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Jose Bazan v. U.S. Bancorp As Successor In Interest To Downey Savings and Loan


February 14, 2011


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


Plaintiff Jose Bazan filed the instant action in the Santa Clara County Superior Court, alleging five state-law claims for relief. Defendant removed the action to federal court and 20 subsequently moved to dismiss Plaintiff's Complaint. In reviewing the pleadings, the Court 21 became concerned that it lacked subject matter jurisdiction over the removed action. The Court 22 therefore ordered Defendant to show cause why the case should not be remanded. Defendant's 23 motion is fully briefed, and both parties have responded to the Order to Show Cause. Pursuant to Civil Local Rule 7-1(b), the Court finds that these matters are appropriate for determination 25 without oral argument and vacates the motion hearing and case management conference scheduled 26 for February 17, 2011. Having considered the submissions of the parties and the relevant law, the Court finds that it lacks removal jurisdiction and remands the action to state court. The Court 28 therefore does not reach the merits of Defendant's motion to dismiss.


This action arises out of a residential mortgage transaction in which Downey Savings and Loan Association, U.S. Bank's predecessor in interest, allegedly failed to make material 4 disclosures and provided Plaintiff with a loan he could not actually afford. On or about August 16, 2006, Plaintiff Jose Bazan refinanced an existing mortgage with the assistance of Eduardo Huerta, 6 a broker employed by United Trust Mortgage Company. Compl. ¶ 18. At the time, Plaintiff's loan 7 balance was $315,000 and had an interest rate of 9.8 percent. Id. Plaintiff sought to refinance in 8 order to lower his interest rate and obtain funds to pay off other creditors and to pay for a 9 remodeling project. Id. Plaintiff provided his financial information to Defendant and was told that 10 he would be able to refinance his loan. Compl. ¶¶ 18-19.

6.375% interest rate on the refinance would be fixed only for five years. Compl. ¶ 22. Defendant 14 allegedly told Plaintiff not to worry about the adjustable rate, as he would be able to refinance the 15 loan after five years without a problem. Id. Plaintiff alleges that he was told this was the best loan Plaintiff also claims that Defendant failed to disclose that the loan included an interest-only 18 payment and that escrow fees were not included in the loan. Compl. ¶¶ 24-25. At some point, Defendant multiple times to attempt to work out a loan that he could actually afford, Plaintiff 21 claims that Defendant has been unwilling to provide assistance. Id.

Law, Cal. Bus. & Profs. Code § 17200; (2) fraudulent omission; (3) injunctive relief; (4) breach of 25 the covenant of good faith and fair dealing; and (5) rescission pursuant to California Civil Code § 1688. Defendant removed the action to federal court on July 26, 2010, on the basis of federal 27 question jurisdiction under 28 U.S.C. § 1331. Notice of Removal at 2, ECF No. 1. Although 28

Plaintiff requested a 30-year fixed rate loan wi

th an interest rate under 6 percent. Compl.

¶¶ 20, 22. When it came time to sign the loan documents, however, Plaintiff realized that the Defendant could offer him, and he had no choice but to sign the loan documents. Compl. ¶ 23.

Plaintiff became unable to afford his monthly payments. Compl. ¶ 26. Although he contacted

On June 23, 2010, Plaintiff filed the instant action in the Santa Clara County Superior Court, alleging five state-law claims for relief: (1) violations of the California Unfair Competition

Plaintiff's Complaint contains only state-law claims, Defendant argued that these claims were artfully pled to disguise a federal cause of action. The Notice of Removal states that the factual 2 allegations for each of Plaintiff's claims necessarily depend on a violation of the federal Truth in 3

Notice of Removal states that Plaintiff's claims for breach of the covenant of good faith and fair 5 dealing and for rescission under California Civil Code § 1688 turn on violations of the federal Removal ¶¶ 5-6. Defendant thus argues that under the "well-pleaded complaint" rule, these claims 8 arise under federal law and establish federal question jurisdiction.

