FYI: 9th Cir Holds State Contract Law SOL Applies to TILA Rescission Claims Following Timely Cancellation

The U.S. Court of Appeals for the Ninth Circuit recently held that Washington’s six-year statute of limitations governing contracts instead of the Truth in Lending Act’s (“TILA”) one-year statute of limitations applies to claims to enforce rescission under TILA, after a notice of right to cancel was timely submitted.

The Ninth Circuit also held that the trial court should have given the borrowers leave to amend the complaint because the borrower’s rescission claim under TILA was not time-barred, and amending the complaint would not be futile.

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

Husband and wife borrowers obtained a refinance mortgage loan in April of 2010, but the bank that extended the loan (“Bank”) allegedly failed to provide notice of the borrowers’ right to rescind the loan under TILA. As a result, the borrowers could rescind the loan within three years after the loan was made in April of 2010 under TILA section 1635(f). Two weeks prior to the expiration of the three-year period, the borrowers sent the Bank a notice of intent to rescind the loan. The Bank did not respond.

In February of 2017, the Bank filed a non-judicial foreclosure action. The borrowers responded by filing suit in the U.S. District Court for the Western District of Washington, seeking rescission of the loan under TILA section 1635(f), declaratory and injunctive relief, and damages under Washington’s Consumer Protection Act (“WCPA”).

The Bank moved to dismiss the complaint, arguing that the claims were time-barred because the borrowers failed to sue within 3 years after the loan was made.

The trial court found that the borrowers “timely rescinded the loan by sending the notice of rescission to the Bank within three years of the loan’s consummation[,]” but still granted the motion to dismiss because the borrowers did not file suit within one year as required by section 1640 of TILA, which applies to claims for damages.

The trial court “acknowledged that the limitations period applicable to TILA rescission enforcement claims is an ‘unsettled issue of law’” after the Supreme Court’s decision in Jesinowski v. Countrywide Home Loans in 2015 but, because “some statute of limitations must apply … borrowed the limitations period for monetary damages under TILA, 15 U.S.C. § 1640(3)…. [,]” concluded that all of the borrowers’ claims were time-barred and dismissed the complaint without leave to amend. The borrower’s appealed.

On appeal, the Ninth Circuit explained that “TILA gives borrowers the right to rescind certain loans within 3 business days after consummation of the loan. 15 U.S.C. § 1635(a). However, if the creditor fails to make required TILA disclosures to the borrower, the window for rescission is expanded to three years from consummation of the loan. 15 U.S.C. § 1635(f). Once a borrower rescinds a loan under TILA, the borrower ‘is not liable for any finance or other charge, and any security interest given by the [borrower] … becomes void upon such rescission.’ 15 U.S.C. § 1635(b); see 12 C.F.R. § 226.23(a)(3). Within 20 days after the creditor receives a notice of rescission, the creditor must take steps to wind up the loan. 15 U.S.C. § 1635(b). ‘Upon the performance of the creditor’s obligations under this section, the [borrower] shall tender the property to the creditor … [or] tender its reasonable value.’ Id. Once both creditor and borrower have so acted, the loan has been wound up.”

The Court further explained that, until Jesinowski, it “required that borrowers effectuate TILA loan rescissions by giving lenders their notice of rescission and also bringing suit to enforce that rescission … within the three-year window set forth in 15 U.S.C. § 1635(f).”

However, the Supreme Court of the United States in Jesinowski “eliminated the need for a borrower to bring suit within the three-year window to exercise TILA rescission. Instead, ‘rescission iseffected when the borrower notifies the creditor of his intention to rescind.’” In so ruling, the Supreme Court “did not clarify when a suit to enforce the rescission must be brought after a lender’s failure to act on that notice of rescission.”

Thus, the Ninth Circuit was confronted with the following question: “when a borrower effectively rescinds a loan under TILA, but no steps are taken to wind up the loan, when must suit be brought to enforce that rescission?”

The borrowers argued that no statute of limitations applies to a rescission action given the Jesinowski, decision. The Bank argued that the applicable statute of limitations was “Washington’s two-year catchall statute of limitations.”

The Court agreed with the trial court that some statute of limitations applied, but rejected the trial court’s and the parties’ “arguments as to what that limitation period should be.”

