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McNeil v. Wells Fargo Bank, N.A.

United States District Court, N.D. California

July 1, 2014

TROY L. McNEIL and TRICIA A. McNEIL, Plaintiffs,
v.
WELLS FARGO BANK, N.A., U.S. BANK NATIONAL ASSOCIATION, CAL-WESTERN RECONVEYANCE, LLC, and DOES 1-10, inclusive, Defendants.

ORDER GRANTING MOTION TO DISMISS

SAMUEL CONTI, District Judge.

I. INTRODUCTION

This is a mortgage foreclosure dispute. Defendants Wells Fargo Bank, N.A. ("Wells Fargo") and U.S. Bank National Association ("U.S. Bank") (collectively, "Defendants") now move to dismiss. ECF No. 14 ("MTD"). Plaintiffs Troy and Tricia McNeil oppose the motion, ECF No. 18 ("Opp'n"), [1] and Defendants have declined to file a reply brief. The Court held a hearing on the Motion on April 4, 2014. For the reasons set forth below, the Motion is GRANTED in part and DENIED in part.

II. BACKGROUND

Plaintiffs are residents of the property at issue in this case, which is located on Senger Street in Livermore, California (the "subject property"). ECF No. 1 Ex. A ("Compl.") ¶ 3. In April 2004, Plaintiffs borrowed $536, 000 from Wells Fargo Home Mortgage, which later merged into Wells Fargo. Compl. Ex. A. The loan was secured by a deed of trust on the subject property. Id . The deed of trust included an "Adjustable Rate Rider, " which allowed for an increase in the interest rate on the loan. Id.

In 2011, Wells Fargo transferred its beneficial interest in the deed of trust to U.S. Bank through a Corporate Assignment Deed of Trust (the "Corporate Assignment"). Compl. Ex. B. Plaintiffs allege that the Corporate Assignment shows that the deed of trust was transferred to a mortgage backed security trust, and that this trust was governed by a Pooling Services Agreement ("PSA"). Compl. ¶ 21. Plaintiffs further allege, upon information and belief, that Defendants lack standing to foreclose on the deed of trust because Plaintiffs' promissory note was not transferred to the investment trust prior the trust's closing date. Id . ¶ 23.

In December 2011, a notice of default was recorded against the subject property, indicating that Plaintiffs were $24, 848.53 in arrears. Compl. Ex. C. In March 2012, the trustee on the deed of trust recorded a notice of trustee's sale, scheduling the sale for April 4, 2012. Compl. Ex. D. The notice indicates that the total unpaid balance on the loan was $522, 493.45.

In May 2012, Plaintiffs entered into a loan modification agreement with Wells Fargo. Compl. ¶ 26. The modification agreement created a secondary principal balance of $34, 212.59, on which no interest accrues, and dropped the interest rate on the remaining balance to 2.5 percent for six years. ECF No. 14 ("RJN") Ex. 6 ¶¶ 1-2. Pursuant to the agreement, Plaintiffs promised to make monthly principal and interest payments of $2, 424.62 starting on July 1, 2012. Id . ¶ 2. Plaintiffs also promised to make monthly escrow deposits "as defined in the Note." Id . The agreement states that escrow deposits may be subject to change in the future. Id.

Plaintiffs allege that the monthly escrow charges initially amounted to $800, bringing Plaintiffs' total monthly payments to $3, 224.62. Compl. ¶ 85. Defendants subsequently assessed Plaintiffs for additional charges, increasing the total monthly payments to $4, 400. Id . At the hearing and in their opposition brief, Plaintiffs asserted that Defendants improperly applied Plaintiffs' payments, resulting in the additional charges. The Complaint itself is silent on the issue. In any event, Plaintiffs do allege that they could not afford the additional monthly charges assessed by Defendants.

On February 4, 2013, the substituted trustee on the deed of trust recorded yet another notice of default against the subject property, indicating that Plaintiffs were $29, 644.95 in arrears. Compl. Ex. F. Another notice of trustee's sale was recorded on May 6, 2013, setting the sale date for May 28, 2013. At the hearing, Plaintiffs suggested that the foreclosure was the direct result of the unauthorized charges assessed by Defendants after they executed the first loan modification agreement.

