American Bar Association
Media Alerts
Media Alerts - Ho v. ReconTrust Co.
Decrease font size
Increase font size
February 2, 2017
  Ho v. ReconTrust Co.
Headline: The Ninth Circuit panel affirms that the trustee of a California deed of trust securing a non-judicial foreclosure under California state law is not a" debt collector" within the purview of the Fair Debt Collection Practices Act.

Areas of Law: Fair Debt Collection Practices Act, Consumer Finance, State (California) and Federal Civil Procedure

Issues Presented: (1) Whether the trustee of a California deed of trust is a "debt collector" pursuant to the Fair Debt Collection Practices Act where the trustee mailed a notice of default and a notice of sale to the borrower in pursuance of a non-judicial foreclosure on the borrower's home. (2) Whether the district court's dismissal, without prejudice, of plaintiff's Truth in Lending Act claim in trying to rescind the mortgage is preserved for appeal even if not repleaded.

Brief Summary: Plaintiff-Appellant Vien-Phuong Thi Ho ("Ho"), borrower, filed suit in the United States District Court for the Central District of California against Defendants-Appellees ReconTrust Company, N.A. ("ReconTrust"), trustee, and Countrywide Home Loans Inc. ("Countrywide"), lender, and Bank of America, N.A., asserting that ReconTrust violated the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., ("FDCPA") because its mailing of notices of default and sale to Ho in initial pursuance of non-judicial foreclosure on Ho's California home misrepresented the amount she owed to Countrywide, 15 U.S.C. § 1692e(2)(A). The district court granted ReconTrust's motion to dismiss the FDCPA violation claim because the court decided that it was not a "debt collector." Ho also sought to rescind the mortgage transaction because she alleged that the defendants committed fraud under the Truth in Lending Act ("TILA"), 15 U.S.C. § 1635(a). The district court twice dismissed Ho's rescission claim without prejudice; Ho did not replead it in her third complaint.

Ho appealed to the Ninth Circuit and asserted that ReconTrust was a "debt collector" because the mailed notices qualified as attempts to collect debt for Countrywide and that ReconTrust fell under the purview of the FDCPA, which prohibits offensive practices by debt collectors attempting to collect debt. The Ninth Circuit panel affirmed the district court's decision that ReconTrust's notices were an enforcement of a security interest for a non-judicial foreclosure under California law, not an attempt to collect money or debt as defined by the FDCPA.

Ho also argued although she did not replead the TILA claim, her prior attempts properly preserved it and the claim should be reinstated pursuant to the court's holding in Merritt v. Countrywide Fin. Corp. 759 F.3d 1023 (9th Cir. 2014). The Ninth Circuit panel agreed with Ho and vacated the dismissal. The court remanded the case to the district court for consideration on ground that the district court erred by not giving Ho the right to replead the TILA claim.

Significance: The Ninth Circuit's decision that a trustee enforcing a security interest is not a "debt collector" within the scope of the FDCPA breaks from Fourth and Sixth Circuit decisions holding that a mortgage foreclosure, including the enforcement of a security interest, is a debt collection that is subject to the FDCPA. Thus, the circuit split illustrates the ambiguity of FDCPA's "debt collector" phrase.

Extended Summary: In June 2007, Plaintiff-Appellant Vien-Phuong Thi Ho ("Ho") purchased a home in Long Beach, California through a loan obtained from Defendant-Appellee Countrywide Bank ("Countrywide"). The loan was secured by a deed of trust with the Defendant-Appellee, ReconTrust Company, N.A. ("ReconTrust"), authorized as the trustee. By late 2008, Ho began missing loan payments. In 2009, ReconTrust initiated a non-judicial foreclosure.

In accordance with California's non-judicial foreclosure process, Cal. Civ. Code § 2924(a)(1), ReconTrust recorded a notice of default and mailed the notice to Ho. The default notice informed Ho of the initiation of non-judicial foreclosure proceedings and that her property "may be sold without any court action." The notice also advised Ho that she could bring her account "in good standing by paying all of her past due payments" to Countrywide in the amount of $22,782.68. Ho did not make any payments.

