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Hawkins v. First Horizon Home Loans

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA


November 22, 2010

ERIC HAWKINS AND LYNDA HAWKINS, PLAINTIFFS,
v.
FIRST HORIZON HOME LOANS, A DIVISION OF FIRST TENNESSEE BANK N.A., SUCCESSOR IN INTEREST BY MERGER TO FIRST HORIZON HOME LOAN CORPORATION, A TENNESSEE CORPORATION; FORT KNOX LENDING, A CALIFORNIA BUSINESS ENTITY FORM UNKNOWN, CALIFORNIA HOME AND MORTGAGE, A CALIFORNIA BUSINESS ENTITY FORM UNKNOWN; JAMES JABOUT, AN INDIVIDUAL, LOANGUY.COM, A CALIFORNIA CORPORATION, AND DOES 1-10, DEFENDANTS.

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

MEMORANDUM AND ORDER

This matter is before the court on defendant First Horizon Home Loans' ("Horizon")*fn1 motion to dismiss plaintiffs Eric and Lynda Hawkins'("plaintiffs") complaint pursuant to Federal Rule of Civil Procedure ("FRCP") 12(b)(6).*fn2 Plaintiffs oppose the motion. For the reasons set forth below,*fn3 Horizon's motion is GRANTED.

BACKGROUND

Plaintiffs reside at 8256 Waterwell Way in Tracy, California (the "Property"). (Compl., filed July 16, 2010 [Docket # 1], ¶ 1.) In or around June 2006, plaintiffs contacted defendant James Jabout ("Jabout"), a friend of theirs and a mortgage broker employed by defendant California Home and Mortgage ("CH&M"), about obtaining a loan (the "Subject Loan" or "Construction Loan") to fund construction of a new home on their Property. (Id. ¶¶ 6, 16.) Plaintiffs claim the Construction Loan would convert to a "permanent mortgage loan" when construction on the Property was finished. (Id. ¶ 16.) Plaintiffs also claim that no interest would be charged during the construction period, i.e., interest charges would begin only after the loan converted into a permanent loan. (Id. ¶ 32; Decl. of K. Brian Matlock in Support of Compl., filed July 16, 2010 ["Matlock Decl."], Ex. D.)

According to plaintiffs, Jabout initiated the loan application process without requesting documentation of income or other financial information. (Compl. ¶ 18.) They contend that Jabout, his employer CH&M, and Loanguy.com fabricated and inflated their financial information on the final loan application. (Id. ¶ 20.) Further, plaintiffs contend that Horizon is liable for the alleged fabrication because Horizon is in an agency relationship with all other defendants which ties them either in this single incident or in an overarching fraudulent course of conduct. (Id. ¶ 9.)

Finally, plaintiffs contend that during the loan process Horizon charged plaintiffs "numerous [j]unk fees" and failed to make certain mandatory disclosures. (Id. ¶¶ 75, 82, 89.) Specifically, as to the non-disclosures, plaintiffs allege that defendants failed to (1) "provide the required disclosures prior to consummation of the transactions"; (2) "submit to [p]laintiffs a consumer handbook on adjustable rate mortgages"; (3) "contain the statement 'You are not required to complete this agreement merely because you have received these disclosures or signed a loan application' on the Good Faith Estimate"; (4) "fully explain the terms of the Subject Loan and the second loan to [p]laintiffs in a meaningful way"; (5) "submit the required Good Faith Estimates of the disclosures within three days of [p]laintiffs' initial application" (6) "submit the Special Information Booklet to plaintiffs" (7) "disclose the current credit score of the consumer or the most recent score of the consumer that was previously calculated by the credit reporting agency for a purpose related to the extension of credit"; (8) "disclose a range of possible credit scores under the model used"; (9) "disclose all of the key factors that adversely affected the credit score of the consumer in the model used"; (10) "disclose the date on which the credit score was created"; and (11) "disclose the name of the person or entity that provided the credit score or credit file upon which the credit score was created" in violation of the Fair and Accurate Credit Transaction Act ("FACTA"), the Real Estate Settlement and Procedures Act ("RESPA"), and the Truth in Lending Act ("TILA"). (Id. ¶¶ 73-92.)

At the end of the loan application process, plaintiffs state they received two loans: (1) the Construction Loan from Horizon memorialized by a Residential Construction Loan Agreement and other documents; and (2) a second loan from Horizon memorialized by a Deed of Trust and other documents. (Id. ¶¶ 26, 35; Matlock Decl., Exs. B-G.)

After receiving the loans, plaintiffs began building a home on the Property, drawing on the Subject Loan during the construction process. (Compl. ¶ 40.) They contend that during this time interest accrued notwithstanding the parties' agreement to the contrary. (Id.) Construction was completed in August 2007. (Id. ¶ 41; Matlock Decl., Ex. H.) At this time, plaintiffs believed the Construction Loan would become a "permanent loan." (Compl. ¶¶ 41-42.) However, plaintiffs allege that Horizon refused to convert the Construction Loan. (Id. ¶ 43.)

Thereafter, plaintiffs allege that they continued making payments on the Subject Loan until their default in April 2008.

(Id. ¶ 44.) Following default, plaintiffs requested and obtained loan modification agreements from Horizon effective January 1, 2009. (Id. ¶ 45; Matlock Decl., Ex. J.)

