Court: District Court, E.D. California; April 24, 2015; Federal District Court
The Court addressed the Defendants' Motion to Dismiss filed by Wells Fargo Bank and HSBC Bank regarding Plaintiff Josh Meixner's complaint. The Court granted the motion in part and denied it in part after reviewing the arguments from both parties.
Factually, in January 2005, Meixner secured a mortgage loan with Wells Fargo for $329,855, backed by a Deed of Trust. By September 2008, he faced payment difficulties and sought a loan modification, allegedly being advised by Wells Fargo to stop payments to qualify for the Home Affordable Modification Program (HAMP). In March 2009, he began the modification process through Pro City Mortgage.
On July 22, 2009, Wells Fargo recorded a Notice of Default indicating a past due amount of $16,593.81. Following communications with Pro City Mortgage, Meixner was informed in September and October 2009 that he had been approved for a loan modification, with proposed terms including a five-year fixed interest rate, likely around 2%, increasing thereafter. However, he was later told that the modification was denied due to “net negative income.”
In December 2009, additional discussions indicated that his file was still under review for HAMP, and supplemental income information was requested. By December 31, 2009, Wells Fargo sent him a HAMP Trial Period Plan (TPP), stating that compliance with its terms could lead to a permanent loan modification.
On March 19, 2010, Walter Pajares from Pro City Mortgage informed the Plaintiff that Wells Fargo would finalize the loan modification after the third Trial Payment Plan (TPP) payment. Pajares advised the Plaintiff to continue making modified payments. On June 17, 2010, a Wells representative indicated there was no timeline for finalization but instructed the Plaintiff to keep making monthly payments of $2,058.40. A later conversation on June 28, 2010, with Howard Welling, a Wells representative, reassured the Plaintiff that the modification process was progressing, stating the final payment would be 31% of the Plaintiff's gross income and confirming that the file was undergoing final approval.
However, on July 28, 2010, a representative named Abed informed the Plaintiff that the HAMP loan modification had been denied due to an income deficit, which exceeded allowable limits, although he suggested that filing for Chapter 7 bankruptcy could lead to approval for a modification. On August 3, 2010, the Plaintiff was told by a loss mitigation representative that a new HAMP application was needed due to procedural changes, and there was confusion about how income was assessed.
By August 6, 2010, the Plaintiff was informed that the file was still under review, with a process duration of 45 days. Further inquiries revealed ongoing HAMP review status and a recommendation to submit updated documentation. On September 2, 2010, a call to Wells’ bankruptcy department led to confirmation of HAMP approval but implied bankruptcy was necessary to resolve credit card debt hindering final approval. Lastly, on September 14, 2010, the Plaintiff received a returned payment from Wells that included the TPP amount plus an additional payment.
On September 15, 2010, Plaintiff contacted Wells and spoke with a representative named Tinika, who informed him that his file was inactive and the property was scheduled for sale on October 26, 2010. Later, on September 28, 2010, another representative, Kimberly, indicated that the foreclosure sale had been postponed to November 29, 2010, and advised the Plaintiff to submit a new IRS Form 4506-T for HAMP review, emphasizing that bankruptcy would halt the sale. By February 15, 2011, a representative from Wells stated that the Plaintiff's file was active in foreclosure without a scheduled sale date and that he was "pre-approved" for HAMP, contingent on submitting further documentation. On February 22, 2011, loan processor Connie Salgado explained the review process and estimated a two to three-week timeframe for approval, asserting a high likelihood of success despite the Plaintiff being 20 months behind on payments.
On March 8, 2011, the bankruptcy department confirmed ongoing review with a foreclosure sale date set for April 5, 2011, prompting another request for financial documents. A subsequent conversation with Salgado indicated that only Petersen’s 2009 tax return was needed, but the loan modification was ultimately denied on March 21, 2011. Between April and November 2011, the Plaintiff engaged with multiple representatives regarding his denial, learning he did not qualify due to net present value (NPV) calculations. The property was sold at a nonjudicial foreclosure sale on June 21, 2012. The Plaintiff alleges that Wells failed to adhere to the Federal Treasury’s guidelines for HAMP modifications, asserting he was eligible for a HAMP loan modification as a TPP could only be offered after confirming eligibility.
