UTA - Rossberg and Lueras - TSC 11-19-13

Rossberg & Lueras: Do Pre-Foreclosure Loan Modification Negotiations Negate the
Lender’s Right to Foreclose?
By Tami S. Crosby, Esq., Kate Heidbrink, Esq., and Matt Cox; Miles, Bauer, Bergstrom &
Winters, LLP
Two recent cases from the Fourth Appellate Division of the California Court of Appeals have
confirmed that lenders have no duty under California law to modify mortgage loans: Rossberg
v. Bank of America and Lueras v. BAC Home Loan Servicing. This portion of the decisions
in these two cases certainly lends itself to the belief that these decisions are favorable to the
banking industry however there is another aspect of the Lueras case that is significantly less
favorable. The Lueras court also imposed new duties upon lenders not to misrepresent
information about the sale date or status of loan modification applications. While these cases
were decided in reliance upon pre-Homeowner Bill of Rights (HOBR) law, the holdings in these
two cases fit with the anti-dual-tracking and single point of contact requirements of HOBR.
Rossberg v. Bank of America
In Rossberg v. Bank of America, N.A. (Sept. 26, 2013) 2013 WL 5366377, the borrowers
took out two loans with Bank of America in August 2007, for the purchase of their home. Id. at
3. Shortly after the Rossbergs obtained their loans, Bank of America transferred the Note and
Deed of Trust for the first lien to a Pooling and Servicing Agreement, for which U.S. Bank was
the trustee. Id. The Rossbergs soon fell behind on their loan payments, and in early 2009, began
discussions with Bank of America to modify their loans. Id. at 4.
On September 22, 2009, Bank of America executed a Substitution of Trustee, designating
Cal-Western Reconveyance Corporation (Cal-Western) as the new Trustee under the Deed of
Trust. Id. at 5. Bank of America did not have a notary acknowledge the Substitution of Trustee
until November 11, 2009, and did not record the document until November 18, 2009. Id. Three
days after Bank of America executed the Substitution of Trustee, and nearly two months before
Bank of America recorded that document, Cal-Western executed a Notice of Default. Id. Cal-
Western then recorded the Notice of Default on September 28, 2009, three days after executing
it. Id. In January 2011, Cal-Western, as Bank of America’s attorney-in-fact, executed and
recorded an Assignment of Deed of Trust that transferred all beneficial interest in the Deed of
Trust and Note to U.S. Bank, National Association, as Trustee for the Certificate holders of Banc
of America Funding Corporation. Id. at 6.
The Rossbergs filed suit in April 2011 seeking to block the foreclosure sale. Id. They
alleged that on numerous occasions, Bank of America employees verbally told them that they
had been granted a loan modification, but that these modifications were never implemented. Id.
After the trial court sustained a demurrer to the original complaint with leave to amend, the
Rossbergs filed a first amended complaint, naming Bank of America, U.S. Bank, and Cal-
Western as defendants and alleging the following causes of action: (1) violation of Civil Code
section 2923.5; (2) violation of section 2924 et seq.; (3) fraud; (4) violation of Business and
Professions Code section 17200; (5) breach of contract; (6) declaratory relief; and (7) quiet title.
Id. Bank of America and U.S. Bank demurred to the first amended complaint and the court

sustained their demurrers without leave to amend, entering a judgment of dismissal. The
Rossbergs then timely filed their appeal of that judgment.
Lueras v. BAC Home Loan Servicing
In March 2007, borrower Lueras refinanced his home loan, securing the Note with a
Deed of Trust for $385,000 in favor of Bank of America. Lueras v. BAC Home Loan Servicing,
LP (Oct. 31, 2013) 2013 WL 5848859. Lueras later suffered financial hardship and failed to
make his regular monthly payments on his loan beginning in December 2008. Id.
In the middle of 2009, more than eight months after Lueras stopped making his regular
monthly payments on the loan, he requested a loan modification from Bank of America,
successor by merger to BAC Home Loan Services. Id. In a letter dated August 17, 2009, Bank
of America notified Lueras that he qualified for the Fannie Mae HomeSaver Forbearance™
program, and thus was eligible for reduced mortgage payments for a period of up to six months
(the Forbearance Agreement). Id. at 4. The Forbearance Agreement reduced the monthly
payments on Lueras’s Loan for six months, commencing on September 16, 2009. Id. Lueras
tendered each of the reduced monthly payments under the Forbearance Agreement. Id at 5.
