9th Cir. Limits Scope of FDCPA ‘Enforcement of Security Interest’ Exception

The U.S. Court of Appeals for the Ninth Circuit recently held that a notice regarding overdue homeowners association (HOA) assessments contained language that overshadowed and conflicted with the homeowner’s federal Fair Debt Collection Practices Act debt validation rights.

Limiting the scope of its ruling in Ho v. ReconTrust Co., NA, 840 F.3d 618, 620 (9th Cir. 2016), the Court rejected the debt collector’s argument that in sending the notice regarding overdue HOA assessments, it merely sought to perfect a security interest and was therefore subject only to the limitations under 15 U.S.C. § 1692f(6).

A copy of the opinion in Mashiri v. Epsten Grinnell & Howell is available at:  Link to Opinion.

A debt collection law firm sent a notice to a homeowner on behalf of an HOA seeking to collect an overdue homeowner’s assessment fee, as well as late, administrative, and legal fees. The notice also included a warning that failure to pay the assessment fee would result in a lien against the property. The law firm subsequently recorded a lien on the homeowner’s property.

The homeowner filed a complaint, alleging that the debt collector’s notice violated the FDCPA, the Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code § 1788 et seq. (Rosenthal Act), and the California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq. (UCL).

As you may recall, the FDCPA requires a debt collector to send the debtor a written notice that informs the debtor of the amount of the debt, to whom the debt is owed, her right to dispute the debt within 30 days of receipt of the letter, and her right to obtain verification of the debt.  See 15 U.S.C. § 1692g.

Notice of the debtor’s right to dispute the debt and to request the name of the original creditor must not be overshadowed or inconsistent with other messages appearing in the communication, 15 U.S.C. § 1692g(b). Overshadowing or inconsistency may exist where language in the notice would “confuse a least sophisticated debtor” as to her validation rights. Terran v. Kaplan, 109 F.3d 1428, 1432 (9th Cir. 1997). In other words, “whether the initial communication violates the FDCPA depends on whether it is likely to deceive or mislead a hypothetical ‘least sophisticated debtor.'” Id. at 1431.

The district court granted the debt collector’s motion to dismiss, concluding that the notice “complied with the clarity and accuracy requirements” of the FDCPA, and therefore “did not threaten to take action that could not legally be taken” as prohibited by the FDCPA. The district court dismissed the homeowner’s state law claims as dependent on her FDCPA claims.

The homeowner appealed, arguing that the notice violated § 1692g for two reasons.

First, she contended that the notice demanded payment sooner than the expiration of the requisite 30-day dispute period provided under 15 U.S.C. § 1692g.

Second, she claimed that by threatening to record a lien within 35 days, irrespective of whether she disputed the debt, the law firm failed to effectively explain her right to dispute the debt.

The debt collector countered that it was only enforcing a security interest and not attempting to collect a debt, and therefore the notice needed to comply only with the FDCPA’s obligations relating to enforcement of security interests under 15 U.S.C. § 1692f(6).

The debt collector also argued that even if it were subject to the notice requirements under 15 U.S.C. § 1692g, it complied with the statutory requirements because it sent the notice to perfect the HOA’s right to record an assessment lien against the homeowner’s property under California Civil Code § 5660.

The Ninth Circuit disagreed, noting that the FDCPA defines “debt” as “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” 15 U.S.C. § 1692a(5).

Contrary to the debt collector’s contentions, the Ninth Circuit held that the overdue HOA assessment fee was clearly a debt under § 1692a(5), because it related to the homeowner’s household and arose from her membership in the HOA.

The Court then examined whether the debt collector was subject solely to § 1692f(6).  The debt collector argued that, based on the definition of a “debt collector” under 15 U.S.C. § 1692a(6), entities engaged in the enforcement of security interests are subject only to § 1692f(6). The Ninth Circuit disagreed.

In a recent ruling, the Ninth Circuit held that where a California foreclosure trustee is engaged solely in the enforcement of a security interest and not in debt collection it is subject only to § 1692f(6) rather than the full scope of the FDCPA.  Ho v. ReconTrust Co., NA, 840 F.3d 618, 620 (9th Cir. 2016). However, the Court observed that “[i]f entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors.” Id.

