Case Number: KC069877 Hearing Date: July 26, 2018 Dept: J

Re: Michael Lee Folkes v. Wilmington Trust, N.A., et al. (KC069877)

MOTION FOR SANCTIONS PURSUANT TO CALIFORNIA CODE OF CIVIL PROCEUDRE SECTION 128.7

Moving Parties: Defendants Select Portfolio Servicing, Inc.’s and Wilmington Trust, N.A., Successor Trustee to Citibank, N.A., as Trustee, for the Benefit of Registered Holders of Structured Asset Mortgage Investments II Trust 2007-AR3, Mortgage Pass Through Certificates, Series 2007-3’s (erroneously sued as Wilmington Trust, N.A.)

Respondent: Plaintiff Michael Lee Folkes

POS: Moving OK; Opposing OK

Plaintiff alleges that his residential mortgage loan was obtained through defendants’ fraudulent inducement of the loan by inflating his monthly income by 500% without his knowledge. Plaintiff also alleges that defendants have failed to properly consider his loan modification application. The complaint, filed 12/15/17, asserts causes of action against Wilmington Trust, N.A., Successor Trustee to Citibank, N.A., as Trustee, for the Benefit of Registered Holders of Structured Asset Mortgage Investments II Trust 2007-AR3, Mortgage Pass Through Certificates, Series 2007-3 (erroneously sued as Wilmington Trust, N.A.) (“Wilmington”), Select Portfolio Servicing, Inc. (“SPS”), National Default Servicing Corporation (“NDSC”) and Does 1-10 for:

1. 1. Fraud

2. 2. Intentional Misrepresentation

3. 3. Violation of Homeowner Bill of Rights—Single Point of Contact

4. 4. Violation of Homeowner Bill of Rights—Dual Tracking

5. 5. Negligence

6. 6. Violation of B&P Code § 17200

On 1/3/18, NDSC filed its Declaration of Nonmonetary Status. On 1/16/18, SPS and Wilmington filed their answer. A court trial is set for 3/4/19.

Defendants Select Portfolio Servicing, Inc. (“SPS”) and Wilmington Trust, N.A., (“Wilmington”) Successor Trustee to Citibank, N.A., as Trustee, for the Benefit of Registered Holders of Structured Asset Mortgage Investments II Trust 2007-AR3, Mortgage Pass Through Certificates, Series 2007-3 (erroneously sued as Wilmington Trust, N.A.) move the court for an order, per CCP § 128.7, striking out Plaintiff Michael Lee Folkes’ (“plaintiff”) complaint and requiring him to pay sanctions of $5,142.00, on the basis that the complaint (1) was filed for the improper purpose of causing delay and needlessly increasing defendants’ cost of litigation, (2) asserts claims and legal contentions that are not warranted by existing law and (3) includes allegations and factual contentions that lack evidentiary support.

REQUEST FOR JUDICIAL NOTICE:

SPS’s and Wilmington’s request for judicial notice (“RJN”) is ruled on as follows: Grant as to Exhibit “1” (i.e., docket for U.S. Bankruptcy Court for the Central District of California Case No. 2:11-bk-50478-RN [hereinafter, the “BK Action”]); Grant as to Exhibit “2” (i.e., bankruptcy schedules filed 9/26/11 in the BK Action); Grant as to Exhibit “3” (i.e., Notice of Default and Election to Sell Under Deed of Trust recorded 1/31/17) and Grant as to Exhibit “4” (i.e., Notice of Trustee’s Sale recorded 7/7/17).

“[A] court may take judicial notice of the fact of a document’s recordation, the date the document was recorded and executed, the parties to the transaction reflected in a recorded document, and the document’s legally operative language, assuming there is no genuine dispute regarding the document’s authenticity. From this, the court may deduce and rely upon the legal effect of the recorded document, when that effect is clear from its face.” Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 265, disapproved of on other grounds by Yvanova v. New Century Mortg. Corp. (2016) 62 Cal.4th 919.

