United States District Court, S.D. California
WILLIAM Q. HAYES, District Judge.
The matter before the Court is the Motion to Dismiss Plaintiff's First Amended Complaint filed by all Defendants. (ECF No. 21).
On November 12, 2013, Plaintiff Scott Marquette commenced this action by filing a Complaint in this Court. (ECF No. 1). On March 3, 2014, Defendants Bank of America, N.A. ("Bank of America"), Federal Home Loan Mortgage Corporation S/A-3 day ARC-125949 ("Freddie Mac"), and Mortgage Electronic Registration Systems, Inc. ("MERS") filed a motion to dismiss the Complaint. (ECF No. 9). On July 30, 2014, the Court issued an Order dismissing the Complaint without prejudice. (ECF No. 13).
On October 3, 2014, Plaintiff filed the First Amended Complaint ("FAC"), which is the operative pleading. (ECF No. 20). On October 17, 2014, Defendants filed the Motion to Dismiss Plaintiff's First Amended Complaint, accompanied by a Request for Judicial Notice. (ECF No. 21). On November 10, 2014, Plaintiff filed an opposition. (ECF No. 22). On November 17, 2014, Defendants filed a reply. (ECF No. 24).
II. Allegations of the FAC
On May 24, 2007, Plaintiff entered into two "consumer credit transactions" to "refinance his principal dwelling/residence located at 2625 Pirineos Way, #228, Carlsbad, California 92009, by signing two promissory notes payable to Mortgage Investors Group, the originating lender." (ECF No. 20 at 6). The first promissory note in the amount of $324, 000.00 was secured by a first deed of trust against Plaintiff's residence (the "First Loan"). The second promissory note in the amount of $72, 000.00 was secured by a second deed of trust against Plaintiff's residence (the "Second Loan"). The funds from the transactions were used to pay off the existing mortgages secured by Plaintiff's residence, "which were originated by a different creditor, First Franklin Home Loans, and not Mortgage Investors Group." Id. at 7. "The Transactions did not involve new advances, nor did the Transactions involve new credit being given by First Franklin Home Loans, the creditor for the existing prior mortgages." Id. "The Transactions were subject to a finance charge and were payable by written agreement in more than four installments." Id.
"On May 24, 2007, Plaintiff met with a notary public and a mortgage broker at the mortgage broker's office in Encinitas, California." Id. at 8. The mortgage broker had Plaintiff sign numerous documents related to the loan transactions at issue. All documents signed by Plaintiff were taken by the mortgage broker, and the mortgage broker then handed Plaintiff another packet of documents and told Plaintiff that the packet contained copies of the documents that Plaintiff had just signed.
The packet of documents handed to Plaintiff and represented by the mortgage broker to be copies of the documents that Plaintiff had just signed were not exact copies of the documents that Plaintiff had signed, and instead, contained three copies of the Notice of Right To Cancel for each loan with incorrect dates and blank lines for the date of expiration of the right to cancel. All copies of the Notices of Right To Cancel received by Plaintiff contained an incorrect date for the "date of the transaction", i.e., May 23, 2007, and did not contain the date of expiration of the right to cancel, i.e., the space was left blank.
Id. at 8-9.
Shortly after Plaintiff consummated the transactions, servicing for both the First Loan and Second Loan was transferred to Countrywide Home Loans, Inc., which later became known as Bank of America. In 2010, Bank of America identified Freddie Mac as the assignee/owner of the First Loan. Bank of America never identified the assignee/owner of the Second Loan.
On March 28, 2009, Plaintiff mailed a Rescission Notice pursuant to 15 U.S.C. § 1635 and a Qualified Written Request pursuant to 12 U.S.C. § 2605 to Countrywide Home Loans, Inc. and Mortgage Investors Group. Bank of America has failed to respond to the Rescission Notice and Qualified Written Request in the manner required by law.
