Labrador v. Seattle Mortgage Company, No. 3:2008cv02270 - Document 32 (N.D. Cal. 2008)

Court Description: ORDER Granting in Part and Denying in Part 5 12 MOTION to Dismiss filed by Seattle Mortgage Company. Signed by Judge Samuel Conti on 10/28/08. (sclc2, COURT STAFF) (Filed on 10/29/2008)
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Labrador v. Seattle Mortgage Company Doc. 32 1 2 3 4 5 UNITED STATES DISTRICT COURT 6 NORTHERN DISTRICT OF CALIFORNIA 7 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 MARY B. LABRADOR, individually and ) on behalf of all others similarly ) ) situated, ) Plaintiff, ) ) ) v. ) SEATTLE MORTGAGE COMPANY, ) ) Defendant. ) ) ) Case No. 08-2270 SC ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS 16 17 I. 18 INTRODUCTION This matter comes before the Court on the Motion to Dismiss 19 ("Motion") submitted by the defendant Seattle Mortgage Company 20 ("Defendant" or "SMC"). 21 Labrador ("Plaintiff" or "Labrador") opposed the Motion and 22 Defendant filed a Reply. 23 reasons, the Court GRANTS in part and DENIES in part Defendant's 24 Motion. Docket No. 5. The plaintiff Mary B. Docket Nos. 18, 22. For the following 25 26 27 28 II. BACKGROUND This class action arose out of a reverse mortgage transaction between Plaintiff and SMC. According to Plaintiff's Complaint, a United States District Court For the Northern District of California 1 reverse mortgage is a type of home equity loan available only to 2 senior homeowners whereby the homeowner is able to convert his or 3 her home equity into cash while maintaining ownership of the home. 4 Notice of Removal, Docket No. 1, Ex. A ("Compl.") ¶ 12. 5 typical mortgage, where the borrower makes monthly payments to the 6 lender, in a reverse mortgage the lender makes monthly payments to 7 the borrower. 8 homeowner for living expenses, health care, or any other purpose. 9 Id. Id. Unlike a These cash payments may in turn be used by the The loan is secured by a deed of trust on the home. Id. 10 Depending on the terms of the reverse mortgage, the borrower may 11 not have to repay either the loan principal or the accrued 12 interest so long as he or she remains living in the home. 13 and when the homeowner is no longer able to care for him or 14 herself and requires nursing-home care, or when the homeowner 15 dies, the subsequent sale of the home is expected to generate the 16 proceeds to repay the principal of the loan, as well as any 17 interest, fees and expenses. 18 Id. Id. ¶ 13. Plaintiff is an 82-year-old resident of San Francisco. Id. ¶ 19 7. 20 broker, contacted Plaintiff and convinced her to enter into a 21 reverse mortgage loan. 22 executed an HECM reverse mortgage loan originated by Defendant.1 23 Id. 24 to Defendant of $7,255.80. In July 2006, a representative of Home Center, a mortgage loan Id. ¶ 22. The following month Plaintiff At the close of the loan, Plaintiff paid an "origination fee" Id. ¶ 24. This fee was conveyed in 25 1 26 27 28 If HECM is Home Equity Conversion Mortgage, the title of a federal program under which the Department of Housing and Urban Development ("HUD") provides mortgage insurance for qualifying reverse mortgage loans. See 12 U.S.C. § 1715z-20; Mot. at 2. 2 1 its entirety by Defendant to the mortgage broker, Home Center. 2 Id. 3 Center in the amount of $490 in connection with Plaintiff's loan. 4 Id. ¶ 25. United States District Court For the Northern District of California 5 In addition, Defendant paid a "correspondent fee" to Home Plaintiff subsequently filed her Complaint in the Superior 6 Court of California for the City and County of San Francisco. 7 Compl. 8 diversity jurisdiction. 9 Plaintiff's Complaint is that Defendant violated the federal See Defendant then removed the action to this Court based on See Notice of Removal. The crux of 10 regulation 24 C.F.R. § 206.31(a)(1). 11 in part, that a mortgage broker's fee may be included in the 12 origination fee charged to the borrower only "if there is no 13 financial interest between the mortgage broker and the mortgagee." 14 24 C.F.R. § 206.31(a)(1). 