Adding to the growing split of authority among California’s various state appellate courts, and among various federal courts in California, the Court of Appeal of the State of California, Third Appellate District, recently held that a loan servicer may owe a duty of care to a borrower through application of the “Biakanja” factors, even though its involvement in the loan does not exceed its conventional role.
In so ruling, the Third District “assumed without deciding” that California Civil Code § 2923.6(g) offers an affirmative defense to a negligence claim in loan modification cases where the borrower submits multiple loan modification applications.
A copy of this opinion is available at: Link to Opinion.
As you may recall, in order to determine whether a general duty of care exists, California courts balance the six factors used by the California Supreme Court in Biakanja v. Irving, 49 Cal.2d 647 (1958): (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (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.”
In 2001, a borrower obtained a loan secured by a deed of trust to her home. The deed of trust was later assigned to the defendant servicer. In 2010, the borrower was laid off from her job and sought a loan modification from the servicer. In May 2010, the servicer allegedly told the borrower that it “would be unable to assist her unless she was at least three months delinquent in her monthly mortgage payments, and thus in default.”
In June 2010, the borrower defaulted on the loan. On Aug. 1, 2010, the servicer allegedly informed the borrower’s agent that she might qualify for a HAMP loan modification.
On Aug. 9, 2010, the servicer sent the borrower a letter approving her request for a repayment plan. The borrower allegedly believed that she would receive a permanent loan modification upon completion of the repayment plan and agreed to the repayment plan’s terms. After making three payments, the borrower contacted the servicer regarding the loan modification. The servicer told the borrower to continue making payments.
On Jan. 3, 2011, the servicer denied the borrower’s application for a HAMP modification for failure to provide necessary documents. The borrower then supposedly spoke with the servicer’s representative who stated that the servicer denied her application because the borrower had failed to submit a statement from the State of California declaring her permanently disabled. Allegedly, the State of California does not issue such a document, and the servicer supposedly “requested [this] nonexistent document to further delay the process and frustrate [the borrower].”
In July 2011, the borrower applied for another HAMP modification. The servicer allegedly requested the same documents over and over again. In particular, the servicer supposedly requested that the borrower produce her entire loan application on two separate occasions, requesting duplicates of other previously submitted documents by fax.
While her second application was pending, the borrower ceased receiving disability insurance and began receiving unemployment insurance. The servicer then allegedly demanded that the borrower submit a new application and supporting documents. In November 2011, the borrower returned to work. The servicer supposedly again demanded additional documents due to the change in circumstances. The borrower allegedly complied with the servicer’s demands and submitted the requested documents.
On Jan. 18, 2012, the servicer allegedly denied the borrower’s application for a HAMP modification, due to an excessive forbearance amount. The borrower asserted that the forbearance amount would have been significantly less had she been given a permanent loan modification “over a year earlier as had been represented.”
On April 6, 2012, one of the servicer’s representatives allegedly told the borrower that she “was approved for another trial loan modification and that upon completion, [she] would receive a permanent loan modification with a 2% fixed interest rate for five years and a principal reduction.” The borrower again submitted the requested documents but never received either a HAMP trial period plan (TPP) or a permanent loan modification.
The borrower allegedly continued her effort to obtain a loan modification, without success. In December 2012, she filed for bankruptcy protection.
The borrower then filed suit against the servicer for intentional misrepresentation, negligent misrepresentation, breach of contract, promissory estoppel, negligence, intentional infliction of emotional distress, conversion, violations of the Unfair Competition Law and conspiracy. The servicer demurred to – i.e., moved to dismiss — the borrower’s claims. The trial court sustained each of the servicer’s demurrers.
On appeal, the Third District Court of Appeal reversed the trial court’s dismissal of the borrower’s purported negligence claim.
In addressing the borrower’s negligence claim, the Third District first acknowledged the general rule that lenders do not owe borrowers a duty of care unless their involvement in a transaction goes beyond their “conventional role as a mere lender of money.” However, the Court also pointed out that even when the lender is acting as a conventional lender, the no-duty rule is only a general rule.