"The Rescission Notice received by defendant BofA provided that Plaintiff disputed the debts, was represented by an attorney and all communications regarding the debts were to be directed to Plaintiff's attorney." Id. at 10. "From after March 28, 2009 through early 2013, despite knowing that Plaintiff was represented by counsel, defendant BofA attempted to communicate and communicated with Plaintiff on numerous occasions in an attempt to collect the disputed debts." Id. "From March 28, 2009 through present, defendant BofA has attempted on numerous occasions to collect fees and charges that are not lawfully permitted to be added to the alleged debt." Id. at 10-11. In early 2013, defendant BofA, through its representative/employee came to Plaintiff's residence when Plaintiff was not present and communicated information about the disputed debt to Plaintiff's roommate." Id. at 11.
On March 11, 2010, Plaintiff and Defendants entered into a written tolling agreement to allow time for the parties to explore settlement options and negotiations. On July 23, 2012, Plaintiff received notice from Bank of America that the Second Loan was forgiven "as a result of the Department of Justice and State Attorneys General global settlement with major mortgage services, including Bank of America, N.A." Id. at 13. On October 8, 2013, Bank of America and Freddie Mac gave notice of termination of the Tolling Agreement as of November 13, 2013. Plaintiff filed the Complaint on November 12, 2013, prior to the expiration of the Tolling Agreement.
As a result of Defendants' failures to act in compliance with TILA, RESPA, and the California Rosenthal Act, Plaintiff has suffered emotional distress and has "spent at least 20 hours of time compiling information and completing at least 12 separate Loan Modification Applications" for Bank of America. Id. at 15.
The FAC asserts three claims: (1) violation of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601, et seq., against Freddie Mac and MERS; (2) violation of the California Rosenthal Act ("RFDCPA"), Cal Civ. Code §§ 1788, et seq., against Bank of America; and (3) violation of the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601, et seq., against Bank of America. The FAC requests declaratory relief, injunctive relief, and rescission on the TILA claim, and statutory damages, actual damages, attorneys' fees, and costs on all claims.
III. 12(b)(6) Standard
Federal Rule of Civil Procedure 12(b)(6) permits dismissal for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). Federal Rule of Civil Procedure 8(a) provides that "[a] pleading that states a claim for relief must contain... a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).
"[A] plaintiff's obligation to provide the grounds' of his entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Fed.R.Civ.P. 8(a)). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citation omitted). "[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. (citation omitted). "When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679. "In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotations and citation omitted).
The FAC alleges two counts in support of Plaintiff's first claim for violation of TILA against Freddie Mac and MERS. Count one alleges that the First Loan was subject to Plaintiff's right of rescission, as described by 15 U.S.C. § 1635 and Regulation Z, 12 C.F.R. § 226.23. Count one alleges that Plaintiff did not receive all required material disclosures, which gave Plaintiff a continuing right to rescind the First Loan for up to three years after consummation of the transaction. Count one further alleges that Plaintiff timely exercised his option to rescind the First Loan on March 28, 2009. Count two of the TILA claim seeks damages for Freddie Mac's and MERS' alleged failure to comply with TILA's rescission provisions in response to Plaintiff's March 28, 2009 rescission notice.
Defendants contend that Plaintiff's TILA claim must be dismissed because the claim is insufficiently pled for the following reasons: rescission is not available for residential mortgage transactions or refinancing transactions; Plaintiff fails to allege credible tender; and Plaintiff has waived its right to rescission. Defendants also contend that Plaintiff has failed to sufficiently allege any TILA violation because Plaintiff's allegations remain vague and conclusory and "fails as to Defendants Freddie Mac and MERS because he still does not allege any facts showing they had any involvement in the origination of Plaintiff's First Loan." (ECF No. 21-1 at 17). Defendants contend that Plaintiff's damages allegations are conclusory and that Plaintiff must plead detrimental reliance. Defendants request that Plaintiff's TILA claim be dismissed with prejudice.
