Paulhus, et al v. Fay Servicing LLC, et al

Filing 31

ORDER signed by Senior Judge William B. Shubb on 5/29/2014 GRANTING defendants' 20 23 Motions to Dismiss. Plaintiffs have 20 days from date of Order to file an Amended Complaint. (Marciel, M)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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----oo0oo----

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SCOTT PAULHUS and LYNETTE
PAULHUS,

CIV. NO. 2:14-736 WBS AC
MEMORANDUM AND ORDER RE: MOTION
TO DISMISS

Plaintiffs,

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v.
FAY SERVICING, LLC; CALIBER
HOME LOANS, INC., formerly
known as VERICREST FINANCIAL,
INC.; SUMMIT MANAGEMENT
COMPANY, LLC; and DOES 1
through 20, inclusive,
Defendants.

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----oo0oo---Plaintiffs Scott Paulhus and Lynette Paulhus brought

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this action against defendants Fay Servicing, LLC (“Fay”),

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Caliber Home Loans, Inc., formerly known as Vericrest Financial,

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Inc. (“Vericrest”), and Summit Management Company, LLC

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(“Summit”), arising out of the foreclosure of plaintiffs’ home.

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Defendants now move to dismiss the Complaint pursuant to Federal

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Rule of Civil Procedure 12(b)(6) for failure to state a claim
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upon which relief can be granted.

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I.

Factual & Procedural History

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In 2004, plaintiffs entered into a mortgage loan for

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$850,000, which was secured by a Deed of Trust to their home in

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Granite Bay, California.

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Substitution of Trustee recorded in December 2011 indicates that

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Summit is the current trustee under the Deed of Trust.

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(Vericrest Req. for Judicial Notice1 (“Vericrest RJN”) Ex. C.)

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Plaintiff alleges that Fay is the current mortgage servicer and

(Compl. ¶ 17 (Docket No. 1-1).)

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that it assumed servicing rights to the loan from Vericrest in

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2013.

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(Compl. ¶ 18.)
On December 14, 2011, Summit recorded a Notice of

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Default reflecting that plaintiffs were $16,384.82 in arrears on

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their loan.

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rescinded the Notice of Default on February 17, 2012.

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RJN Ex. E.)

(Vericrest RJN Ex. D.)

Summit subsequently
(Vericrest

Although plaintiffs allege throughout the Complaint

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Although a court generally may not consider items
outside the pleadings when deciding a motion to dismiss, it may
consider items of which it can take judicial notice, Barron v.
Reich, 13 F.3d 1370, 1377 (9th Cir. 1994), including matters of
public record, MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504
(9th Cir. 1986).
Both Vericrest and Fay request that the court
judicially notice several recorded documents pertaining to
plaintiff’s property. (Docket Nos. 21, 24.) Those items include
the Deed of Trust, (Vericrest RJN Ex. A (Docket No. 24-1)), the
Assignment of Deed of Trust, (id. Ex. B. (Docket No. 24-2)), the
Substitution of Trustee, (id. Ex. C (Docket No. 24-3)), a Notice
of Default, (id. Ex. D (Docket No. 24-4)), a Rescission of Notice
of Default, (id. Ex. E. (Docket No. 24-5)), and an Assignment of
Mortgage/Deed of Trust, (id. Ex. F (Docket No. 24-6)). The court
will take judicial notice of these documents, since they are
matters of public record whose accuracy cannot be questioned.
See Fed. R. Evid. 201; Lee v. City of Los Angeles, 250 F.3d 668,
689 (9th Cir. 2001).
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that they were “forced into default,” (Compl. ¶ 23), they do not

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allege that they received this or any other Notice of Default.

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On March 16, 2012, plaintiffs allegedly received a

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monthly statement from Vericrest for $5,993.27 instead of their

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usual payment of $3,973.16 per month.

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subsequently contacted Vericrest to inform them that the amount

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stated was “unjustified and erroneous.”