First, the Court reasoned that where “there is no statute of limitations expressly applicable to a federal statute, … ‘the general rule is that a state limitations period for an analogous cause of action is borrowed and applied to the federal claim.’ … As a ‘narrow exception to the general rule,’ courts may ‘decline to borrow a state statute of limitations only when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes ….”

The Court concluded that because “TILA does not provide a statute of limitations for rescission enforcement claims[,] we borrow from analogous Washington state law. … Under Washington’s general contract law, the statute of limitations sets forth a six-year limitation period for an ‘action upon a contract in writing, or liability express or implied arising out of a written agreement.’”

Because the loan documents were written agreements and the right to rescind under TILA “arises out of that written agreement[,] … contract law provides the best analogy” and the Court borrowed “the general contract law statute of limitations. … There is no federal law that provides a closer analogy, nor to TILA policies at stake and the practicalities of TILA rescission litigation make federal law a more appropriate vehicle for interstitial lawmaking.”

The Court rejected the trial court’s holding that “TILA’s one-year statute of limitations  for legal damages claims” applied to the case at bar for two reasons.

First, the district court’s decision “was based primarily on a misreading of [borrowers’] complaint as requesting TILA relief rather than relief under the WCPA.”

Second, “TILA provides for both legal damages and equitable relief but only includes a statute of limitations for legal damages relief. Because the statute does not provide that the same one-year limitation applies to both damages claims and claims for equitable relief and “Congress surely know how to draft the statute [to so provide but didn’t]” the trial court erred when it refused to borrow the analogous limitations statute from state law. “Only when a state statute of limitations would ‘frustrate or significantly interfere with federal policies’ do we turn instead to federal law to supply the limitation period.

The Ninth Circuit held that applying “Washington’s longer six-year contract statute of limitations would actually further TILA’s purpose, which is to protect consumers from predatory lending practices and promote the informed use of credit. 15 U.S.C. § 1601(a).”

The Court rejected the Bank’s argument that Washington’s two-year catch-all limitations statute applied because “[i]n similar contexts, the Supreme Court previously determined that catchall statutes were not substantively analogous and declined to borrow them.” There was no need to resort to the catchall statute when Washington’s contract statute was more closely analogous.

Finally, since courts “’do not ordinarily assume that Congress intended that there be no time limit on actions at all,’ the Ninth Circuit rejected the borrowers’ “argument that no statute of limitations applies to TILA rescission enforcement claims.”

The Ninth Circuit concluded that because the borrowers’ “cause of action arose in May of 2013 when the Bank failed to take any action to wind up the loan within 20 days of receiving [the] notice of rescission[,] … the district court erred in dismissing the claim as time barred.” The trial court also erred by dismissing with prejudice because the borrowers’ rescission enforcement claim was not time barred under Washington’s six-year statute of limitations.

Thus, the order of dismissal was reversed and the case remanded for further proceedings.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: 9th Cir Upholds Judgment for Deceptive Disclosures Against Online Lender

The U.S. Court of Appeals for the Ninth Circuit held that an online payday lender's "loan note" violated § 5 of the Federal Trade Commission Act ("FTC Act") because, although it was "technically accurate", the lender's online loan portal made it difficult to discern the loan terms and therefore likely to mislead consumers about the terms of the loan.

Accordingly, the Ninth Circuit affirmed the trial court's summary judgment and relief order in favor of the FTC.

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

The defendant owner ("Owner") controlled a series of companies that offered high-interest payday loans to borrowers.  The loans were offered exclusively through a number of proprietary websites. 

Potential borrowers would enter personal information into one of the Owner's websites, and approved borrowers would be directed to a webpage that disclosed the loan's terms and conditions by hyperlinking to seven documents, including the Loan Note and Disclosures ("Loan Note"), which provided the essential terms of the loan as mandated by the federal Truth in Lending Act ("TILA").

Borrowers could open the Loan Note if they chose, but they could also ignore the document and electronically sign their names by clicking a button that said: "I AGREE Send Me My Cash!"

In April 2012, the FTC filed a lawsuit against [the Owner] and his businesses alleging their business practices violated § 5 of the FTC Act prohibition against "unfair or deceptive acts or practices in or affecting commerce." 15 U.S.C. § 45(a)(1).

