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Luis Mireles, et al v. Wells Fargo Bank

January 11, 2012


The opinion of the court was delivered by: Margaret M. Morrow United States District Judge


On August 16, 2011, plaintiffs filed this action in Los Angeles Superior Court.*fn1 Defendants removed the case to this court on September 16, 2011, asserting that the action was a "mass tort" action and invoking jurisdiction under the Class Action Fairness Act ("CAFA"), 28 U.S.C. § 1332(d).*fn2 Defendants also invoked the court's diversity jurisdiction under 28 U.S.C. § 1332(a).*fn3 On October 14, 2011, plaintiffs filed a motion to remand.*fn4 Defendants filed a motion to dismiss one week later, on October 21, 2011.*fn5 Both motions are opposed.*fn6


A. The Complaint's Factual Allegations

The complaint in this action was filed on behalf of 108 named plaintiffs. It is a sprawling document that is 84 pages and 387 numbered paragraphs long; many paragraphs contain multiple subparagraphs. The court summarizes the complaint's allegations below.

The complaint alleges that "[a]s the result of an aggressive and relentlessly pursued growth strategy between 2003 and 2009," Wells Fargo Bank, N.A. ("Wells Fargo") became the fourth largest banking institution in the nation, and was the "master servicer" for loans and mortgages at issue in this action.*fn7 As part of a massive scheme of investor fraud, defendants allegedly inflated property appraisals, disregarded underwriting standards, sold predatory loan products, and promised refinancing packages, all while asserting that they were "prudently lending to qualified homeowners."*fn8 Defendants allegedly sold mortgage products to borrowers who could not otherwise meet traditional underwriting standards for such loans, and thereby contributed to a massive housing price bubble.*fn9 After the bubble collapsed, plaintiffs' net worth and credit ratings were devastated.*fn10 The complaint alleges that defendants are responsible for a host of other ills related to the current economic crisis, including a "mortgage meltdown in California that was substantially worse than any economic problems facing the rest of the United States,"*fn11 and a "knowing[ ] and systematic[ ] destr[uction of] California home values." They assert that defendants "acted with callous or reckless disregard" for the fact that "their actions [might] cause California home prices to plummet."*fn12

Defendants allegedly created risky "mortgage pools," promising investors lucrative benefits, and "managed risk through leverage and derivatives trading."*fn13 They purportedly knew that the mortgage pools contained loans that were at very high risk of default.*fn14 Borrowers like plaintiffs were allegedly "handcuffed" and required to accept these "dangerous products" because defendants imposed substantial early payment penalties if borrowers "tried to get out of the[ ] toxic loans [and replace them with] more stable fixed rate products."*fn15

With the proceeds of TARP funds, defendants allegedly committed numerous fraudulent acts, including issuing notices of default in violation of California law, misrepresenting their intention to arrange loan modifications for plaintiffs, and failing to respond to plaintiffs' communications.*fn16 Plaintiffs assert that defendants have been foreclosing on their homes without proof that defendants hold the notes and deeds of trust they seek to enforce, and without being able to demonstrate ownership of notes and trust deeds in question.*fn17

The complaint also contains a number of allegations regarding Wachovia, and its acquisition of Golden West Financing Corporation ("Golden West"). Golden West was an Oakland, California-based mortgage lender run by Herbert and Marion Sandler.*fn18 It offered a product known as the "Pick-A-Pay" mortgage.*fn19 This type of mortgage permitted borrowers to choose from multiple payment options every month: (1) full payment of interest and principal sufficient to pay down the loan over a traditional 30 year term; (2) a higher payment that would pay off the loan in 15 years; (3) an interest-only payment; or (4) a minimum payment that did not cover interest, and caused the unpaid interest to be added to the loan balance.*fn20 Plaintiffs contend that the fourth option resulted in "negative amoritization," i.e., in growth of the outstanding balance over time.*fn21 Plaintiffs contend that this product lured borrowers to take out loans by offering low "teaser" rates that "ratcheted sharply upwards as interest rates increased."*fn22 It was purportedly marketed to unsophisticated home buyers who did not understand the financial risks they faced if they entered into such a loan.*fn23 Plaintiffs assert that Golden West's loans were labeled the "Typhoid Mary of the mortgage industry" by The New York Times, and that the Sandlers were included on a list of "25 people to blame for the financial crisis" by Time Magazine.*fn24 After Wachovia acquired Golden West, its mortgage portfolio was dominated by Pick-A-Pay mortgages. By the end of 2007, it held $120 billion of these mortgages, compared with $50 billion of "traditional mortgages."*fn25 More than $70 billion of Wachovia's Pick-A-Pay mortgages were issued to California borrowers.*fn26