15 the $490 "correspondent fee" to the mortgage broker Home Center, 16 sought to induce Home Center to steer loans to SMC, and thereby 17 created a financial interest between SMC and Home Center. 18 Because, as Plaintiff alleges, this financial interest existed, 19 Defendant was prohibited under § 206.31(a)(1) from charging 20 Plaintiff the origination fees she paid in connection with her 21 reverse mortgage loan. 22 Section 206.31(a)(1) states, Plaintiff alleges that SMC, in paying Based on the foregoing alleged violation, Plaintiff asserts 23 the following causes of action: (1) financial elder abuse, in 24 violation of California's Elder Abuse and Dependent Adult Civil 25 Protection Act ("Elder Abuse Act"), Welfare and Institutions Code 26 § 15657.5 et seq.; (2) unlawful, deceptive, and unfair business 27 practices, in violation of California Business and Professions 28 3 1 Code § 17200 et seq.; (3) violation of California's Consumers 2 Legal Remedies Act ("CLRA"), California Civil Code § 1770 et seq.; 3 (4) unjust enrichment; and (5) declaratory relief. 4 45-77. See Compl. ¶¶ 5 6 III. LEGAL STANDARD United States District Court For the Northern District of California 7 A Federal Rule of Civil Procedure 12(b)(6) motion to dismiss 8 tests the sufficiency of the complaint. 9 Rule 12(b)(6) is appropriate if the plaintiff is unable to Dismissal pursuant to 10 articulate "enough facts to state a claim to relief that is 11 plausible on its face." 12 1955, 1974 (2007). 13 favor of the plaintiff. 14 Ins. Co., 23 F.3d 226, 228 (9th Cir. 1994). 15 inferences or conclusory legal allegations cast in the form of 16 factual allegations, however, are insufficient to defeat a motion 17 to dismiss. 18 Cir. 1981). Bell Atl. Corp. v. Twombly, 127 S. Ct. All reasonable inferences are to be drawn in Everest & Jennings, Inc. v. Am. Motorists Unreasonable W. Mining Council v. Watt, 643 F.2d 618, 624 (9th 19 20 21 22 IV. DISCUSSION Defendant asserts various grounds for dismissal; the Court addresses each in turn. 23 A. 24 Defendant moves to dismiss the entire Complaint based on the 25 argument that there was no "financial interest" between Defendant 26 and the mortgage broker Home Center, and, accordingly, that there 27 was no violation of 24 C.F.R. § 206.31(a)(1). 28 Whether There Existed a "Financial Interest" 4 As noted above, § United States District Court For the Northern District of California 1 206.31(a)(1) prohibits lenders from charging reverse mortgage 2 "origination fees" and sharing those fees with mortgage brokers if 3 there is a financial interest between the mortgage broker and the 4 lender. 5 by Defendant to the mortgage broker was in fact a "back-channel 6 fee arrangement" used to induce mortgage brokers to steer 7 mortgages to Defendant. 8 Plaintiff, created a "financial interest" within the meaning of 24 9 C.F.R. § 206.31(a)(1), and therefore should have prohibited Plaintiff alleges that the $490 "correspondent fee" paid Compl. ¶ 19. This fee, according to 10 Defendant from charging Plaintiff the "origination fee" of 11 $7,255.80. 12 Both parties agree that neither 24 C.F.R. § 206.31 nor the 13 set of mortgage regulations of which it is a part defines the 14 phrase "financial interest." 15 defines a term, that definition controls, and the court need not 16 look to the dictionary or common usage." 17 Gutierrez, 425 F.3d 620, 628 (9th Cir. 2005). 18 such a definition, however, courts "construe a statutory term in 19 accordance with its ordinary or natural meaning." 20 Meyer, 510 U.S. 471, 476 (1994). 21 courts look "to its plain language." 22 F.3d 929, 932 (9th Cir. 2004). 23 its plain meaning controls unless such a reading would lead to 24 absurd results." 25 Dictionary in support of their interpretations, so too will this 26 Court. 27 "An interest involving money or its equivalent; esp., an interest 28 Id. "When a statute or regulation Alaska Trojan P'ship v. In the absence of F.D.I.C. v. Thus, to interpret a regulation, United States v. Bucher, 375 "If the regulation is unambiguous, As both parties rely on Black's Law Black's Law Dictionary defines "financial interest" as: 5 1 in the nature of an investment." 