The U.S. Court of Appeals for the Ninth Circuit recently amended its opinion in Ho v. ReconTrust Co., maintaining and affirming its prior ruling that the trustee in a California non-judicial foreclosure did not qualify as a debt collector under the federal Fair Debt Collection Practices Act (FDCPA).

The amendments to the prior ruling among other things add that a California mortgage foreclosure trustee meets the FDCPA’s exclusion from the term “debt collector” for entities whose activities are “incidental to … a bona fide escrow arrangement” at 15 U.S.C. § 1692a(6)(F).

The Ninth Circuit also removed its prior discussion of Sheriff v. Gillie, 136 S. Ct. 1594 (2016), replacing it with a discussion of foreclosure being a “traditional area of state concern” not to be superseded by federal law without “clear and manifest purpose of Congress,” which the Court found lacking here.

Splitting from the Fourth and Sixth Circuits and ruling against the position argued by the CFPB in an amicus curiae brief, the Ninth Circuit explained that the California foreclosure trustee defendant was not attempting to collect money from the plaintiff when it sent her a notice of default and notice of sale so that its activities did not qualify as debt collection.

This holding affirms the leading case of Hulse v. Owen Federal Bank, 195 F. Supp. 2d 1188 (D. Or. 2002), which has been the subject of much debate concerning whether non-judicial foreclosure constitutes debt collection.

The Ninth Circuit also vacated the trial court’s dismissal of the TILA rescission claim based on its recent ruling that a claim for rescission under the Truth in Lending Act does not require that a plaintiff allege the ability to repay the loan.

A link to the amended opinion is available at: Link to Opinion.

The plaintiff took out a loan to buy a house and the loan was secured by a deed of trust. There are three parties to a deed of trust: (i) the lender, who is the trust beneficiary, (ii) the borrower, who as the trustor holds equitable title to the property, and (iii) the trustee, who is an agent for the lender and the borrower, holds legal title to the property, and is authorized to sell the property if the borrower fails to pay the loan.

The plaintiff missed payments on her mortgage and the trustee initiated a non-judicial foreclosure under California law. As required by the statute, the trustee mailed the plaintiff a notice of default stating how much she owed on the loan, that she had the right to bring the account into good standing, and that it could be sold without any court action.

When the plaintiff didn’t pay, the trustee mailed a notice of sale informing the plaintiff that the house would be sold if she did not pay. The sale never took place because the plaintiff received a loan modification.

However, she sued the trustee anyway claiming that it had violated the FDCPA by misrepresenting the amount of the debt and sought to rescind the mortgage transaction under TILA for purported fraud.

The trial court granted the trustee’s motion to dismiss, and the plaintiff appealed arguing that the notice of default and notice of sale were attempts to collect a debt because both threatened foreclosure unless the plaintiff paid the mortgage.

As you may recall, the FDCPA defines the term “debt” to mean “any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.” 15 U.S.C. § 1692a(5).

The Ninth Circuit interpreted this to be “synonymous” with the word “money” such that the trustee would only be liable if it attempted to collect money, directly or indirectly, from the plaintiff. The Court found that the trustee did not do so because the “object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower” as California’s non-judicial foreclosure law does not permit deficiency judgments following the foreclosure. Thus, the non-judicial foreclosure extinguishes the debt, and any action taken to advance the non-judicial foreclosure is not an attempt to collect a debt as defined by the FDCPA.

The Ninth Circuit rejected the plaintiff’s argument that the possibility of repossession of the property may induce the debtor to pay off the debt explaining that such an “inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence.” This is contrary to the Sixth Circuit’s ruling in Glazer v. Chase Home Fin. LLC, 704 F.3d 453 (6h Cir. 2013) (holding that all “mortgage foreclosure is debt collection” under the FDCPA), and the Fourth Circuit’s ruling in Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373 (4th Cir. 2006) (similar).

The Ninth Circuit noted that the Fourth Circuit “was more concerned with avoiding what it as viewed a ‘loophole in the [FDCPA]’ than with following the [FDCPA’s] text,” and that the Sixth Circuit’s ruling “rests entirely on the premise that ‘the ultimate purpose of foreclosure is the payment of money.’”

The Ninth Circuit distinguished its reasoning by pointing out that the FDCPA defines “debt” as an “obligation of the consumer to pay money,” whereas a trustee in a California non-judicial foreclosure collects money from the purchaser, not the consumer, so that the money is not “debt” as defined by the FDCPA.

Rather, the Court held, sending notices of default and sale under California’s non-judicial foreclosure law fits into the FDCPA’s exception of enforcement of a security interest, at 15 U.S.C. § 1692a(6)(F). The Ninth Circuit explained that entities whose principal purpose is the enforcement of security interests can be debt collectors under the FDCPA but that “the enforcement of security interests is not always debt collection.” This is consistent with the Fourth and Sixth Circuits’ premise that an entity does not become a “debt collector” where its “only role in the debt collection process is the enforcement of a security interest.”

The Ninth Circuit also differentiated its reasoning by pointing out that the trustee’s right to enforce the security interest as a non-debt collector under the 1692a(6)(F) exception necessarily implied that the trustee must also be able to take the statutorily-required steps leading up to the sale as a non-debt collector, including sending the notice of default and notice of sale. Such communications are necessary to effect the enforcement of the security interest and do not convert it into debt collection.

The Court further held that a trustee’s role under California law as the holder of legal title means that the trustee functions as an escrow, which further satisfies the 1692a(6)(F) exclusion from “debt collector” of an entity whose activities are “incidental to …a bona fide escrow arrangement.” The Ninth Circuit also pointed out that the notices of default and sale protect the debtor by informing her of her rights and of the impending foreclosure and are not for the purpose of harassing the debtor into paying a debt she might not otherwise pay.

Concerning the TILA claim, the Court held that after the plaintiff’s TILA claims had been dismissed, it had ruled that a mortgagor did not need to allege her ability to repay the loan in order to state a rescission claim under TILA. Thus, the plaintiff’s TILA claims were reinstated.

The Ninth Circuit’s holding distinguishes debt collection from the actions taken to initiate and facilitate a non-judicial foreclosure by pointing out that those actions do not constitute an attempt to collect money from the consumer because the purpose of a non-judicial foreclosure in California is to retake and resell the security on the loan resulting in collection of money from the purchaser of the property.

Thus, non-judicial foreclosure under California law falls under the FDCPA’s 1692a(6)(F) exclusion from the definition of “debt collector.”