By Danny Newman
Loan Servicer Accessing Credit Reports Does Not Violate FCRA Despite Bankruptcy Discharge
Marino v. Ocwen Loan Servicing LLC, 978 F.3d 669 (2020)
In another loss for plaintiffs and attorneys seeking relief under the Fair Credit Reporting Act (FCRA)—and the attorney’s fees and threat of punitive damages that come with it—the Ninth Circuit held that a loan servicer’s periodic access to a homeowner’s credit reports did not violate the FCRA in Marino v. Ocwen Loan Servicing LLC, 978 F.3d 669 (2020).
Ocwen is a servicer of mortgage loans. Plaintiffs Christopher Marino and Josh and Kristin Hardin owned homes subject to mortgages serviced by Ocwen. Each plaintiff received a bankruptcy discharge of their personal liability for the mortgage debt, but the liens on their homes survived their bankruptcies, and the plaintiffs still held title to the properties. Following the discharges, Ocwen accessed the plaintiffs’ credit reports.
Plaintiffs therefore alleged that, after the discharges, and after plaintiffs had vacated the homes, Ocwen could not have had permissible reasons to obtain their credit reports. By obtaining the reports without permissible reasons, Ocwen willfully violated the FCRA, leading to statutory and punitive damages.1 To show that a defendant recklessly disregarded the FCRA’s requirements, plaintiffs must show that a defendant “ran a risk of violating the law substantially greater than the risk associated with a reading [of the FCRA] that was merely careless.” Id. at 672.
Ocwen argued, among other things, that 15 U.S.C. § 1681b(a)(3)(A) in the FCRA permitted its conduct because creditors may obtain consumer credit reports when they intend “to use the information in connection with a credit transaction involving the consumer on whom the report is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer.” Id. Thus, Ocwen argued that even after discharge and the plaintiffs vacating the properties, it could access the credit reports to determine whether the plaintiffs were eligible for alternatives to foreclosure or other loss mitigation opportunities without violating the FCRA.
The district court skipped the threshold question of whether Ocwen’s conduct amounted to a violation of the FCRA. Instead, it found any violation by Ocwen could not have been willful as a matter of law. Therefore, plaintiffs could not recover statutory or punitive damages.
On appeal, the Ninth Circuit directed that district courts should not skip the threshold question of whether the conduct violated the FCRA before reaching the willfulness question, because doing so unnecessarily restricts understanding of what actions actually violate the law in an area so rife with litigation.2 And when it reached the threshold question, Judge Lynn Adelman of the Eastern District of Wisconsin, sitting by designation, issued a shot across the bow. Judge Adelman wrote that “[u]nder either the negligence or willfulness standard, when the applicable language of the FCRA is ‘less than pellucid,’ a defendant will nearly always avoid liability so long as an appellate court has not already interpreted that language.” Id. At 673-74 (citing Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 70 (2007)). The court continued that “in nearly every case involving unclear statutory language, [a] court may dispose of the appeal by concluding that the defendant did not negligently or willfully violate the statute.” Id. at 674.
Turning to the question of whether Ocwen violated the statute, the court held that the plaintiffs’ claims failed because, even after discharge of the debt and vacating the properties, “Ocwen was not prohibited from inquiring whether the plaintiffs wished to explore alternatives to foreclosure, such as entering into a new loan on different terms or a payment plan that might allow the plaintiffs to keep their homes.” Id. at 675. Citing Section 524(j)(3) of the Bankruptcy Code, the court reasoned that the discharge injunction specifically does not include a secured creditor’s efforts to seek payments associated with a valid security interest in lieu of foreclosing the lien. Ocwen had submitted a declaration stating that one of the reasons it retrieved the plaintiffs’ reports was to determine whether they were eligible for an alternative to foreclosure, and the plaintiffs could not dispute that such an exercise was valid under FCRA § 1681b(a)(3) because the liens were still in force. Thus, Ocwen did not violate the statute at all, let alone willfully, and the court could end its analysis. That the plaintiffs never expressed interest in an alternative arrangement after discharge or vacated their homes and surrendered the properties was of no moment. As the court noted, the parties were involved in an ongoing “credit transaction,” so Ocwen was within its rights to access the reports and consider its options. Id.
