Case Name: Osric Dixon, et al. v. Nationstar Mortgage, LLC, et al.
Case No.: 2015-1-CV-287231

Currently before the Court is defendants Nationstar Mortgage, LLC (“Nationstar”), Deutsche Bank Trust Company Americas (“DBT”) and Mortgage Electronic Registration Systems, Inc.’s (“MERS”) (collectively, “Defendants”) demurrer to the first amended complaint (“FAC”) of plaintiffs Osric Dixon and Emmanuela Dixon (“Plaintiffs”).

I. Factual and Procedural Background

As relevant here, Plaintiffs allege the following in their operative FAC: Plaintiffs own real property located at 18510 Serra Avenida, Morgan Hill, CA. (FAC, ¶ 3.) On March 28, 2006, Plaintiffs signed a deed of trust (“DOT”) and adjustable rate balloon note (the “Note”) with Homecomings Financial Network, Inc. (“HFN”). (FAC, ¶ 9.) The DOT names MERS as the beneficiary in its capacity as nominee for HFN. (FAC, ¶ 9.) The DOT is void because MERS cannot be a valid nominee due to its lack of employees. (FAC, ¶ 12.)

In 2013, MERS assigned the loan to Nationstar. (FAC, ¶ 84.) At that time, Plaintiffs attempted to secure a loan modification from Nationstar. (FAC, ¶ 91.) On May 23, 2013, Nationstar offered Plaintiffs a loan modification, which they considered to be insulting. (FAC, ¶ 91.)

Sometime thereafter, Plaintiffs sent several complaints to the Federal Trade Commission (“FTC”) about Defendants’ practices. (FAC, ¶ 96.) The FTC referred the matter to the Consumer Financial Protection Bureau (“CFPB”). (FAC, ¶ 96.) The CFPB opened an account for Plaintiffs on its web portal, which it uses to communicate with claimants. (FAC, ¶ 97.) Nationstar “staged” three files in Plaintiffs’ CFPB Portal inbox with different addresses, which caused the CFPB to send a letter to the incorrect address. (FAC, ¶ 97) In addition, Defendants changed Plaintiffs’ secondary e-mail address. (FAC, ¶ 103.)

On November 17, 2014, Nationstar recorded an assignment of the DOT, transferring its interest to a real estate mortgage investment trust (“REIT”) set up under New York Law and administered by DBT. (FAC, ¶¶ 98, 135.) Under the terms of its pooling and servicing agreement, the REIT closed in 2006. (FAC, ¶ 135.) The DOT is void due to the assignment of the DOT to the REIT after its closing date. (FAC, ¶ 135.)

In spite of the fact that the DOT was void, DBT caused Quality Loan Service Corporation to file a notice of default in 2015. (FAC, ¶ 110.)

On December 4, 2015, Plaintiffs filed the FAC, asserting 10 causes of action for: (1) declaratory relief; (2) violation of the California Uniform Commercial Code section 3-501, subdivision (b)(2); (3) wrongful foreclosure; (4) mail fraud; (5) violation of the Fair Debt Collection Practices Act (the “FDCPA”); (6) violation of Penal Code section 502; (7) violation of the Homeowner Bill of Rights (“HBOR”); (8) violation of the Fair Credit Reporting Act (the “FCRA”); (9) breach of the implied covenant of good faith and fair dealing; and (10) violation of Business and Professions Code, section 17200 (the “UCL”).

On January 4, 2016, Defendants filed a notice of removal to United States District Court. Pursuant to a stipulation between the parties, the district court dismissed the fourth, fifth, and eighth causes of action for mail fraud, violation of the FDCPA, and violation of the FCRA. The matter was subsequently remanded back to this Court.

On April 28, 2016, Defendants filed the instant demurrer to the remaining causes of action in the FAC on the ground of failure to state sufficient facts to constitute a cause of action. (See Code Civ. Proc., § 430.10, subd. (e).) Plaintiffs filed their opposition on July 6, 2016. On July 12, 2016, Defendants filed their reply.