Lueras continued to make the reduced payments for four more months, ending in July 2010. Id.
at 5. Following his final reduced payment in July 2010, Lueras failed to make any more
payments on the Loan. Id.
The Forbearance Agreement stated that during the deferral period, the loan servicer
would review the loan to determine any other available default resolution options. Id. At the
end of the deferral period the Forbearance Agreement confirmed that one of the following would
occur: the loan would be reinstated under the original terms; the servicer would modify the loan;
or if no feasible alternative could be identified, then the foreclosure proceedings would
commence, with no new notice required to begin the process. Id. at 5. In agreeing to the terms
of the Forbearance Agreement, Lueras acknowledged that he understood and agreed that the
servicer was not obligated or bound to make any modification of the loan documents or provide
any other alternative resolution of the default. Id.
In October 2010, Lueras was mailed a Notice of Default by ReconTrust, as the Trustee.
Id. at 6. Then, in February 2011, more than six months after failing to make reduced monthly
payments, and more than twenty-five months after failing to make regular monthly payments,
Lueras received a Notice of Trustee’s Sale, with a scheduled sale date of February 22, 2011. Id.
Bank of America rescheduled the sale a total of four times, ultimately setting the sale for May
18, 2011. Id.
Lueras filed suit against Bank of America, ReconTrust and Fannie Mae, alleging that
Bank of America eventually determined he was eligible for a HAMP loan modification and that
they had made an oral offer to modify his loan. Id. at 7. In his first amended complaint, Lueras
contradicts this assertion in stating that, in a letter dated May 5, 2011, Bank of America informed
Lueras he was not eligible for a HAMP loan modification. Id. Within the same first amended
complaint, Lueras notes that he immediately contacted Bank of America upon receipt of that
letter and was advised that the May 5, 2011 letter was sent to him in error. Id. Lueras was then
told that he had been placed in an approved program in which the interest rate on his loan would

be reduced for four years, but that Bank of America needed to first obtain Fannie Mae’s
approval. Id.
On May 6, 2011, Bank of America sent Lueras another letter stating his financial
documents were being reviewed to determine if he qualified for a HAMP modification. Id.
Lueras again immediately contacted Bank of America and was informed that the May 6 letter
was also sent in error as his application had already been approved by Bank of America. Id.
Lueras was told the trustee’s sale, which had been rescheduled for May 18, 2011, would be reset,
pending approval by Fannie Mae. Id.
Following the contact on May 6, Lueras never received a further response from Bank of
America advising whether he was or was not he was eligible for a loan modification program.
Id. He likewise never received notice from Fannie Mae that it had denied him a loan
modification. Id. at 8. On May 18, 2011, Lueras was informed by the California Attorney
General’s Office that the foreclosure sale would be conducted on that date. Minutes later,
Lueras’s home was sold at the foreclosure sale. Id.
Despite the sale on May 18, 2011, the defendants claimed that Lueras did not suffer harm
as a result of the sale and thus his claims were not viable as the sale was rescinded and any
equity Lueras might have in the property remains. Id. at 10. Lueras retained ownership and
possession of the property at all relevant times up to and including the date the first amended
complaint was filed with the court. Id. at 4.
A key issue in the Lueras case that seemed to have had a significant impact on the
majority’s holding, was the court’s refusal to take judicial notice of the fact that the May 18,
2011 Trustee’s sale of Lueras’s home had been rescinded. The Court of Appeal stated that in
reviewing the lower court’s judgment, they were limited to the well-pleaded facts of the
complaint and matters subject to judicial notice. Id. at 10. The Court held that, nothing in the
record permitted them to consider the foreclosure sale to have been rescinded, as the first
amended complaint did not allege rescission of the foreclosure sale, nor did any party request
that the Appellate Court take judicial notice of anything establishing such a rescission. Id.
