Court Opinion

ID: 4663920
Source: CourtListenerOpinion
Date Created: 2021-03-02 00:00:37.709186+00
Date Added: 2024-06-11T08:02:32.325084
License: Public Domain

NOT FOR PUBLICATION                              FILED
                                                                             MAR 1 2021
                                                                   SUSAN M. SPRAUL, CLERK
                                                                        U.S. BKCY. APP. PANEL
                                                                        OF THE NINTH CIRCUIT

          UNITED STATES BANKRUPTCY APPELLATE PANEL
                    OF THE NINTH CIRCUIT

In re:                                              BAP No. CC-20-1092-LGF
CHARLES L. DUFF,                                    BAP No. CC-20-1095-LGF
             Debtor.                                (consolidated)

CHARLES L. DUFF; CATHRYN DUFF,        Bk. No. 9:18-bk-11889-DS
                Appellants,
v.                                    Adv. No. 9:19-ap-01059-DS
NEWREZ LLC, d/b/a Shellpoint Mortgage
Servicing; BANK OF NEW YORK
MELLON; COUNTRYWIDE FINANCIAL
CORPORATION; COUNTRYWIDE              MEMORANDUM *
HOME LOANS, INC.; COUNTRYWIDE
BANK N.A.; LANDSAFE, INC.;
LANDSAFE APPRAISAL, INC.; BANK
OF AMERICA CORPORATION; BANK
OF NEW YORK MELLON; BAYVIEW
LOAN SERVICING, LLC,
                Appellees.

      * This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
              Appeal from the United States Bankruptcy Court
                    for the Central District of California
              Deborah J. Saltzman, Bankruptcy Judge, Presiding

Before: LAFFERTY, GAN, and FARIS, Bankruptcy Judges.

                                INTRODUCTION

      Charles Duff appeals the bankruptcy court’s orders dismissing his

and his nondebtor spouse’s complaint against appellees pursuant to Civil

Rule 12(b)(6), applicable via Rule 7012, 1 without leave to amend.

      The complaint’s allegations that appellees’ conduct caused harm to

the Duffs were facially implausible and could not be cured by amendment.

We therefore AFFIRM.

                                      FACTS

      Mr. Duff filed a chapter 11 petition in November 2018. In October

2019, he and his wife, Cathryn Duff (collectively, “Plaintiffs”), filed an

adversary proceeding against Countrywide Financial Corporation,

Countrywide Home Loans, Countrywide Bank, N.A. (collectively

“Countrywide”), Bank of America Corporation (“BANA”), LandSafe, Inc.,

LandSafe Appraisal, Inc. (collectively, “LandSafe”), The Bank of New York

Mellon (“BONY”) 2, Bayview Loan Servicing, LLC (“Bayview”), and

      1  Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
       2 According to BONY, the real party in interest is “The Bank of New York Mellon
NewRez LLC dba Shellpoint Mortgage Servicing (“Shellpoint”)

(collectively, “Defendants”).

      The complaint contained eight causes of action for: (1) violations of

California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et

seq.); (2) violations of the Racketeer Influenced and Corrupt Organizations

Act (18 U.S.C. § 1962(c)); (3) violations of the Racketeer Influenced and

Corrupt Organizations Act (18 U.S.C. § 1962(d)); (4) unjust enrichment;

(5) fraud; (6) violations of the Fair Debt Collection Practices Act (15 U.S.C.

§§ 1692-1692p); (7) breach of the covenant of good faith and fair dealing;

and (8) promissory estoppel.

      These claims were based on the following relevant allegations: In

2006, Plaintiffs applied for a loan from Countrywide to refinance the

mortgage on their Santa Barbara, California, residence (the “Property”). In

connection with the loan application process, Landsafe conducted an

appraisal of the Property and concluded that it was worth $2,850,000.