When Wachovia announced its purchase of Golden West, the housing market was already beginning to decline, and investors were concerned about their potential exposure.*fn27 To reassure its investors, Wachovia's officers made various representations regarding the safety and stability of Golden West's portfolio, and claimed to have implemented policies to ensure that borrowers could pay their loan obligations.*fn28 Wachovia stated in 2007 that it did not "anticipate any meaningful potential impact to earnings with the sub prime going forward."*fn29

The Pick-A-Pay loans were allegedly concentrated in California, and when these loans "reset prematurely due to the contractual breaches by Wells Fargo," many homeowners lost their homes through foreclosure.*fn30 Plaintiffs allege that defendants were motivated to foreclose on properties quickly so that the homes could be added to their growing inventory of Real Estate Owned ("REO") properties.*fn31 When Wells Fargo acquired Wachovia, it allegedly took a large 'paper loss' on Wachovia's non-performing loans and mortgages, so that whatever money or benefits it was able to recoup on the defaulted mortgages could be reflected as new profits.*fn32

Plaintiffs contend that, according to data reported pursuant to the Home Mortgage Disclosure Act, fully one-fifth of all the loans defendants made to low and moderate income borrowers, including plaintiffs, were high-cost refinance loans with an average interest rate of

9.8%; these loans purportedly represented close to $11 billion in lending. Plaintiffs assert that the loans went directly into mortgage pools securitized and sold by defendants, who profited from the loans' "secret excessive markups."*fn33

The complaint alleges that had all of this i nformation been properly disclosed to plaintiffs, they would have behaved differently, deferring their purchase of a home and refusing to enter into expensive adjustable rate mortgages.*fn34 It pleads a multitude of purportedly deceptive acts by defendants, including their failure to:

"(1) establish due diligence policies, procedures and controls reasonably designed to detect and report instances of money laundering, (2) establish procedures to take reasonable and practicable measures to verify the identity of those applying for an account with the institution and maintain records of the information used to verify a person's identity, including name, address, and other identifying information,

(3) determine and report the sources of funds used for the mortgages they originate[d] and service[d], as well as the sources of funds used to acquire any mortgages, [and] (4) disclose to Plaintiffs the identities, address and telephone numbers of transferees of their mortgages."*fn35

Essentially, the complaint asserts that defendants engaged in a fraudulent scheme by offering mortgages at unsustainable loan-to-value ratios, often to individuals who they knew were a poor credit risk and at high risk of default.*fn36 Defendants were allegedly aware of the consequences of their actions, and knew that defaults on a large scale would have a cascade effect and depress property values throughout the state, causing plaintiffs and other similarly situated individuals to lose the equity in their homes and have no means to refinance their mortgage or sell their home.*fn37

Plaintiffs charge that defendants fraudulently misrepresented to multiple plaintiffs that they would receive assistance securing a loan modification.*fn38 They also implied or stated that if plaintiffs sought a loan modification, defendants would assist them and they would often be able to obtain a modification. Defendants purportedly made these representations with no intention of providing assistance to plaintiffs, or with knowledge that plaintiffs were not good candidates for loan modifications.*fn39

Plaintiffs also allege that defendants sold the notes and deeds of trust relating to plaintiffs' properties in transactions that were unlawful or fraudulent in various ways. The sales allegedly

"(a) [i]ncluded sales to nominees who were not authorized under law at the time to own a mortgage, including, among others, MERS;

(b) [i]nvolved misrepresentations by Defendants to investors and concealment from investors of Plaintiff[s'] true financial condition and the true value of Plaintiff[s'] home[s] and mortgage[s];

(c) [i]nvolved misrepresentations by Defendants to investors and concealment from investors of the true financial condition of other borrowers and the true value of their homes and mortgages also included in the pools;

(d) [w]ere for consideration greater than the actual value of the said notes and deeds of trust;

(e) [w]ere for consideration greater than the income stream that could be generated from the instruments even assuming a 0% default rate thereon. . . ."*fn40

Plaintiffs assert that, had they been aware of defendants' conduct, they would not have entered into their mortgages or purchased homes.*fn41

Plaintiffs allege that Wells Fargo is now under investigation by various governmental agencies, and is being sued in several class actions.*fn42 They contend that Wells Fargo settled a lawsuit with the California Attorney General that alleged lending violations related to the Pick-A- Pay loan product; the settlement purportedly contemplates that the bank will make $2 billion in loan modifications.*fn43 Wells Fargo has also allegedly entered into settlements with the attorneys general of Arizona, Colorado, Florida, Illinois, Nevada, New Jersey, Texas, and Washington.*fn44

