Monday, October 14, 2019

FYI: Cal App Ct (2nd Dist) Rejects Claim That Loan Assignment During Default Was Void

The Court of Appeal for the Second District of California recently affirmed the dismissal of a borrower's claims for wrongful foreclosure alleging that the assignment of his mortgage to the foreclosing entity was invalid.

In so ruling, the Second District rejected the borrower's argument that a mortgage cannot be assigned to another entity while the loan is in default as illogical and incorrect, in part because this reasoning would allow borrowers to prevent lenders from assigning debt by refusing to make payments.

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

A borrower took out a mortgage loan secured by a deed of trust to his home (the "Loan").  After the initial lender was closed and placed into receivership by the federal government, the FDIC as receiver transferred the Loan to a new entity ("Assignor"), who in turn assigned the Loan to yet another entity ("Assignee") and recorded the assignment. 

Thereafter, a substitution of trustee was recorded declaring that Assignee was substituted for a new trustee ("Trustee") on the Loan.  The Assignee and Trustee foreclosed the Borrower's home in April 2017.

The borrower filed a wrongful foreclosure action against the Assignee and Trustee alleging that they had no rightful claim to foreclose on his home on the basis that: (i) the initial lender sold his mortgage to entities that were not named defendants to the foreclosure, and; (ii) that the Loan was not legally transferred, conveyed or assigned to Assignee because the borrower defaulted on the Loan nearly eight years prior to the time of assignment. 

The trial court sustained the Assignee and Trustee's demurrer to the borrower's complaint and the instant appeal followed.

On appeal, the appellate court reviewed the Borrower's chief argument that a financial institution may not validly assign a mortgage loan to another entity while the loan is in default, and that such an assignment is "void." 

Under California law, it is not enough for a homeowner merely to allege a mortgage assignment was voidable. See, e.g., Yhudai v. IMPAC Funding Corp. (2016) 1 Cal.App.5th 1252, 1256.  Rather, the homeowner must allege facts supporting a legally viable theory as to why the challenged assignment is void as a matter of law. See, e.g., Kalnoki v. First American Trustee Servicing Solutions, LLC (2017) 8 Cal.App.5th 23, 44; cf. Yvanova v. New Century Mortgage Corp. (2016) 62 Cal.4th 919, 929–930 [distinguishing between void and 4 voidable contracts].

Here, the Appellate Court noted that complaint asserted without any logical basis or supporting legal authority that a borrower, by refusing to pay, can prevent a lender from assigning the debt. 

Examining the Borrower's argument that the assignment was void, the Second District was unpersuaded by this "strange suggestion," concluding that the Borrower's argument was legally incorrect because he did not explain how the assignments were void as a matter of law.  See, e.g., Mendoza, supra, 6 Cal.App.5th at pp. 811– 820.). 

The other five claims raised in the borrower's complaint failed for not being within the jurisdiction of the appellate court (federal claims dismissed upon removal as invalid and remanded to state court), forfeited as not raised in the opening brief (claims for violation of Civil Code section 2934 or for cancellation of written instruments), or for want of an underlying claim (claim for unfair competition).

Because the Borrower failed to provide a logical basis for his argument suggesting that the assignment of his mortgage loan while in default was void, nor any supporting legal authority, the Second District concluded that the trial court's judgment sustaining the demurrer without leave to amend was proper, and affirmed the judgment.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Thursday, October 10, 2019

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's summary judgment ruling in favor of the financial services defendants in an action to rescind the mortgage under the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (TILA).

In so ruling, the Ninth Circuit held that the plaintiff consumer did not have a right of rescission under TILA because he previously quitclaimed his interest in the property to his ex-wife, and his new loan to acquire the property from his ex-wife was a "residential mortgage transaction".

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

The plaintiff and his now ex-wife obtained title to the subject property in 1990.  In 2003, Plaintiff quitclaimed the property to his wife, and she then encumbered the property with a series of deeds of trust listing her as the sole owner.

The couple divorced in 2007.  The divorce judgment awarded the property to Plaintiff, and ordered him to among other things "immediately refinance the mortgage owning on said property in order to remove Wife's name from said financial obligation."  The judgment also ordered Plaintiff to pay his ex-wife $100,000.

The lender extended a loan to Plaintiff, who executed a deed of trust securing the note on the property.  Plaintiff used the proceeds from the loan to pay off his ex-wife's outstanding loan balance and to satisfy the money judgment. 

Plaintiff filed suit against the lender and its successors (Defendants) seeking rescission of the loan and other relief.  The trial court dismissed his claim for rescission as time-barred, and granted summary judgment against him on his claims for declaratory and injunctive relief and damages. 

