Forster et al v. Wells Fargo Bank, N.A. et al
Filing
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ORDER GRANTING 10 MOTION TO DISMISS, WITH LEAVE TO AMEND IN PART AND WITHOUT LEAVE TO AMEND IN PART. Amended Pleadings due by 2/13/2018. Signed by Judge Beth Labson Freeman on 1/23/2018. (blflc1S, COURT STAFF) (Filed on 1/23/2018)
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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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KEITH FORSTER, et al.,
Plaintiffs,
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v.
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WELLS FARGO BANK, N.A., et al.,
Defendants.
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United States District Court
Northern District of California
Case No. 17-cv-05120-BLF
ORDER GRANTING MOTION TO
DISMISS, WITH LEAVE TO AMEND IN
PART AND WITHOUT LEAVE TO
AMEND IN PART
[Re: ECF 10]
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Plaintiffs Keith and Ying Forster sue Defendants Wells Fargo Bank, N.A. (“Wells Fargo”)
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and HSBC Bank USA, N.A. (“HSBC”) for alleged misconduct relating to review of their
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applications for modification of their home mortgage loan. For the reasons discussed below,
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Defendants’ Rule 12(b)(6) motion to dismiss the Forsters’ claims for negligence and breach of
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contract is GRANTED, WITH LEAVE TO AMEND IN PART AND WITHOUT LEAVE TO
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AMEND IN PART.
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I.
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BACKGROUND1
Mr. and Mrs. Forster bought their home in 2005. Compl. ¶ 8, ECF 1. HSBC is the current
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owner or beneficiary of the Forsters’ home mortgage loan, and Wells Fargo is the loan servicer.
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Id. ¶¶ 2-3. In 2010, the Forsters fell behind on their mortgage payments. Id. ¶ 9. Wells Fargo
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offered them the opportunity to apply for a loan modification, and they submitted a completed
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application in late 2010. Id. ¶¶ 9-10. However, Wells Fargo spent the next several years asking
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the Forsters for the same documentation over and over again. Id. ¶ 11. Although the Forsters
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complied with every request, their application for loan modification was denied. Id. ¶ 12.
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The Forsters’ well-pled factual allegations are accepted as true for purposes of the motion to
dismiss. See Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011).
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On December 10, 2013, the Forsters entered into a written contract with Defendants
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whereby Defendants agreed to review the Forsters for loan modification in strict compliance with
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its own guidelines and with California law. Compl. ¶ 13. In early 2015, the Forsters submitted a
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new loan modification application at Wells Fargo’s direction. Id. ¶ 14. The new application
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supported a change in financial circumstances, specifically, increased income and decreased
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expenses. Id. Wells Fargo denied the application on or about March 2, 2016, stating that the
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change in circumstances did not provide a sufficient basis for another review. Id. ¶ 15. Wells
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Fargo’s decision was based on a miscalculation of the Forsters’ income. Id. ¶ 17. The Forsters
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believe that had their proper income been used, another review would have been warranted based
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on changed financial circumstances. Id.
United States District Court
Northern District of California
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In November 2016, the Forsters were invited to submit another application for loan
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modification. Compl. ¶ 18, ECF 1. They did so on November 28, 2016. Id. Approximately one
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month later, Wells Fargo recorded a Notice of Default despite the ongoing loan modification
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review. Id. ¶¶ 19-20. Wells Fargo denied the application for loan modification on May 9, 2017,
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on the basis that the Forsters had the ability to make their existing mortgage payments. Id. ¶ 22.
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The Forsters assert that the basis for Wells Fargo’s denial is erroneous, as Wells Fargo informed
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them in April 2017 that the payment due was $627,019.87, an amount that the Forsters do not
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have the ability to pay. Id. ¶ 23. The Forsters’ appeal of the denial was rejected. Id. ¶ 24.
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The Forsters allege that they have foregone other loss mitigation options such as
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bankruptcy or short sale based on the representations that they would be reviewed for loan
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modification. Compl. ¶ 25. They also allege that Defendants’ lack of diligence in reviewing their
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loan modification applications has resulted in an increase in indebtedness, lost equity in the
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property, damage to credit, and other damages. Id. ¶ 26.
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The Forsters filed this lawsuit against Wells Fargo and HSBC in the Santa Clara County
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Superior Court on July 25, 2017, asserting four state law claims: (1) negligence; (2) violation of
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California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200; (3) violation of
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California’s Homeowners Bill of Rights (“HBOR”), Cal. Civ. Code § 2923.6; and (4) breach of
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contract. Compl., ECF 1. Defendants removed the action to federal district court on the basis of
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diversity of citizenship. Notice of Removal, ECF 1. They now seek dismissal of Claim 1
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(negligence) and Claim 4 (breach of contract) under Federal Rule of Civil Procedure 12(b)(6) for
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failure to state a claim upon which relief may be granted. Defendants do not challenge Claim 2
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(UCL) or Claim 3 (HBOR) in the current motion.
