Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_15-cv-01934/USCOURTS-caed-2_15-cv-01934-1/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1332 Diversity-Petition for Removal

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UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF CALIFORNIA 

EDGAR MARTINEZ et al., 

Plaintiffs, 

v. 

FLAGSTAR BANK, FSB et al., 

Defendants. 

No. 2:15-cv-01934-KJM-CKD 

ORDER 

The plaintiffs, Edgar Martinez, Erika Martinez, and Delfina Prado, allege Flagstar 

Bank, FSB foreclosed on their home while their application for a loan modification was pending. 

They also allege the application process was so bewildering that it shows Flagstar was negligent, 

and so deceptive that it shows Flagstar acted fraudulently. Flagstar moves to dismiss their first 

amended complaint. The matter was submitted for decision without a hearing. As discussed 

below, the motion is granted in part and denied in part. 

I. JUDICIAL NOTICE 

As a preliminary matter, the court grants the defendants’ unopposed request for 

judicial notice. The documents for which judicial notice is requested are public records, 

including publicly recorded documents and court filings in related cases. See Fed. R. Civ. P. 201 

(governing judicial notice); Harris v. Cty. of Orange, 682 F.3d 1126, 1132 (9th Cir. 2012) 

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(undisputed matters of public record are subject to judicial notice on a motion to dismiss); 

Olmstead v. ReconTrust Co., 852 F. Supp. 2d 1318, 1321 (D. Or. 2012) (recorded documents, 

such as a deed of trust, may be subject to judicial notice on a motion to dismiss). The court notes, 

however, that Flagstar can save effort in the future by simply citing the court’s previous orders in 

this case rather than requesting judicial notice of them. See, e.g., L.H. v. Schwarzenegger, 645 F. 

Supp. 2d 888, 891 n.1 (E.D. Cal. 2009). 

II. BACKGROUND 

A. Allegations 

On this motion, the court assumes the plaintiffs’ allegations are true. Ashcroft v. 

Iqbal, 556 U.S. 662, 678 (2009). Here, the plaintiffs’ first amended complaint alleges as follows: 

Mr. and Ms. Martinez purchased a house in Stockton, California in September 2008, and lived 

there with their children. First Am. Compl. ¶ 10, ECF No. 15. Their purchase was financed by a 

mortgage loan through Wholesale America Mortgage, Inc. Id. ¶ 11. The deed of trust names Mr. 

Martinez and Ms. Prado as borrowers, Req. J. Notice Ex. 1, ECF No. 17-1, but in October 2008, 

the property was conveyed from Ms. Prado and Mr. Martinez to Mr. and Mrs. Martinez as 

husband and wife as joint tenants. Id. Exs. 2, 3. The loan was refinanced in late 2008, and 

Flagstar acquired it soon afterwards. See First Am. Compl. ¶¶ 12–13. 

In late 2011, after Mr. Martinez lost his job and Ms. Martinez began suffering 

from health problems, they began experiencing financial hardship. Id. ¶ 14. In about January 

2012, they contacted Flagstar and asked whether they could obtain mortgage relief assistance. Id.

¶ 15. They were current in their payments at the time. Id. Flagstar sent them an application for a 

loan modification, which they completed and returned. Id. For the next six months, Flagstar 

representatives frequently told the Martinezes they must miss payments before Flagstar would 

consider a modification. Id. ¶ 16. They were reluctant to follow this advice, and they could have 

borrowed money from friends or family or even declared bankruptcy instead of missing 

payments, but in July 2012, they decided to miss a payment. Id. ¶ 17. At about this time, Ms. 

Prado moved into the house. Id. ¶ 11. In 2012, she also signed a quitclaim deed, transferring her 

rights in the property to Mr. Martinez. Req. J. Notice Ex. 6, ECF No. 17-2. 

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Flagstar repeatedly asked the Martinezes to resubmit the same documents, and 

despite the fact that they submitted everything Flagstar requested, their application was repeatedly 

denied for incompleteness. First Am. Compl. ¶¶ 18–19. These delays, claim the Martinezes, 

were intentional and meant to prolong the loan modification process. Id. Flagstar assured them it 

would not foreclose on the house while their applications were pending, but in September 2012, 

while their application for a loan modification was pending, Flagstar recorded a notice of default. 