The Ninth Circuit vacated the trial court's judgment and remanded, holding that Plaintiff's letter to the loan servicer gave proper, timely notice of rescission within three years of the loan transaction under TILA.

On remand, the trial court again granted summary judgment in favor of Defendants, holding that Plaintiff had no statutory right under TILA to rescind the mortgage because his loan was a residential mortgage transaction.

As you may recall, TILA defines a residential mortgage as "a transaction in which a mortgage is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling."  15 U.S.C. § 1602(x).

The trial court concluded that, although Plaintiff had "a partial interest in the property from 1990 to 1997 and was the sole owner from 1997 to 2003, his interest in the property was fully extinguished in 2003 when he conveyed the entirety of his interest to his wife via quitclaim deed."

The trial court further found that pursuant to his obligations under the divorce judgment, Plaintiff entered into the loan in question specifically to acquire ownership interest in the property, and thus "[the loan] was a residential mortgage transaction as to which TILA provide[d] no statutory right of rescission."

This appeal followed. 

Plaintiff argued that the issue of whether his loan was a residential mortgage transaction was not properly before the trial court on remand because Defendants waived the issue by failing to raise it until after the prior appeal, and because defendants' argument was barred by law of the case and the Ninth Circuit's mandate in the prior appeal.

The Ninth Circuit disagreed, holding that "a defendant need not raise every possible argument in a motion for summary judgment and may make a different argument on remand if a grant of summary judgment in its favor is reversed on appeal."

In the prior appeal, the Ninth Circuit never ruled on the issue whether Plaintiff had a right of rescission.  Instead, it merely held that Plaintiff's letter to the servicer provided sufficient notice that he was exercising his right to rescind, and the trial court therefore erred in dismissing his claims for rescission on the ground of improper notice. 

Thus, the Ninth Circuit held that "neither law of the case nor the mandate on appeal barred the district court from addressing defendants' 'residential mortgage transaction' argument."

Plaintiff also argued that the trial court misinterpreted the statute by including in the definition of a residential mortgage transaction an initial acquisition and a reacquisition of the property.

Plaintiff cited the Official Staff Interpretations to Regulation Z, which provides that the term residential mortgage transaction "does not include a transaction involving a consumer's principal dwelling if the consumer had previously purchased and acquired some interest to the dwelling, even though the consumer had not acquired full legal title."  12 C.F.R. Pt. 226, Supp. I, Subpt. A § 226.2(a)(24)-5(i) ().

The Ninth Circuit observed that the "refinance" ordered by the divorce judgment allowed Plaintiff to pay off his ex-wife's outstanding mortgage and then made it possible for Plaintiff to acquire the property in his own right.  The loan was not a refinance where the borrower changed from the ex-wife to Plaintiff, and Plaintiff did not acquire title until the day after he signed the loan. 

Thus, the Ninth Circuit held, the trial court correctly concluded that the Official Staff Interpretations to Regulation Z refers to a situation where the borrower increases an existing ownership interest using loan proceeds, rather than the situation where the borrower reacquires a property after he had given up all ownership interest.

Next, Plaintiff argued that the 2003 quitclaim deed did not establish his subsequent lack of ownership interest in the property because upon the filing of the dissolution of marriage, the property took on communal attributes and he acquired a "species of co-ownership." 

The Ninth Circuit held, without deciding the issue, that assuming Plaintiff gained an interest in the property by operation of Oregon law, he still "acquired" his interest for purposes of TILA's "residential mortgage transaction" provision.  As the Ninth Circuit explained, the plain language of the statute requires a transaction in which a mortgage is created "to finance the acquisition or initial construction of such dwelling."

Plaintiff also argued that the language used in the loan documents showed that he already owned an interest in the property before he took out the loan.

However, the Ninth Circuit stated that the lender's characterization of the transaction was not determinative, and even if Plaintiff believed the purpose of the loan was to comply with the divorce judgment, the fact remained that he had no interest in the property when he took out the mortgage.

Accordingly, the Ninth Circuit affirmed the trial court's grant of summary judgment in favor of the Defendants.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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The U.S. Court of Appeals for the Ninth Circuit recently vacated an order sua sponte remanding to state court a putative class action removed under the federal Class Action Fairness Act.