865 (9th Cir. 2000). In the case of a removed action, if it appears at any time before final judgment 13 that the court lacks subject matter jurisdiction, the court must remand the action to state court. 28 U.S.C. § 1447(c). "The removal statute is strictly construed, and any doubt about the right of 15 removal requires resolution in favor of remand." Moore-Thomas v. Alaska Airlines, Inc., 553 F.3d 1241, 1244 (9th Cir. 2009) (citing Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992)). Because 17 of the "strong presumption" against removal jurisdiction, the defendant bears the burden of 18 establishing the facts to support jurisdiction. Gaus, 980 F.2d at 566-67.

complaint rule," which provides that "federal jurisdiction exists only when a federal question is 23 presented on the face of the plaintiff's properly pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987). This rule makes the plaintiff the master of his complaint and permits 25 him to avoid federal jurisdiction by relying exclusively on state law. Id. Ordinarily, therefore, 26 federal question jurisdiction is determined from the face of the plaintiff's complaint. Easton v. Crossland Mortg. Corp., 114 F.3d 979, 982 (9th Cir. 1997).

Lending Act ("TILA"), 15 U.S.C. § 1601 et seq. Notice of Removal ¶¶ 3-4. More specifically, the Truth in Lending Act ("TILA") and are artfully pled to disguise their federal character. Notice of 7

II.Legal Standard

As the Court noted in its prior Order to Show Cause, ECF No. 17, every federal court has an independent obligation to examine its own jurisdiction. Hernandez v. Campbell, 204 F.3d 861,


A.Federal Question Jurisdiction

The presence or absence of federal-question jurisdiction is governed by the "well-pleaded

The artful pleading doctrine provides a narrow corollary to the well-pleaded complaint rule.

Under this doctrine, a plaintiff may not avoid federal jurisdiction by "omitting from the complaint 3 allegations of federal law that are essential to the establishment of his claim." Lippitt v. Raymond 4

James Financial Services, Inc., 340 F.3d 1033, 1041 (9th Cir. 2003). The artful pleading doctrine 5 permits courts to "delve beyond the face of the state court complaint" and find federal question 6 jurisdiction by recharacterizing a state-law claim as a federal claim. Id. The Ninth Circuit has 7 cautioned, however, that courts should invoke the artful pleading doctrine "only in limited 8 circumstances." Id. (quoting Sullivan v. First Affiliated Securities, Inc., 813 F.2d 1368, 1373 (9th Cir. 1987)). Accordingly, application of the artful pleading doctrine is generally limited to two 10 types of cases: (1) those involving complete preemption; and (2) cases in which "a substantial, disputed question of federal law is a necessary element of . . . the well-pleaded state claim," or

where the right to relief depends upon resolution of a substantial, disputed federal question.

Lippitt, 340 F.3d at 1042-43. In this case, Defendant's Notice of Removal appears to rely on the 14 existence of a substantial federal question to establish jurisdiction, while Defendant's response to 15 the Order to Show Cause relies heavily on preemption. The Court will therefore address both 16 possible bases for federal question jurisdiction in turn.

lack of federal question jurisdiction "with respect to preemption." Def.'s Response to OSC ("OSC Response") 1, ECF No. 18. Defendant argues that actions based on loan disclosures are properly 21 brought in federal court and cites a number of cases finding state-law loan disclosure requirements 22 preempted by federal law. OSC Response 2-3. As the Court previously explained, a case 23 ordinarily may not be removed to federal court on the basis of a federal preemption defense, "even 24 if the defense is anticipated in the plaintiff's complaint, and even if both parties admit that the 25 defense is the only question truly at issue in the case." Hunter v. Philip Morris USA, 582 F.3d 26 U.S. 1, 14 (1983)). Accordingly, Defendant may only remove on the basis of federal preemption if 28 it can show that the doctrine of "complete preemption" applies.

