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KAMALA D. HARRIS Attorney General of California ZACKERY P. MORAZZINI Supervising Deputy Attorney General S. MICHELE INAN Deputy Attorney General State Bar No. 119205 455 Golden Gate Avenue, Suite 11000 San Francisco, CA 94102-7004 Telephone: (415) 703-5474 Fax: (415) 703-5480 E-mail: Michele.Inan@doj.ca.gov Attorneys for Defendants Edmund G. Brown Jr., Governor of California and Kamala D. Harris, Attorney General of California IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

CHRISTOPHER P. DUENAS,

3:10-cv-05884-RS

Plaintiff, DEFENDANTS GOVERNOR BROWN AND ATTORNEY GENERAL HARRIS v. REPLY BRIEF IN SUPPORT OF MOTION TO DISMISS COMPLAINT FOR DECLARATORY, INJUNCTIVE EDMUND G. BROWN JR., in his official OR OTHER RELIEF capacity as Governor of California; KAMALA D. HARRIS, in her official Date: April 14, 2011 capacity as Attorney General of California; Time: 1:30 p.m. JAMES TOWERY, in his official capacity Courtroom: 3, 17th Floor Judge: Hon. Richard Seeborg as the Chief Trial Counsel of the State Bar of California, Trial Date: None Set Defendants. Action Filed: December 27, 2010

INTRODUCTION It is now very evident that this action is motivated by an unfounded belief that no attorney will agree to perform a loan modification if the attorney has to delay receipt of fees until after performance of a loan modification. Duenas believes that any delay in receipt of fees to perform a loan modification creates too high a risk that the attorney will not be paid at all, and he believes
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this restricts to zero the pool of attorneys who will agree to perform a loan modification. Duenas also believes that no attorney will agree to perform a loan modification because California Civil Code section 2944.7 is vague about the scope of activity triggering the fee restriction creating too high a risk of criminal liability for violation of the statute. These theories of liability are insufficient to establish standing even at this early stage of the litigation and they are also fatally flawed as a matter of law. Duenas claim that he is injured because no attorney will perform a loan modification for him is not within the realm of factual plausibility and insufficient to establish standing. Even allowing for standing, Duenas allegations that no attorney will represent him because of the fee restriction or because the statute is vague fails to state claims for relief as a matter of law. Section 2944.7 does not prohibit an attorney from performing a loan modification for a borrower. It does not limit the amount of fees an attorney can charge a borrower for performing a loan modification. It requires only that an attorney who offers to perform a loan modification or other form of loan forbearance for a borrower with the borrowers lender delay receipt of fees until after the loan modification is actually performed. Because Duenas does not allege facts sufficient to establish standing and his constitutional claims are fatally flawed, defendants urge the Court to dismiss the action against defendants. In challenging section 2944.7, Duenas focuses much of his argument on wisdom of the law which he disputes. Contrary to his criticisms, the law serves an important purpose of protecting consumers from being preyed up by unscrupulous lawyers and others offering loan modification and forbearance services. By restricting advance fees for performance of these services, the law ensures that consumers receive the benefit of their bargain before paying for the services. ARGUMENT I. GOVERNOR BROWN MUST BE DISMISSED Duenas makes no response at all to defendants argument that this action against Governor Brown is barred by the Eleventh Amendment. Defs Mot. To Dismiss, p. 7. This failure to prosecute the action against Governor Brown requires that Governor Brown be dismissed from the action. See Fed. R. Civ. P. 41(b).
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II.

DUENAS LACKS STANDING TO BRING THE CLAIMS Duenas claims that he is harmed by section 2944.7 because no attorney will agree to

