Harry Wong v. Fay Servicing, LLC

Filing 54

ORDER GRANTING 45 MOTION TO DISMISS. Signed by Judge Beth Labson Freeman on 3/10/2017. (blflc4, COURT STAFF) (Filed on 3/10/2017)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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HARRY WONG, ET AL.,
Plaintiffs,

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ORDER GRANTING MOTION TO
DISMISS

v.

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FAY SERVICING, LLC,

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United States District Court
Northern District of California

Case No. 16-cv-03074-BLF

Defendant.

[Re: ECF 45]

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Plaintiffs Harry Wong and Maryanne Wong (“Plaintiffs”) bring this suit against Fay

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Servicing, LLC (“Fay”), alleging that they were not extended a right to appeal the denial of their

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loan modification, in violation of 12 C.F.R. § 1024.41(h), 15 U.S.C. § 1692e, California Civil

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Code § 1788.17, and California Business and Professions Code § 17200 et seq. (“UCL”), and that

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Fay committed negligent misrepresentation. Second Am. Compl. 1 (“SAC”), ECF 44. Before the

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Court is Fay’s motion to dismiss the SAC. Mot., ECF 45. Having considered the papers filed in

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conjunction with the motion and the parties’ oral argument at the hearing on February 2, 2017, the

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Court GRANTS Fay’s motion to dismiss for reasons stated below.

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I.

BACKGROUND
On or about December 31, 2000, Plaintiffs purchased a residential property located at 1421

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Dana Street, Palo Alto, CA 94301 (the “Property”). SAC ¶ 11. On or about March 8, 2006,

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Plaintiffs refinanced their loan by executing a Promissory Note and Deed of Trust secured by the

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Property, in favor of Washington Mutual Bank, FA. Id. ¶¶ 12, 13. On September 30, 2011,

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Plaintiffs entered into a loan modification agreement with JPMorgan Chase Bank, N.A., successor

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in interest to the Federal Deposit Insurance Corporation, as Receiver for Washington Mutual

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Bank, FA. RJN, Ex. 2. The agreement provides that in the first one to five years, the monthly

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payment would be $6,131.43 and would increase to $6,736.04 in years 6 to 40. Id.
On July 6, 2015, Plaintiffs were at least $246,465.97 in arrears on their loan, and a notice
of default was recorded against the Property. RJN, Ex. 5. When Plaintiffs failed to cure their

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default, a Notice of Trustee’s Sale (“NOTS”) was recorded on October 27, 2015, setting the

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foreclosure sale for November 20, 2015. Id., Ex. 6. On or about November 13, 2015, Plaintiffs

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submitted a loan modification application to Fay. SAC ¶ 14. Following this initial application

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submission, Plaintiffs provided additional application materials as requested on November 17,

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2015, November 18, 2015, December 13, 2015, December 24, 2015, December 30, 2015, and

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January 8, 2016. Id. ¶ 14. On January 26, 2016, Plaintiffs received a decision on their loan

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modification application, denying certain loss mitigation programs but offering a plan that

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required a $30,000.00 down payment due by February 1, 2016 and six monthly payments of

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$12,253.69. Id. ¶¶ 16-17. At that time, the Property was scheduled for a February 22, 2016

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foreclosure sale. Id. ¶ 19. Plaintiff Harry Wong spoke to Trecia Smith, Fay’s account manager at

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the time, about the decision and his ability to appeal. Id. ¶ 20. Ms. Smith confirmed that Plaintiffs

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could not appeal the decision and that if Fay did not receive an acceptance of the offered plan, the

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February 22, 2016 trustee’s sale would go forward. Id. In light of this representation, Plaintiffs

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accepted the plan and tendered the $30,000, despite feeling that they had valid grounds to appeal,

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especially given that their income was sufficient to support the $6,131.43 payment required by the

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prior loan modification. Id. ¶ 21.

