Galindo v. Ocwen Loan Servicing, LLC

Citation: 282 F. Supp. 3d 1193Docket: Case No. 17–CV–00021–LHK

Court: District Court, N.D. California; September 29, 2017; Federal District Court

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Plaintiffs Cesar Galindo and Maria Rivera are suing Defendant Ocwen Loan Servicing, LLC for negligence and violations of California's Unfair Competition Law. The Court, upon review, has partially granted and partially denied Defendant's motion to dismiss. 

The background includes Galindo's loan of $436,000 from Bank of America, secured by a deed of trust on their property in San Jose, CA. The Plaintiffs defaulted on the loan in March 2009, with a Notice of Default recorded in March 2011. Ocwen acquired servicing rights for the loan in September 2012. The Plaintiffs allege they began applying for a loan modification under the Home Affordable Modification Program (HAMP) but did not specify the application date. After years of unsuccessful negotiations for a loan modification, they filed an administrative complaint in 2015.

On May 29, 2015, Ocwen responded to the complaint, stating that Plaintiffs were approved for a Trial Period Plan (TPP) offer in September 2012, which required three payments for loan modification eligibility. Plaintiffs claim they never received this offer. Ocwen also stated that Plaintiffs' initial HAMP request was recorded in May 2014 but was denied due to the account owner not participating in the HAMP program. Additionally, Ocwen indicated they approved a Proprietary Modification in December 2014, requiring a down payment and subsequent TPP payments, but denied the modification in February 2015 due to non-compliance with payment deadlines.

On April 8, 2015, Plaintiffs submitted a second HAMP modification request to Defendant, which was denied due to the account owner's policies against principal reduction or non-participation in HAMP. In September 2015, BSI Financial Services, Inc. acquired the servicing rights to Plaintiffs' loan and subsequently received a loan modification request from Plaintiffs. On September 28, 2015, BSI filed a Notice of Trustee’s Sale with the Santa Clara County Recorder’s Office, despite no decision being made on the modification application. 

On January 4, 2017, Plaintiffs filed suit against BSI, alleging negligence, breach of the implied covenant of good faith and fair dealing, violation of California Civil Code Section 2923.6(c), and violation of the UCL. BSI moved to dismiss all claims on January 26, 2017. The Court granted the motion on March 17, 2017, ruling that Plaintiffs' negligence claim failed because it was based on actions by Defendant, not BSI, and similarly dismissed the other claims against BSI. Plaintiffs were granted leave to amend their complaint but could not add new causes of action or parties without permission.

On April 13, 2017, Plaintiffs sought leave to file a First Amended Complaint (FAC) and add Defendant as a party; BSI did not oppose this motion. The Court approved the request on May 26, 2017, leading to the filing of the FAC on May 29, 2017, which included claims against both parties. On July 5, 2017, Plaintiffs sought a temporary restraining order (TRO) to prevent the scheduled trustee's sale of their home. The Court ordered responses from Defendant and BSI, which were filed on July 10, 2017. The Court denied the TRO on July 14, 2017, concluding that Plaintiffs did not show a likelihood of success on the merits since neither Defendant nor BSI were current servicers of the loan and thus lacked authority to halt the sale. Additionally, Plaintiffs did not adequately support their claims of negligence and UCL violation for the purposes of the TRO.

Plaintiffs filed a motion for a temporary restraining order (TRO), which was subsequently denied by the Court. During this time, both BSI and the Defendant moved to dismiss the Plaintiffs' First Amended Complaint (FAC) on July 10, 2017. Ten days after the TRO denial, on July 24, 2017, Plaintiffs voluntarily dismissed BSI without prejudice and opposed the Defendant's motion to dismiss the same day. The Defendant replied on July 31, 2017.

The legal standard for a motion to dismiss under Rule 12(b)(6) requires a complaint to provide a short, plain statement of the claim indicating entitlement to relief. A complaint that does not meet this standard may be dismissed. The Supreme Court has ruled that the plaintiff must plead enough factual content to make a claim plausible on its face, allowing for reasonable inferences of liability. While factual allegations are accepted as true and construed favorably for the nonmoving party, conclusory legal assertions and unwarranted inferences cannot defeat a motion to dismiss.

