On June 28, 2012, plaintiffs James Wilson, Pauline Wilson, and Pam Croysdil (collectively "plaintiffs") filed a First Amended Complaint (FAC) against Household Finance Corporation (Household) and Housekey Financial Corporation (Housekey) (collectively defendants) alleging thirteen causes of action: (1) fraud in the origination of the loan; (2) violation of California Code of Civil Procedure § 2923.5; (3) Real Estate Settlement Procedures Act (RESPA) violation; (4) rescission; (5) predatory lending; (6) a claim titled "Unfair and Deceptive Business Practices Act (UDAP)"; (7) breach of contract; (8) breach of implied contract of good faith and fair dealing; (9) cancellation of instruments; (10) intentional misrepresentation; (11) negligent misrepresentation; (12) quiet title; and (13) declaratory relief. The complaint alleges generally that plaintiffs James and Pauline Wilson were misled during the refinancing of their home and their efforts to forestall a pending foreclosure.
Defendants have moved to dismiss most of the causes of action in the First Amended Complaint; the court submitted the motion without hearing. After considering the parties' arguments, the court hereby GRANTS the motion in part and DENIES it in part, as explained below.
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 Dep't, 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 particularized 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, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. 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.'" Id. (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." Id. at 679. 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, 907-08 (9th Cir. 2003); Parks Sch. of Bus. v. Symington,
51 F.3d 1480, 1484 (9th Cir. 1995); compare Van Buskirk v. Cable News Network, Inc., 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).
A. The Allegations of the First Amended Complaint
Plaintiffs allege that in 2006 James and Pauline Wilson, then each seventy-nine years old, sought to reduce their mortgage payments to stabilize payments in retirement and so contacted Household about refinancing their mortgage. FAC ¶ 192. An agent assured them he would fill out the loan application, but never asked them about their expenses or income and never asked for documentation of those figures. FAC ¶¶ 23, 25. Defendants thereafter qualified plaintiffs for a loan by falsely stating plaintiffs' income. FAC ¶ 190.
The agent told the Wilsons they qualified for an "excellent" thirty year loan at a reduced monthly payment, so plaintiffs proceeded with the loan process. FAC ¶¶ 24, 187. Plaintiffs signed the loan documents in December 2006. They were not given much time to read the documents, the tops of which were obscured, but they trusted the agent who said they qualified for an affordable loan commensurate with the value of the property and so signed the documents. FAC ¶¶ 27-28, 30. Based on the information they had provided the agent, however, he should have been aware they could not afford the loan they were offered. FAC ¶¶ 54, 57.
At some point plaintiffs contacted Household in attempt to lower their monthly payments, but were told they could not receive any assistance because they were current on the loan. FAC ¶ 32. An agent of Household told plaintiffs they had to be delinquent on the loan in order to qualify for assistance. FAC ¶¶ 32-33. Once they had fallen behind, they again contacted Household, but were denied any assistance even though they were originally assured the modification looked good. FAC ¶¶ 33-34, 194. Indeed, defendants asked plaintiff to fill out paperwork for a modification under the Home Affordable Modification Program (HAMP) but later told plaintiffs that defendants did not participate in HAMP. FAC ¶ 214. Defendants also led plaintiffs to believe they would suspend the foreclosure proceedings during the modification process. Defendants never intended to modify the loan but rather sought to force plaintiffs into foreclosure and charge them excessive penalties and interest. FAC ¶ 194.
It was not until November 2011, after the denial of the loan modification, when plaintiffs reviewed the loan qualifying summary, that they understood defendants' suppression of facts and deception. FAC ¶ 60. Only after meeting with counsel in April 2012 did they fully understand the terms of the forty-year loan and the fact that it exceeded the value of the property. FAC ¶¶ 29, 31, 49.
B. Fraud Claims (First, Fourth, Tenth and Eleventh Causes of Action)
Defendants argue that any claims of fraud stemming from loan origination are barred by the statute of limitations and that the later claims of intentional and negligent misrepresentation based on the loan modification are not adequately pleaded. Plaintiffs do not explicitly address the statute of limitations in their opposition, but do argue that "[a]fter finally receiving the loan documents after closing, Plaintiffs filed the documents away, having no cause to review the documents." Opposition, ECF No. 14, at 4.*fn1 They also allege they are entitled to rescind the loan because defendants misrepresented plaintiffs' income and understated their expenses and failed to disclose the true purpose of the loan. FAC ¶¶ 105-106.
In addition to the general 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)); Neubronner v. Milken, 6 F.3d 666, 671-72 (9th Cir. 1993) ("A pleading is sufficient under Rule 9(b) if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations." (internal quotation marks, citation omitted)); Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (recognizing that "plaintiffs may aver scienter generally, just as the rule states--that is, simply by saying that scienter existed") (internal quotation marks and citation omitted). To avoid dismissal, the complaint must describe the time, place, and specific content of the false representations and identify the parties to the misrepresentations. Kearns, 567 F.3d at 1124.
i. Statute of Limitations
As provided by the California Code of Civil Procedure, a cause of action for fraud must be brought within three years, although "[t]he cause of action in that case is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud . . . ." CAL. CIV. PROC. CODE § 338(d). This discovery rule "postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action." Norgart v. Upjohn Co., 21 Cal. 4th 383, 397 (1999). Under the rule, "[a] plaintiff need not be aware of the specific 'facts' necessary to establish the claim; that is a process contemplated by pretrial discovery. Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights. So long as a suspicion exists, it is clear that the plaintiff must go find the facts; she cannot wait for the facts to find her." Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 1111 (1998).