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On March 30, 2016, Plaintiff Harry Wong filed a complaint against Fay in the Santa Clara

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County Superior Court, and subsequently filed a first amended complaint on June 1, 2016. Notice

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of Removal 1, ECF 1. Fay removed the case to this Court on June 6, 2016, based on federal

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question jurisdiction. Id. Fay filed a motion to dismiss the complaint on June 13, 2016, which the

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Court granted with leave to amend on the basis that Plaintiff Harry Wong had failed to join

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indispensable parties and that the first amended complaint contained insufficient allegations

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relating to plausible grounds to appeal the loan modification decision. ECF 38. Plaintiff Harry

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Wong later joined Maryanne Wong as co-plaintiff and filed the SAC, attaching part of the letter

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from Fay setting forth the decision on Plaintiffs’ loan modification application and the programs
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that were denied, including a “Repayment Plan.” SAC, Ex. A to SAC. Now pending before the

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Court is Fay’s motion to dismiss the SAC.

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II.

LEGAL STANDARD
“A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a

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claim upon which relief can be granted ‘tests the legal sufficiency of a claim.’” Conservation

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Force v. Salazar, 646 F.3d 1240, 1241–42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d

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729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts

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as true all well-pled factual allegations and construes them in the light most favorable to the

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plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the
Court need not “accept as true allegations that contradict matters properly subject to judicial

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notice” or “allegations that are merely conclusory, unwarranted deductions of fact, or

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unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008)

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(internal quotation marks and citations omitted). While a complaint need not contain detailed

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factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to

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relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.

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Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the

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court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

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III.

DISCUSSION
Before turning to the merits of the parties’ arguments, the Court addresses Fay’s request

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for judicial notice.
A.

Judicial Notice
Fay has requested judicial notice of seven documents, attached to the request as Exhibits 1

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through 7: (1) Deed of Trust; (2) Loan Modification Agreement recorded on February 20, 2012;

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(3) Corporate Assignment of Deed of Trust recorded on November 8, 2012; (4) Substitution of

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Trustee; (5) Notice of Default and Election to Sell Under Deed of Trust; (6) Notice of Trustee’s

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Sale recorded on October 27, 2015; and (7) Corporate Assignment of Deed of Trust recorded on

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November 17, 2015. RJN, ECF 46.

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Judicial notice is appropriate with respect to all the exhibits for the purpose of the motion
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to dismiss because they are documents publicly filed with the Santa Clara County Recorder. See

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Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988) (court may take judicial notice

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of matters of public record). Judicial notice is appropriate with respect to Exhibits 1 and 2 on the

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additional ground that their “contents are alleged in [the] complaint and whose authenticity no

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party questions.” Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005); SAC ¶¶ 12-13, 21.

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Plaintiffs have neither opposed the request for judicial notice nor disputed the authenticity

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of the documents. The request for judicial notice is GRANTED with respect to all the exhibits

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attached to Fay’s request.

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B.

Violation of 12 C.F.R. § 1024.41(h)

Plaintiffs allege that Fay violated 12 C.F.R. § 1024.41 by not granting them an opportunity

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to appeal its decision on their loan modification application. SAC ¶¶ 35-37. In moving to dismiss

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this claim, Fay first argues that the SAC remains deficient for failing to demonstrate that Plaintiffs

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were eligible for any of the programs that Fay did not offer in its decision. Mot. 6. Second, Fay

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contends that the right to appeal is only available under 12 C.F.R. § 1024.41(h) if the loss

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mitigation application is completed 90 days or more before a foreclosure sale and Plaintiffs

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submitted their application only seven days before the originally scheduled foreclosure sale. Id. at

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7-8. Plaintiffs counter that the denial of the loan modification programs might have been an error

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and whether they could qualify for the programs is a factual issue that should not be disposed on

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this motion. Opp’n 6-7, ECF 47. Next, Plaintiffs argue that their application was facially

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complete as of the date of the first submission, November 13, 2015, which was more than ninety

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days before the February 22, 2016 foreclosure sale date. Id. at 9.

