Drakeford v. Capital Benefit, Inc.

Background

Rhonda and Reginald Drakeford obtained a loan from defendants. The jury found that the loan was primarily for consumer purposes, not business purposes, and that the loan and defendants’ conduct violated the federal Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Rosenthal Fair Debt Collection Practices Act. The jury also found that Marcel Bruetsch and Capital Benefit, Inc. breached fiduciary duties owed to the Drakefords and that the breach substantially contributed to their harm.

The jury awarded statutory damages on the statutory claims and $13,791.94 for breach of fiduciary duty. It found that the Drakefords negligently misrepresented information to defendants but awarded defendants no damages on their counterclaim. It also found that the Drakefords did not act with malice, fraud, oppression, or unclean hands, while Bruetsch and Capital Benefit did act with unclean hands.

Defendants’ post-trial motion

Defendants sought judgment as a matter of law, which would have overturned the verdict because of insufficient evidence, or alternatively a new trial. They argued that equitable estoppel barred the Drakefords’ claims, that any relief under the Truth in Lending Act should be limited to rescission, and that defendants should be treated as the prevailing parties.

The court denied the motion. It held that the evidence supported the jury’s finding that the loan was primarily for consumer purposes. That evidence included the loan’s disclosed use to pay off a prior mortgage on the Drakefords’ home, information they supplied about the loan’s consumer purpose, and their testimony about their intended use of the proceeds. The court rejected defendants’ arguments that mixed personal and business accounts, or the loan documents’ business-purpose language, required a different result.

The court also rejected equitable estoppel. It explained that the jury found, at most, negligent conduct by the Drakefords rather than intentional fraud, and found that they were not sophisticated borrowers who deliberately misled defendants. The court concluded that there was no basis to bar the Drakefords’ claims or damages through equitable estoppel.

The court further found sufficient evidence to support the Real Estate Settlement Procedures Act verdict, including evidence of a pattern or practice of noncompliance. The evidence included defendants’ foreclosure practices, their reliance on standardized business-purpose forms, and their use of intermediaries to obtain borrowers and determine loan purposes. The court also found sufficient evidence that Bruetsch and Capital Benefit breached fiduciary duties by failing to explain loan terms, exercise reasonable care in funding the loan, and provide undivided loyalty to the Drakefords.

The court rejected defendants’ argument that rescission under the Truth in Lending Act prevented the Drakefords from also receiving the $13,791.94 fiduciary-duty damages. Because the jury found that Bruetsch and Capital Benefit acted with unclean hands, the court held that the loan charges they received supported the damages award. Defendants’ renewed motion for judgment and alternative request for a new trial were denied.

Unfair Competition Law ruling

The court granted the Drakefords’ motion for findings and relief under California’s Unfair Competition Law, which prohibits unlawful, unfair, or fraudulent business practices. The court did not adopt all of the Drakefords’ proposed findings, but it adopted findings supported by the trial evidence and verdict.

The court found that Bruetsch and Capital Benefit failed to establish that the loan was exempt from the Truth in Lending Act as a business-purpose loan. It found that they did not resolve consumer-purpose information in the loan application or adequately determine the loan’s actual purpose. The court also found that Bruetsch and Capital Benefit acted as the lender defendants’ agents in originating the loan, that Fred Mayer was not the Drakefords’ agent, and that Bruetsch and Capital Benefit were mortgage brokers providing mortgage-brokerage services.

The court identified loan terms including an 11.5% base interest rate, a 10% late fee on payments not received by the tenth day after the due date, and a 19.5% default interest rate for payments more than 30 days late. Because Capital Benefit’s servicing agreement entitled it to all default interest and half of late fees, the court found those provisions primarily benefited Bruetsch and Capital Benefit.

The court found that Bruetsch and Capital Benefit did not communicate with the Drakefords before originating the loan to confirm the application’s contents, explain the loan terms, disclose their roles as broker and fiduciary, or explain conflicts of interest. The court concluded that these were business practices under the Unfair Competition Law.

The court concluded that the loan violated the Truth in Lending Act because it was a high-cost mortgage with prohibited terms, including a higher interest rate after default and a late fee exceeding the statutory limit. It also concluded that required disclosures were not provided. The court found violations of California’s mortgage-broker licensing law based on the breach of fiduciary duties, and treated the federal and state violations as unlawful business practices under the Unfair Competition Law.

The court also found fraudulent business practices because defendants failed to disclose conflicts involving default interest and other material loan terms, and because the conduct was likely to deceive a reasonable consumer. It found unfair business practices because the conduct was immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers. The court found that the Drakefords suffered economic injury and had no adequate remedy at law because the violations threatened their ownership of their home.

Remedies and judgment

The court granted the Drakefords’ request for a rescission remedy under the Truth in Lending Act and the Unfair Competition Law. The loan secured by the property at issue was subject to rescission. The preliminary injunction issued on August 13, 2020, continued until rescission was completed or the court dissolved it. Defendants were required to issue a $234,713.09 payoff demand to the Drakefords’ new lender and cooperate in reconveying the existing loan through the new loan transaction. The court retained jurisdiction over the rescission process.

The court entered judgment for the Drakefords and against Capital Benefit, Marcel Bruetsch, Robert V. Williams, Waltraud M. Williams, and Richard Westin. The $18,691.94 money judgment consisted of $2,800 in Truth in Lending Act statutory damages against all defendants, $700 in Rosenthal Act statutory damages against Bruetsch and Capital Benefit, $1,400 in additional statutory damages identified in the judgment, and $13,791.94 in fiduciary-duty compensatory damages against Bruetsch and Capital Benefit. Defendants were ordered to take nothing on their counterclaims. The Drakefords were declared the prevailing party and permitted to seek attorney fees, costs, and other recoverable expenses.