Plaintiff alleges inaccuracies in Abed's representation of their gross monthly income, asserting that Wells’ calculations overlooked mileage reimbursements and Petersen’s income. Plaintiff claims Wells had previously determined that modifying the Subject Loan under HAMP was more beneficial than foreclosure. Plaintiff also asserts timely payment of all required Trial Payment Plan (TPP) installments, believing this entitled them to a permanent loan modification. The lawsuit is filed against Defendants Wells, HSBC, and DOES 1-50, citing ten causes of action: Breach of Contract, Promissory Estoppel, Negligence, Intentional Misrepresentation, Negligent Misrepresentation, Wrongful Foreclosure, Conversion, Violation of Business and Professions Code section 17200, Unjust Enrichment, and Equitable Accounting.
The legal standard under Federal Rule of Civil Procedure 8(a) requires a concise statement of claims to provide defendants with fair notice of the allegations. The complaint's factual claims must be accepted as true, allowing courts to draw reasonable inferences in favor of the plaintiff. While detailed factual allegations are not mandated, claims must avoid mere labels or conclusions, and must present enough factual content to suggest a plausible entitlement to relief. Courts are not to assume unpleaded facts or violations of law.
A court cannot dismiss a complaint if the plaintiff presents sufficient facts that make the claim plausible on its face. Dismissal is only appropriate if the claims do not move from conceivable to plausible. The plausibility standard is not a probability requirement but necessitates more than mere speculation about wrongful conduct. Courts should apply their judicial experience and common sense in assessing plausibility. In deciding a motion to dismiss, courts can only consider the complaint, any attached exhibits, and facts that can be judicially noticed. If a complaint does not state a plausible claim, courts are generally required to grant leave to amend unless it is clear that no amendment could resolve the deficiencies. While courts should liberally allow amendments, they may deny leave if the plaintiff has already amended the complaint previously.
In the breach of contract claim, the plaintiff alleges that Wells did not provide a permanent loan modification after fulfilling the Trial Payment Plan (TPP). The defendants argue that the TPP is not a contract. However, the court finds the plaintiff has adequately stated a breach of contract claim, which requires establishing a contract, the plaintiff's performance, the defendant's breach, and resulting damages. Recent rulings from the Ninth Circuit confirm that a TPP agreement under HAMP constitutes a contract, allowing a party to sue if the lender breaches its terms. The court highlights that if a borrower has complied with all TPP requirements, including payments and documentation, the lender is obligated to offer a permanent modification, as long as the borrower's representations remain true.
Plaintiff claims that the Home Affordable Modification Program (HAMP) Trial Payment Plan (TPP) constituted a contract contingent on making three required payments. Plaintiff asserts that after fulfilling these payments and qualifying for HAMP, Wells Fargo breached the contract by failing to permanently modify his loan. Defendants contend that the permanent modification was dependent on Plaintiff qualifying for the program and argue that he did not provide sufficient facts to demonstrate such qualification. They refer to conditional language in the TPP and a letter from Wells stating that qualification under HAMP was necessary for a permanent modification.
However, case law supports that HAMP TPPs can be viewed as contracts even with conditional language, provided the borrower performs as required. Courts have upheld TPPs as contracts in similar contexts, indicating that if a borrower meets the payment requirements and alleges qualification for HAMP, the existence of a contract is established. While Defendants acknowledge Plaintiff's compliance with payment requirements, they incorrectly assert that he has not shown qualification for HAMP.
Plaintiff argues qualification based on two points: first, that Wells miscalculated his gross income, leading to a denial of his modification application; and second, that Wells had already determined his qualification for HAMP when offering the TPP. The legal principle is that offering a TPP implies a prior determination of qualification, assuming the borrower's representations are accurate. As Defendants do not dispute the accuracy of Plaintiff's representations, he argues that Wells had previously assessed him as qualified for HAMP before issuing the TPP. The Court finds Plaintiff's allegations sufficient to establish that he qualified for HAMP based on plausible claims of income miscalculation and prior qualification determination.
Plaintiff alleges that he qualified for the Home Affordable Modification Program (HAMP) and made timely Trial Period Plan (TPP) payments, thereby fulfilling all TPP conditions. This establishes a breach of contract claim against Wells, as they were required to permanently modify the loan per the TPP. Consequently, the Court denied Defendants’ motion to dismiss this breach of contract claim.