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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
as true all well-pled factual allegations and construes them in the light most favorable to the
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United States District Court
Northern District of California
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plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the
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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
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A.
Negligence (Claim 1)
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Under California law, a plaintiff must allege the following elements to state a claim for
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negligence: “‘(1) the defendant owed the plaintiff a duty of care, (2) the defendant breached that
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duty, and (3) the breach proximately caused the plaintiff’s damages or injuries.’” Alvarez v. BAC
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Home Loans Servicing, L.P., 228 Cal. App. 4th 941, 944 (2014) (quoting Lueras v. BAC Home
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Loans Servicing, L.P., 221 Cal. App. 4th 49, 62 (2013)). The Forsters allege that “Defendants
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owe[d] a general duty of care to properly and timely process Plaintiffs[’] loan modification
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application.” Compl. ¶ 33, ECF 1. Defendants allegedly breached that duty both “by failing to
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diligently and timely review the pending application,” and “by failing to use accurate financial
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data in support of their denial.” Id. ¶¶ 33-34. Defendants also allegedly were “negligent per se”
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when they pursued foreclosure during the loan modification process. Id. ¶¶ 35-37.
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As an initial matter, although the negligence claim is asserted against both Wells Fargo and
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HSBC, it is clear on the face of the complaint that the claim is based solely on the conduct of
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Wells Fargo. See Compl. ¶¶ 8-47. The negligence claim is asserted against HSBC on the basis of
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the Forsters’ belief that Wells Fargo acted “on behalf of HSBC.” Id. ¶ 3. Accordingly, only Wells
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Fargo’s conduct is at issue.
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Defendants move to dismiss the negligence claim based upon a legal argument that under
California law a mortgage loan servicer does not owe the borrower a duty of care in the processing
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United States District Court
Northern District of California
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of a loan modification application. The Forsters dispute Defendants’ characterization of
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California law and contend that a mortgage loan servicer does owe the borrower a duty of care
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under facts such as those alleged here. “When interpreting state law, federal courts are bound by
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decisions of the state’s highest court.” Strother v. S. Cal. Permanente Med. Grp., 79 F.3d 859,
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865 (9th Cir. 1996) (internal quotation marks and citation omitted). Where, as here, the California
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Supreme Court has not addressed the issue, this Court “must predict how the highest state court
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would decide the issue using intermediate appellate court decisions, decisions from other
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jurisdictions, statutes, treatises, and restatements as guidance.” Id. (internal quotation marks and
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citation omitted).
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“Whether a duty of care exists is a question of law to be determined on a case-by-case
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basis.” Lueras, 221 Cal. App. 4th at 62. Under California law, “as a general rule, a financial
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institution owes no duty of care to a borrower when the institution’s involvement in the loan
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transaction does not exceed the scope of its conventional role as a mere lender of money.”
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Nymark v. Heart Fed. Sav. & Loan Assn., 231 Cal. App. 3d 1089, 1096 (1991). However, that
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general rule is not determinative in every case. Rossetta v. CitiMortgage, Inc., -- Cal. App. 5th ---,
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2017 WL 6422567, at *15 (2017). In order to determine whether a duty of care exists in a
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particular case, California courts balance the factors set forth in Biakanja v. Irving (1958) 49 Cal.
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2d 647 (1958). Id. Those factors are: (1) the extent to which the transaction was intended to
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affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the
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plaintiff suffered injury, (4) the closeness of the connection between the defendant’s conduct and
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the injury suffered, (5) the moral blame attached to the defendant’s conduct, and (6) the policy of
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preventing future harm. Biakanja, 49 Cal. 2d at 650.
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“California courts of appeal have not settled on a uniform application of the Biakanja
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factors in cases that involve a loan modification.” Rosetta, 2017 WL 6422567, at *15. “Although
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lenders have no duty to offer or approve a loan modification, courts are divided on the question of
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whether accepting documents for a loan modification is within the scope of a lender’s
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conventional role as a mere lender of money, or whether, and under what circumstances, it can
give rise to a duty of care with respect to the processing of the loan modification application.” Id.
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United States District Court
Northern District of California
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(internal citations omitted). Defendants urge the Court to follow Lueras, 221 Cal. App. 4th at 67,
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and its progeny to decide that under the Biakanja factors a loan servicer does not owe a home
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mortgagee a common law duty of care in the processing of a loan modification application. The
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Forsters ask the Court instead to follow Alvarez, 228 Cal. App. 4th at 944, and its progeny in
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deciding that a common law duty of care in the loan modification process does arise under
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application of the Biakanja factors. California appellate courts and federal district courts within
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the Ninth Circuit appear to be split relatively evenly on this question. See Rosetta, 2017 WL
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6422567, at *15 (collecting cases); Marques v. Wells Fargo Bank, N.A., No. 16-CV-03973-YGR,
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2016 WL 5942329, at *7 (N.D. Cal. Oct. 13, 2016) (“A growing number of courts that have
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addressed this issue since Lueras and Alvarez have adopted the holding in Lueras in finding that a
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mortgage servicer does not owe borrowers a duty of care in processing a residential loan
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modification.”); Romo v. Wells Fargo Bank, N.A., No. 15-CV-03708-EMC, 2016 WL 324286, at
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*9 (N.D. Cal. Jan. 27, 2016) (collecting cases and stating that “most federal district courts have
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followed Alvarez”).
