Friday, March 31, 2017

FYI: Cal App Ct (2nd Dist) Holds Res Judicata Did Not Bar TILA Action Based on Prior Contract Action

The Court of Appeals of California, Second District, recently held the dismissal of a borrower's breach of contract claim in a prior lawsuit did not bar a claim in subsequent lawsuit for violation of the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. ("TILA"), even if the breach of contract and TILA claims were based on the same set of underlying facts, because the right to full disclosures under TILA was a distinct primary right from the common law rights in contract.

However, although the Appellate Court determined that the dismissal based on the doctrines of res judicata and issues preclusion was reversible error, the dismissal was affirmed because the borrower's claims, including the TILA cause of action, were barred by the statute of limitations or otherwise failed to state a valid cause of action.  

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

In the first lawsuit, the borrower's complaint asserted causes of action for breach of contract, temporary restraining order and preliminary injunction, violation of the California's unfair competition law in Bus. & Prof. Code § 17200, et seq. ("UCL"), specific performance, and equitable rescission.  The borrower alleged that the lender failed to disclose fees when she refinanced the loan, and it added additional sums for "escrow option insurance" when her loan was subsequently modified.  The borrower claimed that these undisclosed sums made the loan unaffordable.

The trial court sustained the defendants' demurrer based on several deficiencies in the complaint.  The borrower filed an amended complaint that was virtually identical to the original complaint which, once again, did not attach any of the alleged agreements or describe their terms in any greater detail.  The court sustained the defendants' demurrer to the amended complaint without leave to amend.  The Appellate Court affirmed.  The California Supreme Court denied the borrower's request for review.

The borrower then filed a new complaint, this time omitting the alleged breach of contract claim, and instead asserting causes of action for violation of TILA, the UCL, fraudulent omission/concealment, and injunctive relief.  The general allegations in the complaint were identical to those in the prior lawsuit. 

The borrower alleged that the lender violated TILA by failing to make required disclosures with respect to the "escrow option insurance," which was supposedly surreptitiously added to her monthly loan payment obligation.  She also alleged that the lender's violation of TILA was an unlawful business practice in violation of the UCL, and the lender's alleged failure to disclose the "escrow option insurance" in the loan modification agreement constituted fraudulent concealment.  According to the borrower, had she known the true facts, she would have considered other financing options, and thus requested injunctive relief preventing the sale of the property.

The lender demurred, contending that the borrower's new complaint was barred as a matter of law by the doctrines of claim preclusion and issue preclusion. 

The lender argued that the borrower was asserting the same primary right in both actions (claim preclusion), and the issues alleged had been actually litigated and decided against the borrower on the merits (issue preclusion).  The lender also argued that the TILA and fraud causes of action were untimely; the borrower lacked standing to assert a UCL claim because she failed to allege she had lost money or property as a result of the lender's actions; and the claim for injunction was improper because injunctive relief is a remedy and not a cause of action. 

In her opposition, the borrower emphasized that she had not pleaded either violation of TILA or fraud in her prior lawsuit. 

The trial court sustained the defendants' demurrer without leave to amend.  In so ruling, it found that "[t]he 'primary right' of Plaintiff in both actions—the right to be free from increased loan payments that were not agreed to—is the same, which means the present proceeding is on the same 'cause of action' as the prior proceeding."  The trial court also ruled the claims were barred by collateral estoppel because her claims "all involve the same underlying issue—the validity of the increased loan payments that Plaintiff allegedly did not agree to," and that issue had been litigated and decided.  Moreover, the trial court held that the TILA and fraud claims were time barred; the borrower lacked standing to bring a UCL claim; and the cause of action for injunctive relief was not a valid cause of action.  The borrower appealed.

First, the Appellate Court had to determine if the borrower's TILA cause of action was subject to claim preclusion or issue preclusion.

As you may recall, the doctrine of res judicata has two aspects — claim preclusion and issue preclusion.  DKN Holdings LLC v. Faerber (2015) 61 Cal.4th 813, 824; Boeken v. Philip Morris USA, Inc. (2010) 48 Cal.4th 788, 797.

Claim preclusion prevents relitigation of the same cause of action in a second suit between the same parties or parties in privity with them.  Claim preclusion arises if a second suit involves (1) the same cause of action (2) between the same parties [or those in privity with them] (3) after a final judgment on the merits in the first case.  DKN Holdings, 61 Cal.4th at 824.  The bar applies if the cause of action could have been brought, whether or not it was actually asserted or decided in the first lawsuit.  Busick v. Workermen's Comp. Appeals Bd. (1972) 7 Cal.3d 967, 974.

