Marvin B. Graham borrowed money to purchase a house in 2004. Approximately seven years later, he defaulted on his loan and received a notice of sale. Graham filed this action to halt foreclosure proceedings and to cancel the note. He contends "defendants' Lending Personnel"
Graham appeals a judgment of dismissal after the court sustained a demurrer to his second amended complaint (SAC) without leave to amend. He contends he sufficiently alleged facts to support his causes of action for fraud and deceit, violations of Business and Professions Code section 17200
We derive the facts from the complaints and the documents of which the court took judicial notice.
Graham borrowed $391,200 in 2004 from First Franklin Financial Corporation (First Franklin) to purchase a home in Vista, California, for $489,000. A deed of trust on the property secured the loan in first priority. He obtained a second loan for $97,800, secured by the property in second priority. American National Lending, Inc. (American National), was the loan broker for the transaction. American National's appraiser assessed the fair market value of the property at the time at $525,000.
In 2011 after Graham fell behind in his payments, First Franklin substituted ReconTrust Company, N.A. (ReconTrust),
In 2012 Graham sued BofA, ReconTrust, Deutsch Bank, First Franklin and American National (collectively defendants).
Graham amended his original complaint after defendants filed a demurrer. He alleged identical "preliminary facts" and nearly identical allegations for the fraud cause of action, but in the section 17200 cause of action he added allegations defendants failed to disclose "the true cost of the loan" and "negative features of [adjustable-rate mortgage (ARM)] loans" and they misrepresented the "true value of the home" and "using the lure of early low monthly payments induced [Graham] to execute a loan package that clearly was not needed nor good for him." He contended the Lending Personnel were "equally complicit in their lending practices in approving the $489,000 loan package without regard to the actual fair market value" of the home.
Graham attached to the first amended complaint (FAC) the consent judgment entered against five institutional lenders, including BofA, to settle a suit filed by the federal government and 49 states, including California, regarding mortgage foreclosure and modification practices. Graham requested declaratory relief "as to the applicability of the Settlement to the terms of [his] home loan and how the present litigation should proceed in the face of the provisions outlined in the national Settlement."
Defendants demurred arguing the FAC did not state a cause of action for fraud, negative fraud or deceit because Graham failed to plead the elements
Graham filed a SAC with substantial changes.
The SAC includes additional "preliminary facts" purporting to outline historical procedures of home financing since 1945 and asserting legal arguments about how financial institutions have "destroyed the home financing methodology" by various practices such as "fragmentation and repacking" of notes and substitutions of trustees on deeds of trust. According to Graham, this conduct along with conduct of the Federal Reserve, Congress, Fannie Mae, Freddie Mac, and government-sponsored entities caused average national home values to appreciate from 5 percent per year in the late 1990s to 15 percent per year before collapsing in 2007. He alleges the "financial elite"
Graham alleges the Lending Personnel made the following representations related to his loans: (a) the home had an "increasing and revised upwards — value of $525,000"; (b) such was the fair market value (FMV) of the home; (c) such "rapid increase in the FMV" of the home "demonstrated the security of the purchase"; (d) the FMV of the home "was ever-increasing, such that the [home] could be `turned for a profit' in the near future, or refinanced to obtain better terms"; and (e) the loan was "good" for Graham when defendants knew the $525,000 appraisal was speculative. He alleges the $525,000 appraisal was false because it was an "artificially inflated and engineered rate that was impossible to justify by any historical data" and "the appraiser justified the valuation by the use of comparable sales, which were all tainted by the activities described ... [and] were ... part of the pervasive industry-wide fraud." In addition, Graham alleges Lending Personnel knew he planned to keep the home for a long time and did not intend to sell or "flip" the house for a profit. He also alleges the Lending Personnel knew he was an unsophisticated borrower, his loan was "unsustainable," he "would not be able to pay back such loan" and they "steamroll[ed] the loan transaction" even though they knew the loan was misaligned with Graham's stated interests.
