Saturday, September 14, 2019

FYI: Cal App Ct (2nd Dist) Upholds Denial of Class Cert Based on Survey and Statistical Sampling

The Court of Appeal for the Second District of California affirmed an order denying class certification in a wage and hour litigation, holding that plaintiffs' proposed anonymous, double-blind survey and statistical sampling failed to address individualized issues for liability and damages.

In so ruling, the Appellate Court held that the plaintiffs' trial plan was unmanageable and unfair because, among other things, the proposed survey deprived the defendants of the ability to cross-examine the witnesses and to assert defenses. 

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

In this putative class action, property inspectors (Plaintiffs) alleged that they were engaged by three service providers to perform property inspections for two insurance companies. 

Plaintiffs alleged they were employees of the insurers and service companies (Defendants) jointly, and Defendants failed to pay minimum wages and overtime (Cal. Lab. Code § 1194), furnish timely or accurate wage statements (Cal. Lab. Code § 226(e)), establish a policy for meal or rest breaks, or reimburse them for employment expenses (Cal. Lab. Code § 2802), and in so doing violated California's Unfair Competition Law (Bus. & Prof. Code § 17200, et seq.).

The Plaintiffs moved for class certification, supported by their expert's declaration that liability could be determined and damages calculated classwide by using "established survey methods and statistical analyses"  of a random sample of class members.

The trial court denied certification on the ground that Plaintiffs failed to show their status as employees could be established on predominantly common proof.

Plaintiffs appealed and the Appellate Court reversed the order, remanding with instructions for the trial court to evaluate the Plaintiffs' trial plan. 

On remand, the Plaintiffs' expert elaborated on the trial plan, proposing an anonymous, double-blind survey of all class members.  Specifically, the plan provided that all potential class members would be invited to participate in the survey and a telephone survey firm would conduct interviews and ask questions concerning:

(1) the amount of overtime worked, (2) the numbers of meal and rest breaks to which inspectors were entitled to take under California law but did not take (assume the law applied to these individuals), (3) the amount of time inspectors spent performing specific tasks of relevance to the claimed minimum wage violations, (4) the number of miles that inspectors drove to do their work, [and] (5) the amount of money that inspectors spent for other business expenses incurred in connection with their work.

The respondents would receive a small financial incentive to participate in the survey, and would be told their answers and participation were confidential.

The respondents would asked to recall, among other things, the time they spent doing inspection, the number of days per week worked beginning in 2005, the number of hours worked, when they took breaks and the duration of each break, whether they incurred expense, and which of the three service companies and only one of the insurers they worked for and for how long.

The survey did not include questions about the second insurer for unknown reasons.  When asked why, Plaintiffs' expert answered "I wasn't asked to do that." 

Using the sampling data from the survey, Plaintiffs' expert would generate estimated totals for each subclass, apportioned separately for inspections done for each of the Defendants, and provide a margin of error and confidence levels.

In opposition to Plaintiffs' trial plan, Defendants' expert identified several flaws in the proposed survey. 

First, the survey asked no questions related to the employee/independent contractor distinction, and in fact avoided questions about the degree of independence inspectors enjoyed. 

Specifically, the survey did not ask questions about the Defendants' knowledge or control of any facet of an inspector's workday, e.g., how many hours the inspector worked, what breaks were or could have been taken, or what meets were attended or expense incurred.  Defendants argued that this deficit left the independent contractor question unanswered and potentially skewed the survey results by artificially narrowing variances.

The expert also argued that the very precise recall required by the survey questions about events stretching back 10 years invited significant error.  Further, if the data showed that the respondents' experiences varied widely, the average may not be representative of the actual experiences of many members of class, and the anonymous nature of the survey led to inaccurate and unverifiable results.

The trial court again denied certification, finding Plaintiffs' statistical sampling unworkable because it did not specify which insurer's inspections were performed, or explain whether the inspectors' failure to take meal or rest  breaks was due to preference or to the exigencies of the job.  Also, the survey's anonymity deprived the Defendants from cross-examining witnesses to verify responses or test them for accuracy or bias.

This appeal followed.