1.Complete Preemption

In its response to the Order to Show Cause, Defendant states that it addresses the perceived 1039, 1042-43 (9th Cir. 2009) (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 law cause of action through complete pre-emption," the claim, although pleaded in terms of state 3 law, is in actuality based on federal law and is therefore removable to federal court. Beneficial Nat. 4

"extraordinary" situations. Ansley v. Ameriquest Mortg. Co., 340 F.3d 858, 862 (9th Cir. 2003). It 6 is a narrow exception that applies only "when Congress intends not merely to preempt a certain 7 amount of state law, but also intends to transfer jurisdiction of the subject matter from state to 8 federal court." Wayne v. DHL Worldwide Express, 294 F.3d 1179, 1183 (9th Cir. 2001). Indeed, 9 the Supreme Court has identified only three federal statutes that have the "unusually 'powerful' 10 pre-emptive force" required to completely preempt state law for purposes of removal jurisdiction.

or even identify a specific statutory provision that it believes completely preempts Plaintiff's 14 claims. Presumably, however, Defendant relies either on TILA's limited preemption clause, U.S.C. § 1610, or on preemption regulations promulgated by the Office of Thrift Supervision under 16 the Home Owner's Loan Act ("HOLA"), 12 C.F.R. § 560.2.*fn1 The Ninth Circuit has not addressed 17 whether TILA or HOLA completely preempts state law for the purposes of removal jurisdiction.

However, this Court agrees with the weight of authority finding that neither of these laws possesses 19 the "unusually 'powerful' pre-emptive force," Beneficial Nat. Bank, 539 U.S. at 6, required to 20 invoke the complete preemption doctrine.

lacks the preemptive force required to convert a state law claim into a federal cause of action.

Magee v. Exxon Corp., 135 F.3d 599, 602 (8th Cir. 1998). TILA expressly preserves state-law 24 regulation that does not conflict with its provisions. See 15 U.S.C. § 1610(a)(1) ("Except as 25 provided in subsection (e) of this section, this part and parts B and C of this subchapter do not 26

Under the complete preemption doctrine, when "a federal statute wholly displaces the state- Bank v. Anderson, 539 U.S. 1, 8 (2003). Complete preemption, however, arises only in Beneficial Nat. Bank, 539 U.S. at 6-7, 11.

Notably, Defendant does not address the requirements of the complete preemption doctrine As for TILA, the Court agrees with the Eighth Circuit's determination that the statutory text annul, alter, or affect the laws of any State relating to the disclosure of information in connection 2 with credit transactions, except to the extent that those laws are inconsistent with the provisions of 3 this subchapter and then only to the extent of the inconsistency."). TILA thus cannot be said to "wholly displace[] the state-law cause of action through complete pre-emption," Beneficial Nat. Bank,539 U.S. at 8, and Defendant cannot rely on TILA preemption as a ground for removal. See 6 also Brittain v. Onewest Bank, FSB, No. 09-2953, 2010 WL 889279 (N.D. Cal. Mar. 11, 2010) 09-02130, 2010 WL 383368, at *7 (C.D. Cal. Jan. 25, 2010) (same); Bartolome v. Homefield Because Office of Thrift Supervision ("OTS") regulations under HOLA contain an express field preemption provision, see (finding that TILA does not completely preempt state claims); Ortega v. HomEq Servicing, No. CV 8 Financial Inc., No. CV 09-7258, 2009 WL 4907050, at *4 (C.D. Cal. Dec. 11, 2009) (same).

C.F.R. § 560.2(a), HOLA arguably presents a closer question.

Nonetheless, "[t]he 'dispositive question' for complete preemption is not simply whether HOLA 13 preempts state law by occupying a field of regulation." Barela v. Downey Savings & Loan Ass'n, F.A., No. CV 09-3757, 2009 WL 2578889, at *3 (C.D. Cal. Aug. 18, 2009). Rather, complete 15 preemption turns on whether the federal statute provides the "exclusive cause of action" for the 16 claims asserted. Beneficial Nat. Bank, 539 U.S. at 9. District courts within the Ninth Circuit that 17 have considered this question have concluded that HOLA and its implementing regulation do not 18 have the effect of complete preemption. See, e.g., Sarzaba v. Aurora Loan Services, No.

