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Espinoza v. Recontrust Company

October 19, 2010


The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court


Presently before the Court is a motion to dismiss brought by Defendant Greenlight Financial Services. (Doc. No. 37.) Rather than opposing the motion, and in violation of a Court order, Plaintiffs filed a (third) amended complaint. (Doc. Nos. 40, 41.) The Court ordered the amended complaint stricken and, additionally, ordered Plaintiffs to show cause why Defendants Reconstrust, N.A. and Countrywide Home Loans, Inc. should not be dismissed from this action for want of prosecution. (Doc. No. 41.) The Court held a hearing on September 13, 2010 on Defendant's motion to dismiss and the Court's order to show cause. For the reasons described herein, the Court GRANTS Defendant's motion to dismiss and DISMISSES WITH PREJUDICE all claims against Defendant Greenlight Financial Services. In addition, the Court DISMISSES WITHOUT PREJUDICE all claims against Defendants Reconstrust, N.A. for failure to serve and DISMISSES WITHOUT PREJUDICE all claims against Countrywide Home Loans, Inc. for want of prosecution.


The following background, unless otherwise specified, is taken from Plaintiffs' Second Amended Complaint ("SAC"). On or about February 28, 2006, Plaintiffs purchased a home in El Centro, California (the "Property"). Plaintiffs financed the Property by borrowing a total $397,700 in the form of two concurrent, "piggybacked" mortgage loans. Plaintiffs borrowed $318,200 for the first mortgage from Defendant Greenlight Financial Services ("Greenlight") and $79,500 for the concurrent second mortgage from former Defendant GMAC Mortgage, LLC ("GMAC").*fn1 On or about that date, Plaintiffs executed the above-referenced notes for the amounts borrowed, which notes were secured by Deeds of Trust on the Property.*fn2

Plaintiffs allege the loan they applied for was marketed as a fixed rate mortgage loan. However, instead of a fixed rate mortgage, the interest rate was only locked in place for the first five years. After the initial period, the monthly mortgage payment would increase dramatically when the interest rate of the loan began to adjust. Furthermore, although Defendant made representations about the affordability of the loan, the actual amount-after the interest rate adjustment-was substantially more than Plaintiffs could afford.

According to Plaintiffs, Greenlight failed to provide initial Truth in Lending ("TILA") statements and other disclosures required by the Real Estate Settlement Procedures Act ("RESPA"). As a consequence, Plaintiffs allege it was impossible for them to determine the actual amount of the loan and payments or determine if any fraud existed in the loan documents.

Plaintiffs allege Defendant knowingly or willfully ignored the reality of Plaintiffs' true income. For example, Defendant did not request a tax transcript, although Plaintiffs had signed a release for one. In the same vein, through its Stated Income loan program, Defendant did not require Plaintiffs to verify their income. Plaintiffs allege the loan program gave Defendant the ability to make up whatever income was needed to qualify Plaintiffs for the loan. Despite Defendant's attempts at willful ignorance, Plaintiffs disclosed their true income during the loan application process. Without Plaintiffs' consent, Defendant either fraudulently inflated the Plaintiffs' income on the loan application in order to qualify the Plaintiffs for the adjustable rate mortgage or failed to perform income analysis at all to determine if the Plaintiffs qualified for or could afford the loans.

Plaintiffs did not have any indication that anything was wrong until the loan rate adjusted to the point that they could no longer afford to make payments.*fn3 It was then that Plaintiffs obtained a forensic review of their loan documents and discovered violations of federal and state law. Furthermore, Plaintiffs received all loan documents in English although they are Spanish speakers and conducted the loan transaction in Spanish.

