Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_17-cv-06100/USCOURTS-cand-5_17-cv-06100-1/pdf.json

Nature of Suit Code: 220
Nature of Suit: Foreclosure
Cause of Action: 28:1332 Diversity-Fraud

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United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

FRANCISCO CERVANTES, et al.,

Plaintiffs,

v.

WEST END 3199 REO LLC, et al.,

Defendants.

Case No.17-cv-06100-VKD

ORDER GRANTING WEST END 

DEFENDANTS’ MOTION TO DISMISS

WITH LEAVE TO AMEND

Re: Dkt. No. 74

Plaintiffs Francisco Cervantes and Maria Elena Velazquez-Cervantes sue for alleged 

violations of California law in connection with their mortgage loan for certain property located in 

San Jose, California (“Property”). They claim that after they signed a loan modification 

agreement, defendants fraudulently altered material terms of the document, which ultimately 

caused them to lose the Property in foreclosure. The First Amended Complaint (“FAC”), the 

operative pleading, asserts four claims for relief: (1) fraudulent alteration of loan documents; 

(2) negligence; (3) breach of contract; and (4) wrongful foreclosure. The Court’s jurisdiction is 

based on diversity. 28 U.S.C. § 1332.

Defendants West End 3199 REO LLC, West End Trust 2012-1, LNR Partners, LLC, LNR 

AFIS Asset Services, LLC, Midland Loan Services, Ana G. Castro and Stacey Barnes

(collectively “West End defendants”) move to dismiss the FAC for failure to state a claim for 

relief, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs oppose the 

motion. 

Upon consideration of the moving and responding papers, as well as the oral arguments 

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presented, the Court grants defendants’ motion to dismiss with leave to amend.1

I. BACKGROUND

The following background facts are drawn from the FAC and, for purposes of resolving the 

present motion, are deemed true:

In August 2007, plaintiffs purchased the Property and borrowed $540,000 from Lehman 

Brothers Bank (“Lehman”) pursuant to a Deed of Trust (“DOT”) and Promissory Note (“Note”). 

The Property is a two-story, four-unit structure. The two upper units are for residential use, and 

the lower two units are for commercial use. Plaintiffs live in one of the upper units and use one of 

the lower units for their business. Dkt. No. 65, FAC ¶¶ 6-11.

Around May 5, 2009, Lehman assigned the DOT, along with the Note, to defendant 

Bayview Loan Services, LLC (“BLS”). Id. ¶ 12.

Several years later, on January 14, 2013, BLS recorded an assignment of the DOT and 

Note to Bayview Fund Acquisitions (“BFA”). The assignment is dated August 3, 2012 with an 

effective date of July 31, 2012. Id. ¶ 14.

BFA assigned the DOT and Note to defendant West End Trust 2012-1 (“West End Trust”). 

The assignment is dated August 3, 2012 with an effective date of July 31, 2012, and was recorded 

on or about January 14, 2013. Id. ¶ 15.

On August 6, 2014, West End Trust recorded an assignment of the DOT and Note to 

defendant West End 3199 REO LLC (“West End 3199”). The assignment is dated July 23, 2014. 

Id. ¶ 16.

The FAC identifies BLS and defendant Midland Loan Services (“Midland”) as the loan 

servicers who received and processed plaintiffs’ loan payments. Id. ¶ 19. Other servicers or 

 

1

 Defendants Bayview Loan Servicing, LLC, Bayview Fund Acquisitions, LLC and Julie Butera 

(collectively, “Bayview defendants”) have separately moved to dismiss the FAC. Dkt. No. 74. 

The Court will issue a separate order on that motion. Plaintiffs have voluntarily dismissed the 

only other named defendant, First American Title Insurance Co. (“First American”). Dkt. No. 80. 

All parties who remain in the case have expressly consented that all proceedings in this matter 

may be heard and finally adjudicated by a magistrate judge. 28 U.S.C. § 636(c); Fed. R. Civ. P. 

73.