10-2732, 2010 WL 3171082, at *3-4 (C.D. Cal. Aug. 10, 2010); Caampued v. First Federal Bank 21 of California, No. C 10-0008, 2010 WL 963080, at *2 n.1 (N.D. Cal. Mar. 16, 2010); Bolden v. KB 22

Home,618 F. Supp. 2d 1196, 1205 (C.D. Cal. 2008). These courts have pointed out that the OTS 23 regulation includes an express savings clause that preserves broad categories of state laws from 24 preemption "to the extent that they only incidentally affect the lending operations of Federal 25 savings associations or are otherwise consistent" with the preemption regulation. 12 C.F.R. 26

§ 560.2(c). Because the OTS regulation explicitly preserves certain state-law claims, these courts 27 have found that "HOLA does not have the 'unusually powerful preemptive force' that goes beyond 28 merely preempting state law claims to also permit removal." Pazos, 2010 WL 3171082, at *3; see 10cv1569, 2010 WL 3385062, at *3 (S.D. Cal. Aug. 26, 2010); Pazos v. Wachovia Mortg., No. CV

also Bolden,618 F. Supp. 2d at 1205 ("the plain language of the regulation shows that Congress 2 did not intend for the HOLA to completely preempt all state law lending regulation").

against complete preemption. See, e.g., Pazos, 2010 WL 3171082, at *4; Barela, 2009 WL 2578889, at *4. First, that court has noted that if there is any federal cause of action under which 6 plaintiffs could bring HOLA-preempted disclosure claims, it is provided by TILA. Pazos, 2010

The Central District of California has identified two additional considerations that weigh WL 3171082, at *4; Barela, 2009 WL 2578889, at *4. As discussed above, however, TILA itself 8 does not provide an exclusive cause of action. While TILA does not limit the scope of HOLA 9 preemption as a defense to state-law claims, the fact that TILA has limited preemptive effect 10 weighs against a finding that HOLA requires all disclosure-related claims to be converted into federal TILA claims. Pazos, 2010 WL 3171082, at *4 & n.3. Second, as the Central District has noted, courts considering HOLA preemption of state-law claims typically do not recharacterize 13 those claims as federal TILA claims, as Defendant urges this Court to do. Id. at 4. Rather, courts 14 simply treat HOLA preemption as an ordinary federal preemption defense to a claim brought under 15 state law. See, e.g., Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1006 (9th Cir. 2008) (finding 16 state claims preempted by HOLA without suggesting that such claims should be recharacterized as 17 federal TILA claims); Amaral v. Wachovia Mortg. Corp., 692 F. Supp. 2d 1226, 1236-38 (E.D. 18 Cal. 2010) (same). The Court finds this reasoning to be persuasive and agrees that HOLA does not 19 completely preempt state-law claims. Accordingly, neither HOLA nor TILA preemption can serve 20 as a basis for removal.

doctrine allows federal courts to retain jurisdiction over state law claims that implicate a 24 substantial, disputed federal question. Lippitt, 340 F.3d at 1042. The scope of this exception is 25 limited, however, for it is "long-settled . . . that the mere presence of a federal issue in a state cause 26 of action does not automatically confer federal-question jurisdiction." Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 813 (1986). Similarly, the "mere need to apply 28 federal law in a state-law claim" does not "suffice to open the 'arising under' door" to federal

2.Substantial Federal Question

In addition to state law claims subject to complete federal preemption, the artful pleading jurisdiction. Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 313 (2005). Thus, as the Court noted in its prior order, the fact that a complaint references federal law, 3 or that the same facts would provide a basis for a federal claim, without more, does not convert a 4 state law claim into a federal claim. See Easton, 114 F.3d at 982 (finding no removal jurisdiction 5 where complaint alleged violations of the federal Civil Rights Act and federal Constitution, but 6 sought relief only under state law); Rains v. Criterion Systems, Inc., 80 F.3d 339, 344 (9th Cir. 1996) (finding no removal jurisdiction where complaint relied on federal law to establish a state-8 law claim for wrongful termination in violation of public policy and same facts could have 9 supported a federal civil rights claim).