Plaintiffs filed their original complaint, which consisted of eighteen causes of action against five Defendants, on August 9, 2009. (Doc. No. 1.) By the time Plaintiffs filed their SAC on May 7, 2010, six causes of action remained. (Doc. No. 28.) On May 21, 2010, two of the Defendants, Ditech Home Financing and GMAC Mortgage, LLC, filed a motion to dismiss Plaintiffs' SAC. (Doc. No. 29.) The Court granted the motion on July 13, 2010 and instructed Plaintiffs that if they wished to file an amended complaint, they must do so within 21 days. (Doc. No. 36.) After 21 days had expired, on August 3, 2010, Defendant Greenlight filed the present motion to dismiss. (Doc. No. 37.) Rather than opposing the motion, and in violation of the Court's July 13, 2010 order, Plaintiffs filed a third amended complaint on September 2, 2010. (Doc. No. 40.) The Court ordered the third amended complaint stricken and, in addition, ordered Plaintiffs to show cause why Defendants Reconstrust, N.A. and Countrywide Home Loans, Inc. ("Countrywide") should not be dismissed from this action for want of prosecution. (Doc. No. 41.) On September 13, 2010, the Court held a hearing on Defendant Greenlight's motion to dismiss and the Court's order to show cause. Plaintiffs' counsel did not appear at the hearing. In a letter dated September 14, 2010, Plaintiffs' counsel informed the Court he had "resigned as a member of the California State Bar." The Court has attached the letter to this order because it is not evident that counsel has notified Plaintiffs of his resignation from the State Bar.


I. Legal Standard

A complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a) (2009). A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the claims asserted in the complaint. Fed. R. Civ. P. 12(b)(6); Navarro v. Block, 250 F.3d 729, 731 (9th Cir. 2001). The court must accept all factual allegations pled in the complaint as true, and must construe them and draw all reasonable inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). To avoid a Rule 12(b)(6) dismissal, a complaint need not contain detailed factual allegations, rather, it must plead "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). 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) (citing Twombly, 550 U.S. at 556).

However, "a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citation omitted). A court need not accept "legal conclusions" as true. Ashcroft v. Iqbal, --- U.S. ---, 129 S.Ct. 1937, 1949, 173 LED.2d 868 (2009). In spite of the deference the court is bound to pay to the plaintiff's allegations, it is not proper for the court to assume that "the [plaintiff] can prove facts that [he or she] has not alleged or that defendants have violated the... laws in ways that have not been alleged." Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983).

II. Analysis

A. Intentional Misrepresentation and Fraudulent Concealment

In their first and second causes of action against Defendant Greenlight, Plaintiffs seek damages for intentional misrepresentation and fraudulent concealment. They allege Defendant failed to make a variety of disclosures required under federal and state law, and as a result, the loan seemed less expensive than it really was. In its motion to dismiss, Defendant contends Plaintiffs' intentional misrepresentation claim should be dismissed as time barred because Plaintiffs' original complaint was not filed until more than three years after the loan transaction. In any event, Defendant contends that Plaintiffs' allegations regarding both claims lack the specificity required by Federal Rule of Civil Procedure 9(b).*fn4

1. Limitation Period for Intentional Misrepresentation

Pursuant to Section 338(d) of the California Code of Civil Procedure, an action for relief on the ground of fraud or mistake must be commenced within three years. "A plaintiff must bring a claim within the limitations period after accrual of the cause of action." Fox v. Ethicon Endo-Surgery, Inc., 35 Cal. 4th 797, 806 (Cal. 2005) (citing Cal. Civ. Proc. Code § 312 and Norgart v. Upjohn Co., 21 Cal. 4th 383, 397 (Cal. 1999)). "Generally speaking, a cause of action accrues at 'the time when the cause of action is complete with all of its elements.' An important exception to the general rule of accrual is the 'discovery rule,' which postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action." Id. (internal citations omitted). The discovery rule "may be expressed by the Legislature or implied by the courts." Norgart, 21 Cal. 4th at 397 (citation omitted). In the present case, Section 338(d) expressly provides that a cause of action for relief on the ground of fraud "is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud." Cal. Civ. Proc. Code § 338(d).

"In order to rely on the discovery rule for delayed accrual of a cause of action, 'a plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence.'" Fox, 35 Cal. 4th at 808 (citation omitted). "In assessing the sufficiency of the allegations of delayed discovery, the court places the burden on the plaintiff to 'show diligence'; 'conclusory allegations will not withstand demurrer.'" Id. (citation omitted). Thus, "[i]n order to adequately allege facts supporting a theory of delayed discovery, the plaintiff must plead that, despite diligent ...

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