Faubion v. FCI Lender Services, Inc.

• Court: District Court, E.D. California
• Decided: March 8, 2021
• Docket: 2:20-cv-01463
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 VERONICA FAUBION, et al., No. 2:20-cv-01463-JAM-CKD 12 Plaintiffs, 13 v. ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS 14 FCI LENDER SERVICES, INC. et al., 15 Defendants. 16 17 I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND1 18 In February 2017, Veronica Faubion and her husband, Brandon 19 Hintz, (“Plaintiffs”) entered into a lease-option-to-purchase 20 real estate agreement for the Property at issue in this case. 21 First Am. Compl. (“FAC”) ¶ 30, ECF No. 15. In November 2018, the 22 seller requested Plaintiffs let the lease-option agreement expire 23 and agreed to grant them a three-year extension so they could 24 finish upgrades and secure financing. Id. ¶ 31. Shortly 25 thereafter, the seller rescinded the offer to extend the 26

27 1 This motion was determined to be suitable for decision without oral argument. E.D. Cal. L.R. 230(g). The hearing was 28 scheduled for January 26, 2021. 1 contract. Id. ¶ 32. Prior to the expiration of the option-to- 2 purchase, Plaintiffs exercised the 90-day extension clause. Id. 3 ¶ 33. 4 Plaintiffs then contacted a real estate agent and mortgage 5 loan originator who suggested Plaintiffs seek a mortgage loan 6 from Defendant, PS Funding, Inc. (“PS Funding”). Id. ¶ 36. 7 Plaintiffs allege PS Funding took advantage of their pressing 8 need to obtain financing in order to make several changes to the 9 loan agreement. Id. ¶ 36. Specifically, PS Funding increased 10 the interest rate and the loan points from two to four. Id. 11 Around, March 27, 2019, Plaintiffs were scheduled to close and 12 record. Id. ¶ 37. However, on the day of the recording, the 13 title representative informed Plaintiffs that a judgment had been 14 recorded with the county clerk on March 20, 2019, related to a 15 business debt. Id. In light of the judgement and other issues 16 related to Plaintiff Hintz’s businesses and pending litigation, 17 PS Funding required Hintz be removed from the loan. Id. ¶ 38. 18 Accordingly, Mrs. Faubion became the sole borrower and the 19 Property was to be vested as her sole and separate property until 20 Plaintiffs could obtain conventional financing. Id. Plaintiffs 21 allege PS Funding also required Mrs. Faubion execute documents 22 stating the Property was not to be her principal residence, 23 despite knowing that it was. Id. On March 27, 2019, PS Funding 24 made a loan to Mrs. Faubion evidenced by a note and secured by a 25 deed of trust against the Property. Id. ¶ 41. 26 Around May 30, 2019, a lis pendens was improperly filed on 27 the Property in relation to the judgment. Id. ¶ 42. Plaintiffs 28 took immediate action to remove the judgment and lis pendens, 1 which the Superior Court removed on August 16, 2019. Id. PS 2 funding, however, declared Plaintiffs were in default under the 3 terms of the note due to the lis pendens effective June 1, 2019. 4 Id. ¶ 43. PS Funding then increased the interest rate from 9% to 5 15.5% under the default provision. Id. Plaintiffs attempted to 6 pay their regular monthly payment through the online web portal 7 maintained by Defendant FCI Lender Services, Inc. (“FCI”), but 8 their access had been disabled. Id. ¶ 44. In June 2019, 9 Plaintiffs called FCI to inquire why their access to the online 10 payment portal had been disabled. Id. ¶ 45. FCI and PS Funding 11 refused to accept any further monthly payments and instead 12 demanded the loan be paid in full. Id. 13 On July 3, 2019, PS Funding sent Plaintiffs a letter 14 indicating they considered Plaintiffs to be in default and 15 intended to accelerate the note and require payment of the full 16 balance owed. Id. ¶ 46. On July 17, 2019, Mr. Hintz’s attorneys 17 responded to the letter explaining that the lis pendens was 18 improperly filed and that they would seek removal from the court. 19 Id. ¶ 47. PS Funding never responded. Id. On July 17, 2019, PS 20 Funding reiterated that it considered Plaintiffs to be in 21 default. Id. ¶ 48. Due to the improperly filed lis pendens and 22 declaration of default, Plaintiffs were unable to obtain 23 conventional funding on the Property and were unable to sell. 24 Id. ¶ 49. 