Tuesday, April 22, 2014

FYI: Cal App Says Loan Mod Claims Not Preempted Under HOLA

Friday, July 2, 2010

A California Appellate Court recently held that two Borrowers’ cause of action against their lender for unfair business practices was properly dismissed because its inclusion in the amended complaint was beyond the scope of the trial court’s order granting leave to amend the original complaint.  The Appellate Court also found that the Borrowers’ cause of action against the lender for breach of the implied covenant of good faith and fair dealing was properly dismissed because it was inadequately plead. 

However, the Appellate Court found that the Borrowers’ cause of action for breach of contract was not preempted by the Home Owners’ Loan Act (“HOLA”), and was therefore improperly dismissed by the trial court.  A copy of the opinion is attached.

Wachovia Mortgage, FSB and the Borrowers entered into a settlement agreement by which Wachovia agreed to bring the Borrowers account current, and to modify the Borrowers’ home loan in consideration for the Borrowers dismissing their pending action against Wachovia.  Wachovia allegedly failed to bring the Plaintiffs account current, and allegedly failed to modify the loan as agreed.  The Borrowers brought an amended complaint that alleged Wachovia was liable for unfair business practices, for breach of the implied covenant of good faith and fair dealing and for breach of contract.  The trial court determined the Borrowers' claims were preempted by HOLA, and dismissed the complaint without leave to amend.  The Borrowers appealed.

With respect to whether the Borrowers’ cause of action for unfair business practices was properly dismissed, the appellate court affirmed the trial court without examining the preemption issue.  The appellate court explained that the Borrowers could not “amend the complaint to add a new cause of action without having obtained permission to do so, unless the new cause of action is within the scope of the order granting leave to amend.” In this case, “the new cause of action is not within the scope of the order granting leave to amend.” 

The appellate court also sustained the trial court’s dismissal of the borrowers’ second cause of action without analyzing the preemption issue.  The appellate court relied on a California Supreme Court decision, which held that, “the tort of breach of the covenant of good faith and fair dealing applies only in the context of insurance contracts…in the absence of violation of an independent duty arising from the principles of tort law.”  As the Borrowers did not sue under an insurance contract and did not allege an independent duty, the appellate court found “they have not stated a cause of action for breach of the covenant of good faith and fair dealing.”

Finally, the Court determined that the Borrowers’ cause of action for breach of contract was not preempted by HOLA and the Office of Thrift Supervision’s regulations thereto, specifically 12 C.F.R. 560.2.  There Appellate Court found that Section 560.2 “does not apply to contractual obligations voluntarily undertaken by a federal savings association.” Dispositive was the fact that the Borrowers were not suing to enforce the lenders obligations to apply payments to their account properly, but were suing “based on the settlement agreement in which Wachovia specifically agreed to credit [Borrowers’] account with the disputed payments.” 



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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