In so ruling, the Ninth Circuit held:

1.         When a notice of removal plausibly alleges a basis for federal court jurisdiction, a federal trial court may not remand the case back to state court without giving the defendants an opportunity to demonstrate that the jurisdictional requirements were satisfied;

2.         The amount in controversy may be based on reasonable assumptions tied to the allegations in the complaint;

3.         When a statute or contract provides for the recovery for attorneys' fees, prospective attorneys' fees must be included in the assessment of the amount in controversy; and

4.         The defendants' summary judgment motion in state court, asserting that the plaintiffs' claims were barred by a release from a prior class action settlement, did not defeat federal court jurisdiction. 

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

An employee filed a putative class action against her employer in state court, alleging that the employer failed to compensate its employees for wages and missed meal breaks and failed to issue accurate itemized wage statements, all in violation of state wage and hour laws.

The employer removed the case to federal court alleging minimum diversity jurisdiction under the federal Class Action Fairness Act (CAFA). 

As you may recall, a federal trial court has original jurisdiction under CAFA if:  (1) any member of the class is a citizen of a state different from any defendant, (2) the class contains at least 100 members, and (3) the amount in controversy exceeds $5,000,000.  28 U.S.C. § 1332(d)(2), (d)(5)(B).

To show minimum diversity, the employer alleged that it was a citizen of Maryland and Delaware and the employee was a citizen of California.  To satisfy the class size requirement, the employer provided a declaration stating that it employed at least 2193 nonexempt employees during the period defined in the complaint.

To satisfy the amount in controversy requirement, the employer relied on its employee data (e.g., number of nonexempt employees, hourly rate of pay, and number of workweeks worked by putative class members), and then made assumptions about the frequency of the violations alleged in the complaint.

Using assumed violation rates, the employer alleged a potential amount in controversy exceeding $15 million, with its most "conservative estimate" totaling over $5.5 million, including attorneys' fees (which the employer asserted should be included to in the calculation).

After the employer filed the notice of removal, the trial court issued an order sua sponte remanding the case to state court.  The trial court stated that the employer's calculations of the amount in controversy was " unpersuasive"  and rested on "speculation and conjecture."

The trial court faulted the employer for not offering evidentiary support for its assumptions, and concluded that "prospective attorneys' fees are too speculative" to be included in the amount in controversy.

The litigation proceeded in state court.  The employer filed a motion for summary judgment, arguing that a release from a related class action settlement barred all of the employee's claims.

The employer filed a timely petition for permission to appeal under 28 U.S.C. § 1453(c)(1), which the Ninth Circuit granted.

The employer argued that the trial court imposed an erroneous burden of proof by sua sponte remanding the case to state court without allowing it an opportunity to support its allegations with evidence.

The Ninth Circuit observed that "when a defendant seeks federal-court adjudication, the defendant's amount-in-controversy allegation should be accepted when not contested by the plaintiff or questioned by the court."  Dart Cherokee Basin Operating Co., LLC v. Owens, 574 U.S. 81, 87 (2014).

The appellate court noted that the trial court did not conclude that the employer's allegations were implausible.  Instead, the trial court stated that the employer failed to meet its burden of proving the amount in controversy with evidence. 

The Ninth Circuit also noted that a notice of removal "need not contain evidentiary submissions."  Dark Cherokee, 574 U.S. at 84.  "[W]hen a defendant's assertion of the amount in controversy is challenged and both sides submit proof, the court decides by a preponderance of the evidence whether the amount-in-controversy requirement has been satisfied."  Id., at 88.

Thus, the appellate court held that the trial court's sua sponte order deprived the employer of "a fair opportunity to submit proof."

Next, the employer argued that the trial court erred in disallowing its assumptions in its estimate of the amount in controversy.

The Ninth Circuit explained that a removing defendant is permitted to rely on "a chain of reasoning that includes assumptions."  Ibarra v. Manheim Invs., Inc., 775 F.3d 1193, 1199 (9th Cir. 2015).  However, "assumptions cannot be pulled from thin air but need some reasonable ground underlying them."  Id.

The employee alleged that the employer " routinely" failed to provide overtime wages and compensation for rest and meal breaks.  The employer assumed six minutes of unpaid overtime per day and one missed rest break per week.

The employer assumed that 100% of wage statements were inaccurate because the employee alleged that "[n]ot one of the paystubs that Plaintiffs received complied with Labor Code § 226b."

Based on the allegations in the complaint, and noting that the amount in controversy was merely an estimate of the total amount in dispute, the Ninth Circuit determined that the trial court mischaracterized the employer's assumptions as being "speculation and conjecture."

The employer also argued that the trial court erred by "refusing to consider prospective attorneys' fees in the amount in controversy."

