Wednesday, June 26, 2019

FYI: Cal Sup Ct Allows Creditor Holding Senior and Junior Liens to Seek Deficiency on Sold-Out Second Lien

The Supreme Court of California recently held that the anti-deficiency statute in California Code of Civil Procedure § 580d did not bar a creditor holding two deeds of trust on the same property from recovering a deficiency judgment on the junior lien extinguished by a non-judicial foreclosure sale on the senior lien. 

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

The bank extended two loans to the borrowers that were secured by deeds of trust on a commercial property. The bank sold both loans to an investor that subsequently foreclosed on the first deed of trust and acquired the property at a public auction. 

The investor sued the borrowers to recover the amount still owned on the second deed of trust extinguished by the trustee's sale.  Both parties moved for summary judgment.

The trial court granted summary judgment in favor of the borrowers, holding that Code of Civil Procedure § 580d barred a deficiency judgment on the junior lien.  The appellate court reversed the trial court's judgment. 

The Supreme Court granted review.

As you may recall, "California has an elaborate and interrelated set of foreclosure and antideficiency statutes relating to the enforcement of obligations secured by interests in real property."  Alliance Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1236.  

Secured creditors must abide by the one form of action rule, and that action is foreclosure which may be either judicial or non-judicial.  Code of Civil Proc. 726(a). 

In a judicial foreclosure, a secured creditor may seek a deficiency judgment to recover the difference between the amount of the debt and the fair market value of the property if the property is sold for less than amount of the outstanding debt.  However, the debtor has a statutory right to redemption.  Alliance Mortgage, 10 Cal. 4th at 1236.

In a non-judicial foreclosure, also known as a trustee's sale, the creditor exercises the power of sale under the deed of trust, and the debtor has no statutory right of redemption.  But under section 580d, "the creditor may not seek a deficiency judgment" after a non-judicial foreclosure.  Id.

Specifically, Section 580d(a) provides that "no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust."

The question before the Supreme Court was whether California Code of Civil Procedure § 580d barred a deficiency judgment on a junior lien held by a senior lienholder that sold the property comprising the security for both liens. 

The Supreme Court began its analysis by observing that before the enactment of section 580d, a debtor had a statutory right to redemption under a judicial foreclosure but not under a trustee's sale.  This right to redeem, as the Supreme Court explained, was similar to the prescription of a deficiency judgment, which had the effect of making the security satisfy a realistic share of the debt. 

The Supreme Court next analyzed the leading case of Simon v. Superior Court (1992) 4 Cal. App. 4th 63, which held that section 580d precludes a deficiency judgment for a junior lienholder who was also the foreclosing senior lienholder. 

In Simon, the junior and senior loans were issued just four days part, and the deeds of trust securing the loans were recorded on the same date.  Simon treated the two loans as one to prevent creditors from circumventing the provisions of section 580d.  It was in that context that Simon said courts will not penalize creditors from extending multiple loans secured by trust deeds on the same property. 

Here, the Supreme Court found no evidence to suggest that the two notes in this case were executed in separate transactions to evade section 580d. 

The Supreme Court observed that the loans at issue here were executed in separate transactions more than two years apart.  There was no evidence of any irregularity at the foreclose sale to suggest that the investor sought an excessive recovery by obtaining a deficiency judgment on the junior lien. 

Because no sale occurred under the junior deed of trust, the Supreme Court heled that the section 580d did not bar a deficiency judgment on the junior loan. 

However, the Supreme Court cautioned that, where there is evidence of gamesmanship by the holder of the senior and junior liens on the same property, two liens may still be treated as a single lien within the meaning of section 580d. 

Accordingly, the Supreme Court affirmed the judgment of the appellate 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





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

Monday, May 20, 2019

FYI: 9th Cir Rejects Challenges to CFPB Structure and CID

The U.S. Court of Appeals for the Ninth Circuit ("Ninth Circuit") recently affirmed a trial court's Order requiring a law firm to respond to interrogatories and requests for production of documents pursuant to a Civil Investigative Demand promulgated by the Consumer Financial Protection Bureau's ("CFPB" or "Bureau").