As you may recall, " in wage and hour cases where a party seeks class certification based on allegations that the employer consistently imposed a uniform policy or de facto practice on class members, the party must still demonstrate that the illegal effects of this conduct can be proven efficiently and manageably within a class setting."   Duran v. U.S. Bank National Assn. (Cal. 2014) 59 Cal. 4th 1, 28-29.  " Class certification is appropriate only if 'individual questions can be managed with an appropriate trial plan.'" Id., at 27.

The Plaintiffs argued that their expert's survey was "methodologically correct and scientifically valid, captured all pertinent variation in hours worked among inspector, eschewed irrelevant questions, and produced reliable and accurate results."

The Appellate Court explained that the problem with the survey was not the scientific measurement procedure, rather it failed as a trial plan because it did not fairly establish Defendants' liability on a classwide basis as to any claim.

With respect to overtime and meal and rest breaks, the Appellate Court noted that "simply having the status of an employee [did] not make the employer liable for a claim for overtime compensation or denial of breaks."   Instead, "[a]n individual employee establishe[d] liability by proving actual overtime hours worked without overtime pay, or by providing that he or she was denied rest or meal breaks."

The Appellate Court found that Plaintiffs' expert asked no questions about the second insurer, and thus, it was unclear how Plaintiffs could establish the liability of the second insurer without considering whether any inspector worked for this insurer more than eight hours in a day or 40 in a week (Lab. Code § 510).

The Appellate Court explained that Plaintiffs' plan also failed with respect to their minimum wage claim (Lab. Code § 1194), because the inspectors were paid a piece rate for each inspection performed and Plaintiffs offered no explanation how they could establish the number of inspections performed for the second insurer, how long they took, or what the second insurer paid for them.

Regarding the meal and rest period claims, the Appellate Court explained that the inspectors performed inspections for a number of insurance companies, including non-parties, often in the same day, but the survey failed to ask if anyone ever worked long enough in a day for either of the insurance companies in this case to be entitled to a meal or rest period from that insurer or any of its three co-employers.

Further, the Appellate Court noted that "plaintiffs made no effort to explain how they could establish through common proof what expenses, if any, inspectors incurred for any particular insurer, or how they were deprived of wage statements."

The Appellate Court determined that the anonymous survey deprived the Defendants of any meaningful examination of any witnesses, as Plaintiffs expert did not know who the survey respondents were and why any class member had chosen not to participate.

After the Appellate Court issued an opinion affirming the trial court's ruling, Plaintiffs petitioned for rehearing, arguing that Defendants' liability could be established independent of the survey by examining the various policies and contracts demonstrating all the Defendants were co-employers that had the right to control Plaintiffs' work.

Plaintiffs argued that liability may be established classwide by the failure of one employer to pay overtime or provide a rest break on even a single occasion.

This approach, in the Appellate Court's view, was similar to that rejected in Duran, where the plaintiffs alleged their employer had misclassified them as outside sales persons, rendering them exempt from overtime laws.  In Duran, the plaintiffs proposed to proceed classwide with an initial liability phase and a second phase to address the extent of damages, but the California Supreme Court held that whether a given employee is properly classified depends in large part on the employee's individual circumstance.  Duran, 15 Cal.4th at 36. 

The Appellate Court also observed that in Brinker, the California Supreme Court analyzed the elements of the off-the-clock claim before it, holding that "liability is contingent on proof [the employer] knew or should have known off-the-clock work was occurring."  Brinker, 53 Cal.4th at 1024. 

As the Appellate Court explained, "an employer's liability for failure to provide overtime or rest breaks will depend on the employees' individual circumstance.  Liability to one employee by one employer does not establish even that employer's liability to other employees, much less the liability of a joint employer to any employee."

The Court continued, explaining that "[e]ven if a class action trial could determine that an employer is liable to an entire class for a consistently applied policy or uniform job requirements and expectations contrary to Labor Code requirements, or if it knowingly encouraged a uniform de factor practice inconsistent with the requires, any procedure to determine the defendant's liability to the class must still permit the defendant to introduce its own evidence, both to challenge the plaintiffs showing and to reduce overall damages."

Plaintiffs proposed that once the subclasses were certified and liability established in the first phase, class members could submit claims by answering a questionnaire, and any dispute could be resolved in "streamlined trials" where Defendants could cross-examine claimants and present their own witnesses. 