Issue preclusion prohibits the relitigation of issues argued and decided in a previous case even if the second suit raises a different cause of action.  The doctrine applies "(1) after final adjudication (2) of an identical issue (3) actually litigated and necessarily decided in the first suit and (4) asserted against one who was a party in the first suit or one in privity with that party."  DKN Holdings, 61 Cal.4th at 825.  The doctrine differs from claim preclusion in that it operates as a conclusive determination of issues; it does not bar a cause of action.  Id.

The Appellate Court held that the trial court erred in its ruling because different primary rights may be violated by the same wrongful conduct.  As support, the Appellate Court relied on Agarwal v. Johnson (1979) 25 Cal.3d 932, 954-955, which held that an employer's racially discriminatory conduct may violate distinct primary rights under federal civil rights law and state tort law regarding defamation and intentional infliction of emotional distress.

In this case, although the borrower's contract and TILA claims were largely based on the same set of underlying facts, the Appellate Court determined that the two actions do not involve the same primary rights 

The Appellate Court held that the primary right at issue in the borrower's TILA cause of action was the right to full disclosure of the material terms of the loan and the subsequent loan modification.  This was, according to the Appellate Court, a federal statutory right distinct from the common law right to have enforced only those contractual terms which the borrower had agreed to (the claim presented by her initial lawsuit).  Thus, the Appellate Court concluded that the doctrine of claim preclusion did not bar the TILA cause of action.

Notably, the opinion was silent on whether the borrower could have, or should have, raised the TILA cause of action in the first lawsuit.  In fact, in the new complaint, the borrower alleged that she discovered the material omissions by May 2012 – well before she filed the original lawsuit in July 2013. 

Turning next to issue preclusion, the Appellate Court held that the prior ruling on the merits of the borrower's contract claim did not preclude the TILA cause of action.  This is because the adequacy of the disclosures at closing and in the loan modification agreement were neither actually litigated nor determined in the prior lawsuit.  Instead, the trial court sustained the demurrer because the borrower failed to allege sufficient facts to state a valid cause of action.  Thus, the Appellate Court concluded that the trial court erred by applying the doctrine of issue preclusion to dismiss the TILA claim.

However, the Appellate Court agreed with the trial court that the TILA cause of action was untimely under the statute of limitations. 

As you may recall, most TILA actions must be filed "within one year from the date of the occurrence of the violation."  15 U.S.C. § 1640(e).  A violation of TILA based on specific disclosures, however, may be brought within three-years.  Id.; 15 U.S.C. § 1639.  The violations here allegedly occurred in 2007 and 2010.  The borrower's current lawsuit was not filed until August of 2015.  Under either the one year or three-year statute of limitations, the borrower's claim was untimely.  Therefore, the Appellate Court concluded the untimely TILA cause of action was properly dismissed. 

Next, the trial court had determined that the borrower lacked standing because she could not show any loss of money or property as a result of the allegedly unlawful business practices.  The Appellate Court disagreed. 

In a previous decision, the Appellate Court had held that "the existence of an enforceable obligation, without more, ordinarily constitutes actual injury or injury in fact."  Sarun v. Dignity Health (2014) 232 Cal.App.4th 1159, 1167.  Here, the borrower had alleged that she paid money to the bank in excess of what she should have owed.  According to the Appellate Court, these allegations were sufficient to allege injury in fact to confer standing to assert a UCL cause of action. 

However, an action to enforce the UCL must be commenced within four years after the cause of action accrued.  Bus. & Prof. Code § 17208.  Because both the refinancing and the loan modification occurred more than four years before the new lawsuit was filed in August 2015, the Appellate Court concluded that the borrower's UCL claim was time-barred.

Relatedly, the borrower's fraudulent concealment claim, like her TILA and UCL claims, was based on the alleged nondisclosure of material terms of the loan refinancing and loan modification.  A cause of action for fraud is governed by a three-year statute of limitations.  Code of Civ. P. 338(d).  Because the borrower alleged that she discovered the alleged fraud when her loan was supposedly forensically examined in May 2011, the cause of action filed in August of 2015 was barred by the three-year statute of limitation. 

Finally, the Appellate Court ruled that the borrower's request for injunctive relief was properly dismissed because she failed to allege any valid cause of action.

Accordingly, the Appellate Court affirmed the order dismissing the action.  

Eric Tsai
Maurice Wutscher LLP
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