Tostado v. Rehabbers Financial

















Filed 4/3/13 Tostado v. Rehabbers Financial CA2/1













>NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

>



California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115>.



IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA



SECOND
APPELLATE DISTRICT



DIVISION
ONE




>

TERESA TOSTADO et al., Plaintiffs and Appellants, v. REHABBERS FINANCIAL, INC., Defendant and Respondent.

B240628 (Los Angeles County Super. Ct. No. GC047462)

APPEAL from
a judgment of the Superior Court
of href="http://www.adrservices.org/neutrals/frederick-mandabach.php">Los Angeles
County, C. Edward Simpson, Judge. Affirmed in part and reversed in part.

The
Business Legal Group and Russell M. Frandsen for Plaintiffs and Appellants Teresa
Tostado and Roberto Tostado.

Bruce B.
Paller for Defendant and Respondent Rehabbers Financial, Inc.

——————————

>

Plaintiffs
Teresa Tostado and Robert Tostado obtained a loan from Rehabbers Financial,
Inc., dba Aztec Financial (Aztec) to construct a home on a vacant lot for
Teresa Tostado’s mother. Plaintiffs
claim that Aztec failed to disclose to them several material terms of the loan
and filed this action asserting claims for violations of the Truth in Lending
Act (15 U.S.C. § 1601 et seq.) (TILA) and other California
statutory and common law provisions. The
trial court sustained Aztec’s demurrer on statute of limitations and
substantive grounds. We reverse on
plaintiffs’ claims for violations of the Rosenthal Fair Debt Collection
Practices Act (Civ. Code, § 1788 et seq.) (Rosenthal Act) and Unfair
Competition Law (Bus. & Prof. Code, § 17200 et seq.) (UCL), breach of
the implied covenant of good faith and
fair dealing, and declaratory relief, and affirm on the remaining claims.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

>1. Plaintiffs’
First Amended Complaint

Plaintiffs’
operative first amended complaint (complaint), filed December 20, 2011, alleged
that plaintiffs owned an unencumbered vacant lot in South Pasadena. In September 2006, plaintiffs and Aztec
entered into a loan agreement for $475,000 secured by a deed of trust for the
purpose of permitting plaintiffs to build a house on the lot for Teresa
Tostado’s mother to live in.href="#_ftn1"
name="_ftnref1" title="">[1]

Plaintiffs
contended that Aztec deceived them about the nature of the loan in several
respects. When plaintiffs entered into
the loan with Aztec, they claim Aztec told them that they would pay only
interest on loan amounts that were drawn down for construction. In addition, plaintiffs repeatedly told Aztec
that the loan was to construct their residence, but in reality, the loan was a
commercial loan: Aztec falsely and
fraudulently included in the loan papers a document stating that the property
was non-owner occupied investment property and told plaintiffs not to worry
about the document because it was “‘just a document the lender needs.’” By so doing, Aztec intended to have plaintiff
fraudulently waive their rights under TILA, which does not apply to commercial
loans. Further, Aztec falsely told
plaintiffs that it was charging them the lowest rate, telling plaintiffs that
all construction loans were higher-interest rate loans.

On September 9, 2010, when Aztec filed a
notice of default and election to sell, plaintiffs discovered that their loan
was not subject to TILA.href="#_ftn2"
name="_ftnref2" title="">[2] In the fall of 2009, Aztec began calling
plaintiffs about payments due under the loan and stated that $620,000 was
owed. Plaintiffs allege Aztec
fraudulently added charges to the note and in October 2011, claimed that
$800,000 was now due. Aztec repeatedly
called plaintiffs and threatened to foreclose.
Plaintiffs believed Aztec had made a mathematical error in calculating
the interest owed, and tried to contact Aztec to get an explanation for the
charges, but never received any explanation.

Plaintiffs
alleged that Aztec’s misrepresentations were discovered within the year before
the filing of their complaint.

Plaintiffs
first amended complaint alleged 11 claims for relief: violation of TILA; violations of the UCL;
violations of the Fair Debt Collection Practices Act (15 U.S.C. § 1692 et
seq.) (FDCPA); violations of the Rosenthal Act; negligence; breach of fiduciary
duty (Civ. Code, § 2923.1); fraud; breach of the covenant of good faith
and fair dealing; negligent infliction of emotional distress; intentional
infliction of emotional distress; and declaratory relief.

Plaintiffs
sought an injunction, damages, disgorgement, attorneys’ fees and costs,
punitive damages, and a declaration of the true amounts plaintiffs owed to
Aztec.

