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Rusty Krouse and Brenna Krouse v. Bac Home Loans Servicing


December 5, 2011


The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge


Plaintiffs Rusty Krouse and Brenna Krouse seek redress from Defendants BAC Home Loans Servicing, LP and Bank of America, N.A. ("Defendants" or "BoA") based on claims of breach of contract, breach of implied covenant of good faith and fair dealing, promissory estoppel, violations of the Rosenthal Fair Debt Collection Practices Act, violations of California's Unfair Competition Law, and violations of the Truth-In-Law Lending Act ("TILA") codified at 12 CFR Part 226 ("Regulation Z").*fn1

Presently before the Court is Defendants' Motion to Dismiss ("MTD") Plaintiffs' Second Amended Complaint for failure to state a claim upon which relief may be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn2


The Defendants in this matter are in the business of making and servicing home mortgage and deed of trust loans.*fn4 This action arises out of a residential loan transaction involving Plaintiffs' real property. On December 19, 2007, Plaintiffs procured a loan in the amount of $417,000, which was secured by a Promissory Note and a Deed of Trust recorded on December 26, 2007. (MTD at 2). It is undisputed, that at the closing of the loan transaction, Plaintiffs were provided with the Truth in Lending Act disclosures, explaining the terms of their loan. (MTD at 2.)

Furthermore, it is undisputed that On December 19, 2007, Plaintiffs received and signed two Notices of the Right to Cancel ("NRC"), which were intended, among other things, to set out the time reserved for Plaintiffs to rescind the loan agreement. (MTD at 3.)

In early 2009, Plaintiffs found it difficult to make their obligated deed of trust payments. As a result, in April 2009, Plaintiffs applied for a loan modification through the Home Affordable Modification Program ("HAMP"), serviced by Bank of America N.A. ("BoA").

HAMP is a key initiative of the Troubled Asset Relief Program ("TARP")-a government program supplying U.S. financial institutions with roughly $700 billion. The HAMP initiative offers incentive funds to financial institutions for providing mortgage loan modifications to eligible borrowers who are in financial distress. Defendants are one of many institutions that receive HAMP funds. Generally speaking, to qualify for a home loan modification under HAMP: (1) the borrower requests HAMP loan modification; (2) the servicer and borrower enter into Trial Period Plan agreement; and (3) based on the borrower's financial information and Net Present Value ("NPV"), servicer will either approve or deny borrower for the HAMP loan modification. If the NPV produces a "negative" result (meaning losses to the servicer from foreclosure are less than losses from modification), the servicer is not obligated to modify the loan. However, under the HAMP guidelines, if the NPV result is positive the servicer is obligated to provide a loan modification.

In July 2009, after reviewing Plaintiffs' financial information, BoA informed Plaintiffs via a telephone conversation that they had conditionally met the eligibility requirements to qualify for a permanent loan modification under HAMP. As the Plaintiffs allege, BoA also explained that if the Plaintiffs made three timely trial period plan ("TPP") payments of $2,345, then BoA would provide a permanent loan modification.

On August 23, 2009, Plaintiffs received a written, but unsigned, TPP. The TPP explained how Plaintiffs were required to make three timely TPP payments for the months of August, October, and November 2009.*fn5 Plaintiffs thereafter timely made the three TPP payments and continued to make the TPP payments after November 2009.

In December 2009, Plaintiffs contacted Defendants and were told they were "still under review" and must continue making payments. Plaintiffs then received a letter dated December 12, 2009, from BoA requesting their tax returns and the most recent profit and loss statement. Plaintiffs allege the tax returns and similar financial information had previously been submitted to Defendants prior to starting the TPP.

