Opinion
CIV. NO. 2:14-736 WBS AC
05-29-2014
SCOTT PAULHUS and LYNETTE PAULHUS, Plaintiffs, 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.
MEMORANDUM AND ORDER RE: MOTION
TO DISMISS
Plaintiffs Scott Paulhus and Lynette Paulhus brought this action against defendants Fay Servicing, LLC ("Fay"), Caliber Home Loans, Inc., formerly known as Vericrest Financial, Inc. ("Vericrest"), and Summit Management Company, LLC ("Summit"), arising out of the foreclosure of plaintiffs' home. Defendants now move to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.
I. Factual & Procedural History
In 2004, plaintiffs entered into a mortgage loan for $850,000, which was secured by a Deed of Trust to their home in Granite Bay, California. (Compl. ¶ 17 (Docket No. 1-1).) A Substitution of Trustee recorded in December 2011 indicates that Summit is the current trustee under the Deed of Trust. (Vericrest Req. for Judicial Notice ("Vericrest RJN") Ex. C.) Plaintiff alleges that Fay is the current mortgage servicer and that it assumed servicing rights to the loan from Vericrest in 2013. (Compl. ¶ 18.)
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. 241)), the Assignment of Deed of Trust, (id. Ex. B. (Docket No. 242)), the Substitution of Trustee, (id. Ex. C (Docket No. 243)), a Notice of Default, (id. Ex. D (Docket No. 244)), a Rescission of Notice of Default, (id. Ex. E. (Docket No. 245)), and an Assignment of Mortgage/Deed of Trust, (id. Ex. F (Docket No. 246)). 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).
On December 14, 2011, Summit recorded a Notice of Default reflecting that plaintiffs were $16,384.82 in arrears on their loan. (Vericrest RJN Ex. D.) Summit subsequently rescinded the Notice of Default on February 17, 2012. (Vericrest RJN Ex. E.) Although plaintiffs allege throughout the Complaint that they were "forced into default," (Compl. ¶ 23), they do not allege that they received this or any other Notice of Default.
On March 16, 2012, plaintiffs allegedly received a monthly statement from Vericrest for $5,993.27 instead of their usual payment of $3,973.16 per month. (Id. ¶ 19.) Plaintiffs subsequently contacted Vericrest to inform them that the amount stated was "unjustified and erroneous." (Id.) The next month, plaintiffs received a billing statement for $4,020.01, and concluded that Vericrest had amended the statement to reflect the amount that was actually due. (Id. ¶ 20.) Plaintiffs allege that they paid that amount each month for over a year and that Vericrest continued to accept their payments. (Id.)
On September 1, 2013, Fay sent plaintiffs a billing statement for $5,513.13. (Id. ¶ 21.) Plaintiffs allege that they contacted Fay to correct the bill, and that Fay informed them that they did not have their complete loan file because of the "servicer change." (Id.) Plaintiffs also allege that they spoke to a Fay employee on December 3, 2013, who represented that plaintiffs would not be considered in default if they submitted proof of income and two payments for $3973.16. (Id.) When Plaintiffs submitted those payments, Fay allegedly rejected them and stated that they were insufficient to satisfy the full amount owed. (Id. ¶ 22.) As a result, plaintiffs allege, they were "forced into default." (Id. ¶ 23.)
Plaintiffs brought this action in Placer County Superior Court on February 18, 2014, alleging five claims: (1) breach of the covenant of good faith and fair dealing; (2) violations of section 2937 of the California Civil Code; (3) unfair business practices in violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Profs. Code §§ 17200 et seq.; (4) violations of California Civil Code section 2924.17; and (5) injunctive relief pursuant to California Civil Code section 2924.12. (Docket No. 1.) Defendants removed to this court on the basis of diversity jurisdiction, 28 U.S.C. § 1332, and now move to dismiss plaintiffs' Complaint pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. (Docket Nos. 20, 23.)
