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Basham v. Pacific Funding Group


July 21, 2010



Plaintiffs Daniel R. Basham and Carole Basham brought this action against defendants Pacific Funding Group ("Pacific"), Mortgage Electronic Registration Systems, Inc. ("MERS"), Wells Fargo Home Mortgage, Inc., dba America's Service Company ("ASC"), Citibank N.A. as Indenture Trustee for BSARM 2007-2 ("Citibank") and NDEX West, L.L.C. ("NDEX") alleging various federal and state claims arising out of plaintiffs' mortgage transaction. Presently before the court is defendant ASC's motion to dismiss the First Amended Complaint ("FAC") pursuant to Federal Rule of Civil Procedure 12(b)(6). (Docket No. 30.)

I. Factual and Procedural Background

On or about September 27, 2005, plaintiffs obtained a loan from the now-bankrupt subprime loan originator and reseller American Home Mortgage ("AHM") in order to refinance their home, located at 110 Bewicks Circle in Sacramento, California (the "Subject Property"). (FAC ¶ 15.) This loan was secured by a Deed of Trust on the property. (Req. for Judicial Notice ("RJN") (Docket No. 39) Ex. A.) The Deed of Trust listed North American Title Company as Trustee, American Brokers Conduit as the lender, and MERS as the nominal beneficiary for the lender and the lender's successors and assigns. (Id.)

In October 2008, plaintiffs began experiencing financial problems and defaulted on their mortgage; sometime thereafter they allegedly contacted ASC to discuss loan modification. (Id.) In May 2009, plaintiffs requested a loan modification from ASC which was subsequently denied. (Id. ¶ 19.) NDEX recorded a Notice of Default on July 8, 2009. (RJN Ex. B.) In September 2009, plaintiffs submitted a second loan modification application to ASC. This application was also denied. (FAC ¶ 20.)

A Trustee's sale of plaintiffs' property was scheduled for January 14, 2010, but plaintiffs were granted a temporary restraining order and preliminary injunction against the sale. (See Mot. to Dismiss (Docket No. 38), at 4; Docket Nos 1, 24-25.) Plaintiffs initiated this action on January 13, 2010, and filed a First Amended Complaint ("FAC") on April 5, 2010. (Docket Nos. 1, 34.)

II. Discussion

To survive a motion to dismiss, a plaintiff must plead "only enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). This "plausibility standard," however, "asks for more than a sheer possibility that a defendant has acted unlawfully," and where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility." Ashcroft v. Iqbal, 566 U.S. ---, ----, 129 S.Ct. 1937, 1949 (U.S. 2009) (quoting Twombly, 550 U.S. at 556-57). In deciding whether a plaintiff has stated a claim, the court must assume that the plaintiff's allegations are true and draw all reasonable inferences in the plaintiff's favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). However, the court is not required to accept as true "allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

In general, a court may not consider items outside the pleadings in deciding a motion to dismiss, but may consider items of which it takes judicial notice. Barron v. Raich, 13 F.3d 1370, 1377 (9th Cir. 1994). A court may take judicial notice of facts "not subject to reasonable dispute" because they are either "(1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201. ASC requests that the court take judicial notice of the following publicly recorded documents associated with the Subject Property: (1) the Deed of Trust, (2) the Notice of Default and Election to Sell Under Deed of Trust, (3) the Assignment of Deed of Trust, (4) the Substitution of Trustee, and (5) the Notice of Trustee's Sale. (RJN Exs. A-E (Docket No. 39).) The court will take judicial notice of these documents, since they are matters of public record whose accuracy cannot be questioned. See Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001).

A. Negligence Per Se

Plaintiffs' first cause of action for negligence per se alleges that all defendants are negligent because they violated California Civil Code sections 2923.5 and 2924. (FAC ¶ 29.) Negligence per se is an evidentiary presumption that a party failed to exercise due care if:

(1) he violated a statute, ordinance, or regulation of a public entity;

(2) the violation proximately caused death or injury to a person or property;

(3) the death or injury resulted from an occurrence of the nature within the statute, ordinance, or regulation was designed to prevent; and

(4) the person suffering the death or the injury to his person or property was one of the class of persons for whose protection the statute, ordinance, or regulation was adopted.

