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Eric Davis and Serena Davis v. Citibank West

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION


March 24, 2011

ERIC DAVIS AND SERENA DAVIS,
PLAINTIFFS,
v.
CITIBANK WEST, FSB, AND AS MOOT CITIMORTGAGE, INC.,
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 AND DENYING MOTION TO STRIKE

Before the Court is a Motion to Dismiss (Motion) Plaintiffs' First Amended Complaint (FAC) brought by Defendants Citibank West, FSB, and Citimortgage, Inc. (together, Citibank).

Plaintiffs Eric and Serena Davis filed an opposition brief and Motion to Strike Defendants' Motion.

Having considered the parties' submissions and arguments, and for the reasons set forth below, the Court GRANTS Defendant's Motion to Dismiss and DENIES Plaintiffs' Motion to Strike.

I. Background

On June 28, 2005, Plaintiffs Eric and Serena Davis obtained a $1,500,000 home mortgage 24 loan from Citibank secured by their home at 3737 Coyote Canyon, Soquel, CA. FAC at ¶ 14.

Plaintiffs served Citibank with a complaint on October 4, 2010, and amended their complaint on October 6, 2010. Dkt Nos.1, 3, 5. In their FAC, Plaintiffs allege that their loan was provided in 27 the form of a "check or checks not backed by or redeemable in Federal Reserve Notes, coins or 28 lawful money of the United States for their full face value." FAC ¶ 21. Plaintiffs assert four causes of action based on the allegedly illusory loan: Breach of Contract, Fraud (Mail and Wire), 2 Usury, and violations of the Truth in Lending Act (TILA, 15 U.S.C. § 1600 et seq.) . Id. ¶¶ 28-43.

A motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 6 2001). In considering whether the complaint is sufficient to state a claim, the court must accept as 7 true all of the factual allegations contained in the complaint. Ashcroft v. Iqbal, 129 S.Ct. 1937, 8

II. Legal Standard

1949 (2009). However, the court need not accept as true "allegations that contradict matters 9 properly subject to judicial notice or by exhibit" or "allegations that are merely conclusory, 10 unwarranted deductions of fact, or unreasonable inferences." In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008). While a complaint need not allege detailed factual allegations, it United States District Court For the Northern District of California "must contain sufficient factual matter, accepted as true, to "'state a claim to relief that is plausible 13 on its face.'" Iqbal, 129 S.Ct. at 1949 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 14 (2007)). A claim is facially plausible when it "allows the court to draw the reasonable inference 15 that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. 16 17 of Federal Rule of Civil Procedure 9(b). Under the federal rules, a plaintiff alleging fraud "must 18 state with particularity the circumstances constituting fraud." Fed. R. Civ. Pro. 9(b). To satisfy 19 this standard, the allegations must be "specific enough to give defendants notice of the particular 20 misconduct which is alleged to constitute the fraud charged so that they can defend against the 21 charge and not just deny that they have done anything wrong." Semegen v. Weidner, 780 F.2d 727, 22 731 (9th Cir. 1985). Thus, claims sounding in fraud must allege "an account of the time, place, and 23 specific content of the false representations as well as the identities of the parties to the 24 misrepresentations." Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007).

26 could not possibly be cured by the allegation of other facts. Lopez v. Smith, 203 F.3d 1122, 1130 27 (9th Cir. 2000). The rule favoring liberality in granting leave to amend is particularly important for 28 pro se litigants. Lopez v. Smith, 203 F.3d 1122, 1131 (9th Cir. 2000).

Additionally, claims sounding in fraud are subject to the heightened pleading requirements If a court grants a motion to dismiss, leave to amend should be granted unless the pleading

III. Discussion

Plaintiffs, the Court would have federal question jurisdiction over Plaintiffs' TILA claim and 6 accordingly supplemental jurisdiction over Plaintiffs' three state law claims. However, for the 7 reasons discussed below, Plaintiffs have failed to establish that jurisdiction is appropriate on any of 8 these bases.

