Strugala v. Flagstar Bank, FSB, No. 5:2013cv05927 - Document 69 (N.D. Cal. 2015)

Court Description: ORDER granting in part and denying in part 55 Motion to Dismiss. This action is otherwise STAYED. The clerk shall ADMINISTRATIVELY CLOSE this file. Strugala shall submit a brief Status Report which describes the status of proceedings before th e IRS on 3/6/2016 and continuing every six months thereafter. Furthermore, within 10 days of obtaining an official opinion from the IRS, Strugala shall file a Notice informing the court of such development and request that this matter be reopened and that a Case Management Conference be scheduled. The Case Management Conference scheduled for 11/19/2015 is VACATED. Signed by Judge Edward J. Davila on 9/4/2015. (ejdlc1S, COURT STAFF) (Filed on 9/4/2015)
Download PDF
1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 LISA STRUGALA, an individual, on behalf of herself and on behalf of the class of all others similarly situated, 8 9 Plaintiff, 10 v. ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS Re: Dkt. No. 55 11 United States District Court Northern District of California Case No. 5:13-cv-05927-EJD FLAGSTAR BANK, FSB, 12 Defendant. 13 14 In this putative class action, Plaintiff Lisa Strugala (“Strugala”) challenges her former 15 mortgage lender’s practice of first reporting, and then not reporting, capitalized interest on 16 borrowers’ tax forms. Presently before the court is a Motion to Dismiss filed by the lender, 17 Flagstar Bank, FSB (“Flagstar”).1 See Docket Item No. 55. Strugala opposes the motion. See 18 Docket Item No. 59. 19 Federal jurisdiction arises pursuant to 28 U.S.C. § 1332. Having carefully reviewed the 20 parties’ briefing, the court finds that Strugala’s withdrawn claims should be dismissed, and that 21 Flagstar’s alternative request under the primary jurisdiction doctrine is meritorious. Accordingly, 22 Flagstar’s motion will be granted in part and denied in part for the reasons explained below. 23 I. Flagstar is “one of the nation’s leading federal savings banks” and is headquartered in 24 25 BACKGROUND Michigan. See First. Am. Compl. (“FAC”), Docket Item No. 18, at ¶¶ 3, 55. This case involves 26 27 28 1 Flagstar also filed a Request for Judicial Notice (Docket Item No. 56), which is GRANTED. 1 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 one of Flagstar’s financial products known as the “negative amortization” loan. According to the 2 FAC, “‘negative amortization’ loans generally provide the borrower the option in any given month 3 to pay a ‘Minimum Payment,’ which is generally, but not always, less than the interest due for the 4 month.” Id. at ¶ 3. Under the “Minimum Payment” option, the unpaid monthly interest is then 5 “deferred” and added to the loan balance to be repaid on a later date. Id. at ¶ 4. This arrangement 6 usually causes the overall loan balance to increase rather than decrease while the interest is 7 deferred, even though the borrower is making monthly payments. Id. at ¶ 5. 8 A Form 1098 is a tax document issued by a lender which the tax-payer borrower utilizes to 9 determine the amount of mortgage interest that should be reported to the Internal Revenue Service (“IRS”) with annual income taxes. Id. at ¶ 1. The statute that obligates lenders to issue Forms 11 United States District Court Northern District of California 10 1098 is 26 U.S.C. § 6050H. Id. 12 Strugala alleges that prior to 2011, Flagstar reported on annual tax Forms 1098 both the 13 amount of actual interest it received from a negative amortization borrower as well as the amount 14 of interest the borrower “deferred” by exercising the “Minimum Payment” option. Id. at ¶ 7. 15 Strugala contends this practice violated § 6050H because that statute requires lenders to report 16 only interest they “receive,” and not unpaid interest that accrued back to principal during a 17 calendar year. Id. at ¶¶ 1, 7. As a result of this over-reporting, Strugala alleges that “tens of 18 thousands” of tax returns were filed incorrectly. Id. at ¶ 9. 