Additionally, Plaintiff asserts a promissory estoppel claim, arguing he relied on Wells' promise to modify his loan. Defendants contend that the TPP was conditional on Plaintiff qualifying for HAMP, which they claim negates a definite promise. However, the Court finds that Plaintiff has sufficiently pled promissory estoppel. The necessary elements include a clear promise, reasonable and foreseeable reliance, and resultant injury. The TPP is deemed to contain a sufficiently definite promise, allowing the court to ascertain the scope of duties and potential damages. Relevant case law supports the notion that similar TPP agreements can constitute enforceable promises. The Court highlighted prior rulings affirming that a clear promise and detrimental reliance were adequately alleged, emphasizing the implications of the TPP on Plaintiff’s decisions regarding his home.
Defendants contend that Plaintiff Wells’ promise was contingent on qualifying for a permanent loan modification, asserting that Plaintiff lacks sufficient income for HAMP eligibility and could not reasonably depend on the qualification language. The Court rejects this argument, finding the alleged promise in the Trial Period Plan (TPP) to be clear and unambiguous. The promise states that if Plaintiff qualifies under HAMP and adheres to the TPP terms, his mortgage loan will be modified to avoid foreclosure. Plaintiff has sufficiently claimed qualification for HAMP and reasonable reliance on the promise, having made required payments under the TPP, which led him further into default. The Court notes that the reliance was reasonable, given the prolonged negotiation period, and detrimental, as it resulted in accelerated foreclosure actions. Consequently, the Court concludes that Plaintiff has established a claim for promissory estoppel, denying Defendants’ motion to dismiss this claim.
Regarding negligence, Plaintiff alleges that Defendants improperly handled his loan modification application. Defendants argue that they owed no duty of care to Plaintiff. The Court finds that a duty of care exists in this context, as the elements of negligence—duty, breach, causation, and damages—are present. While generally, lenders do not owe a duty of care if their involvement is limited to conventional lending roles, case law indicates that this does not categorically preclude the existence of such a duty in certain circumstances.
To establish the existence of a duty of care, courts evaluate the Biakanja factors: [1] intention of the transaction affecting the plaintiff; [2] foreseeability of harm to the plaintiff; [3] certainty of injury suffered by the plaintiff; [4] closeness of the connection between the defendant's actions and the injury; [5] moral blame associated with the defendant's conduct; and [6] the policy aimed at preventing future harm. The California Third District Court of Appeals applied these factors in Nymark to assess whether a financial institution owes a duty of care to a borrower-client. Recent California appellate decisions have utilized this balancing test in loan modification cases, leading to varied conclusions regarding a lender's duty of care. For instance, Alvarez determined that while lenders generally have no obligation to offer modifications, a special relationship may arise when they agree to consider modification applications. Conversely, Jolley concluded that commercial lending creates a special relationship, imposing a duty of care. In contrast, Lueras classified residential loan modification as a traditional lending activity, which does not impose such a duty. Federal district courts in California echoed these differing interpretations, with cases like Segura establishing that a duty of care arises when a lender invites a borrower to apply for a modification, while Johnson confirmed that once modification is offered, the lender must handle the application with ordinary care. Collectively, these cases indicate that traditional lending activities do not typically create a duty of care, but certain conduct during modification negotiations can result in a special relationship and corresponding duty. Other cases, such as Valencia and Colom, reinforced that lenders lack a common law duty to offer or process loan modifications absent special circumstances.
Defendants argue that California's prevailing rule, established in *Lueras*, indicates that lenders have no duty of care towards borrowers seeking loan modifications. In *Lueras*, the court found that the lender's obligations regarding loan modifications arise solely from loan agreements and relevant regulations. The court applied the *Biakanja* factors and concluded that if a borrower needs a modification due to their inability to repay, the lender's actions are not closely connected to the borrower's harm, thus negating moral blame and the imposition of a common law duty of care for negligence claims. However, the court acknowledged that lenders do have a duty to avoid making material misrepresentations about loan modification applications or foreclosure status.