Approximately seven months later, in July 2009, plaintiffs filed for bankruptcy. (Compl. ¶ 49.) After the conclusion of plaintiffs' bankruptcy proceeding, Horizon instituted foreclosure proceedings. (Id. ¶ 51; Matlock Decl., Ex. T.) Horizon filed a first Notice of Default and Election to Sell in January 2010, and an amended one in April 2010. (Compl. ¶¶ 53, 54; Matlock Decl., Exs. L, U, V.) No foreclosure sale has been noticed or scheduled. Plaintiffs filed this lawsuit on July 16, 2010.*fn4

Plaintiffs bring forth sixteen causes of action: (1) violations of the Truth in Lending Act, 15 U.S.C., sections 1601 et seq.; (2) violations of the Real Estate Settlement and Procedures Act, 12 U.S.C., sections 2601 et seq.; (3) violations of the Fair and Accurate Credit Transaction Act, 15 U.S.C., sections 1681 et seq.; (4) common law intentional misrepresentation; (5) statutory fraud; (6) breach of written contract; (7) breach of fiduciary duty; (8) constructive fraud; (9) negligent lending; (10) unjust enrichment; (11) violations of the California Unfair Competition Law, California Business & Professions Code Sections 17200 et seq. ("UCL"); (12) contractual breach of good faith and fair dealing; (13) predatory lending practices; (14) violation of California Civil Code, section 1916.7(c) ("Section 1916.7"); (15) violation of California Civil COde, section 2923.6 ("Section 2923.6"); and (16) fraudulent inducement to contract.

STANDARDS

Under Federal Rule of Civil Procedure 8(a), a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). Under notice pleading in federal court, the complaint must "give the defendant fair notice of what the claim is and the grounds upon which it rests." Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). "This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims." Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002).

On a motion to dismiss, the factual allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322 (1972). The court is bound to give plaintiff the benefit of every reasonable inference to be drawn from the "well-pleaded" allegations of the complaint. Retail Clerks Int'l Ass'n v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963). A plaintiff need not allege "'specific facts' beyond those necessary to state his claim and the grounds showing entitlement to relief." Twombly, 550 U.S. at 570. "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." Iqbal, 129 S.Ct. at 1949.

Nevertheless, the court "need not assume the truth of legal conclusions cast in the form of factual allegations." United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th Cir. 1986). While Rule 8(a) does not require detailed factual allegations, "it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation." Iqbal, 129 S.Ct. at 1949. A pleading is insufficient if it offers mere "labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555; Iqbal, 129 S.Ct. at 1950 ("Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."). Moreover, it is inappropriate to assume that the plaintiff "can prove facts which it has not alleged or that the 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).

Ultimately, the court may not dismiss a complaint in which the plaintiff has alleged "enough facts to state a claim to relief that is plausible on its face." Iqbal, 129 S.Ct. at 1949 (citing Twombly, 550 U.S. at 570). Only where a plaintiff has failed to "nudge [his or her] claims across the line from conceivable to plausible," is the complaint properly dismissed. Id. at 1952. While the plausibility requirement is not akin to a probability requirement, it demands more than "a sheer possibility that a defendant has acted unlawfully." Id. at 1949. This plausibility inquiry is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950.

In ruling upon a motion to dismiss, the court may consider only the complaint, any exhibits thereto, and matters which may be judicially noticed pursuant to Federal Rule of Evidence 201. See Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988); Isuzu Motors Ltd. v. Consumers Union of U.S., Inc., 12 F. Supp. 2d 1035, 1042 (C.D. Cal. 1998).

ANALYSIS

A. Violation of TILA

Plaintiffs' first cause of action asserts both a rescission and damage claim for alleged violations of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq. (Compl. ¶ 78.) Specifically, plaintiffs allege that defendants (1) "fail[ed] to provide the required disclosures prior to consummation of the transactions"; (2) "fail[ed] to submit to [p]laintiffs a consumer handbook on adjustable rate mortgages"; (3) "fail[ed] to contain the statement 'You are not required to complete this agreement merely because you have received these disclosures or signed a loan application' on the Good Faith Estimate"; (4) "fail[ed] to fully explain the terms of the Subject Loan and the second loan to [p]laintiffs in a meaningful way"; (5) "fail[ed] to submit the required Good Faith Estimates of the disclosures within three days of [p]laintiffs' initial application"; and (6) engaged in "predatory lending" by "extending credit[] to [p]laintiffs. . . without regard to [p]laintiffs' repayment ability." (Compl. ¶ 75; Pls.'s Opp.'n ["Opp.'n"], filed Oct. 20, 2010 [Docket #18], 3-4.)

Defendant Horizon argues that plaintiffs' TILA claims are time barred. (Horizon's Motion to Dismiss ["MTD"], filed October 8, 2010 [Docket #15], 6-9). Plaintiffs respond that the statutory period has not expired based on equitable tolling and/or the continuing violation doctrine. (Opp.'n at 3-4.)

1. Rescission

Rescission claims under TILA "shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first." 15 U.S.C. § 1635(f).

Further, equitable tolling does not apply to rescission under this provision of TILA. If the borrower files his or her suit over three years from the date of a loan's consummation, a court is powerless to grant rescission. 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)); accord Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412 (1998) ("[Section] 1635(f) completely extinguishes the right of rescission at the end of the 3-year period."). If a borrower exercises her right to rescind within the three-year limitation period, such action only entitles the borrower to damages, not rescission. Cazares v. Household Fin. Corp., No. CV 04-6887 DSF, 2005 U.S. Dist. LEXIS 39222, at *24-25 (C.D. Cal. 2005) (citing 15 U.S.C. § 1640(a); Belini v. Wash. Mut. Bank, FA, 412 F.3d 17 (1st Cir. 2005)).

In this case, plaintiffs allege they consummated the Subject Loan on or about September 11, 2006. (Compl. ¶ 26.) Plaintiffs did not bring the instant action until July 16, 2010; accordingly, more than three years has passed since the alleged TILA violations. 15 U.S.C. § 1640(e). As such, Horizon's motion to dismiss plaintiffs' recision claim under TILA is GRANTED without leave to amend.

