
Because no defendant was, like the Borrower, a citizen of California, the notice concluded that diversity jurisdiction was established and removal was proper.

The trial court agreed and the matter remained in federal court.  The trial court subsequently granted summary judgment in favor of the defendants. 

The Borrower appealed.  On appeal, she did not contest the trial court’s summary judgment decision, but instead only challenged the court’s subject matter jurisdiction over the action.

As you may recall, federal subject matter jurisdiction – specifically, diversity jurisdiction – exists where an action is between “citizens of different states,” and the “matter in controversy exceeds the sum or value of $75,000.”  It requires “complete diversity” of citizenship, meaning that “the citizenship of each plaintiff is diverse from the citizenship of each defendant.” 

The Borrower argued that the defendants failed to establish diversity jurisdiction because, following Americold, they were required to demonstrate the citizenship of the Trust’s investors, and could not simply rely on the citizenship of the Bank as its trustee.

In addressing the argument, the Ninth Circuit first discussed two other pertinent Supreme Court decisions, Navarro and Carden v. Arkoma Associates. 

The Ninth Circuit explained that in Navarro, the Supreme Court reaffirmed that “a trustee is a real party to the controversy for purposes of diversity jurisdiction when he possesses certain customary powers to hold, manage, and dispose of assets for the benefit of others.” 

However, in Carden, the Supreme Court held that “diversity jurisdiction in a suit by or against the [limited partnership] entity depends on the citizenship of ‘all the members.’”  The Supreme Court further explained that Navarro was consistent with that rule because it “did not involve the question whether a party that is an artificial entity other than a corporation can be considered a ‘citizen’ of a State, but the quite separate question whether the parties that were undoubted ‘citizens’ . . . were the real parties to the controversy.” 

The Ninth Circuit noted that although other “[c]ourts applying Navarro and Carden to the question of a trust’s citizenship for diversity purposes have reached different conclusions,” in 2006 it had held in Johnson v. Columbia Props. Anchorage, LP that a “[a] trust has the citizenship of its trustee or trustees.” 

However, in 2016 the Supreme Court decided Americold, in which it addressed “how to determine the citizenship of a ‘real estate investment trust.’”  In analyzing the issue, the Supreme Court noted that under the applicable state law, a “real estate investment trust” was not a corporation, but instead “an ‘unincorporated business trust or association’ in which property is held and managed ‘for the benefit and profit of any person who may become a shareholder.’”

Thus, the Supreme Court determined that the real estate investment trust’s “shareholders appear[ed] to be in the same positions as the shareholders of a joint-stock company or the partners of a limited partnership – both of whom we viewed as members of their relevant entities,” and “therefore conclude[d] that for purposes of diversity jurisdiction, [the real estate investment trust’s] members include its shareholders.”

However, the Supreme Court expressly stated that it was not overturning Novarro, but instead distinguished it noting that “Navarro had nothing to do with the citizenship of [a] trust,” rather it “reaffirmed a separate rule that when a trustee files a lawsuit in her name, her jurisdictional citizenship is the State to which she belongs.”

In applying Americold to its case, the Ninth Circuit stated that “[a]lthough [the Borrower] suggests that Americold constituted a sea change in how courts determine the citizenship of a trust, we do not find the decision to be quite so momentous.  Indeed, the Court clearly articulated that which we already knew: ‘when a trustee files a lawsuit or is sued in her own name her citizenship is all that matters for diversity purposes.’”

The Ninth Circuit ruled that because the Borrower sued the Bank in its own name, and did not mention the Trust either in the caption or in the complaint’s list of defendants, “Americold holds that, because [the Bank] as trustee was ‘sued in [its] own name, [its] citizenship is all that matters for diversity purposes.’”

Accordingly, “[t]he parties were . . . completely diverse, and the trial court properly exercised diversity jurisdiction in over the action.”

After reaching its ruling, the Ninth Circuit noted in dicta that there was potential conflict between its decision in Johnson that “[a] trust has the citizenship of its trustee or trustees” and Americold where the Supreme Court concluded that the citizenship of nontraditional trusts should be determined based on their members, not trustees.

After discussing the differences between “traditional trusts” and other artificial entities to which states have applied the “’trust’ label,” the Ninth Circuit concluded that “Johnson remains good law when applied to what Americold labelled traditional trusts.” 