In early January 2010, Plaintiffs received a letter from BoA requesting tax returns, documentation stating Plaintiffs were not subject to homeowners' association dues, and documentation showing completion of credit counseling. Again, Plaintiffs claim these documents were already in BoA's custody, but they still produced the documents

During the latter part of January 2010, Plaintiffs received a letter from BoA claiming Plaintiffs had not made all necessary TPP payments. Plaintiffs thereafter requested and received a copy of their loan history from Defendants, which indicated that Plaintiffs made every payment since entering the TPP trial period.

The following month, Plaintiffs received another letter from BoA requesting their tax returns. In lieu of submitting their tax returns for a third time, Plaintiffs called to inquire as to the status of the loan modification, and the purpose of the document request, but did not receive a conclusive answer.

Between February and June 2010, Plaintiffs continued to make their TPP payments and communicated with BoA on seven separate occasions. By phone and in writing, BoA repeatedly assured Plaintiffs that they had satisfied the HAMP requirements and had been approved for the permanent loan modification and that the paperwork would be sent to them in the near future. They were instructed to continue making the TPP payments while awaiting the loan modification paperwork. However, the promised paperwork never arrived and, in a call in early June 2010, a BoA representative could not explain why the paperwork had not been sent out.

Then, on June 25, 2010, Plaintiffs received a letter from BoA informing them that they had not qualified for a HAMP modification due to a negative NPV result.*fn6 Just four days later, on June 29, Plaintiffs contacted BoA by telephone. Contradicting the letter that Plaintiffs had just received, the BoA representative "confirmed" Plaintiffs' loan modification had been approved in February of 2009.

Plaintiffs never received the final loan modification documents. Instead, BoA sent Plaintiffs' file to collection.*fn7

In all, Plaintiffs allege that they made the three initial TPP payments, as well as eight additional timely TPP payments. Subsequently, Plaintiffs began receiving harassing collection calls and letters.

As a result of these events, Plaintiffs claim to have suffered increased loan interest amounts, an extended loan payoff period, a higher principle balance, damage to their credit, and have been deterred from seeking other remedies to address their deed of trust default.


A. Motion to Dismiss

On a motion to dismiss for failure to state a claim under Rule 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Rule 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to "give the defendant fair notice of what the...claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1964 (2007) (internal citations and quotations omitted). Though "a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. at 1964-65 (internal citations and quotations omitted). A plaintiff's factual allegations must be enough to raise a right to relief above the speculative level. Id. at 1965 (citing 5 C. Wright &

A. Miller, Federal Practice and Procedure § 1216, pp. 235-36 (3d ed. 2004) ("The pleading must contain something more...than...a statement of facts that merely creates a suspicion [of] a legally cognizable right of action")).

Moreover, "Rule 8(a)(2)...requires a 'showing,' rather than a blanket assertion of entitlement to relief. Without some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirements of providing not only 'fair notice' of the nature of the claim, but also 'grounds' on which the claim rests." Twombly, at 1965, n.3 (internal citations omitted). A pleading must contain "only enough facts to state a claim to relief that is plausible on its face." Id. at 1960. If the "plaintiffs...have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed." Id.

A court granting a motion to dismiss a complaint must then decide whether to grant leave to amend. Rule 15(a) empowers the court to freely grant leave to amend when there is no "undue delay, bad faith[,] dilatory motive on the part of the movant,...undue prejudice to the opposing party by virtue of...the amendment, [or] futility of the amendment...." Foman v. Davis, 371 U.S. 178, 182 (1962). Leave to amend is generally denied when it is clear the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992); Balistieri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1990) ("A complaint should not be dismissed under Rule 12(b)(6) unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.") (internal citations omitted).


A. Breach of Written Contract

1. Parties' Claims

Plaintiffs allege that, by means of its communications with them regarding the TPP agreement, BoA was contractually obligated by the TPP agreement to provide them with a permanent loan modification. Plaintiffs assert they performed all of their obligations by paying the monthly TPP payments and by submitting the requested paperwork.

Defendants move to dismiss on the basis that the alleged written contract falls under the statute of frauds because it was unsigned.