Plaintiff contends that the loan transactions at issue are not residential mortgage transactions or refinancing transactions that are exempt from TILA's requirements. Plaintiff contends that it need not allege credible tender, citing Merritt v. Countrywide Fin. Corp., 759 F.3d 1023, 1029-33 (9th Cir. 2014), and that he has alleged credible tender by offering to sell the subject property to tender the proceeds. Plaintiff contends that Defendant relies on inapplicable state law in contending that Plaintiff has waived his right to rescission. Plaintiff contends that the FAC and the loan documents that Defendant seeks judicial notice of demonstrate that MERS was involved in the original loan transaction and that Freddie Mac can be liable as an "assignee." (ECF No. 22 at 24). Plaintiff contends that he need not plead detrimental reliance for seeking damages solely based on Defendants' failure to respond to or honor Plaintiff's rescission notice.
i. Rescission of Residential Mortgages and Mortgage Refinancing Transactions under TILA
Defendants contend that Plaintiff is not entitled to rescission under TILA because the First Loan is a "residential mortgage transaction, " as defined by 15 U.S.C. section 1602(x), which is excluded from the right of rescission under section 1635(e). (ECF No. 21-1 at 12-13). Defendants contend that Plaintiff is not entitled to rescission under TILA because the First Loan is a "refinance transaction, " which is also excluded from the right of rescission under section 1635(e). Plaintiff contends that the First Loan is not a "residential mortgage transaction" because it was not made to "purchase or acquire" Plaintiff's residence. (ECF No. 22 at 19). Plaintiff contends that the First Loan is a refinance transaction "by a new creditor" and therefore not excluded by section 1635(e). Id.
15 U.S.C. section 1635(a) provides, in relevant part:
Except as otherwise provided in this section, in the case of any consumer credit transaction (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction....
15 U.S.C. § 1635(a). Regulation Z similarly provides that "[i]n a credit transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction, except for transactions described in paragraph (f) of this section." 12 C.F.R. § 226.23(a)(1). Certain transactions are excluded from the right to rescission, including: "[a] residential mortgage transaction as defined in section 1602(w)... [and] a transaction which constitutes a refinancing or consolidation (with no new advances) of the principal balance then due and any accrued and unpaid finance charges of an existing extension of credit by the same creditor secured by an interest in the same property..." 15 U.S.C. § 1635(e); see also 12 C.F.R. § 226.23(f) ("The right to rescind does not apply to... [a] residential mortgage transaction... [or] [a] refinancing... by the same creditor of an extension of credit already secured by the consumer's principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation"). Section 1602(x) defines "residential mortgage transaction" as a "transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer's dwelling to finance the acquisition or initial construction of such dwelling." 15 U.S.C. § 1602(x).
The FAC alleges that the "funds from the Transactions were used to pay off the existing prior mortgages secured by Plaintiff's primary residence/dwelling, which were originated by a different creditor, First Franklin Home Loans, and not Mortgage Investors Group." (ECF No. 20 at 7). The Court finds that the allegations of the FAC do not show that the loan transactions at issue are "residential mortgage transactions, " as defined in 15 U.S.C. section 1602(x), which are excluded from rescission by section 1635(e)(1). The facts alleged do not show that the loans were to "finance the acquisition or initial construction" of Plaintiff's dwelling. 15 U.S.C. § 1602(x). The Court further finds that the allegations of the FAC do not show that the loan transactions at issue are excluded from rescission by section 1635(e)(2) because the FAC alleges that the loan transactions were "originated by a different creditor, " not "the same creditor." (ECF No. 20 at 7); 15 U.S.C. § 1605(e)(2); see also Harris v. OSI Fin. Servs., Inc., 595 F.Supp.2d 885, 889-90 (N.D. Ill. 2009) ("[The] right to rescind the entire amount of the loan applies even in a case where the borrower is seeking a loan to refinance an existing loan from a different prior creditor."). The Court concludes that the allegations of the FAC show that the loans at issue do not fall within the transactions excluded from the right to rescission pursuant to 15 U.S.C. section 1635(e). Defendants' motion to dismiss Plaintiff's TILA claim on the ground that the loans at issue are not covered by TILA is denied.
