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Lueras v. BAC Home Loans Servicing, LP

California Court of Appeals, Fourth District, Third Division

October 31, 2013

RICHARD LUERAS, Plaintiff and Appellant,
v.
BAC HOME LOANS SERVICING, LP, et al., Defendants and Respondents.

Appeal from a judgment of the Superior Court of Orange County No. 30-2011-00481113, Kirk H. Nakamura, Judge.

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COUNSEL

Law Offices of Lenore Albert and Lenore L. Albert for Plaintiff and Appellant.

Reed Smith, David J. de Jesus and Adam M. Forest for Defendants and Respondents.

OPINION

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FYBEL, ACTING P. J.

Introduction

Richard Lueras appeals from a judgment entered after the trial court sustained without leave to amend a demurrer to his verified first amended complaint (the First Amended Complaint). After the foreclosure sale of his home, Lueras sued Bank of America, N.A., successor by merger to BAC Home Loans Servicing, LP (Bank of America), ReconTrust Company, N.A. (ReconTrust), and Federal National Mortgage Association, commonly called and referred to as “Fannie Mae.” The First Amended Complaint asserted causes of action for negligence, breach of contract, violation of the Perata Mortgage Relief Act (Civ. Code, § 2923.5), fraud/misrepresentation, unfair and unlawful practices (Bus. & Prof. Code, § 17200), and to quiet title.

The First Amended Complaint included no allegations directed specifically to Fannie Mae, and we therefore affirm the judgment in its favor. As to Bank of America and ReconTrust, we affirm the judgment as to the causes of action for violation of Civil Code section 2923.5 and to quiet title, but, in all other respects, reverse and remand to permit Lueras to amend the First Amended Complaint.

The key fact alleged in the First Amended Complaint is that a mere 13 days before Bank of America foreclosed on Lueras’s home, Bank of America falsely represented in writing to Lueras that no foreclosure sale would occur while Lueras was being considered for “other foreclosure avoidance programs.” In so doing, Bank of America expressly and in writing informed Lueras he “will not lose [his] home during this review period.” A Bank of America representative also informed Lueras the pending foreclosure sale would be postponed. Nevertheless, days later, Bank of America foreclosed on Lueras’s home.

Another key point is the trial court sustained a demurrer without leave to amend to the First Amended Complaint—i.e., Lueras had filed only two complaints in a complicated and evolving area of law before facing dismissal. Given the standard of review and California’s policy of liberality in granting of amendments, Lueras should be given an opportunity to amend the First Amended Complaint.

Allegations

In reviewing the order sustaining the demurrer, we accept the factual allegations of the First Amended Complaint as true.

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(Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42 [105 Cal.Rptr.3d 181, 224 P.3d 920].) We also accept as true facts appearing in exhibits attached to the complaint. (Sarale v. Pacific Gas & Electric Co. (2010) 189 Cal.App.4th 225, 245 [117 Cal.Rptr.3d 24]; Dodd v. Citizens Bank of Costa Mesa (1990) 222 Cal.App.3d 1624, 1626-1627 [272 Cal.Rptr. 623].) If the facts expressly alleged in the complaint conflict with an exhibit, the contents of the exhibit take precedence. (Sarale v. Pacific Gas & Electric Co., supra, at p. 245.)

In March 2007, Lueras refinanced his home loan in the amount of $385, 000. The monthly payment on the 30 year loan was $1, 965.10. To secure the loan, a trust deed against Lueras’s home was recorded.

Lueras made every monthly payment due until he and his wife suffered financial hardship. In 2009, Lueras requested a loan modification from the lender, Bank of America, under the Home Affordable Modification Program (HAMP).[1]

In 2009, Fannie Mae instituted the HomeSaver Forbearance program, which was available to those who did not qualify for HAMP loan modifications. According to the First Amended Complaint, “[t]he program was supposed to lead to a permanent plan so that the borrower could ‘save’ their [sic] home and in the interim offer the owner a 6 month plan reducing the monthly payment by 30% to 50% less than the current mortgage payment.” Fannie Mae’s Announcement 09-05R, [2] issued in April 2009, stated: “HomeSaver Forbearance is a new loss mitigation option available to borrowers [who] are either in default or for whom default is imminent and who do not qualify for the HAMP. A servicer should offer a HomeSaver Forbearance if such borrowers have a willingness and ability to make reduced monthly payments of at least one half of their contractual monthly payment. The plan should reduce the borrower’s payments to an amount the borrower can afford, but no less than 50 percent of the borrower’s contractual monthly payment, including taxes and insurance and any other escrow items at the time the forbearance is implemented. During the six month period of forbearance, the