2. Standard

Under California law, a claim for breach of contract requires that a plaintiff demonstrate: (1) the existence of the contract; (2) plaintiff's performance or excuse for nonperformance of the contract; (3) defendant's breach of the contract; and (4) resulting damages. Armstrong Petrol. Corp. V. Tri Valley Oil & Gas Co., 116 Cal. App. 4th 1375, 1391 n. 6 (2004). In California, the statute of frauds states that any agreement to purchase real estate secured by a mortgage or deed of trust, which is not reduced to writing, is invalid. Cal. Civ. Code § 1624(a)(6); Secrest v. Security National Mortgage Loan Trust 2002-2, 167 Cal. App. 4th 544, 552 (2008) ("An agreement for the sale of real property or an interest in real property comes within the statute of frauds"). "A mortgage can be created, renewed, or extended, only by writing, executed with the formalities required in the case of a grant of real property." Cal. Civ. Code § 2922. An agreement to modify a contract subject to the statute of frauds is also subject to the statute of frauds. Secrest, at 553.

3. Analysis

Plaintiffs' breach of written contract claim fails because the alleged contract falls under the doctrine of statute of frauds, and its requirements had not been met. Here, the alleged contract is the TPP agreement. Both parties agree the TPP is an agreement that modifies, at least temporarily, the original mortgage agreement. However, Defendants contend that they never executed the TPP agreement, and therefore the contract is unenforceable under the statute of frauds.

Plaintiffs argue that Doughtry v. California Kettleman Oil Royalties, Inc. prevents Defendants from raising the affirmative defense of statute of frauds where they fully performed their end of the disputed contract. 9 Cal. 2d 58, 81 (1937) (statute of frauds barred where one party fully performs). However, for this rule to apply, a sufficient change of position has to occur "so that the application of the statutory bar would result in an unjust and unconscionable loss, amounting in effect to fraud."

Anderson v. Stansbury, 38 Cal. 2d 707 (1952); see also Secrest, at 556 ("The principle that full performance takes a contract out of the statute of frauds has been limited to the situation where performance consisted of conveying property, rendering personal services, or doing something other than the payment of money.").

Plaintiffs allege that as a result of the breach they have suffered increased interest amounts, a longer loan payoff time, a higher principle balance, damage to their credit, and deterrence from seeking other remedies to address their mortgage default. As the Secrest court held, to remove a contract from the purview of statute of frauds the performance must be more than the payment of money. Here, Plaintiffs suggest that the performance was only the monthly TPP payments and the production of financial documents. The Court does not find this performance to be of the severity causing Plaintiffs a sufficient change in position to bar the statute of frauds.

Accordingly, because the statute of frauds applies, and no claimed exception to the statute have been properly alleged or pled, Plaintiffs' breach of written contract claim is dismissed.

B. Breach of Oral Contract

Plaintiffs also allege Defendants breached an oral contract for the TPP loan agreement. Plaintiffs allege that they entered into a binding oral agreement with BoA by phone in July 2009. Plaintiffs claim the oral contract is enforceable because they fully performed in accordance with the express terms of the agreement, therefore barring the statute of frauds.

However, this claim also fails because the statute of frauds applies. Plaintiffs have not sufficiently pled facts demonstrating that any exception to the writing requirement of the statute of frauds applies.

C. Breach of Good Faith And Fair Dealing

Plaintiffs claim that Defendants' actions breached California's covenant of good faith and fair dealing. Defendants move to dismiss on the basis that the covenant only applies under limited circumstances, not present here.

The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation. Foley v. Interactive Data Corp., 7 Cal. 3d 654, 683-84 (1988). The covenant of good faith is read into contracts in order to protect the express covenants or promises of the contract, not to protect some general public policy interest not directly tied to the contract's purpose. Id. at 690. "In essence, the covenant is implied as a supplement to the express contractual covenants, to prevent a contracting party from engaging in conduct which frustrates the other party's rights to the benefits of the contract." Love v. Fire Ins. Exchange, 221 Cal. App. 3d 1136, 1153 (1998).

