Our thanks to MSR in Calif for this well articulated article all need to absorb.
In a wrongful foreclosure lawsuit, the plaintiff may recover tort damages – i.e., any damages proximately caused by the foreclosing defendant, the Fourth District Court of Appeal held last week. Miles v. Deutsche Bank National Trust Co. (April 29, 2015) 2015 WL 1929732.
In considering the question of what damages may be recovered for a claim of wrongful foreclosure, the defendant foreclosing lender argued that because the plaintiff borrower owed the lender an amount greater than the value of the foreclosed property (i.e., there was no equity in the property), the plaintiff suffered no damages. The Court of Appeal disagreed with this contract analysis of damages and instead applied a tort measure of damages (“any damages proximately caused”) under Civil Code § 3333. Such tort damages may include, for example: moving expenses, lost rental income, damage to credit, emotional distress, and punitive damages.
The significant facts in Miles are as follows: The plaintiff obtained an $815,000 mortgage loan in 2005. The borrower failed to make property tax payments in 2005-06, which the loan servicer paid and then then increased plaintiff’s monthly payment. In September 2007, the borrower applied for a loan modification and then missed making some loan payments. The plaintiff alleged that the loan servicer required a $12,075.09 “processing fee” for the loan modification, which the borrower paid. The defendant denied the characterization of this payment.
On March 7, 2008, the loan servicer sent a loan modification agreement to the borrower. The borrower called the loan servicer to inquire about the interest rate after the initial 5-year period and was told that the modification agreement needed to be revised. On March 13, 2008, the loan servicer sent a revised loan modification agreement to the borrower. The borrower signed this agreement and returned it to the loan servicer. Upon return receipt, the loan servicer also signed the loan modification agreement.
Then things got interesting. Four days after it executed the loan modification agreement, the loan servicer sent a default letter to the borrower demanding payment of $39,997.18. On April 30, 2008, the loan servicer sent another loan modification agreement that increased the principal almost $40,000. A month later, the loan servicer sent another loan modification agreement that increased the principal almost $65,000. Similar communications occurred back and forth, until ultimately the defendant foreclosed on the property and evicted the plaintiff.
In addressing the legal issues before it, the Miles court identified the three elements necessary for a claim of wrongful foreclosure, namely:
- That defendant caused an “illegal, fraudulent, or willfully oppressive sale of real property” pursuant to a power of sale in a mortgage or deed of trust;
- That the plaintiff was “prejudiced or harmed”; and
- That the borrower “tendered the amount of the secured indebtedness or was excused from tendering.”
Regarding damages, the defendant argued that the measure of damages was “benefit of the bargain” – i.e., contract damages. The Miles court rejected this argument, in part because such a damage analysis would allow lenders to foreclose on “underwater homes with impunity.” Instead, the Miles court held that because the claim of wrongful foreclosure was a tort, the tort measure of damages set forth in Civil Code § 3333 applied (“any damages proximately caused”). In reversing summary judgment, the Miles court did not award any damages but sent the matter back to the trial court.
In a footnote, the Miles court noted that post-2008 legislation could affect borrowers who enter into a loan modification, but the claim in Miles pre-dated that legislation. (See e.g., Civ.Code, §§ 2924.12, subd. (b), 2923.6, subd. (c)(3).)
In sum, the claim of wrongful foreclosure remains alive and well in California, and the courts will permit a plaintiff to recover tort damages, including credit damage, possible emotional distress and punitive damages.
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