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United States District Court, N.D. California, San Jose Division

December 13, 2005.

CRISTINA PLATA, et al., Plaintiffs,

The opinion of the court was delivered by: JEREMY FOGEL, District Judge

On July 5, 2005, Plaintiffs Cristina Plata ("Plata") and Luis Mapula ("Mapula") filed a complaint against Defendants Long Beach Mortgage Company ("LBMC"), Vision Quest 21 Inc. dba Century 21 Su Casa ("Vision Quest"), Mariposa Mortgage, Inc. ("Mariposa"), Washington Mutual, Bic D. Pho ("Pho"), Felipe Antonio Neri ("Neri"), Antonio Sandoval ("Sandoval"), Raphael Angel Berrios ("Berrios"), and Does 1 to 50. Plaintiffs allege fourteen claims for relief:*fn2 (1) Violation of the Truth in Lending Act, 15. U.S.C. § 1601 et seq., and Federal Reserve Regulation Z. 12 C.F.R. § 226 et seq., (2) Violation of the Real Estate and Settlement Procedures Act, 12 U.S.C. § 2601 et seq. and Federal Reserve Regulation X, 24 C.F.R. § 3500 et seq., (3) Predatory Lending, California Financial Code § 4970 et seq., (4) Violation of the Unfair Competition Act, California Business and Processions Code § 17200 et seq., (5) Violation of the False Advertising Act, California Business and Processions Code § 17500 et seq., (6) Constructive Fraud, California Civil Code, § 1573, (7) Intentional Misrepresentation, California Civil Code §§ 1709-1710, (8) Concealment, California Civil Code §§ 1709-1710, (9) Negligent Misrepresentation, California Civil Code §§ 1709-1710, (10) Breach of Fiduciary Duty, (11) Negligence, (12) Notary Malfeasance, (13) Violation of California Civil Code § 1632, and (14) Rescission/Cancellation, California Civil Code § 1689 and "Court's Inherent Equitable Authority." Plaintiffs request damages and injunctive and declaratory relief.

Plaintiffs allege the following facts. Plata and Mapula are of Mexican origin and, at all relevant times, were married to each other. Also at all relevant times, both Plaintiffs spoke minimal English and could not read or write in English. In April 2004, Plata attended a flea market in San Jose, California, where Vision Quest had a marketing table. An individual who identified himself as a representative of Century 21 Su Casa, which Plaintiffs allege was a name under which Vision Quest did business, approached Plata and offered to assist her with the purchase of a home. She explained that she was living in a converted single-room garage and was not actively shopping for a home, but nevertheless gave her contact information to the representative. Neither Plata nor Mapula had ever purchased any real property.

  Approximately one week after the introduction at the flea market, Humberto Madero ("Madero") contacted Plaintiffs and invited them to Vision Quest's office for an evaluation of their home-purchasing options. Approximately one week later, Plaintiffs met Madero at the Vision Quest office, where Madero introduced Plaintiffs to his supervisor, Neri. Neri evaluated Mapula's credit history and informed him that he would be able to purchase a home with no down payment. Madero then drove Plaintiffs to several properties for sale, of which the Plaintiffs liked a home located at 2834 Burdick Way in San Jose, California ("Burdick property"), owned by Sandoval. Madero told Plaintiffs that the monthly payment should be no more than $2,800. In a meeting at the end of April, 2004, Neri informed Plaintiffs that their monthly payments would be approximately $2,700 and that Sandoval would give Plaintiffs $8,000 which could be used toward the purchase of the property. Mapula then signed a purchase agreement.

  In early May, 2004, Madero informed Plaintiffs for the first time that they would have to pay to Neri all closing costs, represented to be $5,000, up front. Plaintiffs assert that they would not have purchased the property if they had known that they would need to pay the closing costs up front, but that Mapula believed that he had entered into a binding agreement. Plaintiffs borrowed $5,000 to pay Neri.

  Approximately one week later, while at the Vision Quest office, an employee of Vision Quest asked Mapula, through a Spanish-language interpreter, how much he and Plata could afford to pay in monthly mortgage payments. Mapula responded that he understood that the monthly payments would be approximately $2,700 and that they could not afford a monthly payment greater than $3,000. Later that month, Plata said to the interpreter that he and his wife could not afford a monthly mortgage payment of $3,000. The interpreter told Plata that he and Mapula would be able to move into the Burdick property no later than June 14, 2005. Soon thereafter, Plata traveled to Mexico for several weeks.

