The U.S. Court of Appeals for the Ninth Circuit recently held that the trustee of a California deed of trust securing a real estate loan was not a “debt collector” under the federal Fair Debt Collection Practices Act, because the trustee was not attempting to collect money from the borrower.
In so ruling, the Court held that “actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect ‘debt’ as that term is defined by the FDCPA.”
The Court also vacated the dismissal of the borrower’s federal Truth In Lending Act claim, confirming its prior ruling in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), that a mortgagor need not allege the ability to repay in order to state a TILA rescission claim.
A copy of the opinion in Ho v. ReconTrust Co. is available at: Link to Opinion.
A borrower sought damages under the FDCPA, alleging that the foreclosure trustee initiated a California non-judicial foreclosure and sent her a notice of default and a notice of sale that misrepresented the amount of debt she owed. The borrower also sought to rescind her mortgage transaction under TILA.
The trial court granted the servicer’s motion to dismiss the borrower’s FDCPA claims, and dismissed her TILA claim.
The borrower appealed, arguing that the foreclosure trustee was a “debt collector” under the FDCPA because the notice of default and the notice of sale constituted attempts to collect debt and threatened foreclosure unless she brought her account current.
The Ninth Circuit disagreed, holding that the California foreclosure trustee would only be liable if it had attempted to collect money from the borrower.
As you may recall, the FDCPA imposes liability on “debt collectors.” Under the FDCPA, the word “debt” is defined as an “obligation . . . of a consumer to pay money.” 15 U.S.C. § 1692a(5). The FDCPA’s definition of “debt collector” includes entities that regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another.
Distinguishing rulings from the Fourth and Sixth Circuits, and agreeing with the California Courts of Appeal, the Ninth Circuit held that a California foreclosure trustee was not a “debt collector” subject to the FDCPA because the foreclosure trustee was not attempting to collect money from the borrower.
Specifically, the Court noted that the Fourth Circuit’s ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006), “was more concerned with avoiding what it viewed as a ‘loophole in the [FDCPA]’ than with following the [FDCPA]’s text,” which the Ninth Circuit found improper.
The Court also noted that the Sixth Circuit’s ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013), “rests entirely on the premise that ‘the ultimate purpose of foreclosure is the payment of money,” but “the FDCPA defines debt as an ‘obligation of a consumer to pay money.’” The Ninth Circuit emphasized that “[f]ollowing a trustee’s sale, the trustee collects money from the home’s purchaser, not from the original borrower. Because the money collected from a trustee’s sale is not money owed by a consumer, it isn’t ‘debt’ as defined by the FDCPA.”
The Ninth Circuit held that the object of a non-judicial foreclosure in California is to retake and resell the security on the loan, and thus actions taken to facilitate a non-judicial foreclosure, such as sending the notice of default and notice of sale, are not attempts to collect “debt” under the FDCPA.
Accordingly, the Ninth Circuit concluded that the foreclosure notices at issue were an enforcement of a security interest, rather than debt collection under the FDCPA.
The Ninth Circuit found it significant that California expressly exempts trustees of deeds of trust from liability under the California Rosenthal Act, Cal. Civ. Code. § 2924(b), the state analogue of the FDCPA, observing that holding California foreclosure trustees liable under the FDCPA would subject them to obligations that would frustrate their ability to comply with the California statutes governing non-judicial foreclosure.
The Ninth Circuit agreed with the foreclosure trustee, and, citing Sheriff v. Gillie, 136 S. Ct. 1594, 194 L. Ed. 2d 625 (2016), in which the U.S. Supreme Court instructed that the FDCPA should not be interpreted to interfere with state law unless Congress clearly intended to displace that law, the Ninth Circuit affirmed the district court’s dismissal of the FDCPA claim, declining to create a conflict with state foreclosure law in its interpretation of the term “debt collector.”
Turning to the borrower’s TILA claims, which the trial court had dismissed without prejudice, the Court noted that it recently held in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, 1032-33 (9th Cir. 2014), that a mortgagor need not allege the ability to repay the loan in order to state a rescission claim under TILA. However, this was the basis of the trial court’s dismissal of the TILA claim.
Accordingly the Ninth Circuit vacated the dismissal of the borrower’s TILA claim and remanded it to the trial court for reconsideration. The Court also affirmed the dismissal of the borrower’s FDCPA claims, vacated the dismissal of her TILA claims, and remanded the TILA claims for reconsideration.