Specifically, the FTC alleged that the Owner violated § 5 because the terms disclosed in the Loan Note did not reflect the terms that the Owner actually enforced.  Thus, the FTC asked the court to permanently enjoin the Owner from engaging in consumer lending and to disgorge "ill-gotten monies."

The parties agreed to bifurcate the proceedings in the trial court into a "liability phase" and a "relief phase."

During the liability phase, the FTC moved for summary judgment on the FTC Act claim, which the trial court granted. 

In the relief phase, the trial court enjoined the Owner from assisting "any consumer in receiving or applying for any loan or other extension of Consumer Credit," and ordered the Owner to pay approximately $1.27 billion in equitable monetary relief to the FTC. 

The trial court then directed the FTC to direct as much money as practicable to "direct redress to customers," and then to "other equitable relief . . . reasonably related to the Defendants' practices alleged in the complaint," and then to "the U.S. Treasury as disgorgement." 

The Owner subsequently appealed both the entry of summary judgment and the relief order.

On appeal, the Owner first argued that the trial court erred in granting the motion for summary judgment finding him liable for violating § 5 of the FTC Act.

As you may recall, to prevail on a claim under § 5, the FTC must show that a representation, omission, or practice is "likely to mislead consumers acting reasonably under the circumstances."  This consumer-friendly standard does not require the FTC to provide "[p]roof of actual deception," only that the "net impression" of the representation would be likely to mislead – even if such representation "also contains truthful disclosures."  

The FTC argued that the Loan Note was likely to mislead borrowers about the terms of the loan.  Specifically, although the top third of the Loan Note contained the so-called "TILA box," which contained the "amount financed," "finance charge," total of payments," and "annual percentage rate," the fine print below the TILA box was essential to understanding the loan's terms. 

The densely packed text below the TILA box set out two alternative payments scenarios: (1) the "decline-to-renew" option, and (2) the "renewal" option.

Importantly, borrowers hoping to exercise the decline-to-renew option had to navigate through an online customer-service portal and affirmatively choose to "change the Scheduled" payment, and agree to "Pay Total Balance."  This had to be done at least three business days before the next scheduled payment.

Alternatively, borrowers who did nothing would default to the "renewal" option, which would end up costing the borrow significantly more than the amount listed in the TILA box. 

Based on these facts, the Ninth Circuit agreed with the FTC "that the Loan Note was deceptive because it did not accurately disclose the loan's terms." 

In reaching its conclusion, the Court noted that "under the terms that [the Owner] actually enforced, borrowers had to perform a series of affirmative actions in order to decline to renew the loan and thus pay only the amount reported in the TILA box."

Further, "the fine print's oblique description of the loan's terms fails to cure the misleading 'net impression' created by the TILA box."

The Owner argued that the Loan Note was not deceptive because it was "technically accurate," but the Ninth Circuit explained that "the FTC Act's consumer-friendly standard does not require only technical accuracy."  

The Owner next argued that the court's narrow focus on the Loan Note failed to capture the "net impression" on borrowers.  The Court disagreed, ruling that the Owner "wrongly assumes that non-deceptive business practices can somehow cure the deceptive nature of the Loan Note."  Instead, the FTC "must show only that a specific 'representation' was 'likely to mislead.'"

Finally, the Owner argued that summary judgment was inappropriate because he demonstrated a genuine issue of material fact.  Specifically, the Owner pointed to deposition testimony from consumers that they had not read the disclosures but understood them upon reading them at their depositions, and his expert's testimony. 

The Ninth Circuit again disagreed, ruling that because proof of "actual deception" is unnecessary to establish a violation, and the Owner could be liable if the Loan Note "possesses a tendency to deceive."  The Court further ruled that the Owner's expert testimony was insufficient to create a question of fact.

Thus, the Ninth Circuit held "that the Loan Note was likely to deceive a consumer acting reasonably funder the circumstances," and therefore "the trial court did not err in entering summary judgment against [the Owner] as to the liability phase."

With respect to the relief phase, the Owner argued that the FTC improperly used § 13(b) to pursue penal monetary relief under the guise of equitable authority, because  § 13(b) provides only that trial courts may enter "injunction[s]."  15 U.S.C. § 53(b). 

