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Terry Appling v. Wachovia Mortgage

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION


February 7, 2011

TERRY APPLING,
PLAINTIFF,
v.
WACHOVIA MORTGAGE, FSB, A FEDERAL SAVINGS BANK; WORLD SAVING BANK, FA, A
FEDERAL SAVINGS BANK; WELLS FARGO BANK, NA, A NATIONAL BANKING ASSOCIATION MEMBER;
IQ HOME LOANS AND REALTY CORPORATION, A CALIFORNIA CORPORATION; ALI MIRZAEI AND WILLIAM CHEN,
DEFENDANTS.

The opinion of the court was delivered by: Lucy H. Koh United States District Judge

United States District Court For the Northern District of California

ORDER GRANTING MOTION TO DISMISS WITH PREJUDICE

Defendants Wachovia Mortgage (formerly known as World Savings Bank, FSB, and Wachovia Mortgage, FSB, now a division of Wells Fargo Bank, NA) and Wells Fargo Bank, NA, 22 move to dismiss Plaintiff's complaint. Pursuant to Civil Local Rule 7-1(b), the Court finds that this 23 motion is appropriate for determination without oral argument and vacates the motion hearing and 24 case management conference scheduled for February 10, 2011. Having considered the submissions 25 of the parties and the relevant law, the Court grants the motion to dismiss with prejudice. The 26 Court also dismisses this action, without prejudice, as to Defendants IQ Home Loans and Realty Corporation, Ali Mirzaei, and William Chen.

I.Background

A.Procedural History

On May 3, 2010, Plaintiff filed the instant action against Wachovia Mortgage, FSB ("Wachovia"), World Savings Bank, FA ("World Savings"), Wells Fargo Bank, NA ("Wells Fargo"), IQ Home Loans and Realty Corporation ("IQ"), Ali Mirzaei, and William Chen.*fn1

Plaintiff's original complaint alleged eight causes of action: (1) violations of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601, et seq.; (2) negligent misrepresentation; (3) violations of the Fair Credit Reporting Act ("FCRA"), 15 U.S.C. § 1681, et seq.; (4) breach of fiduciary duty; (5) 9 violations of California's Unfair Competition Law ("UCL"), Cal. Bus. & Profs. Code § 17200, et seq.; (6) conversion; (7) breach of contract; and (8) wrongful foreclosure. Also on May 3, 2010, Appl. for TRO and Mot. for Prelim. Inj. (TRO Appl.) 1, ECF No. 3. The Court granted the TRO, Order Granting Appl. for TRO and Setting Hearing on Preliminary Injunction, ECF No. 9, but subsequently denied Plaintiff's motion for a preliminary injunction. Appling v. Wachovia Defendants Wachovia and Wells Fargo then moved to dismiss the entire action. On September 17, 2010, the Court granted Defendants' motion in part and dismissed all of Plaintiff's claims against Wachovia and Wells Fargo with prejudice, except for his TILA cause of action.

Order Granting in Part and Denying in Part Defendants' Mot. to Dismiss, ECF No. 37. Defendants 21 had challenged Plaintiff's TILA claims only on statute of limitations grounds. Because the Court 22 found that equitable tolling of the statute of limitations appeared to be a possibility, the Court 23 denied Defendants' motion as to one basis for Plaintiff's TILA claim and granted leave to amend to 24 allege grounds for equitable tolling as to the other basis. On October 1, 2010, Plaintiff filed a First Amended Complaint ("FAC") that includes a single cause of action for TILA violations.

Defendants now move to dismiss this claim, and the entire action, pursuant to Rule 12(b)(6).

2007, Plaintiff entered into a fixed-rate "pick-a-payment" loan originated by World Savings and secured by the Property. FAC ¶ 12. During the duration of the loan, Plaintiff could choose among 8 four payment options each month, including: 1) a payment covering enough interest and principal 9 to pay off the loan within its scheduled 30-year term; 2) a payment covering interest only; 3) a 10 minimum payment representing the smallest payment permitted, which may not be sufficient to

Prelim. Inj. (TRO Decl.) Ex. 3, ECF No. 4.*fn2 The minimum payment amount is subject to change 14 every twelve months on the "payment change date." TRO Decl. Ex. 4. If the borrower makes 15 minimum payments less than the interest owing on the loan, any unpaid interest is deferred and 16 added to the principal. TRO Decl. Ex. 3. If this happens, then on the payment change date, the 17 minimum payment is increased to the amount necessary to pay the principal and interest by the 18 maturity date of the loan (subject to a payment cap that limits the amount by which the monthly 19 payments can be increased, but which is overridden if the principal balance exceeds 125 percent of 20 the original loan amount). TRO Decl. Ex. 4. 21

B.Factual History

At the time Plaintiff initiated this action, he owned real property located at 175 N. Sunnyvale Avenue, Sunnyvale, CA 94086 (the "Property"). FAC ¶ 6. On or about November 5,

cover the interest due on the loan; and 4) a payment covering enough interest and principal to pay off the loan within 15 years. Decl. of Terry Appling in Supp. of Appl. for TRO and Mot. for

