Zephyr v. Saxon Mortgage Services, Inc.

Citations: 873 F. Supp. 2d 1223; 2012 U.S. Dist. LEXIS 78091; 2012 WL 2046814Docket: No. 2:11-cv-02224-MCE-CKD

Court: District Court, E.D. California; June 5, 2012; Federal District Court

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Defendant Saxon Mortgage Services, Inc. filed a Motion to Dismiss Jo Ann Zephyr's First Amended Class Action Complaint, which is fully briefed. The Court granted several Requests for Judicial Notice from both parties, including Saxon's request concerning the legislative history of California Penal Code Section 632, which Zephyr opposes, asserting the statute's clarity makes such history unnecessary. Additionally, Zephyr's unopposed request for judicial notice of a California mortgage license for Saxon was accepted, as was Saxon's supplemental request focusing on Section 632.7's legislative history. The Court denied Saxon's Motion to Dismiss, which argued that applying Penal Code 632 and 632.7 to its conduct violated the dormant Commerce Clause. Zephyr, a California resident, asserts that Saxon made and recorded unsolicited mortgage-related calls to California residents without their consent, alleging violations of Penal Code 632 and 632.7. She seeks statutory damages of $5,000 per violation, injunctive relief, attorneys' fees, and other appropriate remedies, claiming to meet class action requirements under Rule 23 of the Federal Rules of Civil Procedure. Saxon does not dispute making the calls or their potential recording violations but challenges the legal application based on constitutional grounds.

The Court has accepted the requests for judicial notice from Saxon and Zephyr, affirming the authenticity and relevance of attached public documents concerning Section 632 of the Penal Code. Despite Zephyr's objections to some legislative history, they do not dispute the documents' public availability or authenticity. Under Rule 12(b)(6), the Court emphasizes that all material facts alleged must be taken as true and viewed favorably towards the nonmoving party. A complaint must contain a clear, concise statement of the claim, providing fair notice of the basis for relief, without needing detailed factual allegations. However, mere labels or formulaic recitations of elements are insufficient; a factual basis must exist to demonstrate a plausible right to relief. Courts are not obliged to accept legal conclusions disguised as factual allegations. When considering a motion to dismiss, courts must also determine whether to grant leave to amend, which should be freely given unless there are concerns of delay, bad faith, undue prejudice, or futility. Dismissal without leave to amend is appropriate only if no amendment could salvage the complaint. Saxon argues that California Penal Code sections 632 and 632.7, which mandate unanimous consent for recording calls, unconstitutionally conflict with Texas and federal laws allowing one-party consent.

Saxon argues that Texas Penal Code 16.02 allows recording with the consent of only one party, and that California's Penal Code sections 632 and 632.7 impose an unconstitutional burden on interstate commerce, violating the dormant Commerce Clause. Saxon contends that its practice of recording calls without both parties' consent is lawful in Texas, and that requiring unanimous consent interferes with Texas law. Additionally, Saxon claims that telecommunications should be shielded from conflicting state regulations. 

Saxon presents two main arguments: 
1. The application of California laws 632 and 632.7 to calls made from Texas constitutes a per se violation of the Commerce Clause, as it adversely affects out-of-state businesses.
2. The burden imposed on interstate commerce by these laws outweighs any benefits to California residents, as out-of-state businesses would incur costs and adjustments to comply with California’s requirements.

Saxon also references the legislative history of California's Privacy Act, arguing it was not intended to penalize out-of-state businesses for recording calls with California customers. 

In response, Zephyr asserts that similar arguments have been dismissed by the California Supreme Court in Kearney v. Salomon Smith Barney and that Saxon, holding a California servicing license, must comply with California law, including the consent requirements. Saxon counters that Kearney is not binding, claiming it was wrongly decided, and argues that the legislative history of 632 supports its stance. Saxon also maintains that its licensed status as a mortgage servicer is irrelevant to the constitutionality of California's wiretapping laws. 

The court will assess whether the dormant Commerce Clause invalidates the application of sections 632 and 632.7 regarding Saxon's recorded calls to California residents, with consideration of the Kearney case as a significant precedent.