The Court of Appeal then noted the split in decisions concerning “whether accepting documents for a loan modification is within the scope of a lender’s conventional role as a mere lender of money, or whether, and under what circumstances, it can give rise to a duty of care with respect to the processing of the loan modification application.”
As you may recall, a majority of federal district courts have found that a loan servicer does not owe a duty of care to a borrower when it reviews a loan modification application. And, in a recent unpublished opinion, the Ninth Circuit also concluded that a lender does not have a duty to a loan modification applicant when the applicant’s “negligence claims are based on allegations of delays in the processing of their loan modifications.” Anderson v. Deutsche Bank Nat’l, 649 Fed. App’x 550, 552 (9th Cir. 2016).
California Courts of Appeal have also reached different results where they addressed a servicer’s duty of care in reviewing loan modification applications. Compare Lueras v. BAC Home Loans Servicing, LP, 221 Cal.App.4th 49 (Cal. App. 4th Dist., 2013) (residential loan modification is a traditional lending activity, which does not give rise to a duty of care) with Alvarez v. BAC Home Loans Servicing, LP, 228 Cal.App.4th 941 (Cal. App. 1st Dist., 2014) (servicer has no general duty to offer a loan modification, but a duty may arise when the servicer agrees to consider the borrower’s loan modification application) and Daniels v. Select Portfolio Servicing, Inc., 246 Cal.App.4th 1150 (Cal. App. 6th Dist., 2016) (following Alvarez and applying Biakanja factors to conclude that lender owed borrowers a duty of care in the loan modification process).
In sustaining the servicer’s demurrers to the borrower’s negligence claim, the trial court had relied on Lueras in holding that “lenders do not have a common law duty of care to offer, consider, or approve a loan modification, to offer foreclosure alternatives, or to handle loans so as to prevent foreclosure.”
In Lueras, the Fourth District Court of Appeal reasoned that “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.” The Lueras court then found that the Biakanja factors weighed against finding a duty of care, and it explained: “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.”
The Court of Appeal disagreed with the trial court, and found Alvarez to be the better reasoned ruling.
The Court of Appeal looked to Meixner v. Wells Fargo Bank, N.A., 101 F.Supp.3d 938 (E.D. Cal. 2015) where the federal district court reasoned: “Alvarez identified an important distinction not addressed by the Lueras reasoning — that the relationship differs between the lender and borrower at the time the borrower first obtained a loan versus the time the loan is modified. The parties are no longer in an arm’s length transaction and thus should not be treated as such. While a loan modification is traditional lending, the parties are now in an established relationship. This relationship vastly differs from the one which exists when a borrower is seeking a loan from a lender because the borrower may seek a different lender if he does not like the terms of the loan.”
The Third District then applied the Biakanja factors to the borrower’s negligence claim.
As to the first factor — “the extent to which the transaction was intended to affect the plaintiff” — the Court of Appeal found that the loan modification was intended to affect the borrower because the servicer’s decision on the borrower’s application for a modification plan would likely determine whether or not the borrower could keep her house. The Court concluded the first factor weighed in favor of finding a duty of care.
As to the second factor – “the foreseeability of harm to the plaintiff” — the Third District held that the potential harm to the borrower was readily foreseeable because the alleged mishandling of the documents deprived the plaintiff of the possibility of obtaining the requested relief, even though there was no guarantee that the modification would be granted had the application been properly processed. The Court of Appeal also pointed out that the servicer increased the likelihood that the borrower would incur additional expenses of default during the lengthy loan modification process, thereby increasing the foreseeable potential harm. The Court concluded the second factor weighed in favor of finding a duty of care.
As to the third factor – “the degree of certainty that the plaintiff suffered injury” — the Court of Appeal found that the borrower’s alleged damage to credit, increased interest and arrears, and foregone opportunities to pursue unspecified other remedies constituted a sufficient injury and weighed in favor of finding a duty of care.
