Attorneys and other entitiesthat regularly engagein collection work for community associations may be subject to the requirements of the Fair Debt Collection Practices Act, 15 U.S.C.§ 1692 et. seq.,as well as analogous state laws governing the consumer collection process. Practitioners shouldbe aware of numerous FDCPA decisions issued during the past year that may significantly impact their compliance obligations and litigation risks.A few of those decisions are discussed below.
Duty to discloseaccruing interest, fees or other charges
A significant recent trend in FDCPA case law involvescourts that have imposed new disclosure obligations that are not found in the plain language of the Act. One line of cases createsa duty to disclose to the debtor that the amount of the debt may be increasing due to accruing interest,fees or other charges. These decisions effectively hold that it is misleading to accuratelystate the exact balance due as of the date of the communication with the debtor,if the collector knows the stated balance is increasing, or is likelyto increase, beforethe debtor pays it. Two decisions out of the SecondCircuit that have sparked a wave of new lawsuits against collectors are Avila v. Riexinger & Associates, LLC,817 F.3d 72 (2d Cir. 2016) and Carlin v. Davidson Fink LLP, 852 F.3d 207 (2d Cir. 2017).
In Avila, the collector sent letters that accurately stated the “currentbalance” due as of the date of the letters. The debtors sued, claiming the letters were “false, deceptive or misleading” in violation of section 1692e of the FDCPA,because they suggestedthe balance was “static”and did not disclose that the account balance might increasedue to interest and fees. See Avila, 817 F.3d at 74. The Second Circuitagreed with the consumers, and observed that a reasonable consumer might be misled about how much had to be paid to “clear her account”:
“A reasonable consumercould read the noticeand be misled into believing that she could pay her debt in full by paying the amount listedon the notice.
In fact, however, if interestis accruing daily,or if there are undisclosed late fees, a consumer who pays the “currentbalance” stated on the notice will not know whetherthe debt has been paid in full. . . . Because the statement of an amountdue, without noticethat the amountis already increasing due to accruinginterest or other charges, can misleadthe least sophisticated consumer into believingthat payment of the amount statedwill clear her account, we hold that the FDCPA requires debt collectors, when they notify consumers of their account balance,to disclose that the balance may increase due to interest and fees.”
Id.at 76. The AvilaCourt also embracedthe reasoning used by the Seventh Circuit in Miller v. McCalla,Raymer, Padrick, Cobb, Nichols,& Clark, L.L.C., 214 F.3d 872 (7th Cir.2000), where the Court fashioned “safe harbor”language that can be used to describethe “amount of the debt” under section1692g of the FDCPA in circumstances where the account balancevaries from day to day. See Avila, 817 F.3d at 76-77.
Avilaholds that stating the “current balance”in a letter may be misleading unless the collectoralso makes clear that balance will increase:
“We hold that a debt collector will not be subject to liability underSection 1692e for failing to disclose that the consumer’s balance may increase due to interest and fees if the collection notice either accurately informs the consumer that the amount of the debt stated in the letter will increase over time, or clearly statesthat the holder of the debt will accept payment of the amount set forth in full satisfaction of the debt if paymentis made by a specified date.”
Id. at 77. To avoid confusion to the debtor,the Avila Court held that use of the “safe harbor” language from the Miller case would be sufficient. Id. The Avila Court also appeared to express a preference for “freezing” the amount a collector will acceptfor a specified period of time, stating: “a debt collector who is willing to accept a specified amount in full satisfaction of the debt if paymentis made by a specific date could considerably simplifythe consumer’s understanding by so stating, while advising that the amount due would increaseby the accrual of additional interestor fees if paymentis not received by that date.” Id.
The Second Circuit subsequently compounded the pain for collectors the following year in Carlin. There,it held that a payoff statement listinga “Total Amount Due” that was valid througha specific date did not adequately statethe amountof the debt, because it includedunspecified “fees,costs, additional payments, and/or escrowdisbursements” that were not yet due as of the time the statement issued.See Carlin, 852 F.3d at 215. The CarlinCourt observed:
“Absent fuller disclosure, an unsophisticated consumermay not understand how these fees are calculated, whetherthey may be disputed, or what provision of the note gives rise to them. Because the statement givesno indication as to what the unaccrued fees are or how they are calculated, she cannot deducethat information from the statement.”
Id. at 217. The Court held a statement of the amount of the debt is “incomplete where, as here, it omits information allowingthe least sophisticated consumer to determine the minimum amount she owes at the time of the notice, what she will need to pay to resolvethe debt at any given moment in the future,and an explanation of any fees and interestthat will causethe balance to increase.” Id.
The AvilaandCarlindecisions are part of largerand disturbing trend where courts have creatednew FDCPA disclosure obligations out of whole cloth.
