IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA
September 24, 2010
MATTHEW SARAD AND NELLI SARAD, PLAINTIFFS,
OPTION ONE MORTGAGE, ET AL., DEFENDANTS.
This matter came before the court on November 13, 2010, for hearing on: (1) the motion to dismiss or for a more definite statement and to strike filed by defendant American Home Mortgaging Servicing (Doc. No. 31); (2) the motion to dismiss or for a more definite statement filed by defendants Sand Canyon Corporation, formerly known as ("f/k/a") Option One Mortgage Corporation*fn1 , and H&R Block, Inc. (Doc. No. 32); and (3) the motion to dismiss for lack of personal jurisdiction filed by defendant H&R Block, Inc. (Doc. No. 33). Plaintiff Matthew Sarad, proceeding pro se, appeared at the hearing on his own behalf. No appearance was made by plaintiff Nelli Sarad, who is also proceeding pro se. Christina Rovira, Esq. appeared telephonically for defendant American Home Mortgage Servicing, Inc. Bruce T. Bauer, Esq. appeared telephonically for defendants Sand Canyon Corporation, f/k/a Option One Mortgage Corporation, and H&R Block, Inc. Upon consideration of all written materials filed in connection with the motions, the parties' arguments at the hearing, and the entire file, the court concludes that defendants' motions to dismiss must be granted.*fn2
In their single-spaced, fifty-three page complaint (including attached exhibits), plaintiffs allege as follows. Plaintiffs purchased the subject property located at 759 Glen Mady Way in Folsom, California on or about October 27, 2006 for approximately $1,200,000. (Compl. ¶ 3.) They financed the purchase through an adjustable rate "interest only" mortgage loan with defendant Option One Mortgage Corporation secured by a Deed of Trust on the subject property. (Id.) Plaintiffs made a down payment of approximately $242,122 and took out a first mortgage of $754,000 and a second mortgage of $250,000. (Compl. ¶ 51.) In May of 2008, plaintiff Matthew Sarad lost his job. (Id. ¶ 68.) At that time, plaintiffs unsuccessfully sought to refinance the property or obtain a loan modification. (Id. ¶¶ 68, 74.) Plaintiffs have apparently defaulted on the loan, with Notices of Default being recorded against the property on August 1, 2008 and July 13, 2009, reflecting amounts owing as of those dates of $27, 949.94 and $28, 479.62.
Plaintiffs allege that defendants Option One Mortgage Corporation and H&R Block Inc. were national mortgage lenders and that in May of 2008 defendant American Home Mortgage Servicing Inc. acquired Option One Mortgage Corp. from H&R Block Inc.. (Id. ¶ 2.) Plaintiffs complain generally that these defendants engaged on a national level in irresponsible, predatory lending practices which included steering borrowers into costly sub-prime loans with "exploding" adjustable rates.*fn3 Specifically, plaintiffs claim that defendants promised them that they could later refinance their loan to bring down their monthly payment and borrow additional funds using the property as security. (Id. ¶¶ 3, 57.) They also allege that agents of the defendants assured them that both their income and the value of their home would continue "grow." (Id.) Plaintiffs claim that they did not qualify for the loan they were extended but instead entered into the transaction after being offered a "stated income" loan with imaginary income figures provided by the defendants' loan brokers. (Id. ¶ 4.) According to plaintiffs, defendants' agents falsified plaintiffs' loan information and instructed plaintiff Nelli Sarad, who in fact had no income, to manufacture income numbers based on a portion of her husband's income at the time. (Id. ¶ 61.) Defendants also inflated the appraisal of the property to facilitate the making of the loan. (Id. ¶ 66.)
