The following is an update analyzing a recent case of interest.
Finding that prior authority to the contrary had been overruled by subsequent United States Supreme Court and state court decisions, a California Court of Appeal recently held that California’s Rosenthal Act (similar to but broader than the federal Fair Debt Collection Practices Act (FDCPA)) can apply to a nonjudicial foreclosure. Best v Ocwen Loan Servicing, LLC, 2021 WL 2024716 (Cal Court of Appeal, May 21, 2021). To view the opinion, click here.
The Bests took out a loan for $555,000 in 2005 secured by a deed of trust on their California home. The original lender and beneficiary was New Century Mortgage Corporation, which recorded an assignment to Deutsche Bank National Trust as trustee in March 2009. Deutsche Bank as trustee assigned the note and trust deed to Deutsche in October 2009. In April 2012 Ocwen notified the Bests that it was the servicer and it ultimately again assigned the note and trust deed to Deutsche and substituted Western Progressive, LLC as the foreclosure trustee. When the Bests defaulted, Western recorded a notice of default in 2015 and a notice of trustee’s sale in November 2018, followed by a nonjudicial foreclosure sale in December 2018.
Meanwhile, in 2016 the Bests filed an action against Deutsche, Ocwen, and others (collectively the “Bank”) in federal district court, alleging among other things that Deutsch and Ocwen lacked standing to foreclose because the assignments were invalid. They further asserted that the note was not properly securitized because it was not timely assigned to the trust in conformity with the pooling and servicing agreement. The Bests pleaded claims for relief based on breach of contract, negligence, breach of the implied covenant of good faith and fair dealing, violation of the California Homeowner Bill of Rights, rescission, cancellation of instruments and unfair competition. The Bank filed a motion to dismiss, which was granted in part with prejudice. The Court granted leave to amend a number of claims for lack of particularity. The Bank sought dismissal of the amended complaint, which eventually resulted in dismissal with prejudice. That dismissal was affirmed by the Ninth Circuit.
After the 2018 foreclosure, the Bests sued again, this time in state court. They again asserted that the assignments and the substitution of trustee was invalid and made other claims similar to but not identical to those in the federal action. They added a cause of action for violation of the Rosenthal Act based, among other things, on the nonjudicial foreclosure which occurred two years after dismissal of the federal action.
The Bank demurred, asserting claim preclusion defenses based on the dismissed federal action and also arguing separate legal grounds against each of the six causes of action. The trial court sustained the demurrer without leave to amend based solely on claim preclusion, not reaching the other arguments. The Bests appealed to the California Court of Appeal (the “Court”), which affirmed in part and reversed in part. It held that claim preclusion did not bar the Rosenthal Act claim and others which arose from actions which occurred after the federal action was dismissed. It then addressed the claims left undecided by the trial court, ruling that the Bests could assert a Rosenthal Act violation based on the nonjudicial foreclosure, thereby departing from earlier authority.
The Court’s published opinion addressed three issues worthy of note here. First, it affirmed that the trial court and the Court could take judicial notice of certified copies of recorded documents and of records in the federal court file, especially those which represented rulings by that court. The Court’s discussion is not ground breaking but a good tutorial on what courts may and may not take judicial notice of under California law.
Second, it found that claim preclusion (as opposed to issue preclusion, which was not asserted as a defense by the Bank) did not bar any of the claims which arose from facts which occurred after the dismissal of the federal action. Applying federal preclusion law (not California, as argued by both parties, because the purportedly preclusive case arose in federal court), the Court reasoned that the causes of action could not have been identical because they did not arise from a distinct nucleus of operative facts. Under federal preclusion standards, the claims must arise from the same transaction, which the Bests alleged did not occur here because the nucleus of facts in question occurred after the federal case was filed. The Court agreed, citing well-settled law holding that claim preclusion does not apply to claims that “were not in existence and could not have been sued upon…. when the allegedly preclusive action was initiated.” [Citation omitted.] This left the Rosenthal Act claim, among other claims, viable.
The Court then addressed whether the Bests could assert a violation of the Rosenthal Act based on the nonjudicial foreclosure, a question which had been answered in the negative by a “host” of federal district court cases. Those cases had relied primarily on analogy to the FDCPA, where courts had held that foreclosing on security was not collection of an obligation to pay money. Other district courts had ruled that a debt secured by a trust deed was not a “consumer debt”. The court rejected those holdings as no longer good authority.
It looked instead to the United States Supreme Court’s decision in Obduskey v McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019), which it found had “effectively overruled the cases …. holding that foreclosure is not debt collection.” The Supreme Court had ruled that a nonjudicial foreclosure could not be a violation of the FDCPA, but arrived at that conclusion because a business engaged in nonjudicial foreclosure proceedings is not a “debt collector” within the meaning of the FDCPA.
The Court noted that “debt collector” was defined in the FDCPA distinctly, a definition not repeated in the Rosenthal Act. The Obduskey court also had indicated that a loan secured by a deed of trust on a residence was in fact a consumer debt, nullifying cases which had ruled that a trust deed was not a consumer debt and therefore dismissed FDCPA, and subsequently Rosenthal Act, claims. Moreover, the Supreme Court had dispatched with the distinction made between foreclosure on collateral, the purpose of which was to recover payment on a debt, and direct payment of money by the debtor. It had effectively held that nonjudicial foreclosure was indeed debt collection and overruled prior decisions which had dismissed FDCPA claims based on a contrary view.
The Court also cited recent California authority which held that a deed of trust was a consumer debt under the Rosenthal Act, overruling federal cases which had held to the contrary. Freed up from contrary authority, the Court held “that a nonjudicial foreclosure can be ‘debt collection’ by a ‘debt collector’ so as to trigger the protections of the Rosenthal Act.”
This case is a classic example of how litigation which bordered on frivolous can create significant new precedent. The Best’s litigation sounds all too familiar to courts – state, federal, and bankruptcy – which were buried between 2008 and about 2014 under the avalanche of internet- inspired litigation by often pro se borrowers trying to win a “free home” by alleging that foreclosing creditors lacked proper assignments, securitization, and standing to sue or foreclose. Overwhelmingly these cases were decided against the homeowners at trial and again after they wound their way to appellate courts and on occasion state supreme courts. I note that the Bests’ claims came somewhat later, but they do sound all too familiar. On the ultimate merits, I am dubious the Bests will prevail, even under the Rosenthal Act.
But that is not the point. The Court of Appeal here seized on this case to tell us that Obduskey changed the fair debt collection landscape, at least in California. Its ruling cannot be expanded to include viable claims arising from nonjudicial foreclosures under the FDCPA because of the definition of “debt collector” in the federal act. However, even in the federal forum, this ruling is significant because it emphasizes that Obduskey did away with the warped concept that foreclosure on collateral was not debt collection. Of course it is; good for the courts which have affirmed that reality.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association (CLA) Business Law Section. This submission was authored by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA, ret.,), a member of the ad hoc group, with editorial contributions from Uzzi O. Raanan, a partner with Danning, Gill, Israel & Krasnoff, LLP, also a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.
This ebulletin was prepared by Walter K. Oetzell, Walter K. Oetzell, APC, firstname.lastname@example.org.