Sunday, December 16, 2018

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

Admitted to practice law in California, Nevada and Oregon


Sunday, December 2, 2018

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, 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 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000

Admitted to practice law in California, Nevada and Oregon