In June 2013, Plaintiffs contacted Wells Fargo about obtaining a second loan modification. Compl. ¶ 31. The request was denied on the grounds that the "investor" lacked contractual authority to modify the loan and Plaintiffs had exceeded the number of modifications allowed by the investor. Id . Plaintiffs contend that neither reason is accurate. Id . Wells Fargo subsequently denied Plaintiffs' appeal of the denial of the modification request. Id . ¶ 33.

The trustee's sale was apparently delayed during the application process for the second loan modification, and a new notice of trustee's sale was later recorded, setting the sale date for October 16, 2013. RJN Ex. 11. According to Defendants, the trustee's sale was postponed yet again to April 14, 2014.

Based on these facts, Plaintiffs assert causes of action for (1) lack of standing to foreclose, (2) violation of California Civil Code section 2923.55, (3) promissory estoppel, (4) breach of the implied covenant of good faith, (5) intentional misrepresentation, (6) violation of the Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, and (7) cancellation of instruments.

Defendants now move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6).

III. LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block , 250 F.3d 729, 732 (9th Cir. 2001). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't , 901 F.2d 696, 699 (9th Cir. 1988). "When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal , 556 U.S. 662, 679 (2009). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id . (citing Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555 (2007)).

Claims sounding in fraud are subject to the heightened pleading requirements of Federal Rule of Civil Procedure 9(b), which requires that a plaintiff alleging fraud "must state with particularity the circumstances constituting fraud." See Kearns v. Ford Motor Co. , 567 F.3d 1120, 1124 (9th Cir. 2009). "To satisfy Rule 9(b), a pleading must identify the who, what, when, where, and how of the misconduct charged, as well as what is false or misleading about [the purportedly fraudulent] statement, and why it is false." United States ex rel Cafasso v. Gen. Dynamics C4 Sys., Inc. , 637 F.3d 1047, 1055 (9th Cir. 2011) (quotation marks and citations omitted).

IV. DISCUSSION

A. Lack of Standing

Plaintiffs allege, upon information and belief, that Defendants lack standing to foreclose because their promissory note was not transferred to the mortgage backed security trust prior to the closing date established by the PSA. Compl. ¶ 44. Defendants argue that Plaintiffs lack standing to enforce the terms of the PSA because they are third parties to the agreement. MTD at 4-5 (citing Jenkins v. JPMorgan Chase Bank, N.A. , 216 Cal.App.4th 497, 511 (Cal.Ct.App. 2013)). Defendants further argue that Plaintiffs may not bring a preemptive action challenging their authority to foreclose. Id.

Plaintiffs respond that the promissory note and deed of trust are inseparable, and that production of the note is essential to determining whether Defendants are entitled to exercise the power of sale. Opp'n at 12-13. However, California appellate courts have consistently rejected the theory that California's nonjudicial foreclosure scheme (Cal. Civ. Code §§ 2924-2924k) requires a foreclosing party to have a beneficial interest in or physical possession of the note.[2] Plaintiffs' citations to the Commercial Code are also unavailing, as the California nonjudicial foreclosure scheme controls in this context. See Debrunner v. Deutsche Bank Nat. Tr. Co. , 204 Cal.App.4th 433, 440-41 (Cal.Ct.App. 2012).

Moreover, Plaintiffs' theory is barred by the California Court of Appeal's decision in Jenkins. As in this case, the plaintiff in Jenkins challenged the defendants' standing to foreclose because her home loan was pooled with other loans in a securitized investment trust without compliance with the trust's PSA. 216 Cal.App.4th at 505. Specifically, the plaintiff alleged that the promissory note was not transferred to the trust with an unbroken chain of endorsements and that the trustee did not have actual physical possession of the note prior to the closing date of the trust. Id. at 510. The court found that the claim was properly dismissed, reasoning that even if the nonjudicial foreclosure statute was interpreted broadly, it did not provide a right to bring such a preemptive action. Id. at 513.

As Plaintiffs point out, another California Court of Appeal reached a contrary holding in Glaski v. Bank of Am., N.A. , 218 Cal.App.4th 1079, 1099 (Cal.Ct.App. 2013), where the court found that the plaintiff could state a claim for wrongful foreclosure where he alleged that the entity claiming to be the noteholder was not the true owner of the note. However, many judges in this District, including the undersigned, have held that Glaski is the minority view, and have joined with the majority view set forth in Jenkins. See, e.g., Gieseke v. Bank of Am., N.A., 13-CV-04772-JST, 2014 WL 718463, at *3 (N.D. Cal. Feb. 23, 2014) (Tigar J.); Subramani v. Wells Fargo Bank N.A., C 13-1605 SC , 2013 WL 5913789, at *3 (N.D. Cal. Oct. 31, 2013) (Conti J.).

