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dismissing all TILA and RESPA claims without prejudice, and holding that the proper course was for the court to "defer its review of Plaintiffs' remaining state-law claims"
Summary of this case from NAJAROO v. LA GRINDING COMPANYOpinion
Case Number C 09-02666 JF (RS).
October 14, 2009
ORDER GRANTING MOTIONS TO DISMISS [re: document nos. 17, 18]
This disposition is not designated for publication in the official reports.
I. BACKGROUND
This action arises out of a residential mortgage transaction. Plaintiffs Jeff B. Graves and Lynn T. Vo ("Plaintiffs") allege that in November 2004, Defendant Hamid Saraydarpour ("Saraydarpour") approached them in his capacity as a loan officer for Defendant Cedar Mortgage Company, Inc. ("Cedar"), and solicited them to refinance their residence located at 1862 Market Street, Santa Clara, California ("the Property"). FAC ¶ 20. Allegedly, Saraydarpour told Plaintiffs that he could arrange the "best deal" and the "best interest rates," id. ¶ 22, and that he could refinance the loan if it ever were to become unaffordable. Id. ¶ 28.
Plaintiffs allege that they were able to document their income and that their FICO score was approximately 720, entitling them to be classified as "prime" borrowers. Id. ¶ 23. Plaintiffs claim that they requested a fixed rate mortgage and that Saraydarpour assured them that the loan he sold them was a fixed-rate mortgage. Id. ¶ 24. Plaintiffs assert that Saraydarpour, contrary to their request, sold them an adjustable rate mortgage with option payments capped at a rate of eleven percent. Id. Plaintiffs allege that Saraydarpour overstated their income on the loan application without their knowledge or permission and that "Defendant underwriters" knew or should have known that the information was inaccurate, but approved the loan anyway. Id. Plaintiffs claim that Saraydarpour classified them as "sub-prime" borrowers and informed them that the mortgage at issue in the instant case was the only mortgage loan program for which they qualified. Id. at ¶ 26. Plaintiffs allege that they were funneled improperly into a sub-prime program to increase the commissions and fees payable to unspecified Defendants. Id.
Plaintiffs claim that they were not given a copy of any of the loan documents prior to closing, permitted to review the documents, or provided more than a few minutes to sign them, and that the notary instructed Plaintiffs to sign and initial the documents without any explanation of their contents. Id. ¶ 29. Plaintiffs also allege that they never received the required copies of a proper notice of cancellation. Id. The FAC contains allegations that Defendants willfully prevented Plaintiffs from receiving or reviewing the documents in order to hide the facts surrounding their loan, and that Defendants continue to hide facts from Plaintiffs. Id. ¶ 30.
On December 23, 2004, Plaintiffs completed the loan on the Property, and the terms of the loan were memorialized in a Promissory Note that was secured by a Deed of Trust. The Deed of Trust identified Defendant DSL Service Company ("DSL") as trustee and Defendant Downey Savings and Loan Association, F.A. ("Downey"), as the Lender. More than four years later, on or about January 8, 2009, Defendant FCI Lender Services, Inc. ("FCI"), agent to DSL, sent Plaintiffs a Notice of Default and Election. Plaintiffs allege that they responded by mailing a Qualified Written Request ("QWR") to Downey pursuant to the Real Estate Settlement Procedures Act ("RESPA") on or about June 9, 2009, and that the QWR contained a demand to rescind the loan under provisions of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et. seq. Plaintiffs claim that Downey "has yet to properly respond to this Request." Id. ¶ 32. On or about January 12, 2009, FCI filed a Notice of Default in Santa Clara County, California and on April 16, 2009, FCI filed a Notice of Trustee's Sale. Id. ¶¶ 42-43. Plaintiffs allege that none of the Defendants is a "person entitled to enforce" the security interest under the Note and Deed of Trust and that they discovered Defendants' alleged misrepresentations and unlawful conduct only within the past year. Id. ¶¶ 33, 49.
