FYI: Cal App Ct (1st Dist) Holds Rosenthal Act Allows Class Actions, Cure Provisions Apply to Debtor Notices

In an unreported opinion, the Court of Appeal for the First District of California recently held that a debt collector that violated the minimum type-size requirement for collection letters under Cal. Civil Code § 1812.701(b) may utilize the procedure for curing violations under California’s Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) to correct its violations.

However, the Appellate Court reversed the dismissal because the trial court should have allowed the consumer to amend the complaint or locate a suitable class representative after granting summary judgment in favor of the debt collector on her individual claim.

In so ruling, the Court also held that Rosenthal Act violations may be brought as class actions under a 1999 amendment essentially incorporating the federal Fair Debt Collection Practices Act’s provisions into the Rosenthal Act.

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

The consumer received a debt collection letter from the debt collector that did not provide certain statutorily required language in the proper type-size.  The consumer filed a complaint on behalf of a putative class alleging violation of Cal. Civil Code § 1812.701(b).  As you may recall, a violation of section 1812.701(b) is “considered a violation of the Rosenthal Fair Debt Collection Practices Act”.  Cal. Civil Code § 1812.702

Nine days after it was served with the consumer’s complaint, the debt collector sent a revised collection letter that contained the required language in the same type-size as that which was used to inform her of her debt.

The debt collector argued that it cured the alleged violation within the 15-day period prescribed by Cal. Civil Code § 1788.30(d) for a curable Rosenthal Act violation.  The debt collector moved for summary judgment on the consumer’s individual claim. 

The trial court found that the “cure” provision under section 1788.30(d) applied to the debt collector’s section 1812.701(b) violation, and granted the debt collector’s motion for summary judgment and dismissed the entire putative class action.

This appeal followed.

As you may recall, debt collection practices in California are governed by federal law and by California’s Rosenthal Fair Debt Collection Practices Act, Cal. Civil Code § 1788, et seq.

Originally the Rosenthal Act did not permit class actions.  In 1999, the Legislature passed Assembly Bill No. 969, adding Cal. Civil Code B' 1788.17 to the Rosenthal Act, which provides in relevant part:  “[n]otwithstanding any other provision of this title, every debt collector collecting or attempting to collect a consumer debt shall comply with the provisions of Sections 1692b to 1692j, inclusive, of, and shall be subject to the remedies in Section 1692k of [the FDCPA].”   

Section 1692k of the FDCPA specifically provides for both individual and class action remedies, but does not contain a cure provision like the Rosenthal Act.

Then in 2003, the Legislature enacted the Consumer Collection Notice law, Cal. Civil Code §§ 1812.700-1812.702, which required third party debt collectors subject to the FDCPA, in their first written notice to debtors, to provide a description of debtor rights under state and federal law.  Cal. Civil Code B' 1812.700(a).

As relevant in this case, “[t]he type-size used in the disclosure shall be at least the same type-size as that used to inform the debtor of his or her specific debt, but is not required to be larger than 12-point type.”    Cal. Civil Code § 1812.701(b).

The cure provision in the Rosenthal Act states:  “[a] debt collector shall have no civil liability under this title if, within 15 days either after discovering a violation which is able to be cured, or after the receipt of a written notice of such violation, the debt collector notifies the debtor of the violation, and makes whatever adjustments or corrections are necessary to cure the violation with respect to the debtor.”  Cal. Civil Code § 1788.30(d).

The consumer argued that the trial court erred in applying section 1788.30(d) because the cure provision was repealed when the Legislature enacted section 1788.17 to require debt collector to comply with listed provisions of the FDCPA and subjected them to the remedies in section 1692k of the federal act. 

