Friday, April 25, 2014

FYI: Cal App Ct Holds No Duty of Care Imposed in Handling Loan Modifications, Declines to Follow Jolley v. Chase Home Finance

Tuesday, October 15, 2013

The California Court of Appeal, Fourth Appellate District, recently distinguished Jolley v. Chase Home Finance, LLC (2013) 213 Cal. App. 4th 872 ("Jolley"), ruling the defendant bank owed no duty to the borrowers in considering their loan modification request on the basis that Jolley involved a construction loan with ongoing disbursements made throughout the construction period, whereas the present action involved a home mortgage loan, and also, unlike the California UDAP claim in Jolley, the borrowers failed to properly allege "dual tracking" where a bank pursues foreclosure while also engaging in loan modification discussions.

In so ruling, the Court of Appeal held: (1) the borrowers failed to plead fraud with sufficient particularity because the borrowers failed to identify the bank's representative that made the alleged false statement; (2) that the borrowers failed to state a claim under the California UDAP statute because they did not properly an unfair business practice; and (3) the borrowers failed to state a claim for negligent misrepresentation because the bank did not owe a duty.

A copy of the opinion is available at:

The Plaintiffs and appellants (the "borrowers") financed the purchase of their residence with a promissory note and deed of trust. The borrowers later refinanced the home, and later began loan modification negotiations.  In January 2009, the trustee recorded a notice of default and election to sell under the deed of trust.  The loan was transferred to the defendant and appellee bank (the "bank") in October 2009, and the borrowers resumed loan modification negotiations with it.

Subsequently, the bank sent the borrowers a letter informing them that preliminary review indicated they may not be eligible for the Home Affordable Modification Program ("HAMP"), but it had been directed to place their mortgage in a "Trial Period Plan."  The borrowers and the bank continued to discuss a potential modification.  The bank later informed the borrowers by letter it would not adjust the terms of their mortgage.

One of the borrowers allegedly called the bank to reopen the modification process and allegedly spoke with a person in its customer service department. The employee supposedly told the borrower that her loan had been transferred to the foreclosure department, there was no scheduled trustee's sale date, and the modification would be reopened if the borrowers submitted documents showing additional income.  At a later date, the borrower was allegedly told she had been preapproved for a loan modification but would need to submit another package.

Several days later, a member of the bank's "home preservation" team allegedly contacted the borrowers. The borrowers supposedly explained that they had more income than what was represented in the bank's letter.  Allegedly at the bank's representative's direction, the borrowers submitted additional documents needed to process their request.  The bank's representative supposedly told the borrowers their loan modification was "under review."  The next day, the bank sold the borrowers' home at a trustee's sale.

The borrowers spoke again with the bank's representative, who informed them their home had been sold at the trustee's sale two days earlier. The borrowers told a bank representative that they never received prior notice that the bank would be selling the home, who responded that notice should have been sent.

Subsequently, the bank offered the borrowers a special forbearance agreement that they could accept by signing and returning the letter with the first of several payments. That agreement required the borrowers to make payments during a trial period, and the bank would review the outstanding amounts for a loan modification.  The borrowers were unable to comply with the terms of the forbearance agreement because their home had already been sold. The bank's representative continued to tell the borrowers that their loan modification was under review.

After the trustee's sale, the borrowers sued the bank for fraud, negligent misrepresentation, and "unlawful business practices" under the California Unfair Competition Law ("UCL").  The bank eventually moved for summary judgment, submitting portions of one of the borrower's deposition in which she acknowledged she and her husband stopped making mortgage payments in order to obtain a loan modification, and she understood the loan was in default. She admitted receiving a letter from the bank informing her that if the loan was not cured, the home was subject to a foreclosure sale. She also admitted receiving the notice of trustee's sale.

After the bank filed its summary judgment motion, the borrowers moved for leave to amend the complaint. Specifically, the borrowers sought to include the allegation that one of the borrowers called a bank agent and representative, who told her the loan had recently been transferred from the modification department to the foreclosure department and that there was no trustee sale pending.  The borrowers maintained the unidentified representative's statement was reflected in the borrower's deposition, which contained a typographical error on the page where she recounted the conversation.

The court granted the borrowers leave to amend. The amended pleading added an allegation that the borrower called the bank's Customer Service department to re-open the modification process based on additional income that had not been taken into consideration. During that telephone call, the employee supposedly told the borrower that: her loan had been transferred to the foreclosure department; there was no trustee's sale date scheduled for the property; if the borrower submitted additional documents showing additional income that the modification would be re-opened. Thereafter the borrower was told that she had been pre-approved for a loan modification; that she needed to submit another loan modification package and that a loan 'negotiator' would be contacting her shortly. 