In this case, Plaintiff does not reference TILA or explicitly rely on TILA violations to establish a state cause of action. Nonetheless, Defendant argues that Plaintiff's claims for breach of the covenant of good faith and fair dealing and for rescission under California Civil Code § 1688 13 necessarily depend on violations of TILA and therefore arise under federal law.*fn2 Notice of First, Plaintiff's claim for breach of the covenant of good faith and fair dealing alleges that Defendant breached the covenant implied in all contracts by using its superior knowledge to 17 intentionally conceal the fact that Plaintiff did not actually qualify for the loan and that the loan 18 would cost Plaintiff significantly more than stated in the Truth in Lending Disclosure Statement.

Compl. ¶¶ 57-61. While some of these allegations might also form the basis for a TILA claim, a 20 state court considering this claim will not necessarily need to determine whether Defendant's 21 conduct violated TILA. Rather, the state court will look to the terms of the contract itself to determine whether Defendant's conduct injured or frustrated Plaintiff's right to receive the benefits 2 of the contract. See, e.g., Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal. 4th 342, 371-73 826 P.2d 710 (1992) (describing the scope of the implied covenant); App. 2008) (same). Defendant has not explained why such an inquiry, grounded in state-law 6 principles of contract interpretation, necessarily "depends on resolution of a substantial, disputed 7 federal question." Lippitt, 340 F.3d at 1042. Accordingly, the Court finds that Plaintiff's claim for 8 breach of the implied covenant does not turn upon a substantial, disputed question of federal law 9 and cannot serve as a basis for federal question jurisdiction. See, e.g, Solano v. Midcountry Bank, Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225, 1235-36, 83 Cal. Rptr. 3d 410 (Cal. Ct. No. 10cv1297, 2010 WL 3385004, at *4 (S.D. Cal. Aug. 25 2010) (rejecting argument that similar implied covenant claim established federal question jurisdiction); Briggs v. First Nat. Lending Services, No. C 10-00267, 2010 WL 962955, at *3 (N.D. Cal. Mar. 16, 2010) (same).

Second, Plaintiff's rescission claim seeks to rescind the loan contract pursuant to California Civil Code § 1689(b)(1) on grounds that Plaintiff entered into the contract through fraud, undue 15 influence, and mistake of fact. Compl. ¶¶ 67-70. Plaintiff alleges that Defendant engaged in fraud 16 by suppressing the disclosure of material aspects of the loan and by telling Plaintiff he would have 17 no problem refinancing the loan in five years. Compl. ¶ 68. Plaintiff also alleges that he signed the 18 contract under the undue influence of Defendant, a large, sophisticated lending institution that took 19 unfair advantage of Plaintiff's weakness and vulnerable state. Compl. ¶ 69. Again, while some of 20 these allegations could support a TILA cause of action, Plaintiff's claim for rescission alleges more 21 than mere non-disclosure and turns on state-law concepts of fraud, undue influence, and unilateral 22 mistake. A state court evaluating this claim need not determine whether Defendant's non-23 disclosures violated TILA. Rather, it must ask whether Defendant's conduct amounted to fraud or 24 undue influence under state law, or whether Plaintiff's consent was the result of a unilateral 25 mistake, as defined by state contract law. See, e.g., Donovan v. RRL Corp., 26 Cal. 4th 261, 278, California contract law); Cal. Civ. Code §§ 1571-77 (defining fraud, undue influence, and mistake 28 for purposes of contract formation). As with Plaintiff's claim under the implied covenant, 27 P.3d 702 (2001) (considering rescission claim based on unilateral mistake as defined by Defendant has not explained why Plaintiff's state law rescission claim, also based on principles of 2 state contract law, necessarily "depends on resolution of a substantial, disputed federal question."

