Servicers Have Duty of Care to Borrower in Modifying Loans When Nymark Factors Are Met (California)

In federal district court in California, a magistrate judge has issued two decisions refusing loan servicers’ bid to dismiss a homeowner’s negligence claims, as related to loan modification efforts.  The magistrate judge parses the divergent legal authority and sides with the finding of a duty on behalf of the servicer when certain factors are met.
The facts alleged in this case are nearly as egregious as those alleged in Garcia, and the court finds that Plaintiffs have sufficiently alleged this claim. The loan modification was intended to affect them (e.g., the loan modification would have reduced their monthly mortgage payments), the harm from mishandling their application was foreseeable (e.g., Plaintiffs applied for a loan modification (or at least tried to apply for one) to avoid foreclosure), their injury was certain to occur (e.g., Plaintiffs’ application allegedly was never even submitted by the so-called “single point of contact,” and obviously this means that it would not be granted), the connection between Wells Fargo’s conduct and Plaintiffs’ loss of their home is close (e.g., Plaintiffs relied on Wells Fargo’s representation that the foreclosure would not occur while their application was pending, so their failure to appear at the trustee’s sale was not surprising), Wells Fargo’s alleged role in this debacle would subject them to moral blame (e.g., Plaintiffs allege that Wells Fargo tricked them into defaulting on the Second Loan so that Wells Fargo could string them along with respect to the loan modification on the First Loan so it could foreclose under the Second Loan), and the same public policy considerations cited in Garcia apply here as well. While a lender may not have a duty to modify the loan of any borrower who applies for a loan modification, a lender surely has a duty to submit a borrower’s loan modification application once the lender has told the borrower that it will submit it, as well as a duty to not foreclose upon a borrower’s home while the borrower’s loan modification is being considered once the lender has told the borrower that it won’t foreclose during this time and to ignore all foreclosure-related notices. In short, taking Plaintiffs’ allegations as true at this stage, the court fails to see, even in a cynical world, how Wells Fargo’s role could possibly be described as a “conventional” one that relates to the “mere” lending of money. Its role went beyond that. The court rejects Wells Fargo’s argument that it had no duty to Plaintiffs in this situation.
Rijhwani v. Wells Fargo Home Mortgage, Inc., C 13-05881 LB, 2014 WL 890016 (N.D. Cal. Mar. 3, 2014)
Defendants next move to dismiss Plaintiffs’ fourth claim for negligence. See Motion, ECF No. 5 at 6; Complaint, ECF No. 1, ¶¶ 69–77. The elements of a negligence cause of action are (1) the existence of a duty to exercise due care, (2) breach of that duty, (3) causation, and (4) damages. See Merrill v. Navegar, Inc., 26 Cal.4th 465, 500 (2001). Under California law, as Defendants point out, lenders generally do not owe borrowers a duty of care unless their involvement in the loan transaction exceeds the scope of their “conventional role as a mere lender of money.” See Nymark v. Heart Fed. Savings & Loan Ass’n, 231 Cal.App.3d 1089, 1095–96 (1991) (citations omitted). To determine “whether a financial institution owes a duty of care to a borrower-client,” courts must balance the following non-exhaustive factors:
[1] the extent to which the transaction was intended to affect the plaintiff, [2] the foreseeability of harm to him, [3] the degree of certainty that the plaintiff suffered injury, [4] the closeness of the connection between the defendant’s conduct and the injury suffered, [5] the moral blame attached to the defendant’s conduct, and [6] the policy of preventing future harm.