2 clearly and conspicuously disclose the certain aspects of the loan, in violation of TILA and the 3 regulations thereunder. First, Plaintiff alleges that the loan documents did not clearly and 4 conspicuously disclose the annual interest rate upon which the payments listed in Plaintiff's Truth 5 in Lending Disclosure Statement ("TILDS") were based. FAC ¶¶ 16-17. Second, Plaintiff alleges 6 that the loan documents did not clearly and conspicuously disclose the certainty that negative 7 amortization (deferred interest) would occur if Plaintiff followed the payment schedule set forth in 8 the TILDS accompanying the loan documents. FAC ¶¶ 18-20. Plaintiff no longer resides at the 9 property at issue in this case, and he now seeks only monetary damages for these alleged TILA 10 violations. FAC at 5. 11

sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." In considering whether the complaint is sufficient to state a claim, the court must accept as true all of the factual allegations contained in the complaint.

"allegations that contradict matters properly subject to judicial notice or by exhibit" or "allegations 19 that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." St. Clare v. Gilead Scis., Inc. (In re Gilead Scis. Sec. Litig.), 536 F.3d 1049, 1055 (9th Cir. 2008). While a complaint need not allege detailed factual allegations, it "must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949

(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible 24 when it "allows the court to draw the reasonable inference that the defendant is liable for the 25 misconduct alleged." Iqbal, 129 S.Ct. at 1949. If a court grants a motion to dismiss, leave to 26 amend should be granted unless the pleading could not possibly be cured by the allegation of other 27 facts. Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000). 28

Plaintiff alleges that the loan documents describing these terms were misleading and did not

II. Legal Standard

A motion to dismiss for failure to state a claim under Rule 12(b)(6) tests the legal

Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). However, the court need not accept as true violations of regulations promulgated under the Truth in Lending Act ("TILA"), 15 U.S.C. § 1638.

III. Discussion

Plaintiff's First Amended Complaint contains a single cause of action alleging two

First, Plaintiff claims that Defendants violated 12 C.F.R. § 226.17 and 12 C.F.R. § 226.19 by 5 failing to clearly and conspicuously disclose the annual interest rate upon which the payments 6 listed in the Truth in Lending Disclosure Statement were based. FAC ¶¶ 16-17. In its prior order, 7 the Court found that this claim appeared to be barred by the one-year statute of limitations 8 applicable to TILA damages claims. The Court noted that the alleged discrepancies between the 9 interest rate disclosed in the Truth in Lending Disclosure Statement ("TILDS") and the interest rate 10 disclosed in the Note were evident from the face of the loan documents, and therefore it appeared that equitable tolling would not apply. The Court thus dismissed this portion of Plaintiff's TILA claim, but granted leave to amend to allege plausible grounds for equitable tolling. Plaintiff has not 13 attempted to allege grounds for equitable tolling in his amended complaint. Accordingly, the Court 14 assumes that no grounds for equitable tolling exist, and this portion of Plaintiff's TILA claim is 15 time-barred.

Second, Plaintiff claims that Defendants violated 12 C.F.R. § 226.19 by failing to clearly and conspicuously disclose the fact that negative amortization was certain to occur if Plaintiff 18 followed the payment schedule set forth in the TILDS. FAC ¶¶ 18-19. In its prior order, the Court 19 found that equitable tolling might apply to this claim, but did not reach the merits of the alleged TILA violation. Defendants now argue that Plaintiff cannot state a TILA claim on this basis, and 21 the Court agrees.

Under 12 C.F.R. § 226.19(b), loan documents must disclose "[a]ny rules relating to changes in the index, interest rate, payment amount, and outstanding loan balance including, for example, an explanation of . . . negative amortization . . . ." 12 C.F.R. § 226.19(b)(2)(vii). The official commentary to the regulation provides further guidance:

If a consumer is given the option to cap monthly payments that may result in negative amortization, the creditor must fully disclose the rules relating to the option, including the effects of exercising the option (such as negative amortization will occur and the principal loan balance will increase) . . . .

12 C.F.R. Pt. 226, Suppl. I ¶ 19(b)(2)(vii)-2. As Plaintiff correctly points out, California district 2 courts have considered the disclosures required under § 226.19(b)(vii) in the context of adjustable 3 rate mortgages. In cases where negative amortization was certain to occur if the plaintiff followed 4 the payment schedule set forth in the TILDS, these courts have found that disclosing only the 5 possibility of negative amortization may not be sufficient. See, e.g., Romero v. Countrywide Bank, 6 N.A., No. C 07-4491, 2010 WL 2985539, at *6 (N.D. Cal. July 27, 2010); Ralston v. Mortg. Investors Group, Inc., No. C 08-536, 2009 WL 688858, at *5-6 (N.D. Cal. Mar. 16, 2009);

Amparan v. Plaza Home Mortg., Inc., 678 F.Supp. 2d 961, 972 (N.D. Cal. 2008). As in these 9 cases, the loan documents and TILDS provided to Plaintiff disclosed the possibility of negative 10 amortization and explained, in the abstract, when negative amortization occurs, but did not explicitly disclose that if Plaintiff followed the payment schedule set forth in the TILDS, negative amortization was certain to occur. RJN Ex. 2; TRO Decl. Ex. 3; id. Ex. 4 at 2. The Court thus 13 agrees with Plaintiff that, in this respect, his claim is quite similar those sustained by other courts in 14 this District.

