Unlawful May Not Be Actionable

Consumer protection laws are intended to ensure that business entities follow the law and that their customers do not suffer harm due to their business practices.

But what happens when that’s only partially true – when a company “misbehaves” but no tangible injury was suffered? Can their customers still sue and recover damages for the misbehavior?

That was the question recently presented to the California Court of Appeal in Lagrisola v. North American Financial Corporation (2023) 314 Cal. Rptr.3d 941.

In that case, Loreto and Mercedes Lagrisola obtained a $550,000 mortgage loan in 2017 from North American Financial Corp. (NAFC), secured by a mortgage on their San Diego home. The Lagrisolas’ loan was one of 319 that NAFC originated in California between 2014 and 2018, acting as both the loan broker and lender.

However, during this period NAFC was licensed only as a loan broker and not as a lender as required by section 22100 of the California Financial Code. The Lagrisolas were unaware that NAFC was not licensed as a lender in California at the time the loan was made.

In 2020, California regulators and NAFC entered into a settlement agreement whereby NAFC agreed to refrain from lending activity without first obtaining a license and to pay an administrative penalty of $75,000. The settlement was the first public disclosure of NAFC’s unlicensed lending activity.

It is noted by the court that the regulators and NAFC both acknowledged that the settlement agreement was “intended to constitute a full, final, and complete resolution of the violations.”

In 2021 the Lagrisolas sued NAFC individually and on behalf of a class of similarly situated persons alleging that NAFC violated not only California Financial Code sections 22100 and 22751 (which provides that loan charges other than or in excess of charges allowed by law shall be forfeited by a licensee under the statute) but also violated section 17200 of the California Business and Professions Code, as such section was amended by the passage of Proposition 64 in 2004 (often referred to as the Unfair Competition Law or UCL).

The Lagrisolas alleged that NAFC’s status as an unlicensed lender was a material fact that borrowers would want to be informed of prior to entering into a loan transaction and that had they known that NAFC was not licensed to make loans in California they would not have done business with them.

They requested that the court award them the amount of “illegal” interest the couple paid on their loan and to disgorge all profits made by NAFC when it sold the unlicensed loans it made in the secondary market prior to the filing of the action by the Lagrisolas.

Allowing the company to retain its earnings from these loans, they said, would reward NAFC for its non-compliance with state law.

NAFC filed a demurrer, asking the court to dismiss the lawsuit.

After a hearing, the trial judge ruled that the Lagrisolas did not show that they had suffered an actual injury, and therefore lacked standing to sue under section 17200 of the California Business and Professions Code (the UCL), and that there was no private right of action under California Financial Code sections 22100 and 22751.

The Lagrisolas then appealed, and the appeals court affirmed the trial court’s decision.

The appellate court noted that the UCL requires both an economic injury and that the injury be caused by the unfair business practice that is the basis of the claim. The Lagrisolas, the court said, failed to show they had suffered an injury or lost money as a result of NAFC’s licensing status.

Their subjective assertion of an intangible harm, the court said, does not establish the elements for standing the under the UCL.

Additionally, the court concluded that violations of California Financial Code sections 22100 and 22751 do not provide for a private right of action. Rather, these statutes are to be enforced by the attorney general or administrative regulators for violations, as was the case here when NAFC was ordered to pay a $75,000 penalty. 

One appellate court judge disagreed with his colleagues about the UCL ruling and stated that making an unlicensed loan is an unlawful business practice that is actionable due to the failure to disclose material information (as opposed to making an affirmative misrepresentation which the majority agreed would be actionable).

He would have ruled that because the plaintiffs alleged that had they known of NAFC’s lack of a license they would not have entered into the loan, they had adequately pleaded an economic injury for the purpose of establishing standing under the UCL.

The dissenting judge did agree with the trial court’s holding that there is no private right of action under the California Financial Code sections 22100 and 22751.