As to the fourth factor – “the closeness of the connection between the defendant’s conduct and the injury suffered” — the Third District noted that the borrower’s default was imminent which could indicate that she would have suffered damage to her credit and increased interest and arrears regardless of the servicer’s conduct. However, the Court of Appeal also recognized that the borrower was current on the loan until she learned that she could not be considered for a loan modification unless she defaulted. The Court of Appeal then concluded that the fourth Biakanja factor weighed in favor of finding a duty of care at the pleading stage.
As to the fifth factor – “the moral blame attached to the defendant’s conduct” — the Third District reasoned that a borrower’s lack of bargaining power, coupled with the servicer’s alleged incentive to unnecessarily prolong the loan modification process, “provide a moral imperative that those with the controlling hand be required to exercise reasonable care in their dealings with borrowers seeking a loan modification.” The Court of Appeal also noted that the “the moral blame attached to the defendant’s conduct” is heightened when the defendant first induces a borrower to take a vulnerable position by defaulting and then subjects the borrower’s loan application to a review process that does not meet the standard of ordinary care.” The Court of Appeal found that the fifth Biakanja factor weighed in favor of a finding that the servicer owed a duty of care to the borrower.
As to the sixth and last factor – “the policy of preventing future harm” — the Court of Appeal found imposing a duty of care on the servicer would advance the policy of preventing future harm. The Third District noted that California’s Homeowner’s Bill of Rights demonstrates a rising trend to require lenders to deal reasonably with borrowers in default to try to effectuate a workable loan modification.
Notably, the Court of Appeal’s application of the Biakanja factors signifies a reversal from its recent decision in Conroy v. Wells Fargo Bank, N.A., 13 Cal.App.5th 1012. There, the Third District had held that where there is privity of contract, a duty of care does not lie in the mortgage loan context. The Third District later vacated and de-published Conroy.
Notwithstanding its finding that the servicer owed the borrower a duty of care, the Court of Appeal did suggest that the servicer might have an affirmative defense to her negligence claim. In particular, the Third District “assumed without deciding” that California Civil Code § 2923.6(g) offers an affirmative defense to a negligence claim in loan modification cases where the borrower submits multiple loan modification applications.
As you may recall, section 2923.6(g) provides: “[T]he mortgage servicer shall not be obligated to evaluate applications from borrowers who have already been evaluated or afforded a fair opportunity to be evaluated for a first lien loan modification,” unless there has been a material change in the borrower s financial circumstances since the date of the borrower’s previous application and that change is documented by the borrower and submitted to the mortgage servicer.”
Nevertheless, the Court of Appeal found that the servicer’s potential defense based upon the borrower’s multiple loan modification applications was not appropriate on demurrer as it required an analysis of facts outside of her complaint.
The Third District did affirm the trial court’s dismissal of the borrower’s purported conversion claim. There, the borrower alleged that a 2006 assignment of the deed of trust was invalid due to defects in the securitization process. As a result, the borrower alleged that the later assignment of the deed of trust to the servicer was invalid.
The Court of Appeal found the borrower had not alleged that the deed of trust was securitized or assigned to a trust in 2006. As a result, the Court of Appeal affirmed the trial court’s dismissal of the borrower’s purported claim for conversion.
In an unpublished portion of its opinion, the Third District: (1) reversed the trial court’s dismissal of the borrower’s unfair competition claim; (2) affirmed the trial court’s dismissal of the borrower’s purported claims for intentional misrepresentation and promissory estoppel, but concluded she should have been given leave to amend; and, (3) affirmed the trial court’s dismissal, without leave to amend, of the borrower’s purported claims for negligent misrepresentation, breach of contract, and intentional infliction of emotional distress.
