Saturday, January 6, 2018

FYI: Cal App Ct (3rd Dist) Holds Servicer May Owe Borrower Duty of Care as to Loan Mod Efforts

Adding to the growing split of authority among California's various state appellate courts, and among various federal courts in California, the Court of Appeal of the State of California, Third Appellate District, recently held that a loan servicer may owe a duty of care to a borrower through application of the "Biakanja" factors, even though its involvement in the loan does not exceed its conventional role. 

 

In so ruling, the Third District "assumed without deciding" that California Civil Code § 2923.6(g) offers an affirmative defense to a negligence claim in loan modification cases where the borrower submits multiple loan modification applications.

 

A copy of this opinion is available at:  Link to Opinion

 

As you may recall, in order to determine whether a general duty of care exists, California courts balance the six factors used by the California Supreme Court in Biakanja v. Irving, 49 Cal.2d 647 (1958):  (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendants conduct and the injury suffered, (5) the moral blame attached to the defendant s conduct, and (6) the policy of preventing future harm."

 

In 2001, a borrower (Borrower) obtained a loan secured by a deed of trust to her home (Loan).  The deed of trust was later assigned to the defendant servicer (Servicer).  In 2010, Borrower was laid off from her job and sought a loan modification from Servicer.  In May 2010, Servicer allegedly told Borrower that it "would be unable to assist her unless she was at least three months delinquent in her monthly mortgage payments, and thus in default." 

 

In June 2010, Borrower defaulted on the Loan.  On August 1, 2010, Servicer allegedly informed Borrower's agent that Borrower might qualify for a HAMP loan modification.

 

On August 9, 2010, Servicer sent Borrower a letter approving Borrower's request for a repayment plan.  Borrower allegedly believed that she would receive a permanent loan modification upon completion of the repayment plan.  Borrower agreed to the repayment plan's terms.  After making three payments, Borrower contacted Servicer regarding the loan modification.  Servicer told Borrower to continue making payments.

 

On January 3, 2011, Servicer denied Borrower's application for a HAMP modification for failure to provide necessary documents.  Borrower then supposedly spoke with Servicer's representative who stated that Servicer denied Borrower's application because Borrower had failed to submit a statement from the State of California declaring her permanently disabled.  Allegedly, the State of California does not issue such a document, and Servicer supposedly "requested [this] nonexistent document to further delay the process and frustrate [Borrower]."

 

In July 2011, Borrower applied for another HAMP modification.  Servicer allegedly requested the same documents over and over again.  In particular, Servicer supposedly requested that Borrower produce her entire loan application on two separate occasions, requesting duplicates of other previously submitted documents by fax.

 

While her second application was pending, Borrower ceased receiving disability insurance and began receiving unemployment insurance.  Servicer then allegedly demanded that Borrower submit a new application and supporting documents.  In November 2011, Borrower returned to work.  Servicer supposedly again demanded additional documents due to the change in circumstances.  Borrower allegedly complied with Servicer's demands and submitted the requested documents. 

 

On January 18, 2012, Servicer allegedly denied Borrower's application for a HAMP modification, due to an excessive forbearance amount.  Borrower asserted that the forbearance amount would have been significantly less had she been given a permanent loan modification "over a year earlier as had been represented."

 

On April 6, 2012, one of Servicers representatives allegedly told Borrower that she "was approved for another trial loan modification and that upon completion, [she] would receive a permanent loan modification with a 2% fixed interest rate for five years and a principal reduction."  Borrower again submitted the requested documents but never received either a HAMP trial period plan or a permanent loan modification.

 

Borrower allegedly continued her effort to obtain a loan modification, without success.  In December 2012, Borrower filed for bankruptcy protection.

 

Borrower then filed suit against Servicer for intentional misrepresentation, negligent misrepresentation, breach of contract, promissory estoppel, negligence, intentional infliction of emotional distress, conversion, violations of the Unfair Competition Law and conspiracy.  Servicer demurred to – i.e., moved to dismiss -- Borrower's claims.  The trial court sustained each of Servicer's demurrers.

 

On appeal, the Third District Court of Appeal reversed the trial court's dismissal of Borrower's purported negligence claim.

