Bayarsaikhan vs. Headlands Residential Series Owner Trust, Series E

Defendants Headlands Residential Series Owner Trust, Series E and Servis One, Inc. d/b/a BSI Financial Services’ demurrer to Plaintiffs Bayarmanlai Bayarsaikhan and Khulan Buyanbat’s First Amended Complaint is SUSTAINED without leave to amend.

Defendants Headlands Residential Series Owner Trust, Series E and Servis One, Inc. d/b/a BSI Financial Services (collectively, “Defendants”) demur to the first, second, fourth, and fifth causes of action alleged in the First Amended Complaint (“FAC”).

First Cause of Action: Violation of Civil Code section 2924.17 [All further statutory references are to the Civil Code unless otherwise indicated]:

Section 2924.17 provides:

(a) A declaration recorded pursuant to Section 2923.5 or pursuant to Section 2923.55, a notice of default, notice of sale, assignment of a deed of trust, or substitution of trustee recorded by or on behalf of a mortgage servicer in connection with a foreclosure subject to the requirements of Section 2924, or a declaration or affidavit filed in any court relative to a foreclosure proceeding shall be accurate and complete and supported by competent and reliable evidence.

(b) Before recording or filing any of the documents described in subdivision (a), a mortgage servicer shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information.

(c) Any mortgage servicer that engages in multiple and repeated uncorrected violations of subdivision (b) in recording documents or filing documents in any court relative to a foreclosure proceeding shall be liable for a civil penalty of up to seven thousand five hundred dollars ($7,500) per mortgage or deed of trust in an action brought by a government entity identified in Section 17204 of the Business and Professions Code, or in an administrative proceeding brought by the Department of Financial Protection and Innovation or the Department of Real Estate against a respective licensee, in addition to any other remedies available to these entities.

In Lucioni v. Bank of America, N.A. (2016) 3 Cal.App.5th 150 (“Lucioni”), the court explained the statute as follows:

Section 2924.17 creates a procedural right directed at the requirements for a declaration that a different HBOR [Homeowner’s Bill of Rights] provision (§ 2923.55) requires a mortgage servicer to file at the time of the notice of default. Subdivision (a) of section 2924.17 states that the declaration must be “accurate and complete and supported by competent and reliable evidence.” The purpose of the declaration, as explained by section 2923.55, is to ensure that Page 3 of 27

particular information is provided to the borrower before the notice of default is filed. Subdivisions (a) and (b) of section 2923.55 provide that the foreclosing entity may not record a notice of default unless it first sends the borrower specified information, including, among other things, a statement that the borrower may request “[a] copy of any assignment, if applicable, of the borrower’s mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose.” Section 2923.55, subdivision (c) requires that the foreclosing entity file, with the notice of default, a declaration stating that it has contacted the borrower, tried with due diligence to contact the borrower, or that no contact was required because the property owner did not meet the statutory definition of “borrower.” This is the declaration referenced in section 2924.17. The statute does not require the declaration to contain a statement about the right to foreclose. The declaration concerns only the lender’s efforts to contact the borrower to provide the required information.

Another subdivision of section 2924.17 contains an important additional requirement for the declarant. Subdivision (b) of section 2924.17 states that before filing the declaration, a mortgage servicer “shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower's loan status and loan information.” The statute, however, does not require a statement in the declaration about the default and the right to foreclose. Subdivision (b) of section 2924.17 is directed at ensuring the foreclosing entity’s “review[]” of its right to foreclose.

Sections 2924.17 and 2923.55, then, place a burden on the foreclosing party to file a declaration with the notice of default, and provide requirements for the lender’s diligence prior to filing that declaration. Those provisions do not create a burden on the foreclosing party to prove anything in court, other than that the declaration required by section 2923.55, subdivision (c) was filed, and that necessary steps were taken before filing it. (Id. at pp. 162- 163.)

Lucioni further explained: “The statute, however, does not require a statement in the declaration about . . . the right to foreclose. Subdivision (b) of section 2924.17 is directed at ensuring the foreclosing entity's ‘review[]’ of its right to foreclose.” (Lucioni, at p. 163, italics added.) That is, section 2924.17 “do[es] not create a right to litigate, preforeclosure, whether the foreclosing party’s conclusion that it had the right to foreclose was correct. If the Legislature wished to authorize as much, it could have authorized injunctive relief for a violation of section 2924(a)(6), but it did not.” (Lucioni, at p. 163.)

