Judge William A. Crowfoot, Case Number: 24AHCV00009, Date: 2024-06-28 Tentative Ruling

Judge: William A. Crowfoot, Case: 24AHCV00009, Date: 2024-06-28 Tentative Ruling

Plaintiff Nishan Abeyratne (“Plaintiff”) filed this action on January 2, 2024. Plaintiff owns the real property at 135 Spinks Canyon Road in Bradbury, California (“Property”). In order to purchase the Property, Plaintiff and nonparty Linton Abeyratne (collectively, “Borrowers”) took out a loan secured by a deed of trust (“Loan”). Plaintiff asserts nine causes of action arising from loan servicing provided by defendant Dovenmuehle Mortgage, Inc. (“Defendant”) for that Loan. Plaintiff also names six other defendants: Shellpoint Mortgage Servicing (“Shellpoint”), Nexbank, Mortgage Electronic Registration Systems, Inc. (“MERS”), Raphael, ALC, First Bank, and Newrez LLC dba Shellpoint Mortgage Servicing (“Newrez”).

On March 6, 2024, Defendant filed a demurrer to the entire complaint on the grounds that it fails to state any cause of action against it.

A demurrer tests the legal sufficiency of the pleadings and will be sustained only where the pleading is defective on its face. (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) “We treat the demurrer as admitting all material facts properly pleaded but not contentions, deductions or conclusions of fact or law. We accept the factual allegations of the complaint as true and also consider matters which may be judicially noticed. [Citation.]” (Mitchell v. California Department of Public Health (2016) 1 Cal.App.5th 1000, 1007; Del E. Webb Corp. v. Structural Materials Co. (1981) 123 Cal.App.3d 593, 604 [“the facts alleged in the pleading are deemed to be true, however improbable they may be”].) Allegations are to be liberally construed. (Code Civ. Proc., § 452.) In construing the allegations, the court is to give effect to specific factual allegations that may modify or limit inconsistent general or conclusory allegations. (Financial Corporation of America v. Wilburn (1987) 189 Cal.App.3rd 764, 769.)

A demurrer may be brought if insufficient facts are stated to support the cause of action asserted. (Code Civ. Proc., § 430.10, subd. (e).) “A demurrer for uncertainty is strictly construed, even where a complaint is in some respects uncertain, because ambiguities can be clarified under modern discovery procedures.” (Khoury v. Maly’s of California, Inc. (1993) 14 Cal.App.4th 612, 616.) A demurrer for uncertainty will be sustained only where the complaint is so bad that the defendant cannot reasonably respond. (Code Civ. Proc., § 430.10, subd. (f).)

Where the complaint contains substantial factual allegations sufficiently apprising defendant of the issues it is being asked to meet, a demurrer for uncertainty will be overruled or plaintiff will be given leave to amend. (Williams v. Beechnut Nutrition Corp. (1986) 185 Cal.App.3d 135, 139, fn. 2.)

Plaintiff alleges that in or around July 2020, Borrowers “began to struggle to make payments on the Loan due to the economic downturn caused by the COVID-19 pandemic.” (Compl., ¶ 16.) Defendant “contacted Borrowers over the phone to inquire about a missed payment” and “informed [them] that if they were suffering from COVID-related financial hardships, then Borrowers were eligible for COVID-related forbearance.” (Compl. ¶ 16.) Defendant also advised Borrowers to fill out a form and, upon return of the form, Borrowers would receive the forbearance. Borrowers did as instructed and after returning the form, Defendant stopped calling about missed payments. (Comp., ¶ 16.)

On April 12, 2022, Borrowers received a notice from Defendant advising them that Shellpoint would be their new servicer and that Loan payments should be remitted to Shellpoint starting April 28, 2022. (Compl., ¶ 17.) The day after, Borrowers received a contradictory notice from Defendant advising them that payments should be made to Defendant. (Compl., ¶ 18.) This notice also informed Borrowers that the Loan was in default and being accelerated, despite Borrowers’ belief that the Loan was still in forbearance. (Compl., ¶¶ 18-19.) Borrowers began to make monthly payments and their first payment was accepted. (Compl., ¶ 19.) Borrowers also made repeated attempts to contact Shellpoint throughout 2021 and 2022, who told them that the Loan did not exist in its database. (Compl., ¶¶ 20, 27.)