 

In addressing Borrower's negligence claim, the Third District first acknowledged the general rule that lenders do not owe borrowers a duty of care unless their involvement in a transaction goes beyond their "conventional role as a mere lender of money."  However, the Court also pointed out that even when the lender is acting as a conventional lender, the no-duty rule is only a general rule.

 

The Court of Appeal then noted the split in decisions concerning "whether accepting documents for a loan modification is within the scope of a lender's conventional role as a mere lender of money, or whether, and under what circumstances, it can give rise to a duty of care with respect to the processing of the loan modification application."

 

As you may recall, a majority of federal district courts have found that a loan servicer does not owe a duty of care to a borrower when it reviews a loan modification application.  And, in a recent unpublished opinion, the Ninth Circuit also concluded that a lender does not have a duty to a loan modification applicant when the applicant's "negligence claims are based on allegations of delays in the processing of their loan modifications."  Anderson v. Deutsche Bank Nat'l, 649 Fed. App'x 550, 552 (9th Cir. 2016).

 

California Courts of Appeal have also reached different results where they addressed a Servicer's duty of care in reviewing loan modification applications.  Compare Lueras v. BAC Home Loans Servicing, LP 221 Cal.App.4th 49 (Cal. App. 4th Dist., 2013) (residential loan modification is a traditional lending activity, which does not give rise to a duty of care) with Alvarez v. BAC Home Loans Servicing, L.P. 228 Cal.App.4th 941 (Cal. App. 1st Dist., 2014) (servicer has no general duty to offer a loan modification, but a duty may arise when the servicer agrees to consider the borrower's loan modification application) and Daniels v. Select Portfolio Servicing, Inc., 246 Cal.App.4th 1150 (Cal. App. 6th Dist., 2016) (following Alvarez and applying Biakanja factors to conclude that lender owed borrowers a duty of care in the loan modification process).

 

In sustaining Servicer's demurrers to Borrower's negligence claim, the trial court had relied on Lueras in holding that "lenders do not have a common law duty of care to offer, consider, or approve a loan modification, to offer foreclosure alternatives, or to handle loans so as to prevent foreclosure."

 

In Lueras, the Fourth District Court of Appeal reasoned that "a loan modification is the renegotiation of loan terms, which falls squarely within the scope of a lending institution's conventional role as a lender of money."  The Lueras court then found that the Biakanja factors weighed against finding a duty of care, and it explained:  "If the modification was necessary due to the borrower's inability to repay the Loan, the borrower's harm, suffered from denial of a loan modification, would not be closely connected to the lender's conduct.  If the lender did not place the borrower in a position creating a need for a loan modification, then no moral blame would be attached to the lender's conduct."

 

The Court of Appeal disagreed with the trial court, and found Alvarez to be the better reasoned ruling. 

 

The Court of Appeal looked to Meixner v. Wells Fargo Bank, N.A., 101 F.Supp.3d 938 (E.D. Cal. 2015) where the federal district court reasoned:  "Alvarez identified an important distinction not addressed by the Lueras reasoning 'that the relationship differs between the lender and borrower at the time the borrower first obtained a loan versus the time the loan is modified. The parties are no longer in an arm's length transaction and thus should not be treated as such. While a loan modification is traditional lending, the parties are now in an established relationship. This relationship vastly differs from the one which exists when a borrower is seeking a loan from a lender because the borrower may seek a different lender if he does not like the terms of the loan."

 

The Third District then applied the Biakanja factors to Borrower's negligence claim. 

 

As to the first factor -- "the extent to which the transaction was intended to affect the plaintiff" -- the Court of Appeal found that the loan modification was intended to affect Borrower because the Servicer's decision on Borrower's application for a modification plan would likely determine whether or not Borrower could keep her house.  The Court concluded the first factor weighed in favor of finding a duty of care.

 

As to the second factor – "the foreseeability of harm to the plaintiff" -- the Third District held that the potential harm to borrower was readily foreseeable because the alleged mishandling of the documents deprived Plaintiff of the possibility of obtaining the requested relief, even though there was no guarantee that the modification would be granted had the application been properly processed.  The Court of Appeal also pointed out that Servicer increased the likelihood that Borrower would incur additional expenses of default during the lengthy loan modification process, thereby increasing the foreseeable potential harm. The Court concluded the second factor weighed in favor of finding a duty of care.

