9th Cir. Holds Foreclosure Trustee Not FDCPA ‘Debt Collector’

This article was originally published on the Maurice Wutscher blog and is republished here with permission.

The U.S. Court of Appeals for the Ninth Circuit recently
held that the trustee of a California deed of trust securing a real estate loan
was not a “debt collector” under the federal Fair Debt Collection Practices
Act, because the trustee was not attempting to collect money from the borrower.

In so ruling, the Court held that “actions taken to
facilitate a non-judicial foreclosure, such as sending the notice of default
and notice of sale, are not attempts to collect ‘debt’ as that term is defined
by the FDCPA.”

The Court also vacated the dismissal of the borrower’s
federal Truth In Lending Act claim, confirming its prior ruling in Merritt
v. Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), that a mortgagor need
not allege the ability to repay in order to state a TILA rescission claim.

A copy of the opinion in Ho v. ReconTrust Co. is
available at:  Link
to Opinion.

A borrower sought damages under the FDCPA, alleging that the
foreclosure trustee initiated a California non-judicial foreclosure and sent
her a notice of default and a notice of sale that misrepresented the amount of
debt she owed.  The borrower also sought to rescind her mortgage
transaction under TILA.

The trial court granted the servicer’s motion to dismiss the
borrower’s FDCPA claims, and dismissed her TILA claim.

The borrower appealed, arguing that the foreclosure trustee
was a “debt collector” under the FDCPA because the notice of default and the
notice of sale constituted attempts to collect debt and threatened foreclosure
unless she brought her account current.

The Ninth Circuit disagreed, holding that the California
foreclosure trustee would only be liable if it had attempted to collect money
from the borrower.

As you may recall, the FDCPA imposes liability on “debt
collectors.”  Under the FDCPA, the word “debt” is defined as an
“obligation . . . of a consumer to pay money.”  15 U.S.C. §
1692a(5).  The FDCPA’s definition of “debt collector” includes entities
that regularly collect or attempt to collect debts owed or due or asserted to
be owed or due to another.

Distinguishing rulings from the Fourth and Sixth Circuits,
and agreeing with the California Courts of Appeal, the Ninth Circuit held that
a California foreclosure trustee was not a “debt collector” subject to the
FDCPA because the foreclosure trustee was not attempting to collect money from
the borrower.

Specifically, the Court noted that the Fourth Circuit’s
ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79
(4th Cir. 2006), “was more concerned with avoiding what it viewed as a
‘loophole in the [FDCPA]’ than with following the [FDCPA]’s text,” which the
Ninth Circuit found improper.

The Court also noted that the Sixth Circuit’s ruling in Glazer
v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013), “rests entirely on
the premise that ‘the ultimate purpose of foreclosure is the payment of money,”
but “the FDCPA defines debt as an ‘obligation of a consumer to pay
money.’”  The Ninth Circuit emphasized that “[f]ollowing a trustee’s sale,
the trustee collects money from the home’s purchaser, not from the original
borrower. Because the money collected from a trustee’s sale is not money owed
by a consumer, it isn’t ‘debt’ as defined by the FDCPA.”

The Ninth Circuit held that the object of a non-judicial
foreclosure in California is to retake and resell the security on the loan, and
thus actions taken to facilitate a non-judicial foreclosure, such as sending
the notice of default and notice of sale, are not attempts to collect “debt”
under the FDCPA.

Accordingly, the Ninth Circuit concluded that the
foreclosure notices at issue were an enforcement of a security interest, rather
than debt collection under the FDCPA.

The Ninth Circuit found it significant that California
expressly exempts trustees of deeds of trust from liability under the
California Rosenthal Act, Cal. Civ. Code. § 2924(b), the state analogue of the
FDCPA, observing that holding California foreclosure trustees liable under the
FDCPA would subject them to obligations that would frustrate their ability to
comply with the California statutes governing non-judicial foreclosure.

The Ninth Circuit agreed with the foreclosure trustee, and,
citing Sheriff v. Gillie, 136 S. Ct. 1594, 194 L. Ed. 2d 625 (2016), in
which the U.S. Supreme Court instructed that the FDCPA should not be
interpreted to interfere with state law unless Congress clearly intended to
displace that law, the Ninth Circuit affirmed the district court’s dismissal of
the FDCPA claim, declining to create a conflict with state foreclosure law in
its interpretation of the term “debt collector.”

Turning to the borrower’s TILA claims, which the trial court
had dismissed without prejudice, the Court noted that it recently held in Merritt
v. Countrywide Fin. Corp., 759 F.3d 1023, 1032-33 (9th Cir. 2014), that a
mortgagor need not allege the ability to repay the loan in order to state a
rescission claim under TILA. However, this was the basis of the trial court’s
dismissal of the TILA claim.

Accordingly the Ninth Circuit vacated the dismissal of the
borrower’s TILA claim and remanded it to the trial court for
reconsideration.  The Court also affirmed the dismissal of the borrower’s
FDCPA claims, vacated the dismissal of her TILA claims, and remanded the TILA
claims for reconsideration.