2. Aztec’s Demurrer

Aztec
demurred to all causes of action on the basis they were barred by the
applicable statutes of limitations and they did not state a claim for
relief. Aztec argued that the loan
originated in September 2006, but plaintiffs attempted to rely on the discovery
rule by alleging Aztec’s wrongdoings had only been discovered within the year
preceding the filing of the original complaint on June 1, 2011.
However, plaintiffs did not show that they were unable to uncover
Aztec’s wrongdoing earlier despite exercising due diligence. Further, Aztec argued plaintiffs lacked
standing due to the October 12, 2010
filing of their chapter 7 bankruptcy proceedings, and their claims were barred
by judicial estoppel because they failed to list the lawsuit as an asset in
their bankruptcy schedules. On the
merits of plaintiffs’ claims, Aztec argued (1) plaintiffs’ claim under
TILA was barred because TILA did not apply to commercial loans; (2) plaintiffs’
claim for negligence failed because a lender does not owe a borrower a duty of
care; (3) plaintiffs’ claim for breach of fiduciary duty failed because a
lender does not owe a borrower a duty of care; (4) plaintiffs’ claim for
negligent infliction of emotional distress failed because Aztec had no duty to
plaintiffs; (5) plaintiffs’ claim for intentional infliction of emotional
distress failed because Aztec’s conduct was not extreme or outrageous;
(6) plaintiffs’ claim for declaratory relief failed because it was
duplicative of their other claims and plaintiffs had not tendered payment
required on the defaulted loan.

3. Plaintiffs’ Opposition

Plaintiffs
argued in opposition that they were willing to pay amounts owed to Aztec, but
that their action sought a determination of the amounts they were obligated to
pay; their loan was to build a single-family residence and thus subject to
TILA; Aztec misrepresented the interest rate, claiming it was the best rate
available when in fact it was not; plaintiffs did not discover Aztec had failed
to comply with TILA until the notice of default was recorded on September 9,
2010; statutes of limitations did not apply to actions for offset or recoupment
under TILA; Aztec relied on facts not set forth in the complaint as a basis for
demurrer; and plaintiffs amended their schedules to list the lawsuit, and the
claim reverted to them upon the granting of their discharge in bankruptcy.href="#_ftn3" name="_ftnref3" title="">[3] Plaintiffs asserted that Aztec’s torts were
continuing, and commenced with the initial violations of TILA, fraud in the inducement
in entering into the loan, continuing efforts to collect illegal interest
rates, the sending of “dunning notices,” sending of false loan statements,
accruals of illegally imposed penalties, and the recordation of a notice of
default and sale.

4. Plaintiffs’ Surreply

Plaintiffs filed a surreply to
Aztec’s reply to their opposition to its demurrer in which it reasserted that
Aztec’s torts were continuing, plaintiffs did not discover Aztec’s wrongdoing
with the exercise of reasonable diligence, the loan was for a residence, not a
business, and Aztec falsely claimed they could not exercise their right of
setoff and recoupment.href="#_ftn4"
name="_ftnref4" title="">[4]

5. Hearing on Demurrer; Plaintiffs’
Posthearing Brief; Ruling

The
transcript of the hearing held March 6,
2012 on the demurrer is not part of the record. However, plaintiffs filed a posthearing brief
to address what they believed was Aztec’s misstatement of the law at the
hearing regarding damages under TILA.
Plaintiffs asserted that because double damages were available under
title 15 United States Code section 1640(a)(2)(A)(i), plaintiffs were entitled
to offset those damages against amounts Aztec claimed were owed. Further, such a claim for setoff would not be
barred by the statute of limitations under title 15 United States Code section
1640(e). The trial court sustained the
demurrer without leave to amend “for the reasons set forth in the moving
papers.” On April 2, 2012, Aztec filed a notice of ruling. Plaintiffs appeal the order sustaining the
demurrer.href="#_ftn5" name="_ftnref5" title="">[5]

>DISCUSSION

I. Standard of Review

“[T]he
function of a demurrer is to test the sufficiency of a pleading as a matter of
law,” and “we apply the de novo standard of review in an appeal following the
sustaining of a demurrer without leave to amend.” (California
Logistics, Inc. v. State of California (2008) 161 Cal.App.4th 242,
247; Holiday Matinee, Inc. v. Rambus, Inc.
(2004) 118 Cal.App.4th 1413, 1420.) A
complaint “is sufficient if it alleges ultimate rather than evidentiary facts,”
but the plaintiff must set forth the essential facts of his or her case
“‘“‘with reasonable precision and with particularity sufficient to acquaint
[the] defendant with the nature, source, and extent’”’” of the plaintiff’s
claim. Legal conclusions are
insufficient. (Doe v. City of Los Angeles (2007) 42 Cal.4th 531, 550
& 551, fn. 5.) “We assume the truth
of the allegations in the complaint, but do not assume the truth of
contentions, deductions, or conclusions of law.” The trial court errs in sustaining a demurrer
“if the plaintiff has stated a cause of action under any possible legal theory,
and it is an abuse of discretion for the court to sustain a demurrer without
leave to amend if the plaintiff has shown there is a reasonable possibility a
defect can be cured by amendment.” (>California Logistics, Inc., at p. 247.)