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employees who allegedly had access to the loan documents and relevant information are 

defendants LNR AFIS Asset Services, LLC (“LNR AFIS”), LNR Partners, LLC (“LNR 

Partners”), Julie Butera (BLS’s Senior Asset Manager), Ana G. Castro (LNR Partners’ Asset 

Manager) and Stacey Barnes (Midland’s Loan Servicing Analyst). Id. ¶ 20.

In June 2009, after assignment of the DOT and Note to BLS, plaintiffs obtained a loan 

modification. Ms. Butera allegedly told them that, pursuant to the loan modification terms, 

paragraph (c), the new interest rate on the loan would be 4% for two years, and after that, 

“[plaintiffs] will have a 1% increase (as maximum) for the remainder of the term.” Id. ¶¶ 24-25.

Plaintiffs allege that the executed loan modification agreement “became part of the Note” 

and contained the following provision regarding the new interest rate:

(c) New Interest Rate

Effective on 07/01/2009, Borrower’s rate of interest will be 4.00% 

and will adjust to the terms of the original note and the note will 

control the interest rate for the remainder of the term. The annual 

increase in the interest rate will be capped at 1% for the remainder of 

the term.

Id. ¶¶ 27, 29. Additionally, the loan modification agreement contained the following provision:

6. NO OTHER CHANGES

. . . . Nor shall this Agreement in any way impair, diminish, or affect 

any of the Borrower’s rights or remedies in the Security Instrument 

whether such rights or remedies arise herein or by operation of law. 

Any inserted terms, changes or additions to this Agreement will 

immediately render it null and void. Borrower is encouraged to 

review this Agreement with his/her legal advisor prior to signing

it, . . . .

Id. ¶ 31. Further, the loan modification agreement provided:

8. NO ORAL MODIFICATION

This Agreement may not be amended or modified in any way except 

by a written instrument executed by all the parties hereto.

Id. ¶ 32. 

Plaintiffs go on to allege that sometime between June 23, 2009 and October 27, 2014, 

defendants altered the loan documents without plaintiffs’ knowledge. Id. ¶¶ 33-34. However, 

plaintiffs say that the alleged alteration was not revealed until October 27, 2014, by which time 

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they had filed for a second Chapter 13 bankruptcy. Specifically, they say that in that bankruptcy 

proceeding, defendant Ana Castro (LNR Partner’s Asset Manager) submitted a declaration 

attesting to the new interest rate under the loan modification agreement as follows:

In June 2009 . . . A true and correct copy of the Modification 

Agreement is attached hereto as Exhibit “A.” Under the of the [sic] 

Modification Agreement (as described in section 1(c)), the variable 

interest rate on the loan was reduced to 4% for a two-year period 

(effective 7/1/09 – 7/1/11). Effective 7/1/11, the interest rate 

increase[d] to 5%; effective 7/1/12, the interest rate increased to 6%, 

and effective 7/1/13, the interest rate increased to 7% . . . (with the 

exception that the highest interest rate would not exceed 8.89%).

Id. ¶ 112. Plaintiffs allege that “[t]his entire paragraph has been inserted to the loan documents 

after we had executed them without our knowledge.” Id.

Meanwhile, in the period leading up to plaintiffs’ discovery of the alleged alteration, 

plaintiffs missed two mortgage payments, one in December 2010 and another in May 2011. Id. 

¶ 40. They filed for Chapter 13 bankruptcy in June 2011, and that matter was dismissed in March 

2013. Plaintiffs then filed a Chapter 7 bankruptcy petition, which was discharged on October 22, 

2013. Id. ¶ 41. They claim that no additional payments were missed during those bankruptcy 

proceedings. Id.

Beginning in July or August 2012, while their bankruptcy proceedings were still pending,

plaintiffs say that they stopped receiving monthly statements from BLS. After several months 

passed without receipt of any monthly statements, Mr. Cervantes says that he and his wife 

repeatedly asked for periodic statements so they could resolve issues regarding their missed 

payments. However, the FAC alleges that plaintiffs received little or no helpful information in 

response to their requests. Id. ¶¶ 42-46.

