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Grieves v. MTC Financial Inc.

United States District Court, N.D. California, San Jose Division

July 25, 2017

CHRISTOPHER GRIEVES, Plaintiff,
v.
MTC FINANCIAL INC., et al., Defendants.

          ORDER GRANTING WITH PREJUDICE JPMORGAN CHASE BANK'S AND MTC FINANCIAL'S MOTIONS TO DISMISS RE: DKT. NO. 18, 34, 42

          LUCY H. KOH United States District Judge.

         Plaintiff Christopher Grieves (“Grieves”) sues Defendants MTC Financial Inc. (“MTC”), JPMorgan Chase Bank, N.A. (“Chase”), California Reconveyance Company (“CRC”), U.S. Bank, N.A. (“U.S. Bank”), and U.S. Bank Trust, N.A. (collectively, “Defendants”), for causes of action relating to Grieves's residential mortgage. Before the Court are Chase's and MTC's motions to dismiss the First Amended Complaint (“FAC”). ECF Nos. 18, 34. MTC has also filed a motion to join Chase's motion to dismiss the FAC. ECF No. 42. The Court finds these matters suitable for resolution without oral argument, vacated the July 20, 2017 on Chase's motion to dismiss, and hereby VACATES the August 17, 2017 hearing on MTC's motion to dismiss. Having considered the submissions of the parties, the relevant law, and the record in this case, the Court hereby GRANTS MTC's motion to join Chase's motion to dismiss, and GRANTS with prejudice Chase's and MTC's motions to dismiss the FAC.

         I. BACKGROUND

         A. Factual Background

         1. Plaintiff's Deed of Trust

         On May 9, 2006, Grieves borrowed $656, 000.00 from Washington Mutual Bank, N.A. (“WaMu”), secured by a deed of trust encumbering property located at 2618 Estates Drive in Aptos, California (“the Property”). ECF No. 3-22 (First Amended Complaint, or “FAC”), at ¶¶ 3, 105. The deed of trust (“Deed of Trust”) was recorded against the Property on May 17, 2006. Id. ¶ 111; see Chase RJN, Ex. 1. California Reconveyance Company (“CRC”) was listed as the Trustee. Id. ¶ 114.

         Grieves alleges that, although WaMu recorded the May 17, 2006 Deed of Trust, Grieves's residential home loan “was the product of an illegal table-funded loan originated and perpetrated by WaMu.” Id. ¶ 112. Specifically, Grieves alleges that, “[f]rom 2000 to 2008, ” WaMu was able to originate “trillions in mortgage loans” because WaMu was able to “‘securitize' the mortgages into privately held investment conduits that allowed [WaMu] to draft [its] own underwriting guidelines.” Id. ¶ 17. Grieves alleges that “[o]nce the mortgages were securitized, ” the mortgages were owned by “special purpose entities” and the mortgages were taken off of WaMu's balance sheets. Id. ¶ 18. Grieves alleges that, “[a]lthough securitization was originally created as a post-origination transaction where bundles of mortgages [were] pooled together and sold off in bulk to [special purpose entities], as demand grew for mortgage-back[ed] securities in the market place, originators started creating [special purpose entities] prior to any loan being originated.” Id. ¶ 19. According to Grieves, these special purpose entities could “anonymously fund loans based off of any underwriting guidelines” allowed. Id. Grieves alleges that “[i]n these ‘stranger funded' transactions, ” WaMu called itself a “lender, ” but WaMu in fact drew its loan funds from these “pre-funded [special purpose entities].” Id. ¶ 20. In effect, Grieves states, WaMu acted “as a broker, that facilitated these stranger-funded loans, maintaining only” the servicing rights to Grieves's mortgage. Id. ¶ 20.

         Grieves alleges that this “process of stranger funding loans is commonly known as ‘table-funding, '” which is a process in which “the brokering originator brings a third-party funding source (usually unknown to the broker) to the closing table at escrow to complete the transaction.” Id. at 21. Grieves alleges that, because his home loan was “table funded” at its origination, Grieves's Deed of Trust was void ab initio. See, e.g., id. ¶ 129.

         2. Closing of WaMu, Chase's Assignment of the Deed of Trust to U.S. Bank, and First Notice of Default

         On September 25, 2008, the Office of Thrift Supervision closed WaMu and appointed the Federal Deposit Insurance Corporation (“FDIC”) as Receiver. On that same date, Chase entered into a Purchase and Assumption Agreement (“P&A Agreement”) with the FDIC, through which Chase acquired WaMu's assets. See Pl. RJN, Ex. B.

         On June 16, 2011, Chase assigned Grieves's Deed of Trust to U.S. Bank. Id. ¶ 118; see Chase RJN, Ex. 2. The assignment was recorded on June 23, 2011. See FAC ¶118; Chase RJN, Ex. 2. Grieves alleges that, despite this “purported” assignment of the Deed of Trust to U.S. Bank, Grieves's Deed of Trust was “void at that time” because of WaMu's illegal table funding. FAC ¶ 119. Grieves further alleges that U.S. Bank never provided Grieves with “any written notice whatsoever of the assignment.” Id. ¶ 124.

