Judge: Armen Tamzarian, Case: 21STCV38565, Date: 2023-01-10 Tentative Ruling

Case Number: 21STCV38565    Hearing Date: January 10, 2023    Dept: 52

Defendants New Residential Mortgage LLC and Deutsche Bank National Trust Company’s Demurrer to Second Amended Complaint        

Defendants New Residential Mortgage LLC and Deutsche Bank National Trust Company demur to the third amended complaint of plaintiffs Kenya Portillo, as administrator of the Estate of Hector Portillo, and Kenya Portillo, as an individual.

The third amended complaint alleges the following causes of action, numbered 1-5 in the caption but not numbered consecutively in the body:

1 (caption)/1 (body): Violation of Civil Code § 2923.5 (pre-default notice)

2/4: Violation of Civil Code § 2923.7 (single point of contact)

3/6: Violation of Civil Code § 2924.10 (notice of receipt of application to modify loan)

4/7. Unfair business practices

5/8. Cancellation of instruments

            The court’s order refers to the causes of action by their consecutive numbers as in the caption.

1st Cause of Action: Civil Code § 2923.5

            Plaintiffs fail to allege sufficient facts for the first cause of action.  Civil Code section 2923.5 requires a mortgage servicer to “contact the borrower in person or by telephone in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure” (Civ. Code, § 2923.5(a)(2)) before recording a notice of default.  Plaintiffs allege defendants recorded a notice of default without first contacting them to assess the borrower’s financial situation and explore ways to avoid foreclosure.  (3AC, ¶¶ 31-32.)

This cause of action, however, requires a “material violation” of the homeowner’s bill of rights.  (Civ. Code, § 2924.19(a)(1) & (b).)  Furthermore, “[a] mortgage servicer, mortgagee, beneficiary, or authorized agent shall not be liable for any violation that it has corrected and remedied prior to the recordation of the trustee’s deed upon sale.”  (Civ. Code, § 2924.19(c).)

“A material violation is one that affected the borrower’s loan obligations, disrupted the borrower’s loan-modification process, or otherwise harmed the borrower.”  (Billesbach v. Specialized Loan Servicing LLC (2021) 63 Cal.App.5th 830, 837 (Billesbach).)  “Absent any meaningful harm to” the borrower, the defendants’ “uncured violations [a]re not material.”  (Id. at p. 846.)  Examples of immaterial violations include “failure to initiate contact” when the “borrower had opportunity to discuss financial situation and foreclosure alternatives” (id. at p. 845) and dual-tracking when later remedied by properly evaluating and acting on a pending loan-modification application (id. at pp. 846-847). 

In Billesbach, after the plaintiff sued, the mortgage servicer “postponed the foreclosure sale, provided [him] with a single point of contact, communicated with him about foreclosure alternatives, reviewed his loan-modification application, and ultimately offered him a trial-period modification plan.  [Fn.]  These curative measures satisfied the HBOR’s purpose to ensure that borrowers have a meaningful opportunity to obtain loss-mitigation options.”  (Billesbach, supra, 63 Cal.App.5th at p. 846.)  “[W]hen an otherwise valid notice is recorded in violation of the HBOR’s requirements, the notice is not void, and the violation may be cured without recording a new notice.”  (Ibid.)

Plaintiffs allege the notice of default and election to sell was recorded on July 16, 2018.  (3AC, ¶ 15, Ex. D.)  Plaintiffs allege defendants “failed to send any written notifications in respect to any foreclosure alternatives before recording a Notice of Default.”  (Id., ¶ 31.)  If that failure to provide notice resulted in a material violation (and was not cured), it would be an actionable violation of Civil Code section 2923.5. 

But no notice of trustee’s sale was recorded until September 2, 2021.  (3AC, ¶ 16, Ex. E.)  Then, plaintiffs submitted a complete loan modification application on September 29, 2021.  (Id., ¶ 17, Ex. F.)  On October 5, 2021, an agent for New Residential Mortgage, LLC “advised that the loan modification application file is in review.”  (Id., ¶ 21.)  Thus, the alleged violation occurred three years before defendants attempted to sell the property via nonjudicial foreclosure.  Defendants then reviewed the loan modification application.  Plaintiffs allege no further efforts toward nonjudicial foreclosure since October 5, 2021. 

