Wednesday, April 23, 2014

FYI: Cal App Ct Reverses Dismissal of Breach of Loan Mod and Wrongful Foreclosure Action, Holds No Tender Required in Context of Performing Loan Mod

Monday, September 17, 2012

The California Court of Appeals, Second District, recently reversed a trial court's order sustaining a servicer's demurrer without leave to amend, holding that the borrower had sufficiently alleged formation of a valid contract to modify her loan and breach of the loan modification contract. The Court further held that the borrower should be allowed to amend the complaint to allege causes of action for breach of the covenant of good faith and fair dealing, and wrongful foreclosure.
 
A copy of the opinions is available at:
http://www.courts.ca.gov/opinions/documents/B229112.PDF
 
Plaintiff-borrower ("Borrower") completed a trial loan modification and entered into a loan modification ("Loan Modification") with Defendant-servicer ("Servicer"). The Borrower submitted the first payment contemplated by the terms of the Loan Modification in July of 2009 and Servicer acknowledged receipt of the payment and the Loan Modification documents.
 
In December of 2009, Borrower received a revised loan modification ("Revised Modification") agreement from Servicer reducing the monthly mortgage payments. The Revised Modification stated that if all of Borrower's representations remained true and all preconditions to the modification were met, the loan documents would automatically be modified and all unpaid late charges would be waived. 
 
Borrower alleged that the signed revised modification was submitted with, the contemplated monthly payment to Servicer on December 11, 2009. Borrower further alleged that the original signed Revised Modification was in the possession of Servicer. Borrower made payments pursuant to the Revised Modification for several months before receiving a notice to quit and learning the property had been foreclosed on and sold at auction.
 
Servicer allegedly returned the final payment made by Borrower for the reason that the payment was not sufficient to satisfy the default amount and no alternative payment arrangements had been made. The borrower'scomplaint also alleged that the trial loan modification was fully performed and that the Loan Modification and Revised Modification were partially performed. Borrower alleged that despite performance, Servicer breached the agreements by failing to honor the agreements' terms, wrongly proceeding to foreclosure sale, and wrongfully selling the property without offering her an alternative to avoid foreclosure.
 
Borrower filed a Complaint asserting causes of action for breach of contract, wrongful foreclosure and several other causes of action not at issue on appeal.
 
The Court held that the key issue in resolving whether Borrower had sufficiently plead a cause of action for breach of contract was whether the Borrower alleged performance of a condition precedent to formation of a valid agreement to modify the terms of the loan.  The Court recited the rule that, "[i]n contract law, a 'condition precedent' is 'either an act of a party that must be performed or an uncertain event that must happen before the contractual right accrues or the contractual duty arises.'
 
The conditions precedent at issue here are: 1) whether Borrower was required to have her signature notarized on the Loan Modification and Revised Modification; 2) whether execution of an agreement depended upon Servicer returning a copy of the Modification after it had been signed to Borrower; and 3) whether the Borrower had timely signed the Revised Modification.
 
First, the Court found that Borrower had adequately alleged a cause of action for breach of contract for the Loan Modification, but not the Revised Modification. The Court reasoned that because the Revised Modification had a detailed form for a notary to fill out acknowledging that Borrower signed the document before him or her, but the Loan Modification did not, notarizing the Revised Modification was a condition precedent. Due to this, the Court found that Borrower had only asserted a valid cause of action for breach of contract as to the Loan Modification.
 
Second, the Court found that the Servicer returning a copy of the loan modification agreement it had signed to Borrower could not be a condition precedent as it would give the Servicer sole control over the formation of the contract. Thus, the return of a signed copy of either the Loan Modification or Revised Modification was not a condition precedent to an enforceable contract.
 
Third, the Court glossed over the timeliness precondition, stating that there is no issue raised as to the timeliness of Borrower's signature on the Loan Modification, and that the timeliness issue only pertained to the Revised Modification.
 
The Court concluded that Borrower had alleged sufficient facts to state a cause of action for breach of contract with regard to the Loan Modification, but not the Revised Modification because the conditions precedent for a valid contract had not been met. Because Borrower sufficiently plead a cause of action for breach of contract with regards to the Loan Modification, the Court found the trail court had erred in sustaining Servicer's demurrer.
 
Further, the Court found Borrower should have been permitted to amend the complaint to include a cause of action for breach of the covenant of good faith and fair dealing. The Court reasoned that because every contract imposes a duty of good faith and fair dealing and because the Loan Modification Borrower had sufficiently plead the existence of a valid contract, Borrower should have been permitted leave to amend the complaint.
 
Finally, the Court found with respect to the wrongful foreclosure cause of action that Borrower had alleged a cause of action as Borrower was not in default under the terms of the Loan Modification. Servicer argued that Borrower was required to make a full tender to set aside a foreclosure. The Court held that because Borrower was not in default under the terms of the Loan Modification, there was no requirement Borrower tender any amount to forestall the foreclosure sale, and thus the Borrower should have been permitted leave to amend the complaint.



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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