  In early June, Mapula tried unsuccessfully to reach Madero by telephone and, subsequently, went to the Vision Quest office. Neri then informed Mapula that the monthly payments would be $3,200. Mapula responded that he and his wife could not afford this payment, to which Neri responded that they could refinance the property in 24 months so that the monthly payment could be lowered. Neri also told Mapula that he would receive several thousand dollars in cash which would ease the burden of the monthly payments. Neri further advised Mapula that if he was unable to make payments, he should contact Neri, who would refinance the home, but that Mapula could not fall behind on the payments for more than one month.

  In early July, 2004, at the request of Neri, Mapula met with Berrios and signed certain documents. Mapula noticed that one of the documents contained a figure between $3,500 and $4,500. Neri explained that the figure was incorrect, and would be corrected later to $3,200. At this meeting, Mapula informed Berrios that Plata was in Mexico and would not return until late July, 2004. Neri then handed the documents that were to be signed by Plata to Berrios, and directed Berrios to make sure that the paperwork was completed. Plaintiffs believe that these documents included an inter-spousal conveyance of a community property interest from Plata to Mapula. This conveyance was recorded as document number 17882693 at the Santa Clara Count Recorder's office on or about July 6, 2004. Though Plata claims never to have met Berrios or signed the conveyance, this document was notarized by Berrios as having been signed by Plata in his presence on June 24, 2004.

  Soon thereafter, Mapula was informed that escrow had closed and he took possession of the Burdick property. Two weeks after he took possession, Mapula again met with Neri. Neri informed Mapula that he would not receive the several thousand dollars which had been discussed previously, but that Neri had either contributed or arranged to contribute $16,000 toward the purchase of the property. Neri had Mapula sign a note for $16,000 payable to Sandoval, though the street address listed on the note was the address of the Vision Quest office. This was the first that Plaintiffs learned of a $16,000 note.

  Plaintiffs have since learned that the loan application prepared by Neri contained many false or misleading representations about Mapula's assets, income, and employment history, significantly exaggerating his financial capacity. They learned also that they had purchased the property with two loans underwritten by LBMC, the total principal of which was $543,000. Plaintiffs' combined monthly mortgage payment is more than $3,500. Washington Mutual subsequently acquired both of the LBMC loans. Plaintiffs believe that all of the documents related to their purchase of the Burdick property are written in English.

  In connection with Plaintiffs' loans, Mariposa received over $7,030 in fees and costs and a yield spread premium of $4,344 (which was not clearly disclosed as such to Plaintiffs). In addition, Mariposa charged Plaintiffs $75 for Mapula's credit report. The final HUD-1 shows that Vision Quest received $295 and Berrios received $250.

  Two motions are presently before the Court. First, Defendant LBMC moves to strike nine passages of Plaintiffs' complaint, selected from Plaintiffs' first and fourth claims and the prayer for relief. Second, Defendants LBMC and Washington Mutual move to dismiss the second and eleventh claims against LBMC and the thirteenth claim against both LBMC and Washington Mutual, pursuant to Federal Rule of Civil Procedure 12(b)(6).


  1. Motion to strike

  Defendant LBMC moves to strike nine selected passages of Plaintiffs' complaint. The Court may strike "from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). Motions to strike generally will not be granted unless it is clear that the matter to be stricken could not have any possible bearing on the subject matter of the litigation. LeDuc v. Kentucky Central Life Insurance Co., 814 F.Supp. 820, 830 (N.D. Cal. 1992). Allegations "supplying background or historical material or other matter of an evidentiary nature will not be stricken unless unduly prejudicial to defendant." Id. Moreover, allegations that contribute to a full understanding of the complaint as a whole need not be stricken. Id.

  The Court is disinclined to grant a motion to strike when, as in the instant case, the motion is essentially a request to rule on the merits of specific allegations presented in the complaint. However, at the hearing on December 9, 2005, the parties agreed to the following clarification of the complaint. First, to the extent that the rescission claim could be read as asserting a TILA claim, the complaint should not be so read. Instead, it should be read as asserting a common law claim for rescission. Second, with respect to the Unfair Competition Act claim, Plaintiffs have admitted that they cannot meet the requirements to assert standing on behalf of the general public. Thus, the complaint should be read not to assert such a claim. Accordingly, the Court DENIES the motion to strike, but orders that the complaint be read in the aforementioned ways.

  2. Motion to dismiss

  A complaint may be dismissed for failure to state a claim upon which relief can be granted for one of two reasons: (1) lack of a cognizable legal theory or (2) insufficient facts under a cognizable legal theory. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). For purposes of a motion to dismiss, all allegations of material fact in the complaint are taken as true and construed in the light most favorable to the nonmoving party. Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir. 1994). A complaint should not be dismissed "unless it appears beyond doubt the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Id. However, the Court "is not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged." Id. at 754-55. Motions to dismiss generally are viewed with disfavor under this liberal standard and are granted rarely. See Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir. 1997).

