Case Name: Guillermina Garcia-Barrera, et al. v. Wells Fargo Bank, N.A., et al.
Case No.: 2017-CV-317925

Demurrer to the First Amended Complaint by Defendant Wells Fargo Bank, N.A.

Factual and Procedural Background

This is a foreclosure action. Plaintiffs Guillermina Garcia-Barrera and Rogelio Barrera (collectively, “Plaintiffs”) are owners of real property located at 826 N. White Road in San Jose, California (“Property”). (First Amended Complaint [“FAC”] at ¶¶ 3, 7.) In May 2006, Plaintiffs obtained $612,500 in financing secured by the Property, executing a Promissory Note and Deed of Trust in favor of World Savings Bank, F.S.B. (Id. at ¶ 8.) The loan payment included an escrow payment designed to pay taxes and insurance on the Property. (Ibid.) Defendant Wells Fargo Bank, N.A. (“Wells Fargo”) is the current owner of Plaintiffs’ loan and beneficiary of the Deed of Trust securing the mortgage loan. (Id. at ¶ 4.)

In January 2011, Plaintiffs received a HAMP modification agreement which modified the terms of their loan, including the principal balance, which was modified to $632,680.46. (FAC at ¶ 9.) Plaintiffs thereafter fell into arrears due to an unexpected financial hardship and eventually filed a Chapter 13 bankruptcy petition on July 22, 2011. (Id. at ¶¶ 10-11.) During the course of the bankruptcy, Plaintiffs made payments toward the loan, including the arrearage and monthly payments. (Id. at ¶ 11.)

Plaintiffs dismissed their Chapter 13 bankruptcy petition on February 29, 2016. (FAC at ¶ 14.) Thereafter, on April 20, 2016, defendant Clear Recon Corp. recorded a Notice of Default for Plaintiffs’ loan indicating a default in the amount of $167,914.08, for non-payment on the loan since August 2011. (Id. at ¶ 15.) Plaintiffs had made substantial payments toward the loan, which they now believe were not applied to the loan and are possibly being held in a suspense account instead of being applied toward the default. (Id. at ¶ 16.) Plaintiffs have since tried to remedy the issue but to no avail. (Id. at ¶ 17.)

On August 31, 2017, defendants caused a Notice of Trustee’s Sale to be recorded for the Property, where the total amount owed on Plaintiffs’ loan is $771,419.05. (FAC at ¶ 18.) Plaintiffs believe the amounts set forth in the Notice of Default and Notice of Trustee’s Sale do not reflect payments they made toward the loan since July 2011. (Ibid.)

On March 14, 2018, Plaintiffs filed the operative FAC against defendants setting forth causes of action for: (1) Violation of Civil Code Section 2924.17; (2) Violation of Civil Code Section 2924(a); and (3) Declaratory Relief.

Demurrer to the FAC

Currently before the Court is the demurrer to the FAC by defendant Wells Fargo on the ground that each claim fails to state a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) Wells Fargo filed a request for judicial notice in conjunction with the motion. Plaintiffs filed written opposition. Wells Fargo filed reply papers.

Wells Fargo’s Request for Judicial Notice

In support of the motion, Wells Fargo requests judicial notice of various real property documents, records filed in the bankruptcy court, and the loan modification agreement. (See Request for Judicial Notice [“RJN”] at Exhibits A-S.)

“Judicial notice is the recognition and acceptance by the court, for use by the trier of fact or by the court, of the existence of a matter of law or fact that is relevant to an issue in the action without requiring formal proof of the matter.” (Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117.)

Here, the Court may take judicial notice of Exhibits A, J, and S as real property documents recorded in Santa Clara County. (See Evid. Code, § 452, subd. (h); see also Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 264-265 [disapproved on other grounds in Yvanova v. New Century Morg. Corp. (2016) 62 Cal.4th 919] [court may take judicial notice of the existence and recordation of real property records]; Evans v. California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 549 [court may take judicial notice of recorded deeds].)

In addition, the Court may take judicial notice of Exhibits C, D, E, F, G, H, I, K, L, M, N, O, P, Q, and R as documents filed in the bankruptcy court. (See Evid. Code, § 452, subd. (d); see also Cloud v. Northrop Grumman Corp. (1988) 67 Cal.App.4th 995, 999, 1018 [judicial notice of bankruptcy filings in considering motion for judgment on the pleadings].)

Finally, with respect to Exhibit B, the loan modification agreement, it has been held that a contract between private parties is not subject to judicial notice. (See Gould v. Maryland Sound Industries, Inc. (1995) 31 Cal.App.4th 1137, 1145.) However, judicial notice of a contract or similar type of private-party document has been allowed where there is no dispute regarding the document’s authenticity and enforceability. (See Ascherman v. Gen. Reinsurance Corp. (1986) 183 Cal.App.3d 307, 310-311.) Here, Plaintiffs do not dispute the authenticity or enforceability of the loan modification agreement. In fact, the loan modification agreement is specifically referenced in the FAC. (See FAC at ¶ 9.) The Court therefore takes judicial notice of the loan modification agreement.

