FYI: Cal App Ct (4th Dist) Holds "Always On" Call Recorder May Violate Calif Invasion of Privacy Act

The California Court of Appeals, Fourth District, recently reversed summary judgment awarded in favor of the defendant based on violations of the California Invasion of Privacy Act, Penal Code § 630, et seq. ("Privacy Act"), which prohibits the recording of confidential communications without the knowledge or consent of the other party, and the intentional recording of communications using a cellular or cordless telephone.

 

In so ruling, the Appellate Court held that the defendant could not establish that it lacked the requisite intent to violate the Privacy Act, because the defendant's full-time "always on" recording system recorded all calls on the company phones regardless of whether the calls were made for personal or business purpose.

 

A copy of the opinion is available at:  Link to Opinion

 

From March 2009 through May 2012, the defendant employed a full-time "always on" telephone call recording system that was activated when an employee placed a telephone call. 

 

The defendant recorded 317 of the plaintiff's telephone conversations in calls made to the plaintiff on the defendant's company telephone.  The plaintiff's daughter, who was employed by the defendant, placed 316 of the calls, and the plaintiff's friend, who was also an employee of the defendant, placed one of the calls.  None of these calls involved defendant's business.

  

In defendant's "Electronic Monitoring and Device Use" written policy in effect at the time, the defendant authorized its employees to use company telephones for personal calls, expressly advising them in writing that their "personal calls may be recorded." 

 

The plaintiff sued the defendant for alleged violations of the California Invasion of Privacy Act, Penal Code § 630, et seq. ("Privacy Act"). 

 

Specifically, the plaintiff alleged that defendant intentionally recorded her confidential telephone conversations in violation of: (1) § 632(a), which prohibits one party to a telephone call from intentionally recording a confidential communication without the knowledge or consent of the other party, and (2) § 632.7(a), which prohibits the intentional recording of a communication using a cellular or cordless telephone.

 

The defendant filed a motion for summary judgment, arguing that both causes of action fail, because the defendant did not intentionally record any of the plaintiff's telephone calls.  The defendant argued that it did not intend to record each specific conversation at issue, and the plaintiff cannot establish that the defendant had the requisite intent for purposes of violating section 632(a) or section 632.7(a).

 

The plaintiff argued that the defendant did not meet its initial burden on establish its lack of intent, and even if it did, there were triable issues of material fact that precluded summary judgment in its favor. 

 

The trial court granted the defendant's motion for summary judgment.  This appeal followed.

 

The issue on appeal was, for purposes of determining a potential violation of section 632(a) or section 632.7(a), whether the defendant intentionally recorded the plaintiff's conversations with the defendant's employees.

 

The defendant argued that it did not "intentionally" record the 317 challenged calls, as required for purposes of §§ 632(a) and 632.7(a), because the mere act of installing a recording device on company phones did not satisfy the requirements for intent under the eavesdrop statutes.  The defendant argued that these recordings were made "by chance."

 

However, in the Appellate Court's view, the defendant did not record the 317 confidential conversations by chance.  Instead, these recordings were made by a full-time "always on" telephone call recording system that was always in operation, and the defendant recorded all calls made from the designed company telephone.  Additionally, the Appellate Court found that the defendant authorized its employees to use company telephones for personal calls and advised them that their "personal calls may be recorded."

 

Thus, the Appellate Court held that the defendant failed to meet its initial burden on summary judgment, because its call recording system recorded all calls during the period of time when the defendant recorded the 317 conversations at issue.  Because the defendant recorded the calls that contained the plaintiff's confidential communication, the Appellate Court concluded that the defendant may have violated both sections 632(a) and section 632.7(a).

 

Notwithstanding the automatic recording of all calls on company phones, the defendant argued that these eavesdrop statutes were designed to protect individuals against eavesdroppers without penalizing the innocent use of recording equipment. 