The panel not only shut down this avenue for plaintiffs under FCRA, but its broad proclamations of how district courts should analyze these questions and statement that where the statute is arguably ambiguous, defendants must prevail until an appellate court says otherwise, could have far-reaching effects on FCRA law. Interestingly, the decision was penned by a district judge sitting by designation.Though unscientific, for as long as this writer has paid attention, it seems that district judges sitting by designation on federal appeals courts have the tendency to use the opportunity to correct holes in various debtor-creditor jurisprudence that causes so much work in the district courts. Judge Adelman was plainly writing from experience of having seen one too many FCRA or Fair Debt Collection Practices Act (FDCPA) cases for his liking and saw an opportunity to strike back.
Nevada Statute Providing HOAs Superpriority Lien Does Not Violate Constitution
Wells Fargo Bank, N.A. v. Mahogany Meadows Avenue Trust, 979 F.3d 1209 (2020)
The Ninth Circuit sided with homeowner’s associations (HOAs) to allow them to extinguish otherwise first liens established by lenders’ deeds of trust, although Judge Eric Miller outlined ways that lenders can avoid such a harsh fate.
Nevada law grants HOAs a superpriority lien on properties within the association for certain unpaid assessments. See Nev. Rev. Stat. § 116.3116. By foreclosing on a property, an HOA can extinguish other liens, including a first deed of trust held by a mortgage lender.3 n 2008, Luis Carrasco and Janet Kongnalinh purchased a house in Las Vegas that was within an HOA and subject to its restrictive covenants, including an obligation to pay dues and other assessments to the HOA. They financed the purchase with a loan from Wells Fargo, N.A., and to secure the loan, they recorded a deed of trust in favor of Wells Fargo. Within a few years, the borrowers failed to pay their HOA dues, and the HOA recorded a lien for missed payments. The HOA ultimately foreclosed on the property to satisfy its lien, and in 2013, Mahogany Meadows Avenue Trust purchased the property—worth approximately $200,000—at a public auction for $5,332, purportedly extinguishing Wells Fargo’s lien/deed of trust.
Wells Fargo brought a quiet-title action against Mahogany Meadows, the HOA, and the HOA’s agent seeking a declaration that the foreclosure sale was invalid and that Wells Fargo’s deed of trust “continues as a valid encumbrance against the property.” Wells Fargo argued that NRS § 116.3116 constitutes an unconstitutional taking and violates the Fourteenth Amendment’s Due Process Clause.
Previously, the Nevada Supreme Court had held that the statute did not violate the Takings Clause, and the district court agreed. After first affirming the United States Supreme Court’s longstanding principle that liens are property interests protected by the Takings Clause, the panel explained that there was no “state action” to constitute a taking because both the statute creating the HOA’s right to a Superpriority lien and the HOA’s recording of its restrictive covenants occurred before Wells Fargo loaned the money to the borrowers to buy the subject property. Id. at 1214 (citing Bourne Valley Court Trust v. Wells Fargo Bank, 832 F.3d 1154, 1160 (9th Cir. 2016). The panel reasoned that when “background principles” of state law already serve to deprive the property owner of the interest it claims to have been taken, it cannot assert a claim under the Takings Clause. Id. (citing Esplande Props., LLC v. Seattle, 307 F.3d 978, 985 (9th Cir. 2002), quoting Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1029 (1992) “The State cannot take what the owner never had.” Id. (internal citations omitted). In reaching its conclusion, the court partially relied on United States v. Security Indus. Bank, 459 U.S. 70, 76 (1982), which held that the Bankruptcy Code’s provisions permitting debtors to avoid certain liens on their property was not a taking, at least when the Code is applied prospectively.
Somewhat amusingly, the court was not afraid to assign blame to Wells Fargo for its own plight by pointing out at least three ways Wells Fargo could have avoided its predicament: paying off the lien itself before the HOA foreclosed, requiring the borrower to pay into an escrow sufficient to cover HOA dues each month, or simply not lending where its lien would be subject to an HOA superpriority lien. In so doing, the court appeared aware that, after rendering its opinion, it is unlikely any institutional lender would ever be victimized again by Nevada’s HOA scheme.
