Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES NEWS—Cal. App.: Lenders did not violate UCL or commit fraud by representing a property’s value would increase, (May 27, 2014)

By Greg Hammond, J.D.

Various financial institutions that were involved with granting a borrower’s loan for the purchase of residential property, did not engage in fraud or violate California’s Unfair Competition Law (UCL) by representing that the property’s value would increase and would allow the borrower to make a considerable profit. In reaching its decision to affirm the trial court’s judgment, sustaining the financial institutions’ demurrer to the borrower’s complaint, the California district court of appeal in San Diego determined that the borrower failed to sufficiently allege fraud, violations of the UCL, or entitlement to declaratory relief (Graham v Bank of America, N.A., May 23, 2014, McConnell, J.).

Background. Marvin B. Graham took out a loan from First Franklin Financial Corporation (First Franklin) to purchase a home in 2004. However, roughly seven years later, he defaulted on the loan and a notice of sale was provided to him. In response, Graham filed a complaint alleging that his lender knew the appraisal for his property was speculative, but it nevertheless falsely represented that the property’s value would rise and would allow him to sell or refinance his home at a considerable profit before adjustable rate mortgage payments would be required. He also described how mortgage banking practices changed between 2001 and 2008, leading to the housing market collapse in 2007. Specifically, Graham’s second amended complaint (SAC) alleged: (1) negative fraud and deceit and affirmative fraud; (2) violations of section 17200 of California’s Unfair Competition law (UCL); (3) legal and equitable relief based on fraud and public policy; and (4) declaratory relief. The trial court granted the financial institutions’ demurer to Graham’s claims, and Graham appealed.

Fraud and deceit. On appeal, Graham argued that his SAC sufficiently alleged the necessary elements of negative fraud and deceit or affirmative fraud. However, the court determined that Graham’s fraud claims centered around the appraised value of his home, which is a representation of opinion, not fact. In addition, the court noted that a borrower should know that an appraisal is intended for the benefit of a lender to determine whether a loan should be made, not for the purpose of making sure a borrower has made a good bargain. Consequently, the court concluded that statements regarding the appraised value of Graham’s property were not actionable fraudulent misrepresentations.

California’s UCL. There are three types of unfair competition under California’s UCL—acts or practices that are unlawful, unfair, or fraudulent. According to the court, a violation of another law is required before stating a cause of action under the UCL’s “unlawful” prong. However, because Graham’s SAC and arguments on appeal failed to demonstrate that the financial institutions violated another law, it was determined that there was no basis for Graham’s UCL claim based on the “unlawful” prong of the UCL.

Graham also argued that his SAC supported a claim for “unfair” business practices under the UCL. The court noted that under the unfair business prong, Graham was required to show that the financial institutions’ conduct was tethered to an “underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law.” Because Graham failed to allege that any statements regarding the appraisal or opinions about the future value of his property established conduct tethered to a violation of constitutional, statutory, or regulatory provisions, he failed to demonstrate the financial institutions’ conduct constituted unfair business practices under the UCL.

The court also concluded that Graham did not state an adequate claim for fraudulent business practices under the UCL, as financial institutions do not owe borrowers a duty to disclose the “speculative” nature of an appraisal or to guarantee the success of a borrower’s investment. Even if the financial institutions violated one of the unfair competition prongs of the UCL, the court determined that Graham failed to allege a causal link between the alleged violations and an injury in fact. Consequently, Graham failed to demonstrate he had standing to sue under the UCL.

Declaratory relief. On appeal, Graham argued that he was entitled to a declaration of rights on: (1) whether the financial institutions have complied with their obligations under the National Mortgage Settlement and (2) whether the note and deed are not enforceable because the loan agreement was unconscionable. However, the court determined that Graham did not have standing to sue for declaratory relief, as he was an incidental beneficiary that could not enforce the National Mortgage Settlement. In addition, the court found that Graham failed to sufficiently allege the loan was procedurally or substantively unconscionable, as he could not demonstrate: (1) there was a lack of choice or negotiation, or surprise regarding the terms of the loan; (2) specific terms were substantively unconscionable, as he did not attach the loan agreement to the SAC; and (3) the loan agreement shocked the conscience or was so oppressive or favorable to the lending institutions that the loan should be considered unconscionable.

Because the trial court properly sustained the financial institutions’ demurrer to the SAC without leave to amend, and Graham could not demonstrate how he could amend his complaint, the appellate court determined that the trial court did not abuse its discretion in denying Graham leave to amend. Consequently, the trial court’s judgment was affirmed.

The case number is D063779.

Attorneys: Thomas W. Gillen (Law Offices of Thomas Gillen) for Marvin B. Graham. Stuart W. Price (Bryan Cave) for Bank of America.

Companies: Bank of America

Cases: StateUnfairTradePractices CaliforniaNews