Beatty v. PHH Mortgage Corporation

Background

Frederick James Beatty alleged that he had owned the property at issue since around 2005. Deutsche Bank was the loan beneficiary, PHH Mortgage Corporation was the servicer, and Western Progressive, LLC was the trustee. Beatty alleged that a prior foreclosure sale had been rescinded and that, in June 2019, he tried to reinstate the loan.

According to the first amended complaint, PHH directed Beatty to contact Aldridge Pite LLP to make a reinstatement payment, but that entity could not find his loan file. PHH later told him that Western Progressive was assigned to the loan. Beatty alleged that the defendants gave him conflicting information about the amount and recipient of the payment. PHH eventually instructed him to wire $29,498.35, which he did on June 26, 2019. Beatty alleged that PHH confirmed receipt and told him the property was out of foreclosure, but the property was sold at foreclosure the next day.

Beatty further alleged that PHH and Western Progressive gave him conflicting instructions about making the July 2019 payment and refused or failed to accept it despite repeated attempts. He claimed damages including credit damage, lost income and rental income, loss of an interest in the property, emotional distress, and lost time and resources.

Motion and Judicial Notice

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts and a legally recognized theory to support relief. The court granted the defendants’ request for judicial notice as to documents 1–2 and 11–13, including specified recorded documents and a notice of rescission. It denied the request as to the other documents as moot.

Express Contract Claim

Beatty alleged that the defendants breached paragraph 19 of the deed of trust by foreclosing after he reinstated the loan. The court held that paragraph 19 conditioned reinstatement on meeting specified requirements, including paying the amounts due before the earliest of five days before the sale or another applicable deadline. Beatty alleged that he tendered payment the day before the foreclosure sale, and neither his complaint nor his opposition disputed that he had not brought the loan current more than five days before the sale. Because he did not allege compliance with the deed’s reinstatement requirements, the court granted the motion to dismiss the express contract claim. The claim was later dismissed with prejudice in the conclusion.

Implied Covenant of Good Faith and Fair Dealing

The court allowed Beatty’s claim that the defendants breached the implied duty of good faith and fair dealing by failing to provide accurate reinstatement information and refusing to accept full and timely payments. The court reasoned that the deed’s reinstatement provision could fairly imply duties to provide payment information within the defendants’ control and to accept full and timely payments. Beatty adequately alleged that PHH gave conflicting information about the proper payee and amount owed and that PHH and Western Progressive failed to accept or process his July payment.

The court also held that Beatty adequately alleged damages for this claim. It rejected the defendants’ arguments concerning credit damage, lost income, rental income, and loss of an interest in the property at the pleading stage. The court stated that whether Beatty could ultimately prove those damages was a question for another day.

However, the court dismissed with prejudice the portion of the claim based on alleged failures to accept payments before May 2019. Beatty’s allegations about those earlier events remained vague, and the court said he had not added facts after being instructed to clarify them.

Negligence

The court allowed Beatty to proceed on a negligence theory based on allegedly negligent loan servicing. Although California generally does not impose a duty of care on a lender or servicer acting within its conventional role, the court applied the six-factor test concerning whether a special duty exists. It found that the reinstatement and payment procedures were intended to benefit Beatty, that harm from inaccurate information during foreclosure was foreseeable, and that Beatty adequately alleged injury and a close connection between the defendants’ conduct and that injury.

The court concluded that the alleged facts supported imposing a duty of care under the specific circumstances because the servicer’s conduct allegedly caused or worsened the mortgage default and resulting foreclosure sale. The court did not decide the defendants’ argument that the economic-loss rule barred the claim; it said the parties had not adequately explained whether the alleged loss of equitable title was an injury to property or only an economic loss.

The court dismissed Beatty’s request for emotional-distress damages arising from negligence because he had not alleged facts showing an applicable exception to the general rule limiting such damages in negligence cases. The conclusion also dismissed the prayer for emotional-distress damages tied to the good-faith and negligence claims with prejudice.

Wrongful Foreclosure

The court denied the motion to dismiss Beatty’s wrongful foreclosure claim. The defendants argued that the claim was moot because the foreclosure sale had been rescinded. The court nevertheless found that Beatty adequately alleged that a foreclosure sale occurred and explained that, under the authorities discussed, equitable title may pass to a foreclosure purchaser when the highest bid is accepted even if the deed has not been recorded. The defendants did not show that the loss of equitable title did not constitute a sale for purposes of the claim or that the loss had been cured.

California Unfair-Competition Claim

The court denied the motion to dismiss Beatty’s claim under California’s Unfair Competition Law to the extent it relied on unlawful or unfair conduct. Beatty adequately alleged underlying claims for breach of the implied covenant, negligence, and wrongful foreclosure, which could serve as supporting claims for the unlawful and unfair theories. The court also rejected the argument that Beatty lacked a possible remedy or standing because he adequately alleged loss of an equitable interest and possible entitlement to restitution or injunctive relief.

The court dismissed the UCL claim to the extent it relied on the fraudulent theory. Beatty did not allege intentional harm or facts meeting the heightened pleading standard for fraud. The conclusion states that this part of the claim was dismissed with prejudice.

Disposition

The court granted in part and denied in part the defendants’ motion to dismiss. The express contract claim was dismissed. The pre-May 2019 portion of the implied-covenant claim, the emotional-distress damages connected to the good-faith and negligence claims, and the fraudulent-prong portion of the UCL claim were dismissed with prejudice. Beatty’s remaining implied-covenant, negligence, wrongful foreclosure, and UCL claims based on unlawful and unfair conduct were allowed to proceed. The court also set a case-management conference for February 5, 2020.