Judge: Mel Red Recana, Case: 23STCV17914, Date: 2024-06-27 Tentative Ruling

Case Number: 23STCV17914    Hearing Date: June 27, 2024    Dept: 45

Superior Court of California

County of Los Angeles

Hearing date:              June 27, 2024

Moving Party:             Defendant Axos Bank, S&L

Responding Party:      Plaintiff Ruth Ann Isaacs Hamilton

(1)   Defendant Axos Bank’s Demurrer to Plaintiff’s First Amended Complaint

(2)   Defendant Axos Bank’s Motion to Strike Plaintiff’s First Amended Complaint

The court has considered the moving, opposition, and reply papers.

The court SUSTAINS Axos Bank’s Demurrer to the fifth and sixth causes of action of the First Amended Complaint, with 20 days’ leave to amend.

The Court DENIES Axos Bank’s Motion to Strike as to paragraphs 47, 63, 64, and 68 of the First Amended Complaint, and as to paragraphs 3, 4, and 5 of the prayer for relief on page 16 of the First Amended Complaint. The Court GRANTS the Motion to Strike as to paragraph 83, and as to paragraph 6 of the prayer for relief on page 16 of the First Amended Complaint, with 20 days’ leave to amend.

Background

            Plaintiff Ruth Ann Isaacs Hamilton (Plaintiff) filed this action on July 31, 2023, against defendants Axos Bank, S& L (Axos Bank), 4505 Santa Rosalia Lender LLC (4505) (collectively, Defendants), and Does 1 through 100, alleging causes of action for (1) Violation of California Civil Code sections 1671 et seq.; (2) Elder Abuse (Elder Adult and Dependent Adult Civil Protection Act – Welf. & Inst. Code §§ 15600, et seq.); (3) Negligence; (4) Negligent Infliction of Emotional Distress; (5) Conversion; (6) Unfair Competition; and (7) Breach of Contract. On December 11, 2023, Plaintiff filed the operative First Amended Complaint (FAC) against the same Defendants, alleging causes of action for (1) Violation of California Civil Code section 1671; (2) Elder Abuse (Elder Adult and Dependent Adult Civil Protection Act – Welf. & Inst. Code §§ 15600, et seq.); (3) Conversion; (4) Unfair Competition; (5) Breach of Contract; and (6) Violation of Cal. Penal Code § 496. This dispute arises out of Defendants’ alleged misconduct in connection with a certain loan agreement and real property. (FAC, ¶¶ 1-4.) Plaintiff alleges that Defendants improperly assessed Plaintiff for late charges, default judgment interest rates, and other penalties in connection with the subject loan agreement. (Id., at ¶¶ 17-20.)

            On January 25, 2024, Axos Bank demurred to and moved to strike the FAC. On February 20, 2024, Plaintiff opposed the demurrer and motion to strike. On February 26, 2024, Axos Bank replied to both oppositions. On June 11, 2024, Plaintiff filed a sur-reply.

Legal Standard – Axos Bank’s Demurrer to the First Amended Complaint

When considering demurrers, courts read the allegations liberally and in context. (Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 Cal.App.4th 1216, 1228 (Taylor).) “A demurrer tests the pleadings alone and not the evidence or other extrinsic matters. Therefore, it lies only where the defects appear on the face of the pleading or are judicially noticed.” (SKF Farms v. Superior Court (1984) 153 Cal.App.3d 902, 905.) “The only issue involved in a demurrer hearing is whether the complaint, as it stands, unconnected with extraneous matters, states a cause of action.” (Hahn v. Mirda (2007) 147 Cal.App.4th 740, 747.)

Discussion – Axos Bank’s Demurrer to the First Amended Complaint

            Request for Judicial Notice

            The court DENIES Axos Bank’s request for judicial notice, as the court does not rely on that document in reaching its decision herein.

Meet and Confer – Axos Bank’s Demurrer to the First Amended Complaint

            Per Code of Civil Procedure section 430.41, subdivision (a), the parties are required to meet and confer in person, by telephone, or by video conference before filing a demurrer. (Code Civ. Proc., § 430.41, subd. (a).) Axos Bank indicates having met and conferred with Plaintiff by telephone, but the parties were unable to resolve the issues raised. (Fink Decl., ¶¶ 3-4.) The court finds this sufficient.

Defendant Axos Bank’s Demurrer to the First Amended Complaint

Defendant Axos Bank demurs to the first, second, third, fourth, fifth, and sixth causes of action in the FAC on the grounds that they fail to state a cause of action. (Code Civ. Proc., § 430.10, subd. (e).)

