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Woodson v. Countrywide Home Loans

June 23, 2010


The opinion of the court was delivered by: Honorable Larry Alan Burns United States District Judge


This is the rare case that alleges violations of the Truth in Lending Act ("TILA") in home loan documents, but doesn't involve a home in or facing foreclosure. In fact, the Plaintiffs' home doesn't exist any longer. It was destroyed in a wildfire that ravaged southern California in the fall of 2007. Plaintiffs discovered the alleged TILA violations, they say, when they were living in a rental home and trying to determine how to finance the building of a new home on their torched property.

I. Factual Background

Until it was destroyed, the Woodsons owned a home at 17116 El Vuelo in Rancho Sante Fe, California. They obtained two loans from Countrywide in January of 2007, using the property as collateral. The first loan, obtained on January 15, 2007, was a refinance loan for $2 million. The second loan, obtained on January 19, 2007*fn1 , was a home equity line of credit for $800,000.*fn2 After their home burned, the Woodsons received $500,000 from their insurance company, all of which was applied to the second loan.

On January 7, 2009, the Woodsons' lawyer wrote to Countrywide with a "loan audit" detailing various failures to disclose and overstatements in the loan documents. (Compl. Ex. 1.) The letter threatened rescission of the loans, but proposed instead a "loan subordination" on the following terms:

[O]ur clients would accept a settlement of their claims by way of a subordination of the first priority Countrywide loan to a new construction loan for the reconstruction of their home. This subordination would entail the payoff in full of the second priority Countrywide loan at the time of the subordination. The proposed construction loan would be in the amount of $4,000,000 and would be made by La Jolla Bank and Trust . . .

In light of this, we would propose that the remaining loan's interest rate be modified to a fixed interest rate of 4.5% for the balance of the term of the loan. This adjustment would be sufficient to allow our clients to continue to hold the property pending construction of their new home and to be able to pay principal and interest payments on a monthly basis . . . . (Id.) Countrywide either failed to respond to the January 7, 2009 letter or else responded in the negative.*fn3

The Woodsons' lawyer followed up with a second letter on May 19, 2009. (Compl. Ex. 2.) That letter asserted and exercised a right to rescind the loans under TILA, voiding Countrywide's security interest in their property. The letter also represented that the Woodsons were prepared to tender the amount due under the loans. Finally, the letter offered, for the second time, to renegotiate the first priority loan in lieu of rescission.*fn4 Again, Countrywide either failed to respond or else declined the Woodsons' overtures.

II. Procedural History

The Woodsons filed the present lawsuit on October 12, 2009. It was removed to federal court on December 3, 2009. The Woodsons state six causes of action. The first and second allege violations of TILA and the California Business and Professions Code, respectively. The third cause of action seeks declaratory relief. The fourth cause of action alleges predatory lending in violation of the California Financial Code. The fifth and sixth causes of action allege fraud and negligent misrepresentation, respectively.

Countrywide filed a motion to dismiss the Woodsons' complaint, and, in the alternative, a motion to strike portions of it, on December 10, 2009. Countrywide's stance is that the TILA and other violations the Woodsons allege are concocted in order to force the loan subordination and modification that the Woodsons need if they're to afford the construction of a new home on their property.

III. Legal Standard

A rule 12(b)(6) motion to dismiss for failure to state a claim challenges the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). In considering such a motion, the Court accepts all allegations of material fact as true and construes them in the light most favorable to the non-moving party. Cedars-Sinai Med. Ctr. v. Nat'l League of Postmasters of U.S., 497 F.3d 972, 975 (9th Cir. 2007). A complaint's factual allegations needn't be detailed, but they must be sufficient to "raise a right to relief above the speculative level . . . ." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). "[S]ome threshold of plausibility must be crossed at the outset" before a case can go forward. Id. at 558 (internal quotations omitted). A claim has "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, - U.S. -, 129 S.Ct. 1937, 1949 (2009). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.

While a court must draw all reasonable inferences in the plaintiff's favor, it need not "necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations." Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003) (internal quotations omitted). In fact, no legal conclusions need to be accepted as true. Ashcroft, 129 S.Ct. at 1949. A complaint doesn't suffice "if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id. That includes a mere formulaic recitation of the elements of a cause of action; this will not do either. Bell Atlantic Corp., 550 U.S. at 555. The general point of ...

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