In March 2013, plaintiffs received a statement showing that the total past due amount on 

their loan, including interest, escrow payments and late fees, was $24,666.96. The statement also 

provided a website where plaintiffs could access information about their loan. Mr. Cervantes 

registered on the website, but was unable to access information about their mortgage. According 

to an email he received from defendant Barnes (defendant Midland’s Loan Service Analyst), 

plaintiffs’ mortgage information could not be accessed on the website because their loan was 

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“flagged as Special Serviced.” Id. ¶¶ 48-54.

Mr. Cervantes says that when he asked what they could do to bring their loan current, he 

was referred to Ms. Castro. Id. ¶ 55. Plaintiffs kept calling Ms. Castro for possible solutions to 

their situation, but were “not aware of the fraudulent alteration of the loan documents at this 

point.” Id. ¶ 56. Plaintiffs allege that although they had some communications with Ms. Castro, 

she failed to make a good faith effort to inform them of foreclosure prevention alternatives. Id. 

¶¶ 57-60.

In July 2013, plaintiffs received a letter advising that a notice of default was to be 

recorded. Id. ¶ 57. Plaintiffs say that they otherwise continued to make their regular payments as 

scheduled, and that “Defendant kept receiving the benefits of the forged note. Note that we did 

not execute, and we did not knew [sic] of the fraudulent alteration.” Id. ¶ 58.

Some eight months later, on March 6, 2014, plaintiffs received notice that their insurance 

was about to expire. Mr. Cervantes says he contacted Ms. Castro, who told him that she would 

contact the insurance company directly. Id. ¶¶ 59-60. At that time, Mr. Cervantes says that 

neither he nor his wife were aware that a notice of default had been recorded. Id. ¶ 60.

Several days later, on March 10, 2014, Mr. Cervantes spoke by phone with Ms. Castro, 

who told him that they (i.e., plaintiffs) were six months late on their payments. Mr. Cervantes 

insisted that they had only missed payments for two months. Id. ¶¶ 61-62.

The next day, March 11, 2014, Mr. Cervantes received a letter, dated February 12, 2014, 

regarding a Notice of Application of Partial Payment. Then, on March 13, 2014, he received mail 

advising that the Property was scheduled for a short sale pursuant to the Notice of Default. He 

called Ms. Castro “to find out what was going on,” but she did not answer her phone. Id. ¶¶ 63-

64. After doing a public records search, Mr. Cervantes learned that a notice of default had been 

recorded on March 6, 2014. Id. ¶ 65.

That same day, March 13, 2014, Mr. Cervantes sent an email to Ms. Castro, reiterating that 

plaintiffs wanted to resolve the issues with their past due payments and complaining about the lack 

of help they received from Ms. Castro and her organization. Id. ¶¶ 67-70. Ms. Castro sent a reply 

email, “just to reflect that she had sent a letter agreement in August of 2013.” Id. ¶ 71. Based on 

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the FedEx tracking number in Ms. Castro’s email, Mr. Cervantes says he discovered that her letter 

was sent to his old address in Gilroy. Id.

On March 25, 2014, Mr. Cervantes received a statement advising that, to bring their 

mortgage current, plaintiffs would have to pay $127,264.81. Plaintiffs claim that this amount is 

incorrect and is based on the alleged fraudulent alteration of their loan documents. Id. ¶ 72. 

According to plaintiffs, the amount they owe for the two missed payments is $17,528.97. Id. ¶ 78. 

They believe that the only explanation for the large discrepancy between the parties’ respective 

calculations of the past due amounts is the alleged fraudulently altered provision regarding the 

new interest rate in their 2009 loan modification agreement.

In the following months, plaintiffs say that they continued to try to work out a solution and 

expressed their intent to bring their account current, to no avail. On June 2, 2014, plaintiffs 

offered to make “a $25,000 one-time payment and $6,500 monthly payments until [they] get 

caught up in order to avoid the foreclosure.” Id. ¶ 84. In a June 6, 2014 letter, Ms. Castro told 

plaintiffs that for the past two and a half years, they had been making short payments. Plaintiffs 

insisted that they were never advised that their payments were short until the notice of default was 

recorded in March 2014. Plaintiffs claim that they were not given meaningful assistance and that 

Ms. Castro continued to send mail to their old address in Gilroy. Id. ¶¶ 79-105.