II. Request for Judicial Notice

Defendants ask the Court to take judicial notice of: (A) the complaint filed in case no. 513CV007767 (“Case 1”); (B) the FAC in Case 1; (C) the judgment of dismissal in Case 1; and (D) the Court of Appeal’s opinion affirming the judgment of dismissal. The request for judicial notice is GRANTED. (See Evid. Code, § 452, subd. (d) [stating that a court may take judicial notice of court records].)

III. Discussion

Defendants argue that the defense of res judicata bars each cause of action in the FAC. In addition, they advance specific arguments concerning each cause of action. The Court will address each of these arguments in turn.

A. Legal Standards

The function of a demurrer is to test the legal sufficiency of a pleading. (Trs. Of Capital Wholesale Elec. Etc. Fund v. Shearson Lehman Bros. (1990) 221 Cal.App.3d 617, 621.) Consequently, “ ‘[a] demurrer reaches only to the contents of the pleading and such matters as may be considered under the doctrine of judicial notice’ [Citations.]” (South Shore Land Co. v. Petersen (1964) 226 Cal.App.2d 725, 732; see also Code Civ. Proc., § 430.30, subd. (a).) “‘It is not the ordinary function of a demurrer to test the truth of the [ ] allegations [in the challenged pleading] or the accuracy with which [the plaintiff] describes the defendant’s conduct. [ ] Thus, [ ] ‘the facts alleged in the pleading are deemed to be true, however improbable they may be.’ [Citations.]” (Align Technology, Inc. v. Tran (2009) 179 Cal.App.4th 949, 958.) “A demurrer must dispose of an entire cause of action to be sustained.” (Fremont Indem. Co. v. Fremont General Corp. (2007) 148 Cal.App.4th 97, 119.) In addition, “a demurrer based on an affirmative defense will be sustained only where the face of the complaint discloses that the action is necessarily barred by the defense.” (McKenney v. Purepac Pharmaceutical Co. (2008) 167 Cal.App.4th 72, 79.)

B. Res Judicata

Defendants assert that the entire FAC is barred by the defense of res judicata because Plaintiffs raised the same claims in Case 1 and the Court entered judgment against Plaintiffs in that action after sustaining a demurrer without leave to amend.

The doctrine of res judicata, or claim preclusion, bars relitigation of a claim where a second suit involves: “(1) the same cause of action (2) between the same parties [or those in privity with them] (3) after a final judgment on the merits in the first suit.” (Daniels v. Select Portfolio Servicing, Inc. (2016) 246 Cal.App.4th 1150, 1164, internal citations omitted.) While a judgment on a general demurrer may bar a new action, its preclusive effect is narrow. “[A] judgment on a general demurrer will have the effect of a bar in a new action in which the complaint states the same facts which were held not to constitute a cause of action on the former demurrer or, notwithstanding differences in the facts alleged, when the ground on which the demurrer in the former action was sustained is equally applicable to the second one.” (McKinney v. County of Santa Clara (1980) 110 Cal.App.3d 787, 794; see also Daniels, supra, 246 Cal.App.4th at p. 1165 [stating that “the final judgment on the merits requirement is satisfied only if, despite the newly alleged facts, appellants’ claims are (1) susceptible to a demurrer (2) on the same grounds that the demurrer in [the prior case] was sustained”].)
Here, Defendants make no attempt to establish that each of Plaintiffs’ causes of action is susceptible to a demurrer for the same reasons the Court relied on when sustaining the demurrer in Case 1. Accordingly, Defendants fail to establish that the instant action is barred by the defense of res judicata. (See Daniels, supra, 246 Cal.App.4th at p. 1166 [declining to determine whether claim preclusion bars the plaintiffs’ claims where the final judgment on the merits requirement is insufficiently developed].)

C. Arguments Specific to a Cause of Action

1. First Cause of Action

The first cause of action is for declaratory relief. Plaintiffs seek a declaration that the DOT is void because MERS is not a valid beneficiary or nominee and the DOT does not identify the contracting parties as required by Civil Code section 1558. (FAC, ¶¶ 119, 121.)