2 ed. 2004). 3 to the mortgage broker did not create any type of interest between 4 the two, but rather was merely a payment for services rendered. 5 Plaintiff argues that this payment was, in effect, an investment 6 by Defendant in the mortgage broker, with the intention that such 7 a payment would result in the mortgage broker Home Center steering 8 additional reverse mortgages to Defendant. United States District Court For the Northern District of California 9 Black's Law Dictionary 829 (8th Defendant argues that the payment of $490 by Defendant Without further factual development, the Court cannot 10 conclude at this time that the payment of $490 did not result in a 11 financial interest between Defendant and the mortgage broker. 12 Perhaps anticipating this, Defendant also points to various other 13 regulations that prohibit not only a "financial interest" but also 14 prohibit any "financial benefits." 15 570.611(b) (stating that, in regards to Community Development 16 Block Grants ("CDBGs"), "no persons . . . who are in a position to 17 participate in a decisionmaking process or gain inside information 18 . . . may obtain a financial interest or benefit from a CDBG- 19 assisted activity . . .). 20 here, the regulation prohibits only "financial interests," and 21 does not bar "financial benefits," the payment at issue was 22 permissible as it cannot be construed as anything other than a 23 "financial benefit." 24 what, precisely, was the nature of the payment. 25 reasons, Defendant's Motion to Dismiss the entire Complaint based 26 on the argument that there was no "financial interest" is DENIED. 27 /// 28 See, e.g., 24 C.F.R. § Thus, according to Defendant, where, as This only begs the question, however, of 6 For these United States District Court For the Northern District of California 1 B. First Cause of Action 2 Defendant also argues that Plaintiff's first cause of action 3 for violations of the Elder Abuse Act should be dismissed. 4 Defendant argues that Plaintiff has not alleged sufficient facts 5 to state a claim. 6 alleges that "Defendant manipulated Plaintiff and the Class into 7 paying excessive, unlawful and unfair fees and costs in connection 8 with her reverse mortgage." 9 allegations, in combination with the allegations incorporated by Mot. at 13. First, Plaintiff, however, clearly Compl. ¶ 48. These factual 10 reference, sufficiently allege violations of the Elder Abuse Act. 11 See Welf. & Inst. Code § 15610.30 (stating "'[f]inancial abuse' of 12 an elder . . . occurs when a person or entity does any of the 13 following: (1) Takes, . . . appropriates, or retains real or 14 personal property of an elder . . . to a wrongful use or with 15 intent to defraud, or both . . ."). 16 Defendant also asserts that the first cause of action must be 17 dismissed because the Elder Abuse Act does not confer an 18 independent private right of action. 19 Defendant cites Berkeley v. Dowds, 152 Cal. App. 4th 518, (Ct. 20 App. 2007), which held that "[t]he Act does not create a cause of 21 action as such, but provides for attorney fees, costs and punitive 22 damages under certain conditions." 23 California Court of Appeal cases, however, have called into 24 question this holding. 25 Management, Inc., 163 Cal. App. 4th 657 (Ct. App. 2008), the court 26 concluded that the holding in Berkeley regarding the absence of a 27 private right of action in the Elder Abuse Act was "inconsistent 28 In support of this argument, Id. at 529. Subsequent Recently, in Perlin v. Fountain View 7 1 with the California Supreme Court's dicta." 2 careful review of relevant caselaw, the court in Perlin stated 3 that the California "Supreme Court's language in Barris v. County 4 of Los Angeles, . . . 20 Cal. 4th 101 [(1999)] and Covenant Care, 5 Inc. v. Superior Court, . . . 32 Cal. 4th 771 [(2004)] is 6 authority for the proposition that the Act creates an independent 7 cause of action." 