Subsequently, ReconTrust took the second step of the non-judicial foreclosure process and recorded a notice of sale and mailed the notice to Ho. Cal. Civ. Code § 2924(a)(3). The notice of sale informed Ho that her property would be sold in public auction "unless [she took] action to protect [her] property." The notice of sale also stated that ReconTrust "is a debt collector attempting to collect a debt. Any information obtained will be used for that purpose."

Ho filed suit in the United States District Court for the Central District of California against Defendants-Appellees ReconTrust, Countrywide, and Bank of America, N.A., and asserted that ReconTrust violated the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq. ("FDCPA"). Ho claimed the notices she received by ReconTrust's initial pursuance of a non-judicial foreclosure on her property mispresented the amount she owed to Countrywide in violation of 15 U.S.C. § 1692e(2)(A). In her suit, Ho also sought to rescind the mortgage transaction because she alleged that the defendants committed fraud under the Truth in Lending Act ("TILA"), per 15 U.S.C. § 1635(a).

ReconTrust moved to dismiss the FDCPA violation claim because it asserted that the notices of default and sale mailed to Ho were not attempts to collect on a debt owed and therefore it was not a "debt collector" under the FDCPA. The district court granted ReconTrust's motion to dismiss Ho's claims under the FDCPA.

As for Ho's TILA rescission claim, the district court dismissed it twice without prejudice and Ho did not replead it in her third complaint. In addition to these two issues, the district court also dismissed Ho's other claims under the FDCPA, the Racketeer Influenced and Corrupt Organizations Act ("RICO Act") and the Real Estate Settlement Procedures Act.

Ho appealed to the Ninth Circuit and asserted that ReconTrust was a "debt collector" because the mailed notices qualified as attempts to collect debt for Countrywide and, therefore, ReconTrust as a debt collector fell within the purview of the FDCPA. Additionally, Ho argued that though she did not replead her TILA claim in the district court it should be reinstated on appeal because the Ninth Circuit had clarified the requirements of a TILA claim in Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, (9th Cir. 2014).

The first issue on appeal was whether the trustee of a California deed of trust is a "debt collector" pursuant to the FDCPA where the trustee mailed notices of default and sale to the borrower in pursuance of a non-judicial foreclosure on the borrower's home. The Ninth Circuit panel first looked at the language of the FDCPA. Under the FDCPA, a "debt collector" is liable for civil damages for abusive conduct while attempting to collect debt. §§ 1692d - f, 1692k. The FDCPA general definition of a "debt collector" is 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). Under the FDCPA the word "debt" is akin to money. 15 U.S.C. § 1692a(5). Therefore, ReconTrust would be liable under the FDCPA if it was attempting to collect debt. However, the Ninth Circuit relied on 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."

The Ninth Circuit panel concluded that the objective of a non-judicial foreclosure is to "retake and resell the security," and not collect the debt or money from the borrower. In retaking and reselling the security the trustee collects money from the home purchaser and not the original borrower, such as Ho. Therefore, ReconTrust's conduct and objective in a non-judicial foreclosure on Ho's property made ReconTrust a trustee governed under section 1692f(6) as an enforcer of a security interest and not as a "debt collector" under section 1692a.

In holding that ReconTrust was not a "debt collector" the Ninth Circuit panel broke from Fourth and Sixth Circuit decisions holding that a mortgage foreclosure, including the enforcement of a security interest, is a debt collection that is subject to the FDCPA. 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). The Ninth Circuit did agree with the sister circuits that if an entity's "only role in the debt collection process is the enforcement of a security interest" then it does not fall under the "debt collector" category. Wilson, 443 F.3d at 378; see Glazer, 704 F.3d at 464.

The panel noted that had ReconTrust taken additional actions it could possibly be classified as a "debt collector" under the general definition of the term. The panel reasoned that ReconTrust's actions fell under the umbrella of "enforcement of a security interest." Under California's non-judicial foreclosure statutes the only way ReconTrust could enforce the security interest was by sending the notice of default and notice of sale. Therefore, a trustee, such as ReconTrust, acting in compliance with California law in non-judicial foreclosure proceedings would simultaneously violate the FDCPA if the mailing of these notices constituted additional actions.