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plaintiffs received a billing statement for $4,020.01, and

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concluded that Vericrest had amended the statement to reflect the

(Id. ¶ 19.)

(Id.)

The next month,

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amount that was actually due.

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that they paid that amount each month for over a year and that

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Vericrest continued to accept their payments.

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(Id. ¶ 20.)

Plaintiffs

Plaintiffs allege

(Id.)

On September 1, 2013, Fay sent plaintiffs a billing

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statement for $5,513.13.

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they contacted Fay to correct the bill, and that Fay informed

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them that they did not have their complete loan file because of

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the “servicer change.”

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spoke to a Fay employee on December 3, 2013, who represented that

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plaintiffs would not be considered in default if they submitted

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proof of income and two payments for $3973.16.

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Plaintiffs submitted those payments, Fay allegedly rejected them

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and stated that they were insufficient to satisfy the full amount

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owed.

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“forced into default.”

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(Id. ¶ 22.)

(Id. ¶ 21.)

(Id.)

Plaintiffs allege that

Plaintiffs also allege that they

(Id.)

When

As a result, plaintiffs allege, they were
(Id. ¶ 23.)

Plaintiffs brought this action in Placer County

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Superior Court on February 18, 2014, alleging five claims: (1)

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breach of the covenant of good faith and fair dealing; (2)

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violations of section 2937 of the California Civil Code; (3)
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unfair business practices in violation of California’s Unfair

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Competition Law (“UCL”), Cal. Bus. & Profs. Code §§ 17200 et

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seq.; (4) violations of California Civil Code section 2924.17;

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and (5) injunctive relief pursuant to California Civil Code

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section 2924.12.

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court on the basis of diversity jurisdiction, 28 U.S.C. § 1332,

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and now move to dismiss plaintiffs’ Complaint pursuant to Rule

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12(b)(6) for failure to state a claim upon which relief can be

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granted.

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II.

(Docket No. 1.)

Defendants removed to this

(Docket Nos. 20, 23.)

Discussion

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On a motion to dismiss, the court must accept the

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allegations in the complaint as true and draw all reasonable

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inferences in favor of the plaintiff.

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U.S. 232, 236 (1974), overruled on other grounds by Davis v.

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Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322

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(1972).

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plead “only enough facts to state a claim to relief that is

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plausible on its face.”

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544, 570 (2007).

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for more than a sheer possibility that a defendant has acted

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unlawfully,” and where a complaint pleads facts that are “merely

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consistent with” a defendant’s liability, it “stops short of the

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line between possibility and plausibility.”

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556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 556–57).

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A.

Scheuer v. Rhodes, 416

To survive a motion to dismiss, a plaintiff needs to

Bell Atl. Corp. v. Twombly, 550 U.S.

This “plausibility standard,” however, “asks

Ashcroft v. Iqbal,

Breach of Covenant of Good Faith and Fair Dealing
California, like the majority of states, recognizes an

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implied covenant of good faith and fair dealing.

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Interactive Data Corp., 47 Cal. 3d 654, 683 (1988) (citing
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Foley v.

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Restatement of Contracts (2d) § 205).

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plaintiffs’ claim for breach of the implied covenant of good

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faith and fair dealing sounds in contract or tort.

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v. DHI Mortg. Co., 642 F.2d 1153, 1165 (E.D. Cal. 2009) (O’Neill,

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J.) (recognizing “uncertainty whether the claim proceeds under

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contract or tort law.”).

It is not clear whether

Cf. Spencer

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To the extent that a claim for breach of the implied

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covenant of good faith and fair dealing sounds in contract, it

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applies only to promises “arising out of the contract itself.”

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Foley, 47 Cal. 3d at 690; accord Racine & Laramie, Ltd. v. Dep’t

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of Parks & Recreation, 11 Cal. App. 4th 1026, 1031 (4th Dist.

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1992) (“The implied covenant of good faith and fair dealing rests

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upon the existence of some specific contractual obligation.”).

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corollary to this rule is that a claim for breach of the implied

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covenant of good faith and fair dealing requires a plaintiff to

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identify a contract to which both he and the defendant were

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parties.