The dissent strongly disagreed with this approach and stated that the court should have
considered matters which may have been judicially noticed. The dissent felt the Appellate Court
should have taken notice of trial court’s final minute order ruling on the demurrers which
expressly relied upon the fact that the plaintiff admitted in the Opposition that the foreclosure
sale was rescinded. Dissent at 7. The dissent felt that the consequences of the majority’s refusal
to find the rescission judicially noticed was akin to allowing a wrongful death action to proceed
when the alleged victim did not die. Dissent at 1.
Accusing a Servicer of Violating § 2923.5 Does Not Preclude Foreclosure
In both Rossberg and Lueras, the borrowers alleged violations of the former, pre-
Homeowner Bill of Rights (HOBR) [Cal. Civ. Code § 2923.5, i.e. SB 1137], prior to its
revisions. In Rossberg, the borrowers acknowledged that the Declaration accompanied the
Notice of Default but alleged that the Declaration was false. Rossberg at 13. The Appellate
Court disagreed, noting that the borrowers had incorrectly calculated the contact requirement

timeframe, and that, by their own admission, the borrowers had multiple telephone conversations
with their servicer in July 2009, more than 30 days before the Notice of Default recorded. Id. at
13-14. Thus, the Appellate Court held that the trial court properly sustained the demurrer as to
the Rossbergs’ claim for violation of § 2923.5, dismissing same without leave to amend, as the
Rossbergs failed to “clearly and specifically” set forth the specific authority or factual allegations
that would have established their claim. Id. at 27.
Lueras’ Cal. Civ. Code 2923.5 violation claim asserted that Bank of America never
initiated exploration of foreclosure alternatives with him until after the Notice of Default was
recorded. Lueras at 31. The Appellate Court noted that the only remedy afforded by § 2923.5 is
a one-time postponement of the foreclosure sale before it happens. Id at 31. The Appellate
Court held that since Lueras was not seeking postponement of the foreclosure sale by way of his
lawsuit but rather, admitted that the sale had already been conducted, he could not state, as a
matter of law, a claim for violation of Civ. Code § 2923.5. Id.
Fraud & Unfair Competition Law Violations: Difficult for Borrowers to Prove
Fraud claims typically focus on communications between lenders and borrowers wherein
the lenders have indicated to the borrowers that they were promised a loan modification or, at the
very least, an opportunity to modify their loan, but that the promise was never acted upon. In
addition, these claims suggest that there was never any intent on the part of the lender to actually
modify the loan.
In Rossberg, the cause of action for fraud was based on the Rossbergs’ allegation that
while Bank of America employees made promises to them that they had been granted a loan
modification, neither Bank of America nor U.S. Bank ever intended to actually modify their
loan. Rossberg at 19. The Rossbergs claimed that their servicer’s failure to modify their loan as
verbally promised caused them needless disclosure of confidential information. Id. They also
claimed that they were damaged, because, without the promise of a loan modification, they
would have refinanced their loan or sold their home “early on.” Id. at 21. The Appellate Court
rejected each of these fraud claims. Id. at 21-22.
Similar to the Rossbergs, Lueras alleged that he was led to believe a long-term solution to
keep him in his home was in progress, and that his home would not be sold in May 2011. Lueras
at 32. In reliance upon these purported statements, Lueras claimed that he continued to make the
payments on the loan while also providing the necessary financial information the servicer
requested in order to complete his loan modification package. Id. The court in Lueras held that
these allegations did not allege the detrimental reliance necessary to support a claim of fraud and
misrepresentation for the following reasons: (1) continuing to make payments on the loan does
not constitute detrimental reliance, as the borrower already has the obligation to make those
payments; and (2) the time and effort spent assembling materials for an application to modify a
loan constitutes de minimis damages. However, distinguishable from the Rossberg holding, the
Lueras Court opined that there was a reasonable possibility that the defects in the fraud count
could be cured by amendment because the foreclosure sale went forward despite the express
representations made by Bank of America in the May 5 and 6 letters which stated that no
foreclosure sale would occur. Id. at 34.

