Jordan v. Paul Financial, LLC, No. 3:2007cv04496 - Document 413 (N.D. Cal. 2012)

Court Description: ORDER DENYING RBS FINANCIAL PRODUCTS INC.'S MOTION FOR SUMMARY JUDGMENT; GRANTING PLAINTIFFS' MOTION FOR CLASS CERTIFICATION 411 (Illston, Susan) (Filed on 8/23/2012)

Download PDF
Jordan v. Paul Financial, LLC Doc. 413 1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE NORTHERN DISTRICT OF CALIFORNIA 7 8 GREGORY M. JORDAN, et al., 9 Plaintiffs, United States District Court For the Northern District of California 10 11 No. C 07-04496 SI ORDER DENYING RBS FINANCIAL PRODUCTS INC.’S MOTION FOR SUMMARY JUDGMENT; GRANTING PLAINTIFF’S MOTION FOR CLASS CERTIFICATION v. PAUL FINANCIAL, LLC, et al., 12 Defendants. / 13 14 Presently pending before the Court are a motion by defendant RBS Financial Products Inc. 15 (“RBS”) for summary judgment, and a motion by plaintiffs for class certification. Having considered 16 the arguments of the parties, the papers submitted, and for good cause shown, defendant’s motion is 17 DENIED, and plaintiffs’ motion is GRANTED. 18 BACKGROUND 19 20 I. The Loan 21 In 2005, plaintiff Gregory Jordan ("Jordan") and plaintiffs Eli and Josephina Goldhaber ("the 22 Goldhabers") entered into option adjustable rate mortgage loan agreements ("Option ARM loans") with 23 defendant Paul Financial, LLC ("Paul Financial"). Fourth Amended Complaint (“4AC”), ¶¶ 2, 3. Like 24 all adjustable rate loans, the interest rates on the plaintiffs’ loans were pegged to a variable index and 25 thus changed over time. See, e.g., Plascencia v. Lending 1st Mortg., 259 F.R.D. 437, 440 (2009). The 26 Paul Financial loans also contained a few idiosyncratic features, including an initial “teaser” rate. 27 Jordan's loan from Paul Financial had an initial teaser interest rate of 1%, while the Goldhabers' loan 28 had an initial rate of 1.375%. Id. at ¶ 74. These teaser rates were dubbed the “yearly rate” on the Dockets.Justia.com 1 plaintiffs’ Promissory Notes (the “Notes”). See Weiss Decl., Ex. 1. Despite their name, however, these 2 “yearly rates” lasted for only one month, after which the loan’s interest rate substantially increased 3 pursuant to the variable index rate. Id. at ¶ 25. This variable rate, disclosed in the Notes, was the sum 4 of 3.825% plus the federal reserve index. As a result, after one month, the interest accruing on the loans 5 more than quadrupled, from an amount near 1% to an amount between 4 and 8%. Id. at ¶ 25. At the same time, the Truth in Lending Disclosure Statement ("TILDS") that Paul Financial 7 provided plaintiffs along with the Note listed a payment schedule outlining the amount of plaintiffs' 8 minimum monthly payments for the first five years. Id. at ¶ 28. The TILDS payment schedule was 9 tethered to the teaser rate, while the actual interest rate after the first month was tethered to the far- 10 United States District Court For the Northern District of California 6 higher variable rate. Therefore, the minimum monthly payments did not cover the interest incurred after 11 the first month of the loan. Id. The interest left outstanding would be added to the principal of the loan 12 and begin accumulating interest itself. Thus, if plaintiffs paid only the monthly payment listed on the 13 payment schedule, the principal on the loan would increase, and plaintiffs would lose equity with each 14 payment -- a process known as negative amortization. 15 One month after originating the Goldhabers’ loan, Paul Financial sold it to Greenwich Capital 16 Financial Products, Inc., now called RBS Financial Products, Inc. ("RBS"). Id. at ¶ 7. RBS purchased 17 loans from Paul Financial pursuant to a January 1, 2004 Master Mortgage Loan Purchase and Interim 18 Servicing Agreement (“MLPA”), which set forth the terms and conditions under which RBS would later 19 purchase loans from Paul Financial. Jordan’s loan was also sold less than one month after origination, 20 though instead to Luminent Mortgage Trust 2006-2, the trustee of which is HSBC. Both HSBC and 21 Luminent have been dismissed as defendants in this case. See Doc. 385. Therefore, only the 22 Goldhabers’ loan documents are at issue here. 23 The loan documents at issue are the Note, the Prepayment Penalty Addendum to Note (the 24 “Addendum”), and the TILDS. The pertinent sections for the purposes of the two instant motions are 25 as follows: 26 The Note 27 The Note is dated July 28, 2005, and sets forth plaintiffs’ promise to pay a principal amount of 28 $409,500. Weiss Decl., Ex. 1. The numbers that are specific to the Goldhabers’ loan are emboldened 2 1 in the note. Section 2 describes the interest to be paid on the loan: 2 12 (A) Interest Rate Interest will be charged on unpaid principal until the full amount of Principal has been paid. I will pay interest at a yearly rate of 1.375%. The interest rate I will pay may change . . . (B) Interest Change Dates The interest rate I will pay may change on the first day of September, 2005, and on that day every month thereafter. Each date on which my interest rate could change is called an “Interest Change Date.” The new rate of interest will become effective on each Interest Change Date. (C) Interest Rate Limit My interest rate will never be greater than 12.500%. (D) The Index Beginning with the first Interest Change Date, my interest rate will be based an index . . . (E) Calculation of Interest Rate Changes Before each Interest Change Date, the Note Holder will calculate my new interest rate by adding Three and 825/1000 percentage points (3.825%) to the Current Index. The Note Holder will then round the result of this addition to the nearest one-eighth of one percentage point (0.125%). Subject to the limit stated in section 2(c) above, the rounded amount will be new interest rate until the next Interest Change Date. 13 Section 3 describes the loan payments: 14 (A) Time and Place of Payments I will pay principal and interest by making a payment every month. I will make my monthly payments on the first day of each month beginning on September 01, 2005. I will make these payments every month until I have paid all of the principal and interest and any other charges described below that I may owe under this Note. Each monthly payment will be applied as of its scheduled due date and will be applied to interest before Principal. If, on August 01, 2035, I still owe amounts under this Note, I will pay those amounts in full on that date, which is called the “Maturity Date.” ... (B) Amount of My Initial Monthly Payments Each of my initial monthly payments will be in the amount of U.S. $1,388.84. This amount may change. (C) Payment Change Dates My monthly payment may change as required by Section 3(D) below beginning on the 1st day of September, 2006, and on that day every 12th month thereafter. Each of these dates is called a "Payment Change Date." My monthly payment will also change at any time Section 3(F) or 3(G) below requires me to pay the Full Payment. I will pay the amount of my new monthly payment each month beginning on each Payment Change Date . . . (D) Calculation of Monthly Payment Changes At least 30 days before each Payment Change Date, the Note Holder will calculate the amount of the monthly payment that would be sufficient to repay the unpaid principal that I am expected to owe at the Payment Change Date in full on the Maturity Date in substantially equal installments at the interest rate effective during the month preceding the Payment Change Date. The result of this calculation is called the "Full Payment." The Note Holder will then calculate the amount of my monthly payment due the month preceding the Payment Change Date multiplied by the number 1.075. The result of this calculation is called the "Limited Payment." Unless Section 3 4 5 6 7 8 9 United States District Court For the Northern District of California 10 11 15 16 17 18 19 20 21 22 23 24 25 26 27 28 on 3 1 2 3 4 5 6 3(F) or 3(G) below requires me to pay a different amount, I may choose to pay the Limited Payment. (E) Additions to My Unpaid Principal My monthly payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal I owe at the monthly payment date in full on the Maturity Date in substantially equal payments. If so, each month that my monthly payment is less than the interest portion, the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid principal. The Note Holder will also add interest on the amount of this difference to my unpaid principal each month. The interest rate on the interest added to Principal will be the rate required by Section 2 above. 7 The Prepayment Penalty Addendum to Note 8 9 United States District Court For the Northern District of California 10 11 The Addendum sets forth additional terms of the loan, including a “prepayment penalty” against the borrower: 19 Additional Covenants In addition to the covenants and agreements made in the Note, this Addendum amends and restates Section 5 of the Note in its entirety as follows: I have the right to make payments of Principal at any time before they are due. A payment of Principal only is known as a “prepayment”. When I make a Prepayment, I will tell the Note Holder in writing that I am doing so. Subject to the Prepayment Penalty specified below, I may make a full Prepayment or partial Prepayments of my obligation. The Note Holder will use all of my Prepayments to reduce the amount of Principal that I owe under this Note. If I make a partial Prepayment, there will be no changes in the due date or in the amount of my monthly payment unless the Note Holder agrees in writing to those changes. If within the first 36 months after the execution of the Note, I make any prepayment(s) within any 12-month period, the total of which exceeds twenty (20) percent of the original principal amount of this loan, I will pay a prepayment penalty in an amount equal to the payment of six (6) months’ advance interest on the amount by which the total of my prepayment(s) within that 12-month period exceeds twenty (20) percent of the original principal amount of the loan. 20 The TILDS 21 The TILDS discloses 6.619% as the Annual Percentage Rate (“APR”) on the Goldhabers’ loan. 22 Weiss Decl., Ex. 2. The APR is placed prominently in a box explaining that the APR is "The cost of 23 your credit as a yearly rate." Id. The TILDS also includes a payment schedule, as follows: 12 13 14 15 16 17 18 24 25 # Payments $ Payment Beginning On 12 $1,388.84 9/1/2005 27 12 $1,493.01 9/1/2006 28 12 $1,604.99 9/1/2007 26 4 1 12 $1,725.37 9/1/2008 2 11 $1,854.78 9/1/2009 3 300 $3,306.51 8/1/2010 4 1 $3,032.04 8/1/2035 5 6 7 8 The TILDS also contains a Truth-in-Lending Recap (“TIL Recap”), which contains various data regarding the loan. No. Payments to 1st Rate Adjustment 1 No. Payments to Subsequent Rate Adjustment(s) 1 10 No. Payments to 1st Payment Adjustment 12 11 No. Payments to Subsequent Payment Adjustment(s) 12 12 Maximum Rate Increase at First Adjustment (s) 11.125% Maximum Rate Increase at Subsequent Adjustment(s) 12.500% Lifetime Rate Increase Cap 12.500% 15 Number of Payments 360 16 Interest Rate 1.375% 17 Odd Days Rate 1.375% Index 2.737% Margin 3.825% Fully Indexed Rate 6.500% United States District Court For the Northern District of California 9 13 14 18 19 20 21 A.P.R. Finance Charge 23 6.619% $606,703.26 Total of Financed 22 Amount Payments $402,230.86 $1,008,934.14 24 25 Plaintiffs allege that the loan documents they signed were misleading because they did not 26 unambiguously disclose: 1) the “actual interest rate,” 2) the fact that the interest rate would sharply 27 increase after only one month; 3) the fact that the monthly payments were based on the teaser rate, and 28 not the actual interest rate; and 4) that negative amortization was “guaranteed to occur after only one 5 1 month,” and instead only acknowledged that it "may" occur. Id. at ¶¶ 1, 28, 33. On the basis of these allegations, Jordan filed a putative class action complaint against Paul 3 Financial on August 30, 2007. The complaint was amended to add the Goldhabers as plaintiffs and add 4 Luminent Capital, Luminent Trust, HSBC, and RBS as defendants. The operative complaint is now the 5 Fourth Amended Complaint (“4AC”), filed on October 13, 2009, which states three causes of action: 6 1) violations of the Truth in Lending Act ("TILA"), 15 U.S.C. §1601, et seq.; 2) fraudulent omissions; 7 and 3) unlawful, unfair, and fraudulent business practices in violation of California's Unfair Competition 8 Law ("UCL"), Bus. & Prof Code §17200, et seq. On January 27, 2009, the Court denied plaintiff's 9 motion for class certification. Doc. No. 152. On September 30, 2010, the Court granted RBS's motion 10 United States District Court For the Northern District of California 2 to dismiss the 4AC in part, dismissing plaintiffs' TILA claims as time barred, and dismissing the 11 “unlawful” prong of plaintiffs' business practices claim with leave to amend. Doc. No. 295. On July 12 27, 2011, following the parties' joint request for dismissal, the Court ordered the dismissal of defendants 13 Luminent Trust and HSBC. Plaintiffs’ surviving claims are for (1) fraudulent omissions and (2) unfair 14 and fraudulent business practices in violation of the UCL, against defendant RBS only. 15 . 16 II. The Goldhabers’ Bankruptcy 17 The Goldhabers filed a voluntary petition for Chapter 7 bankruptcy on March 18, 2010 (the 18 “Bankruptcy Case”). See In re Goldhaber, No 2:10-BK-20052 (Bankr. C.D. Cal. Mar. 18, 2010). The 19 Goldhabers did not list any interest in this litigation in their schedules or petition. Id. The Bankruptcy 20 Case was closed on July 29, 2010. In RBS’ summary judgment motion (“MSJ”), it asserted a standing 21 challenge due to the Goldhabers’ failure to list their interest in this litigation. MSJ at 11. Plaintiffs then 22 successfully petitioned the bankruptcy court to reopen the Bankruptcy Case, and filed amended 23 schedules listing their claims against defendants. Weiss Decl., Ex. 8. While the Bankruptcy Case was 24 open, plaintiffs also entered into a stipulation with the trustee of their estate, stating that “[d]ebtors are 25 hereby delegated and granted authority and standing to prosecute, on behalf of the Debtor’s Estate 26 subject to exemption rights, the Debtor’s claims as pleaded” in this case. Weiss Decl., Ex. 9. 