The Appellate Court disagreed.  Finding no express repeal language in Civil Code § 1788.18, the Appellate Court explained that an implied repeal will be found “only when there is no rational basis for harmonizing the two potentially conflicting statutes.”  Garcia v. McCutchen (1997) 16 Cal.4th 469, 477.  The Appellate Court observed that the Ninth Circuit Court of Appeals addressed this very issue in Afewerki v. Anaya Law Grp. (9th Cir. 2017) 868 F.3d 771, and held that section 1788.17 did not remove or impliedly repeal section 1788.30b’s defense for cured violations.

The Appellate Court noted that while section 1788.17 applied “[n]otwithstanding any other provision” of the Rosenthal Act, the mere incorporation of certain provisions from the FDCPA -- none of which says anything about curing violations -- did not render sections 1788.17 and 1788.30(d) so inconsistent that the two cannot operate concurrently.

Moreover, the Appellate Court found nothing in the legislative history of section 1788.17 indicating an intent to repeal section 1788.30(d).

The consumer also argued that the type-size violation cannot be cured under section 1788.30(d) because the statute requires compliance in the debt collector’s first written communication to the consumer. 

Alternatively, the consumer argued that the cure provision did not apply to the debt collector’s section 1812.701(b) violation.

The Appellate Court rejected these arguments, citing the floor analysis of Senate Bill No. 1022 -- the bill that enacted the Consumer Collection Notice Law -- and noted that the Legislature intended a violation of the type-size requirement to be a Rosenthal Act violation and subject to the 15-day correction period. 

Thus, the Appellate Court found no error in the trial court’s application of section 1788.30, and its determination that the debt collector’s violation could be cured in a writing sent after the first written communication with the debtor.

Next, the Appellate Court turned to the consumer’s argument that the trial court erred by dismissing the entire putative class action after granting summary judgment on her individual claim.

To resolve this issue, the Appellate Court began by considering whether the language “individual action” in section 1788.30 barred a class action based on alleged violations of section 1812.701(b).

As you may recall, the remedies provision of the Rosenthal Act state that “[a]ny debt collector who violates this title with respect to any debtor shall be liable to that debtor only in an individual action, and his liability therein to that debtor shall be in an amount equal to the sum of any actual damages sustained by the debtor as a result of the violation.”  Cal. Civil Code B' 1788.30(a). 

The debt collector may also be liable for statutory damages for a willful violation.   Cal. Civil Code § 1788.30(b). 

However, in the Appellate Court’s view, section 1788.17 may be reasonably read to incorporate the class action remedies of the FDCPA into the Rosenthal Act, “[n]otwithstanding any other provision” of the Rosenthal Act, such as the individual action provisions in section 1788.30.b

The Appellate Court observed that several federal courts faced with this questions have concluded that “class actions may proceed under the amendment to the Rosenthal Act.”  Gonzales v. Arrow Fin. Servs., LLC (9th Cir. 2011) 660 F.3d 1055, 1066 (collecting cases).

Thus, the Appellate Court determined that the consumer could bring a putative class action for claim under section 1812.701(b).

Finally, the Appellate Court turned to the issue of the pick off exception in putative class actions.

As you may recall, a typical pick off situation arises when prior to class certification, a defendant gives the named plaintiff the entirety of the relief claimed by that individual and then attempts to obtain dismissal of the action, on the basis that the named plaintiff can no longer pursue a class action. 

The involuntary receipt of relief does not, of itself, prevent the class plaintiff from continuing as a class representative.  Wallace v. GEICO General Ins. Co. (2010) 183 Cal.App.4th 1390, 1399. Rather, the trial court must decide whether the named plaintiff can continue to fairly represent the class in light of the individual relief offered by the defendant.  Id., at pp. 1399-1400.

The debt collector argued that it did not pick off the named plaintiff, but rather, it substantively prevailed on the merits of her individual claim based upon the cure defense under section 1788.30(d).

However, the Appellate Court determined that the debt collector did not prevail against the consumer in the sense that her allegations were disproven or shown to be meritless.  Instead, her allegations were implicitly conceded and the debt collector did not produce any evidence that it corrected the alleged violations as to the rest of the putative class.