U.S. Bank National Association is the Successor in Interest to the Federal Deposit Insurance Corporation as Receiver for Downey Savings and Loan Association, F.A.
Plaintiffs filed their original complaint on June 16, 2009, asserting claims under TILA, RESPA, and California law. They filed the operative FAC on August 7, 2009 alleging claims for: (1) violations of TILA by Downey; (2) violations of California's Rosenthal Act, Cal. Civ. Code § 1788 et seq. by Downey and FCI; (3) negligence against all Defendants; (4) violations of RESPA by Downey; (5) breach of fiduciary duty by Saraydarpour, Cedar, Marguerite Nogosek, and Downey; (6) fraud by all Defendants; (7) violations of California's Unfair Competition Law ("UCL"), Bus. Prof. Code § 17200 et seq. by all Defendants; (8) breach of contract by Saraydarpour, Nogosek, and Downey; (9) breach of the implied covenant of good faith and fair dealing by Saraydarpour, Nogosek, and Downey; and (10) wrongful foreclosure against Downey, FCI, and DSL.
In their opposition papers, Plaintiffs agree to dismiss their Rosenthal Act claim against U.S. Bank without prejudice. Opp. Mot. to Lender Defendants at 10, n. 3.
All Defendants move to dismiss for failure to state a claim upon which relief can be granted. Downey, FCI, and DSL ("Lender Defendants") move in the alternative for a more definite statement, and Cedar, Saraydarpour, and Nogosek ("Loan Broker Defendants") move additionally to dismiss for lack of subject matter jurisdiction.
II. MOTION TO DISMISS
A. Legal Standard
1. Rule 12(b)(6) Motion to Dismiss
"Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory." Mendiondo v. Centinela Hosp. Medical Center, 521 F.3d 1097, 1104 (9th Cir. 2008). For purposes of a motion to dismiss, "all allegations of material fact are taken as true and construed in the light most favorable to the nonmoving party." Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-338 (9th Cir. 1996). However, "[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle [ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citations omitted). Leave to amend must be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. Lucas v. Department of Corrections, 66 F.3d 245, 248 (9th Cir. 1995).
1. Rule 12(b)(1) Motion to Dismiss
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) challenges the jurisdiction of the court over the subject matter of the complaint. Fed.R.Civ.P. 12(b)(1). It is a fundamental precept that federal courts are courts of limited jurisdiction. Limits upon federal jurisdiction must not be disregarded or evaded. Owen Equipment Erection Co. v. Kroger, 437 U.S. 365, 374, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978). The plaintiff has the burden to establish that subject matter jurisdiction is proper. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). This burden, at the pleading stage, must be met by pleading sufficient allegations to show a proper basis for the court to assert subject matter jurisdiction over the action. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189, 56 S.Ct. 780, 80 L.Ed. 1135 (1936); Fed.R.Civ.P. 8(a)(1). When a defendant challenges jurisdiction "facially," all material allegations in the complaint are assumed true, and the question for the court is whether the lack of federal jurisdiction appears from the face of the pleading itself. Thornhill Publishing Co. v. General Telephone Electronics, 594 F.2d 730, 733 (9th Cir. 1979).
B. Documents Considered by the Court
The Court may consider, under the incorporation by reference doctrine, documents that are connected to the loan transaction at issue as to which both Plaintiffs and Defendants make unopposed requests for judicial notice. For purposes of a motion to dismiss under Rule 12(b)(6), the pleadings are deemed to include "documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleading." See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), cert. denied, overruled on other grounds by Galbraith v. City of Santa Clara, 307 F.3d 1119 (9th Cir. 2002); see also In re Stac Elcs. Sec. Litig., 89 F. 3d 1399, 1405 n. 4 (9th Cir. 1996) (noting that complete copies of documents whose contents are alleged in the complaint may be considered in connection with a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6)).