“Where a
complaint shows on its face that the action is barred by the statute of
limitations, a general demurrer for failure to state a cause of action will
lie. [Citations.]” (Kendrick
v. City of Eureka (2000) 82 Cal.App.4th 364, 367–368.) The running of the statute must appear
“clearly and affirmatively” from the dates alleged; it is not enough that the
complaint may be time-barred. (>Marshall v. Gibson, Dunn & Crutcher
(1995) 37 Cal.App.4th 1397, 1403.) To
survive a demurrer on statute of limitations grounds where the facts pleaded
disclose the action is time-barred, the plaintiff must plead facts showing that
the statute does not apply based on the discovery rule. (CAMSI
IV v. Hunter Technology Corp. (1991) 230 Cal.App.3d 1525, 1536.) In particular, the plaintiff must plead “the
time and manner of discovery” and “the inability to have made earlier discovery
despite reasonable diligence.” (>Id. at p. 1536.)

Generally,
a limitations period begins to run “‘upon the occurrence of the last fact
essential to the cause of action.’” (>DeRose v. Carswell (1987) 196 Cal.App.3d
1011, 1017.) However, where a tort
involves a continuing wrong, the statute of limitations does not begin to run
until the date of the last injury or when the tortious acts cease. (Aryeh
v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1192.)

II. Plaintiffs’ Claims

The
statutes of limitations applicable to plaintiffs’ claims range from one to four
years. We conclude that certain of plaintiffs’
claims are time-barred, certain others fail to state a cause of action under
the substantive law, and the trial court erred in reversing plaintiffs’ claims
for violation of the Rosenthal Act and UCL, and breach of the implied covenant
of good faith and fair dealing and declaratory relief.

A. TILA

Plaintiffs’
first cause of action alleged that Aztec breached TILA by failing to provide
required disclosures in writing, failed to deliver required timely notices,
failed to disclose all finance charge details, failed to disclose the annual
percentage rate, failed to provide a good faith estimate or a consumer handbook
on adjustable rate mortgages before the loan application. (15 U.S.C. §§ 1602(u), 1638(a), (b); 12
C.F.R. §§ 226.5(a)(1), 226.19(a)(1), (b)(1), 226.22(a)(4) (2012).) Plaintiffs sought expungement of the notice
of default and other negative credit reports.

Claims under TILA for damages
are subject to a one-year statute of limitations (15 U.S.C.
§ 1640(e).) There is disagreement
whether the period of limitations commences on the date the credit contract is
executed (Wachtel v. West (6th Cir.
1973) 476 F.2d 1062, 1065), or at the time the plaintiff discovered, or should
have discovered, the acts constituting the violation (NLRB v. Don Burgess Construction Corp. (9th Cir. 1979) 596 F.2d
378, 382). “[T]he doctrine of equitable
tolling, may, in the appropriate circumstances, suspend the limitations period
until the borrower discovers or had reasonable opportunity to discover the
fraud or nondisclosures that form the basis of the TILA action.” (King
v. State of Cal. (9th Cir. 1986) 784 F.2d 910, 915.) King
emphasized that in determining whether or not a limitations period should be
tolled, a court should assess “whether tolling the statute [would] effectuate
the congressional purpose of the Truth-in-Lending Act.” (Ibid.) “‘[T]he doctrine of equitable tolling may, in
the appropriate circumstances, suspend the limitations period until the
borrower discovers or had reasonable opportunity to discover the fraud or
nondisclosures that form the basis of the TILA claim.’ [Citation.]
Equitable tolling is ‘appropriate where the plaintiff is actively misled
by the defendant about the cause of action or is prevented in some
extraordinary way from asserting his [or her] rights.’ [Citation.]”
(Deaville v. Capital One Bank
(W.D.La. 2006) 425 F.Supp.2d 744, 752; see also Baker v. Beech Aircraft Corp. (1974) 39 Cal.App.3d 315, 323.)