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The relevant subsection of 12 C.F.R. § 1024.41(h) governing the right of appeal is as
follows:
(1) Appeal process required for loan modification denials. If a servicer receives a
complete loss mitigation application 90 days or more before a foreclosure sale or
during the period set forth in paragraph (f) of this section, a servicer shall permit
a borrower to appeal the servicer’s determination to deny a borrower’s loss
mitigation application for any trial or permanent loan modification program
available to the borrower.
12 C.F.R. § 1024.41(h)(1). 12 C.F.R. § 1024.41 also clarifies when the protection of this section
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applies:
(3) Determining protections. To the extent a determination of whether protections
under this section apply to a borrower is made on the basis of the number of days
between when a complete loss mitigation application is received and when a
foreclosure sale occurs, such determination shall be made as of the date a
complete loss mitigation application is received.
12 C.F.R. § 1024.41(b)(3).
The main issue here is whether Plaintiffs had a right to appeal and whether Fay made an

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unlawful misrepresentation when it failed to inform Plaintiffs of their right to appeal. As the

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regulation provides, “a servicer shall permit a borrower to appeal the servicer’s determination . . .

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,” “if a servicer receives a complete loss mitigation application 90 days or more before a
foreclosure sale or during the period set forth in paragraph (f) of this section.” The parties do not

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Northern District of California

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argue that paragraph (f) applies so the focus is whether Fay received Plaintiffs’ “complete loss

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mitigation application 90 days or more before a foreclosure sale.” 12 C.F.R. § 1024.41(h)(1). If

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not, Plaintiffs have no right to appeal and Fay’s failure to inform Plaintiffs of their right to appeal

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is not a violation of the regulation.

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It is not disputed that when Plaintiffs first submitted their loan modification application to

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Fay on November 13, 2015, a foreclosure sale was scheduled for November 20, 2015. As such,

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based on these two dates, the application was not submitted ninety days before a foreclosure sale.

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However, the SAC also alleges that Plaintiffs continued to supplement their application several

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times and do not allege a complete application until January 8, 2016. SAC ¶ 15. The SAC also

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alleges that the foreclosure sale was later scheduled for February 22, 2016. Id. ¶¶ 16-20.

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Alternatively, assuming that the foreclosure sale was postponed to February 22, 2016 at the time

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the application was completed on January 8, 2016, January 8, 2016 is still not ninety days before

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February 22, 2016.

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In an attempt to concoct a ninety-day window, Plaintiffs argue that their application was

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“facially complete” on November 13, 2015, despite having to submit additional documents until

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January 8, 2015 and that the foreclosure date should be determined at the time the “decision was

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made on Plaintiff’s loss mitigation application.” Opp’n 10; 12 C.F.R. § 1024.41(c)(2)(iv). The

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Court finds this calculation untenable for several reasons. First, this theory conveniently neglects
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the language of the 12 C.F.R. § 1024.41(b)(3) that requires that the “number of days between

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when a complete loss mitigation application is received and when a foreclosure sale occurs [] shall

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be [determined] as of the date a complete loss mitigation application is received.” Plaintiffs’ own

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pleading admits that the application was not complete until January 8, 2016, thus foreclosing any

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argument that 90 days remained until the February 22, 2016 rescheduled foreclosure date.

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Alternatively, even assuming that the application was “facially complete” on November 13, 2015,

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as of that date, a foreclosure sale was scheduled on November 20, 2015, far less than the required

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90 days. Plaintiffs’ argument that the foreclosure date should be determined at the time the

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“decision was made on Plaintiff’s loss mitigation application” is thus contrary to the language in
12 C.F.R. § 1024.41 and unsupported by any authority. See, e.g., 12 C.F.R. § 1024.41(b)(3).

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Second, Plaintiffs’ theory attempts to straddle both November 13, 2015 and January 8, 2016 as the

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date their application was completed, so to procure the later February 22, 2016 foreclosure date,

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but also to reach back to November 13, 2015 as the date when the application was “facially

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complete.” This contorted legal gymnastics essentially masquerades an untimely application as a

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timely one, and imposes additional obligations on Fay, that it otherwise would not have incurred if

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it were to reject Plaintiffs’ application outright and to foreclose on their property on November 20,

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2015. The Court thus rejects Plaintiffs’ interpretation of the regulation.

