Court: District Court, N.D. California; March 7, 2013; Federal District Court
The Court has issued an order granting the plaintiffs, Eugene and Herenia Perez, a motion to remand their case to state court and denying motions to dismiss from defendants Wells Fargo Bank, N.A. and First American Loanstar Trustee Services LLC. The plaintiffs' claims arise from the foreclosure of their property at 95 Monterey Drive, Daly City, California.
The Court acknowledged requests for judicial notice from both defendants, which included documents deemed public records or referenced in the plaintiffs' Second Amended Complaint (SAC). No objections were raised by the plaintiffs regarding these documents, leading the Court to take judicial notice of them as permitted under Rule 201 of the Federal Rules of Evidence.
In the background, the SAC details that Mrs. Perez refinanced the property in August 2007 for $525,000 with an 8.5% interest-only loan, resulting in a monthly payment of $8,718.75. After missing two payments by October 2008, Wells Fargo offered a forbearance agreement that required increased payments. The plaintiffs argue this agreement was unconscionable. Following further payment defaults, Wells Fargo recorded a notice of default in March 2009 and scheduled a trustee sale, which was postponed due to multiple bankruptcy filings by the plaintiffs.
Throughout 2009 and into early 2010, the sale date was repeatedly rescheduled while Mrs. Perez sought a loan modification with assistance from attorney John P. Skowronski. Despite assurances from Wells Fargo regarding the status of the foreclosure, processing delays occurred until mid-June 2010, when additional documentation was requested from Mrs. Perez.
On June 23, 2010, Agbabiaka confirmed with Kelly that he had faxed necessary documents and was informed that the foreclosure sale scheduled for June 28, 2010, had been canceled. Despite this, Agbabiaka checked the status on June 26, 2010, and received a recorded message confirming the sale's cancellation, which was heard by Agbabiaka, Mrs. Perez, and associate Alexander Nixon. However, the foreclosure sale occurred as planned on June 28, 2010, with no bidders, resulting in the property reverting to Wells Fargo. A trustee’s deed was recorded on July 2, 2010, indicating that at the time of the sale, Wells Fargo claimed Mrs. Perez owed $617,953.10, while the property's fair market value was estimated at $740,000. Wells Fargo later sold the house to a third party for approximately $645,000 on March 30, 2011.
On August 10, 2010, Wells Fargo notified Mrs. Perez of a loan modification that would reduce her interest-only payment significantly. Plaintiffs were evicted around December 2010, losing personal belongings in the process. They allege four causes of action:
1. **Violation of the Rosenthal Fair Debt Collection Practices Act**: Plaintiffs argue that Wells Fargo, as a debt collector, violated the Act by misleading them about the foreclosure sale, causing them to lose property equity and suffer emotional distress.
2. **Violation of California Business and Professions Code Sections 17200 (Unfair Competition Law)**: Plaintiffs claim that both Wells Fargo and Loanstar engaged in unfair and fraudulent practices by misleading Mrs. Perez about the forbearance agreement and the cancellation of the trustee sale, which they argue was known to lead to foreclosure.
Plaintiffs assert these actions resulted in lost equity, confiscated personal property, and emotional distress.
Plaintiffs allege wrongful foreclosure against both Defendants under California Civil Code Sections 2921, et seq., claiming violations of notice provisions in section 2924, as the foreclosure sale proceeded despite notice of its cancellation on June 28, 2010. This action purportedly resulted in loss of equity, personal property, and severe emotional distress for the Plaintiffs. Additionally, Plaintiffs assert negligence against Wells Fargo, arguing that it failed to exercise reasonable care in processing Mrs. Perez’s loan modification application, culminating in the sale of their property while the application was still under consideration.
In a motion to remand the proceedings to state court, Plaintiffs argue that federal jurisdiction is lacking since their sole federal claim under the Truth in Lending Act (TILA) has been dismissed, and there is no diversity jurisdiction because Wells Fargo is a citizen of both California and South Dakota. They assert the court should evaluate whether to exercise supplemental jurisdiction or remand, citing factors such as judicial economy and fairness, which they believe support remand. Plaintiffs emphasize the case's proximity to trial and the application of state law, while also noting that they did not engage in forum shopping.
