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Stitt v. Citibank, N.A.

United States District Court, N.D. California

April 25, 2013

GLORIA STITT, RONALD STITT, JUDI SHATZER, MARKET ZIRLOTT, and TERRI LOUISE ZIRLOTT, individually and on behalf of other members of the general public similarly situated, Plaintiffs,

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[Copyrighted Material Omitted]

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For Gloria Stitt, Terri Louise Zirlott, individually, and on behalf of other members of the general public similarly situated, Mark Zirlott, Judi Shatzer, Ronald Stitt, Plaintiffs: Mark Philip Pifko, LEAD ATTORNEY, Daniel Alberstone, Roland K. Tellis, Baron & Budd, P.C., Encino, CA.

For Citibank, N.A., a national association, CitiMortgage, Inc., a New York corporation, Defendants: Debra Lee Bogo-Ernst, PRO HAC VICE, Chicago, IL; Steven Edward Rich, Mayer Brown LLP, Los Angeles, CA.


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Order Granting in Part and Denying in Part Defendants' Motion to Dismiss


Named Plaintiffs Gloria Stitt, Ronald Stitt, Judi Shatzer, Mark Zirlott, and Terri Louise Zirlott filed a Class Action Complaint against Defendants Citibank, N.A. and CitiMortgage, Inc. (collectively, " Citi" or " Defendants" ). (Dkt. No. 1-1.) Plaintiffs allege Citi engaged in fraudulent practices by charging marked-up or unnecessary fees in connection with Defendants' home mortgage loan servicing businesses. This action was filed separately as to these Defendants pursuant to a previous order of the Court. ( See Bias, et al. v. Wells Fargo & Co., et al., Case No. 12-cv-00664-YGR [Dkt. No. 59].)

Defendants filed a Motion to Dismiss on August 21, 2012, seeking dismissal of the Complaint with prejudice. (Dkt. No. 5.) On September 4, 2012, Plaintiffs filed their Opposition to the Citi Defendants' Motion to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(6). (Dkt. No. 7.) Citi filed their Reply in Support of Motion to Dismiss on September 13, 2012. (Dkt. No. 12.) The

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Court held oral argument on November 6, 2012. (Dkt. No. 18.)

Having carefully considered the papers submitted and the pleadings in this action, oral argument at the hearing held on November 6, 2012, and for the reasons set forth below, Plaintiffs' first claim for violation of the Racketeer Influenced and Corrupt Organizations Act (" RICO" ) and second claim for conspiracy to violate RICO are Dismissed With Leave to Amend. The Court Denies Defendants' Motion to Dismiss the third claim for unjust enrichment and fourth claim for fraud.

I. Factual and Procedural Background

Plaintiffs allege that Defendants have engaged and continue to engage in fraudulent practices in connection with their home mortgage loan servicing business.[1] (Compl. ¶ 2.) Defendants allegedly adopted a uniform practice designed to maximize fees assessed on delinquent borrowers' accounts. ( Id. ¶ ¶ 2-4.) As part of a fraudulent scheme, Defendants " formed an enterprise with their respective subsidiaries, affiliates, and 'property preservation' vendors, . . . unlawfully mark[ed] up default-related fees charged by third parties[,] and assess[ed] them against borrowers' accounts" for an undisclosed profit. ( Id. ¶ 9.) Specifically, " Defendants order[ed] default-related services from their subsidiaries and affiliated companies, who, in turn, obtain[ed] the services from third-party vendors." ( Id. ¶ 41.) The third-party vendors charged Defendants for their services, but Defendants " assess[ed] borrowers a fee that [wa]s significantly marked-up from the third-party vendors' actual fees for the services." ( Id. ) Through the unlawful enterprise, Defendants marked-up fees charged by vendors, " often by 100% or more," and failed to disclose the mark-ups and hidden profits to borrowers. ( Id. ¶ 4.)

In addition to marked-up fees, Defendants had a " practice of routinely assessing fees . . . even when they [we]re unnecessary." (Compl. ¶ 4.) Plaintiffs allege that: " even if the property inspections were properly performed and actually reviewed by someone at the bank, Citi's continuous assessment of fees for these inspections on borrowers accounts [ sic ] [wa]s still improper because of the frequency with which they [we]re performed. If the first inspection report show[ed] that the property [wa]s occupied and in good condition, it [would be] unnecessary and inappropriate for Citi's system to automatically continue to order monthly inspections. Nothing in the reports justifie[d] continued monitoring." ( Id. ¶ 52.)