The Ninth Circuit agreed, stating that "[w]e have long held (and reiterated [in early 2018]) that attorneys' fees awarded under fee-shifting statutes or contracts are included in the amount in controversy."  Fritsch v. Swift Transp. Co. of Ariz., LLC, 899 F.3d 785, 794 (9th Cir. 2018).

Because the complaint sought recovery of attorneys' fees, and because there was no dispute that at least some of the California wage and hour laws in the complaint entitle a prevailing plaintiff to an award of attorneys' fees, the Ninth Circuit held that the trial court should not have excluded prospective attorneys' fees from the amount in controversy.

The employee argued that the employer's summary judgment motion in state court defeated federal court jurisdiction, because it argued that her claims were barred by a release from a prior class action settlement.

The Ninth Circuit disagreed, explaining that post-filing developments do not defeat jurisdiction if jurisdiction was properly invoked as of the time of filing of the complaint.  Further, the strength of any defense indicated the likelihood of the plaintiff prevailing, but is irrelevant to determining the amount at stake in the litigation.

The employee also suggested that jurisdiction was defeated because she stipulated that the amount in controversy did not exceed $5,000,000.

However, the U.S. Supreme Court has held that when "a class-action plaintiff stipulates, prior to certification of the class, that he, and the class he seeks to represent, will not seek damages that exceed $5 million in total," the trial court should ignore the stipulation when assessing the amount in controversy.  Std. Fire Ins. Co. v. Knowles, 568 U.S. 588, 590, 596 (2013).

Accordingly, the Ninth Circuit vacated the trial court's order refusing federal court jurisdiction, and remanded for further proceedings.



Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Saturday, September 14, 2019

FYI: Cal App Ct (2nd Dist) Upholds Denial of Class Cert Based on Survey and Statistical Sampling

The Court of Appeal for the Second District of California affirmed an order denying class certification in a wage and hour litigation, holding that plaintiffs' proposed anonymous, double-blind survey and statistical sampling failed to address individualized issues for liability and damages.

In so ruling, the Appellate Court held that the plaintiffs' trial plan was unmanageable and unfair because, among other things, the proposed survey deprived the defendants of the ability to cross-examine the witnesses and to assert defenses. 

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

In this putative class action, property inspectors (Plaintiffs) alleged that they were engaged by three service providers to perform property inspections for two insurance companies. 

Plaintiffs alleged they were employees of the insurers and service companies (Defendants) jointly, and Defendants failed to pay minimum wages and overtime (Cal. Lab. Code § 1194), furnish timely or accurate wage statements (Cal. Lab. Code § 226(e)), establish a policy for meal or rest breaks, or reimburse them for employment expenses (Cal. Lab. Code § 2802), and in so doing violated California's Unfair Competition Law (Bus. & Prof. Code § 17200, et seq.).

The Plaintiffs moved for class certification, supported by their expert's declaration that liability could be determined and damages calculated classwide by using "established survey methods and statistical analyses"  of a random sample of class members.

The trial court denied certification on the ground that Plaintiffs failed to show their status as employees could be established on predominantly common proof.

Plaintiffs appealed and the Appellate Court reversed the order, remanding with instructions for the trial court to evaluate the Plaintiffs' trial plan. 

On remand, the Plaintiffs' expert elaborated on the trial plan, proposing an anonymous, double-blind survey of all class members.  Specifically, the plan provided that all potential class members would be invited to participate in the survey and a telephone survey firm would conduct interviews and ask questions concerning:

(1) the amount of overtime worked, (2) the numbers of meal and rest breaks to which inspectors were entitled to take under California law but did not take (assume the law applied to these individuals), (3) the amount of time inspectors spent performing specific tasks of relevance to the claimed minimum wage violations, (4) the number of miles that inspectors drove to do their work, [and] (5) the amount of money that inspectors spent for other business expenses incurred in connection with their work.

The respondents would receive a small financial incentive to participate in the survey, and would be told their answers and participation were confidential.

The respondents would asked to recall, among other things, the time they spent doing inspection, the number of days per week worked beginning in 2005, the number of hours worked, when they took breaks and the duration of each break, whether they incurred expense, and which of the three service companies and only one of the insurers they worked for and for how long.

The survey did not include questions about the second insurer for unknown reasons.  When asked why, Plaintiffs' expert answered "I wasn't asked to do that." 

Using the sampling data from the survey, Plaintiffs' expert would generate estimated totals for each subclass, apportioned separately for inspections done for each of the Defendants, and provide a margin of error and confidence levels.

In opposition to Plaintiffs' trial plan, Defendants' expert identified several flaws in the proposed survey. 