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Supp. 2d 1029, 1063 (E.D. Cal. 2009) (Karlton, J.).

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See Champlaie v. BAC Home Loan Servicing, LP, 706 F.

Although plaintiffs’ claim for breach of the implied

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covenant of good faith and fair dealing is premised on the

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allegation that Vericrest and Fay mishandled their mortgage

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payments, plaintiffs do not identify any contract to which either

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Vericrest or Fay is a party.

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existence of such a contract, plaintiffs do not allege that they

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were a party to that contract2 or identify a specific contractual

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Even if the court could infer the

Nor have plaintiffs alleged any facts that would permit
the court to infer the existence of a contract of which they were
intended third-party beneficiaries. See Klamath Water Users
Protective Ass’n v. Patterson, 204 F.3d 1206, 1210 (9th Cir.
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provision that could serve as a basis for their claim.

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Racine & Laramie, 11 Cal. App. 4th at 1031.

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plaintiffs have not stated a contract claim for breach of the

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implied covenant of good faith and fair dealing.

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705 F. Supp. 2d at 1063-64 (dismissing claim for breach of

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implied covenant of good faith and fair dealing where plaintiff

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failed to allege the existence of a contract with the defendant

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loan servicer or foreclosure trustee).

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See

As a result,

See Champlaie,

California has also recognized a tort claim for breach

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of the implied covenant of good faith and fair dealing.

Foley,

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47 Cal. 3d at 682.

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covenant of good faith and fair dealing does not arise in the

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context of an arms-length transaction between contracting

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parties.

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Fed. Ins. Co., 307 F.3d 944, 955 (9th Cir. 2002); Mitsui Mfrs.

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Bank v. Superior Court, 212 Cal. App. 3d 726, 730 (4th Dist.

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1989).

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involving a “special relationship” between those parties.

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Bionghi v. Metro. Water Dist. of S. Cal., 70 Cal. App. 4th 1358,

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1370 (2d Dist. 1999); accord Spencer, 642 F. Supp. 2d at 1165.

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Plaintiffs contend that such a “special relationship

A tort claim for breach of the implied

See, e.g., Pension Trust Fund For Operating Eng’rs. v.

Rather, it arises only in “limited circumstances”

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does exist” because Fay and its predecessor, Vericrest, entered

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into a contract with the lender or its successor-in-interest to

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service plaintiffs’ loan.

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Although plaintiffs refer to such a contract in their Opposition,

(Pls.’ Opp’n at 3:5-9 (Docket No. 25.)

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1999) (“Before a third party can recover under a contract, it
must show that the contract was made for its direct benefit--that
it was an intended beneficiary of the contract.”).
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they do not allege its existence in the Complaint.

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had, a lending relationship of the sort plaintiffs allude to is

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not the type of “special relationship” required to state a tort

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claim for breach of the implied covenant of good faith and fair

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dealing.

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Trust Fund, 307 F.3d at 955).

Even if they

See Spencer, 642 F. Supp. 2d at 1165 (quoting Pension

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Accordingly, because plaintiffs have not stated a claim

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for breach of the implied covenant of good faith and fair dealing

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under either a contract or tort theory, the court must grant

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defendants’ motion to dismiss this claim.
B.

California Civil Code Section 2937
Section 2937 of the California Civil Code requires a

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loan servicer to provide written notice before transferring

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servicing responsibilities to a new mortgage servicer.

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Code § 2937(b).

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may not hold a borrower liable for payments made to a previous

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servicer or late charges arising out of such payments if those

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payments were made prior to the borrower’s receipt of the notice

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required by section 2937(b).

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to state a claim for a violation of section 2397, a plaintiff

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must allege that the harm he suffered resulted from that

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statutory violation.

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No. 1:09-937 OWW GSA, 2011 WL 1205250, at *3 (E.D. Cal. Mar. 29,

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2011) (citing Faria v. San Jacinto Unified Sch. Dist., 50 Cal.