Although the Ninth Circuit found the argument to have "some force," it concluded that it was "foreclosed by our precedent," which had "repeatedly held that § 14 'empowers trial courts to grant any ancillary relief necessary to accomplish complete justice, including restitution.'"

The Owner requested that the Court revisit its precedent in light of the Supreme Court's decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), wherein the Court determined that a claim for "disgorgement imposed as a sanction for violating the federal securities law" was a "penalty" within the meaning of the federal catch-all statute of limitations.

The Owner argued that Kokesh severs the line of reasoning that links "injunctions" to "equitable monetary relief." 

However, the Ninth Circuit explained that a "three-judge panel may not overturn prior circuit authority unless it is 'clearly irreconcilable with the reasoning or theory of intervening higher authority,'" which threshold the Court determined was not met. 

Further, the Owner argued that the trial court abused its discretion in calculating the amount of the award, because the $1.27 billion judgment overstated his unjust gains.  The Ninth Circuit again disagreed, ruling that "the trial court did not abuse its discretion when calculating the amount it ordered [the Owner] to pay." 

Finally, the Owner challenged the trial court's decision to enjoin him from engaging in consumer lending, but Ninth Circuit again could not "find fault with the trial court's decision to enter a permanent injunction." 

Accordingly, the Ninth Circuit affirmed the judgment of the trial court in its entirety. 

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: Cal App Ct (4th DCA) Rules Servicer and Investor Did Not Violate HBOR

The Court of Appeals of California, Fourth District, recently affirmed summary judgment awarded in favor of the mortgage servicer and loan owner defendants on the borrowers' claims for alleged violations of the California Homeowner Bill of Rights (HBOR), finding that the defendants properly contacted the borrowers and provided them with the required foreclosure information before recording the notice of default. 

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

The plaintiffs ("Borrowers") obtained a loan in 2007, secured by their residence.  In 2013, the Borrowers defaulted and entered into a loan modification agreement with the loan owner ("Owner").  The Borrowers then defaulted on the loan modification agreement.

On March 10, 2014, the then mortgage servicer ("Servicer") sent the Borrowers a letter that contained documents that outlined their eligibility and the protections contained in the federal Servicemembers Civil Relief Act.  Between March 18 and November 22, 2014, the Servicer spoke to the Borrowers multiple times regarding the status of their mortgage account, their financial situation, foreclosure avoidance options, and on at least three occasions provided them with a toll free number for the Department of Housing and Urban Development (HUD).

The Borrowers submitted a complete loan application to the Servicer in March 2014, but the Servicer denied the application.  The Borrowers did not appeal this denial.

The Servicer informed the Borrowers via letter on November 26, 2014 that they could request copies of their payment history and the note, the name of the entity that "holds the loan," and any "assignments of mortgage or deed of trust required to demonstrate" the right to foreclose.

On January 14, 2015, the Servicer recorded a notice of default for the loan stating the amount that the Borrowers had to pay to bring their account current.  The notice of default included a declaration averring that the Servicer had contacted the Borrowers.

On April 28, 2015, the Servicer recorded a notice of trustee's sale against the property.

The Borrowers last made a payment on the loan in October 2013. The trustee's sale had not occurred as of June 19, 2017. The borrowers filed suit against the Owner and Servicer.  The operative complaint sought to enjoin the sale and alleged that defendants violated the HBOR (Cal. Civ. Code,  §§ 2923.55, 2923.6) and California Business and Professions Code § 17200 by not contacting the Borrowers before recording the notice of default and properly informing them about their foreclosure alternatives.

The defendants moved for summary judgment supported by a declaration arguing that the undisputed facts demonstrated that they did not violate the HBOR or section 17200. The trial court granted the Defendants motion for summary judgment.  This appeal followed.

Initially, the Appellate Court observed that the HBOR, "effective January 1, 2013, was enacted 'to ensure that, as part of the nonjudicial foreclosure process, borrowers are considered for, and have a meaningful opportunity to obtain, available loss mitigation options, if any, offered by or through the borrower's mortgage servicer, such as loan modifications or other alternatives to foreclosure.'" Civ. Code, § 2923.4, subd. (a).

