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Yang v. Home Loan Funding

February 18, 2010

NICK N. YANG AND GER CT. MOUA, INDIVIDUALLY AND ON BEHALF OF OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
HOME LOAN FUNDING, INC., AND DOES 1 THROUGH 20, INCLUSIVE, DEFENDANTS



The opinion of the court was delivered by: Anthony W. Ishii Chief United States District Judge

ORDER ON DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' THIRD AMENDED COMPLAINT Documents # 97 and 101

This is a class action pursuant to the Truth In Lending Act against two named financial institutions, Home Loan Funding, Inc., and One West Bank, F.B.S., and several Doe defendants (collectively, "Defendants") who allegedly originated, serviced, purchased/sold or were otherwise involved in promoting or marketing a type of home mortgage loan called an Option Adjustable Rate Mortgage ("Option ARM"). Plaintiffs' Third Amended Class Action Complaint (the "TAC") names as defendants Home Loan Funding, Inc. ("HLF"), and defendant One West Bank, F.S.B. ("One West"), which was previously sued as Doe defendant #3. The named plaintiffs in this action, Nick N. Vang and Ger Ct. Moua ("Plaintiffs") are residents of Clovis, California. In the instant motion, defendant One West moves to dismiss the complaint in its entirety as to it. Federal subject matter jurisdiction exists pursuant to 28 U.S.C. § 1331. Venue is proper in this court.

PROCEDURAL HISTORY

The original complaint against HLF was filed on October 5, 2007. The first amended complaint, filed on October 26, 2007, alleged claims against HLF on behalf of the named plaintiffs and on behalf of a class of plaintiffs similarly situated. The Second Amended Complaint was filed on November 1, 2008, pursuant to the court order granting Plaintiffs' motion to further amend. The Second Amended Complaint added as a named defendant IndyMac Bank, F.S.B. Defendant IndyMac Bank failed and went into receivership. On November 12, 2008, the Federal Deposit Insurance Corporation ("FDIC"), in its role as receiver of IndyMac Bank, successfully moved to dismiss all claims as to it on the ground the Financial Institutions Reform, Recovery and Enforcement Act of 1989, 12 U.S.C. § 1821(d)(12) ("FIRREA") imposed a requirement for the exhaustion of administrative remedies as a precondition of the court's jurisdiction over claims against a bank in receivership. Plaintiffs' claims against IndyMack Bank were dismissed without prejudice.

Plaintiffs' TAC was filed on August 27, 2009, pursuant to the court's order granting leave to further amend,. The TAC named One West as a defendant for the first time, and also named IBM Holdco Co., LLC ("Holdco"). Holdco is the parent company of One West Bank Group LLC which is the parent company of One West bank. One West moved to dismiss the TAC on October 22, 2009. Doc. # 97. Defendant Holdco moved to dismiss the TAC as to it on the same date. Pursuant to Plaintiffs' motion, the court dismissed Holdco without prejudice on November 16, 2009. Plaintiffs' opposition to One West's motion to dismiss was filed on November 11, 2009. One West's reply was filed on November 30, 2009. On December 3, 2009, the court vacated the hearing date scheduled for December 7, 2009, and took the matter under submission as of that date.

FACTUAL BACKGROUND

Both the named Plaintiffs and the proposed class of plaintiffs consist of individuals who obtained mortgage loans called Option Adjustable Rate Mortgages, or "Option - ARM's." The TAC alleges defendant HLF originated the Option-ARM's at issue in this action and sold them to Indymac Bank. When Indymac Bank failed, its loans were assigned to its successor, Indymac Federal Bank, which sold substantially all of the loans to defendant One West Bank. The TAC alleges that "HLF, in concert with Indymac Bank, FSB and certain of the Doe Defendants, created, approved, sold, controlled and/or dictated the terms of the Option ARM loans that are the subject of this complaint." Doc. # 90 at ¶ 10. The TAC alleges the following were characteristics of all of the Option ARM loans:

(i) the Monthly Payment Amount stated in the Note is based upon a low "teaser" interest rate which ranges from 1% to 3%; (ii) the payment schedule listed in the [Truth in Lending Disclosure Statement ("TLDS")], for the first 3 - 5 years of the Note is based upon a fully amortizing payment at the "teaser" interest rate; (iii) the interest rate "adjusts" after only one month to a rate which is the sum of the "index" and the "margin"; and (iv) after the first 3-5 years, the amount of the monthly payments increases.