When Borrowers attempted to make a second payment, they “were locked out of the online portal used to make payments.” (Compl., ¶ 21.) On June 28, 2022, Borrowers received correspondence from Defendant rejecting their payment; the correspondence claimed that the Loan was accelerated and the amount tendered was insufficient to reinstate it. (Compl., ¶ 21.) Borrowers allegedly “were instructed to obtain updated amounts from Prober & Raphael”, a law firm. (Compl., ¶ 21.)

Borrowers allegedly made several attempts to contact P&R but received no response until September 2, 2022. In the meantime, on August 18, 2022, Borrowers sent Defendant a letter inquiring about the status of the Loan and requested a payoff amount to facilitate a refinance. (Compl. ¶¶ 23, 24.) (Compl., ¶ 24.) On August 23, 2022, Borrowers received a generic response from Defendant indicating that their inquiry had been received and their account was being reviewed. (Compl., ¶ 24.)

On September 2, 2022, P&R sent an e-mail instructing Borrowers to contact their lender and indicating that the file had been transferred to Shellpoint. (Compl., ¶ 22.)

On September 30, 2022, Defendant advised Borrowers that it needed 15 more days to respond to their inquiry about the Loan’s status and payoff quote. (Compl., ¶ 25.)

On November 7, 2022, Defendant sent a letter stating: “Our records reflect that a letter dated April 13, 2022 was sent to you under separate cover informing you that we have forwarded your file to the legal firm [P&R] to proceed with foreclosure action. Please contact [P&R] for further information regarding this loan and the foreclosure action.” (Compl., Ex. 4.) Defendant also pledged to send a payoff quote under separate cover. (Compl., ¶ 26, Ex. 4.) Plaintiff alleges that Borrowers never received said quote. (Compl., ¶ 28.) Instead, in a letter dated January 14, 2023, Defendant advised Borrowers of loss mitigation options, including refinancing, loan modification, forbearance, or a short sale. (Compl., ¶ 28.) Borrowers were not provided with a single point of contact, nor did they receive any further communication from Defendant besides a letter dated July 1, 2023, in which Defendant offered the same loss mitigation options as before. (Compl., ¶¶ 28-29.)

On August 8, 2023, Borrowers sent Defendant a letter through certified mail demanding a payoff statement and informing Defendant of their intention to refinance the Loan. Borrowers also informed Defendant that they had attempted to reach it multiple times from 2021 to 2023 to no avail. (Compl., ¶ 30.) Borrowers did not receive a response to this letter. Rather, on some unspecified date, Borrowers received a notice of default and election to sell under the deed of trust (“NOD”), recorded on August 30, 2023, by P&R on behalf of Nexbank. (Compl, ¶ 32.) The NOD is purportedly attached to the Complaint as Exhibit 6, but no Exhibit 6 is included. The NOD allegedly contained a declaration dated April 12, 2022, identifying Nexbank as the servicer, but Plaintiff alleges that Nexbank did not acquire its interest until August 2023 when an assignment of the deed of trust from First Bank to Nexbank was recorded. (Compl., Ex. 5.)

As an initial matter, Defendant demurs to the “entire complaint” for failure to state any cause of action. (Demurrer, p. 1.) Notably, however, Defendant does not address Plaintiff’s First Cause of Action based on Civil Code section 2943, which governs payoff demand statements, nor does Defendant address Plaintiff’s Fourth Cause of Action for violation of Civil Code section 2923.7 or Ninth Cause of Action for declaratory relief. Therefore, the demurrer should technically be overruled in its entirety as Defendant concedes that the Complaint states two causes of action. However, in the interest of judicial economy, the Court analyzes the merits of Defendant’s arguments regarding Plaintiff’s Second, Third, Fifth, Seventh, and Eighth Causes of Action.

Civil Code section 2923.5 pertains to a mortgage servicer’s responsibilities before recording a notice of default. Specifically, subdivision (a), paragraph (1) provides that a notice of default shall not be recorded

(A) Either 30 days after initial contact is made by paragraph (2) or 30 days after satisfying the due diligence requirements as described in subdivision (e).

(B) The mortgage servicer complies with paragraph (1) of subdivision (a) of Section 2924.18, if the borrower has provided a complete application [for a first lien loan modification] as defined in subdivision (d) of Section 2924.18.

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. During the initial contact, the mortgage servicer shall advise the borrower that he or she has the right to request a subsequent meeting and, if requested, the mortgage servicer shall schedule the meeting to occur within 14 days. The assessment of the borrower’s financial situation and discussion of options may occur during the first contact, or at the subsequent meeting scheduled for that purpose. In either case, the borrower shall be provided the toll-free telephone number made available by the United States Department of Housing and Urban Development (HUD) to find a HUD-certified housing counseling agency. Any meeting may occur telephonically.