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servicer should work with the borrower to identify the feasibility of, and implement, a more permanent foreclosure prevention alternative. The servicer should evaluate and identify a permanent solution during the first three months of the forbearance period and should implement the alternative by the end of the sixth month.” (Announcement 09-05R, supra, at pp. 31 32 <https://www.fanniemae.com/content/ announcement/0905.pdf> [as of Oct. 31, 2013].)

Although Lueras requested a HAMP loan modification, “Bank of America apparently offered [him] the Forbearance program instead of the HAMP program.” In a letter dated August 17, 2009, Bank of America notified Lueras that “you qualify for the Fannie Mae HomeSaver Forbearance™ program” and, as a consequence, he was eligible for reduced mortgage payments for a period of up to six months. The letter stated: “Under the HomeSaver Forbearance program, we are working with Fannie Mae, a government sponsored enterprise, to reduce your mortgage payment by up to 50% for up to 6 months while we work with you to find a long term solution.”

Lueras accepted Bank of America’s offer for reduced monthly payments under the HomeSaver Forbearance program by entering into a forbearance agreement (the Forbearance Agreement), which was attached as an exhibit to the First Amended Complaint. The Forbearance Agreement reduced the monthly payments on Lueras’s home loan to $1, 101.16 for six months, commencing on September 16, 2009. The Forbearance Agreement stated the “Deferral Period Payment” commenced on September 16, 2009, and ended on the earliest of (1) six months from “the execution date by Servicer”; (2) “execution of an agreement with Servicer for another resolution of my default under my loan Documents...”; or (3) “my default under the terms of this Agreement.” The Forbearance Agreement stated: “The Servicer will suspend any scheduled foreclosure sale, provided I continue to meet the obligations under this Agreement.”

The Forbearance Agreement also stated: “During the Deferral Period, Servicer will review my Loan to determine whether additional default resolution assistance can be offered to me. At the end of the Deferral Period either (1) I will be required to recommence my regularly scheduled payments and to make additional payment(s), on terms to be determined by Servicer, until all past due amounts owed under the Loan documents have been paid in full, (2) I will be required to reinstate my Loan in full, (3) Servicer will offer to modify my Loan[, ] (4) Servicer will offer me some other form of payment assistance or alternative to foreclosure, on terms to be determined solely by Servicer..., or (5) if no feasible alternative can be identified, Servicer may commence or continue foreclosure proceedings or exercise other rights and remedies provided Servicer under the Loan Documents.”

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Lueras made the monthly payment of $1, 101.16 for a period of 10 months. During that time, Bank of America did not work with Lueras to identify the feasibility of, much less implement, a more permanent foreclosure prevention alternative; Bank of America did not evaluate and identify a permanent solution during the first three months of the deferral period; and Bank of America did not implement a permanent solution by the end of the sixth month period.

Meanwhile, Lueras submitted to Bank of America all information required to determine whether he qualified for a HAMP loan modification. In October 2010, while Lueras waited for Bank of America’s determination, he was served with a notice of default by the trustee, ReconTrust. The notice of default stated the total amount in arrears was $64, 424.98 as of October 19, 2010. It was not until this notice of default was recorded that Bank of America began to explore with Lueras alternatives to foreclosure. At that point, Lueras enlisted the aid of the California Attorney General’s Office, which agreed to monitor and assist with the loan modification process on behalf of Lueras.

In December 2010, Lueras requested a loan modification package from Fannie Mae. In January 2011, Lueras returned the completed package to Fannie Mae, which sent a copy of it to Bank of America. The completed package included over 100 pages of documents from Lueras.

In February 2011, Lueras was served with a notice of trustee’s sale with a scheduled sale date of February 22, 2011. Bank of America rescheduled the sale date a total of four times, ultimately setting the sale for May 18, 2011.

