FYI: 9th Cir Rejects Debtor's Attempt to Avoid SBA Judgment By Disclaiming Inheritance

The U.S. Court of Appeals for the Ninth Circuit recently affirmed the district court's judgment in favor of the United States Small Business Administration ("SBA") in a Federal Debt Collection Procedures Act, 28 U.C.S. § 3001 et seq. ("FDCPA"), lawsuit the SBA filed against a loan guarantor to satisfy a default judgment assigned to it after the guarantor disclaimed an inheritance to avoid paying the judgment. 

The Federal Debt Collection Procedures Act, which governs the collection of money owed to the U.S. government, should not be confused with the federal Fair Debt Collection Practices Act, which is found at 15 U.S.C. § 1692 et seq. and governs how debt collectors may collect debts from consumers.

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

The SBA, a federal government agency, guaranteed 75% of a $175,000 small business loan between a private bank and a company, and the company's owner personally guaranteed the loan. The company defaulted on the loan, and the private bank sued the company and guarantor, obtaining a default a judgment against them. When neither the company nor the guarantor satisfied the default judgment, the bank assigned the default judgment to the SBA to honor is guaranty of the loan, which totaled over $300,000.

The guarantor later inherited a share of his deceased father's trust, which was valued at over $150,000. Instead of accepting the inheritance, he signed a disclaimer under California law that allowed him to renounce his share of the trust and legally pass it to his two children, thereby attempting to prevent his creditors from accessing his share of the trust.  The SBA filed a lawsuit under the FDCPA seeking to void the disclaimer under the FDCPA's prohibition of fraudulent transfers of property. 

The guarantor countered that California law permitted the disclaimer because it states that a disclaimer is not a voidable transfer, and that the default judgment obtained against the guarantor was not a "debt" as defined by the FDCPA.  The trial court disagreed, holding that the FDCPA pre-empted California law and that the default judgment was a debt within the meaning of the FDCPA. The guarantor appealed.

In affirming, the Ninth Circuit explained that the FDCPA's fraudulent transfer provision, 28 U.S.C. §3304(a), permits the federal government to void a fraudulent transfer by a debtor who owes a debt to the U.S. where the existence of the debt pre-dated the transfer, there was a transfer of assets, a lack of equivalent value in exchange of the transfer, and the debtor's insolvency at the time of the transfer. The parties' arguments focused on whether the guarantor's disclaimer qualified as a transfer of property and whether the default judgment constituted a debt within the meaning defined by the FDCPA. 

The guarantor argued that he had acted lawfully under the California Probate Code, which states that a disclaimer is not a voidable transfer. The Ninth Circuit held, however, that California law directly conflicted with the FDCPA, which defines "transfer" so as to include the guarantor's disclaimer because it involves "every mode…of disposing of or parting with an asset or an interest in an asset…". 28 U.S.C. §3301(6).  Thus, the Court held, the disclaimer was a transfer of property that could be voided under the FDCPA and the federal statute pre-empted state law, which the Ninth Circuit found was supported by U.S. Supreme Court precedent.

The guarantor's argument that the default judgment did not qualify as a debt under the FDCPA also failed.  The FDCPA defines "debt" as an amount owing to the U.S. government because of a direct loan or a loan insured or guaranteed by the U.S., includes a long list of various types of debts and financial obligations, and contains the catch-all phrase "other source of indebtedness."  28 U.S.C. §3002(3).  The Ninth Circuit found that the default judgment fit into the catch-all phrase and that limiting language attached to the catch-all phrase ("owing under the terms of a contract originally entered into by only persons other than the United States") did not prevent the default judgment from qualifying as "debt" under the statute. 

In reaching its ruling, the Ninth Circuit examined the statutory language and purpose of the FDCPA, the House report and legislative discussion on the statute, and case law interpreting limiting language in statutes. It reasoned that, looking beyond the label given to the debt and analyzing the source of the debt, especially the contract that the created the debt, led to the conclusion that the SBA was a party to the contract that created the debt and had statutory authority to pursue collection of it.

