(Alameda County Super. Ct. No. HG09471481) Trial Court: Alameda County Superior Court Trial Judge: Hon. Richard Keller
The opinion of the court was delivered by: Lambden, J.
CERTIFIED FOR PUBLICATION
Allen Pfeifer (Allen) and Florence A. Pfeifer (Florence), a son and his mother (collectively, the Pfeifers), have a mortgage insured by the Federal Housing Administration (FHA). They filed a third amended complaint against Countrywide Home Loans, Inc. (Countrywide) and ReconTrust Company (Recon), after a non-judicial foreclosure proceeding was commenced against their property. The trial court sustained a demurrer by Countrywide and Recon (collectively, the lenders) without leave to amend against the Pfeifers' third amended complaint and then entered judgment in favor of the lenders.
The Pfeifers appeal and challenge the trial court's rulings that they did not have a cognizable legal claim against Recon under the federal Fair Debt Collection Practices Act (FDCPA or the Act). They also challenge, among other things, the trial court's denial of their requests for declaratory relief and for wrongful foreclosure based on the lenders' failure to conduct a face-to-face interview as mandated by the servicing regulations of the Department of Housing and Urban Development (HUD).
We conclude that the deed of trust incorporates by reference the servicing requirements of HUD, including the face-to-face interview, and the lenders had to comply with the servicing terms prior to conducting a valid non-judicial foreclosure. We also hold that tender is not required in the present situation, because the borrowers are seeking to enjoin a pending foreclosure sale based on the lenders' failure to comply with the servicing requirements incorporated in the FHA deed in trust. Although we agree with those courts that refuse to permit any private right of action for failure to comply with the HUD regulations and the Pfeifers cannot seek damages based on their wrongful foreclosure action, we concur with those courts distinguishing an offensive action from a defensive action. Thus, we conclude that the servicing requirements are conditions precedent to the acceleration of the debt or to foreclosure. Consequently, the Pfeifers may seek to enjoin the lenders from proceeding with a non-judicial foreclosure based on the lenders' failure to perform an HUD servicing requirement.
Accordingly, we reverse the trial court's judgment as to the Pfeifers' request for injunctive relief based on their wrongful foreclosure claim and their request for declaratory relief. We, however, otherwise affirm the trial court's judgment, including the lower court's ruling that the Pfeifers do not have a claim for damages against Recon for violating the FDCPA, because Recon is not a debt collector under the statute.
On August 31, 2009, the Pfeifers filed a complaint against the lenders to enjoin a foreclosure, for declaratory relief, for an accounting, and for elder abuse.*fn1 The Pfeifers filed a first amended complaint, and the lenders demurred. On June 28, 2010, the trial court sustained the lenders' demurrer with leave to amend the Pfeifers' pleading. The Pfeifers filed a second amended complaint and, after obtaining new counsel after the death of their original attorney, received the court's permission to file a third amended complaint.
The Pfeifers filed their third amended complaint on January 25, 2011, which set forth the following seven causes of action: breach of the implied covenant of good faith and fair dealing against the lenders, wrongful foreclosure against the lenders, breach of contract against the lenders, fraud and deceit against the lenders, a violation of the FDCPA against Recon, financial elder abuse against Countrywide, and a request for declaratory relief against the lenders. The Pfeifers requested, among other things, general and punitive damages as well as an order canceling the notice of default and notice of trustee sale.
In their pleading, the Pfeifers alleged that they owned property in Hayward, California, and that Florence is the mother of Allen. The pleading asserted that Florence was incompetent and suffered from Alzheimer's disease and that the original lender knew, or reasonably should have known, that Florence was incompetent and unable to provide consent to a loan agreement. In May 2011, Allen was appointed as guardian ad litem to represent the interests of his mother.