Id. ¶ 20; Req. J. Notice Ex. 4, ECF No. 17-1 (notice of default). In April 2013, Flagstar recorded 

a notice of trustee’s sale. First Am. Compl. ¶ 21; Req. J. Notice Ex. 5, ECF No. 17-2 (notice of 

trustee’s sale). 

After recording these notices, Flagstar informed the Martinezes their application 

had been denied because it was incomplete, but the Martinezes had in fact submitted a complete 

application. First Am. Compl. ¶ 22. The same day Flagstar denied their application for 

incompleteness, the Martinezes submitted another complete application, and Flagstar postponed 

the foreclosure sale date. Id. ¶ 23. The next month, Flagstar sent the Martinezes a letter that 

stated they did not qualify for a modification due to “excessive obligations” and because they did 

not meet the investor requirements. Id. ¶ 24. But Flagstar had known about their obligations, it 

was itself the “investor,” and since the outset it had told the Martinezes they were qualified for a 

loan modification. Id. In May and July 2013, the Martinezes again submitted complete 

applications for a loan modification, but as before, Flagstar claimed the applications were 

incomplete. Id. ¶ 25. 

On July 9, 2013, Flagstar sold the house in a foreclosure sale. Id. ¶ 26. The 

Martinezes moved out in the second week of August 2013. Id. ¶ 26. They were forced to sell 

many of their possessions for less than their true value. Id. ¶ 30. If Flagstar had fairly considered 

the applications for loan modifications, it would have granted them, and the Martinezes would 

have made payments to bring their account current. Id. Fees, interest, and penalties would not 

have accrued, and they would not have suffered negative reports to their credit. Id. The process 

caused them stress, anxiety, migraines, depression, and marital difficulties. Id. 

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B. Ms. Prado 

The plaintiffs assert many facts about Ms. Prado in their opposition brief that they 

do not allege in their complaint. Ms. Prado’s identity is the first of these facts. According to the 

plaintiffs’ opposition brief, Ms. Prado is Ms. Martinez’s mother. See Opp’n at 1, ECF No. 19. In 

addition, the briefing asserts Ms. Prado lived with the Martinez family in 2008, but later moved 

away to Arizona. See id. at 1, 3. 

The plaintiffs’ opposition brief also asserts that in about July 2012, Ms. Prado 

moved back to California to help the Martinezes with their expenses and begin looking for a job. 

Opp’n at 3. As noted above, in 2012 she signed a quitclaim deed, transferring her rights in the 

property to Mr. Martinez. Req. J. Notice Ex. 6. In the plaintiffs’ opposition brief, they assert she 

signed the quitclaim deed at the request of “the bank.” Opp’n at 3. 

Finally, the complaint alleges Ms. Prado was “generally aware of the modification 

process and foreclosure proceedings” and that she, along with the Martinezes, was forced to leave 

the house and suffered harm to her credit as a result of the foreclosure. See First Am. Compl. 

¶¶ 11 & 31. In their opposition brief, the plaintiffs assert in addition that Ms. Prado submitted 

documents with the Martinezes’ application for a loan modification, including a financial 

worksheet, a letter of hardship, a statement of her income, and an explanation of her residence in 

California and Arizona. Opp’n at 3. 

C. Procedural History 

The plaintiffs filed a complaint in San Joaquin County Superior Court in July 

2015. ECF No. 1-2. They alleged claims for negligent and intentional misrepresentation, false 

promise, negligence, intentional infliction of emotional distress, violation of California Civil 

Code sections 2923.61 and 2924.10,2 and violations of California’s Unfair Competition Law 

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 That section reads, in part, “If a borrower submits a complete application for a first lien 

loan modification offered by, or through, the borrower’s mortgage servicer, a mortgage servicer, 

mortgagee, trustee, beneficiary, or authorized agent shall not record a notice of default or notice 

of sale, or conduct a trustee’s sale, while the complete first lien loan modification application is 

pending. . . .” Cal. Civ. Code § 2923.6(c). 

2

 That section reads, in part, “When a borrower submits a complete first lien modification 

application or any document in connection with a first lien modification application, the mortgage 

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(UCL), Cal. Bus. & Prof. Code §§ 17200 et seq. See generally id. Flagstar removed the case to 

this court on the basis of this court’s diversity jurisdiction. Not. of Removal, ECF No. 1. 