Id. at 1098 (quotation marks and citations omitted).4
Defendants argue that Chase was under no duty to provide a loan modification because it did not exceed the scope of its conventional role as a mere lender of money. Motion at 6–7. Defendants counter that numerous California federal and state courts have applied the six-factor test articulated in Nymark “to find mortgage servicers have a duty, including this Court.” Opp’n at 14–15 (citing Chancellor v. OneWest Bank, No. C 12–01068 LB, 2012 WL 1868750, at *13 (N.D.Cal. May 22, 2012)). Indeed, as the state and federal district court cases cited by the parties demonstrate, courts are divided on the question of when lenders owe a duty of care to borrowers in the context of the submission of and negotiations related to loan modification applications and foreclosure proceedings.5 Compare Motion, ECF No. 5 at 6–7 and Reply, ECF No. 13 at 3–4 (citing Diunugala v. JP Morgan Chase Bank, N.A., No. 12cv2106–WQH–NLS, 2013 WL 5568737, at *4 (S.D.Cal. Oct. 3, 2013) (finding Jolley (cited by the Rowlands) inapposite in the context of “a residential home loan and related loan servicing issues” and granting motion to dismiss negligence claim against lender and servicer that used wrong underwriting standards when reviewing loan modification application); Rockridge Trust v. Wells Fargo, N.A., No. C–13–01457 JCS, 2013 WL 5428722, at *35–36 (N.D. Cal. Sept. 25, 2013) (noting divergent opinions, collecting cases, and holding that loan modification is a traditional money lending activity that does not give rise to a duty of care); Sanguinetti v. CitiMortgage, Inc., No. C 12–5424 SC, 2013 WL 4838765, at *4–5 (N.D.Cal. Sept. 11, 2013) (dismissing negligence claim based on lender’s duty of care to follow proper loan modification procedures where alleged duty arose from consent judgment between lender and California and federal governments regarding mortgage practices); Hosseini v. Wells Fargo Bank, N.A., No. C–13–02066 DMR, 2013 WL 4279632, at *7 (N.D.Cal. Aug. 9, 2013) (dismissing negligence claim for failure to establish duty of care based on lender’s “undertaking the loan modificiation process and requesting and accepting documentation” from plaintiffs); Armstrong v. Chevy Chase Bank, FSB, No. 5:11–cv–05664 EJD, 2012 WL 4747165, at *4 (N.D.Cal. Oct. 3, 2012) (loan modification is a traditional money lending activity); Nymark, 231 Cal.App.3d at 1096–97 (court found that a lender owed the plaintiff no duty because the lender performed an appraisal of the plaintiff’s property “in the usual course and scope of its loan processing procedures to protect [the lender's] interest by satisfying [itself] that the property provided adequate security for the loan”); and Wagner v. Benson, 101 Cal.App.3d 27, 35 (Cal.Ct.App.1980) (court rejected the plaintiffs’ negligence claim that was based on their allegation that the lender was negligent “in loaning money to them, as inexperienced investors, for a risky venture over which the [lender] exercised influence and control”)); with Opp’n, ECF No. 11 at 14–15 (citing McGarvey v. JP Morgan Chase Bank, N.A., No. 2:13–cv–01099–KJMEFB, 2013 WL 5597148, at *6 (E.D Cal. October 11, 2013) (denying motion to dismiss because, once it offered a loan modification and processed her application, servicer could have duty of care to deceased borrower’s daughter to exercise ordinary care in processing loan modification request); Jolley v. Chase Home Finance, LLC, 213 Cal.App. 4th 872 (2013) (holding that there was a triable issue of material fact as to whether Chase owed Jolley a duty of care in servicing a construction loan, which was disbursed in installments depending on progress towards completion); Trant v. Wells Fargo Bank, N.A., No. 12–cv–164–JM–WMC, 2012 WL 2871642, at *6–7 (S.D.Cal. July 12, 2012) (finding duty of care because lender acted outside the scope of the typical lender-borrower relationship where employees ensured plaintiffs they would receive at least a temporary modification); Kennedy v. Wells Fargo Bank, N.A., No. No. CV 11–4635 DSF (PLAx), 2011 WL 4526085, at *4 (C.D.Cal. Sept. 28, 2011) (applying the six-factor test and finding that the totality of the circumstances favored finding a duty of care at the motion to dismiss stage); Ansanelli v. JP Morgan Chase Bank, N.A., No. C 10–03892 WHA, 2011 WL 1134451, at *7 (N.D.Cal. Mar. 28, 2011) (finding sufficient active participation by the servicer to create a duty where the defendant offered “an opportunity to plaintiffs for loan modification and to engage with them concerning the trial period plan,” which was “precisely ‘beyond the domain of a usual money lender’ ”); Garcia v. Ocwen Loan Servicing, LLC, No. C 10–0290 PVT, 2010 WL 1881098 (N.D.Cal. May 10, 2010) (finding that a servicer had a duty of care to a borrower under the Nymark factors).