Plaintiffs allege that their mortgage contracts disclosed that Defendants will pay for default-related services when necessary, which would be reimbursed by borrowers, but " [n]owhere [wa]s it disclosed to borrowers that the servicer may mark-up the actual cost of those services to make a profit, nor d[id] it permit such fees to be assessed on borrowers' accounts

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when they [we]re unnecessary." (Compl. ¶ 43.) Defendants identified the marked-up fees as " Delinquency Expenses" on mortgage statements. ( Id. ¶ ¶ 10, 49 & 50.) Defendants " le[ft] borrowers unable to know the true nature of the fees that [we]re assessed under the 'Delinquency Expenses' description" because they merely gave borrowers, in statements and other documents, " a list of potential types of fees without a true itemization." ( Id. ¶ 105.) Specifically, Defendants told borrowers that the " Delinquency Expenses" were " third-party expenses such as property inspection fees, property preservation costs, appraisal costs, and attorney fees" occurred as a result of default. ( Id. ) Plaintiffs allege that the marked-up fees included Broker's Price Opinion fees (" BPOs" ) and appraisal fees. ( Id. ¶ ¶ 31 & 44-49.)

Plaintiffs also allege that Defendants used two software programs (CitiLink and Maestro [the " Programs" ]), which were designed to manage borrowers' accounts and assess fees according to protocols and policies designed by executives at Citibank, N.A. and CitiMortgage, Inc. (Compl. ¶ ¶ 36-37 (also alleging the Programs are proprietary to Defendants).) The management of payment information for loans was automated by these Programs, and all payments were automatically loaded into them. ( Id. ¶ 38.) With the parameters inputted into the Programs, CitiLink and Maestro " automatically implement[ed] decisions about how to manage borrowers' accounts based on internal software logic," including " automatically assess[ing] late fees, default-related service fees, and other charges" when a loan was past due. ( Id. ¶ 39.) Defendants' software Programs and overall practices were designed to ensure that inspections were automatically ordered regardless of whether the inspections were necessary. ( Id. ¶ ¶ 50-51.)

As stated supra, Plaintiffs have mortgages serviced by CitiMortgage. (Compl. ¶ ¶ 61, 65 & 70.) As to Plaintiffs Gloria and Ronald Stitt, Defendants " continually assessed fees for default-related services, including property inspections . . . as early as April 19, 2010." ( Id. ¶ 62.) The Stitts allege on information and belief that they " paid some or all of the unlawful fees assessed on their account" but cannot provide detail of every fee assessed because Defendants maintain the complete accounting. ( Id. ¶ 63.) As to Plaintiff Judi Shatzer, Defendants " continually assessed fees for default-related services, including property inspections . . . [f]rom January 2009 to February 2012 . . . for more than 30 property inspections." ( Id. ¶ 66.) Plaintiff Shatzer alleges on information and belief that she " paid some or all of the unlawful fees assessed on her account." ( Id. ¶ 67.) As to Plaintiffs Mark and Terri Louise Zirlott, Defendants " continually assessed fees for default-related services, including property inspections . . . as early as April 19, 2009. From April 2009 to March 2010, Citi assessed fees for twelve property inspections." ( Id. ¶ 71.) The Zirlotts allege on information and belief that they " paid some or all of the unlawful fees assessed on their account." ( Id. ¶ 72.)

As to each Named Plaintiff, the mortgage statements identified the fees as " Delinquency Expenses" but " did not adequately disclose the true nature of the fees assessed" nor did the statements disclose that " such fees may contain mark-ups nor did they state exactly which of those categories of fees were assessed against [Plaintiffs' accounts]." ( Id. ¶ ¶ 62, 66 & 71.) In addition, they did not state if the fees included more than one category of fee. As such, the Named Plaintiffs are unable to know if there were other categories of fees that were assessed under the " Delinquency Expenses" description. ( Id. ) Plaintiffs allege " Defendants are under a continuous duty to disclose to [them and class members] the true character, quality,

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and nature of the fees they assess on borrowers' accounts." ( Id. ¶ 74.)