27 Following the bankruptcy judge’s order approving the stipulation, RBS attempted to settle the 28 Goldhabers’ claims with the trustee of their estate. See In re Goldhaber, No 2:10-BK-20052, Doc. 35. 6 1 The trustee agreed to the settlement and filed a motion for approval with the bankruptcy court. Id., Doc. 2 35. The Goldhabers opposed the settlement, arguing that the stipulation barred the trustee from entering 3 into a settlement with RBS, and that RBS was attempting to “pick off” the putative class representative 4 in this litigation. Id., Doc. 36 at 8. The bankruptcy judge denied the motion for settlement, citing the 5 stipulation. Doc. 42 at 2. The parties then proceeded to file oppositions and replies to the two 6 respective motions at bar. 7 8 Presently before the Court are RBS' motion for summary judgment on all claims and plaintiffs' motion for class certification. 9 United States District Court For the Northern District of California 10 11 LEGAL STANDARD I. Motion for Summary Judgment 12 Summary judgment is proper if the pleadings, the discovery and disclosure materials on file, and 13 any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled 14 to judgment as a matter of law. See Fed. R. Civ. P. 56(a). The moving party bears the initial burden of 15 demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 16 323 (1986). The moving party, however, has no burden to disprove matters on which the non-moving 17 party will have the burden of proof at trial. The moving party need only demonstrate to the Court that 18 there is an absence of evidence to support the non-moving party's case. Id. at 325. Once the moving 19 party has met its burden, the burden shifts to the non-moving party to "set out ‘specific facts showing a 20 genuine issue for trial.'" Id. at 324 (quoting then Fed. R. Civ. P. 56(e)). To carry this burden, the 21 non-moving party must "do more than simply show that there is some metaphysical doubt as to the 22 material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "The 23 mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury 24 could reasonably find for the [non-moving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 25 (1986). 26 In deciding a summary judgment motion, the Court must view the evidence in the light most 27 favorable to the non-moving party and draw all justifiable inferences in its favor. Id. at 255. 28 "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from 7 1 the facts are jury functions, not those of a judge . . . ruling on a motion for summary judgment." Id. 2 However, conclusory, speculative testimony in affidavits and moving papers is insufficient to raise 3 genuine issues of fact and defeat summary judgment. Thornhill Publ'g Co., Inc. v. GTE Corp., 594 F.2d 4 730, 738 (9th Cir. 1979). The evidence the parties present must be admissible. Fed. R. Civ. P. 56(c)). 5 6 II. Class Certification The decision as to whether to certify a class is committed to the discretion of the district court 8 within the guidelines of Federal Rule of Civil Procedure 23. See Fed. R. Civ. P. 23; see also Cummings 9 v. Connell, 316 F.3d 886, 895 (9th Cir. 2003). A court may certify a class if a plaintiff demonstrates that 10 United States District Court For the Northern District of California 7 all of the prerequisites of Federal Rule of Civil Procedure 23(a) have been met, and that at least one of 11 the requirements of Federal Rule of Civil Procedure 23(b) have been met. See Fed. R. Civ. P. 23; see 12 also Valentino v. Carter-Wallace, Inc., 97 F.3d 1227, 1234 (9th Cir. 1996). 13 Rule 23(a) provides four prerequisites that must be satisfied for class certification: (1) the class 14 must be so numerous that joinder of all members is impracticable, (2) questions of law or fact exist that 15 are common to the class, (3) the claims or defenses of the representative parties are typical of the claims 16 or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests 17 of the class. See Fed. R. Civ. P. 23(a). 18 A plaintiff must also establish that one or more of the grounds for maintaining the suit are met 19 under Rule 23(b), including (1) that there is a risk of substantial prejudice from separate actions; (2) that 20 declaratory or injunctive relief benefitting the class as a whole would be appropriate; or (3) that common 21 questions of law or fact predominate and the class action is superior to other available methods of 22 adjudication. See Fed. R. Civ. P. 23(b). 23 In determining the propriety of a class action, the question is not whether the plaintiffs have 24 stated a cause of action or will prevail on the merits, but, rather, whether the requirements of Rule 23 25 are met. See Staton v. Boeing Co., 327 F.3d 938, 954 (9th Cir. 2003); see also Eisen v. Carlisle & 26 Jacquelin, 417 U.S. 156, 178 (1974). The Court is obliged to accept as true the substantive allegations 27 made in the complaint. See In re Petroleum Prods. Antitrust Litig., 691 F.2d 1335, 1342 (9th Cir. 1982); 28 see also Blackie v. Barrack, 524 F.2d 891, 901 (9th Cir. 1975). Therefore the class order is speculative 8 1 in one sense because the plaintiff may not be able to later prove the allegations. See Blackie, 524 F.2d 2 at 901 n.17. However, although the Court may not require preliminary proof of the claim, it "need not 3 blindly rely on conclusory allegations which parrot Rule 23 requirements. Courts may also consider 4 the legal and factual issues presented by plaintiff's complaint." 2 Alba Conte & Herbert B. Newberg, 5 Newberg on Class Actions, 7.26 (4th ed. 2005). Sufficient information must be provided to form a 6 reasonable informed judgment on each of the requirements of Fed. R. Civ. P. 23. See Blackie, 524 F.2d 7 at 901 n.17. In order to safeguard due process interests and the judicial process, the Court conducts an 8 analysis that is as rigorous as necessary to determine whether class certification is appropriate. See 9 Chamberlan v. Ford Motor Co., 402 F.3d 952, 961 (9th Cir. 2005); see also Gen. Tel. Co. of the Sw. v. United States District Court For the Northern District of California 10 Falcon, 457 U.S. 147, 161 (1982). 11 12 13 DISCUSSION I. MOTION FOR SUMMARY JUDGMENT 14 RBS moves for summary judgment on the Goldhabers’ remaining claims against RBS: common 15 law fraudulent omission, and violation of the California’s UCL under its “fraud” and “unfair” prongs. 16 RBS contends that summary judgment is proper because: 1) the Goldhabers lost standing upon filing 17 for bankruptcy; 2) the loan documents were not misleading; 3) RBS is not liable for Paul Financial's 18 conduct; 4) plaintiffs' fraudulent omissions claim fails because the loan documents did not conceal a 19 material fact and there was no actual reliance; and 5) plaintiffs' UCL claim fails because plaintiffs lack 20 standing, RBS' conduct was not fraudulent or unfair, and plaintiffs do not seek remedies available under 21 the UCL. The Court will address each of RBS' arguments in turn. 22 23 A. 24 RBS argues that the Goldhabers lack standing to bring their claims because (1) they filed for 25 Chapter 7 bankruptcy and (2) they failed to disclose their interest in this litigation in their bankruptcy 26 petition or schedules. Motion for Summ. J. ("MSJ") at 11-12. As noted above, in response to RBS’ 27 initial standing challenge, the Goldhabers petitioned the bankruptcy court to reopen their case. The 28 bankruptcy court approved a stipulation between the Goldhabers and the trustee of their estate, which Standing 9 1 "delegated and granted authority and standing [to the Goldhabers'] to prosecute, on behalf of the 2 Debtors' Estate subject to exemption rights" this action. Doc. No. 370 at 2. RBS disputes that a trustee 3 can delegate its standing, contending that the Goldhabers can have standing only if the trustee has 4 abandoned the claims. MSJ Reply at 2-3. Rule 17(a) of the Federal Rules of Civil Procedure provides that "[e]very action shall be 6 prosecuted in the name of the real party in interest." Rule 17(a) "does not itself define real party in 7 interest. Instead, it allows a federal court to entertain a suit at the instance of any party to whom the 8 relevant substantive law grants a cause of action." U-Haul Int'l, Inc. v. Jartran, Inc., 793 F.2d 1034, 9 1038 (9th Cir. 1986). Furthermore, Rule 17(a) recognizes that a "court may not dismiss an action for 10 United States District Court For the Northern District of California 5 failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time 11 has been allowed for the real party in interest to ratify, join, or be substituted into the action. After 12 ratification, joinder, or substitution, the action proceeds as if it had been originally commenced by the 13 real party in interest." Fed. R. Civ. P. 17. In U-Haul, the Ninth Circuit provided the plaintiff the 14 opportunity to seek ratification from the other real parties in interest before it would consider finding 15 that the plaintiff lacked standing. 793 F.2d at 1040. There, the court further recognized that "[t]he 16 modern function of [Rule 17] ... is simply to protect the defendant against a subsequent action by the 17 party actually entitled to recover, and to insure generally that the judgment will have its proper effect 18 as res judicata." Id. at 1039 (citing Note of Advisory Committee on 1966 Amendment to Fed. R. Civ. 19 P. 17). 20 Here, the relevant substantive law grants plaintiffs a cause of action. Although plaintiffs have 21 transferred their interest in this action to their estate by declaring bankruptcy, such an assignment does 22 not preclude the trustee from ratifying plaintiffs' continued pursuit of their cause of action. According 23 to the terms of the stipulation, the trustee granted plaintiffs the authority to prosecute the claims, thereby 24 providing the necessary ratification. In re Goldhaber, 10-BK-20052, Order Approving Stipulation, at 25 ¶ 2. Furthermore, as the Supreme Court has recognized, "an assignee of a legal claim for money owed 26 has standing to pursue that claim in federal court, even when the assignee has promised to remit the 27 proceeds of the litigation to the assignor." Sprint Communications Co., L.P. v. APCC Services, Inc., 554 28 U.S. 269, 269 (2008). Here, plaintiffs will remit the bulk of their proceeds if they prevail; yet they also 10 1 retain exemption rights for $1,820. Moreover, the underlying purpose of Rule 17(a) is served, because 2 the stipulation protects "the defendant against a subsequent action by the party actually entitled to 3 recover"; the stipulation bars the trustee from bringing any similar action against RBS. Finally, the 4 bankruptcy judge rejected the attempted settlement between RBS and the Trustee, finding that because 5 of the stipulation, “RBS and its counsel may negotiate settlement of the claims the Debtors have against 6 RBS and the below described class action lawsuit with counsel of record for the Debtors.” In re 7 Goldhaber, 10-BK-20052, Doc. 42 at 2 (emphasis added). The Court agrees with the bankruptcy court 8 that the Goldhabers are now the proper party to pursue or dispose of their claims. 9 United States District Court For the Northern District of California 10 B. 11 Defendant contends that summary judgment is appropriate because the loan documents were not 12 misleading since (1) plaintiffs admit that the documents describe negative amortization and (2) the loan 13 disclosures clearly compare the APR and the interest rate. MSJ at 13, 14. Loan documents 14 A jury finding for plaintiffs on its fraudulent omissions claim would require, inter alia, the 15 finding of a misrepresentation or material omission. Small v. Fritz Companies, Inc., 30 Cal. 4th 167, 16 173 (2003). Similarly, a jury finding for plaintiffs under the fraud prong of their UCL claim would also 17 require, inter alia, the finding of a misrepresentation or material omission, because this claim is 18 predicated upon the alleged fraudulent practices of defendants. 4AC, ¶ 112. Thus, the Court interprets 19 RBS' argument that the documents were not misleading as a challenge to the presence of a genuine issue 20 of material fact as to the existence of a misrepresentation or material omission. 21 22 1. Whether the Documents Accurately Describe Negative Amortization 23 RBS argues that the loan documents accurately describe negative amortization, and, further, that 24 the plaintiffs themselves admit to understanding the concept. MSJ at 13. Regarding the former, 25 defendants point to Section 3(E) of the Adjustable Rate Note, which states that: 26 27 28 (E) Additions to my Unpaid Principal: My monthly payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal I owe at the monthly payment date in full on the Maturity Date in substantially equal payments. If so, each month that my monthly payment is less than the interest portion, the Note Holder will subtract 11 1 2 the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid principle. The Note Holder will also add interest on the amount of this difference to my unpaid principal each month. 3 Weiss Decl., Ex. 1. 4 Concerning plaintiffs’ knowledge of the concept, defendants point out that the Goldhabers 5 previously acquired a different option ARM mortgage that had, in fact, negatively amortized. See E. 6 Goldhaber Depo. 31:23-32:24, 65:25-68:16-16; J. Goldhaber 79: 17-25 (explaining negative 7 amortization as when “they take money out of your equity.”) 