         On June 23, 2011, CRC as Trustee recorded a Notice of Default and Election to Sell Under Deed of Trust against the Property. Id. ¶ 127-28; see Chase RJN, Ex. 3. Grieves alleges that “[a]t the time of the execution and recording of the [June 23, 2011] Notice of Default, ” Grieves's Deed of Trust “had been void for five (5) years” because of WaMu's illegal table funding. Id. ¶ 129.

         On September 26, 2011, CRC as Trustee executed and recorded a Notice of Trustee's sale. Id. ¶ 132; see RJN, Ex. 4. Grieves alleges, however, that “the Grieves [Deed of Trust] was void at that time” because of WaMu's illegal table funding. FAC ¶ 132.

         3. The Potter Action in State Court

         Also in 2011, Grieves and 426 other individuals (“the Potter Plaintiffs”) brought suit in the Superior Court for the County of Los Angeles against Chase; Chase Home Finance, LLC; Long Beach Mortgage Company; EMC Mortgage Corporation; Bear Stearns; EAppraiseit; First American Corporation; CRC; and the FDIC (collectively, “the Potter Defendants”). See Chase RJN, Ex. 9 (“Potter Compl.”). The operative complaint in the state court lawsuit, Potter, v. JPMorgan Chase Bank, N.A., Case No. BC459627 (hereinafter, “the Potter Action”), was the fourth amended complaint, which was filed on December 21, 2012. Id.

         The fourth amended complaint in the Potter Action was 150 pages in length. Id. The fourth amended complaint alleged a “massive and centrally directed fraud by which [the Potter] Defendants placed homeowners into loans which [the Potter] Defendants knew [the Potter] Plaintiffs could not afford, abandoned industry standard underwriting guidelines, and intentionally inflated the appraisal values of homes throughout California for the sole purpose of herding as many borrowers as they could into the largest loans possible which [the Potter] Defendants would then sell on the secondary market.” Id. ¶ 2. The Potter Action alleged that, beginning in early 2000, WaMu “shifted its focus from originating a more limited number of prudently-underwritten safe loans to an all-out volume model in which” WaMu sold home loans to secondary market investors. Id. ¶ 76. Further, the Potter Action complaint alleged that WaMu “fuel[ed] the ever growing securitization machine” by originating and funding new loans through various divisions of WaMu. Id. ¶¶ 77-79. WaMu “sold or securitized most of the subprime home loans [WaMu] acquired, ” id. ¶ 88, which caused a “race to the bottom” wherein the Potter Defendants “disregarded underwriting standards” and “induced [the Potter] Plaintiffs into mortgage products they knew would devastate both [the Potter] Plaintiffs and the economy, ” “[a]ll in the name of selling mortgages on the secondary market for spectacular profit.” Id. ¶ 99.

         The Potter Action complaint alleged that, from 2003 to 2008, the Potter Defendants misrepresented and concealed “[t]hat [the Potter] Defendants were in fact dependent on selling loans [they] originated into the secondary mortgage market, ” and that the Potter Defendants had “morphed into a loan conveyor belt, packaging loans with little if any regard for their underwriting standards, and selling those loans at extravagant profit to investors on the secondary market.” See Id. at ¶ 213. The Potter Plaintiffs alleged that, “[a]s a result of [the Potter] Defendants' improper scheme, [the Potter] Plaintiffs lost equity in their homes [and] their credit ratings and histories were damaged or destroyed.” Id. ¶ 119.

         The Potter Action complaint further alleged that the Potter Defendants, including WaMu and Chase, made money by initiating foreclosure proceedings “without having any true possessory or ownership interest in the deed of trust.” Id. ¶ 274. According to the Potter Plaintiffs, “[s]ecuritizing a loan generally entails the sale of a loan to private investors, ” which the Potter Plaintiffs alleged resulted in the ultimate note holders being “many, disparate and unrelated entities, no one of which can lawfully enforce the note without the participation of all the other anonymous note holders to partial interests in a single home loan.” Id. ¶ 277. The Potter Plaintiffs alleged that the Potter Defendants continued to demand payments under the Potter Plaintiffs' respective promissory notes and deeds of trust, despite the fact that the Potter Defendants “have no proof that they own the notes and deeds of trust they seek to enforce.” Id. ¶ 278.

         Counts One, Two, and Three of the operative Potter Action complaint alleged that the Potter Defendants engaged in fraudulent concealment, intentional misrepresentation, and negligent misrepresentation by, beginning in January 2003, “pool[ing] [home] loans, fraudulently inflat[ing] the value of these pooled loans[, ] and then sell[ing] the pools to unsuspecting investors for grossly unmerited profits.” See, e.g., id. ¶¶ 327, 358. The Potter Plaintiffs alleged that the Potter Defendants failed to disclose, among other facts, that the Potter Defendants “were selling their loans to investors rather than holding their loans, ” and that the Potter “Defendants were making loans simply to create sufficient product to sell to investors for profit.” Id. ¶¶ 333, 382. The Potter Plaintiffs alleged that, as a proximate result of the Potter Defendants' conduct, the Potter Plaintiffs suffered “loss of equity in their houses, costs and expenses related to protecting themselves, reduced credit scores, unavailability of credit, reduced availability of goods and services tied to credit ratings, increased costs of those services, as well as fees and costs.” Id. ¶¶ 350, 399.