 

As support for this argument, the defendant cited People v. Superior Court of Los Angeles County (1969) 70 Cal.2d 123 ("Smith"), and People v. Buchanan (1972) 26 Cal.App.3d 274 ("Buchanan").

 

In Smith, a criminal case, the issue was whether certain tape recorded conversations were obtained in violation of former section 653j, the predecessor to section 632 under consideration in this case.  People v. Superior Court of Los Angeles County (1969) 70 Cal.2d 123, 125.  The defendant business owner in Smith hired a private investigator to install and test a voice-activated tape recorder that would record all conversations, including telephone conversations in its offices, both automatically (noise-activated) and manually.  Id., at 126.  The defendant in Smith was charged with a crime, the tapes were potential evidence, and it was defendant who argued that the tape recordings were made in violation of the applicable statute.  Id., at 126-27.

 

The court in Smith rejected the criminal defendant's statutory interpretation that "intent to record" meant merely putting the recording equipment in operation.  Id., at 132.  Rather, the court in Smith held that "the mere intent to activate a tape recorder which subsequently 'by chance' records a confidential communication" was insufficient to constitute an offense.

 

However, as the Appellate Court explained, the California Supreme Court later summarized its conclusion in Smith as follows: 

 

Former section 653j, subdivision (a) "required an intent to record a confidential communication, rather than simply an intent to turn on a recording system apparatus which happened to record a confidential communication." 

 

Estate of Kramme (1978) 20 Cal.3d 567, 572, fn. 5.

 

Applying this standard, the Appellate Court determined that the defendant's recordings were unlike the recording in Smith.  The defendant in this case did not merely record confidential communications while testing its recording equipment.  Rather, the defendant knew that it was recording all calls on company phones and told its employees that that were authorized to use company phones for personal use and that their personal calls might be recorded. 

 

Thus, based on the different timing, frequency, and purpose for using the equipment that recorded the challenged calls, the Appellate Court distinguished Smith.

 

In Buchanan, a switchboard operator "inadvertently" overheard a telephone conversation during the moment in time that she was required to stay on the line to ensure a proper connection.  People v. Buchanan (1972) 26 Cal.App.3d 274, 281.  The court in Buchanan held that the operator did not intentionally eavesdrop on a telephone call in violation of the Privacy Act.  Id., at 288.

 

The Appellate Court easily distinguished Buchanan because in the Court's view there was nothing inadvertent or momentary about the defendant's recording of the 317 challenged calls.  The Court found that the defendant was purposefully recording all calls on the company telephone lines from which the 317 challenged calls were recorded.  Moreover, the defendant's disclosures regarding the practice of recording calls, and the plaintiff's knowledge of the company policy of recording calls, weighed against a lack of intent for purposes of section 632(a) or section 632.7(a). 

 

In sum, the Appellate Court concluded that the defendant did not meet its burden of establishing as a matter of law that it did not have "knowledge to a substantial certainty that [its] use of the equipment w[ould] result in the recording of a confidential conversation" of an employee and a third party like the plaintiff.  Smith, 70 Cal.2d at 134.

 

Accordingly, the Appellate Court reversed the judgment, and instructed the trial court on remand to enter an order denying the defendant's motion for summary judgment.

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Mass SJC Holds Statutory Power of Sale Allowed Despite Omission of "Statutory Power of Sale" in Mortgage

The Massachusetts Supreme Judicial Court ("SJC") recently held that the "statutory power of sale" as defined in M.G.L. ch. 181, § 21 was incorporated by reference in a lender's form reverse mortgage instrument even though the lender used the term "power of sale" rather than the specific term "statutory power of sale."

 

Accordingly, the SJC ruled, the lender was able to utilize the Massachusetts statutory power of sale.

 

A copy of the opinion is available at:  Link to Opinion

 

In 2007 and 2008, three elderly borrowers ("Borrowers") each obtained loans from the same lender ("Lender") secured by reverse mortgages against their respective properties.  The Lender used a standard form for its reverse mortgage instruments. 

