Court of Appeal (Cal.) Says “Sold-Out Junior” Mortgage Holder Violates FDCPA By Collecting on Obligation; Suggests Consumer Can Avoid FCRA Pre-Emption By Claiming Credit Reporting Damages Are Ancillary to Debt Collection Violation

In Alborzian v. JPMorgan Chase Bank, N.A., — Cal.Rptr.3d —-, 2015 WL 1114426 (Cal.App. 2 Dist. 2015), the California Court of Appeal addressed whether a sold-out junior mortgage holder violated the FDCPA/Rosenthal Act by collecting on the debt post-foreclosure by the senior.

A lender who lends money used to purchase a parcel of property and who holds a junior lien on that property cannot sue the borrower personally for the loan balance if the senior lienholder who also contributed to the purchase of the property forecloses on the property but does not collect enough from the foreclosure sale to pay off the junior lienholder. (Former Code Civ. Proc., § 580b, enacted by Stats.1989, ch. 698, § 12.) FN1 Can the borrower sue the junior lienholder for trying to collect the no-longer-enforceable debt if the lienholder’s collection efforts inaccurately imply that the debt is still enforceable? We conclude that the borrower may sue the debt collector under the Fair Debt Collection Practices Act (FDCPA) ( 15 U.S.C. § 1692 et seq .); and may sue the junior lienholder or its debt collector under the Rosenthal Fair Debt Collection Practices Act (Rosenthal Act) ( Civ.Code, § 1788 et seq .) and Unfair Competition Law (UCL) ( Bus. & Prof.Code, § 17200 et seq.). However, the borrower may not sue for violations of the Consumer Legal Remedies Act (CLRA) ( Civ.Code, § 1750 et seq.). We accordingly affirm in part and reverse in part the trial court’s order sustaining the lienholder’s and debt collector’s demurrers.

The Court of Appeal suggested that a consumer obtain FCRA standing and avoid FCRA pre-emption merely by setting up credit reporting damages as a damage ancillary to the debt collection violation.

Defendants next contend that plaintiffs’ state law claims are preempted by the Fair Credit Reporting Act (FCRA) (15 U.S.C. § 1681 et seq.) The FCRA generally regulates the credit reporting industry (§ 1681, subd. (b)), and as pertinent to this case, the means by which persons and companies furnish information to credit reporting agencies (§ 1681s–2.) To assure uniformity, the FCRA preempts state laws that impose “a requirement or prohibition … relating to the responsibilities of persons who furnish information to consumer reporting agencies.” (§ 1681t, subd. (b)(1)(F).)  Plaintiffs allege that defendants furnished false information to credit reporting agencies regarding the unenforceable debt, which thereby injured plaintiffs. These allegations do not implicate the FCRA’s preemption clause. Although a FDCPA claim based solely on allegations of false credit reporting may be preempted by the FCRA ( Miller v. Bank of America, N.A. (S.D.Cal.2012) 858 F.Supp.2d 1118, 1124), plaintiffs’ claims are grounded in defendants’ deceptive efforts to collect Chase’s loan; plaintiffs’ allegations of false credit reporting go solely to the injury they claim to have suffered in order to confer standing. In such cases, there is no preemption. ( Rex, supra, 905 F.Supp.2d at pp. 1151–1154.)

The Firm’s Bulletin on the case can be found here:  3.17.15 e-alert pdf