Defendants persuasively argue that both of these contentions do not support a claim for declaratory relief. (See Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 517 [sustaining a demurrer to a declaratory relief cause of action where the underlying claim was not feasible], disapproved on other grounds by Yvanova v. New Century Mortg. Corp. (2016) 62 Cal.4th 919.) First, it is well-established that MERS may act as a beneficiary or nominee under a deed of trust and exercise any authority provided under the terms of that contract. (Gomes v. Countrywide Home Loans, Inc. (2011) 192 Cal.App.4th 1149, 1157; Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 273, disapproved on other grounds by Yvanova v. New Century Mortg. Corp. (2016) 62 Cal.4th 919.) Here, the DOT specifically permits MERS to exercise all rights granted to the lender, including the right to transfer or assign the Note and DOT. (FAC, Ex. A.) Accordingly, the DOT is not void on this basis. Second, the DOT clearly identifies the contracting parties. (FAC, Ex. A.) As such, it does not violate Civil Code section 1558. (See, e.g., Jackson v. Grant (9th Cir. 1989) 890 F.2d 118, 120-121 [finding a violation of Civil Code section 1558 only where the name of the beneficiary was left blank in the deed of trust]; Sotanski v. HSBC Bank USA, National Association (N.D. Cal., Aug. 12, 2015, No. 15-CV-01489-LHK) 2015 WL 4760506 at *6 [rejecting argument that the failure to identify the “true lender” violates Civil Code, § 1558].)Accordingly, the DOT is not void on this basis either.

In light of the foregoing, the demurrer to the first cause of action for declaratory relief is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND. (See City of Stockton v. Sup. Ct. (2007) 42 Cal.4th 730, 747 [stating that if the plaintiff has not had an opportunity to amend the complaint in response to a demurrer, leave to amend is liberally allowed as a matter of fairness].)

2. Second Cause of Action

The second cause of action is for violation of the California Uniform Commercial Code section 3501, subdivision (b)(2), which provides that “[u]pon demand of the person to whom presentment is made, the person making presentment shall (A) exhibit the instrument, (B) give reasonable identification and, if presentment is made on behalf of another person, reasonable evidence of authority to do so, and (C) sign a receipt on the instrument for any payment made or surrender the instrument if full payment is made.” Presentment is defined by statute as “a demand made by or on behalf of a person entitled to enforce an instrument (1) to pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank, or (2) to accept a draft made to the drawee.” (Cal. U. Com. Code, § 3501, subd. (a).)

Defendants contend that the second cause of action fails because the Note waives the right to presentment. (See Rottman v. Hevener (1921) 54 Cal.App. 485, 489 [providing that a written instrument may expressly waive the right to presentment]; White v. Standard Lumber & Wrecking Co. (1916) 29 Cal.App. 646, 649 [same].) This argument is well-taken. The Note specifically states that “I and any other person who has obligations under this Note waive the rights of Presentment and Dishonor.” (FAC, Ex. A.) As such, the demurrer to the second cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

3. Third Cause of Action

The third cause of action is for wrongful foreclosure. Plaintiffs allege that the DOT is void because it was assigned to a REIT established under New York law long after the closing date for that trust. (FAC, ¶ 135.)

Defendants persuasively argue claim that Plaintiffs do not have standing to challenge the initiation of foreclosure on this basis. A borrower has standing to sue for wrongful foreclosure only where an alleged defect in the assignment renders the assignment void. (Saterbak v. JPMorgan Chase Bank, N.A. (2016) 245 Cal.App.4th 808, 815.) Under New York law, an assignment that does not comply with the terms of a pooling and service agreement does not render the assignment void. (Ibid.) Instead, the unauthorized act renders the assignment voidable by the beneficiary. (Ibid.) Here, the assignment of the DOT to a REIT after the closing date of the trust renders it voidable rather than void under New York law. Since Plaintiffs do not allege facts demonstrating that Nationstar actually voided the assignment, Plaintiffs fail to allege lack standing to sue on this basis. Accordingly, the demurrer to the third cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

4. Sixth Cause of Action

The sixth cause of action is for violation of Penal Code section 502, which provides a civil right of action for damages to an owner or lessee of a computer, computer system, computer network, computer program or data who suffers damages by reason of a person who knowingly and without permission commits specified computer-related offenses. With respect to this cause of action, Plaintiffs allege that Defendants tampered with their CFPB account by changing their secondary e-mail address and providing documents with incorrect addresses. (FAC, ¶ 153.)