The Ninth Circuit concluded that the debt collector sent the notice to collect payment of a debt – i.e., the amounts due to the HOA.  Even though the debt collector also sought to perfect the HOA’s security interest and preserve its right to record a lien in the future, the Court held that the effort to collect payment made the debt collector subject to the full scope of the FDCPA, including § 1692g and § 1692e.

Turning to the homeowner’s argument that the notice did not provide her with the required 30 days in which to dispute the debt, the Court observed that the notice’s demand for payment within 35 days of the date of the letter was inconsistent with her right to dispute a debt within 30 days of receipt of the letter. See 15 U.S.C. § 1692g(a); Cal. Civ. Code § 5660.

The Ninth Circuit held that the least sophisticated debtor, when confronted with such a notice, would reasonably forgo her right to 30 days in which to dispute the debt and seek verification. The Court ruled that infringement of the debtor’s right to 30 days in which to dispute the debt therefore plausibly violated 15 U.S.C. § 1692g.  See Terran, 109 F.3d at 1434.

The homeowner additionally argued that the least sophisticated debtor might not understand, on the basis of the notice, that upon notifying the debt collector of a dispute, all debt collection activities would “cease . . . until the debt collector obtains verification of the debt . . . and a copy of such verification . . . is mailed to the consumer by the debt collector.” 15 U.S.C. § 1692g(b).

In California, under the Davis-Stirling Act, a homeowners’ association may not record a lien with a county recorder’s office contemporaneously with mailing the demand letter, but instead must provide notice of the debt at least 30 days prior to recording a lien, during which time a debtor-homeowner may dispute the debt.  Cal. Civ. Code § 5660.

The Ninth Circuit explained that the obligations imposed on the HOA pursuant to the FDCPA, including the provision requiring suspension of debt collection activities pending debt verification, were thus consistent with the requirements the HOA must satisfy pursuant to the Davis-Stirling Act.

Contrary to the debt collector’s contentions, the Ninth Circuit held that the HOA’s right to record a lien 30 days after providing notice under Cal. Civ. Code § 5660 was not absolute, but instead was dependent on whether the homeowner disputed the debt. Pursuant to the Davis-Stirling Act, if the homeowner disputed the debt and requested an informal dispute resolution proceeding, the HOA must participate in dispute resolution “prior to recording a lien.” Cal. Civ. Code § 5670.

The Court agreed that the debt collector’s threat of recording of a lien was a debt collection activity, which under the FDCPA must cease if the debtor disputes the debt and the debt collector had not yet mailed verification of the debt to the debtor. In allegedly failing to do so, the Court held that the debt collector’s threat of filing a lien would overshadow the homeowner’s right to dispute the debt, in violation of 15 U.S.C. § 1692g.

The Ninth Circuit held that a least sophisticated debtor would likely (and incorrectly) believe that even if she disputed the debt and the debt collector had not yet mailed verification of the debt to her, the debt collector would record a lien on the 35th day after the date of the letter, and as a result would reasonably forgo her right to 30 days in which to dispute the debt and seek verification.

Accordingly, the Court held that the alleged infringement of the debtor’s right to 30 days in which to dispute the debt plausibly violated 15 U.S.C. § 1692g.

In sum, the Ninth Circuit concluded that the homeowner had plausibly alleged a claim under the FDCPA (15 U.S.C. § 1692g), and therefore reversed the trial court’s dismissal of that claim as well as her related claims under 15 U.S.C. 1692e(5), the Rosenthal Act, and the UCL.

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Patrick R. Tira is based in Maurice Wutscher's San Diego office, where he practices in the firm's Commercial Litigation, Consumer Credit Litigation, Business Formation and Transactions, Intellectual Property Litigation, and Employment Litigation groups. He has extensive litigation experience in matters involving a wide variety of complex real estate and business disputes, ranging from post-foreclosure evictions and real estate fraud to misappropriation of trade secrets claims and shareholder disputes. He is experienced in all stages of litigation and has recovered millions for his clients in judgments and arbitration awards. In addition to his success in the courtroom, Patrick advises internet and other technology companies, real estate investors, medical professionals, and other businesses on an array of transactional matters. For example, he has extensive experience counseling clients on entity formation, licensing and service-level agreements, real estate agreements, internal policies and procedures, and related matters. Patrick employs his litigation experience to appropriately structure internal policies and procedures, licensing and service-level agreements, ownership and other agreements, and also to anticipate where disputes may arise in the future. He strives to enable his clients to achieve their goals and to avoid potential litigation.