TILA
“specifically exempts from its scope extensions of credit for business or
commercial purposes.” (>Poe v. First Nat. Bank of DeKalb Cty. (5th
Cir. 1979) 597 F.2d 895, 896.) TILA
applies to transactions in which “the party to whom credit is offered or
extended is a natural person, and the money, property, or services which are the
subject of the transaction are primarily for personal, family, or household
purposes.” (15 U.S.C.
§ 1602(h).) In evaluating whether a
certain loan was made for commercial purposes, the emphasis is on the purpose
of the transaction and not the categorization of the properties used to secure
the loan. “Whether an investment loan is
for a personal or a business purpose requires a case by case analysis.” (Thorns
v. Sundance Properties (9th Cir. 1984) 726 F.2d 1417, 1419.)

Here, even
assuming TILA applied to plaintiffs’ loan (although Aztec allegedly
fraudulently made the loan as a commercial loan), plaintiffs’ claims are
time-barred. Plaintiffs should have
discovered, by reading their loan documents and reviewing Aztec’s disclosures,
Aztec’s violation of TILA prior to the foreclosure in September 2010. Thus, they cannot rely on the discovery
doctrine to delay the running of the statute, which commenced with the
origination of the loan in September 2006.

Further,
they cannot rely on a recoupment claim under TILA to avoid the bar of the
statute of limitations. Generally, “a
defendant’s right to plead ‘recoupment,’ a ‘“defense arising out of some
feature of the transaction upon which the plaintiff’s action is grounded,”’
[citation] survives the expiration” of the limitations period. (Beach
v. Ocwen Fed. Bank) (1998) 523 U.S. 410, 415 [118 S.Ct. 1408, 140 L.Ed.2d
566].) To avoid dismissal at this stage,
plaintiffs must show that “(1) the TILA violation and the debt are products of
the same transaction, (2) the debtor asserts the claim as a defense, and (3)
the main action is timely.” (>Moor v. Travelers Ins. Co. (5th Cir.
1986) 784 F.2d 632, 634.) TILA (15
U.S.C. § 1640(e)) makes recoupment available only as a defense in “an action to
collect [a] debt.”

Here,
plaintiffs cannot use a recoupment claim to escape the bar of the statute. Although plaintiffs’ TILA claim satisfies the
first prong of the test as it is related to the mortgage debt, the action here
fails the second prong because plaintiffs attempt to use a recoupment claim
affirmatively, and not as a defense, and thus exceed the scope of TILA.

B. UCL

Plaintiffs’
second cause of action alleged that Aztec violated the UCL by inserting into
the loan documents the provision that the loan was for a nonowner occupied
investment property, and Aztec made untrue or misleading statements and
falsified the loan documents. Plaintiffs
alleged that Aztec violated TILA, FDCPA, the Rosenthal Act, and the Mortgage
Brokers and Bankers Fiduciary Duty Law, which predicates satisfy the UCL.

“[U]nfair
competition shall mean and include any unlawful, unfair or fraudulent business
act or practice and unfair, deceptive, untrue or misleading
advertising . . . .”
(Bus. & Prof. Code, § 17200.)
“The UCL defines unfair competition as ‘any unlawful, unfair or
fraudulent business act or practice.’
[Citation.] Therefore, under the
statute ‘there are three varieties of unfair competition: practices which are unlawful, unfair or
fraudulent.’” (In re Tobacco II Cases (2009) 46 Cal.4th 298, 311.) For unfair business practices actions under
the unlawful prong, “‘an action based on Business and Professions Code
[section] 17200 to redress an unlawful business practice “borrows” violations
of other laws and treats these violations, when committed pursuant to business
activity, as unlawful practices independently actionable under section 17200 et
seq. and subject to the distinct remedies provided thereunder.’” (Farmers
Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 383.) The focus of the UCL is “on the defendant’s
conduct, rather than the plaintiff’s damages, in service of the statute’s
larger purpose of protecting the general public against unscrupulous business
practices.” (In re Tobacco Cases II, at p. 312.) The remedies available under the UCL are
limited to injunctive, restitutionary and related relief (Bus. & Prof.
Code, § 17203; State of California
v. Altus Finance (2005) 36 Cal.4th 1284, 1303.) However, restitutionary or injunctive relief
is not mandatory; rather, equitable considerations may guide the court’s
discretion in fashioning a remedy for a UCL violation. (Cortez
v. Purolator Air Filtration Products Co. (2000) 23 Cal.4th 163, 180.) The statute of limitations on UCL claims is
four years from the date of accrual.
(Bus. & Prof. Code, § 17208.)

Here, as
discussed below, plaintiffs have stated a claim for violation of the Rosenthal
Act upon which they can base their UCL claim.
As a result, the trial court erred in sustaining the demurrer to this
cause of action.