perform a loan modification if the attorney has to await payment of fees until after performance and risk receiving no payment at all. See Pltfs Opp., p. 10:15-17 ([t]he timing of payment . . . is a bar to selecting the attorney of his choice and of selecting any reasonably competent and ethical attorney); p. 5:5 (timing is the difference between being paid and not being paid); p. 5:7-8 (by delaying payment until all services are complete (regardless of how long that may be), the attorney faces a substantial risk of not being paid at all). This allegation is insufficient to establish standing because Duenas has not alleged that he has tried and failed to hire an attorney before filing his lawsuit and is thus harmed by the restriction in section 2944.7. Defs Mot. To Dismiss, p. 9-10. The allegation that a delay in payment of fees creates too high a risk that an attorney representing a borrower will not be paid at all is also not plausible. An attorneys risk of not being paid by a borrower in default on his mortgage who seeks a loan modification is no different than the risk of non-payment of fees by an indigent client, or a debtor client, or even a criminal defendant client who may be dissatisfied with his attorney and insolvent by the end of a criminal prosecution. It will always be the case that clients in the poorest financial condition have the hardest time being represented by their attorney of choice. But this phenomenon by itself cannot reduce the pool of available attorneys to zero as is alleged, and it cannot by itself constitute sufficient harm to establish standing. The restriction at issue in Schaffer v. Defense Intelligence Agency, 601 F.2d 16 (D.D.C. 2009) cited by Duenas is distinguishable from the restriction delaying payment of fees in section 2944.7 and the case is inapposite. Pltfs Opp., p. 10-11. In Schaffer, plaintiff sought permission from his employer to speak to his attorney about confidential information in connection with an employer investigation. Permission was denied. Plaintiff argued he was injured conferring standing because of the limitation placed on his right to consult with his attorney in connection with the investigation and the district court agreed. Id. at 25-26. The employer restriction in Schaffer directly affected plaintiffs ability to be represented by his attorney. The statutory restriction in section 2944.7 does not distort an attorneys ability to represent a client in a loan
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modification matter; the restriction only delays receipt of fees for performance of a loan modification until after the attorney actually performs the service. Duenas argues that he faces possible co-conspirator criminal liability for violating section 2944.7 should he offer to pay an attorney to perform a loan modification in advance of performance and is thus harmed by the fee timing restriction in section 2944.7. Pltfs Opp., p. 10. This claim of injury is meritless as a matter of law as fully explained in defendants opposition to plaintiffs motion to amend the complaint and will not be repeated here, except to say that the original complaint does not allege any warned or threatened prosecution of Duenas for violation of section 2944.7. Without any warned or threatened harm, the remaining allegations are too speculative and abstract to confer standing as a matter of law. See Defs Opp. To Mot. To Amend, p. 5-6, citing Lopez v. Candaele, 630 F.3d 775, 786-88 (9th Cir. 2010). III. THE CONSTITUTIONAL CHALLENGES ARE BARRED AS A MATTER OF LAW A. First Amendment Claim

Duenas argues that section 2944.7 is a content-based restriction on the practice of law barred by Mothershed v. Justices of the Supreme Court, 410 F.3d 602 (9th Cir. 2005) because it delays an attorneys receipt of fees for loan modification work. Pltfs Opp., p. 11-12. But it is clear that section 2944.7 is not a content-based restriction on the practice of law prohibited by Mothershed. Section 2944.7 does not restrict Duenas from hiring an attorney to perform a loan modification and it does not prevent an attorney from performing a loan modification for Duenas. The statute merely limits when an attorney may collect fees where the attorney negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of loan forbearance . . . . Civ. Code, 2944.7(a). Where the attorney performs any of these services, the statute requires the attorney to delay payment of his fees until after performance. Duenas is free to consult with an attorney in all the areas he seeks, and he is free to pay the attorney in advance of receiving the advice if that is the fee arrangement he negotiates. Consequently, the law is not the content-based law envisioned in Mothershed. Moreover, unlike being represented in court, loan modification work is not a service that requires an attorney. Even assuming that an attorney refuses to provide the service because of
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section 2944.7, Duenas could hire the attorney to represent him in every other respect. If a loan modification or loan forbearance becomes a possibility, Duenas could negotiate the loan forbearance himself or hire another professional to do so. Duenas argues that the fee restriction violates his First Amendment right to hire counsel because it reduces the likelihood of an attorney being compensated at all such that no competent attorney will practice in this area See Pltfs Opp., p. 16:15-18. This argument is insufficient to state a claim for relief for violation of the First Amendment for the same reason it is insufficient to confer standing. As stated above, it is implausible that no attorney will agree to perform loan modification work if the attorney has to delay receipt of fees until after performance. There is always a risk that an attorney will not be paid for his services when he represents financiallydistressed clients. And it will always be the case that clients with the least amount of financial resources are going to have the hardest time being represented by lawyers of their choice. This is a marketplace phenomenon not caused by section 2944.7, and without more, it is insufficient to constitute a violation of a First Amendment right to hire counsel. In Roa, Jr. v. Lodi Medical Group, Inc., 65 P.2d 164 (Cal. 1985), the California Supreme Court rejected a constitutional challenge to a California statute limiting the amount of fees an attorney could claim in a medical malpractice action when representing a party under a contingency fee arrangement. The reasoning of the decision requires the same result here. Upholding the constitutionality of Civil Code section 6146, the California Supreme Court stated that section 6146 does not violate an individuals right to retain counsel, but simply limits the compensation that an attorney may obtain when he represents an injured party under a contingency fee agreement. Id. at 166. The court rejected the notion that the contingency fee restriction violated First Amendment rights. Id. at 167 n.5. The court stated section 6146 does not prohibit the use of contingency fees in medical malpractice actions, it simply places limits on the percentage of recovery that an attorney may retain when he represents a plaintiff on a contingency basis. Id. Duenas argues that the fee restriction in Roa is distinguishable from the restriction in section 2944.7 because the restriction in Roa, while reducing the amount of fees an attorney could
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recover on a contingency basis, did not prevent the attorney from billing hourly for his services. Pltfs Opp., p. 16. As stated, section 2944.7 does not restrict an attorney from billing hourly for services. The statute only requires that an attorney who has offered to arrange a loan modification or other form of loan forbearance wait to claim, demand, collect or receive compensation until after the attorney has fully performed each and every service he contracted to perform or represented he would perform. Therefore, the distinction Duenas makes between the restriction in section 2944.7 and the restriction in Roa is no distinction at all. B. Fifth Amendment Claim