The Appellate Court explained that this approach would render any prior liability phase either duplicative or superfluous, as Defendants would likely raise several objections, and consequently the second phase could easily occupy the trial court for several months.

Finding that Plaintiffs' survey afforded "no fair, manageable way" to establish liability on common proof, the Appellate Court affirmed the trial court's order denying class certification.

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


Wednesday, August 28, 2019

FYI: 9th Cir Holds Supporting Evidence Not Required for CAFA Removal

The U.S. Court of Appeals for the Ninth Circuit recently reversed a trial court order remanding a case to state court for lack of jurisdiction under the federal Class Action Fairness Act (“CAFA”) because the jurisdictional allegations pled provided a short and plain statement of jurisdiction.

The Court held this was sufficient, even without supporting evidence, to confer jurisdiction.

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

A plaintiff filed a class action complaint against a defendant in California state court claiming that defendant “had engaged in unlawful business practices related to the advertisement and sale of residential internet services”  Plaintiff filed the case on behalf of himself and all California consumers that paid for defendant’s internet services within the last four years.

Defendant removed the putative class action to the federal trial court pursuant to CAFA.  In the notice of removal, defendant, a citizen of Delaware and Georgia, alleged that it met CAFA’s jurisdictional requirements “because it was a putative class action with more than 100 class members,” and “that the amount in controversy exceeded $5,000,000, exclusive of interest and costs.” Defendant also alleged that that minimal diversity existed between the parties because plaintiff and all class members were California Citizens.

Plaintiff moved to remand the case to state court by making a facial challenge to the notice of removal. Specifically, plaintiff argued that defendant had not “adequately plead the existence of minimal diversity” because defendant based the citizenship allegations solely “on information and belief.”

The trial court granted plaintiff’s motion to remand finding that defendant’s citizenship allegations were insufficient to establish minimal diversity because they were based on no more than “sensible guesswork.” This appeal followed.

The Ninth Circuit began its analysis by noting that Congress enacted CAFA with the “intent . . . to strongly favor the exercise of federal diversity jurisdiction over class actions with interstate ramifications.”  CAFA gives federal trial courts jurisdiction over class actions when, “any member of a class of plaintiffs is a citizen of a State different from any defendant.” 28 U.S.C. § 1332(d)(2)(A). In contrast to section 1332(a)’s complete diversity of citizenship requirement, the Ninth Circuit observed that CAFA only requires “minimal diversity.”

The issue in this appeal is what the “removing defendant must plead in its notice of removal.” 

The removing defendant has the burden to plead minimal diversity by including in the notice of removal “a short and plain statement of the grounds for removal.” 28 U.S.C. § 1446(a).  Congress borrowed the “short and plain statement” standard from Rule 8(a), signifying to the Ninth Circuit that courts should liberally construe removal allegations similar to other pleadings.  The Ninth Circuit also noted that the removing defendant may plead minimal diversity based on “information and belief,” without submitting evidence to support the allegations.

Defendant alleged that “all putative class members were citizens of California.”  The Ninth Circuit rejected plaintiff’s argument that defendant had to come forth with evidence to demonstrate why it believed its citizenship allegations. 

Instead, the Court held that a removing defendant may base its citizenship allegations “solely on information and belief.”  Here, defendant’s notice of removal contained the required short and plain statement that the putative class members were all California citizens necessary to confer jurisdiction under CAFA.

The Ninth Circuit also determined that the trial court erred by placing the burden on the removing defendant “to prove its jurisdictional allegations in response to” plaintiff’s facial challenge.  Instead, jurisdictional factual allegations at the pleading stage “need not be proven unless challenged.” This is especially true, the Ninth Circuit noted, because CAFA contains “no antiremoval presumption.” 

The Ninth Circuit found it significant that plaintiff’s motion to remand only facially challenged the legal adequacy of the notice of removal, instead of factually challenging the jurisdictional allegations because a facial challenge accepts the removing defendant’s allegations as true and then argues that the allegations on their face fail to confer jurisdiction.  As a result, the Appellate Court held it was improper for the trial court to require defendant “to present evidence in support of its allegation of minimal diversity.”