Moreover, “in such a case, as Navarro held, the trustee is the real party in interest, and so its citizenship, not the citizenships of the trust’s beneficiaries, controls the diversity analysis.” 


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

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Friday, April 12, 2019

FYI: Cal App (4th Dist) Confirms Limited Liability for Foreclosure Trustees

The Court of Appeal for the Fourth District of California recently held that a trustee conducting a non-judicial foreclosure is not subject to tort liability unless it violated duties established by the deed of trust and governing statutes, or if the trustee has effectively taken on a different or modified duty by its actions.

A copy of the opinion is available at:  Link to Opinion

A commercial developer purchased real property and obtained a loan to fund construction.  The loan was secured by a deed of trust on the property.

The lender sent a notice of default stating that the payments required under the loan had not been made and demanded payment of the total payoff balance.  A title company recorded a substitution of trustee, which substituted the title company as a the new trustee under the deed of trust. 

When the developer failed to pay off the loan, the title company (Trustee) recorded the notice of default and a notice of trustee’s sale.  The property was sold at a public auction.

The developer filed a lawsuit.  The operative second amended complaint asserted claims for wrongful foreclosure, wrongful disseisin and ouster, and conspiracy.

The trial court sustained the Trustee’s demurrer to the developer’s second amended complaint without leave to amend, and it subsequently entered judgment in favor of the title company.  

This appeal followed.

On appeal, the developer argued that each of the three causes of action it asserted against the Trustee were adequately pleaded to survive demurrer. 

As you may recall, in California, “[a] beneficiary or trustee under a deed of trust who conducts an illegal, fraudulent or willfully oppressive sale of property may be liable to the borrower for wrongful foreclosure.”  Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929.  However, “[t]he trustee of a deed of trust is a not a true trustee with fiduciary obligations, but acts merely as an agent for the borrower-trustor and lender-beneficiary.”  Id., at p. 927.

The trustee’s “only duties are: (1) upon default to undertake the steps necessary to foreclose the deed of trust; or (2) upon satisfaction of the secured debt to reconvey the deed of trust.”  Heritage Oaks Partners v. First American Title Ins. Co. (2007) 155 Cal. App. 4th 339, 345.

The Appellate Court observed that neither the deed of trust nor the governing statutes created a duty on the part of the Trustee to verify that beneficiary received a valid assignment of the loan or verify the authority of the person who signed the substitution of trustee. 

“Such an inquiry is beyond the scope of the trustee’s duties,” the Appellate Court explained, “and there is no appropriate basis for imposing tort liability on [the Trustee] for failing to take actions that are beyond the scope of its duties.”

The developer argued in Lupertino v Carbahal (1973) 35 Cal.App.3d 742, the court found that the trustee was equitably estopped from asserting that it complied with the notice requirements of the non-judicial foreclosure statutes.  There, the trustee mailed the notice of trustee’s sale to only the borrowers’ address of record, and because the borrowers had moved, they did not receive actual notice in time to cure the default.

The Appellate Court explained that the trustee in Lupertino had previously been in communication with the borrowers at their then-current address.  “[B]y its actions, the trustee effectively took on the duty of communicating with the borrowers at their then-current address, regardless of the borrowers’ failure to update their address of record.”  The Court noted that the developer did not raise any similar issues against the Trustee’s actions in this case.

Additionally, to successfully challenge a foreclosure, the Appellate Court noted that a plaintiff must show both a failure to comply with the procedural requirements for the foreclosure sale and that the irregularity prejudiced the plaintiff.  Knapp v. Doherty (2004) 123 Cal.App.4th 76, 96.

The developer alleged that the trustee’s sale was noticed for March 3, 2015, but the property was not sold until March 5, 2015, and the sale price was less than the outstanding principal balance due on the loan.  In the Appellate Court’s view, these facts, without more, do not support the developer’s assertions that the Trustee failed to properly notice and conduct the foreclosure sale. 

The developer also argued that the notice of default contained “irregularities” including, among other things, that it was signed by an agent of the beneficiary and listed an incorrect address and phone number for the beneficiary. 