Duenas argues in support of his Fifth Amendment claim that no attorney will agree to perform a loan modification for him because the risk of criminal liability for violation of a vague statute is too great. Pltfs Opp., p. 8-9. This sweeping conclusion is based on Duenas unfounded belief that, because section 2944.7 makes no exception for a loan modification that is accomplished within the context of foreclosure defense litigation, it is vague. Id., p. 7. Section 2944.7 provides fair notice of the activity that triggers the fee restriction that activity is offering or performing a loan modification or other loan forbearance with the borrowers lender, and the fee restriction applies to each and every service the attorney either offers to perform or performs. Civ. Code, 2944.7(a)(1); see Defs Mot. To Dismiss, p. 10-11. As stated in defendants motion to dismiss, an attorney is free to consult with a borrower and be paid for the advice in advance of providing the advice in all the areas the borrower seeks. An attorney is also free to require advance payment of fees to defend a borrower in any action in court brought by a lender against a borrower related to his mortgage. If such a court matter is resolved by settlement requiring the lender to modify the borrowers loan, the settlement activity does not trigger the fee restriction in section 2944.7 so long as at the onset of the attorney-client relationship, the attorney did not offer to perform a loan modification or other loan forbearance. Therefore, section 2944.7 is not unconstitutionally vague. C. Fourteenth Amendment Claim

Duenas argues that the fee restriction in section 2944.7 creates a suspect classification and implicates a fundamental right requiring heightened scrutiny. Pltfs Opp., p. 15. However, he
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does not identify the suspect classification purportedly created by the statute. And as stated earlier, section 2944.7 does not implicate any constitutional right to hire counsel because the restriction does not prevent a borrower from hiring an attorney to perform a loan modification. Therefore, there is no infringement of a fundamental right, and even assuming the statute created a classification, rational basis is the proper standard for review. Section 2944.7 easily satisfies the rationality standard. The State has an interest in protecting residential loan borrowers from predatory attorneys and other persons who exploit homeowners by offering foreclosure rescue scams that do not help the borrower regain their home. Defs Mot. to Dismiss, p. 16-17, Defs Req. for Judicial Notice, Exh. 1. And as stated in the motion to dismiss filed by defendant James Towery, Chief Trial Counsel of the State Bar of California, attorneys are among those who perpetrate loan modification scams. Def. Towerys Mot. To Dismiss, p. 3-4; see also Office of Attorney Generals Website, Individuals and Businesses the Attorney Generals Office Has Sued, http://ag.ca.gov/loanmod. Because attorneys and other persons exploit borrowers in distress, the California Legislature enacted section 2944.7. Section 2944.7 requires any person who offers to perform or performs a loan modification or other form of loan forbearance to delay payment of fees until after the work has been performed to ensure that the borrower actually receive the benefit of the bargain. In Roa, supra, the court rejected an equal protection claim similar to the equal protection claim asserted in the complaint that attorneys hired by lenders to perform a loan modification are not subject to the fee restriction applicable to attorneys hired by borrowers as not violating equal protection. Complaint, 48. In Roa, plaintiff argued that Civil Code section 6146 violated equal protection because it limited fees that plaintiffs attorneys may charge but did not limit defense counsel fees. 65 P.2d 164, 171. The court rejected plaintiffs argument based on the California Legislatures rational basis for the contingency fee statute. Roa stated: the Legislature could have determined that there was a special need (1) to protect plaintiffs from having their recoveries diminished by high contingency fees, and (2) to reduce the temptation to adopt improper methods of prosecution which contracts for large fees contingent upon success have sometimes been supposed to encourage. Id.
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Here it is clear from the legislative history of section 2944.7 that the California Legislature enacted section 2944.7 to protect consumers from persons who were preying on borrowers fears of losing their homes and their ignorance of the options available to them, and charging these borrowers fees (often up-front, non-refundable fees) for services the borrower could obtain elsewhere, free-of-charge. Defs Mot. To Dismiss, Req. for Judicial Notice, Exh. 1, p. 4. Therefore, there is a rational basis for the distinction in section 2944.7 between attorneys representing borrowers and attorneys representing lenders. Duenas final argument is that section 2944.7 violates equal protection because it is overinclusive applying not only to fees paid by individual borrowers but also to fees paid by investors with dozens or hundreds of houses and even judges with houses. Pltfs Opp., p. 15. The argument is not supported by any law. That a statute is alleged to be overinclusive does not implicate equal protection. CONCLUSION For these reasons, defendants Governor Brown and Attorney General Harris respectfully request that the court grant their motion to dismiss the complaint. Dated: March 31, 2011 Respectfully submitted, KAMALA D. HARRIS Attorney General of California ZACKERY P. MORAZZINI Supervising Deputy Attorney General

/s/ S. Michele Inan S. MICHELE INAN Deputy Attorney General Attorneys for Defendants Edmund G. Brown Jr., Governor of California and Kamala D. Harris, Attorney General of California
SA2011100031 20424224.doc

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