The Court rejected the guarantor's arguments that the default judgment had not been entered in favor of the U.S., but merely assigned to the SBA, that the financial obligation was merely a guaranty and not a loan, and that the SBA improperly sought to enforce the entire default judgment instead of only the portion related to the SBA loan. The Ninth Circuit found each of the arguments to be without merit or legal authority.

Accordingly, the Ninth Circuit affirmed the trial court's holding that the SBA was allowed to reach the guarantor's trust share because the FDCPA pre-empted California's disclaimer law and the default judgment was a debt within the statute.

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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FYI: 9th Cir Holds Mortgagee's "Sold Out Second" Claim Not Barred by California's 4-Yr Statute of Limitations

The U.S. Court of Appeals for the Ninth Circuit recently reversed a ruling that disallowed an unsecured creditor's claim filed in a California bankruptcy court based on the forum state's statute of limitations. 

In so ruling, the Ninth Circuit held that, although courts typically apply the forum state's statute of limitations if the contract is silent on the issue, exceptional circumstances warranted the application of a longer statute of limitations here, because the creditor had no option but to enforce its claim in the forum based on where the bankruptcy petition was filed.  

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

In 2007, the plaintiff borrowers ("Borrowers") purchased a condominium in California with two loans secured by liens against the property, of which a bank ("Bank") held the junior lien.

Borrowers' promissory note to Bank provided in relevant part that: 

"[T]he Bank is a national bank located in Ohio and Bank's decision to make this Loan … was made in Ohio.  Therefore, this Note shall be governed by and construed in accordance with … the laws of Ohio … without regard to conflict of law principles."

Borrowers defaulted, the senior lender foreclosed, and Bank was left holding an unsecured claim in the amount of $42,000. 

Borrowers filed bankruptcy, and Bank filed a proof of claim based on the 2007 note.  Borrowers objected to the claim on the grounds that the claim was barred by California's applicable four-year statute of limitations.  Cal. Code Civ. Proc. § 337.  Bank argued that its claim was timely because the promissory note's choice of Ohio law incorporated Ohio's six-year statute of limitations period.  Ohio Rev. Code § 1303.16.

The bankruptcy court held that the promissory note selected Ohio's six-year statute of limitations period, and overruled Borrowers' objection.  The Bankruptcy Appellate Panel ("BAP") reversed.  Bank appealed from the BAP's decision.

As you may recall, when a contract contains a choice of law provision, federal courts will enforce that choice.  See, e.g., Flores v. Am. Seafoods Co., 335 F.3d 904, 916-19 (9th Cir. 2003).  But where a choice of law provision does not expressly include the statute of limitations, the Ninth Circuit construes it as silent on the issue.  See, e.g., Des Brisay v. Goldfield Corp., 637 F.2d 680, 682 (9th Cir. 1981).  Here, the Ninth Circuit determined that the choice of law provision at issue was materially identical to the one in Des Brisay. 

In Des Brisay, the Ninth Circuit applied the well-established rule that a federal right of action for which no statute of limitations was provided was subject to the limitations period which the forum state applies to analogous claims.  See, e.g., Wilson v. Garcia, 471 U.S. 261, 266-67 (1985).  However, unlike Des Brisay, this was not a federal securities case premised on an implied right of action.  This case involved a common law action on a promissory note for which both Ohio and California have statutorily prescribed a statute of limitations. 

To resolve this conflict of laws, the Ninth Circuit turned to the Restatement (Second) of Conflict of Laws.  See, e.g., Liberty Tool, & Mfg. (In re Vortex Fishing Systems), 277 F.3d 1057, 1069 (9th Cir. 2001). 

As you may recall, the 1971 version of the Restate (Second) of Conflict of Laws § 142 provides that:  "(1) An action will not be maintained if it is barred by the statute of limitations of the forum, including a provision borrower the statute of limitations of another state."  The 1988 version of § 142 is similarly worded, except that it provides a limited carve out which states "unless exceptional circumstances of the case make such a result unreasonable … The forum will apply its own statute of limitations barring the claim."