As you may recall, California has amended the HBOR since its passage, but when the Servicer recorded the notice of default, the HBOR required the Servicer to send a letter informing the Borrowers that they have the right to request certain loan documents before recording the notice of default.  See former Cal. Civ. Code, § 2923.55, subds. (a)-(b). A servicer or any other party also could not record the notice of default until 30 days after making initial contact with the borrower in person or by telephone to "assess" the borrower's financial situation and to "explore" foreclosure alternative options. Id. The servicer must inform the borrower during this initial contact that they may request an additional meeting to take place within 14 days and provide the borrower with HUD's toll-free phone number to find a HUD-certified housing counseling agency. Id.  A borrower may seek injunctive relief "to enjoin a material violation" of former section 2923.55, before anyone records a trustees deed upon sale. See former § 2924.12, subd. (a)(1).

The Borrowers argued on appeal that disputed material facts regarding whether Defendants complied with former section 2923.55 before recording the notice of default should have precluded summary judgment.  The Borrowers cited Mabry v. Superior Court (2010) 185 Cal.App.4th 208, 215, to argue that whether a defendant complied with section 2923.55's requirements is typically a "classic question of fact that" the trier of fact must resolve.

The Appellate Court noted that it construes the terms "assess" and "explore" narrowly "to avoid crossing the line from state foreclosure law into federally preempted loan servicing."  Mabry, 185 Cal.App.4th at 232.  Thus, it limits exploration "to merely telling the borrower the traditional ways that foreclosure can be avoided (e.g., deeds 'in lieu,' workouts, or short sales), as distinct from requiring the lender to engage in a process that would be functionally indistinguishable from taking a loan application in the first place." Id.

The Appellate Court found that the trial court correctly determined that the Defendants "satisfied the requirements of former section 2923.55" before recording the notice of default." 

Specifically, before recording the notice of default, the Servicer initiated at least 11 phone calls with the Borrowers, the husband borrower called and spoke to the Servicer eight more times, and the Servicer unsuccessfully tried to call the Borrowers an additional 35 times.  During the phone calls the Servicer discussed the following with the Borrowers: a loss mitigation review; their loan modification application; payment options; the HUD referral phone number; the possible sale of the property; and offered to conduct a loss mitigation meeting several times. This evidence "clearly establishes" that Defendants made a prima facie showing that they met "all of the contact and notice requirements of former section 2923."

The Appellate Court also found that Defendants made a prima facie showing that they "complied with the requirements of former section 2923.55, subdivision (b)(2) by fully reviewing and processing" the Borrowers' "loan modification application before recording the notice of default."

The burden then shifted to the Borrowers to come forward with evidence sufficient to give "rise to one or more triable issues of fact."  The husband borrower presented evidence that before the Servicer recorded the notice of default he did not recall any phone calls occurring or being offered a meeting to discuss foreclosure alternatives.  However, he did not actually deny the contacts or the contents or the discussions.  

The Appellate Court found this insufficient to create a triable issue of material fact "and entitled the defendants to summary judgment."

The Borrowers also argued that a material fact dispute remained because the Defendants did not initiate the contacts.  The Appellate Court rejected this argument because the evidence showed that the Servicer initiated multiple contacts and because former section 2923.55 did "not require that a lender initiate the contact; rather, the statute requires only that the lender make contact in some manner and provide the borrower with an opportunity to discuss the borrower's financial situation and possible options for avoiding foreclosure."  To hold otherwise would have elevated "form over substance." 

The Borrowers argument also failed because a violation of the statute's provisions must be "material" to support a claim for an injunction.  Thus, when "the purpose of the statute is met -- if the borrower has had an opportunity to have at least two substantive discussions with the lender regarding the borrower's financial situation and possible options for avoiding foreclosure -- then the fact that one or both of these discussions may have arisen as a result of the borrower initiating the telephone call with the lender or its agent cannot be considered to constitute a 'material' violation of the statute."

Finally, because the Borrowers' claims for violations of section 17200 are predicated on their failed HBOR claims the trial court correctly found that the defendants are also entitled to summary judgment of their alleged section 17200 claims.

Accordingly, the Appellate Court affirmed the trial court's judgment. 