The judicially noticeable documents reflect as follows: On 9/26/11, plaintiff filed for Chapter 7 bankruptcy in the BK Action. (RJN, Exhibit “1”). Plaintiff was discharged on 1/10/12, and the BK Action was terminated 3/12/12. (Id.). On 1/31/17, a “Notice of Default and Election to Sell Under Deed of Trust” was recorded. (Id., Exhibit “3”). On 7/7/17, a “Notice of Trustee’s Sale” was recorded. (Id., Exhibit “4”).

At the outset, plaintiff’s argument that the court lacks jurisdiction over SPS and Wilmington because they were not served with the summons and complaint fails. SPS and Wilmington submitted to the court’s jurisdiction when they filed their answer to the complaint on 1/16/18.

“By presenting to the court, whether by signing, filing, submitting, or later advocating, a pleading, petition, written notice of motion, or other similar paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, all of the following conditions are met: (1) It is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. (2) The claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law. (3) The allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery. (4) The denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.” CCP § 128.7(b).

“If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation. In determining what sanctions, if any, should be ordered, the court shall consider whether a party seeking sanctions has exercised due diligence.” CCP § 128.7(c).

“A motion for sanctions under this section shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). Notice of motion shall be served as provided in Section 1010, but shall not be filed with or presented to the court unless, within 21 days after service of the motion, or any other period as the court may prescribe, the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected. If warranted, the court may award to the party prevailing on the motion the reasonable expenses and attorney’s fees incurred in presenting or opposing the motion. Absent exceptional circumstances, a law firm shall be held jointly responsible for violations committed by its partners, associates, and employees.” CCP § 128.7(c)(1). As an initial matter, counsel for SPS and Wilmington, Allison O. Chua, attests that she caused the motion to be served on plaintiff’s counsel at least 21 days prior to the filing date of the motion. (Chua Decl., ¶ 5). Plaintiff, in his opposition, does not claim otherwise.[1]

“A sanction imposed for violation of subdivision (b) shall be limited to what is sufficient to deter repetition of this conduct or comparable conduct by others similarly situated. Subject to the limitations in paragraphs (1) and (2), the sanction may consist of, or include, directives of a nonmonetary nature, an order to pay a penalty into court, or, if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of some or all of the reasonable attorney’s fees and other expenses incurred as a direct result of the violation.” CCP § 128.7(d). “Monetary sanctions may not be awarded against a represented party for a violation of paragraph (2) of subdivision (b).” CCP § 128.7(d)(1).

“Under Code of Civil Procedure section 128.7, a court may impose sanctions for filing a pleading if the court concludes the pleading was filed for an improper purpose or was indisputably without merit, either legally or factually. (Guillemin v. Stein (2002) 104 Cal.App.4th 156, 168.” Peake v. Underwood (2014) 227 Cal.App.4th 428, 440. “A claim is factually frivolous if it is ‘not well grounded in fact’ and it is legally frivolous if it is ‘not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.’ (Id. at p. 167.) In either case, to obtain sanctions, the moving party must show the party’s conduct in asserting the claim was objectively unreasonable. (Ibid.) A claim is objectively unreasonable if ‘any reasonable attorney would agree that [it] is totally and completely without merit.’ (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 650; Guillemin, supra, at p. 168.).” Id.

SPS and Wilmington contend that plaintiff is judicially estopped from prosecuting his fraud-based claims in this action because he did not disclose same in his bankruptcy schedules. (Motion, 6:1-7:3). “’”Judicial estoppel sometimes referred to as the doctrine of preclusion of inconsistent positions, prevents a party from ‘asserting a position in a legal proceeding that is contrary to a position previously taken in the same or some earlier proceeding…’”…It is an “’extraordinary remed[y] to be invoked when a party’s inconsistent behavior will otherwise result in a miscarriage of justice.’”’ (Daar & Newman v. VRL International (2005) 129 Cal.App.4th 482, 490-491).” Gottlieb v. Kest (2006) 141 Cal.App.4th 110, 130-131. “In California, courts consider five factors in determining whether to apply judicial estoppel: ‘The doctrine [most appropriately] applies when “(1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake.”’ (Aguilar v. Lerner (2004) 32 Cal.4th 974, 986-987, quoting Jackson [v. County of Los Angeles (1997)] 60 Cal.App.4th [171,] at p. 183; accord, MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 422).” Id. at 131. “Judicial estoppel is an equitable doctrine and its application by the court is discretionary.” Levin v. Ligon (2006) 140 Cal.App.4th 1456, 1468.

