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Jefferson v. Chase Home Finance

December 14, 2007; as amended April 29, 2008


The opinion of the court was delivered by: Thelton E. Henderson, District Judge.


This matter came before the Court on November 14, 2007 on Defendant's Motion for Summary Judgment. This class action for damages, restitution, and injunctive relief alleges that certain of Defendant Chase Home Finance's practices relating to the way it services mortgages violate California's Consumer Legal Remedies Act, Cal. Civil Code §§ 1750 et seq. ("CLRA"), the False Advertising Act, Cal. Business and Professions Act §§ 17500 et seq., the Unfair Competition Law, Cal. Bus. & Prof.Code § § 17200 et seq. ("UCL"), and constitute conversion under California law. Chase moves for summary judgment.

As discussed more fully in this Order, Plaintiff has significantly reformulated his claims in his opposition to Chase's summary judgment motion. Nonetheless, his theories of liability fall within a broad construction of the First Amended Complaint. The Court will therefore construe Plaintiff's opposition as a request to amend the Complaint to conform to the more specific theories set out in response to this Motion. Apache Survival Coalition v. United States, 21 F.3d 895, 910-911 (9th Cir.1994).

This Order analyzes Plaintiff's claims as so articulated. For reasons set out below, the Court finds that Plaintiff's state law claims are not preempted by the National Bank Act and regulations promulgated thereunder. Moreover, Chase has not shown it is entitled to summary judgment on any of Plaintiff's causes of action. Accordingly, Chase's motion for summary judgment is DENIED.


Plaintiff T.C. Jefferson refinanced his Oakland Home in February, 2003. He signed a promissory note ("Note") which described, among other things, the borrower's right to prepay:

I have the right to make payments of Principal at any time before they are due....When I make a Prepayment, I will tell the Note Holder in writing that I am doing so. I may not designate a payment as a Prepayment if I have not made all the monthly payments due under the Note.

I may make a full Prepayment or partial Prepayments without paying a Prepayment charge. The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note. However, the Note Holder may apply my Prepayment to the accrued and unpaid interest on the prepayment amount, before applying my Prepayment to reduce the Principle amount of the Note....

Jefferson Decl. Exh. A, Note ¶ 4. The Deed similarly provided that:

2. Application of Payments or Proceeds:

... all payments accepted and applied by Lender shall be applied in the following order of priority: (a) interest due under the Note; (b) principal due under the Note; (c) amounts due under Section 3.... Any remaining amounts shall be applied first to late charges, second to any other amounts due under this Security Instrument, and then to reduce the principal balance of the Note.... [¶] Voluntary prepayments shall be applied first to any prepayment charges and then as described in the Note.

In July, 2003, Defendant Chase Home Finance L.L.C. ("Chase") began servicing Plaintiff's loan.

The payment coupon at the bottom of each monthly statement Plaintiff received from Chase provided:

Please designate how you want to apply any additional funds. Undesignated funds first pay outstanding late charges and fees, then principal. Once paid, additional funds cannot be returned.

Jefferson Decl. Exh. B. (emphasis added).

In December, 2004, Plaintiff called Chase to see how he could make occasional prepayments. The customer service representative told him any prepayment would be used to pay principal, and mentioned no special requirements for payment. Jefferson Decl. ¶ 4.*fn1 Soon afterward, Plaintiff began making additional monthly prepayments of $167.00 per month, using the automatic "bill pay" service of his own bank. He also continued to pay his regular monthly principal and interest.

In late January, 2005, Plaintiff received his monthly statement and was surprised to learn that the additional $167.00 payment he had made that month was not applied to the principal, but instead had been placed in "suspense." He called Chase customer service to find out why the payment had not been applied to the principal on his loan. The customer representative informed him that he would have to make a formal request in writing that his extra payment be applied to principal.

On January 24, 2005, Plaintiff sent Chase a letter requesting that his additional payments be applied to the principal:

... [I] formally request that Chase Bank apply each individual monthly payment of $167 to the principal of loan # [ ] beginning with the January 2005 payment.

Each $167.00 payment will be made in addition to the standard monthly payment and should be applied to the principal of the loan immediately upon receipt.

Jefferson Decl. Exh. D. Chase responded with a letter stating "[w]e have received your request to apply the amount of $167.00 each month to the principal balance of your loan. Your account has been noted." Id. Exh. E.

Letters notwithstanding, Chase failed to apply subsequent prepayments to the principal of the loan. The next month Plaintiff again received notice that the $167.00 had been applied to "suspense." What followed over the next few months was a series of phone calls, letters, requests for information and action, and form-letter responses.*fn2 Although Chase eventually credited most of Plaintiff's $167.00 payments to principal, Plaintiff states that not all of the prepayments have been credited on the date they were received. Plaintiff alleges that Chase continues to apply each of Plaintiff's $167.00 payments to "suspense" rather than to principal.

Chase asserts that its practice is to apply additional payments received after the full monthly payment to principal only if the payments are specifically designated as principal prepayments. Christina Copeland, a Chase Vice-President who has worked in the payment processing department for nine years, explained that if the borrower's loan is current, and Chase receives extra funds in the same check as the regular monthly payment, Chase automatically applies the extra funds directly to prepayment of principal. If, however, Chase receives undesignated funds after the borrower has made a regular monthly payment, Chase places the funds in "suspense," and requests the borrower how those funds should be applied in the next monthly statement (e.g., to the following month's payment, to principal, to unpaid fees, or to escrow).