On July 8, 2014, Ms. Castro advised that the lender was proceeding with a non-judicial 

foreclosure. Id. ¶ 105. A notice of sale was recorded on July 30, 2014. Id. ¶ 107.

On September 29, 2014, plaintiffs filed another petition for Chapter 13 bankruptcy. Id.

¶ 108. As discussed above, it was during this proceeding that they say the alleged fraudulently 

altered terms of their loan documents came to light in a declaration Ms. Castro filed with the

bankruptcy court. However, plaintiffs claim they did not realize until later that the terms recited in 

Ms. Castro’s declaration were different than what plaintiffs contend are the actual loan 

modification terms. Id. ¶¶ 110-112.

The Property was sold at a February 3, 2015 foreclosure sale to Donton Construction, Inc. 

(“Donton”). Plaintiffs are now renting the Property from Donton. Id. ¶¶ 121-122.

Mr. Cervantes says that it was not until sometime in April or early May 2015, as he 

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reviewed his loan documents, that he realized the terms recited in Ms. Castro’s declaration were 

different than those that appeared in his records and that Ms. Castro had submitted false and 

altered loan documents to the bankruptcy court. Further, he says that various proofs of claim filed 

in the bankruptcy proceeding demonstrate that Ms. Castro’s declaration regarding the loan’s new

interest rate was false. Id. ¶¶ 115-119, 124-129.

Plaintiffs filed the present lawsuit on October 25, 2017, asserting three claims for relief: 

(1) “Homeowners Bill of Rights Violations”; (2) “Mortgage Servicing Rules Under the DoddFrank Act Violations”; and (3) “Fraud by Altering Loan Documents.” The Bayview defendants 

and the West End defendants moved to dismiss pursuant to Rule 12(b)(6) for failure to state a 

claim for relief. In response to those motions, plaintiffs filed their FAC, which as noted, assert the 

following four claims for relief: (1) fraudulent alteration of loan documents, (2) negligence, 

(3) breach of contract, and (4) wrongful foreclosure. All claims stem from the alleged fraudulent 

alteration of plaintiffs’ loan documents.

The Bayview defendants contend that the FAC still fails to state a claim for relief and must 

be dismissed pursuant to Rule 12(b)(6).2 For the reasons discussed below, the Court grants 

defendants’ motion to dismiss with leave to amend.

II. LEGAL STANDARD

A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) tests the legal 

sufficiency of the claims in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). 

Dismissal is appropriate where there is no cognizable legal theory or an absence of sufficient facts 

alleged to support a cognizable legal theory. Id. (citing Balistreri v. Pacifica Police Dep’t, 901 

F.2d 696, 699 (9th Cir. 1990)). In such a motion, all material allegations in the complaint must be 

taken as true and construed in the light most favorable to the claimant. Id.

However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere 

conclusory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Moreover, 

 

2 Defendants also originally moved to dismiss this action for lack of subject matter jurisdiction 

pursuant to Rule 12(b)(1), arguing that defendant First American destroyed the Court’s diversity 

jurisdiction. Defendants have since withdrawn that portion of their motion, in view of plaintiffs’ 

voluntary dismissal of First American.

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“the court is not required to accept legal conclusions cast in the form of factual allegations if those 

conclusions cannot reasonably be drawn from the facts alleged.” Clegg v. Cult Awareness 

Network, 18 F.3d 752, 754-55 (9th Cir. 1994).

Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the 

claim showing that the pleader is entitled to relief.” This means that the “[f]actual allegations 

must be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. 

Twombly, 550 U.S. 544, 555 (2007) (citations omitted). However, only plausible claims for relief 

will survive a motion to dismiss. Iqbal, 556 U.S. at 679. A claim is plausible if its factual content 

permits the court to draw a reasonable inference that the defendant is liable for the alleged 

misconduct. Id. A plaintiff does not have to provide detailed facts, but the pleading must include 

“more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. at 678.

Documents appended to or incorporated into the complaint or which properly are the 

subject of judicial notice may be considered along with the complaint when deciding a Rule 

12(b)(6) motion. See Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010); Hal 

Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990).