First Cause of Action – Violation of California Civil Code section 1671

Axos Bank contends the first cause of action fails because the FAC fails to plead any facts to establish that the 18% default interest rate was unreasonable under the circumstances existing at the time the contract was made.[1]

“[A] provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” (Civ. Code, § 1671, subd. (b).)

Here, the FAC alleges that Axos Bank improperly charged Plaintiff an 18% default interest rate on the subject loan agreement following an initial default in December 2021. (FAC, ¶ 21.) The FAC alleges that Plaintiff received a demand statement on May 20, 2022, itemizing the amount required to reinstate the loan, which included the 18% default interest rate and additional charges of approximately $12,558.37, which bore no reasonable relationship to the actual damages resulting from the default. (FAC, ¶ 25.) The FAC alleges that even after Plaintiff reinstated the loan, Axos Bank again shortly thereafter reinstated the 18% default interest rate. (FAC, ¶ 30.)

The court finds that the FAC alleges sufficient facts to state a claim for violation of Civil Code section 1671, subdivision (b). The Court of Appeal in Honchariw v. FJM Private Mortgage Fund, LLC (2022) 83 Cal.App.5th 893 held that a default interest charge imposed against the entire unpaid principal loan balance following a single default constituted an unlawful penalty. (Id., at p. 906.) The FAC appears to allege a similar type of charge here. (See FAC, ¶¶ 2-3, 24, 41, 67.) The court does find that the FAC is not entirely clear as to whether the default interest was allegedly charged against the entire unpaid principal balance, but at the pleading stage, the court liberally construes ambiguous allegations in favor of Plaintiff. (See Code Civ. Proc., § 452 [“In the construction of a pleading, for the purpose of determining its effect, its allegations must be liberally construed, with a view to substantial justice between the parties.”]; Taylor, supra, 144 Cal.App.4th at p. 1228.)

The court therefore OVERRULES Axos Bank’s demurrer to the first cause of action.

Second Cause of Action – Elder Abuse

Axos Bank contends the FAC fails to state sufficient facts for an elder abuse claim because it alleges that Plaintiff did not turn 65 until January 30, 2023 and that Axos Bank transferred all of its interest in the loan to Defendant 4505 less than two months later, having no further involvement with the loan. Axos Bank contends the FAC does not allege Axos Bank engaged in any acts constituting financial elder abuse between January 30, 2023 and March 21, 2023, and otherwise fails to allege facts with the requisite specificity. Axos Bank contends it is not a violation to sell the loan, and the FAC alleges Axos Bank had the discretion as to how it would use the $90,000 reserve. Axos Bank also contends financial elder abuse in the banking context is limited to transactions that the bank actually knew were assisting the customer in committing a specific tort, and that Plaintiff does not contend she actually paid the allegedly improper charges.

Financial elder abuse occurs when a person takes the property of an elder for a wrongful use or with intent to defraud or by undue influence. (See Welf. & Inst. Code, § 15610.30, subd. (a).) A person is deemed to have taken the property when he or she has deprived an elder of any property right. (See Id., § 15610.30(c).) Although bad faith or intent to defraud is no longer required, wrongful use of property must still be alleged. (Stebley v. Litton Loan Servicing, LLP (2011) 202 Cal.App.4th 522, 527-28.) “A person . . . shall be deemed to have taken . . . property for a wrongful use if . . . the person . . . takes . . . the property and the person . . . knew or should have known that this conduct is likely to be harmful to the elder . . . .” (Id., § 15610.30, subd. (b).) Elder abuse claims are statutory causes of action and therefore must be pleaded with particularity. (See Covenant Care, Inc. v. Superior Court (2004) 32 Cal.4th 771, 790, citing Lopez v. Southern Cal. Rapid Trans. Dist. (1985) 40 Cal.3d 780, 795.)

Here, the FAC alleges that Plaintiff turned 65 years old on January 30, 2023. (FAC, ¶ 35.) The FAC alleges that Axos Bank continued to improperly assess the allegedly illegal default interest charges against Plaintiff in February and March 2023. (FAC, ¶ 36.) The FAC then alleges that Plaintiff paid off all of these allegedly improper default interest charges, and other penalties and late charges, in April 2023. (FAC, ¶ 39.) The court finds these allegations sufficient to allege that Axos Bank knew or should have known its actions would likely harm Plaintiff and therefore states a cause of action for financial elder abuse.

The court therefore OVERRULES Defendant 4505’s demurrer to the second cause of action.