As you may recall, California’s Unfair Competition Law (UCL) prohibits, and provides civil remedies for, unfair competition, which it defines as any unlawful, unfair, or fraudulent business act or practice. To plead standing, a UCL plaintiff must (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact (i.e., economic injury) and (2) show that economic injury was the result of the unfair business practice.
With respect to the borrower’s purported claim for violation of the UCL, the Court of Appeal found that the borrower had standing based upon the postage fees which the borrower allegedly spent repeatedly re-submitting documents to the servicer. The Court of Appeal held that these fees constituted “sufficient economic harm as a result of the alleged mishandling of her loan modification application materials.”
The Third District also found that the borrower adequately alleged both unfair and fraudulent practices by alleging that the servicer “intentionally delayed the application process by demanding that [the borrower] submit the same documents over and over again, all in an attempt to increase arrears, penalties, and fees, resulting in an incurable default.”
The Court of Appeal also reversed the trial court’s refusal to grant the borrower leave to amend her purported promissory estoppel claim based upon the servicer’s alleged 2012 oral promise to grant a trial plan and permanent modification.
In California, promissory estoppel requires: (1) a promise that is clear and unambiguous in its terms, (2) reliance by the party to whom the promise is made, (3) the reliance must be reasonable and foreseeable, and (4) the party asserting the estoppel must be injured by his or her reliance.
The Third District acknowledged that the borrower failed to allege either an unambiguous promise or reasonable reliance because a general promise to send some sort of trial loan modification agreement does not constitute a clear and unambiguous promise to provide any kind of mortgage relief. And, the Court reasoned that no borrower could reasonably rely on an alleged promise to offer a loan modification on any terms, as the offered modification might not lower their monthly payments sufficiently to allow her to avoid default.
Nevertheless, the Third District held that the borrower should have been given leave to amend to state a viable cause of action, if she is able to do so.
Likewise, the Court of Appeal also reversed the trial court’s dismissal of the borrower’s intentional misrepresentation claim, based upon an alleged 2012 oral representation that the servicer would send the borrower a HAMP TPP. The Court held that the trial court should have given the borrower leave to amend.
In particular, the Third District found that the borrower had adequately alleged that the servicer’s representative made this promise without any intention of performing it, with the intent to induce the borrower to submit another application, thereby prolonging the loan modification process and allowing the servicer to charge additional interest, fees, and penalties.
However, the Court of Appeal acknowledged that the borrower had failed to adequately allege damages based upon her reliance on the supposed misrepresentation. Instead, the borrower opaquely alleged that she might have pursued unspecified “alternate remedies” had she not relied on the false promise that she would receive a HAMP TPP. The borrower also alleged that she suffered damage to her credit and increased arrears, fees, and penalties, while awaiting a loan modification.
The Third District observed that the borrower’s complaint suggested that she had no alternative remedies, due to her poor finances. And, the Court of Appeal noted that the borrower had not alleged how the servicer’s representations could have caused her damages, as opposed to her default on the loan. Nevertheless, the Court of Appeal determined that the borrower should have been given leave to explain her damages and overcome her pleadings deficiencies.
The Court of Appeal did affirm the trial court’s dismissal of the borrower’s purported negligent misrepresentation claim. The Court found that the borrower had merely alleged that the servicer negligently promised to modify her loan. And, California does not recognize a cause of action for negligent false promise.
The Third District also found that the borrower failed to allege that the servicer agreed to modify her loan. The Court noted that the borrower’s alleged agreement to provide a TPP on terms to be specified in the future amounts to an unenforceable “agreement to agree.”
Finally, the Court of Appeal affirmed the trial court’s dismissal of the borrower’s purported claim for intentional infliction of emotional distress (IIED).
As you may recall, in order to state a claim for IIED, a plaintiff must allege: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff s suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant’s outrageous conduct.
The Court of Appeal found that the alleged mishandling of the borrower’s loan modification applications did not constitute conduct so extreme, outrageous, or outside the bounds of civilized society as to support a cause of action for intentional infliction of emotional distress.