The Pfeifers had a mortgage insured by the FHA. The note indicated that on April 25, 2008, the Pfeifers borrowed $606,977.00 at 6.125 percent interest from Alameda Mortgage Corporation (Alameda Mortgage). The monthly payment was $3,688.06. The deed of trust was filed on April 30, 2008.
According to the Pfeifers' third amended complaint, Countrywide purchased the loan made by Alameda Mortgage in the principal amount of $606,977, but this transaction "was a sham and fictitious one." This loan was secured by the Pfeifers' home in Hayward. The Pfeifers alleged that Alameda Mortgage "was essentially a front for Countrywide. Alameda Mortgage was only the nominal lender and did not use its own money to make the loan. Instead, it used the money from Countrywide and the entire transaction was premised on the fact that Countrywide would promptly become the owner of the loan, and would then securitize it. Countrywide set the terms of the deal and enforced all the underwriting standards and guidelines." The pleading stated that Alameda Mortgage was a dual agent of both Countrywide and them. Bank of America purchased Countrywide, and Bank of America received the servicing rights of the Pfeifers' loan.*fn2
After Countrywide declared the Pfeifers' loan in default, Countrywide, according to the Pfeifers' third amended complaint, retained Recon to collect the debt. The third amended complaint stated that Recon became the trustee of the deed of trust after the Pfeifers defaulted on their obligations. The Pfeifers alleged that Recon was a "debt collector" as used in FDCPA. They further asserted that Mortgage Electronic Registration Systems, Inc. (MERS), a Delaware corporation, was the "nominee beneficiary of the subject loan" but did not have any beneficial interest in the loan. MERS, according to the pleading, is a subsidiary of MERSCORP, a Reston, Virginia corporation. These corporations, the Pfeifers asserted, failed to register to do business in California.
On May 13, 2009, Recon recorded a notice of default. The notice of default stated pursuant to Civil Code section 2924, subdivision (c) the following: "Upon your written request the beneficiary . . . will give you a written itemization of the entire amount you must pay." The notice of default also stated that at this time the Pfeifers owed $27,313.25 to reinstate their loan.
The Pfeifers claimed in their third amended complaint that on May 13, 2009, Recon recorded the notice of default prior to providing them with the 30-day advance debt validation notice required by the FDCPA. If they had received proper notice, they would have been able to explain, according to their pleading, that a truck had collided with their property and that they had collected checks in the amount of $13,844.99, $637.00, and $314.00 (for a total of $14,795.99) in damages, which could have been credited to their mortgage. They declared that Countrywide failed to credit them with this money and unlawfully kept the money. They maintained that Countrywide also received $4,691 for mortgage payments that were not properly credited to their mortgage. Additionally, the Pfeifers asserted, "Countrywide unlawfully 'force placed' insurance thereby wrongfully charging [their] account approximately $637.00." They alleged that they had adequate insurance at all relevant times. They averred that Recon had a mandatory duty under the FDCPA to investigate these accounting problems and correct them prior to recording a notice of default. Furthermore, they stated that Recon was not entitled to any immunity from suit and was not entitled to claim "any bona fide error defense for failure to comply with debt validation procedure in the FDCPA."
With regard to their second cause of action, wrongful foreclosure, the Pfeifers alleged, among other things: "The instant loan is insured by the [FHA] and is subject to the pre-foreclosure requirements provided by the FHA. These requirements include a requirement of a face-to-face interview between an agent of the lender and the borrower prior to commencing any foreclosure proceedings. The scope of this interview is summarized in [title 24 of the Code of Federal Regulations section] 203.604(b), which is incorporated by reference. Defendants have breached this obligation and prematurely commenced a foreclosure proceeding. Plaintiffs are entitled to the cancellation of the notice of default and notice of sale until defendants comply with these regulations. These regulations have the force of law and may be enforced by the borrowers. . . ." The Pfeifers asserted that they were "entitled to a restraining order to stop the non-judicial foreclosure proceedings and to compel defendants to meet their obligations under federal" law.
