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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Wednesday, February 13, 2019

FYI: Cal App Ct (2d Dist) Holds Former Servicer and Trustee Entitled to Recover Attorneys' Fees

The Court of Appeals for the Second District of California held that California's fee shifting statue in California Civil Code § 1717 permitted a former loan servicer and foreclosure trustee to recover their attorneys' fees authorized by the contract, even though the deed of trust was assigned to another financial institution.

However, the Court vacated the trial court's award of attorneys' fees against the borrower because the deed of trust only permitted attorneys' fees to be added to the loan balance.

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

The borrower defaulted on the mortgage and sued the loan servicer and foreclosure trustee (collectively, "defendants") to stop the foreclosure.  Her complaint asserted four causes of action: (1) violation of California Civil Code § 2923.5, (2) quiet title, (3) unlawful debt collection practices in violation of the California Rosenthal Act, and (4) declaratory and injunctive relief. 

The trial court sustained the defendants' demurrers without leave to amend.  The appellate court affirmed the trial court's ruling on appeal.  The defendants moved for attorneys' fees pursuant to the deed of trust and the Rosenthal Act.

In relevant part, section 9 of the deed of trust authorizes the lender pay "reasonable attorneys' fees to protect its interest in the Property and/or rights in the Security Instrument."  Section 9 further states that "[a]ny amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument."

Section 14 of the deed of trust states in pertinent part:  "Lender may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument, including, but not limited to, attorney fees."

The defendants argued that they were entitled to attorneys' fees pursuant to sections 9 and 14 -- even though the deed of trust had been assigned to another financial institution -- because California Civil Code § 1717 authorizes courts to enforce contractual attorney fee clauses.

The trial court granted the motion for attorneys' fees and ordered the borrower to pay the defendants $46,827.40.  The trial court did not discuss the defendants' request for fees pursuant to the Rosenthal Act.

This appeal followed.

The first issue on appeal was whether the defendants were entitled to contractual attorneys' fees under the deed of trust even though they were neither the lender nor signatories to the promissory note or deed of trust.

As you may recall, California Civil Code § 1717(a) provides that "[i]n any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs." 

Section 1717 has been "interpreted to further provide a reciprocal remedy for a nonsignatory defendant, sued on a contract as if he were a party to it, when a plaintiff would clearly be entitled to attorneys' fees should he prevail in enforcing the contractual obligation against the defendant."  Reynolds Metals Co. v. Alperson (1979) 25 Cal.3d 124, 128.

Although the defendants were not the original lender identified in the note and deed of trust, the Court noted that the defendants were agents of the lender who had authority to enforce the lender's rights under the contracts.  The borrower sued the defendants for taking actions authorized by the deed of trust during their tenure as loan servicer and trustee.  Thus, in the Court's view the defendants stood in the shoes of a party to the contract and could recover attorney fees as provided by the contract pursuant to section 1717.

The second issue on appeal was whether the deed of trust authorized a separate award to pay attorneys' fees, as opposed to adding the fees to the loan balance.

The Court observed that section 9 of the deed of trust provides that any amounts disbursed by the lender "shall become additional debt of Borrower secured by this Security Instrument."  The Court held that the text of section 9 did not authorize a separate award of attorneys' fees.

The Court also found that the word "charge" in section 14 of the deed of trust authorizes the lender to charge the borrowers attorneys' fees it may have incurred and add those fees to the outstanding balance due under the promissory note.  In the Court's own words, "[t]here is no language in section 14 that indicates the trust deed permits a freestanding contractual attorney fees award."

The defendants argued that because they were no longer the active servicer or trustee of the deed of trust, their attorneys' fees were not amounts disbursed by the lender under section 9 and adding their attorneys' fees to the loan balance would be unjustified.

The Court found the argument unpersuasive because the defendants' right to seek attorneys' fees in the first place, despite being non-parties to the contracts, depended on their assertion that they acted as the lender's agents and stood in the lender's shoes.  As the Court explained, the defendants "must take the bitter with the sweet." 

Thus, the Court concluded that the deed of trust permitted the defendants to recover their attorneys' fees but did not authorize a separate fee award against the borrower.

The loan servicer also argued that it was entitled to attorneys' fees under the Rosenthal Act, as an independent basis for a fee award against the borrower.