The Appellate Court observed that Civil Code ' 2924(a)(1) permits the trustee, mortgagee, or any of their authorized agents to record the notice of default.  It further observed that the developer did not plead any facts demonstrating prejudice flowing from the purported defects in the notice.  Specifically, that the defect impaired its ability to protect its interest in the property. 

Thus, the Appellate Court concluded that the Trustee’s demurrer  to the wrongful foreclosure claim was properly sustained. 

The Appellate Court then turned to the developer’s remaining causes of action for “wrongful disseisin and ouster” and “conspiracy.” 

Noting that both of these claims were derivative of the wrongful foreclosure claim, and that the developer did not argue how these claims might still be viable even if the wrongful foreclosure cause of action was not, the Appellate Court concluded that Trustee’s demurrer as to the remaining claims was also properly sustained. 

Accordingly, the Appellate Court affirmed the trial court’s order sustaining without leave to amend the Trustee’s demurrer to the second amended complaint.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Wednesday, April 10, 2019

FYI: 9th Cir Reverses Summary Judgment on TCPA Allegations That Creditor Ratified Contractor's TCPA Violations

The U.S. Court of Appeals for the Ninth Circuit recently reversed a summary judgment award in favor of a student loan buyer, holding that triable issues of fact existed as to whether it had actual knowledge of or willfully ignored and thereby ratified the Telephone Consumer Protection Act (“TCPA”) violations of the debt collectors contracted by the owner’s servicer.


The plaintiff received student loans through a federal program under which the owner of the loans “guarantees student loans made by private lenders and then takes ownership of those loans if a student-borrower defaults.

The borrower defaulted and the owner of the loans contracted with a loan servicing company, which in turn contracted with debt collectors to collect on loans in default.

Five different debt collection companies began calling the borrower and left pre-recorded messages using a cellular telephone number that “she neither provided in connection with her student loans nor consented to be called on.”

The borrower sued the loan owner, loan servicer and several debt collectors, alleging the violated the TCPA by calling the borrower’s telephone number without her express consent using an automatic telephone dialing system (“ATDS”) and leaving pre-recorded messages. All of the defendants except the loan owner were “dismissed for lack of personal jurisdiction.”

The trial court granted the loan owner’s motion for summary judgment and the borrower appealed, arguing that (a) the owner was vicariously liable for the debt collectors’ TCPA violations under a 2008 Order of the Federal Communications Commission; and (b) the owner was vicariously liable “under the federal common law agency principles of ratification and implied actual authority.”

On appeal, the Ninth Circuit began by explaining that “[u]nder the TCPA, it is unlawful ‘to make any call (other than … with the prior express consent of the called party) using any automatic telephone dialing system or an artificial or prerecorded voice … to any telephone number assigned to a … cellular telephone service.”

The FCC’s 2008 Order determined that “[c]alls placed by a third party collector on behalf of that creditor are treated as if the creditor itself placed the call.” Because Congress had addressed the issue directly and “the 2008 FCC Order is a fully adjudicated declaratory ruling,” it is entitled to deference under the Supreme Court’s decision in Chevron, U.S.A. Inc. v. Natural Res. Def. Council. 

Rejecting the plaintiff’s first argument, the Court pointed out that “[t]hough the 2008 FCC Order implies a creditor could be liable for a debt collector’s TCPA violations, the Order does not make such liability per se or automatic. … To the contrary, in a 2013 order, the FCC clarified that a court should determine whether a defendant is vicariously liable for the TCPA violations of a third-party called by using federal common law agency principles.”

The Ninth Circuit also explained that the borrower’s argument ignored the Court’s 2014 decision in Gomez v. Campbell-Ewald Co., “which held that ‘a defendant may be vicariously liable for TCPA violations where the plaintiff establishes an agency relationship, as defined by federal common law, between the defendant and a third-party caller.” Thus, “there is no per se liability.”

The Court then turned to analyze the applicable federal common law agency principles, looking to the Restatement (Third) of Agency for guidance, focusing on the “two agency principles that [plaintiff] believes makes [the owner/creditor] liable for the debt collectors’ TCPA violations—ratification and implied actual authority.”

The Ninth Circuit explained that “ratification is the principal’s assent (or conduct that justifies a reasonable assumption of assent) to be bound by the prior action of another person or entity. … [and] creates consequences of actual authority, including, in some circumstances, creating an agency relationship when none existed before.”

