Thursday, May 2, 2013

FYI: Cal App Ct Holds Assignee's Claim for Origination Fraud Was FDCPA "Debt," and Fraud Claim Was Not Assigned with Loan

The California Court of Appeal, First District, recently ruled that:


(1) the assignment to a debt collector of a loan secured by a second deed of trust did not include assignment of a claim for origination fraud, because the contractual assignment did not expressly include tort claims and the assignment occurred after the foreclosure of the senior deed of trust when there no longer was any property interest under the second deed of trust;


(2) the assignee's claim for origination fraud was a "debt" under the federal Fair Debt Collection Practices Act, as the obligation on the part of the borrower to be truthful on her loan application derived from a consensual or contractual transaction; and


(3) the lower court's award of attorney fees and costs was reasonable in light of such factors as the market rate in the local community, time spent on litigation, and the fact that the borrower was "completely successful" in proving that the debt collector violated the FDCPA.


A copy of the opinion is available at:


A borrower ("Borrower") executed two promissory notes with a mortgage lender ("Lender") in order to purchase a home. The senior mortgage loan was for $340,000 and the junior loan was for $85,000 both of which were secured by deeds of trust on the property ("First Property").  On her loan application, Borrower indicated that she did not have a family or business relationship with the seller of the property, acknowledging that "any intentional or negligent misrepresentation of this information . . . may result in civil liability, including monetary damages."  However, the seller turned out to be Borrower's son.   Both promissory notes contained language providing that Lender had the right to transfer the notes.   At about the same time, another property ("Second Property") was purchased in Borrower's name, which Borrower claimed was purchased under her name as a result of identity theft. 


Borrower eventually defaulted on her mortgage payments on the First Property, which resulted in a foreclosure of the senior deed of trust.  About nine months after the foreclosure on the senior lien, a debt buyer ("Debt Collector") acquired Borrower's second promissory note as part of a pool of loans.  Debt Collector sent Borrower a number of notices informing her of the transfer of the note, including a notice asserting that Borrower was obligated to pay Debt Collector the unpaid balance on the second promissory note.   Debt Collector also concluded that Borrower had made misrepresentations on her loan application. 


Seeking actual and punitive damages, Debt Collector filed suit against Borrower, alleging intentional misrepresentation, fraudulent concealment, promise without intent to perform, and negligent misrepresentation.  Debt Collector further alleged that, because it was not seeking a deficiency judgment for the balance of a promissory note following the foreclosure of the senior deed of trust, it could pursue a judgment for Borrower's alleged fraud in connection with her loan application.


Around the time of the filing of its complaint, Debt Collector sent Borrower a letter, with the summons and complaint attached, stating among other things "If you notify us of your intent to voluntarily provide us with . . . documentation [related to Borrower's federal tax returns], we may suspend actions to provide you with an opportunity to provide use with copies of the same."  The letter also told Borrower to notify Debt Collector if she wanted to provide a copy of her promissory note as Debt Collector, "as assignee of the promissory note, has the right to reverify the information contained therein."  Finally, threatening litigation, the letter also informed Borrower that "any information or misrepresentations provided in the [loan] application are a violation of federal law and may result in 'civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation' for which [Debt Collector] . . . currently seeks."


The lower court ultimately concluded that Debt Collector failed to adequately allege an assignment of Lender's tort claims, as distinct from an assignment of the Lender's contractual rights under the second promissory note.  The lower court additionally found in part that, because Debt Collector's complaint stated that the promissory note was assigned after the foreclosure of the senior deed of trust, there was no underlying property interest to support "an incidental assignment of the original lender's fraud claims." 


Borrower also filed a cross-complaint alleging violations of California's Rosenthal Act and the federal Fair Debt Collection Practices Act ("FDCPA"), for alleged deceptive debt collections practices.  Borrower moved for summary judgment or summary adjudication on her cross-complaint, citing the letter Debt Collector sent her after it had filed its lawsuit.  Borrower sought $1,000 for the FDCPA violation and $1,000 for violation of California's Rosenthal Act.  In response, Debt Collector argued in part that the FDCPA did not apply because Borrower bought the property from her son and purchased the Second Property. 


The lower court granted in part and denied in party Borrower's motion for summary adjudication on the cross-complaint, ruling that Debt Collector's conduct threatening prosecution of meritless claims violated the FDCPA, and noting that Debt Collector had made a binding judicial admission that it received the second promissory note after the foreclosure of the first deed of trust, which extinguished the second deed of trust securing the second promissory note.   Partly concluding that the amount of Borrower's damages remained unresolved, the lower court awarded statutory damages in the nominal amount of one dollar. 


The lower court explained that if Borrower insisted on a greater amount, summary adjudication would be denied and the matter would proceed to trial.   The lower court entered judgment in Borrower's favor, indicating on the order that Borrower was the "prevailing party" and later awarding Borrower attorney fees and costs in the amount of almost $90,000.00.  The lower court, however, denied Borrower's summary adjudication motion with respect to her Rosenthal Act claim.