In opposition, Wells Fargo contends that complete diversity exists, asserting it is a citizen of South Dakota, referencing case law that supports this position, including Wachovia Bank v. Schmidt. Wells Fargo maintains that its main office is located in Sioux Falls, South Dakota, which defines its citizenship, and acknowledges that the Schmidt decision did not address dual citizenship in relation to its principal place of business.
Wells Fargo contends that the decision in Schmidt contradicts the Ninth Circuit's ruling in American Surety Co. v. Bank of California, which established that a national bank is a citizen of the state where its principal place of business is located. Wells Fargo argues that Schmidt's interpretation, which identifies a national bank as a citizen of the state where its main office is located per its articles of incorporation, cannot coexist with American Surety. Furthermore, Wells Fargo claims that American Surety has been effectively abrogated by 12 U.S.C. § 36(g)(3)(B), which defines "home State" as the state of a national bank's main office, emphasizing that "State" is singular. The bank criticizes American Surety's reliance on a principal place of business test that was not standard for corporations at the time, citing Hertz Corp. v. Friend as a contrasting authority. Wells Fargo implicitly acknowledges Loanstar's citizenship as California but argues it should be disregarded due to alleged fraudulent joinder or because it qualifies as a nominal defendant. The bank claims Loanstar was fraudulently joined since plaintiffs have no reasonable chance of establishing a cause of action against it, suggesting that plaintiffs strategically amended their complaint to defeat diversity jurisdiction. Alternatively, Wells Fargo defines a nominal defendant and asserts that Loanstar does not meet the threshold for substantive allegations. If the court finds a lack of diversity jurisdiction, Wells Fargo requests the exercise of supplemental jurisdiction, citing prior amendments to the complaint, potential delays in state court, and resources already invested in the litigation. In response, plaintiffs argue that Schmidt would have upheld the principal place of business standard for national banks and assert that American Surety remains binding precedent, pointing to California District Court cases that have followed it post-Schmidt and noting that only one other Ninth Circuit case on this issue adhered to American Surety.
Wells Fargo's motion to dismiss addresses several claims made by the Plaintiffs, focusing on the Rosenthal Act, the Unfair Competition Law (UCL), wrongful foreclosure, and negligence.
1. **Rosenthal Act**: Wells Fargo argues that the claim fails because foreclosure-related actions do not fall under the Act's purview, citing *Reyes v. Wells Fargo Bank*. They assert that their actions were attempts to assist the Plaintiffs rather than debt collection beyond ordinary foreclosure processes. Additionally, they contend that any statements regarding the cancellation of the June 28, 2010 foreclosure sale were mere unenforceable promises under the statute of frauds, referencing *Mehta v. Wells Fargo Bank*. Wells Fargo also notes that the Plaintiffs did not specify how they would have acted differently if not for the alleged misinformation, asserting that their financial circumstances would not have allowed for foreclosure prevention.
2. **UCL**: Wells Fargo claims that the Plaintiffs’ UCL claim fails for multiple reasons: (a) damages are not available under the statute, (b) any oral representations about the foreclosure sale cancellation were unenforceable, (c) the Plaintiffs were no longer under consideration for loan modification at the time of the foreclosure, and (d) offering a forbearance agreement did not constitute a UCL violation, as the Plaintiffs did not provide contrary authority.
3. **Wrongful Foreclosure**: This claim is argued to fail based on the tender rule, referencing the court's previous order granting a motion to dismiss.
4. **Negligence**: Wells Fargo asserts that the negligence claim is based on the foreclosure occurring while considering a loan modification application, but contends that it owed no duty to the Plaintiffs as it did not exceed its role as a lender, citing *Nymark v. Heart Fed. Sav. Loan Ass’n*.
Overall, Wells Fargo seeks dismissal of all claims based on legal precedents and the nature of their actions relative to the Plaintiffs' circumstances.