2. Damages

TILA provides that a plaintiff can bring an action to recover damages "within one year from the date of the occurrence of the violation." 15 U.S.C. § 1640(e). As stated above, plaintiffs bring this action approximately four years after consummation of the loan; accordingly, their TILA claims are time-barred.

a. Continuing Violation

Plaintiffs argue that their claims are timely because defendants engaged in "predatory lending," which they assert is a continuing violation of TILA. However, the Ninth Circuit has expressly rejected the continuing violation theory as applied to claims for damages brought under TILA. King, 784 F.2d at 914. In King, the Ninth Circuit stated that the theory is "unrealistically open ended" and "exposes the lender to a prolonged and unforeseeable liability that Congress did not intend." Id. Accordingly, Horizon's motion to dismiss plaintiffs' predatory lending claim is GRANTED without leave to amend.

b. Equitable Tolling

Alternatively, plaintiffs argue that equitable tolling applies to extend the statute of limitations. (Compl. ¶ 77.) Specifically, plaintiffs claim they "had no reasonable opportunity to discover the. . . [alleged] violations until around August 2009"*fn5 because they relied on "their friends and business partners [to] act truthfully and in [p]laintiffs['] best interest" regarding the execution of the loans. (Compl. ¶¶ 39, 77.) Consequently, plaintiffs state they were not provoked to inquire into the alleged violations until after the statutory period had passed. (Id. at 48.)

To establish excusable delay, a plaintiff must show "fraudulent conduct by the defendant resulting in concealment of the operative facts, the plaintiff's failure . . . to discover the operative facts that are the basis of [his/her] cause of action within the limitations period, and [his/her] due diligence . . . until discovery of those facts." Federal Election Com'n v. Williams, 104 F.3d 237, 240-41 (9th Cir. 1996)(emphasis added). Equitable tolling "focuses on whether there was excusable delay by the plaintiff," and "does not depend on any wrongful conduct by the defendant to prevent the plaintiff from suing." Santa Maria v. Pac. Bell, 202 F.3d 1170, 1178 (9th Cir. 2000).

The plaintiff must allege facts demonstrating that the TILA violations alleged could not have been discovered by due diligence during the one-year statutory period; otherwise, equitable tolling should not be applied and dismissal at the pleading stage is appropriate. Lingad v. Indymac Federal Bank, 682 F. Supp. 2d 1142, 1147 (2010). "Such factual underpinnings are all the more important . . . since the vast majority of [a plaintiff's] alleged violations under TILA are violations that are self-apparent at the consummation of the transaction. Cervantes v. Countrywide Home Loans, Inc., No. CV 09-517-PHX-JAT, 2009 WL 3157160, **13-14 (D. Ariz. Sept. 24, 2009).

Here, plaintiffs allegations are not sufficient to invoke equitable tolling. First, relying on a lender and assuming correctness of the loan documents does not excuse plaintiffs from conducting their own due diligence. See e.g. Nichalson v. First Franklin Financial Corp., No. 2:10-cv-00598-MCE-EFB, 2010 WL 3505089, **2-3 (E.D. Cal. Sept. 3, 2010)(finding a lack of due diligence because the plaintiff did not review her loan documents; instead, relying on her lenders and assuming that all the information was true and correct).

Second, although plaintiffs eventually performed some due diligence, it was not performed within the time allotted by TILA. Indeed, plaintiffs state they did not begin their inquiry into the alleged violations until August 2009, after the statute of limitations period had ended. See Kelley v. Countrywide Home Loans, No. CV F 09-1148 LJO DLB, 2009 WL 3489422, **5-6 (E.D. Cal. Oct. 26, 2009) (finding that equitable tolling was not appropriate because the plaintiff had not shown anything which prevented him from comparing his loan documents and TILA's statutory and regulatory requirements within the statutory period); Martinez v. EMC Mortg. Corp., No. CV F 09-0813 LJO GSA, 2009 WL 2043013, at *7 (E.D. Cal. Jul. 13, 2009) (same).

Without facts regarding why the alleged violations were not, and could not have been, reasonably discovered until August 2009, the court cannot equitably toll the statute of limitations in this case. As such, defendant Horizon's motion to dismiss plaintiffs' claim for damages for violations of TILA is GRANTED with leave to amend.

B. RESPA

Plaintiffs' second claim is for violations of the Real Estate Settlement and Procedures Act ("RESPA"), 12 U.S.C. 2601, et seq. Specifically, plaintiffs allege Horizon "failed to submit the Special Information Booklet to [p]laintiffs" in violation of RESPA § 2604 and Horizon "charged [plaintiffs] numerous [j]unk fees" constituting illegal kickbacks in violation of RESPA § 2607. (Compl. ¶ 82; Opp.'n at 6.) Horizon moves to dismiss these claims on the basis that (1) plaintiffs are not afforded a private right of action under § 2604; and (2) plaintiffs' § 2607 claim is time-barred. (MTD at 10.) Plaintiffs respond that their claims are valid and timely based upon the application of equitable tolling. (Opp.'n at 5-6.)