Here, the Ninth Circuit held that § 142 compelled the application of the longer statute of limitations under Ohio law based on "exceptional circumstances." 

According to the Ninth Circuit, the unique structures of the Bankruptcy Code meant that, through no fault of Bank's, there was no forum for its claim other than the one in which Borrower's bankruptcy was filed.  This was not a case filed voluntarily by Bank in California, in which a dismissal on statute of limitations grounds would be without prejudice to bringing the same claim in Ohio.  Rather, the Court held, once Borrowers declared bankruptcy, Bank was obligated to bring all of its claims in the district where Borrowers filed. 

Thus, the Ninth Circuit concluded that disallowing Bank's claim under California's statute of limitations would be wholly unreasonable under the circumstances. 

Accordingly, the Ninth Circuit reversed the BAP's judgment and remanded the case to the bankruptcy court.

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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FYI: CD Cal Cites Lack of Clear Regulatory Guidance in Dismissing ADA Claims Relating to Website Accommodations for Visually-Impaired

The U.S. District Court for the Central District of California recently dismissed a claim brought under the federal Americans with Disabilities Act ("ADA") brought by a visually-impaired plaintiff who alleged that the defendant pizza company's website did not permit users to complete their purchases using a screen-reading software program.  The plaintiff also alleged that the company's mobile app did not allow him to access the menu on his iPhone using a particular software. 

In dismissing the action without prejudice, the Court concluded that there were no regulations clarifying what web accessibility accommodations are required under the ADA.  Thus, the Court held, it was uncertain whether the company's web accessibility accommodations complied with the ADA.  In so ruling, the Court expressly called on Congress, the Attorney General, and the Department of Justice to issue regulations setting minimum web accessibility standards.

A copy of the opinion is attached.

The plaintiff brought the lawsuit against a retail pizza company, alleging the company's website and mobile app were not accessible to and independently usable by plaintiff and other blind or visually-impaired people using "screen readers." 

In particular, the plaintiff alleged the company's website did not allow users to complete their purchase using the screen-reading software program Job Access With Speech ("JAWS").  The plaintiff also alleged the company's mobile app did not permit him to access the menus and applications on his iPhone using the "VoiceOver" software program.  The plaintiff alleged that the website and mobile app failed to comply with version 2.0 of W3C's Web Content Accessibility Guidelines ("WCAG 2.0") under the ADA. 

The plaintiff brought claims under the ADA and California's Unruh Civil Rights Act ("UCRA"). 

The Court noted that the company's website and mobile app included accessibility banners that directed users who access the website using screen readers to call a specific toll free number if they need any assistance.  The Court also noted that the toll free phone number is staffed by a live representative who can assist blind or visually-impaired individuals.  The banners also indicated customers can call their local store directly to make purchases or ask questions.

The company moved for summary judgment on all of plaintiff's claims, asserting that dismissal was warranted for several reasons. 

First, according to the company, websites and mobile apps do not constitute "places of public accommodation" under the ADA.  Next, the company asserted the lawsuit violates fundamental principles of due process because the ADA, its implementing regulations, and the Department of Justice's ("DOJ") website all failed to indicate whether complying with WCAG 2.0 constitutes compliance with the ADA. 

The company's third argument was that the plaintiff could not establish violations of any applicable accessibility standards.  Fourth, according to the company, the UCRA claims fail because plaintiff could not establish the company intentionally discriminated against him.  The company's fifth argument was that plaintiff's UCRA's claims fail because the company did not have notice of the barriers plaintiff claims exist.  The company's final argument asserted the matter should be stayed because the DOJ had not issued any accessibility regulations addressing the websites and mobile apps of private businesses. 

The Court first address the company's argument that websites and mobile apps do not constitute "places of public accommodation" under the ADA.  In analyzing the background of the ADA and legal precedent interpreting it, the Court rejected the argument that websites and mobile apps do not need to comply with the ADA. 