Here, the FAC alleges, in pertinent part, as follows:

Defendants violated section 2924.17 by recording a Notice of Default (“NOD”) and Declaration of Compliance (“DOC”) that were inaccurate, incomplete, and unsupported by competent and reliable evidence. (FAC ¶¶ 34, 41-42.) Defendants relied solely on Plaintiffs’ CPA’s allegedly false denial that he had not signed the CPA letter used during the loan application process, despite Plaintiffs providing handwriting samples, bank statements, tax records, and corroborating documentation verifying the authenticity and Page 4 of 27

accuracy of the letter. (FAC ¶¶ 26-29, 36-39, Ex. C.) Defendants falsely represented they contacted Plaintiffs for loss mediation options, but in reality, Defendants called the loan in full, claiming that the CPA stated he did not draft the CPA letter when Plaintiffs first obtained the loan. (FAC ¶¶ 31-32, 34.) Defendants initiated foreclosure proceedings despite Plaintiffs being current on their mortgage payments and not in genuine default. (FAC ¶¶ 40, 43-44.)

The FAC fails to adequately allege a cause of action for violation of section 2924.17.

Although Plaintiffs allege the NOD and DOC were inaccurate and unsupported by competent and reliable evidence, the allegations primarily challenge the substantive basis for Defendants’ decision to accelerate the loan rather than any actionable procedural defect under section 2924.17. (FAC ¶¶ 26-29, 36-39, Ex. C.) Further, the FAC concedes Defendants contacted Plaintiffs prior to recording the NOD and informed them the loan was being accelerated based on alleged irregularities in the loan application process. (FAC ¶ 25.)

Section 2924.17 requires only that foreclosure-related documents be accurate and supported by competent and reliable evidence, and that the servicer review evidence substantiating the borrower’s default and right to foreclose before recording such documents. (See Adams v. Bank of America, N.A. (2020) 51 Cal.App.5th 666, 674; Billesbach v. Specialized Loan Servicing LLC (2021) 63 Cal.App.5th 830, 844.) As explained in Lucioni, section 2924.17 “do[es] not create a right to litigate, preforeclosure, whether the foreclosing party’s conclusion that it had the right to foreclose was correct.” (Lucioni, supra, 3 Cal.App.5th at p. 163.)

Here, Plaintiffs essentially allege that Defendants should have credited Plaintiffs’ evidence over the CPA’s denial, thereby challenging the correctness of Defendants’ determination that grounds existed to accelerate the loan, rather than alleging a failure to review evidence or comply with the procedural requirements of section 2924.17.

Thus, the demurrer to the first cause of action is sustained.

Second Cause of Action for Fraud:

The elements of fraud are (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably relied on the representation; and (5) the plaintiff suffered resulting damages. (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) Fraud must be pleaded with specificity rather than with “ ‘general and conclusory allegations.’ ” (Small v. Fritz Companies, Inc. (2003) 30 Cal.4th 167, 184.) The specificity requirement means a plaintiff must allege facts showing how, when, where, to whom, and by what means the representations were made, and, in the case of a corporate defendant, the plaintiff must allege the names of the persons who made the representations, their authority to speak on behalf of the corporation, to whom they spoke, what they said or wrote, and when the representation was made. (Lazar v. Superior Court, supra, 12 Cal.4th at p. 645.) Page 5 of 27

Under section 2924, subdivision (d), a notice of default or a notice of sale recorded as part of a nonjudicial foreclosure proceeding constitutes a privileged communication pursuant to Section 47. (See Schep v. Capital One, N.A. (2017) 12 Cal.App.5th 1331, 1336.) Section 47(c) establishes that certain communications made between persons on a matter of common interest are privileged if the statements are made “without malice.” (Lundquist v. Reusser (1994) 7 Cal.4th 1193, 1203-1204.) For purposes of this statutory privilege, malice has been defined as “a state of mind arising from hatred or ill will, evidencing a willingness to vex, annoy or injure another person.” (Id., at p. 1204.)

The FAC alleges fraud based on Defendants’ allegedly false statement concerning the reason for declaring Plaintiffs’ loan in default. (FAC ¶ 48.) Plaintiffs allege that in the NOD, Defendants represented that Plaintiffs had breached and defaulted under the DOT due to a violation of the acceleration clause, stating that “during the loan application process, Borrower or persons acting with Borrower’s knowledge or consent provided materially false, misleading, or inaccurate information to the Lender.” (Id. ¶ 51.) Those representations were false because the CPA letter was authentic, Plaintiffs never provided false financial information, and Defendants ignored evidence confirming the truth of the loan application materials. (Id. ¶¶ 54-55.) Defendants knowingly relied on the CPA’s allegedly false denial and fabricated a “loan-fraud” basis to accelerate a performing loan. (Id. ¶¶ 55-58.) Plaintiffs relied on the recorded foreclosure documents as lawful and authentic, diverted resources to attorneys’ fees, forewent refinancing or sale opportunities, and suffered reputational harm, credit injury, emotional distress, and the threat of wrongful foreclosure. (Id. ¶¶ 59-60.) As a result, Plaintiffs sustained damages. (Id. ¶ 61.)