Count two of the TILA claim seeks damages for Freddie Mac's and MERS' alleged failure to comply with TILA's rescission provisions in response to Plaintiff's March 28, 2009 rescission notice. The FAC alleges that "[o]n or about March 28, 2009, pursuant to 12 CFR 226.23, Plaintiff exercised his right to rescind the First Loan Transaction." (ECF No. 20 at 19). The FAC further alleges that "Defendants Freddie Mac and MERS failed to properly respond to Plaintiff's rescission notice and failed to comply with the rescission provisions of 12 CFR 226.23." Id.
Defendants contend that Plaintiff's damages allegations are conclusory and that Plaintiff must plead detrimental reliance. Defendants cite to In re Smith, 289 F.3d 1155 (9th Cir. 2002) for the proposition that a plaintiff must plead and prove detrimental reliance to recover damages under TILA. Plaintiff contends that it need not plead detrimental reliance for seeking damages solely based on Defendants' failure to respond to or honor Plaintiff's rescission notice. Plaintiff cites to Lyon v. Chase Bank USA, N.A., 656 F.3d 877, 887 (9th Cir. 2011) for the proposition that detrimental reliance in TILA cases need only be shown where the claim is based on misrepresentations or inadequate or missing disclosures.
15 U.S.C. section 1640(a) provides, in relevant part, that "any creditor who fails to comply with any requirement imposed under this part, including any requirement under section 1635 of this title... is liable to such person in an amount equal to the sum of... any actual damage sustained by such person as a result of the failure... [and] in the case of an individual action relating to a credit transaction not under an open end credit plan that is secured by real property or a dwelling, not less than $400 or greater than $4, 000...." 15 U.S.C. § 1640(a). In In re Smith, a bankruptcy court awarded the debtor statutory damages for a violation of 15 U.S.C. section 1638(a)(3) & (4) for failing to "conspicuously disclose and define the finance charge' and annual percentage rate'" in mortgage loan documents. 289 F.3d at 1156. The bankruptcy court found that the debtor was not entitled to actual damages because "she failed to show... any actual damages under 15 U.S.C. § 1640(a)(1)." Id. at 1157. The Ninth Circuit Court of Appeals affirmed, reasoning that "[w]e join other circuits and hold that in order to receive actual damages for a TILA violation, i.e., an amount awarded to a complainant to compensate for proven injury or loss, ' [citation.], a borrower must establish detrimental reliance." Id. (citing Black's Law Dictionary 394 (7th ed. 1999)).
In Lyon, the defendant admitted to violating 15 U.S.C. section 1666(a) by "failing to provide a written explanation in response to [the plaintiff's] billing dispute" and by "attempting to collect the disputed charge and reporting it as delinquent to credit agencies." 656 F.3d at 885. The defendant nevertheless contended that "evidence of detrimental reliance" was required for the plaintiff to recover "actual damages" under 15 U.S.C. section 1640(a). The Ninth Circuit Court of Appeals rejected that contention, reasoning that in the case of a violation of section 1666(a), "[t]here is simply no relevant disclosure or conduct under these circumstances that [the plaintiff] could have relied upon." Id. at 887. "If [the defendant's] argument were to be followed in cases of defiant refusal to comply with § 1666(a)(3)(B), [the defendant] has discovered that silence is truly golden." Id. "To require evidence of detrimental reliance on an unmade explanation would necessarily bar recovery of actual damages because such evidence could never exist." Id. at 887-88.
In this case, Plaintiff requests statutory damages in addition to actual damages in count two of Plaintiff's TILA claim. See 15 U.S.C. § 1640(a) (providing for both actual damages and statutory damages for violations of section 1635); see also Stephenson v. Chase Home Fin. LLC, No. 10cv2639, 2011 WL 2006117, at *3, *5 (S.D. Cal. May 23, 2011) (finding that the failure to adequately allege actual damages for violations of 15 U.S.C. sections 1641(f)(2) and 1635 is "an insufficient ground for dismissal" because "Plaintiffs are entitled to statutory damages pursuant to 15 U.S.C. Section 1640(a)(2)(A)(iv)"). The Court need not resolve whether Plaintiff must plead or prove "detrimental reliance" to seek actual damages pursuant to 15 U.S.C. section 1640(a) for an ...