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Lenders Behaving Badly – Borrower Makes a Credible Case for Intentional Infliction of Emotional Distress, Fraud and Violation of Foreclosure Statute Section 2924g(d) Against Downey Savings & Loan (U.S. Bank N.A.)

Real Estate Law by Peter N. Brewer, Esq.

The litigation tide turns in favor of the borrower due to the lender’s conduct. [Ragland v. U.S. Bank National Association et al, Filed September 13, 2012, No. G045580]

Facts of the Case

Pam Ragland was a borrower in Orange County and she had a loan with Downey Savings.  Ragland thought that Downey Savings had offered her a fixed rate loan (but instead she had an adjustable one) and claimed her mortgage broker forged her name on certain loan documents.  She applied for a loan modification. (She did admit that she signed the promissory note and deed of trust and related riders.)   What follows in the record is a horrific (and all too believable) tale of navigating Downey’s complicated loss mitigation department.  Apparently, Downey representatives informed her that collection activity was frozen, that she should miss a payment and there was a pending investigation on the forgery issue.  She attempted to pay on a number of occasions but Downey refused the payments.

Legal Maneuverings

The trial court granted Ragland’s application for a temporary restraining order (“TRO”): The ex parte application was heard on November 26, on which date the trial court issued an order stating:  “Plaintiff shall be entitled to a temporary restraining order enjoining the foreclosure sale on December 9, 2008; upon bringing the loan current by December 16.  Current is as of November 26, 2008.” A hearing on Ragland’s motion for a preliminary injunction was scheduled for December 16, 2008.

However, Ms. Ragland’s counsel wrote to the Downey to ask they tack the arrearages to the end of the loan and then she make regular payments. She did not bring the loan current and the trial court denied the preliminary injunction.

Downey foreclosed the next day and Ragland sued for negligent misrepresentation, fraud, violation of Section 2924g(d), intentional infliction of emotional distress and some other claims.  Downey brought a motion for summary judgment and won, but the appellate court reversed and gave a lengthy opinion preserving some of Plaintiff’s claims.

What Went Wrong For the Lender?

First of all, it is clear from the recitation of facts that the bank representatives consistently informed the borrower that the foreclosure was on hold or frozen on multiple occasions.  Further, there was evidence or it could be inferred from the evidence that:

1)       the borrower was NOT delinquent at the time of the first contact;

2)      she had the ability to make the past due payments;

3)      the lender representatives told her to miss a payment;

4)      the lender representatives knew about the forgery allegation;

5)      the lender rejected payments;

6)      the lender tacked on late fees and increased the reinstatement amount; and

7)      the lender failed to wait the 7 days after the expiration of the TRO as required by California law when they conducted the trustee’s sale 1 day later.

The appellate court was not thrilled with some of this conduct and noted: “In July 2008, Downey Savings told Ragland her loan should not have been placed in foreclosure and the foreclosure was “on hold.”  If Downey Savings wrongfully placed Ragland’s loan in foreclosure, as Ragland alleges, then it had no right to demand payment of additional fees and interest to reinstate the loan.  Downey Savings could not take advantage of its own wrong.  (Civ. Code, § 3517.)”

The court was also dismissive of many of the lender’s arguments, “Defendants ask, if Ragland could have made all of the past due monthly loan payments, why did she not offer to pay them?  The question is rhetorical:  If she had offered to pay the past due monthly loan payments, Downey Savings certainly would have rejected the offer, just as now Defendants vigorously argue a tender must be unconditional and offer payment of additional fees.”

What Happens Next?

The borrower has viable claims against the lender for negligent misrepresentation, violation of the foreclosure statute, and intentional infliction of emotional distress.  Discovery will like seek the bank’s internal records of communication with the borrower.  There will likely be skirmishes over any records held by the legal department and whether they are privileged or should be produced under the crime-fraud exception.

Author’s Comment:  Lenders should have clear communication protocols for their staff when communicating borrowers.  Imagine if the representative had told the borrower – “Ma’am, if you do not make your payments, the loan will be in default and you could lose your home in foreclosure” or “Ma’am, please fill out a loan modification package, but even if you submit that package, you need to make your mortgage payments or your loan will go into default.”  It would have been difficult then for the borrower to assert that the lender caused her defaults and caused her to lose the property in foreclosure.

Additionally, in a case where a Temporary Restraining Order has been granted, the bank’s counsel should have advised the lender to postpone the trustee’s sale date by another week to comply with California law.

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