De Dios v. International Realty & Investments

Citations: 641 F.3d 1071; 79 Fed. R. Serv. 3d 459; 2011 U.S. App. LEXIS 7421; 2011 WL 1346956Docket: 08-56288

Court: Court of Appeals for the Ninth Circuit; April 11, 2011; Federal Appellate Court

Original Court Document: View Document

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The Ninth Circuit Court of Appeals case involves Maribel Juan De Dios as the plaintiff-appellant against International Realty Investments, Inc. as the defendant-appellee. The appeal arises from a decision by the United States District Court for the Central District of California regarding the Fair Debt Collection Practices Act (FDCPA), which seeks to eliminate abusive debt collection practices. A key issue is whether International Realty qualifies as a "debt collector" under the Act, particularly given the exclusion for those collecting debts that were not in default when acquired.

The background reveals that De Dios rented an apartment in Los Angeles and faced increased rent from a new landlord, which she contested. During this dispute, the property was placed in receivership, and International Realty managed the property and collected rents. After the receivership ended, a management agreement was signed between International Realty and the property's owner, Norton Community Apartments, L.P.

De Dios, along with other tenants, sued Norton regarding the rent increase. A Stipulated Forbearance was agreed upon, allowing tenants to pay the original rent while the case was pending. Following the resolution of the state court case, International Realty sent a Collection Letter to De Dios for overdue rent accrued since August 2006. De Dios subsequently filed a federal lawsuit alleging violations of the FDCPA.

The district court ruled in favor of International Realty, concluding that it was not a debt collector because it had acquired the debt before it was in default and thus fell under the Act's exemption. The Ninth Circuit affirmed this decision, underscoring that the debt was not in default when International Realty took over the collection.

International Realty is not classified as a "debt collector" under the Fair Debt Collection Practices Act (FDCPA). The Act defines a debt collector as any entity whose primary business involves debt collection or who regularly collects debts owed to others. Certain exemptions apply, including those for original creditors and for debts not in default at the time of acquisition. International Realty argues that it is exempt because it obtained the debt before it was due, thus it was not in default.

The timeline shows that International Realty began managing the property in February 2006 and was tasked with collecting rents. Due to a Stipulated Forbearance, the rent increase obligation was suspended until a court ruling in July 2007. The Collection Letter, which stated that rent was due retroactively from August 1, 2006, was sent on July 25, 2007. Since the debt was not payable until after International Realty's involvement and given the terms of the Collection Letter, the debt could not be considered in default. Courts typically determine if a debt is in default by examining the relevant contracts and state law. In this case, the Stipulated Forbearance meant the debt was effectively on hold, and the Collection Letter sought future payments, reinforcing that the debt was not in default at the time International Realty acquired it.

By June 2006, International Realty had the authority to collect rent that was not in default, independent of its role during the receivership. The Seventh Circuit's decision in *Bailey v. Security National Servicing Corporation* established that a forbearance agreement does not constitute default under certain conditions. In that case, although plaintiffs were in default on their mortgage, they were not in default under the forbearance agreement after signing it with HUD. The court distinguished the nature of a lender's communication that merely informed the plaintiffs of payment statuses without demanding payment, thus exempting the lender from being classified as a debt collector.

Similarly, in *Franceschi v. Mautner-Glick Corporation*, a property management agent was not deemed to be collecting a debt in default since it acquired the right to collect rents before they became due under a settlement agreement. This reasoning applies to De Dios's claims, as the Property Management Agreement with International Realty was valid and not expired when the Collection Letter was sent. The receivership order did not restrict International Realty since it was not a party to the lawsuit, and the contract transitioned to non-exclusive status after July 2007.

Additionally, De Dios's arguments regarding rent calculations being erroneous lacked support. As a result, International Realty is classified as exempt from being a "debt collector" under § 1692a(6)(F)(iii) because it obtained the right to collect rent before it was contractually overdue.

Furthermore, the district court's rulings imposing sanctions against De Dios's counsel for filing multiple identical actions and awarding attorneys' fees to the defendant for opposing De Dios’s disqualification motion were reviewed for abuse of discretion and affirmed.

The district court sanctioned De Dios’s counsel $500 for employing a "vexatious litigation strategy" by filing nine identical actions instead of a single consolidated action for alleged violations of the Act, which it found to unnecessarily increase litigation costs and burden the court. Counsel’s failure to file a notice of related case violated local rules, and her justification for multiple filings, based on clients' differing settlement positions, was deemed unpersuasive. The court emphasized that separate lawsuits do not resolve ethical issues associated with collective representation and expressed concern that some clients sought to punish International Realty rather than genuinely resolve claims. Although sanctions under 28 U.S.C. § 1927 do not apply to initial pleadings, the court had sufficient grounds to impose sanctions under Rule 11 and its inherent authority to prevent abusive litigation practices. The court also awarded $12,000 in attorneys’ fees to International Realty’s counsel due to De Dios’s unsuccessful motion to disqualify defense counsel, which lacked merit as there was no actual conflict of interest and the motion was procedurally defective. De Dios’s counsel did not contest the court's findings, which were legally sound, and the after-the-fact justifications for the motion were insufficient. The district court's decision to impose sanctions under 28 U.S.C. § 1927 was affirmed.