Wednesday, September 19, 2012

FYI: Cal App Ct Allows Trial On Allegations that Bank Told Borrower to Miss Payment to Receive Loan Mod, Rules Cal Civ Code 2924(g) Not Preempted

The California Court of Appeals, Fourth Appellate District, recently held that a borrower raised triable issues of fact regarding her claims of intentional misrepresentation, fraud, and a violation of Cal. Civ. Code 2924g(d), based upon her allegation that her lending bank instructed her to miss a mortgage payment to receive a loan modification, but nevertheless proceeded to foreclose on the subject property.  In so holding, the Court also determined that Cal. Civ. Code 2924g(d) creates an implied private right of action, and is not preempted by federal law.
A copy of the opinion is available at
A borrower refinanced her home loan.  Shortly thereafter, she alleged that her signature had been forged on several of the loan documents, though she did not dispute signing the note or deed of trust. 
Several years later, the borrower sought to modify her loan.  She alleged that an employee of the bank that owned the loan instructed her to miss a payment, and represented that if she did so, she would receive a loan modification.  When the bank informed her that it would charge a fee to modify the loan, the borrower requested that the fee be waived, on the grounds that "the loan was forged and nothing was done about it." 
The borrower then spoke with a supervisor, who allegedly told her that the forgery allegations would have to be investigated by the bank's legal department, and that the bank could not collect from the borrower during the investigation.  The borrower did not make that month's payment.  She received a delinquency notice, along with correspondence indicated the bank's intention to foreclose, shortly thereafter. 
Over the next several months, the borrower alleged that she made several attempts to contact the bank to determine the status of her loan.  Each time, she alleged that she was either told that the foreclosure would not proceed, or supposedly promised return calls that never came.  The borrower also supposedly attempted to make several payments on her loan, each of which was supposedly rejected by the bank. 
The trustee recorded a notice of trustee's sale, and the borrower filed the instant lawsuit, asserting various causes of action based on her claims that the bank instituted foreclosure proceedings after instructing her to miss a payment and refusing several subsequent payments.  The bank denied these allegations. 
The borrower then filed an application for a temporary restraining order ("TRO"), to enjoin the foreclosure sale.  The bank provided her with the amount necessary to reinstate her loan, which included late fees, interest and foreclosure costs.  The borrower stated that she could not pay that amount. 
The lower court entered a conditional TRO, whereby the borrower was given several weeks to bring her loan current.  If she did not do so, the lower court found that "there would seem to be no need to issue a preliminary injunction..." 
The borrower did not bring her loan current, and the borrower's home was sold the day after the expiration of the deadline set by the lower court. 
Litigation continued.  The borrower ultimately filed a third amended complaint several years later, which asserted causes of action for negligent misrepresentation, fraud, violation of Cal. Civil Code Section 2924g(d), and intentional and negligent infliction of emotion distress, among others.  The lower court granted the bank's motion for summary judgment as to all claims, and the borrower appealed. 
The Appellate Court began by considering the borrower's claim of negligent misrepresentation.  It noted that the borrower presented evidence that she missed a payment in reliance on the bank's alleged representation that she should do so. 
The bank argued that the borrower did not suffer damages -- an element necessary to prevail on a claim of negligent misrepresentation -- because she admitted that she could not reinstate the loan at the time of the foreclosure sale.
The Appellate Court disagreed.  It found that the evidence presented by the borrower "created at the very least a triable issue of fact on damages." In so holding, the Appellate Court relied on the fact that the borrower represented that she could have made the back payments due at the time of the foreclosure sale, but not the fees assessed for late payments and foreclosure costs.  The Appellate Court held that the borrower presented evidence indicating that the late payments and foreclosure costs were incurred only because the bank induced the borrower to miss a payment.  Accordingly, it noted that, if the borrower's allegations were correct, the bank "had no right to demand payment of additional reinstate the loan." 
The Court used similar reasoning to reverse summary adjudication of the borrower's fraud claim. 
The Court then turned to the borrower's claim that the bank and its agents violated Cal. Civ. Code 2924g(d), which provides that foreclosure sales may be conducted "no sooner than on the seventh day after...expiration or termination of [an] injunction...that required the postponement of the sale..." 
The borrower alleged that the bank held a foreclosure sale the day after the expiration of the injunction issued by the lower court.  The bank argued that Sec. 2924g(d) does not create a private right of action and is preempted by federal law; and that the lower court did not issue an injunction at all; rather, it issued a conditional order whereby the bank was only restrained from conducted a sale if the borrower brought the loan current, which she did not do.  The Court considered each argument in turn. 
It began by holding that "section 2924g(d) creates a private right of action and is not preempted."  To reach that conclusion, the Court relied on precedent establishing that a private right of action is impliedly created where "there [is] no administrative mechanism to enforce the statute, a private remedy further[s] the purpose of the state and was necessary for it to be effective," while also noting that California courts do not favor constructions of statutes that render them advisory only.  Mabry v. Superior Court (2010) 185 Cal. App. 4th 208, 218. 
Here, the Court found that there was no administrative mechanism to enforce 2924g(d), and further found that it was unreasonable to expect the attorney general to enforce all instances in which the statute might be violated.  The Court also found that the statute was not preempted, because the foreclosure process is traditionally a matter of state law. 
The Court then considered whether the lower court's order constituted a restraining order.  It answered in the affirmative, holding that the lower court's order that the borrower reinstate the loan by a certain date was "a condition subsequent, the failure of which to satisfy would terminate the injunctive relief." 
Finally, the Court considered the borrower's claims of intentional and negligent infliction of emotion distress.  The borrower alleged intentional infliction of emotion distress with regard to her claim that the bank induced her not to make mortgage payments, and then foreclosed on her home; and negligent infliction of emotional distress in that the bank sold her home at a foreclosure sale. 
The Court found for the borrower in as to the claim of intentional infliction of emotional distress, and for the bank as to the negligent infliction of emotional distress claim relating to the foreclosure sale
The Court held that the borrower's allegations as to the bank's conduct, if proven, "was so extreme as to exceed all bounds of decency in our society," which established a triable issue of material fact as to intentional infliction of emotional distress. 
Nevertheless, the Court held that the borrower "cannot recover under cause of action for negligent infliction because [the bank's] conduct resulted only in injury to property...[and because] she cannot prove a relationship giving rise to a duty of care."  The Court reached this conclusion because "[n]o fiduciary duty exists between a borrower and a lender in an arm's length transaction." 
Accordingly, the Court reversed the lower court's judgment with regard to the intentional misrepresentation, fraud and intentional infliction of emotional distress claims, and affirmed the lower court's judgment with regard to the negligent infliction of emotion distress claim. 


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