19 Flagstar eventually changed its practice in 2011 and ceased reporting “deferred interest” on 20 Forms 1098. Id. at ¶ 10. It apparently did so without notice to borrowers and did not issue 21 amended Forms 1098 to correct the errors. Id. at ¶¶ 10, 11. Instead, Strugala alleges that “when 22 Flagstar decided to change its interest reporting policy in 2011, it determined that it would try to 23 make up for its prior over-reporting of interest by under-reporting consumers interest payments in 24 later years.” Id. at ¶ 17. It does this, Strugala claims, by refusing to provide Forms 1098 to 25 borrowers who have actually paid back previously-deferred interest in years subsequent to 2011, if 26 that amount is less than that which Flagstar over-reported in prior Forms 1098. Id. at ¶ 22. Since 27 28 2 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 there is a three year statute of limitations for amending tax returns, Strugala alleges that borrowers 2 affected by Flagstar’s interest reporting are now precluded from correcting errors on prior years’ 3 returns. Id. at ¶ 15. 4 Strugala obtained a 30-year “negative amortization” adjustable rate mortgage loan from 5 Flagstar on or about July 13, 2007, in connection with a home she previously owned in Los Gatos, 6 California. Id. at ¶¶ 24, 25. Strugala’s loan provided for the “Minimum Payment” option. Id. at ¶ 7 25. She and her tax preparer relied on the Forms 1098 issued by Flagstar for tax years 2007 8 through 2011, and did not cross-check the amount of interest listed on those forms with the 9 amount Strugala actually paid. Id. at ¶ 28. Unbeknownst to Strugala, those 1098 Forms included 10 United States District Court Northern District of California 11 interest that had been deferred. Id. at ¶¶ 32, 34. Strugala’s Los Gatos home was sold at a short sale in 2012. Id. at ¶ 35. By her 12 calculation, this sale resulted in Flagstar receiving an interest payment that was more than the total 13 amount of interest Flagstar over-reported on her Forms 1098 between 2007 and 2011. Id. at ¶ 38. 14 Flagstar, however, did not issue Strugala a Form 1098 for 2012, and would not do so after 15 receiving requests from Strugala. Id. at ¶¶ 39, 41. 16 Strugala alleges harm from Flagstar’s interest reporting practice. Id. at ¶ 46. Because her 17 income was significantly higher in 2011 and 2012 than it was in the years when Flagstar was over- 18 reporting interest, the tax deductions she took in the earlier years “were worth significantly less 19 than they would be for her in 2012.” Id. at ¶ 47. Due to the statute of limitations, Strugala cannot 20 now amend her prior returns. Id. at ¶ 48. She also alleges damages in the form of accountancy 21 fees necessary to investigate and correct prior tax returns. Id. at ¶ 51. 22 Strugala initiated this action on December 23, 2013, and filed the FAC on February 26, 23 2014. She asserts six causes of action against Flagstar on behalf of herself and two purported 24 classes, a “damage” class and an “injunctive” class, including (1) breach of contract, (2) breach of 25 the covenant of good faith and fair dealing, (3) violation of § 6050H, (4) violation of the Unfair 26 Competition Law (“UCL”), California Business and Professions Code § 17200, (5) declaratory 27 28 3 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 2 relief, (6) injunctive relief, and (7) fraud. II. LEGAL STANDARD Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient 3 specificity to “give the defendant fair notice of what the . . . claim is and the grounds upon which 5 it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A 6 complaint that falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim 7 upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). “Dismissal under Rule 12(b)(6) is 8 appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support 9 a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th 10 Cir. 2008). Moreover, the factual allegations “must be enough to raise a right to relief above the 11 United States District Court Northern District of California 4 speculative level” such that the claim “is plausible on its face.” Twombly, 550 U.S. at 556-57. When deciding whether to grant a motion to dismiss, the court generally “may not consider 12 13 any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 14 1542, 1555 n. 19 (9th Cir. 1990). However, the court may consider material submitted as part of 15 the complaint or relied upon in the complaint, and may also consider material subject to judicial 16 notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-69 (9th Cir. 2001). In addition, the court must generally accept as true all “well-pleaded factual allegations.” 17 18 Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). The court must also construe the alleged facts in the 19 light most favorable to the plaintiff. Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1988). 