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

Background

Lombard Flats LLC and Martin Eng sued over collection of a mortgage loan secured by property at 949 Lombard Street in San Francisco. Fay Servicing LLC was the current servicer; U.S. Bank Trust National Association held the note and deed of trust; and VRMTG Asset Trust was the trust for which U.S. Bank Trust served as owner trustee. J.P. Morgan Chase Bank had previously serviced the loan and had previously been a defendant, but it was dismissed earlier in the case.

The operative complaint asserted three claims: violation of the federal Fair Debt Collection Practices Act against Fay; violation of California’s Rosenthal Fair Debt Collection Practices Act against Fay; and violation of California’s Unfair Competition Law (UCL) against all defendants. The plaintiffs alleged that Fay sought to collect $3.2 million even though a prior bankruptcy proceeding had reduced the loan to $3 million. They also alleged that Chase had promised a payment-forbearance plan, later demanded payments, and made repeated collection calls.

Arguments and analysis

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. They argued that the loan was not a consumer debt because Lombard Flats had treated the property as its asset in a 2009 bankruptcy proceeding and because Mr. Eng had identified the property as an investment property on a refinance application. They also argued that the plaintiffs lacked standing to bring the UCL claim and had improperly asserted that claim against all defendants.

The court held that the debt-collection claims could proceed. Under both debt-collection statutes, the debt must be owed by a natural-person consumer and must have been obtained primarily for personal, family, or household purposes. The court found that Mr. Eng was listed as the borrower on the 2005 deed of trust and the 2022 assignment. The transfer of title to Lombard Flats did not automatically change the borrower on the loan, and the bankruptcy representations did not necessarily conflict with the plaintiffs’ position that Mr. Eng was the borrower. The court therefore rejected the judicial-estoppel argument.

The court also declined to decide at the dismissal stage whether the loan was obtained for an investment purpose. Although Mr. Eng checked “investment” on a refinance application, the complaint did not rely on that application, and the purpose of a debt is not determined solely by how a transaction is documented. The court said the issue was better addressed on summary judgment.

The court dismissed the UCL claim. The plaintiffs conceded that the claim was derivative, meaning it depended on alleged wrongdoing underlying their other claims. The complaint asserted the UCL claim against all three current defendants, but asserted the other claims only against Fay. It contained no allegations against U.S. Bank Trust or VRMTG, and the plaintiffs had already received two opportunities to amend. The court therefore dismissed U.S. Bank Trust and VRMTG with prejudice. The court also held that the plaintiffs had not shown UCL standing because they alleged no loss of money or property resulting from the allegedly misleading collection letter; the claimed $200,000 difference was not money they had actually lost.

Disposition

The court granted the motion to dismiss in part and denied it in part. The two debt-collection claims against Fay survived. The UCL claim was dismissed with prejudice, and U.S. Bank Trust and VRMTG were dismissed with prejudice. The case was narrowed to the two debt-collection claims against Fay, whose answer was due within fourteen days. Judge Laurel Beeler signed the order on October 6, 2023.