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 
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