Cal. Evid. Code § 669. California Civil Code section 2924 provides a "comprehensive statutory framework" that governs the non-judicial foreclosure process. Moeller v. Lien, 25 Cal. App. 4th 822, 834 (1994); see Cal. Civ. Code § 2924 (listing, inter alia, the requirements for a properly filed notice of default and the timing and process for the foreclosure sale). Section 2923.5 regulates who can file and when and how a notice of default can be filed to initiate a non-judicial foreclosure. Cal. Civ. Code § 2923.5 (requiring, inter alia, that the mortgagee, beneficiary, or authorized agent must use due diligence contact the borrower to explore options to avoid foreclosure).

The negligence per se doctrine does not establish a cause of action distinct from negligence. Cal. Serv. Station & Auto. Repair Ass'n v. Am. Home Assurance Co., 62 Cal. App. 4th 1166, 1178 (1998) ("[A]n underlying claim of ordinary negligence must be viable before the presumption of negligence of Evidence Code section 669 can be employed."). Rather, the negligence per se doctrine treats a statutory violation as evidence of negligence. See Sierra-Bay Fed. Land Bank Assn. v. Superior Court, 227 Cal. App. 3d 318, 333 (1991) ("[I]t is the tort of negligence, and not the violation of the statute itself, which entitles a plaintiff to recover civil damages. In such circumstances the plaintiff is not attempting to pursue a private cause of action for violation of the statute; rather, he is pursuing a negligence action and is relying upon the violation of a statute, ordinance, or regulation to establish part of that cause of action."). Plaintiffs are not entitled to a presumption of negligence in the absence of an underlying negligence action. Coyotzi v. Countrywide Fin. Corp., No. 09-1036, 2009 WL 2985497, at *6 (E.D. Cal. Sept. 15, 2009) (quoting Quiroz v. Seventh Ave. Ctr., 140 Cal. App. 4th 1256, 1285 (2006)).

The FAC simply makes a general allegation as to five defendants, with no factual elaboration as to how ASC might have violated either section 2923.5 or section 2924. Indeed, plaintiffs generally allege that ASC had no authority to modify their loan, yet their first cause of action alleges that defendants failed to comply with section 2923.5's foreclosure avoidance and workout plan requirements to avoid the foreclosure of plaintiffs' property. (See FAC ¶¶ 18-21, 29, 31, 33.) This general allegation gives ASC insufficient notice of whether they have committed any conduct to violate section 2923.5 or section 2924, and ASC should not be forced to guess whether it is individually liable for this conduct. See Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983).

B. Negligence

Plaintiffs' second cause of action for negligence against ASC is based on the alleged violation of the Gramm-LeachBliley Act, 15 U.S.C. §§ 6801-09, 6803(a)(3), (c)(3) and 66 Federal Register 8616. (FAC ¶¶ 41, 43.) The Gramm-Leach-Bliley Act provides that financial institutions have an obligation to protect the security and confidentiality of their customers' nonpublic personal information, and requires such institutions regularly to disclose to their customers their information security policies. 15 U.S.C. §§ 6801, 6803(a)(3). As previously explained, the violation of a statute can be used to satisfy an element of a negligence cause of action. See Sierra-Bay, 227 Cal. App. 3d at 333. Plaintiffs allege that ASC violated the Gramm-Leach-Bliley Act and its duty of care to plaintiffs when it failed to safeguard plaintiffs' loan modification packet and the sensitive and confidential information it contained. (FAC ¶ 41.)