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The plaintiffs argue that defendants’ misconstrue the thrust of their claims. The issue here, plaintiffs argue, is not whether the documents adequately explained or the Goldhabers properly understood the general concept of negative amortization – though those are live questions of material fact – but whether the loan documents failed to disclose that this particular loan was certain to negatively amortize if payments were made pursuant to the payment schedule. Plaintiffs point to the conditional language in the Note, such as the statement in above-quoted section 3(E) that “My payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal I owe at the monthly payment date.” Weiss Decl., Ex. 1. See also Note, ¶3(A) (“I will pay principal and interest by making a payment every month”); ¶3(E) (“If the minimum payment is not sufficient to cover the amount of the interest due then negative amortization will occur”). Such statements, plaintiffs argue, are misleading because payments made according to the schedule would necessarily be insufficient to pay down the interest. Furthermore, plaintiffs argue, it was misleading not to state that the initial rate was a teaser rate “absolutely certain to double or triple after just 30 days.” Pl.’s Opp. at 9 (citing Eckes Dep. 73:17-75:13). Plaintiffs also dispute the defendants’ characterizations of the Goldhabers testimony regarding their understanding of the loan on the same grounds. According to the plaintiffs, it is irrelevant (or at least non-dispositive) whether the Goldhabers understood the general concept of negative amortization. What is important is what they understood about this loan. And the testimony from the depositions, plaintiffs argue, proves that they were misled. Eli Goldhaber testified: Q: Did you think this was a negative amortization loan when you 12 1 2 E.G.: Q: 3 E.G.: 4 entered into it? No. If you thought it was a negative amortization loan before you signed the documents, would you have signed them? No, I haven’t – no, I wouldn’t. In Josephine Goldhaber’s deposition, she similarly stated: 5 Q: 6 Ms. Klubes: J.G.: If this note - that it said “Adjustable Rate Negative Amortization Note,” would you have signed this – entered into this loan? Objection. Of course not. 7 Plaintiffs therefore dispute defendants’ contention that they understood the loan documents. 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The Court finds that, as an initial matter, whether the Goldhabers understood that paying according to the provided payment schedule necessarily led to negative amortization is a genuine issue of material fact. It is material because it goes to their reliance on the documents, and it is genuine because the parties present contradicting characterizations of the Goldhabers’ own testimony. The harder question is whether a genuine issue of material fact remains about the nature of the negative amortization inherent to the Goldhabers’ Loan. There is no genuine question as to whether the loans would certainly negatively amortize if the TILDS payment schedule was followed. The payment schedule listed in the TILDS, for at least the first 12 months of the loan, was pegged to the teaser rate of 1.375% -- a rate that lasted only 30 days. Therefore, after the interest rate jumped in the second month to the far higher index rate, payments according to the schedule would not cover the interest accruing on the principal. As this Court noted in finding plaintiffs’ claims viable in the face of RBS’ motion to dismiss: Defendants contend that negative amortization was not ‘guaranteed.’ However, if the APR is pegged at 3.825% above the federal reserve index, and the teaser rate was 1.375%, then the federal reserve index would need to be 2.45% in order for the teaser rate and the interest rate to be the same during the period in which the minimum monthly payments were calculated based upon the teaser rate. Plaintiffs assertion that negative amortization was ‘certain’ makes considerable mathematical sense. Dismissal Order at 17, fn. 15, Doc. 295. RBS now argues that negative amortization was not certain since a borrower was not prevented from paying more than the TILDS payment schedule. The question, therefore, is whether it is misleading to state in loan documents that something may occur when, following the offered (though optional) schedule within those documents, it is certain to occur. 13 Numerous courts in this District that have analyzed this precise question at the 12(b)(6) stage 2 have found viable claims for fraud, both under TILA and the common law. See., eg., Ralston v. 3 Mortgage Investors Group, Inc., 2009 WL 688858 (N.D. Cal. Mar. 16, 2009)(Fogel, J.) (“A number of 4 courts have recognized the viability of claims for failure clearly and conspicuously to disclose the 5 certainty of negative amortization”); Plasencia v. Lending 1st Mortg., 2008 WL 1902698 (N.D.Ca. Apr. 6 28, 2008) (Wilken, J.) (“Plaintiffs may be able to show that the Note's reference to negative 7 amortization as a hypothetical event does not clearly and conspicuously disclose” required information.) 8 Neither party has cited to, nor has the Court been able to find, any cases that dispose of this issue 9 at the summary judgment stage. After considering the issue, the Court finds that there remains a 10 United States District Court For the Northern District of California 1 genuine issue of material fact as to the whether the loan statements constitute misrepresentations with 11 respect to negative amortization. As the Court noted in its order denying dismissal of this claim, simply 12 providing technically accurate disclosure does not excuse the potentially inadequate or misleading 13 character of other disclosures, or lessen the resulting potential for confusion. Doc. 295 (citing Amparan, 14 2008 WL 5245497 at *9). It is of course possible that a buyer would pay more each month than the 15 schedule provided for in the TILDS, thus avoiding negative amortization. But the Court will not turn 16 a blind eye to the fact that the document at issue here is, as far as the Court can tell, designed to mislead. 17 Nowhere in the TILDS, or the Note for that matter, is there any revelation of the fact that the interest 18 rate is certain to sharply increase after just 30 days. Nor does the TILDS contain any indication that 19 following the payment schedule provided will unquestionably lead to negative amortization. In fact, 20 the TILDS does not even state what the payment schedule is based on -- the teaser rate, it turns out, not 21 the actual interest rate. However, were one to follow the TILDS payment schedule, after 59 months of 22 payment, the borrower would owe 110% of the original principal.1 23 Therefore, the Court finds that there remains a genuine issue of material fact as to whether an 24 ordinary consumer would be misled by the Notes’ explanation of the negative amortization inherent 25 in the loan. 26 1 27 28 The initial principal was $409,500.00. Following the payment schedule provided, after 59 months the borrower would have paid $94,949.10. Their estimated principal at that point would have raised to $449,550.00, payable over the next 25 years. Interest would also be calculated based on that elevated principal, not the initial amount. 14 1 2. Interest Rate Disclosures 2 The second dispute regarding the fraudulent nature of the loan documents is whether the interest 3 rate disclosure is misleading. The first page of the Note states that “I will pay interest as a yearly rate 4 of 1.375%. The interest rate I will pay may change.” Weiss Decl, Ex. 1. The TILDS states the APR 5 is 6.990%, and is “the cost of your credit at a yearly rate.” Weiss, Decl., Ex. 2. Therefore, the same 6 phrase -- “yearly rate” -- is used twice to define quite different rates. The issue of whether or not a defendant is due summary judgment on this question was already 8 decided by this Court in this case, in its earlier iteration against HSBC (involving plaintiff Jordan’s 9 nearly identical loan from Paul Financial). The Court held that “this Court adopts the reasoning in 10 United States District Court For the Northern District of California 7 Amparan and Andrews and finds that there is a factual dispute as to whether reference in the loan 11 documents to both the APR and the finance charge as ‘yearly’ rates of interest would have been 12 confusing to an ordinary consumer.” Doc. 207, at 12 (citing Amparan v. Plaza Home Mortg., Inc., 2008 13 WL 5245497 *6 (N.D. Cal. Dec. 17 2008) (Fogel, J.) (holding that plaintiff had stated a claim under 14 TILA when the TILDS represented that the APR was 7.136%, describing this figure as the “[t]he cost 15 of your credit as a yearly rate,” while the Note represented that “I will pay interest at a yearly rate of 16 1.500%.”); Andrews v. Chevy Chase Bank, FSB, 240 F.R.D. 612, 618 (E.D. Wis. 2007) (same), rev’d 17 on other grounds. 18 RBS argues that the Court should reverse its earlier decision because the Court did not have 19 before it the now-submitted “TIL Recap” that was part of the loan documents. Defendants argue that 20 because the TIL Recap states that “No. Payments to 1st Rate Adjustment” is 1, while “No. Payments 21 to 1st Payment Adjustment” is 12, a person would know that the interest rate will adjust after the first 22 payment, but the payment rate will not change until after the first year of payments. 23 RBS’ argument that the TIL Recap saves the document is unavailing. First, it is unclear from 24 the TIL Recap what the interest rate adjustment would actually be after the first month. One would have 25 to turn to the Note to find out that “beginning with the first Interest Change Date, my interest rate will 26 be based on an Index.” Note, ¶ 2(D). The cited “Interest Change Date,” in turn, references September 27 2005 as set forth in section 2(B); yet this is the very section that states, “[t]he interest rate I will pay may 28 change on the first day of September, 2005.” This leaves the borrower back at the beginning, unsure 15 1 as to the certainty of the rate change, and what that rate will be. It is therefore difficult to reconcile the 2 two documents, which obscure the actual interest scheme. Second, the problem is not only the 3 confusion as to when the payments and interest change, it is that the “yearly rate” described in the Note 4 controls the payment rate set forth in the TILDS, while the “yearly rate” described in the TILDS sets 5 forth the APR, i.e., the interest rate. The use of the same term to describe different rates, which in turn 6 affect different dollar quantities (payments owed versus actual balance owed), is also likely misleading. 7 Adding to the confusion, the two rates are completely unrelated to one another. Furthermore, the most conspicuous number set forth in the Note – clearly set off and emboldened 9 on the front page – states that “I will pay interest at a yearly rate of 1.375%.” Weiss Decl., Ex. 1. Yet, 10 United States District Court For the Northern District of California 8 as noted, this is only the actual interest rate for 30 days. The Court cannot find, as a matter of law, that 11 the Note is not misleading when its most prominent number is a “yearly rate” that lasts for only 30 12 days, has no relationship to the “yearly rate” of the APR, and controls only the payment rate that, if 13 followed, will certainly cause negative amortization. In reality, after the first 30 days, the actual interest 14 rate jumps to the current index plus 3.825%. The TIL Recap defendants rely on to save the documents 15 merely repeats the ruse that the “interest rate” is 1.375%, and provides no explanation as to how the 16 monthly payments in the TILDS schedule were derived. The TIL Recap therefore does not change the 17 Court’s earlier conclusion that summary judgment is inappropriate here. See Doc. 207. 18 In sum, the Court finds that a genuine issue of material fact exists as to whether the documents 19 misrepresent the nature of the negative amortization inherent to the loans and the loan’s actual interest 20 rates. 21 22 C. 23 Because RBS was not a party to the initial mortgage, plaintiffs must prove that RBS aided and 24 abetted Paul Financial in order to hold them liable. In California, “liability may be imposed on one who 25 aids and abets the commission of an intentional tort if the person knows the other’s criminal conduct 26 constitutes a breach of a duty and gives substantial assistance or encouragement to the other to so act.” 27 First Alliance Mortgage Company v. Lehman Commercial Paper, 471 F.3d 977, 993 (9th Cir. 2006) 28 (citing Casey v. U.S. Bank National Assn., 127 Cal. App. 4th 1138 (2005)) (emphasis included). In Aiding and abetting 16 1 other words, to demonstrate that RBS aided and abetted Paul Financial, plaintiffs must show that RBS 2 had actual knowledge of the fraudulent omissions and UCL violations, and provided substantial 3 assistance to further those ends. 4 5 1. Actual Knowledge RBS argues that summary judgment is proper here because “[p]laintiffs point to nothing to 7 support their claim that RBS had actual knowledge of any supposed fraudulent conduct . . . [T]he record 8 shows that RBS did not instruct Paul Financial in its business operations, including which loans to 9 originate, nor did it ‘approve’ underwriting guidelines for their use by Paul Financial, as plaintiffs 10 United States District Court For the Northern District of California 6 imply.” Def.’s Mot. at 13. Plaintiffs, they contend, merely have unsupported and conclusory allegations 11 of actual knowledge of a fraudulent intent. Id. 12 Plaintiffs respond that evidence in the record supports their claim that RBS was “well aware that 13 Paul Financial was originating Option ARM Loans using misleading loan documents.” Pl.’s Opp. at 14 24. They rely most heavily on the deposition of Craig Eckes, a managing director of RBS. Plaintiffs 15 point to portions of Eckes’ deposition that demonstrate that RBS was aware (I) that the Option ARM 16 loans used “teaser rates” (citing Eckes Dep., 73:17-74:10); (ii) that the teaser rates would apply only for 17 the first month of the loan (id., and Ex. 2 (Underwriting Guidelines)); (iii) that Paul Financial calculated 18 the minimum monthly payments for the first 5 years of the loan using the teaser rate, rather than the 19 interest rate that it anticipated would actually apply (id.); and (iv) that the Option ARM loans were 20 certain to cause negative amortization because, after one month, the monthly payment amounts listed 21 in the TILDS were insufficient to repay the monthly interest. 