Graham v. Bank of America, N.A. , 226 Cal. App. 4th 594 ( 2014 )

Filed 5/23/14
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
MARVIN B. GRAHAM, D063779
Plaintiff and Appellant,
v. (Super. Ct. No. 37-1012-00051304)
BANK OF AMERICA, N.A., et al.,
Defendants and Respondents.
APPEAL from a judgment of the Superior Court of San Diego County,
Timothy M. Casserly, Judge. Affirmed.
Law Offices of Thomas Gillen, Thomas W. Gillen and Richard L. Barthel for
Plaintiff and Appellant.
Bryan Cave, Stuart W. Price, Sean D. Muntz, Allan P. Bareng and Jigar S. Vakil
for Defendants and Respondents.
INTRODUCTION
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 the
"defendants' Lending Personnel"1 made fraudulent misrepresentations or omissions by
stating the appraised fair market value of his home in 2004 was "increasing" and that the
loan was "good for [him]," while allegedly knowing the appraisal was "outrageously
speculative." Taking issue with industry-wide mortgage banking practices, Graham
seeks to hold the defendants responsible for the decline in his property value as well as
the collapse of the real estate market.
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 172002 and declaratory relief. He also contends it was an
abuse of discretion to deny further leave to amend. We affirm.
1 Graham defines "defendants' Lending Personnel" (Lending Personnel) as "a
lending team" composed of "people identified as vice-president, or manager, or as an
appraiser or as a broker, or a loan officer, or a loan processor, or employee of some type
authored [sic] to create and process loan documents." Graham alleges he does not
remember the names of these individuals even though their names and titles appeared on
business cards and name tags affixed to their clothing. He contends their identities are
"more readily in the knowledge of defendants."
2 All further statutory references are to the Business and Professions Code unless
otherwise noted.
2
FACTUAL AND PROCEDURAL BACKGROUND
We derive the facts from the complaints and the documents of which the court
took judicial notice.3 (Howard Jarvis Taxpayers Assn. v. City of La Habra (2001) 25
Cal. 4th 809, 814.)
I
The Loans
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)4 a subsidiary of Bank of America, N.A.
(BofA) as the trustee and assigned its interests under the deed of trust to "Deutsche Bank
National Trust Company as trustee for the certificate holders of the FFMLT 2005 FF2
3 The court granted defendants' request for judicial notice of five documents
recorded with the San Diego County Recorder's Office: (1) deed of trust recorded on
December 30, 2004; (2) substitution of trustee recorded on October 27, 2011; (3)
corporation assignment of deed of trust recorded on October 27, 2011; (4) notice of
default and election to sell recorded on October 27, 2011; and (5) notice of trustee's sale
recorded on February 13, 2012.
4 ReconTrust is erroneously sued as "Reconstruct Co. NA."
3
Trust, mortgage pass-through certificates, series 2005-FF2 (Deutsche Bank)."
ReconTrust recorded a notice of default and election to sell indicating he owed more than
$100,000 for past due payments and costs. Several months thereafter, ReconTrust sent a
notice of trustee's sale indicating an intention to sell the property at auction.
II
The Pleadings
A
In 2012 Graham sued BofA, ReconTrust, Deutsch Bank, First Franklin and
American National (collectively defendants).5 The original complaint set out
"preliminary facts" describing changes in mortgage banking practices from 2001 to 2008,
which allegedly affected home values by driving prices up before they collapsed in 2007.
Graham alleged the defendants knew the $525,000 appraisal for his house was
speculative and they falsely represented the value of the home would appreciate to permit
a sale or refinance at a substantial profit before adjustable rate mortgage payments were
required. He asserted causes of action for (1) fraud, negative fraud, and deceit, (2) an
order terminating foreclosure proceedings and cancellation of the notes, and (3) violation
of section 17200.
Graham amended his original complaint after defendants filed a demurrer. He
alleged identical "preliminary facts" and nearly identical allegations for the fraud cause of
5 American National is not a party to this appeal. According to Graham, the
corporation is dissolved.