Plaintiffs allege that they informed defendants' agents that they were concerned that they could not afford the property in question, that the offered interest rate was too high and that they could not qualify for the loan. (Id. ¶ 52.) Plaintiffs also informed defendants' agents that it might become important to them that they be able to refinance the property or borrow on its equity in the future. (Id. ¶ 105.) The defendants' agents reassured plaintiffs that they would qualify for a "stated income" loan that would not require verification of income and then inflated the figures provided by plaintiffs in order to make the loan. (Id.) According to plaintiffs, the agents overcame their concerns by assuring them that they could lock in an "interest only" loan for five years which could later be restructured if their income was disrupted or the monthly payments on the mortgage became overwhelming. (Id. ¶ 57.) Plaintiffs claim that defendants' agents charged outrageous and illegal fees in connection with the loan and required them to purchase unnecessary insurance, including pool, spa, well and well pump insurance even though the home had none of these features. (Id. ¶¶ 64-65.)
When plaintiff Matthew Sarad lost his job in May of 2008, plaintiffs' income was greatly reduced. (Id. ¶ 68.) Plaintiffs attempted to take out an equity loan from defendant Option One Mortgage, based upon the approximately $300,000 they had invested in the property by that time, without success. (Id.) In November of 2008 plaintiffs sought a loan modification from defendants H&R Block and American Home Mortgaging Servicing, also without success. (Id. ¶ 74.) In fact, plaintiffs claim that they were "forced under duress" by defendants to sign predatory forbearance and loan modification agreements to avoid accelerated foreclosure proceedings. (Id. ¶ 75.) As a result of defendants' action plaintiffs were required to move out of their home, had their credit ruined and suffered emotional distress. (Id. ¶¶ 106-08.)
Based on these allegations, plaintiffs purport to state sixteen separate causes of action, most alleging violations of California law. Those causes of action are as follows: (1) violation of the Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq.; (2) violation of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601, et seq.; (3) violation of California Civil Code §§ 1920, 1921; (4) violation of California Civil Code §2823.6; (5) violation of the Unfair Competition Act, California Business & Professions Code § 17200, et seq.; (6) violation of the False Advertising Act, California Business & Professions Code § 17500, et seq.; (7) Constructive Fraud in violation of California Civil Code § 1573; (8) Intentional Misrepresentation in violation of California Civil Code §§ 1709, 1710; (9) Concealment in violation of California Civil Code §§ 1709, 1710; (10) Negligent Misrepresentation in violation of California Civil Code §§ 1709, 1710; (11) Fraud on the Public in violation of California Civil Code § 1711; (12) Rescission pursuant to California Civil Code § 1689; (13) Breach of Fiduciary Duty; (14) Negligence; (15) Breach of the Implied Covenant of Good Faith and Fair Dealing; and (16) Intentional Infliction of Emotional Distress.
In terms of relief, plaintiffs seek declaratory and injunctive relief, rescission of the loan in question, surrender of the deed to the property to them, statutory, compensatory and punitive damages and costs of suit.
ARGUMENTS OF THE PARTIES
Defendants Sand Canyon, f/k/a Option One Mortgage Corporation and H&R Block, Inc. and defendant American Home Mortgage Servicing, Inc. seek dismissal of plaintiffs' complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on the grounds that plaintiffs have failed to state any cognizable claim. (Doc. Nos. 31, 32) In this regard, defendants argue that plaintiffs' first claim for violation of TILA is time-barred. In addition, defendants asserts that plaintiffs' TILA claim is not cognizable because residential mortgage transactions such as that at issue here are exempt under TILA and, in any event, plaintiffs have failed to tender. Defendants also contend that plaintiffs' second claim for violation of RESPA is also untimely.*fn4
Finally, defendants argue that none of plaintiffs various state law claims are cognizable. Defendant H&R Block, Inc. also has moved separately for dismissal pursuant to Fed. R. Civ. P. 12 (b)(2) due to lack of personal jurisdiction. (Doc. No. 33.)
Plaintiffs oppose dismissal of their complaint. In their 115-page (including exhibits) opposition brief, they argue that their TILA claim is timely because it was filed within three-years of the purchase of their home. They also contend that the statute of limitations under TILA is subject to equitable tolling where the violations are concealed by the defendants' misrepresentations and are not apparent on their face. Plaintiffs assert that they filed this action within one year of learning that they could not refinance. Plaintiffs argue that they can satisfy any tender requirement through a third party willing to advance them money on their likely recovery against defendants in this action. They contend that TILA does now apply to mortgage loan transactions. With respect to their RESPA claim, plaintiffs argue that it is not barred by the statute of limitations because they did not learn of any RESPA violations until November of 2008 and this action was filed within one year thereafter. Finally, plaintiffs oppose defendant H&R Block's motion to dismiss for lack of personal jurisdiction essentially on the grounds that defendant Option One Mortgage Corp. and H&R Block, Inc. are one in the same.