1. 12 U.S.C. § 2604

Numerous California district courts have concluded that no private right of action exists for violation of § 2604. See e.g. Bassett v. Ruggles, No. CV-F-09-528, 2010 WL 1525554, *9 (E.D. Cal. Apr. 15, 2010) (finding § 2604 does not authorize a private remedy); Kerr v. American Home Mortg. Servicing, Inc., No. 10-cv-1612 BEN, 2010 WL 3743879, *1 (S.D. Cal. Sept. 23, 2010) ("Courts have consistently held. . . there is no private right of action for alleged RESPA disclosure violations during the loan origination process."); Pagtalunan v. Reunion Mortg. Inc., No. C-09-00162, 2009 WL 961995, *3 (N.D. Cal. Apr. 8, 2009); Agbabiaka v. HSBC Bank USA Nat'l Ass'n, No. C 09-05583, 2010 WL 1609974, *4 (N.D. Cal. Apr. 20, 2010) ("There is no private right of action under RESPA for violations of Sections 2603 and 2604."). Consistent with the district courts in California the court also holds that § 2604 does not provide plaintiffs with a private right of action. Accordingly, Horizon's motion to dismiss plaintiffs' RESPA § 2604 claim is GRANTED without leave to amend.

2. 12 U.S.C. § 2607

The statute of limitations for bringing a claim under RESPA § 2607 is one year. 12 U.S.C. § 2614. More than one year has passed since the alleged violations and, as set forth supra, plaintiffs do not plead facts sufficient to invoke equitable tolling. Thus, the Horizon's motion to dismiss plaintiffs' RESPA § 2607 claim is GRANTED with leave to amend.

C. FACTA

Plaintiffs' third claim for relief is based on Horizon's alleged violation of the Fair and Accurate Credit Transactions Act ("FACTA"), 15 U.S.C. § 1681, et seq. (Compl. ¶ 86-92.) Specifically, plaintiffs' allege defendants willfully "failed to provide [] disclosures [in violation of] Section 212(b) of [FACTA]." (Compl. ¶¶ 88, 90.) Horizon responds that plaintiffs' FACTA claim is time-barred and defectively plead. (MTD at 9.)

A plaintiff must bring a FACTA action within "2 years after the date of discovery by the plaintiff of the violation that is the basis for such liability." 15 U.S.C. § 1681p. "Under federal law a cause of action accrues when the plaintiff is aware of the wrong." Acri v. International Ass'n of Machinists & Aerospace Workers, 781 F.2d 1393, 1396 (1986). That is, "when the plaintiff 'knows or has reason to know of the injury which is the basis of the action.'" Kemp v. Regents of University of Cal., No. C-09-4687 PJH, 2010 WL 2889224 (N.D. Cal. July 22, 2010) (citing TwoRivers v. Lewis, 174 F.3d 987, 991-992 (9th Cir. 1999); Trotter v. Int'l Longshoremen's & Warehousemen's Union, 704 F.2d 1141, 1143 (9th Cir. 1983)).

Here, plaintiffs allege they did not receive the requite disclosures when they executed the Subject Loan around September 12, 2006. (Compl. ¶ 88-89.) Yet, they did not file the current action until July 16, 2010. Plaintiffs assert they were unable to ascertain the alleged non-disclosures until a forensic audit was completed on the loan document in August 2009. (Id. at 77.) However, plaintiffs' tolling rationale fails for the same reason their TILA and RESPA § 2607 tolling rationale fails: plaintiffs plead no facts explaining why they were prevented from discovering the alleged violations within the two year statutory period. See Kelley, 2009 WL 3489422 at **5-6 (finding that equitable tolling was not appropriate because the plaintiff had not shown anything which prevented him from comparing his loan documents and the statutory and regulatory requirements within the statutory period). Accordingly, Horizon's motion to dismiss plaintiffs' FACTA claim is GRANTED with leave to amend.*fn6

D. Fraud

Plaintiffs' fourth, fifth, and eighth claims for relief are based on the alleged fraud of defendant Horizon. (Compl. ¶¶ 93-140, 160-164.) Specifically, plaintiffs bring their claims based on three alleged bad acts: defendants' (1) fraudulent overstatement of their income on loan documents ("income fabrication"); (2) misrepresentation of when interest charges would begin ("interest misrepresentation"); and (3) refusal to convert plaintiffs' Subject Loan to a permanent loan ("non-conversion"). (Id.) Horizon contends that (1) plaintiffs' claims are time-barred; (2)plaintiffs fail to meet the pleading standard of Rule 9(b); and (3) plaintiffs fail to link Horizon to any fraud. (MTD at 11-12; Horizon's Reply to Pls. Opposition, [Docket #21], filed October 29, 2010 ["Reply"], at 6-7.)

1. Time-Bar

A three year statute of limitations exists for fraud actions. CCP § 338(d). The accrual begins when the aggrieved party discovers the fraud or mistake. Id.

In this case, plaintiffs fail to plead facts that demonstrate this litigation was timely filed with respect to their claims of income fabrication and interest misrepresentation.*fn7 Rather, plaintiffs' exhibits demonstrate that the alleged fraud based upon income fabrication and interest misrepresentation could have been discovered within the statutory period. For example, the alleged income fabrication is listed in both the Allonge and the Uniform Underwriting and Transmittal Summary. (Matlock Decl., Ex. D, O.) Both of these documents are signed by plaintiffs in July and September 2006, respectively. As such, plaintiffs were on notice of the alleged fraud approximately four years ago, but failed to investigate or file an action.

As to the alleged interest misrepresentation, Horizon correctly points out that paragraph 2.A of the Allonge is captioned "Interest During the Construction Period," and it reads in pertinent part: "Borrower will pay interest only, based on a 360-day year, on the amount advanced by the Note Holder at the rate of prime 0% during the Construction Period of the loan, as such interest rate exists daily." (Id.) As stated above the Allonge was signed by plaintiffs in September 2006; accordingly, they were on notice of any alleged improper charges at that time. Moreover, by Exhibit S, plaintiffs received invoices with interest charges from Horizon as early as June 2007; yet, plaintiffs did not file this action until July 16, 2010. (Id. at Ex. S.) Accordingly, these fraud claims are time-bared.