To avoid a conflict between state and federal law, the panel relied on the Supreme Court's instructions that the "FDCPA should not be interpreted to interfere with state law unless Congress clearly intended to displace that law." Sheriff v. Gillie, 136 S. Ct. 1594, 1602 (2016). The panel reasoned that the Supreme Court in Sheriff v. Gillie was trying to prevent federal encroachment on state rights especially in areas that have been traditionally a matter of state law. Since mortgage foreclosures have been traditionally a matter for the states, the "debt collector" phrase in FDCPA is ambiguous, and FDCPA provisions interfere with California state law regarding non-judicial foreclosure proceedings the Ninth Circuit applied the state law.

The second issue was whether the district court's dismissal, without prejudice, of Ho's TILA claim in trying to rescind the mortgage is preserved for appeal even if not repleaded. Ho asserted that her TILA claim should be reinstated on appeal because the Ninth Circuit had clarified the requirements of a TILA claim in Merritt v. Countrywide Fin. Corp. The panel stated that claims dismissed without prejudice and not repleaded are normally not preserved for appeal and are considered "voluntarily dismissed." Lacey v. Maricopa Cty., 693 F.3d 896, 928 (9th Cir. 2012). However, the panel concluded that Ho's case fell within the exception created by Lacey.

In Ho's case, the district court stated that Ho could replead the claim if she could declare that she had the means or ability to repay the loan. The district court judge concluded that if Ho could not make the declaration to pay the loan in good faith then she should not continue with her TILA claim. However, in Merritt, the Ninth Circuit held that a mortgagor does not have to declare the ability to repay the loan for her TILA rescission claim to survive a motion to dismiss. Following Lacey, the panel held that where the district court "dismisses a claim and instructs the plaintiff not to refile the claim unless he includes certain additional allegations that the plaintiff is unable or unwilling to make, the dismissed claim is preserved for appeal even if not repleaded."

For these reasons, the Ninth Circuit panel affirmed the district court's dismissal of Ho's FDCPA claim alleging that ReconTrust was a "debt collector," and vacated the district court's dismissal of Ho's TILA rescission claim, remanding it to the district court for consideration. In addition, the Ninth Circuit panel also affirmed the district court's dismissal of Ho's other claims under the FDCPA, the RICO Act and the Real Estate Settlement Procedures Act.

Judge Edward R. Korman, partially dissented and partially concurred. Judge Korman argued that the text and the purpose of the FDCPA is that a trustee pursuing a non-judicial foreclosure proceeding is a "debt collector" because the entity is trying to obtain debt or money by forcing the sale of the property being foreclosed upon. Judge Korman also claimed that FDCPA does not interfere with California state law for initiating or conducting non-judicial foreclosures, and therefore the FDCPA should not be overridden by state law. He asserted that other sister circuits have ruled that foreclosure proceedings are a form of debt collection subject to the FDCPA. Judge Korman concurred in vacating the district's dismissal of Ho's TILA claim and remanding it for consideration.

To read the full opinion, please visit:

https://cdn.ca9.uscourts.gov/datastore/opinions/2016/10/19/10-56884.pdf

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

Argument Date: Argued and Submitted June 5, 2015

Date of Issued Opinion: October 19, 2016

Docket Number: 10-56884

Decided: Affirmed the district court's dismissal of appellant Ho's failure to state a claim under FDCPA, and vacated the dismissal of Ho's TILA claim and remanded for consideration.



Counsel: 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.

Author of Opinion: Judge Alex Kozinski

Partial Dissent and Partial Concurrence: Judge Edward R. Korman

Circuit: Ninth Circuit

Case Alert Author: Juan Villanueva

Case Alert Supervisor: Philip L. Merkel

    Posted By: Glenn Koppel @ 02/02/2017 07:05 PM     9th Circuit  

FuseTalk Enterprise Edition - © 1999-2018 FuseTalk Inc. All rights reserved.

Discussion Board Usage Agreement

Back to Top