Granados v. City National Bank

Background

Elizabeth Granados alleged that Wharton Note Company was wrongfully attempting to foreclose on her property. She alleged that in 2005 she obtained a $120,000 second-position mortgage from City National Bank and signed a deed of trust securing the loan. Granados alleged that she made payments from 2005 to 2008, defaulted in 2010, and then stopped receiving monthly statements or other notices in 2014.

Granados and her former husband each filed bankruptcy cases at different times. She alleged that she believed the loan had been closed or was no longer accruing interest because of the lack of communication. In November 2022, she received notice that City National Bank had transferred the loan’s servicing rights and ownership to Wharton. Wharton later recorded a notice of default stating that $239,278.00 was owed, including interest charged since 2015, and recorded a notice of trustee’s sale. The court had previously granted Granados’s request for a temporary restraining order stopping the foreclosure sale.

The amended complaint asserted claims under the federal Truth in Lending Act, the implied covenant of good faith and fair dealing, the Fair Debt Collection Practices Act, 12 C.F.R. § 1024.41, and several California statutes. Wharton moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not adequately state a legally recognized claim.

Truth in Lending Act and Billing-Statement Claims

Wharton argued that Granados’s Truth in Lending Act claims were barred by the statute’s one-year limitations period. The court held that the complaint plausibly alleged that the discovery rule could delay the limitations period because Granados claimed she reasonably believed the loan was closed until November 2022. The court also rejected Wharton’s reliance on disputed facts in bankruptcy records at the motion-to-dismiss stage.

Wharton separately argued that City National Bank was exempt from sending periodic statements because of the bankruptcy proceedings. The court held that it could not decide from the complaint and the disputed bankruptcy-record facts whether the bankruptcy exemption applied. The court also held that Granados plausibly alleged a “charged off” loan theory because she alleged that she was told the loan was charged off but that interest and late fees continued to be assessed without periodic statements. The court therefore denied the motion to dismiss Granados’s Truth in Lending Act and section 1026.41 claims.

Fair Debt Collection Practices Act

Granados clarified that her Fair Debt Collection Practices Act claim was based on Wharton’s alleged misrepresentation of the amount owed through late fees and interest charged on a loan she claimed had been charged off, rather than solely on the foreclosure attempt or City National Bank’s earlier conduct. The court concluded that this theory might be timely and might adequately allege that Wharton acted as a debt collector, but Granados requested permission to amend the claim to explain those points more clearly. The court granted the motion to dismiss this claim with leave to amend.

Implied Covenant of Good Faith and Fair Dealing

The court held that Granados did not plausibly allege that Wharton’s conduct caused her failure to pay the mortgage. According to the allegations, Wharton did not take over the loan until November 2022, after the loan had become due, and then communicated with Granados and sent a notice of default three months later. The court also noted that Granados did not cite authority establishing that Wharton was liable for City National Bank’s alleged earlier bad-faith conduct merely because Wharton became the assignee. The court granted the motion to dismiss this claim with leave to amend.

California Statutory Claims

The court held that Granados plausibly alleged a claim under California Civil Code section 2954.5 to the extent it concerned late fees allegedly assessed without the required advance notice. The statute did not cover interest payments, however. The court also held that her California Civil Code section 2924.17 claim was plausible to the extent it relied on allegedly unlawful late fees under section 2954.5 and on Truth in Lending Act violations that allegedly inflated the amount stated in the notice of default. The court therefore denied the motion to dismiss those limited section 2954.5 and section 2924.17 theories.

The court granted the motion to dismiss Granados’s California Civil Code section 2966 claim with leave to amend, concluding that the statute did not apply to the mortgage transaction as pleaded because the alleged participants did not qualify as an “arranger of credit” under the statute.

The court also granted the motion to dismiss Granados’s California Unfair Competition Law claim with leave to amend. The court concluded that the complaint did not adequately allege that Wharton’s conduct caused the claimed economic injuries, including the threatened foreclosure and alleged damage to Granados’s credit.

Disposition

Judge Haywood S. Gilliam, Jr. granted in part and denied in part Wharton’s motion to dismiss. The court dismissed the Fair Debt Collection Practices Act, implied-covenant, section 2966, and Unfair Competition Law claims with leave to amend. The court did not dismiss the Truth in Lending Act and section 1026.41 claims, or the limited California Civil Code sections 2954.5 and 2924.17 theories described above. Any amended complaint had to be filed within 21 days of the order.