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To the extent it has addressed the question, the Ninth Circuit has concluded that
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“application of the Biakanja factors does not support imposition of such a duty.” Anderson v.
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Deutsche Bank Nat. Tr. Co. Americas, 649 F. App’x 550, 552 (9th Cir. 2016) (no duty of care
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where the borrower’s negligence claim is based on allegation of delay in the processing of loan
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modification application); see also Badame v. J.P. Morgan Chase Bank, N.A., 641 F. App’x 707,
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709-10 (9th Cir. 2016) (“Chase did not owe Plaintiffs a duty of care when considering their loan
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modification application because ‘a loan modification is the renegotiation of loan terms, which
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falls squarely within the scope of a lending institution’s conventional role as a lender of money.’”)
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(quoting Lueras, 221 Cal. App. 4th at 67); Deschaine v. IndyMac Mortg. Servs., 617 F. App’x
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690, 693 (9th Cir. 2015) (“IndyMac owed no duty of care to Deschaine when considering his
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request for a loan modification, because ‘a loan modification is the renegotiation of loan terms,
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which falls squarely within the scope of a lending institution’s conventional role as a lender of
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money.’”) (quoting Lueras, 221 Cal. App. 4th at 67).
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This Court finds the Lueras line of cases to be more persuasive and therefore concludes
United States District Court
Northern District of California
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that, were it to address the issue, the California Supreme Court most likely would find that a
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mortgage servicer does not owe a borrower a duty of care in processing an application for a
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residential loan modification. In particular, this Court is not persuaded that the California
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Supreme Court would find that the foreseeability of harm, closeness of connection, moral blame,
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or other Biakanja factors give rise to a common law duty. “Harm to the borrower as a result of an
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extended review period, while foreseeable, is neither certain nor primarily attributable to the
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lender’s delay in the processing of the application.” Anderson, 649 Fed. App’x at 552. Where
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modification is necessary because the borrower cannot repay the loan, the borrower’s harm is not
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closely connected with the lender’s conduct, and the lender is not morally culpable. See id. This
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Court therefore concludes that the California Supreme Court would find cases involving
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applications for residential loan modification to fall within the general rule that financial
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institutions do not owe borrowers a common law duty of care.
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Accordingly, Defendants’ motion to dismiss the Forsters’ negligence claim is GRANTED
WITHOUT LEAVE TO AMEND.
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B.
Breach of Contract (Claim 4)
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The elements of a claim for breach of contract under California law are: “(1) the existence
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of the contract, (2) plaintiff’s performance or excuse for nonperformance, (3) defendant’s breach,
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and (4) the resulting damages to the plaintiff.” Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811,
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821 (2011). “A written contract may be pleaded either by its terms – set out verbatim in the
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complaint or a copy of the contract attached to the complaint and incorporated therein by reference
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– or by its legal effect.” McKell v. Washington Mut., Inc., 142 Cal. App. 4th 1457, 1489 (2006).
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“In order to plead a contract by its legal effect, plaintiff must allege the substance of its relevant
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terms.” Id. (internal quotation marks and citation omitted). Pleading a contract by its legal effect
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“is more difficult, for it requires a careful analysis of the instrument, comprehensiveness in
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statement, and avoidance of legal conclusions.” Id. (internal quotation marks and citation
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omitted).
The Forsters allege that “Plaintiffs and Defendants entered into a written contract wherein
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Defendants agreed to review Plaintiffs for a loan modification in strict compliance with its [sic]
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United States District Court
Northern District of California
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own guidelines, California law and in good faith.” Compl. ¶ 60, ECF 1. Defendants point out,
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correctly, that the alleged written contract is not attached to the complaint or quoted verbatim.
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Nor is sufficient information provided to plead the alleged written contract by legal effect, as the
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Forsters do not allege the timing of the review allegedly promised, or which of the many loan
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modification applications referenced in the complaint was the subject of the written contract.
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Accordingly, the Forsters have failed to allege facts showing the existence of a written contract.
Defendants’ motion to dismiss the Forsters’ breach of contract claim is GRANTED WITH
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LEAVE TO AMEND.
IV.
ORDER
(1)
negligence;
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The motion is GRANTED WITHOUT LEAVE TO AMEND as to Claim 1 for
(2)
The motion is GRANTED WITH LEAVE TO AMEND as to Claim 4 for breach of
contract;
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(3)
Any amended complaint shall be filed on or before February 13, 2018; and
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(4)
Leave to amend is limited only to Claim 4 for breach of contract – the Forsters may
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not add new claims or parties without express leave of the Court.
Dated: January 23, 2018
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BETH LABSON FREEMAN
United States District Judge
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