Plaintiffs do not, however, allege any facts that indicate they have been harmed by ASC's security failings. Rather, the FAC merely alleges that ASC's alleged loss of plaintiffs' documents "poses a potential anticipated threat of dissemination and disclosure of plaintiffs' personal nonpublic information." (FAC ¶ 41.) "To be actionable, harm must constitute something more than nominal damages, speculative harm, or the threat of future harm--not yet realized." Aguilera v. Pirelli Armstrong Tire Corp., 223 F.3d 1010, 1015 (9th Cir. 2000). Plaintiffs' further assertion that "as a direct and proximate result of wrongful conduct described herein, plaintiffs have suffered compensable damages according to proof" epitomizes the type of conclusory statement that fails Rule 8's pleading standard. (FAC ¶ 44); see Iqbal, 566 U.S. ---, 129 S.Ct. 1937 (2009).

C. Truth in Lending Act

Plaintiffs allege that ASC, among other defendants, violated TILA 15 U.S.C. §§ 1601-1667(f) and 12 C.F.R. § 226.23 by not informing plaintiffs of their right to rescind, by failing to acknowledge plaintiffs' alleged rescission, and by failing to inform plaintiffs of alleged "kickbacks paid to [Pacific]." (FAC ¶ 47.)

1. Rescission Claim

In a consumer credit transaction where the creditor acquires a security interest in the borrower's principal dwelling, TILA provides the borrower with "a three-day cooling-off period within which [he or she] may, for any reason or for no reason, rescind" the transaction. McKenna v. First Horizon Home Loan Corp., 475 F.3d 418, 421 (1st Cir. 2007) (citing 15 U.S.C. § 1635). A creditor must "clearly and conspicuously disclose" this right to the borrower along with "appropriate forms for the [borrower] to exercise his right to rescind." 15 U.S.C. § 1635(a). If a creditor fails to provide the borrower with the required notice of the right to rescind, the borrower has three years from the date of consummation to rescind the transaction. 15 U.S.C. § 1635(f); see 12 C.F.R. § 226.23(a)(3) ("If the required notice or material disclosures are not delivered, the right to rescind shall expire 3 years after consummation."). "[Section] 1635(f) completely extinguishes the right of rescission at the end of the 3-year period." Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412, (1998); see also Miguel v. Country Funding Corp., 309 F.3d 1161, 1164 (9th Cir. 2002) ("[S]section 1635(f) represents an 'absolute limitation on rescission actions' which bars any claims filed more than three years after the consummation of the transaction." (quoting King v. California, 784 F.2d 910, 913 (9th Cir. 1986))). Plaintiffs signed the deed of trust on September 19, 2005 (RJN Ex. A), and filed this action on January 13, 2010, more than three years after closing. Because tolling is not available for a claim for rescission under TILA, plaintiffs' rescission claim must be dismissed.

Furthermore, the Ninth Circuit has held that rescission under TILA "should be conditioned on repayment of the amounts advanced by the lender." Yamamoto v. Bank of N.Y., 329 F.3d 1167, 1170 (9th Cir. 2003) (emphasis in original). District courts in this circuit have dismissed rescission claims under TILA at the pleading stage based upon the plaintiff's failure to allege an ability to tender loan proceeds. See, e.g., Garza v. Am. Home Mortgage, No. 08-1477, 2009 U.S. Dist. LEXIS 7448, at *15 (E.D. Cal. Jan. 27, 2009) (stating that "rescission is an empty remedy without [the borrower's] ability to pay back what she has received"); Ibarra v. Plaza Home Mortgage, No. 09-3926, 2009 U.S. Dist. LEXIS 73299, at *4 (C.D. Cal. July 29, 2009); Ing Bank v. Korn, No. 09-124, 2009 U.S. Dist. LEXIS 73329, at *7 (W.D. Wash. May 22, 2009). Plaintiffs have not alleged any facts indicating that they are able to tender sufficient funds to repay the loan principal. Without such facts, plaintiffs cannot receive the equitable remedy of rescission.