The FAC fails to adequately allege a cause of action for fraud because it does not sufficiently plead justifiable reliance. The FAC alleges Defendants falsely stated in the NOD that Plaintiffs provided materially false or misleading information during the loan application process and falsely represented compliance with borrower-contact requirements. (FAC ¶¶ 51-52.) However, the FAC also alleges Defendants contacted Plaintiffs before recording the NOD and informed them the loan was being accelerated based on alleged deficiencies in the loan application, including the CPA’s denial that he signed the CPA letter used during the loan process. (FAC ¶¶ 25-29.) The FAC further alleges Plaintiffs disputed the CPA’s statements and provided Defendants with handwriting samples, bank statements, and other evidence purportedly establishing the CPA letter was authentic. (Ibid.)

Accordingly, the FAC affirmatively demonstrates Plaintiffs did not rely on the alleged misrepresentations contained in the NOD or DOC. Rather, Plaintiffs expressly disputed Defendants’ assertions prior to the recording of the NOD and attempted to convince Defendants the statements were false. Because Plaintiffs allegedly knew Defendants’ statements were false and challenged them before the foreclosure documents were recorded, Plaintiffs cannot plausibly allege justifiable reliance as required to state a claim for fraud.

Further, the alleged misrepresentations contained in the recorded NOD and related foreclosure documents are privileged under sections 47 and 2924, subdivision (d). Although the privilege is qualified, the FAC does not adequately allege malice sufficient to overcome the privilege because Plaintiffs’ own allegations establish Defendants relied on the CPA’s denial Page 6 of 27

and recorded the NOD based on perceived irregularities in the loan application process. (FAC ¶¶ 25-29, 55.)

Thus, the demurrer to the second cause of action is sustained.

Third Cause of Action for Slander of Title

A slander of title claim requires: (1) publication; (2) absence of privilege or justification, including malice; (3) falsity; and (4) pecuniary loss. (Deutsche Bank National Trust Co. v. Pyle (2017) 13 Cal.App.5th 513, 527, fn. 7.)

The FAC alleges that Defendants recorded the NOD in the Orange County official records, thereby publishing false statements that Plaintiffs committed loan-application fraud and defaulted under the deed of trust; the statements were false because Plaintiffs were current on the loan, the CPA letter was authentic, and Defendants ignored evidence disproving any fraud; Defendants acted with malice by recording the NOD; and the recording clouded title and caused harm to their financial standing and legal expenses to clear title. (FAC ¶¶ 80-87.)

The FAC fails to adequately allege a cause of action for slander of title. The NOD was recorded as part of a nonjudicial foreclosure proceeding and is therefore subject to the qualified privilege under sections 47 and 2924, subdivision (d), but Plaintiffs fail to adequately allege malice sufficient to overcome that privilege. Although Plaintiffs allege Defendants acted with malice by recording the NOD without proper investigation and with reckless disregard for the truth, the FAC also alleges Defendants accelerated the loan based on the CPA’s denial concerning the CPA letter and perceived irregularities in the loan application process. (FAC ¶¶ 25-29, 36, 55.) Accordingly, Plaintiffs’ conclusory allegations of malice are insufficient to overcome the qualified privilege. (FAC ¶ 84.)

Thus, the demurrer to the third cause of action should be sustained.

Fourth Cause of Action for Intentional Infliction of Emotional Distress (“IIED”):

A claim for IIED requires: (1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff’s suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant’s outrageous conduct. (Hughes v. Pair (2009) 46 Cal.4th 1035, 1050.) The conduct must be so extreme as to be beyond all bounds of decency tolerated by society. (Id. at pp. 1050-1051.)

The FAC alleges Defendants falsely accused them of loan-application fraud, initiated foreclosure proceedings on a current loan, ignored Plaintiffs’ evidence disproving fraud, and weaponized the foreclosure process to coerce and distress Plaintiffs. (FAC ¶¶ 89-93.) BSI agents came to their home, left notices, photographed the property, and made repeated threatening calls advising foreclosure was imminent, including late-evening calls after counsel had been retained. (Id. ¶¶ 94-95.) Defendants’ conduct caused anxiety, panic attacks, humiliation, insomnia, fear of displacement, and severe emotional distress. (Id. ¶¶ 94-98.) Page 7 of 27

The FAC fails to adequately allege conduct sufficiently extreme and outrageous to support a claim for IIED. Although Plaintiffs characterize Defendants’ conduct as harassing and coercive, the alleged acts arise from Defendants’ efforts to enforce their contractual rights under the deed of trust and pursue foreclosure proceedings based on perceived irregularities in the loan application process. Such conduct, even if upsetting or distressing to Plaintiffs, does not exceed all bounds tolerated in a civilized society as required to state an IIED claim. Further, the FAC alleges Defendants relied on the CPA’s denial that he authored the CPA letter supporting the loan application. (FAC ¶¶ 26, 55, 91.) Plaintiffs’ disagreement with Defendants’ decision to accelerate the loan and proceed with foreclosure does not transform ordinary foreclosure-related conduct into outrageous conduct actionable as IIED.

Thus, the demurrer to the fourth cause of action is sustained.