On October 19, 2016, the Ninth Circuit Court of Appeals waded into California’s heavily litigated foreclosure arena with a 2-1 opinion in the hotly contested case of Ho v. ReconTrust Company, N.A., 840 F.3d 618 (2016).

In a resounding victory for the mortgage banking industry, former Chief Judge Alex Kozinski authored a majority opinion interpreting the federal Fair Debt Collection Practices Act to exclude foreclosure trustees from the statutory definition of “debt collector.”  The financial services bar had long been waiting for the Ninth Circuit to choose a side in the nationwide debate over the scope of this statute, and the court’s decision may represent a turning of the tide in favor of mortgage servicers, foreclosure trustees, and their agents.

Debt Collection: A Quagmire Of Federal And State Regulation.  The Fair Debt Collection Practices Act (15 U.S.C. §§ 1692–1692p), more commonly referred to by its abbreviation FDCPA, sets some federal ground rules for debt collection—an area traditionally dominated by state law.  Because of the ensuing overlap between state and federal law, the FDCPA is frequently pled in conjunction with its state counterpart in debt-collection related lawsuits.  In Ho, the California analog was the Rosenthal Fair Debt Collection Practices Act (Cal. Civ. Code §§ 1788–1788.33), often known as the Rosenthal Act.

Both the FDCPA and the Rosenthal Act subject “debt collectors” to civil damages for engaging in certain collection practices that the statutes consider “abusive.”  Examples are using profanity (15 U.S.C. § 1692d(2) & Cal. Civ. Code §1788.11(a)); falsely claiming to be an attorney (15 U.S.C. § 1692e(3) & Cal. Civ. Code §1788.13(b)); communicating about the debt with third parties such as the debtor’s employer or family (15 U.S.C.

§ 1692c(b) & Cal. Civ. Code § 1788.12(a), (b)); and calling continuously with intent to harass or annoy (15 U.S.C. § 1692d(5) & Cal. Civ. Code § 1788(d)).

The two acts attach stiff statutory penalties to violations.  The FDCPA imposes a $1,000 fine per instance (15 U.S.C. § 1692k(a)(2)(A)), whereas the slightly more flexible Rosenthal Act allows for a range of penalties between $100 and $1000 per violation (Cal. Civ. Code § 1788.30(b)).

But who exactly is a “debt collector”?  California state law expressly exempts trustees of deeds of trust from exposure to Rosenthal Act liability when they are carrying out their foreclosure-related duties under the state’s nonjudicial foreclosure statutes.  See Cal. Civ. Code § 2924(b).  Until Ho, however, it was unclear whether the FDCPA could be considered to carve out the same exception.

The Ninth Circuit Weighs In.  In Ho, the plaintiff’s theory of relief was that her foreclosure trustee, ReconTrust, was acting as a “debt collector” for FDCPA purposes when it sent her a notice of default and, eventually, a notice of sale after she became delinquent on her mortgage loan.  Ho, 840 F.3d at 620.  Specifically, she claimed that the notices violated the statute because they “misrepresented the amount of debt she owed.”  Id.  The district court disagreed, dismissing the plaintiff’s FDCPA claim.  On appeal, the Ninth Circuit affirmed.

The appellate court gave several different reasons for reaching this conclusion.  First, it cited the Tenth Circuit Court of Appeals and—what was a greater stretch—a dissent from a justice on the Alaska Supreme Court.  Both of these opinions drew a common-sense distinction between collecting cash owed by a borrower and taking possession of property that is encumbered by a pre-existing security interest.  As Judge Kozinski noted, in his characteristically colorful language,

“[t]he 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.”  Id. at 621.

The court’s next reason for excluding foreclosure trustees from the definition of “debt collector” was grounded on the most basic principles of federalism—that is, the age-old national debate about how to maintain the delicate balance between federal and state law in this country.  As the court noted, “[h]olding trustees liable under the FDCPA would subject them to obligations that would frustrate their ability to comply with the California statutes governing non-judicial foreclosure.”  Id. at 624.  The court, in effect, acknowledged that requiring foreclosure trustees to comply with both the federal FDCPA and California law would place them in an impossible position.  ReconTrust, in fact, listed “a half dozen conflicts” between California’s non-judicial foreclosure statutes and the FDCPA.  Id.  Amici from the mortgage banking industry went even further, arguing that “holding trustees liable as debt collectors would ‘literally prevent [California’s foreclosure] system from functioning.’”  Id. (quoting a friend-of-the-court brief filed by the United Trustees’ Association) (alteration in original).

