United States District Court, N.D. California, San Jose Division
ORDER DENYING WEST END DEFENDANTS' MOTION TO
DISMISS THE SECOND AMENDED COMPLAINT RE: DKT. NO.
VIRGINIA K. DEMARCHI, United States Magistrate Judge.
Francisco Cervantes and Maria Elena Velazquez-Cervantes sue
for alleged violations of California law in connection with
their mortgage loan for certain property located in San Jose,
California (“Property”). They claim that after
they signed a loan modification agreement, defendants
fraudulently altered material terms of the document, which
ultimately caused them to lose the Property in foreclosure.
The operative Second Amended Complaint (“SAC”)
asserts four claims for relief: (1) fraudulent alteration of
loan documents; (2) negligence; (3) breach of contract; and
(4) wrongful foreclosure. The fourth claim for wrongful
foreclosure is the sole claim asserted against defendants
West End 3199 REO LLC (“West End 3199”), West End
Trust 2012-1 (“West End Trust”) and LNR Partners,
LLC (“LNR”). The Court will refer to these
defendants collectively, as the “West End
defendants.” The Court's jurisdiction is based on
diversity. 28 U.S.C. § 1332.
West End defendants now move to dismiss the SAC for failure
to state a claim for relief, pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. Plaintiffs oppose the
motion. Upon consideration of the moving and responding
papers, as well as the oral arguments presented, the Court
denies the motion.
following background facts are drawn from the SAC and, solely
for purposes of resolving the present motion, are deemed
August 2007, plaintiffs purchased the Property and borrowed
$540, 000 from Lehman Brothers Bank (“Lehman”)
pursuant to a deed of trust (“DOT”) and
Promissory Note (“Note”). In conjunction with
that transaction, plaintiffs also obtained a loan from the
U.S. Small Business Administration in the amount of $432,
000. The Property is a two-story, four-unit mixed-use
owner-occupied structure. The two upper units are for
residential use, and the two lower units are for commercial
use. Plaintiffs live at the Property and also operate their
business there. Dkt. No. 130 ¶¶ 5-10.
May 5, 2009, Lehman assigned the DOT, along with the Note, to
defendant Bayview Loan Servicing (“BLS”),
effective March 31, 2009. Id. ¶¶ 11-12.
years later, on January 14, 2013, BLS recorded an assignment
of the DOT and Note to Bayview Fund Acquisitions
(“BFA”). The assignment is dated August 3, 2012
with an effective date of July 31, 2012. Id. ¶
then assigned the DOT and Note to defendant West End Trust.
The assignment is dated August 3, 2012 with an effective date
of July 31, 2012, and was recorded on or about January 14,
2013. Id. ¶ 14.
August 6, 2014, West End Trust recorded an assignment of the
DOT and Note to defendant West End 3199. The assignment is
dated July 23, 2014. Id. ¶ 15.
to the SAC, the Note provided for an adjustable rate
mortgage, consisting of 62 fixed monthly payments of $4,
353.00 (principal and interest) for the first five years.
Beginning in January 2013, plaintiffs would be required to
make 298 additional payments, i.e., 297 monthly payments of
$4, 947.98 (principal and interest), and one final payment of
$4, 947.10 (principal) in October 2037. Id.
¶¶ 23-24. Plaintiffs further allege that, pursuant
to a payment clause in the original Note, beginning in
January 2013, their monthly payments would be subject to
interest rate adjustments based on the London Interbank
Offered Rate (“LIBOR”) quarterly index, plus a 5%
margin. Id. ¶¶ 25-26.
2009, after assignment of the DOT and Note to BLS, plaintiffs
obtained a loan modification. In an email to plaintiffs,
Julie Butera, a BLS Senior Asset Manager, stated that the
modified loan terms provided for a 4% fixed interest rate for
two years. Id. ¶ 29. In a telephone
conversation with Ms. Butera, Mr. Cervantes asked what would
happen after two years. Ms. Butera reportedly responded that
pursuant to the loan modification terms “paragraph (c),
” after two years at ¶ 4% interest rate,
“[plaintiffs] will have a 1% increase (as maximum) for
the remainder of the term.” Id. ¶ 30.