Loanstar asserts immunity from liability based on its role as a trustee, citing California Civil Code sections 47 and 2924(d), and the case Kachlon v. Markowitz. The sole allegation against Loanstar involves its notification to Plaintiffs that a foreclosure sale was canceled, despite proceeding with the sale. Loanstar argues this claim is insufficient to overcome its immunity, as Plaintiffs did not allege malice. Additionally, Loanstar contends that an automated message cannot constitute valid notice of cancellation. It maintains that the actions taken were within its statutory role as a foreclosure trustee, executed in good faith based on instructions from Wells Fargo.
Regarding the Unfair Competition Law (UCL) claim, Loanstar states that it must be based on unlawful, unfair, or fraudulent conduct. It argues that Plaintiffs failed to satisfy the “fraudulent” prong due to a lack of particularity in their allegations and did not demonstrate how they were harmed by Loanstar's actions, particularly failing to express what could have prevented their foreclosure. Loanstar does not directly address the “unlawful” or “unfair” prongs but suggests that Plaintiffs did not specify the statute violated.
For the wrongful foreclosure claim, Loanstar cites the tender rule and argues that Plaintiffs lack a claim because they did not receive statutory notice of the sale's cancellation.
In opposition, Plaintiffs argue that Loanstar is not immune from liability for proceeding with the sale after canceling it, asserting that this demonstrates malice. They also claim that there is no evidence indicating that Loanstar acted in good faith based on information from Wells Fargo. Under the Rosenthal Act, Plaintiffs assert that their allegations show actions beyond ordinary foreclosure processes, including claims that a forbearance agreement forced higher payments and that Wells Fargo delayed processing a loan modification, all while incorrectly informing them about the foreclosure status.
Plaintiffs contend that Wells Fargo's reliance on the statute of frauds is misplaced, as they are not enforcing an agreement. They highlight that the term "canceled" implies that the foreclosure process would need to restart completely. Regarding their Unfair Competition Law (UCL) claim, Plaintiffs assert that their Second Amended Complaint (SAC) details "unfair" business practices and sufficiently pled "unlawful" practices based on violations of the Rosenthal Act. They argue they can seek monetary damages under the UCL and claim a loss of equity in their home, calculated as the difference between its market value and their outstanding debt to Wells Fargo. Plaintiffs maintain they are not required to demonstrate emotional distress since they are not claiming it as a separate cause of action. They also argue against Wells Fargo's claim regarding the unenforceability of oral promises, citing similar reasoning related to the Rosenthal Act. Furthermore, they assert that whether a letter to Mrs. Perez represented an attempt to grant a loan modification is a factual issue unsuitable for resolution at the motion to dismiss stage.
In their wrongful foreclosure claim, Plaintiffs argue that the tender rule does not apply since they are seeking damages, not equitable relief, and they clarify they are not trying to set aside the foreclosure. They state that requiring them to tender the loan amount would be inequitable, especially after the property has been sold to a third party. Consequently, they claim a valid wrongful foreclosure cause of action. In their negligence claim, Plaintiffs assert that Wells Fargo failed to exercise reasonable care in processing Mrs. Perez’s loan modification application, which they argue exceeds its usual role as a lender. In response, Wells Fargo counters that it did not violate the Rosenthal Act as it was under no obligation to review the loan modification or postpone the foreclosure sale.
Wells Fargo argues that its actions are regulated by nonjudicial foreclosure statutes and fall within its debt collection practices, referencing California Civil Code sections and relevant case law. It asserts that the alleged misrepresentations do not qualify as actionable under the Rosenthal Act. Regarding the Unfair Competition Law (UCL), Wells Fargo contends that the plaintiffs lack standing since the only economic injury cited is due to foreclosure from their default, not from Wells Fargo's business practices, rendering their UCL claim invalid.