The First Amended Complaint alleged that Bank of America eventually determined Lueras was eligible for a HAMP loan modification and made an oral offer to modify the loan. Lueras accepted the offer. But, the First Amended Complaint also alleged that, in a letter dated May 5, 2011, Bank of America informed Lueras he was not eligible for a HAMP loan modification. The May 5, 2011 letter, which was attached as an exhibit to the First Amended Complaint, stated Bank of America was reviewing Lueras’s financial information “to determine if there are other options available to you” and that Bank of America “will contact you within 10 days to let you know what other options are available to you and the next steps you need to take.” The May 5 letter also stated: “If a foreclosure sale of your home is currently pending and on hold, that hold will continue and remain in effect while you are considered for other foreclosure avoidance programs.” While advising Lueras not to ignore any foreclosure notices, the letter stated, “you will not lose your home during this review period.”

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Lueras immediately contacted Nancy Whitaker of Bank of America, who told him the May 5, 2011 letter was sent by “a third party ‘home retention’ vendor” and was an error. Whitaker told Lueras that he had been placed in an approved program in which the interest rate on his loan would be reduced for four years. She advised him that Bank of America needed to obtain Fannie Mae’s approval.

In a letter to Lueras, dated May 6, 2011, Bank of America informed him it was reviewing his financial documents to determine whether he was eligible for a HAMP loan modification. The May 6 letter, which was attached as an exhibit to the First Amended Complaint, stated Lueras would receive one of three possible responses: (1) notification he had been approved for a trial period plan under HAMP, (2) notification he was not eligible for a HAMP loan modification, or (3) more information was needed to make a decision.

Lueras immediately contacted Bank of America about the May 6 letter. He was informed the letter was sent in error as his application had already “been approved” by Bank of America. Whitaker told Lueras the trustee’s sale, which had been rescheduled for May 18, 2011, would be reset, pending approval by Fannie Mae. On Lueras’s copy of the May 6, 2011 letter is this handwritten note: “per Nancy [¶] ‘sent in error’... [¶] 5/18 reset... [¶] already approved.”

During May 2011, Lueras made many contacts with Fannie Mae, Bank of America, and the California Attorney General’s Office, but “[n]o response was ever received stating why the foreclosure was proceeding.” Lueras never received a further response—oral or written—from Bank of America, advising whether he was or was not eligible for a loan modification program. He likewise never received notice from Fannie Mae that it had denied him a loan modification.

According to the First Amended Complaint, the Making Home Affordable program guidelines require the loan servicer to wait 30 days from the date of denial of a HAMP loan modification before foreclosing so the borrower can appeal the decision.

On May 18, 2011, Lueras was informed by the California Attorney General’s Office that the foreclosure sale would be conducted on that date. Minutes later, Lueras’s home was sold at the foreclosure sale to H and K Acquisitions, LLC. H and K Acquisitions, LLC, was named as a defendant in the First Amended Complaint but is not a party to this appeal.

Procedural History

Lueras filed this lawsuit in June 2011. The complaint asserted causes of action for negligence, breach of contract, breach of contract (third party

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beneficiary), fraud/misrepresentation, unfair and unlawful practices, and to quiet title. The trial court sustained, with leave to amend, a demurrer by Bank of America, ReconTrust, and Fannie Mae.[3]

Lueras filed the First Amended Complaint, which asserted causes of action for negligence (against Bank of America, ReconTrust, and Fannie Mae), breach of contract (against Bank of America and Fannie Mae), violation of Civil Code section 2923.5 (against Bank of America and ReconTrust), fraud/misrepresentation (against Bank of America and Fannie Mae), unfair and unlawful practices (against Bank of America and Fannie Mae), and quiet title (against Bank of America, ReconTrust, and Fannie Mae). The trial court sustained without leave to amend Bank of America, ReconTrust, and Fannie Mae’s demurrer to the First Amended Complaint and ordered it dismissed with prejudice. Lueras timely appealed from the subsequently entered judgment of dismissal.

Motion to Strike Portions of Lueras’s Reply Brief

Bank of America, ReconTrust, and Fannie Mae move to strike several portions of Lueras’s reply brief referring to a December 19, 2007 letter, of which Lueras requested we take judicial notice. The motion is made on the ground the request for judicial notice was improper and, therefore, those portions of Lueras’s reply brief, which reference the December 19, 2007 letter, should be stricken. We grant the motion.

California Rules of Court, rule 8.204(a)(1)(C) states an appellate brief must “[s]upport any reference to a matter in the record by a citation to the volume and page number of the record where the matter appears.” We may decline to consider passages of a brief that do not comply with this rule. (Ragland v. U.S. Bank National Assn. (2012) 209 Cal.App.4th 182, 195 [147 Cal.Rptr.3d 41].) As a reviewing court, we usually consider only matters that were part of the record when the judgment was entered. (Ibid.)

