In De Dios v. International Realty & Investments, — F.3d —-, 2011 WL 1346956 (9th Cir. 2011), the Court of Appeals for the Ninth Circuit held that a residential property manager was not a “debt collector” within the meaning of the FDCPA because it did not acquire the debt when in default. The facts were as follows:
In 2001, Maribel Juan De Dios rented an apartment in Los Angeles. After seeking an exemption from the rent stabilization law, in 2006 a new landlord began increasing De Dios’s monthly rent to amounts De Dios considered excessive. De Dios initially paid under protest, but then ceased payment of the increased rent. ¶ Meanwhile, between late 2005 and June 2006, the property was in receivership. The court-appointed receiver retained his company, International Realty & Investments, Inc. (“International Realty”), as the agent to manage and collect rents on the property. Once the owner, Norton Community Apartments, L.P., regained control of the property from the receiver, Norton signed a “Property Management Agreement” with International Realty to continue its services as the property manager, beginning July 1, 2007. ¶ In July 2006, various tenants, including De Dios, sued Norton in state court over the rent dispute and other claims. Norton agreed not to file an unlawful detainer action if De Dios (and other tenants) continued to pay the pre-increase rent amount until there was a judicial ruling on the issue (the “Stipulated Forbearance”). Almost a year later, the Stipulated Forbearance ended with De Dios’s excessive rent claims being stricken and a negotiated rent increase resolving the other claims. ¶ Following resolution of the state court action, in late July 2007 International Realty sent De Dios a letter stating that the accrued rent from August 2006 to the present was due August 15, 2007 (the “Collection Letter”). Shortly before the due date of her accrued rent increase, De Dios filed suit in federal court, alleging that International Realty violated various disclosure obligations under the Act. Eight other tenants represented by the same attorney also filed nearly identical federal court actions.
The Court of Appeals explained the analytical framework for determining when a debt is in “default” under the FDCPA:
Although the Act does not define “in default,” courts interpreting § 1692a(6)(F)(iii) look to any underlying contracts and applicable law governing the debt at issue. See, e.g., Fed. Trade Comm’n, Advisory Op. n. 2 (April 25, 1989) (“Whether a debt is in default is generally controlled by the terms of the contract creating the indebtedness and applicable state law.”), available at www.ftc.gov/os/statutes/fdcpa/letters/cranmer.htm; Berndt v. Fairfield Resorts, Inc., 339 F.Supp.2d 1064, 1068–69 (W.D.Wis.2004) (examining plaintiff’s timeshare purchase contract and defendant’s management agreement to determine if overdue association fees were in default); Skerry v. Mass. Higher Educ. Assistance Corp., 73 F.Supp.2d 47, 52–54 (D.Mass.1999) (applying federal regulations governing student loans at issue to determine if they were in default).FN3 Here, the Stipulated Forbearance held the debt in suspension and the Collection Letter sought payment of amounts due prospectively. Even ignoring International Realty’s role during the receivership, by June 2006 it had authority to collect the rent which was not yet in default. [FN3. The Act’s legislative history is consistent with construing “in default” to mean a debt that is at least delinquent, and sometimes more than overdue. See S.Rep. No. 95–382 (1977) (debt collector does not include those “mortgage service companies and others who service outstanding debts for others, so long as the debts were not in default when taken for servicing”), reprinted in 1977 U.S.C.C.A.N. 1695, 1698; Fed. Trade Comm’n, Staff Commentary on the Fair Debt Collection Practices Act § 803, 53 Fed.Reg. 50097, 50103 (Dec. 13, 1988) (exemption in § 1692a(6)(F)(iii) was intended to apply to mortgage companies and other parties “whose business is servicing current accounts”), available at www.ftc.gov/os/statutes/fdcpa/commentary.shtm# 802 (emphasis added); accord FTC v. Check Investors, Inc., 502 F.3d 159, 173 (3d Cir.2007); Schlosser v. Fairbanks Cap. Corp., 323 F.3d 534, 538 (7th Cir.2003).]
The Court of Appeals also sanctioned plaintiffs’ counsel for splitting the claims into multiple lawsuits:
The district court did not abuse its discretion in sanctioning De Dios’s counsel $500 for “vexatious litigation strategy” in filing nine separate but identical actions for alleged violations of the Act instead of a single action naming all nine tenants as plaintiffs. In its order to show cause on sanctions, the district court wrote: “[T]here appears to be no legitimate reason for the filing of nine individual actions rather than a single action naming nine Plaintiffs. By filing the case as they did, Plaintiffs’ counsel unnecessarily multiplied the costs of litigation and the burden on the Court.” ¶ We agree. To begin, counsel failed to file a notice of related case in violation of the local rules. As referenced in the court’s detailed findings, counsel attempted to justify her actions by professing that conflicts in the clients’ respective settlement positions prevented her from filing one suit. This argument is singularly unpersuasive. The district court pointedly noted that “merely filing separate lawsuits does not alleviate the ethical issues related to collective representation.” The district court also documented its concern that some of the clients undertook the litigation to punish International Realty rather than to resolve claims under the Act. ¶ Although De Dios is correct that sanctions under 28 U.S.C. § 1927 do not apply to complaints or initial pleadings, see Moore v. Keegan Mgmt. Co. (In re Keegan Mgmt. Co., Sec. Litig.), 78 F.3d 431, 435 (9th Cir.1996), the district court had ample grounds on this record to impose the sanctions under Rule 11 and its inherent authority to curb abusive litigation practices. See Fed.R.Civ.P. 11(b)(1) (allowing sanctions for filings that “harass, cause unnecessary delay, or needlessly increase the cost of litigation”); Gomez v. Vernon, 255 F.3d 1118, 1133–34 (9th Cir.2001) (imposing inherent power sanctions for counsel’s abusive tactics that resulted in unnecessary litigation).