Although the company raised several other arguments, the remainder of the Court's opinion addressed the company's argument that the lawsuit violates fundamental principles of due process because the ADA, its implementing regulations, and the DOJ's website all failed to indicate whether complying with WCAG 2.0 constitutes compliance with the ADA. 

The Court quickly established that the ADA regulations specifically reference "screen reader software" and "other effective methods of making visually delivered materials available to individuals who are blind or have low vision" as forms of accommodations under the ADA. 

According to the company, however, other than the acknowledgement that accommodations for web access exist, there was no concrete guidance addressing the accessibility standards a website must meet, or any standards established that companies operating websites must meet.  More specifically, the company argued that there were no regulations, guidelines or rules establishing that it had to comply with the WCAG 2.0. 

Responding to the company's argument, the Court observed that "the DOJ has consistently stated its view that the ADA's accessibility requirements apply to websites belonging to private companies."  The Court determined that the true inquiry was whether the DOJ had issued any guidance regarding the specific type of access at issue in this case.

The Court noted that the DOJ had issued a Notice of Proposed Rulemaking ("NOPR") in 2010 intended to address requirements for public accommodations via the internet and websites accessible to individuals with disabilities.  Within the NOPR, the DOJ acknowledged the creation of WCAG, but stated that "a clear requirement that provides the disability community consistent access to Web sites and covered entities clear guidance on what is required under the ADA does not exist."  Since the 2010 NOPR, the DOJ has not issued any final rule regarding web access.

The company relied on the fact that no final rule regarding web access had been issued to assert that plaintiff's allegations that the company failed to comply with certain accessibility standards would violate the company's due process rights.  In support of its argument, the company relied on the Ninth Circuit's ruling in United States v. AMC Entertainment, where that Court concluded that a specific provision within an ADA regulation was too vague to put the defendant on notice of whether it was required to retroactively incorporate a comparable viewing angle requirement in movie theaters. After criticizing the government for having "ample opportunity" to clarify the provision at issue but failing to do so, the Ninth Circuit concluded: "We decline to require AMC to have determined the precise meaning of the regulation when the government did not do so." 

The Court here found the ruling from AMC was analogous to the facts of this case.  "Here, too, Plaintiff seeks to impose on all regulated persons and entities a requirement that they 'compl[y] with the WCAG 2.0 Guidelines' without specifying a particular level of success and without the DOJ offering meaningful guidance on this topic.  This request flies in the face of due process." 

The Court rejected the plaintiff's argument that because the DOJ has issued several "Statements of Interest" and entered into several consent decrees and settlements requiring compliance with WCAG 2.0, so too must the company. 

In addition, the Court observed that the ADA requires "reasonable accommodations," and does not require entities to provide the best available accommodation.  The Court then determined that the plaintiff failed to articulate why the company providing a telephone hotline for the visually-impaired, or its use of a technical standard other than WCAG 2.0, would not qualify as a reasonable accommodation. 

The Court granted the company's motion and dismissed each of plaintiff's claims without prejudice pursuant to the primary jurisdiction doctrine, which allows the Court to stay proceedings or dismiss a complaint without prejudice pending the resolution of an issue within the special competence of an administrative agency. 

The Court then expressed the significance of establishing regulations and guidelines addressing the constantly-present issue of web accessibility.  "The Court concludes by calling on Congress, the Attorney General and the Department of Justice to take action to set minimum web accessibility standards for the benefit of the disabled community, those subject to Title III [of the ADA], and the judiciary." 

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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FYI: 9th Cir Holds FDCPA §1692f(6) Applies to Non-Judicial Foreclosures

The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of an FDPCA claim arising out of a non-judicial foreclosure.  The Ninth Circuit ruled that section 1692f(6) of the FDCPA applies to non-judicial foreclosure activity. 

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

Two borrowers refinanced a loan secured by their home and executed a note and deed of trust.  The lender assigned the note to a purchaser of the subject loan (the "loan owner").  Later, the lender assigned the deed of trust to the loan owner and caused a notice of default to be recorded.  The borrowers subsequently filed a Chapter 7 bankruptcy petition, and eventually received a discharge from the bankruptcy court.