Chase explains it adopted this practice because many borrowers send in multiple undesignated partial payments each month to make up a regular monthly payment. If Chase were to process partial payments as prepayments of principal, those borrowers might not have sufficient funds to make up a regular mortgage payment at the end of the month, and inappropriately incur a late fee. Copeland Declaration ¶¶ 7-8.

Plaintiff filed his First Amended Complaint in May, 2007. The First Cause of Action alleges violation of the Consumer Legal Remedies Act, Cal. Civil Code § 1750 et seq. , specifically, that Chase unlawfully:

• made representations that its services had sponsorship approval, characteristics or benefits it did not have, in violation of 1770(a)(5);

• advertised goods and services with intent not to sell them as advertised, in violation of § 1770(a)(9);

• made representations that a transaction conferred or involved rights, remedies or obligations which it did not have in violation of § 1770(a)(14).

First Amended Complaint ¶¶ 20-22. The Second Cause of Action alleges that Chase violated California's False Advertising Act, Business and Professions Code § 17500 et seq. , by disseminating information about its services that contained untrue or misleading statements which Chase knew or should have known were misleading. FAC ¶ 29. The Third Cause of Action is brought under California's Unfair Competition Law, Business and Professions Code § 17200 et seq. , and alleges that Chase engaged in unfair, illegal, and/or fraudulent practices. Id. ¶¶ 32-36. The Fourth Cause of Action is one for conversion. Id. ¶¶ 37-44.

Chase moves for summary judgment on all claims.


Summary judgment is appropriate when there is no genuine dispute as to material facts and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Material facts are those that may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute as to a material fact is "genuine" if there is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id. The court may not weigh the evidence and must view the evidence in the light most favorable to the nonmoving party. Id. at 255.

A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion, and of identifying those portions of the pleadings and discovery responses that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the moving party will have the burden of proof at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. Id. at 322-23. However, on an issue for which its opponent will have the burden of proof at trial, the moving party can prevail merely by "pointing out to the District Court ... that there is an absence of evidence to support the nonmoving party's case." Id. at 325. If the moving party meets its initial burden, the opposing party must then "set forth specific facts showing that there is a genuine issue for trial" to defeat the motion. Fed.R.Civ.P. 56(e); Anderson, 477 U.S. at 250.


I. Plaintiff's Claims Under State Law

A threshold question is the precise nature of Plaintiff's state law claims. In opposition to summary judgment, Plaintiff argues that his claims stem from Chase's misrepresentations about how it would credit payments. Opposition at 13-18. Specifically, Plaintiff points to Chase's statement in the payment coupons Plaintiff received every month that "[u]ndesignated funds first pay outstanding late charges and fees, then principal," Jefferson Decl. Exh. B, as the "primary language" on which Plaintiff relies. At the hearing, Plaintiff also identified the language in the deed of trust setting out the "Application of Payments or Proceeds," and, with respect to Mr. Jefferson's individual claim, the disputed telephone statements of customer service representatives as unlawful misrepresentations. Reporter's Transcript of November 14, 2007 Hearing ("Hearing RT") at 36, 42-43, 45.

Chase contends this is a complete reinvention of Plaintiff's claims-that his First Amended Complaint alleged that Chase's practice of holding payments in suspense rather than immediately applying them to the loan principal was unlawful under state consumer protection laws, and any misrepresentation claims were limited, at most, to the language in the mortgage note allowing borrowers to make prepayments to principal without penalty. Chase protests that Plaintiff should not be permitted to allege new facts and theories at this stage to escape summary judgment.

Plaintiff is not alleging an entirely new theory, distinct from what he alleged in the First Amended Complaint and articulated in discovery. The Complaint certainly intimated that Chase's substantive failure to apply payments to Plaintiff's account promptly was unlawful. See, e.g., FAC ¶¶ 3, 11, 15(b) (common question of law is whether it was lawful for Chase "to fail to promptly apply prepayments to its consumers' mortgage accounts"). But it also clearly alleged that Chase's misrepresentations were unlawful. For example, Plaintiff alleged that "DEFENDANTS' mortgage notes and other documents relating to these mortgages specifically include provisions allowing California consumers to make such prepayments without penalty, and/or provisions that such payments will be applied to the account principal or unpaid interest." FAC ¶ 10. The First Cause of Action alleges that Chase's acts were "intended to result in DEFENDANTS making representations that their services had ... characteristics or benefits that they did not have," advertised goods and services with the intent not to sell them as advertised, and made representations that "a transaction conferred or involved rights, remedies or obligations" that it did not have or involve, in violation of the CLRA. FAC ¶¶ 20-22. The Second Cause of Action explicitly alleges deceptive advertising. The UCL claim generally alleges that the above was unlawful, deceptive, illegal, and/or fraudulent. In sum, the First Amended Complaint heavily emphasized misrepresentation as a basis for the claims.

Plaintiff did not previously identify the payment coupon statement as an unlawful misrepresentation. The Complaint does not mention it. The most specific cause of action alleges only that the "untrue and/or misleading statements and misrepresentations made by these DEFENDANTS" included "words and images disseminated to the general public" and "clauses in mortgage notes and deeds of trust" that stated or implied consumers could make prepayments without penalty, and that such payments would be promptly applied to the consumers' account principals or unpaid interest. FAC ¶ 29(a), (b).

Nor did Plaintiff specifically identify the payment coupon statement ...

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