Thus, the Ninth Circuit held that defendant’s jurisdictional allegations, which provided a short and plain statement of the parties’ citizenships based on information and belief, met its burden to plead minimal diversity. 

The Ninth Circuit therefore reversed the trial court’s order remanding the case to state court.

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


Monday, August 26, 2019

FYI: Cal App (3rd Dist) Allows HOBR Claim for Vague Reasons for Loan Mod Denial

The Court of Appeal for the Third District of California recently affirmed in part, and reversed in part, an order granting a mortgage servicer’s motion to dismiss several causes of action brought by plaintiff borrowers for denying their requests to modify their mortgage loan.

The appellate court affirmed the dismissal as to the borrowers’ counts for breach of contract, negligence, and intentional infliction of emotional distress.  However, it also held that the borrowers stated that a valid cause of action under California’s Homeowner Bill of Rights, section 2923.6, and reversed as to that claim.

Specifically, the appellate court concluded that the servicer’s explanation that it “do[es] not have the contractual authority to modify [the] loan because of limitations in [its] servicing agreement” was not sufficiently detailed, and that without knowing the actual reason for denial, it could not be said for certain that the failure to provide “specific reasons for the investor disallowance” as required under section 2923.6(f) was not material.

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

After falling behind on their mortgage loan, the plaintiffs-borrowers (“Borrowers”) requested loss mitigation assistance from their mortgage servicer (“Servicer”) and alleged that they were offered a loan modification in exchange for agreeing to make three trial payments of $1,633.53.  Borrowers completed the trial payments but were not offered a modification, which led to Servicer recording a notice of default three months later.  After first dismissing an action against Servicer without prejudice, the Borrowers initiated the instant litigation in early 2014.

In late 2014, Borrowers submitted a completed loan modification application with supporting documents to Servicer to review Borrowers for a Home Affordable Modification Program (“HAMP”) or a non-Hamp “Trial Payment Plan” modification.  Two months later, the Servicer denied the Borrowers for the HAMP modification, purportedly due to lack of contractual authority to modify the loan due to limitations in its servicing agreement.  However, the Borrowers were provided a non-Hamp Trial Payment Plan offer that required them to make three trial payments—the first one in the amount of $171,745.78—which was “essentially an initial payment of the past due total arrearages.”

The Borrowers appealed the Servicer’s denials, arguing that the non-Hamp Trial Payment Plan was a constructive denial and that they would have been approved if “fairly and carefully reviewed.”

The Borrowers’ operative third amended complaint alleged five causes of action against the Servicer for: (1) breach of contract, (2) violation of California’s Business & Professions Code section 17200 (not at issue on appeal), (3) negligence, (4) violation of California’s Homeowner Bill of Rights, section 2923.6, and (5) intentional infliction of emotional distress.

As was the case with the prior Complaints, the trial court sustained the Servicer’s demurrer to the third amended complaint as to all causes of action, and this time, without leave to amend. The instant appeal from the judgment of dismissal followed.

Initially, the Third District reviewed Borrowers breach of contract claim, which alleged that the Servicer had breached the written contract to extend a mortgage modification in exchange for three trial payments. 

The appellate court noted that the purported contract attached to the third amended complaint referred multiple times to the agreement Servicer offered as a “Special Forbearance Agreement,” and expressly stated that it was “not a waiver of the accrued or future payments that become due, but a period for you to determine how you will be able to resolve your financial hardship.” Further, the purported “agreement” made no promise of a loan modification, but that “[t]he lender is under no obligation to enter into any further agreement,” and completion of trial payments would result only in a review for a loan modification based on investor approval.

The Borrowers’ argument that the temporary payment plan which led them to believe a permanent modification was forthcoming was tantamount to a binding contract was rejected by the trial court.  On appeal, they argued that the trial court erred in finding that the forbearance agreement did not obligate the Servicer to modify their mortgage loan, citing the 4th District’s holding in West v. West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, which held a “Trial Plan Agreement” required the lender to offer a permanent loan modification. 