For the wrongful foreclosure claim, Wells Fargo outlines three necessary elements: (1) an illegal or oppressive sale by the trustee or mortgagee, (2) prejudice or harm to the party contesting the sale, and (3) the trustor or mortgagor's tender of the secured debt or an excuse from doing so. Wells Fargo argues that the plaintiffs failed to demonstrate prejudice from alleged notice deficiencies, as they did not specify actions they would have taken with proper notice. Additionally, it asserts that the tender rule requires a valid payment offer to contest the foreclosure.
In addressing negligence, Wells Fargo references a six-factor test to assess a lender's duty of care from a cited case. It argues that key factors indicating harm and close connection are absent, emphasizing that the plaintiffs were not harmed by its simultaneous loan modification review during the foreclosure process.
Loanstar, in its response, claims that the heightened pleading standards of Federal Rule of Civil Procedure 9(b) apply to the plaintiffs' claims, which are based on alleged fraud. It contends that plaintiffs did not meet these requirements regarding a recorded message and failed to show direct damage from the message, which impedes their ability to challenge the trustee sale.
A motion to remand allows a civil action to be returned to state court if there are defects in the removal process, except for lack of subject matter jurisdiction, which must be addressed within 30 days of removal. Under 28 U.S.C. § 1441(a), a defendant can remove a case to federal court if original jurisdiction exists, either through diversity or federal question. If a federal court lacks subject matter jurisdiction at any point before final judgment, it must remand the case (28 U.S.C. § 1447(c)). Additionally, if federal claims that justified removal are dismissed, the court may choose not to exercise supplemental jurisdiction over related state law claims, although it retains discretion to do so (28 U.S.C. § 1367(a)). Courts must weigh factors such as judicial economy and fairness when deciding on supplemental jurisdiction. Federal question jurisdiction exists when a federal issue is evident in the plaintiff's complaint (28 U.S.C. § 1331).
Diversity jurisdiction in federal court requires complete diversity of citizenship among parties and an amount in controversy exceeding $75,000, as outlined in 28 U.S.C. § 1332(a). An exception exists for cases where a non-diverse defendant is considered to have been fraudulently joined, meaning their presence in the lawsuit can be disregarded for diversity purposes if the plaintiff fails to state a legitimate cause of action against them, which must be evident based on state law. District courts have ruled that remand is not appropriate if the complaint can potentially be amended to state a cause of action against the allegedly fraudulently joined defendant.
Defendants can provide evidence to demonstrate fraudulent joinder. In evaluating diversity, federal courts are instructed to ignore nominal parties—those without a genuine interest in the case—and rely solely on the citizenship of real parties. Nominal parties typically include individuals joined solely for procedural purposes, such as trustees acting in a ministerial capacity. However, trustees may not be considered nominal defendants if substantive claims for damages are made against them.
California Civil Code § 2924(d) provides that a trustee's performance of statutory duties is protected as a privileged communication under § 47, which allows for communications made without malice to interested parties. Malice is defined as actions motivated by hatred or ill will or lacking reasonable grounds for belief in the truth of the communication, thus acting with reckless disregard for the plaintiff's rights.
Trustees under Section 2924(b) are granted a privilege that protects them from liability for good faith errors based on information provided by beneficiaries regarding defaults on secured obligations. The Unfair Competition Law (UCL) prohibits any unlawful, unfair, or fraudulent business practices, allowing claims from individuals who suffer economic injury as a result. To establish standing under the UCL, a plaintiff must demonstrate (1) a loss of money qualifying as injury in fact and (2) that this loss was caused by the unfair business practice in question.
A violation of the UCL can be claimed through one of three prongs: (1) an “unlawful” act requires a factual basis showing an underlying legal violation; (2) a “fraudulent” act necessitates that the practice is likely to deceive the public; and (3) while the definition of “unfair” practices lacks a definitive standard, California courts have applied three tests. One of these tests demands that the unfair practice be connected to specific constitutional, statutory, or regulatory provisions. Additionally, UCL claims based on fraudulent conduct must adhere to the heightened pleading standard of Federal Rule 9(b).