A principal ratifies a third party’s acts in two ways: “[t]he first is by a ‘knowing acceptance of the benefit’. … The second way … is through ‘willful ignorance.’”

The Court cited its 2018 decision in Kristensen v. Credit Payment Servs. Inc., a TCPA class action and “the only case in our circuit, or any circuit, that analyzes in what circumstances ratification may create an agency relationship when none existed before ….” That case involved a text message sent to plaintiff’s cell phone without his prior consent “as part of a marketing campaign for payday lenders.”

The plaintiff sued “the lenders and marketing companies but not the company that sent the text message. The trial court granted summary judgment for the defendants, rejecting plaintiff’s theory of vicarious liability that “defendants ratified … the [sender’s] unlawful texting campaign by accepting customer leads while knowing that [the sender] was using texts to generate those leads.” The Ninth Circuit affirmed, holding that because the non-party sender was not an agent or “purported agent of the defendants, they could not have ratified the [sender’s] acts.”

The Ninth Circuit distinguished Kristensen because “[u]nlike the texting publisher in Kristensen, here, a reasonable jury could find that the debt collectors pretended and demonstrably assumed to act as [the owner/creditor’s] agents.”

Having found Kristensen inapplicable, the Court analyzed “whether a triable issue of fact exists as to whether [the owner/creditor’s] conduct ‘justifies a reasonable assumption’ that it assented to the debt collector’s allegedly unlawful calling practices.”

Highlighting that “[t]h focal point of ratification is an observable indication that a principal has exercised an explicit or implicit choice to consent to the purported agent’s acts[,]” the Court found that “a reasonable jury could conclude that [the owner/creditor] accepted the benefits—loan payments—of the collectors’ calls while knowing some of the calls may have violated the TCPA. If a jury concluded that [the owner/creditor] also had ‘knowledge of material facts,’ [its] acceptance of the benefits of the collector’s unlawful practices would constitute ratification.”

Because there was “evidence that [the owner/creditor] communicated consent to the debt collectors through acquiescence in their calling practices that allegedly violated the TCPA[,]” and the knowledge of material facts requirement can be met either through “actual knowledge” or “willful ignorance,” the Court found that “a reasonable jury could find that [the owner/creditor] ratified the debt collectors’ calling practices by remaining silent and continuing to accept the benefits of the collectors’ tortious conduct despite knowing what the collectors were doing or, at the very least, knowing of facts that would have led a reasonable person to investigate further.”

Because triable issues of fact existed as to whether the owner/creditor had actual knowledge of or engaged in willful ignorance and thereby ratified the debt collector’s calling practices, the Ninth Circuit held that “a reasonable jury could find that [the owner/creditor] ratified the debt collectors’ calling practices” and reversed the trial court’s order granting summary judgment in defendant’s favor.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Sunday, April 7, 2019

FYI: 9th Cir Holds GSE Is Not "Consumer Reporting Agency" Under FCRA

The U.S. Court of Appeals for the Ninth Circuit recently held that a government sponsored enterprise ("GSE) that licensed underwriting software to lenders was not a consumer reporting agency under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. ("FCRA"). 

In so ruling, the Ninth Circuit determined that the GSE did not assemble or evaluate consumer information to furnish consumer reports to third parties.  Instead, the GSE merely provided software to allow lenders to assemble or evaluate such information. 

A copy of the opinion is available at:  Link to Opinion

The plaintiffs had a short sale after defaulting on their mortgage.  After waiting two years, they attempted to refinance their mortgage and a number of lenders used a software called Desktop Underwriter ("DU") to ascertain whether a loan to them would be eligible for purchase by the GSE.

The GSE created DU to allow lenders to enter the information about the borrower and the property.  DU automatically applies the guidelines and requirements in the GSE's selling guide.  The lender can also contract with credit bureaus to pay for and import the borrower's credit report into DU.  The lender then uses DU to underwrite the loan. 

DU analyzes all the inputted or imported information and provides a report called "DU Findings", on a loan's eligibility for purchase by the GSE.  The GSE is not involved in the process of generating DU Findings.

Three of the eight DU Findings created in evaluating the plaintiffs' prospective loan stated that the loan was ineligible due to a foreclosure reported within the last seven years -- which was inaccurate.

