New California Court of Appeal Decision Reaffirms General Rule that Residential Lenders Owe no Duty to Borrowers, Including in the Loan Modification Context

by Allen Matkins
Contact

In a recent decision, Lueras v. BAC Home Loans Servicing, LP, 2013 Cal. App. LEXIS 886, the California Court of Appeal returned to the general rule that, absent unique circumstances giving rise to a duty of care, lenders do not owe a duty of care to their borrowers. The decision may bolster the position of mortgage lenders and servicers defending against negligence claims in foreclosure-avoidance and related actions.

Relevant Background and Summary of Case

Lueras resolves, for the moment, the apparent tension between two California Court of Appeal cases, Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, and Jolley v. Chase Home Finance, LLC (2013) 213 Cal.App.4th 872, each of which address the degree to which lenders owe a duty of care to their borrowers. The Nymark court held that a lender owed no duty of care to a borrower in preparing an appraisal of real property when the purpose of the appraisal was to protect the lender by satisfying it that the collateral provided adequate security for its loan. The court reached its holding by considering six factors to determine whether to recognize a duty of care: (1) the extent to which the transaction was intended to affect the borrower; (2) the foreseeability of harm to the borrower; (3) the degree of certainty that the borrower suffered an injury; (4) the closeness of the connection between the lender's conduct and the injury suffered; (5) the moral blame attached to the lender's conduct; and (6) policy concerns relating to the prevention of future harm.

The more recent Jolley decision, however, questioned whether the Nymark decision stood for the blanket proposition that lenders do not owe borrowers a duty of care, finding that a construction lender might indeed owe such a duty to a borrower. The court's rationale for this holding was premised on its reasoning that the relationship between a lender and borrower on a construction loan is "ongoing." While the court limited its holding to construction loans, it's decision did call into question the long standing rule that lenders owe no such duty. The Jolley court, after a highly selective discussion of federal and state legislation aimed at providing assistance to homeowners at risk of foreclosure, concluded that, while the new legislation did not directly apply to construction loans, it "sets forth policy considerations that should affect the assessment whether a duty of care was owned to [the plaintiff] at that time."

The Lueras decision reflects a return to the general rule. However, the decision did not do away with the exception to the general rule. As such, unique lender-borrower relationships may still give rise to a duty of care. In Lueras, the court based its conclusion on a rigorous examination of federal and state law regarding duty in the lender/borrower context. In Lueras, homeowner Richard Lueras sued his lender, alleging, among other things, causes of action for negligence, breach of contract, violation of the Perata Mortgage Relief Act, fraud/misrepresentation, unfair and unlawful practices, and to quiet title. Lueras alleged that, after falling behind in his mortgage payments, he requested a loan modification from his lender pursuant to the Home Affordable Modification Program, or HAMP. Instead, he alleged, the lender offered Lueras reduced monthly payments under the Federal National Mortgage Association (Fannie Mae) HomeSaver Forbearance program. Lueras accepted the offer and made the reduced payments as directed. During the forbearance period, Lueras claimed that his lender was to work with him to find a more permanent solution to avoid forbearance, but it did not.

As alleged by the Plaintiff in Lueras, shortly after the forbearance period ended, Lueras was served with notice of a pending foreclosure sale. The date of the sale was pushed back several times, from February 2011 to May 2011. During that period, the lender informed Lueras that he qualified for loan modification under HAMP. The lender orally offered to modify Lueras’s loan. Lueras accepted the offer. The lender also repeatedly advised Lueras that he was not at risk of foreclosure during the pendency of the loan modification process. Days after the last communication regarding modification, the lender foreclosed on Lueras’ property. Lueras alleged that the lender breached its duty of care in the handling of his application for a loan modification and in foreclosing on his property.

The trial court sustained the lender's demurrer, without leave to amend. The Court of Appeal reversed the trial court's ruling, in part, largely because Lueras "had filed only two complaints in a complicated and evolving area of law before facing dismissal." As to Lueras's cause of action for negligence, the Court of Appeal undertook a substantial, detailed survey of the evolving law regarding lenders' duties of care, if any, including an analysis of the Jolley decision and the state and federal law upon which it was based. Ultimately, the Lueras court expressly rejected the Jolley court's reasoning, holding 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[,]" and that this "conventional role" is governed by the general rule that no duty of care is owed. In so doing, the Lueras court clarified the duty issue in the residential loan modification setting and reaffirmed the longstanding general principle that a lender does not owe a duty of care to its borrowers.

Potential Implications

Lueras temporarily resolves the tension between Nymark – one of the cases most commonly relied on by lenders accused of negligence – and Jolley, which raised questions about kinds of lender-borrower relationships which might give rise to a duty of care. In so doing, Lueras reaffirms the general principle that lenders do not owe their borrower a duty of care, expanding the principle to hold that a residential lender owes no common law duty of care to offer, consider, or approve a loan modification, or to explore and offer foreclosure alternatives. Accordingly, and for the time being, the Lueras decision may serve to bolster mortgage lender and servicer defenses to negligence claims brought by defaulting borrowers, or borrowers denied a loan modification, in foreclosure-avoidance and related actions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Allen Matkins | Attorney Advertising

Written by:

Allen Matkins
Contact
more
less

Allen Matkins on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.