Business Solutions Alert: Attempt to Thwart Foreclosure Process and Force Loan Modification Dismissed

In Rossberg v. Bank of America, N.A. (No. G047028, published 9/26/13, filed 8/27/13), a California Court of Appeal held that the trial court properly sustained the demurrer of a lender and a trustee where the borrowers failed to adequately allege that the defendants violated statutory requirements for conducting a nonjudicial foreclosure, or that there existed an enforceable agreement to modify their loans. The borrowers sued the lender and the trustee to prevent them from selling their home at a nonjudicial foreclosure sale after the borrowers defaulted on two loans from the bank secured by deeds of trust.

After defaulting on their loan, the borrowers began discussions with the lender to modify their loans. Over the course of two and one-half years, the lender’s employees repeatedly told the borrowers that a loan modification had been granted.

The lender then executed and notarized a substitution of trustee. Before the document was recorded, however, the new trustee executed and recorded a notice of default, indicating that the borrowers were nine months in default. A notice of trustee’s sale was later recorded when the borrowers remained in default.

To stop the foreclosure, the borrowers sued the lender and the trustee alleging causes of action based on unperformed promises to modify the loans and failure to comply with the statutory requirements for conducting a nonjudicial foreclosure. The borrowers alleged: (1) violation of Civil Code section 2923.5 (Notice of default); (2) violation of Civil Code section 2924 (Requirements prior to sale); (3) fraud; (4) violation of unfair competition law; (5) breach of contract; (6) declaratory relief; and (7) quiet title. The trial court sustained the defendants’ demurrer on every cause of action without leave to amend, and the Court of Appeal affirmed.

With respect to Civil Code section 2923.5, which requires that contact with the borrower occur more than thirty days prior to recording a notice of default, the borrowers erroneously interpreted the statute and pleaded that they were not contacted within the thirty days leading up to the recording of the notice of default. This cause of action failed because it did not adequately allege that the lender failed to contact the borrowers in the statutory time (i.e., more than thirty days) before the new trustee recorded the notice of default. On the contrary, the complaint alleged that the borrowers had been contacted multiple times and more than thirty days before the notice of default was recorded.

As to the borrowers’ allegation that the new trustee violated Civil Code section 2924, the court held that the statute expressly authorized the substituted trustee to record the notice of default, even though the substitution of trustee was not notarized or recorded until later. The court found that the plain language of the statute authorized the new trustee to act on the day that the substitution of trustee was executed, regardless of when the substitution was recorded.

As to the promissory fraud allegations, the court rejected the argument that the promise of loan modifications induced the borrowers to continue making loan payments instead of obtaining a replacement loan. The court noted that the lender credited those payments toward the amount they owed and allowed them to remain in their home, and that it was speculative that the borrowers would be able to qualify for a replacement loan.

Finally, as to the breach of contract claim, the statute of frauds required that the loan modification agreement be in writing signed by the lender. (But see Chavez v. IndyMac Mortgage Services (No. D061997, filed September 19, 2013) [holding that a lender that failed to sign and return a loan modification agreement to a borrower was equitably estopped from relying on the lack of executed agreement as a basis for dismissing a breach of contract action].) The court held that the claim failed as a matter of law because the borrowers did not allege that they entered into a signed, written agreement with the lender to modify their loans.

Rossberg makes clear that in appropriate circumstances, a demurrer continues to be a powerful tool to counter borrowers’ attempts to block the foreclosure process and force a loan modification. Of course, California’s liberal policy in favor of permitting amended pleadings will usually result in the trial court granting leave to amend in the first instance. But where the statutory requirements for notice of default and notice of sale have been met, and in the absence of a written agreement to modify a loan, courts have not hesitated to find borrowers’ creative, but ultimately unsupportable, arguments unavailing.

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October 1, 2013