In so ruling, the Ninth Circuit cited prior Supreme Court separation-of-power opinions which indicate that the Bureau's restriction permitting removal of its Director only by the president "for cause" did not violate the Constitution's separation of powers doctrine to conclude that its structure was constitutionally permissible.  

The Ninth Circuit also held that the Civil Investigative Demand was proper because the Bureau was permitted to investigate the law firm for potential Telemarketing Sales Rule violations pursuant to an exception to the practice-of-law exclusion, and because the Bureau complied with the demand requirements under section 5562(c)(2).

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

The CFPB opened an investigation to determine whether a law firm ("Law Firm") violated the Telemarketing Sales Rule, 16 C.F.R. pt. 310 in the course of providing debt-relief services to its consumer clients. 

After the Law Firm refused to comply with the CFPB's Civil Investigative Demand requiring it to respond to seven interrogatories and four requests to produce documents (the "CID"), the CFPB filed a petition in the United States District Court for the Central District of California to enforce compliance.  The trial court granted the CFPB's petition and ordered the Law Firm to respond to the CID.  The instant appeal ensued.

On appeal, the Law Firm argued that the CFPB's structure violates the U.S. Constitution's separation of powers doctrine, and that the CFPB lacked statutory authority to issue the CID. 

In considering the Law Firm's first argument, the Ninth Circuit analyzed the history of the formation and purpose of establishing the CFPB, the powers bestowed upon it to implement and enforce federal consumer financial laws, and the role of its single Director appointed by the President with the advice and consent of the Senate.  12 U.S.C. § 5491(b). 

As you may recall, the Bureau's Director serves for a term of five years that may be extended until a successor has been appointed and confirmed, and may be removed by the President only for "inefficiency, neglect of duty, or malfeasance in office." § 5491(c)(1)-(3).  It is this "only for cause" provision that the Law Firm challenges and contends that an agency with the CFPB's broad law-enforcement powers may not be headed by a single Director removable by the President only for cause. 

The Ninth Circuit reviewed prior Supreme Court separation-of-powers decisions to determine whether the CFPB's structure is constitutionally permissible.  In Humphrey's Executor v. United States, 295 U.S. 602 (1935), the petitioner similarly challenged the structure of the Federal Trade Commission ("FTC"), which similarly allowed for removal of the agency's five Commissioners only by the President for cause.  There, the Supreme Court held that the for-cause removal restriction was a permissible means of ensuring that the FTC's Commissioners would "maintain an attitude of independence" from the President's control. Id. at 629.

The Ninth Circuit remarked that like the FTC, the CFPB exercises quasi-legislative and quasi-judicial powers, and Congress could therefore seek to ensure that the agency discharges those responsibilities independently of the President's will.  See PHH Corp. v. CFPB, 881 F.3d 75, 91-92 (D.C. Cir. 2018) (en banc) (noting that the CFPB acts in part as a financial regulator, a role that has historically been viewed as calling for a measure of independence from the Executive Branch). 

As such, the Ninth Circuit opined, the Supreme Court's reasoning in its decisions in Humphrey's Executor and Morrison v. Olson, 487 U.S. 654 (1988) applied equally to the CFPB, and the for-cause removal restriction protecting the CFPB's Director does not "impede the President's ability to perform his constitutional duty" to ensure that the laws are faithfully executed. Morrison, 487 U.S. at 691.

Accordingly, the Ninth Circuit viewed the Supreme Court's separation-of-powers decisions in those cases as controlling, and the CFPB's structure as constitutionally permissible.

Next, the Ninth Circuit considered the Law Firm's argument that the CFPB lacked statutory authority to issue the CID.  First, the Law Firm argued that the CID's investigation into its advertising of legal services violated the Consumer Financial Protection Act's practice-of-law exclusion, 12 U.S.C. § 5517(e)(1), which provides that  the Bureau "may not exercise any supervisory or enforcement authority with respect to an activity engaged in by an attorney as part of the practice of law under the laws of a State in which the attorney is licensed to practice law." 