First, the survey asked no questions related to the employee/independent contractor distinction, and in fact avoided questions about the degree of independence inspectors enjoyed. 

Specifically, the survey did not ask questions about the Defendants' knowledge or control of any facet of an inspector's workday, e.g., how many hours the inspector worked, what breaks were or could have been taken, or what meets were attended or expense incurred.  Defendants argued that this deficit left the independent contractor question unanswered and potentially skewed the survey results by artificially narrowing variances.

The expert also argued that the very precise recall required by the survey questions about events stretching back 10 years invited significant error.  Further, if the data showed that the respondents' experiences varied widely, the average may not be representative of the actual experiences of many members of class, and the anonymous nature of the survey led to inaccurate and unverifiable results.

The trial court again denied certification, finding Plaintiffs' statistical sampling unworkable because it did not specify which insurer's inspections were performed, or explain whether the inspectors' failure to take meal or rest  breaks was due to preference or to the exigencies of the job.  Also, the survey's anonymity deprived the Defendants from cross-examining witnesses to verify responses or test them for accuracy or bias.

This appeal followed.

As you may recall, " in wage and hour cases where a party seeks class certification based on allegations that the employer consistently imposed a uniform policy or de facto practice on class members, the party must still demonstrate that the illegal effects of this conduct can be proven efficiently and manageably within a class setting."   Duran v. U.S. Bank National Assn. (Cal. 2014) 59 Cal. 4th 1, 28-29.  " Class certification is appropriate only if 'individual questions can be managed with an appropriate trial plan.'" Id., at 27.

The Plaintiffs argued that their expert's survey was "methodologically correct and scientifically valid, captured all pertinent variation in hours worked among inspector, eschewed irrelevant questions, and produced reliable and accurate results."

The Appellate Court explained that the problem with the survey was not the scientific measurement procedure, rather it failed as a trial plan because it did not fairly establish Defendants' liability on a classwide basis as to any claim.

With respect to overtime and meal and rest breaks, the Appellate Court noted that "simply having the status of an employee [did] not make the employer liable for a claim for overtime compensation or denial of breaks."   Instead, "[a]n individual employee establishe[d] liability by proving actual overtime hours worked without overtime pay, or by providing that he or she was denied rest or meal breaks."

The Appellate Court found that Plaintiffs' expert asked no questions about the second insurer, and thus, it was unclear how Plaintiffs could establish the liability of the second insurer without considering whether any inspector worked for this insurer more than eight hours in a day or 40 in a week (Lab. Code § 510).

The Appellate Court explained that Plaintiffs' plan also failed with respect to their minimum wage claim (Lab. Code § 1194), because the inspectors were paid a piece rate for each inspection performed and Plaintiffs offered no explanation how they could establish the number of inspections performed for the second insurer, how long they took, or what the second insurer paid for them.

Regarding the meal and rest period claims, the Appellate Court explained that the inspectors performed inspections for a number of insurance companies, including non-parties, often in the same day, but the survey failed to ask if anyone ever worked long enough in a day for either of the insurance companies in this case to be entitled to a meal or rest period from that insurer or any of its three co-employers.

Further, the Appellate Court noted that "plaintiffs made no effort to explain how they could establish through common proof what expenses, if any, inspectors incurred for any particular insurer, or how they were deprived of wage statements."

The Appellate Court determined that the anonymous survey deprived the Defendants of any meaningful examination of any witnesses, as Plaintiffs expert did not know who the survey respondents were and why any class member had chosen not to participate.

After the Appellate Court issued an opinion affirming the trial court's ruling, Plaintiffs petitioned for rehearing, arguing that Defendants' liability could be established independent of the survey by examining the various policies and contracts demonstrating all the Defendants were co-employers that had the right to control Plaintiffs' work.

Plaintiffs argued that liability may be established classwide by the failure of one employer to pay overtime or provide a rest break on even a single occasion.

This approach, in the Appellate Court's view, was similar to that rejected in Duran, where the plaintiffs alleged their employer had misclassified them as outside sales persons, rendering them exempt from overtime laws.  In Duran, the plaintiffs proposed to proceed classwide with an initial liability phase and a second phase to address the extent of damages, but the California Supreme Court held that whether a given employee is properly classified depends in large part on the employee's individual circumstance.  Duran, 15 Cal.4th at 36. 

The Appellate Court also observed that in Brinker, the California Supreme Court analyzed the elements of the off-the-clock claim before it, holding that "liability is contingent on proof [the employer] knew or should have known off-the-clock work was occurring."  Brinker, 53 Cal.4th at 1024. 

