Bank Must Face Homeowner’s Negligence Claim Because It Owes A Duty To Use Reasonable Care In Processing Loan Modification

In Alvarez v. BAC Home Loans Servicing L.P. (August 7, 2014, A138443) — Cal.App. 4th —, the First District Court of Appeal reversed a judgment entered in favor of Defendants as to fraud, unfair competition and negligence causes of action.


Plaintiffs refinanced three home mortgages with Meridias Capital, Inc. ("Meridias").  Meridias transferred the loans to Countrywide, which later became a subsidiary of Bank of America.  The loans contained negative amortization provisions.  After making regular monthly payments on the loans, Plaintiffs realized that the principal balances of the loan were increasing, rather than decreasing.  Plaintiffs entered into discussions with Bank of America to modify the terms of the loans.  After two years, Bank of America notified Plaintiffs that their requests for loan modifications were denied and default notices were recorded on Plaintiffs' real property.

Plaintiffs sued Defendants alleging various causes of action including a cause of action for fraud that alleged that Defendants concealed the true terms of the loans, in particular the negative amortization provisions.  Plaintiffs also included a cause of action for negligence that alleged that Bank of America had a duty of care to them to properly review their loan modification requests.  The trial court entered judgment for Defendants on these causes of action pursuant to Defendants' demurrer.


The Court of Appeal reversed, holding that Plaintiffs had alleged facts sufficient to support a fraud cause of action against Defendants and a negligence claim against Bank of America.  The appellate court found that under a theory of aiding and abetting, Countrywide could be liable for the alleged fraud of Meridias.  The appellate court found that as to Bank of America, while the general rule is that where a corporation purchases the assets of another corporation or otherwise acquires assets by transfer there is no successor liability, there is an exception to this general rule when the transaction amounts to a merger or consolidation.  Here Plaintiffs' complaint alleged a merger between Bank of America and Countrywide. 

Regarding the cause of action for negligence in connection with the loan modification applications, the appellate court noted the general rule that a financial institution owes no duty of care to a borrower when the financial institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.  Here, however, because Plaintiffs' complaint alleged that Bank of America agreed to consider Plaintiffs' loan modification applications, Bank of America could owe Plaintiffs a duty of care to properly process the applications.  In reaching the conclusion that Bank of America could owe the Plaintiffs a duty of care, the appellate court considered that a borrower's lack of bargaining power, coupled with conflicts that exist in the modern loan servicing industry, provide a moral imperative that those with the controlling hand be required to exercise reasonable care in dealing with a borrower seeking a loan modification.

Finally, the appellate court noted the disfavored practice of "dual tracking" in finding a potential duty of care.  Dual tracking is a practice whereby a loan servicer pursues a dual track of moving ahead with nonjudicial foreclosure while processing a loan modification request.


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