If a complaint is dismissed, the Court must consider whether to grant leave to amend under Rule 15(a), which should be freely given unless it would cause undue prejudice, delay, or is futile. 

Plaintiffs allege negligence and a violation of the Unfair Competition Law (UCL) against the Defendant. The elements of negligence in California include: (1) a legal duty of care owed by the defendant to the plaintiff, (2) breach of that duty, (3) causation, and (4) resulting injury. The California Supreme Court has established six factors, known as the Biakanja factors, to assess the existence of a duty of care.

The Biakanja factors, derived from Biakanja v. Irving, outline six criteria to determine a defendant's duty of care: (1) intention to affect the plaintiff, (2) foreseeability of harm, (3) certainty of injury, (4) closeness of the connection between conduct and injury, (5) moral blame attached to the conduct, and (6) policy considerations for preventing future harm. Generally, in California, financial institutions owe no duty of care to borrowers if their role remains strictly as lenders. In Lueras v. BAC Home Loans Serv. LP, the court ruled that a loan modification is part of a lender's conventional role, thus the Biakanja factors did not establish a duty of care due to the lack of direct connection between the lender's actions and the borrower’s default. Conversely, in Alvarez v. BAC Home Loans Serv. L.P., the court determined that once a lender agrees to consider a loan modification application, it has a duty to exercise reasonable care in processing that application, as significant harm from delays was foreseeable. This created a divergence in court interpretations, with the defendant advocating for the Lueras standard, while the plaintiffs cited Alvarez, alleging the defendant failed to notify them of a modification offer and incorrectly assessed their eligibility for a HAMP loan modification. Federal courts have shown inconsistency in applying these rulings, with a trend towards Lueras, but no Ninth Circuit decision endorsing Alvarez has been identified.

At least four unpublished Ninth Circuit opinions have adopted the ruling from *Lueras*, establishing that financial institutions do not owe a duty of care to borrowers in the loan modification process. Key cases include *Anderson v. Deutsche Bank*, which states that lenders are not liable if they did not create a need for modification; *Badame v. J.P. Morgan Chase*, asserting that loan modifications are part of a lender's conventional role; *Deschaine v. IndyMac Mortgage Services*, indicating no obligation to prevent foreclosure; and *Benson v. Ocwen Loan Servicing*, which affirms that loan servicers do not owe borrowers a common law duty of care. The reliance on *Lueras* has been consistent, with the California Court of Appeal concluding that loan modifications are merely renegotiations of terms within a lender's typical function. Consequently, the court finds that Plaintiffs cannot prove a duty of care exists, rendering any amendment futile and resulting in the dismissal of their negligence claim with prejudice.

Regarding the California Unfair Competition Law (UCL), Plaintiffs allege violations based on three points: failure to provide an approved HAMP loan modification, incorrect denial of a subsequent application, and improper processing of their application. The Defendant argues for dismissal of the UCL claim, asserting that it hinges on the validity of underlying substantive claims. The court agrees that Plaintiffs have not adequately alleged a violation under the 'unlawful' prong of the UCL, as they fail to identify any other laws that were violated.

Plaintiffs' First Amended Complaint (FAC) includes a negligence claim against Defendant and a claim under the unlawful prong of the Unfair Competition Law (UCL). The court determined that Plaintiffs cannot establish a negligence claim because Defendant owed no duty of care during the loan modification process. Consequently, since the UCL claim's unlawful prong relies on the negligence claim, it also fails. The court cited Singh v. Wells Fargo Bank, emphasizing the need for an underlying legal violation to support a UCL unlawful claim. As a result, the court granted Defendant's motion to dismiss the negligence claim and dismissed the UCL claim under the unlawful prong with prejudice. However, the court denied Defendant's motion to dismiss the UCL claim under the unfair prong, noting that California law permits unfair practice claims without requiring a violation of another law. The court also granted Defendant's unopposed request for judicial notice of a public record related to the case. Lastly, the court did not consider Plaintiffs' new argument regarding the fraudulent prong of the UCL, as it was not adequately pleaded in the FAC. In summary, the court's rulings included: 1) dismissal of the negligence claim with prejudice, 2) dismissal of the UCL unlawful claim with prejudice, and 3) denial of the motion to dismiss the UCL unfair claim.