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Thi Ho v. ReconTrust Co., NA

United States Court of Appeals, Ninth Circuit

October 19, 2016

Vien-Phuong Thi Ho, Plaintiff-Appellant,
v.
ReconTrust Company, NA, subsidiaries of Bank of America, N.A.; Countrywide Home Loans Inc; Bank of America, N.A., Defendants-Appellees.

          Submitted June 5, 2015

          Submission Vacated June 8, 2015

          Resubmitted September 3, 2015 Pasadena, California

         Appeal from the United States District Court for the Central District of California D.C. No. 2:10-cv-00741-GW-SS George H. Wu, District Judge, Presiding Argued and

          Nicolette Glazer, Esq. (argued), Law Offices of Larry R. Glazer, Century City, California, for Plaintiff-Appellant.

          Margaret M. Grignon (argued) and Kasey J. Curtis, Reed Smith LLP, Los Angeles, California; Carolee A. Hoover and David C. Powell, McGuire Woods LLP, San Francisco, California; for Defendants-Appellees.

          Dean T. Kirby, Jr. and Martin T. McGuinn, Kirby & Mcguinn, A P.C., San Diego, California, for Amici Curiae United Trustee's Association, California Bankers Association, American Legal and Financial Network, Arizona Trustee Association and California Mortgage Association.

          Meredith Fuchs, General Counsel, To-Quyen Truong, Deputy General Counsel, John R. Coleman, Assistant General Counsel, Nandan M. Joshi and Thomas M. McCray-Worrall, Attorneys, Consumer Financial Protection Bureau, Washington, D.C., for Amicus Curiae Consumer Financial Protection Bureau.

          Before: Alex Kozinski and Consuelo M. Callahan, Circuit Judges, and Edward R. Korman, [*] Senior District Judge.

         SUMMARY[**]

         Fair Debt Collection Practices Act

         Affirming in part and vacating in part the district court's dismissal of an action for failure to state a claim, the panel held that the trustee of a California deed of trust securing a real estate loan was not a "debt collector" under the Fair Debt Collection Practices Act.

         Seeking damages under the FDCPA, the plaintiff alleged that the trustee of the deed of trust on her property sent her a notice of default and a notice of sale that misrepresented the amount of debt she owed. The plaintiff also sought to rescind her mortgage transaction under the Truth in Lending Act.

         Disagreeing with the Fourth and Sixth Circuits, and agreeing with the California Courts of Appeal, the panel held that the trustee was not a "debt collector" subject to damages under the FDCPA because the trustee was not attempting to collect money from the plaintiff. The panel held that the object of a non-judicial foreclosure in California is to retake and resell the security on the loan. 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" as that term is defined by the FDCPA. The panel wrote that following a trustee's sale, the trustee collects money from the home's purchaser, not the original borrower. Because the money collected from a trustee's sale is not money owed by a consumer, it is not "debt." Accordingly, the foreclosure notices were an enforcement of a security interest, rather than general debt collection under 15 U.S.C. § 1692a(6). Citing Sheriff v. Gillie, 136 S.Ct. 1594 (2016), the panel declined to create a conflict with state foreclosure law in its interpretation of the ambiguous term "debt collector." Accordingly, the panel affirmed the dismissal of the FDCPA claim.

         The panel held that even though the district court twice dismissed the plaintiff's TILA rescission claim and she did not replead it in her third complaint, it was preserved for appeal because the district court instructed her that she would be required to allege the ability to repay the loan in order to state a rescission claim. The panel held that under Merritt v. Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), decided after the district court's dismissal, a mortgagor need not allege the ability to repay in order to state a rescission claim. Accordingly, the panel vacated the dismissal of the TILA claim and remanded for consideration of the claim in light of Merritt.

         The panel affirmed the dismissal of other claims in a concurrently filed memorandum disposition.

         Judge Korman dissented in part and concurred in part. He wrote that the only reasonable reading of the FDCPA is that a trustee pursuing a non-judicial or judicial foreclosure proceeding is a debt collector because both proceedings are intended to obtain money by forcing the sale of the property being foreclosed upon. He also wrote that the FDCPA does not interfere with California's arrangement for conducting non-judicial foreclosures in a way that would justify nullifying the protections that the FDCPA provides, and the FDCPA's preemption section provides ample room for the operation of California law. Judge Korman concurred in the remand to the district court for consideration of the TILA rescission cause of action.

          OPINION

          KOZINSKI, Circuit Judge.

         The principal question in this appeal is whether the trustee of a California deed of trust is a "debt collector" under the Fair Debt Collection Practices Act (FDCPA).