8 the court "reject[ed] plaintiffs' argument that a violation of the 9 Act does not constitute an independent cause of action." United States District Court For the Northern District of California 10 Id. at 665. Perlin, 163 Cal. App. 4th at 666. After a Accordingly, Id. Other federal courts in California have reached the same See, e.g., Genton v. Vestin Realty Mortgage II, Inc., 11 conclusion. 12 Case No. 06-2516, 2007 WL 951838, at *2 (S.D. Cal. March 9, 2007) 13 (stating "Plaintiffs' assertion that its Elder Abuse claim is not 14 a cause of action is unavailing"); Negrete v. Fid. & Guar. Life 15 Ins. Co., 444 F. Supp. 2d 998, 1002 (C.D. Cal. 2006) (finding the 16 plaintiff's allegations sufficient to state a claim under the 17 Elder Abuse Act). 18 relevant caselaw, the Court is convinced that the Elder Abuse Act 19 does in fact confer a private right of action. 20 to Dismiss Plaintiff's first cause of action is DENIED. After review of the statutory language and the Defendant's Motion 21 C. Second Cause of Action 22 Plaintiff's second cause of action is for unlawful, 23 deceptive, and/or unfair business practices in violation of 24 California Business and Professions Code § 17200 et seq. 25 Defendant's argument in favor of dismissal hinges on the 26 invalidity of the underlying claim under 24 C.F.R. § 206.31. 27 discussed above, however, Plaintiff has sufficiently alleged a § 28 8 As United States District Court For the Northern District of California 1 206.31 violation. Insofar as Plaintiff alleges unlawful or unfair 2 business practices, such a claim has been properly alleged. 3 the extent that Plaintiff alleges fraudulent business practices, 4 see Compl. ¶ 58, Plaintiff has failed to plead the necessary 5 particularity as required by Federal Rule of Civil Procedure 9(b). 6 See Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 7 2003) (stating that "Rule 9(b) demands that, when averments of 8 fraud are made, the circumstances constituting the alleged fraud 9 be specific enough to give defendants notice of the particular To 10 misconduct . . . so that they can defend against the charge and 11 not just deny that they have done anything wrong") 12 quotation marks omitted, alteration in original); see also id. 13 (holding "[a]verments of fraud must be accompanied by the who, 14 what, when, where, and how of the misconduct charged") (internal 15 quotation marks omitted). 16 fraud with this particularity, the fraud allegations, to the 17 extent there are any, are DISMISSED without prejudice and 18 Plaintiff may amend her Complaint to cure this defect. (internal As Plaintiff's Complaint fails to plead 19 D. 20 Plaintiff's third cause of action alleges violations of 21 California's CLRA, which prohibits "unfair methods of competition 22 and unfair or deceptive acts or practices undertaken by any person 23 in a transaction intended to result or which results in the sale 24 or lease of goods or services to any consumer." 25 1770(a). 26 therefore misrepresented, its financial relationship with the 27 mortgage broker in violation of § 1770(a)(3); misrepresented that 28 Third Cause of Action Cal. Civ. Code § Plaintiff alleges that Defendant failed to disclose, and 9 1 the transactions and services it offered conferred rights that 2 these transactions and services did not actually contain in 3 violation of § 1770(a)(14); and failed to properly disclose costs, 4 fees, and charges associated with its reverse mortgage in 5 violation of § 1770(a)(19). United States District Court For the Northern District of California 6 Defendant's primary argument for dismissal of Plaintiff's 7 CLRA claim is that the CLRA applies only to the sale of "goods" 8 and "services," and not to credit transactions. 9 California Supreme Court nor the Ninth Circuit has squarely Neither the 10 addressed the issue of whether a transaction involving the 11 provision of a reverse mortgage loan is covered by the CLRA. 12 Federal courts must apply "California law as we believe the 13 California Supreme Court would apply it." 14 & Affiliates, 224 F.3d 922, 924 (9th Cir. 2000). 