A. Jurisdiction

In the FAC, the Plaintiffs allege three bases for jurisdiction: (1) diversity; (2) 42 U.S.C. § 1983; and (3) Seventh Amendment of the United States Constitution. Although not raised by the Regarding diversity, the FAC alleges that Plaintiffs are residents of California, and that CitiBank (West) FSB has its principal office in San Francisco, California. For diversity purposes, the citizenship of a federal savings bank is determined by the location of its home office.

United States District Court For the Northern District of California U.S.C. § 1464(x). Therefore, it appears from the face of the complaint that there is no diversity 13 between the parties, as Plaintiffs and one of the Defendants are all alleged to be California citizens.

Second, regarding § 1983, Plaintiffs did not assert a § 1983 claim in the FAC. Moreover, in order to prevail under § 1983, a plaintiff "must show (1) that Defendants deprived him or her of a 16 right secured by the Constitution or laws of the United States and (2) that, in doing so, Defendants 17 acted under color of state law." Jensen v. Lane County, 222 F.3d 570, 574 (9th Cir. 2000) (internal 18 citations and alterations omitted). Plaintiffs have not alleged that any Defendant acted under color 19 of state law. Even if Plaintiffs had attempted to assert a § 1983 claim in the FAC, Plaintiffs have 20 failed to allege specific facts to establish such a claim. Therefore, there is no jurisdiction under § 21 Third, the Seventh Amendment right to a jury trial does not give this Court jurisdiction over 1983 based on the allegations in the FAC.

Plaintiffs' claims.

25 claim. The Court has jurisdiction over a TILA claim under 28 U.S.C. § 1331, and supplemental 26 jurisdiction over related state law claims pursuant to 28 U.S.C. § 1367(a). However, as discussed 27 herein, the Court finds that Plaintiffs have failed to allege sufficient facts to sustain any of their 28 claims.

Finally, Plaintiffs have attempted to assert a claim arising under federal law, their TILA or to establish a plausible § 1983 or TILA claim, this Court will decline to exercise supplemental 3 jurisdiction over the additional alleged state law claims, and dismiss those claims. See Brady v. 4

B. Breach of Contract

In California, the statute of limitations for breach of a written contract is four years. Cal. Code Civ. P. § 337(1). Although it is somewhat unclear, Plaintiffs' breach of contract claim 8 appears to arise on or near the date the loan was executed. Because the loan was entered in June, 9 If Plaintiffs cannot plead facts to establish that diversity jurisdiction is in fact appropriate, Brown, 51 F.3d 810, 815 (9th Cir. 1995). 2005, but Plaintiffs did not bring their complaint until October, 2010, it appears the breach of 10 contract claim is time-barred. Although the limitations period may be equitably tolled, equitable tolling is applied "sparingly" in the Ninth Circuit. Lehman v. United States, 154 F.3d 1010, 1016 United States District Court For the Northern District of California (9th Cir. 1998). Plaintiffs must allege facts to establish that such tolling is appropriate. Plaintiffs 13 have alleged no such facts here. Although Plaintiffs state that they "only recently became aware of 14 the fraudulent activities of the Defendants," this conclusion is not sufficient to state a basis for 15 equitably tolling Plaintiff's claims. FAC ¶ 23.

In addition, Plaintiffs have failed to allege all the elements of a breach of contract claim. 17 breach of contract claim requires that the plaintiff plead facts establishing: "(1) existence of the 18 contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) 19 damages to plaintiff as a result of the breach." Armstrong Petroleum Corp. v. Tri-Valley Oil & Gas 20 Co., 116 Cal. App. 4th 1375, 1391 n.6, (2004) (citation omitted). Although Plaintiffs have 21 appended a Deed of Trust which identifies Citibank (West) FSB as the "Lender" and Plaintiffs as 22 Opp'n at 3. Plaintiffs cannot state a breach of contract claim without a contract. In addition, Plaintiffs fail to allege that they performed their obligations under the Deed of Trust, or that their 25 nonperformance was excused. Finally, Plaintiffs have failed to allege how Citibank breached the Deed of Trust or what damages Plaintiffs suffered as a result. Accordingly, this claim is dismissed.

