Monday, October 6, 2014

FYI: Cal App Ct Reverses Dismissal of Borrower's Breach of Contract and Fraud Claims Relating to HAMP Mod, Including Those Against Servicer's Employees

The California Court of Appeal, Fourth District, recently reversed the dismissal of borrowers’ allegations that a loan servicer breached a contract to modify the borrowers’ loan, as the borrowers were making plan payments under a HAMP trial period plan agreement when the servicer foreclosed. 

In so ruling, the Fourth District held that the borrowers stated claims for breach of contract and fraud, including against the servicer’s employees who made the alleged misrepresentations.

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/G050049.PDF.

In 2009, the borrowers (Borrowers) applied to have their loan modified in 2009.  In November 2011, the servicer (Servicer) allegedly informed Borrowers that they had been approved for a trial period plan under a Fannie Mae modification program.

According to Borrowers’ complaint, they were told that all they had to do was make three monthly payments of $957.43, starting on December 1, 2011.  Supposedly, if they made the payments, then they would move to the next step – verification of financial hardship. If they passed that test, they alleged their loan would be permanently modified.

Borrowers allegedly made the first two payments for December 2011 and January 2012.  A representative of Servicer allegedly told them in December that Servicer had received the December and January payments and that foreclosure proceedings had been suspended.  However, toward the end of January 2012, the subject property was sold at a trustee’s sale.

Borrowers filed suit in pro persona (pro se).  After a series of demurrers and amended complaints, the trial court dismissed the action.  The trial court reasoned that the trial period plan agreement was not a binding loan modification agreement, and Borrowers had no right to any guaranteed loan modification.

The Fourth District reversed the dismissal of Borrowers’ claim for breach of contract.  The Fourth District held, “[I]f the borrower complied with all terms of the TPP Agreement – including making all required payments and providing all required documentation – and if the borrower’s representations remained true and correct, the servicer had to offer a permanent modification.”  citing West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 788.

The Fourth District reasoned that by taking “TARP money, lenders had to follow Treasury Department guidelines for restructuring loans.  [The lenders do] not have discretion to set their own criteria for handing out loan modifications.”

The Fourth District also reversed the trial court’s dismissal of Borrowers’ claims for promissory fraud, fraudulent misrepresentation, and promissory estoppel.

As you may recall, a cause of action for promissory fraud requires the plaintiff to allege that the promissor did not intend to perform at the time the promise was made, that the promise was intended to deceive and induce reliance, that it did induce reliance, and that this reliance resulted in damages. Lazar v. Superior Court (1996) 12 Cal.4th 631, 637; Building Permit Consultants, Inc. v. Mazur (2004) 122 Cal.App.4th 1400, 1414-1415.

In support of their claim for promissory fraud, Borrowers alleged that Servicer never intended to modify their loan – notwithstanding the representations made in the TPP agreement and those supposedly made by the parade of Servicer representatives who communicated with them – but rather allegedly intended to foreclose all along.

The Fourth District found that these allegations were sufficient to state a claim for promissory fraud.

Borrowers brought their claim for fraudulent misrepresentation against Servicer, Servicer’s CEO, a member of Servicer’s board of directors, and several of Servicer’s employees.

The Fourth District reversed the dismissal with respect to Servicer and its employees who allegedly made the supposed misrepresentations. 

The Appellate Court held that Borrowers had sufficiently pled fraudulent misrepresentation by alleging that representatives of Servicer had supposedly assured them that the payments submitted per the TPP agreement had been received and credited and that the foreclosure proceedings had supposedly been suspended.

With respect to Servicer’s employees who allegedly made the supposed misrepresentations, the Fourth District reasoned that “[i]f a tortious act has been committed by an agent acting under authority of his principal, the fact that the principal thus becomes liable does not, of course, exonerate the agent from liability … The fact that the tortious act arises during the performance of a duty created by contract does not negate the agent’s liability.” citing Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68.

The Fourth District did, however, affirm the dismissal of Servicer’s CEO and the member of its board of directors.  The Fourth District found that Borrowers had alleged no facts showing that either of these defendants had personal knowledge of or involvement in any promises or misrepresentations supposedly made to Borrowers.

The Appellate Court also affirmed the dismissal of Borrowers’ claim for an accounting.  A cause of action for accounting requires a showing of a relationship between the plaintiff and the defendant, such a fiduciary relationship, that requires an accounting or a showing that the accounts are so complicated they cannot be determined through an ordinary action at law. (citing Brea v. McGlashan (1934) 3 Cal.App.2d 454, 460.)

Borrowers alleged that Servicer supposedly misapplied the loan payments they made from March 2010 through November 2011 and that there were “surplus” funds left over from the trustee’s sale.

The Appellate Court first determined that the issue of surplus funds had been resolved in another case.  With respect to the supposedly misapplied loan payments, the Fourth District found that “it appears this issue can be folded into the fraud and breach of contract causes of action.”

Generally, “[a]n action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.” (citing Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.)

Accordingly, the Fourth District affirmed the dismissal of Borrowers’ claim for accounting.



Eric Tsai
McGinnis Wutscher Beiramee LLP
 
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