Another common type of claim based upon fraud that borrowers have brought against
foreclosing lenders is the violation of California’s Unfair Competition Law (Bus. & Prof. Code §
17200, “UCL”). These claims can reasonably be summarized as simple accusations that the
lenders have treated the borrowers unfairly in the loan origination and loan modification
processes. Despite the seemingly broad reach of this type of claim, the Rossberg and Lueras
cases suggest that these borrowers had difficulty asserting a concrete violation of the UCL.
In Rossberg, the Appellate Court dismissed the UCL claim entirely, holding that the
borrowers failed to cite to any authority showing what is required to allege a fraud claim under
the UCL and that they made no attempt to explain how the allegations adequately stated the UCL
claim. Rossberg at 23-24. In Lueras, the trial court held that the borrower lacked standing to
bring a UCL claim because he suffered no monetary damages. Despite this holding by the trial
court, the Appellate Court opined that the allegation that Lueras’ home was sold by way of
foreclosure is sufficient to satisfy the economic injury prong of the UCL standing requirement.
Id. at 37. The Appellate Court based its reasoning on the fact that the home was sold despite
Bank of America’s representations that the sale was on hold while he was being considered for
foreclosure alternatives. Id. at 38. The distinguishing factor that seemed to contribute to the
Appellate Court’s granting leave to amend seemed to focus on these supposed
misrepresentations, as well as the confusion concerning the sale date. Given the holding in
Lueras, this suggests that servicers and lenders should be careful not to promise that no
foreclosure will take place during loan modification negotiations.
Breach of Contract: Loan Modification Agreements Must Be in Writing. California
Law Does Not Support a Right to a Permanent Loan Modification; However, Investor
Program Announcements Can Be ReadInto Loan Modification Negotiations.
In Rossberg, the borrowers claimed that, based upon the representations made by Bank of
America, they had entered into a “partially written, partially verbal, and verbal agreement” to
modify their loans. Rossberg at 24. The Appellate Court rejected this cause of action, finding
that the Rossbergs failed to allege that, as required by the Statute of Frauds, they actually entered
into a signed, written agreement with Bank of America to modify their loans. Id. at 25.
Relying upon their decision in Secrest v. Security Nat’l Mortgage Loan Trust 2002-2
(2008) 167 Cal.App.4th 544, 552, the Appellate Court held that since the Rossbergs alleged that
the loan modification agreement modified the terms of their Note and Deed of Trust, the Statute
of Frauds requires that the loan modification agreement be in writing. Id. The Rossbergs
countered that their loan modification was not subject to the Statute of Frauds as it was an
agreement to arrange a refinancing loan, not an agreement to transfer an interest in real property.
Id. The Appellate Court responded to this argument by pointing out that it directly contradicts
the controlling precedent set forth in Secrest (Id.), and reiterated that because the Rossbergs
failed to “clearly and specifically” set forth the specific authority or factual allegations that
would have established their claim, the trial court was correcting in dismissing same. Id. at 14.
Lueras’ breach of contract cause of action was based primarily on his reliance upon a
section of the Forbearance Agreement which stated that “[d]uring the Deferral Period, Servicer
will review my Loan to determine whether additional default resolution assistance can be offered
to me.” Lueras at 25. The Appellate Court found that this section expressly required Bank of

America to “review” Lueras’s loan to determine “whether additional default resolution assistance
can be offered,” but that it did not expressly require Bank of America to offer Lueras a loan
modification or an alternative to foreclosure. Id.
Despite this reasoning, the Appellate Court continued its analysis by stating that
Announcement 09-05R, issued to provide clarification on the HomeSaver Forbearance Program,
must be read into the HomeSaver Forbearance agreements. Id. at 26. Announcement 09-05R
states that “During the six month period of forbearance, the servicer should work with the
borrower to identify the feasibility of, and implement, a more permanent foreclosure prevention
alternative. The servicer should evaluate and identify a permanent solution during the first three
months of the forbearance program and should implement the alternative by the end of the sixth
month.” Id. at 25. In analyzing the Forbearance Agreement in conjunction with Announcement
09-05R, the Appellate Court focused on the meaning of the word should, as found within the
Announcement and, after examining dictionary definitions, the California Rules of Court, and
case precedent, concluded that while the word should in Announcement 09-05R is not
mandatory, at the very least it imposes a moral obligation or strong recommendation, and can
mean duty or necessity. Id. at 29. The Appellate Court held that the moral obligation created by
the word should equated to operating in good faith and that while Announcement 09-05R gives a
loan servicer discretion to work with a borrower to identify the feasibility of a foreclosure
prevention alternative, and to evaluate and implement a permanent solution, that discretionary
power must be exercised in good faith. Id. at 30.