A notice of default recorded shall include a declaration of compliance that the mortgage servicer “has contacted the borrower, has tried with due diligence to contact the borrower as required by this section, or that no contact was required because the individual did not meet the definition of “borrower” pursuant to subdivision (c) of Section 2920.5.” (Civ. Code, § 2923.5, subd. (b).)

Defendant argues that any claim premised on violations of sections 2923.5 and 2923.55 fail because Plaintiff admits that Defendant contacted Plaintiff in 2020 over the phone to inquire about missed payments and offered a mortgage forbearance. (Demurrer, p. 9 [citing to Compl., ¶¶ 16, 28.) This argument ignores the accompanying allegation that Borrowers were informed that the forbearance would be granted subject to the completion and return of a form, and that Borrowers followed those instructions. (Compl., ¶ 16.) Defendant also notably does not address Plaintiff’s allegations that the declaration with the NOD that was recorded did not comply with section 2923.5 because it was dated April 12, 2022, even though Nexbank did not acquire its interest in the Loan until August 21, 2023. (Compl., ¶ 45.)

The Court acknowledges that the status of the Loan and whether Borrowers remained in forbearance as of April 2022 is unclear from the allegations comprising the Second Cause of Action; however, Plaintiff alleges that after Borrowers returned the form, they did not receive any phone calls about missed payments and an inference can be made that the forbearance was, in fact, granted. There are no allegations that Borrowers were thereafter in default. Additionally, there are no allegations that Defendant contacted Borrowers either in person or by phone after the forbearance was granted and August 30, 2023, when the NOD was recorded.

Civil Code section 2923.55, like section 2923.5, mandates certain notice requirements before recording a notice of default, but differs most significantly from section 2923.5 in that it requires: (1) specific information about certain protections if the borrower is a servicemember or a dependent of a service member, and (2) compliance with section 2923.6(c) instead of 2924.18. While there are other differences between the two statutes with regards to their applicability, these differences are irrelevant to Defendant’s demurrer. Instead, Defendant repeats its argument against Plaintiff’s Second Cause of Action and contends again that Plaintiff’s Third Cause of Action fails to allege sufficient facts because it “not only complied with the requirement to contact Plaintiff and discuss financial issues, but actually provided relief” in 2020. (Demurrer, p. 10.) Defendant also argues that it provided a declaration of compliance as required. (Demurrer, p. 11.) Because Defendant asserts the same argument, the Court incorporates its analysis of Defendant’s demurrer to the Second Cause of Action and OVERRULES the demurrer to the Third Cause of Action.

E. Fifth Cause of Action: Breach of the Implied Covenant of Good Faith and Fair Dealing

All contracts impose upon each party an implied duty of good faith and fair dealing as part of its performance and its enforcement. (Foley v. Interactive Data Corporation (1988) 47 Cal.3d 654, 683.) Under the implied covenant, each contracting party must “refrain from doing anything to injure the right of the other to receive the agreement’s benefits.” (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1072.) In sum, the implied covenant “fills in” gaps in contracts in order to effectuate the intentions of parties or protect their reasonable expectations. (Id.) Consequently, a breach of the covenant of good faith and fair dealing is treated as a breach of the underlying contract. (Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal. App. 3d 1371, 1393.)

Defendant argues that Plaintiff cannot state a claim for breach of the implied covenant of good faith and fair dealing because the deed of trust “contains no mention of modification of any of the terms of the contract, or acceptance of payment, or options if the borrower fails to pay.” (Demurrer, p. 12.) However, a breach of the covenant of good faith and fair dealing does not involve the breach of any express terms. Here, Plaintiff alleges that Defendant breached the covenant of good faith and fair dealing by “rejecting [his] Loan payments and thereafter charging interest and fees on said payments, refusing to provide a payoff statement, and failing to abide by requirements to discuss loss mitigation options with [him].” (Compl., ¶ 65, Ex. 2; Opp., pp. 6-7.) Plaintiff has therefore sufficiently stated a claim because he alleges that Defendant, acting as the agent of the lender, prevented him from performing his contractual obligations under the deed of trust by wrongfully refusing to accept mortgage payments that Plaintiff attempted to make.