 

As to the third factor – "the degree of certainty that the plaintiff suffered injury" -- the Court of Appeal found that Borrower's alleged damage to credit, increased interest and arrears, and foregone opportunities to pursue unspecified other remedies constituted a sufficient injury and weighed in favor of finding a duty of care.

 

As to the fourth factor – "the closeness of the connection between the defendant's conduct and the injury suffered" -- the Third District noted that Borrower's default was imminent which could indicate that Borrower would have suffered damage to her credit and increased interest and arrears regardless of Servicer's conduct.  However, the Court of Appeal also recognized that Borrower was current on the Loan until she learned that she could not be considered for a loan modification unless she defaulted.  The Court of Appeal then concluded that the fourth Biakanja factor weighed in favor of finding a duty of care at the pleading stage.

 

As to the fifth factor – "the moral blame attached to the defendant's conduct" -- the Third District reasoned that a borrower's lack of bargaining power, coupled with the servicer's alleged incentive to unnecessarily prolong the loan modification process, "provide a moral imperative that those with the controlling hand be required to exercise reasonable care in their dealings with borrowers seeking a loan modification."  The Court of Appeal also noted that the "the moral blame attached to the defendant's conduct" is heightened when the defendant first induces a borrower to take a vulnerable position by defaulting and then subjects the borrower's loan application to a review process that does not meet the standard of ordinary care."  The Court of Appeal found that the fifth Biakanja factor weighed in favor of a finding that Servicer owed a duty of care to Borrower

 

As to the sixth and last factor – "the policy of preventing future harm" -- the Court of Appeal found imposing a duty of care on Servicer would advance the policy of preventing future harm.  The Third District noted that California's Homeowner's Bill of Rights demonstrates a rising trend to require lenders to deal reasonably with borrowers in default to try to effectuate a workable loan modification.

 

Notably, the Court of Appeal's application of the Biakanja factors signifies a reversal from its recent decision in Conroy v. Wells Fargo Bank, N.A., 13 Cal.App.5th 1012.  There, the Third District had held that where there is privity of contract, a duty of care does not lie in the mortgage loan context.  The Third District later vacated and de-published Conroy.

 

Notwithstanding its finding that Servicer owed Borrower a duty of care, the Court of Appeal did suggest that Servicer might have an affirmative defense to Borrower's negligence claim.  In particular, the Third District "assumed without deciding" that California Civil Code § 2923.6(g) offers an affirmative defense to a negligence claim in loan modification cases where the borrower submits multiple loan modification applications.

 

As you may recall, section 2923.6(g) provides:  "[T]he mortgage servicer shall not be obligated to evaluate applications from borrowers who have already been evaluated or afforded a fair opportunity to be evaluated for a first lien loan modification", unless there has been a material change in the borrower s financial circumstances since the date of the borrower's previous application and that change is documented by the borrower and submitted to the mortgage servicer."

 

Nevertheless, the Court of Appeal found that Servicer's potential defense based upon Borrower's multiple loan modification applications was not appropriate on demurrer as it required an analysis of facts outside of Borrower's Complaint.

 

The Third District did affirm the trial court's dismissal of Borrower's purported conversion claim.  There, Borrower alleged that a 2006 assignment of the Deed of Trust was invalid due to defects in the securitization process.  As a result, Borrower alleged that the later assignment of the Deed of Trust to Servicer was invalid.

 

The Court of Appeal found that Borrower had not alleged that the Deed of Trust was securitized or assigned to a Trust in 2006.  As a result, the Court of Appeal affirmed the trial court's dismissal of Borrower's purported claim for conversion.

 

In an unpublished portion of its opinion, the Third District:  1) reversed the trial court's dismissal of Borrower s unfair competition claim; 2) affirmed the trial court's dismissal of Borrower's purported claims for intentional misrepresentation and promissory estoppel, but concluded that Borrower should have been given leave to amend; and, 3) affirmed the trial court's dismissal, without leave to amend, of Borrower's purported claims for negligent misrepresentation, breach of contract, and intentional infliction of emotional distress.