22 Plaintiffs also provide the Court with the “Underwriting Guidelines” provided to commercial 23 investors like RBS by Paul Financial. Berns Decl., Ex. 2. The Underwriting Guidelines, in a section 24 entitled “Initial Note Rate,” state that “The interest rate is based on the index plus margin rounded to 25 the nearest 1/8%. The interest rate will change on the first payment date and monthly thereafter.” Berns 26 Decl., Ex. 2 (Underwriting Guidelines). Plaintiffs contrast the definitive statement of “will change” in 27 outside investor documents with the statement in the plaintiffs’ actual Note that the interest rate “may 28 change” after the first month. Pl.’s Opp. at 5; Note ¶ 2(A). 17 1 Plaintiffs also provide deposition testimony from John Glander, Paul Financial’s former Vice 2 President for Secondary Marketing. The testimony provided by Glander suggests that RBS approved 3 loan documents before purchasing Option ARM loans from Paul Financial. Glander Dep. 27:20-24 4 (“Can you describe the due diligence that [secondary market purchasers] perform?” Glander: “They 5 would pull files, typically using a third party such as Clayton, in the case of Greenwich [now RBS], to 6 review files to make sure they met our underwriting criteria and met all compliance.”) Craig Eckes of 7 RBS also testified that RBS employed a document custodian that reviewed “the notes, mortgages, all 8 of the underlying legal documentation that led to the loan.” Eckes Dep., 52:9:14. The Court finds that there remains a genuine issue of material fact as to RBS’ actual knowledge 10 United States District Court For the Northern District of California 9 of fraudulent behavior. RBS argues that in reviewing the loan documents it was simply engaged in 11 typical due diligence. However, as plaintiffs argue, RBS’ due diligence may well have imparted the 12 knowledge required to establish aiding and abetting. Nor does defendants’ reliance on First Alliance 13 save their claim.2 See infra, Section I.3.b. There, the Ninth Circuit upheld the jury’s finding that 14 Lehman (the loan purchaser) had actual knowledge of First Alliance’s (the loan originator’s) mortgage 15 fraud. It is true that there may have been more evidence of knowledge – one Lehman officer noted his 16 concern that if First Alliance “does not change its business practices, it will not survive scrutiny” – and 17 that the Ninth Circuit found the evidence “not overwhelming.” 471 F.3d at 994. However, plaintiffs 18 need not show “overwhelming evidence” at this stage; defendants are the movants here. While RBS 19 need not disprove elements that are plaintiffs’ burden, they have failed to demonstrate to the Court, as 20 they must, that there is an absence of evidence to support the plaintiffs’ case. Celotex, 477 U.S. at 325. 21 Instead, the plaintiffs have provided numerous pieces of evidence, including deposition testimony and 22 the underwriting guidelines, to support their claim. A genuine issue of material fact remains as to RBS’ 23 actual knowledge of the alleged fraud. 24 25 26 27 28 2 First Alliance is discussed more thoroughly infra, at Section I.3.b. In First Alliance, Lehman provided First Alliance with a committed revolving line of credit and underwriting services, and eventually became First Alliance’s sole source of warehouse funding and underwriting. Id. at 986-87. The Ninth Circuit upheld aiding and abetting liability against Lehman. RBS contends that there was more evidence of actual knowledge in First Alliance than exists here. 18 1 2. Substantial Assistance 2 In order to prove that RBS aided and abetted Paul Financial’s fraudulent behavior, plaintiffs also 3 must show that RBS provided “substantial assistance or encouragement” to Paul Financial to act. First 4 Alliance, 471 F.3d at 993. In First Alliance, Lehman provided First Alliance with a committed 5 revolving line of credit and underwriting services, and eventually became First Alliance’s sole source 6 of warehouse funding and underwriting. Id. at 986-87. RBS argues that the facts here are “plainly 7 different,” because “RBS was only one of several investors in Paul Financial’s business; indeed, there 8 is no evidence that suggests RBS’s investment was irreplaceable or crucial to Paul Financial’s ability 9 to stay in business.” Def. Reply at 10. United States District Court For the Northern District of California 10 Plaintiffs contend that Paul Financial could not have originated loans without the help of lenders 11 like RBS, and that RBS was a “significant purchaser” of Paul Financial’s Option ARM loans. Paul 12 Financial, they point out, did not use its own funds to originate Option ARM loans; instead, like many 13 loan originators, it used funds obtained from warehouse lenders that provided massive credit lines. 14 Plaintiffs contend that an RBS affiliate was Paul Financial’s primary warehouse lender, providing $300 15 million credit lines. After loans were originated, they were sold in bulk to investors in the secondary 16 market. The proceeds were then used to pay back the warehouse lenders. 17 RBS was one such secondary market investor, which purchased loans from Paul Financial 18 pursuant to a Master Mortgage Loan Purchase and Interim Servicing Agreement (“MLPA”).3 In 19 discovery, RBS revealed that it purchased 5,550 Option ARM loans secured by real property located 20 in California from Paul Financial during the “liability period.” Weiss Decl., Ex. 4, No. 2. Loans were 21 sold by Paul Financial soon after closing; the Goldhabers’ loan, for example, was sold approximately 22 one month after origination. See RBS’ Supp. Filing, Doc. 408. RBS Financial Products (the defendant 23 here) would then sell the products either to other RBS entities for securitization, Eckes Dep., 11:21, or 24 25 26 27 28 3 The MLPA set the purchase terms that applied to all of the mortgage loans covered by the agreement and enabled RBS to buy Option ARM loans from Paul Financial in bulk, eliminating the need to renegotiate the purchase terms on a per transaction basis. Eckes Dep., 89:20-92:16, 43:3-44:3. 19 1 to outside banks.4 RBS Securities (not a named defendant here) was the “arm that distributed the 2 mortgage bonds that resulted in the securities of whole loans.” Eckes Dep., 11:24-12:2. This meant, 3 according to the plaintiffs, that “RBS issued and sold bonds securitized by future cash flows from the 4 loans, including the anticipated negative amortization.” Pl.’s Opp. at 5 (citing Eckes Dep. 11:10-12:2, 5 131:18-132:13) (emphasis included). By purchasing loans quickly from Paul Financial, as Eckes 6 admits, RBS “[made] sure that our clients could originate more loans.” Eckes Dep. 132:4-7. The Court finds that plaintiffs have provided sufficient evidence that there is a genuine issue of 8 material fact as to whether RBS provided substantial assistance to Paul Financial to participate in 9 fraudulent behavior. Defendant’s contention that RBS was not the only investor, as Lehman was to First 10 United States District Court For the Northern District of California 7 Alliance (eventually), is not dispositive. The test is one of “substantial assistance,” not essential 11 assistance. It is uncontroverted that RBS was one of Paul Financial’s major secondary market 12 purchasers, as well as the affiliate to a major warehouse lender. Hundreds of millions of dollars, if not 13 billions, flowed through Paul Financial because of RBS’ involvement. The Court therefore finds there 14 remains a genuine issue of material fact as to whether RBS substantially assisted Paul Financial in 15 originating the allegedly fraudulent loans. 16 17 D. 18 The Court has thus found that there remain genuine issues of material facts both as to whether 19 the loan documents contained misrepresentations, and as to whether RBS aided and abetted Paul 20 Financial. Under California law, in order to prevail on their fraudulent omission claim, plaintiffs must 21 show that: (1) the defendant concealed or suppressed a material fact; (2) the defendant was under a duty 22 to disclose the fact to the plaintiff; (3) the defendant must have intentionally concealed or suppressed 23 the fact with the intent to defraud the plaintiff; (4) the plaintiff must have been unaware of the fact and 24 would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result 25 of the concealment or suppression of the fact, the plaintiff must have sustained damage. Hahn v. Mirda, Fraudulent omission claim 26 27 28 4 Following the hearing on this motion, RBS provided a supplemental brief stating that the Goldhabers’ loan was not securitized by RBS, but rather was sold to Treasury Bank in a pool of loans. McLaughlin Decl., ¶ 4. 20 1 147 Cal. App. 4th 740, 748 (2007). While defendants generally dispute all elements of the claim, see 2 Def.’s Reply at 11, fn. 14, they focus their attack on two prongs: that the defendant concealed a material 3 fact, and that the plaintiff relied on it. The Court has already found that there remains a genuine issue 4 as to whether the defendant concealed a material fact, so will turn to defendant’s latter contention: that 5 plaintiffs did not rely on defendant’s alleged fraud. For fraudulent misrepresentation claims, “it is not . . . necessary that [a plaintiff’s] reliance upon 7 the truth of the fraudulent misrepresentation be the sole or even the predominant or decisive factor 8 influencing his conduct . . . It is enough that the representation has played a substantial part, and so has 9 been a substantial factor, in influencing his decision.” In re: Tobacco II Cases, 46 Cal. 4th 298, 326 10 United States District Court For the Northern District of California 6 (2009). Reliance on a fraudulent omission can be shown where a plaintiff proves that "had the omitted 11 information been disclosed, [he] would have been aware of it and behaved differently.” Mirkin v. 12 Wasserman, 5 Cal. 4th 1082, 1093 (1993). 13 Defendants argue that plaintiffs could not have relied on omissions in the loan documents 14 because (1) they understood how negative amortization and adjustable interest loans operated, and (2) 15 plaintiffs’ testimony indicates that Plaintiffs relied on contradictory information from their independent 16 broker rather than on the documents. Def.’s Reply at 11. 17 Regarding the first contention, as discussed above, the Court finds that the Goldhabers’ general 18 knowledge of the concept of negative amortization does not necessarily evince an understanding of this 19 loan, particularly considering the confusing (and potentially misleading) nature of the loan documents. 20 See Section I.B. There is no evidence, for example, that the Goldhabers understood that following the 21 payment schedule provided in the TILDS would necessarily lead to negative amortization. 22 therefore cannot rely on an assertion that the Goldhabers understood the machinations of loans in 23 general to demonstrate a lack of reliance on the representations made in this loan. RBS 24 Regarding RBS’ second contention, that the Goldhabers actually relied on an independent 25 broker’s statements instead of the loan documents, there is a dispute between the parties as to whether 26 the broker that spoke with Mrs. Goldhaber was a representative of Paul Financial or an independent 27 third-party retailer. See Pl.’s Opp. at 14; Def.’s Reply at 11. However, even if the broker was 28 unaffiliated with Paul Financial, there remains a triable issue of material fact regarding the plaintiffs’ 21 reliance on the loan documents. As noted above, the Goldhabers repeatedly stated at deposition that had 2 the omitted information been provided in the loan documents, they would have acted differently. E. 3 Goldhaber Dep., 87:19-88:22, 127:25-127:8; J. Goldhaber Dep., 133:23-134:2, 134-7-14 (“If this note 4 said [that] ‘If I make payments according to the payment amount stated in this note, my loan - - this loan 5 will cause my principal balance to increase,’ otherwise negative amortization, would you have entered 6 into the loan?” “No.”) Moreover, there are factual questions about whether the broker even discussed 7 the terms of the loan. See J. Goldhaber Dep., 77:3-5 (“Did [the broker] tell you anything about what 8 the terms of the loan were going to be?” “No. He says to me, ‘We going to send the documents. You 9 have all the time in the world to read them.’ And we did.”) The Court finds the evidence credible that 10 United States District Court For the Northern District of California 1 the Goldhabers relied on the loan documents; at the very least, they have set forth specific facts showing 11 a genuine issue for trial. See Celotex, 477 U.S. at 324. 12 The Court finds that defendants have not met their burden for summary judgment with respect 13 to any of the five elements of common law fraud. Therefore, the Court DENIES defendants’ motion 14 for summary judgment with respect to the fraud claim. 15 16 E. 17 Plaintiffs also bring claims against RBS pursuant to California’s UCL, under the “unfair” and 18 “fraudulent” prongs of that statute (excluding the “unlawful” prong, as the Court found their TILA 19 claims barred by the statute of limitations). RBS argues that plaintiffs’ UCL claims fail for three reasons 20 independent of the common law fraud claim: (a) Plaintiffs lack standing under the UCL because they 21 have not suffered an injury in fact that is a result of the defendant’s unfair competition; (b) the loan 22 documents were not fraudulent or unfair; and (c) plaintiffs’ requested relief is not permitted under the 23 UCL. MSJ at 21-24. UCL Claims 24 25 26 1. UCL Standing Requirements RBS argues that plaintiffs have failed to prove standing under the UCL, because they have not 27 28 22 1 shown that they have “suffered injury in fact.”5 MSJ at 21 (citing Sevidal v. Target Corp., 189 Cal. App. 2 4th 905, 923-24 (2010)). According to RBS, plaintiffs have failed to prove any injury – including lost 3 equity - because they “achieved their objectives” and “received the benefit of the bargain – in this case, 4 to purchase the subject investment property and create a stream of rental income.” Id. at 22 (citing 5 Birdsong v. Apple, Inc., 590 F.3d 955, 961-62 (9th Cir. 2009)). 