4
action, but in the section 17200 cause of action he added allegations the 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 of fraud with
sufficient specificity. Defendants argued the FAC did not state a cause of action for
violation of section 17200 because the fraud claims fail and Graham did not plead facts
demonstrating a violation of a constitutional, statutory or regulatory provision to render
the alleged conduct "unfair." Defendants additionally argued Graham lacks standing
because he has not "lost money or property." Defendants also asserted Graham is not
entitled to declaratory or injunctive relief because he did not allege a present and actual
5
controversy or the necessary elements for injunctive relief. The court sustained the
demurrer with leave to amend.
B
Graham filed a second amended complaint (SAC) with substantial changes.6 The
SAC alleges four causes of action: (1) negative fraud and deceit and affirmative fraud;
(2) violation of section 17200; (3) legal and equitable relief based on fraud and public
policy against defendants; and (4) declaratory relief.
The SAC includes additional "preliminary facts" purporting to outline historical
procedures of home financing since 1945 and asserting legal arguments about how
6 We disregard many of the additions to the SAC, which appear to be irrelevant
imports from pleadings in other cases, because we may disregard allegations that are
contrary to facts of which judicial notice may be taken (Breneric Associates v. City of Del
Mar (1998) 69 Cal. App. 4th 166, 180) and allegations that conflict with factual
allegations in prior complaints. (People ex rel. Gallegos v. Pacific Lumber Co. (2008)
158 Cal. App. 4th 950, 957.) To illustrate, Paragraph 12 of the SAC refers to a 2007 loan
agreement, whereas Graham entered into the loan and deed of trust in 2004. Paragraphs
20 and 26 refer to the 2008 purchase of Countrywide by BofA and conduct by
"Countrywide folks" whereas First Franklin was the loan originator for Graham's loan.
Paragraph 47 states "defendant Countrywide" made a 2007 statement to investors about
board-based declines in housing values at "the same time" representations were made to
plaintiff, but Graham's loan originated in 2004. Additionally, the SAC alleges Lending
Personnel did not advise plaintiff the loan would be "pre-scheduled and sold immediately
upon execution of the loan" or that "MERS" (presumably Mortgage Electronic
Registration Systems, Inc.) would be the controlling entity per the deed. The record
before us does not indicate MERS has any involvement in this transaction. The deed of
trust identifies lender First Franklin as the beneficiary and the trustee as Commonwealth
Land Title Company. While the deed of trust permits the lender to sell the note or partial
interest in the note without prior notice to the borrower and to appoint a successor trustee,
the assignment of the deed of trust to Deutsche Bank and the substitution of trustee to
ReconTrust did not occur until after Graham defaulted on the loan, seven years after
origination of the loan.
6
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" knew the
potential for disaster based upon warnings from government officials, calls for legislation
and other events from 2001 through 2008. While Graham cites publically available
information, he alleges he could not have suspected the pending collapse of the real estate
market because the market was the victim of "financial engineering" and a "Wall Street
ponzi scheme" and defendants, as well as others, were "players, engineers, and
manipulators in this endemic and collusive fraud on California homeowners."
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"; (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]
7
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
industry-wide business practices contending the 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 third cause of action alleges the promissory notes are void and the deeds
should be rescinded based upon the alleged fraud. The fourth cause of action seeks
8
declaratory relief ordering defendants take nothing by the notes or the deeds due to
alleged "fraud, unconscionability and . . . [s]tatutory violations" and to refinance the
property as required by the National Mortgage Settlement.
III
Ruling on Demurrer
The court sustained the 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 the 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 [the] 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.
9
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 for injunctive relief because Graham did not allege facts that
would prohibit enforcement of the terms of the deed of trust.7
The court ruled the fourth cause of action for declaratory relief fails because
Graham does not allege a justiciable controversy.