III. DISCUSSION

A. Requests for Judicial Notice

Both sides have submitted documents for which they request judicial notice. Noting the 

alleged alteration of their loan modification agreement, plaintiffs object to defendants’ documents 

on the grounds that they are incomplete and that their contents are disputed. Mr. Cervantes also 

filed a declaration appending several exhibits in support of plaintiffs’ opposition papers. In 

resolving the present motion, the Court cannot properly consider Mr. Cervantes’ declaration and 

exhibits, which are matters outside the pleadings. Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 

988, 998 (9th Cir. 2018). In any event, the Court finds it unnecessary to consider the documents 

submitted by the parties. Even accepting all of plaintiffs’ allegations as true, and viewing those 

allegations in a light most favorable to plaintiffs, the FAC does not allege sufficient facts to 

support a plausible claim for relief.

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B. Claim 1: Fraudulent Alteration of Loan Documents

Plaintiffs claim that the defendants fraudulently altered their loan modification agreement. 

Citing to the Uniform Commercial Code (“UCC”) § 3-407,3they claim that the alleged fraudulent 

alteration voided the Note and extinguished their obligations under the loan agreement. The 

parties agree that this claim is one for fraud.

To state a claim for fraud under California law, a plaintiff must allege: (1) a 

misrepresentation (false representation, concealment, or non-disclosure); (2) knowledge of falsity 

(or scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and 

(5) resulting damage. Lazar v. Super. Ct., 12 Cal.4th 631, 638 (1996). “In alleging fraud or 

mistake, a party must state with particularity the circumstances constituting fraud or mistake.” 

Fed. R. Civ. P. 9(b). However, “[m]alice, intent, knowledge, and other conditions of a person’s 

mind may be alleged generally.” Id. “A pleading is sufficient under [R]ule 9(b) if it identifies the 

circumstances constituting fraud so that a defendant can prepare an adequate answer from the 

allegations. While statements of the time, place and nature of the alleged fraudulent activities are 

sufficient, mere conclusory allegations of fraud are insufficient.” Moore v. Kayport Package 

Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989). “To comply with Rule 9(b), allegations of fraud 

must be specific enough to give defendants notice of the particular misconduct which is alleged to 

constitute the fraud charged so that they can defend against the charge and not just deny that they 

have done anything wrong.” Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001) 

(internal quotations and citation omitted).

The West End defendants contend that the FAC, which indicates that the alleged alteration 

occurred sometime in a five-year period by unidentified person(s), does not allege sufficiently 

specific facts to support a claim for fraud. Given the nature of plaintiffs’ fraud claim and their 

allegations as to their discovery of the purported fraud, it appears that not all facts concerning the 

 

3 Section 3-407(a) defines an “alteration” as “(i) an unauthorized change in an instrument that 

purports to modify in any respect the obligation of a party, or (ii) an unauthorized addition of 

words or numbers or other change to an incomplete instrument relating to the obligation of a 

party.” UCC § 3-407(a). Section 3-407(b) goes on to provide that “an alteration fraudulently 

made discharges a party whose obligation is affected by the alteration unless that party assents or 

is precluded from asserting the alteration.”

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circumstances of the alleged fraud are available to them at this stage of the litigation. 

Nevertheless, the FAC does not allege facts indicating what role, if any, the West End defendants

played in the purported fraudulent alteration of the loan modification agreement. And in their 

opposition papers, plaintiffs say that defendant BLS altered the modification agreement and that 

the Bayview defendants concealed the alteration from plaintiffs and from “good faith successors,” 

the West End defendants. Dkt. No. 83 at 5:4-5, 6:17-18.

Moreover, even accepting plaintiffs’ allegations as true and construing them in a light most 

favorable to plaintiffs, the West End defendants argue that the FAC’s allegations suggest that 

plaintiffs’ interest rate would have been higher under what plaintiffs claim are the “true” loan 

terms. As alleged in the FAC, plaintiffs say that effective July 1, 2009, their rate of interest was 

4.00% and “will adjust to the terms of the original note and the note will control the interest rate 

for the remainder of the term.” Dkt. No. 65 ¶ 29. According to defendants, the original Note 

provides for quarterly interest rate adjustments using the London Interbank Offered Rate 

(“LIBOR”), plus a margin of five percentage points. Dkt. No. 97 at ECF p. 7.