The borrower alleged those representations were false, and the true facts were that the trustee's sale date for the property had been scheduled to take place and that regardless of whether or not the borrowers submitted additional financial documents, the modification process would not be re-opened and the trustee's sale would proceed as scheduled.  The borrowers further alleged that the bank "had no intention of providing [the borrowers] verbal or written notice regarding the date that the trustee's sale of [the borrowers'] house would take place"; they were ignorant of the falsity of the representations, and in reliance on them, they were induced not to take any other action to reinstate their loan or to forestall the foreclosure and protect the substantial amount of equity they had in the property. They alleged they were induced to provide the various loan modification packages, and as a result of their inaction the property was foreclosed upon and sold at the trustee's sale, causing them damage.

The bank again demurred (i.e., moved to dismiss), which the trial court sustained.  The trial court concluded that the borrowers failed to plead what misrepresentation was made, other than a misrepresentation by an unidentified employee that was not a part of the foreclosure department and failed to plead that the bank ratified or authorized the statement by the unnamed employee.  The court further ruled the borrowers did not plead facts to establish the elements of intent to induce reliance, justifiable reliance, causation or damages. Finally, the court ruled the borrowers did not plead facts to support liability under the UCL.

The borrowers did not timely amend, and the trial court dismissed the second amended complaint with prejudice. Thereafter, the court entered a judgment of dismissal in the bank's favor. The borrowers appealed.

As you may recall, to state a fraud claim, a party must allege (1) a misrepresentation as to a material fact; (2) knowledge of its falsity or scienter; (3) intent to defraud; (4) justifiable reliance; and (5) resulting damage. (Robinson Helicopter Co. v. Dana Corp. (2004) 34 Cal.4th 979, 990.) The heightened pleading standard for fraud requires " 'pleading facts which "show how, when, where, to whom, and by what means the representations were tendered." ' " (Ibid.) A plaintiff's burden in asserting fraud against a corporate employer requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written. (Hamilton v. Greenwich Investors XXVI, LLC (2011) 195 Cal.App.4th 1602, 1614.)

The Court of Appeal classified the borrowers' misrepresentation claims as based on the single telephone conversation occurring in March of 2010. Because these allegations failed to identify the bank employee, they were deficient; they simply lacked the required specifics as to the name of the person at the bank who spoke and his or her authority to speak.

In reaching this conclusion, the Court of Appeal distinguished cases in which courts have found plaintiffs met their fraud pleading burden because the identity of a person or persons making the misrepresentations was a matter uniquely within the defendant's knowledge. (E.g., West v. JPMorgan Chase Bank, N.A., supra, 214 Cal.App.4th at p. 793; Boschma v. Home Loan Center, Inc. (2011) 198 Cal.App.4th 230, 248.)  According to the Court of Appeal, the borrowers provided no information allowing it to conclude that the bank will necessarily have superior knowledge of that person's identity or authority to speak, and therefore, no way for the bank to dispute the claim. Accordingly, the Court of Appeal affirmed the trial court's ruling.

Next the Court of Appeal analyzed the borrowers' UCL claim.  As you may recall, a UCL plaintiff must allege that the defendant committed a business act or practice that is fraudulent, unlawful, or unfair. (See Buller v. Sutter Health (2008) 160 Cal.App.4th 981, 986.) The borrowers first addressed their UCL claim in supplemental briefing, contending they have sufficiently alleged that the bank committed a business practice—"dual tracking"—that is unfair. They pointed to Jolley, supra, 213 Cal.App.4th 872, as authority that this business practice supports a cause of action for unfair business practices under the UCL.

The Court of Appeal examined Jolley, noting it was decided in the context of a motion for summary judgment brought by a bank, which had assumed the assets of its predecessor. (Jolley, supra, 213 Cal.App.4th at pp. 877-878.)

The plaintiff in Jolley alleged that before the modification, the predecessor made false representations about certain matters, and that there were irregularities in the construction loan disbursements, causing delays. (Id. at p. 878.) The plaintiff in Jolley sought another loan modification. The plaintiff in Jolley also spoke with a bank employee who told him there was a high probability of a loan modification so as to avoid the foreclosure, the likelihood was good.  The plaintiff in Jolley alleged he was induced by these representations to borrow heavily to finish the project, and he claimed construction delays during the loan modification negotiations prevented him from selling the property before the housing market collapsed.  Rather than agree to a loan modification, the bank in Jolley demanded payment in full and its trustee recorded a notice of default and then a notice of sale. (Jolley, supra, 213 Cal.App.4th at p. 881.)