DISCUSSION
I
Standard of Review
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.) 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,
7 On appeal, Graham does not challenge the court's ruling on the third cause of
action. Nor does Graham challenge the finding of no unfair business practices based on
allegations of splitting the note from the deed.
10
deductions or conclusions of fact or law (Evans v. City of Berkeley (2006) 38 Cal. 4th
1, 6) 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.)
II
Graham Does Not State a Cause of Action for Fraud or Deceit
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.
A
"To establish a claim for fraudulent misrepresentation, the plaintiff must prove:
'(1) the defendant represented to the plaintiff that an important fact was true; (2) that
representation was false; (3) the defendant knew that the representation was false when
the defendant made it, or the defendant made the representation recklessly and without
regard for its truth; (4) the defendant intended that the plaintiff rely on the representation;
(5) the plaintiff reasonably relied on the representation; (6) the plaintiff was harmed; and
(7) the plaintiff's reliance on the defendant's representation was a substantial factor in
causing that harm to the plaintiff.' " (Perlas v. GMAC Mortgage, LLC (2010) 187
Cal. App. 4th 429, 434 (Perlas), italics omitted.)
The required elements for fraudulent concealment are: (1) concealment or
suppression of a material fact; (2) by a defendant with a duty to disclose the fact to the
plaintiff; (3) the defendant intended to defraud the plaintiff by intentionally concealing or
11
suppressing the fact; (4) the plaintiff was unaware of the fact and would not have acted as
he or she did if he or she had known of the concealed or suppressed fact; and (5) plaintiff
sustained damage as a result of the concealment or suppression of the fact. (Bank of
America Corp. v. Superior Court (2011) 198 Cal. App. 4th 862, 870 (Bank of America
Corp.).)
B
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 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. 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."
Statements regarding the appraised value of the property are not actionable
fraudulent misrepresentations. Representations of opinion, particularly involving matters
of value, are ordinarily not actionable representations of fact. (Neu-Visions Sports Inc. v.
Soren/McAdam/Bartells (2000) 86 Cal. App. 4th 303, 308 (Neu-Visions) [accountant's
opinion of the value of a building not actionable misrepresentation of fact]; Padgett v.
12
Phariss (1997) 54 Cal. App. 4th 1270, 1284 [opinion of fair market value of property not
actionable misrepresentation].) A representation is an opinion " 'if it expresses only (a)
the belief of the maker, without certainty, as to the existence of a fact; or (b) his judgment
as to quality, value . . . or other matters of judgment.' " (5 Witkin, Summary of Cal. Law
(10th ed. 2005) Torts, § 774, p. 1123.)
Appraisals are "an opinion as to the market value" of a property prepared by a
qualified independent appraiser. (12 C.F.R. §§ 34.42(a), 34.45 (2014); 12 Witkin,
Summary of Cal. Law (10th ed. 2005) Real Property, § 498, p. 576.) It is an estimate of
the price a buyer would be willing to pay and a seller would be willing to accept at a
given time based upon market conditions.
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
13
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.)
Similarly, Graham does not allege actionable misrepresentations based on
allegations the 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.
Predictions about a buyer's real estate investment or the fair market value for
property in the future are not actionable misrepresentations. " 'It is hornbook law that an
actionable misrepresentation must be made about past or existing facts; statements
regarding future events are merely deemed opinions.' " (Neu-Visions, supra, 86
Cal.App.4th at pp. 309-310.) " '[A]bsent special circumstances . . . a loan transaction is at
arm's length and there is no fiduciary relationship between the borrower and lender.'
[Citations.]' [Citation.] A commercial lender pursues its own economic interests in
lending money." (Perlas, supra, 187 Cal.App.4th at p. 436.) A loan agreement does not
require the lender to protect the success of a borrower's investment. (Nymark v. Heart
Fed. Savings & Loan Assn., supra, 231 Cal.App.3d at p. 1096.) A borrower must rely on
his or her own judgment and risk assessment to decide whether to accept a loan. (Perlas,
at p. 436.)
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,
14
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.