Flagstar moved to dismiss in September 2015. ECF No. 7. In January 2016, the 

motion was granted in part and denied in part: (1) Ms. Prado’s claims were dismissed with leave 

to amend to allege facts showing she suffered a redressable injury; (2) the motion was granted 

with respect to the claims for negligence and negligent infliction of emotional distress, but leave 

to amend was granted to allege facts that showed these claims accrued within the limitations 

period; and (3) the motion was denied with respect to the claims for negligent and intentional 

misrepresentation, false promise, and violation of the California Civil Code and UCL. Order 

Jan. 7, 2016, ECF No. 12. 

The plaintiffs filed an amended complaint later in January, alleging the same 

claims as in the original complaint. ECF No. 15. In February 2016, Flagstar renewed its motion 

to dismiss Ms. Prado’s claims and the claims for negligence and intentional infliction of 

emotional distress. ECF No. 16. As to Ms. Prado’s claims, Flagstar argues the plaintiffs have 

still not alleged facts that establish Ms. Prado’s standing. As to the negligence claims, Flagstar 

argues the plaintiffs’ allegations show neither that Flagstar owed a duty nor that the plaintiffs 

suffered damages. And as to the claim for intentional infliction of emotional distress, Flagstar 

argues the plaintiffs have not alleged facts that show it acted outrageously or that they suffered 

anything but financial losses. 

III. LEGAL STANDARD 

A party may move to dismiss for “failure to state a claim upon which relief can be 

granted.” Fed. R. Civ. P. 12(b)(6). The motion may be granted only if the complaint lacks a 

“cognizable legal theory” or if its factual allegations do not support a cognizable legal theory. 

Hartmann v. Cal. Dep’t of Corr. & Rehab., 707 F.3d 1114, 1122 (9th Cir. 2013). The court 

assumes these factual allegations are true and draws reasonable inferences from them. Iqbal, 556 

U.S. at 678. If the complaint’s allegations do not “plausibly give rise to an entitlement to relief,” 

 

servicer shall provide written acknowledgment of the receipt of the documentation within five 

business days of receipt. . . .” Cal. Civ. Code § 2924.10(a). 

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the motion must be granted. Id. at 679. Allegations that are “merely consistent with the 

defendant’s liability” are not enough. Id. at 678 (citation and quotation marks omitted). 

A complaint need contain only a “short and plain statement of the claim showing 

that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), not “detailed factual allegations,” 

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). But this rule demands more than 

unadorned accusations; “sufficient factual matter” must make the claim at least plausible. Iqbal, 

556 U.S. at 678. In the same vein, conclusory or formulaic recitations of a cause’s elements do 

not alone suffice. Id. (quoting Twombly, 550 U.S. at 555). Evaluation under Rule 12(b)(6) is a 

context-specific task drawing on “judicial experience and common sense.” Id. at 679. And aside 

from the complaint, district courts have discretion to examine documents incorporated into the 

complaint by reference, Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1160 (9th Cir. 2012); 

affirmative defenses based on the complaint’s allegations, Sams v. Yahoo! Inc., 713 F.3d 1175, 

1179 (9th Cir. 2013); and proper subjects of judicial notice, W. Radio Servs. Co. v. Qwest Corp., 

678 F.3d 970, 976 (9th Cir. 2012). 

IV. DISCUSSION 

A. Ms. Prado’s Standing 

“Standing is the threshold issue of any federal action . . . .” Emp’rs-Teamsters 

Local Nos. 175 & 505 Pension Trust Fund v. Anchor Capital Advisors, 498 F.3d 920, 923 (9th 

Cir. 2007). Article III standing requires a plaintiff to satisfy three conditions: (1) the plaintiff 

must suffer a concrete and particularized “injury in fact”; (2) the injury and conduct complained 

of must be causally connected, and the injury must be traceable to the defendant’s challenged 

actions; and (3) the injury must be “likely” to be redressed by resolution favorable to the plaintiff. 

Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992). At this initial stage of litigation, it 

is enough for a plaintiff to allege and not prove these three elements. See id. at 561. 

