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Rosales v. Downey Savings & Loan Association

March 2, 2009


The opinion of the court was delivered by: Hayes, Judge


The matter before the Court is the Motion to Dismiss (Doc. # 4) filed by Defendant U.S. Bank National Association.


On October 27, 2008, Plaintiffs initiated this action by filing a Complaint in the Superior Court of California, County of San Diego. Not. of Removal, p. 2. On January 12, 2009, Defendants removed the Complaint to this Court (Doc. # 1).

A. Factual Allegations in the Complaint

Plaintiffs own real property in Chula Vista, CA (the "Property"). On June 16, 2006, Plaintiffs refinanced the Property with Defendant Downey Savings and Loan Association, F.A. ("Downey"). Downey "aggressively was marketing its payment option adjustable rate mortgage ('Option ARM')", which is a complicated loan product that "was very difficult to understand because of the double talk and misleading and deceptive language." Complaint, ¶ 12. "Plaintiff was told that the loan would be a fixed rate of 6% which at the time of closing was 7.107% and when she protested about the change of rate, Defendant told them to focus on the payment of $1,397.32 which was based on the teaser rate of 1.374%. No further explanations were given [] at the time of signing the loan documents." Id., ¶ 13. "When Defendants made the above alleged representations to Plaintiff, they knew them to be false and made the representations with the intention to deceive and defraud Plaintiff and to induce Plaintiff to act in reliance on these representations in the manner alleged, or with the expectation that Plaintiff would so act." Id.

The interest rate "went up from 1.375% to the maximum 10.950% in the second month." Id., ¶ 14. When the one month Option ARM expired, "the loan immediately became an Adjustable rate loan." Id., ¶ 15. "Unlike most adjustable rate loans, where the rate can only change once [e]very year or every six months, the interest rate on the Defendant's Option ARM changed every month." Id.

Plaintiffs had several payment options during the 30-year life of the loan. The "minimum" payment option was based on the introductory interest rate of 1.375%, which was "substantially less than the interest accruing on the loan." Id., ¶¶ 16, 17. However, "the loan balance on Plaintiffs' Option ARM also has a negative amortization cap buried in the fine print of 115% of the original principal of the loan. If the balance hits the cap, the monthly payment is immediately raised to the fully amortizing level.... When that happened, Plaintiff experienced significant 'payment shock.'" Id., ¶ 18. Plaintiffs had the option of making an interest-only payment instead of making the minimum payment because of their limited income. Alternatively, Plaintiffs "could choose to make a fully amortizing principal and interest payment based on either a 15-year or a 30-year term which was out of the question in view of Plaintiffs limited resources." Id., ¶ 19. Plaintiffs could not make the payments because the "negative amortization was so high." Id., ¶ 26. "Notwithstanding the refinance, negative amortization continued causing the loan to be recast with monthly payments exceeding Plaintiffs' income. [Downey] promised Plaintiffs that they could refinance again in a few months to make their payments affordable." Id.

As part of the loan package on the Option ARM described above, Defendants purportedly prepared and tendered to Gloria S. Rosales and Carlos M. Rosales, a single man, Husband and Wife, as Trustor, a Deed of Trust dated June 16, 2006, encumbering the Subject Property recorded on June 22, 2006, as Instrument Number 2006-0443678 of Official Records in the Office of the County Recorder of San Diego County.

Id., ¶ 30.

Downey "and the brokers it accepted as 'business partners' misrepresented or obfuscated the true terms of the Option ARMs offered by [Downey]." Id., ¶ 24. Downey "and its business partner brokers also misrepresented or obfuscated how difficult it might be for borrowers to refinance an Option ARM loan." Id., ¶ 25. Defendants "knew, or should have known" that Plaintiffs could never pay the loans according to their terms; "[t]he subject loan transaction was economically impossible from [its] inception." Id., ¶ 27.

B. Claims for Relief

First Cause of Action: Quiet Title (Against All Defendants)

Plaintiffs allege that the recordation of the Deed of Trust "was wrongful and should be voided by virtue of Defendants' fraudulent conduct alleged in this complaint." Id., ¶ 32. Plaintiffs "seek[] to quiet title in the Subject Property as to each Defendant" on grounds that "each such Defendant has no right, title, estate, lien, or interest in the Subject Property." Id., ¶ 33.

Second Cause of Action: Injunctive Relief (Against All Defendants)

Plaintiffs request that Defendants "be enjoined from in any way proceeding with foreclosure or removing, evicting, or in any way interfering with Plaintiffs' quiet and exclusive possession and occupancy of the Subject Property whether by private power of sale, an unlawful detainer court action, or otherwise." Id., ¶ 35.

Third Cause of Action: Fraud (Against All Defendants)

Plaintiffs allege that Defendants knew or should have known at the time the loan documents were prepared and tendered that it was not possible for Plaintiffs to pay the loan; that the worse the loan, the more money Defendants made; and that the loan was unconscionable. Plaintiffs allege that nevertheless, Defendants knowingly and falsely represented that the loan was viable and that Plaintiffs could make the payments. Plaintiffs allege that "[i]n reasonable reliance on these representations, Plaintiffs [were] induced to and did sign loan documents." Id., ¶ 40. Plaintiffs allege that "[a]s a proximate result of the fraudulent conduct of Defendants," Plaintiffs "signed loan documents purportedly transferring a security interest in their home that were unrealistic, unreasonable and oppressive for persons in Plaintiff's position thereby causing Plaintiffs damages." Id., ¶ 41.

Fourth Cause of Action: Negligent Infliction of Emotional Distress (Against All Defendants)

Plaintiffs allege that "Plaintiffs were financially unsophisticated and vulnerable to the importunities of Defendants who falsely represented themselves as reputable Mortgage Lenders, this relationship giving rise Defendants' duty to exercise due care towards Plaintiffs;" that Defendants' conduct breached their duty of care; and that "[a]s a proximate result of said breach ...

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