As you may recall, the Rosenthal Act includes a provision authorizing a court to award reasonable attorneys§ fees to a "prevailing creditor upon a finding by the court that the debtor's prosecution or defense of the action was not in good faith."  Civil Code § 1788.30(c).

The Court determined that the borrower advanced a colorable argument in her complaint, and therefore the Rosenthal Act did not authorize an award of attorneys' fees to the loan servicer under these circumstances.

Accordingly, the Court reversed the order compelling the borrower to pay $46,827.40 in attorneys' fees and remanded for further proceedings consistent with its opinion.  


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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Monday, January 21, 2019

FYI: 9th Cir Holds Debtor Who Successfully Challenges Automatic Stay Fee Award Also Entitled to Appellate Fees

In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held that a debtor who successfully challenges -- as opposed to a debtor who defends -- an award of attorney’s fees and costs for violations of the automatic stay under § 362(k) of the Bankruptcy Code is entitled to an award of appellate fees and costs.

In so ruling, the Court reversed the trial court’s order denying the debtor’s motion for appellate attorney’s fees and costs, and remanded the matter to the trial court with instructions to remand to the bankruptcy court to calculate reasonable attorney’s fees and costs on appeal. 

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

Husband and wife debtors filed a petition under Chapter 13 of the Bankruptcy Code in October of 2012, which triggered the automatic stay under section 362 of the Code. The debtors listed a $3,535 unsecured, nonpriority debt in their schedules owed to a medical services company. The debt, however, had previously been assigned to a collection agency in July of 2012.

The collection agency, which did not receive notice of the bankruptcy, filed a collection action against the wife in July 2013. The parties entered into a payment plan, but the debtor defaulted.

The collection agency served a writ of garnishment on the debtors in April of 2014. The debtor’s counsel demanded that the garnishment be dissolved, but the wife’s wages were garnished for several more weeks before stopping.

In June of 2014, debtors filed a motion for contempt in the bankruptcy court against the collection agency for violating the automatic stay. The motion was unopposed and the bankruptcy court granted it in August of 2014, awarding $1,295 in damages and $1,277 for attorney’s fees and costs. The debtors appealed both awards, arguing that “the bankruptcy court erred in failing to account for several days of attorneys’ work needed to end the stay violation.”

While the appeal was pending, the Ninth Circuit held in In re Schwartz-Tallard that section 362(K)(1) of the Bankruptcy Code authorized an award of reasonable attorney’s fees and costs incurred on appeal in defending a judgment under section 362(k).

The trial court affirmed the damages award, “but remanded to the bankruptcy court the attorneys’ fees calculation in light of Schwartz-Tallard. The bankruptcy court then awarded attorneys’ fees and costs of $16,324.40, in addition to the $1,277 initially awarded[, but] refused to award attorneys’ fees and costs incurred on appeal, claiming it lacked jurisdiction due to a pending application for these fees before the trial court.”

In June of 2017, the trial court denied the debtors’ motion for appellate attorney’s fees and costs because debtors failed to file a memorandum of “points and authority” required by the court’s local rules. In the alternative the trial court held that section 362(k) “does not allow for recovery of appellate work when a party is prosecuting, and not defending, the judgment on appeal.” The debtors appealed to the Ninth Circuit.

The Ninth Circuit first addressed the trial court’s applicable local rule, which provides relevant part that “[t]he failure of a moving party to file points and authorities in support of the motion constitutes a consent to the denial of the motion….”

The Ninth Circuit reasoned that, although “[o]nly in rare cases will we question the exercise of jurisdiction in connection with the application of local rules[,]” the case before it was “one of those rare cases.” It then concluded that the trial court abused its discretion because the debtor’s motion “clearly indicated that the attorney’s fees and costs requested pertained solely to the appeal, and did not need to be further segregated.”

Turning to the issue of appellate attorney’s fee and costs, the Court began by explaining that section 362(k)(1) of the Bankruptcy Code provides in relevant part that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

The Ninth Circuit then disagreed with the trial court’s reading of its Schwartz-Tallard ruling, explaining that “[p]reviously, [in Sternberg v. Johnston] we interpreted § 362(k)(1) as limiting attorneys’ fees and costs awards to those incurred in stopping a stay violation. ‘Once the violation has ended, any fees debtor incurs after that point in pursuit of a damage award would not be to compensate for ‘actual damages under § 362(k)(1),’ and thus fees incurred pursuing damages for a stay violation were not recoverable under the statute. … However, Schwartz-Tallard overruled Sternberg in 2015.”