In opposition, Plaintiffs ask the Court to limit the acceptance of Wells Fargo’s request for judicial notice in accordance with Evidence Code section 452, subdivision (h). (See OPP at p. 3.) In doing so, Plaintiffs appear to object to the request for judicial notice. Plaintiffs’ however fail to substantiate their objection under Evidence Code section 452, subdivision (h) and therefore the objection is overruled.

Accordingly, the request for judicial notice is GRANTED.

Legal Standard

“In reviewing the sufficiency of a complaint against a general demurer, we are guided by long settled rules. ‘We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. We also consider matters which may be judicially noticed.’” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) “A demurrer tests only the legal sufficiency of the pleading. It admits the truth of all material factual allegations in the complaint; the question of plaintiff’s ability to prove these allegations, or the possible difficulty in making such proof does not concern the reviewing court.” (Committee on Children’s Television, Inc. v. General Foods Corp. (1983) 35 Cal.3d 197, 213–214.)

“The reviewing court gives the complaint a reasonable interpretation, and treats the demurrer as admitting all material facts properly pleaded. The court does not, however, assume the truth of contentions, deductions or conclusions of law. … [I]t is error for a trial court to sustain a demurrer when the plaintiff has stated a cause of action under any possible legal theory. And it is an abuse of discretion to sustain a demurrer without leave to amend if the plaintiff shows there is a reasonable possibility any defect identified by the defendant can be cured by amendment.” (Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 850.)

First Cause of Action: Violation of Civil Code Section 2924.17

The first cause of action is a claim for violation of Civil Code section 2924.17, subdivision (b). That section provides that, before recording a Notice of Default or Notice of Trustee’s Sale, “a mortgage servicer shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information.” (Civ. Code, § 2924.17.)

Plaintiffs allege defendant Wells Fargo failed to review competent and reliable evidence to substantiate the default before recording the Notice of Default and Notice of Trustee’s Sale for the Property. (FAC at ¶ 25.) This is because, since July 2011, Plaintiffs had made payments toward the loan and Wells Fargo failed to apply such payments to the loan balance. (Ibid.) In addition, defendant Wells Fargo charged Plaintiffs for an insurance policy in 2015 when the escrow payments were covering the insurance payments. (Ibid.) Thus, the alleged default in the foreclosure documents recorded for Plaintiffs’ Property along with the mishandling of the insurance demonstrates that Wells Fargo failed to review competent and reliable evidence to substantiate Plaintiffs’ default. (Id. at ¶ 26.)

Defendant Wells Fargo argues, based on the judicially noticed documents, that Plaintiffs participated in two bankruptcy cases. (See RJN at Exhibits C, D, E, F, G, H, I, K, L, M, N, O, P, Q, and R.) Wells Fargo relies on judicially noticed documents in the second bankruptcy case, namely the Objection to Plan Confirmation and Proof of Claim, which include a detailed payment history and reflect a default similar to the default alleged in the Notice of Default recorded in this case. (Id. at Exhibits N and O.) Based on these judicially noticed documents, Wells Fargo argues that it reviewed competent and reliable evidence to substantiate Plaintiffs’ default and thus there is no claim stated under section 2924.17.

This argument however is not persuasive as the judicially noticed documents do not conclusively establish that Wells Fargo complied with section 2924.17. In fact, Plaintiffs clearly allege the default in the foreclosure documents recorded for the Property along with the mishandling of the insurance demonstrates that Wells Fargo failed to review competent and reliable evidence to substantiate Plaintiffs’ default. (See FAC at ¶ 26.) Such allegations must be taken as true for purposes of demurrer. (See Olson v. Toy (1996) 46 Cal.App.4th 818, 823 [for purposes of demurrer, we accept these allegations as true].) In addition, Wells Fargo concedes that the amount of default listed in the Proof of Claim is not the same as that identified in the Notice of Default. With this in mind, Wells Fargo asks the Court to infer that the default included in the Proof of Claim accurately reflects the default at the time the Notice of Default was recorded. (See Memo of P’s & A’s at p. 13.) The discrepancy between the amount listed in the Proof of Claim and Notice of Default may mean however that Wells Fargo did not review competent and reliable evidence to substantiate Plaintiffs’ default. It is certainly reasonable for a trier of fact to draw this conclusion. Therefore, whether defendant Wells Fargo reviewed competent and reliable evidence to substantiate Plaintiffs’ default remains a factual issue beyond the scope of demurrer. (See C.R. v. Tenet Healthcare Corp. (2009) 169 Cal.App.4th 1094, 1104 [court cannot resolve factual issues at the demurrer stage].)