C. FDCPA

Plaintiffs’
fourth cause of actionhref="#_ftn6"
name="_ftnref6" title="">[6] alleged that Aztec
violated the FDCPA by using unfair and unconscionable means to collect its
debt, including sending deceptive letters and making phone calls to plaintiffs,
making false reports to credit agencies, and increasing the amount of the
mortgage.

The term “debt collector” is
defined in title 15 United States Code section 1692a(6) as follows: “The term ‘debt collector’ means any person
who uses any instrumentality of interstate commerce or the mails in any
business the principal purpose of which is the collection of any debts, or who
regularly collects or attempts to collect, directly or indirectly, debts owed
or due or asserted to be owed or due another.”
The courts which have looked at the definition of “debt collector” have
uniformly held that the FCDPA does not apply to a bank acting to collect a debt
owed to itself. (See >Thomasson v. Bank One, Louisiana, N.A.
(E.D.La. 2001) 137 F.Supp.2d 721, 724 [in collecting on its own debts, a bank
does not meet the criteria of a ‘debt collector’ pursuant to the FDCPA “because
as a bank it primarily loans money to consumers rather than collects
outstanding debts”].) Here, plaintiffs’
complaint alleges that Aztec was attempting to collect a debt on its own
behalf; under the FDCPA, Aztec is not a debt collector. Therefore, the claim fails as a matter of
law.

>D. Rosenthal
Act

Plaintiffs’
fifth cause of action alleged that Aztec violated the Rosenthal Act by using
unfair and unconscionable means to collect its debt, including sending
deceptive letters and making phone calls to plaintiffs, making false reports to
credit agencies, and increasing the amount of the mortgage.

The
Rosenthal Act “was enacted ‘to prohibit debt collectors from engaging in unfair
or deceptive acts or practices in the collection of consumer debts, and to
require debtors to act fairly in entering into and honoring such debts. [Citation.] . . . A debt
collector violates the act when it engages in harassment, threats, the use of
profane language, false simulation of the judicial process, or when it cloaks
its true nature as a licensed collection agency in an effort to collect a
consumer debt.” (Sipe v. Countrywide Bank (E.D.Cal. 2010) 690 F.Supp.2d 1141,
1151.) The Rosenthal Act defines a debt
collector as “any person who, in the ordinary course of business, regularly, on
behalf of himself or herself or others, engages in debt collection.” (Civ. Code, § 1788.2, subd. (c).) The statute of limitations on a Rosenthal Act
claim is one year. (Civ. Code,
§ 1788.30, subd. (f).)

Here,
plaintiffs alleged that Aztec was a “debt collector” within the meaning of the
Rosenthal Act and that Aztec commenced harassing them about their debt in or
about fall 2009, and that the calls continued.
Although not specifically pleaded, we can assume for the sake of
demurrer that Aztec’s calls continued at least until the commencement of
foreclosure in September 2010; under the continuing tort doctrine, the statute
did not run until this time, which is less than a year before the filing of
plaintiffs’ initial complaint in June 2011.
Thus, the trial court erred in sustaining a demurrer to this claim. We note that the trial court in ruling on the
demurrer only reached the statute of limitations issue with respect to this
claim, and did not address the merits.

>E. Negligence

Plaintiffs’ sixth cause of
action for negligence alleged that Aztec had a duty to perform acts as a lender
in a manner not to cause plaintiffs harm, and breached those duties by failing
to make required disclosures, taking fees to which it was not entitled,
wrongfully making negative reports about plaintiffs’ credit, and taking
payments to which it was not entitled.

A financial
institution owes no duty of care to a borrower when the transaction does not
exceed the scope of the mere lending of money.
(Nymark v. Heart Fed. Savings
& Loan Assn. (1991) 231 Cal.App.3d 1089, 1096–1097.) Here, plaintiffs have not alleged any conduct
by Aztec that goes beyond the scope of lending money to plaintiffs. Thus, plaintiffs’ claim for negligence fails.

>F. Breach
of Fiduciary Duty

Plaintiffs’
seventh cause of action for breach of fiduciary duty alleged that Aztec owed a
fiduciary duty to plaintiffs under Civil Code section 2923.1, which imposes a
duty on mortgage brokers, and that Aztec breached that duty by obtaining a
mortgage for plaintiffs that had unfavorable terms and which they ultimately
could not afford, by securing for itself a secret profit, by falsely
documenting the nature of the loan by surreptitiously inserting a statement
that the loan was nonresidential when in fact it was residential, and charging
a commercial rate of interest for a residential loan.

