Alvarez v BAC — Negligence in Loan Modification–California Court of Appeals

Alvarez v. BAC Home Loans Serv., L.P., No A138443, 2014 WL ________ (Cal. Ct. App. -1st Dist. Aug. 14, 2014)(slip opinion).

Opinion here: 2014-a138443–alvarez v bac

BANA’s Liability for Countrywide


Ct. discusses existence of “aiding and abetting” liability and successor liability and found both were adequately pled


While plaintiffs do make the argument that Countrywide, as the assignee of plaintiffs’ promissory notes, became liable for fraud committed by Meridias, their claim is also based on the assertion that Countrywide is directly liable as an aider and abettor of the fraud. Defendants simply ignore and mischaracterize the allegations of the complaint. The complaint alleges that Countrywide is directly liable for the fraud because it dictated use of the deceptive loan documents by Meridias and directly engaged in deceptive marketing of the Option ARM loans. As the alleged successor in interest to Countrywide, Bank of America has assumed Countrywide’s liability.


Defendants also rely on the “general rule of successor nonliability [which] provides that where a corporation purchases, or otherwise acquires by transfer, the assets of another corporation, the acquiring corporation does not assume the selling corporation’s debts and liabilities.” (Fisher v. Allis-Chalmers Corp. Product Liability Trust (2002) 95 Cal.App.4th 1182, 1188.) However, this rule does not apply if, among other things, “the transaction amounts to a consolidation or merger of the two corporations.” (Ibid.) The allegations regarding the mergers between Bank of America and Countrywide set forth in the federal complaint are sufficient to defeat a challenge on the pleadings to defendants’ successor liability.



The fact that a false statement may be obviously false to those who are trained and experienced does not change its character, nor take away its power to deceive others less experienced. There is no duty resting upon a citizen to suspect the honesty of those with whom he [or she] transacts business. Laws are made to protect the trusting as well as the suspicious. [T]he rule of caveat emptor should not be relied upon to reward fraud and deception.” (Boschma, supra, 198 Cal.App.4th at p. 249.) Accordingly, the court erred in sustaining defendants demurrer to plaintiffs’ first cause of action for fraud.




As discussed above, plaintiffs have alleged delayed discovery sufficient to overcome the demurrer. Similarly, for the reasons discussed above, the cause of action is not defeated by defendants’ assertion that they cannot be held responsible for fraud committed by Meridias. Finally, the complaint alleges that plaintiffs suffered harm sufficient to establish standing under the UCL. The allegations regarding the foreclosure of at least some of plaintiffs’ properties, as well as the allegations of lost equity, are sufficient to allege, if not to prove, economic injury under section 17200. (Boschma, supra, 198 Cal.App.4th at p. 254; see Rosenfeld v. JPMorgan Chase Bank, N.A. (N.D.Cal. 2010) 732 F.Supp.2d 952, 973; Sullivan v. Wash. Mut. Bank, FA (N.D.Cal. Oct. 23, 2009, No. C-09-2161) 2009 U.S. Dist. LEXIS 104074 at pp. *4-5; Rabb v. BNC Mortg., Inc. (C.D.Cal. Sept. 21, 2009, No. CV 09-4740 AHM (RZx)) 2009 U.S. Dist. LEXIS 92061, at p. *2.)



Contrary to defendants’ characterization, plaintiffs do not allege that defendants owed plaintiffs a duty to offer or approve a loan modification. Rather, they allege that defendants owed them a duty to exercise reasonable care in the review of their loan modification applications once they had agreed to consider them. The complaint alleges (albeit awkwardly) that defendants “undertook to review” plaintiffs’ loans for potential modification under the federal Home Affordable Modification Program (HAMP) and that having done so they owed plaintiffs the duty to exercise reasonable care in processing and reviewing their applications for loan modifications in accordance with the federal HAMP guidelines.


As 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 v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1095-1096, citing Wagner v. Benson (1980) 101 Cal.App.3d 27, 34-35 [A “special relationship” between a lender and borrower exists only in those situations “when the lender ‘actively participates’ in the financed enterprise ‘beyond the domain of the usual money lender.’ ”]; see Ragland v. U.S. Bank National Assn. (2012) 209 Cal.App.4th 182, 206 [“No fiduciary duty exists between a borrower and lender in an arm’s length transaction”].) However,“[e]ven when the lender is acting as a conventional lender, the no-duty rule is only a general rule.” (Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, 901 (Jolley).) “ ‘Nymark does not support the sweeping conclusion that a lender never owes a duty of care to a borrower. Rather, the Nymark court explained that the question of whether a lender owes such a duty requires “the balancing of the ‘Biakanja factors.’ ” ’ ” (Id. at p. 901.)5 Citing recent federal authority, the court in Jolley agreed with the observation that “Nymark and the cases cited therein do not purport to state a legal principle that a lender can never be held liable for negligence in its handling of a loan transaction within its conventional role as a lender of money.” (Id. at p. 902, citing Ottolini v. Bank of America (N.D.Cal., Aug. 19, 2011, No.