Plaintiffs allege that unbeknownst to them, about three weeks later,

Countrywide/Landsafe fabricated a second “secret, phony appraisal” (the

“Second Appraisal”), which showed the value of the Property to be

$3,494,500. Plaintiffs alleged that this Second Appraisal was part of a

fraudulent scheme by Appellees to “systematically [corrupt] the appraisal

process” so that it “could continue to rapidly originate and close loans to

f.k.a. The Bank of New York as Trustee for the Certificate-holders of CWALT, Inc.,
Alternative Loan Trust 2006-HY3, Mortgage Pass-Through Certificates Series, 2006-
                                          3
fill up its ever expanding and highly profitable mortgage-backed securities

pipeline to Wall Street . . . .” Plaintiffs did not discover the Second

Appraisal until November 2018.

        Countrywide ultimately offered, and Plaintiffs accepted, a loan of

$1,850,000, to be repaid with interest-only payments for the first ten years,

and principal and interest payments thereafter. Plaintiffs alleged that the

loan was fraudulently induced and arranged by Countrywide and

Landsafe based on phony appraisals and other fraudulent schemes and

conduct and that Defendants 3 intended to induce Plaintiffs to accept the

loan regardless of whether they qualified. Beginning in the eleventh year of

the loan, Plaintiffs began having difficulty making their monthly payments,

which had increased from $10,406.25 to $15,046.25 after the payments

changed from interest only to principal plus interest.

        Although Plaintiffs initially remained current on the increased loan

payments, they contacted BANA, Countrywide’s successor, to see if it

would be willing to restructure or refinance the loan. BANA informed

Plaintiffs that it would consider restructuring the loan only if Plaintiffs

were behind in their monthly loan payments. Plaintiffs thereafter let their

payments go into arrears and applied several times for loan modification,

only to be denied each time. Eventually, Bayview initiated foreclosure

HY3.”
        Plaintiffs alleged that all defendants acted in concert “to accomplish the
        3

offenses complained of.”
                                            4
proceedings in its capacity as servicer for BONY, BANA’s successor-in-

interest. This led to Mr. Duff filing his bankruptcy case in November 2018.

      The complaint also alleged that applicable statutes of limitations did

not bar the requested relief because the allegedly phony appraisal scheme

was intentionally concealed by Defendants. Additionally, Plaintiffs alleged

that the limitations periods were tolled by the pendency of a 2013 federal

class action lawsuit, of which Plaintiffs were members, against

Countrywide, LandSafe, and others arising from the allegedly fraudulent

appraisal scheme. The complaint also contained a section on real estate

appraisal standards and the importance of accurate appraisals in the home

buying or refinancing process. Finally, the complaint detailed the

purported scheme by defendants Countrywide, LandSafe, and BANA to

falsify and inflate appraisals.

      Plaintiffs alleged that

      Defendants’ fraudulent scheme and unlawful conduct resulted
      in Plaintiffs being burdened with a relatively high interest rate
      mortgage Loan which they could ill afford and which they
      were not really properly qualified for, and which they would
      eventually not be able to afford when the monthly mortgage
      payment ballooned from $10,406.25 a month, to $15,046.19 a
      month – a 50% increase in their monthly mortgage Loan
      payment.

      Defendants BONY and Shellpoint moved to dismiss the complaint

under Civil Rule 12(b)(6) for failure to state a claim upon which relief can

be granted. They argued that: (1) Plaintiffs’ claims were barred by

                                      5
applicable statutes of limitations; (2) the complaint contained no allegations

against BONY or Shellpoint, neither of whom participated in the

origination of the subject loan; and (3) the claims failed as a matter of law.

Defendants BONY and Bayview separately moved to dismiss the

complaint, arguing that: (1) most of the claims were untimely; (2) none of

the claims were adequately pleaded; and (3) the allegations supporting the

fraud-based claims lacked particularity. Shortly thereafter, defendants

Countrywide, BANA, and Landsafe filed a joinder in the two motions to

dismiss. Plaintiffs opposed the motions, and Defendants replied.

