MASHIRI v. EPSTEN GRINNELL & HOWELL 845 F. 3D 984 (9th Cir. 2017)
HOMEOWNERS ASSOCIATIONS AND THEIR COUNSEL MUST COMPLY WITH THE FAIR DEBT COLLECTION PRACTICES ACT IN SENDING OUT DEBT COLLECTION LETTERS REQUIRED UNDER THE CALIFORNIA DAVIS-STIRLING ACT THREATENING TO RECORD A LIEN BASED ON DELINQUENT ASSESSMENTS.
Zakia Mashiri (“Mashiri”) was a homeowner and member of a Homeowners Association (“HOA”). As a member, Mashiri incurs annual assessment fees. Mashiri fell delinquent on the HOA assessment dues by failing to pay the 2012 assessment.
Epsten Grinnell & Howell (“Epsten”), a law firm hired on behalf of the HOA, sent borrower Mashiri a debt collection letter demanding payment of the delinquent HOA Assessment fee, and other charges including attorney fees (the “Notice”). The Notice also included a warning that failure to pay the assessment fee would result in the HOA recording a lien against Mashiri’s property. This type of notice is required under the Davis-Stirling Common Interest Development Act (the “Act”) under California law before a lien may be recorded for delinquent HOA assessments. The purpose of the Act is to protect homeowners from being foreclosed on for small sums of delinquent assessments. The pertinent language of the Notice sent to Mashiri stated:
“This letter is to advise you that $598.00 is currently owing on your Association assessment account. Failure to pay your assessment account in full within thirty-five (35) days from the date of this letter will result in a lien being recorded against your property upon authorization of the Board of Directors. All collection costs incurred will be charged to your account.
Unless you notify this office within 30 days of receiving this notice that you dispute the validity of the debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within thirty (30) days of receiving this notice that the debt, or any portion thereof, is disputed, we will obtain verification of the debt or a copy of the judgment against you (if applicable) and a copy of [ ] such verification or judgment will be mailed to you.
You have the right to inspect the association records pursuant to Corporations Code Section 8333. You may submit a written request to meet with the Board to discuss a payment plan for this debt. You shall not be liable to pay the charges, interest and costs of collection if it is determined the assessment was paid on time to the Association. You have the right to dispute the assessment debt by submitting a written request for dispute resolution to the association pursuant to the association’s “meet and confer” program required in Civil Code Section  et seq., and the Board offers to participate in dispute resolution. You have the right to request alternative dispute resolution with a neutral third party pursuant to Civil Code Section  et seq. before the association may initiate foreclosure against your separate interest, except that binding arbitration shall not be available if the association intends to initiate a judicial foreclosure.
IMPORTANT NOTICE: IF YOUR SEPARATE INTEREST IS PLACED IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR ASSESSMENTS, IT MAY BE SOLD WITHOUT COURT ACTION.
This is a communication from a debt collector attempting to collect a debt and any information obtained will be used for that purpose.
Accompanying the Notice were copies of Mashiri’s account statement and the HOA assessment collection policy.
Within 30 days of receipt of the Notice, Mashiri disputed the debt in writing and requested that Epsten validate it. Mashiri also stated that she never received a bill for the 2012 assessment that had been charged to her. In response to Mashiri’s letter, Epsten provided her two weeks later with another copy of her account statement. Two weeks after that, Epsten, on behalf of the HOA, recorded a lien on Mashiri’s property for $928.00, which included additional attorney fees. Three days after the lien was recorded, Mashiri sent the HOA a check for the original amount of the HOA assessment, the sum of $385.00. In a letter that accompanied the check, Mashiri disputed the balance of the debt.
THE COURT PROCEEDINGS:
After Mashiri received a copy of the lien, she filed a Complaint in federal District Court in California. Mashiri alleged violations of the Fair Debt Collection Practices Act (“FDCPA”), the Rosenthal California Fair Debt Collection Practices Act (“Rosenthal Act”), and other violations of California law.
Epsten filed a Motion to Dismiss and the District Court dismissed without leave to amend the FDCPA claim holding that the Notice satisfactorily complied with the FDCPA. Since the balance of the claims under California law were dependent on a violation of the FDCPA claim, the District Court also dismissed those claims.
