District Court (Cal.) Finds Debt Settlement Did Not Transmogrify the Debt Outside of the Rosenthal Act or Eviscerate Debtor’s Attorneys’ Representation

In Munoz v. California Business Bureau, Inc., 2016 WL 6517655 (E.D. Cal. 2016), Magistrate Judge McAuliffe found that a debt subject to the Rosenthal Act did not lose its character because it was settled, nor did the settle end the debtor’s counsel’s representation so as to allow direct communication with the debtor by the debt collector’s counsel.  First, Judge McAuliffe found once-a-debt, always-a-debt.

If the Court were to accept Defendant’s argument, that a settlement agreement transforms the debt, this argument would turn the FDCPA on its head. A debt collector then would be permitted to compromise an outstanding consumer debt, however minimally, and thereafter be exempted from the statutory preclusion of abusive debt collection practices. This kind of end run around the statutory protections intended for consumers cannot be found in the language of the FDCPA or any case authority. The Court further finds that Defendant’s “transformation” theory is inconsistent with the statutory language. It is an “undisputed premise that the appropriate point in time for determining the character of a financial obligation is when the obligation arose.” See Mlnarik v. Smith, Gardner, Slusky, Lazer, Pohren & Rogers, LLP, 2014 U.S. Dist. LEXIS 163448, 2014 WL 6657747 (N.D. Cal. Nov. 21, 2014) (“the relevant time is when the loan is made, not when collection is attempted”). In other words, the Court evaluates the nature of the debt at the time it arises rather than when it is to be collected. Id. Defendant does not and cannot dispute that the underlying transaction out of which the financial obligation arose was for medical services for personal purposes.  Based on the Court’s above analysis, Defendant fails to demonstrate that Plaintiff’s case falls outside the scope of the FDCPA and the RFDCPA.

Second, Judge McAuliffe found that the settlement of the debt did not allow the debt collector’s counsel to “assume” that the debtor no longer was represented by counsel.

The Court finds that Defendant’s arguments miss the mark for several reasons. First, Defendant cannot rely on the lack of formal notice to establish that it did not have actual knowledge of attorney representation. CBB concedes in Mr. Oropeza’s declaration that its practice assumes that a party is not represented unless “there is a [written] provision in the settlement agreement to notify the attorney.” Oropeza Decl. at pg. 5. Defendant repeats this internal policy in its opposition arguing that “if Plaintiff and his attorney wanted communications about payments to be directed to [Plaintiff’s counsel], then don’t sign a waiver and provide an instruction to communicate with [Plaintiff’s counsel] or some other attorney.” (Doc. 20 at 11). Yet this position finds no support in the plain language of the FDCPA. Section 1692c(a)(2) does not require notice in writing that a consumer is represented by counsel; it simply provides that once a debt collector learns a consumer is represented, it must cease communicating directly with him. Accord Goins v. JBC & Assocs., P.C., 352 F. Supp. 2d 262, 272-73 (D. Conn. 2005) (“[I]f a debt collector learns that a consumer is represented by an attorney in connection with the debt, even if not formally notified of this fact, the debt collector must contact only the attorney and must not contact the debtor.”). Defendant’s argument that it did not know that Plaintiff was represented due to Plaintiff’s failure to submit written or formal notice is therefore unavailing. Formal written notice is not required to trigger the broad remedial protections of § 1692c(a)(2) and the Court will not read such a requirement into the FDCPA. Second, despite Defendant’s claims to the contrary, there can be no genuine dispute that CBB knew Plaintiff was represented with respect to this debt. Plaintiff’s counsel represented Plaintiff and filed an answer in the state court case that included his “email address, mailing address, and telephone number.” See 15 U.S.C. § 1692c(a)(2); (Doc. 14-4, pg. 2). Defendant later signed a settlement agreement, approved by Plaintiff’s counsel, on July 2, 2015. On July 20, 2015, merely eighteen days later, Defendant sent Plaintiff a letter titled “this is an attempt to collect a debt by a debt collector and any information obtained will be used for that purpose.” (Doc. 14-7 at 2). In reality, Defendant is not challenging that it had actual knowledge that Plaintiff was represented; without dispute, Defendant knew Plaintiff was represented as to this debt. Instead, without providing support from any binding law, Defendant asks the Court to infer that an exception to actual knowledge exists where a party signs a settlement agreement settling a debt. If the Court were to infer this exception, such a result would render meaningless the policy underlying the FDCPA to protect consumers from unwanted communications by debt collectors. Certainly, allowing a debt collector to simply claim that it assumed that representation ended with respect to a particular debt would directly contradict the FDCPA’s broad remedial purpose.   Indeed, the only exceptions that Section 1692c(a)(2) makes to the requirement that a debtor be contacted through counsel are where (1) the attorney fails to respond within a reasonable time; and (2) the attorney consents to the debt collector’s direct communication with the client. 15 U.S.C. § 1692c(a)(2). If Congress also intended to make an exception that a debt collector may contact a debtor in cases where a Court proceeding underlying the debt is concluded, it could have added a third exception. “Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent.” Andrus v. Glover Constr. Co., 446 U.S. 608, 616-17(1980). Had Defendant first contacted Plaintiff’s counsel, without a sufficient response within a reasonable time period, Defendant would then be free to assume the termination of representation and contact the consumer directly. See Graff v. Hunt & Henriques, 2008 U.S. Dist. LEXIS 65355 (N.D. Cal. Aug. 25, 2008) (under section 1692c(a)(2) Court held that a reasonable trier of fact could conclude that Plaintiff’s attorney, who failed to respond to a debt collector’s letter for ten days and failed to file in answer in state court resulting in default judgement, failed to respond to the “creditors letter within a reasonable period of time). On these undisputed facts, Defendant knew Plaintiff was represented and that knowledge did not terminate as a result of the settlement.  The Court is also not persuaded by Defendant’s argument that the California Rules of Court terminated any “actual knowledge” of representation. There is nothing in the FDCPA that remotely indicates that attorney representation terminates when a hearing related to the debt is vacated. The FDCPA relates attorney representation to the existence of the underlying debt. 15 U.S.C. § 1692c(a)(2) (“if the debt collector knows the consumer is represented by an attorney with respect to such debt.”). Any vacated hearings related to the underlying debt certainly did not cancel the debt and therefore a reliance on state court procedures to override the clear and unambiguous language of the FDCPA is inapposite.  Moreover, while California Rule of Court 3.1385(c) vacated all hearings, the settlement agreement also included language that in the event of dismissal the Court would retain jurisdiction to enforce the agreement. Although hearings are vacated after a notice of settlement is filed, Rule 3.1385(b) requires parties to file their dismissal within “45 days after the date of settlement of the case.” Cal. Rules of Court, rule 3.1385(b). Ostensibly, this is because a litany of complications can arise between a good faith settlement and the final disposition of a case. Courts are often required to intervene after settlement agreement in order to interpret disputed terms of the settlement agreement. Those proceedings undoubtedly require the participation of the attorneys who drafted the settlement agreement. Therefore, Defendant’s effort to convince the Court that Rule 3.1385 eliminates the need for continued attorney representation when the settlement agreement explicitly contemplates the need for further proceedings is unpersuasive.