The court in Lueras, however, granted plaintiffs leave to amend to allege a cause of action for negligent misrepresentation. The court held that while a lender does not have a duty to offer or approve a loan modification, “a lender does owe a duty to a borrower to not make material misrepresentations about the status of an application for a loan modification or about the date, time, or status of a foreclosure sale.” (Lueras v. BAC Home Loans Servicing, LP. at p. 68.) The court explained, “It is foreseeable that a borrower might be harmed by an inaccurate or untimely communication about a foreclosure sale or about the status of a loan modification application, and the connectionbetween the misrepresentation and the injury suffered could be very close.” (Id. at pp. 68-69.)


The opinion in Lueras cited numerous federal district court opinions that conclude a lender owes no duty of care to a borrower to modify a loan. (Lueras v. BAC Home Loans Servicing, LP, supra, 221 Cal.App.4th at pp. 64-65.)6 The court also cited other district court decisions recognizing that a lender does owe a borrower a duty of care in negotiating or processing an application for a loan modification. (Id. at pp. 64-65.)

7 Ansanelli v. JP Morgan Chase Bank, N.A. (N.D.Cal., Mar. 28, 2011, No. C 10–03892 WHA) 2011 U.S. Dist. Lexis 32350, pp. *21–*22 [“allegation that lender offered plaintiffs a loan modification and ‘engage[d] with them concerning the trial period plan’ was sufficient to create duty of care”]; Watkinson v. Mortgage IT, Inc. (S.D.Cal. June 1, 2010) 2010 U.S. Dist. Lexis 53540, pp. *23–24 [duty of care found where bank knowingly misstated borrower’s income and value of property on loan application, and where borrower sought but was denied a loan modification]; Becker v. Wells Fargo Bank, N.A., Inc. (E.D.Cal., Nov. 30, 2012, No. 2:10–cv–02799 LKK KJN PS) 2012 U.S. Dist.  Lexis 170729, pp. *34–*35 [complaint stated claim against lender for negligence during the loan modification process]; Crilley v. Bank of America, N.A. (D. Hawaii, Apr. 26, 2012, No. 12–00081 LEK–BMK) 2012 U.S. Dist. Lexis 58469, p. *29 [denying motion to dismiss because plaintiffs “have pled sufficient facts to support a finding that Defendant went beyond its conventional role as a loan servicer by soliciting Plaintiffs to apply for a loan modification and by engaging with them for several months” regarding the modification]; Garcia v. Ocwen Loan Servicing, LLC (N.D. Cal., May 10, 2010, No. C 10–0290 PVT) 2010 U.S. Dist. Lexis 45375, pp. *7–*11 [plaintiff’s allegations of lender’s conduct in handling application for loan modification pleaded a duty of care].)


Garcia v. Ocwen Loan Servicing, LLC, supra, 2010 U.S. Dist. Lexis 45375, pages *7–*11, is representative of those cases that have found that the Biakanja factors weigh in favor of imposing a duty of care on a lender that undertakes to review a loan for potential modification. The court explained, “Based on the foregoing factors,[the lender] arguably owed Plaintiff a duty of care in processing Plaintiff’s loan modification application, as at least five of the six factors weigh in favor of finding a duty of care. [¶] The transaction was unquestionably intended to affect Plaintiff. The decision on Plaintiff’s loan modification application would determine whether or not he could keep his home. [¶] The potential harm to Plaintiff from mishandling the application processing was readily foreseeable: the loss of an opportunity to keep his home was the inevitable outcome. Although there was no guarantee the modification would be granted had the loan been properly processed, the mishandling of the documents deprived Plaintiff of the possibility of obtaining the requested relief. [¶] The injury to Plaintiff is certain, in that he lost the opportunity of obtaining a loan modification and . . . his home was sold. [¶] There is a close connection between Defendant’s conduct and any injury actually suffered, because, to the extent Plaintiff otherwise qualified and would have been granted a modification, Defendant’s conduct in misdirecting the papers submitted by Plaintiff directly precluded the loan modification application from being timely processed. [¶] The existence of a public policy of preventing future harm to home loan borrowers is shown by recent actions taken by both the state and federal government to help homeowners caught in the home foreclosure crisis. See, e.g., CAL.CIV.CODE § 2923.6 (encouraging lenders to offer loan modifications to borrowers in appropriate circumstances); see also, Press Release at (“Gov. Schwarzenegger Signs Legislation to Provide Greater Assistance to California Homeowners”), and (describing the federal “Making Home Affordable Program”). [¶] Whether or not moral blame attaches to this Defendant’s specific conduct is not clear at this stage of the proceedings. However, in light of the other factors weighing in favor of finding a duty of care, the uncertainty regarding this factor is insufficient to tip the balance away from the finding of a duty of care.”