LEGAL STANDARDS APPLICABLE TO DEFENDANTS' MOTIONS
The purpose of a motion to dismiss pursuant to Rule 12(b)(6) is to test the legal sufficiency of the complaint. N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). A plaintiff is required to allege "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). Thus, a defendant's Rule 12(b)(6) motion challenges the court's ability to grant any relief on the plaintiff's claims, even if the plaintiff's allegations are true.
In determining whether a complaint states a claim on which relief may be granted, the court accepts as true the allegations in the complaint and construes the allegations in the light most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1989). In general, pro se complaints are held to less stringent standards than formal pleadings drafted by lawyers. Haines v. Kerner, 404 U.S. 519, 520-21 (1972). However, the court need not assume the truth of legal conclusions cast in the form of factual allegations. W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).
Under Rule 12(b)(2) of the Federal Rules of Civil Procedure, a defendant may seek dismissal of an action for lack of personal jurisdiction. "Where, as here, there is no applicable federal statute governing personal jurisdiction, the law of the state in which the district court sits applies." Core-Vent Corp. v. Nobel Indus. AB, 11 F.3d 1482, 1484 (9th Cir.1993). See also Yahoo! v. La Ligue Contre Le Racisme, 433 F.3d 1199, 1205 (9th Cir. 2006) (en banc) (same) "California's long-arm statute allows courts to exercise personal jurisdiction over defendants to the extent permitted by the Due Process Clause of the United States Constitution." Core-Vent Corp., 11 F.3d at 1484. See also Love v. Associate Newspapers, Ltd., 611 F.3d 601, 608-09 (9th Cir. 2010); Boschetto v. Hansing, 539 F.3d 1011, 1015 (9th Cir. 2008). Thus, only constitutional principles constrain the jurisdiction of a federal court in California. Love, 611 F.3d at 608-09; Boschetto, 539 F.3d at 1015; Sher v. Johnson, 911 F.2d 1357, 1361 (9th Cir.1990). "Due process requires that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of suit does not offend traditional notions of fair play and substantial justice." Harris Rutsky & Co. Ins. Servs., Inc. v. Bell & Clements Ltd., 328 F.3d 1122, 1129 (9th Cir.2003) (internal quotations omitted). See also Burger King v. Rudzewicz, 471 U.S. 462, 476 (1985); Yahoo!, 433 F.3d at 1205.
Once a defendant challenges jurisdiction, the burden of proof to show that jurisdiction is appropriate lies with the plaintiff. Love, 611 F.3d at 608; Boschetto, 539 F.3d at 1015; Sher, 911 F.2d at 1361. When a defendant's motion to dismiss is to be decided on the pleadings, affidavits, and discovery materials, the plaintiff need only make a prima facie showing that personal jurisdiction exists in order for the action to proceed. Love, 611 F.3d at 608; Boschetto, 539 F.3d at 1015; Sher, 911 F.2d at 1361. In deciding whether plaintiff has met this burden, the court accepts plaintiff's allegations as true. Love, 611 F.3d at 608; Boschetto, 539 F.3d at 1015; Sher, 911 F.2d at 1361.
