Consumer Finance Insights
February 6, 2017

Ninth Circuit: Trustees Are Not “Debt Collectors” Under the FDCPA

A recent decision by the Ninth Circuit has created a circuit split regarding the interpretation of the Fair Debt Collection Practices Act (FDCPA).  In Vien-Phung Ho v. ReconTrust Co. et al., case no. 10-56884, the court held that the trustee of a California deed of trust is not a “debt collector” under the statute.  This decision is in direct conflict with holdings from the Fourth and Sixth Circuits, which have held that a trustee is a “debt collector” under the FDCPA.  See Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 378–79 (4th Cir. 2006); Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461 (6th Cir. 2013).

The underlying facts of the Ninth Circuit case are straightforward.  Ho borrowed money from a lender, and ReconTrust served as the trustee for the deed of trust.  When Ho began to fall behind on her payments, ReconTrust sent her various statutorily-mandated notices regarding the deficiency, the possibility of foreclosure, and the loss of Ho’s rights of possession and redemption.  Ho’s loan was eventually modified by the servicer, but she nonetheless sued ReconTrust, claiming it violated the FDCPA by sending her notices that misrepresented the amount of debt she owed.  The district court granted ReconTrust’s motion to dismiss the FDCPA claim and Ho appealed.

Ho argued to the Ninth Circuit on appeal that ReconTrust is a “debt collector” and subject to the FDCPA because the notice of default and the notice of sale constitute attempts to collect debt.  She further argued that the threat of foreclosure on her home was an inducement to Ho to pay her debt.

The Ninth Circuit disagreed.  It reasoned that under the FDCPA, in order to qualify as a “debt collector,” an institution must seek the payment of money from a consumer.  If the party or institution does not seek money from a consumer, it is not collecting debt under the FDCPA.  The Ninth Circuit found that ReconTrust, as the trustee on the deed of trust, was not seeking to collect money from Ho when it sent her notices about the consequences of default.  It was merely taking steps to effect a non-judicial foreclosure, the purpose of which is not to obtain money but rather to retake and resell a security so that the borrower no longer owes money to the lender.  The Court found that when ReconTrust sent the default notice and notice of sale to Ho, it did not seek money from Ho.  Accordingly, since ReconTrust did not seek money, ReconTrust was not a “debt collector” under the FDCPA.

The Court explained:

[W]e 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.  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.”

The Court found further support for its decision.  First, it reasoned that neither a notice of sale nor a notice of default are the type of “harassing” communications that the FDCPA attempts to regulate.  Second, it looked to a recent Supreme Court opinion, Sheriff v. Gillie, 136 S. Ct. 1594, 1602 (2016), which found that courts should not interpret the FDCPA in a way that conflicts with state law, unless Congress intended to displace the state law.  In this case, if the FDCPA applied to the trustee, there could be a conflict between the trustee’s obligations under California law regarding non-judicial foreclosure and the FDCPA.  California has strict rules about when the notices must be sent, and to whom.  For example, the notice of default must be sent directly to the borrower, even if the borrower is represented by counsel.  The FDCPA would prohibit a communication with a borrower represented by counsel.  This puts the trustee in the awkward provision of trying to determine which law it should comply with.  Given the Supreme Court’s holding, the Ninth Circuit declined to interpret the phrase “debt collector” in a manner that “interferes” with California’s foreclosure scheme.

This ruling should bring some relief to entities serving as trustees in California, because it provides support for the argument that trustees are not bound by the provisions of the FDCPA as “debt collectors.”  However, with this split from rulings in other circuits, the case could be ripe for review by the Supreme Court.  The plaintiff, Ho, has indicated that she is considering petitioning the Supreme Court for certiorari.  Until it is clear whether the Supreme Court will take this up, companies acting as trustees in California should proceed with caution when sending debt notices.

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