Debt collector may be held liable under the Rosenthal Act for falsely stating that substitute service had been achieved on the debtor, even if the debt collector did not know the statement was false.  

Dear constituency list members of the Insolvency Law Committee the following is a case update written by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com) analyzing a recent decision of interest.

SUMMARY

On October 7, 2022 the California Court of Appeal, First District, Division 4 (“Court of Appeals”) reversed the trial court’s Anti-SLAPP order striking the complaint filed by Kacie Lynn Young (“Plaintiff”), and held that Cal. Civ. Code § 1788.17 incorporates into the Rosenthal Fair Debt Collection Practices Act the strict liability standard of 15 U.S.C. § 1692(e) for false statements made in collecting a debt or regarding the legal status of the debt.

To read Young vs. Midland Funding, LLC, 84 Cal. App. 5th 34 (2022), click here.

FACTS

A dispute arose when Plaintiff’s employer told her in 2019 that it received an earningswithholding order seeking to garnish her wages.  Plaintiff claimed she had no knowledge of the lawsuit or the judgment against her before then.  Plaintiff investigated and discovered the existence of a 2010 default judgment against her and in favor of Midland Funding, LLC for an alleged debt of $8,529.93 plus interest.  She maintained that she was not aware of the lawsuit or the judgment before 2019 and had not been served with the complaint in the lawsuit.

Plaintiff then filed her own complaint against the defendants – Midland Funding, LLC and Midland Credit Management, Inc. (the “Midland Defendants”) – in the San Mateo County Superior Court. She sought damages, penalties, and reasonable attorney fees and costs under the Rosenthal Fair Debt Collection Practices Act (Cal. Civ. Code § 1788 et seq.), arguing that Midland was a debt collector of consumer debt and had engaged in false and deceptive conduct in attempting to collect that debt since she was never served with process. The default judgment and subsequent collection efforts followed entry of the default judgment.

The Midland Defendants denied the allegations and filed a motion to strike Plaintiff’s claims under the anti-SLAPP (strategic lawsuits against public participation) law (Cal. Code of Civ. Proc. § 425.16). The trial court granted the anti-SLAPP motion and dismissed Plaintiff’s complaint, asserting that Plaintiff failed to show that she would probably prevail on the merits of her claims. The trial court also awarded the Midland Defendants their attorneys’ fees.  Plaintiff appealed.

ON APPEAL

The Court of Appeal reversed the trial court’s decision granting the Midland Defendants’ anti-SLAPP motion relating to the equitable claims, and it reversed the part of the trial court’s judgment dismissing Plaintiff’s claim under the Rosenthal Act.  It ruled that Plaintiff’s equitable claims were moot, but that Plaintiff’s claim under the Rosenthal Act was not time-barred because there was evidence that the defendants engaged in efforts to garnish Plaintiff’s wages until at least one year before Plaintiff filed her lawsuit.

The Court of Appeal stated that Plaintiff showed that she would probably prevail on her claim under the Rosenthal Act and presented sufficient evidence demonstrating that the defendants falsely represented that they effected substituted service of process on her in the debt collection lawsuit.  The Court of Appeal also noted that Plaintiff was not required to show that the Midland Defendants knowingly made false representations.

As a result, the Court of Appeal reversed the trial court’s granting of the Midland Defendant’s anti-SLAPP motions and remanded the matter with directions to dismiss those claims as moot. Further, the Court of Appeal reversed the dismissal of Plaintiff’s Rosenthal Act cause of action and vacated the judgment awarding the Midland Defendants’ attorneys’ fees.  Plaintiff was also awarded her costs on appeal.

REASONING

The Court of Appeal held that the Midland Defendants – as the debt collectors – may be held liable under the Rosenthal Act for falsely stating that substitute service had been achieved on Plaintiff/debtor, leading to entry of a default judgment against her.  It further found that the debt collector need not know that the statement was false in order to be liable, holding that Cal. Civ. Code § 1788.15(a), which makes it a violation to knowingly employ improper service of process to collect a debt, is overridden by Civ. Code § 1788.7’s words “notwithstanding any other provision.”  

The effect of the decision, and as the Court of Appeal held, was that California Civil Code section 1788.17 incorporates into the Rosenthal Fair Debt Collection Practices Act, the strict liability standard of 15 United States Code section 1692(e) for false statements made in collecting a debt or regarding the legal status of the debt.  Thus, the debt collector may be held liable under the Rosenthal Act for falsely stating that substitute service had been achieved on the debtor.  However, the Court of Appeal noted that, under both state and federal law, the debtor may have an affirmative defense that the error was unintentional and occurred despite employment of procedures reasonably designed to avoid such errors.  Cal. Civ. Code § 1788.30(e); 15 U.S.C. § 1692k(c).

AUTHOR’S COMMENTS

This appears to be the correct result based upon the facts of the case and the controlling law.  The Court of Appeal was fairly thorough in its review of authorities and the interplay between controlling California and Federal law.  As of the date of this article, this author could find no California reported decisions citing this case, and no further appeal is pending at this time.  It remains to be seen what other courts will do in similar situations.  However, on October 26, 2022, the Court of Appeals granted the Respondent’s Petition for a Rehearing.  Young v. Midland Funding, LLC, 2022 Cal. App. LEXIS 917.  Based on the Respondent’s Petition, this opinion is “not citable.”  

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member John Kim of the Brower Law Group, A Professional Corporation (John@BrowerLawGroup.com).