 

As you may recall, California's Unfair Competition Law (UCL) prohibits, and provides civil remedies for, unfair competition, which it defines as any unlawful, unfair, or fraudulent business act or practice.  To plead standing, a UCL plaintiff must (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact (i.e., economic injury) and (2) show that that economic injury was the result of the unfair business practice.

 

With respect to Borrower's purported claim for violation of the UCL, the Court of Appeal found that Borrower had standing based upon the postage fees which Borrower allegedly spent repeatedly re-submitting documents to Servicer.  The Court of Appeal held that these fees constituted "sufficient economic harm as a result of the alleged mishandling of her loan modification application materials."

 

The Third District also found that Borrower adequately alleged both unfair and fraudulent practices by alleging that Servicer "intentionally delayed the application process by demanding that [Borrower] submit the same documents over and over again, all in an attempt to increase arrears, penalties, and fees, resulting in an incurable default."

 

The Court of Appeal also reversed the trial court's refusal to grant Borrower leave to amend her purported promissory estoppel claim based upon Servicer's alleged 2012 oral promise to grant a trial plan and permanent modification.

 

In California, promissory estoppel requires: (1) a promise that is clear and unambiguous in its terms, (2) reliance by the party to whom the promise is made, (3) the reliance must be reasonable and foreseeable, and (4) the party asserting the estoppel must be injured by his or her reliance.

 

The Third District acknowledge that Borrower failed to allege either an unambiguous promise or reasonable reliance because a general promise to send some sort of trial loan modification agreement does not constitute a clear and unambiguous promise to provide any kind of mortgage relief.  And, the Court reasoned that no borrower could reasonably rely on an alleged promise to offer a loan modification on any terms, as the offered modification might not lower their monthly payments sufficiently to allow her to avoid default.

 

Nevertheless, the Third District held that Borrower should have been given leave to amend to state a viable cause of action, if she is able to do so.

 

Likewise, the Court of Appeal also reversed the trial court's dismissal of Borrower's intentional misrepresentation claim, based upon an alleged 2012 oral representation that Servicer would send Borrower a HAMP TPP.  The Court held that the trial court should have given Borrower leave to amend.

 

In particular, the Third District found that Borrower had adequately alleged that Servicer's representative made this promise without any intention of performing it, with the intent to induce Borrower to submit another application, thereby prolonging the loan modification process and allowing Servicer to charge additional interest, fees, and penalties.

 

However, the Court of Appeal acknowledged that Borrower had failed to adequately allege damages based upon her reliance on the supposed misrepresentation.  Instead, Borrower opaquely alleged that she might have pursued unspecified "alternate remedies" had she not relied on the false promise that she would receive a HAMP TPP.  Borrower also alleged that she suffered damage to her credit and increased arrears, fees, and penalties, while awaiting a loan modification.

 

The Third District observed that Borrower's Complaint suggested that Borrower had no alternative remedies, due to her poor finances.  And, the Court of Appeal noted that Borrower had not alleged how Servicer's representations could have caused her damages, as opposed to her default on the Loan.  Nevertheless, the Court of Appeal determined that Borrower should have been given leave to explain her damages and overcome her pleadings deficiencies.

 

The Court of Appeal did affirm the trial court's dismissal of Borrower's purported negligent misrepresentation claim.  The Court found that Borrower had merely alleged that Servicer negligently promised to modify her Loan.  And, California does not recognize a cause of action for negligent false promise.

 

The Third District also found that Borrower failed to allege that Servicer agreed to modify her Loan.  The Court noted that Borrowers alleged agreement to provide a TPP on terms to be specified in the future amounts to an unenforceable "agreement to agree."

 

Finally, the Court of Appeal affirmed the trial court's dismissal of Borrower 's purported claim for intentional infliction of emotional distress ("IIED").

 

As you may recall, in order to state a claim for IIED, a plaintiff must allege:  (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff s suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant's outrageous conduct.

