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Calif. App. Court (4th Dist) Holds Rosenthal Act May Apply to Foreclosures, ‘Continuing Violation’ Doctrine May Apply

Rosenthal ActThe Court of Appeal of the State of California, Fourth Appellate District, recently reversed in part and affirmed in part a trial court’s judgment sustaining the defendant loan servicer’s and loan owner’s demurrer (motion to dismiss) based on res judicata.

In the nonpublished portion of this opinion, the Court held that, as to three of the plaintiffs’ causes of action — including their California Rosenthal Act cause of action — the trial court erred by sustaining the demurrer based on res judicata.

As to the remaining three causes of action, the plaintiffs did not articulate any reason why res judicata did not apply, and therefore forfeited any such contention.

However, in the published portion of this opinion, the Court held that the Rosenthal Act could apply to a nonjudicial foreclosure, and that the continuing violation doctrine may apply to Rosenthal Act claims.  The Court also concluded that the federal court opinions the defendants relied upon were superseded by controlling decisions of the Supreme Court of the United States, the Ninth Circuit, and the California Courts of Appeal.

A copy of the opinion in Best v. Ocwen Loan Servicing, LLC is available at:  Link to Opinion.

In an action filed in December 2018, the plaintiffs alleged that the defendants, a group of financial institutions, attempted to collect a debt secured by the plaintiffs’ home, despite having no legal right to do so.

The plaintiffs raised six causes of action: (1) violation of the Rosenthal Fair Debt Collection Practices Act (Civ. Code, § 1788 et seq.); (2) improper substitution of trustee (Civ. Code, § 2934a, subd. (a)); (3) unfair competition (Bus. & Prof. Code, § 17200); (4) negligent misrepresentation; (5) cancellation of instruments; and (6) intentional infliction of emotional distress.

The trial court sustained the defendants’ demurrer to the entire complaint on the ground of res judicata, ruling that the plaintiffs were asserting the same causes of action as in a prior federal action that they brought, unsuccessfully, against the defendants in 2016. The plaintiffs timely appealed.

The plaintiffs argued on appeal that their prior federal Fair Debt Collection Practices Act (FDCPA) cause of action and their present California Rosenthal Act cause of action were not the same, for several reasons. Of these, the Fourth Appellate District considered only their argument that their current Rosenthal Act cause of action arose out of “continuing violations” which occurred after the judgment in the 2016 federal action.

“[C]laim preclusion does not apply to claims that were not in existence and could not have been sued upon . . . when the allegedly preclusive action was initiated.” Media Rights Technologies, Inc. v. Microsoft Corp., (9th Cir. 2019) 922 F.3d 1014, 1021.

The plaintiffs specifically alleged that defendants violated the Rosenthal Act “by engaging in abusive and oppressive conduct within one year of the filing of the Complaint through (i) unethical mismanagement of the escrow account; (ii) refusal to correct accounting errors or adequately responding to [the plaintiffs’] repeated disputes over several years; (iii) assessment of illegal fees; and improperly attempting to collect amounts that are not due to them.”

The Fourth Appellate District determined that at least some of these alleged violations of the Rosenthal Act took place after the federal action was filed. Thus, the Court held that the Rosenthal Act cause of action was not barred by res judicata.

In addition, the unfair competition cause of action expressly incorporated “[t]he violations of law alleged in” the Rosenthal Act cause of action. Because at least some of these violations allegedly occurred after the complaint in the 2016 federal action was filed, the Fourth Appellate District also concluded that the unfair competition cause of action was not barred by res judicata.

The Appellate Court also noted that the cancellation cause of action sought to cancel the November 2018 notice of trustee’s sale. As this instrument did not exist when the 2016 federal action was filed, the Court concluded that the plaintiffs could not have sought to cancel it in that action and res judicata did not apply.

Regarding the remaining causes of action, the plaintiffs only argued that they did not allege them in the 2016 federal action.

However, the Fourth Appellate District held that this does not prevent the application of res judicata. “Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding.” (Brown v. Felsen, (1979) 442 U.S. 127, 131.) Thus, the Court concluded that the plaintiffs forfeited any other argument regarding these causes of action.

Therefore, the Fourth Appellate District held that three causes of action — under the Rosenthal Act, for unfair competition, and for cancellation of instruments — were not barred by res judicata.

Next, the Court considered whether the demurrer to these causes of actions could have been sustained on alternative grounds.

The defendants also demurred to the Rosenthal Act cause of action on the ground that “[c]onduct undertaken in connection with the foreclosure of a deed of trust is not actionable under [the Rosenthal Act].”

The Fourth Appellate District observed that the Rosenthal Act is modeled on the federal FDCPA. It incorporates the FDCPA, in order that a violation of the FDCPA is per se a violation of the Rosenthal Act. (Civ. Code, § 1788.17.)

However, the Rosenthal Act is more extensive than the FDCPA. For example, the FDCPA does not apply to creditors seeking to collect their own debts; however, the Rosenthal Act does, “so long as they do so ‘in the ordinary course of business, regularly.’” Huy Thanh Vo v. Nelson & Kennard, 931 F.Supp.2d 1080, 1090 (E.D. Cal. 2013), quoting Civ. Code § 1788.2, subd. (c).