By separate order, we previously denied Lueras’s request for judicial notice; we therefore decline to consider those portions of Lueras’s reply brief which are supported solely by the December 19, 2007 letter. Those portions are (1) on page 4, the first full paragraph beginning “On December 19, 2007 Congress received letters”; and (2) from page 19, the fourth full paragraph beginning “In the letter dated December 19, 2007” through the third full paragraph on page 20, ending “investors would not lose their dividends.”

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Standard of Review

We independently review a ruling on a demurrer to determine whether the pleading alleges facts sufficient to state a cause of action. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415 [106 Cal.Rptr.2d 271, 21 P.3d 1189].) In so doing, “[t]he complaint must be liberally construed and survives a general demurrer insofar as it states, however inartfully, facts disclosing some right to relief.” (Longshore v. County of Ventura (1979) 25 Cal.3d 14, 22 [157 Cal.Rptr. 706, 598 P.2d 866].)

“On appeal from a judgment dismissing an action after sustaining a demurrer without leave to amend, ... [w]e give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] Further, we treat the demurrer as admitting all material facts properly pleaded, but do not assume the truth of contentions, deductions or conclusions of law. [Citations.] 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. [Citation.]” (City of Dinuba v. County of Tulare (2007) 41 Cal.4th 859, 865 [62 Cal.Rptr.3d 614, 161 P.3d 1168].)

At the outset, and as part of our discussion of the standard of review, we address the argument that some or all of Lueras’s claims are not viable because the foreclosure sale has been rescinded and “any equity Lueras might have in the property remains.” In opposition to the demurrer to the First Amended Complaint, Lueras acknowledged, “the trustee was able to rescind the foreclosure sale” and, in his reply brief, argues, “[t]he rescission of the trustee’s deed upon [sale] does not moot Mr. Lueras’[s] claims.”

In reviewing the judgment, we are limited to the well pleaded facts of the complaint and matters subject to judicial notice. (Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1126 [119 Cal.Rptr.2d 709, 45 P.3d 1171]; Walgreen Co. v. City and County of San Francisco (2010) 185 Cal.App.4th 424, 433 [110 Cal.Rptr.3d 498].) The First Amended Complaint did not allege rescission of the foreclosure sale. No party has requested we take judicial notice of anything establishing such rescission. No party has explained what “rescission” means in this context, briefed the legal consequences of a rescission on possible future attempts to foreclose, or informed us of the status of any current foreclosure proceedings. No party has argued that statements of Lueras’s counsel constitute judicial admissions.

In short, nothing in the record permits us to consider the foreclosure sale to have been rescinded or the legal significance of any such rescission in

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reviewing the judgment and the sufficiency of the First Amended Complaint. Whether a rescission of the foreclosure sale occurred and the legal significance of a rescission is better resolved in the trial court, after Lueras has the opportunity to replead and, as necessary and permitted, upon concrete evidence. Further, assuming there was a “rescission” of the foreclosure sale, we cannot say as a matter of law at this stage that Lueras cannot plead any cause of action.

Discussion

I.

Negligence

In the first cause of action of the First Amended Complaint, for negligence, Lueras alleged Bank of America and ReconTrust breached a duty of care in the handling of his application for a loan modification and in foreclosing his property. Bank of America and ReconTrust argue Lueras failed to allege, and cannot allege, the existence of a duty of care.

A. Overview of the Law of Negligence and Relevant Allegations of the First Amended Complaint

To state a cause of action for negligence, a plaintiff must allege (1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately caused the plaintiff’s damages or injuries. (Thomas v. Stenberg (2012) 206 Cal.App.4th 654, 662 [142 Cal.Rptr.3d 24].) Whether a duty of care exists is a question of law to be determined on a case by case basis. (Parsons v. Crown Disposal Co. (1997) 15 Cal.4th 456, 472 [63 Cal.Rptr.2d 291, 936 P.2d 70].)

