MARIA-ELENA JAMES, Magistrate Judge.
The Court earlier ruled on Motions to Dismiss filed by Defendants Bosco Credit, LLC ("Bosco"), Franklin Credit Management Corporation ("Franklin"), and T.D. Service Financial Corporation ("T.D."). See Order re: Mot. to Dismiss ("MTD Order"), Dkt. No. 38. However, in doing so, the Court left one matter unresolved and requested supplemental briefing from Plaintiff Scott Fitzgerald ("Plaintiff") and Defendants Franklin and Bosco (for purposes of this Order, "Defendants") concerning Plaintiff's Fifth Cause of Action. Id. at 18-19. Defendants and Plaintiff timely filed their supplemental responses. Pl.'s Resp., Dkt. No. 39; Defs.' Resp., Dkt. No. 40; Defs.' Reply, Dkt. No. 41; Pl.'s Reply, Dkt. No. 42. Having considered the parties' positions, the relevant legal authority, and the record in this case, the Court
In the Fifth Cause of Action, Plaintiff alleges Defendants interfered with his right of reinstatement pursuant to California Civil Code section 2924c, by improperly charging interest, fees, and other costs on Plaintiff's mortgage and doing so while the secured property was underwater. First Am. Compl. ("FAC") ¶ 81, Dkt. No. 15. Specifically, Plaintiff alleges his loan was discharged as part of his Chapter 7 bankruptcy, and "[p]ursuant to 11 U.S.C. § 524[a](2), a discharges [sic] operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor." Id. ¶ 72. Plaintiff also contends that pursuant to 11 U.S.C. § 506(b), "to the extent that a claim is secured by a property, the value of which is less than the amount of such claim, the creditor is not entitled to interest on such claim, fees, costs, or charges provided for under the agreement." Opp'n at 7 (quoting 11 U.S.C. § 506(b)), Dkt. No. 29.
Defendants initially challenged this claim on two primary grounds. First, they contested Plaintiff's reliance on 11 U.S.C. § 524(a)(2). They argued that while a discharge following a Chapter 7 bankruptcy relieves a debtor of his personal liability, it does not relieve him of in rem liability. Bosco & Franklin's Mot. to Dismiss ("BF Mot.") at 8, Dkt. No. 22. Accordingly, they argued, "Bosco's in rem right remained" and "[i]n this case, Defendants had the right to notify [P]laintiff that foreclosure proceedings had been initiated and, to avoid non-judicial foreclosure on the property, to identify the outstanding due." Id. at 9. Second, they contended Plaintiff is "wrong" that 11 U.S.C. § 506(b) prohibits creditors from charging interest, fees, or other costs while the property is underwater. Id. at 13. They further argued "Plaintiff fails to allege actual facts to show whether and to what extent the Property's value was `underwater' or not." Id. Along those lines, Defendants contended the "Property value would require a judicially determined value before such argument could even be posed, and nothing related to same is alleged." Id. at 13-14.
In its MTD Order, the Court noted that, in California, a trustor may have "the legal right to bring [his] account in good standing by paying all of [his] past due payments plus permitted costs and expenses within the time permitted by law." Cal. Civ. Code § 2924c(b)(1). To comply with the statute, a trustee must (1) issue a Notice of Default with the requisite statutory language; and (2) respond to requests for the amount necessary to reinstate the loan. Id. California law further provides that "[r]einstatement of a monetary default under the terms of an obligation secured by a deed of trust, or mortgage may be made at any time within the period commencing with the date of recordation of the notice of default until five business days prior to the date of sale set forth in the initial recorded notice of sale." Id. § 2924c(e). Consequently, courts have recognized claims for what essentially amounts to interference with the exercise of reinstatement. See, e.g., Crossroads Inv'rs, L.P. v. Fed. Nat'l Mortg. Ass'n, 246 Cal.App.4th 529, 545-46 (2016), review filed (May 24, 2016) (plaintiff "established a prima facie case showing [defendant] violated Section 2924c by not providing it with the requested information to redeem the loan.").
The Court requested supplemental briefing regarding Plaintiff's section 2924c claim, particularly as Plaintiff cited no case law supporting his position that § 506(b) applied in the manner he asserted. See FAC ¶ 81. First, the Court requested supplemental briefing from Plaintiff on the following issues:
MTD Order at 19 (emphases in original). Second, the Court requested that Defendants explain "[w]hy they believe 11 U.S.C. § 506(b) does not apply to [Plaintiff's] case and what legal authority supports this position, including specific case law." Id.
This Order now addresses whether Plaintiff states a claim upon which relief can be granted under California Civil Code section 2924c.
Federal Rule of Civil Procedure ("Rule") 8(a) requires that a complaint contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). A complaint must therefore provide a defendant with "fair notice" of the claims against it and the grounds for relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations and citation omitted).
