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Nichalson v. First Franklin Financial Corp.

June 11, 2010


The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge


This action arises out of a mortgage loan transaction in which Plaintiff Lynn Nichalson ("Plaintiff") financed her home in 2006. Presently before the Court is a Motion by Defendant First Franklin Financial Corporation ("Defendant") to Dismiss Plaintiff's Complaint for failure to state a claim upon which relief may be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendant has concurrently filed a Motion to Strike pursuant to Federal Rule of Civil Procedure 12(f). For the reasons set forth below, Defendant's Motion to Dismiss is granted with leave to amend, and Defendant's Motion to Strike is denied as moot.


This action arises out of activity surrounding a residential loan transaction secured by property located at 9527 Clarke Farms Drive, Elk Grove, California ("Property").

Plaintiff alleges that Defendant extended credit to her without regard for her ability to pay. She contends that she accurately reported her income on her loan application, but that Defendant overstated her income without Plaintiff's knowledge or consent. Furthermore, Plaintiff alleges that the loan's interest rates were subject to increase, such that the monthly payments exceeded Plaintiff's ability to pay. Nonetheless, as indicated in the Deed of Trust, Plaintiff was approved for a loan in the amount of $534,800.00.

Plaintiff further alleges that Defendant awarded higher commissions to its loan officers when they sold loans with high yield spread premiums. This practice encouraged loan officers to steer borrowers, Plaintiff included, into loans that they were unable to repay.

The terms of the loan were memorialized in a Promissory Note, which was secured by a Deed of Trust on the Property. Plaintiff alleges that she has mailed to Defendant a Qualified Written Request ("QWR") under the Real Estate Settlement Procedures Act ("RESPA"), including a demand to rescind the loan under the Truth In Lending Act ("TILA").


On a motion to dismiss for failure to state a claim under Rule 12(b)(6), all allegations of material fact must be accepted as true and construed in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Federal Rule of Civil Procedure 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief," in order to "give the defendant fair notice of what the...claim is and the grounds upon which it rests." Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed. 2d 80 (1957). While 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 "entitlement to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations and quotations omitted). Factual allegations must be enough to raise a right to relief above the speculative level. Id. (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) ("The pleading must contain something more...than...a statement of facts that merely creates a suspicion [of] a legally cognizable right of action").

If the court grants a motion to dismiss a complaint, it must then decide whether to grant leave to amend. The court should "freely give[]" leave to amend when there is no "undue delay, bad faith[,] dilatory motive on the part of the movant,...undue prejudice to the opposing party by virtue of...the amendment, [or] futility of the amendment...." Fed. R. Civ. P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962). Generally, leave to amend is only denied when it is clear that the deficiencies of the complaint cannot be cured by amendment. DeSoto v. Yellow Freight Sys., Inc., 957 F.2d 655, 658 (9th Cir. 1992).


A. Truth in Lending Act ("TILA")

Plaintiff seeks to rescind her loan pursuant to the Truth in Lending Act ("TILA"), 15 U.S.C. § 1600 et. seq., as well as a termination of Defendant's security interest in the property, statutory and punitive damages, costs, and attorney's fees. She alleges that Defendant failed to provide material disclosures regarding her loan as required under TILA. Defendant argues that Plaintiff's claim for TILA violations is time-barred because civil damages are subject to a one-year statute of limitations and claims for rescission have a three-year statute of limitations.

With respect to civil damages for Defendant's failure to provide disclosures mandated by TILA, the statute of limitations allows Plaintiff to file suit within one year from the "date of occurrence" of the alleged violation. 15 U.S.C. ยง 1640(e). The "date of occurrence" is the date the transaction is consummated, which in a mortgage loan case is when the Plaintiff closed on the loan. See Walker v. Washington Mutual Bank FA, 63 F. App'x. 316, 317 (9th Cir. 2003). Plaintiff's Complaint alleges that the loan transaction was completed in April 2007, ...

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