FYI: Calif Sup Ct Confirms Negligence Claims Against Loan Servicer Not Actionable

The Supreme Court of California recently upheld the dismissal of negligence claims brought by a borrower in relation to a mortgage servicer's handling of the borrower's loan modification application.

 

In so ruling, the Court held that:

 

- Consistent with the law in other states, the borrower's negligence claims here were barred by the economic loss doctrine; and that

 

- A loan servicer does not owe a borrower a common law duty of care sounding in tort to process, review and respond carefully and completely to the borrower's loan modification application.

 

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

 

The plaintiff borrower ("Borrower") obtained two loans from the same company ("Lender") that were secured by his home.  After Borrower defaulted on both loans, Lender recorded notices of default in connection with the loans and scheduled a foreclosure sale of the collateral property for February 2010.

 

Borrower contacted Lender about the possibility of canceling the foreclosure sale in order that Borrower could submit applications for modification of the loans. Borrower submitted his applications in January 2010. Shortly thereafter, Lender canceled the foreclosure sale.

 

In March 2010, Lender sent Borrower two identical letters, one for each loan, which informed Borrower that the loans had been charged off and accelerated and that Lender would "proceed with whatever action [was] deemed necessary to protect [Lender's] interests." Borrower believed the letters meant his loans had been modified to unsecured loans and as a result, the Property would never be sold at a foreclosure auction in connection with those loans. As Lender had not yet responded to Borrower's modification applications, Borrower believed the letters to be Lender's response.

 

In November 2010, one of the loans was sold to another entity ("New Owner"). Four years later, New Owner foreclosed on the Property.

 

Borrower filed suit against New Owner, Lender, and the entity who acted as servicer at the time of foreclosure ("Servicer") alleging negligence, promissory estoppel, intentional infliction of emotional distress and violation of the unfair competition law.

 

Defendants demurred and the trial court granted Lender's demurrer as to the negligence claim. The Court of Appeals affirmed concluding that relevant authorities "decisively weigh against extending tort duties into mortgage modification negotiations."

 

The Supreme Court granted review.  The specific question addressed by the Court was whether Lender owed Borrower a duty "to process, review and respond carefully and completely to [his] loan modification applications" so as to avoid causing Borrower pure monetary loss through a negligent lack of care in handling his applications.

 

Borrower claimed the duty arose as a matter of law upon submission of a loan application to a lender, and that Lender's failure "to process, review and respond carefully and completely" to the application is actionable in tort. The California Supreme Court noted that the existence of such a duty is an issue upon which the state's courts of appeal were divided.

 

"A duty of care may arise through statute" or by operation of the common law.  J'Aire Corp. v. Gregory, (1979) 24 Cal.3d 799, 803. The Supreme Court focused its review on the common law, in which Borrower grounded his negligence claim.

 

The Supreme Court first found Borrower's argument failed in light of the economic loss doctrine. The economic loss doctrine bars recovery in tort for negligently inflicted "purely economic losses," or financial harm unaccompanied by physical or property damage. Southern California Gas Leak Cases (2019) 7 Cal. 5th 391, 400. One circumstance in which the economic loss doctrine functions to bar a claim is a negligence claim for pure economic loss in deference to a contract between the parties. See Robinson Helicopter Co., Inc. v. Dana Corp. (2004), 34 Cal.4th 979, 988.

 

Although not all tort claims for monetary losses between contracting parties are barred by the doctrine, such claims are barred when they arise from the parties' underlying contracts. See Robinson, 34 Cal.4th at p. 991. The Supreme Court found that Borrower's claim arose from, and was not independent of, the mortgage loan contract. Thus, the Court held that Borrower's negligence claim was barred by the economic loss rule.

 

The Supreme Court noted that the deed of trust entered into by the parties, specified their rights and obligations with respect to the loan and the collateral securing the loan.  Thus, the Court held, imposing the duty alleged by Borrower would not only create obligations that were not negotiated or agreed to by the parties, but would in fact be contrary to the allocation of rights and responsibilities in the deed of trust. Giving deference to the agreement and according respect to contract doctrines, the Court could not allow a tort duty under these circumstances.