The defendants argued that the Rosenthal Act does not apply to foreclosure on a trust deed by citing several federal district court opinions. However, the Fourth Appellate District held that these opinions had been undermined by subsequent decisions of the Supreme Court of the United States, the Ninth Circuit, and the California Courts of Appeal.

In 2019, in Obduskey v. McCarthy & Holthus LLP, (2019) U.S. [139 S.Ct. 1029], the Supreme Court of the United States effectively overruled the defendants’ cited opinions, holding that a loan secured by a deed of trust is a “‘debt’ … primarily for personal, family, or household purposes.” (Id. at pp. 1033, 1035-1040.) (see 15 U.S.C. § 1692a(5))

Meanwhile, in 2018, Davidson v. Seterus, Inc., 21 Cal.App.5th 283 (2018), held that a loan secured by a trust deed can be a “consumer debt” within the meaning of the Rosenthal Act. (Id. at pp. 298-300.) The Fourth Appellate District decided that this definitive construction of state law effectively overruled the contrary federal cases.

The Fourth Appellate District also remarked that the California Legislature recently amended the Rosenthal Act to state that: “[t]he term ‘consumer debt’ includes a mortgage debt.” (Civ. Code, § 1788.2, subd. (f), Stats. 2019, ch. 545, § 2, p. 5004.)

The defendants also argued that the Rosenthal Act cause of action was time-barred. The limitations period under the Rosenthal Act is one year. (Civ. Code, § 1788.30, subd. (f).) The defendants asserted that the plaintiffs were aware of allegedly unlawful debt collection practices as early as 2016, when they filed the federal action.

The Fourth Appellate District was not persuaded and held that, at a minimum, the plaintiffs can recover any damages flowing from the most recent violations that occurred after the 2016 federal action was filed.

Additionally, the Fourth Appellate District concluded that the continuing violation doctrine applied. “Under the appropriate circumstances . . ., the continuing violation doctrine may apply to [Rosenthal Act] claims.” (Joseph v. J.J. Mac Intyre Companies, L.L.C., (N.D. Cal. 2003) 281 F.Supp.2d 1156, 1161. “The key is whether the conduct complained of constitutes a continuing pattern and course of conduct as opposed to unrelated discrete acts.” (Id. at p. 1161.) If it does, “[a]pplication of the continuing violation doctrine to these facts is not only logical by way of analogy, it is entirely consistent with . . . the Rosenthal Act’s broad remedial purpose of protecting consumers.” (Id. at p. 1162.) The Court thus held that the demurrer to this cause of action could not have been sustained on these grounds.

In demurring to the unfair competition cause of action, the defendants argued that the plaintiffs failed to allege any unlawful, unfair, or fraudulent conduct. They also argued that this cause of action was time-barred.

However, the Fourth Appellate District held that “[v]irtually any law — federal, state or local — can serve as a predicate for a [UCL] action.” (Law Offices of Mathew Higbee v. Expungement Assistance Services, (2013) 214 Cal.App.4th 544, 553.) Because the plaintiffs adequately alleged violations of the Rosenthal Act, the Court concluded that they also adequately alleged “unlawful” business practices and that it need not decide whether the plaintiffs adequately alleged any unfair or fraudulent conduct.

The limitations period for unfair competition is four years. (Bus. & Prof. Code § 17208.) As the Rosenthal Act cause of action was not time-barred, the Fourth Appellate District also held that the unfair competition cause of action was not time-barred. The Court thus concluded that the demurrer to this cause of action could not have been sustained on these grounds.

Finally, in demurring to the cause of action for cancellation of instruments, the defendants argued that the plaintiffs failed to allege any facts showing that the instruments were void or voidable — i.e., the allegations to this effect were unduly conclusory.

One of the elements of a cause of action for cancellation of an instrument is that the instrument is void or voidable. (Civ. Code, § 3412; Thompson v. Ioane, (2017) 11 Cal.App.5th 1180, 1193-1194.) The Fourth Appellate District conceded that the plaintiffs’ allegations that the March 2009 and November 2009 assignments were invalid were indeed conclusory. However, the Court also noted that the plaintiffs did specifically allege that the January 2013 substitution of trustee and the April 2014 assignment were invalid because they were executed by an agent without subscribing the name of the principal. They also specifically alleged that the January 2013 substitution of trustee was invalid because the beneficiaries had not signed and recorded a majority action affidavit.

The Fourth Appellate District held that these allegations were not conclusory. Because the defendants did not argue otherwise, the Court assumed that these instruments were void or voidable. The Court thus concluded that the demurrer to this cause of action could not have been sustained on this ground.

Accordingly, the Fourth Appellate District reversed the trial court’s judgment with respect to the first (Rosenthal Act), third (unfair competition), and fifth (cancellation of instruments) causes of action. However, the judgment was affirmed with respect to the second (improper substitution of trustee), fourth (negligent misrepresentation), and sixth (intentional infliction of emotional distress) causes of action.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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