At the outset, defendants have requested judicial notice of documents and records related to the loan transaction at issue. (Doc. No. 32-2.) Specifically, defendants request that the court take judicial notice of the following: (1) a Deed of Trust executed by plaintiffs dated October 24, 2006, and recorded in the Sacramento County Recorder's Office on October 27, 2006; (2) the Assignment of Deed of Trust recorded August 29, 2008 in the Sacramento County Recorder's Office; (3) a Deed of Trust recorded in the Sacramento County Recorder's Office on July 11, 2005; (4) a Notice of Default and Election to Sell Under Deed of Trust recorded with the Sacramento County Recorder's Office on April 22, 2009; (5) a Notice of Default and Election to Sell Under Deed of Trust recorded with the Sacramento County Recorder's Office on August 1, 2008; and (6) a Notice of Default and Election to Sell Under Deed of Trust recorded with the Sacramento County Recorder's Office on July 13, 2009. (Doc. No. 32-2, Exs. 1-6.) Defendants' requests for judicial notice will be granted pursuant to Federal Rule of Evidence 201. See Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001) (on a motion to dismiss, court may consider matters of public record); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986) (on a motion to dismiss, the court may take judicial notice of matters of public record outside the pleadings).
I. TILA Cause of Action
As noted above, plaintiffs allege that defendants failed to make numerous material disclosures to them in connection with this mortgage loan transaction as required by TILA. Plaintiffs seek rescission and the award of damages.
Plaintiff's TILA claim for damages is barred because such a suit for such damages must be filed within one year following the alleged violation. 15 U.S.C. § 1640(e). The failure to make required disclosures for purposes of a damages claim under TILA occurs on the date the loan documents are signed, because on that date the buyer is in possession of all information relevant to they buyer's discovery of the TILA violation and the basis for a damages claim. Meyer v. Ameriquest Mortgage Co., 342 F.3d 899, 902 (9th Cir. 2003); Lingad v. Indymac Federal Bank, 682 F. Supp.2d 1142, 1147 (E.D. Cal. 2010) ("[W]hen a plaintiff fails to allege any facts demonstrating that the TILA violations alleged could not have been discovered by due diligence during the one-year statutory period, equitable tolling should not be applied and dismissal at the pleading stage is appropriate."); Rosal v. First Federal Bank of California, 671 F. Supp. 2d 1111, 1122 (N.D. Cal. 2009). Here, plaintiffs commenced this suit thirty months after the mortgage loan was made and any TILA violation could have occurred, and almost eighteen months after the statute of limitations for a claim of damages under TILA had expired.*fn5
Plaintiffs' complaint also seeks rescission with respect to the alleged TILA violations. To state a claim for rescission under TILA, however, the plaintiffs must allege that they are able to tender the proceeds of her loan. See Yamamoto v. Bank of New York, 329 F.3d 1167, 1171 (9th Cir. 2003) (holding that rescission under TILA "should be conditioned on repayment of the amounts advanced by the lender" and explaining that, because rescission is a remedy that restores the status quo ante, a borrower seeking rescission is required to allege ability to tender the loan proceeds); LaGrone v. Johnson, 534 F.2d 1360, 1362 (9th Cir. 1974); Garcia v. Wachovia Mortgage Corp., 676 F. Supp.2d 895, 903 (C.D. Cal. 2009). There is no such allegation in plaintiffs' complaint.*fn6 Rather, in their opposition to the motion, plaintiffs merely suggest the possibility that they may be able to meet tender requirement through a third party willing to advance them money on their likely recovery against defendants in this action. Such tenuous speculation does not satisfy the tender requirement. See Lal v. American Home Servicing, Inc., 680 F. Supp. 2d 1218, 1222-23 (E.D. Cal. 2010) (tender requirement for a TILA rescission claim not met by plaintiff/borrower's proffer that once successful in their civil action they will be able to secure refinancing to satisfy obligation).
Moreover, plaintiffs' complaint alleges that the loan in question was obtained by them to acquire, at the time, their primary residence. As such, this was a "residential mortgage transaction" which is exempt from TILA's right of rescission. See 15 U.S.C. § 1635(e)(1); Barrett v. JP Morgan Chase Bank, N.A., 445 F.3d 874, 879 (6th Cir. 2006); Khan v. GMAC Mortgage, LLC, No. 2:10-cv-00900-GEB-JFM, 2010 WL 2635095, at *3 (E.D. Cal. June 30, 2010); see also Wilson v. First Franklin Financial Corp., Civ. No. S-08-2572 FCD/JFM, 2010 WL 2106551, at *2 (E.D. Cal. May 25, 2010) (concluding that such residential mortgage transactions are also exempted from Regulation Z (12 C.F.R. § 226.23(f)(1)) and the Home Ownership and Equity Protection Act (15 U.S.C. § 1602(aa)(1))) .
