Lombard Flats LLC v. JP Morgan Chase Bank N.A.

Background

Lombard Flats LLC, the alleged mortgage borrower, and New Owners Group LLC, the property’s title holder, sued Fay Servicing LLC and U.S. Bank Trust National Association. The dispute concerned a mortgage loan secured by property at 949 Lombard Street in San Francisco. Chase had previously serviced the loan and was dismissed from the case before this order.

The plaintiffs alleged that Chase promised an eighteen-month COVID-19 payment-forbearance plan, later demanded monthly payments of $12,700, returned three payments, made repeated collection calls, threatened negative credit reporting and foreclosure, and denied a loan-modification application without explanation. They also alleged that the current defendants failed to provide requested loan-modification and foreclosure-prevention information, failed to provide transfer notices, refused to recognize the alleged forbearance, and sought to collect a $3.2 million balance even though a bankruptcy court order had reduced the principal balance to $3 million.

The amended complaint asserted twelve claims: a federal Fair Debt Collection Practices Act claim; two Rosenthal Fair Debt Collection Practices Act claims; two California Homeowner’s Bill of Rights claims; elder financial abuse; intentional misrepresentation; concealment; breach of the implied covenant of good faith and fair dealing; two California Unfair Competition Law claims; and negligence. The defendants moved to dismiss under Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity, and Rule 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Rulings

The court denied dismissal based on the defendants’ argument that the amended complaint asserted claims outside the scope of the earlier permission to amend. The earlier order had not limited the claims that could be added, and the case was still at an early stage.

The court dismissed all of New Owners Group’s claims with prejudice because New Owners was only alleged to be the property’s legal title holder, was not a borrower or otherwise obligated on the mortgage, and had not shown an injury traceable to the defendants’ conduct. The court explained that being an allegedly necessary party did not eliminate the constitutional requirement to have standing.

The court denied dismissal of claim one under § 1692e of the federal Fair Debt Collection Practices Act. It held, at this stage, that the debt could qualify as a consumer debt because the assignment listed Martin Eng as a borrower, even though Lombard Flats also alleged that it was the borrower. The court also rejected the argument that the statute of frauds barred the claim. The court reasoned that the bankruptcy court’s order was not a loan-modification agreement and that falsely representing the amount of a debt can violate § 1692e. Fay had conceded that the loan’s principal balance remained $3 million.

The court allowed claim two under § 1788.17 of California’s Rosenthal Act to proceed for the same reasons as the federal debt-collection claim. The court dismissed claim eight under the Rosenthal Act because it did not identify which statutory provision was violated and because its allegations concerned Chase’s conduct, without adequately alleging that Fay or U.S. Bank was Chase’s successor. The court stated that merely purchasing a mortgage loan was not enough to establish successor liability.

The court dismissed both Homeowner’s Bill of Rights claims, claims three and ten, because Lombard Flats was an entity rather than a natural person and therefore did not qualify as a statutory borrower with standing under the provisions at issue.

The court dismissed the elder-abuse claim without prejudice because the plaintiffs did not oppose dismissal and said they intended to add Mr. Eng as a plaintiff. It also dismissed the intentional-misrepresentation and concealment claims without prejudice because the plaintiffs conceded that those fraud-based claims were not pleaded with the required specificity.

The court dismissed the implied-covenant claim. It concluded that the alleged forbearance plan was an oral modification of a mortgage loan and therefore was not part of the enforceable contract under the statute of frauds. The court also noted that the alleged refusal to accept payments was attributed to Chase rather than the current defendants and that the complaint did not allege that a foreclosure had occurred.

The two Unfair Competition Law claims appeared duplicative. Because the federal and Rosenthal Act claims survived, one UCL claim survived under the statute’s unlawful-conduct theory. The order did not identify which of claims nine and twelve was the surviving claim; it stated that only one survived.

The court dismissed the negligence claim with prejudice. It relied on California authority holding that mortgage lenders and servicers do not owe borrowers a general duty of care in negligence.

Disposition and Effect

The motion to dismiss was granted in part and denied in part. The surviving claims were the federal Fair Debt Collection Practices Act claim, the Rosenthal Act claim under § 1788.17, and one of the two UCL claims. The court dismissed all other claims. The dismissals of New Owners Group’s claims and the negligence claim were with prejudice; the elder-abuse, intentional-misrepresentation, and concealment claims were dismissed without prejudice; and the order did not add a prejudice designation when dismissing several other claims.

The court gave the plaintiffs forty-two days from the date of the order to file another amended complaint and required any new complaint to include a redline comparison with the current complaint. The court also anticipated that the amended complaint would address whether Mr. Eng should be added as a plaintiff and whether he, Lombard Flats, or both were borrowers. The court stated that if Lombard Flats alone were the borrower, the surviving claims would not be viable on the current record because the debt would be commercial rather than consumer debt, and Mr. Eng would lack standing for the same reason as New Owners Group.