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Smith v. Ygrene Energy Fund, Inc.

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

July 26, 2017

GRACHIAN L. SMITH, et al., Plaintiffs,
YGRENE ENERGY FUND, INC., et al., Defendants.


          LAUREL BEELER United States Magistrate Judge.


         This is a fraud suit over home-improvement loans. The plaintiffs allege that the defendants falsely told them that the loans would attach to their properties (like property taxes) and, correspondingly, failed to reveal that the loans would have to be repaid when a property was sold or refinanced. The plaintiffs claim that, contrary to the defendants‘ representations, they indeed had to repay the loans when they sold or refinanced their homes - at which point they incurred prepayment penalties. The plaintiffs also claim that the defendants charged them various improper fees.

         The defendants now move to dismiss the complaint.[1] They mainly argue that the plaintiffs‘ fraud claims do not meet the "heightened pleading" standard of Federal Rule of Civil Procedure 9(b). They make additional arguments against certain claims. The parties have consented to magistrate jurisdiction. See 28 U.S.C. § 636(c).[2] The court can decide this issue without a hearing. See Civil L.R. 7-1(b). For the reasons given below, and as more specifically described below, the court now partly grants the defendants‘ motion.


         1. The Parties and Jurisdiction

         The named plaintiffs are California or Florida residents and homeowners.[4] They sue on their own behalf and on behalf of national classes and California and Florida subclasses. Defendant Ygrene Energy Fund, Inc. is alleged to be a Delaware corporation with its headquarters in Sonoma County, California; defendant Ygrene Energy Fund Florida, LLC, a limited-liability company headquartered in Tampa, Florida.[5] The plaintiffs allege that at least one member of a proposed national class, a class "numbering in the tens of thousands, " will be from a state "different . . . [from] that of Defendants." They also allege an amount in controversy exceeding $5 million.[6] The court thus has subject-matter jurisdiction of this dispute under the "minimal diversity" rule of the Class Action Fairness Act. 28 U.S.C. § 1332(d)(2).

         2. PACE Loans

         The subject of this dispute are "Property Assessed Clean Energy" (PACE) loans. ¶ 19. These are home-improvement loans that finance environmental upgrades to residential properties (such as solar panels or better windows).[7] PACE loans take an unusual form. Unlike traditional loans, PACE loans do not involve a straightforward extension of credit from a lender, who then receives periodic repayments directly from the borrower. Instead, PACE loans are created as tax liens on the given property; homeowners then repay the loan as a special tax assessment.

         PACE loans reflect a partnership between state or local governments, on the one hand, and private finance companies, like Ygrene, on the other. The government creates a special tax-assessment district in which PACE loans will be made. The plaintiffs explain:

[Residential property owners are permitted to opt into a special assessment district to receive financing for energy improvements and retrofits on their homes. The loans are repaid through an annual assessment on the owner‘s property tax bill. A lien in the amount of the loan is placed on the home."[8]

         In the end, "PACE loans are no different than private loans except that the terms are less favorable when compared to conventional loans, and instead of a monthly billing statement, borrowers receive an annual tax assessment."[9]

         The defendants market and administer PACE programs, provide "initial funding" for PACE loans, and ultimately receive the homeowners‘ payments.[10] They also securitize the bonds that result from individual loans and sell these securities to investors. As the plaintiffs more fully describe matters:

Ygrene is the nation‘s leading, multi-state provider of residential and commercial . . . [PACE] financing.[11]
. . . .
Ygrene acts as a lender by using private capital to provide financing to property owners in the PACE districts it administers. Ygrene‘s capital sources and structure include a $100 million revolving line of credit for the initial funding of PACE loans.[12]
Funding for a specific project is accomplished by the special PACE district‘s . . . issuing revenue bonds secured by special tax liens. . . . As part of the agreement between the district and Ygrene, the district sells and assigns all of its rights to receive the special tax revenues to Ygrene.[13]
More specifically the district issues a revenue bond to fund the PACE program. The bond is privately placed with Ygrene and issued as a single drawdown bond. Ygrene funds the purchase price of the bond by making advances. Each advance is considered a "sub-series bond" of the drawdown bond.[14]
The drawdown bond is in the form of a revolving line of credit, allowing for the repayments of amounts drawn and the re-borrowing of such repaid amounts. Each advance is secured by a Financing Agreement and a senior priority assessment lien on the property[15]
Each individual property owner within the district desiring to finance an energy improvement enters into a Financing Agreement with the district under which the property owner agrees to the district‘s imposition of a non-ad valorem assessment on the property[16]
Each sub-series bond is secured solely by its own collateral, consisting of the Financing Agreement (evidencing the assessment lien) and a revenue account.[17]
When it holds a sufficient amount of sub-series bonds, Ygrene securitizes the bonds and sells them to private investors.[18]