Lender Defendants contend that the Court should not consider Plaintiffs' papers in opposition to their motion to dismiss as the papers were filed three days late and exceed the page limit by seven pages. The Court will consider the opposition papers because it does not appear that Lender Defendants were prejudiced by Plaintiffs' noncompliance with the Court's local rules. The Court directs Plaintiffs to comply with the local rules in future filings.
1. Statute of limitations
Plaintiffs seek both money damages, for which the applicable limitations period is one year, see 15 U.S.C. § 1640(e), and rescission, for which the limitations period is three years, see 15 U.S.C. § 1635(f). The FAC alleges that the loan transaction at issue in this action was consummated on December 23, 2004 and that the mortgage was sold at a foreclosure sale on June 12, 2009. FAC ¶ 31, D. RJN, Ex. A. Plaintiffs did not file their original complaint until June 16, 2009, four and a half years after the loan transaction was consummated. It is undisputed that both the one-year time limit of § 1640(e) and three-year time limit of § 1635(f) have expired.
Plaintiffs claim, however, that "the doctrine of equitable tolling suspends the [one-year] statute of limitations until borrowers have or had reasonable opportunity to discover the fraud or the non-disclosures that form the basis of a TILA action." Opp. Mot. to Lender Defendants at 8. The Ninth Circuit has held that equitable tolling of the TILA limitations period is authorized in appropriate circumstances. King, 784 F.2d at 915. Such circumstances exist where "a reasonable plaintiff would not have known of the existence of a possible claim within the limitations period." Santa Maria v. Pac Bell, 202 F.3d 1170, 1178 (9th Cir. 2002). In such a case, the limitations period may be extended "until the borrower discovers or had reasonable opportunity to discover the fraud or nondisclosures that form the basis of the TILA action." King, 784 F.2d at 915. A motion to dismiss on statute of limitations grounds should be granted "only if the assertions of the complaint, read with the required liberality, would not permit the plaintiff to prove that the statute was tolled." Plascencia v. Lending 1st, 583 F. Supp. 2d 1090, 1097 (N.D. Cal. 2008) (quoting Durning v. First Boston Corp., 815 F.2d 1265, 1278 (9th Cir. 1987)).
The FAC fails to meet even this liberal pleading standard. Plaintiffs' sole assertion regarding when they actually discovered Defendants' alleged fraud or non-disclosures is that "the misrepresentations and allegations stated herein were all discovered within the past year such that any applicable statute of limitations are extended or should be extended pursuant to the equitable tolling doctrine or other equitable principles." FAC ¶ 49. This allegation is merely a "conclusion[]" and "formulaic recitation" of the legal standard and contains no facts indicating how or when in the last year Plaintiffs discovered the alleged fraud or nondisclosures or what Plaintiffs learned that they had not known previously. Twombly, 550 U.S. at 555, see also Plascencia, 583 F. Supp. 2d at 1097.
Plaintiffs also claim that the three-year limitations period is inapplicable to their TILA rescission claim because Chapter 15 U.S.C. 1635(a) grants consumers "the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later . . ." Opp. Mot. to Lender Defendants at 9-10. Plaintiffs point out that Regulation Z of the Federal Reserve Board provides that Notice of the Right to Rescind "shall clearly and conspicuously disclose . . . the date the rescission period expires." 12 C.F.R. § 226.23(b)(1). Id.