A lender owes no fiduciary duty
of care to a borrower in an arm’s length financial transaction. (Ragland
v. U.S. Bank National Assn. (2012) 209 Cal.App.4th 182, 206.) However, Civil Code section 2923.1,
subdivision (a), provides: “[a] mortgage
broker providing mortgage brokerage services to a borrower is the fiduciary of
the borrower.” A mortgage loan broker is
customarily a person “retained by a borrower to act as the borrower’s agent in
negotiating an acceptable loan.” (>Wyatt v. Union Mortgage Co. (1979) 24
Cal.3d 773, 782, italics omitted; see also Civ. Code, § 2923.1, subd. (b)
[“‘Mortgage broker’ means a licensed person who provides mortgage brokerage
services. . . .’ . . . ‘Mortgage brokerage
services’ means arranging or attempting to arrange, as exclusive agent for the
borrower or as dual agent for the borrower and lender, for compensation or in
expectation of compensation, paid directly or indirectly, a residential
mortgage loan made by an unaffiliated third party”].)

Here, Aztec
owed no fiduciary duty to plaintiffs as their lender. Further, plaintiffs have not pleaded that
Aztec acted as a mortgage broker in procuring their loan, and thus Civil Code
section 2923.1 does not apply to their loan.
The trial court property sustained Aztec’s demurrer on this cause of
action.

G. Fraud

Plaintiffs’
eighth cause of action for fraud alleged that Aztec misrepresented material
facts, including that the interest rate on the loan was the lowest rate
available, that interest would accrue only from the date of disbursement of
funds, and by inserting documents specifying that the loan was nonresidential. Plaintiffs alleged the representations were
false when made, were made with the intent that plaintiffs rely thereon, and
that plaintiffs relied on them to their detriment.

“‘The
elements of fraud, which give rise to the tort action for deceit, are
(a) misrepresentation (false representation, concealment, or
nondisclosure); (b) knowledge of falsity (or “scienter”); (c) intent to
defraud, i.e., to induce reliance; (d) justifiable reliance; and (e)
resulting damage.’” (>Lazar v. Superior Court (1996) 12
Cal.4th 631, 638.)

A necessary
element of the defense of fraud in the execution is reasonable reliance. That is, when a plaintiff asserts that the
defendant misrepresented the nature of the contract, the contract is not
considered void due to the fraud if the plaintiff had a reasonable opportunity
to discover the true terms of the contract.
The contract is only considered void when the plaintiffs’ failure to
discover the true nature of the document executed was without negligence on the
plaintiff’s part. (Rosenthal v. Great Western Financial Securities Corp. (1996) 14
Cal.4th 394, 419–420.) This issue
usually arises when the plaintiff failed to read the terms of the contract,
relying instead on the defendant’s representation as to the effect of the
contract. It is not reasonable to fail
to read a contract; this is true even if the plaintiff relied on the
defendant’s assertion that it was not necessary to read the contract. (Id.
at pp. 423–424.) Reasonable diligence
requires a party to read a contract before signing it. (Brookwood
v. Bank of America (1996) 45 Cal.App.4th 1667, 1674.) This presumes, however, that the parties were
dealing at arm’s length. When the parties are in a fiduciary relationship, the
same degree of diligence is not required of the nonfiduciary party. (Stafford
v. Shultz (1954) 42 Cal.2d 767, 777.)
If the defendant is in a fiduciary relationship with the plaintiff which
requires the defendant to explain the terms of a contract between them, the
plaintiffs’ failure to read the contract could be reasonable. (Lynch
v. Cruttenden & Co. (1993) 18 Cal.App.4th 802, 808–809.) In such a situation, the defendant
fiduciary’s failure to perform its duty would constitute constructive fraud (>Van de Kamp v. Bank of America (1988)
204 Cal.App.3d 819, 854), the plaintiff’s failure to read the contract would be
justifiable (Twomey v. Mitchum, Jones
& Templeton, Inc. (1968) 262 Cal.App.2d 690, 715), and constructive
fraud in the execution would be established.

A cause of
action for fraud is governed by a three-year statute of limitations. (Code Civ. Proc., § 338, subd.
(d).) The action accrues when the
aggrieved party discovers the facts constituting the fraud. (Ibid.) “The courts interpret discovery in [the]
context [of fraud] to mean not when the plaintiff became aware of the specific
wrong alleged, but when the plaintiff suspected or should have suspected that
an injury was caused by wrongdoing. The
statute of limitations begins to run when the plaintiff has information [that]
would put a reasonable person on inquiry.
A plaintiff need not be aware of the specific facts necessary to
establish a claim since they can be developed in pretrial discovery. Wrong and wrongdoing in this context are
understood in their lay and not legal senses.
[Citation.]
[¶] . . . ‘“Under this rule constructive and
presumed notice or knowledge are equivalent to knowledge. So, when the plaintiff has notice or
information of circumstances to put a reasonable person on inquiry, or has the
opportunity to obtain knowledge from sources open to [her] investigation (such
as public records or corporation books), the statute commences to run.” [Citation.]’”
(Kline v. Turner (2001) 87
Cal.App.4th 1369, 1374.)