Doc. # 90 at ¶ 21.

The TAC alleges that Defendants knew "that for Plaintiffs' and Class Members' loans, the sum of the index and the margin would necessarily result in an interest rate that always exceeded the "teaser" rate by several percentage points. As a result, after only one month, the interest accruing on the note more than doubled . . ." resulting in a monthly interest on the loan that was greater than the scheduled payment amount. The difference between the amount of interest owed at the new rate and the amount payed according to the schedule of payments was added to the balance owed on the loan resulting in a "reverse amortization" of the loan. Plaintiffs allege that because the margin rate was always greater than the "teaser" rate, the loans were designed to, and always would, cause negative amortization. Doc. # 90 at ¶ 22.

Plaintiffs allege six claims for relief. The first alleges violation of the Truth in Lending Act, 15 U.S.C. § 1601 et seq. against all Defendants. In particular, the TAC alleges there were material omissions in the information Defendants were required to disclose to Plaintiffs. The TAC alleges that Defendants made material omissions by:

(1) failing to disclose that negative amortization was certain to occur; (2) establishing a payment schedule that was not based on the annual percentage rate ("APR"), but rather an interest rate that applied for at most 30 days; (3) listing in the TILDS an APR having no relation to the monthly payment listed for the first two to five years; (4) failing to disclose that the initial interest rate listed in the Note was discounted; and (5) failing to disclose the certainty of negative amortization in the Loan Documents provided to Plaintiffs and Class Members before they entered into the Loan Documents.

Doc.# 90 at ¶ 49.*fn1

Plaintiffs' second claim for relief alleges Fraudulent Omissions under California common law against all Defendants. Plaintiffs' second claim essentially alleges that Defedants failed to clearly and conspicuously disclose items 1, 2, and 4 form the list of Material Omissions and that Defendants failed to disclose the applicable annual percentage rate. Plaintiffs allege that "[t]his Option ARM loan scheme of stating only partially true facts and omitting important material information was purposefull and intentionally devised in order to deceive consumers into believing that these loans would provide a low-interest rate loan for the first three to five years of the Note and that if they made their payments according to the payment schedule provided their payments would be sufficient to pay both principal and interest." Doc. # 90 at ¶ 85.

Plaintiffs' third claim for relief alleges violation of California's Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq. against all Defendants. Plaintiffs' fourth claim for relief alleges breach of contract under California common law, also against all Defendants. Plaintiffs' fifth and sixth claims for relief allege unjust enrichment and seeks declaratory judgment, respectively, against defendant OneWest. Significantly, for purposes of this motion, Plaintiffs' and Class Members seek rescission of their mortgages pursuant to the Truth in Lending Act.

LEGAL STANDARD

A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure can be based on the failure to allege a cognizable legal theory or the failure to allege sufficient facts under a cognizable legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir.1984). To withstand a motion to dismiss pursuant to Rule 12(b)(6), a complaint must set forth factual allegations sufficient "to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) ("Twombly"). While a court considering a motion to dismiss must accept as true the allegations of the complaint in question, Hospital Bldg. Co. v. Rex Hospital Trustees, 425 U.S. 738, 740 (1976), and must construe the pleading in the light most favorable to the party opposing the motion, and resolve factual disputes in the pleader's favor, Jenkins v. McKeithen, 395 U.S. 411, 421, reh'g denied, 396 U.S. 869 (1969), the allegations must be factual in nature. See Twombly, 550 U.S. at 555 ("a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do"). The pleading standard set by Rule 8 of the Federal Rules of Civil Procedure "does not require 'detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) ("Iqbal").

The Ninth Circuit follows the methodological approach set forth in Iqbal for the assessment of a plaintiff's complaint:

"[A] court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief."

Moss v. U.S. Secret Service, 572 F.3d 962, 970 (9th Cir. 2009) (quoting Iqbal, 129 S.Ct. at 1950).

DISCUSSION

I. Failure to Make Factual Disclosures Required by TILA

Plaintiffs allege in their first claim for relief that Defendants failed to make necessary disclosures pursuant to TILA and that they are entitled to both rescission and damages. Defendants contend first that rescission is not an available remedy, and ...


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