Mashiri appealed the dismissal of her complaint to the Ninth Circuit Court of Appeals. Mashiri argued that the Notice was defective for two reasons. First, it failed to comply with the FDCPA because it demanded payment sooner than the expiration of the borrower’s thirty-day dispute period. Second, Mashiri argued that when the Notice threatened to record a lien within thirty-five days, irrespective of whether she disputed the debt, then it failed to effectively explain her right to dispute the debt.
Epsten raised two arguments in opposition. First, it argued that it was not attempting to collect a debt under the FDCPA because it was just seeking to enforce a lien and not seeking collection of money. Second, Epsten argued that that even if the FDCPA applied to it for purposes of the Notice that it complied with the FDCPA.
The Appellate Court first determined whether Epsten, in sending the Notice, was subject to the full FDCPA. The Appellate Court concluded that the contents of the Notice clearly sought payment of a debt, the sum of $598.00. Epsten tried to distinguish the Notice by arguing that it was merely engaged in the enforcement of a security interest, obtaining a lien. The Appellate Court rejected that argument, stating that there was no existing lien interest at the time the Notice was sent. The lien had yet to be recorded, as opposed to a foreclosure trustee communicating about a debt subsequent to the recording of a Notice of Default (“NOD”). The Appellate Court distinguished this case from the case of Ho v. ReconTrust Co., NA, 840 F.3d 618 (9th Cir. 2016) which held that a foreclosure trustee’s communications, limited solely to pursuing non-judicial foreclosure, did not make it a debt collector under the FDCPA. In this action, Epsten was seeking payment of a debt, regardless of whether it also sought to record a lien if not paid in full.
The Appellate Court then determined that the Notice did not comply with the FDCPA for two reasons. This type of Notice is often referred to as a “Validation Notice”. It gives the borrower a 30 day opportunity from receipt to dispute the debt and obtain verification for the basis for the debt. The Appellate Court first concluded that the Notice had information that could be confusing to a debtor under the “least sophisticated debtor” standard used in these instances. If the letter or notice could confuse or deceive a hypothetical “least sophisticated debtor”, then the letter or notice is defective under the FDCPA.
Here, the Notice demanded payment within 35 days of the “date” of the Notice, which was inconsistent with the FDCPA requiring 30 days from “receipt” to pay or dispute the debt. If a letter or notice gives only 30 days from the date the letter was sent, then it effectively shortens the time to pay or dispute the debt to a period of less than 30 days and that is improper. The mailing may be delayed or the debtor may have to mail the payment to the creditor earlier than the 30 days in order to make sure it is received in time. This discrepancy may cause a borrower, under the “least sophisticated” standard to be confused and forgo the borrower’s rights. As a result, the Notice violated the FDCPA.
The Appellate Court’s second problem with the Notice was the fact that a borrower may not understand that upon notifying Epsten of a dispute, all debt collection activities would cease until the debt collector obtains verification of the debt. Because the language stated that a lien “will” be recorded if Mashiri “failed to pay” the full amount, a “least sophisticated” borrower might incorrectly assume that lien will be recorded, even if she disputed the debt and Epsten did not send a verification of debt to her. The Appellate Court concluded the language in the Notice provided an inaccurate message to Mashiri, overshadowing her right to dispute the debt under the FDCPA. The 30 day waiting period was also consistent with the Davis Stirling Act.
In conclusion, the Appellate Court reversed the dismissal of all claims for relief and reinstated the complaint to allow it to proceed forward in the District Court. The Appellate Court held that Mashiri had stated in the complaint a plausible claim for relief under the FDCPA because the Notice contained language that overshadowed and conflicted with Mashiri’s FDCPA debt validation rights when reviewed under the “least sophisticated debtor” standard.
This case was dealing with the initial pleadings in the case on a motion to dismiss. The Court was required to assume that all allegations set forth in the Complaint were true. However, the Court’s reasoning would make it difficult for the party sending the notice or letter to later overcome a summary judgment motion brought by the borrower.
Attorneys that handle collection for Homeowners associations need to make sure their default letters comply with the language required in the FDCPA, are not ambiguous, and also provide sufficient time to respond under the FDCPA before taking any act to record a lien due to delinquent assessments.