In light of the weight of authority, the Court once again adopts the reasoning of Jenkins. For these reasons, Plaintiffs' claim for lack of standing is DISMISSED with prejudice to the extent that it is predicated on a violation of the PSA. The Court grants Plaintiffs leave to amend to extent that they can plead an alternative theory.

B. Civil Code Section 2923.55

Section 2923.55 provides that a mortgage servicer may not record a notice of default until a number of requirements are met and sets forth a list of information that the mortgage servicer must send to the borrower in writing. Defendants argue that Plaintiffs' claim for violation of section 2923.55 fails because the Complaint does not specify how Defendants ran afoul of the statute or which particular provisions are at issue. MTD at 6. The Court agrees. The Complaint merely quotes the statute verbatim, without highlighting any particular provisions, and then recites some general facts without explaining how those facts relate to the claim. See Compl. ¶¶ 56-68.

In their opposition brief, Plaintiffs suggest that Defendants violated section 2923.55(b)(1) (though Plaintiffs do not cite to this particular subsection), Opp'n at 16-17, which provides that a mortgage servicer may not record a notice of default until it has "contact[ed] the borrower in person or by telephone in order to assess the borrower's financial situation, " Cal. Civ. Code § 2923.55(b)(1). However, according to Plaintiffs' own pleading, they spoke with Defendants about a loan modification before either of the notices of default were recorded. Compl. ¶¶ 26, 31. Plaintiffs argue that the loan modification discussions did not satisfy the statute. Opp'n at 17. The Court disagrees. California Civil Code 2923.5 includes a similar provision requiring a lender to contact a borrower about his or her financial situations prior to the recording of a notice of default, and California courts have held that this requirement may be satisfied through loan modification discussions. See Rossberg v. Bank of Am., N.A. , 219 Cal.App.4th 1481, 1494-95 (Cal.Ct.App. 2013).

Plaintiffs further argue that Defendants violated section 2923.55(c) "by using incompetent and unreliable evidence which the mortgage servicer claimed to review to substantiate the borrower's default and right to foreclose." Opp'n at 17. Plaintiffs appear to be asserting that Defendants violated the statute because their denial of Plaintiffs' application for a second loan modification was in error and because Defendants lacked standing to foreclose. As to the first theory, Section 2923.55 merely requires that the lender "explore options" to avoid foreclosure. It does not entitle the borrower to a loan modification, even if he or she is well qualified. As to the second theory, nothing in Section 2923.55 entitles a borrower to challenge the standing of a foreclosing entity.

Accordingly, Plaintiffs' second claim for violation of 2923.55 is DISMISSED with leave to amend. The amended complaint shall explain exactly how Defendants allegedly violated the statute.

C. Promissory Estoppel

"Promissory estoppel applies whenever a promise which the promissor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance would result in an injustice if the promise were not enforced." Lange v. TIG Ins. Co. , 68 Cal.App.4th 1179, 1185 (Cal.Ct.App. 1998). "To be binding, the promise must be clear and unambiguous." Id.

Plaintiffs copy and paste a number of general factual allegations into their promissory estoppel section, but fail to explain how these allegations have anything to do their claim. The Court DISMISSES the promissory estoppel claim to the extent that it is based on these allegations.[3] However, the Court declines to dismiss to the extent that the claim is premised on Plaintiffs' allegation that Defendants breached the loan modification agreement. Compl. ¶ 86. Plaintiffs allege that the loan modification contract specifies that Plaintiffs were to make monthly payments of $2, 424.62, plus escrow deposit payments which initially totaled $800 per month. Id . ¶ 77. Plaintiffs further allege that Wells Fargo later added other previously undisclosed monthly charges, raising Plaintiffs' monthly payments from $3, 224 to approximately $4, 400 per month. Id . Though the pleading could be clearer, it appears that Plaintiffs are alleging that they relied on the agreement to their detriment, resulting in the foreclosure proceedings at issue now.