Finally, as many courts have recognized, it is clear that "defendant[s] had no duty to disclose to plaintiff[s] that [t]he[y] did not have the ability to repay the loan." Cross v. Downey Savings & Loan Ass'n, No. CV 09-317 CAS (Ssx), 2009 WL 481482, at *5 (C.D. Cal. Feb 23, 2009). See also Davidson v. Countrywide Home Loans, Inc, No. 09-CV-2694-IEG (JMA), 2010 WL 2925440, at *9 (S.D. Cal. July 23, 2010) ("[T]o the extent Plaintiffs bases this claim on the contention that Countrywide gave Davidson a loan she could not afford, this claim would fail."); Camillo v. Washington Mutual Bank, F.A., No. 1:09-CV-1548 AWI SMS, 2009 WL 3614793, *7 (E.D. Cal. Oct. 27, 2009) ("Thus, Defendants had not duty to disclose to [Plaintiffs] that [they] did not have the ability to repay the loan.")
For all of these reasons, plaintiffs TILA claim must be dismissed with prejudice.
II. RESPA Cause of Action
With respect to their second cause of action alleging violations of RESPA, plaintiffs seek recovery and damages under 12 U.S.C. § 2607. However, this cause of action is also time-barred. Claims for damages under 12 U.S.C. § 2607 are subject to a one year statute of limitations from the date the violation occurs. See 12 U.S.C. § 2614; see also Allan v. Greenpoint Mortgage Funding, ___F. Supp.2d___, ___, 2010 WL 2985080, at *3-4 (N.D. Cal. July 27, 2010); Green v. Alliance Title, et al., No. CIV S-10-0242 MCE EFB PS, 2010 WL 3505072, at *6 (E.D. Cal. Sept. 2, 2010). As noted above with respect to their TILA claim, plaintiffs commenced this suit thirty months after the mortgage loan was made and any RESPA violation could have occurred, and almost eighteen months after the statute of limitations for a claim of damages under RESPA had expired.*fn7
III. Personal Jurisdiction Over Defendant H&R Block, Inc
As noted above, in opposition to a defendant's motion for lack of personal
jurisdiction the plaintiff bears the burden of proof to show that jurisdiction is proper. Love, 611 F.3d at 608; Boschetto, 539 F.3d at 1015; Sher, 911 F.2d at 1361.
Here, defendant H&R Block, Inc. has come forward with declarations establishing that it is a corporation organized under the laws of Missouri with it's principal place of business in Kansas City, Missouri, the only state in which it is authorized to do business. Those declarations also establish that defendant H&R Block, Inc. does not maintain employees in California, does not provide goods or services in California, does not derive revenue from goods consumed or services rendered in California and does not have a registered agent in California.
Plaintiff's oppose defendant H&R Block, Inc.'s motion to dismiss for lack or personal jurisdiction solely on the grounds that defendant Option One Mortgage Corp. was a subsidiary of H&R Block, Inc. at the time the loan in question was made. Defendant H&R Block, Inc. has submitted declarations establishing that each of its subsidiaries maintains their on records of income, losses and gains and that all corporate formalities are properly maintained in that regard.
In opposition to the motion to dismiss for lack of personal jurisdiction, plaintiffs have not made any showing that non-resident defendant H&R Block, Inc. has: (1) directed its activities or consummated some transaction within California or purposely availed itself of the privilege of conducting activities in California; and (2) that their claim arises out of or relates to the H&R Block, Inc.'s California-related activities. See Boschetto, 539 F.3d at 1016; see also Love, 611 F.3d at 609. Having failed to meet its burden of making a prima facie showing that jurisdiction over defendant H&R Block, Inc. is appropriate, "the jurisdictional inquiry ends and the case must be dismissed." Boschetto, 539 F.3d at 1016. See also Pebble Beach Co. v. Caddy, 453 F.3d 1151, 1155 (9th Cir. 2006).