To rely on a claim of delayed discovery, a plaintiff must allege facts showing that the basis of the claim could not have been discovered earlier, even in the exercise of reasonable diligence, and identifying how and when plaintiff discovered the fraud. Briosos v. Wells Fargo Bank, No. C 10--02834 LB, 2011 WL 1740100, at *4 (N.D. Cal. May 5, 2011); but see Bonds v. Nicoletti Oil, Inc., No. CV-F-07-1600 OWW/DLB, 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). "Reasonable diligence requires the reading of a contract before signing it." Brookwood v. Bank of Am., 45 Cal. App. 4th 1667, 1674 (1996). Moreover, even though "the law is solicitous of those who are particularly susceptible to fraud due to their ignorance, age, or infirmity," such persons "are still expected to be prudent in their business transactions." Alfaro v. Cmty. Hous. Improvement Sys. & Planning Ass'n, 171 Cal. App. 4th 1356, 1394 n.23 (2009). Plaintiffs have not alleged that the agent affirmatively misrepresented the contents of the loan documents or that plaintiffs were prevented from reading them, only that they did not have much time to read them before signing. Moreover, they do not allege the documents were thereafter withheld from them; to the contrary it appears that they "filed them away." ECF No. 14 at 9. On these facts they cannot rely on delayed discovery.
In their fourth cause of action, plaintiffs allege they are entitled to rescind the loan because of defendants' alleged misrepresentation of plaintiffs' income and understatement of their expenses to qualify them for a loan they could not afford. FAC ¶ 105. It is unclear whether this is part of a Truth In Lending Act (TILA) cause of action, 15 U.S.C. § 1601, et seq., or is a separate claim. The claim is regardless barred by the statute of limitations and plaintiffs have not alleged delayed discovery, as there is nothing in the complaint suggesting they were prevented from obtaining a copy of the application filled out in their names.
ii. Sufficiency of the Allegations Concerning Loan Modification
In California, a claim of fraud has five elements: (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably and reasonably relied on the representation; and (5) the plaintiff suffered resulting damages. Lazar v. Superior Court, 12 Cal. 4th 631, 638 (1996); Ali v. Humana, Inc., No. 12--cv--00509--AWI--GSA, 2010 WL 2376972, at *5 (E.D. Cal. June 22, 2012). The elements for a claim of negligent misrepresentation are (1) a misrepresentation of a past or existing material fact, (2) without reasonable grounds for believing it to be true, (3) with intent to induce another's reliance, (4) justifiable reliance by a party who was ignorant of the truth, and (5) damage stemming from the reliance on the representation.
B.L.M. v. Sabo & Deitsch, 55 Cal. App. 4th 823, 834 (1997); Continental Airlines, Inc. v. McDonnell Douglas Corp., 216 Cal. App. 3d 388, 402 (1989). Liability for negligent misrepresentation must flow from an assertion of material fact, not from an implied representation or nondisclosure. Yanase v. Auto Club of So. Cal., 212 Cal. App. 3d 468, 473 (1989). Courts in the Ninth Circuit have applied the standard to claims of intentional and negligent misrepresentation, which in California are a species of fraud. Meridian Project Systs., Inc. v. Hardin Constr. Co., 404 F. Supp. 2d 1214, 1219-20 (E.D. Cal. 2005); Bily v. Arthur Young & Co., 3 Cal. 4th 370, 407 (1992) (negligent misrepresentation is a species of the tort of deceit); see generally Vess v. Ciba-Geigy Corp., 317 F.3d 1097, 1104-05 (9th Cir. 2003); but see Petersen v. Allstate Idem. Co., 281 F.R.D. 413, 417-18 (C.D. Cal. 2012) (questioning whether the Rule 9(b) standard for fraud applies to negligent misrepresentation).
Defendants argue that the complaint is insufficient because it does not meet the federal pleading standards for fraud. They also urge that plaintiffs cannot bring a claim for negligent misrepresentation because defendants did not owe them a fiduciary duty. Plaintiffs counter that under Comm. on Children's Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197, 217 (1983), the pleading standards for fraud are relaxed because "defendant possesses full information concerning the facts of the controversy." ECF No. 14 at 10. Whatever the California standard, the standard for pleading fraud under Rule 9(b) is relaxed only as to those matters primarily within the opposing party's knowledge; "[f]or example, in cases of corporate fraud, plaintiffs will not have personal knowledge of all of the underlying facts." Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir. 1989) (citation omitted). In this case, however, plaintiffs were participants in the conversations they cite as containing actionable misrepresentations. They have not shown they are entitled to any relaxation of Rule 9(b)'s pleading standard.
Whether or not Rule 9(b)'s particularity requirements apply to negligent misrepresentation, defendants argue the claim cannot be saved by amendment because they do not owe a duty of care to plaintiffs, a necessary element of negligence. Plastino v. Wells Fargo Bank, 873 F. Supp. 2d 1179, 1190 (N.D. Cal. 2012) ("As with any negligence claim, the tort of negligent representation requires that Plaintiff allege a duty of care."); Eddy v. Sharp, 199 Cal. App. 3d 858, 864 (1988) ("As is true of negligence, responsibility for negligent misrepresentation rests upon the existence of a legal duty, imposed by contract, statute or otherwise, owed by a defendant to an injured person."). Under California law, there is no fiduciary relationship between a lender and a borrower when "the institution's involvement in the loan transaction does not exceed the ...