"Borrowers," Plaintiffs argue in their Opposition to the Motion that "NO contract exists." See 23

C. TILA

A TILA claim for damages is subject to a one-year statute of limitations. See 15 U.S.C. §1640(e). As a general rule, the one-year period runs from the date of the consummation of the 4 transaction at issue. See King v. California, 784 F.2d 910, 915 (9th Cir. 1986). "[T]he doctrine of 5 equitable tolling may, in the appropriate circumstances, suspend the limitations period until the 6 borrower discovers or had reasonable opportunity to discover the fraud or nondisclosures that form 7 the basis of the TILA action." Id. However, as discussed above, Plaintiffs have pled no facts that 8 support equitable tolling. Because the loan agreement was entered June 28, 2005 and the 9

Complaint was filed October 4, 2010, Plaintiffs' TILA damages claims appear to be time barred. 'time, place, and specific content of the false representations as well as the identities of the parties 15 to the misrepresentations.'" Swartz, 476 F.3d at 764 (quoting Edwards v. Marin Park, Inc., 356 16 F.3d 1058, 1066 (9th Cir. 2004)). To survive a motion to dismiss, "'allegations of fraud must be 17 specific enough to give defendants notice of the particular misconduct which is alleged to 18 constitute the fraud charged so that they can defend against the charge and not just deny that they 19 have done anything wrong.'" Id. (quoting Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 20 Plaintiffs allege in conclusory fashion that Defendants made "false representations" to 22 them, but do not identify what those representations are or when they were made. Plaintiffs' claim 23 for fraud is based on their "vapor money" argument, but as discussed below, this theory is legally 24 invalid. Therefore, Plaintiffs' allegation that Defendants misrepresented the nature of the loan 25 because they failed to lend Plaintiffs "lawful money" does not suffice to state a plausible claim for 26 fraud. Because Plaintiffs have not alleged sufficient facts indicating the specific content of any 27 false representations made by Defendants, Plaintiffs' fraud claim does not meet the Rule 9(b) 28 standards. Therefore, this claim is dismissed.

See FAC at ¶ 14, 16; Dkt. No. 1. Accordingly, this claim is dismissed.

D. Fraud

United States District Court For the Northern District of California A complaint must "state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). Allegations of fraud must be stated with "specificity including an account of the 14 2001)). of usury under California law. These elements are: (1) a loan or forbearance; (2) interest exceeding 4 the statutory maximum; (2) absolute repayability of loan and interest; and a (4) a lender with a 5 willful intent to enter into a usurious transaction. Jones v. Wells Fargo Bank, 112 Cal. App. 4th 6 1527, 1537 (2003) (internal quotation omitted). The statutory maximum is ten percent per year. 6.000%, the interest charged was greater than twenty times this because "the actual lawful money 9 which the Defendants risked for the alleged loan" was less than 5% of the face value of the loan.

E. Usury

Citibank argues that Plaintiffs have failed to allege sufficient facts to establish the elements Id. at 1538. Plaintiffs allege that, although their Deed of Trust states an annual interest rate of 8 As discussed below, Plaintiff's "vapor money" theory is without merit. Therefore, Plaintiffs have failed to allege at least the second element of a usury claim, namely that the interest exceeded the United States District Court For the Northern District of California statutory minimum. Although Plaintiffs state this as a conclusion, the other facts alleged in the 13 complaint refute this conclusion. As a result, the Court cannot "draw the reasonable inference that 14 the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. Therefore, Plaintiffs 15 have failed to allege a claim for usury under California law. by or redeemable in Federal Reserve Notes, coins or lawful money of the United States for their 19 full face value." FAC at¶ 21. Plaintiffs allege that no more than 1/20th of the loan was provided in 6% annual rate. Id. at¶ 18. claims have been brought and rejected across the United States for over 25 years. See Nixon v. Individual Head of St. Joseph Mortg. Co., 615 F.Supp. 898, 900 (C.D. Ind. 1985) (accepting that a 25 check is not "legal tender in the sense of a dollar bill or coins," but rejecting the theory that 26 therefore a bank loan proffered as a check was invalid); Frances Kenny Family Trust v. World Sav. Bank FSB, No. C 04-03724, 2005 U.S. Dist. LEXIS at *15 (N.D. Cal. Jan. 19, 2005) (". . . 28 plaintiffs' 'vapor money' theory has no basis in law. It has been squarely addressed and rejected