 

The Supreme Court also noted that its decision is consistent with the decisions of other state supreme courts as well as with the well-established principal of state law that "a financial institution owes not 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. Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089.

 

Borrower argued that Nymark did not apply because the decision was "limited to the loan origination context." However, the Court found that the central questions relevant to Nymark's applicability is whether handling loan modification applications was within the scope of Lender's role as lender. The Court found that it was. Thus, the Supreme Court found that such involvement, absent more, did not "exceed the scope of [an institution's] conventional role as a mere lender of money." Nymark, 231 Cal.App.3d at p. 1096.

 

The Court further noted that, although some cases involving insurance policies and contracts for professional services allowed tort recovery, these were distinguishable from the mortgage lending and modification cases as they do not share the special characteristics associated with the contexts exempt from the economic loss rule.

 

Borrower further argued that Nymark and the economic loss rule were not applicable.

 

Borrower first argued that as he was not claiming a breach of contract, the economic loss doctrine did not apply. However, the Court found the economic loss rule does not apply only when there is a viable breach of contract claim.

 

Borrower next argued that at the modification stage, borrowers are "captive" as they cannot choose who services their loans or handles their requests for modification. However, the Court found Borrower was only captive to the extent he could not now ask another bank or servicer to rewrite the terms of his contract with Lender. Alvarez v. BAC Home Loans Servicing, L.P. (2014), 228 Cal.App.4th 941, 494.

 

Borrower also argued that "[i]f the lower Court had considered the [Biakanja v. Irving (1958), 49 Cal.2d 647, 650] factors, it would have seen that they point toward a duty of care in the mortgage servicing context."  However, the Court found that the multifactor approach for ascertaining a duty of care articulated in Biakanja did not apply in the mortgage servicing context as this approach is only applicable when the plaintiff is a "third person not in privity" with the defendant. Biakanja v. Irving (1958), 49 Cal.2d 647, 650. The Supreme Court also held that Biakanja did not displace the contractual economic loss rule when it squarely applied.

 

Finally, the Court disagreed with Borrower's arguments that the "policy preventing future harm" (Biakanja, 49 Cal.2d at p. 650) and the "'"sum total"'" (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 841) of policy considerations required recognition of his claim.

 

The Court noted that there were viable claims Borrower could bring other than negligence.  In addition, the Court found that instead of seeking to fill a gap in the law, Borrower was seeking to create a new and expansive negligence cause of action atop all existing laws. The Court found that imposing such a duty was a policy decision best left to the legislature.

 

Thus, the Supreme Court held that when a borrower requests a loan modification, the lender owes no tort duty sounding in general negligence principles to "process, review and respond carefully and completely to" the borrower's application, and affirmed the judgment of the lower court.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: 8th Cir Holds Various FCRA Claims Failed for Lack of Spokeo Standing

The U.S. Court of Appeals for the Eighth Circuit recently held that various federal Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq. (FCRA) claims should be dismissed for lack of Article III standing.

 

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

 

This appeal arose out of an action commenced by plaintiff, a prospective employee ("Prospective Employee") after having an offer of employment rescinded by a prospective employer ("Employer").

 

Prospective employee alleged three violations of the FCRA: (1) taking adverse employment action based on a consumer report without first providing the report to the applicant, in violation of 15 U.S.C. § 1681b(b)(3)(A) ("adverse action claim"); (2) obtaining a consumer report without providing a disclosure form that complied with the FCRA, in violation of 15 U.S.C. § 1681b(b)(2)(A)(i) ("improper disclosure claim");  and  (3)  exceeding  the  scope  of  the  Authorization  by  obtaining  more  information than disclosed  in  the Authorization, in violation of 15 U.S.C. § 1681b(b)(2)(A)(ii) ("failure to authorize claim").

 

Employer moved to dismiss for lack of standing. The trial court initially granted the motion as to the improper disclosure and failure to authorize claims. However, on further review the court reinstated both claims. Employer appealed, alleging Employee lacked standing to pursue the FCRA claims.