The Third District similarly found Borrowers’ argument unconvincing, and distinguished the facts from West, which offered a modification under HAMP, for the case at bar, which expressly disclaimed a promise to modify.  Whereas West was grounded in a Treasury directive and HAMP guidelines, the forbearance agreement here offered offer no comparable authority for imposing a similar obligation upon the Servicer.  Accordingly, the appellate court concluded that the Servicer’s demurrer was properly sustained as to their breach of contract claim.

Borrowers’ negligence claim argued that the Servicer owed them a general duty of care in the handling and processing of their loss mitigation review and negligently made false representations in promising a modification in exchange for trial payments. 

While acknowledging that a financial institution can owe a duty of reasonable care in processing loan modifications (Alvarez v. BAC Home Loans Servicing, LP (2014) 228 Cal.App.4th 941), the trial court sustained the Servicer’s demurrer as to this count on the basis that Borrowers merely alleged that a nonexistent contract was not honored, and the claim for negligence per se similarly failed for failure to reference any such violation.

On appeal, the Borrowers argued that the failed to adequately apply Alvarez, and that a per se duty of care is also owed under California's Homeowner Bill of Rights.  The appellate court disagreed. 

Even assuming that the Servicer owed a duty of care in processing the loan application, the Third District held that Borrowers’ third amended complaint failed to allege a breach or any facts that might suggest a failure to comply with any duty under Alvarez.  Thus, the trial court’s decision to sustain the Servicer’s demurrer as to Borrower’s negligence claim was affirmed.

Next, the appellate court reviewed the dismissal of the Borrower’s cause of action under California’s Homeowner Bill of Rights.  In sustaining the Servicer’s demurrer, the trial court rejected the Borrowers claims that their written denials were insufficiently detailed to comply with section 2923.6(f) on the basis that Borrowers’ allegations were vague and they failed to provide authority that anything more was required.

As you may recall, Section 2923.6 subdivision (f) of the Homeowner Bill of Rights requires a servicer, following the denial of a loan modification, to send written notice “identifying the reasons for the denial.”  Subdivision (f)(2) further requires that “[i]f the denial was based on investor disallowance, the specific reasons for the investor disallowance” must be given.  (§ 2923.6, subd. (f)(2)).

On appeal, the Third District analyzed the Servicer’s denial for a HAMP modification, which explained that “[we] do not have the contractual authority to modify your loan because of limitations in our servicing agreement.”  The appellate court concluded that the statement was ambiguous and did not suffice as an explanation – at least for the purposes of a demurrer. 
Although the Servicer argued that the purported violation was not material, as is required for a borrower to bring a claim for injunctive relief under section 2923.6 when a deed upon sale has not yet been recorded, the appellate court disagreed, reasoning that it could not determine whether the failure to provide “reasons for the disallowance” was not material without knowing the investor’s actual reason for denying the HAMP modification.

Because the appellate court concluded that Borrowers stated a claim under section 2923.6, the trial court’s order sustaining the demurrer to the Homeowner Bill of Rights claim was reversed.

Lastly, the Third District reviewed the sustained demurrer as to the Borrowers’ intentional infliction of emotional distress claim—that the Servicer’s refusal to provide a modification and offer approving modification conditioned only upon payment of $171,745.78 in arrearages constituted “extreme and outrageous” conduct.

In sustaining the demurrer, the trial court explained that creditors, such as the Servicer, enjoy a qualified privilege to protect their economic interest by asserting their legal rights—in this instance, to collect the 6-plus years of arrearages due on the loan—even though doing so may cause emotional distress. 

On appeal, the Borrowers argued that the trial court failed to adequately consider cases finding actionable conduct based on improper creditor action.  Bundren v. Superior Court (1983) 145 Cal.App.3d 784, 790 (creditor who knows the debtor is susceptible to emotional distress due to a physical or mental condition may incur liability for causing emotional distress).  The Borrowers claim that the Servicer knew its conduct was likely to cause more emotional distress than a typical debt collection because it knew they were trying to modify their loan since 2010 and could become homeless.  