         Count Four alleged that Defendants violated California's UCL. See Id. ¶ 416. Among other allegations, the complaint alleged that the Potter Defendants violated the Patriot Act by “failing to adequately identify the source of funds used to fund mortgages and fund the securitization pools that purchased mortgages, ” id. ¶ 432; that the Potter Defendants “violated California common law by pursuing foreclosures through mere nominees . . . and without proof [Defendants] owned the notes and deeds of trust underlying their foreclosure actions, ” id. ¶ 435; and that the Potter Defendants violated UCC 3-301 by “foreclosing on [the Potter] Plaintiffs without being ‘holders' or in possession of their respective Notes, ” id. ¶ 439. According to Plaintiffs, Defendants' violations caused “loss of equity in [the Potter Plaintiffs'] houses, costs and expenses related to protecting themselves, reduced credit scores, unavailability of credit, increased costs of credit, reduced availability of goods and services tied to credit ratings, increased costs of those services, as well as fees and costs.” Id. ¶ 449.

         In addition, a subset of the Potter Plaintiffs whose homes had already been sold at foreclosure-a subset of plaintiffs that did not include Grieves-alleged in Count Five of the Potter Action that the Potter Defendants had engaged in wrongful foreclosure. See Id. ¶ 459.

         After the Potter Plaintiffs filed the fourth amended complaint, the FDIC removed the Potter Action to the U.S. District Court for the Central District of California on February 8, 2013, and asserted federal jurisdiction because the FDIC was a defendant. See Potter v. JPMorgan Chase Bank, N.A., 2013 WL 1912718, at *1 (C.D. Cal. May 8, 2013). However, on May 8, 2013, the district court granted FDIC's motion to dismiss FDIC as defendant, and the district court declined to exercise supplemental jurisdiction over the state law claims. Id. Accordingly, the Potter Action was remanded to the Los Angeles County Superior Court on May 10, 2013. Id.

         On June 2, 2014, the Los Angeles County Superior Court issued an order in the Potter Action dismissing the fourth amended complaint with prejudice. See Chase RJN, Ex. 10. The state court noted that the fourth amended complaint “track[ed] the allegations in Ronald v. Bank of America, 198 Cal.App.4th 862 (Cal.Ct.App. 2011), in addition to another set of cases against Wells Fargo, the Wells Fargo Bank Mortgage Cases, Coordinated Docket No. JCCP4711. Id. at 6. Indeed, because the state court found the allegations in the Potter Action were so similar to these earlier cases, the state court concluded that “repetition is pointless” and the state court incorporated the reasoning of Ronald and the Wells Fargo Bank Mortgage Cases into the state court's order dismissing the Potter Action. Id. The state court also noted that the Potter Plaintiffs were “trying to fight on in the face of their defeat against FDIC in federal court on the theory that somehow [Chase] is responsible for the pre-liquidation torts of WaMu, ” which had already been rejected. Id. at 7. Accordingly, the state court sustained Chase's demurrer to the fourth amended complaint without leave to amend. Id. at 6-7.

         On July 18, 2014, the state court entered judgment in favor of Chase and against the Potter Plaintiffs. RJN, Ex. 11.

         4. Substitution of MTC as Trustee under Grieves's Deed of Trust, and the 2016 Trustee's Sale

         On March 3, 2015, U.S. Bank recorded a Substitution of Trustee, which substituted MTC as Trustee under the Deed of Trust. See Chase RJN, Ex. 5.

         On April 23, 2015, MTC recorded a Notice of Default and Election to Sell Under Deed of Trust against the Property. FAC ¶ 133; see Chase RJN, Ex. 6. According to Grieves, the Deed of Trust was void at the time that MTC recorded the Notice of Default because of WaMu's illegal table funding. See FAC ¶ 133.

         On December 3, 2015, MTC recorded a Notice of Trustee's Sale against the Property, which scheduled a Trustee's Sale for January 13, 2016. See Chase RJN, Ex. 7. On January 20, 2016, MTC recorded a Trustee's Deed upon sale. See Chase RJN, Ex. 8.

         B. Procedural History of the Instant Case

         On March 15, 2016, Grieves and 7 other individuals filed a complaint against MTC and Chase in Orange County Superior Court. See ECF No. 1-2. The complaint alleged only state law causes of action for (1) intentional misrepresentation; (2) negligent misrepresentation; (3) violation of California's Homeowner Bill of Rights, Cal. Civ. Code ยง 2924.17; (4) violation of California's Homeowner Bill ...


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