Wells Fargo goes a step further to argue that the existence of a Proof of Claim constitutes a final judgment and thus furnishes a basis for res judicata. Simply put, Wells Fargo asserts the amount listed in the Proof of Claim is conclusive and Plaintiffs cannot file a separate lawsuit, as they have done here, to challenge that amount of the default. In support, Wells Fargo relies on Siegel v. Federal Loan Mortg., Corp. (9th Cir. 1998) 143 F.3d 525 (“Siegel”). In that case, Freddie Mac initiated foreclosure proceedings after debtor Siegel defaulted on two loans. (Id. at p. 528.) When Siegel filed for bankruptcy, Freddie Mac filed proofs of claim to which Siegel did not object, and the bankruptcy court allowed Freddie Mac to foreclose. (Ibid.) While his bankruptcy proceeding was ongoing, Siegel sued Freddie Mac in state court, arguing that Freddie Mac should not be able to proceed against him because it had violated its duties under the loan agreements. (Id. at pp. 528-529.)

Thereafter, Freddie Mac removed the action to federal court and filed a motion for summary judgment arguing that Siegel’s action was barred by the res judicata effect of the bankruptcy proceeding. (Siegel, supra, 143 F.3d at p. 528.) The district court granted the motion. In affirming the district court’s ruling, the Ninth Circuit applied a four-factor test for assessing the scope of claims precluded by a bankruptcy court’s determination: (1) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) whether substantially the same evidence is presented in the two actions; (3) whether the two suits involve infringement of the same right; and (4) whether the two suits arise out of the same transactional nucleus of facts. (Id. at p. 529.) Having applied these factors, the Ninth Circuit concluded that res judicata barred Siegel’s claims. (Ibid.)

Siegel is distinguishable for several reasons. For example, that case addressed evidence on a motion for summary judgment as opposed to a demurrer which considers only the well-pleaded facts of the complaint and any judicially noticed documents. Also, the moving papers fail to articulate and apply the Siegel factors for res judicata for the proof of claim in this action. Nor does Siegel even address a claim under section 2924.17. Moreover, Siegel gave preclusive effect to a proof of claim because there was no objection made by the debtor. (See Siegel, supra, 143 F.3d at p. 529 [“No objection was filed to the claims in the bankruptcy action.”].) Defendant Wells Fargo fails to set forth any evidence showing that Plaintiffs did not object to the Proof of Claim. The res judicata argument therefore is not sustainable on demurrer.

Finally, for the first time in reply, Wells Fargo argues Plaintiffs did not allege a single fact to support this cause of action. (See Reply at p. 8.) Courts typically do not consider points raised for the first time on reply for due process reasons. (In re Tiffany Y. (1990) 223 Cal.App.3d 298, 302-303; see also Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764; REO Broadcasting Consultants v. Martin (1999) 69 Cal.App.4th 489, 500.) Accordingly, the Court declines to consider this argument.

Therefore, the demurrer to the first cause of action on the ground that it fails to state a claim is OVERRULED.

Second Cause of Action: Violation of Civil Code Section 2924(a)(1)(C)

The second cause of action is a claim for violation of Civil Code section 2924, subdivision (a)(1)(C). That section requires that the beneficiary of the deed of trust include a statement in the notice of default that describes “the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust or mortgage that is in default.” (Civ. Code, § 2924, subd. (a)(1)(C).)

Here, Plaintiffs allege that a Notice of Default was recorded stating they were in default for $167,914.08 for non-payment on the loan since August 2011. (See FAC at ¶ 15.) Consistent with this allegation, defendant Wells Fargo submits a Notice of Default stating that Plaintiffs were in default in the amount of $167,914.08. (See RJN at Exhibit J.) Based on the foregoing, the Court finds that the Notice contains the required statement.

Accordingly, the demurrer to the second cause of action is SUSTAINED WITH 20 DAYS’ LEAVE TO AMEND after written notice of entry of this signed order, for failure to state a claim. (See City of Stockton v. Super Ct. (2007) 42 Cal.4th 730, 747 [where plaintiff has not had opportunity to amend complaint in response to demurrer, “leave to amend is liberally allowed as a matter of fairness unless the complaint shows on its face that it is incapable of amendment”].)

Third Cause of Action: Declaratory Relief

The third cause of action is a claim for declaratory relief. As an equitable remedy, declaratory relief is “dependent upon a substantive basis for liability” and has “no separate viability” if all other causes of action are barred. (Glue-Fold, Inc. v. Slautterback Corp. (2003) 82 Cal.App.4th 1018, 1023, fn. 3.) Here, as Wells Fargo argues, the claim for declaratory relief is based on the prior causes of action. Since Plaintiffs’ first cause of action survives demurrer, so too does the claim for declaratory relief.

Therefore, the demurrer to the third cause of action on the ground that it fails to state a claim is OVERRULED.

The Court will prepare the Order.