“Dual Tracking” Can Be Unfair Competition
Unfair competition claims are often seen as “tag-along” claims without a lot of independent value. A recent California Court of Appeal decision (Fourth District, Division Three in Santa Ana) published January 14, 2016 — Majd v. Bank of America, N.A. — illustrates that unfair competition claims have their place in lawsuits challenging foreclosure.
Specifically, the decision clarifies that a lender might be liable for unfair competition for engaging in “dual tracking” — negotiating with the borrower for a loan modification while simultaneously foreclosing. The Majd decision also clarifies pleading rules regarding tender and necessary parties.
The facts
According to the complaint:
The borrower obtained an interest-only, adjustable-rate $600,000 home loan in 2006. By 2011, the monthly payments had jumped from $3,231.56 to $5,311.92, and the borrower fell behind.
The trustee recorded a notice of default, but the bank lender also engaged in loan modification discussions with the borrower. The bank repeatedly requested information from the borrower, and each time the borrower supplied the requested information.
Nonetheless, while the bank continued to assure the borrower that it had received all requested information, the property was sold at a trustee’s sale.
The borrower sued, but the trial court sustained the bank’s demurrer and dismissed the complaint in its entirety.
The opinion
The Court of Appeal reversed, and reinstated the borrower’s claims for unfair competition, wrongful foreclosure, and cancellation of the trustee’s deed. The court’s most noteworthy holdings are described below:
Foreclosing during the loan modification review process can be unfair competition
As to the unfair competition claim, the court observed that the borrower’s position was not based on the dual tracking prohibition contained in California Homeowner’s Bill of Rights (Civil Code section 2923.6) because the bank’s actions predated the enactment of that legislation.
Nonetheless, the court held that the bank’s foreclosure during the modification review process could be characterized as “unfair” in light of federal HAMP regulations (which bar foreclosure until at least 30 days after the loan modification review is completed), and in light of similar case holdings.
Thus, the court held, the borrower could proceed with his claim for unfair competition.
The tender requirement does not apply where it would be inequitable
Plaintiffs are normally required to tender the full amount of the debt due before proceeding with an action to set aside a trustee’s sale. But courts have recognized an exception to this rule where requiring tender would be inequitable.
Here, the court held that the “whole point” of the prohibition on dual tracking is to provide the borrower with a right to be contacted about the possibility of alternatives to full payment of the debt, so it would be nonsensical and unfair to require the borrower to make a full tender of the original debt before pursuing a claim based on dual tracking.
The borrower should have included the foreclosing trustee and the foreclosure sale purchaser as parties to the lawsuit
The court found two “fundamental defects” with the borrower’s complaint: it failed to include the foreclosing trustee or the foreclosure sale purchaser as defendants.
The court observed that it was the trustee that performed the allegedly wrongful foreclosure sale, but the borrower did not name the trustee as a defendant, nor did the borrower allege that the trustee was acting as the bank’s agent or following the bank’s instructions in connection with the foreclosure. Likewise, the court noted that the borrower did not name the foreclosure sale purchaser (a different bank to whom the deed of trust had been assigned) as a defendant. The foreclosure sale purchaser was an “indispensable party” to the borrower’s claim for cancellation of the trustee’s deed.
As to both pleading defects, however, the court held that the borrower should simply be given a chance to amend the complaint and move forward with the lawsuit.
Lesson
Even in cases where the facts pre-date California’s statutory prohibition embodied in Civil Code section 2923.6, the practice of “dual tracking” is vulnerable to challenge based on the Unfair Competition Law. A plaintiff in such an action probably need not make a full tender as a prerequisite to filing the lawsuit, but should name the foreclosing trustee and the foreclosure sale purchaser as defendants.