Nevertheless, the court continued to reject Wells Fargo’s argument under the Due Process Clause as well. The court recognized the Nevada legislature’s enactment of an “opt-in” notice scheme for foreclosure sales—where only junior lienholders who advise senior lienholders of their desire for notice ahead of time—as state action. Mahogany Meadows, 979 F.3d 1209, 1217. The Ninth Circuit had previously held that this aspect of the statute violated due process. However, in 2018, the Nevada Supreme Court had interpreted the statute to require notice to junior lienholders anyway, and because the HOA had actually provided Wells Fargo the notice that was substantively required by the statute, the Due Process Clause was not violated.
Although Mahogany Meadows’ holdings do not directly apply to Oregon, they reinforce the Ninth Circuit’s desire for certainty on these issues and that it will not bend the rules to avoid harsh results, especially for sophisticated market participants. The case also serves as a reminder for attorneys and their clients to do what they can on the front end to avoid litigation and creatively address challenges posed by statutory regimes, rather than hope for rescue from courts after the fact.
California Property Acquired after 1975 in Marriage Presumptively Community Property Available to Creditors
In re Brace, 979 F.3d 1228 (2020)
The Ninth Circuit, with the help of the California Supreme Court, has clarified California community property framework and what property is presumptively part of a debtor’s estate.
If a debtor holds property in joint tenancy, only his one-half joint interest becomes part of the bankruptcy estate. See In re Reed, 940 F.2d 1317, 1332 (9th Cir. 1991). The Bankruptcy Code permits a Chapter 7 trustee to sell the jointly held property and apportion the proceeds between the bankruptcy estate and the non-debtor joint owners. See 11 U.S.C. § 363(h) & (j). However, if the relevant property is community property, the property becomes part of the bankruptcy estate in its entirety. See 11 U.S.C. § 541(a)(2). With community property, the trustee is permitted to sell the property and distribute all proceeds to creditors instead of apportioning some of the proceeds to the non-debtor spouse. See id.
Clifford Brace Jr. married Anh Brace in 1972 in California. “Shortly after [the Braces] were married,” they acquired a piece of real property located in San Bernardino. In re Brace, 979 F.3d 1228, 1231. In 1977, the couple acquired real property in Redlands. In 2016, Mr. Brace filed a Chapter 7 bankruptcy petition; Mrs. Brace did not. Prior to the petition date, the Braces moved the Redlands property and the San Bernardino property into a trust. The bankruptcy trustee filed adversary proceedings to avoid the transfers to the trust as fraudulent and alleging both properties belonged to the estate because they were community property.
The Bankruptcy Court sided with the trustee and held both properties were community property under California law—specifically California Family Code Section 760, which applies a presumption in favor of community property for property purchased during marriage—and subject to clawback for sale and distribution to creditors without reserving. The BAP affirmed.
On November 8, 2018, the Ninth Circuit certified the question of whether the presumption in favor of community property applies where: “(1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate.” Id. See footnote 1 at 1231. After an 18-month delay, the Supreme Court of California determined that the answer to the certified question hinges on when the property at issue was acquired. Specifically, “[f]or joint tenancy property acquired during marriage before 1975, each spouse’s interest is presumptively separate in character.” In re Brace, 9 Cal.5th 903, 266 Cal.Rptr.3d298, 470 P.3d 15, 36 (2020) (citing Cal. Fam. Code § 803). Conversely, “[f]or joint tenancy property acquired with community funds on or after January 1, 1975, the property is presumptively community in character.” Id. at 938. (citing Cal. Fam. Code § 760).
Therefore, the Ninth Circuit panel limited the precedential value of In re Summers, 332 F.3d 1240, 1243-44 (9th Cir. 2003), which held that “[w]hen property is conveyed to a husband and wife as joint tenants, the form of the conveyance is such as to destroy the statutory presumption that the property is community even though the consideration for such conveyance consists of community funds or assets.” In re Brace, 979 F.3d 1228, 1232. (Quoting In re Summers, alteration in original.) The California Supreme Court’s answer to the certified question had restricted Summers’s holding only to properties acquired before 1975.