The Court reasoned that, as it explained in Schwartz-Tallard, “’Congress undoubtedly knew that unless debtors could recover the attorney’s fees they incurred in prosecuting an action for damages, many would lack the means or financial incentive (or both) to pursue such actions.’ … Allowing for attorneys’ fees and costs while prosecuting an action for damages is likely the only way debtors in bankruptcy can afford to pursue damages. As is the case here, damages themselves may be too limited to justify an action if attorneys’ fees and costs in pursuit of those damages are not recoverable.”

The Court noted that “[u]nlike most fee-shifting statutes, the language does not explicitly refer to a ‘prevailing party.’ … Still, § 362(k)’s ‘phrasing signals an intent to permit, not preclude, an award of fees incurred in pursuing a damages recovery.’ … The statute clearly provides for damages and attorney’s fees and costs for an injured debtor when a creditor violates the automatic stay. … Section 362(k)(1) also serves a deterrent function much like many fee-shifting statutes.”

In addition, the Ninth Circuit continued, “fee shifting statutes allow for recovery of attorneys’ fees incurred in establishing a party’s claim for fees. … This principle ensures that the fee award is not diluted by the time and effort spent on the claim itself, … and includes appellate attorney’s fees when a party successfully challenges the trial court’s award or when a party successfully defends a favorable judgment on appeal.”

“Most fee-shifting statute cases that award appellate attorneys’ fees do so for successfully defending a judgment on appeal. … Significantly, Schwartz-Tallard also reached this outcome after carefully considering the purpose of § 362(k). If a creditor unsuccessfully appeals a bankruptcy court’s judgment in favor of a debtor, it stands to reason that the party who violated the stay should continue to pay for its harmful behavior by compensating the debtor for its appellate attorneys’ fees and costs.”

The Ninth Circuit then noted that “courts also grant appellate attorneys’ fees in fee-shifting statute cases when, as here, parties successfully challenge initial judgments on appeal. … Indeed, we are not aware of any authority suggesting that, although fees may be awarded under a fee-shifting statute for defending a judgment on appeal, they are not available for successfully challenging the judgment as inadequate. As note, the firmly established principle is that ‘attorneys fees may be awarded for time devoted in successfully defending appeals of or challenges to the trial court’s award of attorney’s fees.’”

The Court concluded that although it was “unaware of any previous case that has analyzed § 362(k)’s application of this principle, the purpose of § 362(k) strongly favors the outcome we now reach.” Because the Ninth Circuit found that § 362(k) is meant to protect debtors when a creditor violates the automatic stay and “thus seeks to make debtors whole, as if the violation never happened, to the degree possible[,] [t]his reasonably includes awarding attorney’s fees and costs on appeal to a successful debtor, even when the debtor must bring the appeal.”

Accordingly, the trial court’s order refusing to award the debtors their attorneys’ fees and costs incurred on appeal was reversed, and the case remanded to the trial court, with instructions to remand to the bankruptcy court to determine the amount of reasonable appellate attorney’s fees and costs.


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, January 9, 2019

FYI: 9th Cir Holds "Unlawful Information Collection and Sharing" Class Action Improperly Removed Under CAFA

In a 2-1 decision, the U.S. Court of Appeals for the Ninth Circuit held that a putative class action against state entities and a private contractor for allegedly collecting and sharing personal data without authorization was essentially a local controversy and was therefore correctly remanded to state court under an exception in the federal Class Action Fairness Act ("CAFA").

Accordingly, the Ninth Circuit affirmed the ruling of the trial court remanding the matter to state court. 

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

The plaintiffs ("Plaintiffs") sought to maintain an action in state court on behalf of a class of users of a bridge against two entities of the State of California ("State Entities") and a private company ("Company") that contracted with the State Entities to operate the bridge's toll system.

Plaintiffs' principle claims alleged the defendants violated the California privacy statutes prohibiting collection of personal data when they collected personally identifiable information from people driving over toll bridges and then shared the information with various unauthorized third parties.

The Company removed the action to federal court under CAFA.  Plaintiffs then moved to remand arguing, among other things, that removal was precluded under 28 U.S.C. § 1332(d)(5)(A) because the Company was acting on behalf of the state even though it is a private company.