In the second cause of action for violation of section 17200, Graham alleges the same representations regarding the appraised value of the property constitute unlawful, unfair or fraudulent business practices. He also makes generalized allegations regarding industrywide business practices contending defendants (1) created "mass loans for profit"; (2) colluded with other institutional lenders, appraisers and credit rating agencies "to monetize and support the entire lending industry's ruse/hoax of an ever-increasing and expanding real estate market"; (3) created and used MERS "as a straw-man entity" and "to circumvent and unseat the real property recording requirements"; (4) engineered a system of splitting up deeds from notes to "subvert[] the integrity of the judicial system and real property recording system" to rely exclusively on the deed to "perpetrate foreclosure"; (5) foreclosing on homes "with no cause, with defective notice, with improper purpose, without proper authority"; and (6) participated in "[d]ual tracking" in which lending institutions undertake loan modification negotiations while, soon thereafter, taking steps toward foreclosure.
The court sustained defendants' demurrer to the SAC without leave to amend, ruling there is no basis for the first cause of action for fraud or deceit because an appraisal is an opinion rather than a statement of fact and plaintiff failed to show justifiable reliance on "a speculative appraisal." The court also ruled the SAC fails to allege fraudulent misrepresentations or omissions with sufficient specificity.
As to the second cause of action, the court ruled Graham alleged insufficient facts to demonstrate unlawful business practices or to show defendants engaged in unfair business practices in violation of section 17200. "[A] speculative appraisal does not support plaintiff['s] cause of action for fraud and consequently fails to support plaintiff['s] second cause of action for unfair business practices in violation of [section] 17200." The court found Graham does not allege facts to support a fraud claim under section 17200 because he does not "plead facts establishing a misrepresentation that would deceive consumer, fails to plead facts showing actual reliance, and fails to plead defendants' actions caused him injury." The court found no unfair business practices based upon allegations of splitting the note from the deed of trust because the mortgage follows the note. The court also noted Graham lacks standing because he cannot establish the required element of harm since the trustee's sale has not yet occurred.
As to the third cause of action, the court found no basis for legal and equitable relief based on fraud or violation of public policy because Graham alleges no facts showing the note or home equity line of credit were procured by fraud, accident or mistake. Additionally, Graham is not entitled to rescission because he does not allege he either has tendered or has the ability to tender the amount due under the loan. The court also ruled there is no basis
The court ruled the fourth cause of action for declaratory relief fails because Graham does not allege a justiciable controversy.
On appeal from a judgment after a demurrer is sustained without leave to amend, we review the order de novo and exercise our independent judgment on whether the complaint states a cause of action as a matter of law. (Lincoln Property Co., N.C., Inc. v. Travelers Indemnity Co. (2006) 137 Cal.App.4th 905, 911 [41 Cal.Rptr.3d 39].) We assume the truth of all properly pleaded material facts, as well as facts inferred from the pleadings and those of which judicial notice may be taken. (Howard Jarvis Taxpayers Assn. v. City of La Habra, supra, 25 Cal.4th at p. 814.) However, we do not assume the truth of contentions, deductions or conclusions of fact or law (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6 [40 Cal.Rptr.3d 205, 129 P.3d 394]) and we disregard allegations contrary to the law or to a fact of which judicial notice may be taken (Brenereic Associates v. City of Del Mar, supra, 69 Cal.App.4th at p. 180).
Graham contends the SAC sufficiently alleges the elements necessary to state a claim for what he refers to as negative fraud and deceit or affirmative fraud. We disagree.
Here, Graham's allegations of misrepresentations and/or concealment center on the appraisal. Graham alleges defendants represented (a) the home had an "increasing and revised upwards — value of $525,000"; (b) such was the FMV of the home; (c) such "rapid increase in the FMV" of the home "demonstrated the security of the purchase"; (d) the FMV of the home "was ever-increasing, such that the [home] could be `turned for a profit' in the near future, or refinanced to obtain better terms"; and (e) the loan was "good" for Graham. Graham alleges the representations about the appraised value of the property were false because the appraisal was an "artificially inflated and engineered rate." He admits "the appraiser justified the valuation by the use of comparable sales," but alleges the comparable sales were "tainted" by what Graham alleges is part of a "pervasive industry-wide fraud."