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App. 4th 1939, 1947 (4th Dist. 1996)).

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Cal. Civ.

The statute also provides that a loan servicer

Cal. Civ. Code § 2937(g).

In order

See Amaral v. Wachovia Mortg. Corp., Civ.

Plaintiffs allege that Vericrest failed to notify him

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that it was transferring servicing responsibilities to Fay and

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that, “[a]s a result of [d]efendants’ failure to abide by the
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requirements of Civil Code § 2937,” they were “subject to unfair

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and unlawful business practices . . . .”

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even if plaintiffs have sufficiently alleged that Vericrest and

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Fay failed to comply with section 2937, they have not alleged any

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facts to support their allegation that they suffered harm as a

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result.

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monthly payment because it miscalculated the escrow amount due,

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that it rejected plaintiffs’ purportedly inadequate payments, and

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that plaintiffs “fell into default” because Vericrest and Fay

(Compl. ¶¶ 38-39.)

But

Plaintiffs allege only that Fay requested an excessive

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“mishandl[ed]” their loan and “fail[ed] to accurately account for

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[plaintiffs’] loan terms.”

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these allegations establish that plaintiffs’ default resulted

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from Fay’s miscalculation of the amount due on the loan, not from

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Vericrest’s failure to inform plaintiffs that it was transferring

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servicing responsibilities to Fay.

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(Id. ¶ 23, 33.)

By their own terms,

Plaintiffs also allege that after they contacted Fay

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about their September 2013 billing statement, they were “shuffled

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from one person to another” for several months because Fay did

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not have plaintiffs’ complete loan file.

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the extent that plaintiffs allege any harm as a result, their

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allegations establish that the harm occurred “due to the servicer

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change,” (id. ¶¶ 21, 31), not due to Vericrest’s failure to

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notify them of the servicer change.

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plaintiffs have not alleged any causal connection between the

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harm they alleged and defendants’ purported violations of section

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2937, the court must grant defendants’ motion to dismiss this

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claim.

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(Id. ¶¶ 21, 31.)

To

Accordingly, because

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C.

California Civil Code Section 2924
Section 2924.17 of the California Civil Code requires

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that any notice of default filed and recorded by a mortgage

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servicer must be accurate, complete, and supported by competent

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and reliable evidence.

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further provides that a servicer must ensure that it has reviewed

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competent and reliable evidence, including the borrower’s loan

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status and loan information, before filing and recording a notice

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of default.

Cal. Civ. Code § 2924.17(a).

Id. § 2924.17(b).

The statute

Sections 2924.12 and 2924.19 of

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the California Civil Code authorize a court to remedy a violation

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of section 2924.17 by enjoining a foreclosure sale until the

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violation is cured.

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Cal. Civ. Code. §§ 2924.12, 2924.19.

Section 2924.17 is part of the Homeowner’s Bill of

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Rights, which “took effect on January 1, 2013.”

Rockridge Trust

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v. Wells Fargo, N.A., --- F. Supp. 2d ----, ----, Civ. No.

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13:1457 JCS, 2013 WL 5428722, at *28 (N.D. Cal. Sep. 25, 2013).

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“California courts comply with the legal principle that unless

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there is an express retroactivity provision, a statute will not

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be applied retroactively unless it is very clear from extrinsic

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sources that the Legislature . . . must have intended a

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retroactive application.”

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4th 828, 841 (2002).

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section 2924.17 is premised on the Notice of Default recorded in

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2011, (see Vericrest RJN Ex. C), plaintiffs cannot state a claim

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because section 2924.17 does not apply retroactively to Notices

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of Default recorded before 2013.

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Chase, N.A., Civ. No. 2:12-225 WBS CMK, 2014 WL 546584, at *8

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(E.D. Cal. Feb. 11, 2014); Emick v. JP Morgan Chase Bank, Civ.

Myers v. Philip Morris Cos., 28 Cal.