The court previously dismissed Ms. Prado’s claims because the original complaint 

did not explain what injury she suffered. See Order Jan. 7, 2016, at 2. The amended complaint 

sheds little additional light on her alleged injury. Ms. Prado does not clarify what property 

interest she claims to have lost in this litigation. She does not address the effect of the publicly 

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recorded documents that show she conveyed the property to Mr. and Ms. Martinez in 2008 and 

quitclaimed her interest to Mr. Martinez in 2012. Req. J. Notice Exs. 2, 3, 6. She alleges only 

that she remained obligated to repay the mortgage debt and lived in the house. First Am. Compl. 

¶¶ 11 & 31. Neither does she allege she participated in the application process, but only that she 

was “generally aware” of it. Id. ¶ 31. These allegations do not show she has standing. 

As noted above, the plaintiffs’ opposition brief includes somewhat more detailed 

assertions: Ms. Prado signed the quitclaim deed “at the request of the bank” and helped prepare 

documents that were submitted with the applications for a loan modification. Opp’n at 3. But the 

court cannot consider these assertions here. See Schneider v. Cal. Dep’t of Corr., 151 F.3d 1194, 

1197 n.1 (9th Cir. 1998) (“In determining the propriety of a Rule 12(b)(6) dismissal, a court may 

not look beyond the complaint to a plaintiff’s moving papers, such as a memorandum in 

opposition to a defendant’s motion to dismiss.” (emphasis in original)). 

The only additional allegation that might support Ms. Prado’s standing is her claim 

that the foreclosure sale and delinquent payments damaged her credit. See First Am. Compl. 

¶ 11. Nevertheless, her allegations are too conclusory to be entitled to a presumption of truth, and 

do not show she has standing to participate in this lawsuit. See Hernandez v. Select Portfolio, 

Inc., No. 15-01896, 2015 WL 3914741, at *22 (C.D. Cal. June 25, 2015) (“Although [the 

plaintiff] maintains she suffered damage to her credit . . . she does not allege any facts to support 

these legal conclusions.”). 

Ms. Prado’s claims are therefore dismissed. This leaves the question of whether 

she should be allowed a second opportunity to amend. In light of the Federal Rules’ liberal 

policy of amendment, “a district court should grant leave to amend even if no request to amend 

the pleading was made, unless it determines that the pleading could not possibly be cured by the 

allegation of other facts.” Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995) (citation and 

quotation marks omitted). Here, with one exception, the pleading shortfalls identified in this 

order may perhaps be cured with more concrete factual allegations, and could therefore show Ms. 

Prado has standing. The exception is Ms. Prado’s claim that she suffered damage to her credit. 

As explained in the following paragraphs, the court concludes a claim of damaged credit would 

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be preempted by the Fair Credit Reporting Act (FCRA), 15 U.S.C. §§ 1681–1681x. It therefore 

could not support her standing here. 

“Congress enacted FCRA in 1970 to ensure fair and accurate credit reporting, 

promote efficiency in the banking system, and protect consumer privacy.” Safeco Ins. Co. of Am. 

v. Burr, 551 U.S. 47, 52 (2007). The FCRA imposes duties on those who send information to 

credit reporting agencies, whom it refers to as “furnishers” of credit information. Gorman v. 

Wolpoff & Abramson, LLP, 584 F.3d 1147, 1153 (9th Cir. 2009). According to a House Report, 

“[t]he most common . . . furnishers of information” include “lenders.” Id. at 1153 n.7 (quoting 

H.R. Rep. No. 108–263, at 24 (2003)). A furnisher’s duties generally fall into two classes. First, 

the FCRA imposes a duty to provide accurate information, for example requiring that “[a] person 

shall not furnish any information relating to a consumer to any consumer reporting agency if the 

person knows or has reasonable cause to believe that the information is inaccurate.” 15 U.S.C. 

§ 1681s-2(a)(1)(A). The Ninth Circuit has held that the duties within this class are not 

enforceable by private actions. Gorman, 584 F.3d at 1153–54. Second, the FCRA imposes 

duties on furnishers of credit information who receive notice from a credit reporting agency that a 

consumer disputes the information the furnisher provided to the agency. See generally 15 U.S.C. 

§ 1681s-2(b). The FCRA expressly creates a private right of action for willful or negligent 

failures to fulfill the duties in this second class. Id. §§ 1681n, 1681o; Gorman, 584 F.3d at 1154. 

