Lyons et al v. JPMorgan Chase Bank, N.A., No. 4:2010cv05166 - Document 62 (N.D. Cal. 2011)
Court Description: ORDER GRANTING DEFENDANT'S 52 MOTION TO DISMISS THE FIRST AMENDED COMPLAINT. Signed by Judge Claudia Wilken on 11/2/2011. (ndr, COURT STAFF) (Filed on 11/2/2011)
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Lyons et al v. JPMorgan Chase Bank, N.A. Doc. 62 1 IN THE UNITED STATES DISTRICT COURT 2 FOR THE NORTHERN DISTRICT OF CALIFORNIA 3 4 5 LAURA B. LYONS and ELAINE RUTH LEE, individually and on behalf of all others similarly situated, 6 7 8 9 United States District Court For the Northern District of California 10 No. C 10-5166 CW ORDER GRANTING DEFENDANT'S MOTION TO DISMISS THE FIRST AMENDED COMPLAINT (Docket No. 52) Plaintiffs, v. JPMORGAN CHASE BANK, N.A., Defendant. ________________________________/ 11 12 Plaintiffs Laura B. Lyons and Elaine Ruth Lee charge 13 Defendant JPMorgan Chase Bank, N.A., (Chase) in an amended 14 complaint, with violations of California common and statutory law 15 based on fraud, in connection with Option Adjustable Rate 16 Mortgages (OARMs) that it obtained from Washington Mutual Bank. 17 Chase moves to dismiss their complaint. 18 motion and Chase has replied to the opposition. 19 taken under submission on the papers. 20 papers submitted by the parties, the Court GRANTS Chase’s motion. 21 22 Plaintiffs oppose the The motion was Having considered the BACKGROUND According to the complaint, on or about March 9, 2005, Lyons 23 obtained an OARM from Washington Mutual. 24 2005, Lee obtained an OARM from Washington Mutual. 25 allege that Washington Mutual knew and fraudulently concealed from 26 borrowers that these were negative amortization loans, in which 27 the scheduled monthly payments would be insufficient to cover the 28 interest owed and thus result in increasing principal balances, On or about July 21, Plaintiffs Dockets.Justia.com 1 causing the payments to "recast" to higher amounts needed to pay 2 off the principal owed. 3 concealed the true interest rate that borrowers would pay. 4 They also allege that Washington Mutual On September 25, 2008, the Office of Thrift Supervision closed Washington Mutual and the Federal Deposit Insurance 6 Corporation (FDIC) was appointed as receiver. 7 Washington Mutual's assets from the FDIC. 8 Plaintiffs brought their original complaint pleading 1) breach of 9 contract; 2) violation of California’s Unfair Competition Law 10 United States District Court For the Northern District of California 5 (UCL), Cal. Bus. & Prof. Code § 17200, et seq.; and 3) unjust 11 enrichment. 12 11, 2011, the Court dismissed these claims with leave to amend 13 because it found that the complaint did not allege that Chase had 14 breached any terms of its contract with Plaintiffs. 15 Chase purchased On November 15, 2010 Plaintiffs also sought declaratory relief. On July In their first amended complaint (1AC) filed July 26, 2011, 16 Plaintiffs repeat unamended their claims for breach of contract 17 and violation of the UCL based on "unlawful" business practices to 18 preserve the claims for appeal. 19 based on the theory that at the time Chase acquired and serviced 20 these loans, it was aware that they were fraudulently obtained: 21 violations of the UCL based on "unfair" business practices; and 22 unjust enrichment based on fraud. 23 declaratory relief. 24 They allege the following claims Again, Plaintiffs seek Plaintiffs plead that Chase was aware that the loan 25 agreements were so misleading as to be fraudulent and that after 26 Chase purchased Washington Mutual’s OARMs it unjustly enriched 27 itself by collecting payments and loan servicing fees based on an 28 agreement that it knew was fraudulently obtained. 2 1 Plaintiffs cite several provisions in their loan agreements 2 as evidence of fraud. 3 previous order, and found that the complaint did not allege that 4 Chase had breached any terms of the loan agreement. 5 noted that some of the language therein might be considered 6 confusing and contradictory, potentially supporting a claim for 7 fraud. 8 9 The Court addressed these provisions in its The Court As evidence of Chase's knowledge of the alleged fraud, Plaintiffs point to Chase's 2008 annual report to its shareholders United States District Court For the Northern District of California 10 in which OARM loans were characterized as "possibly the worst 11 mortgage product" and a product that was not "consumer friendly." 12 1AC ¶ 5. 13 loans knowing that borrowers were contesting the balances and it 14 continued to collect the payments, rather than correcting the 15 alleged fraud, thus unjustly enriching itself. Plaintiffs also allege that Chase purchased the OARM 16 As evidence of Chase's participation in securing the 17 allegedly fraudulent loan documents, Plaintiffs assert that in 18 2005 Chase sent several of its executives with knowledge of the 19 home mortgage business to "infiltrate Washington Mutual". 20 ¶ 32. 