The California Court of Appeal, Fourth District, recently held that a borrower sufficiently alleged causes of action for breach of written contract, negligent misrepresentation, fraud, promissory estoppel, and unfair business practices under California law, ruling that because the borrower had complied with the terms of a "Trial Period Plan" under the federal Home Affordable Mortgage Program, defendant bank had to offer her a permanent loan modification.
In reaching this conclusion, the Court reasoned in part that HAMP's requirements, implemented through U.S Department of the Treasury directives, were "imposed" on the trial repayment agreement between the borrower and bank, thus mandating a permanent loan modification if the borrower complied with the terms of the trial payment plan.
The Court also ruled, however, that the borrower failed to state causes of action to set aside the foreclosure sale of her property, to quiet title, and for conversion and slander of title.
A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/G046516.PDF
Following the default on her home mortgage loan, plaintiff borrower ("Borrower") agreed to a trial period plan ("TPP") under the federal Home Affordable Mortgage Program ("HAMP") implemented by the U.S. Department of the Treasury ("Treasury") with defendant loan owner ("Loan Owner"). The TPP approval letter informed Borrower in part that "[i]f you comply with all the terms of this Agreement, we'll consider a permanent workout solution for your loan once the [TPP] has been completed." Borrower entered into the TPP with Loan Owner, complying with its terms and making all the required payments in a timely manner.
Roughly four months after Borrower made the last of the required trial period payments under the TPP, Loan Owner allegedly sent Borrower letters confirming receipt of Borrower's documentation in support of a permanent HAMP modification and advising Borrower to "continue to make your trial period payments on time." Borrower allegedly continued to make the payments according to the terms of the TPP.
Shortly thereafter, Loan Owner notified Borrower by letter ("Denial Letter") that it had determined that Borrower did not qualify for a permanent loan modification, stating in part that its determination was based on its so-called "Net Present Value" ("NPV") analysis and that "If we receive a request from you within thirty days . . . we will provide you with the . . . input values [used]. If . . . you provide us with evidence that any of these input values are inaccurate, and those inaccuracies are material . . . we will conduct a new NPV evaluation."
On two occasions, Borrow informed Loan Owner that it had allegedly used outdated financial information, and requested a re-evaluation using updated financial information. Loan Owner supposedly did not respond to her requests for the NPV inputs or a re-evaluation, but informed her that no foreclosure sale date had been scheduled. Borrower continued making payments according to the terms of the TPP, and ultimately made a tenth payment under the TPP, but Loan Owner allegedly rejected that payment. Two days after the latest communication with Loan Owner, Borrower's home was sold to a third party at a trustee's sale.
Seeking to set aside the foreclosure sale, Borrower filed suit, asserting various causes of action, including fraud, negligent misrepresentation, breach of contract, promissory estoppel, unfair business practices under California's Unfair Competition Law, and wrongful foreclosure. Loan Owner demurred on the ground that the complaint failed to plead sufficient facts to state any causes of action.
The lower court sustained Loan Owner's demurrer without leave to amend, entering judgment in favor of Loan Owner. Borrower appealed. The appellate court reversed as to the causes of action for fraud, negligent misrepresentation, breach of written contract, promissory estoppel, and unfair business practices, but affirmed as to the other causes of action.
As you may recall, under HAMP, mortgage servicers that had entered "Servicer Participation Agreements"("SPAs") with Treasury agreed to permanently modify homeowners' mortgage loans where the homeowners, having satisfied the initial eligibility requirements for a HAMP loan modification, also satisfied the terms of the TPP. Specifically, the SPAs, together with applicable supplemental Treasury guidelines, provide that "[i]f the borrower complies with all the terms and conditions of the [TPP], the loan modification will become effective on the fourth day of the month following the trial period. . . ." U.S. Dept. Treasury, Supp. Dir. 09-01 ("Treasury Directive").