In reversing summary judgment on the plaintiff's UCL cause of action, the appellate court in Jolley focused in part on allegations indicating the bank had subjected the plaintiff to dual tracking, the "common bank tactic" whereby the lender pursues foreclosure at the same time it engages in loan modification negotiations. The court in Jolley observed that the California Legislature made dual tracking illegal effective January 1, 2018. (Id. at pp. 904-905.) Though it acknowledged the law did not apply and dual tracking was not forbidden by statute at the time, the appellate court in Jolley nevertheless held "the new legislation and its legislative history may still contribute to its being considered 'unfair' for purposes of the UCL . . . ." (Id. at pp. 907-908.)

The Court of Appeal here decline to follow Jolley.  It was not persuaded that the allegations reflected that the bank engaged in dual tracking. The operative pleading alleged that the bank had notified the borrowers that it would not modify their loan.  Moreover, the Court of Appeal stated that the pleading was entirely uncertain as to the identity of the person with whom the borrower spoke, and his or her authority to make purported representations concerning the status of the borrowers' loan and alleged preapproval. At the time of the alleged foreclosure, the borrowers were told their loan modification was "under review." These allegations and facts did not show that the bank's process resulted in a " 'foreclosure[] even when a borrower has been approved for a loan modification.' " (Jolley, supra, 213 Cal.App.4th at p. 904, fn. 20).

Next, the Court of Appeal noted that on numerous occasions it held that to establish a practice is "unfair," a plaintiff must prove the defendant's "conduct is tethered to an[] underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law." (Id., at p. 1366; Levine v. Blue Shield of California(2010) 189 Cal.App.4th 1117, 1137; Scripps Clinic v. Superior Court (2003) 108 Cal.App.4th 917, 940; Byars v. SCME Mortgage Bankers, Inc. (2003) 109 Cal.App.4th 1134, 1147.)

Here, the Court of Appeals held that the borrowers' operative complaint failed to state a claim under the unfairness prong of the UCL because they could not allege the bank's alleged dual tracking, when it occurred in 2010, offended a public policy tethered to any underlying constitutional, statutory or regulatory provision. (Durell v. Sharp Healthcare, supra, 183 Cal.App.4th at p. 1366.)  Accordingly, the Court of Appeal held that the trial court properly sustained the bank's demurrer to that cause of action without leave to amend.

Lastly, the Court of Appeal analyzed the borrower's negligent misrepresentation claim.  Once again relying on Jolley, the borrowers contended that the bank owed them a duty of care not to make misrepresentations to them regarding the status of their loan modification and foreclosure.  In California, "[t]he existence of a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence." (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal. App. 3d 1089, 1095 ("Nymark").)

However, the Court of Appeal reminded that, "as a general rule, a financial institution owes no 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 mere lender of money." (Nymark, supra, 231 Cal.App.3d at p. 1096; see also Wagner v. Benson (1980) 101 Cal.App.3d 27, 34-35; Ragland v. U.S. Bank Nat. Assn. (2012) 209 Cal.App.4th 182, 206).

The Court of Appeal agreed with federal district courts that have held that "offering loan modifications is sufficiently entwined with money lending so as to be considered within the scope of typical money lending activities." The Court of Appeal noted that if lenders were held to a higher standard of care, they simply would assert their rights to reclaim the property upon default, rather than offering services that may benefit a borrower.  (Alvarado v. Aurora Loan Services, LLC (C.D.Cal. 2012) 2012 WL 4475330, *6; see also Juarez v. Suntrust Mortgage, Inc. (E.D.Cal. 2013) 2013 WL 1983111, *12.)

Although the Court of Appeal acknowledged Jolley found that a duty of care existed, that case involved a construction loan, a critical distinction that the Court of Appeal held rendered Jolley inapposite.  Jolley decided that the question of whether a bank owed a duty of care was not properly resolved by the general rule stated in Nymark, supra, 231 Cal.App.3d 1089. (Jolley, supra, 213 Cal.App.4th at pp. 898-899.)  Instead, the court in Jolley applied the six-factor test of Biakanja v. Irving (1958) 49 Cal.2d 647, 650, in which imposition of a duty of care by a lender to a borrower depends on a balancing of several factors.  These factors, according to Jolley, favored a finding of a duty of care owed by a bank under the specific facts of that case, where the relationship between the lender and borrower on a construction loan is "ongoing" with contractual disbursements made throughout the construction period. (Jolley, at pp. 900-901 & fn. 16.)

The Court of Appeal concluded that the handling of loan modification negotiations or servicing is a typical lending activity that precluded imposition of a duty of due care.

Accordingly, the Court of Appeal affirmed the trial court's ruling.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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