In addition, borrowers have suffered harm resulting from: (i) charges for default-related services accumulated over time such that borrowers were driven further into default and/or ensured to stay in default; (ii) damage to credit scores; (iii) the inability to obtain favorable interest rates on future loans because of their default; and (iv) in some cases, foreclosure. (Compl. ¶ ¶ 54-58.)

On the basis of the allegations summarized above, Plaintiffs bring this action on behalf of a class of " [a]ll residents of the United States of America who had a loan serviced by CitiMortgage and whose accounts were assessed fees for default-related services, including Broker's Price Opinions, and inspection fees, at any time, continuing through the date of final disposition of this action." (Compl. ¶ 79.) The Complaint alleges four claims.

Plaintiffs' first claim alleges a violation of RICO, 18 U.S.C. section 1962(c). (Compl. ¶ ¶ 93-114.) The alleged " enterprise" consisted of: (i) Citibank, N.A. and CitiMortgage, Inc., including their directors, employees, and agents; (ii) their subsidiaries and affiliated companies; and (iii) their " property preservation" vendors[2] and their real estate brokers who provide BPOs. ( Id. ¶ ¶ 4, 9, 47 & 96.) This " association-in-fact" enterprise is an " ongoing, continuing group . . . of persons and entities associated together for the common purpose of limiting costs and maximizing profits by fraudulently concealing assessments for unlawfully marked-up and/or unnecessary third party fees for default-related services on borrowers' accounts." ( Id. ¶ 97; see id. ¶ 47.)

The enterprise members--while " systematic[ally] linke[ed]" through contractual and financial ties--act according to policies established by Citi executives but also " have an existence separate and distinct from the enterprise." (Compl. ¶ ¶ 98-99.) Plaintiffs allege that Defendants' scheme constituted " racketeering activity" based on acts of mail and wire fraud (18 U.S.C. sections 1341 and 1343), by which Defendants fraudulently concealed material information and used the mail and wires to obtain money from borrowers using fraudulent pretenses. ( Id. ¶ ¶ 100-102.) Plaintiffs seek treble damages under RICO.

Plaintiffs' second claim alleges a conspiracy to violate RICO. (Compl. ¶ ¶ 115-119.) Defendants allegedly conspired to violate RICO as summarized above, were aware of the nature and scope of the enterprise's unlawful scheme, and agreed to participate in said scheme. Plaintiffs' third claim alleges that Defendants have been unjustly enriched by their wrongful acts and omissions of material fact. ( Id. ¶ ¶ 120-129.) Plaintiffs seek restitution and an order disgorging all profits obtained by Defendants. Plaintiffs' fourth claim alleges fraud as summarized above. ( Id. ¶ ¶ 130-141.)

In the pending Motion, Defendants argue that Plaintiffs have fundamentally failed to allege Citi did anything wrong because: (i) property inspections are common occurrences when loans are in default; (ii) Plaintiffs fail to allege that Citi had a duty to provide an itemization of fees on mortgage statements; and (iii) Citi charged market rates for BPOs. (Mot. at 1-2.) Defendants argue that the RICO claims must be dismissed because Plaintiffs lack standing, but even if they have RICO standing, the RICO and fraud

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claims fail to allege the required elements with particularity. Defendants further argue that the conspiracy claim fails because Plaintiffs have not pled an underlying RICO scheme, and have not sufficiently alleged each Defendant knew about nor agreed to facilitate the alleged RICO conduct. ( Id. at 2.) Finally, Defendants argue the unjust enrichment claim cannot proceed where a valid contract governs the same subject matter. ( Id. at 2-3.)

Plaintiffs oppose all of these arguments and request leave to amend if the Court dismisses any claim. The Court addresses each claim in turn.

II. Discussion

A. Legal Standards Under Fed.R.Civ.P. 12(b)(6)

Pursuant to Fed.R.Civ.P. 12(b)(6), a complaint may be dismissed against a defendant for failure to state a claim upon which relief may be granted against that defendant. Dismissal may be based on either the lack of a 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); Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). For purposes of evaluating a motion to dismiss, the court " must presume all factual allegations of the complaint to be true and draw all reasonable inferences in favor of the nonmoving party." Usher v. City of Los Angeles, ...

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