Here,
plaintiffs cannot state a claim for fraud based upon the asserted execution of
the loan documents based on nondisclosures of the loan’s characterization as a
commercial loan, the interest rate charged, or the accrual date of interest
because those terms were presumably contained in the loan documents plaintiffs
failed to attach to their complaint.
Further, as Aztec owed no fiduciary duty, plaintiffs cannot rely on such
a duty to excuse their failure to read the loan documents.

H. Breach of the Implied
Covenant of Good Faith and Fair Dealing

Plaintiffs’
ninth cause of action for breach of the implied covenant of good faith and fair
dealing alleged that Aztec had a duty to pay at least as much regard to
plaintiffs’ financial interests as its own; Aztec had a duty to comply with the
laws of California; and Aztec had a duty to act fairly towards plaintiffs in
connection with the loan. Plaintiffs
alleged that Aztec breached that duty by failure to disclose to plaintiffs the
true nature of the loan, failing to give plaintiffs required disclosures, and
demanding that plaintiffs pay more interest than they were required to pay.

A cause of
action for breach of the implied covenant of good faith and fair dealing is
premised on the breach of a specific contractual
obligation. (Racine & Laramie, Ltd. v. Department of Parks & Recreation
(1992) 11 Cal.App.4th 1026, 1031–1032 [the purpose of the implied covenant is
to “‘prevent a contracting party from engaging in conduct
which . . . frustrates the other party’s rights to the
benefits of the contract’”].) “Every
contract contains an implied covenant of good faith and fair dealing providing
that no party to the contract will do anything that would deprive another party
of the benefits of the contract.
[Citations.] The implied covenant
protects the reasonable expectations of the contracting parties based on their
mutual promises. [Citations.] The scope of conduct prohibited by the
implied covenant depends on the purposes and express terms of the
contract. [Citation.] Although breach of the implied covenant often
is pleaded as a separate count, a breach of the implied covenant is necessarily
a breach of contract.” (>Digerati Holdings, LLC v. Young Money
Entertainment, LLC (2011) 194 Cal.App.4th 873, 885.) The claim is controlled by the four-year
statute of limitations applying to contracts.
(Krieger v. Nick Alexander
Imports, Inc. (1991) 234 Cal.App.3d 205, 220–221.)

Here,
plaintiffs essentially allege that Aztec breached the loan contract by charging
more interest and principal than legally was due and by failing to comply with
applicable laws. The complaint alleges
that Aztec first breached the loan in fall 2009 by making calls to collect what
it asserted was owed to it and which plaintiffs assert Aztec was not owed. At that time, the statute of limitations
would have begun to run. The complaint
filed in June 2011 was therefore timely on plaintiffs’ claim for breach of the
implied covenant of good faith and fair dealing. We note that the trial court in ruling on the
demurrer only reached the statute of limitations issue with respect to this
claim, and did not address the merits.

I. Negligent Infliction
Of Emotional Distress

Plaintiffs’
10th cause of action for negligent infliction of emotional distress alleged
that as a result of Aztec’s negligence, plaintiffs had suffered from severe
emotional distress.

Negligent
infliction of emotional distress is not an independent tort; it is the tort of
negligence. (Burgess v. Superior Court (1992) 2 Cal.4th 1064, 1072.) Damages for emotional distress are
recoverable only if the defendant has breached a duty to the plaintiff. “[T]his independent duty may be imposed by
law, be assumed by the defendant, or exist by virtue of a special relationship”
between the parties. (>Potter v. Firestone Tire & Rubber Co.
(1993) 6 Cal.4th 965, 984–985.)

Here, as
plaintiffs cannot state a claim for negligence, they cannot state a claim for
negligent infliction of emotional distress.
Thus, the trial court did not err in sustaining Aztec’s demurrer without
leave to amend.

>J. Intentional
Infliction Of Emotional Distress

Plaintiffs’
11th cause of action for intentional infliction of emotional distress alleged
that as a result of Aztec’s conduct, plaintiffs had suffered from severe
emotional distress.