 

In Paragraph 9 of the reverse mortgage instruments, grounds for acceleration of the debt included, among other things, the death of the Borrowers or if the mortgaged properties were no longer the Borrowers' principal residence.  Paragraph 10 provided that "Lender may enforce the debt only through the sale of the property."

 

Paragraph 20 outlined Lender's remedies in the event of default and provided in relevant part: "If Lender requires immediate payment in full under Paragraph 9, Lender may invoke the power of sale and any other remedies permitted by applicable law . . . At this sale Lender or another person may acquire the Property.  This is known as 'foreclosure and sale.'  In any lawsuit for foreclosure and sale, Lender will have the right to collect all costs allowed by law."

 

Thereafter, the two of the Borrowers died and the other was unable to continue living in her property.  Alleging default, Lender brought separate actions in the Land Court against the Borrowers seeking a declaratory judgment allowing it to foreclose pursuant to the statutory power of sale ("SPOS") as set forth in M.G.L. ch. 181, § 21 ("§ 21").  Lender moved for partial judgment on the pleadings in all three actions seeking a judicial declaration that the language in Paragraph 20 of the reverse mortgages incorporates the SPOS as defined in § 21. 

 

The Land Court granted the motions finding that the Lender's reverse mortgages incorporated the SPOS by reference because the SPOS is a "remed[y] permitted by applicable law."  The Land Court then reported the three cases to the Appeals Court pursuant to Mass. R. Civ. P. 64(a) and the Supreme Judicial Court transferred the cases from the Appeals Court on its own motion.

 

At issue before the Massachusetts SJC was whether the standard form language in the reverse mortgages incorporated the SPOS as set forth in § 21.

 

As Massachusetts is a non-judicial foreclosure state, the Court first examined the nature of the "power of sale" which allows mortgagees to foreclose without a judicial proceeding if such authority is granted in the mortgage.  The Court explained that the power of sale is regulated through a detailed statutory framework and is limited by, among other things, the requirements set forth in § 21, which defines the "statutory power of sale" and provides that it "may be incorporated in any mortgage by reference."

 

The SJC noted that there are generally three methods of incorporating the SPOS into a mortgage: (1) by incorporating the exact language defining a statutory power of sale in § 21 into the text of the mortgage; (2) by referring to the definition generally by use of the term "statutory power of sale"; or (3) by including language in the mortgage defining a power substantially similar to that of the statutory power.  However, the Court determined that the Lender's reverse mortgages clearly did not incorporate the SPOS by either the first or third method.

 

Thus, the Court examined whether the reverse mortgages adequately referred to the SPOS in § 21 by allowing the Lender to "invoke the power of sale and any other remedies permitted by applicable law," even though Paragraph 20 did not expressly use the term "statutory power of sale." To resolve this issue, the Court applied principles of contract interpretation.

 

First, the SJC determined that the omission of the word "statutory" before the language "Lender may invoke the power of sale" in Paragraph 20 rendered the reverse mortgages ambiguous on their face as to whether they incorporated the SPOS.  The Court noted that inclusion of the phrase "and any other remedies permitted by applicable law" did not resolve the ambiguity because it could reasonably be understood to refer to remedies other than the SPOS, and therefore, exclude the SPOS.

 

The Court also found that the ambiguity was further exacerbated when viewing the reverse mortgage contracts as a whole because other provisions appeared to contemplate judicial foreclosure, rather than foreclosure by power of sale.  For example, Paragraph 11 provided that the Borrowers' right to reinstatement "applies even after foreclosure proceedings are instituted" and Paragraph 20 stated that "[i]n a lawsuit for foreclosure and sale, Lender will have the rights to collect all costs allowed by law."  