 

A party invoking federal jurisdiction must establish three elements to meet the "irreducible constitutional minimum" of standing: (1) facts demonstrating "an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, (3) that is likely to be redressed by a favorable judicial decision." Spokeo, Inc., v. Robins, 578 U.S. 330, 338 (2016) (citations omitted). Injury in fact has been construed by the Supreme Court as meaning "'an invasion of a legally protected interest' that is concrete and particularized' and 'actual or imminent, not conjectural or hypothetical.'"  Id. (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 559-60 (1992)).  Concreteness is determined by assessing "whether the asserted harm has a 'close relationship' to a harm traditionally recognized as providing a basis for a lawsuit in American courts—such as physical harm, monetary harm, or various intangible harms" such as reputational harm."  TransUnion LLC v. Ramirez, 594 U.S. __, 141 S. Ct. 2190, 2200 (2021).

 

The Eighth Circuit noted that, although the FCRA grants a statutory right to sue to vindicate violations of the statute, "Article III standing requires a concrete injury even in the context of a statutory violation." Spokeo, 578 U.S. at 341. In reviewing whether Prospective Employee had standing, the Court noted that only plaintiffs who have suffered a concrete harm (physical, monetary, or cognizable intangible harm) have standing, while those seeking to collect statutorily allowed damages to ensure defendant's compliance with the law, do not. Transunion, 141 S. Ct. at 2206.

 

Prospective Employee's first claim alleged that Employer took an adverse employment action based on her consumer report prior to showing her the report. The Court found that as the FCRA defines a consumer report as "any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's  creditworthiness  .   .   character, general reputation, personal   characteristic, or mode of living . . . collected in whole or in part for the purpose of serving  as  a  factor  in  establishing  the  consumer's  eligibility  for  .  .  .  employment purposes," 15 U.S.C. § 1681a(d)(1), Employer had obtained a consumer report within the meaning of the statute.

 

The Eighth Circuit acknowledged that Prospective Employee had an unambiguous right to receive a copy of the consumer report prior to adverse action being taken based on the report, the Court then had to determine whether an employer's failure to provide a copy of the consumer report prior to taking adverse action was a bare procedural violation or conduct that caused an intangible harm.

 

The Eighth Circuit noted that federal appellate courts disagree over what qualifies as "injury in fact" in FCRA adverse action claims.  The Third and Seventh Circuits have both essentially held that taking an adverse employment action without first providing the required consumer report is an "informational injury", but the Ninth Circuit has found standing lacking. See Long v. Southeastern Penn. Transp. Auth., 903 F.3d 312, 324 (3d Cir. 2018); Robertson v. Allied Sols., LLC, 902 F.3d 690, 697 (7th Cir. 2018); and Dutta v. State Farm Mut. Auto. Ins. Co., 895 F.3d 1166, 1176 (9th Cir. 2018).

 

The Eighth Circuit noted that the harm present in cases where the court found standing for 15 U.S.C. § 1681b(b)(3)(A)(i) violations was premised on the prospective employee's right to discuss the information in the report with the employer prior to adverse action being taken. However, the Court found the right to pre-action explanation to an employer was not unambiguously written in the statute.

 

The Court also found that neither the text of the FCRA nor the legislative history provided support for Prospective Employee's claim that she had a right under the FCRA to not only receive a copy of the consumer report but to also discuss accurate but negative information within the report directly with the employer prior to the employer's taking adverse action.

 

Thus, the Eighth Circuit held that while Prospective Employee may have demonstrated an injury in law, she failed to demonstrate an injury in fact, and therefore her claim was not redressable under the plain language of the statute.

 

Prospective Employee next claimed that Employer obtained her consumer report prior to providing her with an FCRA compliant disclosure form. A consumer report procured for employment purposes, requires an employer to provide to the applicant "a clear and conspicuous" written disclosure "in a document that consists solely of the disclosure." 15 U.S.C. § 1681b(b)(2)(A)(i).

 

However, the Eighth Circuit has previously held that a technical violation of this provision, absent more, is insufficient to confer standing. See Auer v. Trans Union, LLC, 902 F.3d 873, 877 (8th Cir. 2018). The Court has also held that without specific facts which describe the harm, the plaintiff has failed to allege anything more than a statutory violation "completely removed from any concrete harm or appreciable risk of harm." Id.