While acknowledging that the Bundren court held that creditors could lose their qualified privilege to protect their economic interest if outrageous and unreasonable means are used to seek payment, the appellate court found no such conduct occurred here which “exceed[ed] all bounds usually tolerated by decent society, of a nature which is especially calculated to cause, and does cause, mental distress of a very serious kind.” ’ ” (Christensen v. Superior Court (1991) 54 Cal.3d 868, 904–905.).  Thus, the demurrer was sustained as to the Borrowers’ claims for intentional infliction of emotional distress.

For all of the foregoing reasons, the Third District reversed the trial court's order sustaining the demurrer as to the Borrowers’ claims under the Homeowners’ Bill of Rights, but affirmed as to all other counts, and remanded to the trial court for proceedings consistent with the appellate court's opinion.

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


Wednesday, August 21, 2019

FYI: Cal App (2nd Dist) Holds No Duty of Care Owed in Loan Mod Negotiations

Disagreeing with contrary rulings from the First and Sixth Districts, the California Court of Appeal for the Second District recently affirmed a trial court’s ruling that no duty of care is owed to a borrower during contract negotiations for a mortgage loan modification.

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

In 1998, plaintiff borrower (“Borrower”) obtained a $500,000.00 loan secured by a deed of trust (the “First Loan”).  The First Loan is not at issue.  In 2005, Borrower obtained two junior loans from defendant bank (“Bank”) in the amounts $167,820.00 (the “Second Loan”) and $82,037.00 (the “Third Loan”) (collectively, the “Junior Loans”).  Borrower subsequently encountered financial troubles leading the Bank to record a notice of default on the Second Loan in September 2009. 

In January 2010, Borrower contacted the Bank seeking to modify the Junior Loans and subsequently submitted loan modification requests to the Bank on January 29, 2010.  In March 2010, Borrower received correspondence from the Bank concerning the Second Loan, which Borrower claimed led him to believe the Second Loan had been converted into an unsecured loan. Around this time, Borrower separately alleged the Bank contacted his wife and informed her no foreclosure sale would occur and that the Bank “was simply trying to recover money through standard collection practices.”

In April 2010, Borrower received a second letter from the Bank where it offered to charge off 50% of the Second Loan’s balance if the Bank and Borrower could reach a satisfactory arrangement.  Borrower claims the letter reinforced his belief that the Second Loan had been converted into an unsecured loan.

In November 2010, the Bank sold the Second Loan to a different entity (“Note Holder”) and canceled the Third Loan in March 2014.  In August 2013, Borrower separately modified the First Loan.

In April 2014, the Note Holder recorded a notice of default as to the Second Loan leading Borrower to submit several loan modification requests.  Borrower asserted the Note Holder never responded to his modification attempts, and instead informed him in August of 2014 that the Second Loan service transferred to another entity (the “Current Servicer”).  Thus, Borrower submitted another loan modification application to the Current Servicer who rejected as a result of Borrower “having too little income.” 

Borrower subsequently filed for Chapter 7 bankruptcy relief and submitted two additional loan modification applications during the pendency of his bankruptcy.  The Current Servicer rejected both of loan modification applications again citing Borrower’s low income.  In 2014, Borrower, with the assistance of a legal aid representative, submitted a third loan modification application. The Current Servicer allegedly informed the legal aid representative that it no longer considered the Second Loan as being in “active foreclosure.”  Borrower separately contacted the Note Holder who informed Borrower that “it would consider a modification in lieu of foreclosure.” 

In October 2014, Borrower’s bankruptcy was dismissed lifting the bankruptcy stay.  Borrower subsequently learned that the property at issue would be sold in five days’ time.  Borrower immediately contacted the Current Servicer who confirmed the property’s sale date. 

The property was subsequently sold via foreclosure sale with the Note Holder being the highest bidder. 
Borrower subsequently instituted the instant action against Bank asserting causes of action for: (1) negligence; (2) intentional infliction of emotional distress (“IIED”); and (3) violations of Business and Professions Code section 17200 (“Section 17200”). 

Relevant to this appeal and his negligence claim, Borrower alleged the Bank owed Borrower a duty of care to: (1) “process, review, and respond carefully and completely to the loan modification applications [Borrower] submitted to [the Bank]; and (2) refrain from engaging in unfair and offensive business practices that confused Borrower and prevented him from pursing foreclosure prevention alternatives.  Borrower further alleged the Bank breached its duty of care by failing to respond to his loan modification applications and by stating it would not conduct a foreclosure, among other things. 