Under California law, recovery for breach of the covenant "is available only in limited circumstances, generally involving a special relationship between the contracting parties." Bionghi v. Metro. Water Dist., 70 Cal. App. 4th 1358, 1370 (1999).

California courts have rejected the argument that the doctrine, which traditionally extends only to unique fiduciary-like relationships, should encompass normal commercial banking transactions. Mitsui Mfrs. Bank v. Superior Court, 212 Cal. App. 3d 726, 729 (1989).

This Court previously granted Defendant's Motion to Dismiss Plaintiffs' breach of good faith claim because no underlying contract was established. Again, because Plaintiffs have failed to establish the existence of an enforceable contract, this claim is dismissed.

D. Promissory Estoppel

Plaintiffs contend that Defendants must be estopped from failing to honor the promises made to Plaintiffs regarding the permanent loan modification. Defendants move to dismiss on the basis that no promise had been made to Plaintiffs regarding a permanent loan modification.

Promissory estoppel makes a "promise binding under certain circumstances, without consideration in the usual sense of something bargained for and something given in exchange." Garcia v. World-Sav., FSB, 183 Cal. App. 4th 1037, 1040-41 (2010) (citing Youngman v. Nev. Irrigation Dist., 70 Cal. 2d 240, 249 (1969)). If the language or conduct of an individual leads another to act as he or she would not have acted, then he or she should not be denied the "expectations upon which he acted." Id.

To establish a promissory estoppel claim, three elements must be met: (1) a clear and unambiguous promise in its terms;

(2) reliance that is reasonable and foreseeable; and (3) an injury that results from reliance. Laks v. Coast Fed. Sav. & Loan Assn., 60 Cal. App. 3d 885, 890 (1923).

Plaintiffs have pled sufficient factual allegations to support their promissory estoppel claim. They allege Defendants promised, both orally and in writing, to provide Plaintiffs with a loan modification upon being approved under the HAMP requirements and upon them making timely monthly TPP payments. Plaintiffs allege they were repeatedly assured by BoA that they had satisfied the HAMP requirements, were current with their TPP payments, and would therefore be receiving the loan modification agreement to be signed. Plaintiffs' reliance on those promises were reasonably foreseeable as they acted in accordance with the express terms of the written TPP, as well as the oral promises. Plaintiffs have also sufficiently alleged injury as a result of the promise made by BoA. Defendants' Motion to Dismiss Plaintiffs' claim for promissory estoppel is denied.

E. The Rosenthal Fair Debt Collection Practices Act

Plaintiffs allege BoA violated California's Rosenthal Fair Debt Collection Practices Act ("RFDCPA") by making repeated calls and sending multiple letters seeking to collect on the defaulted deed of trust.

Defendants move to dismiss Plaintiffs' RFDCPA claim under the theory that BoA is not a "debt collector" as defined by RFDCPA, and that Plaintiffs fail to properly plead BoA used "false, deceptive, or unfair means[,]" as required by RFDCPA (Reply in Support of MTD at 9.)

Under RFDCPA, a debt collector is prohibited from collecting or attempting to collect from a debtor in a threatening or harassing manner. See Cal. Civ. Code § 1788 et seq. The RFDCPA defines "debt collector" as "any person who in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection." Id. § 1788.2(c).

Several district courts within the Ninth Circuit have found bank actions to recover on deed of trust defaults not to be "a debt" within the meaning of the RFDCPA. See, e.g., Grill v. BAC Home Loans Serv. LP, No. 10-CV-03057-FCD/GGH, 2011 WL 127891 at 19 (E.D. Cal. Jan. 14, 2011) (citing six California district court cases for this proposition) (internal citations omitted). This Court agrees. Because this is a deed of trust default, BoA is not collecting a "debt" within the meaning of RFDCPA.