The majority concluded by pulling out a trump card—the United States Supreme Court’s recent decision in Sheriff v. Gillie, 136 S.Ct. 1594 (2016), in which Justice Ginsburg, writing for a unanimous Court, “instructed us that the FDCPA should not be interpreted to interfere with state law unless Congress clearly intended to displace that law.”  Ho, 840 F.3d at 625.  “That admonition,” Judge Kozinski wrote, “is especially relevant to our case, as there is little doubt that foreclosure is a traditional area of state concern.”  Id.  “It follows,” he reasoned, that “‘the presumption against preemption remains in effect where [a federal statute] is alleged to preempt state foreclosure laws.’”  Id. (quoting Higley v. Flagstar Bank, 910 F. Supp. 2d 1249, 1257 n.7 (D. Or. 2012)) (alteration in original).

Judge Korman’s Dissent.  Judge Kozinski was not the only colorful voice in this debate.  Judge Edward R. Korman, a former United States Attorney for the Eastern District of New York and now a senior judge in that District, happened to be sitting on the Ninth Circuit panel by designation.  He was apoplectic at the majority’s decision.

In a fiery dissent that ran nearly twice as long as the majority opinion, Judge Korman roundly mocked the precedents cited by Judge Kozinski and argued that “the only reasonable reading [of the FDCPA] is that a trustee pursuing a nonjudicial foreclosure proceeding is a debt collector.”  Id. at 627-28 (Korman, J., dissenting).  He chastised the majority for “undermining the minimum national standards [for debt collection] that Congress has adopted.” Id. at 629.  Going further, he derided Judge Kozinski’s reference to the auto finance arena, commenting “I leave it to the reader to evaluate whether the activities of a trustee of a deed of trust . . . can fairly be analogized to those of a tow truck driver who simply pulls up to a car on the street and repossesses it.”  Id. at 632.  “[I]t is irrelevant,” he concluded, “that the nonjudicial foreclosure process entailed in a mortgage foreclosure proceeding may also have constituted the enforcement of a security interest.”  Id.

Next, Judge Korman devoted many pages to explaining why the FDCPA does not, in fact, conflict with California’s statutory scheme governing nonjudicial foreclosure.  Id. at 635-40.  He dismissed the concerns of the United Trustees’ Association as “overwrought” and “simply false.”  Id. at 636.  Matching Judge Kozinski’s flair for memorable language, he wrote, “[t]he alleged conflicts are, to borrow the Yiddish term, gornisht mit gornisht—nothing with nothing.”  Id. at 637.

Picking A Fight With Sister Circuits.  Judge Korman is far from the only appellate judge who thinks the FDCPA should govern the activities of foreclosure trustees.  The Third, Fourth and Sixth Circuits and the supreme courts of Alaska and Colorado have all reached the opposite conclusion from the majority in HoSee Kaymark v. Bank of Am., N.A., 783 F.3d 168, 179 (3d Cir. 2015), cert. denied, 136 S.Ct. 794 (2016); Glazer v. Chase Home Fin. LLC, 704 F.3d 453, 461–63 (6th Cir. 2013); Wilson v. Draper & Goldberg, P.L.L.C., 443 F.3d 373, 376–77 (4th Cir. 2006); see also Alaska Tr., LLC v. Ambridge, 372 P.3d 207, 213–216 (Alaska 2016); Shapiro & Meinhold v. Zartman, 823 P.2d 120, 123–24 (Colo. 1992) (en banc).

The majority in Ho acknowledged some of this contrary authority, but dismissed it as unpersuasive.  Ho, 840 F.3d at 621.  The dissent emphasized, pointedly, that “every other circuit that has addressed whether foreclosure procedures are debt collection subject to the FDCPA” has held that they are.  Id. at 627.

Ho therefore causes a rupture in the field of debt collection.  It sets up the kind of classic circuit split that frequently prompts the United States Supreme Court to accept a petition for writ of certiorari.  So there is a high likelihood that the status of foreclosure trustees under the FDCPA will ultimately be decided in the high court.  The implications could be profound for the nation’s mortgage lenders—and the homeowners they serve.

For more information regarding the Ho case specifically, or the application of the FDCPA to foreclosure activities, please contact Elizabeth Holt Andrews at