To recover
on a claim for intentional infliction of emotional distress, the plaintiff must
demonstrate (1) outrageous conduct by the defendant, (2) directed at the
plaintiff with the intent of causing extreme emotional distress, (3) actually
and proximately causing emotional distress to the plaintiff, and (4)
plaintiff’s severe or extreme emotional distress. (Trerice
v. Blue Cross of California (1989) 209 Cal.App.3d 878, 883.) Outrageous conduct is conduct which exceeds
the bounds of that usually tolerated in civilized society. Such conduct must be directed at the
plaintiff or occur in the plaintiff’s presence.
(Christensen v. Superior Court
(1991) 54 Cal.3d 868, 903.) The statute
of limitations for an intentional infliction of emotional distress claim is two
years. (Code Civ. Proc.,
§ 335.1.) The claim accrues when
the tortfeasor’s conduct first causes emotional distress. (Kiseskey
v. Carpenters’ Trust for So. California (1983) 144 Cal.App.3d 222, 232
[tort complete when effect of defendant’s conduct results in severe emotional
distress].)

Plaintiffs’
complaint does not allege when they suffered severe emotional distress, but
does allege that the intentional infliction of emotional distress was caused by
all of Aztec’s conduct. Assuming that
Aztec’s attempts to collect its loan in fall 2009 started the clock ticking on
allegedly extreme and outrageous conduct, the two-year statute would not bar
plaintiffs’ claim. However, recovery on
this theory requires a showing of “‘outrageous’” conduct which is “‘so extreme
as to exceed all bounds of that usually tolerated in a civilized
community.’” “An assertion of legal
rights in pursuit of one’s own economic interests does not qualify as
‘outrageous’ under this standard.” (>Yu v. Signet Bank/Virginia (1999) 69
Cal.App.4th 1377, 1397–1398.) Thus,
Aztec’s attempts to collect its loan would not support a claim for emotional
distress.

K. Declaratory Relief

Plaintiffs’
twelfth cause of action for declaratory relief sought a declaration of the
rights and duties of the parties under the loan documents, a declaration that
plaintiffs did not owe Aztec the amounts it claimed, and a declaration of the
amounts plaintiffs owed to Aztec.

Code of
Civil Procedure section 1060 provides in relevant part: “Any person interested under a written
instrument . . . , or under a contract, or who desires a
declaration of his or her rights or duties with respect to
another . . . may, in cases of actual controversy relating
to the legal rights and duties of the respective parties, bring an original
action . . . for a declaration of his or her rights and
duties in the premises, including a determination of any question of
construction or validity arising under the instrument or contract.” Declaratory relief operates prospectively,
serving to set controversies at rest before obligations are repudiated, rights
are invaded or wrongs are committed.
Thus the remedy is to be used to advance preventive justice, to declare
rather than execute rights. (>Baxter Healthcare Corp. v. Denton (2004)
120 Cal.App.4th 333, 360.) Resort to
declaratory relief therefore is appropriate to attain judicial clarification of
the parties’ rights and obligations under the applicable law. (Id.
at p. 362.)

The
limitations period for declaratory relief claims depends on “the right or
obligation sought to be enforced, and the [statute of limitations’] application
generally follows its application to actions for damages or injunction on the
same rights and obligations.” (>Howard Jarvis Taxpayers Assn. v. City of La
Habra (2001) 25 Cal.4th 809, 821.)
“A four-year statute of limitations applies to obligations or
liabilities founded upon an instrument in writing.” (Code Civ. Proc., § 337, subd. (1); >Ginsberg v. Gamson (2012) 205
Cal.App.4th 873, 883.) The limitations
period does not begin to run until a breach occurs. (Romano
v. Rockwell Internat., Inc. (1996) 14 Cal.4th 479, 489.) A party may seek declaratory relief before
there has been an actual breach of an obligation; in such cases the limitations
period still does not begin to run until the breach occurs. (Maguire
v. Hibernia S. & L. Soc. (1944) 23 Cal.2d 719, 734.)

Here,
plaintiffs dispute the amounts owed under the loan documents, meaning a
four-year statute applies to their contract claims. According to the allegations of the
complaint, the dispute arose sometime time in the fall of 2009 when Aztec began
to call about the loan. Thus,
plaintiffs’ claim for declaratory relief is not time-barred.

>DISPOSITION

The judgment is reversed on plaintiffs’ claims for
violations of the Rosenthal Fair Debt Collection Practices Act (Civ. Code,
§ 1788 et seq.), violation of the Unfair Competition Law (Bus. & Prof.
Code, § 17200 et seq.), and plaintiffs’ claims for breach of the implied
covenant of good faith and fair dealing and for declaratory relief. In all other respects, the judgment is
affirmed. The parties are to bear their
own costs on appeal.

NOT TO BE PUBLISHED.



JOHNSON,
J.



We concur:



ROTHSCHILD, Acting, P. J.



CHANEY, J.