As the Appellate Court explained, "an employer's liability for failure to provide overtime or rest breaks will depend on the employees' individual circumstance.  Liability to one employee by one employer does not establish even that employer's liability to other employees, much less the liability of a joint employer to any employee."

The Court continued, explaining that "[e]ven if a class action trial could determine that an employer is liable to an entire class for a consistently applied policy or uniform job requirements and expectations contrary to Labor Code requirements, or if it knowingly encouraged a uniform de factor practice inconsistent with the requires, any procedure to determine the defendant's liability to the class must still permit the defendant to introduce its own evidence, both to challenge the plaintiffs showing and to reduce overall damages."

Plaintiffs proposed that once the subclasses were certified and liability established in the first phase, class members could submit claims by answering a questionnaire, and any dispute could be resolved in "streamlined trials" where Defendants could cross-examine claimants and present their own witnesses. 

The Appellate Court explained that this approach would render any prior liability phase either duplicative or superfluous, as Defendants would likely raise several objections, and consequently the second phase could easily occupy the trial court for several months.

Finding that Plaintiffs' survey afforded "no fair, manageable way" to establish liability on common proof, the Appellate Court affirmed the trial court's order denying class certification.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Wednesday, August 28, 2019

FYI: 9th Cir Holds Supporting Evidence Not Required for CAFA Removal

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court order remanding a case to state court for lack of jurisdiction under the federal Class Action Fairness Act (“CAFA”) because the jurisdictional allegations pled provided a short and plain statement of jurisdiction.

The Court held this was sufficient, even without supporting evidence, to confer jurisdiction.

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

A plaintiff filed a class action complaint against a defendant in California state court claiming that defendant “had engaged in unlawful business practices related to the advertisement and sale of residential internet services”  Plaintiff filed the case on behalf of himself and all California consumers that paid for defendant’s internet services within the last four years.

Defendant removed the putative class action to the federal trial court pursuant to CAFA.  In the notice of removal, defendant, a citizen of Delaware and Georgia, alleged that it met CAFA’s jurisdictional requirements “because it was a putative class action with more than 100 class members,” and “that the amount in controversy exceeded $5,000,000, exclusive of interest and costs.” Defendant also alleged that that minimal diversity existed between the parties because plaintiff and all class members were California Citizens.

Plaintiff moved to remand the case to state court by making a facial challenge to the notice of removal. Specifically, plaintiff argued that defendant had not “adequately plead the existence of minimal diversity” because defendant based the citizenship allegations solely “on information and belief.”

The trial court granted plaintiff’s motion to remand finding that defendant’s citizenship allegations were insufficient to establish minimal diversity because they were based on no more than “sensible guesswork.” This appeal followed.

The Ninth Circuit began its analysis by noting that Congress enacted CAFA with the “intent . . . to strongly favor the exercise of federal diversity jurisdiction over class actions with interstate ramifications.”  CAFA gives federal trial courts jurisdiction over class actions when, “any member of a class of plaintiffs is a citizen of a State different from any defendant.” 28 U.S.C. § 1332(d)(2)(A). In contrast to section 1332(a)’s complete diversity of citizenship requirement, the Ninth Circuit observed that CAFA only requires “minimal diversity.”

The issue in this appeal is what the “removing defendant must plead in its notice of removal.” 

The removing defendant has the burden to plead minimal diversity by including in the notice of removal “a short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a).  Congress borrowed the “short and plain statement” standard from Rule 8(a), signifying to the Ninth Circuit that courts should liberally construe removal allegations similar to other pleadings.  The Ninth Circuit also noted that the removing defendant may plead minimal diversity based on “information and belief,” without submitting evidence to support the allegations.

Defendant alleged that “all putative class members were citizens of California.”  The Ninth Circuit rejected plaintiff’s argument that defendant had to come forth with evidence to demonstrate why it believed its citizenship allegations. 

Instead, the Court held that a removing defendant may base its citizenship allegations “solely on information and belief.”  Here, defendant’s notice of removal contained the required short and plain statement that the putative class members were all California citizens necessary to confer jurisdiction under CAFA.

The Ninth Circuit also determined that the trial court erred by placing the burden on the removing defendant “to prove its jurisdictional allegations in response to” plaintiff’s facial challenge.  Instead, jurisdictional factual allegations at the pleading stage “need not be proven unless challenged.” This is especially true, the Ninth Circuit noted, because CAFA contains “no antiremoval presumption.” 