In the Appellate Court’s view, the debt collector voluntarily gave special treatment to the named plaintiff only, resulting in the elimination of her standing to maintain a putative class action.

Thus, the Appellate Court held that the trial court erred in dismissing the entire putative class action without affording the consumer the opportunity to amend her complaint, redefine the putative class, or locate a suitable class representative. 

Accordingly, the Appellate Court reversed the trial court’s judgment and remanded for further proceedings.

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.  

FYI: Cal App Ct (1st Dist) Rejects Servicer's Attempt to Condition Reinstatement on Payment of Deferred Amounts

The Court of Appeal of the State of California, First Appellate District, recently held that California Civil Code § 2924c permits a borrower to reinstate a modified home mortgage loan by paying only the past due modified payments and associated fees and charges, and that a servicer cannot lawfully condition reinstatement of a loan on the payment of amounts that were deferred in the loan modification.  

In so ruling, the Appellate Court rejected the servicer's argument that the loan modification agreement allowed it to nullify the modification upon the borrower's default and to require payment of the earlier default according to the original terms.

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

The borrowers (Borrowers) obtained a loan modification that adjusted the principal balance, reduced the interest rate and monthly payments, and deferred accrued and unpaid interest and principal, fees, and foreclosure expenses. 

The modification provided that failure to make modified payments as scheduled would be an event of default, the modification would be null and void at the lender's option, and the lender would have the right to enforce the loan according to the original terms.

The servicer (Servicer) recorded a notice of default stating that the borrowers would have to pay the four missed monthly payments and associated late charges and fees, plus all the sums that had previously been deferred under the loan modification, in order to avoid foreclosure.

The Borrowers asserted four causes of action against the Servicer: violation of California Civil Code § 2924c, violation of California Business and Professions Code § 17200, et seq. (UCL), breach of contract, and breach of the covenant of good faith and fair dealing. 

The trial court granted the Servicer's motion for summary judgment and denied the Borrowers' cross-motion for partial summary judgment. 

The Borrowers appealed the trial court's grant of summary judgment to the Servicer on their causes of action for violation of section 2924c and the UCL.

As you may recall, section 2924c(a)(1) provides that when a mortgage loan is accelerated as a result of a homeowner's default, the homeowner can reinstate the loan by paying all amounts due, "other than the portion of principal as would not then be due had no default occurred."  

In other words, the homeowner can cure the default and reinstate his or her loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance. 

The Borrowers argued that under section 2924c, the Servicer "could not lawfully condition reinstatement of their loan on the payment of amounts that were deferred in the loan modification."  They argued that requiring them to pay the deferred balance, instead of just the missed payments plus costs, "essentially requires them to waive their right of reinstatement with respect to the modified loan."

The Servicer argued that the loan modification gave it the option to enforce the original loan terms if the Borrowers defaulted on the modified loan, and because the under the original loan pre-modification the deferred amounts were due and owing, the deferred amounts could properly be required as a condition of reinstatement under section 2924c.b

The Appellate Court began its analysis by observing that the default was the failure to make payments on the modified loan.  Section 2924c gave the Borrowers the opportunity to cure their precipitating default by making up those missed payments and paying the associated fees and charges. 

In the Appellate Court's view, demanding the deferred amounts after the loan was modified meant that the Borrowers would have been in default throughout the term of the modified loan even if they timely made every required monthly payment. 

If the Borrowers had made all of their modified payments, as the Appellate Court explained, the Servicer could not have claimed the deferred amounts until the end of the loan. 

Thus, the Appellate Court concluded that the Servicer failed to demonstrate that the Borrowers could not prevail on their claim that Servicer violated section 2924c, and the trial court erred in granting summary judgment to the Lender on this claim.

Because the Servicer "failed to show that its conduct was consistent with section 2924c," the Appellate Court also held it was an error to grant summary judgment on the UCL cause of action predicated on the violation of section 2924c.

Accordingly, the Appellate Court reversed the judgment and remanded for further proceedings.

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.