The California Court of Appeal, First District, recently ruled that a borrower stated a cause of action for wrongful foreclosure based on a mortgage servicer's alleged noncompliance with California's requirement to exercise due diligence in contacting a borrower prior to initiating foreclosure proceedings under Cal. Civ. Code § 2923.5.
In so ruling, the Appellate Court noted the impropriety of the lower court's taking judicial notice of the facts in a mortgage servicer's declaration asserting that the servicer had complied with the due diligence requirement, where the very facts asserted in the declaration were in dispute. However, the Appellate Court agreed with the lower court's ruling that the borrower failed to state claims for fraud, intentional misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing, slander of title, quiet title, and unfair competition, among others.
A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/A135782.PDF.
Plaintiff borrower ("Borrower") obtained a home mortgage loan from a bank that was secured by a deed of trust on Borrower's property. The deed of trust named Mortgage Electronic Registration Systems, Inc. ("MERS") as the beneficiary. Borrower eventually defaulted on her home loan, and MERS assigned its beneficial interest in the deed of trust to the trustee of a pool of securitized mortgage loans ("Loan Owner"). Around the same time, the trustee under the deed of trust ("Trustee") recorded a notice of Borrower's default. Recorded along with the notice of default was a sworn declaration ("Declaration") by an employee of the loan servicer stating that the loan servicer "tried with due diligence to contact the borrower in accordance with California Civil Code Section 2923.5."
Trustee subsequently recorded a Notice of Trustee's Sale, scheduling the foreclosure sale to take place a few weeks later. Just one day before the scheduled foreclosure sale, Borrower filed a lawsuit against the loan servicer and Trustee (collectively, "Defendants"), seeking declaratory and injunctive relief and asserting various causes of action, including claims for wrongful foreclosure, fraud, intentional misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing, slander of title, quiet title, and violation of California's Unfair Competition Law.
Defendants filed a demurrer, supported by a request for judicial notice of the deed of trust, the notice of default, MERS's assignment of the trust deed, and the notice of the trustee's sale. In opposition, Borrower argued in part that the demurrer misstated facts and should accordingly be stricken or denied. The lower court granted the request for judicial notice, and sustained the demurrer and dismissed the complaint without leave to amend. Borrower appealed.
The appellate court reversed only as to the wrongful foreclosure cause of action, based solely on allegations that Defendants failed to comply with California's due diligence requirement, but affirmed in all other respects.
As you may recall, California law precludes a trustee under a deed of trust from recording a notice of default until 30 days after the loan servicer has made initial contact with the borrower to assess the borrower's financial situation and explore options for avoiding foreclosure, or has satisfied the due diligence requirements of the statute. Cal. Civ. Code § 2923.5 subd.(a)(1). Due diligence, in turn, requires sending a letter by first-class mail, making three attempts to contact the borrower by telephone, and sending a certified letter if no response is received within two weeks of the telephone attempts. Cal. Civ. Code S 2923.5 subd. (e).
In focusing primarily on Borrower's wrongful foreclosure cause of action, the Appellate Court noted among other things that: (1) as to this cause of action, Borrower was not required to tender the amount owed on her loan, as she was seeking to enjoin an upcoming foreclosure sale on grounds that a condition precedent had not been met; (2) a lender has no general duty to offer a borrower a loan modification; and (3) it was proper to take judicial notice only of the existence of the Declaration, but not of the facts of compliance asserted therein, where those facts were in dispute.
Of the various wrongful foreclosure theories Borrower asserted, including several permutations on lack of standing, the Appellate Court determined that Borrower's allegation that Defendants failed to comply with Section 2923.5 was sufficient to state a cause of action for wrongful foreclosure. Specifically, the Appellate Court noted that Borrower's complaint expressly alleged that Defendants did not comply with the contact and due diligence requirements of Section 2923.5, that the facts asserted in the Declaration were in dispute, and that the Declaration provided no information as to when, how or by whom the elements of due diligence were satisfied, or how the declarant knew if they had been.
Thus, pointing out that a demurrer is not the appropriate procedure for ventilating facts in dispute, the Appellate Court concluded that Borrower stated a cause of action for wrongful foreclosure solely based on the loan servicer's purported noncompliance with Section 2923.5 before recording the notice of default.
As to Borrower's other causes of action, the Appellate Court ruled that the lower court properly sustained the demurrer for reasons of lack of particularity, failure to state a claim, no duty to Borrower to offer a loan modification, Borrower's failure to satisfy the terms of the deed of trust, and the like.
Accordingly, the Appellate Court ruled that the lower court erred only to the extent that it sustained the demurrer as to the Section 2923.5 allegation.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
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