         "As part of its services, " the plaintiffs write, "Ygrene provides program design, marketing, administrative duties, origination, application processing, and ongoing reporting services."[19]"Most importantly, Ygrene is solely responsible for developing loan documents and disclosures that are provided to consumers."[20]

         3. The Dispute

         The plaintiffs‘ main grievance concerns whether, and to what extent, PACE liens are attached to the property. More exactly, the plaintiffs complain that Ygrene falsely told them that the PACE loans would not have to be repaid when a borrower sold or refinanced her home. Through various channels, the plaintiffs claim, the defendants told them that the PACE liens would be transferred with the property to new owners (much like regular property taxes), so that, when the plaintiffs sold or refinanced their homes, they would not have to repay whatever balance remained on the PACE loan.

         As it happens, PACE loans "do not travel with the home - in fact, they make it impossible or nearly impossible for consumers to sell their homes without first paying off the loan and incurring a large prepayment penalty. This is because conventional lenders refuse to provide loans on properties encumbered by . . . PACE loans, which benefit from superpriority status."[21] "[O]n at least three occasions since 2010, " the plaintiffs recount, the Federal Housing Finance Agency (FHFA) "has made clear that . . . Fannie Mae and Freddie Mac should neither purchase nor refinance mortgages with PACE loans attached."[22] As a result of the FHFA‘s position, PACE loan borrowers have been unable to sell their homes without first satisfying their PACE loans.[23]

         Contrary to the defendants‘ alleged representations, then, plaintiffs would have to repay the entire remaining PACE loan (and a prepayment penalty) when they sold or refinanced their homes. The plaintiffs thus see deception in the defendants‘ repeated warning that PACE loans "may" not transfer with the property. As the plaintiffs describe the situation, if it is possible in principle that PACE loans will transfer with the property, in practice it is virtually certain that PACE debt must be fully repaid on sale or refinance. See ¶¶ 30-31.

         The plaintiffs locate falsehoods in a number of places. The most specifically identified misstatements lie in two written loan disclosures: the "Universal Approval Agreement" (UAA) that was used for California transactions; and the "Financing Agreement" (FA) used in Florida. According to the plaintiffs, the UAA and FA both

misrepresent[] the nature of PACE loans by saying only that: (1) "certain" lenders desire to comply with FHFA guidance (when virtually all do); (2) the FHFA "appears to have instructed" lenders not to purchase loans with attached PACE loans (when both the FHFA and other agencies repeatedly stated this fact with certainty); and (3) that "you may" need to pay off the PACE loan if a homeowner wanted to sell or refinance (when a homeowner would definitely need to do so) . . . .[24]

         The plaintiffs also allege that they "reviewed and relied upon Ygrene‘s website and promotional materials, all of which similarly represented that Ygrene liens are transferable with the property in the event of a sale or refinance."[25] They claim that emails and phone calls with the defendants‘ employees and "representatives" yielded these same untruths.[26] Finally, they allege that Ygrene maintains a "network" of thousands of third-party building contractors (the contractors who will install the PACE-funded home improvements). These contractors allegedly promote and "sell" the defendants‘ PACE loans to homeowners; they are trained by Ygrene and, armed with false information, they wrongly tell consumers that the PACE loans will transfer with the property and will not need to be repaid on sale or refinance.[27]

         The plaintiffs also challenge several fees as improper. They point to "fees assessed by Ygrene to avoid . . . prepayment penalties, " "payoff statement fees, " and "unreasonable administrative fees."[28] They claim that at least some of these fees were never disclosed - or were inadequately disclosed - in their loan agreements.[29]

         5. The Proposed Classes

         The named plaintiffs sue for themselves and for 12 proposed classes: 4 national classes; 4 California subclasses; and 4 Florida subclasses. These classes are distributed equally among four topics: "Prepayment Penalty"; "Prepayment Waiver Fee"; "Prepayment Penalty - Paid"; and "Payoff and Administrative Fee."[30]

         6. The Claims

         The plaintiffs bring nine claims:

1. California Unfair Competition Law (UCL) (Cal. Bus. & Profs. Code § 17200) (unfair prong);
2. UCL (fraudulent prong);
3. California Consumer Legal Remedies Act (CLRA) (Cal. Civ. Code § 1770(a));
4. Florida Deceptive and Unfair Trade Practices Act (FDUTPA) (Fla. Stat. § 501.201 et seq.);
5. tortious interference with contract;
6. fraudulent inducement;
7. negligent misrepresentation;
8. unjust enrichment; and
9. negligence The defendants move to dismiss all these claims under Rules 9(b) and 12(b)(6).