An appraisal is performed in the usual course and scope of the loan process to protect the lender's interest to determine if the property provides adequate security for the loan. Since the appraisal is a value opinion performed for the benefit of the lender, there is no representation of fact upon which a buyer may reasonably rely. "While it [is] foreseeable the appraisal might be considered by plaintiff in completing the loan transaction, the foreseeabilty of harm [is] remote. Plaintiff [is] in as good a position as ... defendant to know the value and condition of the property. One who seeks financing to purchase real property has many means available to assess the property's value and condition, including comparable sales, advice from a realtor, independent appraisal, contractors' inspections, personal observation and opinion, and the like.... Stated another way, the borrower should be expected to know that the appraisal is intended for the lender's benefit to assist it in determining whether to make the loan, and not for the purpose of ensuring that the borrower has made a good bargain, i.e., not to insure the success of the investment." (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1099 [283 Cal.Rptr. 53].)
Similarly, Graham does not allege actionable misrepresentations based on allegations defendants told him the loan was "good" for him or the market would "increase" and allow him to turn it for a profit. Such statements are merely opinions or predictions about future events, they are not factual representations.
Graham actually alleges he did not rely on representations regarding a quick increase in value or that he could turn a profit because he had no intention of selling or "flipping" the home. Instead, he intended to keep the home for a long time. Further, Graham alleges publically available information existed from 2001 and through 2004 (when he entered into the transaction), which debated the stability of the housing industry. Therefore, the court correctly determined Graham does not allege either actionable fraud or reasonable reliance on defendants' alleged opinions or predictions.
Finally, even if we were to find an actionable representation or omission, Graham does not allege the necessary element of causation. For active misrepresentation, a plaintiff must plead and prove reliance on the representation was a substantial factor in causing harm to the plaintiff. (Perlas, supra, 187 Cal.App.4th at p. 434.) For fraudulent concealment, the plaintiff must plead and prove he or she sustained damage as a result of the concealment or suppression of fact. (Bank of America Corp., supra, 198 Cal.App.4th at p. 873.) Graham does not make that showing here.
Graham alleges the representations or omissions were made with an intent to defraud him by inducing him to finance his home with an adjustable-rate mortgage (ARM) loan, which "could then be quickly marketed to Wall Street and its international investors and bring revenue to defendants." He also alleges (1) the current value of his home is less than the appraised value, (2) his damages include his "initial contribution" to consummate the loan and (3) there is a "clear and present prospect of losing the home to foreclosure."
However, Graham does not allege a sufficient nexus between the alleged misrepresentations or concealment and his alleged economic harm. (Bank of America Corp., supra, 198 Cal.App.4th at p. 873.) In Bank of America Corp., the court observed, "homeowners who did not obtain loans from [the defendants] likewise suffered a decline in property values, a decline in their home equity, and reduced access to their home equity lines of credit. Irrespective of whether a homeowner obtained a loan from [the defendants], or obtained a loan through another lender, or whether a homeowner owned
Similarly here, the damages Graham alleges he incurred are the result of a decline in the overall market. He alleges the market rate at the time of his loan was artificially inflated. He does not allege he could have or would have obtained a better loan from a different lender absent the alleged representations regarding the appraisal. Nor does he allege he would not have entered the market absent the alleged representations or omissions. He received the benefit of his bargain by obtaining a loan to purchase his home. An initial contribution and fees would have been necessary to obtain any loan at the time. The risk of property loss from foreclosure is the result of Graham's default on the loan, not the alleged conduct by defendants. Therefore, Graham has not sufficiently pleaded a causal connection between any damages and any actionable conduct by defendants in entering into the loan agreement.
In this case, the SAC does not allege a violation of law to support a UCL claim. The trial court correctly determined the defendants cannot be held liable for unlawful business practices where there is no violation of another law. (Scripps Clinic v. Superior Court (2003) 108 Cal.App.4th 917, 938 [134 Cal.Rptr.2d 101].)
Instead, Graham asserts in his opening brief the "SAC alleges sufficient facts that are capable of supporting a claim for unlawful business practices." For the first time on appeal, Graham contends "[a]mong the potential violations of law that could reasonably be found when the [SAC] is interpreted in the light most favorable to Appellant are violations of 12 [Code of Federal Regulations part] 34 et seq."
Graham's opening brief contends the SAC supports a claim for "unfair" business practices by claiming generally defendants "engaged in the type of business practices that contributed to an artificial inflation of real estate values, defrauding homeowners, investors, and government officials, and ultimately leading to the collapse of the housing market." He also contends defendants used "highly speculative appraisal methods to support unnecessarily large variable rate loan packages, luring consumers such as Appellant, with low initial teaser rates that allowed for affordable monthly payments, promising that future refinancing will be available to avoid making increased monthly payments."