At oral argument, plaintiffs did not seem to dispute that the original Note calls for the use 

of LIBOR, plus a margin of five percentage points. However, for the first time at the motion 

hearing, plaintiffs proffered a different interpretation of their favored version of the loan 

modification agreement. Briefly stated, plaintiffs’ newly offered theory seems to be based on the 

premise that their modified interest rate would start at 4%, and then would increase on a quarterly 

basis according to whatever the LIBOR index was at that time, but there would be no added 

margin. Plaintiffs contend that if the interest on their mortgage payments properly were calculated 

in this way, they were approximately $26,000 behind on their mortgage, and not the hundreds of 

thousands of dollars claimed by the defendants.

Plaintiffs’ newly offered interpretation, which is not clearly reflected in the FAC’s 

allegations, is not properly before the Court on the present motion. Moreover, the Court harbors 

some doubt whether that theory is a viable basis for a plausible claim for relief. For example, at 

the hearing plaintiffs seemed to suggest that their loan modification payments would not change, 

even though they acknowledge that their loan was an adjustable rate mortgage and that the interest 

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rate on their monthly payments would continue to increase. Nevertheless, because the bases for 

plaintiffs’ newly offered theory are not clear, the Court cannot say with certainty that amendment 

would be futile. See Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) 

(noting that dismissal without leave to amend is appropriate only if it is clear that the complaint 

cannot be saved by amendment). Defendants’ motion to dismiss the fraud claim therefore is 

granted, with leave to amend to allow plaintiffs to plead their new theory as to how their monthly 

payments should have been calculated under the loan modification agreement. To the extent 

plaintiffs can allege additional facts about the circumstances of the alleged fraud, the Court grants 

them leave to amend to allege such facts. However, with respect to the West End defendants, 

leave to amend the fraud claim is granted only insofar as plaintiffs believe they can truthfully 

assert facts demonstrating those defendants’ role in or connection to the alleged fraud.

Insofar as plaintiffs’ remaining claims for relief all stem from the alleged fraudulent 

alteration of their loan modification agreement, those other claims also fail. However, for the 

reasons discussed below, there are additional reasons why those claims must be dismissed.

C. Claim 2: Negligence

“Negligence claims require the following elements: (1) a legal duty of care owed by the 

defendant to the plaintiff; (2) a breach of that duty; (3) causation; and (4) injury to the plaintiff 

resulting from the breach.” Geismar v. Ocwen Loan Servicing LLC, No. 17-cv-02703-JSC, 2018 

WL 276813, at *4 (N.D. Cal., Jan. 3, 2018) (citing Merrill v. Navegar, Inc., 26 Cal.4th 465, 500 

(2001)).

With respect to the Bayview defendants, plaintiffs allege that defendant BLS negligently 

“allowed the wrongful fabrication of a new unlawful negotiable instrument” and then attempted to 

conceal the alteration for the purpose of defrauding the plaintiffs. Dkt. No. 65 ¶ 162-164. As for 

the West End defendants, the FAC goes on to allege that defendants West End 3199 REO LLC, 

West End Trust 2012-1 and LNR Partners “executed the power of sale contained in the DOT 

without having any rights to do it and they knew it or should have known.” Id. ¶ 169. Although 

defendants LNR AFIS, Midland and Ms. Castro are also named in this claim, there are no facts 

alleged about what they did (if anything) that constitutes negligence. These allegations are 

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insufficient to state a plausible claim for relief against the West End defendants. Indeed, as noted 

above, plaintiffs’ opposition now seems to indicate that the alleged fraudulent alteration was also 

concealed from the West End defendants.