The lenders requested that the trial court take judicial notice of the note, deed of trust, notice of default and election to sell under the deed of trust, and the notice of the trustee's sale, which had been referenced in the Pfeifers' third amended complaint. They also requested judicial notice of the substitution of trustee filed in the Alameda County Official Records.
The first page of the deed of trust identifies the deed of trust as an "FHA California Deed of Trust." Paragraph 9 in the deed of trust sets forth the "grounds for acceleration of debt." When a default occurs, this paragraph provides under subdivision (a) that the "[l]ender may, except as limited by regulations issued by the Secretary, in the case of payment defaults, require immediate payment in full of all sums secured by this Security Instrument if: [¶] (i) Borrower defaults by failing to pay in full any monthly payment required by this Security Instrument prior to or on the due date of the next monthly payment, or (ii) Borrower defaults by failing, for a period of thirty days, to perform any other obligations contained in this Security Instrument." Subdivision (b) states under "sale without credit approval," that the "[l]ender shall, if permitted by applicable law . . . and with the prior approval of the Secretary, require immediate payment in full of all sums secured by this Security Instrument . . . ." In subdivision (d), under the heading of "Regulations of HUD Secretary," the agreement reads as follows: "In many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary."
Paragraph 4 in the deed of trust sets forth the application of insurance proceeds to the principal balance. It provides that in the event of loss, "[a]ll or any part of the insurance proceeds may be applied by Lender, at its option, either (a) to the reduction of the indebtedness under the Note and this Security Instrument, first to any delinquent amounts applied in the order in paragraph 3, and then to prepayment of principal, or (b) to the restoration or repair of the damaged Property. Any application of the proceeds to the principal shall not extend or postpone the due date of the monthly payments which are referred to in paragraph 2, or change the amount of such payments. . . ."
The notice of default and election to sell under the deed of trust filed May 13, 2009, provided in relevant part: "IF YOUR PROPERTY IS IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR PAYMENTS, IT MAY BE SOLD WITHOUT ANY COURT ACTION, and you may have the legal right to bring your account in good standing by paying all of your past due payments plus permitted costs and expenses within the time permitted by law for reinstatement of your account . . . ." The notice provided that "[t]his amount is $27,313.25, as of 05/11/2009 and will increase until your account becomes current." The notice further provided the following: "Upon your written request, the beneficiary or mortgagee will give you a written itemization of the entire amount you must pay."
On June 27, 2011, the trial court sustained the lenders' demurrer to the Pfeifers' third amended complaint without leave to amend. The court explained: "First, it appears that there was no requirement in the deed of trust that insurance proceeds be applied to the mortgage principal in lieu of monthly payments. Next, plaintiffs appear to concede through no stated opposition that any claim under California Civil Code section 2923.5 fails because the statute is inapplicable to plaintiffs' deed of trust. Further, there is no statutory duty to modify a loan under California Civil Code section 2923.6. Moreover, the federal loan/modification programs on which plaintiffs rely do not appear to offer a private right of action or designate borrowers in plaintiffs' situation as third-party beneficiaries. In addition, it appears that the named beneficiary, MERS, has the right to foreclose on the property, assign its rights and/or make a substitution of trustee. [Citations.] [¶] In order to maintain any claim based on a purported irregularity in the foreclosure sale procedure, plaintiffs are required to allege tender of the amount owed on the secured debt. [Citation.] Plaintiffs fail to adequately allege tender." The court also noted that the Pfeifers failed to state sufficient facts to support a claim of financial elder abuse.
On July 6, 2011, the court entered judgment in favor of the lenders and stated that the Pfeifers "shall take nothing by their" third amended complaint against the lenders. The Pfeifers filed a timely notice of appeal.