6 Plaintiffs contend that this argument is a red herring because plaintiffs “plainly did not bargain 7 for a loan with guaranteed negative amortization” and, therefore, their “objectives” are irrelevant. Pl.’s 8 Opp. at 18. More importantly, RBS’ “deceptions here resulted in plaintiffs’ loss of equity in their 9 home.” Id. United States District Court For the Northern District of California 10 The Court finds that plaintiffs have met the threshold standing requirements under the UCL. The 11 Ninth Circuit case RBS relies on, Birdsong, is inapposite. There, the plaintiffs claimed that the iPods 12 they purchased suffered diminution in value because there was an inherent risk of hearing loss if listened 13 to at high volumes. 590 F.3d at 961. The Ninth Circuit found that the plaintiffs failed to allege “that 14 Apple made any representations that iPod users could safely listen to music at high volumes for 15 extended periods of time. In fact, the plaintiffs admit that Apple provided a warning against listening 16 to music at loud volumes.” Id. The alleged injury in fact – that their iPods were worth less because of 17 the supposed defect – was premised on the loss of a safety benefit that was not part of the bargain to 18 begin with. 19 Here, however, the Court has found that representations were made, and were potentially 20 misleading. Unlike the plaintiffs in Birdsong, the plaintiffs have shown that the documents at issue may 21 contain misrepresentations that caused them to obtain a loan that, following the attached payment 22 schedule, led to lost equity in their home. See Section I.(2). The deleterious effects of guaranteed 23 negative amortization as well as the additional interest owed on a ballooning principal balance constitute 24 injury in fact. 25 26 5 27 28 RBS also contends that plaintiffs lack standing because they have not demonstrated injury caused by RBS, as RBS was not party to the mortgage, the documents were not fraudulent and, in any case, the plaintiffs did not rely on them. MSJ 21-23. The Court has already disposed of these arguments supra, Sections I.(2) through (4). 23 1 2. “Fraudulent” and “Unfair” Prongs of the UCL 2 The term “fraudulent” as used in § 17200 requires only a showing that members of the public 3 are likely to be deceived. See Blakemore v. Superior Court, 129 Cal. App. 4th 36, 49 (2005). RBS 4 argues that “because RBS is not liable for any alleged material omission in the loan documents, as 5 discussed above in Sections II through IV, neither plaintiffs nor any purported class member can prevail 6 under the ‘fraudulent’ prong of the UCL.” MSJ at 23. As the Court has already found that RBS may 7 be held liable under an aiding and abetting theory, see Section I.3, the Court need not re-address that 8 argument here. Conduct is “unfair” under the UCL if: (1) it causes substantial injury, (2) the injury is one that 10 United States District Court For the Northern District of California 9 consumers themselves could not reasonably have avoided, and (3) the injury is not outweighed by any 11 countervailing benefits to consumers. See, e.g., Camacho v. Auto. Club of S. Cal., 142 Cal. App. 4th 12 1394, 1400-03 (2006). RBS’ arguments here are similar to the arguments elsewhere in its motion -- that 13 RBS was not itself liable for Paul Financial’s loan documents, that the TIL Recap differentiates between 14 the interest rate and the APR, and that plaintiffs were “experienced real estate investors” who could have 15 avoided origination in the first place. MSJ at 24. The Court has already address and rejected these 16 arguments, supra. To the extent that RBS presents a new argument here that plaintiffs could have made 17 “full payment” (i.e., an amortizing payment), the Court reiterates its finding that the crux of the 18 complaint is that following the only listed payment schedule - the TILDS - necessarily led to negative 19 amortization. The possibility that one could have escaped this inevitability does not absolve of the loan 20 of liability under the unfair prong of the UCL. 21 22 3. Whether Plaintiffs’ Requested Relief Is Permitted 23 The UCL limits a prevailing party to injunctive relief and restitution. The plaintiffs’ asserted 24 damages are the loss of home equity, and their prayer for relief includes “restitution, restitutionary 25 disgorgement of all profits accruing to Defendants because of their unfair, fraudulent and deceptive acts 26 and/or practices, attorney’s fees and costs.” 4AC ¶ 116, 117. 27 The plaintiffs have presented a number of theories under which they claim restitution, to which 28 RBS has provided a number of defenses. Responding to the 4AC, RBS initially argued that loss of 24 home equity cannot be cured through restitution from a subsequent purchaser of loans. MSJ at 24 2 (citing First Alliance, 471 F.3d at 995-98). Plaintiffs did not respond to this argument. Instead, in their 3 opposition, plaintiffs argued that they are owed restitution because, “when it securitized Plaintiffs’ loan, 4 RBS received payments that were directly related and attributable to Plaintiffs’ payments of principal 5 and interest.” Pl.’s Opp. at 21. In reply, RBS pointed out that it had never securitized plaintiffs’ loan; 6 instead, it had simply sold it to an unaffiliated bank. Plaintiffs then argued, at the motion hearing, that 7 the proceeds RBS received from the subsequent loan purchaser could itself be the basis for a 8 restitutionary claim, because those proceeds represent payments that the Goldhabers were scheduled to 9 make, regardless of to whom they were directly paid. RBS, relying on First Alliance, responded that 10 United States District Court For the Northern District of California 1 the UCL does not allow recovery of proceeds or profits of the “speculative future amounts that Plaintiffs 11 might have at some point paid” to a subsequent purchaser. See RBS’ Resp. to Plaintiff’s Obj. to RBS’ 12 Supp. Filing, Doc. 408. 13 After oral argument, the parties filed supplemental briefing regarding plaintiffs’ loan. RBS 14 revealed that it purchased plaintiff’s loan (which itself originated on July 28, 2005) from Paul Financial 15 in September 2005. See RBS’ Supp. Filing Regarding Sale of Subject Loan, Doc. 404, Ex. 1, ¶ 3. It 16 then sold the loan to Treasury Bank, an unaffiliated entity, in December of 2005. Id. at ¶¶ 4-5. RBS 17 states that “although RBS received loan payments made by plaintiffs to their loan servicer during the 18 three month period that it owned the subject loan, contrary to plaintiffs’ allegations, those ceased upon 19 the loan’s sale to Treasury Bank.” Id. at 3. 20 RBS therefore received actual payments from the plaintiffs during the three month period it 21 owned the loan. The concern before the First Alliance court was that “the money in which the 22 borrowers purport to have an ownership interest is the money that flowed from First Alliance to 23 Lehman, in the form of bundled mortgage payments to repay [Lehman’s] capital line, and to the 24 bondholders to whom Lehman sold the mortgage-backed securities. In order to draw the necessary 25 connection between the Borrowers' ownership interest and these funds, however, the court would have 26 to assume that all of the money that flowed to Lehman pursuant to its relationship with First Alliance 27 was taken directly from the Borrowers and should not have been.” 471 F.3d at 997. Drawing such an 28 assumptive and indirect connection is unnecessary here, since payments were made directly from the 25 1 plaintiffs to RBS, not just bundled mortgage payments by a large group of borrowers. Here, the three 2 months of payments and the portion (if any) that was “ill gotten” is directly calculable. Therefore, at 3 this time, it appears that restitution remains a viable remedy, and, therefore, summary judgment is 4 inappropriate on the UCL claim. This leaves open the question as to the viability of plaintiffs’ second theory of restitution -- that 6 they can recover the proceeds paid to RBS by Treasury Bank (the subsequent loan purchaser) because 7 those proceeds were paid on the anticipation of the plaintiffs’ future mortgage payments to Treasury 8 Bank. The Court is skeptical that such attenuated and prospective proceeds are subject to a claim for 9 restitution. As plaintiffs point out, however, RBS chose to file this motion for summary judgment 10 United States District Court For the Northern District of California 5 before discovery was complete, presumably so it could be heard at the same time as plaintiffs’ motion 11 for class certification. Considering the changing information before the Court regarding plaintiffs’ loan, 12 the Court finds it appropriate to deny summary judgment on the theory of restitution at this time. This 13 issue may be re-raised prior to trial. 14 15 In conclusion, defendants motion for summary judgment is DENIED. The Court will now turn to plaintiffs’ motion for class certification. 16 17 18 19 20 21 22 23 24 25 26 27 28 II. MOTION FOR CLASS CERTIFICATION Plaintiffs move for certification of a class under Fed. R. Civ. P. 23(b)(3). Plaintiffs seek to certify the following class: All individuals who within the four-year period preceding the filing of Plaintiffs’ original complaint through the date that notice is mailed to the Class (the “Class Period”), obtained an Option ARM loan from Paul Financial, LLC that either (a) was secured by real property located in the State of California, or (b)was secured by real property located outside the State of California where the loan was approved in or disseminated from California, which loan had the following characteristics: (I) the yearly numerical interest rate listed on page one of the Note is 3.0% or less; (ii) in the section entitled “Interest,” the Promissory Note states that this rate “may” instead of “will” or “shall” change, (e.g., “The interest rate I will pay may change”); (iii) the yearly numerical interest rate listed on page one of the Note was only effective through the due date for the first monthly payment and then adjusted to a rate which is the sum of an “index” and “margin”; and (iv) the Note does not contain any statement that paying the amount listed as the “initial monthly payment(s),” will definitely result in negative amortization or deferred interest. Excluded from the Class are Defendants’ employees, officers, directors, agents, representatives, and their family members, as well as the Court and its officers, employees, and relatives. 26 1 In their motion for certification, Plaintiffs stated that they also sought to certify a subclass 2 consisting of all Class members whose Option ARM loans were sold or otherwise assigned by Paul 3 Financial to RBS Financial Products, Inc. (the “RBS Subclass”), which Mr. and Mrs. Goldhaber seek 4 to represent; and a second subclass of all Class members whose Option ARM loans were sold to HSBC, 5 which Jordan was to represent. Since that time, Jordan has dismissed his claims against HSBC, and 6 plaintiffs have not sought to join any new class representatives. Therefore, the Court understands 7 plaintiffs to be seeking a single class, as described above, consisting of all Class members whose Option 8 ARM loans were assigned to RBS. The Court notes, initially, that it denied plaintiffs’ motion for class certification in an earlier 10 United States District Court For the Northern District of California 9 iteration of this case. See Jordan v. Paul Financial, 2009 WL 192888, No. C 07-04496 SI (N.D.Ca. Jan. 11 27, 2009). At that time, the putative class representative was Jordan and the defendants included Paul 12 Financial, HSBC, and Luminent. The Court found that plaintiffs failed to establish traceability, a 13 requirement for standing, because under the class definition provided by the plaintiffs, members of the 14 putative class owned loans that were held or serviced by entities other than the companies that held and 15 serviced Jordan’s loan. The Court held that plaintiff could not use class discovery to identify other 16 defendants and only then join named plaintiffs that would have standing against the newfound 17 defendants. Plaintiffs cure that defect here by seeking class certification against only RBS, the 18 purchaser of the Goldhabers’ loan. 19 The Court also notes that two other courts in this district have certified classes alleging claims 20 nearly identical to those alleged here. In Plascencia v. Lending 1st Mortgage, 259 F.R.D. 437 (N.D.Ca. 21 2009), Judge Wilken granted in part plaintiffs’ motion for class certification for claims against Lending 22 1st, the loan originator, as well as EMC, the mortgage purchaser, of strikingly similar Option ARM 23 loans. Id. at 441. There, like here, the plaintiffs’ TILDS included a schedule of estimated payments 24 based on the initial teaser rate despite the fact that the interest rate rose almost immediately. As here, 25 following the payment schedule would lead to certain negative amortization. Judge Wilken found that 26 plaintiffs met their burden for certification on their common law fraud and UCL claims. Id. Likewise, 27 in Lymburner v. U.S. Financial Funds, 263 F.R.D. 534 (N.D.Ca. 2010), Judge Laporte certified a class 28 asserting fraud claims where a loan certain to negatively amortize pursuant to its payment schedule used 27 1 a promissory note claiming the interest rate “may” increase, instead of “will” or “shall.” Id. While that 2 suit was brought only against the loan originator, many of its arguments are apposite here. The Court 3 finds persuasive the reasoning in both cases, and where appropriate, will adopt their reasoning. 4 5 A. 6 In their opposition to plaintiffs’ motion for class certification, RBS reasserts its challenge to 7 plaintiffs’ standing to sue RBS, citing the Goldhabers’ Chapter 7 bankruptcy. The Court rejected this 8 argument with regard to defendants’ summary judgment motion. See Section I.A. The same reasoning 9 applies here: due to the trustee stipulation, the Goldhabers have standing to challenge fraudulent United States District Court For the Northern District of California 10 Standing behavior committed by Paul Financial and RBS with respect to the loan documents.6 11 12 B. 13 The requirements of Rule 23(a) are numerosity, commonality, typicality, and adequacy. They 14 Rule 23(a) Requirements will be discussed in turn. 15 16 1. 