Moreover, defendants argue that they owe no duty of care to plaintiffs. “‘[A]s a general 

rule, a financial institution owes no duty of care to a borrower when the institution’s involvement 

in the loan transaction does not exceed the scope of its conventional role as a mere lender of 

money.’” Maomanivong v. Nat’l City Mortgage Co., No. C13-05433 DMR, 2015 WL 217347, at 

*7 (N.D. Cal., Jan. 15, 2015) (quoting Nymark v. Heart Fed. Sav. & Loan Assn., 231 Cal.App.3d 

1089, 1096 (1991)). “Liability to a borrower for negligence arises only under special 

circumstances, such as ‘when the lender actively participates in the financed enterprise beyond the 

domain of the usual money lender.’” Id. (quoting Nymark, 231 Cal.App.3d at 1096). Although 

“California Courts are split on whether a loan servicer owes a duty of care to handle loans in such 

a way to prevent foreclosure and forfeiture of property,” several federal district courts, including 

within this district agree that loan modification activities fall within the scope of a lending 

institution’s conventional role as a lender of money. Taylor v. Bosco Credit, LLC, No. 18-cv06310-JSC, 2018 WL 6511150, at *3 (N.D. Cal., Dec. 11, 2018) (citing cases). The parties have 

not addressed whether the alleged alteration of plaintiffs’ loan modification agreement constitutes 

a special circumstance giving rise to a duty of care. But, for the reasons discussed above, the FAC 

fails to allege sufficient facts demonstrating that the West End defendants had anything to do with 

the alleged alteration. Accordingly, defendants’ motion to dismiss this claim is granted. As with 

the fraud claim, leave to amend the negligence claim is granted with respect to the West End 

defendants to the extent plaintiffs believe they can truthfully assert facts demonstrating a plausible 

basis for liability.

D. Claim 3: Breach of Contract

To state a claim for breach of contract, plaintiffs must show (1) the existence of a contract 

with defendants, (2) plaintiffs’ performance or excuse for nonperformance, (3) defendants’ breach, 

and (4) resulting damages to plaintiffs. Oasis W. Realty, LLC v. Goldman, 51 Cal. 4th 811, 821 

(2011).

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Plaintiffs claim that by altering their loan modification agreement, defendants breached 

that agreement’s “No Other Changes” clause, which provides:

6. NO OTHER CHANGES

. . . . Nor shall this Agreement in any way impair, diminish, or affect 

any of the Borrower’s rights or remedies in the Security Instrument 

whether such rights or remedies arise herein or by operation of law. 

Any inserted terms, changes or additions to this Agreement will 

immediately render it null and void. Borrower is encouraged to 

review this Agreement with his/her legal advisor prior to signing

it, . . . .

Id. ¶ 31 (emphasis added). Relying on the highlighted text in this clause, plaintiffs further claim 

that the alleged alteration of the modification agreement voided the Note and excused them from 

performing their obligations under the loan. However, the highlighted text plainly states that an 

alteration to the loan modification agreement renders the modification agreement null and void, 

not the Note or plaintiffs’ payment obligations. Moreover, defendants LNR Partners, LNR AFIS, 

Midland, Ms. Castro and Ms. Barnes say that they are not a party or a successor to a party to any 

contract with plaintiffs. If true, then a claim for breach of contract cannot be stated as to those 

defendants.

Defendants’ motion to dismiss this claim is granted, with leave to amend.

E. Claim 4: Wrongful Foreclosure

“After a nonjudicial foreclosure sale has been completed, the traditional method by which 

the sale is challenged is a suit in equity to set aside the trustee’s sale.” Lona v. Citibank, N.A., 202 

Cal. App.4th 89, 103 (2011). In order to successfully state a claim for wrongful foreclosure, 

plaintiffs must plead that (1) the trustee or mortgagee caused an illegal, fraudulent, or willfully 

oppressive sale of real property pursuant to a power of sale in a mortgage or deed of trust;

(2) plaintiffs were prejudiced or harmed; and (3) they tendered the amount of the secured 

indebtedness or were excused from tendering. Id. “Because the action is in equity, a defaulted 

borrower who seeks to set aside a trustee’s sale is required to do equity before the court will 

exercise its equitable powers.” Id. at 112. “Consequently, as a condition precedent to an action by 

the borrower to set aside the trustee’s sale on the ground that the sale is voidable because of 

irregularities in the sale notice or procedure, the borrower must offer to pay the full amount of the 