On May 1, 2012, this court on its own motion issued the following order: "The parties are to provide supplemental briefs to address the reasoning in a recent Virginia case, Mathews v. PHH Mortgage Corp. (2012)  S.E.2d  [(Mathews)] on the issues raised on appeal. Additionally, the parties are to address whether paragraph 9 in the deed of trust was a negotiated provision and discuss any significance of this issue. Any argument must be supported with citations to the record and explain how the third amended complaint may or may not be amended to address this issue. No other issue may be raised in the supplemental brief. . . ."
On May 11, 2012, this court issued the following order: "The [California] Attorney General is hereby accorded amicus curiae status and is invited to submit an amicus brief on behalf of appellants Allen and Florence Pfeifer. Any such brief should be served and filed by June 15, 2012, and should respond to the cases cited in respondent's brief, filed on February 17, 2012. We have requested the parties to submit supplemental briefing that will be filed during the month of May 2012, and the supplemental briefs will address why this court should not adopt the analysis of Mathews v. PHH Mortgage Corp.[, supra, 724 S.E.2d 196]. Any amicus brief the Office of Attorney General chooses to file should likewise address the analysis employed in said case. Any party may serve and file an answer to the amicus brief within 25 days after it is filed. . . ."
The parties filed supplemental briefs and the California Attorney General (the Attorney General) filed an amicus curiae brief on July 16, 2012. Lenders filed a response to the amicus curiae brief on August 9, 2012. On August 10, 2012, we granted the unopposed application by Wells Fargo Bank, N.A. (Wells Fargo) for permission to file an amicus curiae brief in support of the lenders. No response was filed to Wells Fargo's amicus curiae brief.
The standard of review governing an appeal from the judgment after the trial court sustains a demurrer without leave to amend is well established. " 'We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed.' [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.)
II. Claim that Recon Violated the FDCPA
The fifth cause of action in the Pfeifers's third amended complaint alleges a violation of the FDCPA against Recon. The Pfeifers concede that Recon is not liable for any claim against them as a debt collector under California law, but assert that the state law is preempted by the FDCPA (15 U.S.C. § 1692) and Recon is liable for its unfair debt collection under the federal law.
The purpose of the FDCPA is "to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses." (15 U.S.C. § 1692(e).) The word " 'creditor' means any person who offers or extends credit creating a debt or to whom a debt is owed, but such term does not include any person to the extent that he receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another." (15 U.S.C. § 1692a(4).) "The term 'debt' means any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." (15 U.S.C. § 1692a(5).)
The FDCPA defines " 'debt collector' " as "any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. . . . [T]he term includes any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. . . ." (15 U.S.C. § 1692a(6).)
In order to establish a claim under the FDCPA against Recon, the facts as alleged must show that Recon was a "debt collector" as defined by the Act, that Recon's challenged conduct constituted "debt collection," and that the debt collection actions violated a provision of the Act. (See, e.g., Heintz v. Jenkins (1995) 514 U.S. 291, 294.) In their pleading, the Pfeifers allege that Countrywide retained Recon to collect the debt after Countrywide declared the Pfeifers' loan in default. They further declared that Recon became the trustee of the deed of trust and that Recon was a "debt collector" as used in the FDCPA. Recon mailed the Pfeifers the notice of default pursuant to Civil Code section 2924, subdivision (c), which stated that the Pfeifers owed $27,313.25 together with unspecified unpaid impound payments. Recon recorded a notice of default and filed the notice of trustee's sale.
The Pfeifers argue that Recon was a debt collector because it "was hired by the unknown owner of the note and deed of trust for the specific purpose of collecting an alleged default." It alleged that Recon "recorded a premature notice of default" prior to giving the Pfeifers the notice required by the FDCPA. They maintain that the opinion of the administrative agency responsible for enforcing the Act supports their argument that Recon was a debt collector under the FDCPA and courts should defer to the interpretation of a statute by the administrative agency responsible for enforcing that statute. (See, e.g., Ford Motor Credit Co. v. Milhollin (1980) 444 U.S. 555, ...