2. Kickbacks Disclosure Claim

Plaintiffs' claim that they were not informed of the kickbacks paid to Pacific is not an actionable claim under TILA. TILA grants private remedies for failure to properly disclose the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule or the three day right to rescind. 15 U.S.C. § 1638(a)(2)-(6), (9). It does not grant a private remedy for failure to disclose kickbacks. Furthermore, plaintiffs have not pleaded any facts that show how ASC, who was not involved in the origination of their loan, could be liable for failing to disclose kickbacks that allegedly occurred at that time. As such, it fails to cross the line between possibility and plausibility as required under Iqbal. Accordingly, the court will grant ASC's motion to dismiss plaintiffs' TILA claim.

D. Real Estate Settlement Procedures Act

Plaintiffs complain that all defendants violated the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. §§ 2601-2617, in two ways: (1) by failing to respond to plaintiffs' Qualified Written Request ("QWR") and (2) "by receiving money and/or other things of value for referrals of settlement service business . . . including secret kickbacks and yield spread premiums to loan brokers such as [Pacific]." (FAC ¶ 55.) As a preliminary matter, the court notes that plaintiffs' fourth cause of action fails to distinguish among the defendants and adequately put ASC on notice as to how it might have violated RESPA. See Associated Gen. Contractors of Cal., Inc., 459 U.S. at 526. This is reason enough for the court to grant ASC's motion to dismiss.

1. Failure to Respond to Qualified Written Request

RESPA provides that borrowers must be provided certain disclosures relating to the mortgage loan settlement process. See 12 U.S.C. § 2601. Section 2605 of RESPA relates to the disclosures and communications required regarding the servicing of mortgage loans, and provides that loan servicers have a duty to respond to QWRs from borrowers asking for information relating to the servicing of their loans. 12 U.S.C. § 2605(e). Under RESPA, lenders of federally related mortgage loans must disclose whether servicing of a loan may be assigned, sold or transferred to loan applicants. 12 U.S.C. § 2605(a). Additionally, borrowers may send QWRs under RESPA to loan servicers for information relating to the servicing of their loan. 12 U.S.C. § 2605(e)(1). Loan servicers have sixty days after the receipt of a QWR to respond to the borrower inquiry. 12 U.S.C. § 2605(e)(2).

Section 2605(f) imposes liability on servicers that violate RESPA and fail to make the required disclosures. Although this section does not expressly make a showing of damages part of the pleading standard, "a number of courts have read the statute as requiring a showing of pecuniary damages in order to state a claim." Allen v. United Fin. Mortgage Corp., No. 9-2507, 2010 U.S. Dist. LEXIS 26503 (N.D. Cal. Mar. 22, 2010). Alleging a breach of RESPA duties alone does not state a claim under RESPA. Plaintiffs must, at a minimum, also allege that the breach resulted in actual damages. Hutchinson v. Del. Sav. Bank, FSB, 410 F. Supp. 2d 374 (D.N.J. 2006).

This pleading requirement has the effect of limiting the cause of action to circumstances in which plaintiffs can show that a failure to respond or give notice has caused them actual harm. See Singh v. Wash. Mut. Bank, No. 09-2771, 2009 U.S. Dist. LEXIS 73315, *16, 2009 WL 2588885 (N.D. Cal. Aug. 19, 2009) (dismissing RESPA claim because, "[i]n particular, plaintiffs have failed to allege any facts in support of their conclusory allegation that as a result of defendants' failure to respond, defendants are liable for actual damages, costs, and attorney fees") (citations omitted). Plaintiffs here have not offered any facts to support that ASC's failure to respond to their QWR resulted in pecuniary damages. Plaintiffs' claim that they "have suffered and continue to suffer compensable damages" (FAC ¶ 58) is conclusory and fails even under a liberal pleading standard.