*9 In light of the divergent case law, the undersigned recently issued an opinion weighing the lines of authority. See Rijhwani v. Wells Fargo Home Mortgage, Inc., No. C 13–05881 LB, 2014 WL 8900016, at *14–17 (N.D.Cal. Mar. 3, 2014). The court found (and reaffirms here) that Garcia is persuasive and instructive. As the court explained, in Garcia :
the defendant had [at least twice] cancelled the trustee’s sale to allow time for processing the plaintiff’s application. The defendant asked the plaintiff to submit various documents in connection with the loan modification request. The plaintiff did so, but upon receiving the documents, the defendant routed them to the wrong department. Later, the plaintiff’s agent received a recorded message indicating documents were missing, but the message did not identify which ones were missing. For the next several weeks, the plaintiff’s agent repeatedly tried to contact the defendant to determine which documents were missing, but he was unable to speak with any of the defendant’s employees. The plaintiff’s agent was finally able to actually speak with one of the defendant’s employees, but it was too late. The employee informed the plaintiff’s agent that the home had been sold at a trustee’s sale the day before.
The court concluded that at least five of the six factors cited above weighed in favor of finding that the defendant owed the plaintiff a duty of care in processing the plaintiff’s loan modification application. Id. at *3–4.
Id. at *16–17. Similarly, in Rijhwani, the court found that the Nymark factors supported finding a duty of care and denied the motion to dismiss the plaintiff’s negligence claim. Id. at *17.
The court reaches the same conclusion on the factors here.6 First, the loan modification was intended to affect the Rowlands because it would have reduced their mortgage payments. The Rowlands’ allegations are stronger than those in many of the cases finding a duty of care because (at least as alleged) Chase did not just mishandle a loan modification application. Instead, it mishandled an approved loan modification agreement that Chase representatives repeatedly stated was “complete” and “in place.” See, e.g., Complaint ¶¶ 15–18, 23. Second, the harm in mishandling a loan modification agreement is foreseeable from the outset (and Chase’s alleged breaches continued even while Ms. Rowland reported the ongoing emotional distress from Chase’s delays and collection efforts). Third, the injury was certain to occur in that the principal balance would not be reduced, penalties would accrue, and Ms. Rowland reported the ongoing emotional distress. Fourth, the connection between Chase’s alleged conduct and the injury is obviously direct and immediate. Fifth, Chase’s conduct would subject it to moral blame. Finally, as the Garcia court explained, recent statutory enactments demonstrate “[t]he existence of a public policy in favor of preventing future harm to home loan borrowers.” Garcia, 2010 WL 1881098, at *3 (citing Cal. Civ.Code § 2923.6). In Rijhwani, this court held that a lender has a “surely has a duty to submit a borrower’s loan modification application once the lender has told the borrower that it will submit it.” Rijhwani at *17. Here, where Chase offered the Rowlands a loan modification, admitted its repeated errors, and transferred the servicing rights shortly thereafter, public policy supports the existence of a duty. See Complaint ¶ 40. As in Rijhwani, and at the pleadings stage, Chase’s role is not merely “a ‘conventional’ one that relates to the ‘mere’ lending of money.” Plaintiffs state a claim.
Rowland v. JPMorgan Chase Bank, N.A., C 14-00036 LB, 2014 WL 992005 (N.D. Cal. Mar. 12, 2014)
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