The company purportedly agreed to make $600 million in loan modifications, and to fund a $50 million settlement fund in order to resolve a lawsuit against Wachovia's mortgage unit.*fn45 Finally, on April 5, 2011, Wells Fargo and the SEC purportedly settled charges related to "misrepresentations to investors associated with selling mortgage backed securities."*fn46

The complaint describes in detail a consent decree into which Wells Fargo entered with the Office of the Comptroller of the Currency ("OCC Order"). The decree purportedly states that various federal agencies, including the Board of Governors of the Federal Reserve System, the FDIC, and the Office of Thrift Supervision, found that Wells Fargo had engaged in "unsafe or unsound practices" in its handling of foreclosure-related activities.*fn47 The OCC Order allegedly states that Wells Fargo "filed or caused to be filed in state and federal courts numerous affidavits executed by its employees or employees of third-party service providers making various assertions, such as ownership of the mortgage note and mortgage, the amount of the principal and interest due, and the fees and expenses chargeable to the borrower, in which the affiant represented that the assertions in the affidavit were made based on personal knowledge or based on a review by the affiant of the relevant books and records, when, in many cases, they were not based on such personal knowledge or review of the relevant books and records. . . ."*fn48

Plaintiffs allege that under the OCC Order, Wells Fargo was required to submit to audits and execute a comprehensive plan to "reimburse homeowners who had been improperly foreclosed upon."*fn49 The OCC Order purportedly concluded that Wells Fargo had litigated foreclosure proceedings and initiated non-judicial foreclosure sales without properly endorsed or assigned documents in violation of law.*fn50 Plaintiffs assert that governmental investigations are ongoing; they quote from a news article stating that the Department of Housing and Urban Development's inspector general is conducting a confidential audit of the company.*fn51

The complaint pleads six state law claims. The first four, asserted by all plaintiffs, allege

(1) fraudulent concealment; (2) intentional misrepresentation; (3) negligent misrepresentation; and

(4) violation of the Unfair Competition Law ("UCL"), California Business & Professions Code § 17200 et seq.*fn52 The complaint also pleads a wrongful foreclosure claim on behalf of eleven plaintiffs who lost their properties to foreclosure, and a breach of contract claim on behalf of nine plaintiffs who signed Pick-A-Pay mortgage loan agreements with defendants.*fn53

B. The Complaint's Allegations Regarding Citizenship of the Parties and Amount in Controversy

The complaint contains various allegations regarding the citizenship of the parties and the amount in controversy. Paragraphs 43 through 153 are a non-alphabetized list of the 108 plaintiffs, all of whom are alleged to reside in and own property in California.*fn54 Defendants are alleged to have "acted as Servicer or [in] some other control capacity over [the] processing [of plaintiffs'] loan[s]."*fn55 The complaint alleges that fewer than 100 plaintiffs allege claims that "would, as to them, equal or exceed the jurisdictional amount for federal jurisdiction under 28 U.S.C. § 1332(a)."*fn56

The complaint names nine defendants: Wells Fargo Bank, N.A., which is a national banking association that is chartered in Sioux Falls, South Dakota and has its primary headquarters in San Francisco, California;*fn57 Wells Fargo Home Mortgage, a national banking association with its principal place of business in Des Moines, Iowa;*fn58 America's Servicing Company, a national banking association with its principal place of business in Des Moines, Iowa;*fn59 Wachovia Mortgage, FSB, a national banking association with its principal place of business in Charlotte, North Carolina;*fn60 Wachovia Bank, FSB, formerly known as World Savings Bank, a national banking association with its principal place of business in Charlotte, North Carolina;*fn61 Golden West Financial Corporation, a Delaware corporation whose principal asset is World Savings Bank, based in Oakland, California;*fn62 World Savings Bank, FSB, a national banking association that was "knowingly and willingly doing business" in California;*fn63 World Savings, Inc., a California corporation;*fn64 and Cal-Western Reconveyance Corporation, a California corporation.*fn65

As respects the amount in controversy, the prayer for relief seeks, inter alia, general and special damages, exemplary damages, statutory relief, restitution, injunctive relief and attorneys' fees.*fn66 The prayer for relief reiterates that

"fewer than 100 plaintiffs are alleging claims or amounts in controversy that would, as to them[,] equal or exceed the jurisdictional amount for federal jurisdiction under

28 U.S.C. § 1332(a) and that no relief of any kind is sought under any federal statute or rule."*fn67

C. The Notice of Removal

1. CAFA "Mass Action" ...

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