The Bank demurred to Borrower’s operative complaint, which the superior court granted without leave to amend.  Specifically, the trial court dismissed Borrower’s negligence claim because Borrower failed “to plead facts supporting a tort duty of care by [Bank] to Borrower regarding the loan modification.”  The trial court sustained the Bank’s demurrer to Borrower’s IIED claim for failure to plead outrageous conduct and separately dismissed the Section 17200 “for want of an underlying claim.” 

Borrower appealed the lower court’s order sustaining Bank’s demurrer without leave to amend.

On appeal, Borrower argued the Bank owed him a duty of care under the holdings of Alvarez v. BAC Home Loans Servicing, L.P. (2014) 228 Cal.App.4th 941 (Alvarez); Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150 (Daniels). 

As you may recall, the Alvarez and Daniels rulings held that a lender owes a borrower a duty of care in tort during mortgage modifications negotiations.  However, there is a sharp conflict among California courts as to whether a lender owes a duty of care to a borrower during mortgage loan modification negotiations, and the California Supreme Court has not resolved the conflict.

The Court began its analysis by examining Southern California Gas Leak Cases (2019) 7 Cal.5th 391 (“Gas Leak Cases”), which recently found there is no tort duty where the damages complained of purely are economic.  Specifically, the Gas Leak Cases held that economic losses flowing from “a financial transaction gone awry” are “primarily the domain of contract and warranty law or the law of fraud, rather than of negligence.’” (Gas Leak Cases, supra, 7 Cal.5th at p. 402.)

The Court further noted “a striking degree of unanimity” weighing against the Alvarez and Daniels decisions as courts in at least 23 jurisdictions refuse “to import tort duties during mortgage modifications negotiations. 

The Court next examined the Restatement of Torts (“Restatement”) and found it provided that “no liability in tort for economic loss caused by negligence in the performance or negotiation of a contract between its parties.”  Indeed, the Restatement further explained that the economic loss rule “prevents the erosion of contract doctrines by the use of tort law to work around them…[and] also reduces the confusion that can result when a party brings suit on the same facts under contract and tort theories that are largely redundant in practical effect.”

The Court separately noted “the ability of legislatures to craft remedies beyond the ken of courts…[as] through the democratic process, the Legislature can bring to bear a mix of expertise while considering competing concerns to craft a solution in tune with public demands.”  Gas Leak Cases, supra, 7 Cal.5th at p. 413.

Thus, the Court held that the trial court properly dismissed the Borrower’s negligence claim because “a lender does not owe a borrower a common law duty to offer, consider, or approve a loan modification.”

Concerning Borrower’s other causes of action, the Court found his IIED claim was frivolous and that the trial court correctly dismissed Borrower’s Section 17200 claim.

Accordingly, the Court affirmed the trial court’s order sustaining Bank’s demurrer 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


Monday, August 19, 2019

FYI: 9th Cir Holds Violation of Facial Recognition Law Sufficient for Standing, Upholds Class Cert

The U.S. Court of Appeals for the Ninth Circuit recently held that the class plaintiffs alleged a concrete and particularized harm sufficient to confer Article III standing where the defendant company’s alleged collection, use, and storage of the plaintiffs’ biometric information was the substantive harm targeted by the Illinois Biometric Information Privacy Act (“BIPA”), which statute protects the plaintiffs’ concrete privacy interests. 

The Ninth Circuit further held that the district court did not abuse its discretion in certifying the class.

Accordingly, the Ninth Circuit affirmed the district court orders certifying the class, and denying the defendant’s motion to dismiss.

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

Facebook, Inc. (“Facebook”) operates one of the largest social media platforms in the world, with over one billion active users.  When a new user registers for a Facebook account, they must create a profile and agree to Facebook’s terms and conditions, which permit Facebook to collect and use data in accordance with Facebook’s policies.

In 2010, Facebook launched a feature called Tag Suggestions.  When Tag Suggestions is enabled, Facebook may use facial-recognition technology to analyze whether the user’s Facebook friends are in photos uploaded by that user. 