Debt Collector appealed.  The Appellate Court affirmed as to both Debt Collector's liability and attorney fees.


As you may recall, the FDCPA prohibits debt collectors from using "any false, deceptive, or misleading representation or means in connection with the collection of any debt," including "[t]he false representation of" "the character, amount or legal status of any debt[.]" 15 U.S.C. § 1692e. 


Violations under the FDCPA also include: (1) "[t]he threat to take action that cannot legally be taken . . . ." ; (2) the use of "any false representation or deceptive means to . . . obtain information concerning a consumer; and (3) "[t]he false representation or implication that accounts have been turned over to innocent purchasers for value."  15 U.S.C. § 1692e(5), (10), (12).


Finally, the FDCPA provides an affirmative defense for "any act done or omitted in good faith in conformity with any [Federal Trade Commission] advisory opinion."  15 U.S.C. § 1692k(e).


Rejecting Debt Collector's assertion that it had a right to pursue Borrower for the alleged misrepresentations on her loan application based on the purported assignment of Lender's tort claims against Borrower, the Appellate Court explained that "[a]n assignment agreement must describe the subject matter of the assignment with sufficient particularity to identify the rights assigned," and also that fraud causes of action must be pled specifically.  See Cockerell v. Title Ins. & Trust Co., 42 Cal.2d 284, 292 (1954); Mission Valley East, Inc. v. County of Kern, 120 Cal.App.3d 89, 97 (1981); Lazar v. Superior Court, 12 Cal.4th 631, 645 (1996); Committee on Children's Television, Inc. v. General Goods Corp., 35 Cal.3d 197, 216-17 (1983).


Pointing out that Debt Collector properly alleged assignment of the promissory note itself, the Court nevertheless noted Debt Collector's mere conclusory assertions that Lender assigned its tort claims to Debt Collector through various means, such as:  (1) the sale of the loan assigned all rights Lender had, including the fraud claim; (2) the assignment of tort claims was implied by the language in the assignment agreement providing that "all right, title and interest in the loan" was transferred to Debt Collector; (3) custom and practice in the mortgage industry; and (4) Borrower's acknowledgment in her application that Lender's assigns could rely on the information she provided therein. 


The Appellate Court concluded that the fraud claims were not "incidental to" the transfer of the promissory note to Debt Collector, and that the indorsed promissory note did not show a clear intent to assign the ancillary fraud claim, noting that the assignment agreement was completely silent regarding ancillary tort claims. See Cal. Civ. Code §1084; § 3201 et. seq; Guild Mortgage Co. v. Heller, 193 Cal. App.3d 1505, 1512 (1987); DC3 Entertainment, LLC v. John Galt Entertainment, Inc., 412 F. Supp.2d 1125, 1144 (W.D. Wash. 2006); National Reserve Co. v. Metropolitan Trust Co, 17 Cal.2d 827, 833 (1941).


With respect to the issue of liability under the FDCPA, the Appellate Court determined that Debt Collector's letter to Borrower violated the FDCPA by indicating, incorrectly, that Debt Collector had the right to sue Borrower for any misinformation submitted on the loan application and when it attempted to induce Borrower to settle, particularly in light of Debt Collector's judicial admission that it received assignment of Borrower's second note after the foreclosure of the first deed of trust.   


In so ruling, the Appellate Court rejected Debt Collector's argument that "debt" under the FDCPA never includes tort claims, noting that "debt" does not include tort obligations only when the tort obligations do not arise out of consensual or contractual transactions.  The Court rejected Debt Collector's arguments that Borrower's fraud liability did not arise out of a consensual transaction because the originating lender did not consent to mortgage fraud, and that the transaction was the same as the theft of goods or services, ruling that the Debt Collector's arguments were "contrary to the court decisions that have held that there is no automatic fraud exception to the FDCPA." 


Moreover, the Appellate Court also rejected Debt Collector's argument that, because it relied on an advisory opinion of the Federal Trade Commission, it had a defense to the application of the FDCPA, noting that the "advisory opinion" was only an informal staff opinion letter that disclaimed that it was binding on the FTC.


Turning to the issue of attorney fees, the Appellate Court concluded that even though Borrower was awarded only one dollar, she was nevertheless completely successful in establishing Debt Collector's unlawful conduct and that her success was thus not "partial." See Farrar v. Hobby, 506 U.S. 103 (1992); Thornton v. Wolpoff & Abramson, LLP, 312 Fed.Appx. 161, 164 (11th Cir. 2008).    Thus, taking into account the number of hours spent on the litigation, the prevailing market rates in the relevant community, and the interrelatedness of the FDCPA and Rosenthal Act claims and counterclaims, the Court determined that the lower court did not abuse its discretion in not reducing the attorney fees.


Accordingly, the Appellate Court affirmed the lower court's judgment and award of attorney fees and costs.




Ralph T. Wutscher
McGinnis Wutscher Beiramee 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


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