We start by identifying the allegedly negligent conduct by Bank of America and ReconTrust because our analysis is limited to “the specific action the plaintiff claims the particular [defendant] had a duty to undertake in the particular case.” (Vasquez v. Residential Investments, Inc. (2004) 118 Cal.App.4th 269, 280 [12 Cal.Rptr.3d 846].) In the first cause of action, Lueras alleged that Bank of America and ReconTrust owed him a duty of care to (1) handle his loan “in such a way to prevent foreclosure and forfeiture of his property”; (2) “determine modification approvals, explore and offer foreclosure alternatives with Mr. Lueras prior to default”; (3) “exercise reasonable care and skill in timely and accurately responding to customer requests and inquiries”; (4) “record proper land records”; (5) “properly service the loan”; (6) “ensure chain of title prior to foreclosing”; and (7) “stop all foreclosure sales that are unlawful.”

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Lueras alleged Bank of America and ReconTrust breached that duty of care in several ways. Most importantly, Lueras alleged Bank of America and ReconTrust had a duty to offer Lueras a loan modification and breached that duty by refusing to do so. He also alleged Bank of America and ReconTrust breached their duty of care by “failing to timely and accurately respond to customer requests and inquiries, ” by “failing to comply with state consumer protection laws, properly service the loan, and use consistent methods to determine modification approvals, ” and by “failing to... record proper land records... and ensure chain of title prior to foreclosing and to stop all foreclosure sales that are unlawful.”[4]

Lenders and borrowers operate at arm’s length. (Oaks Management Corporation v. Superior Court (2006) 145 Cal.App.4th 453, 466 [51 Cal.Rptr.3d 561]; Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 579 [37 Cal.Rptr.2d 653]; Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, 476 [261 Cal.Rptr. 735], disapproved on other grounds in Riverisland Cold Storage, Inc. v. Fresno Madera Production Credit Assn. (2013) 55 Cal.4th 1169, 1182 [151 Cal.Rptr.3d 93, 291 P.3d 316].) "[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096 [283 Cal.Rptr. 53] (Nymark).)

In Nymark, supra, 231 Cal.App.3d at page 1092, the court held a lender owed no duty of care to a borrower in preparing an appraisal of the real property security for the loan when the purpose of the appraisal is to protect the lender by satisfying it that the collateral provided adequate security for the loan. The court reached this holding by considering the six factors identified in Biakanja v. Irving (1958) 49 Cal.2d 647 [320 F.2d 16] (Biakanja) to determine whether to recognize a duty of care. (Nymark, supra, at p. 1098.) Those factors are (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of preventing future harm. (Ibid.)

The Nymark court stressed the purpose of the appraisal was to protect the lender’s interest and was not intended to assure the borrower the collateral was sound or to induce him to enter into the loan transaction. (Nymark, supra,

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231 Cal.App.3d at p. 1099.) The foreseeability of harm to the borrower—who would know the value of his own property—was remote, the connection between the lender’s conduct and the injury suffered was “tenuous, ” there was “no moral blame because [the borrower] was in a position to protect himself from loss, ” and a strong public policy prevented imposing on the lender a duty of care in the preparation of an appraisal. (Id. at pp. 1099 1100.)

In Ragland v. U.S. Bank National Assn., supra, 209 Cal.App.4th at page 207, a borrower contended the lender misadvised her to miss a loan payment in order to be considered for a loan modification. The borrower alleged the lender negligently caused her severe emotional distress by then failing to modify her loan and selling her home in a foreclosure sale. (Id. at p. 205.) Affirming summary adjudication of a cause of action for negligent infliction of emotional distress, a panel of this court concluded, “[t]he undisputed facts established there was no relationship between [the borrower] and [the lender] giving rise to a duty the breach of which would permit [the borrower] to recover emotional distress damages based on negligence.” (Id. at p. 208.)

