This action, one of many filed by homeowners attempting to avoid or set aside foreclosure, was initially filed in Sacramento County Superior Court and removed to this court by defendant BAC Home Loans Servicing (BAC) based on this court's federal question jurisdiction. The complaint asserts six causes of action: misrepresentation and fraud; rescission based on a cognovit note;*fn1 wrongful foreclosure; quiet title; unfair business practices; and civil RICO violations. BAC has filed a motion to dismiss for failure to state a claim. Plaintiffs did not initially oppose, but after the court issued an order to show cause, plaintiffs' counsel filed an opposition. The court submitted the motion on the pleadings.
I. Standards for A Motion To Dismiss
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for "failure to state a claim upon which relief can be granted." A court may dismiss "based on the lack of cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Department, 901 F.2d 696, 699 (9th Cir. 1990). A motion to dismiss under this rule may also challenge the sufficiency of fraud allegations under the more particularlized standard of Rule 9(b) of the Federal Rules of Civil Procedure. Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003).
Although a complaint need contain only "a short and plain statement of the claim showing that the pleader is entitled to relief," ( Fed. R. Civ. P. 8(a)(2)), in order to survive a motion to dismiss this short and plain statement "must contain sufficient factual matter . . . to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, U.S. , 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something more than "an unadorned, the-defendant-unlawfully-harmed-me accusation" or "'labels and conclusions'" or "'a formulaic recitation of the elements of a cause of action.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss for failure to state a claim is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 129 S.Ct. at 1950. Ultimately, the inquiry focuses on the interplay between the factual allegations of the complaint and the dispositive issues of law in the action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984).
In making this context-specific evaluation, this court must construe the complaint in the light most favorable to the plaintiff and accept as true the factual allegations of the complaint. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). This rule does not apply to "'a legal conclusion couched as a factual allegation,'" (Papasan v. Allain, 478 U.S. 265, 286 (1986) (quoted in Twombly, 550 U.S. at 555), nor to "allegations that contradict matters properly subject to judicial notice" or to material attached to or incorporated by reference into the complaint. Sprewell v. Golden State Warriors, 266 F.3d 979, 988-89 (9th Cir. 2001).
A court's consideration of documents attached to a complaint or incorporated by reference or matter of judicial notice will not convert a motion to dismiss into a motion for summary judgment. United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003); Parks School of Business v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995); compare Van Buskirk v. CNN, 284 F.3d 977, 980 (9th Cir. 2002) (noting that even though court may look beyond pleadings on motion to dismiss, generally court is limited to face of the complaint on 12(b)(6) motion).
BAC has asked this court to take judicial notice of the Deed of Trust encumbering 8986 Haflinger Way in Elk Grove, California, dated May 12, 2008 and signed by plaintiffs, recorded in the Sacramento County Recorder's Office on May 16, 2008; the Notice of Default and Election to Sell, recorded in Sacramento County on June 2, 2010; and the Substitution of Trustee and Assignment of Deed of Trust, assigning the interest in the Deed of Trust from Mortgage Electronic Registration Servicing LP (MERS) to BAC, which was dated June 1, 2010 and recorded in the Sacramento County Recorder's Office on June 9, 2010. These documents are in the public record and are properly subject to judicial notice. Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001).
As preamble to the specific allegations of their complaint, plaintiffs aver that they are seeking "a determination of what if any party or entity is the owner of the promissory note executed at the time of the loan closing, and whether the deed of Trust secures any obligation of the Plaintiff"*fn2 and claim they are seeking damages for violations of "statutory duties under the Truth in Lending Act 15 USC § 1601, Privacy ACT Title 5 U.S.C. § 552(b)(4), and Fair Debt Collections Practices Act 15 U.S.C. § 1692, and Title 12 USC § 2605, and fundamental fiduciary duties owed to Plaintiff to enforce Plaintiff's right to his home." Complaint (Compl.) ¶¶ 2, 4 (verbatim transcription).
Plaintiffs allege that on May 16, 2008, they executed a promissory note for $280,596 for a loan to purchase the residence at 8986 Halfinger Way in Elk Grove. Id. ¶ 16. They signed a number of documents that were not explained; their questions were not answered. Id. ¶ 17. No one from Metrociti Mortgage told plaintiffs that the loan contained a yield spread premium provision,*fn3 the cost of which was added as points and fees, yet not disclosed. Id. ¶ 18. In addition, no one explained certain features of the interest rate, including how and when adjustments would occur, the basis for calculating the adjustments, or the effect of negative amortization. Id. ¶¶ 19-20. Because of the "hidden and/or disguised provisions" in the deed of trust, plaintiffs say it operates as a cognovit note. Id. ¶ 21. Plaintiffs did not knowingly waive their rights by signing this cognovit note because defendant Metrociti failed to provide plaintiff with sufficient time to read and understand the provisions in the Deed of Trust, which essentially forfeited plaintiffs' control and ownership of the property. Id. ¶¶ 23-24. Finally, they allege that because of a "severance of the ownership and possession of the original Note and Deed of Trust, they do not know the identity of the Note's true owner with the authority to foreclose and that therefore there is no right to foreclose." Id. ¶¶ 24-27.
Plaintiffs' causes of actions based on the foregoing allegations are analyzed below.
III. The Motion To Dismiss
A. Misrepresentation And Fraud*fn4
Plaintiffs' first cause of action alleges that BAC "engaged in a pattern and practice of defrauding Plaintiff in that, during the entire life of the mortgage loan, Defendants, and each of them, failed to properly credit payments made, improperly calculated interest on the accounts, and have failed to accurately debit fees;" that defendants knew the account were not accurate, but accepted plaintiffs' payments "based on the improper, inaccurate and fraudulent representations as to Plaintiff's accounts." Id. ¶¶ 35-36. They contend they were not aware of the fraud until 2010, "when it became increasingly difficult to keep up with the adjusted payments, and Plaintiff began to ask Defendants questions" about the "shifting terms of the agreement." Id. ¶ 36.