2. Failure to Meet Rule 9(b)'s

Pleading Standard Failure to Connect Horizon to Alleged Fraud and Under California law, the elements of common law fraud are "misrepresentation, knowledge of its falsity, intent to defraud, justifiable reliance, and resulting damages." Gil v. Bank of Am., Nat'l Ass'n, 138 Cal. App. 4th 1371, 1381 (2006). "[T]o establish a cause of action for fraud a plaintiff must plead and prove in full, factually and specifically, all of the elements of the cause of action. Conrad v. Bank of America, 45 Cal. App. 4th 133, 156 (1996). There must be a showing "that the defendant intended to induce the plaintiff to act to his detriment in reliance upon the false representation." Conrad v. Bank of America, 45 Cal. App. 4th 133, 156 (1996) (emphasis added).

Further, a court may dismiss a claim grounded in fraud when its allegations fail to satisfy Rule 9(b)'s heightened pleading requirements. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003). Therefore, the plaintiff "must state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). In other words, the plaintiff must include "the who, what, when, where, and how" of the fraud. Id. at 1106 (citations omitted).

Additionally, "Rule 9(b) does not allow a complaint to merely lump multiple defendants together but require[s] plaintiffs to differentiate their allegations when suing more than one defendant . . . and inform each defendant separately of the allegations surrounding his alleged participation in the fraud." Swartz v. KPMG LLP, 476 F.3d 756, 765-766 (9th Cir. 2007). When asserting a fraud claim against a corporation, "the plaintiff's burden . . . is even greater. . . . The plaintiff must 'allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.'" Lazar v. Superior Court, 12 Cal. 4th 631, 645 (1996) (quoting Tarmann v. State Farm Mut. Auto. Ins. Co., 2 Cal. App. 4th 153, 157 (1991)); see also Edejer v. DHI Mortgage Co., No. C 09-1302, 2009 WL 1684714, *12 (N.D. Cal. June 12, 2009) (dismissing a fraud claim, inter alia, where the plaintiff did not allege any the names of the persons who made the allegedly fraudulent representations and their authority to speak); Akhavein v. Argent Mortgage Co., No. 5:09-cv-00634, 2009 WL 2157522, *4 (N.D. Cal. July 17, 2009).

In the present case, plaintiffs allege that "[d]efendants Jabout, LoanGuy.com and [CH&M] fabricated borrower's [sic] financial information on the final loan application." (Compl. ¶ 98). They assert defendant Horizon was aware of the fabricated financial information because (1) Horizon received the Uniform Underwriting and Transmittal Summary with a handwritten note stating that "[p]laintiffs' income would have to be 'stated' to meet the required debt-to-income-ratio" (Compl. ¶ 99); and/or (2) Horizon is in an agency relationship with all other defendants, which ties them either in this single incident or in an overarching fraudulent course of conduct. (Id. ¶ 9.)

Plaintiffs' allegations are insufficient to meet the heightened pleading standard of Rule 9(b). First, plaintiffs do not allege how the handwritten note demonstrates Horizon's knowledge of alleged fraudulent activity. Plaintiffs do not allege that "income would have to be stated" is an indicator of fraudulent activity in the mortgage loan industry or that the phrase clearly indicates the income on the paperwork is fabricated. As such, standing alone, this allegation does not show how Horizon would have knowledge that the income on the loan documents was allegedly fabricated.

Second, plaintiffs' assertion that Horizon is in an agency relationship with all other defendants is conclusory; plaintiffs do not allege any facts to show how Horizon authorized any other defendant to represent and/or bind it. Plaintiffs must allege such facts to sufficiently apprise defendants of the nature of the agency relationship. Cal. Civ. Code § 2295; J.L. v. Children's Institute, Inc., 177 Cal. App. 4th 388, 403-404 (2009). Accordingly, plaintiffs fail to show how Horizon was connected to this fraudulent act.

Finally, plaintiffs fail to inform each specific defendant of the allegation surrounding its alleged participation in the fraud. In this case "defendants" includes several entities and an individual; however, contrary to what is required by Rule 9(b), plaintiffs failed to allege which defendant, let alone which employee(s) at each entity-defendant, actually made the supposedly false representations.

Accordingly, defendant Horizon's motion to dismiss plaintiffs' claims for rescission and damages based on fraud are GRANTED with leave to amend.

E. Breach of Contract

Plaintiffs' sixth claim for relief is a breach of contract claim. (Compl. ¶¶ 141-149.) Plaintiffs allege that Horizon breached the loan contract(s) by (1) failing to convert the Subject Loan into "a permanent mortgage loan on the day the construction period end[ed]," and (2) "charging interest before the construction period ended." (Id. ¶¶ 143-144.)

"[T]o state a claim for breach of contract, the plaintiff must plead: 1) the existence of the contract; 2) plaintiff's performance or excuse for nonperformance of the contract; 3) defendant's breach of the contract; and 4) resulting damages." Armstrong Petrol. Corp. v. Tri Valley Oil & Gas Co., 116 Cal. App. 4th 1375, 1391 n. 6 (2004). On a motion to dismiss, the court need not accept allegations as true if they are contradicted by documents before the court. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). "[W]hen a written instrument is attached to the pleading and properly incorporated therein by reference, the court may examine the exhibit and treat the pleader's allegations of its legal effect as surplusage." Burnett v. Chimney Sweep, 123 Cal. App. 4th 1057, 1064 (2004) (quoting Lumbermens Mut. Cas. Co. v. Vaughn, 199 Cal. App. 3d 171, 178 (1988).)

