Cervantes v. West End 3199 Reo LLC

          ORDER GRANTING IN PART AND DENYING IN PART BAYVIEW DEFENDANTS' MOTION TO DISMISS THE SECOND AMENDED COMPLAINT RE: DKT. NO. 132

          VIRGINIA K. DEMARCHI UNITED STATES MAGISTRATE JUDGE

         Plaintiffs 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 first claim is asserted against defendants Bayview Loan Servicing, LLC (“BLS”) and Bayview Fund Acquisitions, LLC (“BFA”) (collectively, “Bayview defendants”).^[1] The second and third claims are asserted only against BLS. The Court's jurisdiction is based on diversity. 28 U.S.C. § 1332.^[2]

         The Bayview 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 grants the motion in part and denies it in part.

         I. BACKGROUND

         The following background facts are drawn from the SAC and, solely for purposes of resolving the present motion, are deemed true:

         In 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.

         Around May 5, 2009, Lehman assigned the DOT, along with the Note, to defendant BLS, effective March 31, 2009. Id. ¶¶ 11-12.

         Several years later, on January 14, 2013, BLS recorded an assignment of the DOT and Note to BFA. The assignment is dated August 3, 2012 with an effective date of July 31, 2012. Id. ¶ 13.

         BFA then assigned the DOT and Note to defendant West End Trust 2012-1 (“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.

         On August 6, 2014, West End Trust recorded an assignment of the DOT and Note to defendant West End 3199 REO LLC (“West End 3199”). The assignment is dated July 23, 2014. Id. ¶ 15.

         According 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.

         In June 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.

         Section 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 $4, 423.43:

(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.

         The SAC 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 the term.

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.

         In sum, 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. ¶ 35.

         Additionally, the loan modification agreement contained the following provisions, essentially prohibiting any changes to the loan modification agreement terms, except by a writing signed by all parties:

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.

         Plaintiffs 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 interest rate:

(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 ...