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In order to understand the proper application of 12 C.F.R. § 1024.41(h), the Court finds

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persuasive Garmou v. Kondaur Capital Corp., No. 15-12161, 2016 WL 3549356, at *2 (E.D.

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Mich. June 30, 2016). Although Garmou concerned a different subsection of 12 C.F.R. § 1024.41,

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its discussion on how foreclosure dates were determined is instructive here. The defendant in

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Garmou initially scheduled a foreclosure sale to be held on May 22, 2015 and the plaintiff

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submitted a loan modification application twenty-five days before the announced sale. Id. at *4.

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The defendant did not provide the plaintiff a decision on the loan application, on the ground that

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that it had no obligation to consider the application, which was submitted only twenty-five days

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prior to the scheduled sale and not submitted “more than 37 days before a foreclosure sale,” as

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required by 12 C.F.R. section 1024.41(g). Id. Although the defendant subsequently postponed the

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sale on a week-to-week basis for more than a year until May 6, 2016, the court agreed with the
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defendant that the timeline is calculated based on the date the foreclosure sale was originally

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scheduled, and thus, the application was not timely. Id. The court rejected the plaintiff’s

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argument that the length of time should be “between when the application was received and when

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the foreclosure sale was ultimately carried out.” Id. In reaching that conclusion, the court held

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that whether “certain foreclosure protections and other rights in the rule apply depends on the date

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for which a foreclosure sale was scheduled at the time of a borrower’s complete application.” Id.

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at *5 (citing 12 C.F.R. § 1024.41(b)(3)) (other citations omitted).

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Although Plaintiffs’ right to appeal depends on the ninety-day window in 12 C.F.R. section
1024.41(h) and not the thirty-seven window for consideration of an application in section

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1024.41(g), the situation is analogous to that in Garmou. When Plaintiffs submitted their

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application to Fay on November 13, 2015, a foreclosure sale was already scheduled for November

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20, 2015. SAC ¶ 15; Mot. 7-8; RJN, Ex. 6. The untimeliness of Plaintiff’s application, filed only

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seven days before the scheduled foreclosure sale date, is more egregious than that of the plaintiff

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in Garmou, who submitted the application twenty-five days before the scheduled foreclosure sale.

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Accordingly, under section 1024.41(g) and consistent with Garmou, Fay had no obligation to even

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consider and render a decision on Plaintiffs’ application. Moreover, under section 1024.41(h),

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Plaintiffs’ untimeliness also deprived them of the right to appeal the decision.

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Although Fay had no obligation to consider Plaintiffs’ application, Fay evaluated it

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nonetheless and after several document submissions, the application was completed on January 8,

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2016. SAC ¶ 15; Reply 5. In the process of evaluating Plaintiffs’ application, Faye postponed the

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foreclosure sale to February 22, 2016, similar to the situation in Garmou, when the defendant

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delayed the foreclosure in an attempt to give more time to the mortgagor to cure the default.

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Opp’n 10; 2016 WL 3549356, at *4. Fay’s postponement of foreclosure, however, does not

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change the untimeliness of the Plaintiffs’ application. Under this Court’s interpretation of the

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regulation, “the date for which a foreclosure sale was scheduled [would be determined] at the time

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of a borrower’s complete application.” See 12 C.F.R. § 1024.41(b)(3); Garmou, 2016 WL

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3549356 at *5. As discussed above, regardless of whether the application was considered

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completed on November 13, 2015 for which the November 20, 2015 foreclosure date applies, or
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January 8, 2016 for which Plaintiffs argue the February 22, 2016 rescheduled foreclosure date

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would apply, the application was not submitted ninety days before the scheduled foreclosure date

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as of the date of the completed application. Accordingly, Fay did not violate 12 C.F.R. § 1024.41

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in not granting Plaintiffs a right to appeal.