Plaintiffs' allegation of breach by non-conversion of the Subject Loan fails because plaintiffs do not assert any facts or evidence explaining what the alleged breach entailed. Indeed, plaintiffs do not allege what changes in the loan were meant to take place after the conversion, but ultimately did not. As such, it is unclear what Horizon was supposedly obligated to do or what comprised the alleged breach. See Schnelke v. JPMorgan Chase Bank, No. 2:09-cv-03119, 2010 WL 2546100, *3 (E.D. Cal. Jun. 23, 2010) (dismissing contract claim where plaintiff failed to allege where in his mortgage loan contract, or any contract, certain terms were memorialized); see also Logan v. Resmae Mortg. Corp., 2009 WL 5206716, *4 (E.D. Cal. Dec. 24, 2009) (finding that the plaintiff's assertion of vague promises by the defendant were not sufficient to show the existence of a contract).

Further, plaintiffs' non-conversion allegation is contradicted by both the terms of the contract and allegations of the complaint. According to plaintiffs' exhibits, the Subject Loan became a 30-year - i.e., "permanent" - loan at the end of the construction period. (See Matlock Decl., Ex. D) ("On the day after the Construction Period ends, the loan evidenced by this Note will be a permanent mortgage loan."). Further, in their complaint, plaintiffs themselves allege that the Subject Loan remained in place beyond the end of the construction period, and plaintiffs continued making payments on it until they defaulted in April 2008. (Compl. ¶ 44.)

Plaintiffs' assertion that Horizon breached the contract by charging interest is also contradicted by the plain terms of the contract.*fn8 Specifically, by paragraph 2.A of the Allonge which is captioned "Interest During the Construction Period," provides in pertinent part: "Borrower will pay interest only. . . at the rate of prime 0% during the Construction Period of the loan . . . Borrower will make monthly interest payments by the 15th of each month for the amount billed by the Note Holder." (Matlock Decl., Ex D) (emphasis added.) Further, plaintiffs make no factual allegations to support an oral or written modification of this agreement. Accordingly, looking to the four corners of the contract, plaintiffs agreed to interest charges during the construction loan period.

For these reasons, Horizon's motion to dismiss plaintiffs' breach of contract claim is GRANTED with leave to amend.

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

Plaintiffs' twelfth claim for relief asserts that defendants breached the implied covenant of good faith and fair dealing based on the same assertions listed under their breach of contract claim. (Compl. ¶¶ 143-44.)

"To establish a breach of an implied covenant of good faith and fair dealing, a plaintiff must establish the existence of a contractual obligation, along with conduct that frustrates the other party's rights to benefit from the contract." Fortaleza v. PNC Fin. Servs. Group, Inc., 642 F. Supp. 2d 1012, 1021-22 (N.D. Cal. 2009). Further, "a breach of the implied covenant of good faith and fair dealing involves something beyond breach of the contractual duty itself." Careau & Co. v. Security Pacific Business Credit, Inc., 222 Cal. App. 3d 1371, 1394 (1990). The "implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract." Pasadena Live, LLC v. City of Pasadena, 114 Cal. App. 4th 1089, 1093-1094 (2004).

To the extent this court has concluded that plaintiffs cannot show how defendant Horizon failed in any way to perform pursuant to the terms of the contract, and plaintiffs' loan documents indicate that interest was to be charged during the construction period, Horizon's motion to dismiss plaintiffs' claim for breach of the implied covenant of good faith and fair dealing is GRANTED with leave to amend.

G. Breach of Fiduciary Duty, Negligent Lending, and Constructive Fraud

In counts seven, eight, and nine, plaintiffs assert claims against Horizon for breach of fiduciary duty (Count 7), constructive fraud (Count 8) and negligent lending (Count 9). (Id. ¶¶ 150-178.) Specifically, plaintiffs allege that they "perceived their relationship with Jabout as very close and relied on Jabout's financial advice implicitly." (Opp.'n at 9.) Plaintiffs allege that Horizon's fiduciary duty arose because "[t]he relationship of a lender to a borrower is quasi-fiduciary when a lender (Defendant Horizon) takes on an advisory role through its agent (Defendant Jabout), and borrowers reasonably expect a lender not to wrongly apply payments, wrongly charge late fees, or falsely calculate monthly principal and interest amounts due." (Id. at 10.) Horizon moves to dismiss plaintiffs' seventh, eighth, and ninth claims on the basis that these claims can lie only against parties in relationships that give rise to special duties. (MTD at 15.)

1. Fiduciary Duty

To state a claim for breach of fiduciary duty, a plaintiff must show: (1) the existence of a fiduciary relationship; (2) the breach of that relationship; and (3) damage proximately caused by the breach. Roberts v. Lomanto, 112 Cal. App. 4th 1553, 1562 (2003). However, "[a]bsent special circumstances. . . a loan transaction is [an] at arms-length [transaction] and there is no fiduciary relationship between the borrower and lender." Oaks Mgmt. Corp. v. Superior Court, 145 Cal. App. 4th 453, 466 (2006). "A commercial lender is entitled to pursue its economic interest in a loan transaction. This right is inconsistent with the obligations of a fiduciary, which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another." Gonzalez v. First Franklin Loan Services, No. 1:09-CV-00941 AWI-GSA, 2010 WL 144862, *13 (E.D. Cal. Jan. 11, 2010). A lender, however, may be held vicariously liable for breach of fiduciary duty when a broker, who is an agent of the lender, breaches a fiduciary duty owed to the borrower. Id.