Third Cause of Action – Conversion

Axos Bank contends the third cause of action for conversion fails to state a claim because conversion claims cannot be based on money unless a specific, identifiable sums is involved, and even then, requires allegations of the plaintiff’s ownership or right of possession. Axos Bank contends that to the extent Plaintiff paid any money to Axos Bank, she did so intentionally so, and cannot make a conversion claim based on having been allegedly overcharged. Axos Bank contends Plaintiff made these payments per the loan agreement, and no court has ever declared such a default interest payment an unlawful penalty.

“’A cause of action for conversion requires allegations of plaintiff's ownership or right to possession of property; defendant's wrongful act toward or disposition of the property, interfering with plaintiff's possession; and damage to plaintiff. [Citation.] Money cannot be the subject of a cause of action for conversion unless there is a specific, identifiable sum involved, such as where an agent accepts a sum of money to be paid to another and fails to make the payment.’ [Citation.]” (PCO, Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP (2007) 150 Cal.App.4th 384, 395.)

Here, the FAC alleges that Defendants took Plaintiff’s money by imposing an illegal default interest rate and other improper charges, which she paid to avoid foreclosure on her property. (FAC, ¶¶ 20-40.) The FAC also alleges a specific identifiable sum of $237,038.59. (FAC, ¶ 67.) The court further finds Axos Bank’s citation to McKell v. Washington Mutual, Inc. (2006) 142 Cal.App.4th 1457 to be unavailing, as the FAC does not allege Plaintiff was being overcharged, but instead that she was being charged illegally. (See Id., at pp. 1491-1492; FAC, ¶¶ 21-40.) The court finds FAC alleges sufficient facts to state a cause of action for conversion.

The court therefore OVERRULES the demurrer to the third cause of action.

            Fourth Cause of Action – Unfair Competition

            Axos Bank contends the FAC fails to state a cause of action for unfair competition because it fails to allege unfair, fraudulent, or unlawful business practices. Axos Bank contends the default interest provision was not illegal or invalid and was clearly disclosed in the loan documents Plaintiff signed. Axos Bank contends Plaintiff cannot allege any consumer injury since this was a business loan and Plaintiff did not allege any conduct that could be found to significantly threaten or harm competition. Axos Bank further contends there are no allegations that any statements were disseminated to the public upon which reasonable consumers were likely to be decided or any fraudulent misrepresentations in the loan documents, which clearly disclosed the default interest provision at issue. Axos Bank also contends it is not vicariously liable for any violations of Business and Professions Code section 17200.

“As used in this chapter, unfair competition shall mean and include 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) of Part 3 of Division 7 of the Business and Professions Code.” Bus. & Prof. Code, § 17200. “The UCL prohibits any unfair, unlawful, or fraudulent business act or practice. [Citation.] Only the first two types of practices are at issue here. A practice is unlawful under the UCL where it violates a predicate law.” (CADC/RADC Venture 2011-1 LLC v. Bradley (2015) 235 Cal.App.4th 775, 792-793.) “An ‘unlawful’ business practice or act within the meaning of the UCL ‘is an act or practice, committed pursuant to business activity, that is at the same time forbidden by law. [Citation.]” Bernardo v. Planned Parenthood Fed'n of Am. (2004) 115 Cal.App.4th 322, 351 (Bernardo), italics in original.)

Here, the FAC alleges that Defendants charged Plaintiff illegal default interest rates, imposed other improper charges under the loan, and otherwise forced Plaintiff to incur various expenses to avoid foreclosure of her real property. (FAC, ¶¶ 21-40.) The FAC alleges predicate laws such as Civil Code section 1671 for liquidated damages and Welfare and Institutions Code section 15610.30, subdivision (a), for financial elder abuse. (FAC, ¶¶ 42-64.) Whether these actions constituted unfair or fraudulent business practices is a question of fact revolving around the question of whether the public is likely to be deceived. (Daro v. Superior Ct. (2007) 151 Cal.App.4th 1079, 1099 fn. 9.) The court finds the FAC alleges sufficient facts demonstrating unlawful, unfair, or fraudulent business practices for purposes of an unfair competition claim.

The court therefore OVERRULES the demurrer to the fourth cause of action.

Fifth Cause of Action – Breach of Contract

Axos Bank demurs to the fifth cause of action for breach of contract on the grounds that it fails to state a cause of action. Axos Bank contends the FAC does not identify any provision of the loan which it has breached. Axos Bank contends the thrust of this action is that the loan includes a provision allowing Axos Bank to charge default interest, purportedly in violation of Civil Code section 1671, subdivision (b). Axos Bank also contends this claim cannot be based on the holding back of the $90,000 reserve since the FAC alleges that the disposition of that money is within Axos Bank’s sole discretion. Axos Bank further contends that any arguments based on the implied duty of good faith and fair dealing also fail because it does not impose duties beyond the terms of the contract and cannot contradict the express terms of the contract.