In addition, Treasury guidelines require servicers to undertake a three-step process as part of the analysis to determine a borrower's eligibility for a HAMP loan modification. One such step requires servicers to apply a "Net Present Value" ("NPV") test to determine whether a modified mortgage's value to a servicer would be greater than the return on the mortgage if left unmodified. Under Treasury guidelines, a negative NPV result, indicating that the modified mortgage would be lower than the servicer's expected return on a foreclosure, would allow a servicer to decline to modify a mortgage loan and thus to initiate a foreclosure action. For a positive NPV result, however, the Treasury Directive mandates that "the servicer MUST offer the modification." U.S. Dept. Treasury, Supp. Dir. 09-01.
Finally, California's Unfair Competition Law ("UCL") prohibits "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising . . . ." Bus. & Prof. Code § 17200.
Relying extensively on a factually-similar Seventh Circuit case, the appellate court analyzed Borrower's complaint to determine whether it stated facts sufficient to withstand Loan Owners' demurrer. See Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012) ("Wigod").
Concluding that Borrower sufficiently stated causes of action for fraud and negligent misrepresentation, the California Appellate Court determined that Borrower's complaint pleaded facts with the required specificity, demonstrated justifiable reliance on Loan Owner's representations, and sufficiently alleged that she had suffered damages by foregoing taking legal action to stop the foreclosure. In so doing, the Court rejected Loan Owner's assertion that Borrower's allegations failed to satisfy the "justifiable reliance" requirement because the TPP made no promise of a permanent loan modification and the Denial Letter informed Borrower that she did not qualify for a permanent loan modification, pointing out in part that Loan Owner allegedly failed to respond to Borrower's requests for NPV data and a re-evaluation.
Notably, with regard to Borrower's breach of written contract claim, the Appellate Court stressed that, although the TPP itself did not expressly include a promise of a permanent loan modification if Borrower complied with all the terms of the TPP, the Treasury Directive mandated the inclusion of such a proviso and, in order to be a lawful contract in compliance with HAMP, the TPP had to include the proviso "imposed by" the Treasury Directive. See Wigod, supra, 673 F.3d at 565 ("[a]lthough [Loan Owner] may have had some limited discretion to set the precise terms of an offered permanent modification, it was certainly required to offer some sort of good-faith permanent modification to [Borrower] consistent with HAMP guidelines. It has offered none.").
The Appellate Court thus interpreted the TPP in this case as limiting Loan Owner's re-evaluation of Borrower's eligibility for a loan modification at the end of the trial payment period to a determination as to whether she had complied with the terms of the TPP and whether her original representations remained true. Moreover, the Court also concluded that the Denial Letter constituted a modification of the TPP promising Borrower an opportunity prior to any foreclosure sale to challenge Loan Owner's decision to deny her a permanent loan modification.
Accordingly, the Court concluded that Borrower's complaint stated a claim for breach of written contract in that it alleged that: (1) the TPP required Loan Owner to offer her a permanent loan modification; and, (2) Borrower was entitled to challenge the decision to deny her a permanent loan modification prior to any foreclosure sale.
In addressing Borrower's promissory estoppel claim, the Court concluded that Borrower's complaint alleged that she relied to her detriment on promises made by Loan Owner, and thus had sufficiently stated a cause of action to withstand Loan Owner's demurrer as to the estoppel claim.
As to Borrower's UCL claim, noting that the term "unfair" under the UCL includes any unlawful act or practice as well as practices that offend public policy "tethered to specific constitutional, statutory or regulatory provisions," the Appellate Court ruled that Borrower's allegations that Loan Owner: (1) engaged in a practice of making TPPs that did not comply with HAMP guidelines and Treasury directives; and (2) misrepresented Borrower's right to challenge the NPV calculation and the status of the pending foreclosure sale, among others, were sufficient to state a claim under the UCL based on unfair or fraudulent practices. See, e.g., Daugherty v. American Honda Motor Co., Inc., 144 Cal.App.4th 824 (2006)(a fraudulent practice under the UCL "require[s] only a showing that members of the public are likely to be deceived" and "can be shown even without allegations of actual deception, reasonable reliance and damage.").
Finally, as to the wrongful foreclosure and quiet title causes of action, the Court noted among other things that: (1) Borrower failed to allege that she tendered the full amount of the indebtedness; and (2) none of defendants named in the complaint had adverse claims to title to the foreclosed property.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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