“The meaning of ‘acceptance’ in the bankruptcy context is construed broadly to ‘protect[ ] the integrity of the bankruptcy process.’ Id. at 785. Among other possibilities, the grant of a discharge (even if later revoked) or the confirmation of a plan may constitute sufficient ‘acceptance’ of the accuracy of schedules so as to permit judicial estoppel.” In re An-Tze Cheng (9th Cir. BAP2004) 308 B.R. 448, 453. Here, plaintiff’s Chapter 7 bankruptcy filed 9/26/11 resulted in a discharge on 1/10/12. (RJN, Exhibit “1”). Plaintiff did not disclose the fraud-based causes of action enumerated in the complaint in his sworn schedules, despite the fact that these claims are premised on purported misconduct that pre-dated the bankruptcy (Complaint, ¶¶ 32-35). Both the discharge of plaintiff’s debts following his lack of disclosure and the benefit of the automatic stay are sufficient bases for invoking the doctrine of judicial estoppel.

Additionally, SPS and Wilmington point out that plaintiff’s fraud-based claims are time-barred. Plaintiff concedes that he discovered the facts giving rise to his fraud claims in mid-2011. (Complaint, ¶ 37). The applicable statute of limitations for a fraud cause of action is three years. CCP § 338(d). Plaintiff did not file this action, however, until 12/15/17.

Also, plaintiff has failed to sufficiently plead his fraud-based causes of action. “The elements of fraud are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) scienter or knowledge of its falsity; (c) intent to induce reliance; (d) justifiable reliance; and (e) resulting damage. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638; 5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, § 772, p. 1135.) Fraud in the inducement is a subset of the tort of fraud. It ‘occurs when “’the promisor knows what he is signing but his consent is induced by fraud, mutual assent is present and a contract is formed, which, by reason of the fraud, is voidable.’”’ (Rosenthal v. Great Western Fin. Securities Corp. (1996) 14 Cal.4th 394, 415, quoting Ford v. Shearson Lehman American Express, Inc. (1986) 180 Cal.App.3d 1011, 1028, italics omitted.).” Hinesley v. Oakshade Town Center (2005) 135 Cal.App.4th 289, 294.

Plaintiff contends that in December 2006, a certain loan consultant named “Luan” instructed him to “provide bogus rental agreements for other real properties” “in order to inflate [his] actual income on the application” so that he would qualify for his loan. (Complaint, ¶¶ 32 & 33). Although plaintiff alleges that “Luan” was a “representative and authorized agent of Defendants,” he provides no factual support for this allegation. (Id., ¶ 32). The exhibits attached to the declaration of SPS Document Control Officer Sherry Benight (“Benight”), moreover, reflect that Wilmington did not originate the loan. (Benight Decl., ¶¶ 4 and 5, Exhibits “1”-“3”). Benight attests that SPS, moreover, did not acquire the servicing rights to the loan until on or about 8/1/13. (Id., ¶ 6). Plaintiff, then, cannot establish that defendants made a misrepresentation.

Plaintiff’s claim for Violation of Homeowner Bill of Rights—Single Point of Contact also fails. Plaintiff alleges that SPS violated Civil Code § 2923.7 by failing to assign a Single Point of Contact to him. (Complaint, ¶ 42). That provision reads, in relevant part, that “[u]pon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact.” Civil Code § 2923.7(a). Subsection (e) defines a “single point of contact” as “an individual or team of personnel each of whom has the ability and authority to perform the responsibilities described [herein]…” Plaintiff’s allegations are vague and conclusory “contentions, deductions or conclusions of fact or law,” which are insufficient to state a cause of action. Young v. Gannon (2002) 97 Cal.App.4th 209, 220. Further, a violation of § 2923.7 is actionable only when that violation is material. Here, plaintiff has not alleged any facts as to how SPS’ failure to assign a single point of contact affected her loan obligations or the modification process. See Shupe v. Nationstar Mortgage LLC (E.D.Cal. 2017) 231 F.Supp.3d 597, 603 (granting defendant’s motion to dismiss plaintiff’s Section 2923.7 claim after determining, inter alia, that plaintiffs failed to explain “how the alleged denial of their right to a SPOC in any way affected their loan obligations or the modification process”).

