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Calif. App. Court (1st Dist) Holds HBOR Does Not Require Borrower to Own the Collateral Property

mortgage lawThe Court of Appeals of California, First District, recently reversed entry of judgment on the pleadings in favor of a mortgage loan servicer and the named trustee under the deed of trust against claims raised by a borrower alleging violations of California’s Homeowner Bill of Rights.

In so ruling, the Appellate Court held that the HBOR’s requirement that the collateral property be “owner-occupied” did not require the borrower to be the owner of the collateral property, but instead only required “that the property is the principal residence of the borrower and is security for a loan made for personal, family, or household purposes.”

A copy of the opinion in Adams v. Bank of America N.A. is available at:  Link to Opinion.

In August 2006, a borrower obtained a loan from a lender (“bank”) secured by a deed of trust (“senior loan”) upon residential property.  Later that month, she obtained a $28,000 loan from an individual (“individual lender”), secured by a separate deed of trust upon the property (“junior loan”). 

She subsequently defaulted on the junior loan.  Foreclosure of the junior loan resulted in a trustee’s sale of the property to the individual lender in March 2008.  The property remained subject to the first priority lien of the senior loan. 

The borrower filed for Chapter 7 bankruptcy in March 2017, and a discharge order was entered in September 2017.

In December 2017 the borrower filed suit against the servicer of the senior loan and the trustee under the deed of trust (“mortgagees”) primarily alleging violations of California’s Homeowner Bill of Rights (HBOR) for: (i) purported improper ‘dual tracking’ while engaged in good faith negotiations towards a modification of the senior loan; and (ii) the lienholder’s failure to provide a single point of contact during the loan modification process.  The borrower’s complaint further alleged that mortgagees violated various other provisions of the HBOR and sought injunctive and declaratory relief.

The mortgagees moved for judgment on the pleadings arguing that the complaint failed to state facts sufficient to constitute a cause of action under the HBOR, to which the borrower filed no response in opposition.  The trial court granted the mortgagees’ motion without leave to amend, and the clerk subsequently rejected the borrower’s attempt to file an amended complaint.  After the borrower’s motion for rehearing was denied, the instant appeal followed.

Under California law, a motion for judgment on the pleadings is equivalent to a demurrer and is governed by the same de novo standard of review.  Kapsimallis v. Allstate Ins. Co. (2002) 104 Cal.App.4th 667, 672.  All properly pleaded, material facts are deemed true, but not contentions, deductions, or conclusions of fact or law (Id.) and Courts may consider judicially noticeable matters in the motion as well.  Id.; People ex rel. Harris v. Pac Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777.)  When a demurrer is sustained without leave to amend, the appellate court is tasked with determining whether there was a reasonable possibility that the defect can be cured by amendment.  Sanchez v. Truck Ins. Exchange (1994) 21 Cal.App.4th 1778, 1781.

Accordingly, the issue before the Appellate Court was whether the facts alleged by the borrower together with matters subject to judicial notice were sufficient to state a cause of action under California’s HBOR.

As you may recall, the HBOR: (i) prohibits dual tracking, whereby a financial institution continues to pursue foreclosure while evaluating a borrower’s loan modification application (Cal. Civ. Code § 2923.6, subd. (c).), and; (ii) requires that a mortgage servicer establish a single point of contact and provide a borrower who requests a foreclosure prevention alternative with one or more direct means of communication with the single point of contact. Cal. Civ. Code § 2923.7, subd. (a).  However, these provisions do not apply to all mortgages and deeds of trust—only to “first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units.”  Cal. Civ. Code § 2924.15. 

The HBOR defines ‘owner-occupied’ to mean “that the property is the principal residence of the borrower and is security for a loan made for personal, family, or household purposes” (Cal. Civ. Code § 2924.15) and this statutory definition is controlling under California law.  Great Lakes Properties, Inc. v. City of El Segundo (1977) 19 Cal.3d 152, 156 (“When a statute prescribes the meaning to be given to particular terms used by it, that meaning is generally binding on the courts.”) (internal citation omitted).

On appeal, the mortgagees argued that the borrower’s HBOR claims failed as a matter of law because the property had been sold at the foreclosure sale of the junior loan, and the borrower did not own the property, and thus failed to meet the definition of “owner-occupied” under the statute. 

Specifically, the mortgagees contended that: (i) section 2924.15’s definition of “owner-occupied” only applies to the word “occupied” and not to the full term; (ii) the Senate Rules Committee’s discussion of the “restriction to owner-occupied residences’” as “‘on the whole already contained in existing law, Civil Code Section 2923.5. . . .” provides legislative support to their position; (iii) the HBOR’s provision of pre-foreclosure injunctive relief suggests that it must apply to property owners or otherwise such relief would provide no benefit, and; (iv) the HBOR contains an implicit requirement of ownership because the term “borrower” is limited to those who are also owners.

The First District rejected all of these arguments, because although the borrower did not own the property, the statutory definition provided no such requirement of ownership, and she met the definition of “borrower” on the senior loan as the term is defined under the statute.

Given the HBOR’s definition of “owner-occupied,” the First District next needed to determine whether the facts alleged in the complaint or subject to judicial notice were sufficient to satisfy the “principal residence of the borrower” requirement.

The Appellate Court noted that the complaint itself made no allegations that the property was the borrower’s principal residence, nor did any documents submitted by mortgagees in support of their motion for judgment on the pleadings. 

Although filings in the borrower’s bankruptcy proceedings claimed that she “continues in possession of his [sic] estate and, in particular lives in her single family residence located at [the property’s address]”, as do documents submitted by the borrower on appeal, these assertions are not subject to judicial notice (Sosinsky v. Grant (1992) 6 Cal. App. 4th 1548, 1569–1570) and merely residing at the property does not mean that it is necessarily her principal residence.  Because the facts alleged in the complaint together with matters subject to judicial notice did not establish that the property is the borrower’s principal residence as required under section 294.15, the Appellate Court concluded that she failed to state a cause of action to support her HBOR claims.

Lastly, the First District turned to the question of whether the trial court abused its discretion by denying the borrower leave to amend the complaint — i.e., whether on the pleaded and noticeable facts there was a reasonable possibility of an amendment that would cure the complaint’s legal defect or defects. Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.

On appeal, the borrower maintained that the property was her principal residence, as provided in various court filings, and that her proposed amended complaint rejected by the trial court expressly alleged that she ‘continued to reside on the property.”  At oral argument, the borrower’s counsel represented that the borrower could plead and prove that the property was her principal address at all relevant times, and counsel for the mortgagees agreed that leave to amend would be appropriate if the Court determined the HBOR’s definition of “owner-occupied” meant the “principal residence of the borrower.” 

Because this was the First District’s holding regarding the meaning of “owner-occupied”, the Court concluded that a reasonable possibility existed that amendment of the complaint to allege that the property was the borrower’s principal residence would cure the defect.

Accordingly, judgment in the mortgagees’ favor was reversed and the matter was remanded to the trial court to grant the borrower leave to file an amended complaint.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions. For more information, see https://mauricewutscher.com/attorneys/christopher-p-hahn/

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