II. Discussion
On a motion to dismiss, the court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322 (1972). To survive a motion to dismiss, a plaintiff needs to plead "only enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This "plausibility standard," however, "asks for more than a sheer possibility that a defendant has acted unlawfully," and where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 556-57).
A. Breach of Covenant of Good Faith and Fair Dealing
California, like the majority of states, recognizes an implied covenant of good faith and fair dealing. Foley v. Interactive Data Corp., 47 Cal. 3d 654, 683 (1988) (citing Restatement of Contracts (2d) § 205). It is not clear whether plaintiffs' claim for breach of the implied covenant of good faith and fair dealing sounds in contract or tort. Cf. Spencer v. DHI Mortg. Co., 642 F.2d 1153, 1165 (E.D. Cal. 2009) (O'Neill, J.) (recognizing "uncertainty whether the claim proceeds under contract or tort law.").
To the extent that a claim for breach of the implied covenant of good faith and fair dealing sounds in contract, it applies only to promises "arising out of the contract itself." Foley, 47 Cal. 3d at 690; accord Racine & Laramie, Ltd. v. Dep't of Parks & Recreation, 11 Cal. App. 4th 1026, 1031 (4th Dist. 1992) ("The implied covenant of good faith and fair dealing rests upon the existence of some specific contractual obligation."). A corollary to this rule is that a claim for breach of the implied covenant of good faith and fair dealing requires a plaintiff to identify a contract to which both he and the defendant were parties. See Champlaie v. BAC Home Loan Servicing, LP, 706 F. Supp. 2d 1029, 1063 (E.D. Cal. 2009) (Karlton, J.).
Although plaintiffs' claim for breach of the implied covenant of good faith and fair dealing is premised on the allegation that Vericrest and Fay mishandled their mortgage payments, plaintiffs do not identify any contract to which either Vericrest or Fay is a party. Even if the court could infer the existence of such a contract, plaintiffs do not allege that they were a party to that contract or identify a specific contractual provision that could serve as a basis for their claim. See Racine & Laramie, 11 Cal. App. 4th at 1031. As a result, plaintiffs have not stated a contract claim for breach of the implied covenant of good faith and fair dealing. See Champlaie, 705 F. Supp. 2d at 1063-64 (dismissing claim for breach of implied covenant of good faith and fair dealing where plaintiff failed to allege the existence of a contract with the defendant loan servicer or foreclosure trustee).
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. 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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California has also recognized a tort claim for breach of the implied covenant of good faith and fair dealing. Foley, 47 Cal. 3d at 682. A tort claim for breach of the implied covenant of good faith and fair dealing does not arise in the context of an arms-length transaction between contracting parties. See, e.g., Pension Trust Fund For Operating Eng'rs. v. Fed. Ins. Co., 307 F.3d 944, 955 (9th Cir. 2002); Mitsui Mfrs. Bank v. Superior Court, 212 Cal. App. 3d 726, 730 (4th Dist. 1989). Rather, it arises only in "limited circumstances" involving a "special relationship" between those parties. Bionghi v. Metro. Water Dist. of S. Cal., 70 Cal. App. 4th 1358, 1370 (2d Dist. 1999); accord Spencer, 642 F. Supp. 2d at 1165.
Plaintiffs contend that such a "special relationship does exist" because Fay and its predecessor, Vericrest, entered into a contract with the lender or its successor-in-interest to service plaintiffs' loan. (Pls.' Opp'n at 3:5-9 (Docket No. 25.) Although plaintiffs refer to such a contract in their Opposition, they do not allege its existence in the Complaint. Even if they had, a lending relationship of the sort plaintiffs allude to is not the type of "special relationship" required to state a tort claim for breach of the implied covenant of good faith and fair dealing. See Spencer, 642 F. Supp. 2d at 1165 (quoting Pension Trust Fund, 307 F.3d at 955).
Accordingly, because plaintiffs have not stated a claim for breach of the implied covenant of good faith and fair dealing under either a contract or tort theory, the court must grant defendants' motion to dismiss this claim.