C
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 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 [defendants] likewise suffered a decline in
15
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 [defendants],
or obtained a loan through another lender, or whether a homeowner owned his or her
home free and clear, all suffered a loss of home equity due to the generalized decline in
home values." (Ibid.)8
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 the
defendants in entering into the loan agreement.
8 The Bank of America Corp. court also rejected the argument that lenders were
required to disclose to borrowers any alleged intent to defraud investors by selling loans
to mortgage pools at inflated values, which allegedly resulted in depression of the real
estate market. While the court concluded the lender had a duty to refrain from
committing fraud, it did not have a duty to borrowers to disclose its post-loan activities.
(Bank of America Corp., supra, 198 Cal.App.4th at pp. 871-873.)
16
III
Graham Does Not State a Cause of Action for Violation of the
California Unfair Competition Law
A
The California Unfair Competition Law defines (UCL) (§ 17200) " 'unfair
competition' as 'any unlawful, unfair or fraudulent business act or practice and unfair,
deceptive, untrue or misleading advertising.' " (Zhang v. Superior Court (2013) 57
Cal. 4th 364, 370.) A UCL action " 'is not an all-purpose substitute for a tort or contract
action.' [Citation.] Instead, the act provides an equitable means through which both
public prosecutors and private individuals can bring suit to prevent unfair business
practices and restore money or property to victims of these practices. . . . [T]he
'overarching legislative concern [was] to provide a streamlined procedure for prevention
of ongoing or threatened acts of unfair competition.' " (Korea Supply Co. v. Lockheed
Martin Corp. (2003) 29 Cal. 4th 1134, 1150.) As a result, the remedies available to
private individuals for violation of the UCL are limited to restitution and injunctive relief;
damages cannot be recovered. (Id. at pp. 1144, 1150; § 17203.)
Because the statute " 'is written in the disjunctive, it establishes three varieties of
unfair competition—acts or practices which are unlawful, or unfair, or fraudulent.' "
(Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20
Cal. 4th 163, 180 (Cel-Tech).) Graham does not state a cause of action under any of the
three varieties.
17
B
"By proscribing 'any unlawful' business act or practice [citation], the UCL
' "borrows" ' rules set out in other laws and makes violations of those rules independently
actionable." (Zhang v. Superior Court, supra, 57 Cal.4th at p. 370.) A "violation of
another law is a predicate for stating a cause of action under the UCL's unlawful prong."
(Berryman v. Merit Property Management, Inc. (2007) 152 Cal. App. 4th 1544, 1554.)
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.)
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."
" 'When a demurrer is sustained without leave to amend the [plaintiff] may
advance on appeal a new legal theory why the allegations of the [complaint] state a cause
of action.' " (Dudley v. Department of Transportation (2001) 90 Cal. App. 4th 255, 259.)
However, the allegations here do not support a cause of action based on this new theory.
Neither the SAC nor Graham's contentions on appeal demonstrate unlawful conduct.
Graham contends the application of "highly speculative appraisal methods to justify the
highest possible [FMV] for the Property, rather than the most probable [FMV]" did not
18
conform with 12 Code of Federal Regulations parts 34.42(g) and 34.44 (2014). This
argument acknowledges the appraisal was within the market value range, even if it fell on
the high end of the range. Further, the SAC admits the appraisal used comparable sales,
which is permitted by the regulations.9 At best, the SAC alleges the market itself was
inflated, not that the appraisal violated the law. Therefore, there is no basis for a UCL
claim based on unlawful conduct.