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Setting aside the fact that Plaintiffs’ application was untimely under 12 C.F.R. §

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1024.41(h)(1), the SAC also fails to sufficiently allege that Plaintiffs were eligible for any of the

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programs that Fay did not offer in its decision. The regulation “permit[s] a borrower to appeal the

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servicer’s determination to deny a borrower’s loss mitigation application for any trial or

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permanent loan modification program available to the borrower.” 12 C.F.R. § 1024.41(h)(1)
(emphasis added). Plaintiffs conclusorily allege that they had sufficient income to support a 2011

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modification without providing any additional facts about their income. However, whether their

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income was sufficient with respect to the 2011 modification is inapposite to the modification

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application at issue, where the denial specified ineligibility because the loan arrears exceeded the

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allowable amount. SAC ¶ 21; RJN, Ex. 5; Ex. A to SAC (stating that the “delinquent balance on

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the mortgage exceeds program guidelines” and “current income is insufficient to achieve a

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payment that would qualify for the program”). In the absence of any other facts, the SAC remains

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deficient for not alleging plausibly that there were programs for which Plaintiffs were eligible but

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were denied by Fay.

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C.

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Plaintiffs assert that Fay committed negligent misrepresentation, in violation of California

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Civil Code § 1710(2) because it represented to them that a right to appeal was not available. SAC

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¶¶ 39-44. Fay argues that because Plaintiffs had no right to appeal the decision on their loan

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modification application, there was no misrepresentation. Mot. 8-9. Plaintiffs reiterated that

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Fay’s representation that they had no right to appeal was false. Opp’n 13.

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Negligent Misrepresentation

The elements of negligent misrepresentation are “(1) the misrepresentation of a past or

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existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to

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induce another's reliance on the fact misrepresented, (4) justifiable reliance on the

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misrepresentation, and (5) resulting damage.” Nat’l Union Fire Ins. Co. of Pittsburgh, PA v.
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Cambridge Integrated Servs. Grp., Inc., 171 Cal. App. 4th 35, 50 (2009) (citation omitted).
As discussed above, the Court finds that Plaintiffs had no right to appeal because their

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application was not submitted 90 days or more before a foreclosure sale pursuant to 12 C.F.R. §

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1024.41(h). As such, Fay’s representation to Plaintiffs was not false, and this claim fails at least

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for not alleging a misrepresentation.

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D.

Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692c; California
Civil Code § 1788.17

Plaintiff further asserts that Fay violated 15 U.S.C. § 1692c (“FDCPA”) by failing to

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inform Plaintiffs that they had a right to appeal their decision on their loan modification
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application, effectively misleading or deceiving them. SAC ¶¶ 50-53. As a separate cause of
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action, Plaintiff also claims that Fay violated California Civil Code § 1788.17, which requires a
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Northern District of California

debt collector to comply with the FDCPA.
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Fay first argues that it is not a debt collector and that loan modification activities are not
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debt collection activities under either the federal or state statute. Mot. 12, 14. It next contends
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that both causes of action fail because the complaint alleges no false representation or deceptive
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means to collect any debt. Id. at 13-14. Plaintiffs aver that Fay is a debt collector, performed debt
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collection, and misrepresented to Plaintiffs their right to appeal. Opp’n 16-18.
To state a claim under the FDCPA, “a plaintiff must allege facts that establish the

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following: (1) the plaintiff has been the object of collection activity arising from a consumer debt;
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(2) the defendant attempting to collect the debt qualifies as a ‘debt collector’ under the FDCPA;

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and (3) the defendant has engaged in a prohibited act or has failed to perform a requirement
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imposed by the FDCPA.” Pratap v. Wells Fargo Bank, N.A., 63 F. Supp. 3d 1101, 1113 (N.D.
Cal. 2014) (citation omitted). California Civil Code § 1788.17 requires “every debt collector

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collecting or attempting to collect a consumer debt shall comply with the provisions of Sections
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1692b to 1692j . . . of, Title 15 of the United States Code.”

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Regardless of whether Fay was a debt collector or performed debt collection activities, the
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FDCPA cause of action and the California statutory counterpart also fail. As discussed above,
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Plaintiffs had no right to appeal the decision on their loan modification application so Fay did not
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engage in any prohibited act by correctly informing them of their lack of right to appeal.

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E.