25 Once the Superior Court, on August 16, 2019, found the lis 26 pendens had been improperly filed and ordered it be removed from 27 the title, Plaintiffs informed FCI of the order and requested 28 they be allowed to resume payments on the note. Id. ¶ 50. FCI 1 merely responded that Plaintiffs were in default and that it 2 would contact PS Funding regarding how to proceed. Id. 3 Plaintiffs didn’t receive any further response. Id. On October 4 14, 2019, Plaintiffs submitted a request for mortgage assistance. 5 Id. ¶ 51. On October 28, 2019, FCI informed Plaintiffs that the 6 lender had denied this request because they were in default. Id. 7 ¶ 52. Plaintiffs, however, allege they were not in default 8 because the lis pendens was filed improperly and PS Funding had 9 refused to accept payments. Id. Shortly after receiving the 10 October 28 letter, Plaintiffs contacted FCI to inquire why they 11 were denied any loss mitigations options. Id. ¶ 53. FCI 12 informed them that there were no loss mitigation options 13 available because the Property was not owner-occupied. Id. 14 Plaintiffs, however, claim the property had been their primary 15 residence since February 2017. Id. 16 On November 12, 2019, Mrs. Faubion exercised her right to 17 appeal the denial of the request for mortgage assistance by 18 providing proof that the Property was owner-occupied. Id. ¶ 54. 19 That same day, one or both Defendants, caused to be recorded a 20 notice of default and election to sell, setting a sale date for 21 April 22, 2020. Id. ¶ 55; Def.’s Req. for Jud. Notice (“RJN”), 22 ECF No. 21-3. The notice of default claimed that the 23 requirements of California Civil Code Section 2923.5 and 2923.55 24 did not apply because the loan was not secured by a first deed of 25 trust as described in Section 2924.15(a). Id. Plaintiffs allege 26 this was false, as the Property was owner-occupied which both 27 Defendants knew. Id. On November 18, 2019, FCI denied 28 Plaintiffs’ appeal. Id. ¶ 56. 1 On April 20, 2020, Mrs. Faubion transferred, via 2 interspousal transfer deed, a community property interest in the 3 Property to Mr. Hintz. Defs.’ RJN, Ex. 4. The next day on April 4 21, 2020, a day before the Property was to be sold at 5 foreclosure, Mr. Hintz filed a voluntary chapter 13 petition in 6 the United States Bankruptcy Court for the Eastern District of 7 California. Id. at Ex. 5. PS Funding then sought and obtained 8 relief from stay to proceed with the foreclosure sale of the 9 Property by an order entered June 6, 2020. Id. This case was 10 dismissed by an order also entered June 6, 2020. Id. 11 Three days later, on June 9, 2020, Mr. Hintz filed a chapter 12 7 petition in the Bankruptcy Court. Id. at Ex. 6. On July 13, 13 2020, after PS Funding moved for relief from the stay in the 14 Second Bankruptcy case, the Bankruptcy Court entered its order 15 denying PS Funding’s motion as moot as the stay expired by its 16 own terms, allowing PS Funding to proceed with foreclosure. Id. 17 at Ex. 7. This second Bankruptcy Case remains pending. Sheri L. 18 Carello is the duly appointed and acting trustee. Id. 19 On July 21, 2020, Plaintiffs filed the present action 20 against FCI and PS Funding asserting (1) violations of the 21 Homeowners Bill of Rights, California Civil Code § 2924.12; 22 (2) violations of the Real Estate Settlement Procedures Act, 12 23 U.S.C. § 2605(f); (3) Fraud; (4) Breach of Contract; (5) Breach 24 of Good Faith and Fair Dealing; and (6) Unfair Business 25 Practices. See generally Compl., ECF No. 1. That same day, 26 Plaintiffs filed an ex parte application for a temporary 27 restraining order, seeking to enjoin the trustee’s sale set for 28 July 22, 2020. TRO Mot., ECF No. 4. The Court denied this 1 motion, finding Plaintiffs did not demonstrate compliance with 2 Local Rule 231(b) and failed to show a likelihood of success on 3 the merits. Order, ECF No. 13. With no injunction in place, on 4 August 19, 2020, the Property was sold at a trustee’s sale. FAC 5 ¶ 59. 6 On October 13, 2020, Plaintiffs filed their First Amended 7 Complaint, amending the claims to reference the August 8 foreclosure and to seek damages instead of injunctive relief. 