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debt for which the property was security.” Id. “The rationale behind the rule is that if [the 

borrower] could not have redeemed the property had the sale procedures been proper, any 

irregularities in the sale did not result in damages to the [borrower].” Id. (citation omitted; 

alteration in original). There are, however, several exceptions to the tender rule:

First, if the borrower’s action attacks the validity of the underlying 

debt, a tender is not required since it would constitute an affirmation 

of the debt. . .. Second, a tender will not be required when the person 

who seeks to set aside the trustee’s sale has a counterclaim or setoff 

against the beneficiary. . .. Third, a tender may not be required where 

it would be inequitable to impose such a condition on the party 

challenging the sale. . .. Fourth, no tender will be required when the 

trustor is not required to rely on equity to attack the deed because the 

trustee’s deed is void on its face.

Id. at 112-13.

Defendants argue that this claim fails because plaintiffs failed to tender the outstanding 

debt. As discussed, however, the amount of plaintiffs’ indebtedness is a key contested issue, and 

it seems that the first exception to the tender rule may apply. Accordingly, the Court declines to 

dismiss this claim on that basis.

Defendants nevertheless contend that the wrongful foreclosure claim is based on a

misapplication of the Uniform Commercial Code. Here, they argue that the FAC alleges, in 

conclusory fashion, that the loan modification agreement is a negotiable instrument. Defendants 

maintain that the Note is a negotiable instrument, but that the loan modification agreement, which 

modified plaintiffs’ payment obligations under the Note, is not a negotiable instrument.

For present purposes, the Court concludes that it is unnecessary to determine whether the 

loan modification agreement is a negotiable instrument under California law. Suffice to say that 

plaintiffs base their wrongful foreclosure claim on the theory that, pursuant to provisions of 

Article 3 of the Uniform Commercial Code (“UCC”), the alleged alteration of the modification 

agreement discharged their loan obligations, and defendants therefore had no right to proceed with 

foreclosure on the property. Dkt. No. 65 ¶¶ 182-197. As discussed, the premise that the alleged 

alteration voided the Note and extinguished plaintiffs’ payment obligations is not supported by the 

FAC’s allegations. Moreover, “[a]lthough Article 3 of the UCC governs negotiable instruments, it 

does not apply to nonjudicial foreclosure under deeds of trust.” Padayachi v. IndyMac Bank, No. 

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C09-5545 JF (PVT), 2010 WL 4367221, at *3 (N.D. Cal., Oct. 28, 2010). See also Caovilla v. 

Wells Fargo Bank, N.A., No. 13-cv-1003 JSC, 2013 WL 2153855, at *4 (N.D. Cal., May 16, 

2013) (same).

Defendants’ motion to dismiss this claim is granted with leave to amend.

IV. CONCLUSION

Based on the foregoing, defendants’ motion to dismiss the FAC is granted, but plaintiffs 

are given leave to amend each of their claims to the extent they believe that they can truthfully 

assert timely, plausible claims for relief. If they choose to amend, plaintiffs’ amended pleading 

should be titled “Second Amended Complaint.” The Second Amended Complaint must be filed 

no later than January 31, 2019.

Plaintiffs are encouraged to contact the Federal Pro Se Program for assistance. The Pro Se 

Program is located on the Second Floor of the Federal Courthouse in San Jose. Help is provided 

by appointment and on a drop-in basis Monday to Thursday, 9:00 a.m. to 4:00 p.m. The Program 

will be open on December 31, 2018 and January 2, 2019, but will be closed December 24-28, 

2018, January 1, 2019, and January 3-4, 2019. Appointments may be made by signing up in 

person at the Program’s office (Room 2070) at the San Jose Federal Courthouse, or by calling 

408-297-1480. To the extent they have not already done so, plaintiffs are also highly encouraged 

to obtain a copy of the Court’s Handbook for Pro Se Litigants, available on the Court’s website 

(https://www.cand.uscourts.gov/prosehandbook) or from the Clerk’s Office.

IT IS SO ORDERED.

Dated: December 21, 2018

VIRGINIA K. DEMARCHI

United States Magistrate Judge

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