However, unlike, § 1640(e), Chapter 15 U.S.C. § 1635(f) is not subject to equitable tolling. The statute states that the "right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this part have not been delivered to the obligor." 15 U.S.C. § 1635(f) (emphasis supplied). The Ninth Circuit has recognized that "§ 1635 is a statute of repose, depriving the courts of subject matter jurisdiction when a § 1635 claim is brought outside the three year limitation period." See Miguel v. Country Funding Corp., 309 F.3d 1161, 1164 (9th Cir. 2002). Consummation of the transaction occurs at "the time that a consumer becomes contractually obligated on a credit transaction." 12 C.F.R. § 226.2(a)(13). It is undisputed that the loan transaction at issue here was consummated not later than December 23, 2004, when the Deed of Trust was recorded in the official records of the Santa Clara County Recorder. P. RJN as to Lender Defendants, Ex. 2. Plaintiffs' rescission claim became untimely on December 23, 2007, nearly one and a half years before the instant action was filed. Moreover, the Property was sold on June 12, 2009, thereby extinguishing any remaining right to rescission under 15 U.S.C. 1635(f). See D. RJN, Ex. A.
Plaintiffs actually concede that the right to rescind expires in three years after consummation or upon transfer of all of the consumer interests in the property or upon sale of the property whichever occurs first in a footnote. Opp. Mot. to Lender Defendants at 10. n. 3.
2. TILA Disclosure Claims
Lender Defendants contend that Plaintiffs' TILA claims, even if not time-barred or extinguished by the sale of the Property, are pled so generally and in such conclusory fashion that they are left "guessing at the nature of the conduct" allegedly giving rise to a TILA violation. Lender Defendants MTD at 7. Under TILA, a creditor must provide several distinct disclosures to a borrower. See, e.g., 15 U.S.C. §§ 1635 (disclosure of right to rescind), 1637 (disclosure of annual percentage rate and other information in connection with open end credit plan), 1638 (disclosure of amount financed and other information in connection with transaction other than open end credit plan), 1639 (disclosure of annual percentage rate and other information in connection with certain types of mortgage). A borrower may bring an action for violation of any of these disclosure obligations. 15 U.S.C. § 1640. While Plaintiffs claim specifically that Downey failed to disclose "the Notice of Right to Cancel stating the date that the rescission period expires," FAC ¶ 39, the FAC alleges only generally the remaining alleged violations by Downey and fails to explain in any detail the deficiencies of the disclosures that were provided. Id. at ¶ 59. These allegations do not provide Downey with fair notice as to the nature of Plaintiffs' TILA claim.
D. RESPA claim
Plaintiffs allege that Downey violated RESPA by: (1) "failing to correctly and accurately comply with the disclosure requirements," FAC ¶ 83; (2) "failing and refusing to provide a proper written explanation or response to Plaintiffs' QWR" pursuant to 12 U.S.C. § 2605(e)(2), FAC ¶ 84; and (3) "engag[ing] in a pattern of non-compliance with the requirements of the mortgage servicer provisions of RESPA as set forth in 12 U.S.C. § 2605." FAC ¶ 85. Defendants argue that Plaintiffs' RESPA claim should be dismissed because it is time-barred, moot, and insufficiently pled.
1. Statute of Limitations
The Court agrees that applying "the longest statute of limitations available under RESPA," Plaintiffs' RESPA disclosure claims are time-barred. Vrabel v. JP Morgan Chase Bank, N.A. No. C-C-09-1278 MMC 2009 WL 2421856 (N.D. Cal. 2009) (applying 12 U.S.C. § 2614's three-year statute of limitations to the assertion of a violation of RESPA disclosure claim). As with their TILA claims, Plaintiffs contend that they are entitled to equitable tolling, but as with their TILA claims they allege no facts in support of this legal conclusion. See supra III.D. (concluding that Plaintiffs' FAC failed to plead how or when they learned of the alleged fraud or nondisclosures and was merely a recitation of the legal standard for equitable tolling).
2. Sufficiency
Citing 12 U.S.C. § 2601, Plaintiffs acknowledge that the "only disclosures mandated under RESPA at the time of closing are those pertaining to escrow costs." Opp. Mot. to Lender Defendants at 17. Section 2601 does not give rise to a private right of action. See Sanborn v. American Lending Network, 506 F.Supp.2d 917, 922 (C.D. Utah 2007). Even if a private right of action did exist for nondisclosures under RESPA, the FAC fails to allege what escrow cost disclosures Downey failed to make.