We find the Garcia court’s reasoning persuasive and applicable to the facts alleged in the present case. Here, because defendants allegedly agreed to consider modification of the plaintiffs’ loans, the Biakanja factors clearly weigh in favor of a duty. The transaction was intended to affect the plaintiffs and it was entirely foreseeable that failing to timely and carefully process the loan modification applications could result in significant harm to the applicants. Plaintiffs allege that the mishandling of their applications “caus[ed] them to lose title to their home, deterrence from seeking other remedies to address their default and/or unaffordable mortgage payments, damage to their credit, additional income tax liability, costs and expenses incurred to prevent or fight foreclosure, and other damages.” As stated in Garcia, “Although there was no guarantee the modification would be granted had the loan been properly processed, the mishandling of the documents deprived Plaintiff of the possibility of obtaining the requested relief.” (Garcia, supra, 2010 U.S. Dist. Lexis 45375, p. *9.) Should plaintiffs fail to prove that they would have obtained a loan modification absent defendants’ negligence, damages will be affected accordingly, but not necessarily eliminated. With respect to whether defendants’ conduct was blameworthy—the fifth Biakanja factor—it is highly relevant that the borrowers “ability to protect his own interests in the loan modification process [is] practically nil” and the bank holds “all the cards.” (Jolley, supra, 213 Cal.App.4th at p. 900.) As explained in the amicus curiae brief filed by Housing and Economic Rights Advocates et al.: “Traditional mortgage lending involved a bank evaluating a borrower and her security, and issuing a loan with terms reflecting the perceived risk that the borrower would default. The same bank would then(i) retain the loan, making its profit on the interest the borrower paid; and (ii) service the loan, meaning that it would be in contact with the borrower directly, collecting the borrower’s payments and negotiating any changes in loan terms. See Eamonn K. Moran, Wall Street Meets Main Street: Understanding the Financial Crisis (2009) 13 N.C. Banking Inst. 5, 32 (“ ‘Traditionally, banks managed loan “from cradle to grave” as they made mortgage loans and retained the risk of default, called credit risk, and profited as they were paid back.’ ”) [citation omitted]. [¶] These tasks have been dispersed among different actors in the modern mortgage servicing context, however, changing the relationships between the borrower, the loan originator, the ultimate holder of the loan, and the servicer of the loan. [¶] First, borrowers are captive, with no choice of servicer, little information, and virtually no bargaining power. Servicing rights are bought and sold without input or approval by the borrower. Borrowers cannot pick their servicers or fire them for poor performance. The power to hire and fire is an important constraint on opportunism and shoddy work in most business relationships. But in the absence of this constraint, servicers may actually have positive incentives to misinform and under-inform borrowers. Providing limited and low-quality information not only allows servicers to save money on customer service, but increases the chances they will be able to collect late fees and other penalties from confused borrowers.”

The borrower’s lack of bargaining power coupled with conflicts of interest that exist in the modern loan servicing industry provide a moral imperative that those with the controlling hand be required to exercise reasonable care in their dealings with borrowers seeking a loan modification. Moreover, the allegation in the complaint that defendants engaged in “dual tracking,” which has now been prohibited (see Civ. Code, §§ 2923.6, 2924.18) increases the blame that may properly be assigned to the conduct alleged in the complaint. (Jolley, supra, 213 Cal.App.4th at p. 901.)

The policy of preventing future harm also strongly favors imposing a duty of care on defendants. As noted in Jolley, supra, 213 Cal.App.4th at page 903, “[T]he California Legislature has expressed a strong preference for fostering more cooperative relations between lenders and borrowers who are at risk of foreclosure, so that homes will not be

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