The Ninth Circuit found it significant that plaintiff’s motion to remand only facially challenged the legal adequacy of the notice of removal, instead of factually challenging the jurisdictional allegations because a facial challenge accepts the removing defendant’s allegations as true and then argues that the allegations on their face fail to confer jurisdiction.  As a result, the Appellate Court held it was improper for the trial court to require defendant “to present evidence in support of its allegation of minimal diversity.”

Thus, the Ninth Circuit held that defendant’s jurisdictional allegations, which provided a short and plain statement of the parties’ citizenships based on information and belief, met its burden to plead minimal diversity. 

The Ninth Circuit therefore reversed the trial court’s order remanding the case to state court.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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Monday, August 26, 2019

FYI: Cal App (3rd Dist) Allows HOBR Claim for Vague Reasons for Loan Mod Denial

The Court of Appeal for the Third District of California recently affirmed in part, and reversed in part, an order granting a mortgage servicer’s motion to dismiss several causes of action brought by plaintiff borrowers for denying their requests to modify their mortgage loan.

The appellate court affirmed the dismissal as to the borrowers’ counts for breach of contract, negligence, and intentional infliction of emotional distress.  However, it also held that the borrowers stated that a valid cause of action under California’s Homeowner Bill of Rights, section 2923.6, and reversed as to that claim.

Specifically, the appellate court concluded that the servicer’s explanation that it “do[es] not have the contractual authority to modify [the] loan because of limitations in [its] servicing agreement” was not sufficiently detailed, and that without knowing the actual reason for denial, it could not be said for certain that the failure to provide “specific reasons for the investor disallowance” as required under section 2923.6(f) was not material.

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

After falling behind on their mortgage loan, the plaintiffs-borrowers (“Borrowers”) requested loss mitigation assistance from their mortgage servicer (“Servicer”) and alleged that they were offered a loan modification in exchange for agreeing to make three trial payments of $1,633.53.  Borrowers completed the trial payments but were not offered a modification, which led to Servicer recording a notice of default three months later.  After first dismissing an action against Servicer without prejudice, the Borrowers initiated the instant litigation in early 2014.

In late 2014, Borrowers submitted a completed loan modification application with supporting documents to Servicer to review Borrowers for a Home Affordable Modification Program (“HAMP”) or a non-Hamp “Trial Payment Plan” modification.  Two months later, the Servicer denied the Borrowers for the HAMP modification, purportedly due to lack of contractual authority to modify the loan due to limitations in its servicing agreement.  However, the Borrowers were provided a non-Hamp Trial Payment Plan offer that required them to make three trial payments—the first one in the amount of $171,745.78—which was “essentially an initial payment of the past due total arrearages.”

The Borrowers appealed the Servicer’s denials, arguing that the non-Hamp Trial Payment Plan was a constructive denial and that they would have been approved if “fairly and carefully reviewed.”

The Borrowers’ operative third amended complaint alleged five causes of action against the Servicer for: (1) breach of contract, (2) violation of California’s Business & Professions Code section 17200 (not at issue on appeal), (3) negligence, (4) violation of California’s Homeowner Bill of Rights, section 2923.6, and (5) intentional infliction of emotional distress.

As was the case with the prior Complaints, the trial court sustained the Servicer’s demurrer to the third amended complaint as to all causes of action, and this time, without leave to amend. The instant appeal from the judgment of dismissal followed.

Initially, the Third District reviewed Borrowers breach of contract claim, which alleged that the Servicer had breached the written contract to extend a mortgage modification in exchange for three trial payments. 

The appellate court noted that the purported contract attached to the third amended complaint referred multiple times to the agreement Servicer offered as a “Special Forbearance Agreement,” and expressly stated that it was “not a waiver of the accrued or future payments that become due, but a period for you to determine how you will be able to resolve your financial hardship.” Further, the purported “agreement” made no promise of a loan modification, but that “[t]he lender is under no obligation to enter into any further agreement,” and completion of trial payments would result only in a review for a loan modification based on investor approval.

The Borrowers’ argument that the temporary payment plan which led them to believe a permanent modification was forthcoming was tantamount to a binding contract was rejected by the trial court.  On appeal, they argued that the trial court erred in finding that the forbearance agreement did not obligate the Servicer to modify their mortgage loan, citing the 4th District’s holding in West v. West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, which held a “Trial Plan Agreement” required the lender to offer a permanent loan modification. 

The Third District similarly found Borrowers’ argument unconvincing, and distinguished the facts from West, which offered a modification under HAMP, for the case at bar, which expressly disclaimed a promise to modify.  Whereas West was grounded in a Treasury directive and HAMP guidelines, the forbearance agreement here offered offer no comparable authority for imposing a similar obligation upon the Servicer.  Accordingly, the appellate court concluded that the Servicer’s demurrer was properly sustained as to their breach of contract claim.