20 However, “courts are not bound to accept as true a legal conclusion couched as a factual 21 allegation.” Id. 22 III. 23 DISCUSSION Flagstar raises a number of arguments in support of dismissal under Rule 12(b)(6). 24 Alternatively, it argues the court should stay or dismiss this action based on the primary 25 jurisdiction doctrine. After dismissing those claims that have been withdrawn, this court finds the 26 alternative relief best suited to the circumstances that result. 27 28 4 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 A. Dismissal of Claims In her opposition to the motion to dismiss, Strugala concedes that two of her claims, 2 asserting a direct violation of § 6050H and for injunctive relief, should be withdrawn. On that 3 basis, those claims will be dismissed without further leave to amend. 4 5 6 B. Application of Primary Jurisdiction Doctrine Central to all of Strugala’s remaining claims is one key allegation: that Flagstar’s interest reporting policy both before and after 2011 violates § 6050H. Under § 6050H, “[a]ny person . . . 7 who is engaged in a trade or business, and . . . who, in the course of such trade or business, 8 receives from any individual interest aggregating $ 600 or more for any calendar year on any 9 mortgage,” must prepare an information return (such as a Form 1098) providing the IRS with the 10 amount of interest paid and the identity of the person from whom the interest was received. 26 11 United States District Court Northern District of California U.S.C. § 6050H(a), (b). This information must also be provided to the borrower along with 12 certain statements disclosing that the amount of interest listed on the Form 1098 may not be fully 13 deducted in certain circumstances. 26 C.F.R. § 1.6050H-2(b). Monetary penalties may be 14 imposed on an interest recipient who fails to provide the form required by § 6050H, or who fails to 15 provide accurate information on the form. 26 C.F.R. § 1.6050H-2(e)(2) (applying the penalty 16 provisions in 26 U.S.C. § 6721 to violations of § 6050H). 17 But aside from what the statute says, of equal note for this case is what it does not say. 18 Neither § 6050H nor its implementing regulations provide explicit direction to recipients on how, 19 whether and when to report capitalized interest. Nor has the IRS taken a formal position on the 20 issue, as other courts have observed. See Horn v. Bank of America, No. 3:12 cv-1718-GPC-BLM, 21 22 23 24 25 2014 WL 1455917, at *3 (S.D. Cal. Apr. 14, 2014) (noting that “[t]he IRS has never taken a formal position in any published regulation (or even in a private letter ruling)” on whether capitalized interest must be reported on a Form 1098, and classifying the plaintiffs’ claims based on a violation of § 6050H as “novel”). This silence presents a significant challenge to Strugala’s claims given the extent to which 26 they rely on a purported violation of § 6050H through the reporting or non-reporting of capitalized 27 28 5 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 interest. A similar case illustrates why this is so. In Pemberton v. Nationstar Mortgage, LLC, No. 2 3:14-cv-1024-BAS-WVG (S.D. Cal. filed Apr. 23, 2014), the district court - faced with the exact 3 circumstances presented here - invoked the primary jurisdiction doctrine to stay the action pending 4 a determination by the IRS. There, the plaintiffs alleged that Nationstar violated § 6050H by 5 classifying their monthly payments of deferred interest as principal payments on a Form 1098. 6 Much like Strugala, the Pemberton plaintiffs used that violation to assert claims for breach of 7 contract, breach of the covenant of good faith and fair dealing, violation of the UCL, fraud, and 8 declaratory and injunctive relief, as well as a direct claim for violation of § 6050H (which Strugala 9 has since abandoned).2 And much like Flagstar, Nationstar moved to dismiss or stay the case.3 In its order addressing the motion to dismiss, the district court agreed with Nationstar that 10 United States District Court Northern District of California 11 no private right of action is implied in § 6050H and dismissed that claim with prejudice. As to the 12 remaining claims, the court determined that, because “each turn on whether [Nationstar] 13 accurately reported the interest paid” on the 1098 Forms, the IRS’ position on the issue was 14 “necessary . . . to determine whether [Nationstar’s] actions breached any duties.” After further 15 describing the issue as one of “first impression,” the court then referred the matter “to the Internal 16 Revenue Service