The Ninth Circuit rejected this argument, and concluded that the trial court correctly applied one of the exceptions to the practice-of-law exclusion.  Under Section 5517(e)(3), the CFPB's authority is not limited with respect to any attorney, "to the extent they are otherwise subject to enumerated consumer laws or authorities under subtitle F or H" – including enforcement of the Telemarketing Sales Rule, which does not exempt attorneys from its coverage even when they are engaged in providing legal services.   15 U.S.C. § 1602; Telemarketing Sales Rule ,75 Fed. Reg. 48,458-01, 48-467-69 (Aug. 10, 2010).

The Law Firm's second argument that the CID failed to "state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation" as required under § 5562(c)(2) was also rejected, as the Ninth Circuit concluded that the CID properly identified the allegedly illegal conduct under investigation and provision of applicable law to put the Law Firm on notice of the conduct being investigated. 

Accordingly, the trial court's order requiring the Law Firm to comply with the CFPB's Civil Investigative Demand 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.  

Monday, May 13, 2019

FYI: Cal App Ct (5th Dist) Holds Borrower Entitled to Atty Fees for Successful TRO

The Court of Appeal for the Fifth District of California recently held that a court may award attorneys' fees pursuant to Civil Code § 2924.12(h) when a borrower obtains a temporary restraining order to stop a non-judicial foreclosure sale. 

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

The borrowers filed an ex parte application for a temporary restraining order ("TRO") to enjoin the trustee's sale of their home.  The application contained a request for attorneys' fees and costs.

The trial court granted the TRO and set a hearing to show cause for a preliminary injunction.  The order required the defendants to pay $3,500 in attorneys' fees pursuant to Civil Code § 2924.12.

The loan servicer brought this appeal of the attorneys' fees award.

As you may recall, section 2924.12(h) provides that:  "[a] court may award a prevailing borrower reasonable attorney's fees and costs in an action brought pursuant to this section.  A borrower shall be deemed to have prevailed for purposes of this subdivision if the borrower obtained injunctive relief or was awarded damages pursuant to this section."

The loan servicer argued that the borrowers did not prevail for purposes of section 2924.12(h) because they merely obtained a TRO.

The Appellate Court considered Monterossa v. Superior Court (2015) 237 Cal. App. 4th 747, where the Third District held that section 2924.12(h) permitted an award of attorneys' fees to a borrower who had obtained preliminary injunction, as opposed to permanent, injunctive relief. 

The Monterossa court concluded that such fees were permitted by the plain language of the statute because "injunctive relief" incorporates "both preliminary and permanent injunctive relief."  Monterossa, 237 Cal. App. 4th at 753.

The Monterossa court explained that the purpose of the statutory scheme is to provide borrowers with a meaningful opportunity to obtain available loss mitigation options, and a borrower who successfully forces the lender to comply with the statutory process by obtaining a preliminary injunction has prevailed.  Monterossa, 237 Cal. App. 4th at 755.

The Appellate Court found this reasoning persuasive, holding that "the plain statutory language is dispositive of this appeal."  The borrowers prevailed in obtaining a TRO, which was a form of injunctive relief, and therefore the Court held that attorneys' fees were authorized under the statute. 

The loan servicer also argued that the fee request was procedurally defective.

As you may recall, a party may seek statutory attorneys' fees as costs through any of four methods: (1) on noticed motion, (2) at the time a statement of decision is rendered, (3) on application supported by affidavit made concurrently with a claim for other costs, or (4) on entry of a default judgment.  Code Civ. Proc. § 1033.5(a)(10)(B), (c)(5).

Rule 3.1702 of the California Rules of Court proscribes a noticed motion procedure whenever the court is required to determine whether the requested fee is reasonable or whether the requestor is a prevailing party. 

Civil Code § 2924.12(h) requires a determination that the plaintiff is a prevailing party and that the requested fees are reasonable, but the borrowers did not file a notice motion for the fee request.  Thus, the Appellate Court held that the grant of fees based on an ex parte application was improper.

Accordingly, the Appellate Court reversed the award of attorneys' fees and remanded for further proceeding. 


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.  

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

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.  

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





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

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





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