The Real News

October, 2018
Unfair Competition Claims Against Settlement Service Providers Continuing

California has a robust set of laws designed to protect consumers from improper business practices of companies. Codified in Business & Professions Code Section 17200, the Unfair Competition Law (UCL) provides for injunctive and other relief for any business practice that is deemed "unfair," "unlawful" or "fraudulent." This section has been used against settlement industry companies on multiple occasions primarily for claims of overcharging of fees to consumers.

In once such recent case, a consumer filed a civil suit on behalf of a certified class against Fidelity National Title Company (Fidelity), stating that Fidelity had engaged in unlawful conduct by collecting third party delivery fees or fees for preparing deeds and other documents. Such fees were allegedly not listed on Fidelity's schedule of rates that was filed with the Department of Insurance (DOI). The plaintiffs' UCL claims were based on the contention that the charges were unlawful and in violation of the Insurance Code.

The plaintiffs claimed two theories regarding the delivery fees. The first theory, deemed the unfiled rate theory, contended that Fidelity's rate manual did not contain a rate for delivery fees and in charging the fees, Fidelity violated Insurance Code sections 12401.7 and 12414.27. The second theory, deemed the double charge theory, contended Fidelity was unlawfully double charging by collecting the fees for third party deliveries because those services were already paid for by the basic escrow fees covering "disbursements" and "making payoffs".

The plaintiffs also submitted a theory deemed the "Draw Deed Theory" regarding the accusations involving document preparation. They contend that in the settlement statement where the fee is listed for "draw[ing a] deed", the filed rate must also state "draw deed" and that the "document preparation" filed rate did not apply. The plaintiffs further asserted that Fidelity could not lawfully charge for preparing deeds during the period of time where there was no such filed "document preparation" rate for sale transactions ("the gap period").

Fidelity filed a demurrer stating Section 12414.26 of the Insurance Code provided them immunity from civil proceedings for activities covered by Article 5.5 of the Insurance Code. Fidelity contended they were subject to the jurisdiction of the DOI. The Trial Court denied Fidelity's demurrer. Fidelity contended that it only had to file rates for services that it performs, and not its third party vendors. Further, Fidelity also contended that it was permitted to charge for "document preparation" even during the "gap period" because of certain statements provided in its rate manuals.

The Trial Court disagreed with Fidelity and moved to a four-week bench trial. During the trial, the court was asked to interpret Fidelity's rate manuals and determine if they were compliant with the Insurance Code. The Trial Court determined that Fidelity had violated the Insurance Code. Technically, the plaintiffs won. However, the Trial Court determined the plaintiffs had received no "injury", and were denied restitution of any fees, including attorneys' fees. The Trial Court issued an injunction requiring Fidelity to maintain certain "as charged by vendor" language in its rate manuals for third party fees. Fidelity had already updated their manuals and included the new language. The Court agreed the new manuals satisfied the injunction.

The plaintiffs appealed the Trial Court's decision, seeking a restitution award as well as attorneys' fees. Fidelity argued with the appellate court that not only did they not violate any rules, but they were immune to the civil action, again claiming they were under the jurisdiction of the DOI. The Appellate Court agreed and ordered the Trial Court to reverse the award to the plaintiffs. Instead, the prevailing party is now Fidelity. As such, the fees charged were upheld but at great cost to Fidelity. All settlement service providers should take this case as a warning that they need to be accurate and clear with their fee structure and charging of fees to avoid such claims themselves.

Case of the Month

Amy Arlene Turner et al. v. Seterus, Inc.

In 2001, Amy Arlene Turner (Turner) acquired title to her property. She married Joseph Zeleny (Zeleny) in 2003. In 2006, she refinanced the loan on her property, but she remained as the sole person on the deed to the property. Even with Turner remaining the sole person listed on the deed, her and Zeleny both contributed financially to the monthly payments on the loan. Unfortunately for Turner, in 2009, she lost her job and started to fall behind on her payments. In October of 2011, Seterus became the loan servicer. Fast forward to February 9, 2012, Seterus recorded a notice of default and election to sell under deed of trust. In that notice, the amount necessary to cure the default was listed as $21,139.25. The notice also stated they could contact Seterus directly to cure the default, but they would have to pay all past due payments, any additional fees, and would have to do all that at least five business days before the date of the foreclosure. The foreclosure sale was set for October 23, 2012.

On or about October 13, 2012, Zeleny called Seterus with the intention to pay the amount to cure the default. He spoke with a lady name Stacey. She told Zeleny she couldn't help him because he wasn't listed on the loan. Turner came on the telephone and authorized Stacey that she could talk with Zeleny. Stacey told them the cure amount is $30,800.00. Zeleny attempted to pay that amount, but Stacey refused the payment, stating company policy deemed they had to be in a loan modification process in order to cure the default. Turner and Zeleny saw no other option and filed for bankruptcy in order to save their home. Ultimately, they were unsuccessful and Fannie Mae purchased the property on April 29, 2013 at the foreclosure sale.