      After hearing argument, the bankruptcy court announced its ruling

on the record on March 23, 2020. The bankruptcy court found that (1) all

eight causes of action were barred by the applicable statutes of limitations;

and (2) the allegations of the complaint did not plausibly allege a causal

link between the alleged phony appraisal and any injury to Plaintiffs. As a

result, Plaintiffs lacked constitutional standing. The bankruptcy court

found that any amendment would be futile. Accordingly, it granted both

motions to dismiss. Plaintiffs timely appealed.

                              JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(O). We have jurisdiction under 28 U.S.C. § 158.

                                    ISSUE

      Did the bankruptcy court err in dismissing Plaintiffs’ complaint

without leave to amend?

                                       6
                           STANDARD OF REVIEW

      We review de novo a dismissal under Civil Rule 12(b)(6). Barnes v.

Belice (In re Belice), 461 B.R. 564, 572 (9th Cir. BAP 2011) (citing AlohaCare v.

Hawaii, Dep’t of Human Servs., 572 F.3d 740, 744 n.2 (9th Cir. 2009)). “De

novo review requires that we consider a matter anew, as if no decision had

been made previously.” Francis v. Wallace (In re Francis), 505 B.R. 914, 917

(9th Cir. BAP 2014).

                                  DISCUSSION

A.    Standard for Dismissal under Civil Rule 12(b)(6)

      Because we are reviewing this matter de novo, we must apply the

same legal standard as the bankruptcy court. Dismissal under Civil Rule

12(b)(6) may be based on either a “lack of a cognizable legal theory” or “the

absence of sufficient facts alleged under a cognizable legal theory.” Johnson

v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (quoting

Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988)).

      We must construe the complaint in the light most favorable to the

plaintiff and must accept all well-pleaded factual allegations as true. In re

Belice, 461 B.R. at 573. “[T]he key is whether the allegations are well-pled; a

court is not bound by conclusory statements, statements of law, or

unwarranted inferences cast as factual allegations.” Id. (citing Bell Atl. Corp.

v. Twombly, 550 U.S. 544, 555–57 (2007)). “While a complaint attacked by a

Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a

plaintiff’s obligation to provide the ‘grounds’ of his ‘entitlement to relief’

                                         7
requires more than labels and conclusions, and a formulaic recitation of the

elements of a cause of action will not do.” Twombly, 550 U.S. at 555

(citations omitted).

             To survive a motion to dismiss, a complaint must contain
      sufficient factual matter, accepted as true, to state a claim to
      relief that is plausible on its face. A claim has facial plausibility
      when the plaintiff pleads factual content that allows the court
      to draw the reasonable inference that the defendant is liable for
      the misconduct alleged. . . . Threadbare 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) (citations and internal quotation

marks omitted).

B.    The bankruptcy court did not err in dismissing Plaintiffs’
      complaint.

      The bankruptcy court concluded that Plaintiffs’ complaint failed to

state a claim upon which relief could be granted because it failed to

plausibly allege facts supporting the reasonable inference that any

wrongful conduct of Defendants caused injury to them. Accordingly, it

concluded that Plaintiffs lacked constitutional standing. At the same time,

the court focused much of its analysis on whether the claims were barred

by the applicable statutes of limitations, and the parties do the same in

their briefing. But the statute of limitations defense is relevant only if the

complaint adequately pleaded a plausible claim. Further, the bankruptcy

court’s conclusion that Plaintiffs lacked constitutional standing (thus

                                        8
implicitly finding that the court lacked subject matter jurisdiction), while

perhaps correct, is not the appropriate analysis in the context of a motion to

dismiss under Civil Rule 12(b)(6). See Maya v. Centex Corp., 658 F.3d 1060,

1067 (9th Cir. 2011) (noting that Civil Rule 12(b)(1), not (b)(6), is the

appropriate legal basis for challenging Article III standing). But we may

affirm on any basis supported by the record, Caviata Attached Homes, LLC v.

U.S. Bank, Nat’l Ass’n (In re Caviata Attached Homes, LLC), 481 B.R. 34, 44

(9th Cir. BAP 2012), and, as discussed below, we agree with the bankruptcy

court that the complaint failed to state a claim upon which relief could be

granted.

