Is an Actual Injury Necessary for Violation of Business and Professions Code section 17200?

A cause of action for violation of B&P Code section 17200 is routinely alleged in complaints against California corporations and limited liability companies, and the recent decision in Lagrisola v. North American Financial Corporation clarified the rules regarding such a claim.

In 2017, Loreto and Mercedes Lagrisola (the Lagrisolas) applied for and obtained a loan from North American Financial Corporation (NAFC), secured by a mortgage on their residence.

In 2021, the Lagrisolas sued NAFC, individually and on behalf of a class of similarly situated persons.

In the operative First Amended Complaint (FAC), the Lagrisolas alleged that NAFC was not licensed to engage in lending in the state of California between 2014 and 2018 and asserted violations of Business and Professions Code section 17200.

The trial court sustained NAFC’s demurrer to the FAC without leave to amend, concluding that the allegations in the FAC were insufficient to establish an actual economic injury, necessary for standing under Business and Professions Code section 17200.

The Lagrisolas asserted on appeal that the trial court erred in reaching each of the foregoing conclusions.

The appellate court agreed with the trial court, and affirmed its ruling.

NAFC is a Nevada based business entity with offices in California. In 2017, the Lagrisolas borrowed $550,000 from NAFC, secured by real property in San Diego.

This was one of 319 loans NAFC originated to California consumers between July 1, 2014 and August 27, 2018. NAFC acted as both the loan broker and the lender on the loans, but was licensed in California only as a broker.

NAFC was not licensed to lend money to consumers in California, as required by Financial Code section 22100, during the relevant time period.

The Lagrisolas were unaware that NAFC was not licensed as a finance lender and would never have signed up to a loan with NAFC had they been informed that the company was not legally permitted to make loans to them or to any other California borrower.

In the first cause of action in the FAC, they alleged that NAFC violated Business and Professions Code section 17200 by engaging in unlicensed lending in violation of Financial Code sections 22100 and 22751.

They contend that NAFC earned “illegal interest” by engaging in this unlawful lending, and that the retention of such profits “constitutes a loss of money or property” to them, and other similarly situated plaintiffs.

In the second cause of action, the Lagrisolas asserted violations of Business and Professions Code section 17200 based on the alleged deceptive act of failing to disclose that NAFC was not licensed to make loans in California.

As in the first cause of action, they alleged that NAFC earned illegal interest which it is required to forfeit to the borrowers.

NAFC filed a demurrer to the FAC, and the trial court concluded that the allegations in the FAC did not adequately allege an injury in fact and therefore failed to establish standing to bring a claim under Business and Professions Code section 17200.

Business and Professions Code section 17200 (commonly referred to as the Unfair Competition Law, or the “UCL”) defines unfair competition as any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1 (commencing with Section 17500).

Section 17204 further provides, in relevant part, that actions for relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.

The latter statute was amended in 2004 with the passage of Proposition 64. The purpose of Proposition 64 was to materially curtail the universe of those who may enforce the UCL in a private action by confining standing to those actually injured by a defendant’s business practices, and to prohibit private attorneys from filing lawsuits for unfair competition where they have no client who has been injured in fact under the standing requirements of the United States Constitution.

To satisfy the narrower standing requirements imposed by Proposition 64, a party must now:

 (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and

(2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.

NAFC contended that the FAC failed to adequately allege that the Lagrisolas suffered an injury in fact or lost money or property as a result of its licensing status. The trial court agreed.

It explained that a loan has no subjective or intangible value, and that the Lagrisolas cannot establish standing (injury in fact) by alleging that they now possess something they would not have similarly valued or selected had they been aware of the unlicensed status of the lender. The loan the Lagrisolas obtained was identical to the terms and characteristics they desired.

The point of the Proposition 64 amendment was to impose additional requirements on plaintiffs beyond merely having suffered an ‘unlawful, unfair or fraudulent business act or practice, namely, having lost money or property as a result of that practice.

The Lagrisolas did not allege that they did not want a loan in the first instance, that they paid any more for their loan than they otherwise would have, or that they could have obtained the loan at the same or lower price from another lender that was licensed.

Nor did they allege that they suffered any particular harm because of NAFC’s unlicensed status.

Rather, they conceded in the FAC that NAFC was licensed as a broker and, although they set forth the additional requirements that NAFC would have had to meet to be licensed as a lender as well, they do not contend that NAFC would not have been able to meet those requirements.

The Lagrisolas alleged that they would not have agreed to the loan, or perhaps would have obtained a loan from another vendor if they had known that NAFC was not licensed as a lender.

But the Lagrisolas did not assert that a comparable loan was available from a licensed lender, or that NAFC’s unlicensed status harmed them in any way. Notably, the FAC alleged that NAFC resold the loans, but it does not allege that the purchasers were not licensed.

Thus, at the end of the day, the plaintiffs were left with a loan from a presumably licensed lender, at the bargained for rate. The plaintiffs received the benefit of their bargain, having obtained the bargained for loan at the bargained for price.

Further, as the trial court explained loans are not the same as padlocks, for example: Unlike a product or consumable good, a loan has no subjective or intangible value, its value is wholly dependent on its terms, such as the interest rate, principal amount and number of payments.

The Lagrisolas ultimately got the loan they bargained for.

The Lagrisolas did not allege that NAFC made an affirmative representation about the product.

The Lagrisolas did not allege that NAFC made an affirmative representation about its licensing status.

They did not allege that NAFC made any affirmative statements about its licensure status or, perhaps more importantly, that the Lagrisolas relied on any statements NAFC made about its licensure status when choosing to enter into the loan transaction with NAFC.

Proposition 64’s requirement that the plaintiff’s economic injury be caused by the unfair competition requires a showing of a causal connection or reliance on the alleged misrepresentation.

The Lagrisolas did not allege that any injury to them was caused by a misrepresentation or omission, or that they relied on any such misrepresentation or omission. Put another way, the Lagrisolas could not show that they suffered any economic injury because of, or resulting from, NAFC’s failure to inform them that it did not have a lending license.

LESSONS:

1.         Business and Professions Code section 17200 defines unfair competition as any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by Chapter 1, commencing with Section 17500.

2.         Section 17204 further provides, in relevant part, that actions for relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by a person who has suffered injury in fact and has lost money or property as a result of the unfair competition.

3.         To satisfy the narrower standing requirements imposed by Proposition 64, a party must now: (1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that that economic injury was the result of, i.e., caused by, the unfair business practice or false advertising that is the gravamen of the claim.