As in Billesbach, defendants have given plaintiffs a meaningful opportunity at mitigating their losses.  Defendants’ conduct both rendered any violation immaterial and effectively corrected and remedied any violation prior to recording the trustee’s deed upon sale.

In the opposition, plaintiffs argue New Residential Mortgage “caused damages to Plaintiffs in that Plaintiffs had to pay additional interest & late charges, and fees, and will ultimately lose their home.”  (Opp., p. 3.)  Of those things, the third amended complaint alleges only that plaintiffs “incurred additional and unnecessary late penalties.”  (3AC, ¶ 65.)  Plaintiffs do not argue or establish that doing so would constitute a “material violation,” which is the relevant standard under the HBOR. 

And assuming plaintiffs “will ultimately lose their home,” that is not enough.  Plaintiffs must allege facts showing causation: that they will lose their home because defendants failed to write to them before recording the notice of default in 2018—now over four years ago. 

2nd Cause of Action (Civ. Code, § 2924.7) and 3rd Cause of Action (Civ. Code, § 2924.10)

Plaintiffs cannot bring the second and third causes of action because the court already sustained demurrers to them without leave to amend.  Defendants New Residential Mortgage LLC and Deutsche Bank National Trust Company demurred to the entire second amended complaint, including its third cause of action for violation of Civil Code § 2923.7 and fifth cause of action for violation of Civil Code § 2924.10.  On October 6, 2022, the court sustained the demurrer to those third and fifth causes of action without leave to amend.  (Minute order, p. 6.) 

Plaintiffs’ third amended complaint, however, alleges the same two causes of action again—but numbered differently.  A plaintiff cannot simply renumber the same causes of action after the court sustained a demurrer to them without leave to amend. 

4th Cause of Action: Unfair Business Practices

            Plaintiffs allege sufficient facts for this cause of action.  “Unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice.”  (Bus. & Prof. Code, § 17200.)  “[U]nlawful, unfair, or fraudulent” acts are three separate types of violation.  (Drum v. San Fernando Valley Bar Assn. (2010) 182 Cal.App.4th 247, 253.) 

            Plaintiffs allege sufficient facts for an unlawful business practice.  The law “covers a wide range of conduct” and “embraces anything that can properly be called a business practice and that at the same time is forbidden by law.”  (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1143, internal quotes and citations omitted.)  The statute “ ‘borrows’ violations from other laws by making them independently actionable as unfair competitive practices.”  (Ibid.) 

Though plaintiffs do not allege an actionable violation of Civil Code section 2923.5, they allege a violation.  They allege New Residential Mortgage, LLC and Deutsche Bank recorded a notice of default without first contacting them to assess their financial situation and explore options for the borrower to avoid foreclosure.  (3AC, ¶¶ 29-32.)  Assuming the allegations are true, that was unlawful.

Plaintiffs also allege sufficient facts under the fraudulent prong of the unfair competition law.  For that prong, “[t]he test is whether the public is likely to be deceived.” (Prata v. Superior Court (2001) 91 Cal.App.4th 1128, 1146.)  Plaintiffs  allege the declaration of compliance attached to the notice of default (3AC, Ex. D, p. 4) is a lie.  That declaration claims that the servicer contacted the borrower at least 30 days before recording the notice—which plaintiffs allege never occurred.  (3AC, ¶¶ 29-32.)  The public would likely be deceived when a mortgage servicer’s employee signs a false declaration of compliance with the HBOR.

            Plaintiffs allege sufficient facts for standing.  A plaintiff must be “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.)  “[T]o bring a UCL action, a private plaintiff must be able to show economic injury caused by unfair competition.”  (Zhang v. Superior Court (2013) 57 Cal.4th 364, 372.)  “There are innumerable ways in which economic injury from unfair competition may be shown.  A plaintiff may (1) surrender in a transaction more, or acquire in a transaction less, than he or she otherwise would have; (2) have a present or future property interest diminished; (3) be deprived of money or property to which he or she has a cognizable claim; or (4) be required to enter into a transaction, costing money or property, that would otherwise have been unnecessary.”  (Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 323.)