 

The Court of Appeal found that the alleged mishandling of Borrower's loan modification applications did not constitute conduct so extreme, outrageous, or outside the bounds of civilized society as to support a cause of action for intentional infliction of emotional distress.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Wednesday, January 3, 2018

FYI: 6th Cir Reverses Contempt Sanction Against Defendant That Thwarted Paying Plaintiff Class Counsel's Fees

The Sixth Circuit Court of Appeals recently concluded that distributing all of a company's cash to its owners after a class action settlement was reached but before the court's order to pay became final, thus leaving the company without the ability to pay class counsel's fees or administration costs as required under the settlement agreement, did not constitute contempt. 

 

The trial court had originally determined that the distribution of the money constituted contempt because the defendant had knowingly violated the court's order to pay class counsel's fees. The Sixth Circuit, however, concluded that a finding of contempt is limited to the violation of a definite and specific court order.  Although the court order was specific, it was not definite because it was conditioned on the settlement agreement being affirmed by the highest court from which any party sought review. 

 

Accordingly, the Sixth Circuit reversed the trial court's ruling.

 

A copy of the opinion is available at:  Link to Opinion

 

The defendant owned and operated a number of gyms. The plaintiffs were members of those gyms and believed defendant misrepresented the terms of its gym memberships, and brought a class action against defendant. The parties ultimately reached a settlement, and the settlement agreement required defendant to pay (1) $1.3 million to the class members, (2) class counsel's fees as ordered by the court, and (3) the claims administrator's fees and costs.

 

Some of the class members objected to the settlement. After a fairness hearing, the district court approved the agreement and ordered the parties to implement its terms. Some class members appealed the final order. The Sixth Circuit affirmed the trial court's order, and the Supreme Court denied certiorari. With the denial of certiorari, the trial court's order was final, and it was time for defendant to pay. The defendant, however, was out of money. It had sold all of its gyms and distributed nearly $10.4 million of the sale proceeds to its four owners through what it termed "tax distributions."

 

The terms of the settlement agreement had required the defendant to place in escrow the amount owed to the class members, but it did not include any such requirement for the amounts owed to class counsel or the administrator. Two days before its payment obligations under the settlement agreement came due, the defendant notified the trial court it was out of money and could not meet its remaining obligations under the agreement.

 

The plaintiffs asked the trial court to hold defendant and its four owners in civil contempt. The trial court did so, and ordered them to pay the full amount owed to class counsel and the claims administrator.  The defendant and four owners appealed the contempt finding.

 

The Sixth Circuit quickly acknowledged that contempt is a serious finding, and that courts "must exercise the contempt sanction with caution and use the least possible power adequate to the end proposed."   According to the Court, "contempt is a measure of last resort, not first resort."

 

The Court then identified the issue on appeal as:  "A party cannot be held in contempt unless it has violated a definite and specific court order. Exactly when a court order becomes definite and specific is the question."

 

For purposes of contempt, the court order at issue must be both definite and specific. "When deciding whether a court order is 'definite and specific,' courts must construe any ambiguity in favor of the party charged with contempt."  According to the Sixth Circuit, the burden of showing that an order is definite and specific is "heavy."

 

The Sixth Circuit observed that the date on which a court's order becomes definite and specific is normally not difficult to determine, but the question becomes more complicated where the court's command is conditioned to take effect upon the happening of a future event.

 

That complication existed here. The settlement agreement provided that defendant's obligation to pay would not become effective until the agreement was "fully and finally affirmed by the highest court" from which any party sought review. The trial court's order required defendant to pay class counsel and the claims administrator "in accordance with the terms and conditions set forth in the Settlement Agreement."

 

Based on this condition, the Sixth Circuit concluded that the trial court's order was specific, but not definite.

 

In particular, the timing of the payments was dictated by whether either party appealed. And the objecting class members did appeal, first to the Sixth Circuit and then they sought a writ of certiorari from the Supreme Court, which was denied. It was only after the time to request a rehearing expired that the trial court's order became definite.

 

The Sixth Circuit reasoned that until the order was "fully and finally affirmed" it remained possible that attorneys' fees could be reduced or the order reversed altogether. Although it would have been good business practice to set the money aside, according to the Court, the contempt power is not meant to force businesses into good business practices.