The elements of a cause of action for breach of contract are, “’(1) the existence of the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to the plaintiff.’ [Citations.]” (D'Arrigo Bros. of California v. United Farmworkers of Am. (2014) 224 Cal.App.4th 790, 800.)

Here, the FAC alleges breach of contract against Defendants based on their alleged improper enforcement of the loan, namely, the improper charges and amounts collected thereunder. (FAC, ¶ 75.) The court finds this insufficient to state a cause of action for breach of contract. The FAC contains no allegations indicating that Defendants failed to perform as promised. Instead, the FAC alleges that Defendants enforced illegal provisions of the loan. (See FAC, ¶¶ 74-79.) Moreover, although not directly addressed by the parties’ respective briefs, the court notes that if these terms are illegal as Plaintiff alleges, then they are not enforceable. (Agam v. Gavra (2015) 236 Cal.App.4th 91, 112 [“[I]llegal contracts are not enforceable.”])

The court further agrees with Axos Bank that the implied duty of good faith and fair dealing cannot be used to contradict the express terms of the contract. (See Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (1992) 100 Cal.App.4th, 44, 55.) If the loan provides Axos Bank the right to charge the disputed default interest rate, the implied duty of good faith and fair dealing cannot require a different result.

The court therefore SUSTAINS the demurrer to the fifth cause of action, with 20 days’ leave to amend.

            Sixth Cause of Action – Violation of Penal Code § 496

            Axos Bank demurs to the sixth cause of action on the grounds that it fails to state a cause of action. Axos Bank contends this cause of action fails because the charging of money per the terms of the contract is not a theft under Penal Code section 496, subdivision (c). Axos Bank contends the interest and fees could not have been stolen since they were part of the terms of the loan, especially since Plaintiff paid those funds to Axos Bank. Axos Bank therefore could not have known those funds were stolen.

“The language of section 496(c) is clear and unambiguous. A criminal conviction is not a prerequisite to recovery of treble damages. All that is required for civil liability to attach under section 496(c), including entitlement to treble damages, is that a ‘violation’ of subdivision (a) or (b) of section 496 is found to have occurred. A violation may be found to have occurred if the person engaged in the conduct described in the statute. While section 496(a) covers a spectrum of impermissible activity relating to stolen property, the elements required to show a violation of section 496(a) are simply that (i) property was stolen or obtained in a manner constituting theft, (ii) the defendant knew the property was so stolen or obtained, and (iii) the defendant received or had possession of the stolen property.” (Switzer v. Wood, supra, 35 Cal.App.5th 116, 126 (Switzer), internal citations omitted.)

            Here, the FAC alleges that Axos Bank’s wrongful charges under the loan constitute theft for purposes of Penal Code section 496. (FAC, ¶ 81.) The court finds this insufficient. The FAC contains no allegations indicating that Axos Bank stole Plaintiff’s money from her. It is one thing to allege that the loan agreement contains illegal provisions, but that does not necessarily equate to theft, and Plaintiff provided no authority showing that enforcement of an illegal loan agreement equates to theft for purposes of Penal Code section 496. The Switzer case involved an LLC member who took large sums of money belonging to the plaintiff and/or to the LLC, such as selling inventory and keeping the profits to himself. (Switzer, supra, 35 Cal.App.5th at p. 126.) This case is simply a dispute over the terms of the loan agreement.

            The court therefore SUSTAINS the demurrer to the sixth cause of action, with 20 days’ leave to amend.

Legal Standard – Axos Bank’s Motion to Strike Plaintiff’s First Amended Complaint

“Any party, within the time allowed to respond to a pleading may serve and file a notice of motion to strike the whole or any part thereof, but this time limitation shall not apply to motions specified in subdivision (e).” (Code Civ. Proc., § 435, subd. (b)(2).) “The court may, upon a motion made pursuant to Section 435, or at any time in its discretion, and upon terms it deems proper: (a) Strike out any irrelevant, false, or improper matter inserted in any pleading. (b) Strike out all or any part of any pleading not drawn or filed in conformity with the laws of this state, a court rule, or an order of the court.” (Id., § 436.)

