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Michael Seneca v. First Franklin Financial Corp.

July 28, 2011


The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge


Pending before the Court is a motion to dismiss Plaintiff's First Amended Complaint ("FAC") by Defendants Home Loan Services, Inc. ("HLS"), First Franklin Financial Corporation ("FFFC"), U.S. Bank, N.A. ("U.S. Bank"), and Bank of America, N.A. ("Bank of America", together with HLS, FFFC, and U.S. Bank, collectively, "Defendants"). For the following reasons, Defendants' motion to dismiss is granted in part and denied in part.


In September, 2005, Plaintiff obtained a loan for $225,000.00 for the purchase of the subject property from his mother. (FAC at 6.) On June 22, 2006, Plaintiff sought to obtain an equity loan on the property, but was instead convinced by his broker to refinance the loan in the amount of $300,000.00. (Id.) In February 2007, Plaintiff contacted the same broker whom he had worked with on the original loan and the refinancing, Defendant Mark Moore, to see about the possibility of a short- term loan. (Id. at 6-7.) Defendant Moore responded to Plaintiff by suggesting that he could arrange for a new loan with a lower interest rate and a lower monthly payment. (Id. at 7.) Defendant Moore subsequently personally made a loan to Plaintiff so that he could make two missed payments on his existing loan. (Id. at 8-9.) On February 23, 2007, Plaintiff signed documents to obtain a new loan in the amount of $374,000.00, which was secured by a Note on the subject property. (Id. at 9-10, 15.) Plaintiff assumed the terms of the loan would include a lower interest rate and a lower monthly payment. (Id. at 9.) However, the new loan resulted in higher monthly payments. (Id. at 10-11.)

On October 12, 2010, Plaintiff filed a Complaint in San Diego Superior Court. On November 10, 2010, Defendants removed the action to this Court. (Doc. 1.) On April 5, 2011, the Court issued an Order granting Defendants' motion to dismiss the Complaint and granting Plaintiff leave to file a FAC by May 2, 2011, which he did. (Docs. 14, 16.) The FAC sets forth eight claims for relief: (1) fraud and deceit as to FFFC, (2) fraud and deceit as to other Defendants Moore, Nowak, and Ocean, (3) negligence, (4) professional malpractice and negligence, (5) violation of California Business and Professions Code § 17200, (6) rescission pursuant to the Truth in Lending Act ("TILA"), (7) contractual rescission, and (8) reformation. On May 19, 2011, Defendants filed a motion to dismiss the claims against them in the FAC. (Doc. 18.) Plaintiff filed an opposition to the motion and Defendants filed a reply. (Docs. 20, 22.)


A party may move to dismiss a claim under Rule 12(b)(6) if the claimant fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). The Federal Rules require a pleading to include a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The Supreme Court, however, recently established a more stringent standard of review for pleadings in the context of 12(b)(6) motions to dismiss. See Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). To survive a motion to dismiss under this new standard, "a complaint 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 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." Id. (citing Twombly, 550 U.S. at 556). "Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)).


A. Standing

As an initial matter, Defendants argue Plaintiff lacks standing to assert the claims in the FAC because he is not the real party in interest. Fed. R. Civ. P. 17(a)(1)("An action must be prosecuted in the name of the real party in interest."). Plaintiff filed Chapter 7 bankruptcy in August 2009 and was granted a discharge on December 1, 2009. (RJN Exs. 1-2.)*fn1 The filing of a petition for bankruptcy creates a bankruptcy estate. 11 U.S.C. § 541(a); In re Freidman, 220 B.R. 670, 671 (9th Cir. BAP 1998). Any "legal and equitable interests of the debtor in property as of the commencement of the case" become property of the bankruptcy estate. 11 U.S.C. § 541(a)(1). Legal claims that accrued before the filing of the bankruptcy petition, as Plaintiff's claims did, are property that become part of the bankruptcy estate. Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707-09 (9th Cir. 1986); Hernandez v. Downey Sav. & Loan Ass'n, No. 08cv2336 IEG (LSP), 2009 WL 704381, at *3-4 (S.D. Cal. Mar. 17, 2009)(claims accrued for bankruptcy purposes when they could have been brought); Cain v. Hyatt, 101 B.R. 440, 441-42 (E.D. Pa. 1989).

Where a claim asserted in a lawsuit is the property of the bankruptcy estate, the Chapter 7 trustee is the real party in interest under the Bankruptcy Code and is the proper party to the suit. Accordingly, unless the trustee has abandoned the claim to the debtor, the debtor does not have standing to bring the claim. Hernandez, 2009 WL 704381, at *4. When a legal claim is properly scheduled as property in a bankruptcy proceeding pursuant to 11 U.S.C. § 521(a)(1), it may be expressly abandoned by the trustee, 11 U.S.C. § 554(a), (b), or it may implicitly abandoned if not otherwise administered at the time of the closing of the bankruptcy case, 11 U.S.C. § 554(c). Claims that are not properly scheduled remain property of the bankruptcy estate, even after the court discharges the debt. 11 U.S.C. § 554(d)("Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remain property of the estate."). Plaintiff argues his claims were properly scheduled and the bankruptcy trustee abandoned the claims, thereby entitling him to bring the claims and making him the real party in interest in this action. Plaintiff did not in fact list his legal claims stated in the FAC on the schedule or amended schedule filed with the Bankruptcy Court, but Plaintiff points to an amended Chapter 7 Individual Debtor's Statement of Intention, in which he stated he intended to rescind the loan on his real property as to First Franklin Loan Services. (RJN Ex. 3 at 8.) Plaintiff also points to the Trustee's Notice of Proposed Abandonment of Property. (Opp. Ex. A.) However, the Notice merely states that the bankruptcy trustee intended to abandon Plaintiff's real property because there was little or no equity in the property and preservation of the asset was burdensome to the bankruptcy estate; it says nothing of abandonment of Plaintiff's stated legal claims arising from transactions concerning that real property. (Id.; RJN Ex. 7 ("The trustee in bankruptcy--the real party in interest--abandoned the realty (although not these causes of action since they were never properly scheduled) on 2/10/10.").)

Moreover, Plaintiff asserted the claims he asserts in the FAC in a prior adversary proceeding before the Bankruptcy Court. (RJN Ex. 5; FAC at 5 ("The Plaintiff previously brought this claim for relief against these same Defendants before the Federal Bankruptcy Court. The Bankruptcy Court did not review or comment on the pleadings from either party, and instead dismissed the case stating that it did not have jurisdiction.").) In that proceeding, the Bankruptcy Court issued an Order, which incorporated its prior tentative ruling, holding (1) Plaintiff's TILA and RESPA claims were not scheduled and no amendment to the schedules listed the claims as assets; (2) the trustee was the real party in interest and had not abandoned Plaintiff's claims because they were never properly scheduled; and (2) the trustee is the only party with standing to assert the claims. (RJN Ex. 7.) The Court agrees with these conclusions. Accordingly, the Court finds Plaintiff is not the real party in interest in this action and does not have standing to assert the claims stated in his FAC. Nonetheless, "[t]he court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action." Fed. R. Civ. P. 17(a)(3). Accordingly, the Court provides a period of sixty days from the entry of this Order for the bankruptcy trustee to substitute in as the real party in interest in this action. If such substitution is not made within sixty days, the action will be dismissed.

B. Claims

Even if Plaintiff substitutes in the bankruptcy trustee, Defendants argue Plaintiff's claims should be dismissed for failure to state a claim on which relief can be granted. The Court therefore ...

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