Furthermore, under the RFDCPA, a mortgage servicing company or any assignee of the debt is not considered a debt collector. Lal v. American Home Servicing, Inc, 680 F. Supp. 2d 1218, 1224; see also Angulo v. Countrywide Home Loans, Inc., No. 1:09-CV-877-AWI-SMS, 2009 WL 3427179, at *5 (E.D. Cal. October 26, 2009) (citations omitted); Morgera v. Countryside Home Loans, Inc., No. 2:09-CV-01476-MCE-GGH, 2010 WL 160348, at *3 (E.D. Cal Jan. 11, 2010) ("California courts have declined to regard a residential mortgage loan as a 'debt' under the RFDCPA."). BoA is therefore not a "debt collector" under the RFDCPA.

Accordingly, because the alleged foreclosure is not considered a "debt" under RFDCPA, and BoA is not deemed a "debt collector" within the meaning of the statute, Defendants cannot be held liable for the alleged claims.

Because no set of facts presented by Plaintiffs will alter the fact that a deed of trust is not a "debt," and BoA is not a "debt collector" for recovering funds from a deed of trust default, this cause of action is dismissed without leave to amend.

F. The California Unfair Competition Law

Plaintiffs claim Defendants engaged in unlawful, unfair, and fraudulent acts violating California's Unfair Competition Law ("UCL"). Defendants move to dismiss on the basis that plaintiffs do not plead sufficient facts to support a UCL claim.

The UCL defines unfair competition as "any unlawful, unfair or fraudulent business act or practice." Cal. Bus. & Prof. Code § 17200. It allows for plaintiffs to state claims for acts, or practices which are: unlawful, unfair, or fraudulent. Cal-Tech Commc'ns., Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999).

1. Unlawful Acts or Practices

Any business practice which violates federal, state, or local law is an unlawful business practice under the terms of section 17200. Durrell v. Sharp Healthcare, 108 Cal. App. 4th 1350, 1361 (2010). In this Court's previous Order on this matter, Plaintiffs' unlawful business practice claims were dismissed because Plaintiffs failed to allege a violation of federal, state or local law. Again, because no law has been sufficiently pled as being violated, Plaintiffs' claim fails under this prong of the UCL.

2. Unfair Acts or Practices

To substantiate an unfair acts or practices claim, a Plaintiff must "tether its allegation to a constitutional or statutory provision or regulation carrying out such a statutory policy," Cal-Tech Comms., at 180 (1999); Lozano v. AT&T Wireless Servs., 504 F.3d 718 (9th Cir. 2007), or show that the harm caused outweighs the utility of the Defendants' practices. Lozano, at 735.

Plaintiffs have neither "tethered" their claim to a constitutional or statutory provision or regulation carrying out a statutory policy, nor have they shown how any alleged harm outweighs the utility of the Defendants' practice.

3. Fraudulent Acts or Practices

Allegations of fraud implicate Rule 9(b)'s heightened pleading standard. Rule 9(b) requires Plaintiffs alleging fraud to "state with particularity the circumstances constituting fraud or mistake." In explaining Rule 9(b), the Ninth Circuit has said that "to avoid dismissal for inadequacy under Rule 9(b), [the] complaint would need to state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004) (citations omitted).

Although plaintiffs allege facts establishing time, place, and identifying the parties to various statements, they fail to provide details involving the specific false statements they allege. For example, Plaintiffs assert the legal conclusion that "[BoA] has made misrepresentations and omissions of material fact," without directing the Court to a time, statement, or person, relevant to the misrepresentation. (SAC ¶ 147.) Plaintiffs also do not state what the actual misrepresentations and omissions allegedly were. (SAC ¶ 147.)

Accordingly, Defendants' Motion to Dismiss Plaintiffs' UCL claim is granted.