Lueras’s First Amended Complaint alleged Bank of America “never offered another
resolution of any default such as a modification, pre-foreclosure sale or deed in lieu of
foreclosure.” Id. at 30. As a result, the Appellate Court held that although the Forbearance
Agreement did not impose on Bank of America the obligation to offer Lueras a loan
modification or an alternative to foreclosure, Lueras should be given leave to amend to state a
claim for breach of contract in light of the interpretation of the Forbearance Agreement. Id.
Prior to Lueras, California courts only required a permanent loan modification upon the
borrower’s completion of a HAMP trial modifications (TPPs). In the Lueras opinion, the Court
seems to suggest that non-HAMP related investor announcements may be incorporated into the
four corners of the loan documentation and can be used by borrowers in breach of contract
actions.
Additional Claims
Both Lueras and Rossberg contain additional, distinct holdings that are mostly helpful to
Trustees and to our clients. As an example, in Rossberg, the borrowers claimed a violation of
Cal. Civ. Code § 2924 et seq., stating that the defendants failed to properly record a Notice of
Default because Cal-Western recorded the Notice before it was designated as Trustee under the
Deed of Trust by way of the recordation of the Substitution of Trustee on November 18, 2009.
Id. at 5 and 6. Noting that Bank of America signed the Substitution on September 22, 2009, but
that it was not notarized until six days prior to its recordation on November 18, 2009, the
Appellate Court looked to Section 2934a, which states, “[a] trustee shall be deemed to be
authorized to act as the trustee under the . . . deed of trust for all purposes from the date the
substitution is executed . . . .” and held that a substituted Trustee is authorized to act as Trustee
from the date the substitution is executed, not recorded, as the Rossbergs contended. Id. at 15.

Accordingly, Cal-Western was authorized to act as trustee on September 22, 2009, and validly
recorded the Notice of Default six days later. Id.
Next, the Rossbergs argued that the Substitution of Trustee must be a forgery because a
notary did not acknowledge the signature on that document until nearly two months after Bank
of America signed it. Id. The court held that nothing requires a notary to acknowledge a
document at the same time it is executed, and even a lengthy delay between the execution of the
document and its acknowledgement, does not invalidate the document. Id.
The Rossbergs also claimed that Cal-Western lacked authority to record the Notice of
Default because Bank of America was not the beneficiary under the Deed of Trust when it
executed the Substitution of Trustee designating Cal-Western as Trustee. Id. at 16. According to
the Rossbergs, Bank of America transferred the Note and Deed of Trust to U.S. Bank in April
2007 when it entered into the Pooling and Servicing Agreement. Thus, only U.S. Bank could
have validity executed the Substitution in September 2009. Id. However, Civ. Code § Section
2924 allows a Notice of Default to be recorded by the “trustee, mortgagee, or beneficiary, or any
of their authorized agents.” Id. Because the Notice of Default stated that Cal-Western “is either
the original trustee, the duly appointed substitute trustee, or acting as agent for the trustee or
beneficiary under the Deed of Trust,” the Appellate Court held that the Rossbergs failed to allege
sufficient facts to establish that U.S. Bank, as Beneficiary under the Deed of Trust, did not
authorize Cal-Western to record the Notice of Default as its agent. Id. at 17.
