The California Court of Appeal, First District, recently reversed the dismissal of a borrower’s allegations that a loan servicer supposedly refused to modify the borrower’s loan after the borrower allegedly complied with all conditions of a HAMP Trial Period Plan.
The First District held that a lender must offer a permanent HAMP loan modification if the borrower timely makes all trial period payments, if the borrower complies with the Trial Period Plan terms, and if the borrower’s representations on which the loan modification is based remain correct. In so ruling, the First District declined to follow Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499 and followed a line of cases beginning with Barroso v. Ocwen Loan Servicing, LLC (2012) 208 Cal.App.4th 1001.
A copy of this opinion is available at: http://www.courts.ca.gov/opinions/documents/A138480.PDF
In 2009, the borrower (“Borrower”) applied for a loan modification. Borrower’s loan servicer (“Servicer”) allegedly approved Borrower for the loan modification and told Borrower that he would receive a permanent modification after making timely trial payments.
Allegedly, Borrower timely made the trial payments, and Servicer allegedly informed him in January 2010 that the permanent loan modification would be ready in three days. Three months later, with still no written agreement, Borrower leased his home to a third party. In August 2010, Servicer allegedly informed Borrower that it was denying his home loan modification “because the home was not owner-occupied.”
Thereafter, Borrower allegedly obtained Servicer’s agreement to postpone the foreclosure sale several times in order to pursue the loan modification. In February 2011, supposedly without Borrower’s knowledge, Servicer transferred servicing of the loan to another servicer. In May 2011, the house was sold at auction. According to Borrower’s complaint, Servicer “‘knowingly planned and schemed … to transfer plaintiff’s loan to [the other servicer] and foreclose on [Borrower] behind his back in violation of dual tracking,’ all while lulling [Borrower] into complacency by pretending to pursue the permanent loan modification.”
Borrower’s complaint sought equitable relief and damages for an illegal trustee’s sale, breach of contract-promissory estoppel, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, unfair business practices, negligence, negligent misrepresentation, and an accounting. The trial court found the complaint failed to state a viable cause of action and sustained Servicer’s demurrers without leave to amend.
On appeal, the First District reversed the trial court with respect to Borrower’s breach of contract, breach of the implied covenant of good faith and fair dealing, wrongful foreclosure, and negligent misrepresentation causes of action. The First District determined that “if the borrower has made all required trial payments and complied with all of the TPP’s other terms, and if the borrower’s representations on which the modification is based remain correct, the lender must offer the borrower a permanent loan modification.”
In so holding, the First District declined to follow Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499 which Servicer had cited for the proposition that “a borrower’s compliance with a TPP does not give rise to a contract to permanently modify the original loan.”
In support of the trial court’s dismissal, Servicer argued that Borrower was not eligible for a modification because he was not living in the home. The First District disagreed and held that “HAMP Directive 09-01, requires only that the home must be the borrower’s primary residence, as evidenced by tax returns, credit reports and other ‘reasonable evidence … such as utility bills in the borrower’s name’ … [Borrower’s] allegation that he was temporarily renting out his home does not bar him from showing it was nonetheless his primary residence.”
Servicer also argued that “[Borrower could not] maintain a breach of contract or, indeed, any cause of action arising from the allegedly wrongful foreclosure, because he failed to allege he was willing and able to tender the full amount of the loan.” Again, the First District disagreed and held that “since [Borrower] did not default under the terms of the modified agreement, he was not required to tender his indebtedness to avoid foreclosure.”
With respect to Borrower’s claim for wrongful foreclosure, the First District held that the claim was also wrongfully dismissed “because its legal viability was dependent upon whether [Borrower could] allege … that [Servicer] foreclosed despite an enforceable agreement to permanently modify his loan.”
The First District also reversed the trial court’s dismissal of Borrower’s negligent misrepresentation cause of action. As you may recall, the elements of negligent misrepresentation are (1) the defendant made a false representation; (2) without reasonable grounds for believing it to be true; (3) with the intent to deceive the plaintiff; (4) justifiable reliance on the representation; and (5) resulting harm. (West v. J.P. Morgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792.)
In support of the trial court’s dismissal of Borrower’s negligent misrepresentation claim, Servicer argued that “banks owe their borrowers no duty not to misrepresent the truth ‘in the context of the loan modification allegations/discussions.’” The First District rejected Servicer’s argument.
The First District also reversed the trial court’s dismissal of Borrower’s cause of action for violation of Business and Professions Code Section 17200. As you may recall, Section 17200 permits civil recovery for “any unlawful, unfair or fraudulent business act or practice.”
In support of the trial court’s dismissal, Servicer argued that “the trial court properly sustained the demurrer to this cause of action because [Borrower] failed to allege a ‘predicate act involving a violation of some other statute.’” The First District disagreed and held that “because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition – acts or practices which are unlawful, or unfair, or fraudulent … In other words, a practice is prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ and vice versa.” (citing Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.)
Alternatively, Servicer argued that “[Borrower] lack[ed] standing to bring an unfair competition claim because he [could not] allege he “lost money or property as a result of the unfair competition.” The First District disagreed and found that “the complaint also alleges that [Servicer’s] unfair and deceptive practices deprived [Borrower] of the opportunity to pursue other means of avoiding foreclosure, leading to the loss of his home and the equity he had in it. He sufficiently alleged standing under section 17200.”
Finally, Servicer relied on Mangini v. Aerojet-General Corp. (1991) 230 Cal.App.3d 1125, 1155–1156 for the proposition that “the unfair competition law applies only to ongoing conduct.” The First District dismissed Servicer’s argument and explained, “That was the state of the law when Mangini was decided, but the following year the Legislature amended section 17200 to state that it applies to any unlawful “‘act or practice,’ presumably permitting invocation of the UCA based on a single instance of unfair conduct.” (citing Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4th 632, 653.)
However, the First District affirmed the trial court’s dismissal of Borrower’s negligence claim and his breach of fiduciary duty claim.
With respect to the negligence claim, the First District noted that “[C]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.” (citing Erlich v. Menezes (1999) 21 Cal.4th 543, 552, 553–554.) The First District held that because Borrower’s complaint was based upon the alleged breach of a written agreement, tort remedies were unavailable.
With respect to the breach of fiduciary duty claim, the First District held that the claim runs “afoul of the principle that ‘[n]o fiduciary duty exists between a borrower and lender in an arm's length transaction.’ [A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” (citing Ragland v. U.S. Bank Nat. Assn., supra, 209 Cal.App.4th at p. 206; Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.) Accordingly, the First District affirmed the trial court’s dismissal of Borrower’s claim for breach of fiduciary duty.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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