The plaintiff sued the GSE under the FCRA, which requires a consumer reporting agency to follow "reasonable procedures to assure maximum possible accuracy of consumer information."  15 U.S.C. § 1681e(b). 

On cross-motions for summary judgment, the district court held that the GSE acted as a consumer reporting agency when it licensed DU to lenders and it was therefore subject to the FCRA. 

The case went to trial and the jury was instructed that "[i]n connection with its actions in this case [the GSE] is a consumer reporting agency,' [and] the DU findings are 'consumer reports.'"  The jury returned a verdict for the plaintiffs and awarded $30,000 in damages.  The trial court also awarded attorneys' fees and costs under FCRA's fee shifting provision. 

On appeal, the GSE argued that it was not liable under the FCRA because it was not a consumer reporting agency.

As you may recall, the FCRA defines a consumer reporting agency as "any person which [1] regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers [2] for the purpose of furnishing consumer reports to third parties."  15 U.S.C. § 1681a(f).

The Ninth Circuit observed that the GSE did not assemble or evaluate information when a lender uses DU.  Lenders assembled the consumer information by inputting it into DU, and lenders themselves contracted with and paid the credit bureaus for the reports.  Apart from creating, licensing, and updating DU, the GSE did not assemble or evaluate consumer information.  Instead, the Ninth Circuit found that DU was merely a tool for lenders to do so at their own choosing.

Additionally, the Ninth Circuit noted that its interpretation of the FCRA aligned with the Federal Trade Commission's ("FTC") guidelines, which opined that "[a] seller of software to a company that uses the software product to process credit report information is not a [consumer reporting agency] because it is not 'assembling or evaluating' any information."

The plaintiffs argued that the GSE stored backups of software-generated case files and updated DU's database requirements for information imported from credit bureaus.  In the Ninth Circuit's view, none of this activity demonstrated that the GSE assembled or evaluated information for the purpose of furnishing a consumer report.  Instead, the GSE merely provided software that allowed lenders to assemble or evaluate such information. 

The plaintiffs also argued that the GSE's licensing agreement with the lenders stated that: "[a]s Licensee's agent, [GSE] shall, and is hereby expressly authorized by Licensee to obtain Consumer Credit Data for the sole purpose of performing a Prequalification Analysis and/or making an underwriting recommendation." 

The Ninth Circuit observed that the agreement also stated that it was the licensee-lender who used DU "to request and receive Consumer Reports and/or analyze or evaluate Consumer Credit Data in underwriting Mortgage Loan Applications."  Thus, evidence of what the GSE described itself in the licensing agreement was not what the GSE actually did.

Next, the GSE argued that it was not a consumer reporting agency because it did not assemble or evaluate consumer information for "the purpose of furnishing consumer reports to third parties."  15 U.S.C. § 1681a(f).

As you may recall, FCRA defines "consumer report as any communication by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of servicing as a factor in establishing the consumer's eligibility for credit, insurance, employment, or other statutorily enumerated purposes."  15 U.S.C. § 1681a(d)(1).

The GSE argued that even if it were assembling or evaluating consumer information as a result of DU, it did not do so for the purpose of furnishing consumer reports to third parties.  Instead, its purpose is only to facilitate a transactions between the lender and the GSE.

The Ninth Circuit agreed based on the plain mean of "purpose".  DU determined whether a loan was eligible for purchase by the GSE based only on information provided to it by lenders and credit bureaus.  DU contained no evaluation or new information regarding the borrower's creditworthiness that was not already provided by the lender or credit bureau.  The Ninth Circuit did not find any evidence indicating that the GSE assembled or evaluated consumer information. 

The Ninth Circuit further observed that FCRA imposed duties on consumer reporting agencies to provide a variety of disclosures to consumers.  If the GSE was a consumer reporting agency under FCRA, it would be required to comply with the disclosure requirements and that interpretation would contradict Congress' design for the GSE to operate only in the secondary mortgage market to deal directly with lenders, and not with borrowers themselves. 

Accordingly, the Ninth Circuit reversed the trial court's judgment in favor of the plaintiffs and remanded with instructions to enter judgment in favor of the GSE. 