In two provisions, the FCRA expressly preempts state law claims against 

furnishers of credit information. First, 15 U.S.C. § 1681h(e) preempts claims of defamation, 

invasions of privacy, and negligence that are not based on the furnisher’s “malice or willful intent 

to injure.” Subhani v. JPMorgan Chase Bank, Nat’l Ass’n, No. 12-01857, 2012 WL 1980416, at 

*3 (N.D. Cal. June 1, 2012). Second, in 1996, Congress amended the FCRA to provide that “[n]o 

requirement or prohibition may be imposed under the laws of any State . . . with respect to any 

subject matter regulated under . . . [15 U.S.C. § 1681s-2]. . . .” 15 U.S.C. § 1681t(b)(1)(F).3

 On 

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 Congress expressly reserved from preemption those claims brought under California 

Civil Code § 1785.25(a), which provides, “A person shall not furnish information on a specific 

transaction or experience to any consumer credit reporting agency if the person knows or should 

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the one hand, the second provision appears to preempt any state law claim based on a creditor’s 

responsibilities under § 1681s-2. But on the other hand, the first provision implies certain claims 

may proceed if based on the furnisher’s malice or intent to injure. 

Federal courts are divided over how these two sections may be reconciled. See 

Gorman, 584 F.3d at 1166–67 (illustrating the division but declining to resolve it); see also, e.g., 

Woods v. Prot. One Alarm Monitoring, Inc., 628 F. Supp. 2d 1173, 1180–85 (E.D. Cal. 2007) 

(collecting conflicting authority). The Second and Seventh Circuits have concluded that 

§ 1681t(b)(1)(F) totally preempts state statutory and common law claims that are predicated on 

the reporting of credit information to credit agencies. See Purcell v. Bank of Am., 659 F.3d 622, 

624–25 (7th Cir. 2011); Macpherson v. JPMorgan Chase Bank, N.A., 665 F.3d 45, 48 (2d Cir. 

2011). Several district courts within this Circuit have adopted a similar conclusion and held that 

“state statutory or common law claims alleging damages related to a furnisher’s disclosure of 

inaccurate credit information are preempted.” Desser v. U.S. Bank, N.A., No. 13-09190, 2014 

WL 4258344, at *5–6 (C.D. Cal. Aug. 27, 2014); see also Subhani, 2012 WL 1980416, at *4 

(collecting authority). These courts have reached the same conclusion in the factual context of 

this case, i.e., where the plaintiff alleges claims against a mortgage lender or servicer related to a 

loan modification application. See, e.g., Desser, 2014 WL 4258344, at *5 (finding state-law tort 

claims were “preempted to the extent that these claims assert[ed] damages resulting from 

Defendant’s reporting to a credit agency of inaccurate information concerning the status of 

Plaintiffs’ loan”). 

Having considered these authorities, this court adopts the growing majority rule: 

state law claims “based on alleged injury arising purely from the reporting of credit information 

by a furnisher of credit” are preempted by the FCRA. Roybal v. Equifax, 405 F. Supp. 2d 1177, 

1181 (E.D. Cal. 2005). 

Here, Ms. Prado alleges Flagstar’s actions caused her injury by reporting incorrect 

information about the loan, damaging her credit. This is an injury “arising purely from the 

 

know the information is incomplete or inaccurate.” Here, the plaintiffs do not advance a claim 

based on section 1785.25(a). 

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reporting of credit information by a furnisher of credit,” id., and may not support a state-law 

statutory or tort claim. But an amended claim would not be preempted if founded on injuries 

other than damage to her credit and the reporting of credit information. 

The court therefore grants leave to amend to the extent Ms. Prado can establish her 

standing by asserting damages other than credit damage. Because the court previously granted 

Ms. Prado leave to amend her claims and the first amended complaint did not adequately address 

the shortcomings identified in the court’s previous order, leave to amend is granted on the 

following condition: if Ms. Prado is to remain a plaintiff in this action, a second amended 

complaint must clarify (a) what property interest Ms. Prado alleges she lost as a result of 

Flagstar’s alleged wrongdoing, if any, and (b) what injuries she suffered, other than damage to 

her credit. 

B. Negligence 

To state a claim for negligence, a plaintiff must allege “(1) the defendant owed the 

plaintiff a duty of care, (2) the defendant breached that duty, and (3) the breach proximately 

caused the plaintiff’s damages or injuries.” Lueras v. BAC Home Loans Servicing, LP, 221 Cal. 