23(a)(1) - Numerosity 17 In order to certify, the class must be so numerous that joinder of all members individually is 18 “impracticable.” See Fed. R. Civ. P. 23(a)(1). RBS contends that plaintiffs have failed to identify the 19 number of borrowers who received the Option ARMs as defined by the proposed class in the Fourth 20 Amended Complaint and the class certification motion.7 RBS acknowledges, however, that the number 21 in the subclass is at least 3,000. Def.’s Opp. at 11, n. 11. The Court finds that this is sufficient to 22 establish numerosity under 23(a)(1). 23 24 25 6 In their “Standing” section, defendants also cite plaintiffs’ bankruptcy as a reason to reject their adequacy as class representatives. This issue will be addressed below. See Section II.B.4. 7 26 27 28 RBS argues that plaintiffs “surreptitiously” proposed a much bigger class in their motion for certification than the 4AC. The 4AC cited specific loan forms that used the terms at issue here; the proposed definition in the class motion simply describes the characteristics of those terms. The Court will allow the modification. See In re TFT-LCD (Flat Panel) Antitrust Litigation, 267 F.R.D. 583, 591 (N.D.Ca. 2010) (allowing “proposed modifications [that] are minor, require no additional discovery, and cause no prejudice to defendants.”) 28 1 2. 23(a)(2) - Commonality 2 Rule 23(a)(2) requires the existence of “questions of law or fact common to the class.” RBS 3 does not specifically attack commonality under 23(a)(2); it instead disputes commonality under Rule 4 23(b)(3). Def.’s Opp. at 17; citing Danvers Motor Co. v. Ford motor Co., 542 F.3d 141, 148 (3d. Cir. 5 2008) (when class certification is sought under Ruler 23(b)(3), the “commonality requirement is 6 subsumed by the predominance requirement” because “it is far more demanding.”) The Court finds that 7 plaintiffs satisfy the requirements of 23(a)(2), and will address RBS’ arguments related to commonality 8 with respect to 23(b)(3) below.8 See Plascencia, 259 F.R.D. at 443; Lymburner, 263 F.R.D. at 539-40. 9 United States District Court For the Northern District of California 10 11 3. Typicality 12 Rule 23(a)(3) requires the named plaintiffs to show that their claims are typical of those of the 13 class. To satisfy this requirement, the named plaintiffs must be members of the class and must "possess 14 the same interest and suffer the same injury as the class members." Gen. Tel. Co. of Sw. v. Falcon, 457 15 U.S. 147, 156 (1982) (quotation marks and citation omitted). The typicality requirement "is satisfied 16 when each class member's claim arises from the same course of events, and each class member makes 17 similar legal arguments to prove the defendant's liability." Rodriguez v. Hayes, 591 F.3d 1105, 1124 18 (9th Cir. 2010) (citation omitted). Rule 23(a)(3) is "permissive" and only requires that the named 19 plaintiffs' claims be "reasonably co-extensive with those of absent class members." Hanlon, 150 F.3d 20 at 1020. 21 RBS argues that the proposed class representatives – the Goldhabers – lack typicality because 22 of individual reliance issues and because their loan documents differed from those of other class 23 members. Def.’s Opp. at 13. 24 25 26 27 28 8 For example, all classmembers purchased a loan from Paul Financial, which, in turn, sold it to RBS. All classmembers’ loan documents contained a low teaser rate that dictated the “payment rate” outlined by the TILDS payment schedule, but lasted only one month. All of the loan documents stated the interest rate “may” change, rather than “will” change. The legal question of whether these statements and omissions constitute misrepresentations, a required element of fraud, is also common to the class. 29 1 a. Reliance As discussed in Section I.D, in order to establish their fraudulent omission claim, plaintiffs must 3 show that they relied on the concealed or suppressed fact. Hahn v. Mirda, 147 Cal. App. 4th 740, 748 4 (2007); see also Blickman Turkus, LP v. MF Downtown Sunnyvale, LLC , 162 Cal. App. 4th 858, 868-69 5 (2008) (one element of fraud is justifiable reliance). RBS argues that the Goldhabers relied on a third- 6 party brokers’ oral statements in choosing to obtain the loan, and therefore, they are not typical of the 7 class. Def.’s Opp. at 12. In Section I.D, supra, the Court found that there remains a genuine issue of 8 material fact as to whether the Goldhabers relied on the loan documents. The Goldhabers repeatedly 9 stated at deposition that had the omitted information been provided, they would have acted differently. 10 United States District Court For the Northern District of California 2 See E. Goldhaber Dep., 87:19-88:22, 127:25-127:8; J. Goldhaber Dep., 133:23-134:2, 134-7-14. The 11 Court finds that plaintiffs have made a sufficient showing of reliance for the purposes of typicality under 12 Rule 23(a)(2). 13 RBS also argues that “evidence of reliance on third party statements precludes an individual 14 from showing reliance on documents as pled here,” citing to Ostayan v. Serrano Reconveyance Co., 77 15 Cal. App. 4th 1411, 1419 (Cal. 2000). Def.’s Opp. at 12. However, that case stands for the 16 unremarkable proposition that “a plaintiff’s concession that he did not rely on a defendant’s statement 17 preclude[s] him from establishing reliance on his fraud claim.” Def.’s Opp. at 12. Here, plaintiffs did 18 not concede that they did not rely on the loan documents; rather, they repeatedly stated they did rely on 19 the loan documents. See E. Goldhaber Dep., 87:19-88:22, 127:25-127:8; J. Goldhaber Dep., 133:23- 20 134:2, 134-7-14. Moreover, in establishing that a misrepresentation was a cause of injury-producing 21 conduct, “[i]t is not necessary that the plaintiff’s reliance upon the truth of the fraudulent 22 misrepresentation be the sole or even predominant or decisive factor influencing his conduct. It is 23 enough that the representation has played a substantial part, and so had been a substantial factor, in 24 influencing his decision.” In re: Tobacco II Cases 46 Cal. 4th 298,, 326-27 (2009). Here plaintiffs have 25 established, at the very least, that the omissions in the documents regarding the actual interest rate and 26 the certainty of negative amortization played a substantial factor in influencing their decisions to obtain 27 28 30 1 the loan.9 2 The Court finds that plaintiffs have sufficiently shown reliance for the purposes of typicality. 3 4 b. The Loan Documents 5 RBS also contends that the Goldhabers are not typical because their loan documents “differ from 6 those of other members.” Def.’s Opp. at 12. The Court disagrees. Plaintiffs have limited the class 7 definition to those who accepted loans with characteristics similar to the Goldhabers’ loan: low initial 8 rate that adjusts after one month, statement that negative amortization “may” occur, and guaranteed 9 negative amortization based on the disclosed payment amount. This is sufficient to establish Rule United States District Court For the Northern District of California 10 23(a)(3) typicality. 11 12 4. Adequacy 13 Rule 23(a)(4) permits the certification of a class action only if “the representative parties will 14 fairly and adequately protect the interests of the class.” Representation is adequate if: (1) the class 15 representative and counsel do not have any conflicts of interest with other class members; and (2) the 16 representative plaintiff and counsel will prosecute the action vigorously on behalf of the class. See 17 Staton, 327 F.3d at 954. Plaintiffs argue that the claims of the class members and the proposed 18 representatives are “virtually coextensive,” and that the law firms representing them have solid 19 reputations for excellence, and, therefore, they have met the requirements of 23(a)(4). 20 RBS contests plaintiffs’ adequacy on three grounds: that their claims are time barred; that they 21 do not understand their claim; and that their bankruptcy, for various reasons, affected their adequacy. 22 23 a. 24 Timeliness RBS argues that the Goldhabers’ claims are time-barred. In California, the statute of limitations 25 9 26 27 28 Defendants’ considerable discussion of reliance by former-plaintiff Jordan is irrelevant to the current motion. The Goldhabers have explicitly stated that they read the loan documents, and no evidence has been presented that a broker described the negative amortization inherent to the loan. See J. Goldhaber Dep., Moore Ex. 3, 77:3-8 (“Did he [the mortgage broker] tell you anything about what the terms of the loan were going to be?” “No. He says to me, ‘We going to send the documents. You have all the time in the world to read them.’ And we did.’”) 31 1 is three years for fraudulent omission claims and four years for UCL claims. A plaintiff who identifies 2 Doe defendants in a complaint has three years from the filing of the complaint to identify and serve 3 defendants. See California Code of Civ. P. §§ 474 and 583.210(a). The defendant is then considered 4 a party to the action from its commencement. Fuller v. Tucker, 84 Cal. App. 4th 1163, 1170 (Cal. Ct. 5 App. 2000). See Solomon v. E-Loan, Inc., 2011 WL 1253840, at *6 (E.D. Cal. Mar. 30, 3011). The Goldhabers obtained the subject loan on July 28, 2005. The original complaint was filed 7 on August 30, 2007, and named Does 1-10. RBS was named as a defendant, and identified as Doe 1, 8 in the 4AC on October 7, 2009. Because plaintiffs named RBS within the allowable time period, for 9 the purposes of the statute of limitations they are considered to have been named as defendants on 10 United States District Court For the Northern District of California 6 August 30, 2007 – within both the fraud and UCL claims’ statute of limitations. The claims are 11 therefore timely. 12 13 b. Claim Comprehension 14 RBS contends that the Goldhabers do not understand the nature of their claims, and, therefore, 15 they are not adequate representatives. Def.’s Opp. at 15; citing Bodner v. Oreck Direct, LLC, 2007 WL 16 1223777, *2 (N.D. Cal. Apr.25, 2007) (Patel, J.) (plaintiffs’ “undeniable and overwhelming ignorance 17 regarding the nature of this action, the facts alleged, and the theories of relief against [the] defendant” 18 rendered them inadequate under Rule 23(a)(4).) RBS cites to the fact that the 4AC describes the subject 19 transaction as a refinance of their home, when it was instead a purchase of a home. 4AC, ¶ 3. According 20 to RBS, had plaintiffs read the complaint, they would have noticed (and, presumably, amended) the 21 error. 22 The Court disagrees that this error renders the plaintiffs inadequate. A single error in a 23 complaint is not a basis to find that plaintiffs do not understand the nature of their claims. The court in 24 Bodner found dispositive the fact that the plaintiff met his attorney for the first time the day before his 25 deposition, and that the firm representing the plaintiff had faced past controversy regarding its 26 relationships to plaintiffs. Bodner, at *1. There are no such claims here. Instead, at his deposition, Eli 27 Goldhaber expressed an understanding of the nature of the claims of this suit. See, e.g., E. Goldhaber 28 Dep., 135:5-17 (“I pay my payment, 1300 a month. I look in my statement, and I see minus - another 32 1 minus 1400. So they’re taking 3,000 – almost 3,000 a month out of my equity . . . It just doesn’t show 2 it to me here, in my opinion.”) The Goldhabers sufficiently and adequately comprehend the claims in 3 this suit. 4 5 c. The Goldhabers’ Bankruptcy 6 RBS argues that filing for bankruptcy rendered the Goldhabers’ inadequate class representatives 7 because (1) their standing “fix” (i.e., the stipulation) creates an impermissible conflict of interest with 8 members of the class, and (2) their initial failure to disclose this claim in their bankruptcy proceedings 9 raises questions about their credibility. United States District Court For the Northern District of California 10 As discussed above, the Goldhabers filed a voluntary petition for Chapter 7 bankruptcy on 11 March 18, 2010. See In re Goldhaber, No 2:10-BK-20052 (Bankr. C.D. Cal. Mar. 18, 2010). They did 12 not list any interest in this litigation in their schedules or petition. Id. After being presented with 13 challenges by RBS regarding their standing and judicial estoppel considering their failure to list their 14 claims, the Goldhabers successfully petitioned the Bankruptcy Court to reopen their case. They then 15 amended the schedule to add their interest in this litigation, and entered into the stipulation with the 16 trustee granting them standing in this case. The Court has already found the stipulation granted the 17 Goldhabers standing to pursue their claims. See Section I.A. 18 RBS argues that the stipulation creates “a clear conflict of interest between the Goldhabers and 19 members of the class.” Def.’s Opp. at 15. According to RBS, if the class is approved, the Goldhabers 20 would be “beholden to two masters” -- the trustee and the class -- and thus could not serve as adequate 21 class representatives. In support, RBS relies on Judge Posner’s opinion in Dechert v. Cadle Co., 333 22 F.3d 801, 803 (7th Cir. 2003) (vacating class certification). There, the Seventh Circuit analyzed whether 23 a bankruptcy trustee could serve as a class representative. While explicitly stating that they “do not 24 want to lay down a flat rule that a trustee in bankruptcy (or, what is the equivalent, a debtor in 25 possession) can never be a class representative,” the court held that the trustee in bankruptcy in that case 26 was an inadequate representative due to a fundamental conflict of interest: it was an agent of both the 27 estate and the class. The court first noted that a class representative always has some conflict of interest 28 between her own interests and that of the class. 