Some federal district courts in California have concluded a lender owes no duty of care to a borrower to modify a loan. In Armstrong v. Chevy Chase Bank, FSB (N.D.Cal., Oct. 3, 2012, No. 5:11 cv 05664 EJD) 2012 U.S.Dist. Lexis 144125, pp. *11 *12, the court explained: “[A] loan modification, which at its core is an attempt by a money lender to salvage a troubled loan, is nothing more than a renegotiation of loan terms. This renegotiation is the same activity that occurred when the loan was first originated; the only difference being that the loan is already in existence. Outside of actually lending money, it is undebatable that negotiating the terms of the lending relationship is one of the key functions of a money lender. For this reason, ‘[n]umerous cases have characterized a loan modification as a traditional money lending activity.’” (See Diunugala v. JP Morgan Chase Bank, N.A. (S.D.Cal., Oct. 3, 2013, No. 12cv2106 WQH-NLS) 2013 U.S.Dist. Lexis 144326, p. *10 [“Absent special circumstances, there is no duty for a servicer to modify a loan”]; Sanguinetti v. CitiMortgage, Inc. (N.D.Cal., Sept. 11, 2013, No. 12-5424 SC) 2013 U.S.Dist. Lexis 130129, p. *17 [“Loan modifications are part of the lending process, and negotiating a lending agreement’s terms is one of a bank’s key functions”]; Bunce v. Ocwen Loan Servicing, LLC (E.D.Cal., July 17, 2013, No. CIV. 2:13-00976 WBS EFB) 2013 U.S.Dist. Lexis 100111, p. *15, [agreeing with Armstrong v. Chevy Chase Bank, FSB that lender does not owe duty in loan modification activities]; Kennedy v. Bank of America, N.A. (N.D.Cal., Apr. 26, 2012, No. 12-CV952 YGR) 2012 U.S.Dist. Lexis 58636, pp. *21-*22 [lender owes borrower no duty of care in process of approving loan modification]; Dooms v. Federal Home Loan Mortgage Corp. (E.D.Cal., Mar. 31, 2011, No. CV F 11-0352 LJO DLB) 2011 U.S.Dist. Lexis 38550, p. *28 [“The [lender] owed no duty of

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care to [the borrower] arising from her default, property foreclosure, and loan modification attempts”]; DeLeon v. Wells Fargo Bank, N.A. (N.D.Cal., Oct. 22, 2010, No. 10-CV-01390-LHK) 2010 U.S.Dist. Lexis 112941, p. *12 [the defendant lender did not have a duty “to complete the loan modification process”].)

Other United States District Courts have concluded a lender might owe a borrower a duty of care in negotiating or processing an application for a loan modification. (See Ansanelli v. JP Morgan Chase Bank, N.A. (N.D.Cal., Mar. 28, 2011, No. C 10-03892 WHA) 2011 U.S.Dist. Lexis 32350, pp. *21-*22 [allegation that lender offered plaintiffs a loan modification and “engage[d] with them concerning the trial period plan” was sufficient to create duty of care]; Becker v. Wells Fargo Bank, N.A., Inc. (E.D.Cal., Nov. 30, 2012, No. 2:10-cv-02799 LKK KJN PS) 2012 U.S.Dist. Lexis 170729, pp. *34-*35 [complaint stated claim against lender for negligence during the loan modification process]; Crilley v. Bank of America, N.A. (D. Hawaii, Apr. 26, 2012, Civ. No. 12-00081 LEK-BMK) 2012 U.S.Dist. Lexis 58469, p. *29 [denying motion to dismiss because plaintiffs “have pled sufficient facts to support a finding that Defendant went beyond its conventional role as a loan servicer by soliciting Plaintiffs to apply for a loan modification and by engaging with them for several months” regarding the modification]; Garcia v. Ocwen Loan Servicing, LLC (N.D.Cal., May 10, 2010, No. C 10-0290 PVT) 2010 U.S.Dist. Lexis 45375, pp. *7-*11 [plaintiff’s allegations of lender’s conduct in handling application for loan modification pleaded a duty of care].)

After oral argument, we invited the parties to submit supplemental briefs on three recent opinions, including Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872 [153 Cal.Rptr.3d 546] (Jolley), which addressed whether a construction lender owed a duty of care to the borrower. In Jolley, the plaintiff and Washington Mutual Bank (WaMu) entered into a construction loan agreement by which the plaintiff borrowed $2, 156, 000 to renovate a house for use as rental property. (Id. at pp. 877, 878.) Problems arose due to WaMu’s alleged failure to properly disburse loan proceeds, and WaMu agreed to modify the loan based on an expansion of the construction project. (Id. at p. 878.) Several months after the last disbursement, WaMu was closed by the Office of Thrift Supervision and placed in receivership under the Federal Deposit Insurance Corporation. (Id. at p. 879.) Certain of WaMu’s assets, including the construction loan, were acquired by the defendant bank. (Ibid.)