            Plaintiffs allege, “As a consequence of the Defendant’s practice in this regard,” i.e., not following procedures required under HBOR, “Plaintiff suffered damages by (1) spending numerous hours and resources in providing NEW RES AND DBNTC with updated financial documents that was pointless (2) loss of income due to borrower’s loss of hours at work in order to facilitate NEW RES AND DBNTC’s repetitive request for unnecessary documents, (3) incurred additional and unnecessary late penalties; (4) higher arrears that are no longer affordable to Plaintiff.”  (3AC, ¶ 65.)

            Incurring unnecessary late penalties and higher arrears is an economic injury.  That injury constitutes diminishing a present property interest, depriving plaintiffs of money to which they have cognizable claims, and making the transaction (their loan) cost more money than it otherwise would have. 

When liberally construed, the third amended complaint adequately alleges causation.  It alleges defendants failed to contact them about options to avoid foreclosure before requiring the notice of default in 2018.  One can infer that, had defendants contacted them as required, plaintiffs could have done something between 2018 and 2021 to avoid the late penalties and higher arrears they incurred.

5th Cause of Action: Cancellation of Written Instruments

            Plaintiffs fail to allege sufficient facts for this cause of action.  “A written instrument, in respect to which there is a reasonable apprehension that if left outstanding it may cause serious injury to a person against whom it is void or voidable, may, upon his application, be so adjudged, and ordered to be delivered up or canceled.”  (Civ. Code, § 3412.)  Cancellation requires: “(1) the instrument is void or voidable due to, for example, fraud; and (2) there is a reasonable apprehension of serious injury including pecuniary loss or the prejudicial alteration of one's position.”  (U.S. Bank National Assn. v. Naifeh (2016) 1 Cal.App.5th 767, 778.) 

Plaintiffs seek to cancel the notice of default recorded in 2018 and the notice of trustee’s sale recorded in 2021.  They fail to allege any basis under which those instruments are void or voidable.  They allege defendants violated the HBOR’s requirement of contacting the borrower before recording a notice of default.  But that does not make either of the notices void or voidable.  “[W]hen an otherwise valid notice is recorded in violation of the HBOR’s requirements, the notice is not void, and the violation may be cured without recording a new notice.”  (Billesbach, supra, 63 Cal.App.5th at p. 846.)  As discussed above, any HBOR violation resulting in the recording of the notice of default or notice of trustee’s sale was not material and was remedied or cured.

In the opposition, plaintiffs argue the instruments should be cancelled because otherwise “entities without any actual interest will move to foreclose their home.”  (Opp., p. 10.)  The third amended complaint does not allege defendants have no actual interest in the property.  The attached exhibits show that, via an assignment from the previous trustee, Deutsche Bank acquired an interest in the deed of trust secured by the property.  (3AC, Ex. D.)

Leave to Amend

            After a successful demurrer, where “there is a reasonable possibility that the defects can be cured by amendment, leave to amend must be granted.”  (Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 601.)  The plaintiff bears the burden of “demonstrat[ing] how the complaint can be amended.”  (Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal.App.4th 700, 711.)  “Leave to amend should be denied where the facts are not in dispute and the nature of the claim is clear, but no liability exists under substantive law.”  (Lawrence v. Bank of America (1985) 163 Cal.App.3d 431, 436.)

            As discussed above, the court already sustained demurrers without leave to amend to what are now numbered the second and third causes of action.   

            Plaintiffs show no reasonable possibility of amending the complaint to cure the first or fifth causes of action.  Plaintiffs already amended the complaint three times.  They allege defendants reviewed their completed loan modification application.  They allege no violation of the HBOR that defendants did not cure by reviewing that application.  As in Billesbach, the “curative measures satisfied the HBOR’s purpose to ensure that borrowers have a meaningful opportunity to obtain loss-mitigation options.”  (Billesbach, supra, 63 Cal.App.5th at p. 846.)  Plaintiffs do not show any possibility of establishing the instruments they seek to cancel are void or voidable as required for cancellation.

Disposition

            Defendants New Residential Mortgage LLC’s and Deutsche Bank National Trust Company’s demurrers to the first, second, third, and fifth causes of action are sustained without leave to amend.  The demurrer to the fourth cause of action is overruled.

Defendants New Residential Mortgage LLC and Deutsche Bank National Trust Company are ordered to answer within 20 days.