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Financial Services Law Insights and Observations

California appellate court upholds ruling on debt collection practices

Courts California Debt Collection Consumer Protection HOA Consumer Finance


Recently, the California Court of Appeal for the First Appellate District upheld a ruling against a defendant and its related entities. Plaintiff had filed a class action lawsuit against the defendants, alleging that they had violated the FDCPA and California’s Unfair Competition Law (UCL) in their debt collection practices related to homeowners’ associate (HOA) assessments.

The case was removed from federal to state court after the parties agreed on the move. Plaintiff was permitted to amend her complaint to include allegations against the law firm representing the debt collector and its associates, asserting they were “alter egos” of the debt collector. The state court agreed to bifurcate the claims and first addressed the UCL claim. The court found in favor of plaintiff, ruling that defendant had violated the FDCPA (a prerequisite to finding liability under the UCL) and that the law firm was jointly and severally liable for restitution and attorney fees for class counsel.

On appeal, defendants contended first that the trial court incorrectly upheld the federal court's decision that a waiver of California Civil Code section 5655(a), which required the application of payments be first applied to assessments owed, was invalid. This waiver was included as part of the payment plan that plaintiff agreed to, but the federal court determined it was void as a matter of public policy. Second, the defendants argued that the court was incorrect that defendants breached the FDCPA by issuing pre-lien notices and letters before issuing a notice of default. Finally, the defendants challenged the trial court's decision to approve plaintiff’s request to split the trial and prioritize a non-jury trial on her claim under the UCL.

In denying defendants’ claims, the appellate court agreed that the section 5655(a) waiver was invalid because it contradicted public policy intended to protect homeowners. Additionally, the court doubted whether the collection agency’s pre-lien letter could reasonably be characterized as threatening foreclosure and agreed with the trial court that “the least sophisticated debtor would reasonably understand this language in [defendant’s] pre-[notice of default] letter as threatening foreclosure in violation of section 5720.” Finally, regarding the decision to bifurcate plaintiff’s claims, the court decided that defendant did not sufficiently demonstrate that the trial court had abused its discretion in granting plaintiff’s motion to bifurcate.