App. 4th 49, 62 (2013). Flagstar argues the complaint falls short of establishing it owed the 

Martinezes any duty or caused them any damages. Mot. at 6–10. 

1. Duty of Care 

The defendant’s duty of care is a prerequisite to any claim for negligence. Nymark 

v. Heart Fed. Savings & Loan Ass’n, 231 Cal. App. 3d 1089, 1095 (1991). Whether a duty of 

care exists is a question of law. First Interstate Bank of Ariz., N.A. v. Murphy, Weir & Butler, 

210 F.3d 983, 986 (9th Cir. 2000). 

As a general rule, banks owe borrowers no duty of care unless the institution’s 

involvement “exceed[s] the scope of its conventional role as a mere lender of money.” Nymark, 

231 Cal. App. 3d at 1096. But “Nymark does not support the sweeping conclusion that a lender 

never owes a duty of care to a borrower.” Jolley v. Chase Home Fin., LLC, 213 Cal. App. 4th 

872, 901 (2013) (internal quotation marks omitted). Rather, the court weighs six factors to decide 

whether a financial institution owes a borrower a duty of care: 

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[1] the extent to which the transaction was intended to affect the 

plaintiff, [2] the foreseeability of harm to him, [3] the degree of 

certainty that the plaintiff suffered injury, [4] the closeness of the 

connection between the defendant’s conduct and the injury 

suffered, [5] the moral blame attached to the defendant’s conduct, 

and [6] the policy of preventing future harm. 

Nymark, 231 Cal. App. 3d at 1098 (quoting Connor v. Great W. Sav. & Loan Assn., 69 Cal. 2d 

850, 865 (1968)). These six factors are commonly referred to as the “Biakanja factors” after 

Biakanja v. Irving, 49 Cal. 2d 647, 650 (1958). 

California courts have not settled on a uniform application of these six factors in 

mortgage cases. In Lueras v. BAC Homes Loans Servicing, LP, the Court of Appeal considered 

whether a borrower could state a claim for negligence based on a lender’s failure to “timely and 

accurately respond to customer requests and inquiries, . . . comply with state consumer protection 

laws, properly service the loan, and use consistent methods to determine modification approvals,” 

among other things. 221 Cal. App. 4th at 63. After citing the general rule of Nymark—that a 

lender does not owe a borrower a duty of care unless its involvement exceeds the scope of an 

ordinary lender-borrower relationship—and collecting conflicting federal district court decisions, 

the Lueras court concluded “a loan modification is the renegotiation of loan terms, which falls 

squarely within the scope of a lending institution’s conventional role as a lender of money.” Id. at 

63–67. Therefore, it found a residential lender owed no “common law duty of care to offer, 

consider, or approve a loan modification, or to explore and offer foreclosure alternatives.” Id.

at 67. 

By contrast, in Alvarez v. BAC Home Loans Servicing, L.P., decided after Lueras, 

a different division of the Court of Appeal reached the opposite conclusion. 228 Cal. App. 4th at 

944–45, 948. The Alvarez court cited Lueras’s reasoning that “a lender does owe a duty of care 

to a borrower not to make material misrepresentations about the status of an application for a loan 

modification” and that a borrower would foreseeably be harmed “by an inaccurate or untimely 

communication . . . about the status of a loan modification application.” Id. at 946–47 (quoting 

221 Cal. App. 4th at 68–69). The court then cited Garcia v. Ocwen Loan Servicing, LLC, a 

federal district court decision, as persuasive authority for the proposition that a lender who 

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undertakes to review a borrower’s application for a loan modification must exercise due care 

under the Biakanja factors. Id. at 948 (citing No. 10-0290, 2010 WL 1881098, *2–4 (N.D. Cal. 

May 10, 2010)). In short, the Alvarez court reasoned that because (1) a loan modification is 

intended to benefit the borrower, (2) it is foreseeable that failures in timeliness or accuracy will 

harm the borrower, (3) “the bank holds all the cards” in a loan modification process, and 

(4) imposing a duty of care on a lender would reign in “dual tracking,” mitigate the lender’s 

incentives to mis- or under-inform borrowers, and further the California Legislature’s object in 

passing the California Homeowner Bill of Rights (HBOR), a residential mortgage borrower can 

state a negligence claim against a lender for breaches of its duty of care in processing and 

considering an application for a loan modification. Id. at 948–52. 