Accordingly, H&R Block, Inc.'s motion to dismiss for lack of personal jurisdiction must be granted. See Harris v. Option One Mortgage Corporation, et al., 261 F.R.D. 98, 110-11 (D. S. Car. 2009) (Rejecting plaintiffs' speculative assertion that Sand Canyon Corp. was merely an "alter ego" of H&R Block, Inc. in light of the evidence presented, denying discovery on the issue and granting H&R Block Inc.'s motion to dismiss for lack of personal jurisdiction.)
IV. Granting Plaintiffs Leave to Amend Their Federal Claims Would Be Futile
The undersigned has carefully considered whether plaintiff may amend his complaint to state any claim upon which relief can be granted. "Valid reasons for denying leave to amend include undue delay, bad faith, prejudice, and futility." California Architectural Bldg. Prod. v. Franciscan Ceramics, 818 F.2d 1466, 1472 (9th Cir. 1988). See also Klamath-Lake Pharm. Ass'n v. Klamath Med. Serv. Bureau, 701 F.2d 1276, 1293 (9th Cir. 1983) (holding that while leave to amend shall be freely given, the court does not have to allow futile amendments). Leave to amend would clearly be futile in this case given the nature of the deficiencies noted above (i.e. statute of limitations, non-cognizable claims and lack of personal jurisdiction) with respect to their federal claims. Accordingly, those federal claims will be dismissed with prejudice.
V. Plaintiffs' State Law Claims
Under the analysis set forth above, plaintiffs' federal claims will be dismissed.
Because there will then be no federal claims remaining, this court declines to exercise supplemental jurisdiction over plaintiffs' various state law claims. See 28 U.S.C. § 1367(c)(3) (The district courts may decline to exercise supplemental jurisdiction over a claim . . . if - the district court has dismissed all claims over which it has original jurisdiction"). "'In the usual case in which all federal-law claims are eliminated before trial, the balance of factors . . . will point toward declining to exercise jurisdiction over the remaining state-law claims.'" Acri v. Varian Associates, Inc., 114 F.3d 999, 1000-01 (9th Cir.1997) (quoting Carnegie-Mellon University. v. Cohill, 484 U.S. 343, 350, n. 7 (1988)). See also Gini v. Las Vegas Metropolitan Police Dept., 40 F.3d 1041, 1046 (9th Cir. 1984) (same). Considerations of comity weigh heavily in favor of declining to exercise supplemental jurisdiction since all of plaintiffs' remaining claims arise under California law. See Gibbs v. United Mine Workers of America, 383 U.S. 715, 726 (1966) ("Needless decisions of state law should be avoided [.]") Moreover, federal judicial economy is promoted by declining to exercise supplemental jurisdiction. See Otto v. Heckler, 802 F.2d 337, 338 (9th Cir. 1986) ("The district court, of course, has the discretion to determine whether its investment of judicial energy justifies retention of jurisdiction.")*fn8
For all of these reasons, pursuant to 28 U.S.C. § 1367(c)(3) the court declines to exercise supplemental jurisdiction over plaintiffs' remaining state law claims.*fn9
For the reasons set forth above, IT IS HEREBY ORDERED that:
1. The motion to dismiss, for more definite statement, and/or to strike filed October 8, 2009, by defendant American Home Mortgaging Servicing (Doc. No. 31) is granted;
2. The motion to dismiss or for a more definite statement filed October 13, 2009, by defendants Sand Canyon Corporation, formerly known as ("f/k/a") Option One Mortgage Corporation, and H&R Block, Inc. (Doc. No. 32) is granted;
3. The motion to dismiss for lack of personal jurisdiction filed October 13, 2009, by defendant H&R Block, Inc. (Doc. No. 33) is granted;
4. Plaintiffs' federal claims are dismissed with prejudice; 5. Plaintiffs' state claims are dismissed without prejudice to their re-filing in the appropriate state court; and
6. The Clerk of the Court is directed to close this case.