Defendants argue that the promise lacks sufficient definitiveness and clarity to justify the application of promissory estoppel. MTD at 7. The Court disagrees. The promise alleged by Plaintiffs is set out in the terms of the modification agreement.[4] Next Defendants argue that the claim fails because Plaintiffs have not alleged that they made all their modified payments. Id. at 8. However, Plaintiffs allege that the payments assessed by Defendants added charges not agreed to through the loan modification agreement. Compl. ¶ 27. At the hearing, Defendants suggested that the additional charges were merely the escrow payments disclosed in the agreement. But the Court cannot make such a determination based on the facts alleged or the judicially noticeable documents provided by Defendants.

Accordingly, Plaintiffs' claim for promissory estoppel remains undisturbed to the extent it is based on Defendants' alleged violation of the executed loan modification. It is DISMISSED with leave to amend in all other respects.

D. Breach of the Implied Covenant of Good Faith and Fair Dealing

Plaintiffs' claim for breach of the implied covenant is hardly a model of clarity. Plaintiffs merely recite the definition of the term and then copy and paste factual allegations from other portions of the Complaint, without explaining how they relate. Plaintiffs' opposition does nothing to clarify the matter, and it appears to assert new legal theories that are not alleged in the pleading. To the extent Plaintiffs' claim is premised on the theory that Defendants assessed them for additional charges in violation of the executed loan modification agreement, the claim remains undisturbed. To the extent it is based on the theory that Defendants breached the PSA or that Defendants were under some obligation to offer Plaintiffs a second loan modification, it is DISMISSED with prejudice. As set forth in Section IV.A supra, Plaintiffs lack standing to enforce the terms of the PSA. Moreover, the Court is aware of no authority or contractual provision that would require Defendants to grant Plaintiffs' second request for a loan modification. The rest of the claim is DISMISSED with leave to amend. The amended pleading shall provide Defendants and the Court with clarity as to the basis for the claim.

E. Intentional Misrepresentation

The elements of intentional misrepresentation, also known as fraud, are: "(1) misrepresentation (false representation, concealment, or nondisclosure), (2) knowledge of falsity (or scienter'), (3) intent to defraud (i.e., to induce reliance), (4) justifiable reliance, and (5) resulting damage." Lazar v. Sup. Ct. , 12 Cal.4th 631, 638 (Cal. 1996). Plaintiffs' pleading is impermissibly vague as to the basis for their fraud claim. Once again, Plaintiffs merely copy and paste random factual allegations from other parts of their complaint and leave Defendants and the Court to guess at their legal theory. In their opposition brief, Plaintiffs assert several new grounds for fraud, all of which have a tenuous connection to the fraud claim actually pleaded in the Complaint.

To provide some guidance, the Court addresses the various theories of fraud raised in Plaintiffs' opposition brief and at the hearing. Plaintiffs assert that Defendants willfully concealed the fact that their interest rate was adjustable, Opp'n at 22, but the deed of trust attached to the pleading includes an adjustable rate rider which discloses that Plaintiffs' interest rate might increase. Plaintiffs' other theories of fraud are that "Defendants did not make any reasonable responses to Plaintiffs' request for explanations of the terms and other repayment plan [sic]"; Defendants mishandled mortgage payments; the deed of trust was flawed at the outset; Defendants did not comply with legal requirements for securitizing the loan; and Defendants failed to give Plaintiffs' loan modification agreement a good faith review. Id. at 23. To the extent that any of the conduct identified above is actionable, it is not actionable as fraud. Plaintiffs have yet to identify, among other things, a misrepresentation or reasonable reliance.

At the hearing, Plaintiffs argued that their fraud claim is premised on theory that Defendants misrepresented that they had a beneficial interest in the loan, even though the loan had been transferred to an investment trust. It is unclear why Defendants had a duty to disclose that the loan had been securitized or how the securitization harmed Plaintiffs, as it did not affect Plaintiffs' obligations under the loan agreement. Absent plausible allegations regarding damages and reasonable reliance, this theory also fails.

For the reasons set forth above, Plaintiffs' claim for intentional misrepresentation is DISMISSED with leave to amend. The amended complaint shall specifically identify the basis for Plaintiffs' claim and allege specific facts to support the claim in compliance with Rule 9(b).