 

The Court also observed that the contempt power is not meant to force parties to comply with contracts, where a breach of contract action would be more appropriate. The Court concluded that defendant did not knowingly violate a clear and specific command of the court until its payment obligations under the order became effective, which was after the deadline to request a rehearing with the Supreme Court expired.

 

The Sixth Circuit acknowledged the well-settled rule that parties must comply with court orders even while appeals are pending, but held that the rule is inapplicable in the unusual circumstances where the command to act becomes effective only after the appeals are exhausted.

 

The Court then made the practical observation that plaintiffs could have required defendant to escrow the class counsel and administrator fees the way they did for the class payment. The Court was critical of plaintiffs' failure to do so.  "If the plaintiffs wanted to ensure that defendant would be able to pay class counsel and the claims administrator, they could have insisted that defendant escrow those funds during the appeals. When a class-action settlement calls for payment from a company with shaky finances, self-help is indispensable. Concerned parties are well-advised to insist upon an escrow provision, or even personal guarantees from individual defendants."

 

The Sixth Circuit then addressed defendant's argument that it was impossible to comply with the trial court's order once it became definite. To show impossibility, a party has the burden to demonstrate that (1) it was unable to comply with the court's order, (2) its inability to comply was not self-induced, and (3) it took all reasonable steps to comply.

 

Although the trial court had held that defendant's inability to pay was self-induced, the Sixth Circuit concluded the trial court erred because it took into account defendant's actions that took place before the court's order became definite and specific. Accordingly, the Court remanded the matter to the trial court for the evaluation of defendant's conduct after the court order directing payment became final, and whether that conduct constituted contempt. 

 

Finally, the Sixth Circuit rejected the argument that contempt proceedings are not the proper vehicle for enforcing a monetary award.  The Court also rejected the owners' argument that the Court lacked jurisdiction over them because they were not a party to the settlement or the court order.  "It is well settled law that courts have personal jurisdiction over non-party corporate officers who have notice of an injunction directed at their company and its contents. Second, those non-party corporate officers can be held in contempt for the corporation's failure to comply with the court's order, so long as they were responsible for the corporation's conduct and failed to take appropriate action to ensure performance."

 

The Sixth Circuit also concluded that the trial court erred in holding that the owners were jointly and severally liable. The Court instructed the trial court that, if the owners are found to be in contempt, the trial court is to determine the extent to which each owner is responsible.

 

The Sixth Circuit clarified when a court order becomes definite and specific in the unusual circumstance of when the order is dependent on future events.  In doing so, the Court determined that the trial court erred in taking into consideration conduct that occurred prior to the order becoming final.  Accordingly, the Sixth Circuit reversed the trial court's ruling, and remanded the case for further evaluation.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


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Tuesday, January 2, 2018

FYI: 9th Cir Holds Temporary Stay of Foreclosure Not Enough to Satisfy Diversity "Amount in Controversy"

The U.S. Court of Appeals for the Ninth Circuit recently held that the trial court did not have subject matter jurisdiction based upon diversity over claims which sought a temporary stay of a foreclosure sale pending the review of a loan modification application because the amount of controversy did not exceed $75,000. 

 

In so ruling, the Court held that, for claims which merely seek a temporary stay of a foreclosure sale, the amount in controversy is not the value of the underlying loan. 

 

A copy of the opinion is available at:  Link to Opinion

 

Following a borrower's default on her mortgage loan, the mortgage loan servicer provided a notice of default and scheduled the property for non-judicial foreclosure sale.   Prior to the sale, the borrower filed a complaint in state court asserting alleged violations of the California Homeowners Bill of Rights (HBOR) and of California's unfair competition law, Cal. Bus. & Prof. Code § 17200, et seq. 

 

The borrower's complaint did not seek a specific dollar amount in damages, and instead, it prayed for an "order enjoining the sale of the Subject property while Plaintiff's loan modification application is under review" plus compensatory damages and costs, and the potential award of punitive damages for an intentional, reckless or willful violation. 

 

The servicer filed a notice of removal to the United States District Court based upon diversity jurisdiction.  In the notice of removal, the servicer alleged that complete diversity of citizenship existed and the amount in controversy exceeded $75,000 based upon the value of the unpaid principal balance for the mortgage loan.

