Court Confirms Bank Can Be Held Liable for Conduct and Representations Occurring During Loan Modification Process

A California Court of Appeal recently held that a defaulting mortgagee can assert claims for breach of contract, wrongful foreclosure, unfair business practices and negligent misrepresentation against the foreclosing bank where the bank began negotiations for a loan modification agreement but ultimately foreclosed on the property.  In reversing the trial court's decision sustaining the bank's demurrer, the Court found that the mortgagee was entitled to allege that the bank falsely and fraudulently informed the mortgagee that he would be approved for a permanent loan modification without any intention of actually approving the modification,  and that the mortgagee relied on those representations to his detriment.  As a result, the mortgagee's action against the bank could proceed.  Rufini v. CitiMortgage, Inc. (May 28, 2014, NO. A138480) — Cal.App.4th —- [14 Cal. Daily Op. Serv. 7004].


As alleged in the complaint, James Rufini purchased a home for himself and his fiancée in July 2007. When the engagement broke off, Rufini temporarily moved out and sought a loan modification from his lender, CitiMortgage.  CitiMortgage approved a temporary loan modification, and stated that the modification could become permanent if Rufini made timely trial payments for three months.  Rufini made the required payments, but because the modification had not yet been approved, Rufini did not move back into the house and instead rented it so as to cover the cost of the original loan payments.  Shortly thereafter, Rufini received a notice of default, citing the fact that the home was "not owner occupied."  Rufini made extensive efforts to finalize the loan modification with CitiMortgage, who agreed to delay enforcement multiple times during the process, requested additional documentation from Rufini to verify whether a loan modification was appropriate, and assured Rufini that foreclosure would not occur.  Despite CitiMortgage's representations and conduct with respect to a potential loan modification, CitiMortgage transferred the loan to PennyMac, who foreclosed on the house without any further notice.


The appellate court first concluded that Rufini could assert a claim for breach of contract, finding that, if true, Rufini's allegations regarding the CitiMortgage's representations that a loan modification was or would be approved could support a contract action founded on promissory estoppel.  This holding was based, in part, on the appellate court's ruling that no written contract was required – representations regarding an oral agreement to forbear an outstanding loan obligation are sufficient to support a claim.  The Court further found that Rufini need not show that he was ready and able to satisfy his entire outstanding obligation on the loan, as Rufini's contract allegations arose out of later oral representations, not the actual loan agreement.  Not only were Rufini's allegations sufficient to support a breach of contract claim, they also supported a breach of the covenant of good faith and fair dealing, to the extent Rufini was able to prove the existence of the underlying agreement.

Moreover, the Court noted that the loan modification alleged between Rufini and CitiMortgage likely qualified for the federal Home Affordable Modification Program ("HAMP").  Under HAMP, a borrower seeking a loan modification is provided with a Trial Period Plan setting forth trial payment terms by the lender.  If the borrower has made all the trial payments and their other financial representations remain correct, the lender must offer the permanent loan modification. If the lender fails to do so, the borrower may sue for breach of trial modification plan.  Here, because Rufini was offered a temporary loan modification and made the requisite payments, Rufini likely qualified for a HAMP modification.  Notably, the Court rejected CitiMortgage's argument that Rufini was ineligible for a HAMP modification because he was not residing in his home, stating that Rufini sufficiently alleged he intended to only temporarily rent the home until he completed the loan modification with CitiMortgage.

The Court also concluded that Rufini's allegations could support a claim for negligent misrepresentation.  This claim was supported by Rufini's allegations that CitiMortgage falsely told Rufini he was approved for a loan modification; carried on the pretense of engaging in efforts to finalize it, with the intent of inducing him to rely on it; and that in reasonable reliance, Rufini spent hundreds of hours in loan modification negotiations and lost the opportunity to pursue other means of avoiding foreclosure.  The Court rejected CitiMortgage's argument that it did not owe Rufini a duty not to misrepresent the truth in the loan modification process, distinguishing all of CitiMortgage's authorities in support.  The Court of Appeals even went on to suggest that Rufini may be able to plead as damages any loss of equity in the property as a result of the improper auction sale.

In addition, the Court found that Rufini sufficiently alleged a claim under Business and Professions Code § 17200, California's unfair competition law.  The Court noted that, while traditionally this claim is based on a predicate act involving a violation of some other statute, CitiMortgage's conduct may give rise to liability even where it is solely held to be 'unfair.'  Here, CitiMortgage's unfair and deceptive practices deprived Rufini of the opportunity to pursue other means of avoiding foreclosure, and were sufficient to allege a claim under § 17200.

Notably, the Court confirmed that Rufini could not assert a claim for negligence or breach of fiduciary duty.  First, the Court restated its general preference for resolving contractual disputes under contract law, as opposed to tort, and therefore held that a negligence claim was unsupported.  Second, the Court reaffirmed its commitment to the principle that no fiduciary duty exists between a borrower and a lender in an arm's length transaction.  As a result, Rufini could not state a claim for breach of fiduciary duty.  However, because Rufini sufficiently pled his other claims, Rufini was entitled to proceed with his action against CitiMortgage.

What This Means To You

This decision shows how California courts use HAMP guidelines to measure the reasonableness of loan servicers' conduct in the loan modification process, even where a plaintiff-borrower did not allege a claim under the HAMP statutes.  It is also a strong reminder that bank representatives must be cautious not to overpromise and to carefully document all stages of the loan modification process.


If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Bruce A. Scheidt or Mark E. Ellinghouse | 916.321.4500