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: SD Cal Dismisses Data Security Breach Class Action Against Mortgage Company

The U.S. District Court for the Southern District of California recently dismissed a consumer’s putative class action lawsuit against a mortgage lending and servicing company for purported damages sustained as a result of a security breach wherein his personal information was compromised, and the hackers attempted to open credit cards in his name.

Although the Court previously concluded that the consumer had standing to bring his claims under Article III of the Constitution, it held that the consumer failed to state causes of action for negligence and violations of various California laws.

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

A consumer (“Consumer”), on behalf of himself and others similarly situated, sued his mortgage sued a mortgage lender and servicer (“Mortgage Company”) after its customer database was hacked, and confidential customer information, such as social security numbers, was compromised. 

The consumer claimed that he suffered monetary and emotional distress damages as a result of a cybercriminal’s attempts to open credit cards in his name, as a result of the Mortgage Company’s inadequate security and failure to timely notify its customers of the breach. 

The Consumer filed suit against the Mortgage Company in the Superior Court of California, San Diego County, alleging causes of action for: (i) negligence; (ii) violation(s) of California Constitution (Art. I, § I); (iii) violation(s) of the California Customer Records Act (Civ. Code § 1798.80); (iv) violation(s) of the California Consumers Legal Remedies Act (Cal. Civ. Code § 1750), and; (v) violation(s) of the California Unfair Competition Law (Cal. Bus. & Prof. Code § 17200).

The Mortgage Company removed the action to United States District Court for the Southern District of California under the Class Action Fairness Act, and moved to dismiss the Consumer’s complaint for lack of standing and failure to state a claim.

First, in considering the Consumer’s Article III standing, the federal trial court rejected the Mortgage Company’s arguments that increased risk of identity theft is not an injury in fact, citing the Ninth Circuit’s recent holding that data-breach-victims pled "an injury in fact based on a substantial risk that hackers will commit identity fraud" and established a reasonable inference of causation by alleging that his identity was stolen and exploited.  In re Zappos.com, Inc.,888 F.3d 1020, 1029 (9th Cir. 2018). 

In addition, the Court held that the Mortgage Company’s argument that the Consumer failed to allege it possessed his data at the time of the breach or that it was actually stolen was undermined by its admission that it sent notices to customers who may have been affected by the breach -- which consumer received-- and in any event, was waived because it was raised for the first time in the Mortgage Company’s reply brief.  Thus, the motion to dismiss for lack of standing was denied.

Next, in examining the Consumer’s negligence claims, the federal trial court drew analogies to the Ninth Circuit case of Krottner v. Starbucks, wherein the plaintiff consumer similarly alleged that personal information was misused, but the court couldn’t find “loss related to the attempt to open a bank account in his name.”  Krottner v. Starbucks Corp., 406 F. App'x 129, 131 (9th Cir. 2010).  

Although the Starbucks court found risk of identity theft following a data breach sufficient to supply an injury-in-fact for standing, the Starbucks consumer plaintiff’s claims were insufficient to support actual damages for a negligence claim because the injuries "stem from the danger of future harm."  Here, the Consumer failed to distinguish his case from Starbucks, and the Court found his allegations were too vague for the court or Mortgage Company to evaluate.  Thus, the Consumer’s negligence claims were dismissed, but with leave to amend.

Following amendment by the Consumer, the Court dismissed the negligence claim with prejudice and without leave to amend.  The Consumer alleged damages such as “diminution in value of his personal data, overpayments to [Mortgage Company], and continued risk to his financial information.”  However, as to the alleged continued risk of harm, the Court held the allegation was “still insufficient because it stems from the danger of future harm,” which is insufficient under Starbucks.  The Court also held that the alleged diminution of value of his personal data failed to allege “enough facts to establish how his personal information is less valuable as a result of the breach.”  Similarly, as to the alleged overpayment to Mortgage Company, the Consumer failed to “provide any information to show that he paid a premium for [Mortgage Company] to provide reasonable and adequate security measures.”