To support these conclusory charges, Graham cites record references spanning more than 20 pages of his 26-page complaint. These block citations do not comply with California Rules of Court, rule 8.204(a)(1)(C) and frustrate the court's ability to evaluate the party's position. (Nazari v. Ayrapetyan (2009) 171 Cal.App.4th 690, 694, fn. 1 [90 Cal.Rptr.3d 166].)
With no record references, Graham generally contends, after consumers realize substantial negative equity, payments increase "beyond a sustainable debt to income ratio" and consumers "are forced to exhaust whatever savings they may have in order to satisfy their obligations to financial institutions ... in hopes of avoiding foreclosure" while the defendants earn "a windfall by cash payments, seizure of the property secured by the loans, and compensation from government guarantees when the buyer finally defaults on the loan." We disregard these contentions as not adequately supported by the
Even overlooking these briefing irregularities, the SAC does not support a claim for "unfair" business practices. The standard for determining what business acts or practices are "`unfair'" under the UCL for consumer actions remains unsettled. (Zhang v. Superior Court, supra, 57 Cal.4th at p. 380, fn. 9.) In Cel-Tech, the Supreme Court addressed the term "unfair" in the context of actions between competitors alleging anticompetitive practices, but it broadly criticized previous attempts to define "unfair" as "too amorphous" to provide guidance. (Cel-Tech, supra, 20 Cal.4th at pp. 184-185.) Previously, courts defined "unfair" as a practice that offends public policy or "`is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers'" or required courts to "`"weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim."'" (Id. a p. 184.)
Thereafter, the appellate courts split regarding the definition of "unfair" business practices in consumer action. We described this split in the case of In re Ins. Installment Fee Cases (2012) 211 Cal.App.4th 1395, 1418 [150 Cal.Rptr.3d 618]:
Without acknowledging these authorities, Graham relies on the pre-Cel-Tech definition of "unfair" by asserting the utility of defendant's conduct must be weighed against the gravity of the harm to the alleged victim. We decline Graham's invitation to apply this test.
Graham does not allege defendants' conduct related to his loan processing was "unfair" because he does not allege any statements about the appraisal or opinions about the possible future value of the home constitute conduct tethered to a violation of a constitutional, statutory or regulatory provision. (Wilson v. Hynek, supra, 207 Cal.App.4th at p. 1008.)
Graham's allegations are based on the appraisal and his claim that defendants failed to disclose the "speculative" nature of the appraisal. For the reasons stated in part II.B., ante, we conclude defendants did not owe Graham a duty to disclose related to the appraisal, which was undertaken for the benefit of the lender, or to guarantee the success of Graham's investment. Therefore, he does not adequately state a claim for a fraudulent business practice under the UCL. (Levine v. Blue Shield of California (2010) 189 Cal.App.4th 1117, 1136 [117 Cal.Rptr.3d 262].)
Finally, even if we were to assume defendants' actions violated one of the UCL's unfair competition prongs, Graham does not allege facts demonstrating he has standing to sue under the UCL because he does not allege sufficient facts showing a causal link between the alleged UCL violations and an injury in fact resulting in loss of money or property. (§ 17204; Kwikset Corp. v. Superior Court, supra, 51 Cal.4th 310, 326 [plaintiff required to show "`causal connection'" between economic injury and alleged UCL violation].)
As discussed in part II.C., ante, Graham alleges his property value declined as a result of an overall decline in the market; he does not allege a correlation between his property value decline and defendants' alleged conduct related to the appraisal value. He does not allege he would not have incurred loan origination contribution costs or fees had he borrowed from another lender. Finally, his prospect of losing the home to foreclosure is the result of default, not the alleged conduct of defendants. (Jenkins v. JP Morgan Chase Bank, N.A. (2013) 216 Cal.App.4th 497, 522-523 [156 Cal.Rptr.3d 912] [nonjudicial foreclosure proceedings triggered by default are not economic injury caused by UCL violations]; Daro v. Superior Court (2007) 151 Cal.App.4th 1079, 1099 [61 Cal.Rptr.3d 716] [causation requirement of UCL not met if plaintiff would have suffered "the same harm whether or not a defendant complied with the law"].)
