The California Court of Appeal, Fourth District, recently held two borrowers’ allegations that their lender was not properly licensed were insufficient to establish an actual economic injury, necessary for standing under California Business and Professions Code section 17200, and that there was no private right of action under California Financial Code sections 22100 and 22751.

A copy of the opinion in Lagrisola v. North American Financial Corp. is available at: Link to Opinion.

In 2020, California regulators entered into a settlement agreement with a mortgage lender to address its unlicensed lending activity. Pursuant to the settlement agreement, included as exhibit B to the original complaint, the lender was ordered to “refrain from violating Financial Code section 22100, subdivision (a), by engaging in the business of a finance lender without obtaining a license” and to pay an administrative penalty of $75,000. The parties acknowledged the settlement agreement was “intended to constitute a full, final, and complete resolution of the violations.” The settlement was the first public revelation of the lender’s unlicensed lending activity, and the impetus for the current litigation.

In 2017, the borrowers applied for and obtained a loan with the lender secured by a mortgage on their residence. In 2021, the borrowers sued the lender, individually and on behalf of a class of similarly situated persons, alleging that the lender was not licensed to engage in lending in the state of California between 2014 and 2018 and asserting violations of California Business and Professions Code section 17200 and Financial Code sections 22100 and 22751.

The trial court sustained the lender’s demurrer to the borrowers’ complaint without leave to amend, concluding that the borrowers could not establish injury in fact by alleging that they suffered an injury in fact or lost money or property as a result of the lender’s licensing status. The borrowers timely appealed.

Business and Professions Code section 17200 (commonly referred to as the Unfair Competition Law, or the “UCL”) defines unfair competition as “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500).” Section 17204 further provides, in relevant part, that “[a]ctions for relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by . . . a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.” Bus. & Prof. Code § 17204.

Proposition 64 amended Section 17204 and imposed narrower standing requirements. A party 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 that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.” Kwikset Corp. v. Superior Court (2011) 51 Cal. 4th 310, 320-322; accord California Medical Assn. v. Aetna Health of California Inc. (2023) 14 Cal.5th 1075, 1086.

The lender contended on appeal, as it did in the trial court, that the complaint failed to adequately allege that the borrowers suffered an injury in fact or lost money or property as a result of its licensing status.

Here, the Fourth District noted that the borrowers did not allege that the lender made an affirmative representation about its licensing status or, more importantly, that the borrowers relied on any statements the lender made about its licensing status when choosing to enter into the loan transaction.

Thus, even if an omission could fall into the Kwikset framework, as the borrowers asserted, the Fourth District concluded that the borrowers still had not established causation, the second element required for standing under the UCL. Kwikset noted that “a plaintiff ‘proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements’” and show that “‘the misrepresentation was an immediate cause of the injury-producing conduct.’” Kwikset, supra, 51 Cal.4th at pp. 326–327.

Instead, the borrowers attempted to establish causation by alleging that they would not have obtained the loan had they known the lender was unlicensed, a fact they only discovered three years later because of a public settlement. The Fourth District reasoned that this subjective assertion of an intangible harm falls short of establishing the elements for standing under the UCL.

As the Kwikset court pointed out, whereas federal standing may be based on “intangible” injury that does not involve lost money or property, UCL standing is more stringent. Kwikset, supra, 51 Cal.4th at p. 324. The Court did not believe that the Kwikset court intended to expand Proposition 64 to include standing to plaintiffs based on their intangible distaste for a lender’s failure to complete the licensing process in California.

Thus, the Fourth District held that the borrowers did not establish that they suffered an economic injury caused by an unfair or unlawful business practice of the lender. Therefore, they lacked standing to assert the UCL claims, and the trial court did not err in dismissing the first and second causes of action.

In the third cause of action in the complaint, the borrowers also asserted violations of California Finance Code sections 22100 and 22751 based on the allegation that the lender lacked a license to lend money to California borrowers. They alleged that the law specifically commands that an unlicensed lender is to forfeit all interest and finance charges made on any unlicensed loan.

California Financial Code section 22100, subdivision (a) provides, “[n]o person shall engage in the business of a finance lender or broker without obtaining a license from the commissioner.” Section 22751, subdivision (a) provides, “[i]f any amount other than or in excess of the charges permitted by this division is charged or contracted for, or received, for any reason other than a willful act of the licensee, the licensee shall forfeit all interest and charges on the loan and may collect or receive only the principal amount of the loan.” And related section 22752, subdivision (a) likewise provides that the licensee shall forfeit all interest and charges on the loan “[i]f any provision of this division is violated in the making or collection of a loan.”

However, the Fourth District observed that a violation of a state statute does not automatically give rise to a right of recovery by a private individual. Courts will allow a private right of action only where a statute allows one. Mayron v. Google LLC (2020) 54 Cal.App.5th 566, 571. The statute must contain “‘“‘clear, understandable, unmistakable terms,’” which strongly and directly’ indicate a private right of action is allowed.” Ibid., citing Lu v. Hawaiian Gardens Casino, Inc. (2010) 50 Cal.4th 592, 596–597. If the statue “does not contain an unmistakable directive,” the court may consider the legislative history of the statute to determine whether the Legislature intended to create a private right of action. Mayron, supra, at p. 571.

As relevant here, Financial Code section 22713 specifically provides that the commissioner may bring an action or request that the Attorney General bring an action in the name of the people of the State of California. Fin. Code § 22713, subd. (a). The violator may then be liable for civil penalties, as the lender was here. (Fin. Code § 22713, subd. (b).) Moreover, “[i]f the commissioner determines that it is in the public interest,” the commissioner may include “a claim for restitution, disgorgement, or damages.” Fin. Code § 22713, subds. (b) & (c).

Here, the Fourth District reviewed the record and found it undisputable that the commissioner resolved such an action against the lender through a settlement in December 2020. Despite the final resolution of that matter, the borrowers sought to pursue damages for the lender’s alleged Financial Code violations in addition to those recovered by the commissioner. But the Court held that, when regulatory statutes, like the Financial Code, “‘“provide a comprehensive scheme for enforcement by an administrative agency, the courts ordinarily conclude that the Legislature intended the administrative remedy to be exclusive unless the statutory language or legislative history clearly indicates an intent to create a private right of action.”’” See Noe v. Superior Court (2015) 237 Cal. App. 4th 316, 337.

Accordingly, the Fourth Appellate District also concluded that the provisions of the Financial Code do not provide “clear, understandable, unmistakable terms” for a private cause of action, but instead provide for enforcement of violations via an action by the commissioner, which is what occurred in this case. Thus, the Court affirmed the decision of the trial court.