 

Moreover, the notice Lender is required to send Borrowers under Paragraph 20 must advise that "Borrower has the right in any lawsuit for foreclosure and sale to argue that Borrower did keep promises and agreements . . . and to present any other defenses that Borrower may have."  The SJC noted that it has found substantially similar language to be misleading with disastrous consequences and such language was inconsistent with the practices of a non-judicial foreclosure state.

 

Thus, the Court found that the facial ambiguity of the phrase "power of sale and any other remedies permitted by applicable law," combined with the repeated references to judicial foreclosure, rendered the language in Paragraph 20 susceptible of more than one meaning.  Citing Lechmere Tire & Sales Co. v. Burwick, 360 Mass. 718, 720-721, the Court then noted that because the language is ambiguous and the reverse mortgages are standardized contracts of adhesion, the language should be construed against the drafting party (Lender) and the interpretation that an objectively reasonable borrower of reverse mortgages would give the language should be adopted.

 

However, the application of the rule required "that the alternative interpretation placed upon the alleged ambiguity . . . be, under all circumstances, a reasonable and practical one." See Shea v. Bay State Gas Co., 383 Mass. 218, 225 (1981).  Thus, even construing the language against Lender, the Court found that the only "reasonable and practical" interpretation of the reverse mortgages was that they incorporated the SPOS. 

 

In so finding, the SJC explained that it was important that the cases involved reverse mortgages where the borrower makes no monthly payments and cannot be held personally liable for the debt, and where the lender's only recourse upon default is to obtain payment through a foreclosure sale.  The Court reasoned that without a power of sale, Lender could only recover the principal of the loan by either (1) foreclosure through entry, a process that would take three years; or (2) foreclosure by action, which was rarely used in Massachusetts.  The Court thus concluded that no reasonable borrower in Massachusetts would expect any lender to enter into a reverse mortgage without retaining a power of sale. 

 

As there is no "power of sale" in Massachusetts except the SPOS, the Court found that the power of sale granted in the reverse mortgages must necessarily be a SPOS governed by § 21.  To interpret the power of sale in Paragraph 20 any other way would render the provision a nullity and go against a court's preference for an "interpretation 'which gives a reasonable, lawful and effective meaning to all manifestations of intention, rather than one which leaves a part of those manifestations unreasonable, unlawful or [of] no effect. '" See Ferri v. Powell-Ferri, 476 Mass. 651, 654-655 (2017).

 

Thus, the SJC held that the language of Paragraph 20 of the reverse mortgages incorporated the statutory power of sale as defined in M.G.L. ch. 181, § 21.

 

Accordingly, the Court affirmed the orders of the Land Court granting lender's partial motion for judgment on the pleadings in each case.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 3rd Cir Holds Settlement Offer in Time-Barred Debt May Violate FDCPA

The U.S. Court of Appeals for the Third Circuit held that a collection letter sent to collect a time-barred debt that makes a "settlement offer" to accept payment "in settlement of" of the debt could potentially violate the federal Fair Debt Collection Practices Act's ("FDCPA") general prohibition against "any false, deceptive, or misleading representation or means in connection with the collection of any debt."  15 U.S.C. § 1692e. 

 

Accordingly, the Third Circuit vacated the ruling of the trial court dismissing the complaint, and remanded the matter for further proceedings.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff debtor ("Debtor") incurred a debt of $1,289.86 at a fitness center.  Subsequently, the defendant debt collection company ("Company") sent a letter dated May 18, 2015 that read as follows: "[The creditor] is willing to accept payment in the amount of $128.99 in settlement of this debt.  You can take advantage of this settlement offer if we receive payment of this amount or if you make another mutually acceptable payment arrangement within 40 days . . ." 

 

At the time the letter was sent, the six-year New Jersey statute of limitations applicable to debt-collection actions had already run.

 

The Debtor filed a class action in federal district court alleging that the Company's letter violated the FDCPA.  The Debtor alleged that she interpreted the word "settlement" in the letter to mean she had a legal obligation to pay, and that the least-sophisticated debtor would hold a similar belief.  She claimed that the letter was therefore false, deceptive, or misleading under section 1692e of the FDCPA.

