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Court of Appeal:
Statutory Debt-Collection Procedure Can’t Be Waived
Opinion Says Contractual Abandonment of Right Under Federal Fair Debt Collection Practices Act to Have Funds Applied to Overdue HOA Assessments Before Paying Costs and Fees Was Void as Violative of Public Policy
By Kimber Cooley, Staff Writer
Div. One of the First District Court of Appeal has held that a collection agency hired to recover delinquent homeowners’ association fees may not avoid statutory obligations to apply funds first to the overdue assessments before collecting on collection costs and fees by including a waiver of the statute in a payment plan contract with the debtor, finding such a waiver void as violating public policy.
The opinion was filed May 1 and partially certified for publication on Monday.
In an unpublished portion of the opinion, the court held that two West Los Angeles attorneys who are the sole members of the collection agency and are hired as its outside counsel to help in its recovery efforts, are the alter egos of the entity. This is so, the opinion sets forth, because the agency and the law firm shared common personnel, the agreements and marketing materials show that the collection agency was used as a conduit for law firm business, and the attorneys failed to adequately capitalize or insure the collection agency.
The decision comes in a case where a plaintiff challenged the manner in which the agency applied funds under payment plans and threatened foreclosure action for failure to pay a debt under a statutory threshold required for foreclosure action.
Alameda Superior Court Judge Arturo Castro, sitting on assignment, authored the opinion. It affirms the judgment in favor of plaintiffs issued by Contra Costa Superior Court Judge Barry Baskin who found that both the application of funds and the threatening of foreclosure action violate the law.
Presiding Justice Jim Humes and Justice Kathleen M. Banke joined in the opinion.
Collection Action
Appealing the judgment was ALS Lien Services, the Sawtelle-area law firm of Sweldelson Gottlieb, and attorneys Sandra Gottlieb and David Swedelson, who are the sole shareholders, officers and directors of ALS and sole general partners of the firm.
In November 2013, ALS sent to plaintiff Teresa Doskocz a standard pre-lien letter stating that she was delinquent in the payment of assessments for her townhome in Danville and owed the association $1,239.08.
Doskocz accepted a payment plan with ALS, which included a waiver of Civil Code §5655 which provides that payments “first be applied to the assessments owed, and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection, attorney’s fees, later charges, or interest.”
ALS proceeded to apply only a portion of Doskocz’s payment toward unpaid assessments, applying the remainder to ALS’ collection fees and costs. Doskocz was unable to make the final payment and was offered a second payment plan under which she was to pay a total of $2,033.19 for a debt of $1,074.90.
Doskocz instead paid two payments of $537.45 to satisfy the balance in full. In October 2014, ALS sent Doskocz a pre-notice of default letter (“pre-NOD letter”) stating that she owed $830.73 and that ALS “will record a notice of default” if she did not pay the amount.
She filed a class action in the U.S. District Court for the Northern District of California in 2015 alleging that the collection practices violate the Fair Debt Collection Practices Act (“FDCPA”), codified at 15 U.S.C. §1692 et seq., and thus constitute unlawful business practices under the California Unfair Competition Law, found at Business and Professions Code §17200 et seq. The parties stipulated that the federal case be dismissed and refiled in state court.
After a bench trial, Baskin concluded that ALS had violated the FDCPA and that Gottlieb, Sweldenson and their firm were the alter egos of ALS and were held jointly and severally liable for $156,753 in restitution to the class, calculated as fees and costs charged by ALS after homeowner account balances would have been zero had ALS had complied with §5655.
Waiver of §5655
Castro noted that Civil Code §3513 bars the waiver of a statutory right where the public benefit of a statute is one of its primary purposes. Finding such a benefit to be a primary purpose of §5655, he rejected ALS’ contention that §5655 was adopted only for a “narrow, very private interest.”
Looking to the legislative history of the section, Castro pointed out that the Legislature first codified the priority of assessment payments in Civil Code §§1367 and 1367.1. In 2012, the two statutes were repealed and replaced by §5655.
The jurist found the history of the earlier sections to be instructive and said:
“The prioritization requirement was…intended to protect homeowners from abuses by collection firms and ‘insensitive and overzealous associations who adopt unnecessarily adversarial tactics in collecting past due assessments.’….The Legislature considered these protections applicable to a significant percentage of its populace: at the time, approximately five million homeowners lived in the state’s 30,000 common interest developments.”
He rejected ALS’ argument that language in §5655 allowing for payment plans established that the section contemplated waivers like the one contained in its agreement, saying:
“We…interpret section 5665 to contemplate optional HOA standards for payment plans, but not to allow standards that contravene the prioritization requirement in the preceding section 5655(a).”
Castro explained that the FDCPA prohibits a debt collector from threatening to take action that cannot legally be taken. In the present case, Doskocz alleges that ALS’ pre-lien and pre-NOD letters threatened foreclosure when foreclosure was not permitted under §5720.
The section provides that a homeowners’ association “may not collect” a delinquent assessment less than $1,800 or more than 12 months old “through judicial or nonjudicial foreclosure.”
Castro said that “[w]e have some doubt as to whether ALS’ pre-lien letter can reasonably be characterized as threatening foreclosure before the delinquent assessment reached this statutory threshold” but that there is no need to make that determination as the pre-NOD letter clearly violated the section.
ALS argued that the pre-NOD letter did not contain a threat of foreclosure because it only told the homeowner that a notice of default would be recorded if the payment is not received. Castro rejected that reading and found that the pre-NOD letter violated the section, looking at the letter from the perspective of the least sophisticated debtor.
He opined:
“Such a constrained reading of section 5720 is not supported by its plain language or legislative history….Recording a notice of default starts the foreclosure process: it is the initial step, followed by a notice of sale and then sale….The phrasing ‘seeks to collect’ or ‘attempt[s] to collect’ suggests an intent to cover these steps to commence and perfect the foreclosure process, not just the final step of a completed sale.”
Alter Ego Liability
The judge found no error in Baskin’s finding of alter ego liability, explaining that courts must look at various factors such as “identical equitable ownership, use of the same office and employees, use of a corporation to procure services or serve as an ‘instrumentality’ or ‘conduit’ for the business of another entity, and failure to maintain an arm’s-length relationship.”
Castro said that “[t]here was ample evidence to support the court’s finding on unity of ownership and interest under these factors.”
He was not persuaded by the evidence and expert testimony provided by the attorney/defendants that certain corporate formalities, like a sublease and separate accounts and policies, provided the arms-length relationship that would foreclose a finding of liability. Castro remarked that “these formalities do not overcome the substantial evidence on the other factors, particularly given that the law firm subsequently violated this sublease agreement.”
Turning to the second part of the test for alter-ego liability which required a finding of bad faith or injustice that would result from a finding that the entities were not related, he made note of a failure to adequately capitalize or insure the collection agency, commenting:
“When ALS was incorporated, Swedelson and Gottlieb contributed only $28,000 in capital, and obtained an insurance policy with a $1 million limit and a $250,000 class action sublimit despite having previously defended Association Lien Services in a FDCPA class action and charging over a million dollars for legal services.”
He continued:
“Over the next several years, they continued ALS’s business despite growing delinquencies and additional lawsuits. Then they charged ALS legal fees as outside counsel in this action….The evidence…supported the court’s finding that failure to apply the alter ego doctrine would lead to an inequitable result here.”
The case is Doskocz v. ALS Lien Services, 2024 S.O.S. 1676.
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