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Efrain Munoz, Et. Al v. Phh Corp. Et. Al

March 26, 2013


The opinion of the court was delivered by: Barbara A. McAuliffe United States Magistrate Judge



Currently before the Court is the motion of Efrain Munoz and five other putative class representatives (collectively, "Plaintiffs") to strike PHH Corporation's*fn1 ("Defendants") affirmative defenses to Plaintiffs' First Amended complaint. (Doc. 98.) Defendants filed an opposition on February 18, 2011. (Doc. 120.) Plaintiffs filed a reply brief on February 28, 2011. (Doc. 121.)

This case was stayed on September 9, 2011, and Plaintiffs' motion to strike was denied without prejudice. (Doc. 166, 167.) On August 27, 2012, the stay was lifted, Plaintiffs' Motion was deemed refiled as of August 21, 2012, and the Court requested supplemental briefing. (Doc. 178.) Defendants filed a supplemental opposition on September 21, 2012. (Doc. 182.) Plaintiffs filed a supplemental reply on February 20, 2013. (Doc. 204.)

The Court deemed the matter suitable for decision without oral argument and vacated the hearing set for March 22, 2013. (Doc. 214.) Having considered the moving, opposition, reply and supplemental papers, the declarations and exhibits attached thereto, as well as the Court's file, the Court GRANTS Plaintiffs' Motion to Strike.


A. Factual Background*fn2

Plaintiffs are individuals who obtained mortgages from PHH and provided down payments of less than 20% of the total purchase price of the homes. Those who purchased a home with less than a 20% down payment must generally purchase private mortgage insurance ("PMI") to protect the lender against the risk of default. Borrowers in this situation pay a PMI premium in addition to their monthly mortgage payment.

Plaintiffs allege Defendants selected the specific PMI providers Plaintiffs used as part of the mortgage process. These PMI providers pooled the PMI contracts and reinsured with Atrium to spread the risk of default, giving Atrium a portion of the monthly PMI premiums. Plaintiffs allege that the reinsurance is a sham whereby Atrium took on little to no risk and functioned instead as a means of giving Defendants a referral fee.

Plaintiffs allege Defendants have acted together to violate the Real Estate Settlement Procedures Act ("RESPA") Sections 8(a) and (b) by entering into captive reinsurance arrangements for the purpose of receiving kickbacks, referral payments and unearned fee splits (disguised as ceded reinsurance premiums) from private mortgage insurers to whom Defendants referred business. Plaintiffs allege that, by design of the arrangement between Defendants, Atrium assumed no real or commensurate risk-because the reinsurance trusts were funded almost exclusively by ceded premiums, not Atrium's own capital. Absent the requisite transfer of risk, the reinsurance arrangements were illusory and Defendants' agreement or understanding to provide and accept referral fees and kickbacks in connection with Plaintiffs' and potential class members' settlement services violated RESPA. Accordingly, Plaintiffs seek recovery for all borrowers who were subjected to Defendants' settlement services.

B. Procedural Background

Plaintiffs filed this putative class action on June 2, 2008. (Doc. 2.) After filing an answer, on October 6, 2008, Defendants moved for judgment on the pleadings. (Doc. 30.) Defendants' motion for judgment on the pleadings advanced two arguments: (1) PMI reinsurance is not a "settlement service" under RESPA; and (2) Plaintiffs suffered no injury as their monthly PMI premiums were based on rates filed and approved by the applicable state department of insurance (the "filed rate doctrine"). On September 18, 2009, the court denied Defendants' motion for judgment on the pleadings. (Doc. 60.) The Court found that the PMI facilitated by Defendants was a "settlement service" under RESPA, and the filed rate doctrine did not bar Plaintiffs' claims because Plaintiffs challenged an alleged unfair business practice, rather than the actual PMI premium rates.

On December 10, 2010, Plaintiffs filed a First Amended Complaint. (Doc. 96.) Plaintiffs' First Amended complaint presents one cause of action for violation of Section 8 of RESPA. On December 23, 2010, Defendants filed an answer to Plaintiffs' First Amended Complaint. (Doc. 97.) Defendants' answer presents twenty-six (26) affirmative defenses to Plaintiffs' claims. Id.


A. Legal Standard

Federal Rule of Civil Procedure 8(c) governs affirmative defenses and provides, in pertinent part, that "[i]n responding to a pleading, a party must affirmatively state any avoidance or affirmative defense, including [listed defenses]." Id. "The affirmative defense is a descendant of the old plea of 'confession and avoidance,' whereby a defendant admits the plaintiff's prima facie case, and then alleges additional material that defeats the plaintiff's cause of action." Bd. of Trs. of Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., 487 F. Supp. 2d 1099, 1112 (N.D. Cal. 2007) (citing Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1270, at 558 (3d ed. 2004)). Affirmative defenses have thus been defined as "matters extraneous to the plaintiff's prima facie case, which deny plaintiff's right to recover, even if the allegations of the complaint are true." FDIC v. Main Hurdman, 655 F. Supp. 259, 262 (E.D. Cal. 1987).

The Court is empowered by Federal Rule of Civil Procedure 12(f) to "strike from a pleading an insufficient defense or any redundant, immaterial, impertinent or scandalous matter." Id. "An affirmative defense may be insufficient as a matter of pleading or a matter of law."

Sec. People, Inc. v. Classic Woodworking, LLC, No. 04-cv-3133, at * 2 (N.D. Cal. Mar. 4, 2005). An insufficiently pled affirmative defense is one which fails to provide plaintiff fair notice of the defense. Wyshak v. City Nat'l Bank, 607 F.2d 824, 827 (9th Cir. 1979). An affirmative defense is insufficient as a matter of law where "there are no questions of fact, that any questions of law are clear and not in dispute, and that under no circumstances could the defense succeed." Ganley v. Cnty. of San Mateo, No. 06-cv-3923, 2007 WL 902551, at *1 (N.D. Cal. Mar. 22, 2007)).

The function of a motion to strike is "to avoid the expenditure of time and money" associated with litigating "spurious issues." Sidney--Vinstein v. A.H. Robins Co., 697 F.2d 880, 885 (9th Cir. 1983); See also Fed. Sav. & Loan Ins. Corp. v. Gemini Mgmt., 921 F.2d 241, 244 (9th Cir. 1990) (a motion to strike may be appropriate where it will streamline the ultimate resolution of the action). If the affirmative defense is invalid as a matter of law, the court should ...

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