Chu v. Fay Servicing, LLC

Background

Stephanie Chu challenged a nonjudicial foreclosure involving property at 23 Dory Lane, Foster City, California. The foreclosure process began with defendants’ recording of a Notice of Default and Election to Sell Under Deed of Trust on October 9, 2019. The defendants were Fay Servicing, LLC and Wilmington Trust, N.A. as Trustee for MFRA Trust 2015-1.

Chu’s First Amended Complaint asserted six claims: wrongful foreclosure; violation of California Civil Code section 2924(a)(6); violations of California Civil Code sections 2923.4, 2923.5, and 2923.55 against Fay Servicing; breach of the covenant of good faith and fair dealing; violation of California’s Unfair Competition Law; and declaratory relief. Chu also moved for a preliminary injunction, which is a court order intended to preserve the situation temporarily while a case proceeds.

The court noted that Chu did not timely oppose the motion to dismiss. The defendants’ motion therefore stood unopposed when the court issued its order. The court considered the pleadings, the parties’ briefing, and judicially noticeable materials.

Wrongful-Foreclosure and Section 2924(a)(6) Claims

The court held that Chu had not stated viable claims for wrongful foreclosure or violation of California Civil Code section 2924(a)(6). First, relying on Ninth Circuit authority, the court explained that California law does not permit preemptive lawsuits challenging a party’s authority to pursue foreclosure before that authority has been exercised through a foreclosure.

Second, the court rejected Chu’s theory that the assignment of the deed of trust to Wilmington Trust was void because it was recorded after the trust’s closing date. The court explained that a borrower who has suffered a nonjudicial foreclosure may challenge an assignment on that basis only when the assignment is void under applicable law, rather than merely voidable. The court stated that Chu’s allegations did not establish that the assignment was void.

Third, the court found insufficient Chu’s theory that the note and deed of trust had been separated during securitization, preventing Wilmington Trust from acquiring an interest in them or obtaining authority to foreclose. The court stated that California’s nonjudicial-foreclosure statutes do not require the note and deed of trust to be held by the same party and that Chu’s allegations did not establish either a lack of authority to foreclose or standing to challenge the alleged breaks in title.

The court also noted that several courts had concluded that section 2924(a)(6) does not create a private damages claim or authorize injunctive relief, but the order’s principal reasoning was that Chu had not stated a viable claim.

Homeowners’ Bill of Rights Claims

The court also found that Chu had not alleged sufficient facts to support her claims under California’s Homeowners’ Bill of Rights. Chu alleged that Fay Servicing failed to discuss alternatives to foreclosure and improperly continued foreclosure proceedings while her loan-modification application was pending.

The court observed that Chu alleged defendants had not made a final decision on her application but also acknowledged that they had offered a potential loan modification on the condition that she dismiss this lawsuit. The court stated that Chu could not base her claim on refusing that offer. The court also relied on the Notice of Default’s declaration stating that Fay Servicing had contacted Chu to assess her financial situation and explore ways to avoid foreclosure before the notice was recorded. The court concluded that the Homeowners’ Bill of Rights guarantees an opportunity to try to resolve the default, not a guaranteed result, and that Chu had not stated a violation of the cited provisions.

Contingent Claims

The court dismissed the claims for breach of the covenant of good faith and fair dealing, violation of the Unfair Competition Law, and declaratory relief because each depended on the alleged wrongfulness of the conduct underlying Chu’s first three claims.

Preliminary Injunction

Because Chu had failed to state claims in the complaint, the court denied the motion for a preliminary injunction as moot. The order’s introductory ruling likewise states that the motion for a preliminary injunction was denied in light of Chu’s failure to plead a viable claim.

Disposition

The court granted defendants’ motion to dismiss for failure to state a claim and denied Chu’s motion for a preliminary injunction. The First Amended Complaint was dismissed without prejudice. Chu was allowed to file a Second Amended Complaint no later than 21 days after the order, and defendants were ordered to respond within 21 days after that filing.