The California Court of Appeal, Fourth Appellate District, recently held that a trial court erred in ruling that several borrowers’ claims were precluded by a prior unlawful detainer judgment entered against them following the foreclosure sale of their home.
However, as to the borrowers’ federal Truth in Lending Act claim, the Court held the allegations suffered from several defects and that the trial court correctly sustained the demurrer to this claim without leave to amend.
A copy of the opinion in Struiksma v. Ocwen Loan Servicing, LLC is available at: Link to Opinion.
The plaintiffs were borrowers who lost title to their home in a foreclosure sale. The purchaser at the sale then brought an unlawful detainer action against them under California Code of Civil Procedure § 1161a(b)(3). A default judgment was issued, and the plaintiffs were evicted from their property.
The plaintiffs then filed suit against their lender and loan servicer, who were not parties to the unlawful detainer action. Generally, the plaintiffs alleged that the defendants carelessly failed to credit several payments to their loan balance. Thus, the plaintiffs contended that they were never in default and that the defendants wrongfully foreclosed on the property.
The trial court sustained the defendants’ demurrer to the complaint, finding that all of the plaintiffs’ claims were precluded by the unlawful detainer judgment except for a claim under the federal Truth in Lending Act, which was held to be defective for other reasons. The plaintiffs were denied leave to amend on all claims and timely appealed the resulting judgment.
The Fourth Appellate District first addressed the preclusive effect of an unlawful detainer action under § 1161a. Section 1161a provides for a narrow and sharply focused examination of title. To establish that it is a proper plaintiff, the buyer at a foreclosure trustee’s sale seeking to evict the occupant in possession must show that it acquired the property at a regularly conducted sale and thereafter “duly perfected” its title. Vella v. Hudgins (1977) 20 Cal.3d 251, 255. Additionally, only claims “directly connected with the conduct of the sale” are required to be litigated in a section 1161a proceeding. Id. at 258.
Since only a limited range of title issues can be raised in a section 1161a unlawful detainer action, the Fourth Appellate District held that the preclusive effect of a resulting judgment is likewise limited.
As a result, the Fourth Appellate District concluded that the plaintiffs’ non-TILA claims were not sufficiently related to the trustee’s sale to be precluded by the unlawful detainer action.
The plaintiffs’ non-TILA claims focused on activity that predated the initiation of the trustee’s sale procedures — i.e., the defendants’ alleged failure to apply payments to their account. Although this alleged failure eventually led to the initiation of foreclosure sale proceedings, the Court maintained that it was not directly connected to the conduct of the sale. Thus, the Court held that the plaintiffs’ non-TILA claims were not required to be raised in the unlawful detainer proceeding and were not precluded by it.
The Fourth Appellate District also determined that the defendants’ alleged carelessness in failing to credit the plaintiffs’ payments was not fully and fairly litigated in the unlawful detainer proceeding. The plaintiffs did not file an answer, so a default judgment was entered against them. Although a default judgment precludes relitigation of all issues pleaded in the complaint, Kahn v. Kahn (1977) 68 Cal.App.3d 372, 382, the Court noted that the defendants’ carelessness was not raised in the unlawful detainer complaint. And, as discussed above, the plaintiffs were not required to raise the issue in the proceeding.
The Fourth Appellate District next addressed the plaintiffs’ TILA claim. TILA requires creditors to make certain disclosures to consumers regarding consumer leases and credit transactions. 15 U.S.C. § 1631(a). A “creditor” is defined as “the person to whom the debt arising from the consumer credit transaction is initially payable.” 15 U.S.C. § 1602(g). “TILA [also] provides for assignee liability if the violation is ‘apparent on the face of the loan documents.'” Romero v. Countrywide Bank, N.A. (N.D. Cal. 2010) 740 F.Supp.2d 1129, 1141; 15 U.S.C. § 1641.
The Court found that the defendants were not the plaintiffs’ initial creditor and that the plaintiffs have not alleged that the purported TILA violation was apparent on the face of the loan documents. Thus, the Court concluded that the TILA claim was defective.
Lastly, regarding the trial court denying the plaintiffs leave to amend the TILA claim, the Fourth Appellate District observed that “the plaintiff bears the burden of proving there is a reasonable possibility of amendment.” Rosen v. St. Joseph Hospital of Orange County (2011) 193 Cal.App.4th 453, 458. “Where the appellant offers no allegations to support the possibility of amendment and no legal authority showing the viability of new causes of action, there is no basis for finding the trial court abused its discretion when it sustained the demurrer without leave to amend.” Id.
Here, the Court found that the plaintiffs did not explain to the trial court how they could cure the defects in the TILA claim and that they did not attempt to do so on appeal. Thus, the Court concluded that the trial court did not abuse its discretion when it denied leave to amend the TILA claim.
Accordingly, the Fourth Appellate District affirmed the judgment of the trial court as to the TILA claim and reversed and remanded as to the remaining claims.