FYI: Cal App Ct Holds Non-Holder Servicer May Pursue Judicial Foreclosure in Its Own Name, Compliance w/ PSA Irrelevant

The California Court of Appeal, Fourth District, recently held that where a loan servicer has been assigned the right to foreclose, California Code of Civil Procedure Sec. 725a does not prohibit the servicer from filing a judicial foreclosure action in its own name, and rejected the borrower's argument of lack of compliance with the underlying Pooling and Servicing Agreement as irrelevant to the borrower's default.

 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/D060923.PDF.

 

A borrower obtained a mortgage loan secured by a deed of trust, as well as a home equity line of credit.  The originator of those loans entered into a Pooling and Servicing agreement ("PSA"), which provided for the conveyance of certain mortgage loans into a securitized trust, including the borrower's.  The PSA also appointed a master servicer ("servicer") to service the loans.  Accordingly, the originator transferred its interest to the bank acting as trustee of the trust.

 

The borrower defaulted on both loans, and nonjudicial foreclosure proceedings were instituted and suspended several times.  The borrower then filed a complaint against the servicer, alleging irregularities in the nonjudicial foreclosure process, among other allegations. 

 

The servicer filed a cross-complaint for judicial foreclosure, and moved for summary judgment. The lower court was not satisfied that junior lienholders had received notice of the suit, and accordingly requested that the servicer re-file its motion for summary judgment with that defect corrected.  The servicer did so, and the lower court granted the motion for summary judgment.  The borrower appealed. 

 

As you may recall, California Code of Civil Procedure Sec. 725a ("Sec. 725a") provides that in a judicial foreclosure, "the beneficiary or trustee named in a deed of trust or mortgagee named in a mortgage...shall have the right to bring suit to foreclosure the same..."

 

On appeal, the borrower argued that Sec. 725a allows only beneficiaries, trustees and mortgagees to initiate judicial foreclosure actions.  The borrower noted that the statute applicable to nonjudicial foreclosures specifically provides that agents of the trustee, mortgagee or beneficiary may institute foreclosure proceedings.  Cal. Civil Code Sec. 2924(a)(1).  Therefore, the borrower argued that if the Legislature had intended to allow agents, such as servicers, to initiate judicial foreclosure proceedings, it would have included similar language in Sec. 725a. 

 

The Court disagreed, finding that Sec. 725a "does not explicitly prevent a beneficiary or trustee from contracting its right [to file a judicial foreclosure] to a loan servicer."  Further, the Court observed that because nonjudicial foreclosures proceed without court involvement, "the Legislature saw fit to explicitly set out who could initiate a nonjudicial foreclosure....The Legislature did not have the same concerns in drafting section 725a."

 

Having determined that Sec. 725a does not prohibit a loan servicer from initiating a judicial foreclosure, the Court next analyzed whether the servicer was properly assigned the right to bring the foreclosure action by contract.  The borrower raised several allegations in connection with this issue, including among others that the servicer cannot foreclosure because the lender supposedly did not transfer its interest to the servicer, and that the servicer "is not in compliance with the PSA." 

 

The Court found neither allegation persuasive.  Regarding the first issue, the Court found that the servicer "has been assigned a cause of action (judicial foreclosure) that arose out of a legal obligation (the promissory note and deed of trust).  Whether the promissory note and/or the deed of trust were assigned to [the servicer] is therefore immaterial."  The Court likewise found no merit in the borrower's PSA argument, noting that whether the servicer might have breached the PSA has no bearing on the borrower's failure to repay his loan.   

 

Finally, the borrower challenged the lower court's decision on the basis that the junior lienholder was not joined as a co-defendant in the action.  The Court found that the borrower forfeited the argument by raising it only on appeal, and in any event held that it was without merit: "A junior lienholder's interest in a property that is subject to a judicial foreclosure on a senior lien is not affected if the junior lienholder is not included as a defendant in the judicial foreclosure action." 

 

The Court did find for the borrower on one issue:  it held that the foreclosure decree's award of rent to the servicer was premature, "because the identity of the purchaser was not known at the time." 

 

Accordingly, the Court remanded the matter to the lower court with orders to strike the rent award from the foreclosure decree, but otherwise affirmed the lower court's judgment.