Facebook users living in Illinois brought a class action in a federal district court in California against Facebook claiming that Facebook’s facial-recognition technology violates Illinois law.  Specifically, the Plaintiffs alleged that Facebook violated BIPA by collecting, using, and storing biometric identifiers from their photos without obtaining a written release and without establishing a compliant retention schedule.

Under BIPA, “[a]ny person aggrieved” by a violation of its provisions “shall have a right of action” against an “offending party.”

Facebook moved to dismiss the complaint for lack of Article III standing on the ground that the Plaintiffs had not alleged any concrete injury.  While the motion to dismiss was pending, the Plaintiffs moved to certify a class under Rule 23.

The district court denied Facebook’s motion to dismiss, and certified a Rule 23(b)(3) class of “Facebook users located in Illinois for whom Facebook created and stored a face template after June 7, 2011.”  The matter was then appealed. 

On appeal, the Ninth Circuit addressed the issue of Article III standing, noting that to establish standing a plaintiff “must have suffered an ‘injury in fact’ – an invasion of a legally protected interest which is (a) concrete and particularized; and (b) actual or imminent, not conjectural or hypothetical.”

A concrete injury need not be tangible, but in determining whether an intangible injury is concrete, courts consider both history and legislative intent. 

In determining whether the violation of a statute causes a concrete injury, the Ninth Circuit has adopted a two-step approach: “(1) whether the statutory provisions at issue were established to protect [the plaintiff’s] concrete interests (as opposed to purely procedural rights), and if so (2) whether the specific procedural violations alleged in the case actually harm, or present a material risk of harm to, such interests.”

In considering the first factor, the Ninth Circuit noted that “[p]rivacy rights have long been regarded as providing a basis for a lawsuit in English or American courts.”  Moreover, in recent Fourth Amendment jurisprudence, “the Supreme Court has recognized the potential for unreasonable intrusions into personal privacy” related to enhanced technology. 

In light of this background, the Ninth Circuit “conclude[d] that an invasion of an individual’s biometric privacy rights has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in English or American courts.”

Moreover, “[t]he judgment of the Illinois General Assembly, which is ‘instructive and important’ to our standing inquiry, . . . supports the conclusion that the capture and use of a person’ biometric information invades concrete interests.”

The Ninth Circuit therefore concluded that “the statutory provisions at issue” in BIPA were established to protect an individual’s “concrete interests” in privacy, not merely procedural rights.

The Court next turned to whether the specific procedural violations alleged actually harm, or present a material risk of harm to, such interests.

In concluding that they did, the Ninth Circuit noted that the Plaintiffs alleged that a violation of the BIPA requirements allowed Facebook to create and use a face template and retain that template for all time.  Thus, “[b]ecause the privacy right protected by BIPA is the right not to be subject to the collection and use of such biometric data, Facebook’s alleged violation of these statutory requirements would necessarily violate the plaintiffs’ substantive privacy interests.”

Accordingly, the Ninth Circuit held that “plaintiffs’ have alleged a concrete injury-in-fact sufficient to confer Article III standing.”

The Court next turned to Facebook’s argument that the district court abused its discretion by certifying the class.  Specifically, Facebook argued that class certification was not compatible with Rule 23(b)(3), which requires that “questions of law or fact common to class members predominate over any question affecting only individual members.”  Facebook further argued that the Illinois extraterritoriality doctrine precludes the district court from finding predominance.

The Ninth Circuit disagreed, determining that the “threshold questions of BIPA’s applicability can be decided on a class-wide basis,” by deciding if the violation of BIPA occurred when plaintiffs used Facebook in Illinois, or if they occurred when Facebook’s servers created a face template.

Facebook additionally argued that the district court abused its discretion by certifying a class because a class action is not superior to individual actions, because the possibility of a large, class-wide statutory damages award defeats superiority.   

The Ninth Circuit rejected this argument, ruling that “nothing in the text or legislative history of BIPA indicates that a large statutory damages award would be contrary to the intent of the General Assembly.” 

Thus, the Ninth Circuit held that “the district court did not abuse its discretion in determining that a class action is superior to individual actions in this case.”

Eric Tsai
Maurice Wutscher LLP 
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