  A. Second claim: Violation of the Real Estate and Settlement Procedures Act and Federal Reserve Regulation X

  Plaintiff Mapula alleges the second claim, for violation of the Real Estate and Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq. and Federal Reserve Regulation X, 24 C.F.R. § 3500 et seq., against all Defendants except Washington Mutual. Plaintiff Plata does not allege this claim.

  Defendant LBMC moves to dismiss Mapula's second claim on the ground that under RESPA and Regulation X, a lender that makes federally regulated mortgage loans has only two obligations: (1) to provide a borrower a special information booklet, 12 U.S.C. § 2604(c) and 24 C.F.R. § 3500.6; and (2) to provide a borrower with "a good faith estimate of the amount or range of charges" that the borrower will incur with the settlement, 12 U.S.C. § 2604(c) and 24 C.F.R. §§ 3500.7(a) and (b). Mapula opposes the motion to dismiss this claim, correctly explaining that RESPA and Regulation X are broader than this characterization of them by LBMC. Mapula's claim is not that LBMC violated 12 U.S.C. § 2604, but rather that it violated 12 U.S.C. § 2607.

  Section 8(a) of RESPA, 12 U.S.C. § 2607(a), provides that "[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." Section 8(b) of RESPA, 12 U.S.C. § 2607(b), provides that "[n]o person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." Section 8 violations are further defined by 24 C.F.R. § 3500.14, "Prohibition against kickbacks and unearned fees."

  In 2001, the Department of Housing and Urban Development ("HUD") clarified its interpretation of §§ 2607(a) and (b). Real Estate Settlement Procedures Act Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, and Guidance Concerning Unearned Fees Under section 8(b), 66 Fed. Reg. 53,052 (Oct. 18, 2001) [hereinafter "Statement of Policy 2001-1"]. As originally set out in HUD's 1999 Statement of Policy, HUD established a two-part test for determining the legality of certain lender payments to mortgage brokers under RESPA:

(1) Whether goods or facilities were actually furnished or the services were actually performed for the compensation paid and;
(2) whether the payments are reasonably related to the value of the goods or facilities that were actually furnished or services that were actually performed. Statement of Policy 2001-1, 66 Fed. Reg. at 53,052.
  Yield spread premiums can be useful for borrowers who prefer not to pay up front premiums for loans, and would rather pay fees financed through higher interest rates on loans. However, HUD has explained that "in some cases less scrupulous brokers and lenders take advantage of the complexity of the settlement transaction and use yield spread premiums as a way to enhance the profitability of mortgage transactions without offering the borrower lower up front fees." Id. at 53,054. In these circumstances, "yield spread premiums serve to increase the borrower's interest rate and the broker's overall compensation, without lowering up front cash requirements for the borrower," and thus the yield spread premiums may not comply with the second part of HUD's two-part test. Id.

  Plaintiffs allege that, in connection with their loans, Mariposa received a yield spread premium of $4,344, which was not clearly disclosed as such to Plaintiffs. Complaint ¶ 89. In the second claim, Mapula alleges that because Neri received $5,000 in cash up front from Plaintiffs, Mariposa did not incur any up front costs that would justify a yield spread premium. Complaint ¶ 125. Further, Mapula alleges that because of the document falsification and the absence of all necessary disclosure and Spanish translation, the value of Mariposa's brokering services was $0. Id. ¶ 128. Thus, Mapula alleges that Mariposa's "acceptance of a yield premium spread, and defendant LBMC's payment of that yield spread premium, was an unlawful kickback and/or unearned fee under RESPA because it was not reasonably related to the performance of lawful services." Id. ¶ 130. Mapula contends that "Defendant LBMC should have known that defendant MARIPOSA did not earn the yield spread premium because, inter alia, `. . . common industry practice is that lenders follow underwriting standards that demand a review of originations and therefore lenders typically know that brokers have performed the services required . . .' If defendant LBMC had reviewed plaintiff MAPULA's loan origination, including his loan application, LBMC would have learned of the obvious red flags it contained." Id. ¶ 131 (internal citation omitted). In addition, Mapula's allegations include a reference to HUD's two-part test: "HUD's 2001-1 Policy Statement explains that the second prong of its two part test to determine the legality of yield spread premiums may not be satisfied when the loan broker does not offer the borrower the option to pay a lower amount of total fees up front." Id. ¶ 126.