 

 

Ralph T. Wutscher
McGinnis 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
 

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FYI: 9th Cir Holds Debt Collector Violated FDCPA by Sending Letters to Debtors "Care Of" Their Employers w/o the Debtors' Consent

The U.S. Court of Appeals for the Ninth Circuit recently held that a debt collector violated the federal Fair Debt Collection Practices Act by sending debt collection letters addressed to debtors in "care of" their employers without the debtors' consent. 

 

The Court further ruled, however, that the letters' contents explaining possible consequences for failure to pay amounts owed did not violate the FDCPA's prohibition against misleading or deceptive communications.  The Court also held that the district court improperly denied class certification. 

 

A copy of the opinion is available at:   http://www.ca9.uscourts.gov/datastore/opinions/2012/08/01/10-16615.pdf.

 

After being contacted by the debt collector defendant, plaintiff debtor asked that she not be contacted at work.  The debt collector defendant later sent a debt collection letter to the plaintiff debtor at her work place in "care of" the employer. 

 

Marked "personal and confidential," the letter indicated in part that Debtor owed a debt, and that legal action "could result in a judgment against you" for failure to pay.  The letter also stated that a judgment against Debtor "could result in remedies such as Wage Garnishments, Bank Account Levies, or Attachments of your assets . . . ."  The letter had been opened and read by numerous individuals at Debtor's work place by the time Debtor actually received it.

 

Debtor subsequently filed a putative class action complaint, alleging that defendant debt collector unlawfully sent debt collection letters to plaintiffs' workplaces without their consent, and that the letters contained false, misleading, deceptive or threatening language in alleged violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692 et seq. ("FDCPA"). 

 

Debtor moved for class certification and for partial summary judgment on the liability issue.  The debt collector defendant moved for summary judgment on all claims and opposed the motion for class certification.  At some point during the litigation, Debtor waived her claim for actual damages but maintained her claim for statutory damages

 

Denying Debtor's motions, the district court granted the debt collector's motion for summary judgment as to the putative class claims, ruling that neither the act of sending the letters to the plaintiffs' workplaces nor the contents of the letters violated the FDCPA.  However, the district court denied the debt collector's summary judgment motion as to the individual named plaintiff's claims on the issue of whether the debt collector violated the FDCPA by sending the letter to Debtor's workplace, concluding that fact issues existed as to the debt collector's bona fide error defense as to the named plaintiff's claims.

 

Following the District Court's rulings, Debtor and debt collector entered into a settlement agreement pursuant to Rule 68 of the Federal Rules of Civil Procedure on her individual claim whereby the debt collector agreed to pay Debtor's reasonable and necessary attorney's fees and costs.  Debtor thus filed for over $90,000 in attorney's fees and over $2,000 in litigation costs.  The district court awarded Debtor just over $2,000.

 

Debtor appealed.  The Ninth Circuit ruled that it had jurisdiction, because "[w]hile the language of the offer of judgment does not include an express reservation of [Debtor's] right to pursue an
appeal on behalf of the class, it is not so broad that it can be read to release her class claims."

 

The Ninth Circuit reversed the lower court's ruling in part, ruling that sending debt collection letters in "care of" a third party without the consumer's consent constituted a per se violation of the FDCPA.  However, the Ninth Circuit agreed with the district court that the contents of the letter did not violate the FDCPA.
   
As you may recall, the FDCPA provides in part "without the prior consent of the consumer given directly to the debt collector . . . a debt collector may not communicate, in connection with the collection of any debt, with any person other than the consumer [or] his attorney . . . ."  15 U.S.C § 1692c(b).  In addition, the FDCPA prohibits the use by a debt collector of "any false, deceptive, or misleading representation or means in connection with the collection of any debt," and requires a debt collector to pay fees "in any case of any successful action . . . [for] the costs of the action, together with a reasonable attorney's fee as determined by the court."  15 U.S.C. §§ 1692e, 1692k(a)(3).

 

After ruling that it had jurisdiction over Debtor's class claims under the terms of the Rule 68 settlement agreement, the Ninth Circuit analyzed whether the debt collector violated the FDCPA by  sending the debt collection letters in "care of" employers without the debtors' consent.
 