A substitute foreclosure trustee recorded another notice of default.  The borrowers, the servicer of the subject loan, and the loan owner mediated the borrowers' default with a Nevada foreclosure mediator.  At the mediation, the servicer and the loan owner allegedly could not produce the original loan documents.  The mediation office stated that it would not issue a Certificate of Foreclosure, based upon the mediator's recommendation.

The loan's servicer allegedly sent the borrowers a letter stating:  "You are in default under the terms and conditions of the mortgage loan for failure to pay the required installments when due.  [The servicer] intends to enforce the provision of the Note and related security instrument[] … If you do not pay the full amount of the default, [the servicer] may accelerate the entire sum of both principal and interest due and payable, and invoke any remedies provided for in the Note and security instrument, including but not limited to the foreclosure sale of the property."

Thereafter, counsel for the borrowers allegedly demanded repeatedly that the servicer cease all foreclosure efforts, and that either the servicer or the loan owner prove that it had possession of the note.

The borrowers filed suit against the servicer and the loan owner alleging purported violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ("FDCPA"), intentional infliction of emotional distress, and purported violation of the Nevada Deceptive Trade Practices Act ("DTPA").  Specifically, the borrowers alleged violations of sections 1692c(a)(2), 1692d, 1692e, and 1692(f)(6) of the FDCPA.

The defendants moved to dismiss the borrowers' complaint.  The trial court granted the motion to dismiss and held that the borrowers could not state a claim for relief under the FDCPA because the defendants' alleged conduct was all related to non-judicial foreclosure activities, and therefore not debt collection.

On appeal, the Ninth Circuit first noted its recent ruling in Ho v. ReconTrust Co. where it held that enforcing a security interest does not involve collecting a debt, which "for the purposes of the FDCPA, debt is synonymous with money."  Ho v. ReconTrust Co., 840 F.3d 618, 621 (9th Cir. 2016).  Instead, the "object of a non[-]judicial foreclosure is to retake and resell the security, not to collect money ... Thus, actions taken to facilitate a non-judicial foreclosure … are not attempts to collect 'debt' as that term is defined by the FDCPA."  Id.

The Ninth Circuit followed Ho and affirmed the trial court's dismissal of the borrowers' claims for purported violation of sections 1692c(a)(2), 1692d, and 1692e of the FDCPA because defendants had not attempted to collect a money debt.

However, the Ninth Circuit also found that section 1692a(6) of the FDCPA provides a more expansive definition of "debt collector" for the purposes of section 1692f(6).  In particular, section 1692a(6) states that "[f]or the purpose of section 1692f(6)" a debt collector also includes a security interest enforcer.

The Ninth Circuit then stated that "Ho held that while the FDCPA regulates security interest enforcement activity, it does so only through Section 1692f(6)."

As you may recall, 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."

The Ninth Circuit reversed the trial court's dismissal of the borrowers' claim for purported violation of section 1692(f)(6) of the FDPCA against the servicer.  The Ninth Circuit found that the borrowers had alleged that the servicer threatened to take nonjudicial action to dispossess the borrowers of their home without a legal ability to do so.  The Ninth Circuit then held that section 1692f(6) prohibits such conduct.

However, the Ninth Circuit affirmed the trial court's dismissal of the borrowers' purported claims for intentional infliction of emotional distress.  The Ninth Circuit found that the borrowers failed to allege conduct which was "outside all possible bounds of decency" and "regarded as utterly intolerable in a civilized community," which is required to state a claim for intentional infliction of emotional distress.

Finally, the Ninth Circuit affirmed the trial court's dismissal of the borrowers' purported DTPA claim and held that the real estate loans do not fall within the DTPA, which governs transactions relating to "goods and services" because a real estate loan is neither a good nor a service.  See Nev. Rev. Stat. §§ 598.0915-598.0925, 598.0934.       

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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