On April 28, 2014 (almost one full year later), the plaintiff's sued Seterus (as well as Bank of America and Fannie Mae). Turner alleged 10 causes of action, eight of which were directed at Seterus: 1. Intentional misrepresentation, 2. Negligent misrepresentation, 3. Negligence, 4. Negligence per se, 5. Intentional infliction of emotional distress, 6. Breach of contract, 7. Wrongful foreclosure, and 8. Unlawful, unfair, and fraudulent business practices in violation of Business and Professions Code section 17200 et seq. Seterus demurred and in March 2015, the trial court sustained Seterus's demurrer. A demurrer is a pleading that the defendant can file with the court to object to what the plaintiff is accusing the defendant of doing. Since the trial court sustained Seterus's demurrer, that means that Seterus won on all counts issued against them without going to a full trial. Basically, the trial court determined there was no reason for a trial of Seterus and ended the litigation. Of course, Turner (and Zeleny) appealed.

Part of the demurrer argued that Zeleny had no standing and could not be part of the suit because he was not on the deed. The appellate court disagreed with that logic because they are married and community property rules applied. Also, since Zeleny had proved that he had provided financially to pay the mortgage, again, he had standing.

In another part of the demurrer, Seterus argued that there was no way Turner could have paid the cure amount because she filed for bankruptcy. During the bankruptcy, Turner reported to having only $23,245.00 in their bank account. The trial court agreed with that. However, the appellate court disagreed because they may have only had $23k on a specific date listed during the bankruptcy, but that doesn't mean they didn't have the $31k at the time they called to cure the default.

The trial court sustained Seterus's demurrer for negligence and negligence per se based upon Seterus's argument that they did not owe any duty beyond that of a conventional lender of money. Seterus argued that as 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 rule as a mere lender of money. The appellate court stated that whether a duty of care exists is a question of law to be determined on a case by case basis. The "duty" discussed above was whether or not Seterus had a duty to accept Zeleny's payment when he attempted to make it. Since they refused to accept the payment, the appellate court determined that they did have a duty and therefore that demurrer should not have been sustained.

In the end, the appellate court disagreed with the trial court's decision and the judgement was reversed. The case was remanded to the trial court with instructions to vacate its order sustaining Seterus's demurrer. The appellate court did order the trial court to enter a new order to sustain the demurrer for causes of action for intentional infliction of emotion distress and breach of contract. However, the trial court was also instructed to issue a new order to overrule the demurrer for the causes of action for intentional and negligent misrepresentation, negligence, wrongful foreclosure, and unlawful business practices.

Blockchain is Coming

Blockchain was originally termed block chain. It was invented by Satoshi Nakamoto in 2008 to act as a public ledger for the cryptocurrency named bitcoin. It was designed so that people could not "double dip", meaning that if I bought your bitcoin, the bitcoin company would have to have a way of tracking that I now owned the bitcoin, and not the person who sold it. Since Bitcoin is a completely fabricated digital item with no physical being, they had to be careful so that two people couldn't claim they owned the same bitcoin.

Most people use a "middle man" to conduct financial transactions. That middle man usually takes the form of a bank or similar entity, utilizing tools such as a checking account, savings account, etc. Blockchain is different because it cuts out the middle man and allows the two parties to deal directly with each other. Blockchain creates a public ledger for every person on the same network to see. Each person on the network must approve the transaction. Once the transaction is finalized it is entered into the public ledger. Think of the transaction like a piece of a jigsaw puzzle. Once everyone agrees what the next piece is, that piece is fabricated and fit into the puzzle. What makes this a highly secured transaction is that no one can pull that puzzle piece out and change it (modify the entry) because of all the other pieces of the puzzle that were placed after the original piece. All subsequent transactions would have to be modified. Since that is a laborious process, it would not be undertaken lightly and everyone on the network would have to approve each change.

Blockchain has been working great for Bitcoin. Now, it appears everyone wants to figure out how to make blockchain work for their industry. California is also jumping on board. California Governor Jerry Brown signed two new blockchain bills into law in September 2018. The first bill (AB 2658) requires the California State Secretary of the Government Operations Agency to appoint a working group to investigate and report on the potential uses, risks, and benefits of blockchain technology by state government and California based businesses. The second bill (SB 838) authorizes a non-public corporation or social purpose corporation to adopt provisions in its articles of incorporation to use blockchain technology in order to track shares, share transfers and shareholder information.

Many companies are investing a lot of resources to bringing blockchain to the everyday consumer market and many state governments are researching it as well. It is reasonable to believe, based upon the current trajectory, that blockchain becomes part of the average American's daily life.

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Jennifer Felten, Esq., Principal & Editor
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