Plaintiffs alleged SSB's Atlanta branch recorded phone conversations without client consent, violating California's all-consent rule under § 632. Georgia has a one-party consent law. Plaintiffs sought an injunction against future recordings and damages for past ones. The trial court upheld SSB's demurrer, ruling that one-party consent sufficed under federal and Georgia law, and applying California's all-party consent would breach the Commerce Clause. The Court of Appeal affirmed this decision, emphasizing Georgia's stronger interest in its consent law. The California Supreme Court then reviewed the choice-of-law issue, rejecting SSB's argument that California law exceeded due process limits. It asserted California's legitimate interest in protecting the privacy of its residents' calls made within the state, allowing for legislative jurisdiction. Furthermore, the Court confirmed that federal law does not preempt California's more stringent privacy laws and that applying § 632 does not violate the dormant Commerce Clause. SSB's reliance on Healy was deemed inapplicable, as the calls were made from Georgia but answered in California, affirming California's significant interest in protecting resident privacy.

Section 632 of the California Penal Code does not pertain to recorded conversations involving clients or consumers outside of California. The California Supreme Court indicated that while SSB could later argue compliance with the statute is impractical, this argument would not succeed at the demurrer stage. The statute was enacted in response to threats against the confidentiality of private communications due to technological advancements enabling eavesdropping. It establishes a private right of action for individuals harmed under the statute to seek damages and injunctive relief. 

The court affirmed that California law applies in this case, but while the Kearney decision is not definitive regarding the constitutionality of Sections 632 and 632.7 under the dormant Commerce Clause, its analysis of these statutes is influential. The constitutionality of these sections is evaluated under the dormant Commerce Clause, which allows for regulations that serve a legitimate local interest with only incidental effects on interstate commerce. Regulations that directly burden interstate commerce face strict scrutiny, while those with incidental burdens undergo a balancing test to determine if the burdens outweigh the benefits. 

California Penal Code Sections 632 and 632.7 do not regulate conduct solely occurring in other states, as the calls involve California residents. Additionally, the intent of California's Privacy Act is to protect residents from unauthorized recordings, irrespective of whether the callers are in-state or out-of-state.

No differential treatment exists between in-state and out-of-state callers under Sections 632 and 632.7, which apply uniformly to recorded calls. These sections' effects on interstate commerce are deemed incidental, thus not subject to strict scrutiny, as established in *Goldstene*. Saxon claims that the burden on out-of-state businesses recording calls with California residents outweighs the privacy benefits for California residents; however, this assertion lacks supporting evidence. Saxon has not demonstrated any specific burdens resulting from compliance with California's all-consent recording laws, nor provided evidence regarding the costs associated with such compliance. 

Saxon's argument regarding legislative history is also ineffective, as it contradicts the clear language of the statutes and the California Supreme Court's ruling in *Kearney*, which affirmed that Section 632 applies to out-of-state businesses recording calls with California customers without consent. This ruling clarifies that the statutes encompass the types of calls in question. Therefore, the application of Sections 632 and 632.7 to Saxon's Texas-to-California calls does not violate the dormant Commerce Clause. The burden imposed on interstate commerce appears minor, and Saxon has not provided evidence to suggest that this burden outweighs the benefits to California residents. Consequently, the Court grants the Requests for Judicial Notice and denies Defendants' Motion to Dismiss. Section 632(a) outlines penalties for recording confidential communications without consent, including fines and imprisonment.

Confidential communications, as defined in Section 632(c), are those conducted in circumstances indicating that the parties wish to keep the communication private, excluding public settings or situations where interception is reasonably expected. Section 632.7 establishes penalties for intercepting or recording communications between specified phone types without consent from all parties, with fines up to $2,500 or imprisonment for up to one year, or both. The Commerce Clause of the Constitution grants Congress the authority to regulate interstate commerce, effectively limiting state regulatory powers in this area, a principle known as the dormant Commerce Clause. Texas Penal Code 16.02 prohibits unlawful interception of communications but includes a one-party consent exception, allowing interception if one party consents. Saxon argues that due to the mobility of phone numbers, it cannot ascertain whether a call is subject to one-party or two-party consent laws, claiming California's laws impose an undue burden. Zephyr counters that Saxon, as a licensed mortgage servicer in California, is obligated to understand and comply with California laws. The court highlights that businesses operating across state lines must be aware of and adhere to the laws of the states in which they operate, affirming that state laws do not exceed constitutional authority when applied to such businesses.