 

The Company filed a motion to dismiss, which was granted by the trial court.  In ruling in favor of the Company, the trial court relied on Huertas v. Galaxy Asset Management, 641 F.3d 28 (3d Cir. 2011), which it read to hold that an attempt to collect a time-barred debt does not violate the FDCPA unless it is accompanied by the threat of legal action.  Because the word "settlement" did not constitute threatened legal action, the trial court dismissed the complaint. 

 

The matter was appealed.

 

On appeal, the parties offered competing interpretations of the Third Circuit's ruling in Huertas. 

 

The Company argued "that Huertas imposed a 'threat of litigation' requirement that must be present for an attempt to collect a time-barred debt to violate the FDCPA."  Conversely, the Debtor tried to distinguish Huertas and argued that an "offer to settle may mislead the least sophisticated [debtor] into believing that a time-barred debt is legally enforceable, even when litigation Is not threatened." 

 

Thus, the Third Circuit first analyzed its prior opinion in Huertas, which it stated "stands for the proposition that debt collectors do not violate 15 U.S.C. § 1692e(2)(A) when they seek voluntary repayment of stale debts, so long as they do not threaten to take legal action."  However, "the FDCPA sweeps far more broadly than the specific provision found in § 1692e(2)(A)," and "prohibits 'any false, deceptive, or misleading representation.'" 

 

The appeal therefore required the Court "to decide whether collection letters may run afoul of the FDCPA by misleading or deceiving debtors into believing they have a legal obligation to repay time-barred debts even when the letters do not threaten legal action." 

 

In ruling that they could, the Third Circuit noted that "three other United States Courts of Appeals have addressed the question presented in this appeal," and "[a]ll three have determined that, even absent threats of litigation, it is plausible that offers to 'settle' time-barred debts could mislead the least-sophisticated debtor."  See McMahon v. LVNV Funding, LLC, 744 F.3d 1010 (7th Cir. 2014); Buchanan v. Northland Group, Inc., 776 F.3d 393 (6th Cir. 2015); Daugherty v. Convergent Outsourcing, Inc., 836 F.3d 507 (5th Cir. 2016).

Noting that it was not bound by these precedents, the Third Circuit was "persuaded their considered view is the best interpretation of the FDCPA." 

 

In so ruling, the Court noted that "construing the Act to require a threat of legal action for any FDCPA violation interposes a mandate that is not found in its text."  Further, "in the specific context of a debt-collection letter, the least-sophisticated debtor could be misled into thinking that 'settlement of the debt' referred to the creditor's ability to enforce the debt in court rather than a mere invitation to settle the account." 

 

"Because the words 'settlement' and 'settlement offer" could connote litigation, the least-sophisticated debtor could be misled into thinking [the Company] could legally enforce the debt." 

 

Accordingly, the Third Circuit held that the least-sophisticated debtor could plausibly be misled by the specific language used in the Company's letter.  The Court therefore vacated the trial court's order granting the motion to dismiss and remanded the matter for further proceedings. 

 

However, in so doing, the Court "reiterate[d] what we said both in Huertas and elsewhere: standing alone, settlement offers and attempts to obtain voluntary payments of stale debts do not necessarily constitute deceptive or misleading practices." 

 

In addition, the Court cautioned that it did not "impose any mandates on the language debt collectors must use, such as requiring them to explicitly disclose that the statute of limitations has run," and that it did not "hold that the use of the word 'settlement' is 'misleading as a matter of federal law.'" 

 

Instead, the Third Circuit held, "in keeping with the text and purpose of the FDCPA, we merely reiterate that any such letters, when read in their entirety, must not deceive or mislead the least-sophisticated debtor into believing that she has a legal obligation to pay the time-barred debt." 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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.

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