Soon thereafter, the plaintiff ceased making payments on the loan, claiming he had been forced to default by WaMu’s breaches and negligence in the funding of the construction loan. (Jolley, supra, 213 Cal.App.4th at p. 880.) The plaintiff tried to obtain a loan modification from the defendant and was told “there was a ‘high probability’” the defendant would modify the loan to

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avoid foreclosure and it was likely the construction loan could be rolled over into a fully amortized conventional loan. (Id. at pp. 880-881.) So assured, the plaintiff completed construction by borrowing money from family and friends. (Id. at p. 881.) Instead of offering a loan modification, the defendant demanded payment of the loan in full and refused the plaintiff’s request to postpone the planned foreclosure sale. (Ibid.)

The plaintiff sued the defendant for various causes of action, including negligence, fraud, breach of contract, and promissory estoppel. (Jolley, supra, 213 Cal.App.4th at p. 881.) The trial court granted summary judgment, and the Court of Appeal reversed. (Id. at pp. 877-878.) On the negligence cause of action, the Court of Appeal recognized the general rule that a financial institution does not owe a duty of care to a borrower when the institution acts within its traditional role as a lender of money. (Id. at p. 898.) The Court of Appeal concluded, however, the general rule did not apply to the facts of the case. The court explained: “When considered in full context, the cases show the question is not subject to black-and-white analysis—and not easily decided on the ‘general rule.’ We conclude here, where there was an ongoing dispute about WaMu’s performance of the construction loan contract, where that dispute appears to have bridged the [Federal Deposit Insurance Corporation]’s receivership and Chase’s acquisition of the construction loan, and where specific representations were made by a Chase representative as to the likelihood of a loan modification, a cause of action for negligence has been stated that cannot be properly resolved based on lack of duty alone.” (Ibid.)

The Court of Appeal did not end its analysis there. The court next considered the six factors identified in Biakanja, supra, 49 Cal.2d 647, for determining whether to impose a duty of care. (Jolley, supra, 213 Cal.App.4th at pp. 899-901.) The court assessed those factors and concluded they compelled the conclusion the defendant owed the plaintiff a duty to review his request for a loan modification in good faith. (Id. at pp. 899-901.)

The Jolley court acknowledged it was dealing with a construction loan, not a residential home loan “where, save for possible loan servicing issues, the relationship ends when the loan is funded.” (Jolley, supra, 213 Cal.App.4th at p. 901.) “By contrast, in a construction loan the relationship between lender and borrower is ongoing, in the sense that the parties are working together over a period of time, with disbursements made throughout the construction period, depending upon the state of progress towards completion. We see no reason why a negligent failure to fund a construction loan, or negligent delays in doing so, would not be subject to the same standard of care.” (Ibid., fn. omitted.) Despite limiting its holding to construction loans, the Jolley court went to great lengths, in dictum, to explain the “no duty rule is only a general rule” and to suggest that a lender may be liable for negligence in its handling

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of a loan transaction within its traditional role as a lender of money. (Id. at pp. 901-902, citing Ottolini v. Bank of America (N.D.Cal., Aug. 19, 2011, No. C-11-0477 EMC) 2011 U.S.Dist. Lexis 92900, pp. *16-*17.)

The Jolley court reviewed recent federal and state legislation directed at aiding resident homeowners at risk of losing their homes through foreclosure, and concluded that, while the new legislation did not directly apply to construction loans, it “sets forth policy considerations that should affect the assessment whether a duty of care was owed to [the plaintiff] at that time.” (Jolley, supra, 213 Cal.App.4th at p. 905.) If the new legislation supports imposition of a duty of care on a construction lender, then it would support imposition of such a duty of care on a lender of home loans.

We disagree with Jolley to the extent it suggests a residential lender owes a common law duty of care to offer, consider, or approve a loan modification, or to explore and offer foreclosure alternatives. As the Jolley court recognized, “there is no express duty on a lender’s part to grant a modification under state or federal loan modification statutes.” (Jolley, supra, 213 Cal.App.4th at p. 903.) In Aspiras v. Wells Fargo Bank, N.A. (2013) 219 Cal.App.4th 948, 952, 963-964 [162 Cal.Rptr.3d 230], the court distinguished Jolley and declined to impose a duty of care on an institutional lender in handling a loan modification. The Aspiras court agreed with the federal district courts that had held, “‘offering loan modifications is sufficiently entwined with money lending so as to be considered within the scope of typical money lending activities.’” (Aspiras v. Wells Fargo Bank, N.A., supra, at p. 964.)

