In a 2020 filed case involving the reasonableness and validity of “release fees” and late fees charged by the lender to the borrower, the Honorable Phyllis Hamilton, United States District Court Judge for the Northern District of California, held that both “release fees” and late fees provided for in the loan documents were valid and enforceable.

Plaintiffs Najarian Capital LLC and Najarian Holdings LLC (collectively “Najarian” or “plaintiffs”), both owned by Zareh Najarnian, is in the business of “flipping” homes and selling them to third-party purchasers after renovation. Defendant CoreVest American Finance Lender LLC (“CoreVest”) is successor to CAF Lending, LLC (“CAF”), the lender under the loan documents at issue in the case. From August 2014, plaintiffs received hundreds of short-term loan advances from CAF to finance their purchases of hundreds of residential properties. The loans were made pursuant to loan agreements executed by the parties (“2014 Loan Agreements”). Because plaintiffs used the advances to finance their purchases of specific residential properties, CAF recorded a security lien on the corresponding residential property. The 2014 Loan Agreements provided for monthly late fees calculated as a percentage of the outstanding principal balance of loans that had matured. When plaintiffs were ready pay off a specific loan advance, CAF’s loan servicer delivered a payoff statement to plaintiffs, and then prepared and recorded a release of the security interest after payoff. A $250 “release fee” was charged for processing the payoff and lien release request. In 2015, plaintiffs entered into a new loan agreement with CAF (“2015 Loan Agreement”), which also contained a comprehensive general release that irrevocably released all then-existing claims or potential claims against CAF and its successors (the “2015 Release”).

This dispute arose in 2017 when plaintiffs paid over $75,000 in late fees and were facing $30,000 more. After failed attempts to negotiate a resolution, plaintiffs filed suit in 2020

The Third Amended Complaint (“TAC”) alleged five causes of action: (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) fraud; (4) negligent misrepresentation; and (5) unfair competition. Najarian Holdings LLC v. Corevest American Finance Lender LLC (N.D. Cal., Oct. 9, 2020, No. 20-CV-00799-PJH) 2020 WL 5993225, at *1 (“Narjarnian MTD”).

On a motion to dismiss the TAC, the Court granted and dismissed with prejudice Narjarian’s claims for fraud, negligent misrepresentation, and unfair competition. The Economic Loss Rule barred plaintiffs’ claim based in contract and the unfair competition law did not provide for the compensatory damages sought by plaintiffs. See, California Business and Professions Code § 17203. On the negligent misrepresentation claim, the Court held that while no controlling Ninth Circuit precedent “requires application of Rule 9(b) to negligent misrepresentation claims,” [the heightened pleading rule for fraud causes of action], most district courts in California hold that it does. Narjarnian MTD, 2020 WL 5993225 at *5, citing Villegas v. Wells Fargo Bank, N.A. (N.D. Cal. Sept. 17, 2012) 2012 WL 4097747, at *7. As plaintiffs’ claims sounded in fraud, Rule 9(b) applied, and the Court held the allegations insufficient to meet the heightened standard.

Defendant CoreVest later filed a motion for summary judgment on the remaining claims for breach of contract and breach of the covenant of good faith and fair dealing. Najarian Holdings LLC v. Corevest American Finance Lender LLC (N.D. Cal., Dec. 1, 2021, No. 20-CV-00799-PJH) 2021 WL 5630679 (“Narjarnian MSJ”).

Defendant CoreVest, as the successor to CAF, argued that the 2015 Loan Agreement, and comprehensive release contained therein, operated as a release of plaintiffs’ claims. The Court agreed finding that the release language was not ambiguous and enforceable under California law. See, Cal. Civ. Code § 1638. Plaintiffs’ sole and managing member’s declaration stating that he did not consult with counsel and did not understand his rights was inadmissible parol evidence. The Court found no evidence presented by plaintiffs preventing the Court from giving effect to the express terms of the release provision. As a result, Defendant CoreVest had a complete defense to plaintiffs’ claims, which were based on the 2014 Loan Documents. Narjarnian MSJ, 2021 WL 5630679, at *4-5.

Notwithstanding that CoreVest had a complete defense to plaintiffs’ claims, the Court also ruled on the merits. Plaintiffs alleged that the $250 “release fee” charged for releasing the lien on each loan advance was not authorized by the terms of the 2014 Loan Documents.

Section 10.8 of the 2014 Loan Agreement states, in relevant part, “Borrower shall pay on demand all costs and expenses of Lender in connection with the negotiation, preparation, execution, delivery, administration, amendment, waiver and enforcement of the Loan Documents….” Narjarnian MSJ, 2021 WL 5630679, at *6. Plaintiffs paid the fees directly to defendant’s loan servicer, who prepared and recorded the lien releases. It was undisputed that costs were incurred whenever a lien release was prepared, recorded, and tracked. While the Court acknowledged that the Loan Documents did not specifically provide for “release fees,” the terms were also unambiguous obligating plaintiffs to pay all costs and expenses incurred by CAF in the preparation and execution of any documents, agreements, or instruments related to the property-specific advances. Plaintiffs’ complaint that the $250 fees were “too great” were unsupported and failed to invalidate the releasefees. Narjarnian MSJ, 2021 WL 5630679, at *6.

How is this ruling relevant to trustees? Because California Civil Code, § 2941(e)(1) states, in relevant part, that the “trustee, beneficiary…may charge a reasonable fee to the trustor…for all services involved in the preparation, execution, and recordation of the full reconveyance, including, but not limited to, document preparation and forwarding services rendered to effect the full re-conveyance, and, in addition, may collect official fees. Further, Cal. Civ. Code, § 2941(e)(2) provides that if the fee charged does not exceed forty-five dollars ($45), the fee is conclusively presumed to be reasonable.

Considering that Civil Code § 2941 was made effective in 2004, and in light of 18 years of inflation and the continuing rise in costs of doing business, perhaps it is time to re-evaluate the costs being charged by trustees for processing lien release fees.

Plaintiffs also argued that the late fees charged by CAF were unreasonable penalties where they took the form of liquidated damages and were unsupported by any reasonable endeavor on the part of CAF to estimate the fair average compensation for late payments.

California Civil Code § 1671(b) states that “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.” “The liquidated damages amount ‘must represent the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained. NarjarnianMSJ, 2021 WL 5630679, *6, citing, Garrett v. Coast & Southern Fed. Sav. & Loan Ass’n, 9 Cal. 3d 731, 739 (1973).

The Court granted defendant’s MSJ holding that plaintiffs failed to provide evidence and failed to meet their burden to establish the unreasonableness of the default late charge. Indeed, during discovery, plaintiffs failed to ask about defendant’s practices or intent in calculating or charging the late fees. On the other hand, defendant submitted declarations citing risks and increased costs justifying liquidated damages.

Finally, to add salt to the wound, the Court granted defendant’s attorneys’ fees and costs motion in the amount of $692,079.50. Najarian Holdings LLC v. Corevest American Finance Lender LLC (N.D. Cal., Jan. 28, 2022, No. 20-CV-00799-PJH) 2022 WL 267439.

For more information on this legal update please contact:
Thomas Van
Managing Litigation Attorney
[email protected]