15 California appellate court decisions, although persuasive, are not 16 binding authority and federal courts are not bound by them if it 17 is believed that "the California Supreme Court would decide 18 otherwise." 19 In re K F Diaries, Inc. Intermediate Id. (internal quotation marks omitted). Defendant relies heavily on two California Court of Appeal 20 decisions in support of its argument. 21 Express Publishing, Inc., 147 Cal. App. 4th 224 (Ct. App. 2007), 22 the Court of Appeal analyzed whether the defendant's provision of 23 a credit card to the plaintiff constituted either a "service" or 24 "good" as defined by the CLRA. 25 on the legislative history, the court concluded that "[t]he 26 issuance of a credit card is not a 'transaction intended to result 27 or which results in the sale or lease of goods or services to any 28 In Berry v. American Id. at 229. 10 Relying extensively 1 consumer under [the] CLRA." 2 1770(a)). In McKell v. Washington Mutual, Inc., 142 Cal. App. 4th 1457 United States District Court 3 For the Northern District of California Id. at 228 (citing Cal. Civ. Code § 4 (Ct. App. 2006), the plaintiffs alleged that they were overcharged 5 by the defendant in connection with underwriting, tax services, 6 and wire transfer fees in conjunction with home loans. 7 1465. 8 transactions for the sale of goods or services, concluded that the 9 plaintiffs' claims did not fall within the CLRA as the defendant's Id. at The court, distinguishing the CLRA's protections over 10 "actions were undertaken in transactions resulting in the sale of 11 real property." 12 Id. at 1488. This Court has previously addressed the issue of whether the 13 CLRA applies to mortgages. 14 Case No. 05-0240 SC, 2005 WL 1910927, at *1 (N.D. Cal. Aug. 10, 15 2005), the plaintiffs alleged that the defendants had engaged in a 16 variety of predatory lending practices in providing mortgage 17 loans. 18 that had addressed this issue at the time, this Court concluded 19 that "the CLRA covers the mortgages at issue" and denied the 20 defendants' motion to dismiss. 21 In Knox v. Ameriquest Mortgage Co., After surveying the relatively sparse landscape of cases Id. at *4. Subsequent to Knox, both Berry and McKell were decided. 22 These decisions, however, do not change the Court's conclusion 23 that, were the California Supreme Court to address the issue of 24 whether the CLRA applies to the reverse mortgage at issue in the 25 present case, it would likely answer in the affirmative. 26 the CLRA contains an explicit provision stating that it "shall be 27 liberally construed and applied to promote its underlying 28 11 First, United States District Court For the Northern District of California 1 purposes, which are to protect consumers against unfair and 2 deceptive business practices . . . ." 3 Second, unlike Berry, which addressed only the extension of 4 credit, in the present case Plaintiff has alleged that Defendant 5 provided various services in conjunction with the issuance of the 6 reverse mortgage. 7 fraudulent business practices employed by Defendant in the sale of 8 reverse mortgages are 'services'" under the CLRA). 9 distinction is significant and has been recognized in other Cal. Civil Code § 1760. See Compl. ¶ 67 (stating "[t]he deceptive and This 10 decisions from this District that have concluded that the CLRA 11 applies to mortgage loans. 12 Mortgage, Inc., Case No. 06-7401 SI, 2007 WL 3101250, at *6 (N.D. 13 Cal. Oct. 22, 2007) (stating "unlike Berry, the situation in the 14 present case involves more than the mere extension of a credit 15 line. 16 mortgage loan itself, but also with the services involved in 17 developing, securing and maintaining plaintiffs' loan."); 18 Jefferson v. Chase Home Fin. LLC, Case No. 06-6510 TEH, 2007 WL 19 1302984, at *3 (N.D. Cal. May 3, 2007) (distinguishing Berry and 20 McKell and holding that the defendant had "failed to persuade this 21 Court that financial services agreements related to real estate 22 transactions are excepted from CLRA's scope"). 