 

The Eighth Circuit found Prospective Employee's claim "notably absent" of any claim of harm, either tangible or intangible. Thus, the Court found that Prospective Employer failed to establish she suffered a concrete injury and, therefore, lacked standing to pursue her improper disclosure claim. See TransUnion, 141 S. Ct. at 2206.

 

Finally, Prospective Employee claimed that she did not authorize Employer to obtain her consumer report. However, Prospective Employee did give permission to the company utilized by Employer to conduct a criminal background search and "make an independent investigation of [her] criminal records maintained by public and private organizations."

 

The Court found that Prospective Employee authorized Employer to obtain her consumer report documenting her criminal history. The only potential "non-criminal" search pertained to the database search listed as "National Sex Offender." However, the Court found that because Prospective Employee consented to a criminal background check, the search of the sex offender registry was not so unrelated as to fall outside the scope of the authorization.

 

As such, the Eighth Circuit found Prospective Employee had failed to allege an intangible injury to her privacy sufficient to confer standing under Article III. The Court further noted that even if the search of the national sex offender database was beyond the scope of the authorization, the only possible harm would be invasion of privacy, and Prospective Employee still failed to plead any facts demonstrating a concrete harm.

 

Thus, the Court vacated the trial court's orders and remanded with instructions to dismiss the case for lack of jurisdiction.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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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FYI: 11th Cir Holds CFPB Action Not Precluded by Res Judicata Based on Prior Consent Order

The U.S. Court of Appeals for the Eleventh Circuit recently vacated a trial court's ruling granting summary judgment in favor of a mortgage servicer and against the federal Consumer Financial Protection Bureau ("CFPB") based on res judicata.

 

In so ruling, the Eleventh Circuit held that the res judicata effects of an earlier CFPB lawsuit which was resolved by a consent judgment are measured with reference to the terms of the consent judgment and not the complaint.

 

A link to the opinion is available at:  Link to Opinion

 

In 2013, CFPB filed a lawsuit against a mortgage loan servicer ("Servicer") alleging that the Servicer's practices violated federal law. The lawsuit was resolved by settlement with a consent judgment that released Servicer from liability for the conduct alleged in the suit and established a three-year period during which Servicer had to comply with certain specified servicing standards enforced through a monitoring and compliance regime.

 

After the consent judgment's terms expired, CFBP filed another law suit against Servicer alleging Servicer violated various consumer-protection laws between January 2014 and February 2017. The trial court granted summary judgment in favor of Servicer on res judicata grounds.

 

On appeal, CFPB argued that the consent judgment, and not the complaint, should control res judicata and that the underlying settlement agreement showed that the parties did not intend to preclude a challenge to any conduct occurring from 2014 onwards.

 

The question before the Court was whether the consent judgment had any res judicata effect barring claims in the second lawsuit.

 

As you may recall, a claim is barred by res judicata -- i.e., claim preclusion -- when "(1) there is a final judgment on the merits; (2) the decision was rendered by a court of competent jurisdiction; (3) the parties, or those in privity with them, are identical in both suits; and (4) the same cause of action is involved in both cases."    Ragsdale v. Rubbermaid, Inc., 193 F.3d 1235, 1238 (11th Cir. 1999).  It was undisputed that the first three conditions were met, and only whether the fourth condition was met was in debate. 

 

First, the Eleventh Circuit determined whether it should look to the complaint in the 2013 action or the settlement agreement that resolved it.

 

The Court easily resolved this issue, relying on Norfolk Southern Corp. v. Chevron, U.S.A., Inc., which held that the when two parties settle a lawsuit res judicata is "controlled by the Settlement Agreement into which the parties entered," not by "the original complaint." 371 F.3d 1285, 1288 (11th Cir. 2004). In Norfolk Southern, the Eleventh Circuit allowed a second claim to proceed based on the intent of the parties encapsulated in the settlement agreement reasoning that a judgment based on settlement "receives its legitimating force from the fact that the parties consented to it." Id. at 1288.

 

Similarly, in Original Brooklyn Water Bagel Co. v. Bersin Bagel Grp., the Eleventh Circuit reiterated that "[w]here a case has been settled, the principles of res judicata apply to the matters specified in the settlement agreement." 817 F.3d 719, 725 (11th Cir. 2016). The Court explained that when a consent judgment is entered based on the parties' settlement agreement, the agreement becomes the judgment and the parties are bound as they would be with any other judgment. See Judgment, Black's Law Dictionary (11th ed. 2019); see also Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure §   4443 (3d ed. 2021).