In contrast, the plaintiff in *Alvarez* contended that the lender mishandled their HAMP loan modification application and argued that the lender owed a duty to exercise reasonable care in reviewing the application. The court in *Alvarez* recognized that while the general rule limits lender liability, it does not eliminate the possibility of negligence claims related to loan transactions, particularly when a special relationship is formed as the lender undertakes to review an application for modification. This indicates a nuanced view of lender liability that differs from the strict position taken in *Lueras*.
A duty of care may arise in the relationship between borrower and lender due to the shift from an arm's length transaction to a more captive borrower scenario, where borrowers lack choice, information, and bargaining power. The court assessed the Biakanja factors, highlighting that the transaction was designed to impact the plaintiffs and that failing to process loan modification applications timely and carefully could foreseeably cause significant harm. Although there was no guarantee of a modification, the mishandling of documents deprived the plaintiff of potential relief. The court noted a close connection between the defendant's conduct and the injury due to the privity of the parties, and it found the moral blame on the borrower to be low, given the borrower's limited bargaining power and the conflicts of interest in the loan servicing industry. The court emphasized the importance of preventing future harm, particularly after the California Homeowner Bill of Rights (HBOR) was enacted. It concluded that since a lender agrees to consider a borrower’s loan modification, the Biakanja factors support imposing a duty of care, distinguishing the relationship dynamics during the initial loan procurement from those during a modification. Consequently, the court adopted the reasoning in Alvarez, affirming that a lender owes a duty of care to the borrower during the modification process, as this transaction directly affects the plaintiff in privity with the lender.
Wells’ processing of Plaintiff's loan modification application was crucial to whether Plaintiff could retain his house, making it foreseeable that mishandling could lead to foreclosure. Although there was no assurance of modification approval had the application been properly handled, Plaintiff was deprived of the chance to secure relief due to Wells' negligence. The Court recognizes a strong connection between Wells’ actions and the foreclosure, given their pre-existing relationship. The moral blame associated with Wells’ conduct is significant, particularly considering the borrower’s limited bargaining power and inherent conflicts in the loan servicing industry. The enactment of the Homeowners Bill of Rights (HBOR) further underscores the expectation for lenders to engage reasonably with borrowers in default. Consequently, the Court concludes that Wells owed a duty of care to Plaintiff, which was breached through the mishandling of the loan application, directly leading to foreclosure. Plaintiff has sufficiently established a claim for negligence, resulting in the denial of Defendants’ motion to dismiss this cause of action.
Regarding the claims of intentional and negligent misrepresentation, Plaintiff alleges that Defendants made false representations upon which Plaintiff relied. Defendants contend that the claims lack sufficient detail as required by Rule 9(b), arguing that Plaintiff presents opinions rather than factual assertions. However, Plaintiff maintains that the statements made by Wells’ agents were factual and lacked reasonable bases for their truthfulness. The Court finds that Plaintiff has adequately pleaded both forms of misrepresentation in line with Rule 9(b), which mandates specific detailing of fraud-related claims. The Court will apply state law to determine the elements of fraud while adhering to the particularity requirement of Rule 9(b).
The claim in question is governed by Rule 9(b), which mandates specificity in alleging fraud, requiring the plaintiff to detail the "who, what, when, where, and how" of the fraudulent conduct. Specificity is necessary to inform defendants of the misconduct to prepare an adequate defense. For fraud claims against corporations, plaintiffs must identify the individuals who made fraudulent statements, their authority, the content of those statements, and the timing.
In California, the elements of intentional misrepresentation include: (1) misrepresentation (false representation, concealment, or nondisclosure), (2) knowledge of the falsity (scienter), (3) intent to induce reliance, (4) justifiable reliance, and (5) resulting damages. Negligent misrepresentation shares similar elements but does not require proof of intent to deceive.
The plaintiff's complaint asserts several claims against Wells, including entering into a Trial Period Plan (TPP) and qualifying for the Home Affordable Modification Program (HAMP). The plaintiff alleges he made timely payments under the TPP, was promised a loan modification, and was directed by a Wells representative to miss payments to be considered for modification, which he argues is a misrepresentation as it contradicts HAMP requirements. The plaintiff contends that Wells never intended to grant a loan modification, claiming the statements made were misleading and demonstrating a lack of intention to fulfill the commitments made.