The trouble for Plaintiff, however, is that the loan in this case involved a fixed interest rate.

FAC ¶ 12. By its terms, 12 C.F.R. § 226.19(b) applies only to mortgages with variable interest 17 rates.*fn3 The subsection begins: "If the annual percentage rate may increase after consummation in a 18 transaction secured by the consumer's principal dwelling with a term greater than one year, the 19 following disclosures must be provided . . . ." 12 C.F.R. § 226.19(b). The official commentary 20 describes the coverage of § 226.19(b) as follows: "Section 226.19(b) applies to all closed-end 21 variable-rate transactions that are secured by the consumer's principal dwelling and have a term 22 greater than one year." 12 C.F.R. Pt. 226, Suppl. I ¶ 19(b)-1; see also id.¶ 19(b)-5 (providing 23 examples of variable rate transactions covered by § 226.19(b)). Indeed, it appears that the Federal 24

Reserve Board promulgated the disclosure requirements in § 229.19(b) to address concerns 2 specifically related to adjustable rate mortgages and to ensure that creditors were subject to 3 uniform disclosure requirements for mortgages with variable interest rates. Variable-Rate

Nothing in the regulation, the official commentary, or the agency background materials indicates 6 that § 226.19(b) applies to fixed-rate mortgages, and Plaintiff has not provided any authority 7 suggesting otherwise.*fn4 Cf. Mandrigues v. World Savings, Inc., , 2009 WL 160213, at *5 (N.D.Cal. 8 Disclosure Under Regulation Z, 52 Fed. Reg. 48665-01, 48665, 1987 WL 144603 (Dec. 24, 1987).

Jan. 20, 2009) ("Courts have explained that when a loan contains a variable rate feature, TILA 9 mandates two sets of disclosures: those set forth in 12 C.F.R. § 226.19(b)(1)-(2), which require 10 disclosures with respect to negative amortization, and those set forth in 226.18(f)(2) . . . .")

(emphasis added). Accordingly, the Court concludes that the disclosure requirements under § 226.19(b) do not apply to Plaintiff's mortgage, and Plaintiff therefore cannot state a claim for 13 violations of this regulation.

either ground alleged in the FAC. The Court therefore GRANTS Defendants' motion to dismiss.

Moreover, because it appears that Plaintiff cannot allege additional facts that would either establish 17 a basis for equitable tolling or bring his fixed-rate mortgage under the coverage of § 226.19(b), the Court finds that granting further leave to amend would be futile. Accordingly, the Court dismisses 19 this action with prejudice as to Defendants Wachovia, World Savings Bank, and Wells Fargo.

The Court has concluded that Plaintiff cannot state a claim for TILA violations based on

IV. Dismissal of the IQ Defendants

As previously noted, only the moving Defendants Wachovia (formerly World Savings Bank) and Wells Fargo have appeared in this action. Plaintiff's original Complaint also named 23

Defendants IQ Home Loans and Realty Corporation, Ali Mirzaei, and William Chen (collectively, 2 "the IQ Defendants"). There is no indication that the IQ Defendants have been served in the more 3 than 9 months since this action was initiated on May 3, 2010. Although the Court raised this issue 4 at the Case Management Conference held on September 16, 2010, Plaintiff has taken no action to 5 prosecute this case against the IQ Defendants. Indeed, although Plaintiff's Amended Complaint 6 names the IQ Defendants in the preamble paragraph, FAC at 1, it does not include them in the 7 section describing the parties, FAC ¶¶6-11, and Plaintiff's single cause of action is alleged only 8 against the Bank Defendants. FAC at 3. It thus appears that Plaintiff may have intended to 9 voluntarily dismiss the IQ Defendants by failing to serve them within the time required by Rule 10 4(m) and dropping them from the FAC. Under Rule 4(m) and Rule 41(a), voluntary dismissals and dismissals for failure to serve are generally without prejudice. Accordingly, the Court will dismiss the IQ Defendants without prejudice. 13

V.Conclusion

For the foregoing reasons, the Court hereby GRANTS Defendants' motion to dismiss. The Court dismisses this action with prejudice as to Defendants Wachovia Mortgage, FSB, World 16 Savings Bank, FSB, and Wells Fargo Bank, NA. The Court dismisses the action without prejudice 17 as to Defendants IQ, Ali Mirzaei, and William Chen. The clerk shall close the file. 18

IT IS SO ORDERED. 19 20


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