 

Moreover, as the consent judgment is legitimized by the parties' agreement, the preclusive scope only extends as far as the agreement. See Norfolk S., 371 F.3d at 1288-89; Goldman v. Northrop Corp., 603 F.2d 106, 109 (9th Cir. 1979); Int'l Techs. Consultants, Inc. v. Pilkington PLC, 137 F.3d 1382, 1387 (9th Cir. 1998).

 

Thus, the Eleventh Circuit held that the consent judgment between the parties controlled the res judicata effect of the 2013 action, and the trial court erred to the extent that it held otherwise.

 

Having made the determination that the consent judgment controlled the res judicata effect, the Court next determined the preclusive effect of the consent judgment.

 

The Eleventh Circuit noted that in determining the preclusive effect of a consent judgment, it had to apply principles of contract law to ascertain the parties' intent. Norfolk S., 371 F.3d at 1289; see also United States v. S. Ute Tribe or Band of Indians, 402 U.S. 159, 161 (1971); Keith v. Aldridge, 900 F.2d 736, 740 (4th Cir. 1990) Wright & Miller, supra, at § 4443.

 

The Court determined there were three ways in which the parties' intent could be understood: (1) the CFPB could sue Servicer for all alleged violations that occurred between January 2014 and February 26, 2017; (2) the CFPB could not sue Servicer for any alleged violations between January 2014 and February 26, 2017; or (3) the CFPB could sue Servicer only for legal violations not covered by the settlement terms.

 

The CFPB argued for the first interpretation, relying on the release provision of the settlement agreement which stated CFPB "does not release any liability for conduct other than conduct related to the Mortgage Servicing Practices asserted or that might have been asserted in this complaint." 

 

CFPB asserted that the release made it clear that the parties only intended to release Servicer from liability that occurred prior to the filing of the complaint in the first action. However, the Eleventh Circuit disagreed, reasoning that fundamental contract interpretation principles counsel against reading one provision in isolation. See Hegel v. First Liberty Ins. Corp., 778 F.3d 1214, 1221 (11thh Cir. 2015); Feaz v. Wells Fargo Bank, N.A., 745 F.3d 1098, 1104 (11th Cir. 2014).

 

Servicer argued that the agreement's three-year servicing standard, monitoring and enforcement regime indicated that if any legal violations covered by the standards were committed, the parties intended CFPB to remedy the violation through the agreed upon processes and not through a separate court proceeding.

 

The Eleventh Circuit found this argument more persuasive, ruling that as a practical matter, the agreement would have been impossible to enforce if CFPB could unliterally decide when to invoke or when to ignore it. The Court found Servicer could not have intended to get so little security from the parties' agreement.

 

Servicer also argued that the parties agreed to an exclusive enforcement regime during the three-year term of the agreement, meaning CFPB could not now initiate a new legal proceeding for any legal violation that occurred during that time period.

 

However, the Eleventh Circuit found two issues with this argument: (1) there was no provision that stated CFPB could not sue Servicer at all during the consent judgments term; and (2) the release provision stated in part that nothing in the release "shall limit the CFPB's authority with respect to [Servicer], except to the extent the CFPB has herein expressly released claims." The Court found that CFPB would not have agreed to let Servicer violate the law so long as it didn't violate a servicing standard, and thus rejected this argument.

 

The Eleventh Circuit concluded the best interpretation of the agreement was that it created a particular enforcement mechanism that CFPB was required to follow for conduct covered by the consent judgment's servicing-standards-and-monitoring-regime and occurring between January 2014 and February 26, 2017. 

 

But, the Court continued, the CFPB could sue Servicer to enforce legal violations that occurred during that period which were not covered by the regime.

 

In the Eleventh Circuit's view, this interpretation avoided rendering the agreement's enforcement mechanism meaningless, while preserving CFPB's authority to enforce the law.

 

Thus, the Eleventh Circuit vacated the trial court's ruling and remanded for the trial court to determine which counts the CFPB's current complaint were barred by the consent judgment between the parties.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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