 

The trial court denied the borrower's motion to remand concluding that the borrower's gains from the temporary injunction would surely exceed $75,000 in light of the value of the property and the amount of the indebtedness.

 

Subsequently, the trial court granted the servicer's motion to dismiss for failure to state a claim, and the borrower filed her appeal.

 

Although the borrower did not directly appeal the lower court's denial of her motion to remand, as noted by the Ninth Circuit, federal courts have an "independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party." Arbgaugh v. Y&H Corp., 546 U.S. 500, 514 (2006).

 

As you may recall, federal courts are courts of limited jurisdiction and the burden of establishing its jurisdiction lies with the party asserting its existence.   As noted by the Ninth Circuit, "this burden is particularly stringent for removing defendants because 'the removal statute is strictly construed, and any doubt about the right of removal requires resolution in favor of remand,'" quoting Moore-Thomas v. Alaska Airlines, Inc., 553 F.3d 1241, 1244 (9th Cir. 2009).

 

28 U.S.C. § 1332 provides federal courts with subject matter jurisdiction over diversity claims where the amount in controversy exceeds $75,000 and the parties are citizens of different states.

 

The Ninth Circuit determined there was no issue or dispute over the complete diversity of citizenship between the parties, and narrowly framed the issue on appeal solely as whether value of the indebtedness was a proper measure of the amount in controversy in a complaint seeking only a temporary injunction against foreclosure while a loan modification application is pending.

 

In answering this question, the Court begins it analysis with the general rule that in actions seeking declaratory or injunctive relief, it is well established that the amount in controversy is measured by the value of the object of the litigation.  Further explaining that the "either viewpoint" rule provides that the test for determining the amount in controversy is whether the pecuniary result to either party "i.e. the benefit to the plaintiff or the cost to the defendant" is sufficient to cross the jurisdictional bar.

 

In the case at hand, the Ninth Circuit explained that neither the benefit to the borrower or the cost to the servicer equaled the amount of indebtedness.  The Court reasoned that the "length of the temporary injunction would almost certainly be minimal", and almost fully in the servicer's control as it is based upon the time required to evaluate the borrower's loan modification application in support of its determination of a minimal cost to the servicer. 

 

Specifically, the Court determined that the only pecuniary harm that would be suffered by the servicer was the cost of having to review the borrower's loan modification application and of having to delay foreclosure for the length of that review.  Similarly, the Court reasoned that the only pecuniary benefit to the borrower would be derived from temporarily retaining possession of the property while the servicer reviews the application. 

 

Thus, the Court concluded that the amounts in controversy under the "either viewpoint" test did not equal the amount of the indebtedness because neither outcome resulted in the borrower being relieved of the obligation to repay to the debt to the servicer.

 

The Court specifically noted that its determination was not inconsistent with and did not overrule prior Ninth Circuit case law which established that in cases seeking a permanent injunction or declaration of quiet title that the amount in controversy was properly established by the value of the property or amount of indebtedness.  See Chapman v. Deutsche Bank Nat l Trust Co., 651 F.3d 1039 (9th Cir. 2011); Garfinkle v. Wells Fargo Bank, 483 F.2d 1074 (9th Cir. 1973).  In so noting, the Court distinguished the present case and restricted its holding to cases where the "object of the litigation is only a temporary injunction while [the servicer] considers [the borrower's] loan modification application."

 

The Ninth Circuit further clarified that it's holding should not be construed such that every case seeking a temporary injunction of a foreclosure sale could not meet the amount in controversy requirement, only that the proper valuation of the amount in controversy was not the value of the property or the amount of the indebtedness.  

 

As an example, the Court stated that the jurisdictional limit could be established by other measures such as "the transactional costs to the lender of delaying foreclosure or a fair rental value of the property during the pendency of the injunction."  In the case at hand, the servicer failed to assert these claims in support of removal.  

 

The Court found that the servicer had failed to establish the amounts in controversy exceeded $75,000 as required, and consequently, the trial court lacked subject matter jurisdiction and its denial of the motion to remand was in error.

 

Having determined that the lower court lacked subject matter jurisdiction the Ninth Circuit did not address the merits of the motion to dismiss, and the trial court's decision was vacated and remanded with direction to return the matter to the state court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
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