  The Court concludes that plaintiff Mapula has sufficiently pled a violation of 12 U.S.C. § 2607 and 24 C.F.R. § 3500.14. Mapula alleges that, when considering the value of the brokerage services and the total compensation given for these services, LBMC has paid a yield spread premium that does not comply with the second part of HUD's two-part test. LBMC's only response to Mapula's explanation of his second claim is that "a yield spread premium provides a benefit to the borrower, not something grossly unnecessary." Reply 2. LBMC selectively quotes from HUD's Statement of Policy, which notes that a "yield spread premium [] can be a legitimate tool to assist the borrower." Statement of Policy 2001-1, 66 Fed. Reg. at 53,054 (emphasis added). LBMC ignores the portions of the Statement of Policy, noted above, which explain that, under some circumstances, a yield spread premium may not comply with the second part of HUD's two-part test. Accordingly, the Court will DENY LBMC's motion to dismiss Mapula's second claim.

  B. Eleventh claim: Negligence

  Plaintiffs Plata and Mapula allege their eleventh claim, for negligence, against only five of the named Defendants: Neri, Pho, Vision Quest, Mariposa, and LBMC. Plaintiffs allege that a "reasonably prudent" lender would not have originated the loans at issue in the instant case. Complaint ¶ 203. They allege that Defendants "acted negligently in failing to properly consider, investigate, evaluate or audit plaintiff MAPULA's loan application and/or ability to repay loans" and "failed to consider the usual underwriting factors for assessing creditworthiness when they loaned to plaintiff MAPULA." Id. at ¶¶ 204 and 205. In addition, they allege that Defendants "knew or should have known to utilize the best practices for underwriting and issuing loans when considering the LBMC loans to plaintiff MAPULA but negligently failed to do so." Id. at ¶ 206.

  Defendant LBMC moves to dismiss the claim for negligence on two grounds. First, LBMC argues that it is not directly liable because it owed no common law duty to Plaintiffs. Second, LBMC argues that it is not secondarily liable for any duty owed to Plaintiffs by their mortgage brokers because the mortgage brokers were not LBMC's agents.

  i. LBMC's direct liability

  California courts have held that, in general, there is no duty of care owed to a borrower by a lender. See, e.g., Nymark v. Heart Fed. Savings & Loan Assn., 283 Cal. Rptr. 53, 56 (Ct.App. 1991) ("[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money."). "Liability to a borrower for negligence arises only when the lender `actively participates' in the financed enterprise `beyond the domain of the usual money lender.'" Wagner v. Benson, 161 Cal. Rptr. 516, 521 (Ct.App. 1980) (citing Connor v. Great Western Sav. & Loan Assn., 69 Cal.2d 850 (1968); Bradler v. Craig, 79 Cal. Rptr. 401 (Ct. App. 1969); Kinner v. World Sav. & Loan Assn., 129 Cal. Rptr. 400 (Ct.App. 1976)).

  Plaintiffs contend that Nymark and Wagner are not controlling. In Nymark, the court held that the lender did not owe duty of care to the borrower when it conducted a property appraisal in the context of approving a loan. Nymark, 283 Cal. Rptr. 53. In Wagner, the court held that the lender owed no duty to the borrower with respect to the financial success of the investment made by the borrower with the borrowed funds. Wagner, 161 Cal. Rptr. at 521. Plaintiffs argue that, in making their analyses, the Nymark and Wagner courts should not have relied upon Connor v. Great Western Savings and Loan Association Connor, 69 Cal.2d 850. However, this Court is not in a position to question the analysis that led to the Nymark and Wagner courts' conclusions.

  Plaintiffs also argue that the holdings of Nymark and Wagner are restricted to the facts of those cases. They note in particular that Wagner applied to a commercial loan, whereas the loan at issue in the instant case was residential. They argue that "the special protection that lawmakers accord to residential home loans in consumer protection laws" — citing TILA, RESPA, HOEPA, California Civil Code § 1632 and California Financial Code § 4970 et seq. — support the conclusion that a lender of a residential loan owes a duty of care to a borrower even if a commercial lender does not. However, Plaintiffs do not cite any case authority for this proposition.

  In their opposition, Plaintiffs assert an additional theory of direct liability for negligence, contending that California Financial Code § 4973 creates a duty for a lender to evaluate a borrower's ability to repay a loan covered by that statute. California Financial Code § 4973(f)(1) establishes specific obligations that a lender owes to a borrower:

A person who originates covered loans shall not make or arrange a covered loan unless at the time the loan is consummated, the person reasonably believes the consumer, or consumers, when considered collectively in the case of multiple consumers, will be able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status, and other financial resources, other than the consumer's equity in the dwelling that secures repayment of the loan.
However, this section does not create a general duty by a lender to a borrower.

