Attorneys and other entities that regularly engage in 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 should be 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 disclose accruing interest, fees or other charges
A significant recent trend in FDCPA case law involves courts that have imposed new disclosure obligations that are not found in the plain language of the Act. One line of cases creates a 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 accurately state 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 likely to increase, before the debtor pays it. Two decisions out of the Second Circuit 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 “current balance” 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 suggested the balance was “static” and did not disclose that the account balance might increase due to interest and fees. See Avila, 817 F.3d at 74. The Second Circuit agreed 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 consumer could read the notice and be misled into believing that she could pay her debt in full by paying the amount listed on the notice.
In fact, however, if interest is accruing daily, or if there are undisclosed late fees, a consumer who pays the “current balance” stated on the notice will not know whether the debt has been paid in full. . . . Because the statement of an amount due, without notice that the amount is already increasing due to accruing interest or other charges, can mislead the least sophisticated consumer into believing that payment of the amount stated will 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 Avila Court also embraced the 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 describe the “amount of the debt” under section 1692g of the FDCPA in circumstances where the account balance varies from day to day. See Avila, 817 F.3d at 76-77.
Avila holds that stating the “current balance” in a letter may be misleading unless the collector also makes clear that balance will increase:
“We hold that a debt collector will not be subject to liability under Section 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 states that the holder of the debt will accept payment of the amount set forth in full satisfaction of the debt if payment is 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 accept for a specified period of time, stating: “a debt collector who is willing to accept a specified amount in full satisfaction of the debt if payment is made by a specific date could considerably simplify the consumer's understanding by so stating, while advising that the amount due would increase by the accrual of additional interest or fees if payment is 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 listing a “Total Amount Due” that was valid through a specific date did not adequately state the amount of the debt, because it included unspecified “fees, costs, additional payments, and/or escrow disbursements” that were not yet due as of the time the statement issued. See Carlin, 852 F.3d at 215. The Carlin Court observed:
“Absent fuller disclosure, an unsophisticated consumer may not understand how these fees are calculated, whether they may be disputed, or what provision of the note gives rise to them. Because the statement gives no indication as to what the unaccrued fees are or how they are calculated, she cannot deduce that 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 allowing the least sophisticated consumer to determine the minimum amount she owes at the time of the notice, what she will need to pay to resolve the debt at any given moment in the future, and an explanation of any fees and interest that will cause the balance to increase.” Id.
The Avila and Carlin decisions are part of larger and disturbing trend where courts have created new FDCPA disclosure obligations out of whole cloth.
Collectors seeking to comply with the FDCPA cannot rely on the statute’s plain language. They must attempt to anticipate and disclose additional information that a court might deem important to a debtor, or face strict liability for their failure to do so.
Collecting a “debt” versus foreclosing on a security interest
When an entity is solely seeking to foreclose on a security interest and is not seeking payment of a “debt” from a consumer, then the FDCPA should not apply. Determining the line between foreclosure 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 notices sent 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, because the trustee was solely attempting to retake and resell the security, and not attempting to collect money from the property owner:
“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.”
Id. at 571-72 (citations omitted). The plaintiff argued that ReconTrust was engaged in “debt collection” because its notices pressured her to pay money. The Ho Court rejected this, noting that all of ReconTrust’s activities fell under the umbrella of enforcing a security interest under California’s non-judicial foreclosure statute, and its conduct was therefore not subject to the FDCPA, even if it created an incentive for the debtor to pay:
“If this were sufficient to transform the enforcement of security interests into debt collection, then all security enforcers 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 trustee defendant 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 subject to the FDCPA, because it was not sent solely to enforce a security interest. Rather, the letter requested payment of plaintiff’s homeowners assessment fee, stating: “Failure to pay your assessment account in full within thirty-five (35) days from the date of this letter will result in a lien being recorded against your property.” Id. at 989 (emphasis in opinion).
The Mashiri Court also noted that the firm could not be engaged in “enforcing” a security interest with the letter, because there was “no existing security interest for Espten to enforce at the time of the May Notice because a lien had yet to be recorded against Mashiri’s property.” Id. The letter was required in order to perfect the association’s security interest and permit it to record the lien at a later date. Id. Thus, the Court held that because the firm sent the letter “attempting to collect payment of a debt – irrespective of whether it also sought to perfect the HOA's security interest and 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 Ho and Mashiri decisions illustrate, it is possible to communicate with consumers solely in connection with enforcing a security interest, and thereby remain outside of the coverage of the FDCPA. Any language or conduct that is arguably designed to seek payment on the account, however, may trigger the protections of the Act.
Certifying a class; individualized inquiries on class member “debts”
Consumers have been filing FDCPA class actions against attorneys who collect for homeowners associations with increasing frequency in recent years. While no class action 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 closely examine the putative class claims asserted against attorneys in this space will find many reasons to deny motions for class certification.
A consumer seeking to certify an FDCPA class action must first address the threshold issue of whether the 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 unpaid homeowner assessments, is not a “debt” subject to the FDCPA unless it was incurred “primarily for personal, family or household purposes.” 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 owner is a fact-intensive inquiry, and cannot be completed simply be reading the CCR’s or other documents relating to the purchase of the property. It requires an examination of “the transaction as a whole, paying particular attention to the purpose for which the credit was extended in 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 software business 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 substance of the transaction and the borrower's purpose in obtaining” the property. See Slenk v. Transworld Sys., Inc., 236 F.3d 1072, 1075 (9th Cir. 2001) (emphasis added). This may require not only a review of documents relating to the transaction, but also an evaluation of the debtor’s conduct before and after the obligation was incurred.
All relevant facts relating to the purpose for purchasing the property must be “viewed in the aggregate” and the entire transaction must be viewed “as a whole” – including the owners’ conduct before 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) (applying Slenk; fact issue of whether homeowner assessments qualified as “debts” when “evidence relating to plaintiff’s intent” was “not completely clear” because record did not show if plaintiff resided in, or rented, condo during entire seven years she owned it).
Courts around the country have held that assessments and loan obligations incurred with respect to 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) (denying certification of FDCPA class relating to collection of assessments where determination of whether property was used for business purposes “would require individual 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 class action against a firm that collects delinquent assessments? To certify a class, under Rule 23(b)(3) of the Federal Rules of Civil Procedure, the plaintiff has the burden of showing that “common questions must predominate over any questions affecting 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 members of a class cannot be identified and their claims cannot be adjudicated without engaging in individual inquiries into their particular circumstances, class certification is not appropriate.
For these very reasons, the Court denied class 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 observed that “common issues do not predominate over individualized inquiries” because the Court “will need to conduct individualized investigations in order to determine whether each putative class member has incurred a 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 qualify if incurred by a landlord utilizing the property for commercial purposes . . . The Court therefore would need to examine the circumstances surrounding each putative class member's home purchase to determine the purpose of the transaction.”
The Court rejected the plaintiff’s argument that class members could be easily identified by simply examining the affidavits of value7 relating to each property, noting that reviewing documents alone would not uncover the “substance” of the transaction. In addition, the defendant had identified several instances where the affidavits of value did not accurately reflect the owner’s intent when purchasing the property.
The Court also agreed with defendant that numerous other individualized inquiries that would be required to determine the validity of each putative class member’s claim. Thus, commonality and superiority under Rule 23(b)(3) were not present, and the motion for class certification was denied.
The Lowe decision and cases like it should be very persuasive in defeating putative FDCPA class actions filed against attorneys and other entities that collect assessments for community associations.