Applying that reasoning, Judge David A. Ezra—a senior district judge from Hawai’i who now sits in San Antonio on the Western District of Texas but continues to wear Hawaiian shirts under his robes—affirmed the bankruptcy court’s determination as to the Redlands property. However, the court vacated and remanded as to the San Bernardino property because the record was not clear on whether it was acquired before or after January 1, 1975. In doing so, the court further held that the bankruptcy court had not committed clear error when it discounted as not credible the Braces’ testimony that they had orally transmuted both properties into joint tenancies sometime in the 1970s or ’80s.
Debtors Can Bring FDCPA Claims for Improper Collection Efforts by HOA after Discharge When Debt Was Satisfied Pre-Discharge
Manikan v. Peters & Freedman, LLP, 981 F.3d 712 (9th Cir. 2020)
On the other side of the coin, in Manikan v. Peters & Freedman, LLP, 981 F.3d 712 (9th Cir. 2020), the Ninth Circuit held that provisions of the Bankruptcy Code governing remedies for violating a discharge order do not preclude a debtor from bringing a FDCPA claim arising out of a collector’s post-discharge attempt to collect debt which the debtor alleged was fully satisfied through a Chapter 13 plan before discharge was entered.
Debtor Vincent Manikan owns a home in San Diego, Calif., covered by an HOA to which he pays monthly HOA dues. In 2009, Manikan stopped paying HOA dues and the law firm Peters & Freedman, LLP, started collection efforts on the HOA’s behalf. After the firm eventually instituted foreclosure proceedings, Manikan filed a Chapter 13 petition, listing the HOA as a secured creditor for $3,046.04. The HOA filed for a secured claim in the amount of $2,978.24. Manikan's confirmation plan obligated him to pay the HOA dues directly.
In March 2014, a different debt collection company, NN Jaesche, Inc., received certain of Manikan’s HOA dues and confirmed in writing to the bankruptcy trustee that the HOA debt was “paid in full.” The trustee subsequently amended the schedules and made a separate filing showing the debt to the HOA was satisfied and paid in full. The bankruptcy court eventually entered an order for Manikan’s discharge in late 2015.
Despite all this, the HOA re-hired Peters & Freedman to attempt to collect the amount of the debt that had not been paid. In Manikan’s complaint, he alleged Peters & Freedman hired a process server who banged on windows and scared his elderly mother, prompting a call to the police. Manikan alleged these actions—and any other attempts by Peters & Freedman to collect the HOA debt—violated the FDCPA. The law firm moved for summary judgment arguing that the Ninth Circuit’s decision in Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002), precluded Manikan’s claims because the debt was discharged and, therefore, his remedies were limited by the Bankruptcy Code’s provisions for violations of a discharge order. The district court sided with Peters & Freedman, and Manikan appealed.
Writing for the panel, Judge Danielle Hunsaker, Oregon’s own and in one of her first—if not the first—opinions on bankruptcy law, first held that the HOA debt had in fact been discharged under Section 1328 of the Bankruptcy Code because payment was provided for in the confirmed plan, despite Manikan’s argument that he had paid the debt in full before the discharge order was entered.
Importantly, though, the panel held that discharge did not preclude Manikan’s claims under the FDCPA. Indeed, Judge Hunsaker limited the application of Walls, holding that Manikan’s FDCPA claims could lie against Peters & Freedman for post-discharge collection attempts. The court reasoned that Manikan’s FDCPA claims were not premised on violation of the discharge order. Manikan, 981 F.3d 712, 717. Instead, his claims arose independently under the FDCPA because the debt had been “paid in full” prior to discharge. Id. at 714. Manikan had not—crucially—relied on the discharge order to state his claims. The court further reasoned that “just because he made his arrearage payments through operation of a bankruptcy plan does not render his FDCPA claims inextricably intertwined with bankruptcy issue.” Id. at 717. Therefore, Manikan had successfully pled around Walls, and there was no basis for summary judgment.
Indeed, the court signaled strongly that Manikan’s claims should prevail and appeared dismayed at Peters & Freedman and the HOA’s conduct. Rightly so—the creditor’s and collector’s actions seem reprehensible, leading the Ninth Circuit to a common-sense limit to Walls and leaving open an avenue for aggrieved debtors to defend themselves from overzealous former creditors.
