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Kivett v. Flagstar Bank, FSB

United States District Court, N.D. California

November 20, 2019

WILLIAM KIVETT, individually and on behalf of others similarly situated, Plaintiff,
FLAGSTAR BANK, FSB, a federal savings bank, and DOES 1-100, inclusive, Defendant.




         In this putative class action, plaintiff moves for class certification and for new plaintiffs to intervene with leave to amend the complaint. To the extent stated herein, both motions are Granted.


         California Civil Code § 2954.8(a) requires “[e]very financial institution that makes loans upon the security of real property containing only a one- to four-family residence and located in this state” to “pay interest on the amount so held to the borrower.” Defendant Flagstar Bank, FSB is a federal savings bank that makes the loans covered by Section 2954.8(a).

         In 2010, the enshrinement of the Dodd-Frank Wall Street Reform and Consumer Protection Act changed the federal preemption scheme for banks and federal savings associations. See, e.g., Dodd-Frank Act § 1046 (codified at 12 U.S.C. § 1465). In 2018, our court of appeals relied on this change to hold that the National Bank Act - which governs national banks - did not preempt Section 2954.8(a). Lusnak v. Bank of Am., N.A., 883 F.3d 1185, 1194 (9th Cir. 2018). The instant action is one of three pending actions in the wake of Lusnak to allege violation of Section 2954.8(a). See also McShannock v. JP Morgan Chase Bank N.A., 354 F.Supp.3d 1063 (N.D. Cal. 2018) (Judge Edward Chen); Wilde v. Flagstar Bank FSB, No. 18-cv-1370-LAB (BGS), 2019 WL 1099841 (S.D. Cal. Mar. 8, 2019) (Chief Judge Larry Alan Burns). Judge Edward Chen has since certified for interlocutory appeal the question of whether the Home Owners' Loan Act preempts state law claims. McShannock v. JP Morgan Chase Bank N.A., No. 18-cv-01873-EMC, 2019 WL 955289, at *1 (N.D. Cal. Feb. 27, 2019).

         This civil action began in April 2018, filed by Lowell and Gina Smith. The Smiths alleged that in October 2004, they had obtained a mortgage loan to finance their purchase of real property located in California. The Smiths had executed a deed of trust as security for the loan. The deed of trust called for the establishment of an escrow impound account and required that interest be paid on funds in the escrow account if doing so was required by applicable law. Flagstar then took over the servicing of the Smiths' mortgage account and remained the loan servicer until August 2015. No. interest accrued on the funds (No. 18-02350, Dkt. No. 1).

         The Smiths' complaint alleged two claims against Flagstar: (i) breach of contract, and (ii) violation of California's Unfair Competition Law, California Business & Professions Code §§ 17200 et seq. In August 2018, a Rule 12 order dismissed that complaint without prejudice due to the Smiths' failure to comply with a threshold notice-and-cure requirement provided by the deed of trust. Judgment then entered in favor of Flagstar and against the Smiths (No. 18-02350, Dkt. Nos. 1, 38).

         The Smiths quickly provided Flagstar written notice and an opportunity to cure, which Flagstar refused. Having fixed the cure issue, the Smiths filed the instant suit, alleging the same claims on the same facts as before (No. 18-05131, Dkt. No. 1).

         In October 2018, William Kivett came in as another plaintiff. He only alleged a violation of Section 17200 (Dkt. No. 30 at 2). He alleged that he had obtained a mortgage loan from Flagstar in September 2012. Flagstar serviced his loan from the loan's inception in 2012 until he refinanced with another institution in April 2015. Flagstar held his money in an escrow account during that time. No. interest accrued on the account. In September 2018, plaintiff Kivett gave written notice and demand for cure, which Flagstar denied (First Amd. Compl. ¶¶ 19, 22-24) (Dkt. No. 16).

         In December 2018, a case management schedule set a deadline of January 30, 2019, for leave to add any new parties or to amend the pleadings (Dkt. No. 28). Rule 12 practice followed as to the Smiths but not to plaintiff Kivett. In February 2019, an order converted Flagstar's motion to dismiss into one for summary judgment under Rule 12(d).

         At bottom, Flagstar's motion presented a threshold issue as to whether or not the Home Owners' Loan Act preempted the Smiths' claims. To be clear, the enactment of the Dodd-Frank Act in 2010 had generally ended HOLA preemption. Section 1043 of the Dodd-Frank Act, however, preserved HOLA's preemption scheme for any contract entered into on or before July 21, 2010, “by national banks, [f]ederal savings associations, or subsidiaries thereof . . . .” 12 U.S.C. § 5553. The Smiths had obtained their mortgage in October 2004.

         The preemption argument veered outside the complaint. Flagstar sought judicial notice of the Smiths' promissory note to establish that Flagstar participated in the origination of the Smiths' loan and became its original servicer immediately after origination. The Smiths, however, countered that the deed of trust clearly identified Wholesale America Mortgage as the lender, not Flagstar. Owing to the importance of this factual question and because “matters outside the pleading [were] presented to and not excluded by the court, ” the motion to dismiss became one for summary judgment (Dkt. Nos. 26-1, 29, 37).

         Following discovery and further briefing, summary judgment issued in favor of Flagstar (Dkt. No. 63). In brief, the order hewed to a practical construction of the Dodd-Frank Act's phrase “entered into, ” determining that even though Flagstar had not directly entered into the contract with the Smiths, it sufficed that Flagstar had participated in the origination of the Smiths' loan in 2004. Put simply, the Smiths' claims were still preempted by the Home Owners' Loan Act. With the Smiths out of the picture, the sole surviving plaintiff and claim in this action became plaintiff Kivett and his claim under Section 17200. This brings us to the two instant motions.

         First, plaintiff Kivett seeks to certify a single class of 125, 189 Flagstar customers who, from April 18, 2014, onward, have not received two percent interest on the amounts Flagstar held in their mortgage escrow accounts (Dkt. No. 65). More specifically, plaintiff Kivett seeks to certify the following class pursuant to Rule 23(b)(3):

All persons who on or after April 18, 2014 had mortgage loans serviced by Flagstar Bank FSB (“Flagstar”) on 1-4 unit residential properties in California and paid Flagstar money in advance to hold in escrow for the payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, but did not receive interest on the amounts held by Flagstar in their escrow accounts (excluding, however, any such persons whose mortgage loans originated on or before July 21, 2010).

         The class plaintiff Kivett seeks to represent will be within the four-year statute of limitations counting from the filing of the complaint in the first action. The proposed class would also exclude the mortgage loans that originated before July 21, 2010, for which the claims continue to be preempted. Flagstar opposes plaintiff Kivett's motion for class certification, training all its fire on one Rule 23 element: predominance.

         Second, plaintiff Kivett also moves for Bernard and Lisa Bravo to intervene in this action and to amend the complaint. The primary purpose for this motion is to add a class member currently serviced by Flagstar to ensure standing for an injunction and a class under Rule 23(b)(2), as plaintiff Kivett has not been a Flagstar customer since 2015. Plaintiff ...

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