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Plaintiffs also claim that Fay violated the California Business and Professions Code section

California Business and Professions Code § 17200

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17200 (“UCL”), based on the alleged violations of the federal regulation and the state statutes as

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set forth in the prior causes of action. SAC ¶¶ 68-75; Opp’n 20.

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To bring a UCL claim, a plaintiff must show either an (1) “unlawful, unfair, or fraudulent

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business act or practice,” or (2) “unfair, deceptive, untrue or misleading advertising.” Lippitt v.

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Raymond James Fin. Servs., Inc., 340 F.3d 1033, 1043 (9th Cir. 2003) (citing Cal. Bus. & Prof.

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Code § 17200).

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Given that “Plaintiffs’ UCL claim is tethered to [the other causes of action],” this claim

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Northern District of California

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fails for the same reasons set forth above. Opp’n 20. The Court finds that the SAC fails to

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support that Fay violated any of the statutes or the regulation discussed above. Accordingly, the

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UCL claim is deficient for the same reason.

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F.

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In deciding whether to grant leave to amend, the Court must consider the factors set forth

Leave to Amend

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by the Supreme Court in Foman v. Davis, 371 U.S. 178 (1962), and discussed at length by the

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Ninth Circuit in Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048 (9th Cir. 2009). A district

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court ordinarily must grant leave to amend unless one or more of the Foman factors is present: (1)

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undue delay, (2) bad faith or dilatory motive, (3) repeated failure to cure deficiencies by

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amendment, (4) undue prejudice to the opposing party, and (5) futility of amendment. Eminence

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Capital, 316 F.3d at 1052. “[I]t is the consideration of prejudice to the opposing party that carries

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the greatest weight.” Id. However a strong showing with respect to one of the other factors may

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warrant denial of leave to amend. Id.

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Three of the factors – undue delay, bad faith, or dilatory motive – are not applicable here

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because the present determination on whether to grant leave does not stem from a motion for leave

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by Plaintiffs and there is no evidence or allegation of “undue delay, bad faith or dilatory motive”

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over the course of this case. Undue prejudice to the opposing party also has limited application

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here because the complaint has given Fay fair notice of the asserted claims.
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The Court, however, finds that the remaining factors – repeated failure to cure deficiencies

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by amendments previously allowed, and futility of the amendment – to be dispositive. “[A]

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proposed amendment is futile only if no set of facts can be proved under the amendment to the

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pleadings that would constitute a valid and sufficient claim or defense.” Miller v. Rykoff-Sexton,

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Inc., 845 F.2d 209, 214 (9th Cir. 1988). The Ninth Circuit has alternatively stated that the test of

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whether amendment would be futile is “identical to the one used when considering the sufficiency

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of a pleading challenged under Rule 12(b)(6).” Id.; see Utterkar v. Ebix, Inc., No. 14-02250-LHK,

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2015 WL 5027986, at *8 (N.D. Cal. Aug. 25, 2015).
Here, all of Plaintiffs’ causes of action depend on the allegation that they had a right to

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appeal the decision on their loan modification application despite the untimeliness of their

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application. Notably, Plaintiffs insisted to the Court at the hearing that they stand on their position

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that the foreclosure date should be determined at the time the “decision was made on Plaintiff’s

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loss mitigation application,” and that their application was facially complete on November 13,

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2015. See Opp’n 10. The Court has determined that theory to be contrary to the regulation as

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discussed above. Plaintiffs have not proffered an alternative theory or facts that could render their

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claims viable. Furthermore, Plaintiffs have had prior opportunities for substantive amendments to

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address the deficiencies identified by Fay’s prior motion to dismiss given that this is Plaintiffs’

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second amended complaint. As such, there is also a repeated failure to cure the deficiencies.

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Accordingly, the Court GRANTS Fay’s motion to dismiss without leave to amend.

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IV.

ORDER
For the foregoing reasons, the Court DISMISSES Plaintiffs’ Second Amended Complaint

without leave to amend.

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Dated: March 10, 2017
______________________________________
BETH LABSON FREEMAN
United States District Judge

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