As part of its analysis, the Ninth Circuit referenced the Federal Trade Commission's ("FTC's") commentary on permissible and impermissible conduct, noting in part that, according to the FTC, a debt collector may not send written communications that are easily accessible to third parties.  Thus, the Court concluded that the debt collector's sending the letters in "care of" the employers without consent was a per se violation of the FDCPA.  In so doing, the Ninth Circuit pointed out the likelihood that the letters would be viewed by third parties, and that, as a debt collector, the defendant "should have known of the real possibility that a letter to a debtor's place of employment . .  .  would be viewed by someone other than the debtor." 

 

Next, in examining whether the debt collection letter itself was misleading to the "least sophisticated debtor,"  the Ninth Circuit rejected Debtor's assertions that the letter misrepresented that judgment was inevitable and would result in the loss of all of Debtor's wages or assets.  See, e.g., Donohue v. Quick Collect, Inc., 592 F.3d 1027 (9th Cir. 2910)(referencing standard for determining whether conduct violates section 1692e).  The Court noted that the letter merely stated that judgment "could result" and, further, that the letter nowhere stated that "all" wages or "all" assets would be taken as a result of any ensuing judgment.  Recognizing that the letter should have provided more clarifying language, the Court nevertheless ruled that the letter was in no way false, deceptive or misleading.

 

As to the district court's denial of class certification on the 1692c(b) claim, the Ninth Circuit took issue with a number of the lower court's rulings.  Specifically, the Court ruled that, contrary to the district court's conclusion, the proposed class satisfied the numerosity, commonality, typicality and adequacy requirements under Federal Rule 23(b).  See, e.g., Wal-Mart Stores v. Dukes, ___ U.S. ___, 131 S. Ct. 2541 (2011)(ruling that commonality requires that claims be capable of resolution "in one stroke"). 

 

Moreover, observing among other things that the proposed class members had allegedly suffered the same or similar injury in that they received a debt collection letter at their work places without first giving consent, the Ninth Circuit pointed out that even if questions existed as to whether certain class members had in fact requested the debt collector not to send them letters at work, such questions were merely "peripherally relevant" and could not defeat commonality. 

 

The Ninth Circuit further ruled that debt collector had no "bona fide error" defense as a matter of law, as the debt collector intentionally had sent the letters and had no procedures for determining a debtor's consent prior to sending the letters.  See McCullough v. Johnson, Rodenburg & Lauinger, LLC, 637 F.3d 939 (9th Cir. 2011) (ruling that the bona fide error defense requires an unintentional violation of the FDCPA caused by a bona fide error and procedures in place to avoid the violation).

 

The Ninth Circuit also disagreed with the district court's conclusion that adequacy was lacking because Debtor had waived her actual damages claim and, according to the lower court, plaintiff's counsel was not qualified to represent the class in this "attorney-driven action."   In short, the Ninth Circuit ruled that the district court abused its discretion in concluding that the proposed class failed to satisfy the Rule 23(b) class certification factors and remanded for consideration on this question.

 

As to attorney's fees and costs, the Ninth Circuit made a number of observations including that the lower court had failed to take into account certain factors in calculating the reasonableness of attorney fees.  In so doing, the Court noted in part that the law suit caused the debt collector to cease its practice of sending debt collection letters to workplaces, and that Debtor recovered the full amount of allowable statutory damages. 

 

Notably, the Ninth Circuit granted Debtor's request to reassign the case to a different district court judge.  As the Ninth Circuit explained, "we are struck by the district judge's forceful statements:  the case was "unnecessary," a "waste of time," "not worth a dime," and "should never have been filed."    The Court stressed that "the record reflects an unfortunate dismissive attitude by the district judge both toward [plaintiffs' counsel] and the class [Debtor] seeks to represent." See United States v. Arnett, 628 F.2d 1162, 1165 (9th Cir. 1979)(listing factors used to determine whether reassignment is appropriate).

 

Finally, the Ninth Circuit affirmed the district court's imposition of sanctions against the debt collector's attorney, noting in part that the attorney willfully violated the very protective order he sought to prevent disclosure of confidential information.  See Fink v. Gomez, 239 F.3d 989, 991-93 (9th Cir. 2001)(holding that court may levy sanctions for "willful disobedience of a court order").

 

Ralph T. Wutscher
McGinnis 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
 

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