2. Kickbacks and Illegal Fees

RESPA § 2607 prohibits any person from giving or accepting "any fee, kickback or thing of value pursuant to any agreement or understanding . . . that business incident to or a part of a real estate service . . . shall be referred to any person," and from accepting any unearned fee in relation to a settlement service. 12 U.S.C. § 2607(a), (b). Plaintiffs' allegation that "defendants" gave or received "secret kickbacks and yield spread premiums to loan brokers" (FAC ¶ 57) lacks any factual enhancement whatsoever. Plaintiffs do not explain what these kickbacks were, when they occurred, or whether ASC specifically even received them. ASC should not be forced to guess how it violated RESPA. Gavin v. Trombatore, 682 F. Supp. 1067, 1071 (N.D. Cal. 1988). Plaintiffs' allegations are exactly the type of "naked assertion[s]" devoid of "further factual enhancement" that fail to meet the pleading standard. Iqbal, 566 U.S. --- at ----, 129 S.Ct. 1937, 1949 (2009)(citation omitted).

Moreover, any RESPA kickback claim must be brought within one year of the violation. See 12 U.S.C. § 2614; Edwards v. First Am. Corp., 517 F. Supp. 2d 1199, 1204 (C.D. Cal. 2007); Blaylock v. First Am. Title Ins. Co., 504 F. Supp. 2d 1091, 1106 (W.D. Wash. 2007). Plaintiffs' loan was executed on September 19, 2005. As any alleged kickbacks would have occurred at this time--more than four years before this suit began--the RESPA claim is time barred. For the reasons discussed above, plaintiffs' RESPA claims must be dismissed.

E. Breach of Contract

The elements of a cause of action for breach of contract are (1) the existence of the contract, (2) performance by the plaintiff, (3) breach by the defendant, and (4) damages. First Commercial Mortg. Co. v. Reece, 89 Cal. App. 4th 731, 745 (2001). Plaintiffs allege that ASC entered into an oral agreement with them to "provide plaintiffs with a loan modification at a fixed rate . . . so long as [plaintiffs] paid down some of their existing debt" (FAC ¶¶ 60-61) and that ASC breached this contract by failing to facilitate the approval of plaintiffs' promised loan modification.

A contract to modify a loan must be in writing. "A mortgage or deed of trust comes within the statute of frauds." Secrest v. Sec. Nat'l Mortg. Loan Trust 2002-2, 167 Cal. App. 4th 552, 552 (2008). As any "agreement to modify a contract that is subject to the statute of frauds is also subject to the statue of frauds," a loan modification also requires a written agreement. Id. at 552 (citing Cal. Civ. Code § 1698); see Justo v. Indymac Bancorp, No. 9-1116, 2010 U.S. Dist. LEXIS 22831 (C.D. Cal. Feb. 19, 2010) (dismissing with prejudice a claim that defendant breached an oral contract to modify plaintiff's loan and prevent foreclosure proceedings). Plaintiffs do not allege that there is any written agreement to modify the terms of their loan. Absent a writing, there can be no contract, much less a breach of contract. Plaintiffs' claim must therefore be dismissed.

F. Breach of the Implied Covenant of Good Faith and Fair Dealing

Under California law, every contract "imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." McClain v. Octagon Plaza, LLC, 159 Cal. App. 4th 784 (2008) (quoting Carma Developers, Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 371 (1992)). The covenant "is based on general contract law and the long-standing rule that neither party will do anything which will injure the right of the other to receive the benefits of the agreement." Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1 (1995).

Plaintiffs allege that ASC breached the implied covenant of good faith and fair dealing by "failing to provide the promised loan modification approval." (FAC ¶ 68.) The implied covenant of good faith and fair dealing "cannot impose substantive duties or limits on the contracting parties beyond those incorporated in the specific terms of their agreement." Agosta v. Astor, 120 Cal. App. 4th 596, 607 (2004) (internal citation omitted). "Absent [a] contractual right . . . the implied covenant has nothing upon which to act as a supplement, and should not be endowed with an existence independent of its contractual underpinnings." Waller, 11 Cal. 4th at 36 (internal citations omitted). Plaintiffs failed to adequately plead that a contract to modify the loan agreement existed. The court must therefore grant ASC's motion to dismiss.