Plaintiff’s claim for Violation of Homeowner Bill of Rights—Dual Tracking is also deficient. Plaintiff alleges that SPS “strung [him] along and lulled them [sic] to sleep with a false sense of hope that a loan modification [was] under review, while at the same time taking the steps necessary to conduct a non-judicial foreclosure on the courthouse steps by recording a Trustee’s Sale wherein Plaintiff’s property would be sold.” (Complaint, ¶ 48). However, Section 2923.6 was repealed effective 1/1/18. “When a pending action seeks recovery based on a statutorily-based obligation, and that statutory provision is repealed by legislation not containing an express saving clause, the California courts have consistently concluded the pending actions should be abated.” Rankin v. Longs Drug Stores California, Inc. (2009) 169 Cal.App.4th 1246, 1256. With that said, the court notes that the complaint was filed 12/15/17, during which time Section 2923.6 was operative.

Plaintiff’s Negligence cause of action against SPS fails. Plaintiff alleges that “[p]art of Defendant’s duty in servicing the loan is a duty of care in reviewing Plaintiff’s loan for modification assistance. In particular, this performance goes together with the duty of implied covenant of good faith note to impede the parties to the fair ability to perform their obligations,” that SPS owed him a duty of care according to the six factors enumerated in Biankanja v. Irving (1958) 49 Cal.2d 647, and that SPS “voluntarily assumed a duty to exercise due care in handling Plaintiff’s financial situation when [it] agreed to review Plaintiff for a loan modification.” (Complaint, ¶¶ 54 and 57-65)

“Actionable negligence is traditionally regarded as involving the following: (a) a legal duty to use due care; (b) a breach of such legal duty; (c) the breach as the proximate or legal cause of the resulting injury.” Seo v. All-Makes Overhead Doors (2002) 97 Cal.App.4th 1193, 1202.

“‘The threshold element of a cause of action for negligence is the existence of a duty to use due care…’” Giacometti v. Aulla, LLC (2010) 187 Cal.App.4th 1133, 1137 (citation omitted). “[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money. (Wagner v. Benson (1980) 101 Cal.App.3d 27, 34-35; Fox & Carskadon Financial Corp. v. San Francisco Fed. Sav. & Loan Assn. (1975) 52 Cal.App.3d 484, 488, 489; Bradler v. Craig (1969) 274 Cal.App.2d 466, 473, 476).” Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096. “The principle that a financial institution owes no duty to a borrower has been extended to loan servicers as well. (Azzini v. Countrywide Home Loans, No. 09cv787 DMS (CAB), 2009 WL 5218042, *2 (S.D.Cal. Dec. 29, 2009); Wong v. Am. Servicing Co., Inc., No. 2:09-CV-01506 FCD/DAD, 2009 WL 5113516, *6 (E.D.Cal. Dec. 18, 2009).” Griffin v. Green Tree Servicing, LLC 2015 WL 10059081, *11.

There is a split among Ninth Circuit and California state courts with respect to whether or not lenders and loan servicers owe borrowers a duty of care in processing residential loan modification applications, as evidenced by Lueras v. BAC Home Loans Servicing (2013) 221 Cal.App.4th 49 and Alvarez v. BAC Home Loans Servicing, LP (2014) 228 Cal.App.4th 941.

Lueras reasons that “a loan modification is the renegotiation of loan terms, which falls squarely within the scope of a lending institution’s conventional role as a lender of money. A lender’s obligations to offer, consider, or approve loan modifications and to explore foreclosure alternatives are created solely by the loan documents, statutes, regulations, and relevant directives and announcements from the United States Department of the Treasury, Fannie Mae, and other governmental or quasi-governmental agencies. The Biakanja factors do not support imposition of a common law duty to offer or approve a loan modification. If the modification was necessary due to the borrower’s inability to repay the loan, the borrower’s harm, suffered from denial of a loan modification, would not be closely connected to the lender’s conduct. If the lender did not place the borrower in a position creating a need for a loan modification, then no moral blame would be attached to the lender’s conduct.” Lueras, supra, 221 Cal.App.4th at 67.