The trial court concluded that the Company qualified as a state entity because it was exercising the authority of the state with respect to the alleged violation of the Plaintiffs' privacy rights.

The trial court held that the Company had the burden of satisfying section 1332(d)(5)(A) and because the burden was not met, removal was improper.  The trial court therefore remanded the matter to state court. 

The Company then appealed.

As you will recall, under CAFA, a trial court shall have jurisdiction over a class action when: (1) the amount in controversy exceeds five million, and (2) any class member is a citizen of a state different from any defendant. 28 U.S.C. 1332(d)(2). 

However, CAFA creates an exception from federal court jurisdiction for cases targeting state, local and other government entities that may claim immunities.  See 28 U.S.C. § 1332(d)(5)(A). 

On appeal, the Company argued that the trial court erred because it relied on 42 U.S.C. § 1983 case law to determine that it was a state actor, and that the trial court failed to address the language of CAFA's statutory exception relating to "other governmental entities against whom the trial Court may be foreclosed from ordering relief."

The Company's position was that it was a private entity outside the scope of 28 U.S.C. § 1332(d)(5)(A).  It further "accurately point[ed] out that Section 1983 cases are not controlling because the § 1983 state actor analysis looks to an actor's role and conduct while the CAFA inquiry goes to the nature of the entity itself." 

Thus, the Company argued, the "trial court's exclusive reliance on § 1983 was not appropriate," rather the "issue is whether [the Company] may be considered an instrumentality of the state." 

The Ninth Circuit disagreed, noting that "[th]he trial court's analysis, however, also focused to some extent on the relationship between [the Company] and the state entities ultimately responsible under California law for collecting bridge tolls.  [The Company] is an entity acting on behalf of the state to perform toll related functions required by the statute."

As you may recall, the Eleventh Amendment of the United States Constitution provides that "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State," which means private individuals may not sue non-consenting state entities in federal court. 

Moreover, the Ninth Circuit noted, the state need not be named as a defendant, rather "[t]he Supreme Court has held that 'the reference to actions 'against one of the United States' encompasses not only actions in which a State is actually named as a defendant, but also certain actions against state agents and state instrumentalities.'"

"To determine whether an entity is able to invoke such immunity our Court has said we generally look to a number of factors: (1) whether a money judgment would be satisfied out of state funds, (2) whether the entity performs central government functions, (3) whether the entity may sue or be sued, (4) whether the entity has the power to take  property in its own name or only the name of the state, and (5) the corporate status of the entity."

In reviewing those factors, the Ninth Circuit ruled that the Company "satisfies the second factor of performing a central government function and it has not asserted that it lacks any of the other characteristics," but the "record does not reflect whether it may satisfy the other factors." 

Moreover, "the Mitchell factors are not particularly useful when applied to a private entity because a private entity cannot be an arm of the state when the relationship to the sovereign is by contract only," and "[o]ur case law provides not clear answer as to whether [the Company] qualifies as a governmental entity within the meaning of CAFA."

Nevertheless, the Ninth Circuit continued, "[w]e need not decide whether the trial court erred in remanding on the 'other governmental entit[y]' ground pursuant to § 1332(d)(5)(A) because there is a further justification for remand.  The plaintiffs correctly content that the result is required by provisions of CAFA calling for local actions to be heard in state court.  The local controversy exception is one of several exceptions to CAFA removal jurisdiction."

Under this exception, "a trial court is required to decline jurisdiction over a class action when: (1) more than two-thirds of the proposed plaintiff class(es) are citizens of the state in which the action was originally filed, (2) there is at least one in-state defendant against whom 'significant relief' is sought and 'whose alleged conduct forms a significant basis for the claims asserted' by the proposed class, (3) the 'principal injuries' resulting from the alleged conduct of each defendant were incurred in the state of filing, and (4) no other class action 'asserting the same or similar factual allegations against any of the defendants' has been filed within three years prior to the present action."

In analyzing these factors, the Ninth Circuit determined that "[m]ost of these requirements are met."

In so ruling, the Court held that "[t]his is essentially a dispute between those who use the bridge to travel between Marin County, California and San Francisco, California, and defendants who are charged with operating the bridge on behalf of the State of California.  The trial court properly ruled that the case against [the Company], a toll collector, belongs in state court with the California entities that manage the bridge's maintenance and operation." 

Accordingly, the ruling of the trial court was affirmed. 


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




ALABAMA   |   CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.