         FACTS

         Vien-Phuong Thi Ho bought a house in Long Beach using funds she borrowed from Countrywide Bank. The loan was secured by a deed of trust. A deed of trust involves three parties. See Yvanova v. New Century Mortg. Corp., 62 Cal.4th 919, 926-27 (Cal. 2016) (explaining California deeds of trust). The first party is the lender, who is the trust beneficiary. The second party is the borrower-trustor, who holds equitable title to the property. The third party is the trustee, an agent for both the lender and the borrower who is authorized to sell the property if the debtor defaults. Id. at 927. In this case, the lender was Countrywide, the borrower was Ho and the trustee was ReconTrust.

         After Ho began missing loan payments, ReconTrust initiated a non-judicial foreclosure. See id. at 926-27 (detailing California's complex statutory procedure governing non-judicial foreclosures). As the first step in this process, ReconTrust recorded a notice of default and mailed this notice to Ho. See Cal. Civ. Code § 2924(a)(1). The notice advised Ho that she owed more than $20, 000 on her loan and that she "may have the legal right to bring [her] account in good standing by paying all of [her] past due payments" to Countrywide. The notice also advised Ho that her home "may be sold without any court action." Ho did not pay up. ReconTrust then took the second step in the process by recording and mailing a notice of sale. See Cal. Civ. Code §§ 2924(a)(3). This notice advised Ho that her home would be auctioned "unless [she took] action to protect [her] property." Following the trustee's sale, ReconTrust would deliver the deed to the purchaser and the proceeds of the sale to Countrywide. See 5 Harry D. Miller & Marvin B. Starr, Cal. Real Est. § 13:1 (4th ed. 2015). Ho would then lose both possession of the house and her right of redemption. Id. §§ 13:266, 13:267.[1]

         Ho filed this lawsuit alleging that ReconTrust violated the FDCPA by sending her notices that misrepresented the amount of debt she owed. See 15 U.S.C. § 1692e(2)(A). Ho also sought to rescind her mortgage transaction under the Truth in Lending Act (TILA) on the ground that the defendants had perpetrated fraud against her. See 15 U.S.C. § 1635(a). The district court twice dismissed Ho's rescission claim without prejudice, and Ho did not replead it. The district court then granted ReconTrust's motion to dismiss Ho's FDCPA claims.[2]

         Ho appeals, arguing that ReconTrust is a "debt collector" because the notice of default and the notice of sale constitute attempts to collect debt. Because both notices threatened foreclosure unless Ho brought her account current, she reasonably viewed those documents as an inducement to pay up. Ho also argues that her TILA rescission claim should be reinstated on appeal because our circuit clarified the requirements for such a claim between the district court's dismissal and this appeal. See Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, 1032-33 (9th Cir. 2014).

         DISCUSSION

         I

         The FDCPA subjects "debt collectors" to civil damages for engaging in certain abusive practices while attempting to collect debts. See §§ 1692d-f, 1692k. The statute's general definition of "debt collector" captures any entity that "regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due [to] another." § 1692a(6). Debt is defined as an "obligation . . . of a consumer to pay money." § 1692a(5).

         The FDCPA imposes liability only when an entity is attempting to collect debt. 15 U.S.C. § 1692(e). For the purposes of the FDCPA, the word "debt" is synonymous with "money." 15 U.S.C. § 1692a(5). Thus, ReconTrust would only be liable if it attempted to collect money from Ho. And this it did not do, directly or otherwise. The object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower. California law does not allow for a deficiency judgment following non-judicial foreclosure. This means that the foreclosure extinguishes the entire debt even if it results in a recovery of less than the amount of the debt. Cal. Civ. Code § 580d(a); see Burnett v. Mortg. Elec. Registration Sys., Inc., 706 F.3d 1231, 1239 (10th Cir. 2013) ("[A] non-judicial foreclosure does not result in a mortgagor's obligation to pay money--it merely results in the sale of property subject to a deed of trust."); Alaska Tr., LLC v. Ambridge, No. S-14915, 2016 WL 852265, at *16 (Alaska Mar. 4, 2016) (Winfree, J., dissenting) (noting that non-judicial foreclosure "does not in and of itself collect a debt, but rather calls for the vesting and divesting of title to real property according to the parties' prior agreement" (internal quotation marks omitted)). 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" as that term is defined by the FDCPA.

         The prospect of having property repossessed may, of course, be an inducement to pay off a debt. But that inducement exists by virtue of the lien, regardless of whether foreclosure proceedings actually commence. The fear of having your car impounded may induce you to pay off a stack of accumulated parking tickets, but that doesn't make the guy with the tow truck a debt collector.