Plaintiffs allege that the executed loan modification
agreement with BLS “became part of the modified
Note.” Id. ¶ 32.
1(b) of the modified loan agreement provided that, beginning
August 1, 2009, plaintiffs' new monthly payment
(principal, interest, and estimated escrow payment) would be
(b) New Monthly Payments, Payment Adjustments:
Effective with the Borrower's monthly payment due
08/01/2009, Borrower's monthly principal and interest
payment will be $2, 871.59. The estimate monthly escrow
payment will be $1, 551.84. All payments received by Servicer
will be credited towards amounts due under the loan.
Id. ¶ 33. Plaintiffs allege that while the
original Note contained a payment clause providing for
adjustments to their monthly payments based on an additional
5% margin, the modified loan agreement did not provide for
any additional or further payment adjustments
“regarding the margin.” Id. As such,
plaintiffs contend that Section 1(b) of the modified loan
replaced the payment section of the original Note and
essentially eliminated the additional 5% margin, thereby
setting the monthly payment amount at $4, 423.43 for the
remainder of the loan period.
goes on to allege that Section 1(c) of the modified loan
agreement provided for a new interest rate as follows:
(c) New Interest Rate Effective on 07/01/2009, Borrower's
rate of interest will be 4.00% and will adjust to the terms
of the original note and the note will control the interest
rate for the remainder of the term. The annual increase in
the interest rate will be capped at 1% for the remainder of
Id. ¶ 34. Plaintiffs note that, despite what
Ms. Butera stated in her email, the modified loan agreement
does not say that the 4% rate applies only for the first two
years. While they acknowledge that the original Note provided
for adjustments to their interest rate based on the LIBOR
quarterly index, as discussed above, plaintiffs contend that
the modified loan agreement eliminated the added 5% margin
regarding adjustments to their monthly payments. Thus,
plaintiffs claim that Section 1(c) of the modified loan means
that (1) beginning on October 1, 2009, their interest rate
would adjust to 4% plus LIBOR, without an additional
5% margin, and (2) any increase in the annual interest rate
would be capped at 1%. Id. Plaintiffs claim that in
the period leading up to the foreclosure of the Property, the
LIBOR quarterly index was never more than 1%, and the annual
increases in their interest rate never exceeded the 1% cap.
Id. ¶ 160.
plaintiffs contend that, properly interpreted, the loan
modification agreement provided that, for the remainder of
the loan term, their monthly payments would be $4, 423.43,
and the interest charged on their loan should not have been
more than 5% (4% plus LIBOR, up to 1%). The SAC further
alleges that the modified loan was set to mature on July 1,
2039, “on which date any unpaid interest and all other
sums due shall be paid in full.” Id. ¶
the loan modification agreement contained the following
provisions, essentially prohibiting any changes to the loan
modification agreement terms, except by a writing signed by
6. NO OTHER CHANGES
. . . . Nor shall this Agreement in any way impair, diminish,
or affect any of the Borrower's rights or remedies in the
Security Instrument whether such rights or remedies arise
herein or by operation of law. Any inserted terms, changes or
additions to this Agreement will immediately render it null
and void. Borrower is encouraged to review this Agreement
with his/her legal advisor prior to signing it, . . . .
8. NO ORAL MODIFICATION
This Agreement may not be amended or modified in any way
except by a written instrument executed by
all the parties hereto.
Id. ¶¶ 36-37.
allege that sometime between June 23, 2009, when their loan
modification agreement was executed, and August 1, 2012, when
the DOT and the Note were assigned to West End Trust, the
Bayview defendants surreptitiously altered the modified loan
agreement. Id. ¶¶ 38-43. As discussed
above, plaintiffs say that the modified loan agreement they
signed contained the following Section 1(c) concerning their
(c) New Interest Rate
Effective on 07/01/2009, Borrower's rate of interest will
be 4.00% and will adjust to the terms of the original note
and the note will control the interest rate for the remainder
of the term. The annual increase in the interest ...