B. California Civil Code Section 2937
Section 2937 of the California Civil Code requires a loan servicer to provide written notice before transferring servicing responsibilities to a new mortgage servicer. Cal. Civ. Code § 2937(b). The statute also provides that a loan servicer may not hold a borrower liable for payments made to a previous servicer or late charges arising out of such payments if those payments were made prior to the borrower's receipt of the notice required by section 2937(b). Cal. Civ. Code § 2937(g). In order to state a claim for a violation of section 2397, a plaintiff must allege that the harm he suffered resulted from that statutory violation. See Amaral v. Wachovia Mortg. Corp., Civ. No. 1:09-937 OWW GSA, 2011 WL 1205250, at *3 (E.D. Cal. Mar. 29, 2011) (citing Faria v. San Jacinto Unified Sch. Dist., 50 Cal. App. 4th 1939, 1947 (4th Dist. 1996)).
Plaintiffs allege that Vericrest failed to notify him that it was transferring servicing responsibilities to Fay and that, "[a]s a result of [d]efendants' failure to abide by the requirements of Civil Code § 2937," they were "subject to unfair and unlawful business practices . . . ." (Compl. ¶¶ 38-39.) But even if plaintiffs have sufficiently alleged that Vericrest and Fay failed to comply with section 2937, they have not alleged any facts to support their allegation that they suffered harm as a result. Plaintiffs allege only that Fay requested an excessive monthly payment because it miscalculated the escrow amount due, that it rejected plaintiffs' purportedly inadequate payments, and that plaintiffs "fell into default" because Vericrest and Fay "mishandl[ed]" their loan and "fail[ed] to accurately account for [plaintiffs'] loan terms." (Id. ¶ 23, 33.) By their own terms, these allegations establish that plaintiffs' default resulted from Fay's miscalculation of the amount due on the loan, not from Vericrest's failure to inform plaintiffs that it was transferring servicing responsibilities to Fay.
Plaintiffs also allege that after they contacted Fay about their September 2013 billing statement, they were "shuffled from one person to another" for several months because Fay did not have plaintiffs' complete loan file. (Id. ¶¶ 21, 31.) To the extent that plaintiffs allege any harm as a result, their allegations establish that the harm occurred "due to the servicer change," (id. ¶¶ 21, 31), not due to Vericrest's failure to notify them of the servicer change. Accordingly, because plaintiffs have not alleged any causal connection between the harm they alleged and defendants' purported violations of section 2937, the court must grant defendants' motion to dismiss this claim.
C. California Civil Code Section 2924
Section 2924.17 of the California Civil Code requires that any notice of default filed and recorded by a mortgage servicer must be accurate, complete, and supported by competent and reliable evidence. Cal. Civ. Code § 2924.17(a). The statute further provides that a servicer must ensure that it has reviewed competent and reliable evidence, including the borrower's loan status and loan information, before filing and recording a notice of default. Id. § 2924.17(b). Sections 2924.12 and 2924.19 of the California Civil Code authorize a court to remedy a violation of section 2924.17 by enjoining a foreclosure sale until the violation is cured. Cal. Civ. Code. §§ 2924.12, 2924.19.
Section 2924.17 is part of the Homeowner's Bill of Rights, which "took effect on January 1, 2013." Rockridge Trust v. Wells Fargo, N.A., --- F. Supp. 2d ----, ----, Civ. No. 13:1457 JCS, 2013 WL 5428722, at *28 (N.D. Cal. Sep. 25, 2013). "California courts comply with the legal principle that unless there is an express retroactivity provision, a statute will not be applied retroactively unless it is very clear from extrinsic sources that the Legislature . . . must have intended a retroactive application." Myers v. Philip Morris Cos., 28 Cal. 4th 828, 841 (2002). To the extent that plaintiffs' claim under section 2924.17 is premised on the Notice of Default recorded in 2011, (see Vericrest RJN Ex. C), plaintiffs cannot state a claim because section 2924.17 does not apply retroactively to Notices of Default recorded before 2013. See, e.g., Rose v. J.P. Morgan Chase, N.A., Civ. No. 2:12-225 WBS CMK, 2014 WL 546584, at *8 (E.D. Cal. Feb. 11, 2014); Emick v. JP Morgan Chase Bank, Civ. No. 2:13-340 JAM AC, 2013 WL 3804039, at *3 (E.D. Cal. July 19, 2013); Rockridge Trust, 2013 WL 5428722, at *28.
