FYI: 9th Cir Holds No FDCPA Violation When Debt Validation/1692g Notice Implies Disputes Must Be in Writing

The U.S. Court of Appeals for the Ninth Circuit recently held that a debt collector's debt validation/1692g notice did not violate the federal Fair Debt Collection Practices Act or California's Rosenthal Act, where the notice implied, rather than expressly stated, that the debtor must dispute the debt in writing.
 
A copy of the opinion is available at: 

http://www.ca9.uscourts.gov/datastore/opinions/2012/06/08/10-17220.pdf.

 

Plaintiff-borrower purchased a car under a retail installment contract that was later assigned to a successor creditor.  After Plaintiff- borrower failed to keep up with the payments, the creditor repossessed and sold the car, and hired the defendant debt-collection law firm ("Law Firm") to collect the remaining balance due.

 

The Law Firm sent a debt validation notice to Plaintiff-borrower requesting repayment of the debt.  Based on the federal Fair Debt Collection Practices Act ("FDCPA") and California's Rosenthal Act (the state equivalent of the FDCPA), the notice read in part:  "if you notify [creditor's] attorneys in writing within 30 days that all or part of your obligation or judgment . . . is disputed, then [creditor's attorneys] will mail to you written verification of the obligation or judgment and the amounts owed to the [creditor].  In addition and upon your written request within 30 days of receipt of this letter, [Law Firm] will provide you with the name and address of the original creditor, if different from the current creditor."

 

The Plaintiff-borrower never contacted the Law Firm or made any payments on the debt and, after settling one action brought against her in state court by the Law Firm, Plaintiff-borrower filed suit in federal court.  Plaintiff-borrower alleged that the Law Firm's validation notice violated the FDCPA and the Rosenthal Act by: (1) requiring the Plaintiff-borrower to dispute her debt in writing; and (2) misrepresenting Plaintiff-borrower's right to dispute the debt validation. 

 

The Law Firm moved to dismiss and, in the alternative, for partial summary judgment.  Ruling that the Law Firm's validation notice did not impermissibly require the Plaintiff-borrower to dispute her debt in writing or falsely misrepresent her right to dispute the debt, the district court partially granted the Law Firm's motion to dismiss.  The district court also granted partial summary judgment in favor of the Law Firm.  Plaintiff-borrower appealed the district court's summary judgment order. 

 

The Ninth Circuit affirmed the lower court's ruling.

 

As you may recall, Section 1692g(a) of the FDCPA requires a debt collector to send  a consumer debtor a written validation notice containing among other things:  "[ . . . ] (3) a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, . . . the debt will be assumed to be valid by the debt collector; (4) a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt . . . is disputed the debt collector will obtain verification of the debt . . . and a copy of such verification . . . will be mailed to the consumer by the debt collector; and (5) a statement that upon the consumer's written request within the thirty-day period the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.  15 U.S.C. § 1692g(a)(3)-(5).

 

In addition, the FDCPA provides that a "debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." 15 U.S.C. § 1692e. 

 

Noting that in the Ninth Circuit the law is settled that the FDCPA allows debtors to dispute debts either orally or in writing, the Court focused on whether the validation notice in this case expressly required the Plaintiff-borrower to dispute the debt in writing.  See Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078, 1081-82 (9th Cir. 2005)(to the extent that a validation notice requires that a dispute be in writing, the notice violates section 1692g(a)(3) of the FDCPA).

 

Next, in applying the "least-sophisticated consumer test," the Ninth Circuit concluded that such a consumer could understand the Law Firm's notice to imply that a debt dispute must be in writing.  The Ninth Circuit nevertheless ruled that there is no FDCPA violation where validation notices merely imply that disputes must be in writing. 

 

In so ruling, the Court noted the lack of clarity in the FDCPA itself as to when a consumer must do certain things in writing.   The Ninth Circuit observed that subsection 1692g(a)(4) expressly requires a consumer to "'notif[y] the debt collector in writing . . that the debt [. . .] is disputed,' in order to obtain verification, while subsection (a)(3) is silent as to what form a general dispute of an alleged debt must take."  The Court pointed out that, taken together, the various dispute provisions in the FDCPA could imply that a debtor must dispute a debt in writing. 

 

Reasoning that "a validation notice . . . like [the Law Firm's], which more or less reverses the order of the § 1692g (a)(3)-(5) advisories, cannot be unlawful merely because it allows for the same implication,"  the Court ruled that a debt validation notice violates section 1692g(a)(3) only where it expressly requires a written dispute.
 