Borrowers’ negligence claim argued that the Servicer owed them a general duty of care in the handling and processing of their loss mitigation review and negligently made false representations in promising a modification in exchange for trial payments. 

While acknowledging that a financial institution can owe a duty of reasonable care in processing loan modifications (Alvarez v. BAC Home Loans Servicing, LP (2014) 228 Cal.App.4th 941), the trial court sustained the Servicer’s demurrer as to this count on the basis that Borrowers merely alleged that a nonexistent contract was not honored, and the claim for negligence per se similarly failed for failure to reference any such violation.

On appeal, the Borrowers argued that the failed to adequately apply Alvarez, and that a per se duty of care is also owed under California's Homeowner Bill of Rights.  The appellate court disagreed. 

Even assuming that the Servicer owed a duty of care in processing the loan application, the Third District held that Borrowers’ third amended complaint failed to allege a breach or any facts that might suggest a failure to comply with any duty under Alvarez.  Thus, the trial court’s decision to sustain the Servicer’s demurrer as to Borrower’s negligence claim was affirmed.

Next, the appellate court reviewed the dismissal of the Borrower’s cause of action under California’s Homeowner Bill of Rights.  In sustaining the Servicer’s demurrer, the trial court rejected the Borrowers claims that their written denials were insufficiently detailed to comply with section 2923.6(f) on the basis that Borrowers’ allegations were vague and they failed to provide authority that anything more was required.

As you may recall, Section 2923.6 subdivision (f) of the Homeowner Bill of Rights requires a servicer, following the denial of a loan modification, to send written notice “identifying the reasons for the denial.”  Subdivision (f)(2) further requires that “[i]f the denial was based on investor disallowance, the specific reasons for the investor disallowance” must be given.  (§ 2923.6, subd. (f)(2)).

On appeal, the Third District analyzed the Servicer’s denial for a HAMP modification, which explained that “[we] do not have the contractual authority to modify your loan because of limitations in our servicing agreement.”  The appellate court concluded that the statement was ambiguous and did not suffice as an explanation – at least for the purposes of a demurrer. 
Although the Servicer argued that the purported violation was not material, as is required for a borrower to bring a claim for injunctive relief under section 2923.6 when a deed upon sale has not yet been recorded, the appellate court disagreed, reasoning that it could not determine whether the failure to provide “reasons for the disallowance” was not material without knowing the investor’s actual reason for denying the HAMP modification.

Because the appellate court concluded that Borrowers stated a claim under section 2923.6, the trial court’s order sustaining the demurrer to the Homeowner Bill of Rights claim was reversed.

Lastly, the Third District reviewed the sustained demurrer as to the Borrowers’ intentional infliction of emotional distress claim—that the Servicer’s refusal to provide a modification and offer approving modification conditioned only upon payment of $171,745.78 in arrearages constituted “extreme and outrageous” conduct.

In sustaining the demurrer, the trial court explained that creditors, such as the Servicer, enjoy a qualified privilege to protect their economic interest by asserting their legal rights—in this instance, to collect the 6-plus years of arrearages due on the loan—even though doing so may cause emotional distress. 

On appeal, the Borrowers argued that the trial court failed to adequately consider cases finding actionable conduct based on improper creditor action.  Bundren v. Superior Court (1983) 145 Cal.App.3d 784, 790 (creditor who knows the debtor is susceptible to emotional distress due to a physical or mental condition may incur liability for causing emotional distress).  The Borrowers claim that the Servicer knew its conduct was likely to cause more emotional distress than a typical debt collection because it knew they were trying to modify their loan since 2010 and could become homeless.  

While acknowledging that the Bundren court held that creditors could lose their qualified privilege to protect their economic interest if outrageous and unreasonable means are used to seek payment, the appellate court found no such conduct occurred here which “exceed[ed] all bounds usually tolerated by decent society, of a nature which is especially calculated to cause, and does cause, mental distress of a very serious kind.” ’ ” (Christensen v. Superior Court (1991) 54 Cal.3d 868, 904–905.).  Thus, the demurrer was sustained as to the Borrowers’ claims for intentional infliction of emotional distress.

For all of the foregoing reasons, the Third District reversed the trial court's order sustaining the demurrer as to the Borrowers’ claims under the Homeowners’ Bill of Rights, but affirmed as to all other counts, and remanded to the trial court for proceedings consistent with the appellate court's opinion.


Eric Tsai
Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
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Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon





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