21 their oversight "with an eye towards forcing the collapse or sale 22 of Washington Mutual." 23 Chase purchased Washington Mutual's loans for a small fraction of 24 the amounts claimed to be owed on the loans, and thus are being 25 unjustly enriched from inflated balances caused by the practices 26 alleged above. 1AC Chase also purportedly pressured regulators to tighten 1AC ¶ 33. Finally Plaintiffs plead that 1AC ¶¶ 33, 52, 53. 27 28 3 1 2 LEGAL STANDARD A complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” 4 Civ. P. 8(a). 5 state a claim, dismissal is appropriate only when the complaint 6 does not give the defendant fair notice of a legally cognizable 7 claim and the grounds on which it rests. 8 Twombly, 550 U.S. 544, 555 (2007). 9 complaint is sufficient to state a claim, the court will take all 10 United States District Court For the Northern District of California 3 material allegations as true and construe them in the light most 11 favorable to the plaintiff. 12 896, 898 (9th Cir. 1986). 13 to legal conclusions; “threadbare recitals of the elements of a 14 cause of action, supported by mere conclusory statements,” are not 15 taken as true. 16 (citing Twombly, 550 U.S. at 555). On a motion under Rule 12(b)(6) for failure to Bell Atl. Corp. v. In considering whether the NL Indus., Inc. v. Kaplan, 792 F.2d However, this principle is inapplicable Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009) 17 18 Fed. R. DISCUSSION Chase argues that Plaintiffs' claims must again be dismissed 19 because, insofar as they are predicated on Chase collecting on 20 loans that were allegedly procured by fraud on the part of 21 Washington Mutual, they are barred by the Purchase and Assumption 22 Agreement (P&A agreement). 23 fraudulent conduct by Washington Mutual is the basis for both 24 Plaintiffs' common law unjust enrichment claim and their 25 unfairness claim under the UCL. 26 not bar Plaintiffs’ action, Chase argues, Plaintiffs fail to state 27 any of their claims sufficiently. Chase further asserts that the alleged Even if the P&A Agreement does 28 4 1 2 I. Claims of Breach of Contract and Violation of UCL Under "Unlawful" Prong In their opposition to the motion to dismiss, Plaintiffs 3 acknowledge that they included the claims for breach of contract 4 and violation of the "unlawful" prong of the UCL in this complaint 5 only to preserve these claims for appeal. 6 the deficiencies found by the Court and merely reassert the 7 previous dismissed claims. 8 dismissed. 9 II. They fail to address Accordingly, these claims are Effect of the P&A Agreement United States District Court For the Northern District of California 10 The P&A Agreement between Chase and the FDIC provides, 11 [A]ny liability associated with borrower claims for payment of or liability to any borrower for monetary relief, or that provide for any other form of relief to any borrower, whether or not such liability is reduced to judgment, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or equitable, judicial or extrajudicial, secured or unsecured, whether asserted affirmatively or defensively, related in any way to any loan or commitment to lend made by the Failed Bank prior to failure, or to any loan made by a third party in connection with a loan which is or was held by the Failed Bank, or otherwise arising in connection with the Failed Bank’s lending or loan purchase activities are specifically not assumed by the Assuming Bank. 12 13 14 15 16 17 18 19 20 First Amended Complaint (1AC), Ex. 3 § 2.5. 21 22 23 24 25 26 27 In its previous order, this Court held that Plaintiffs' claims would not be barred by the P&A agreement only to the extent that they were based on Chase's actions after it acquired the loans from Washington Mutual. In the 1AC, Plaintiffs make claims for unjust enrichment under the common law and the "unfair" prong of the UCL that are based on the allegation that Washington Mutual 28 5 1 committed fraud in the procurement of Plaintiffs' loans and Chase 2 knew of this and continues to benefit from it. 3 Plaintiffs offer two responses to Chase's assertions that 4 these claims are precluded by the P&A agreement. 5 state that their claims are based on Chase's conduct after it 6 acquired the loans. 7 loans were fraudulently obtained, they were never enforceable, and 8 therefore remain unenforceable after the transfer. 9 United States District Court For the Northern District of California 10 First, they Second, Plaintiffs argue that because the A. Chase's Post-Acquisition Conduct Both the unjust enrichment claim and the UCL unfairness claim 11 are based on Chase's post-acquisition conduct in applying 12 Plaintiffs' payments and servicing the loan. 13 the initial complaint, Plaintiffs allege that Chase engaged in bad 14 faith conduct by failing to apply Plaintiffs' payments to both 15 principal and interest, allowing the interest to increase and the 16 loans to negatively amortize, increasing the principal through 17 negative amortization, charging an interest rate that was not 18 disclosed and collecting profits by servicing these loans. Specifically, as in 19 As noted previously, courts have held that the FDIC, not 20 Chase, is the party responsible for borrowers' claims arising from 21 Washington Mutual's conduct with regard to their loans. 