Graham contends on appeal he is entitled to a declaration of rights on two grounds: (1) whether defendants have complied with their obligations under the National Mortgage Settlement and asking the court to "order defendants to refinance the property with a fully amortized 30-year, or more, fixed interest rate loan in an amount [that] reflects the current, fair, and true market value of the real property," and (2) whether the note and deed are not enforceable because the loan agreement was unconscionable.
Once the court determines an "actual controversy" exists, the court has discretion under Code of Civil Procedure section 1061 to refuse to make a declaration of rights and duties "including a determination of any question of construction or validity arising under a written instrument or contract, `where its declaration or determination is not necessary or proper at the time under all the circumstances.'" (Maguire, supra, 23 Cal.2d at pp. 728, 730.) The decision to refuse to entertain a complaint for declaratory relief is reviewed on appeal for abuse of discretion. (Orloff v. Metropolitan Trust Co. (1941) 17 Cal.2d 484, 485 [110 P.2d 396].)
The court here determined Graham failed to present a claim supporting a justiciable controversy. We agree.
"The doctrine includes both procedural and substantive elements. [Citation.] The procedural element requires oppression or surprise. [Citation.] Oppression occurs where a contract involves lack of negotiation and meaningful choice, surprise where the allegedly unconscionable provision is hidden within a prolix printed form. [Citation.] The substantive element concerns whether a contractual provision reallocates risks in an objectively unreasonable or unexpected manner. [Citation.] To be substantively unconscionable, a contractual provision must shock the conscience." (Jones, supra, 112 Cal.App.4th at pp. 1539-1540.)
Both elements of procedural and substantive unconscionability must be present, although they need not be present to the same degree. "`Essentially a sliding scale is invoked ...' [citations] ... the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa." (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 [99 Cal.Rptr.2d 745, 6 P.3d 669].)
In this case, Graham fails to allege sufficient facts to show either procedural or substantive unconscionability. Graham makes general allegations defendants' "actions during the transaction were procedurally unconscionable when they took advantage of the plaintiff's lack of sophistication when they: [¶] a. insisted on an interest-only loan; [¶] b. provided only one loan option,
These allegations do not sufficiently allege lack of choice, lack of negotiation or surprise regarding the terms of the loan to demonstrate procedural unconscionability. Graham does not allege he did not have the option to seek another lender or to simply choose not to enter the marketplace at the time. (Shadoan, supra, 219 Cal.App.3d at p. 103 [plaintiffs alleged no facts from which to conclude plaintiffs had no bargaining power because they "alleged no facts indicating that they were unable to receive more favorable terms from another lender, or from [the bank] by paying a different interest rate, or by accepting a different type of loan or one with a different term"].)
Even if we were to assume Graham sufficiently alleged procedural unconscionability, he does not allege substantive unconscionability. Graham did not attach the loan agreement to his complaint and he does not allege specific terms he alleges are substantively unconscionable. The only substantive term Graham refers to on appeal is that defendants "insisted on an interest-only loan."
Various federal financial regulatory agencies and other entities issued documents and statements in 2006 and 2007 (after Graham obtained his loan) providing risk management and consumer protection guidelines for the use of nontraditional and subprime loans such as interest only loans or adjustable rate mortgages, which California adopted. (Greenwald, Cal. Practice Guide: Real Property Transactions (The Rutter Group 2013) ¶ 6:99, p. 6-20.5, citing Stats. 2007, ch. 301, § 1, p. 2437 [legislative findings].) However, these remain recognized loan products and are not necessarily improper or predatory loans. (Cal. Code Regs., tit. 10, § 1436; 72 Fed.Reg. 37569, 37573 (July 10, 2007) ["[s]ubprime lending is not synonymous with predatory lending, and loans with the features described ... are not necessarily predatory in nature"].)
Based upon the facts alleged, we conclude a declaration regarding unconscionability is not proper or necessary under the circumstances. (Code Civ. Proc., § 1061.)
Graham has had three opportunities to plead his claims for fraud, violations of the UCL and declaratory relief. While Graham contends he should be
The judgment is affirmed. Respondents are awarded their costs on appeal.
Haller, J., and O'Rourke, J., concurred.