F. Violation of the UCL

The UCL prohibits acts of "unfair competition, " including any "unlawful, unfair or fraudulent business act or practice." Cal. Bus. & Prof. Code § 17200. "Because [the UCL] is written in the disjunctive, it establishes three varieties of unfair competition- acts or practices which are unlawful, or unfair, or fraudulent." Berryman v. Merit Prop. Mgmt., Inc. , 152 Cal.App.4th 1544, 1554 (Cal.Ct.App. 2007).

Plaintiffs do not specify which prongs of the UCL form the basis of their suit, though it appears they are alleging unlawful and unfair practices. Initially, Plaintiffs allege that Defendants engaged in deceptive business practices by: (1) instituting improper foreclosure proceedings, (2) executing and recording false and misleading documents, (3) executing and recording documents without authority to do so, (4) failing to comply with California Civil Code section 2923.5, and (5) failing to comply with the Home Affordable Modification Program ("HAMP").

Defendants argue that Plaintiffs cannot predicate their UCL claim on violations of section 2923.5 or HAMP because they have yet to allege what those violations are. MTD at 11. Plaintiffs' opposition brief entirely ignores their section 2923.5 claim. As to HAMP, Plaintiffs generally argue that Defendants misrepresented their eligibility for the program, but decline to go into any specifics. Opp'n at 26. The Court finds that both claims are impermissibly vague.[5]

As to the other UCL violations alleged in the Complaint, Defendants argue that Plaintiffs lack standing because they have failed to allege causation. MTD at 11. In support, Defendants cite to Jenkins, where the court rejected a similar UCL claim. 216 Cal.App.4th at 520-24. The court reasoned that because the plaintiff defaulted on her loan prior to the alleged wrongful acts, she could not assert that the impending foreclosure of her home was caused by the defendants' conduct. Likewise, here, Plaintiffs have yet to allege the basic elements of causation with respect to their theory that Defendants breached the PSA. Id. at 523.

Plaintiffs' UCL claim also appears to be predicated on their allegation that Defendants raised their monthly loan payments in violation of the executed loan modification agreement. Compl. ¶ 124. Defendants do not address this allegation, and the Court finds that it can support a claim for unfair practices under the UCL. Plaintiffs' UCL claim remains undisturbed to the extent that it is predicated on this allegation, but is DISMISSED in all other respects. The Court grants Plaintiffs leave to amend to cure the deficiencies identified above.

G. Cancellation of Instruments

Plaintiffs' final claim seeks to cancel the notices of default, notice of trustee's sale, and other instruments recorded in connection with the foreclosure proceedings commenced against the subject property. To the extent that this claim is premised on Defendants' violation of the PSA, it is DISMISSED with prejudice for the reasons set forth in Section IV.A supra. To the extent that it is based on the allegation that Defendants assessed Plaintiffs additional monthly charges in violation of the loan modification agreement, it remains undisturbed.

V. CONCLUSION

Defendants' motion to dismiss is GRANTED in part and DENIED in part. • Plaintiffs' claim for lack of standing is DISMISSED with

prejudice to the extent is predicated on a violation of the PSA and otherwise DISMISSED with leave to amend.
• Plaintiffs' claim for violation of Civil Code Section 2923.55 is DISMISSED with leave to amend.
• Plaintiffs' claim for promissory estoppel remains undisturbed to the extent it is predicated on violation of the loan modification agreement and is otherwise DISMISSED with leave to amend.
• Plaintiffs' claim for breach of the implied covenant remains undisturbed to the extent it is predicated on violation of the loan modification agreement and is otherwise DISMISSED with leave to amend.
• Plaintiffs' claim for intentional misrepresentation is DISMISSED with leave to amend.
• Plaintiffs' claim for violation of the UCL remains undisturbed to the extent it is predicated on violation of the loan modification agreement and is otherwise DISMISSED with leave to amend.
• Plaintiffs' claim for cancellation of instruments is DISMISSED with prejudice to the extent it is predicated on a violation of the PSA and remains undisturbed to the extent that it is predicated on a breach of the executed loan modification agreement.

As set forth above, the amended pleading shall clearly identify the basis for each claim asserted. The amended pleading shall be filed within thirty (30) days of this Order's signature date. Failure to do so may result in dismissal with prejudice of certain claims.

IT IS SO ORDERED.


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