C
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
9 An appraisal is required to conform to "generally accepted appraisal standards as
evidence by the Uniform Standards of Professional Appraisal Practice" and, among other
things, be based upon the market value. (12 C.F.R. § 34.44 (2014).) The federal
regulations governing appraisals define market value as "the most probable price which a
property should bring in a competitive and open market under all conditions requisite to a
fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the
price is not affected by undue stimulus. Implicit in this definition is the consummation of
a sale as of a specified date and the passing of title from seller to buyer under conditions
whereby: [¶] (1) Buyer and seller are typically motivated; [¶] (2) Both parties are well
informed or well advised, and acting in what they consider their own best interests; [¶]
(3) A reasonable time is allowed for exposure in the open market; [¶] (4) Payment is
made in terms of cash in U.S. dollars or in terms of financial arrangements comparable
thereto; and [¶] (5) The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by anyone
associated with the sale." (12 C.F.R. § 34.42(g) (2014).)
19
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.)
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
record. (Liberty National Enterprises, L.P. v. Chicago Title Ins. Co. (2011) 194
Cal. App. 4th 839, 846.)
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 (2013) 57 Cal. 4th 364, 380, fn. 9.) In Cel-Tech, the Supreme Court
addressed the term "unfair" in the context of actions between competitors alleging anti-
competitive practices, but it broadly criticized previous attempts to define "unfair" as "too
20
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." ' " (Ibid.)
The Cel-Tech court concluded it must "require that any finding of unfairness to
competitors under section 17200 be tethered to some legislatively declared policy or
proof of some actual or threatened impact on competition" and, in actions challenging a
direct competitor's "unfair" act, defined the term as "conduct that threatens an incipient
violation of an antitrust law, or violates the policy or spirit of one of those laws because
its effects are comparable to or the same as a violation of the law, or otherwise
significantly threatens or harms competition." (Cel-Tech, supra, 20 Cal.4th at pp. 186-
187.)
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, 1417-1418:
"One line of cases applied a pre-Cel-Tech balancing test for determining whether
a business practice is unfair, under which the court examines the practice's ' " 'impact on
its alleged victim, balanced against the reasons, justifications and motives of the alleged
wrongdoer. In brief, the court must weigh the utility of the defendant's conduct against
the gravity of the harm to the alleged victim . . . . [Citations.]' . . . [A]n 'unfair' business
practice occurs when that practice 'offends an established public policy or when the
21
practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to
consumers.' " ' [Smith v. State Farm Mutual Automobile Ins. Co. (2001) 93 Cal. App. 4th
700, 718-719.]
"A second line of cases adopted the following test or factors for determining
unfairness set forth in section 5 of the Federal Trade Commission Act (15 U.S.C. § 45(n):
'(1) [t]he consumer injury must be substantial; (2) the injury must not be outweighed by
any countervailing benefits to consumers or competition; and (3) it must be an injury that
consumers themselves could not reasonably have avoided.' [Camacho v. Automobile
Club of Southern California (2006) 142 Cal. App. 4th 1394, 1403.]
"A third line of cases, represented by Gregory v. Albertson's, Inc. (2002) 104
Cal. App. 4th 845 (Gregory), applied a more rigorous test for unfairness in consumer UCL
actions. The Gregory court disagreed with the balancing test applied by courts before
Cel-Tech, stating: 'Cel-Tech . . . may signal a narrower interpretation of the prohibition
of unfair acts or practices in all unfair competition actions and provides reason for
caution in relying on the broad language in earlier decisions that the [Cel-Tech] court
found to be "too amorphous." Moreover, where a claim of an unfair act or practice is
predicated on public policy, we read Cel-Tech to require that the public policy which is a
predicate to the action must be "tethered" to specific constitutional, statutory or
regulatory provisions.' "
This court has consistently followed the Gregory, supra, 104 Cal. App. 4th 894 line
of cases and has held a plaintiff alleging an unfair business practice must show the
"defendant's 'conduct is tethered to an[] underlying constitutional, statutory or regulatory
22
provision, or that it threatens an incipient violation of an antitrust law, or violates the
policy or spirit of an antitrust law.' " (Wilson v. Hynek (2012) 207 Cal. App. 4th 999,
1008, quoting Durell v. Sharp Healthcare (2010) 183 Cal. App. 4th 1350, 1366.)
Without acknowledging these authorities, Graham relies on the pre-Cel-Tech
definition of "unfair" by asserting the utility of the 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 the 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.)