Plaintiff alleges that agents of Wells made false statements either knowing they were false or lacking any reasonable basis for believing them to be true, establishing the element of knowledge of falsity for both intentional and negligent misrepresentation. The complaint asserts that Wells intended for Plaintiff to rely on these false representations to profit from servicing a distressed loan, which led to a situation where Wells could recover fees at foreclosure. Plaintiff claims justifiable reliance on Wells’s statements, as their falsity was not easily discernible. Moreover, Plaintiff outlines damages incurred from an unsuccessful loan modification process, including penalties and negative credit reporting, resulting in foreclosure. The Court finds that Plaintiff has sufficiently met the requirements for both intentional and negligent misrepresentation, thus denying the motion to dismiss these claims.
Regarding wrongful foreclosure, Plaintiff seeks damages and punitive damages, arguing that breaks in the chain of title prevented the Real Estate Mortgage Investment Conduit (REMIC) from having the authority to foreclose. Specifically, Plaintiff contends that a beneficiary trust must hold the deed of trust within 90 days of the trust's closing date to maintain REMIC status. He asserts that HSBC was not the rightful owner of the property at the time of foreclosure because it did not possess the deed of trust within this timeframe, violating both federal and New York Trust Law. Defendants counter that Plaintiff lacks standing to contest the securitization process, even if loans or deeds of trust were transferred after the closing date.
Plaintiff asserts standing based on his deed of trust and challenges the interpretation of "sale," claiming that his loan was never transferred to HSBC as trustee for the REMIC Trust. The Court notes that similar arguments have been previously dismissed, adhering to the majority rule that third parties lack standing to contest Pooling and Service Agreements (PSAs). Multiple case precedents support this position, although some courts, such as in Glaski v. Bank of America, have allowed challenges under specific circumstances, particularly when alleging void transfers. The Court defers judgment on the Defendants’ Motion to Dismiss Count Six until the California Supreme Court rules on Yvanova v. New Century Mortgage Corp., which may clarify these issues.
In relation to Count VII, Plaintiff claims damages for conversion, alleging that HSBC collected payments without legal entitlement as the true beneficiary of the loan. Plaintiff argues that HSBC had no right to the beneficial interest and wrongfully collected payments for seven years without consent. The Court will similarly defer judgment on this conversion claim since it hinges on the securitization arguments. Lastly, the document indicates that Count VIII pertains to unfair competition, but details are not provided in this excerpt.
Plaintiff claims unfair competition under California Business and Professions Code section 17200, which addresses unlawful, unfair, or fraudulent business practices and misleading advertising. The Plaintiff asserts that Defendants engaged in such practices. Defendants counter that the claim is based on a rejected legal theory and is contingent on other failed claims. However, since the Court has upheld several of Plaintiff's other claims, the unfair competition claim also stands.
The purpose of California’s unfair competition law is to protect consumers and promote fair competition. The statute's scope is broad, allowing a plaintiff to establish a claim by meeting any of three criteria: (1) engaging in unlawful acts by borrowing violations of other laws, (2) committing unfair business practices that may not be illegal but violate public policy or are deemed immoral, and (3) participating in fraudulent practices that mislead the public.
Plaintiff alleges that Defendants violated California Civil Code section 1709 by willfully deceiving him, leading to injury, and that Wells's representations constitute unfair and fraudulent practices. These allegations are sufficient to meet the requirements of Section 17200, resulting in the denial of Defendants’ motion to dismiss this claim.
Additionally, Plaintiff asserts a cause of action for unjust enrichment, which Defendants argue is not a valid claim in California. The Court agrees, stating that unjust enrichment cannot be a separate cause of action if another cause of action is available, referencing California case law that does not recognize unjust enrichment as an independent claim.
A separate claim for unjust enrichment is denied, stemming from allegations that a doctor charged unsubsidized rates to uninsured patients. Unjust enrichment is conceptualized as a principle within various legal doctrines rather than a standalone claim. Relevant case law, such as *Dinosaur Development Inc. v. White* and *Lauriedale Associates Ltd. v. Wilson*, illustrates that unjust enrichment arises from a failure to make restitution when equitable. The plaintiff cites cases where the California Supreme Court has recognized unjust enrichment; however, only one case supports this assertion, and it is outdated compared to more recent rulings that do not acknowledge unjust enrichment as a separate cause of action when another remedy is available. Numerous cases, including *Ghirardo v. Antonioli* and *Huskinson v. Brown, LLP*, reinforce that California law does not recognize unjust enrichment if other remedies permitting restitution exist. Consequently, the plaintiff's ninth cause of action for unjust enrichment is dismissed without prejudice.
