by The district court denied PNC’s motion to dismiss the borrowers’ complaint for violations of California consumer protection laws and common law claims based on PNC’s foreclosure action after plaintiffs successfully completed their chapter 13 plan. Sokoloski v. PNC Mortgage, No. 14-1374, 2014 WL 6473810 (E.D. Cal. Nov. 18, 2014).
The plaintiffs filed a chapter 13 bankruptcy to pay mortgage arrears and save their home from foreclosure. The plan called for monthly payments of $1,707.00 to cover regular payments on the loan plus a portion for arrears and fees. During the bankruptcy, PNC notified the court that the plaintiffs’ loan payments were being reduced to $554.20 per month. The plaintiffs continued to make the same monthly plan payments they had been making prior to modification thereby allowing them to complete their plan payments earlier than anticipated. The chapter 13 trustee filed a Rule 3002.1(f) “Notice of Final Cure Payment” to which PNC did not respond. The case was closed without discharge (due to the plaintiffs’ failure to complete their financial management instruction). The plaintiffs then continued their payments directly to PNC in the amount of $1,410.05 (the pre-modification, pre-bankruptcy amount). Four months later PNC notified the plaintiffs that they were in default and began foreclosure proceedings. The plaintiffs filed suit alleging negligence, breach of implied covenant of good faith and fair dealing, violation of California’s Rosenthal Fair Debt Collection Practices Act (RFDCPA), and the state Unfair Competition Law (UCL). PNC moved to dismiss.
Citing section 1328(a), PNC argued that because the bankruptcy was closed without discharge the plaintiffs could not rely on the terms of the bankruptcy plan to support their claim that they were current on the loan. The court rejected this argument. Section 1328(a) sets out requirements for a court-ordered discharge but says nothing to suggest that the terms of a chapter 13 plan are not considered satisfied without a formal discharge.
Turning to California consumer laws the court found that the UCL, which creates a claim for a business practice that is forbidden by law, encompasses the plaintiff’s claim that PNC violated Bankruptcy Rule 3002.1(g) by failing to respond to the final cure notice, and, thereby causing the bankruptcy to close prematurely. (The court noted that PNC’s failure to comply with Rule 3002.1 would also have entitled the plaintiffs to reopen their bankruptcy case to seek sanctions). “’By proscribing “any unlawful” business act or practice, the UCL borrows rules set out in other laws and makes violations of those rules independently actionable.’ Yanting Zhang, 57 Cal.4th at 370, 159 Cal.Rptr.3d 672, 304 P.3d 163.” PNC’s failure to properly apply plan payments to cure the arrears constituted injury sufficient to give the plaintiffs standing under the UCL.
The court found that the plaintiffs also stated a claim under the RFDCPA, which prohibits unfair collection practices of debt collectors. PNC stepped out of its role as mere lender and entered into the realm of debt collection when it improperly serviced the loan outside the ordinary foreclosure process. The plaintiffs stated a claim for “false or misleading representation of the character, amount or legal status of a debt,” under that law.
With respect to the negligence claim, the court found that while lenders are typically not held to a duty of care to a borrower, when the lender offers a modification it goes beyond its role as silent lender and takes on a duty of care which will support a claim for negligence. The plaintiffs stated a claim based on PNC’s alleged failure to apply payments properly and its assessment of erroneous fees and arrears.
As to the claim for breach of implied covenant of good faith and fair dealing, the court, for purposes of a motion to dismiss, accepted the plaintiffs’ claim that their arrears were paid up and the loan was current. PNC’s reliance on its letter of modification during the bankruptcy did not support its present claim that the lowered payment amounts were intended to apply for only three months. To the contrary, the letter suggested that the “trial period” was a precursor to a permanent modification. Plaintiffs’ claim that PNC’s assertion of default and institution of foreclosure proceedings injured their rights to receive the benefits of their loan contract, established a claim for breach of implied covenant of good faith and fair dealing.