Plaintiffs also claim that defendant breached the implied covenant of good faith and fair dealing by violating California Civil Code section 2923.5. A contract, not a statute, must be the basis for an implied covenant of good faith and fair dealing, id., nor have they articulated how a failure to comply with section 2923.5 frustrated plaintiffs' rights under the loan contract. Any alleged independent violation of section 2923.5 has been inadequately plead as described above. Plaintiffs' claim for breach of the implied covenant of good faith and fair dealing against ASC will therefore be dismissed.

G. California's Unfair Competition Law

California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code §§ 17200-17210, prohibits "any unlawful, unfair, or fraudulent business act or practice." Cal-Tech Commc'ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999). This cause of action is generally derivative of some other illegal conduct or fraud committed by a defendant, and "[a] plaintiff must state with reasonable particularity the facts supporting the statutory elements of the violation." Khoury v. Maly's of Cal., Inc., 14 Cal. App. 4th 612, 619 (1993).

Plaintiffs' claim under the UCL is vague and conclusory, simply alleging that "by engaging in the above-described acts and practice, Defendants have committed one or more acts of unlawful business practices." (FAC ¶ 78.) Plaintiffs' claim lumps all defendants together and fails to identify any specific act taken by any one of the named defendants. (See FAC ¶¶ 77-81.) Such vague and conclusory allegations are insufficient to inform ASC as to its liability. See Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983); Gauvin, 682 F. Supp. at 1071; see also Lingad v. Indymac Fed. Bank, No Civ. 2:09-02347 GEB JFM, --- F. Supp. 2d ----, 2010 WL 347994, at *11 (E.D. Cal. Jan. 29, 2010). The court has already eliminated plaintiffs' other claims which serve as the basis for this cause of action. Since plaintiffs have failed to state a claim on any of these grounds, and because these grounds appear to be the sole basis for plaintiffs' UCL claim, they by necessity have failed to state a claim against ASC under the UCL. Accordingly the court will grant ASC's motion to dismiss plaintiffs' UCL claim.

H. Quiet Title

Plaintiffs cannot sustain a quiet title claim as a matter of law. The purpose of a quiet title action is to establish one's title against adverse claims to real property. A basic requirement of an action to quiet title is an allegation that plaintiffs "are the rightful owners of the property, i.e., that they have satisfied their obligations under the Deed of Trust." Kelley v. Mortgage Elec. Registration Sys., 642 F. Supp. 2d 1048, 1057 (N.D. Cal. 2009). "[A] mortgagor cannot quiet his title against the mortgagee without paying the debt secured." Watson v. MTC Fin., Inc., 2009 U.S. Dist. LEXIS 63997 (E.D. Cal. July 17, 2009). As plaintiffs concede that they have not paid the debt secured by the mortgage, they cannot sustain a quiet title action against defendants.

I. Declaratory and Injunctive Relief

Plaintiffs purport to state a cause of action for declaratory and injunctive relief. Declaratory and injunctive relief are not causes of action; rather, they are remedies. See McDowell v. Watson, 59 Cal. App. 4th 1155, 1159 (1997) ("Injunctive relief is a remedy and not, in itself a cause of action") (internal quotation marks omitted); see also Nat'l Union Fire Ins. Co. v. Karp, 108 F.3d 17, 21 (2d Cir. 1997). Because plaintiffs' other causes of action have been dismissed and declaratory and injunctive relief are not independent claims, the court will dismiss this claim as well.

IT IS THEREFORE ORDERED that the motion of defendant Wells Fargo Home Mortgage, Inc., dba America's Service Company, to dismiss the causes of action against it be, and the same hereby is, GRANTED.

Plaintiffs have twenty days from the date of this Order to file an amended complaint, if they can do so consistent with this Order.


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