A test for determining the legality of a business practice evaluates whether it is "immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers." This test requires courts to balance the utility of the defendant's actions against the harm caused to the victim. A separate test, based on the Federal Trade Commission Act, specifies that for a practice to be deemed unfair, the consumer injury must be substantial, not outweighed by benefits, and unavoidable by consumers. Relief under the Unfair Competition Law (UCL) is equitable and does not allow for damages.
Regarding jurisdiction, the court had subject matter jurisdiction due to the plaintiffs' initial claim under the Truth in Lending Act (TILA), but after dismissing this claim, the federal question jurisdiction was lost as the plaintiffs did not include it in subsequent amended complaints. As complete diversity is lacking—both parties being citizens of California—only supplemental jurisdiction remains, which the court chooses not to exercise. The plaintiffs’ motion for remand is granted.
The plaintiffs allege violations of the UCL and wrongful foreclosure against Loanstar, seeking damages for lost equity, personal property, and emotional distress due to a miscommunication regarding a property sale. Loanstar's involvement is not nominal or fraudulent; it is central to the plaintiffs' claims.
Plaintiffs have sufficiently stated a claim against Loanstar, as it is not evidently protected from liability under California Civil Code sections 2924(b) and 2924(d). On June 26, 2010, Loanstar allegedly sent an automated message falsely indicating that a scheduled sale on June 28, 2010, was canceled, which may demonstrate malice by showing Loanstar’s lack of reasonable belief regarding the cancellation. Even if the claims might be dismissed based on these privileges, Wells Fargo has not proven that Plaintiffs cannot amend their allegations to meet necessary legal standards.
Additionally, Plaintiffs’ claim against Loanstar for violating the Unfair Competition Law (UCL) remains viable. They contend that Loanstar’s misleading message dissuaded potential buyers, contributing to a sale price below market value—Wells Fargo purchased the property for $617,053.01 while the mortgage owed was $618,243.01, and the fair market value was $740,000. This situation presents a plausible economic injury to Plaintiffs.
Loanstar’s actions may also satisfy the unfairness criteria under the UCL, as the inaccurate message could harm consumers by lowering sale prices and undermining the notice requirements of California Civil Code section 2924f. Furthermore, Plaintiffs seek injunctive relief under the UCL, which remains an option against Loanstar.
Wells Fargo has not established that Plaintiffs’ claims against Loanstar are obviously deficient or that Loanstar is a nominal defendant; both are California citizens, negating diversity jurisdiction. The Court has determined that remanding the case aligns with principles of judicial economy, convenience, fairness, and comity, given the case's history and the progression of pleadings and discovery over the past year and a half.
The Second Amended Complaint (SAC) introduces new factual allegations and different causes of action compared to the Plaintiffs' earlier complaints. Defendants have filed motions to dismiss the SAC, but the Court has yet to rule on them. The trial date is not imminent, and the Court has not conducted significant legal analysis on the SAC, suggesting that remanding to state court would not negatively impact judicial economy. The SAC is based entirely on California law, favoring remand due to principles of comity. Wells Fargo has not demonstrated any inconvenience in shifting the case to the San Mateo County Superior Court, which is only 26.5 miles away. Although Wells Fargo contends that remand may prolong the case as they would need to demur in state court, this assumption hinges on the success of their motions to dismiss. The state court is expected to provide a fair proceeding, making the fairness factor neutral regarding remand. Weighing the interests of judicial economy, comity, fairness, and convenience, the Court grants the Plaintiffs’ Motion to Remand. Consequently, the Court does not address the Motions to Dismiss, which are denied without prejudice. The parties have consented to the jurisdiction of a United States Magistrate Judge. The SAC includes two paragraphs numbered 45, referring to the second one. Loanstar did not oppose the Motion to Remand, and Wells Fargo did not claim federal question jurisdiction. Loanstar, being a single-member LLC with its sole member as a California corporation, is considered a citizen of California. The timing of the SAC filing and the Motion to Remand is noted by Wells Fargo, as is Loanstar's absence from the first amended complaint; however, these points do not affect the decision, especially since the SAC was submitted by different counsel and presents new allegations regarding Loanstar's involvement.