22 e.g., Yeomalakis v. FDIC, 562 F.3d 56, 60 (1st Cir. 2009); Hilton 23 v. Wash. Mut. Bank, 2009 WL 3485953, at *2-*3 (N.D. Cal.). 24 applies even where fraudulent activity is alleged at the inception 25 of the loans. 26 (N.D. Cal. 2009) (holding that claims based on fraudulently 27 originated Washington Mutual loans are barred by the P&A 28 Agreement). See, This Biggins v. Wells Fargo & Co., 266 F.R.D. 399, 415 See also Dipaola v. JPMorgan Chase Bank, 2011 WL 6 1 3501756, at *3-*4 (N.D. Cal.)(plaintiffs are barred by the P&A 2 agreement from bringing any claims against JPMorgan Chase based on 3 fraud at the origination of the loan). The conduct on which Plaintiffs base their amended claims is 5 almost identical to the conduct cited in their original claims, a 6 fact which they acknowledge. 7 that Chase had no obligation to allocate monthly payments to 8 principal and interest. 9 proposition that Chase breached the contract as it existed. 10 United States District Court For the Northern District of California 4 Plaintiffs claim that Chase was aware of fraud committed by 11 Washington Mutual at the inception of the loan but they plead no 12 facts to support such a claim. 13 14 The Court held in its previous order Those claims were based on the Here, B. Unenforceable Due to Fraud Plaintiffs also argue that the loans in question were invalid 15 because they were induced by fraud and therefore Chase had no 16 legitimate contracts to enforce. 17 the fraud when it purchased Washington Mutual's assets, failed to 18 correct it, and continued to collect payments based on the 19 fraudulently obtained contracts. 20 They argue that Chase knew of In Biggins, the court rejected essentially the same argument 21 as the one that Plaintiffs have made here. 22 argument that the contract was invalid due to fraud committed by 23 Washington Mutual was not sufficient to defeat clause 2.5 of the 24 P&A Agreement. 25 Order that the allocation and collection of the payments is within 26 the bounds of the existing contract between Plaintiffs and Chase. 27 Because there are no allegations of any fraud committed after 28 Chase acquired the loans, in order to find an actionable claim one 266 F.R.D. at 415. 7 It held that the This Court found in its prior 1 must look to fraudulent actions which occurred in the formation of 2 the contract. 3 Washington Mutual's lending activities by the P&A agreement. 4 Newbeck v. Washington Mutual Bank, 2010 WL 3222174, at *2 (N.D. 5 Cal.). 6 Chase is insulated from claims arising out of See Plaintiffs point to footnote four in this Court's previous 7 Order, which acknowledges that the language of the original 8 contract could potentially support a claim for fraud. 9 this same footnote the Court clarified that Chase is not the However, in United States District Court For the Northern District of California 10 original lender and is not liable for Washington Mutual's conduct, 11 due to the P&A agreement. 12 support a charge for fraud against Washington Mutual or its 13 successor in interest, the FDIC, does not support a claim against 14 Chase. 15 by Chase after acquisition. 16 written in Chase's 2008 annual report do not support the claim 17 that Chase knew that the loans were fraudulently obtained, nor 18 does Chase's purchase of Washington Mutual's assets for "pennies 19 on the dollar" support such a claim. 20 The fact that the language might Plaintiffs have alleged no fraudulent representations made Moreover, the comments allegedly Because the common law unjust enrichment claim and the UCL 21 unfairness claim are both based on Chase's culpability for alleged 22 fraud committed by Washington Mutual at the inception of the 23 loans, these claims fail. 24 III. Declaratory Relief 25 Plaintiffs seek a declaratory judgment that Chase must cure 26 the defects that Plaintiffs have identified in the terms of their 27 loan agreement. 28 claims adequately, there is no basis for declaratory relief. Because Plaintiffs have failed to state their 8 1 2 CONCLUSION Plaintiffs have failed to cure the deficiencies noted in 3 their initial complaint. 4 raised against Chase because of the P&A Agreement. 5 because Plaintiffs had an opportunity to amend their complaint and 6 did not cure the defects identified by the Court, the motion to 7 dismiss is GRANTED without leave to amend. 8 this file. The claims plead in the 1AC cannot be Accordingly, The Clerk shall close The parties shall bear their own costs. 9 United States District Court For the Northern District of California 10 IT IS SO ORDERED. 11 12 13 Dated: 11/2/2011 CLAUDIA WILKEN United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9
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