Khurana v. Clear Recon Corp

Background

The plaintiffs purchased a single-family home and later obtained a $1,080,000 loan secured by a deed of trust. The loan was later assigned to U.S. Bank, and Cenlar FSB became the loan servicer after the loan was transferred from Citigroup. The plaintiffs alleged that they did not receive timely notice of the servicing transfer, had difficulty obtaining loan information, and repeatedly requested a loan-modification application and a single point of contact without receiving a response.

The plaintiffs defaulted on their repayment obligations. Defendants recorded a notice of default and a notice of trustee’s sale. The plaintiffs filed suit in state court, and Cenlar removed the case to federal court. During mediation, the plaintiffs submitted a loan-modification application, but the case did not settle. The court had previously vacated the scheduled trustee’s sale and the hearing on the plaintiffs’ motion for a preliminary injunction.

Request for Judicial Notice

Cenlar asked the court to take judicial notice of four recorded public documents: the deed of trust and loan-modification agreement, an assignment of the deed of trust, a notice of default, and a notice of trustee’s sale. The plaintiffs did not oppose the request. The court granted the request because the documents were official public records whose authenticity could be accurately and readily determined.

Motion to Dismiss

The court applied Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. At this stage, the court generally accepts the complaint’s factual allegations as true and asks whether those facts plausibly show an entitlement to relief.

California Civil Code section 2923.7

The plaintiffs’ first cause of action alleged that defendants violated California Civil Code section 2923.7, part of the Homeowner Bill of Rights. The statute requires a mortgage servicer to assign a single point of contact when a borrower requests a foreclosure-prevention alternative and to provide direct ways to communicate with that person.

Cenlar argued that the plaintiffs had not adequately alleged that they submitted a loan-modification application or that any violation was material. The plaintiffs argued that their requests for an application were ignored and that they could have submitted a completed application if they had been assigned a single point of contact. The court noted inconsistencies between the complaint and the plaintiffs’ opposition concerning whether an application had been submitted. It also noted that the plaintiffs later submitted a loan-modification application and questioned whether part of the claim had become moot or whether the available damages had been limited.

The court dismissed this claim with leave to amend. The court’s conclusion also referred to inadequate allegations of materiality and allegations concerning nonparty Rushmore Servicing rather than Cenlar.

12 C.F.R. section 1024.38

The plaintiffs’ second cause of action alleged a violation of 12 C.F.R. section 1024.38, a mortgage-servicing provision under the Real Estate Settlement Procedures Act. The provision requires servicers to provide accurate information about available loss-mitigation options and identify options for which borrowers may be eligible.

Cenlar argued that this provision does not provide a private cause of action. The court agreed, relying on the Consumer Financial Protection Bureau’s statement that borrowers cannot privately enforce the requirements of section 1024.38. The court dismissed the second cause of action with prejudice because the provision does not create a private right to sue.

Notice of servicing transfer

The plaintiffs’ third cause of action alleged that defendants violated 12 C.F.R. section 1024.33 and California Civil Code section 2937 by failing to provide timely notice of the transfer of loan servicing. Cenlar argued that the state-law claim was preempted by the federal provision.

The court found that the complaint sufficiently alleged that defendants failed to comply with the federal notice requirements. Because the complaint adequately alleged a federal violation, the court concluded at this stage that the state-law claim was not preempted. The court denied the motion as to the third cause of action.

Unfair-competition claim

The plaintiffs’ fourth cause of action alleged a violation of California Business and Professions Code section 17200, commonly called an unfair-competition claim. The parties agreed that this claim was derivative, meaning it depended on the underlying claims. Because the court allowed two underlying theories to proceed and found that the plaintiffs adequately alleged a causal connection between defendants’ conduct, the threatened foreclosure, and their alleged injuries, the court denied the motion as to the fourth cause of action.

Disposition

Judge Kandis Westmore granted in part and denied in part Cenlar FSB’s motion to dismiss. The first cause of action was dismissed with leave to amend, and the second cause of action was dismissed with prejudice. The motion was denied in all other respects. The plaintiffs were ordered to file a first amended complaint within 21 days of the order.