While plaintiffs allege that they "fell into default" in 2013, (Compl. § 50), they do not allege that any defendant filed or recorded any Notice of Default against them in 2013, let alone that any such notice failed to comply with section 2924.17. In their Opposition, plaintiffs contend that defendants have "continued [to] use a false declaration . . . as a basis for moving forward on non-judicial foreclosure proceedings" in 2013. (Pls.' Opp'n at 5:28-6:2.) Even if the court could infer from this statement that defendants filed and recorded one or more defective notices of default in 2013, the court cannot consider that statement on a motion to dismiss because it does not appear in the Complaint itself. See Butler v. Los Angeles County, 617 F. Supp. 2d 994, 999 (CD. Cal. 2008) ("On a motion to dismiss . . . the Court must limit its review to the four corners of the operative complaint, and may not consider facts presented in briefs or extrinsic evidence." (emphasis added)); William W. Schwarzer, A. Wallace Tashima & James M. Wagstaffe, Federal Civil Procedure Before Trial § 9:211 (2014) (same).
Accordingly, because plaintiffs do not allege that any Notice of Default was filed against their property after the date on which section 2924.17 took effect, the court must grant defendants' motion to dismiss plaintiffs' claim under section 2924.17 and their claims for injunctive relief under sections 2924.12 and 2924.19.
D. Unfair Competition Law
The UCL prohibits unfair competition, which includes "any unlawful, unfair, or fraudulent business act or practice." Cal. Bus. & Profs. Code § 17200. A UCL claim may only be brought "by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition." Cal. Bus. & Profs. Code § 17204; Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 320-21 (2011).
Here, plaintiffs allege only that they were "forced into default" as a result of defendants' allegedly unfair business practices. (Compl. ¶ 50.) They do not allege that they have lost their home, that they paid foreclosure-related fees, or that they incurred any other economic injury as a result of defendants' actions. In fact, notwithstanding any factual statements made in their Opposition, plaintiffs do not even allege that defendants have initiated foreclosure proceedings.
Absent allegations that plaintiffs have actually suffered economic injury as a result of foreclosure proceedings, the possibility that their purported "default" may result in the foreclosure of their home is insufficient to establish that they have lost money or property. See, e.g., Jensen v. Quality Loan Serv. Corp., 702 F. Supp. 2d 1183, 1199 (E.D. Cal. 2010) (Wanger, J.) (holding that plaintiff's allegation that "he 'will' lose his personal residence if a non-judicial foreclosure occurs' was insufficient to allege that plaintiff had lost money or property); Jurewitz v. Bank of Am., N.A., 930 F. Supp. 2d 994, 999-1000 (S.D. Cal. 2013) (holding that plaintiff had not alleged that he lost money or property, even though "a foreclosure sale was scheduled," because he had not lost his home or suffered other economic injury). Accordingly, because plaintiffs have not alleged that they "lost money or property" as a result of defendants' allegedly unfair business practices, see Cal. Bus. & Profs. Code § 17204, the court must grant defendants' motion to dismiss this claim.
IT IS THEREFORE ORDERED that defendants' motion to dismiss be, and the same hereby is, GRANTED.
Plaintiffs have twenty days from the date this Order is signed to file an amended complaint, if they can do so consistent with this Order.
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WILLIAM B. SHUBB
UNITED STATES DISTRICT JUDGE