Defendants contend that Plaintiffs do not allege that they are the owner or lessee of the CFPB’s website or the data submitted to that website. This argument is meritorious. Penal Code section 502, subdivision (e) limits the right to bring a civil action to the owner or lessee of a particular computer system, network, program, or data who suffers damage due to tampering, interference or unauthorized access. Here, the FAC alleges no facts demonstrating that Plaintiffs’ owned the CFPB website or the data contained on that computer network. Accordingly, the demurrer to the sixth cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

5. Seventh Cause of Action

The seventh cause of action is for violation of Civil Code sections 2924.24, subdivision (a)(6) and 2924.17. Section 2924.24, subdivision (a)(6) provides that only the holder of the beneficial interest, the trustee or designated agent of the holder may record a notice of default. Section 2924.17 requires the holder, trustee, or agent to review competent and reliable evidence substantiating the borrower’s default and right to foreclose before recording the notice of default. With regard to this cause of action, Plaintiffs allege that Defendants recorded or caused to be recorded a notice of default even though the DOT is void for the reasons previously articulated in the first and third causes of action, namely, that the parties to the loan are not identified and the loan was impermissibly transferred to the REIT after the trust’s closing date. (FAC, ¶¶ 158-159.)

Defendants persuasively argue that they did not violate the HBOR because Plaintiffs fail to allege facts demonstrating that the DOT is void. As previously discussed in connection with the first and third causes of action, the DOT complied with Civil Code section 1588 by clearly identifying the contracting parties and the assignment of the loan to the REIT after its closing date did not render the assignment to be void. As such, Plaintiffs fail to allege sufficient facts to constitute a cause of action for violation of Civil Code sections 2924.24, subdivision (a)(6) and 2924.17. Accordingly, the demurrer to the seventh cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

6. Ninth Cause of Action

The ninth cause of action is for breach of the implied covenant of good faith and fair dealing. Plaintiffs allege that Defendants violated the covenant by making an insulting loan modification offer. (FAC, ¶ 168.)

Defendants contend that the ninth cause of action fails because the Note and DOT do not require them to offer a loan modification and the breach of the covenant of good faith and fair dealing cannot impose substantive duties beyond those incorporated in the specific terms of the agreement. This argument is well-taken. “The implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract.”
(Pasadena Live, LLC v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1094; see also Agosta v. Astor (2004) 120 Cal.App.4th 596, 607 [stating that “[t]he covenant cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement’”].) Here, the loan and DOT do not contain specific terms requiring Defendants to offer a loan modification. (FAC, Ex. A.) As such, the covenant cannot be extended to create an obligation that Defendants offer a loan modification Plaintiffs deem to be acceptable. Accordingly, the demurrer to the ninth cause of action for violation of the implied covenant of good faith and fair dealing is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.

7. Tenth Cause of Action

The tenth cause of action for violation of the UCL alleges that Defendants’ conduct as specified in the other causes of action constitutes unlawful and unfair business practices. (FAC, ¶¶ 176, 179.)

“In order to protect both consumers and competitors by promoting fair competition in commercial markets for goods and services, the UCL prohibits, and provides civil remedies for, unfair competition. (Jenkins, supra, 216 Cal.App.4th at p. 520, internal citations omitted.) Unfair competition includes any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising. (Bus. & Prof. Code, § 17200.) An action under the UCL “to redress an unlawful business practice ‘borrows’ violations of other laws and treats these violations … as unlawful practices independently actionable under section 17200 et seq….” (Farmers Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 383.)
Defendants persuasively argue that the tenth cause of action fails because it is premised on the conduct alleged in their other causes of action, which fail to state a cause of action. (See Krantz v. BT Visual Images, LLC (2001) 89 Cal.App.4th 164, 178 [stating that the viability of a UCL claim stands or falls with the antecedent substantive causes of action].) As discussed above, Plaintiffs fail to allege sufficient facts to constitute any other cause of action in the FAC. Since the unlawful and unfair conduct alleged in these causes of action form the basis of Plaintiffs’ UCL claim, the UCL claim fails as well. Accordingly, the demurrer to the tenth cause of action is SUSTAINED WITH 10 DAYS’ LEAVE TO AMEND.