A court may dismiss a complaint under Rule 12(b)(6) when it does not contain enough facts to state a claim to relief that is plausible on its face. Id. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a `probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Twombly, 550 U.S. at 557). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555 (internal citations and parentheticals omitted). In considering a motion to dismiss, a court must accept all of the plaintiff's allegations as true and construe them in the light most favorable to the plaintiff. Id. at 550; Erickson v. Pardus, 551 U.S. 89, 93-94 (2007); Vasquez v. Los Angeles Cty., 487 F.3d 1246, 1249 (9th Cir. 2007).
If a Rule 12(b)(6) motion is granted, the "court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (internal quotations and citations omitted).
Having considered the parties' positions and the facts alleged in the FAC, the Court dismisses the Fifth Cause of Action at this time, with leave to amend. To state a claim for a violation of section 2924c, Plaintiff must show how Defendants interfered with efforts to reinstate his loan. Plaintiff premises his section 2924c claim on Defendants' purported violations of 11 U.S.C. § 524(a)(2) (discharge) and 11 U.S.C. § 506(b) (undersecured property). As discussed below, the Court finds Plaintiff has failed to allege facts sufficient to state an interference claim on either of these theories. Finally, more broadly, Plaintiff has not shown how Defendants interfered with his efforts to reinstate his loan; there are no facts, for instance, indicating Plaintiff sought to reinstate his mortgage, had the means to do so, or how each Defendant's specific actions interfered with his efforts to reinstate. Without more, Plaintiff presently fails to state a claim under section 2924c.
Plaintiff's first theory is pursuant to 11 U.S.C. § 524(a)(2), under which he alleges a bankruptcy discharge prohibits creditors from attempting "to collect, recover or offset any such debt as a personal liability of the debtor." FAC ¶ 72. In his supplemental briefing, Plaintiff argues that "[b]y voiding the personal obligation between Plaintiff and Defendant, i.e. the promissory note, Defendant's ability to charge interest under the promissory note was voided, effective the date of discharge." Pl.'s Reply at 2-3. In a heading, he further asserts "[a] Chapter 7 Discharge Voids Personal Liability." Id. at 2. Thus, it appears Plaintiff alleges he is not personally liable for a debt to Bosco, though he concedes in rem liability remains. See Opp'n at 3-4 (indicating Plaintiff does not dispute in rem liability remains following a Chapter 7 discharge).
It is unclear how any purported violations of § 524(a)(2) interfered with Plaintiff's reinstatement rights under California law. Plaintiff's Fifth Cause of Action does little to describe why he believes Defendants' alleged § 524(a)(2) violation would give rise to a claim for interference of his reinstatement rights under California law. Indeed, Plaintiff's assertion of an underlying § 524(a)(2) violation appears at odds with his overarching section 2924c interference claim. On one hand, Plaintiff seems to allege Defendants unlawfully attempted to collect a discharged debt; on the other, he claims Defendants interfered with his right to reinstate the same debt. Plaintiff cannot have it both ways. While courts have recognized that § 524(a)(2) enjoins creditors from attempting to collect discharged debt as a personal liability,
Finally, even if Plaintiff is able to articulate a coherent theory about how a violation of § 524(a)(2) gives rise to the section 2924c claim, the FAC lacks sufficient facts to suggest that a § 524(a)(2) violation is more than speculative. For instance, the FAC provides very few details about the bankruptcy discharge, what was included in that discharge, or why "Plaintiff is informed and believes that Defendant Bosco Credit, LLC was that Plaintiff's personal obligation to pay the debt had been discharged." FAC ¶ 15 (errors in original). Put another way, there are no facts indicating whether Plaintiff's discharge included his loan such that the loan is subject to § 524(a)(2)'s injunction. See In re Eber, 687 F.3d 1123, 1128 (9th Cir. 2012) ("The permanent injunction under § 524(a)(2) . . . enjoins creditor actions related to discharged debts." (emphasis added)). Nor, for that matter, is it clear Defendants sought to collect the debt as a personal liability of Plaintiff and not in an in rem action. See Johnson, 501 U.S. at 84 ("Even after the debtor's personal obligations have been extinguished, the mortgage holder still retains a `right to payment' in the form of its right to the proceeds from the sale of the debtor's property."). Without more, the Court cannot determine the facts of this case even properly give rise to a § 524(a)(2) violation.
Based on the foregoing issues, the Court will dismiss this claim to the extent it is premised on § 524(a)(2); however, as it is not entirely clear what Plaintiff is attempting to allege, the Court cannot necessarily find this claim futile. Accordingly, the Court will grant Plaintiff one further opportunity to amend as his section 2924c interference claim premised on § 524(a)(2).
The FAC also asserts an interference claim based on Defendants' alleged violations of 11 U.S.C. § 506(b). As indicated above, the Court ordered supplemental briefing on this novel claim, but no party identified any case law in which courts have considered the application of § 506(b) in such an interference claim. That said, Defendants have not shown at this point that § 506(b) is necessarily inapplicable as a matter of law.