Finally, the Rossbergs asserted that § 2932.5 rendered the Notice of Default invalid
because Cal-Western recorded the Notice of Default before U.S. Bank recorded its beneficial
interest in the Deed of Trust. Id. According to the Rossbergs, § 2932.5 required U.S. Bank to
record its beneficial interest in the Deed of Trust before anyone could initiate nonjudicial
foreclosure proceedings on its behalf. Id. However, the court quoted Calvo v. HSBC Bank USA,
N.A. (2011) 199 Cal.App.4th 118, 122, stating that “[i]t has been established since 1908 that this
statutory requirement that an assignment of the beneficial interest in a debt secured by real
property must be recorded in order for the assignee to exercise the power of sale applies only to a
mortgage and not to a deed of trust.” Rossberg at 18. In addition, a California Appellate Court
recently held that § 2932.5 is inapplicable to trust deeds. See Haynes v. EMC Mortgage Corp.,
(2012) 205 Cal.App.4th 329, 335-336. Accordingly, nothing in the section rendered the Notice
of Default invalid, as section 2932.5 did not require U.S. Bank to record its Assignment before
Cal-Western recorded the Notice of Default.
As for the entire cause of action asserting violations of Civil Code Section 2924 et seq.,
the court held that the Rossbergs misconstrued the requirements for conducting a nonjudicial
foreclosure and failed to allege any defect in the process that prevented Cal-Western from validly
recording the Notice of Default. Rossberg at 14. And, as with each of the other causes of action
asserted by the Rossbergs, the Court of Appeal confirmed the lower court’s judgment of
dismissal, finding that the Rossbergs failed to “clearly and specifically” set forth the specific
authority or factual allegations that would have established the claim. Id. at 14.
Lueras alleged a cause of action for negligence, asserting that both Bank of America and
ReconTrust, as Foreclosure Trustee, breached a duty of care in the handling of his loan

modification application and the foreclosure. Bank of America and ReconTrust argued that
Lueras failed to allege, and cannot allege, the existence of a duty of care. Lueras at 11.
The Appellate Court concluded that a loan modification is the re-negotiation of loan
terms and that this practice falls squarely within the scope of a lending institution’s conventional
role as a lender of money. Id. at 18. Accordingly, neither Bank of America nor ReconTrust had
a common law duty of care to offer, consider or approve a loan modification, or to offer Lueras
alternatives to foreclosure. Id. at 19. Likewise, neither Bank of America nor ReconTrust had a
duty of care to handle Lueras’s loan in such a way to prevent foreclosure and forfeiture of his
property. Id. The Appellate Court held that such duties are imposed by the loan documents and
the Forbearance Agreement, statutes, or regulations, and that if lenders failed to “follow through”
on those agreements, then remedies lie in breach of contract, not negligence. Id.
However, while the Appellate Court held that a residential lender does not owe a general
duty of care to borrowers during loan modifications negotiations, it was still able to find a basis
for granting leave to amend the complaint, concluding that a lender does owe a duty to a
borrower to not make material misrepresentations about the status of a loan modification
application or about the date, time, or status of a foreclosure sale. Id. at 20. The Court held that
based upon the record, they found it reasonably possible that Lueras could amend his first
amended complaint to state a cause of action for negligent misrepresentation. Id.
While the Lueras court followed precedent in holding that lenders owe no general duty of
care to borrowers during the loan modification process it must also be noted that they established
a new duty not to make material misrepresentations concerning facts and details surrounding
either a loan modification application or pending foreclosure. This changes the rules for lenders
and servicers conducting business in California.
Tami S. Crosby is a Partner at Miles, Bauer, Bergstrom & Winters, LLP. Her
practice areas are Civil Litigation and Foreclosure. She has been a member of
the California State Bar since 1987. She is also admitted to the bar for the U.S.
District Court of California, Central and Eastern Districts, and is a member of
the Orange County Trial Lawyers Association. She can be reached at
tcrosby@mileslegal.com.
Kate Heidbrink is the Foreclosure Manager at Miles, Bauer, Bergstrom &
Winters, LLP. She is licensed to practice law in California, Massachusetts, and
New York. She can be reached at kheidbrink@mileslegal.com.
Matt Cox is a Compliance Assistant at Miles, Bauer, Bergstrom & Winters,
LLP, where he facilitates compliance with non-judicial foreclosure laws for the
states of California, Arizona, and Nevada. He attends Chapman University
School of Law, and can be contacted at mcox@mileslegal.com.

UTA - Rossberg and Lueras - TSC 11-19-13

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