Neither the California Supreme Court nor the Ninth Circuit has taken up this 

question.4 Several California federal district courts have reviewed the conflict. A few examples 

from this district include Cornejo v. Ocwen Loan Servicing, LLC, ___ F. Supp. 3d ____, 2015 

WL 9268690, at *10 (E.D. Cal. Dec. 21, 2015) (following Lueras); Trigueiro v. Bank of Am., 

N.A., No. 14-02556, 2015 WL 4983599, at *7 (E.D. Cal. Aug. 19, 2015) (following Alvarez);

Hsin-Shawn Sheng v. Select Portfolio Servicing, Inc., No. 15-0255, 2015 WL 4508759, at *5 

(E.D. Cal. July 24, 2015) (following Alvarez); Hatton v. Bank of Am., N.A., No. 15-00187, 2015 

WL 4112283, at *9 (E.D. Cal. July 8, 2015) (following Alvarez); Meixner v. Wells Fargo Bank, 

N.A., 101 F. Supp. 3d 938, 954 (E.D. Cal. 2015) (following Alvarez). As one court has noted, it 

appears a majority of district judges have followed Alvarez in circumstances such as those posed 

by this case. See Romo v. Wells Fargo Bank, 2016 WL 324286, *8-10 (N.D. Cal. Jan. 27, 2016). 

The undersigned has yet to adopt a formal position. See Sears v. Bank of Am., No. 13-01664, 

2015 WL 9481042, at *4 (E.D. Cal. Dec. 29, 2015); Moreno v. Wells Fargo Home Mortg., No. 

14-01024-KJM, 2015 WL 3486996, at *10 (E.D. Cal. June 2, 2015); Lane v. CitiMortgage, Inc., 

No. 14-02295, 2014 WL 6670648, at *5 (E.D. Cal. Nov. 21, 2014). 

 4

 In a recent unpublished decision, the Ninth Circuit declined to certify the question to the 

California Supreme Court. Anderson v. Deutsche Bank Nat. Trust Co. Americas, ___ F. App’x 

___, 2016 WL 2343248, at *1 n.1 (9th Cir. May 4, 2016). 

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Generally speaking, courts that find a lender has no duty of care reach this 

conclusion after finding that consideration of a home mortgage loan modification application falls 

within the scope of a mortgage lender’s typical role as a lender of money. See, e.g., Cornejo, 

2015 WL 9268690, at *10; Carbajal v. Wells Fargo Bank, N.A., No. 14-7851, 2015 WL 2454054, 

at *6 (N.D. Cal. Apr. 10, 2015). Those courts that find a lender does owe a duty of care generally 

conclude that a borrower and lender no longer find themselves in the arms-length arena they once 

occupied; after the mortgage agreement takes effect, the lender enjoys significantly greater 

bargaining power and significantly less incentive to take care. See, e.g., Meixner, 101 F. Supp. 3d 

at 954–55; Alvarez, 228 Cal. App. 4th at 949–50. Others reason that “[t]he ground shifted with 

the passing of HBOR.” Johnson v. PNC Mortg., 80 F. Supp. 3d 980, 985 (N.D. Cal. 2015); see 

also Alvarez, 228 Cal. App. 4th at 950 (considering the impact of HBOR). 

Having considered the question carefully, and informed by the decisions of other 

courts, this court adopts the position of the Alvarez court and finds that a lender “does owe a duty 

of care to a borrower not to make material misrepresentations about the status of an application 

for a loan modification” and that a borrower would foreseeably be harmed “by an inaccurate or 

untimely communication . . . about the status of a loan modification application.” 228 Cal. App. 

4th at 946–47. The Martinezes may proceed on a claim that Flagstar breached its duty to take due 

care while processing and considering their application for a loan modification. 

The court acknowledges but disagrees with Flagstar’s position that a duty of care 

should not attach here because Flagstar owed the Martinezes no duty to accept or approve their 

application. See Mot. Dismiss at 7–9. Flagstar’s argument does not account for the fact that by 

the time the Martinezes requested a loan modification, they had entered a long-term financial and 

business relationship with Flagstar, and Flagstar held “all the cards.” Alvarez, 228 Cal. App. 4th 

at 949 (quoting Jolley, 213 Cal. App. 4th at 900). Harm to the Martinezes was a foreseeable 

result should Flagstar not take care in its handling of their application. 