9 See generally FAC. Plaintiffs also added a claim for wrongful 10 foreclosure. FAC ¶¶ 106-115. Defendants then filed this motion 11 to dismiss, arguing Plaintiffs do not have standing to prosecute 12 the claims as they are now part of the bankruptcy estate. See 13 Defs.’ Mot. to Dismiss, ECF No. 21. Plaintiffs opposed this 14 motion, Opp’n, ECF No. 27, to which Defendants replied. Reply, 15 ECF No. 28. 16 17 II. OPINION 18 A. Requests for Judicial Notice 19 Defendants request the Court take judicial notice of 15 20 Exhibits: (1) an Interspousal Transfer Deed transferring all 21 interest of Hintz in the Property to Faubion, as her sole and 22 separate property, recorded on March 27, 2019 in the Official 23 Records of Placer County; (2) the Notice of Default and Election 24 to Sell under Deed of Trust recorded November 12, 2019 in the 25 Official Records; (3) Notice of Trustee’s Sale recorded on March 26 17, 2020 in the Official Records; (4) an Interspousal Transfer 27 Deed transferring the Property from Faubion to Faubion and Hintz 28 as community property dated April 20, 2020 and recorded on April 1 22, 2020 in the Official Records; (5) the Bankruptcy Docket of 2 Brandon Hintz filed in the United States Bankruptcy Court for 3 the Eastern District of California; (6) the Bankruptcy Docket of 4 Brandon Hintz’s Second Bankruptcy Case; (7) an Order entered 5 July 13, 2020 in the Second Bankruptcy Case; (8) Brandon Hintz’s 6 summary of assets and liabilities and bankruptcy schedules filed 7 on June 23, 2020 in the Second Bankruptcy Case; (9) Brandon 8 Hintz’s amended summary of assets and liabilities and bankruptcy 9 schedules filed on October 5, 2020 in the Second Bankruptcy 10 Case; (10) Notice to file Proof of Claim Due to Possible 11 Recovery of Assets issued by the Bankruptcy Court on October 8, 12 2020; (11) the Loan Agreement between Veronica Faubion and PS 13 Funding, Inc.; (12) the Note, dated March 22, 2019, executed by 14 Veronica Faubion in favor of PS Funding; (13) the Deed of Trust, 15 Assignment of Rents and Security Agreement, dated March 22, 16 2019, executed by Veronica Faubion, which was duly recorded in 17 the Official Records on March 27, 2019; (14) the Declaration of 18 Non-Owner Occupancy, executed by Veronica Faubion; and (15) the 19 Business Purpose Certificate, executed by Veronica Faubion. 20 Defs.’ RJN. Plaintiffs do not oppose this request. The Court 21 finds exhibits number 1-10 and 13 are matters of public record 22 and therefore proper subject of judicial notice. Exhibits 11, 23 12, 14, and 15 are not matters of public record. Defendants did 24 not provide any authority indicating they are otherwise proper 25 subjects of judicial notice. See Defs.’ Mot. at 15. 26 Accordingly, the Court GRANTS IN PART and DENIES IN PART 27 Defendants’ Request for Judicial Notice. However, the Court may 28 consider exhibits 11, 12, 14, and 15 without converting the 1 12(b)(6) motion into a motion for summary judgment as their 2 authenticity is not contested and the complaint necessarily 3 relies on them. Lee, 250 F.3d at 688. 4 B. Analysis 5 Every action must be prosecuted in the name of the real 6 party in interest. Fed. R. Civ. P. 17(a). Because the 7 bankruptcy trustee controls the bankruptcy estate, they are the 8 real party in interest to claims that belong to the estate. 9 Griffin v. Allstate Ins. Co., 920 F. Supp. 127, 130 (C.D. Cal. 10 1996). All legal or equitable interests of the debtor in 11 property as of the commencement of a bankruptcy case constitute 12 property of the estate. 11 U.S.C. § 541(a)(1). And all 13 community property belonging to the debtor and his spouse is 14 estate property provided it is (1) under the debtor’s sole, 15 equal or joint management and control, or (2) liable for an 16 allowable claim against the debtor or against the debtor and his 17 spouse. 11 U.S.C. § 541(a)(2). “The scope of section 541 is 18 broad, and includes causes of action.” Sierra Switchboard Co. 19 v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986). 20 Defendants argue that Plaintiffs do not have standing to 21 prosecute the claims set forth in the complaint as they 22 constitute property of the bankruptcy estate. Defs.’ Mot. at 23 15-16. Plaintiffs, however, argue that because the debtor, Mr. 24 Hintz, was not a party to the loan, he could not bring any of 25 the causes of action asserted and thus they are not part of the 26 bankruptcy estate. Pls.’ Opp’n at 5, 8. However, as Defendants 27 point out, the relevant inquiry is not whether the debtor has 28 standing to bring the claim but whether the property, the claims 1 themselves, constitute the debtor’s separate or community 2 property. See 11 U.S.C. § 541; Defs.’ Reply at 2. 3 In California, all property acquired during marriage, 4 subject to a few exceptions, is community property. Cal. Fam. 5 Code § 760. And spouses, generally, have equal rights to manage 6 community property. In re Maynard, 264 B.R. 209, 214 (9th Cir. 7 BAP 2001). Causes of action are a form of property and 8 community property if acquired during marriage. See In re 9 Marriage of Biddle, 52 Cal.App.4th 396, 399-400 (1997). 10 Here, Plaintiffs’ second claim for violations of the Real 11 Estate Settlement Procedures Act is premised on Defendants’ 12 alleged failure to adequately consider and respond to Plaintiffs 13 application for loss mitigation which occurred, at the latest, 14 on November 18, 2019. See FAC ¶¶ 56, 71-76. Because this claim 15 arose during marriage and before Hintz initiated bankruptcy on 16 June 9, 2020, it became part of the bankruptcy estate. See 17 Falcocchia v. Saxon Mortg., Inc., 709 F.Supp.2d 860, 868-69 18 (E.D. Cal. 2010) (finding Plaintiffs’ RESPA claim accrued when 19 Defendants failed to respond to the written request). 20 Similarly, Plaintiffs’ third cause of action for fraud in 21 the inducement, arose when Defendants “forced Plaintiffs to sign 22 documents stating that the Subject Property was not owner- 23 occupied when Defendants knew that the Subject Property was, in 24 fact, owner-occupied.” FAC ¶ 80. And Plaintiffs’ fourth, fifth 25 and sixth causes of action for breach of contract, breach of 26 good faith and fair dealing, and violations of California’s 27 Unfair Competition Law, accrued when Defendants improperly 28 declared Plaintiffs were in default. Id. ¶¶ 89, 94, 100-01. 1 Because these claims arose during marriage, before Hintz filed 2 for bankruptcy, they are community property that became part of 3 the bankruptcy estate. See 11 U.S.C. § 541(a)(1)-(2). 4 Plaintiffs argue that even if Hintz had an interest in 5 Faubion’s claims, her first claim under California’s Homeowners 6 Bill of Rights (“HBOR”) did not become part of the estate as the 7 claim accrued after Hintz had filed for bankruptcy, when the 8 foreclosure sale occurred on August 19, 2020. Pls.’ Opp’n at 9 10. However, an after-acquired interest becomes property of the 10 estate under § 541(a)(7) if it is “(1) [. . .] created with or 11 by property of the estate; (2) acquired in the estate’s normal 12 course of business; or (3) otherwise traceable to or aris[ing] 13 out of any prepetition interest included in the bankruptcy 14 estate.” In re Neidorf, 534 B.R. 369, 371-72 (9th Cir. BAP 15 2015). Causes of action arising from the post-petition 16 foreclosure sale of property within the estate are estate 17 property. In re Solano, 2:16-bk-26833, 2020 WL 4280662 at *5 18 (9th Cir. BAP July 24, 2020). Since Plaintiffs’ HBOR and 19 wrongful foreclosure claims arose from the post-petition 20 foreclosure of the Property within the estate, the claims became 21 estate property. See id. 22 Because all of Plaintiffs’ causes of action are part of the 23 bankruptcy estate Plaintiffs do not have standing to bring these 24 claims.2 Cobb v. Aurora Laon Services, LLC, 408 B.R. 351, 354 25 (E.D. Cal. 2009) (noting that after filing a petition for 26

27 2 Because the Court finds Plaintiffs lack standing, it does not reach the parties’ other arguments regarding the sufficiency of 28 Plaintiffs’ claims. mE IRE IRIE ICE IMIR IRIE RISD □□□ IE OIE IIR IEE EIRENE IIE ES SEES Oe eee

1 bankruptcy a debtor may not prosecute a cause of action 2 belonging to the bankruptcy estate because the trustee is the 3 real party in interest with respect to such claims). 4 Accordingly, these claims are DISMISSED WITHOUT PREJUDICE 5 in the event the trustee, the real party in interest, decides to 6 | file the claims or abandons the estate’s interest. See 7 Trustee’s Resp. FI 6, ECF No. 26, 8 9 Til. ORDER 10 For the reasons set forth above, the Court GRANTS 11 Defendants’ Motion: 12 IT IS SO ORDERED. 13 Dated: March 5, 2021 14 kA 18 teiren staves odermacr 7008 16 17 18 19 20 21 22 23 24 25 26 27 28 11