D
The fraud prong of the UCL may be shown if members of the public are " ' "likely
to be deceived." ' " (Buller v. Sutter Health (2008) 160 Cal. App. 4th 981, 986.) However,
" '[a]bsent a duty to disclose, the failure to do so does not support a claim under the
fraudulent prong of the UCL.' " (Id. at p. 987.) Additionally, the UCL "imposes an
actual reliance requirement on plaintiffs prosecuting a private enforcement action under
the UCL's fraud prong." (In re Tobacco II Cases (2009) 46 Cal. 4th 298, 326.) In other
words, the plaintiff "must allege he or she was motivated to act or refrain from action
based on the truth or falsity of a defendant's statement, not merely on the fact it was
made." (Kwikset Corp. v. Superior Court (2011) 51 Cal. 4th 310, 327, fn. 10.)
23
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 the 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.)
E
Finally, even if we were to assume the 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 (2011) 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. JPMorgan
Chase Bank, N.A. (2013) 216 Cal. App. 4th 497, 522-523 [nonjudicial foreclosure
24
proceedings triggered by default are not economic injury caused by UCL violations];
Daro v. Superior Court (2007) 151 Cal. App. 4th 1079, 1099 [causation requirement of
UCL not met if plaintiff would have suffered "the same harm whether or not a defendant
complied with the law"].)
IV
Graham is Not Entitled to Declaratory Relief
Graham contends on appeal he is entitled to a declaration of rights on two
grounds: (1) whether the 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.
Declaratory relief is available to "[a]ny person interested under a written
instrument . . . who desires a declaration of his or her rights or duties with respect to
another, or in respect to, in, over or upon property . . . in cases of actual controversy
relating to the legal rights and duties of the respective parties . . . ." (Code Civ. Proc.,
§ 1060; Maguire v. Hibernia S. & L. Soc. (1944) 23 Cal. 2d 719, 728 (Maguire) ["[a]
complaint for declaratory relief is legally sufficient if it sets forth facts showing the
existence of an actual controversy relating to the legal rights and duties of the respective
parties under a written instrument and requests that these rights and duties be adjudged by
the court"].)
25
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.)
The court here determined Graham failed to present a claim supporting a
justiciable controversy. We agree.
A
Graham Has No Standing for Declaratory Relief
Based on the National Mortgage Settlement
Graham is not entitled to declaratory relief regarding the National Mortgage
Settlement because he has no standing to enforce the consent judgment. "[I]ndividual
borrowers are merely incidental beneficiaries of the National Mortgage Settlement, and
so have no right to bring third-party suits to enforce the Consent Judgment." (Rehbein v.
CitiMortgage, Inc. (E.D. Va. 2013) 937 F. Supp. 2d 753, 762; Jurewitz v. Bank of Am.,
N.A. (S.D. Cal. 2013) 938 F. Supp. 2d 994, 998 [Consent Judgment contains enforcement
provisions, which do not reference the possibility of enforcement by individual
borrowers].)
26
B
Graham Does Not Sufficiently Allege the Loan Was Unconscionable
Graham is not entitled to a declaration the loan agreement is unconscionable.
"Unconscionability is a question of law." (Jones v. Wells Fargo Bank (2003) 112
Cal. App. 4th 1527, 1539 (Jones).) Generally, unconscionability is " 'recognized to
include an absence of meaningful choice on the part of one of the parties together with
contract terms which are unreasonably favorable to the other party.' " (Shadoan v. World
Sav. & Loan Ass'n. (1990) 219 Cal. App. 3d 97, 102 (Shadoan).)
"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.)