Maintaining Residence in a Property after Petition Date Not Required for Bankruptcy Homestead Exemption
In re Anderson, 988 F.3d 1210 (9th Cir. 2021)
Following a trend of federal appeals courts broadly reading homestead exemptions, see, e.g., In re Maresca, Case No. 19-3331 (2d. Cir. Dec. 14, 2020) (permitting a debtor to use homestead exemption under Section 522 on non-residence), the Ninth Circuit permitted a Chapter 7 debtor in Washington to claim a homestead exemption on a piece of real property that she vacated shortly after filing her bankruptcy petition under the “snapshot rule.” See Wolfe v. Jacobson (In re Jacobson), 676 F.3d 1193, 1199 (9th Cir. 2012) (explaining that a debtor’s right to claim an exemption is locked in as of the petition date). Under § 522(b)(2), each state may “opt out” of the federal exemption scheme and limit its residents to the state-created exemptions. Neither Washington nor Oregon has “opted out.” Therefore, debtors in both states may choose either the exemptions afforded under state law or the federal exemptions under § 522(d). Under § 522(b)(3) (A) and the snapshot rule, exemptions are to be determined in accordance with the state law applicable on the date of filing.
On her bankruptcy schedules, debtor Jesslyn Renee Anderson listed her 15 percent interest in real property in Ferndale, Washington (the “Property”), which she co-owns with her parents. She valued her interest at $90,000 and listed it on Schedule C as a homestead exemption under RCW §§ 6.13.010, 6.13.020, and 6.13.030, which provide in relevant part: “homestead consists of the dwelling house or the mobile home in which the owner resides or intends to reside, with appurtenant buildings, and the land on which the same are situated. … Property included in the homestead must be actually intended or used as the principal home for the owner.” Id. at 1213. RCW § 6.13.010(1). The debtor testified that she got married and moved out of the Property after filing her petition.
The bankruptcy trustee objected to Debtor’s homestead exemption arguing the value was too low and that, because she no longer lived at the Property, the exemption could not apply. After an evidentiary hearing, the bankruptcy court overruled the trustee’s objection. The trustee appealed without disputing that, on the petition date, the debtor lived at the Property. Instead, the trustee argued that, in addition to showing she lived at the Property on the petition date, the debtor was required to demonstrate an intent to continue to reside there. The trustee further argued that she did not and could not have such intent, since she had married and moved in with her husband elsewhere.
The Ninth Circuit disagreed with the trustee as well. The court reasoned that “the plain language of Washington’s homestead statute reflects that Debtor was entitled to an automatic homestead exemption on the petition date, so long as she was occupying the Property as her principal residence, regardless of her future plans.” Id. At 1214. Citing RCW § 6.13.010(1), the court held: “Property included in the homestead must be actually intended or used as the principal home for the owner.”). Id. The court further stated that the debtor’s intent only matters if, on the petition date, the debtor did not reside at the property. Id. Oregon law would similarly permit a debtor to claim as a homestead a property the debtor vacates after the petition date—and might even permit the exemption if the debtor was temporarily removed from the property at the time of filing. See ORS 18.395(1).
The decision is textually sound and furthers the state legislature’s intent to broadly protect homesteads in bankruptcy and insolvency proceedings. It may be a little harsh for creditors to allow debtors to claim homestead exemptions for homes they do not live in, making it easier for debtors to protect property by only temporarily living in it prior to filing. However, the Washington and Oregon statutes appear to permit that on their face and, absent a legislative change, the Ninth Circuit has approved.
In rem Jurisdiction in Civil Forfeiture Action Not Subject to Minimum Contacts Analysis
United States v. Obaid, 971 F.3d 1095 (9th Cir. 2020)
The Ninth Circuit’s most notable decision of the last six months heavily citing bankruptcy law was not a traditional debtor-creditor case, but it might interest section members all the same. As fallout from the worldwide 1MDB corruption scandal—a company that laundered billions for some of the world’s elite and most corrupt regimes—the U.S. Department of Justice (DOJ) sought civil forfeiture of various assets of Saudi national Tarek Obaid, a banker with connections to the Saudi Royal Family who had participated in 1MDB and used funds in American bank accounts to purchase a variety of assets. The DOJ brought its forfeiture case in the Central District of California where some of the assets were purportedly located, including 2 million shares of Series D preferred stock in a company called Palantir that has its principal place of business in the Los Angeles area.