Collectors seekingto comply with the FDCPA cannot rely on the statute’s plain language. They must attemptto anticipate and disclose additional information that a courtmight deem important to a debtor,or face strict liability for their failureto do so.
When an entity is solelyseeking to foreclose on a security interestand is not seeking payment of a “debt”from a consumer, then the FDCPA should not apply. Determining the line betweenforeclosure activity and debt collection, however, can be elusive.
The issue in Ho v. ReconTrust Co., N.A., 858 F.3d 568 (9th Cir. 2016), amended(May 22. 2017),petition for cert. filed(U.S. Aug. 21, 2017)(No. 17-278) was whether noticessent by a trustee as required to initiate a non-judicial foreclosure under California law violated the FDCPA. The Ho Court held that FDCPA did not apply, becausethe trustee was solely attempting to retake and resell the security,and not attempting to collectmoney from the propertyowner:
“Thus, ReconTrust would only be liable if it attemptedto collect money from Ho. And this it did not do, directlyor otherwise. The object of a non-judicial foreclosureis to retake and resell the security, not to collectmoney 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 recoveryof less than the amountof the debt.”
Id.at 571-72 (citations omitted). The plaintiff arguedthat ReconTrust was engaged in “debt collection” because its noticespressured her to pay money. The HoCourt rejected this, noting that all of ReconTrust’s activities fell under the umbrella of enforcinga security interestunder California’s non-judicial foreclosurestatute, and its conductwas therefore not subjectto the FDCPA, even if it created an incentive for the debtor to pay:
“If this were sufficient to transform the enforcement of security interestsinto debt collection, then all securityenforcers would be debt collectors. This would render meaningless the FDCPA’s carefully drawn distinction between debt collectors and enforcers of security interests, and expand the scope of the FDCPA well past the boundary of clear congressional intent and common sense.” Id. at 574.
Unlike the letter sent by the trusteedefendant in Ho, however,the letter sent by the law firm defendant in Mashiri v. Epsten Grinnell& Howell, 845 F.3d 984 (9th Cir. 2017) was subjectto the FDCPA, because it was not sent solelyto enforce a security interest.Rather, the letter requestedpayment of plaintiff’s homeowners assessment fee, stating:“Failure to pay your assessment accountin full withinthirty-five (35) days from the date of this letter will result in a lien being recordedagainst your property.” Id. at 989 (emphasisin opinion).
The MashiriCourt also noted that the firm could not be engagedin “enforcing” a security interestwith the letter,because there was “no existing security interestfor Espten to enforce at the time of the May Notice because a lien had yet to be recordedagainst Mashiri’s property.” Id.The letterwas required in order to perfect the association’s securityinterest and permit it to recordthe lien at a later date. Id.Thus, the Court held that becausethe firm sent the letter “attempting to collect payment of a debt – irrespective of whetherit also sought to perfect the HOA’s security interestand preserve its right to record a lien in the future – it is subject to the full scope of the FDCPA, . . .” Id. at 990.
As the Hoand Mashiridecisions illustrate, it is possible to communicate with consumers solelyin connection with enforcing a security interest, and thereby remain outside of the coverage of the FDCPA. Any language or conductthat is arguably designed to seek payment on the account,however, may trigger the protections of the Act.
Consumers have been filingFDCPA class actionsagainst attorneys who collect for homeowners associations with increasing frequency in recent years. While no classaction should be taken lightly,its worth remembering that a plaintiffs face significant additional hurdles when attempting to certify an FDCPA class action,beyond satisfying the requirements under Rule 23 of the Federal Rules of Civil Procedure. Courts that closelyexamine the putativeclass claims asserted againstattorneys in this space will find many reasonsto deny motionsfor class certification.
A consumer seeking to certify an FDCPA classaction must first addressthe threshold issue of whetherthe Act applies to the obligations incurred by class members. This often not an easy task, given how common it is for owners to use their properties as rentals. An obligation, such as unpaidhomeowner assessments, is not a “debt” subjectto the FDCPA unless it was incurred“primarily for personal, family or householdpurposes.” 15 U.S.C. § 1692a(5);see Turner v.
Cook, 362 F.3d 1219, 1226-27(9th Cir. 2004)(proving existence of a “debt” under the FDCPA is a “threshold” issue in every FDCPA action).
Determining if a “debt”was incurred by an owneris a fact-intensive inquiry, and cannot be completed simplybe reading the CCR’s or other documents relating to the purchaseof the property. It requires an examination of “the transactionas a whole, paying particular attention to the purpose for which the credit was extendedin order to determine whether[the] transaction was primarily consumer or commercial in nature.”See Bloom v. I.C. System,Inc., 972 F.2d 1067, 1068 (9th Cir. 1992) (emphasis added, citation and quotation marks omitted)(personal loan from friend used to start softwarebusiness not a “debt” under the Act: “The [FDCPA] characterizes debts in terms of end uses . . . [n]either the lender’s motives nor the fashion in which the loan is memorialized are dispositive of the inquiry”).