We conclude a loan modification is the renegotiation of loan terms, which falls squarely within the scope of a lending institution’s conventional role as a lender of money. A lender’s obligations to offer, consider, or approve loan modifications and to explore foreclosure alternatives are created solely by the loan documents, statutes, regulations, and relevant directives and announcements from the United States Department of the Treasury, Fannie Mae, and other governmental or quasi governmental agencies. The Biakanja factors do not support imposition of a common law duty to offer or approve a loan modification. If the modification was necessary due to the borrower’s inability to repay the loan, the borrower’s harm, suffered from denial of a loan modification, would not be closely connected to the lender’s conduct. If the lender did not place the borrower in a position creating a need for a loan modification, then no moral blame would be attached to the lender’s conduct.

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B. Why the Allegations of the First Amended Complaint Do Not State a Cause of Action for Negligence

Accordingly, in this case, Bank of America and ReconTrust did not have a common law duty of care to offer, consider, or approve a loan modification, or to offer Lueras alternatives to foreclosure. Likewise, Bank of America and ReconTrust did not have a duty of care to handle Lueras’s loan “in such a way to prevent foreclosure and forfeiture of his property.” Their rights, duties, and obligations in those regards were set forth in the note and deed of trust, the Forbearance Agreement, federal and state statutes and regulations, and the directives and announcements of the United States Department of the Treasury and Fannie Mae. (Cf. Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1154 [121 Cal.Rptr.3d 819] [" 'Because of the exhaustive nature of [the nonjudicial foreclosure] scheme, California appellate courts have refused to read any additional requirements into the non judicial foreclosure statute’”].)

Lueras did not allege Bank of America and ReconTrust did anything wrongful that made him unable to make the original monthly loan payments. Lueras did not allege Bank of America and ReconTrust caused or exacerbated his initial default by negligently servicing the loan. To the contrary, he alleged his inability to make the payments was caused by financial hardship due to the “drastically decreased... demand of his services of his contracting business” and his wife’s loss of employment. Lueras’s allegations that Bank of America and ReconTrust owed him duties to “follow through on their own agreements, ” to comply with consumer protection laws, and to stop foreclosure sales that were unlawful fail to state a cause of action for negligence because such duties, if any, are imposed by the loan documents and the Forbearance Agreement, statutes, or regulations. If Bank of America and ReconTrust failed to “follow through” on those agreements, then Lueras’s remedy lies in breach of contract, not negligence.

Thus, the First Amended Complaint did not, and cannot as a matter of law, state a claim for negligence based on Bank of America’s alleged failure to offer Lueras a loan modification.

C. Basis for Granting Leave to Amend

We conclude, however, that a lender does owe a duty to a borrower to not make material misrepresentations about the status of an application for a loan modification or about the date, time, or status of a foreclosure sale. The law imposes a duty not to make negligent misrepresentations of fact. (Civ. Code, § 1710, subd. 2 [defining “deceit” to include “[t]he assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing

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it to be true”]; Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 172-174 [132 Cal.Rptr.2d 490, 65 F.3d 1255].) In a different context, courts have held a bank depositor can state a claim for negligent misrepresentation, based on a bank employee’s incorrect statements about the settlement of a check. (Wells Fargo Bank, N.A. v. FSI Financial Solutions, Inc. (2011) 196 Cal.App.4th 1559, 1572-1573 [127 Cal.Rptr.3d 589]; Holcomb v. Wells Fargo Bank, N.A. (2007) 155 Cal.App.4th 490, 498-500 [66 Cal.Rptr.3d 142].) It is foreseeable that a borrower might be harmed by an inaccurate or untimely communication about a foreclosure sale or about the status of a loan modification application, and the connection between the misrepresentation and the injury suffered could be very close.[5]

Leave to amend must be granted if “there is a reasonable possibility that the defect can be cured by amendment. . . ." (City of Dinuba v. County of Tulare, supra, 41 Cal.4th at p. 865.) The First Amended Complaint generally alleged Bank of America failed to exercise “reasonable care and skill in timely and accurately responding to customer requests and inquiries.” Based on the record before us and on the grounds we have explained in detail, it is reasonably possible that Lueras could amend the First Amended Complaint to state a cause of action for negligent misrepresentation. We therefore reverse the judgment as to the negligence cause of action and remand to the trial court with directions to allow Lueras the opportunity to amend the First Amended Complaint to plead a cause of action for negligent misrepresentation.

II.

Breach of ...


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