Civil forfeiture actions, like bankruptcy cases, are in rem actions as opposed to in personam actions. Thus, federal courts have jurisdiction if they have sufficient contact with the property, as opposed to the person who purportedly owns the property. Obaid moved to dismiss the action because he lacked sufficient minimum contacts in the Central District of California (and in the alternative, forum nonconveniens).
The Ninth Circuit split panel, with Judge Rawlinson writing for the majority, found itself deciding which of two Supreme Court cases—Shaffer v. Heitner, 433 U.S. 186 (1977) or Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440 (2004)—provided the correct framework for how to analyze jurisdiction in an in rem case. The Shaffer court, in a quasi in rem proceeding, had applied the traditional International Shoe minimum contacts analysis to the person who owned the underlying property for in rem cases and dismissed the action.
However, the court found Hood more relevant to the case at bar. Hood arose out of a Chapter 7 bankruptcy adversary action where a debtor sought discharge of her student loans guaranteed by the Tennessee Assistance Corporation (TSAC). The Hood Court determined that a federal bankruptcy court had jurisdiction to rule on dischargeability despite TSAC’s assertion of sovereign immunity because the res—the bankruptcy estate—was in Tennessee, and that was enough to create jurisdiction over the issues related to the res without the bankruptcy court actually exercising personal jurisdiction over TSAC.
The Obaid court reasoned that in rem bankruptcy jurisdiction “essentially creates a fiction that the property—regardless of actual location—is legally located within the jurisdictional boundaries of the district in which the court sits.” Obaid, 971 F.3d 1095, 1102 (quoting Beck v. Fort James Corp. (In re Crown Vantage, Inc.), 421 F.3d 963, 971 (9th Cir. 2005) (citation omitted) (emphasis in original)). The civil forfeiture statute created a similar legal fiction to the bankruptcy code where such an action “may be brought in the district court for the district in which any of the acts or omissions giving rise to the forfeiture occurred,” even where certain property may be located outside the district—or even in a foreign country. Id. The Obaid court further reasoned that, just as a discharge injunction and order can prohibit creditors from attempting to collect or recover a debt even where the court lacks personal jurisdiction over those creditors because the court has proper in rem jurisdiction, once a court has jurisdiction over the res in the forfeiture action, it need not have personal jurisdiction over the owner of the property to make decisions about the forfeiture of that property. Id. 1106
The vigorous dissent would have limited Hood’s applicability only to bankruptcy cases where the court at least had personal jurisdiction over the debtor. However, the majority observed that there was no basis in Hood or bankruptcy jurisprudence for such a limited application. Frankly, this interpretation misunderstands bankruptcy jurisdiction in this writer’s estimation, and somewhat needlessly went out of its way to protect the assets of a blameworthy foreign national wrapped up in one of the most infamous worldwide corruption scandals in recent memory.
In addition to the better comparison to Hood, the majority found further strong evidence supporting its conclusion in that neither Obaid nor the dissent cited a single case where a federal court had dismissed a civil forfeiture action for lack of personal jurisdiction over the property owner under Shaffer in the more than 40 years since it was published. Id. at 1103. Therefore, rather than having discovered some previously undiscovered jurisdictional analysis for civil forfeiture actions lurking in a 40-year-old Supreme Court case, the Obaid court recognized the argument for what it was—a clever attempt by a couple of the world’s most prestigious law firms representing people connected to the Saudi Royal Family to create new law that was too cute by half. Perhaps the Supreme Court will grant certiorari and clarify the rule. However, without a circuit split to get it there, it is likely that the Saudis and others connected to the 1MDB scandal will have to forfeit whatever assets the DOJ can get its hands on.
2 Judge Carlos Bea (interestingly, a former Olympian) concurred in the judgment but would not have ventured to answer the threshold question without the district court first opining on it.
3 Oregon law diverges from Nevada law in material ways on HOA liens, see, e.g., ORS 100.450, but the holding would apply to all manner of fact scenarios potentially possible under Oregon law.