Plaintiffs claim that their "very close," "year-long" friendship with defendant Jabout created a special circumstance which caused Jabout's involvement in the loan transaction to exceeded the scope of the conventional role as a mere broker. (Compl. ¶ 17; Opp.'n at 9-10.) Further, plaintiffs allege that this special circumstance extends to Horizon as a result of an agency relationship that existed between Horizon and defendant Jabout. (Opp.'n at 9-10.) However, as explained supra, plaintiffs allege no facts to show how Horizon authorized Jabout to represent and/or bind it, which is necessary to set forth an agency relationship.*fn9 CCP § 2295; Children's Institute, Inc., 177 Cal. App. 4th at 403-04. Plaintiffs, therefore, have not demonstrated that Horizon owed plaintiffs a fiduciary duty which could give rise to a claim for breach of that duty. Accordingly, Horizon's motion to dismiss plaintiffs' breach of fiduciary duty claim GRANTED with leave to amend.

2. Negligence and Constructive Fraud

Claims for negligence and constructive fraud also require a duty of care element. "[T]he threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another." Glenn K. Jackson, Inc. v. Roe, 273 F.3d 1192, 1196-1197 (9th Cir. 2001) (applying California law) (quotations and citations omitted)(emphasis added). Additionally, "[c]onstructive fraud is. . . applicable only to a fiduciary or confidential relationship." Assilzadeh v. California Federal Bank, 82 Cal. App. 4th 399, 415 (2000) (emphasis added).

Inasmuch as no fiduciary duty exists between a lender and a borrower and the court finds that plaintiffs have not sufficiently plead an agency relationship between Horizon and any of the other alleged duty-holding defendants, Horizon's motion to dismiss plaintiffs' claims for negligence and constructive fraud are GRANTED with leave to amend.

H. California Civil Code § 1916.7 Claim

Plaintiffs allege the "[S]ubject [L]oan is an adjustable rate loan within the meaning of CC [California Civil Code] § 1916.7." (Compl. ¶ 220.) Further, plaintiffs claim they "did not receive a disclosure notice in the form prescribed by CC § 1916.7(c)." (Id. ¶ 221.) Horizon asserts that the disclosures required by Section 1916.7 appear to be preempted in many circumstances by the federal Alternative Mortgage Transactions Parity Act of 1982 ("AMTPA"). (MTD at 16-17.)

The AMTPA provides in part that "[a]n alternative mortgage transaction may be made by a housing creditor in accordance with this section, notwithstanding any State constitution, law, or regulation." 12 U.S.C. § 3803. "[T]he term 'alternative mortgage transaction' means a loan or credit sale secured by an interest in residential real property ... in which the interest rate or finance charge may be adjusted or renegotiated." 12 U.S.C. § 3802(1)(A).

The Ninth Circuit has stated that AMTPA does not provide for complete preemption, but only of those state law terms that conflict with AMTPA's terms. Ansley v. Ameriquest Mortg. Co., 340 F.3d 858, 864 (9th Cir.2003); Quicken Loans, Inc. v. Wood, 449 F.3d 944, 950 (9th Cir. 2006); accord National Home Equity Mortgage Association v. Face, 239 F.3d 633 (4th Cir. 2001); Black v. Financial Freedom Senior Funding Corp., 92 Cal. App. 4th 917, 930 (Cal. App. 2001), cert. denied, 536 U.S. 959 (2002) ("the phrase 'any state constitution, law, or regulation' can be interpreted as implicitly limited to those that prohibit or impede alternative mortgage transactions or that conflict with [AMTPA's] federal regulations.").

The language of the statute provides that conflicting state laws governing alternative mortgage transactions are preempted where those transactions comply with relevant Office of Thrift Supervision*fn10 regulations. Hafiz v. Greenpoint Mortg. Funding, Inc., 652 F. Supp. 2d 1039, 1048 (N.D. Cal. 2009) (citing 12 C.F.R. 560.35, 560.210, 226.19(b), 226.20(c)).) "Regulations have been issued with respect to [] four aspects of mortgage financing: Late charges; Prepayments; Adjustments to home loans; and Disclosures for variable rate transactions." Ansley, 340 F.3d at 863, n.1 (citing 12 C.F.R. §§ 560.33-560.35, 560.210, 560.220) (emphasis added).) Accordingly, alternative, conflicting, or more rigorous state law disclosure requirements would conflict with AMTPA regulations. See Hafiz, 652 F. Supp. 2d at 1048.

Here, plaintiffs have not asserted any facts regarding how the Section 1916.7 disclosure provisions harmonize with the relevant provisions of AMTPA, nor have plaintiffs responded to defendants' assertion that Section 1916.7 is preempted. Consequently, Horizon's motion to dismiss plaintiffs' Section 1917.6 claim is GRANTED with leave to amend.

I. Unjust Enrichment

Plaintiffs tenth claim for relief asserts that "Horizon and its agents, and Loanguy.com" were unjustly enriched by plaintiffs' monthly loan payments, fees, and interest because the contract was procured by fraud and because defendants breached the express terms of the contract making it unenforcable. (Compl. ¶ 179-186.) As a result, plaintiffs assert they have a claim for restitution. Horizon responds that "because [the unjust enrichment claim] is derivative of plaintiffs' other defective claims, it must fail with them." (MTD at 17.)

In order to establish a claim for unjust enrichment, a plaintiff must plead "receipt of a benefit and unjust retention of the benefit at the expense of another." Lectrodryer v. SeoulBank, 77 Cal. App. 4th 723, 726 (2000). Furthermore, the plaintiff must demonstrate that the defendant received the benefit through mistake, fraud, coercion or request. Nibbi Bros., Inc. v. Home Fed. Sav. & Loan Ass'n, 205 Cal. App. 3d 1415, 1422 (1988).