      The gravamen of each cause of action pleaded in Plaintiffs’ complaint

is that the Second Appraisal resulted in Plaintiffs being fraudulently

induced to accept a loan with a high interest rate that they were not

qualified for and that they could not afford once the monthly payments

increased. Like the bankruptcy court, we find it unnecessary to parse

through the elements of each cause of action pleaded in Plaintiffs’

complaint because this premise is implausible on its face. As a result, all of

Plaintiffs’ claims fail as a matter of law.

      As noted, in evaluating a claim under Civil Rule 12(b)(6), we are

obliged to accept the allegations of the complaint as true. But we are not

obliged to accept conclusory statements or unwarranted inferences cast as

factual allegations. In re Belice, 461 B.R. at 573. Even accepting as true the

allegations that: (1) Countrywide and Landsafe engaged in a fraudulent

                                        9
appraisal scheme; (2) they fabricated the Second Appraisal to obtain

approval from Countrywide’s underwriters and for purposes of

securitizing the loan; and (3) Plaintiffs ultimately could not afford the

payments on the loan, which led to the commencement of foreclosure

proceedings, it does not automatically follow that Defendants’ alleged bad

acts were the cause of Plaintiffs’ injuries, despite Plaintiffs’ conclusory

allegation that the Second Appraisal resulted in their obtaining a loan they

could not afford. This is so even considering the allegation that Defendants

intentionally and fraudulently induced Plaintiffs to accept the loan. Based

on the authorities cited below, this allegation is implausible.

      As a matter of California law, a lender acting in its conventional role

as a lender of money owes no duty of care to a borrower in preparing an

appraisal of the borrower’s collateral. Nymark v. Heart Fed. Sav. & Loan

Ass’n, 231 Cal. App. 3d 1089, 1100 (1991). 4 This is because the purpose of

the appraisal is to protect the lender’s interest by satisfying it that the

collateral is adequate security for the loan. Id. at 1096. In fact, the borrower

is generally in as good a position as the lender to know the value and

condition of the property, particularly when the borrower has lived in the

property. Id. at 1099.

      Moreover,

      4 In Nymark, the court of appeal affirmed the trial court’s grant of summary
judgment dismissing a borrower’s negligence claim against a lender for statements in
an appraisal performed by the lender indicating the subject property was “A quality,”
when it later turned out that the property needed over $50,000 in repairs.
                                          10
      [I]t is not reasonably foreseeable that a borrower will be
      influenced to his or her detriment by an appraisal prepared by
      the lender for its own benefit because the borrower is in a
      position in which he or she knows or should know the value
      and condition of the property independent of the appraisal
      made for the lender's protection. 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 not for the purpose of ensuring
      that the borrower has made a good bargain . . . .

Id.

      In addition, a lender has no duty to determine whether a borrower

can afford to repay a loan. Perlas v. GMAC Mortg., LLC, 187 Cal. App. 4th

429, 436 (2010). In Perlas, the court of appeal affirmed the trial court’s

granting of a demurrer on a borrower’s fraudulent misrepresentation claim

against a lender based on lender’s conduct in qualifying borrowers for a

loan they could not afford. Like the appellants in Perlas, Plaintiffs here

“appear to conflate loan qualification and loan affordability. In effect,

[Plaintiffs] argue that they were entitled to rely upon [the lender’s]

determination that they qualified for the loans in order to decide if they

could afford the loans.” Id. The Perlas court rejected this argument:

“Appellants cite no authority for this proposition, and it ignores the nature

of the lender-borrower relationship. Absent special circumstances, a loan

transaction is at arm’s length and there is no fiduciary relationship between

the borrower and lender.” Id. (citations, alterations, and quotation marks

                                       11
omitted). See also Marino v. Countrywide Fin. Corp., 26 F. Supp. 3d 955, 963-

64 (C.D. Cal. 2014).