Regarding the equitable accounting claim, the defendants argue that the plaintiff fails to meet the necessary elements. An accounting can be compelled if a fiduciary relationship exists or if accounts are too complex for resolution through ordinary legal processes. To succeed, the plaintiff must demonstrate a relationship requiring an accounting and that a balance is due that only an accounting can reveal. An accounting is not appropriate where the plaintiff seeks a specific sum that can be determined through calculation.
Plaintiffs do not claim that Defendants owe a fiduciary duty but assert that Wells is indebted to them for fees and penalties related to the sale of the Subject Property, which are complex to calculate and contingent on the Plaintiff's securitization theory. The Court defers judgment on Defendants’ motion to dismiss Count Ten pending a ruling from the California Supreme Court in Yvanova. The Court's decision on Defendants’ Motion to Dismiss includes: denial for COUNT I, II, III, IV, V, and VIII; granting the motion for COUNT IX with leave to amend; and deferring judgment for COUNTS VI, VII, and X with a request for supplemental briefing within thirty days after the Yvanova decision. In March 2009, Plaintiff hired Pro City Mortgage for loan modification services, but by August 2010, Plaintiff withdrew Pro City Mortgage's authorization to represent him. The Trial Period Plan (TPP) outlines conditions for loan modification, stating that compliance with the TPP is necessary for modification, which will not occur unless all conditions are met, a signed Modification Agreement is received, and the effective date has passed. Wells communicated that if the Plaintiff qualifies under the Home Affordable Modification program and adheres to the TPP terms, the mortgage loan could be modified to avoid foreclosure.
Monthly trial period payments for loan modification are based on previously provided income information and are estimates contingent upon successful loan modification. If the income documentation does not align with prior claims, either the monthly payment may change, or the borrower may not qualify for modification. Acceptance of the offer allows the borrower to determine eligibility for a Home Affordable Modification. Finalized loan terms will be communicated after confirming income and eligibility, and all unpaid late charges will be waived if trial payments are fulfilled. However, the modification is contingent on meeting all conditions, including timely trial payments.
Defendants argue that the plaintiff's claims of negligence and misrepresentation are barred by the statute of limitations, asserting that damages occurred when misrepresentations were made or when loan modification efforts ended in early 2011. They provide no justification for this timeline over the foreclosure date. The plaintiff asserts that Wells Fargo denied loan modifications twice, causing uncertainty regarding the status of his application, which persisted until May 2011 when he requested a traditional modification. The court determines that the statute of limitations began when the plaintiff realized modifications would not be granted, marking the foreclosure date of June 21, 2012, as the appropriate starting point for claims.
The court applies the Biakanja balancing test to assess potential liability to third parties not in privity with the lender, referencing other case law that suggests a lender's duty of care arises when it exceeds conventional lending roles or mishandles the modification application. In this context, specific mishandling allegations are necessary for negligence claims to succeed.
Plaintiffs must demonstrate that they would have secured a loan modification but for defendants’ negligence; failure to do so may influence damages without nullifying them. The New York Trust Law, specified in Section 12.03 of the MSTA, asserts that any trustee actions contrary to the trust, unless legally authorized, are void. The California Supreme Court is set to decide if borrowers can contest an assignment of a note and deed of trust in wrongful foreclosure cases based on alleged defects. Defendants contend that plaintiffs did not adequately plead additional claims under the Unfair Competition Law (UCL). However, the Court finds that plaintiffs sufficiently pleaded breach of contract, promissory estoppel, negligence, intentional misrepresentation, and negligent misrepresentation to satisfy UCL standards. The plaintiffs also allege conversion and violations of California Civil Code section 2924 related to securitization claims but these will not be addressed until the California Supreme Court rules on the Yvanova case. Recent California appellate decisions appear to support this position.