         Our holding today affirms the leading case of Hulse v. Ocwen Federal Bank, 195 F.Supp.2d 1188, 1204 (D. Or. 2002), which held that "foreclosing on a trust deed is an entirely different path" than "collecting funds from a debtor."[3] We acknowledge that two circuits have declined to follow Hulse. Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013); Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378-79 (4th Cir. 2006). But we find neither case persuasive. The Fourth Circuit in Wilson was more concerned with avoiding what it viewed as a "loophole in the Act" than with following the Act's text. 443 F.3d at 376. We rely on policy to help interpret statutory language; we don't make it ourselves. The Sixth Circuit's decision in Glazer rests entirely on the premise that "the ultimate purpose of foreclosure is the payment of money." 704 F.3d at 463. But the FDCPA defines debt as an "obligation of a consumer to pay money." 15 U.S.C. § 1692a(5) (emphasis added). Following 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 most plausible reading of the statute is that the foreclosure notices were "the enforcement of [a] security interest[]" as contemplated by section 1692f(6) rather than "debt collection" as contemplated by section 1692a. The FDCPA's general definition of "debt collector, " contained at section 1692a(6), applies to entities that "regularly collect[] or attempt[] to collect, directly or indirectly, debts owed or due or asserted to be owed or due [to] another." Entities that qualify as debt collectors under this general definition are debt collectors for purposes of the entire statute. However, the FDCPA also includes a narrower definition of "debt collector." This narrower definition of the term "also includes" entities whose principal business purpose is "the enforcement of security interests." 15 U.S.C. § 1692a(6). This provision would be superfluous if all entities that enforce security interests were already included in the definition of debt collector for purposes of the entire FDCPA. But the relationship between sections 1692a(6) and 1692f(6) makes sense if some security enforcers are debt collectors only for the limited purposes of section 1692f(6). All parties agree that ReconTrust is a debt collector under the narrow definition. Ordinarily, section 1692f(6) would protect a consumer against the abusive practices of a security enforcer who does not fit the broader definition of a debt collector. But that doesn't matter in our case because ReconTrust is not accused of conduct prohibited by section 1692f(6). The sole question here is whether ReconTrust is a debt collector under the general definition-that is, whether ReconTrust "regularly collects" debts.

         We do not hold that the FDCPA intended to exclude all entities whose principal purpose is to enforce security interests. If entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors. We hold only that the enforcement of security interests is not always debt collection. We agree with the dissent that the terms are not mutually exclusive. But they also aren't coextensive.[4]

         We therefore agree with a central premise of Wilson and Glazer: An entity does not become a general "debt collector" if its "only role in the debt collection process is the enforcement of a security interest." Wilson, 443 F.3d at 378; see Glazer, 704 F.3d at 464. But from there our paths diverge. We view all of ReconTrust's activities as falling under the umbrella of "enforcement of a security interest." Under California's non-judicial foreclosure statutes, ReconTrust could not conduct the trustee's sale until it sent the notice of default and the notice of sale. If ReconTrust can administer a trustee's sale without collecting a debt, it must be able to maintain that status when it takes the statutorily required steps to conduct the trustee's sale. The right to "enforce" the security interest necessarily implies the right to send the required notices; to hold otherwise would divorce the notices from their context.[5]

         The Glazer court rejected this view, noting that it couldn't think of anyone other than repossessors "whose only role in the collection process is the enforcement of security interests." 704 F.3d at 464. Glazer explained that a "lawyer principally engaged in mortgage foreclosure does not meet this criteria [sic], for he must communicate with the debtor regarding the debt during the foreclosure proceedings, " but this is "not so for repossessors, who typically 'enforce' a security interest--i.e., repossess or disable property--when the debtor is not present, in order to keep the peace." 704 F.3d at 464. We find this distinction unpersuasive. The FDCPA itself recognizes that repossessors will communicate with debtors.[6] Enforcement of a security interest will often involve communications between the forecloser and the consumer. When these communications are limited to the foreclosure process, they do not transform foreclosure into debt collection.

         The notices at issue in our case didn't request payment from Ho.[7] They merely informed Ho that the foreclosure process had begun, explained the foreclosure timeline, apprised her of her rights and stated that she could contact Countrywide (not ReconTrust) if she wished to make a payment. These notices were designed to protect the debtor. They are entirely different from the harassing communications that the FDCPA was meant to stamp out. Thus, we agree with the California Courts of Appeal that "giving notice of a foreclosure sale to a consumer as required by the [California] Civil Code does not constitute debt collection activity under the FDCPA." Pfeifer ...


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