33 1 2 3 4 5 6 So what difference does it make whether the named plaintiff is a trustee in bankruptcy? The difference is that in the usual class action the named plaintiff is a nominal party and the real party is the lawyer for the class. The lawyer has no reason to favor the named plaintiff over the rest of the class members. When the named plaintiff is a fiduciary, however, he cannot just ‘go along’ with the class lawyer. He has a duty to seek to maximize the value of his claim, and this duty may collide with his fiduciary duty as a class representative (if he is permitted to be the class representative) to represent all members of the class equally. Such a collision is especially likely in a case in which the fiduciary is a trustee in bankruptcy, because class-action litigation tends to be protracted yet the Bankruptcy Code requires the trustee to complete his work expeditiously. 7 Id. at 803. The court also noted a separate conflict of interest in that case: the defendant in the class 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 action was affiliated with a creditor to the estate that the trustee represented, thereby putting the trustee on both sides of the action. Id. The Court finds that Dechert does not control here. First, the latter concern is not present: RBS is not a creditor of the Goldhabers’ estate, and thus is not on both sides of the controversy. More fundamentally, the Goldhabers are not the trustees in bankruptcy. While the facts here are idiosyncratic, they remain the debtors. The stipulation granting them standing states that the “[d]ebtors are hereby delegated and granted authority and standing to prosecute, on behalf of the Debtor’s Estate subject to exemption rights, the Debtor’s claims as pleaded.” Weiss Decl., Ex. 9. Unlike the trustee in Dechert, the Goldhabers have a personal stake in this litigation. At the same time, that personal stake is limited to the their exemption rights - a total of $1,820. The claims of the class are likely well in excess of that amount, as RBS recognizes. See Def.’s Opp. at 25. Because the Goldhabers’ personal stake is below the claimed damages, there is no reason to believe they will fail to “go along” with the class lawyer out of an interest to “maximize the value of [their] claim” - the primary concern of the Seventh Circuit in Dechert. See also Cobb v. Monarch, 913 F.Supp. 1164, 1173 (N.D. Ill. 1995) (in suit for violation of lending laws, where bankrupt plaintiff maintained $1,025 in exemption rights, court found she was an adequate class representative.) Moreover, in this case, the Court need not merely ponder the theoretical effects of any conflicts of interest presented by the unusual facts before it. Here, the very situation that concerned the Seventh Circuit has already occurred. RBS attempted to settle with the trustees of the Goldhabers’ estate after the stipulation was entered into. See In re Goldhaber, Doc. 35, No 2:10-BK-20052 (Bankr. C.D. Cal. 34 1 Mar. 18, 2010). RBS offered the estate $30,000 to settle this claim. Id. The Goldhabers would have 2 received their full exemption rights in this settlement. Id. at 4. It would also clearly have been in the 3 creditors’ interest to receive an immediate $30,000 rather than risk the possibility of protracted class 4 litigation and lesser or no damages. Indeed, that is why the trustee attempted to enter into the settlement 5 in the first place. However, the Goldhabers not only opposed the offer, they filed oppositions and fought 6 the trustee’s standing to settle. The Bankruptcy Court agreed with the Goldhabers and rejected the 7 trustee’s standing to settle. Therefore, the situation has presented itself where the Goldhabers could 8 have advanced the interests of their estate over the interests of the class. They rejected that opportunity. 9 This is ample evidence that the concerns present in Dechert about a potential conflict of interest are United States District Court For the Northern District of California 10 inapplicable here. 11 The Court does have a secondary concern about the adequacy of the Goldhabers as class 12 representatives with respect to the bankruptcy. At the motion hearing, the Court expressed issue with 13 the general proposition of a bankrupt representing a class. This concern is exacerbated by the fact that, 14 as RBS points out, that the Goldhabers failed to disclose this claim with their petition. “The honesty 15 and credibility of a class representative is a relevant consideration when performing the adequacy 16 inquiry because an untrustworthy plaintiff could reduce the likelihood of prevailing on the class claims.” 17 Harris v. Vector Mktg. Corp., 753 F. Supp. 2d 996, 1015 (N.D. Cal. 2010) (Chen, J.). The Court asked 18 plaintiffs to file supplemental authorities wherein a bankrupt represented a class, which plaintiffs have 19 done. See Doc. 403; citing, e.g., Hunt v. Check Recovery Systems, Inc., 241 F.R.D. 505, 511 (N.D. Cal. 20 2007) (Jenkins, J.) (plaintiffs were adequate class representatives to pursue their FDCPA claims against 21 check recovery company despite bankruptcies); Hobson v. Lincoln Insurance Agency, Inc., 2001 WL 22 648958 (N.D. Ill. 2001) (“neither the fact that [plaintiff] filed for bankruptcy protection . . . nor her lack 23 of knowledge about the particulars of her case suggest the sort of ‘antagonistic or conflicting claims’ 24 that will result in unfair and inadequate representation” of a suit against insurance agency); Wanty v. 25 Messerli & Kramer, 2006 WL 2691076, *1 (E.D. Wis. Sept. 19, 2006) (where defendant’s sole 26 opposition to class certification was plaintiffs’ bankruptcy, the court still found that plaintiffs were 27 adequate class representatives); Cobb, 913 F. Supp. at 1173 (where bankrupt plaintiff maintained 28 exemption rights, she was an adequate class representative.) Plaintiffs have also submitted authorities 35 where other plaintiffs failed to initially disclose their claims in their bankruptcy petitions. See Cobb, 2 913 F. Supp. at 1173 (plaintiffs filing of an amended schedule of exempted property repaired their 3 ability to become class representatives); Hubbard v. Midland Credit Management, Inc., 2008 WL 4 5384219, *3 (S.D. Ind. Dec. 19, 2008) (failure to disclose lawsuit regarding plaintiffs FDCPA claim was 5 not a bar to adequacy because plaintiff later amended her bankruptcy schedule asset list). After review 6 of the authorities provided by plaintiff, the Court’s concerns regarding the adequacy of the Goldhabers 7 as class representatives are assuaged. Their bankruptcy will not bear directly on the litigation, nor will 8 it raise such unique defenses so as to render them inadequate class representatives. See Washington v. 9 Joe’s Crab Shack, 271 F.R.D. 629, 638 (N.D.Cal. 2010) (Hamilton, J.) (“In general, it is only when the 10 United States District Court For the Northern District of California 1 representative's credibility bears directly on matters directly relevant to the litigation, or when the 11 alleged conflict jeopardizes the interests of the class, that the court should find the representative 12 inadequate.”) The Court finds that plaintiffs have met the requirements of 23(a)(4). 13 14 C. 15 Along with the requirements of 23(a), a plaintiff must also establish that one or more of the 16 grounds for maintaining the suit are met under Rule 23(b). Here, plaintiffs seek certification under 17 Rule 23(b)(3), which provides that a case may be certified as a class action if: Rule 23(b) Requirements 18 the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. 19 20 21 22 Fed. R. Civ. P. 23(b)(3). Plaintiffs argue that they have satisfied these requirements; RBS contends that plaintiffs have failed to show either predominance or superiority. 23 24 25 26 27 28 1. Predominance The test for predominance asks “whether proposed classes are sufficiently cohesive to warrant adjudication by representation.” Hanlon, 150 F.3d at 1022 (quoting Amchem, 117 S.Ct. at 2249). In contrast to the commonality requirement of Rule 23(a), Rule 23(b)(3) “focuses on the relationship between the common and individual issues.” Id. Claims need not be identical for common issues of 36 1 law and fact to predominate, they need only be reasonably coextensive with those of absent class 2 members. Hanlong, 150 F.3d at 1020. 3 Plaintiffs contend that common issues predominate for their fraudulent omissions and UCL 4 claims, as well as issues of assignee liability. Pl.’s Mot. for Class Cert., 17-24. RBS disputes 5 predominance on three grounds -- that possible bankruptcies of individual class members will require 6 individualized inquiries, that reliance issues destroy predominance, and that different borrowers have 7 varying degrees of alleged harm. 8 9 a. Potential Bankruptcies United States District Court For the Northern District of California 10 RBS contends that “in light of current economic conditions,” it likely that some number of 11 proposed class members will have filed for bankruptcy. According to RBS, individualized questions 12 regarding each class member’s standing will therefore predominate. The Court disagrees. First, RBS 13 has not provided any evidence that a number of purported class members have declared bankruptcy. 14 A defendant cannot defeat class certification by simply making an ipse dixit allegation that because of 15 the economic downturn, many members of a class will likely be bankrupt; if it could, Rule 23 would be 16 eviscerated. Moreover, even if some members of the class have declared bankruptcy, determining their 17 standing will be a relatively straightforward manner. The court in Wilborn v. Dun & Bradstreet Corp., 18 180 F.R.D. 247, 256 (N.D. Ill. 1998) engaged this precise argument: 19 20 21 22 23 24 25 26 27 28 First, defendant asserts that some class members may have filed bankruptcy and failed to properly exempt their claims against defendant such that they would lack standing to sue. Defendant argues that because the court will have to conduct an inquiry as to each class member's standing, individual issues predominate. Although some class members may not be entitled to personally recover damages because their claims have become part of a bankruptcy estate, the common issues of law and fact regarding defendant's liability still predominate. If damages are awarded, the bankruptcy status of each class member will have to be determined. This determination regarding damages, however, need not require a highly fact-intensive inquiry, as defendant suggests. Many if not most class members will not have filed bankruptcy. As for those class members who have, determining whether they have exempted their claims against defendant should be a relatively straightforward matter. The bankruptcy issue, therefore, does not preclude certification. Id. This Court finds the Wilborn court’s analysis persuasive, and adopts that analysis here. 37 1 2 b. Reliance As discussed supra, see Sections I.D and II.B.3.a, in order to establish their claim for fraudulent 4 omission, plaintiffs must show, inter alia, that they relied on the concealed or suppressed facts. Hahn 5 v. Mirda, 147 Cal. App. 4th 740, 748 (2007); see also Blickman Turkus, LP v. MF Downtown Sunnyvale, 6 LLC , 162 Cal. App. 4th 858, 868-69 (2008) (element of fraud is justifiable reliance.) RBS argues that 7 determining whether each member of the class relied on the loan documents will require an 8 individualized inquiry and cannot be decided by common proof. Def.’s Opp. at 18. According to RBS, 9 the question of reliance cannot be resolved solely by analyzing the loan documents, but requires looking 10 United States District Court For the Northern District of California 3 at external factors that may have affected each classmembers’ understanding of the documents. The 11 analysis will entail, for example, whether the classmember had significant borrowing experience (as 12 RBS claims the Goldhabers did); the substance of any conversations with a mortgage broker; whether 13 the classmember read the loan documents; and whether the borrower may in fact have desired the type 14 of loan Paul Financial was selling. 15 The resolution of RBS’ argument lies in determining whether the class is entitled to a 16 presumption of reliance. Plaintiffs contend that the class is owed a presumption of reliance, and, 17 therefore, the individualized inquiries proposed by RBS are irrelevant to the class certification inquiry. 18 In support, plaintiffs rely on Plascencia, one of the two cases in this district that certified a class nearly 19 identical to the one proposed here.10 See also Lymburner, 263 F.R.D. at 542. In Plascencia, the court 20 relied on Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153 (1972) in holding that 21 reliance may be presumed in the case of a material fraudulent omission. Plascencia, 259 F.R.D. at 447. 22 RBS responds that the Plascencia analysis is wrong, because it “misrepresent[s] the applicability of 23 Affiliated Ute to fraud claims” under California law, as the California Supreme Court rejected the 24 adoption of the Ute presumption in California. Def.’s Opp. at 21 (citing Quezada v. Loan Center, Inc., 25 2009 WL 5113506, *4 (E.D.Cal. 2009)). 26 10 27 28 In Plascencia, loan originator Lending 1st sold Optional ARMs with a 1% teaser rate, which, like the loan documents at issue here, actually controlled only the payment schedule; the actual interest rate substantially increased after the first month. By following the payment schedule listed in the TILDS, the loan was guaranteed to negatively amortize. EMC, like RBS here, purchased the loans. 38 1 After the parties filed their moving papers in this case, Judge Wilken revisited her class 2 certification opinion in Plascencia. See Plascencia v. Lending 1st Mortgage, 2011 WL 5914278 (N.D. 3 Cal. Nov. 28, 2011). Because the court’s analysis is directly on point, it is cited at length: 4 5 6 In the Class Certification Order, this Court held that individual questions would not predominate regarding the reliance element of Plaintiffs' common law fraud claim, because absent class members' reliance may be presumed in the case of material fraudulent omissions. The Court cited the United States Supreme Court's decision in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). 