         1. Rules 12(b)(6) and 9(b)

         A Rule 12(b)(6) motion to dismiss for failure to state a claim tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A claim will normally survive a motion to dismiss if it offers a "short and plain statement . . . showing that the pleader is entitled to relief." See Fed. R. Civ. P. 8(a)(2). This statement "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 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "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." Iqbal, 556 U.S. at 678. "The plausibility standard is not akin to a ‗probability requirement, ‘ but it asks for more than a mere possibility that a defendant has acted unlawfully." Id. (quoting Twombly, 550 U.S. at 556). "Where a complaint pleads facts that are ‗merely consistent with‘ a defendant‘s liability, it ‗stops short of the line between possibility and plausibility of ‗entitlement to relief.‘‘" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557).

         When considering a Rule 12(b)(6) motion, the court must accept as true all factual allegations in the complaint as well as all reasonable inferences that may be drawn from such allegations. LSO, Ltd. v. Stroh, 205 F.3d 1146, 1150 n. 2 (9th Cir. 2000). Such allegations must be construed in the light most favorable to the nonmoving party. Shwarz, 234 F.3d at 435.

         Fraud allegations elicit a more demanding standard. Rule 9(b) provides: "In alleging fraud . . ., a party must state with particularity the circumstances constituting fraud . . . . Malice, intent, knowledge, and other conditions of a person‘s mind may be alleged generally." Fed.R.Civ.P. 9(b). This means that "[a]verments of fraud must be accompanied by the ‗who, what, when, where, and how‘ of the misconduct charged." Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003). Like the basic "notice pleading" demands of Rule 8, a driving concern of Rule 9(b) is that defendants be given fair notice of the charges against them. See, e.g., In re Lui, 646 F. App‘x 571, 573 (9th Cir. 2016) ("Rule 9(b) demands that allegations of fraud 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.") (quotation omitted); Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (Rule 9(b) requires particularity "so that the defendant can prepare an adequate answer"). This heightened-pleading standard can apply even to claims that do not innately require proof of fraud. E.g., Vess, 317 F.3d at 1103-05. If such a claim nonetheless avers fraudulent conduct, then at least those averments must satisfy Rule 9(b); and, if a claim rests "entirely" on a "unified course of fraudulent conduct, " then "the pleading of that claim as a whole must satisfy the particularity requirement of Rule 9(b)." Id. at 1103-04. Finally, "[a] motion to dismiss a complaint or claim ‗grounded in fraud‘ under Rule 9(b) for failure to plead with particularity is the functional equivalent of a motion to dismiss under Rule 12(b)(6) for failure to state a claim." Id. at 1107.


         1. The Plaintiffs' Allegations Partially Satisfy Rule 9(b)

         1.1 Statements in the Unanimous Approval Agreement and Financing Agreement

         The representations contained in the UAA and FA meet Rule 9(b)‘s demands. They are definite statements making specific representations.[31] Presumably too, the plaintiffs would have been given these documents when they applied for or closed their loan - in any case, they must have been given the documents at a definite time and place. The statements allegedly made in the UAA and FA are adequately specific for Rule 9(b) purposes.

         1.2 Other Statements

         The rest of the alleged representations, however, are not sufficiently pleaded. The plaintiffs point vaguely to the defendants‘ "website, " to an unidentified "promotional video" and other generic "promotional materials, " to unidentified "email" or phone calls with unnamed "agents" and "representative[s], " and to unspecified statements made by unnamed third-party "contractors" - with none of this linked to identifiable people, dates, or places. All this falls short of Rule 9(b). These allegations do "not specify when and where [the misrepresentations] occurred." Vess, 317 F.3d at 1107. Nor do they "identify the [defendants‘] employees, " or the "certified" contractors, who made the false statements, except in the most generic way. Id. They do not "provide any dates, times, or places" where such statements were made. Id. (quoting United States ex rel. Lee v. SmithKline Beecham, Inc., 245 F.3d 1048, 1051 (9th Cir. 2001)). These allegations may satisfy Rule 8(a)(1)‘s more basic notice test; they do convey the plaintiff‘s grievance. But they embody exactly the sort of generic identification of fraud that Rule 9(b)‘s more rigorous demand is meant to winnow out.

         These allegations are not significantly different from those that the Ninth Circuit rejected in Kearns. That case thus controls this analysis. The Kearns plaintiff claimed that the defendants (a car manufacturer and a dealership) made "false and misleading statements" to "increase sales" of their "Certified Pre-Owned (‗CPO‘)" vehicles. Id. at 1122-23. Like the plaintiffs here, the Kearns plaintiff sued under California‘s CLRA and UCL. Id. at 1122. He claimed that "he was exposed to" misrepresentations in the manufacturer‘s "national marketing campaign"; in "sales materials" at the dealership ...

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