F. Vapor Money

Plaintiffs allege that their loan was provided in the form of a "check or checks not backed "actual" money and that therefore the interest rate charged was at least 20 times the agreed upon Plaintiffs' illusory loan theory has been referred to as the "vapor money" theory. Such by various courts throughout the country for over twenty years."); Vollmer v. Present, No. CV 10-2 1182, 2010 U.S. Dist. LEXIS 127446 at *18-19 (D. Ariz. Dec. 1, 2010) ("this theory is entirely 3 implausible and meritless"). the theory lacks merit. See FAC at¶ 13-27. Checks granted for home loans can be used to 6 purchase a home, or exchanged for legal tender. Nixon,615 F.Supp. at 900.Furthermore, a 7 bargained-for contract need not be paid in legal tender if the parties agreed otherwise. Id. Taking Plaintiffs do not specify the basis for their vapor money theory, but regardless of the basis, Plaintiffs' allegations as true, it appears that all parties agreed that the check was an acceptable 9 payment method, including Plaintiffs as demonstrated by their "acceptance of the benefits of the 10 transaction" without complaint for five years. See FAC at¶ 14, 16; Dkt. No. 1; Thiel v. First Fed. Sav. & Loan Ass'n, 646 F.Supp. 592, 596 (N.D. Ind. 1986) (reasoning that by accepting the benefits of a loan, Plaintiffs in a vapor money case had agreed to payment by the proffered check).

Plaintiffs allege no facts in support of their claim that Defendants at any time lacked cash reserves 14 sufficient to back the loan check. See FAC at¶ 13-27. Indeed, Plaintiffs do not allege a failed 15 attempt to spend or cash the loan sum. See FAC. Thus, Plaintiffs cannot proceed on the basis of 16 this vapor money theory. of contract claim alleges the Defendants breached the contract by proffering a check and thus 19 failing to provide the agreed upon sum in "lawful money." FAC at¶ 28-29. The fraud claim 20 alleges that Defendants provided an illusory loan (the check), creating a false debt which they 21 wrongfully attempted to collect. FAC at¶ 30-32. The usury claim alleges that because Defendants 22 had at most 5% of $1,500,000 ($75,000) in their vaults backing the check, Defendants charged 23 their interest on principal of at most $75,000, creating a usurious interest rate. FAC at 24 ¶ 33-35. Finally, the TILA claim alleges that Defendants failed to disclose the material "fact" that 25 they did not loan the Plaintiffs real money. FAC at¶¶ 36-43. Because these causes of action all 26 descend from the vapor money allegations, they are dismissed. United States District Court For the Northern District of California All Plaintiffs' causes of action appear to be based on the vapor money theory. The breach

IV. Conclusion

For the foregoing reasons, the Court GRANTS Defendants' motion to dismiss the FAC.

Because the Court has dismissed the FAC, the Court DENIES Plaintiffs' motion to strike Defendants' Motion as moot.

Plaintiffs are hereby given leave to amend their complaint. However, Plaintiffs may not reassert any cause of action based on a vapor money theory. If Plaintiffs wish to amend their 7 complaint, they must allege facts giving rise to their claims that do not depend on such a theory.

Plaintiffs may not add additional claims or parties without leave of Court or stipulation of the 9 parties pursuant to Federal Rule of Civil Procedure 15.

Plaintiffs shall file a Second Amended Complaint, if any, within days of this order.

If Plaintiffs choose to amend their complaint, they are encouraged to seek assistance from the United States District Court For the Northern District of California Federal Legal Assistance Self-Help Center.*fn1 If Plaintiffs do not file an amended complaint 13 within 21 days of this order, their claims will be dismissed with prejudice. Requests for an 14 extension of time will not be favored and must be made in conformance with Civil Local Rule 6-2 15 or 6-3. 16

IT IS SO ORDERED.


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