Turning to the complaint’s allegations, the court is able to draw the reasonable 

inference that Flagstar owed and breached a duty of care to the Martinezes. The Martinezes 

allege Flagstar induced them to default, told them they qualified, repeatedly lost or purposely 

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misplaced their application materials, and all the while assured them no foreclosure sale would go 

forward while it considered their application. Then it completed a foreclosure sale despite their 

pending application. 

2. Damages 

Damages are an essential element of any claim for common law negligence. See, 

e.g., United States Liab. Ins. Co. v. Haidinger-Hayes, Inc., 1 Cal. 3d 586, 597 (1970) (“No action 

will lie to recover damages if no damages have been sustained.”). Here, the first amended 

complaint alleges the plaintiffs would have avoided a lengthy, distressing, and costly application 

process and would have maintained possession of their home had Flagstar fairly considered their 

applications for loan modifications. Flagstar may eventually disprove these allegations by 

showing it would never have granted their application, or that the Martinezes’ damages arose 

entirely from other sources. See Mot. Dismiss at 9–10 (arguing the Martinezes’ damages arose 

from their medical problems, other financial difficulties, and their bankruptcy). But these are 

questions for another day. The Martinezes’ allegations suffice for purposes of withstanding this 

motion. 

C. Intentional Infliction of Emotional Distress 

A complaint states a claim for intentional infliction of emotional distress when it 

alleges (1) the defendant’s conduct was outrageous; (2) the defendant either intended to cause 

emotional distress or acted with reckless disregard to the probability of causing emotional 

distress; (3) the plaintiff suffered severe emotional distress; and (4) the defendant’s conduct 

actually and proximately caused that emotional distress. Nally v. Grace Cmty. Church, 47 Cal. 3d 

278, 300 (1988). The defendant’s conduct is sufficiently “outrageous” when it is “so extreme as 

to exceed all bounds of that usually tolerated in a civilized community.” Davidson v. City of 

Westminster, 32 Cal. 3d 197, 209 (1982). 

Here, the Martinezes argue the defendants acted outrageously by enticing their 

default, by losing their application materials several times and asking many times for documents 

to be resubmitted, and by promising no foreclosure sale would occur while an application was 

pending, then breaking that promise. See Opp’n at 10. In certain circumstances, a mortgage 

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lender or servicer’s management of a modification application may be so outrageous as to allow a 

claim for the infliction of emotional distress. See, e.g., Ragland v. U.S. Bank Nat. Ass’n, 209 Cal. 

App. 4th 182, 188–89, 204 (2012) (denying summary judgment on a claim for intentional 

infliction of emotional distress where a trier of fact could find the lender induced the borrower to 

default, purposefully refused payment, then sold the home in foreclosure). But the allegations 

here do not rise to that level. See, e.g., Helmer v. Bank of Am., N.A., No. 12-0733, 2013 WL 

1192634, at *6 (E.D. Cal. Mar. 22, 2013) (allegation that a mortgage lender induced the borrower 

to default was not sufficient to show reckless or intentional behavior with respect to the plaintiffs’ 

emotional distress); Mehta v. Wells Fargo Bank, N.A., 737 F. Supp. 2d 1185, 1204 (S.D. Cal. 

2010) (allegation that a mortgage lender broke a promise not to foreclose during the pendency of 

an application for a loan modification was insufficient). The motion is granted with leave to 

amend as to this claim, if possible within the confines of Rule 11. 

V. CONCLUSION 

The motion to dismiss is GRANTED in part and DENIED in part with leave to 

amend: 

(1) Ms. Prado’s claims are dismissed with leave to amend as discussed above. 

Any amended complaint must clarify (a) what property interest Ms. Prado alleges she lost as a 

result of Flagstar’s alleged wrongdoing, if any, and (b) what injuries she suffered, other than 

damage to her credit. 

(2) The motion is denied with respect to the claims for negligence; and 

(3) The claims for intentional infliction of emotional distress are dismissed with 

leave to amend. 

Any second amended complaint shall be filed within twenty-one days of the date 

this order is filed. 

IT IS SO ORDERED. 

DATED: July 18, 2016. 

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