BAC argues that plaintiffs' conclusory statements do not meet the heightened pleading standards for fraud and even if they did, plaintiffs could not prevail because they cannot show justifiable reliance on defendant's statements. ECF No. 5 at 5-6. Plaintiffs address only a portion of BAC's characterization of their pleading as conclusory by arguing that their continued payment shows their reliance on the fraudulent concealment. They also argue that the complaint is timely because they did not become aware of the fraud until 2010, even though defendant did not invoke the statute of limitations in its motion. ECF No. 14 at 3. In its reply, BAC counters that plaintiffs' attempt to avoid the statute of limitations is unavailing, as the pleading is too conclusory.
In California, a claim of fraudulent misrepresentation has five elements:
(1) misrepresentation, which encompasses false representation, concealment and nondisclosure; (2) knowledge of falsity; (3) intent to defraud; (4) justifiable reliance; and (5) damage. Lazar v. Superior Court, 12 Cal.4th 631, 637 (1996); Champlaie v. BAC Home Loans Servicing, LP, 706 F.Supp.2d 1029, 1058 (E.D. Cal. 2010).
In addition to the usual pleading requirements of Rule 8, allegations of fraud must meet heightened pleading standards. Under Rule 9(b), a plaintiff who alleges fraud "must state with particularity the circumstances constituting the fraud," but may "aver generally" the state of mind animating the fraud. The pleading must "'be specific enough to give defendants notice of the particular misconduct . . . so that they can defend against the charge and not just deny that they have done anything wrong.'" Sanford v. MemberWorks, Inc., 625 F.3d 550, 558 (9th Cir. 2010) (quoting Kearns v. Ford Motor Co., 567 F.3d. 1120, 1124 (9th Cir. 2009)). To avoid dismissal, the complaint must describe the time, place and specific content of the false representations and identify the parties to the misrepresentations. Id.; Dooms v. Federal Home Loan Mortgage Corporation, 2011 WL 1232989, at *14 (E.D. Cal. Mar. 31, 2011). In addition, a plaintiff may not "lump multiple defendants together" but rather must "differentiate their allegations." Destfino v. Reiswig, 630 F.3d 952, 958 (9th Cir. 2011) (quoting Cisneros v. Instant Capital Funding Grp., Inc., 263 F.R.D. 595, 606-07 (E.D. Cal. 2009)).
Plaintiffs' claims do not satisfy Rule 9(b)'s pleading standard: although they do claim that BAC credited payments and calculated interest rates improperly, they do not identify the nature of the claimed improprieties nor suggest when any concealment/misrepresentation occurred. Although they claim that their reliance on the concealment is demonstrated by their continued payments, the complaint does not make clear the connection, if any, between the fraud and their continued payments. This portion of the complaint thus is insufficient.
In addition, California Civil Code § 338(d) establishes a three year statute of limitations for actions "on the ground of fraud or mistake," but provides that a cause of action for fraud does not accrue "until the discovery . . . of the facts constituting the fraud." A party is deemed to have discovered the fraud when he "'has reason at least to suspect the factual basis for its elements." Fox v. Ethicon Endo-Surgery, Inc., 35 Cal.4th 797, 807 (2005) (quoting Norgart v. The Upjohn Company, 21 Cal.4th 383, 398 (1999)). To rely on a claim of delayed discovery, a plaintiff must allege facts showing that the fraud could not have been discovered earlier even in the exercise of reasonable diligence and identifying how and when plaintiff discovered the fraud. California Sansome Co. v. U.S. Gypsum, 55 F.3d 1402, 1406-07 (9th Cir. 1995); Briosos v. Wells Fargo Bank, 2011 WL 1740100, at *4 (N.D. Cal. May 5, 2011); but see Bonds v. Nicoletti Oil, Inc., 2008 WL 2233511, at **7-8 (E.D. Cal. May 28, 2008) (questioning whether California pleading standards apply, but finding it plaintiff's burden to plead facts supporting delayed discovery). Plaintiffs' single, wholly conclusory claim that they did not discover the fraud until 2010 is insufficient. They will, however, be given leave to amend this portion of their complaint, if they are able to do so keeping in mind the requirements of Federal Rule of Civil Procedure 11.
B. Rescission and Restitution Of Voidable Cognovit Note
Plaintiffs' second cause of action alleges that defendant Metrociti was aware of the cognovit clause in the loan document but failed to provide fair consideration and that Metrociti's successors in interest, including BAC, "cannot be permitted to benefit from the misrepresentations and fraud committed against the Plaintiff." They also contend that the failure to disclose the cognovit clause as well as the "lack of contractual consent" renders the contract void and unenforceable. Compl. ¶¶ 42-43.
Defendant argues that the complaint simply asserts without explaining how BAC "benefit[s] from the misrepresentations and fraud" allegedly committed by Metrociti; that the alleged fraud underlying this claim has not been adequately pleaded; and rescission of a loan requires the borrower to return the money received. ECF No. 5 at 6. Plaintiffs counter that they have adequately pled the underlying fraud claim, including the discovery of the fraud.*fn5
The cognovit is the ancient legal device by which the debtor consents in advance to the holder's obtaining a judgment without notice or hearing, and possibly even with the appearance on the debtor's behalf, of an attorney designated by the holder. . . .
In the states which permit its use, the cognovit note authorizes an attorney to confess judgment against the person or persons signing it. It is written authority of a debtor and a direction by him for the entry of a judgment against him if the obligation set forth in the note is not paid when due . . . . [I]t cuts off every defense which the maker of the note ...