7 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The citation to Ute was incorrect. The California Supreme Court has held that the presumption of reliance established in Ute does not apply to fraud claims under California common law. Mirkin v. Wasserman, 5 Cal.4th 1082, 1093, 23 Cal.Rptr.2d 101, 858 P.2d 568 (1993). Nonetheless, California courts have held that absent class members are entitled to a similar presumption of reliance for state common law fraud claims in certain circumstances. First, a fraudulent omission must be material, such that “a reasonable man would have relied upon” the alleged omissions. Vasquez v. Superior Court, 4 Cal.3d 800, 814 n. 9, 94 Cal.Rptr. 796, 484 P.2d 964 (1971). Here, a jury could find on a classwide basis that a reasonable person would have wanted to know that the initial one percent rate was ephemeral and that negative amortization was certain to occur if only the minimum payments were made. The jury thus could find that class members would not have taken out their loans if Defendants had clearly disclosed this information. Second, all class members must have received the same representations with allegedly fraudulent omissions; that is, the representations with misleading omissions must have been uniformly given to class members. See Mirkin, 5 Cal.4th at 1093–94, 23 Cal.Rptr.2d 101, 858 P.2d 568 (refusing to apply the class-wide presumption of reliance established in Occidental Land, Inc. v. Superior Court, 18 Cal.3d 355, 134 Cal.Rptr. 388, 556 P.2d 750 (1976), and Vasquez in a fraudulent omissions case where plaintiffs had not “pled that the defendants had made identical representations to each class member”). Defendants here are alleged to have acted in a uniform way toward all class members, by supplying class members with identical loan documents that failed to state in clear language material terms of the loan. Finally, the class representatives must establish “actual reliance.” Iorio v. Allianz Life Ins. Co. of N. Am., 2008 U.S. Dist. LEXIS 118344, at *79–80 (S.D.Cal.). See Mirkin, 5 Cal.4th at 1095, 23 Cal.Rptr.2d 101, 858 P.2d 568 (citing Vasquez, 4 Cal.3d at 814–15, 94 Cal.Rptr. 796, 484 P.2d 964; Occidental, 18 Cal.3d at 362–63, 134 Cal.Rptr. 388, 556 P.2d 750). The named Plaintiffs have alleged that they in fact did rely upon Defendants' omissions. Plascencia, 2011 WL 5914278, at *1-*3; but see Ralston v. Mortgage Investors Group, Inc., 08-cv- 26 27 28 39 1 00536-JF (N.D.Cal. Feb. 27, 2012) (Fogel, J.).11 The Court agrees with Judge Wilken’s analysis and adopts it here. As in Plascencia, a jury could 3 find that a reasonable person would want to know that the teaser rate in plaintiffs’ loan documents was 4 ephemeral and that, if the borrower followed the TILDS payment schedule, negative amortization was 5 certain to occur. See Section I.B.1; Vasquez v. Superior Court, 4 Cal. 3d 800, 814 n.9 (1971). Second, 6 all class members received the same representations; indeed, the class is defined by those 7 representations. See Section II, Introduction. Finally, the class representatives have sufficiently 8 established actual reliance. See Section I.B.1. As in Plascencia, the class is therefore owed the 9 presumption of reliance. See also Lymburner, 263 F.R.D. at 542; Yokoyama v. Midland National Life 10 United States District Court For the Northern District of California 2 Ins. Co., 594 F.3d 1087, 1093 (9th Cir. 2010) (reversing denial of class certification, finding that under 11 Hawaii’s Deceptive Practices Act, reliance on alleged misrepresenations can be shown by an objective, 12 reasonable person standard). 13 In the alternative, RBS argues that it has rebutted the presumption because the class 14 representatives -- the Goldhabers – did not rely on the loans. Def.’s Opp. at 22 (citing Quezada v. Loan 15 Ctr. of California, Inc., 2009 WL 5113506, (E.D. Cal. Dec. 18, 2009) (Shubb, J.)). RBS reiterates its 16 claims that Ms. Goldhaber stated she relied upon statements from her broker, and that the Goldhabers 17 were “experienced borrowers with vast mortgage experience, who despite their alleged confusion, did 18 not ask any questions about their loan documents.” Id. The Court has already addressed and disposed 19 of these arguments, supra. See Section I.D; Section I, n.1. RBS’ reliance on Quezada is also 20 unavailing. Quezada is another case addressing nearly identical loan documents. There, however, the 21 court rejected class certification on typicality grounds because the plaintiff did not read English (the 22 23 24 25 26 27 28 11 Judge Fogel came to the opposite conclusion when faced with similar facts. After citing Plascencia, Judge Fogel analyzed the Ninth Circuit’s opinion in Poulos v. Ceasars World, Inc., 379 F.3d 654 (9th Cir. 2004). There, the Ninth Circuit held that the presumption of reliance “should not be applied to cases that allege both misstatements and omissions unless the case can be characterized as one that primarily alleges omissions.” Id. Judge Fogel went on to find that the plaintiff’s “confusion allegedly stemmed from the fact that he believed that the loan documents represented that his interest rate would be 1% and that they failed to disclose that the 1% rate would be in effect for only one month,” and, therefore, it was a “mixed” case not appropriately granted the presumption. This Court differs in its analysis, and finds that the Goldhabers’ case is one primarily of omission. The 1.375% interest rate did exist, albeit for only one month; the documents omitted the fact that payment according to the payment schedule was certain to cause negative amortization. 40 1 language of the loan documents), had the loan documents explained to her via translation, and admitted 2 that she did not read the terms of the loan documents outside of recognizing several numbers on the 3 pages of those documents. Id. at *3. Those considerations do not apply to the Goldhabers, who have 4 demonstrated that they read and relied on the loan documents. E. Goldhaber Dep., 62:17-25, 80:19- 5 81:3, 87:19-88:22, 127:25-127:8; J. Goldhaber Dep., 133:23-134:2, 134-7-14. 6 7 The Court therefore finds that the class is owed a presumption of reliance that RBS has failed to rebut.12 8 c. Varied Harm RBS also argues that class certification is inappropriate because plaintiffs’ proposed method for 10 United States District Court For the Northern District of California 9 calculating damages is flawed. Def.’s Opp. at 23; citing Lyons Reply Decl. ¶ 6. According to RBS, 11 various loan outcomes, including short sales and foreclosures, will result in individualized inquiries, thus 12 defeating predominance. The Court disagrees. “The amount of damages is invariably an individual 13 question and does not defeat class certification.” Blackie v. Barrack, 524 F.2d 891, 905 (9th Cir. 1975). 14 While the parties dispute the propriety of the model for calculating damages proposed by plaintiff, the 15 Court need not decide the precise method for calculating damages at this stage. The Court finds that 16 calculation of damages will be sufficiently mechanical that whatever individualized inquiries need occur 17 do not defeat class certification. Moreover, the Court has the inherent power to modify the class 18 definition if some subset of borrowers present insurmountable individualized issues. 19 20 21 22 23 24 25 26 27 28 12 Following submission of this matter, RBS submitted a request for permission to file a statement of two recent decisions. The two decisions RBS seeks to submit are Buckley v. Countrywide Financial Corp., 2012 U.S. App. LEXIS 1235 (9th Cir. Jan. 20, 2012) and In re Countrywide Financial Mortgage Marketing and Sales Practices Litigation, 2011 U.S. Dist. LEXIS 147689 (S.D. Cal. Dec. 16, 2011). The first is an unpublished (and therefore non-precedential) opinion from the Ninth Circuit affirming a District Court’s application of Washington state law in denying class certification based on individual issues of reliance in a similar mortgage context. See Circ. R. 36-3(a). The two-sentence opinion “assum[es] that changes to the written disclosures were routinely made orally,” an assumption not applicable here. 2012 U.S. App. LEXIS at *1. The second is an unpublished Southern District of California case that differs with Judge Wilken’s conclusion in Plascencia. In Countrywide, Judge Sabraw found there was “substantial evidence” that loan brokers made oral representations about “the features of the various loan products, interest rate options, negative amortization, other issues of interest and specific to individual followers,” and the brokers and loan officers “provided the supposedly omitted information to each borrower in oral communications or in other loan documents that varied form borrower to borrower.” 2011 U.S. Dist LEXIS 147689, at *23, *36. Similar evidence, in type or quantity, is not present here. In any event, the Court agrees with Judge Wilken’s analysis. Neither opinion alters the Court’s decision. 41 1 The proposed class is based on uniform material omissions made in nearly identical loan 2 documents. The class is owed a presumption of reliance, which RBS has failed to rebut. The Court 3 therefore finds that plaintiffs have shown that common questions of law and fact predominate over 4 individual questions. 5 6 2. Superiority Rule 23(b)(3) also requires that a class action be “superior to other available methods for fairly 8 and efficiently adjudicating the controversy.” The test for superiority of the class action mechanism 9 requires “[d]etermination of whether the objectives of the particular class action procedure will be 10 United States District Court For the Northern District of California 7 achieved in the particular case,” which “necessarily involves a comparative evaluation of alternative 11 mechanisms of dispute resolution.” Hanlon, 150 F.3d at 1023. 12 The Court finds that a class action is a superior method for adjudication of the plaintiffs’ claims. 13 As with Plascencia and Lymburner, the Court finds that “a single action would be superior to 14 maintaining a multiplicity of individual actions involving similar legal and factual issues.” Plascencia, 15 259 F.R.D. at 449. As Judge LaPorte found in Lymburner, individual claims for damages would “not 16 only burden the court system that would be deciding the same legal issues in a number of small cases, 17 but would also not make economic sense for litigants or lawyers. It is possible that in many, if not most, 18 individual cases, ‘litigation costs would dwarf potential recovery.’” 263 F.R.D. at 543 (citing Hanlon, 19 150 F.3d at 1023). 20 RBS argues that a class action is not a superior method for adjudicating plaintiffs’ claims 21 because of the “overwhelming amount of individualized evidence required to establish standing, 22 reliance, causation, and damages.” Def.’s Opp. at 24 (citing Zinser v. Accufix Research Institute, Inc., 23 253 F.3d 1180, 1192 (9th Cir. 2001) (“[i]f each class member has to litigate numerous and substantial 24 separate issues to establish his or her right to recover individually, a class action is not ‘superior.’”) The 25 Court disagrees. Zinser is inapposite here. In Zinser, the putative class brought suit for products 26 liability due to deformation of lead in a pacemaker. The Ninth Circuit found that it would be too 27 difficult to determine a common cause of injury among the 10,500 classmembers because many factors 28 would contribute to the deformation, “including manufacturing and shipping history [as well as] 42 1 handling of the lead by physicians or staff. In view of the formidable complexities here inherent in 2 trying claims of negligence, products liability, and medical monitoring with differing state laws, Zinser 3 does not persuade us that class treatment is superior to individual adjudication.” Id. Clearly the same 4 concerns are not present here. Zisner involved a surgically implanted medical device. Here, the 5 underlying issue is nearly identical loan documents, differing only in rates; furthermore, unlike Zisner, 6 only the law of California applies. Individualized evidentiary issues are not so “numerous and 7 substantial” as to defeat the superiority of a class action in this matter. Id.; see also In re: Visa 8 Check/MasterMoney Antitrust Litigation, 280 F.3d 124, 140 (2nd. Cir. 2001) (Sotomayor, J.) (“[F]ailure 9 to certify an action under Rule 23(b)(3) on the sole ground that it would be unmanageable is disfavored, United States District Court For the Northern District of California 10 and should be the exception rather than the rule.”) 11 Finally, RBS argues that a class action is not superior because there is a strong incentive for 12 individual suits. In support, it states that “using plaintiffs’ formula for calculation, the Goldhabers’ 13 claim is in excess of $50,000,” and, therefore, there is sufficient incentive for class members to bring 14 individual claims. Def.’s Opp. at 25. The Court is unpersuaded. RBS provides no evidence as to the 15 size of other classmembers’ claims. Moreover, classmembers may choose to opt out of the class and 16 pursue their claims individually. 17 18 As in Plascencia and Lymburner, this Court finds that a class action is the superior method of adjudicating plaintiffs’ claims. 19 20 21 22 23 24 25 26 27 /// 28 43 1 CONCLUSION 2 For the foregoing reasons, the Court hereby DENIES defendant's motion for summary judgment 3 and GRANTS plaintiffs' motion for class certification. As the class definition has likely changed since 4 HSBC was dismissed as a defendant, the Court orders plaintiffs to submit a proposed order certifying 5 a class that conforms with this order. Plaintiff must submit the proposed class definition by August 31, 6 2012 Defendants may submit objections to that proposal only if the proposed definition is not in 7 conformity with this Order, and must do so by September 7, 2012. 8 9 United States District Court For the Northern District of California 10 IT IS SO ORDERED. Dated: August 23, 2012 SUSAN ILLSTON United States District Judge 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 44

Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.