to determine whether the Form 1098s [Nationstar] provided to Plaintiffs 17 complied with the requirements of 26 U.S.C. § 6050H” and stayed the case to permit the plaintiffs 18 to seek agency direction. The reasoning applied by the Pemberton court is likewise applicable here. Indeed, this 19 20 case presents the same critical question under § 6050H, just with a different lender in the place of 21 Nationstar. And as the parties’ briefing makes clear, whether and how capitalized interest should 22 be reported is an issue of first impression for the courts, raises a topic particularly suited to 23 24 25 26 27 28 2 The similarities between Strugala’s case and Pemberton are not a coincidence since both cases involve the same lawyers on the plaintiff’s side. 3 The court takes judicial notice of the documents filed in the Pemberton action. See Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006) (The court “may take judicial notice of court filings and other matters of public record.”). 6 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 consideration by the IRS, and poses a risk of inconsistent rulings if the judiciary is left to 2 contemplate it in the first instance without the benefit of IRS guidance. It therefore has all the 3 makings of an issue that should be allocated to the responsible agency for the purposes of this case 4 since Strugala’s claims are otherwise cognizable (as opposed to sufficiently pled, which is an issue 5 the court does not take up at this time). See Syntek Semiconductor Co., Ltd. v. Microchip Tech. 6 Inc., 307 F.3d 775, 780 (9th Cir. 2002) (“[P]rimary jurisdiction is properly invoked when a claim 7 is cognizable in federal court but requires resolution of an issue of first impression, or of a 8 particularly complicated issue that Congress has committed to a regulatory agency.”); see also 9 Maronyan v. Toyota Motor Sales, U.S.A., Inc., 658 F.3d 1038, 1048-49 (9th Cir. 2011) (“The primary jurisdiction doctrine prescribes deference to an administrative agency where (1) the issue 11 United States District Court Northern District of California 10 is not within the conventional experiences of judges, (2) the issue involves technical or policy 12 considerations within the agency’s particular field of expertise, (3) the issue is particularly within 13 the agency’s discretion, or (4) there exists a substantial danger of inconsistent rulings.”). 14 Strugala resists a disposition based on the primary jurisdiction doctrine with only 15 unpersuasive arguments. She first contends the doctrine generally does not apply when the issues 16 being litigated are legal rather than factual. The Pemberton court rejected that argument as an 17 inaccurate statement of the authority upon which it relies. This court concurs that Stugala 18 overstates the rule. There is no absolute prohibition on the referral of legal issues to an agency. 19 See Corneli Seed Co. v. Union P. R. Co., 263 F.2d 127, 130 (9th Cir. 1958). In fact, questions of 20 law “requiring the assertion of the expert and specialized knowledge of the agency members” are 21 particularly suited to referral under the primary jurisdiction doctrine. Id. 22 Here, though Strugala would characterize the question as a simple undertaking of statutory 23 construction, that is quite frankly not the case. It cannot be said based on a plain reading of § 24 6050H whether or not the statute’s use of the term “interest” encompasses capitalized interest. 25 Nor is that question definitively answered with reference to Old Colony Railroad Co. v. 26 Commissioner of Internal Revenue, 284 U.S. 552 (1932), or Wilshire Holding Corporation v. 27 28 7 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 Commissioner of Internal Revenue, 262 F.2d 51, 53 (9th Cir. 1958)), because neither of those 2 cases examine whether capitalized interest is contemplated by the common understanding of the 3 word “interest,” let alone contain the holdings Strugala attributes to them in her opposition.4 There is a better way to distinguish which issues are appropriately referred to an agency, 4 5 rather than focusing on whether they are factual or legal. “[I]t is the extent to which Congress, in 6 enacting a regulatory scheme, intends an administrative body to have the first word on issues 7 arising in judicial proceedings that determines the scope of the primary jurisdiction doctrine.” 