Discussion – Axos Bank’s Motion to Strike Plaintiff’s First Amended Complaint

Meet and Confer – Axos Bank’s Motion to Strike the First Amended Complaint

            Per Code of Civil Procedure section 435.5, subdivision (a), the parties are required to meet and confer in person, by telephone, or by video conference before filing a motion to strike. (Code Civ. Proc., § 435.5, subd. (a).) The court notes that Defendant 4505 submitted Judicial Council Form CIV-140, i.e., Declaration of Demurring or Moving Party Regarding Meet and Confer, which indicates that 4505 was unsuccessful in getting Plaintiff to meet and confer in good faith. (Milligan Decl., ¶ 2, subd. (b).) The court finds this sufficient.

            Axos Bank’s Motion to Strike the First Amended Complaint

            Penalties Under Civil Code Section 1671

            Axos Bank contends that Civil Code section 1671, subdivision (b), does not provide for a damages remedy, and that paragraph 47 of the FAC should therefore be stricken.

“[T]he common law as codified by section 1671, subdivision (d), permits a consumer to seek monetary relief, both offensively and defensively, from liquidated damages.” (Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1400-1401 (Beasley).)

            Here, Axos Bank’s argument is directly contradicted by Beasley. Additionally, given the court overruling the demurrer to the first cause of action, the FAC has alleged sufficient facts to support this request for damages. (See FAC, ¶¶ 42-47.)

            The court therefore DENIES the motion to strike as to paragraph 47 of the FAC.

Punitive Damages

            A claim for punitive damages is subject to a motion to strike when the allegations fail to rise to the level of malice, oppression, or fraud necessary under Civil Code section 3294. (Turman v. Turning Point of Central California, Inc. (2010) 191 Cal.App.4th 53, 64.) “There is no question that punitive damages may be recovered in an action for conversion. [Citations.] Punitive damages are recoverable, however, only upon a showing of malice, fraud or oppression.” (Krusi v. Bear, Stearns & Co. (1983) 144 Cal.App.3d 664, 678.) Punitive damages are also available for elder abuse claims. (Welf. & Inst. Code, § 15657.5, subd. (d).)

Given the court overruling the demurrer to the second cause of action for elder abuse and third cause of action for conversion, the court finds the FAC alleges a basis for seeking punitive damages and that it alleges sufficient facts for punitive damages at the pleading stage. (See FAC, ¶¶ 48-68; Civ. Code, § 3294, subd. (b)(2) [“’Oppression’ means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.”])

 The court therefore DENIES the motion to strike with respect to paragraphs 63 and 68 of the FAC, and with respect to the prayer for punitive damages on page 16, paragraph 3, of the FAC.

Attorney’s Fees

Axos Bank contends Plaintiff has not pled any basis for a right to attorney’s fees.

Attorney’s fees are available in financial elder abuse actions. (Welf. & Inst. Code, § 15657.5, subd. (b).)

Here, Axos Bank’s argument is directly contradicted by Welfare and Institutions Code section 15657.5, subdivision (b). Also, given the court overruling the demurrer as to the second cause of action for elder abuse, the court finds the FAC alleges sufficient facts to state a basis for requesting attorney’s fees.

The court therefore DENIES the motion to strike with respect to paragraph 4 of the prayer for relief on page 16 of the FAC.

Treble Damages

Axos Bank contends treble damages are unavailable under Civil Code section 3345 because no penalty is involved. Axos Bank also contends treble damages are unavailable under Penal Code section 496 unless there has been theft.

The court also finds Axos Bank’s argument regarding no penalty being involved does not make sense, since Civil Code section 3345 expressly provides for treble damages in cases involving financial elder abuse, which is what Plaintiff’s claim is here. (Civ. Code, § 3345, subd. (b).) Moreover, given the court overruling the demurrer to the second cause of action for financial elder abuse, the court finds the FAC alleges a sufficient basis for treble damages. (See FAC, ¶¶ 48-64; Civ. Code, § 3345.)

With respect to the sixth cause of action for violation of Penal Code section 496, given the court’s sustaining of the demurrer to that cause of action, the court finds the FAC fails to allege sufficient facts to support a request for treble damages under Penal Code section 496. (See Pen. Code, § 496.)

The court therefore DENIES the motion to strike with respect to paragraph 64 of the FAC, and with respect to the prayer for treble damages on page 16, paragraph 5, of the FAC. The court GRANTS the motion to strike with respect paragraph 83 of the FAC, and with respect to the prayer for treble damages on page 16, paragraph 6, of the FAC, with 20 days’ leave to amend.

It is so ordered.

Dated: June 27, 2024

_______________________

MEL RED RECANA

Judge of the Superior Court