Negligence consists of the following elements: (1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately caused the plaintiff’s damages or injuries. (Lueras v. BAS Home Loan Servicing, LP (2013) 221 Cal.App.4th 49, 62.) “The existence of a duty of care owed by a defendant to a plaintiff is a prerequisite to establishing a claim for negligence.” (Nymark v. Heart Fed. Savs. & Loan Ass’n (1991) 231 Cal.App.3d 1089, 1095.) “[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.” (Nymark, supra, 231 Cal.App.3d at p. 1096.) However, a duty may arise through statute. (See Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905.

Defendant argues that Plaintiff cannot plead a negligence claim because Plaintiff fails to allege an independent duty separate from its contractual obligations. (Demurrer, pp. 12-13.) In Sheen v. Wells Fargo Bank, N.A. (2022) 12 Cal.5th 905, the California Supreme Court refused to impose a common law tort duty on lenders to “exercise due care in processing, reviewing and responding to loan modification applications.” (Id. at pp. 948.) The Supreme Court applied the economic loss rule and concluded that: (1) a loan modification is within a lender’s “conventional role as a mere lender of money” and (2) refused to impose a duty of care in the loan modification context because it would be “contrary to the rights and obligations expressed in the loan contract” by “imped[ing] [the lender]’s right to foreclose by permitting foreclosure only after [the lender] discharged a tort duty to ‘process, review and respond carefully and completely to [a borrower’s] loan modification application[s].’ ” (Id., p. 925.)

In opposition, Plaintiff does not explain how Defendant’s alleged conduct extended beyond that of a conventional lender (or its agent). Instead, Plaintiff relies on Biakanja v. Irving (1958) 49 Cal.2d 647, which the Sheen court considered inapplicable in the lender-borrower context because Biakanja “does not apply when the plaintiff and defendant are in contractual privity for purposes of the suit at hand.” (Sheen, supra, p. 937.) Plaintiff also relies on Weimer v. Nationstar Mortgage, LLC (2020) 47 Cal.App.5th 341 and Alvarez v. BAC Home Loans Servicing, L.P. (2014) 228 Cal.App.4th 941, both of which were disapproved of by Sheen. (Sheen, supra, p. 98, n. 12.)

Therefore, the demurrer to the Sixth Cause of Action is SUSTAINED without leave to amend.

“A written contract may be pleaded either by its terms—set out verbatim in the complaint or a copy of the contract to the complaint and incorporated therein by reference—or by its legal effect. In order to plead a contract by its legal effect, plaintiff must ‘allege the substance of its relevant terms. This is more difficult, for it requires a careful analysis of the instrument, comprehensiveness in statement, and avoidance of legal conclusions.’ [citation]” (McKell v. Washingtom Mutual, Inc. (2006) 142 Cal.App.4th 1457, 1489).

Defendant argues that Plaintiff fails to sufficiently set forth the terms of the forbearance agreement that Defendant allegedly breached. Defendant demands Plaintiff allege the terms of the agreement verbatim or attach a copy of the contract to the complaint. (Demurrer, p. 13.) Defendant also questions whether Plaintiff is alleging that two years of payments were forgiven. (Ibid.)

As part of Plaintiff’s Seventh Cause of Action, Plaintiff alleges that “in or around July 2020, Borrowers and [Defendant] reached an agreement to forbear Loan payments as a result of Borrowers’ COVID-related financial difficulties. The terms of the agreement were memorialized in a form provided by [Defendant], which was signed and returned by Borrowers.” (Compl., ¶¶ 72-79.) Plaintiff goes on to summarily state that “the forbearance was in place” in or around April 2022. However, without reciting verbatim the applicable contract provisions or attaching a copy of them, these bare and vague allegations are insufficient to demonstrate the substance of the alleged agreement and of the provisions which were actually breached.

H. Eighth Cause of Action: Violation of Business and Professions Code § 17200 et seq.

In Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310, 322, the California Supreme Court held that to satisfy the standing requirement of section 17204, a plaintiff must “(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by the unfair business practice or false advertising that is the gravamen of the claim.”

Here, Defendant argues that Plaintiff does not allege how any unlawful conduct caused economic injury. (Demurrer, pp. 15-16.) Defendant argues that the alleged injury, i.e., foreclosure, was a result of Plaintiff’s failure to make Loan payments. (Ibid.) This argument ignores the key allegation that Defendant wrongfully refused to accept Plaintiff’s payments towards the Loan, thus any failure to make payments was caused by Defendant.

The demurrer to the Second, Third, Fifth, and Eighth Causes of Action is OVERRULED.

The demurrer to the Seventh Cause of Action is SUSTAINED with 20 days’ leave to amend.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.