      Plaintiffs argue that they alleged a fraudulent scheme, injury, and

causation and that the bankruptcy court erred because it did not accept the

allegations of the complaint as true. That is not the case. The bankruptcy

court accepted the allegations as true, but it correctly refused to draw the

unwarranted inference that the alleged fraud caused the injury.

      Next, Plaintiffs argue that the bankruptcy court inappropriately

engaged in speculation that the initial appraisal indicated more than

enough equity to justify making the loan. They contend that the court’s

observation did not take into account that the first appraisal was also

inflated and that other factors are also considered before a loan is

approved, including credit score, payment history, income, and

outstanding debt. These arguments do not help Plaintiffs.

      To begin, there are no allegations in the complaint that the first

appraisal was fraudulent or that Plaintiffs relied on it in accepting the loan.

In their opening brief, Plaintiffs contend that they alleged that the first

appraisal was fraudulent, but their citations to the complaint do not

support that contention.5

      5 Plaintiffs refer to paragraphs 111 and 125 of the complaint. Paragraph 111
pertains to the unfair competition cause of action and alleges that the loan was
fraudulently induced based on phony “appraisals.” Paragraph 125 pertains to the RICO
claim (18 U.S.C. § 1962(c)) and alleges that Defendants used the U.S. mail to transmit the
“so-called appraisals” to Plaintiffs and other victims.
                                           12
      Further, Plaintiffs did not make this argument to the bankruptcy

court. Rather, in their opposition to the motions to dismiss, Plaintiffs

argued:

      completely hidden from Plaintiffs, the Countrywide
      Defendants made up a phony second “appraisal” of the
      Residence which put a value of $3,494,500 on the property . . . .
      The fraudulent appraisal on Plaintiffs’ Residence allowed the
      Countrywide Defendants to, among other things, make a
      jumbo loan to Plaintiffs for which Plaintiffs would not have
      otherwise qualified or taken.

      And their observation that lending decisions are based on additional

factors besides the appraised value actually cuts against their argument

that either appraisal was the basis for the terms of the loan they were

offered; rather, they acknowledge that the appraisal is only one factor

considered by a lender in deciding how much to lend and under what

terms.

      Finally, if the first appraisal was the cause of damage to Plaintiffs,

they knew about it at the time of the loan origination and were thus on

inquiry notice; accordingly, there is no question that the statutes of

limitations on all of their causes of action would have expired before the

complaint was filed. See Pincay v. Andrews, 238 F.3d 1106, 1109–10 (9th Cir.

2001) (“’The plaintiff is deemed to have had constructive knowledge if it

had enough information to warrant an investigation which, if reasonably

                                       13
diligent, would have led to discovery of the fraud.’” (quoting Beneficial

Standard Life Ins. Co. v. Madariaga, 851 F.2d 271, 275 (9th Cir. 1988))).

      Plaintiffs also attempt in their brief to add a new allegation, i.e., that

BANA acted wrongfully in denying a loan modification. But the complaint

alleges no such thing. Rather, the complaint alleges that BANA told

Plaintiffs it would “consider” a loan modification if their payments were

delinquent, not that it would guarantee such a modification.

C.    The bankruptcy court did not err in dismissing the complaint
      without leave to amend.

      On appeal, Plaintiffs do not explicitly argue that the bankruptcy court

should have given them an opportunity to amend their complaint or that it

erred in finding amendment would be futile. In fact, they never asked the

bankruptcy court for leave to amend, nor did they propose any new

allegations that would cure the plausibility issue identified by the

bankruptcy court. Plaintiffs have thus waived the issue. Smith v. Marsh, 194

F.3d 1045, 1052 (9th Cir. 1999). In any event, we see no error in the

bankruptcy court’s conclusion that the deficiencies of the complaint could

not be cured by any amendment.

                                CONCLUSION

      Plaintiffs failed to establish that they had plausible claims for relief

based on the facts alleged. Accordingly, the bankruptcy court did not err in

dismissing their complaint without leave to amend. We therefore AFFIRM.

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