23 the Court concludes, as it did in 2005 in Knox, that mortgage 24 loans such as those in the instant action may be covered by the 25 CLRA. 26 27 28 See, e.g., Hernandez v. Hilltop Fin. Instead, the circumstances here deal not just with the For these reasons, Defendant also argues that Plaintiff has failed to sufficiently plead factual allegations for a CLRA claim. 12 United States District Court For the Northern District of California 1 Plaintiff presents three separate theories for CLRA violations. 2 First, Plaintiff alleges that Defendant failed to disclose, and 3 therefore misrepresented, its financial relationship with the 4 mortgage broker in violation of § 1770(a)(3). 5 prohibits "[m]isrepresenting the affiliation, connection, or 6 association with, or certification by, another." 7 § 1770(a)(3). 8 1770(a)(3) theory is premised on Defendant's alleged failure to 9 disclose its financial relationship with mortgage brokers. Section 1770(a)(3) Cal. Civil Code As stated in her Complaint, Plaintiff's § 10 ¶ 68. 11 constituted a misrepresentation. Compl. This failure to disclose, according to Plaintiff, Id. As currently alleged, this CLRA theory fails to satisfy the 12 13 minimum pleading requirements of Federal Rule of Civil Procedure 8 14 and fails to articulate "enough facts to state a claim to relief 15 that is plausible on its face." 16 Although § 1770(a)(3) on its face prohibits misrepresentations, 17 Plaintiff has instead alleged a failure to disclose. 18 failure to disclose might, under certain circumstances, be 19 tantamount to a misrepresentation, Plaintiff's bare factual 20 allegations in support of this claim fall short of the minimum 21 requirements. Twombly, 127 S. Ct. at 1974. While a Plaintiff's second theory under the CLRA alleges that 22 23 Defendant violated § 1770(a)(14) by "representing that a 24 transaction confers or involves rights, remedies, or obligations 25 which it does not have or involve, or which are prohibited by 26 law." 27 allege any facts related to this theory, and instead has merely 28 Cal. Civil Code § 1770(a)(14). 13 Plaintiff has failed to 1 repeated the conclusory language of the statute. Finally, Plaintiff alleges that Defendant failed to properly United States District Court For the Northern District of California 2 3 disclose costs, fees, and charges associated with its reverse 4 mortgage in violation of § 1770(a)(19). 5 prohibits "[i]nserting an unconscionable provision in the 6 contract." 7 states that "Defendant failed to properly disclose costs, fees, 8 and charges associated with its reverse mortgages." 9 Such factual allegations noticeably do not assert that any of the Section 1770(a)(19) Cal. Civil Code § 1770(a)(19). Plaintiff's Complaint Compl. ¶ 68. 10 provisions were in fact "unconscionable." Without such an 11 allegation, this theory also fails to sufficiently allege the 12 requisite facts. 13 For the reasons stated above, the Court concludes that 14 although the CLRA may apply to mortgage loans such as the ones in 15 the instant action, Plaintiff has nonetheless failed to state a 16 claim under the CLRA. 17 this claim is DISMISSED WITHOUT PREJUDICE. As amendment may cure these deficiencies, 18 E. Fourth and Fifth Causes of Action 19 Plaintiff's fourth cause of action is for unjust enrichment 20 and the fifth cause of action seeks declaratory relief. 21 Defendant's entire argument in favor of dismissal of these claims 22 is premised on the invalidity of Plaintiff's underlying § 206.31 23 theory. 24 valid. 25 fourth and fifth causes of action is DENIED. 26 /// 27 /// 28 As noted above, however, this theory, at this stage, is Accordingly, Defendant's Motion to Dismiss Plaintiff's 14 1 V. CONCLUSION 2 For the reasons stated above, Defendant's Motion to Dismiss 3 is GRANTED with respect to the fraud claim in Plaintiff's second 4 cause of action and Plaintiff's third cause of action for 5 violations under the CLRA. 6 prejudice. Both claims are DISMISSED without Defendant's Motion is otherwise DENIED. 7 8 9 IT IS SO ORDERED. United States District Court For the Northern District of California 10 11 Dated: October 29, 2008 12 13 UNITED STATES DISTRICT JUDGE 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 15