G. Truth In Lending Act and Regulation Z

Plaintiffs allege BoA violated the Truth In Lending Act by "failing to deliver to Plaintiffs two copies of the notice of right to cancel that clearly and conspicuously disclosed the date of the [initial deed of trust] transaction and the date the rescission period expired." (SAC ¶ 156.) Plaintiffs go on to allege that "the notices of right to cancel that Plaintiffs received were materially defective in that they did not indicate the final date to rescind the loan." (Id.) Plaintiffs contend, that as a result of receiving defective forms, Plaintiffs have the right to rescind their initial deed of trust agreement. Defendants move to dismiss on the basis that Plaintiffs did receive a proper and conspicuously disclosed Notice of Right to Cancel ("NRC").

TILA mandates that borrowers be given three business days to rescind, without penalty, a consumer loan that uses their principle dwelling as security. 15 U.S.C. § 1635(a). If the lender does not comply with TILA's disclosure requirements, the rescission period is extended to three years. 15 U.S.C. § 1635(f). The disclosure requirements at issue here are:

(1) that creditors must provide each borrower two NRCs within three days of the transactions' execution, 12 C.F.R. 226.15(b); and (2) that the NRC identify when the cancellation period expires. Id.

It is undisputed that, on December 19, 2007, Plaintiffs received and signed an NRC identifying both the date of the transaction and the period of rescission. Defendants have attached a copy of the NRC to their Motion to Dismiss. Plaintiffs do not dispute its validity.

The NRC states, "You have a legal right under federal law to cancel this transaction, without cost, within THREE BUSINESS DAYS..." of whichever occurs last: (1) the date of the transaction (December 19, 2007); (2) the date Plaintiffs received the TILA; or (3) the date Plaintiffs received the NRC. (Defs.' MTD Exh. 2(D).) Therefore, contrary to their claims, Plaintiffs did receive proper notification of a notice to cancel and the period of rescission and there is no claim or evidence that they exercised their right to cancel.

Additionally, TILA furnishes a roster of transactions to which the disclosure requirements do not apply, which include:

(1) a residential mortgage transaction...; [and]

(2) a transaction which constitutes a refinancing or consolidation (with no new advances) of the principle balance then due and any accrued and unpaid finance charges of an existing extension of credit by the same creditor secured by an interest in the same property[.]

15 U.S.C. § 1635(e)(1)-(2).

A "residential mortgage transaction," for purposes of the

first exemption is defined as, "a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling." 15 U.S.C. § 1602.

Plaintiff argues that the transaction at issue was neither made to acquire or to construct Plaintiffs' residence, barring this exemption. However, Plaintiffs have failed to assert the true nature of the loan at issue, forcing the Court to guess its purpose. This Court will not take part in guessing games and does not accept Plaintiffs' conclusory allegations.

As to the refinancing exemption, Plaintiffs again claim the transaction at hand falls outside of the exemption. However, as explained above, this Court cannot ascertain the nature of the loan. Because the Court cannot decipher from the pleading what the nature of the loan was, and because Plaintiffs have not sufficiently alleged that the NRC must apply or that the TILA exemptions do not apply, Plaintiffs' claim for violation of TILA is dismissed.


As a matter of law, and for the reasons set forth above, Defendants' Motion to Dismiss is GRANTED in part and DENIED in part.

Defendants' Motion to Dismiss is GRANTED without leave to amend with respect to Plaintiffs' Rosenthal Fair Debt Collection Practice Act cause of action.

Defendants' Motion to Dismiss is also GRANTED with respect to Plaintiffs' cause of action for breach of written and oral contract; breach of good faith and fair dealing; violations of the Rosenthal Fair Debt Collection Practices Act; violations of California's Unfair Competition Law; and Violations of Truth-In-Lending Act and Regulation Z. Plaintiffs are given final leave to amend for these causes of action. Any such amendment must be filed within twenty (20) days of the date this Order is electronically filed. No further amendments will be permitted thereafter.

Defendants' Motion to Dismiss is DENIED as to Plaintiffs' promissory estoppel cause of action.


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