To the extent that plaintiffs’ claim under

See, e.g., Rose v. J.P. Morgan

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No. 2:13-340 JAM AC, 2013 WL 3804039, at *3 (E.D. Cal. July 19,

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2013); Rockridge Trust, 2013 WL 5428722, at *28.

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While plaintiffs allege that they “fell into default”

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in 2013, (Compl. § 50), they do not allege that any defendant

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filed or recorded any Notice of Default against them in 2013, let

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alone that any such notice failed to comply with section 2924.17.

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In their Opposition, plaintiffs contend that defendants have

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“continued [to] use a false declaration . . . as a basis for

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moving forward on non-judicial foreclosure proceedings” in 2013.

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(Pls.’ Opp’n at 5:28-6:2.)

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this statement that defendants filed and recorded one or more

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defective notices of default in 2013, the court cannot consider

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that statement on a motion to dismiss because it does not appear

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in the Complaint itself.

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F. Supp. 2d 994, 999 (C.D. Cal. 2008) (“On a motion to dismiss .

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. . the Court must limit its review to the four corners of the

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operative complaint, and may not consider facts presented in

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briefs or extrinsic evidence.” (emphasis added)); William W.

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Schwarzer, A. Wallace Tashima & James M. Wagstaffe, Federal Civil

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Procedure Before Trial § 9:211 (2014) (same).

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Even if the court could infer from

See Butler v. Los Angeles County, 617

Accordingly, because plaintiffs do not allege that any

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Notice of Default was filed against their property after the date

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on which section 2924.17 took effect, the court must grant

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defendants’ motion to dismiss plaintiffs’ claim under section

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2924.17 and their claims for injunctive relief under sections

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2924.12 and 2924.19.

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D.

Unfair Competition Law
The UCL prohibits unfair competition, which includes
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“any unlawful, unfair, or fraudulent business act or practice.”

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Cal. Bus. & Profs. Code § 17200.

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“by a person who has suffered injury in fact and has lost money

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or property as a result of the unfair competition.”

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Profs. Code § 17204; Kwikset Corp. v. Superior Court, 51 Cal. 4th

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310, 320-21 (2011).

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A UCL claim may only be brought

Cal. Bus. &

Here, plaintiffs allege only that they were “forced

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into default” as a result of defendants’ allegedly unfair

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business practices.

(Compl. ¶ 50.)

They do not allege that they

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have lost their home, that they paid foreclosure-related fees, or

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that they incurred any other economic injury as a result of

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defendants’ actions.

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statements made in their Opposition, plaintiffs do not even

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allege that defendants have initiated foreclosure proceedings.

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In fact, notwithstanding any factual

Absent allegations that plaintiffs have actually

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suffered economic injury as a result of foreclosure proceedings,

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the possibility that their purported “default” may result in the

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foreclosure of their home is insufficient to establish that they

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have lost money or property.

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Serv. Corp., 702 F. Supp. 2d 1183, 1199 (E.D. Cal. 2010) (Wanger,

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J.) (holding that plaintiff’s allegation that “he ‘will’ lose his

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personal residence if a non-judicial foreclosure occurs’ was

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insufficient to allege that plaintiff had lost money or

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property); Jurewitz v. Bank of Am., N.A., 930 F. Supp. 2d 994,

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999-1000 (S.D. Cal. 2013) (holding that plaintiff had not alleged

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that he lost money or property, even though “a foreclosure sale

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was scheduled,” because he had not lost his home or suffered

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other economic injury).

See, e.g., Jensen v. Quality Loan

Accordingly, because plaintiffs have not
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alleged that they “lost money or property” as a result of

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defendants’ allegedly unfair business practices, see Cal. Bus. &

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Profs. Code § 17204, the court must grant defendants’ motion to

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dismiss this claim.

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IT IS THEREFORE ORDERED that defendants’ motion to
dismiss be, and the same hereby is, GRANTED.

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Plaintiffs have twenty days from the date this Order is

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signed to file an amended complaint, if they can do so consistent

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with this Order.

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Dated:

May 29, 2014

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