California’ Rosenthal Act And The Credit Transaction Requirement-A Unique Defense

The Rosenthal Fair Debt Collection Practices Act (“Rosenthal Act” or the “Act”), the California version of the federal Fair Debt Collection Practices Act (“FDCPA”), prohibits debt collectors from engaging in certain practices while collecting consumer debts. But not all consumer debts are subject to the Rosenthal Act; and though the FDCPA is incorporated into the Act, because its definitions are not, the Rosenthal Act’s applicability is considerably narrower than its federal counterpart. Specifically, unlike the FDCPA, the California statute regulates collection of only those debts that arise from a “consumer credit transaction,” defined as one in which “property, services or money is acquired on credit.” Cal. Civ. Code § 1788.2(e) and (f). A debt that does not meet the credit transaction requirement does not trigger the Rosenthal Act, even if it would trigger the FDCPA for third party debt collectors.

California courts have used broad language to interpret the “consumer credit transaction” requirement, focusing on whether there actually was an “acquisition” of property or services. “[T]here is a consumer credit transaction when the consumer acquires something without paying for it.” Gouskos v. Aptos Vill. Garage, Inc., 94 Cal. App. 4th 754, 759 (2001). But, the seemingly broad language belies how narrow the statute is applied. The Gouskos court found that services rendered in advance of payment do not create the “acquisition” necessary to trigger the Rosenthal Act. Id. at 760 (“[I]n the automobile repair context there rarely would exist a consumer credit transaction because repair shops typically do not release repaired vehicles without payment; . . . a vehicle owner would typically not acquire a shop’s property or service until [it] is paid for and he . . . regains his . . . own property”). In Koller v. West Bay Acquisitions, LLC, 2012 WL 2862440 (N.D. Cal. July 11, 2012), however, the federal district court did find an “acquisition,” because the plaintiff retained a video for longer than he paid for and owed money for the extra time. 2012 WL 2862440, at *7. Thus, the plaintiff was in possession of property for which he had not paid––in other words, the video was acquired on credit. Thus, the Gouskos/Koller “acquisition” distinction can be outcome determinative. See Crawford v. Farmers Group, Inc., 160 Cal. App. 3d 1164, 1168-69 (1984) (insurance paid in installments falls outside the Rosenthal Act because the insured can cancel the service at any time by simply not paying the monthly premium; there is no service acquired without payment).

In a lawsuit involving the Rosenthal Act, the proper analysis should focus on whether there was, in fact, a “consumer credit transaction.” Durham v. Continental Central Credit, 2009 WL 3416114, at *7 (S.D. Cal. Oct. 20, 2009) (“[T]he regular HOA assessments for ongoing maintenance and general services do not constitute a ‘consumer credit transaction’”; there was “no evidence that Plaintiff or the other homeowners acquired services on credit from the Association”); Lopez v. AM Solutions, LLC, 2014 WL 1272773, at *3 (C.D. Cal. Mar. 3, 2014) (a home equity loan falls within the definition of “consumer credit transaction”); Bhandari v. Capital One, N.A., 2013 WL 1736789, at *5-6 (N.D. Cal. Apr. 22, 2013) (a credit card debt is an example of a consumer debt covered by the Rosenthal Act). As can be seen, determining whether a transaction is a “consumer credit transaction” is crucial to understanding whether the Rosenthal Act will apply.

Important in the consumer banking context, there is a split of authority on the issue of whether dishonored checks are “consumer credit transactions” under the Act. In 1975, the Ninth Circuit ruled that “a check itself is, essentially, an instrument of credit.” Greenway v. Information Dynamics, Ltd., 524 F.2d 1145, 1146 (9th Cir. 1975). But subsequent Ninth Circuit appellate and district courts have disagreed. Charles v. Lundgren & Associates, P.C., 119 F.3d 739, 742 (9th Cir. 1997) (implicitly finding a dishonored check is not a credit transaction); Abels v. JBC Legal Group, P.C., 428 F. Supp. 2d 1023, 1026 (N.D. Cal. 2005) (finding collection on a dishonored check outside the Rosenthal Act because dishonored check does not give rise to a “credit transaction”); Edwards v. Crosscheck Inc., 2011 WL 2836759, at *3-4 (N.D. Cal. July 13, 2011) (same). Another view, put forth by the Ninth Circuit, is that a check is not a credit transaction in itself, but “a creditor’s acceptance of what turns out to be a dishonored check transforms what would have been a contemporaneous exchange into a credit transaction.” In re JWJ Contracting Co., Inc., 371 F.3d 1079, 1081 (9th Cir. 2004).

Finally, in the lease context, courts have found that rent collection and vehicle leases are not consumer credit transactions. See Leasure v. Willmark Communities, Inc., 2013 WL 6097944, at *1 (S.D. Cal. Mar. 14, 2013) (finding collection on rent owed not a consumer credit transaction because plaintiffs had not established that the landlord extended credit to the tenants); Bescos v. Bank of Am., 105 Cal. App. 4th 378, 393 (2003) (a vehicle lease agreement does not qualify as a “consumer credit contract”).

The “consumer credit transaction” is a requirement unique to California’s version of the fair debt collection law. Since the Rosenthal Act’s “credit transaction” requirement does not extend to its federal counterpart, it constitutes a unique and potentially valuable defense to a claim under the California statute. Businesses that are sued under the Rosenthal Act should be sure to carefully examine the “consumer credit transaction” requirement as a potential way to short-circuit the litigation.

For more information on the consumer credit transaction requirement specifically, or the fair debt collection laws generally, contact Scott J. Hyman at sjh@severson.com or Divya S. Gupta at dsg@severson.com.