  Thus, Plaintiffs have not successfully alleged that LBMC owed them a duty that would establish direct liability. Accordingly, the Court will GRANT LBMC's motion to dismiss Plaintiffs' eleventh claim, for negligence, against LBMC, but only to the extent that it is an allegation of direct liability.

  ii. LBMC's duty as derived from an agency relationship with the mortgage brokers

  Plaintiffs make a general boilerplate allegation of agency among the defendants. Complaint ¶ 32. In addition, Plaintiffs allege that LBMC paid a yield spread premium to the mortgage broker. Id. at ¶ 130. Plaintiffs contend that these allegations are sufficient to plead that the mortgage broker was an agent of LBMC.

  LBMC argues that Plaintiffs have not sufficiently pled an agency relationship between it and the broker. LBMC contends that a mortgage broker is always the agent of the borrower, not the agent of the lender. It cites Wyatt v. Union Mortgage Co. for the proposition that a "mortgage loan broker is customarily retained by a borrower to act as the Borrower's agent in negotiating an acceptable loan." Wyatt, 24 Cal.3d 773, 782 (1979) (emphasis added). Plaintiffs correctly point out that this describes only the customary relationship between a borrower and a mortgage broker, and does not establish a bright line rule that a mortgage broker may never be the agent of a lender. In addition, as Plaintiffs' counsel noted at the hearing on December 9, 2005, allegations in the complaint support the inference that the brokers were not working as agents of the Plaintiffs.

  Under the liberal rules of pleading, Plaintiffs' allegations of agency are sufficient to survive a motion to dismiss. Accordingly, the Court will DENY LBMC's motion to dismiss Plaintiffs' eleventh claim, for negligence, but only to the extent that it is an allegation of secondary liability.

  C. Thirteenth Claim: Violation of California Civil Code § 1632

  Plaintiffs allege their thirteenth claim, for violation of California Civil Code § 1632, against only LBMC and Washington Mutual. Plaintiffs allege that "Defendant LBMC failed to provide any loan documentation in the Spanish language despite the fact that the LBMC loans were negotiated in Spanish." Complaint ¶ 217. They allege also that, pursuant to § 1632(k), Defendant Washington Mutual "must allow defendant LBMC to repurchase the loans secured by the Burdick property and defendant LBMC must repurchase and rescind such loans." Id. ¶ 218.

  Parties agree that § 1632 applies to the contracts at issue in the instant case. Section 1632(b) requires that:

Any person engaged in a trade or business who negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, orally or in writing, in the course of entering into any of the following, shall deliver to the other party to the contract or agreement and prior to the execution thereof, a translation of the contract or agreement in the language in which the contract or agreement was negotiated, which includes a translation of every term and condition in that contract or agreement.
Cal. Civ. Code § 1632(b). Section 1632(k) requires that:
Upon a failure to comply with the provisions of this section, the person aggrieved may rescind the contract or agreement in the manner provided by this chapter. When the contract for a consumer credit sale or consumer lease which has been sold and assigned to a financial institution is rescinded pursuant to this subdivision, the consumer shall make restitution to and have restitution made by the person with whom he or she made the contract, and shall give notice of rescission to the assignee. Notwithstanding that the contract was assigned without recourse, the assignment shall be deemed rescinded and the assignor shall promptly repurchase the contract from the assignee.
Cal. Civ. Code § 1632(k).

  Defendants LBMC and Washington Mutual move to dismiss Plaintiff Mapula's thirteenth claim on the ground that Plaintiffs do not allege that LBMC or Washington Mutual conducted business in Spanish or that they negotiated the contracts directly with Plaintiffs. However, Plaintiffs' theory of liability is secondary liability. As explained above, Plaintiffs have met the liberal pleading standards for agency liability. To the extent that it may not be clear from the complaint that the thirteenth claim is premised exclusively on secondary, rather than direct, liability, the Court directs the parties to read the thirteenth claim as alleging only secondary liability. Accordingly, the Court will DENY LBMC's motion to dismiss Mapula's thirteenth claim.


  Good cause therefore appearing, IT IS HEREBY ORDERED that the motion to strike is DENIED, and the parties are instructed to read the complaint in the aforementioned ways. IT IS FURTHER ORDERED that the motion to dismiss is GRANTED in part and DENIED in part.


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