Alvarez, on the other hand, applies the Biakanja factors to hold that while a lender may not owe a duty to offer or approve a loan modification, a lender does owe a duty to a borrower to exercise reasonable care in the review of a borrower’s loan modification application once the lender agrees to review for a modification.

The reasoning applied in Lueras is more persuasive, inasmuch as the Biakanja test is inapplicable in this instant context. Biakanja provides that “[t]he determination whether in a specific case the defendant will be held liable to a third person not in privity is a matter of policy and involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.” Biakanja, supra, 49 C.2d 647, 650. In Biakanja, the notary public defendant prepared the will of the plaintiff’s brother, which left the entire estate to the plaintiff. The will was denied probate for lack of sufficient attestation; as such, plaintiff only received her intestate share of the estate. There, the “principal question [was] whether defendant was under a duty to exercise due care to protect plaintiff from injury and was liable for damage caused plaintiff by his negligence even though they were not in privity of contract.” Id. at 648. The California Supreme Court thus restricted its decision to circumstances in which a stranger to a contract seeks to recover for harm arising from the performance of a particular contract to which the plaintiff is not a party. The goal of the test was to limit liability to contexts in which the “end and aim” of the transaction in issue was intended to benefit the interests of specifically identifiable third parties; in Biakanja, the “’end and aim’ of the transaction was to provide for the passing of Maroevich’s estate to plaintiff…Defendant must have been aware from the terms of the will itself that, if faulty solemnization caused the will to be invalid, plaintiff would suffer the very loss which occurred. As Maroevich died without revoking his will, plaintiff, but for defendant’s negligence, would have received all of the Maroevich estate, and the fact that she received only one-eighth of the estate was directly caused by defendant’s conduct.” Id. at 650-651 (citation omitted).

This instant case, however, does not involve any third-party beneficiary allegations. Furthermore, “there is no principled way to distinguish the process of applying for an original loan from the process of applying for a loan modification; both involve activities clearly within the conventional role of mere lenders of money.” Griffin, supra, 2015 WL 10059081, *14.

Finally, plaintiff’s Violation of B&P Code § 17200 cause of action fails. Plaintiff alleges that SPS and Wilmington violated Section 17200 by “negligently ma[king] false representations,” “unlawfully initiat[ing] foreclosure,” “unfairly breach[ing] the implied covenant of good faith and fair dealing” and by otherwise “violat[ing] the Homeowner Bill of Rights.” (Complaint, ¶¶ 80-82 and 85).

Plaintiff, however, cannot show any compensable injury in fact to demonstrate standing to recover under Business & Professions Code § 17200. “A private plaintiff must make a twofold showing: he or she must demonstrate injury in fact and a loss of money or property caused by unfair competition. (§ 17204; Buckland [v. Threshold Enterprises, Ltd. (2007) 155 Cal.App.4th 798] at p. 817).” Peterson v. Celico Partnership (2008) 164 Cal.App.4th 1583, 1590. The causation requirement of UCL is not met if a plaintiff would have suffered “the same harm whether or not a defendant complied with the law.” Daro v. Superior Court (2007) 151 Cal.App.4th 1079, 1099. Plaintiff alleges that he “lost money as late penalties and legal fees have been accrued as he has striven to meet the terms of the loan contract.” (Id., ¶ 86). However, the complaint is devoid of sufficient facts to show a causal relationship between these purported damages and defendants’ allegedly unfair business practices. In any event, it would appear that plaintiff would have suffered this same harm irrespective of defendants’ actions, as his loan was in default.

Also, the viability of an unfair competition law cause of action stands or falls with plaintiff’s other causes of action, which are insufficiently pled, for the reasons set forth above. See Krantz v. BT Visual Images, L.L.C. (2001) 89 Cal.App.4th 164, 178.

With that said, SPS and Wilmington have not shown that plaintiff’s complaint was filed for an improper purpose or that it, as a whole, was indisputably without merit, either legally or factually. Defendants’ arguments would have been better suited for a demurrer and/or motion for judgment on the pleadings. Accordingly, the motion is denied.

[1] Plaintiff, in fact, filed his opposition on 4/6/18, thirteen days before the motion was filed.