27
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, and no other choices for financing their home; [¶] c.
provided fixed and immovable deadlines by which plaintiff was required to sign loan
documents (so that defendants could process and transfer the loan into securitized trusts
by its 'closing date'); [¶] d. failed to assist herein in understanding the loan documents; [¶]
e. disallowed plaintiff adequate time to review loan documents or to procure aid in
reviewing; [¶] f. demanded he sign the loan documents the same day of the deadline . . . ;
[¶] g. falsely assured plaintiff with the representations, in justifying haste; [¶] h. failed to
divulge the unstable, unsustainable nature of the loans; [¶] i. and failed in all respects to
all representations as fully herein set forth."
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 market place 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
28
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"].)10
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."
We cannot conclude an allegation of the existence of an interest only loan or an
adjustable rate mortgage, without more, shocks the conscience or is so oppressive or
favorable to defendants as to render the loan unconscionable. (Shadoan, supra, 219
Cal.App.3d at pp. 103-104 [loan with unilateral call and prepayment penalty provisions
10 A number of California District Court's, applying California law, have held
plaintiffs are unable to show procedural unconscionability in similar loan transactions
where the complaint "lacks facts establishing how the agreement was presented to the
plaintiff, facts establishing relative bargaining power, or facts establishing a lack of
negotiation." (Riggins v. Bank of Am., N.A. (C.D. Cal. Jan. 24, 2013) 2013 U.S. Dist.
LEXIS 11282, *31 citing Ghuman v. Wells Fargo Bank, N.A. (E.D. Cal. 2012) 2012 U.S.
Dist. LEXIS 103248, *20 [complaint did not demonstrate agreement was oppressive
because it failed to allege facts establishing how plaintiff was presented with loan
agreement or facts establishing relative bargaining power]; Chang Bee Yang v. Sun Trust
Mortg., Inc., (E.D. Cal. 2011) 2011 U.S. Dist. LEXIS 147656, *28 [plaintiffs failed to
show agreement was oppressive because there were presumably other lenders who would
have entered into a loan if they were unable to negotiated over terms and conditions];
Park v. Wachovia Mortg. FSB (S.D. Cal. 2011) 2011 U.S. Dist. LEXIS 2956, *33
["[c]omplaint fail[ed] to identify facts that there was a lack of negotiation and meaningful
choice in obtaining the loan agreement and trust deed to support procedural
unconscionability."]; Legrama v. Fremont Inv. & Loan (N.D. Cal. 2010) 2010 U.S. Dist.
LEXIS 126784, *49-*50 [no procedural unconscionability where "[p]laintiffs state in
their [c]omplaint that [d]efendants acted from an unfair bargaining position, [but] they
offer no facts in support of this contention"].)
29
not unconscionable]; Jones, supra, 112 Cal.App.4th at p. 1540 [interest provisions in note
and forbearance agreement do not shock the conscience].)
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
["[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.)
V
The Court Did Not Abuse Its Discretion in Denying Leave to Amend
"If we see a reasonable possibility that the plaintiff could cure the defect by
amendment, then we conclude that the trial court abused its discretion in denying leave to
amend. If we determine otherwise, then we conclude it did not." (Campbell v. Regents
of University of California (2005) 35 Cal. 4th 311, 320.) " 'The burden of proving such
reasonable possibility is squarely on the plaintiff.' " (Maxton v. Western States Metals
30
(2012) 203 Cal. App. 4th 81, 95.) To satisfy this burden, " 'a plaintiff "must show in what
manner he can amend his complaint and how that amendment will change the legal effect
of his pleading" ' " by clearly stating not only the legal basis for the amendment, but also
the factual allegations to sufficiently state a cause of action. (Ibid.)
Graham has had three opportunities to plead his claims for fraud, violations of the
UCL and declaratory relief. While Graham contends he should be given leave to amend,
he does not meet his burden of demonstrating how he can amend his complaint or how it
would change the legal effect. " 'The assertion of an abstract right to amend does not
satisfy this burden.' " (Maxton, supra, 203 Cal.App.4th at p. 95.)
DISPOSITION
The judgment is affirmed. Respondents are awarded their costs on appeal.
MCCONNELL, P. J.
WE CONCUR:
HALLER, J.
O'ROURKE, J.
31