In Ho v. ReconTrust Co., No. 10-56884, 9th Cir.; 2016 U.S. App. LEXIS 18836 (October 19, 2016), a borrower sued a foreclosure trustee, ReconTrust, and others, asserting that recording a notice of default and other statutorily mandated notices violated the FDCPA because they misrepresented the amount owed on the mortgage loan. The district court granted the trustee’s motion to dismiss, and the plaintiff appealed. In a two-to-one decision, the Ninth Circuit affirmed the district court.
The FDCPA defines “debt” as “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.” “Debt is synonymous with money.” 15 U.S.C. § 1692a(5). A trustee’s notice of default and a notice of sale do not demand payment of money. Rather, they are statutorily-required notices that must be recorded before a trustee may exercise the power of sale. The majority explained that while default notices may “induce” a borrower to repay all or part of the mortgage arrearage, these inducements arise from the underlying lien and risk of foreclosure, not the debt. Chief Judge Kozinski analogized the situation to parking tickets: “[t]he fear of having your car impounded may induce you to pay off a stack of accumulated parking tickets, but that does not make the guy with the tow truck a debt collector.”
The FDCPA specifically discusses “security interests” and contains provisions governing when those who seek to enforce them come within the statutory definition of “debt collector.” Enforcement of a security interest falls within the narrow purview of 15 U.S.C. § 1692f (6), which only prohibits the taking, or threatening to take, non-judicial action to dispossess a consumer of his or her property when there is no right or intent to do so. The court held that Congress intended a narrower definition to apply to those seeking to enforce a security interest rather than the general definition of “debt collector.” Otherwise, the provision containing the narrower definition would be rendered superfluous. However, the court limited its holding, noting that “[I]f entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors.”
Finally, the court expressed concern that subjecting trustees to FDCPA duties would frustrate their ability to comply with California law. California’s non-judicial foreclosure law required the trustee to send the notices in question and required that notices be published in ways that might be deemed illegal communications with third parties under the FDCPA. The FDCPA’s debt verification requirements also could conflict with state law notice deadlines, the majority warned. Given a choice between two reasonable interpretations of federal law–one that might conflict with state law and one that would not–principles of federalism dictate that the court select the latter, the majority explained.
One judge dissented, arguing that “the only reasonable reading” of the FDCPA required the court to find that ReconTrust was a “debt collector.” A foreclosure causes the sale of a property and uses the sale proceeds to pay off some or all the mortgagor’s debt. Thus, the dissent explained, the purpose of a foreclosure is the payment of money. Because the FDCPA applies to entities who collect debts on behalf of others, the act applies to trustees who carry out foreclosure sales. This view is shared by the Fourth and Sixth Circuits, which hold that foreclosure-related-activity is subject to the FDCPA.