Alternatively, a court may grant restitution based on a "quasi-contract theory." McBride v. Boughton, 123 Cal. App. 4th 379, 388 (2004). "Quasi-contractual" unjust enrichment is sought in order to avoid unjustly conferring a benefit upon a defendant where there is no valid contract. Id. However, under California law, a quasi-contract action does not lie "when an enforceable, binding agreement exists defining the rights of the parties." Paracor Fin. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1167 (9th Cir. 1996); Hedging Concepts, Inc. v. First Alliance Mortgage Co., 41 Cal. App. 4th 1410, 1419-1420 (1996).

Plaintiffs' unjust enrichment claim fails because, as the the court concluded supra, plaintiffs have insufficiently alleged fraud or breach of contract, and thus, fail to state that Horizon received and retained benefits and payments which they were not entitled to. Further, plaintiffs' alternative "quasi-contract" theory fails as well. Here, plaintiffs and defendants entered into the Subject Loan, and none of plaintiffs allegations support a claim that a valid contract did not exist between the parties. As such, plaintiffs do not allege sufficient facts to maintain a plausible claim for unjust enrichment.*fn11

Accordingly, Horizon's motion to dismiss plaintiffs' unjust enrichment claim is GRANTED with leave to amend.

J. California Civil Code § 2923.6 claim

Plaintiffs' fifteenth claim for relief is for violation of Section 2923.6. Specifically, plaintiffs claim that after they defaulted on their loan, Horizon was required to offer them a loan modification that was in their best interest and that Horizon failed to do this "when they offered and executed a so-called 'loan modification' in January 2009 with a two-year loan term and an excessive balloon payment in an amount of $1,015,050, and then refused to offer a subsequent meaningful modification." (Compl. ¶ 234.) Defendant Horizon responds that no private right of action exists under Section 2923.6.

In California, "[n]either a private right of action nor actionable duty is discernable from section 2923.6 to defeat a claim based on its violation." Manabat v. Sierra Pacific Mortg. Co., Inc., No. CV F 10-1018 LJO JLT, 2010 WL 2574161, (E.D. Cal. Jun. 25, 2010). Indeed, "Section 2923.6 does not require a lender to enter into a loan modification to serve the parties' best interests." Id.; Zendejas v. GMAC Wholesale Mortg. Corp., 2010 WL 2490975, *5 (E.D. Cal. Jun. 16, 2010) ("[Section 2923.6] in no way confers standing on a borrower to contest a breach of that duty. Other courts to consider this question have agreed unanimously.") (internal citations and quotations omitted); Alford v. Wachovia Bank/World Savings Bank, No. CV F 10-0091 LJO SMS, 2010 WL 415260, *10 (E.D. Cal. Jan. 26, 2010) (same); Pittman v. Barclays Capital Real Estate, Inc., No. 09 CV 0241, 2009 WL 1108889, at *3 (S.D. Cal. Apr. 24, 2009) ("[T]he cited statute clearly addresses this concern by creating a duty between a loan servicer and a loan pool member. The statute in no way confers standing on a borrower to contest a breach of that duty"); Farner v. Countrywide Home Loans, No. 08cv2193, 2009 WL 189025, *2 (S.D. Cal. Jan. 26, 2009) (same).

Because no private right of action exists, Horizon is entitled to dismissal of plaintiffs' Section 2923.6 claim. Accordingly, Horizon's motion to dismiss plaintiffs' Section 2923.6 claim is GRANTED without leave to amend.

K. California Business & Professions Code § 17200

In their eleventh claim for relief, plaintiffs allege that Horizon violated § 17200 of the California Business and Professions Code ("UCL") by engaging in fraudulent business practices. (Compl. ¶¶ 189-202.)

UCL forbids acts of unfair competition, which includes "any unlawful, unfair or fraudulent business act or practice." Id. § 17200. UCL "incorporates other laws and treats violations of those laws as unlawful business practices independently actionable under state law." Plascencia v. Lending 1st Mortgage, 583 F. Supp. 2d 1090, 1098 (N.D. Cal. 2008); see also Farmers Ins. Exch. v. Superior Court, 2 Cal. 4th 377, 383 (1992). "California's UCL has a broad scope that allows for 'violations of other laws to be treated as unfair competition that is independently actionable' while also 'sweep[ing] within its scope acts and practices not specifically proscribed by any other law.'" Hauk v. JP Morgan Chase Bank U.S.A., 552 F.3d 1114 (9th Cir. 2009) (internal citations omitted). "Violation of almost any federal, state, or local law may serve as the basis for a UCL claim." Plascencia, 583 F. Supp. 2d at 1098 (citing Saunders v. Superior Court, 27 Cal. App. 4th 832, 838-839 (1994)).

Plaintiffs' UCL claim is founded upon the same allegations as their fraud claim, and as set forth supra, plaintiffs' allegations are insufficient to state a claim for fraud against Horizon. Accordingly, Horizon's motion to dismiss plaintiffs' claim for violations of California Business & Professions Code § 17200 is GRANTED with leave to amend.*fn12

CONCLUSION

For the foregoing reasons, defendant Horizon's motion to dismiss is GRANTED. Plaintiffs' TILA, rescission and continuing violation claims; RESPA § 2604 claim; Section 2923.6 claim; and predatory lending "claim" are dismissed without leave to amend. As to all other claims, plaintiffs are granted fifteen (15) days from the date of this order to file a second amended complaint in accordance with this order. Horizon is granted thirty (30) days from the date of service of plaintiffs' second amended complaint to file a response thereto.

IT IS SO ORDERED.


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