The Ninth Circuit also ruled that because there was no violation of section 1692g(a)(3), the Plaintiff-borrower failed to establish a claim based on an alleged "false representation" in the validation notice as to her right to dispute the debt. 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com

 

 

FYI: Kansas App Ct Rules in Favor of MERS

The Kansas Court of Appeals recently held that a mortgage was never severed from the underlying note and that a foreclosure was thus permissible, where the mortgage itself clearly established an agency relationship between MERS (as the lender's nominee and the initial mortgagee), and the holder of the note.

 

A copy of the opinion is available at: 

http://www.kscourts.org/Cases-and-Opinions/opinions/CtApp/2012/20120608/106415.pdf.

 

A borrower obtained a loan and was the sole signer of the promissory note.  To secure the loan, both the borrower and his wife ("Surviving Mortgagor") executed a mortgage granting the lender ("Plaintiff Bank") a security instrument in property jointly owned by the borrower and the Surviving Mortgagor.  The mortgage identified Mortgage Electronic Registration Systems, Inc. ("MERS") as the nominee for Plaintiff Bank, and gave MERS certain rights, including the right to foreclose and sell the property and "to take any action required of Lender."  MERS served as the mortgagee of record on behalf of the lender.

 

The borrower subsequently died and Surviving Mortgagor stopped making payments on the underlying loan.  After the loan went into default, MERS assigned the mortgage to Plaintiff Bank.  Seeking recovery against the property only, Plaintiff Bank filed a petition to foreclose on its mortgage. 

 

Surviving Mortgagor moved for summary judgment, arguing that she was not personally liable on the debt and that Plaintiff Bank could not foreclose on the property, because the note and mortgage had been "irreparably severed" in that MERS had held the mortgage while Plaintiff Bank held the underlying debt.  Surviving Mortgagor also claimed that the borrower's estate was not liable under the note, because Plaintiff Bank had failed to make a timely demand for payment under K.S.A. 59-2239(1), which establishes deadlines for asserting certain claims against a decedent's estate.

 

Plaintiff Bank filed a cross-motion for summary judgment, arguing in part that the note and mortgage were never severed, because MERS acted as Plaintiff Bank's agent in its role as "nominee for Lender."

 

The lower court granted Plaintiff Bank's motion for summary judgment, ruling that even if there had been no agency relationship between MERS and Plaintiff Bank due to a split of the note from the mortgage, any such severance had been "cured" by MERS's assignment of the mortgage to Plaintiff Bank, thereby allowing Plaintiff Bank to foreclose on the mortgage.

 

The Surviving Mortgagor appealed.  The Court of Appeals affirmed.

 

Exploring whether MERS acted as Plaintiff Bank's agent in this case, the appellate court pointed out that, although under Kansas law a mortgage is generally unenforceable when the mortgage is not held by the same party that holds the underlying note, an exception exists where there is an agency relationship between the note holder and the holder of the mortgage.  See Landmark Nat'l Bank v. Kesler, 289 Kan. 528, 216 P.3d 158 (2009)(agency relationship between holder of a trust deed and note holder would allow foreclosure).

 

Following the reasoning of a bankruptcy court that confronted the same issue, the Court observed that the mortgage in this case established an express agency relationship between MERS and Plaintiff Bank.  See In re Martinez, 444 B.R. 192 (Bankr. D. Kan. 2011)(a note and mortgage were never severed because the language in the mortgage document explicitly established an agency relationship between MERS and the lender).  The Court noted that the mortgage "explicitly authorize[d] MERS to act on behalf of [Plaintiff Bank] in all situations related to the enforcement of the Mortgage."  In so doing, the Court pointed out that the use of the term "nominee" rather than "agent" did not alter the nature of the relationship between MERS and Plaintiff Bank.

 

Accordingly, in ruling that the plain language of the mortgage itself provided undisputed evidence that MERS acted as agent for Plaintiff Bank and that the note was thus never severed from the mortgage, the Court concluded that Plaintiff Bank was entitled to foreclose on its mortgage.

 

With respect to Surviving Mortgagor's assertion that Plaintiff Bank could not foreclose on the mortgage for failure to demand payment on the note within the time prescribed by K.S.A. 59-2239(1), the Court ruled that the provision was inapplicable in this case, because the statute expressly exempts liens existing at the date of a decedent's death.

 

 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com