8 United States v. Gen. Dynamics Corp., 828 F.2d 1356, 1362 (9th Cir. 1987). With regard to the 9 IRS, it is undebatable that “Congress has given the IRS broad authority to issue rules implementing the tax laws.” Tualatin Valley Builders Supply, Inc. v. United States, 522 F.3d 937, 11 United States District Court Northern District of California 10 942 (9th Cir. 2008). Under this authority, the IRS has promulgated rules regulating the content 12 and scope of Forms 1098. Accordingly, Strugala’s claims raising a novel question of taxation 13 policy in the context of that form are the types on which the agency should have the first word in 14 accordance with Congress’ broad mandate. Strugala’s second argument fares no better. She attempts to distinguish her case from 15 16 Pemberton by pointing out that her request for damages is primarily related to prior tax years for 17 which she can no longer file an amended return. But this distinction makes no difference because 18 she must obtain another form of relief requested in the FAC - the issuance of corrected Forms 19 1098 - before damages related to prior tax years can be calculated. Without doubt, whether or not 20 that relief should be awarded will depend on whether the prior Forms 1098 were non-compliant. In sum, the court finds it cannot proceed with Strugala’s claims without the expertise of the 21 22 23 24 25 26 27 28 4 Another case cited by Strugala, Smoker v. Commissioner of Internal Revenue, Nos. 31130-09, 28928-10, 2013 WL 645265 (T.C. Feb. 21, 2013), is also of little assistance. Notwithstanding the Pemberton court’s description of that opinion as having “no precedential value at law,” it does not resolve the issue raised in this case. In Smoker, the tax court only held that capitalized interest cannot be deducted until it is actually paid; it did not designate how or whether a lender should report such interest on a Form 1098. 8 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 IRS. For that reason, this court, like the Pemberton court,5 will refer the matter to the IRS under 2 the primary jurisdiction doctrine and stay this case until such formal commentary is obtained.6 3 IV. Based on the foregoing, Flagstar’s Motion to Dismiss (Docket Item No. 55) is GRANTED 4 5 IN PART and DENIED IN PART as follows: 1. 6 7 2. United States District Court Northern District of California The motion to dismiss is DENIED WITHOUT PREJUDICE as to the remaining 3. The motion to stay this action and refer this matter to the IRS under the primary claims. 10 11 The motion to dismiss is GRANTED as to Strugala’s claims for violation of § 6050H and for injunctive relief, which claims are DISMISSED WITHOUT LEAVE TO AMEND. 8 9 ORDER jurisdiction doctrine is GRANTED. 12 The court REFERS to the IRS the following question: whether Flagstar’s practice of 13 reporting capitalized interest before and after 2011 complied with the requirements of 26 U.S.C. § 14 6050H and its related regulations. Plaintiff is responsible for initiating proceedings before the IRS 15 with sufficient formality so as to result in the agency’s official position on the issue. This action is otherwise STAYED. The clerk shall ADMINISTRATIVELY CLOSE this 16 17 file. 18 So that the ongoing appropriateness of the stay can be monitored, Strugala shall submit a 19 brief Status Report which describes the status of proceedings before the IRS on March 6, 2016, 20 and continuing every six months thereafter. Furthermore, within 10 days of obtaining an official 21 opinion from the IRS, Strugala shall file a Notice informing the court of such development and 22 23 24 25 26 27 28 5 The court is aware of the district court’s decision in another similar case, Smith v. Bank of America, N.A., No. CV 14-6668 DSF (PLA), but finds the court’s approach in Pemberton more persuasive. 6 The court has reviewed Strugala’s request for judicial notice filed on July 2, 2015 (Docket Item No. 64). In this court’s opinion, the letter from the Department of Treasury dated June 10, 2015, is not a formal agency opinion and, in any event, does not describe the IRS’ position on the matter referred by the Pemberton court. 9 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS 1 2 request that this matter be reopened and that a Case Management Conference be scheduled. The Case Management Conference scheduled for November 19, 2015, is VACATED. 3 4 5 6 7 IT IS SO ORDERED. Dated: September 4, 2015 ______________________________________ EDWARD J. DAVILA United States District Judge 8 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10 Case No.: 5:13-cv-05927-EJD ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO DISMISS