The Consumer also argued that the Mortgage Company’s breach of data violated his right to privacy under Art. I, Section I of the California Constitution.  However, the loss of personal data through insufficient security fails to constitute “a serious invasion of privacy” that is “an egregious breach of the social norms underlying the privacy right” necessary to meet the standard of actionable conduct under the California Constitution.  Hill v. Nat'l Collegiate Athletic Assn., 7 Cal. 4th 1, 37, 40 (1994); In re iPhone Application Litig.,844 F. Supp. 2d 1040, 1063 (N.D. Cal. 2012) ("Even negligent conduct that leads to theft of highly personal information, including social security numbers, does not approach the standard of actionable conduct under the California Constitution and thus does not constitute a violation of Plaintiffs' right to privacy." ).  Accordingly, these claims, too, were dismissed, with leave to amend.

Next, the court considered the Consumer’s claims that the Mortgage Company failed to comply with the Customer Records Act, Civ. Code § 1798.80 (“CRA”), which requires businesses to protect customers' personal information by maintaining "reasonable security procedures," and if a data breach occurs, to notify affected customer's "without unreasonable delay" §§ 1798.81.5, 82. 

The Consumer argued that the Mortgage Company waived its argument by failing to address this claim, but the Court found just the opposite, and that the Consumer failed to address the Mortgage Company’s arguments that dismissal was warranted for failure to allege injury, and for conclusory allegations about security, data disposal and notification.  Thus, the claim was deemed abandoned, and dismissed with leave to amend.  See, e.g., Shull v. Ocwen Loan Servicing, LLC, 2014 WL 1404877, at *2 (S.D. Cal. Apr. 10, 2014).

Following amendment by Consumer, the Court also dismissed the CRA claim with prejudice and without leave to amend.  The Court noted that, although the CRA requires businesses to notify customers of a data breach "in the most expedient time possible and without reasonable delay” (Cal. Civ. Code § 1798.82(a)), courts have required plaintiffs to “show that the delay in notification led to incremental harm.”  The Consumer did not do so here.

Moreover, the CRA requires businesses to "implement and maintain reasonable security procedures and practices appropriate to the nature of the information." Cal. Civ. Code § 1798.81.5.  The Court held that Consumer “could have identified what made [Mortgage Company]'s security measures unreasonable by comparison to what other companies are doing, but simply knowing of higher-quality security measures is not sufficient to state a claim.”

The Consumer’s claims under the Consumers Legal Remedies Act (“CLRA”) asserted that the Mortgage Company violated various provisions of Cal. Civ. Code § 1770(a)'s ban on unfair business practices that result "in the sale or lease of goods or services to any consumer."

As you may recall, the CLRA defines "services" as "work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods." § 1761. 

Here, the Court accepted the Mortgage Company’s argument that home loans do not qualify as “the sale of a service” under the CLRA, citing California Supreme Court authority that that "ancillary services that insurers provide to actual and prospective purchasers of life insurance" do not count as a "service" under the CLRA because the activity centers on a "contractual obligation to pay money." Fairbanks v. Superior Court, 46 Cal. 4th 56, 61, 65 (2009).  Thus, the Consumer’s CLRA claims were dismissed, but without leave to amend.

Lastly, the Consumer claimed that the Mortgage Company violated California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200) (“UCL”) by supposedly engaging in unfair business practices by failing to provide sufficient security for his data. 

Here, the Court noted that the Consumer’s complaint failed to explain which theory he was advancing under the UCL.  Although his opposition brief suggested the Consumer relied upon his CLRA and CRA claims as predicates for an unlawful theory, because those causes of action failed to state a claim, and because the Consumer failed to sufficiently allege “lost money or property,” as required, the Consumer’s Unfair Competition Law claim also failed to state a cause of action, and was dismissed with leave to amend.

Consumer amended his UCL claim, but the Court held the amendments were insufficient, and this time dismissed the UCL claim with prejudice.  The Court noted that a UCL plaintiff must "have suffered an `injury in fact' and `lost money or property as a result of such unfair competition."  Consumer argued that he met this element because funds were withdrawn without his consent from his bank account.  However, the Court noted, Consumer’s bank quickly reversed the transaction, and therefore Consumer suffered no “injury in fact,” as required.

Accordingly, the motion to dismiss Consumer’s putative class action lawsuit was granted with prejudice and without leave to amend.

Eric Tsai

Maurice Wutscher LLP 
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