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Sunday, March 24, 2019

FYI: SCOTUS Rules FDCPA Has Extremely Limited Applicability to Persons Engaging in Nonjudicial Foreclosure Proceedings

The U.S. Supreme Court recently issued its much-anticipated opinion in Obduskey v. McCarthy & Holthus LLP, ruling the federal Fair Debt Collection Practices Act does not cover persons engaged in "non-judicial foreclosures" except with respect to a single provision contained in the FDCPA.

Background

Colorado, like many western states, has a procedure that allows a lender to foreclose property without the need to file a lawsuit.

Here, as you may recall, a Colorado borrower defaulted on his home loan and the mortgage servicer hired a law firm to pursue a non-judicial foreclosure.  The borrower informed the law firm he was disputing the debt and the law firm, without responding to the dispute, proceeded with the non-judicial foreclosure.

The borrower then filed a lawsuit against the mortgage servicer and law firm alleging, among other things, violation of the FDCPA by proceeding with the foreclosure without first providing verification of the debt in response to his dispute as required by 15 U.S.C. § 1692g(b).   The mortgage servicer and law firm filed motions to dismiss.

The FDCPA defines a debt collector as persons engaged "in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts." The Colorado borrower alleged this included the law firm and mortgage servicer.

However, the FDCPA's definition of a debt collector also states that "[the] term [debt collector] also includes any person . . . in any business the principal purpose of which is the enforcement of security interests" for purposes of section 1692f(6). The law believed this provision excluded its efforts undertaken in the nonjudicial foreclosure.

The trial court agreed with the law firm and mortgage servicer and granted their motions to dismiss, determining that the mortgage servicer was not a "debt collector" under the FDCPA because the loan was not in default when it began servicing the loan.[1]  The trial court also found the law firm's nonjudicial foreclosure activities were "outside the scope of the FDCPA."

The borrower appealed and the U.S. Court of Appeals for the Tenth Circuit affirmed the District Court's decision, explaining that despite findings to the contrary by three other circuits (the Fourth, Fifth, and Sixth) and the Colorado Supreme Court, a nonjudicial foreclosure is not an attempt to collect money.  Therefore, the "mere act of enforcing a security interest through a non-judicial foreclosure proceeding does not fall under the FDCPA."

The U.S. Supreme Court granted the borrower's Petition for a Writ of Certiorari on June 28, 2018, and heard oral argument on Jan. 7, 2019.

The Ruling

The Supreme Court first looked to the language of the FDCPA which provides a "general" definition for "debt collector."[2]  However, that subsection also provides: "For the purpose of section 808(6) [15 U.S.C. § 1692f(6)][3], such term also includes any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the enforcement of security interests." (emphasis added).

Focusing on the italicized terms above, and particularly the word "also," the Court stated the phrase "strongly suggests that one who does no more than enforce security interests does not fall within the scope of the general definition.  Otherwise why add this sentence at all?"

Second, the Court explained that it makes sense to "treat security-interest enforcement differently from ordinary debt collection in order to avoid conflicts with state nonjudicial foreclosure schemes."  As an example, the Court noted state nonjudicial foreclosures procedures include consumer protection provisions, some of which are in conflict with the FDCPA, such as the requirement to publicize the sale.

Third, the Court looked to the legislative history which evidenced conflicting proposals regarding the applicability of the entire FDCPA to persons who enforce security interests.  "Given these conflicting proposals, the Act's present language has all the earmarks of a compromise: The prohibitions contained in §1692f(6) will cover security-interest enforcers, while the other 'debt collector' provisions of the Act will not."

Accordingly, the Court concluded with the seemingly narrow holding that "but for §1692f(6), those who engage in only nonjudicial foreclosure proceedings are not debt collectors within the meaning of the Act."


  
[1] The FDCPA's definition of "debt collector" excludes "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 concerns a debt which was not in default at the time it was obtained by such person." 15 U.S.C. § 1692a(6)(F)(iii).

[2] "The term 'debt collector' means any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another."  15 U.S.C. §1692a(6).

[3] Section 1692f(6) prohibits: "[t]aking or threatening to take any nonjudicial action to effect dispossession or disablement of property if—(A) there is no present right to possession of the property claimed as collateral through an enforceable security interest; (B) there is no present intention to take possession of the property; or (C) the property is exempt by law from such dispossession or disablement."


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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