The forms used to document the transaction are not determinative, and they must be evaluated in light of “the substanceofthe transaction and the borrower’s purposein obtaining” the property. See Slenk v. Transworld Sys., Inc.,236 F.3d 1072, 1075 (9th Cir. 2001) (emphasisadded). This may require not only a reviewof documents relatingto the transaction, but also an evaluation of the debtor’sconduct before and after the obligation was incurred.
All relevant facts relating to the purposefor purchasing the property must be “viewed in the aggregate” and the entiretransaction must be viewed“as a whole” – including the owners’ conductbefore and after their purchase. See, e.g., Beeks v. ALS Lien Servs., 2014 WL 2014 WL 7785745,at *6 (C.D. Cal. Feb. 18, 2014) (applyingSlenk; fact issue of whether homeowner assessments qualified as “debts” when “evidencerelating to plaintiff’s intent” was “not completely clear” because recorddid not show if plaintiff resided in, or rented, condoduring entire seven years she owned it).
Courts around the country have held that assessments and loan obligations incurred with respectto rental properties are not“debts” under the FDCPA. See, e.g., Otomo v. Nevada Assoc.Servs., Inc.,2013 WL 1249598,at *8 (D. Nev. Mar. 25, 2013) (denyingcertification of FDCPA class relating to collection of assessments where determination of whether propertywas used for business purposes “would requireindividual investigation to determine the nature of the transaction. . .”); Kitamura v. AOAO of Lihue Townhouse, 2013 WL 139058, at *5 (D. Hawaii Mar. 29, 2013) (FDCPA did not apply where property used for rental purposes); Aniel v. Litton Loan Servicing, LP, 2011 WL 635258, at *4 (N.D. Cal. Feb. 11, 2011) (“Since the debt at issue was incurred in connection with a rental property, as opposed to a personal, family or household purpose, the FDCPA has no application here.”); Sparlin v. Select Portfolio Servicing, Inc., 2012 WL 527486, at *10 (D. Ariz. Feb. 17, 2012) (dismissing FDCPA claims without leave to amend where unpaid obligation was a loan taken for rental property); Johnson v. Wells Fargo Home Mortgage, Inc., 2007 WL 3226153, at *9 (D. Nev. Oct. 29, 2007) (unpaid loans obtained to acquire rental properties not “debts” under the FDCPA); Hunter v. Washington Mutual Bank, 2012 WL 715270, at *4 (E.D. Tenn. March 1, 2012) (FDCPA did not apply to loan for purchase of rental property, even though plaintiff and wife lived in the property for years); Samuel v. Ocwen Loan Servicing, LLC, 2015 WL 11256663, *6 (D. Ga. Feb. 12, 2015).
How, then, does all this relate to certifying an FDCPA classaction against a firm that collectsdelinquent assessments? To certify a class, under Rule 23(b)(3) of the FederalRules of CivilProcedure, the plaintiff has the burdenof showing that “common questionsmust predominate over any questionsaffecting only individual members” and that “class resolution must be superior to other available methods for the fair and efficient adjudication of the controversy.” Fed. R. Civ. Proc. 23(b)(3). This means if the membersof a class cannot be identified and their claims cannot be adjudicated withoutengaging in individual inquiries into their particular circumstances, class certification is not appropriate.
For these very reasons,the Court deniedclass certification in Lowe v.Maxwell & Morgan PC, 322 F.R.D. 393 (D. Ariz. 2017), a putative FDCPA class action filed against a law firm. The Court observedthat “common issues do not predominate over individualized inquiries” because the Court “will need to conductindividualized investigations in order to determine whether each putativeclass member has incurreda qualifying debt.”The Court stated:
“Although homeowners’ association fees can be qualifying debts if incurred by someone who uses the property for personal, family, or household purposes, those same fees would not qualifyif incurred by a landlord utilizing the propertyfor commercial purposes . . . The Court therefore would need to examine the circumstances surrounding each putative class member’s home purchaseto determine the purposeof the transaction.”
The Court rejectedthe plaintiff’s argumentthat class members could be easily identified by simply examining the affidavits of value7relating to each property, noting that reviewingdocuments alone would not uncover the “substance” of the transaction. In addition, the defendant had identified several instances wherethe affidavits of value did not accurately reflect the owner’sintent when purchasing the property.
The Court also agreed with defendant that numerous otherindividualized inquiries that would be required to determine the validity of each putativeclass member’sclaim. Thus, commonality and superiority under Rule 23(b)(3) were not present, and the motionfor class certification was denied.
The Lowedecision and cases like it shouldbe very persuasive in defeating putative FDCPA class actions filed against attorneysand other entitiesthat collect assessments for communityassociations.