Lippitt, 340 F.3d at 1042. Accordingly, the Court finds that Plaintiff's rescission claim does not 4 turn upon a substantial, disputed question of federal law and cannot serve as a basis for federal 5 question jurisdiction. See McLeod v. DHI Mortg. Co., Ltd., No. 08cv2190-WQH-BLM, 2009 WL § 1689 based on failure to disclose loan terms did not provide grounds for removal).

substantial, disputed question of federal law, nor contains claims that completely preempt state law.

jurisdiction over this action. Based on the declaration provided by Defendant, it appears that the 15 parties are diverse and the amount in controversy exceeds $75,000. Thus, had Defendant removed 16 on the basis of diversity jurisdiction, this Court likely would have had jurisdiction. In its notice of 17 removal, however, Defendant identified only federal question jurisdiction as a ground for removal 18 and did not mention diversity jursidiction.

days after service of the pleading upon which removal is based, and the notice of removal must 21 identify the jurisdictional basis for removal. A defendant may amend the notice of removal after 22 the thirty-day window has closed to correct a "defective allegation of jurisdiction." 28 U.S.C. F.3d 1108, 1117 (9th Cir. 2000). However, the notice of removal "cannot be amended to add a 25 separate basis for removal jurisdiction after the thirty day period." ARCO, 213 F.3d at 1117

Accordingly, where the jurisdictional basis in the notice of removal does not establish jurisdiction, 28 an alternative basis raised after the thirty-day removal period cannot cure the lack of subject matter 1396395, at *4-5 (S.D. Cal. May 15, 2009) (finding that claim for rescission under Cal. Civ. Code

Based on the above analysis, the Court concludes Plaintiff's Complaint neither raises a

Accordingly, the artful pleading doctrine does not create jurisdiction over Plaintiff's state-law claims, and the Complaint was not properly removed on grounds of federal question jurisdiction.

B.Diversity Jurisdiction

In its response to the Order to Show Cause, Defendant asserts that the Court has diversity Under 28 U.S.C. § 1446, a removing defendant must file a notice of removal within thirty § 1653; ARCO Environmental Remediation, L.L.C. v. Department of Health and Environmental, (quoting O'Halloran v. University of Washington, 856 F.2d 1375, 1381 (9th Cir. 1988)).

jurisdiction. See e.g., ARCO, 213 F.3d at 1117 (defendants could not assert the All Writs Act and 2 supplemental jurisdiction as a basis for jurisdiction where notice of removal alleged jurisdiction 3 based on 28 U.S.C. § 1331 and 42 U.S.C. § 9613(b)); Villegas v. The Pep Boys Manny Moe & Jack 4 of Cal., 551 F. Supp. 2d 982, 992 (C.D. Cal. 2008) (diversity jurisdiction under CAFA could not 5 establish federal jurisdiction where defendants removed based on ERISA preemption); Sonoma

Falls Developers, LLC v. Nevada Gold & Casinos, Inc., 272 F. Supp. 2d 919, 925 (N.D. Cal. 2003) (defendants could not assert federal question jurisdiction where defendants removed based on 8 diversity jurisdiction). Here, Defendant removed solely on the basis of federal question 9 jurisdiction. Under controlling Ninth Circuit case law, Defendant may not now assert diversity 10 jurisdiction as an alternative ground for removal, and the Court may not find removal jurisdiction on this basis.


Based on the foregoing analysis, the Court finds that it lacks federal question jurisdiction over the removed action. Because Defendant is not permitted to raise new grounds for jurisdiction 15 at this stage in the proceeding, the Court cannot cure the lack of federal question jurisdiction based 16 on the likely existence of diversity jurisdiction. Accordingly, the Court concludes that it lacks 17 subject matter jurisdiction over the removed action and remand is required. The Court hereby 18

REMANDS this matter to the Superior Court for the County of Santa Clara. The Clerk shall close 19 the file. 20


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