In Montgomery v. GCFS, Inc., 2015 WL 3653314, at *1-2 (Cal.App. 1 Dist., 2015), the Court of Appeal affirmed dismissal of a Rosenthal Act claim premised on an alleged prohibition against assignment of a debt from a CFL holder to an unlicensed entity. I’ve changed the order of the opinion somewhat for brevity here; but, the facts were as follows:
In 2004, CashCall, Inc. (CashCall) issued a consumer credit account to appellant.3 CashCall was a licensed finance lender pursuant to the California Finance Lenders Law (§ 22000 et seq.; Finance Lenders Law). The debt appellant incurred from the credit account is governed by the Finance Lenders Law. In 2011, CashCall sold appellant’s debt to GCFS, Inc. (GCFS) for collection. In 2012, GCFS sold appellant’s debt to Mountain Lion Acquisitions, LLC (Mountain Lion LLC). Mountain Lion LLC then sold or assigned the debt to Mountain Lion Acquisitions, Inc. (Mountain Lion). Neither GCFS, Mountain Lion LLC, nor Mountain Lion is a licensed finance lender pursuant to the Finance Lenders Law. These entities are also not institutional investors within the meaning of section 22340. Mountain Lion subsequently sued appellant for payment on the debt. Appellant filed a cross-complaint against Mountain Lion, Mountain Lion LLC, GCFS, and certain individuals alleged to be officers, directors, employees, or agents of these entities (collectively, respondents), alleging violations of the Finance Lenders Law, the Rosenthal Fair Debt Collection Practices Act (Civ.Code, § 1788 et seq.; the Rosenthal Act), and the federal Fair Debt Collection Practices Act (15 U.S.C. § 1692 et seq.; the Federal Debt Collection Act). Appellant alleged that the sale or transfer of her debt to entities that were neither licensed finance lenders nor institutional investors violated section 22340(a) and rendered the debt void pursuant to section 22750, subdivision (b). GCFS and an affiliated individual respondent filed demurrers to appellant’s cross-complaint. Mountain Lion, Mountain Lion LLC, and affiliated individual respondents filed a motion for judgment on the pleadings. The trial court granted the respondents’ motions, finding the sale of appellant’s debt to unlicensed, non-institutional investor entities was not in violation of section 22340(a). This appeal followed.
The Court of Appeal framed the issue and ruling as follows:
Financial Code section 22340, subdivision (a) (section 22340(a))1 provides that “A licensee may sell promissory notes evidencing the obligation to repay loans made by the licensee pursuant to this division or evidencing the obligation to repay loans purchased from and made by another licensee pursuant to this division to institutional investors, and may make agreements with institutional investors for the collection of payments or the performance of services with respect to those notes.” After being sued for an unpaid consumer debt, Khalema M. Montgomery (appellant) filed a cross-complaint challenging the validity of her debt. She contends the sale of her debt from a licensed finance lender to an entity that was neither licensed nor an institutional investor violated section 22340(a). We reject appellant’s interpretation of this provision and affirm.
The Court of Appeal found that the CFL did not prohibit the sale of the debt as argued by the Plaintiffs:
We conclude section 22340(a) does not prohibit a finance lender from selling consumer debt to a party other than an institutional investor or another finance lender. Appellant argues this interpretation contravenes the overall purpose of the Finance Lenders Law. We disagree. The law focuses on the formation and terms of covered loans. A “finance lender” is defined to include “any person who is engaged in the business of making consumer loans.” (§ 22009, italics added.) In accord with this definition, most of the regulatory provisions govern the terms of the loan when made, including permissible interest rates and fees and various impermissible terms. (See §§ 22300–22307, 22311–22312.)11 The sale or assignment of the loan does not alter these terms. We are similarly unpersuaded by appellant’s contention that our conclusion would contravene the purpose of restrictions on usury. Usury restrictions do not restrict the assignment of loans. (See WRI Opportunity Loans II LLC v. Cooper (2007) 154 Cal.App.4th 525, 533 [“To be usurious, a contract ‘must in its inception require a payment of usury’; subsequent events do not render a legal contract usurious.”].) The California Constitution exempts from its usury restrictions “persons authorized by statute”—such as finance lenders (§ 22002)—and “any successor in interest to any loan or forbearance exempted under this article.” (Cal. Const. art. XV, § 1.) The Constitution does not require successors in interest to be independently exempt from usury restrictions. Moreover, in Strike v. Trans–West Discount Corp. (1979) 92 Cal.App.3d 735, 745, the Court of Appeal rejected an argument that “the [non-exempt] assignee of an exempt lender becomes thereby a usurer unable to collect any interest,” noting such a rule would be “not conformable to the public policy exempting [certain entities] in the first instance.” Section 22340(a) provides that the authority conferred by a finance lenders license includes the sale of debts only to institutional investors, but the statute does not prohibit the sale of debts to other parties. Because appellant’s claims hinge on finding a violation of section 22340(a) in the sale of her loan to unlicensed, non-institutional investor parties, her claims fail.
The Court of Appeal reversed the trial court’s awarding of ‘reverse attorneys’ fees’ to the defendant, finding that the Plaintiff’s argument was not in bad faith and was at least colorable.
Second, GCFS argues that, even if section 22340(a) rendered appellant’s debt void, appellant’s claim that GCFS’s sale of the void debt to Mountain Lion LLC violated the Rosenthal Act was utterly without merit. The Rosenthal Act prohibits certain violations of the Federal Debt Collection Act, including making a “false representation” about “the character, amount, or legal status of any debt.” (15 U.S.C. § 1692e, subd. (2); Civ.Code, § 1788.17 [“every debt collector collecting or attempting to collect a consumer debt shall comply with the provisions of Sections 1692b to 1692j, inclusive, of … Title 15 of the United States Code”]; Masuda v. Citibank, N.A. (N.D.Cal.2014) 38 F.Supp.3d 1130, 1134 [“Federal judicial interpretations of the [Federal Debt Collection Act] are incorporated into the Rosenthal Act by Civil Code § 1788.17 such that a plaintiff may state a claim for violation of the Rosenthal Act simply by showing that a defendant violated any of several provisions of the [Federal Debt Collection Act].”].) In an unpublished decision, the Ninth Circuit concluded “a consumer states a valid claim for relief under the [Federal Debt Collection] Act when he alleges that a debt collector has made false representations as to the legal status of a debt in connection with the sale, transfer or assignment of a debt to another debt collector, with the knowledge that the purchaser, transferee or assignee intends to initiate or continue attempts to collect the debt.” (Magrin v. Unifund CCR Partners (9th Cir.2002) 52 Fed.Appx. 938, 939.)14 We express no opinion as to the ultimate merit of appellant’s argument that an entity’s representation, during the sale of a debt to a debt collector, that the debt is valid when it is in fact void constitutes a violation of the Rosenthal Act; however, we conclude the argument is at least colorable. Accordingly, we will reverse the award of attorney fees.