3. Justiciability
Plaintiffs also allege that Downey "fail[ed] and refus[ed] to provide a proper written explanation or response to Plaintiffs' QWR" pursuant to 12 U.S.C. § 2605(e)(2). FAC ¶ 84. Plaintiffs allege that they mailed a QWR to Downey on June 9, 2009. FAC ¶ 32. Based on their own allegations, it thus appears that Plaintiffs' claim based on the QWR was not yet ripe at the time the FAC was filed, as the sixty-day response period to which Defendants were entitled had not elapsed. 12 U.S.C. § 2605(e)(2) (obligating a servicer to provide a written explanation "[n]ot later than 60 days (excluding legal public holidays, Saturdays, and Sundays) after the receipt from any borrower of any qualified written request"). Plaintiffs argue in their opposition papers that Defendants also failed to acknowledge receipt of the QWR within twenty days as required. 12 U.S.C. § 2605(e)(1). However, there are no allegations to this effect in the FAC. This omission likely is curable by amendment.
The FAC was filed on August 7, 2009. Counting from the date Plaintiffs mailed the QWR, the sixty day period (excluding legal public holidays, Saturdays, and Sundays) lapsed on September 2, 2009.
E. Supplemental jurisdiction
Plaintiffs' TILA and RESPA claims provide the sole basis for federal subject matter jurisdiction. Because it remains unclear whether Plaintiffs have any viable federal claims, the Court will defer its review of Plaintiffs' remaining state-law claims. Wade v. Regional Credit Ass'n, 87 F.3d 1098, 1101 (9th Cir. 1996) (holding that "where a district court dismisses a federal claim, leaving only state claims for resolution, it should decline jurisdiction over the state claims and dismiss them without prejudice.")
Loan Broker Defendants move to dismiss for lack of subject matter jurisdiction because Plaintiffs fail to state a claim based upon a federal question against them in particular. While Plaintiffs do allege only state claims against Loan Broker Defendants, these claims arise out of the same residential mortgage transaction as those that are the subject of Plaintiffs' federal claims against Lender Defendants. FAC ¶ 1 (asserting jurisdiction under 28 U.S.C. § 1367 based upon the state claims arising out of the same controversy and sequence of events). As long as Plaintiffs' federal claims against Lender Defendants remain viable, this Court will maintain supplemental jurisdiction as to all state claims arising out of the same residential mortgage transaction. Bahrampour v. Lamper, 356 F.3d 969, 978 (9th Cir. 2004), citing Trs. of the Constr. Indus. Laborers Health Welfare Trust v. Desert Valley Landscape Maint., Inc., 333 F.3d 923, 925 (9th Cir. 2003) (internal quotations and citations omitted) (holding that a "state law claim is part of the same case or controversy when it shares a 'common nucleus of operative fact' with the federal claims and the state and federal claims would normally be tried together."); Executive Software N. Am., Inc. v. United States Dist. Court, 24 F.3d 1545, 1557-58 (9th Cir. 1994) (alteration in original) (internal quotations and citations omitted) (holding that a Court should consider "the underlying objective of most sensibly accommodat[ing] the values of economy, convenience, fairness and comity" in exercising supplemental jurisdiction).
G. Motion for a More Definite Statement
Because it will grant Defendants' motions to dismiss with leave to amend, the Court declines to address Lender Defendants' alternative motion for a more definite statement.
IV. ORDER
Good cause therefor appearing, Defendants' motions to dismiss are GRANTED. Because the FAC is Plaintiffs' first pleading that has been reviewed by the Court, and because it is not entirely clear that at least some of the deficiencies of the FAC could not be cured by amendment, Plaintiffs shall have leave to amend with the exception of Plaintiffs' TILA rescission claim, as to which dismissal is without leave to amend. Any amended complaint shall be filed within thirty (30) days of the date this order is filed