The Court's initial review of the law indicates § 506(b) can apply to cases under Chapter 7 bankruptcy petitions. Specifically, § 103(a) of the Bankruptcy Code provides that "[e]xcept as provided in section 1161 of this title, chapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title[.]" 11 U.S.C. § 103(a).
Section 506(b) provides as follows:
11 U.S.C. § 506(b). A creditors' ability to charge interest under § 506(b) is dependent on at least two factors.
Regarding the first factor, an "allowed secured claim" under § 506(b) is one that qualifies as a secured claim under § 506(a).
Defendants argue "Plaintiff's alleged valuation of the Property fails without justification that the value was judicially determined as required by Section 506(a)." Defs.' Resp. at 5 (citing Matter of Sandy Ridge Dev. Corp., 881 F.2d 1346, 1354 (5th Cir. 1989)). The Court does not find much merit to Defendants' contention that Plaintiff can only assert a violation of § 506(b) if he alleges there was a judicial determination of the value of his property. Moreover, this argument appears to harm Defendants more than Plaintiff. Specifically, if Defendants are correct that there was no judicial determination of the value of Plaintiff's property, there would be no allowed secured claim. And without an allowed secured claim, § 506(b) would not permit Defendants to charge interest, etc. Consequently, the absence of a judicial determination of the value of Plaintiff's property would appear to support—not hurt—Plaintiff's claim that Defendants were not allowed to charge interest. In sum, the Court is not persuaded that Plaintiff's claim must fail based on a lack of a judicially determined property valuation.
Assuming there was a judicial determination of the property value, and therefore an allowed secured claim, Defendants' ability to charge interest is still not guaranteed. The second factor of § 506(b) provides that only oversecured creditors may charge interest. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (under § 506(b), "`[s]uch claim' refers to an oversecured claim. The natural reading of the phrase entitles the holder of an oversecured claim to postpetition interest and, in addition, gives one having a secured claim created pursuant to an agreement the right to reasonable fees, costs, and charges provided for in that agreement."). Conversely, § 506(b) has a "substantive effect of denying undersecured creditors postpetition interest on their claims[.]"
As such, if Defendants are undersecured creditors, § 506(b) limits their ability to charge postpetition interest. Therein, however, lies the problem. The FAC lacks sufficient allegations that Defendants were undersecured creditors because it does not provide plausible facts indicating the value of Plaintiff's property was less than the amount of the debt owed on it. See Matter of Glenn, 796 F.2d 1144, 1146 (9th Cir. 1986) ("[A]n undersecured creditor is one who holds an allowed secured claim for an amount which exceeds the value of the property securing it; an oversecured creditor is one who holds an allowed secured claim in an amount less than the value of the property securing it."). Plaintiff asserts only that he
FAC ¶ 14. He further alleges he "is informed and believes that his property remained underwater until mid to late 2015. Thus, the value of Plaintiff's property was less than the secured claim held by Bosco Credit, LLC, serviced by Franklin Credit Management Corporation." Id. ¶ 16.
"The Twombly plausibility standard, which applies to all civil actions, does not prevent a plaintiff from pleading facts alleged `upon information and belief' where the facts are peculiarly within the possession and control of the defendant, or where the belief is based on factual information that makes the inference of culpability plausible." Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (internal marks and citations omitted). Several district courts in the Ninth Circuit have adopted the Second Circuit's standard. See Slack v. Int'l Union of Operating Eng'rs, 83 F.Supp.3d 890, 900 (N.D. Cal. 2015) ("Because details of the precise nature of [d]efendants' management practice rests solely in the hands of [d]efendants at this juncture, greater specificity is not required at this pleading stage." (citing Arista Records, 604 F.3d at 120-21, additional citations omitted)); Cisco Sys., Inc. v. STMicroelectronics, Inc., 2015 WL 3488923, at *4 (N.D. Cal. June 2, 2015) (adopting Arista Records standard); Circle Click Media LLC v. Regus Mgmt. Grp. LLC, 2013 WL 57861, at *6 (N.D. Cal. Jan. 3, 2013) ("Rule 8 pleading standards do not prevent a plaintiff from `pleading facts alleged upon information and belief where the facts are peculiarly within the possession and control of the defendant[.]'" (quoting Arista Records, 604 F.3d at 120)); GCIU-Emp'r Ret. Fund v. Quad/Graphics, Inc., 2016 WL 3027336, at *3 (C.D. Cal. May 26, 2016) ("Even after Iqbal and Twombly, numerous courts have held that facts may be pleaded on information and belief—especially where, as here, the underlying evidence is peculiarly within the defendant's possession.").
The value of Plaintiff's property is not a fact exclusively in Defendants' possession; there is no reason to believe such information is not accessible to Plaintiff. Such facts can substantiate the allegation that his property was worth less than the debt owed on it. See Paramount Pictures Corp. v. Axanar Prods., Inc., 2016 WL 2967959, at *4 (C.D. Cal. May 9, 2016) (allegations based on "information and belief" sufficiently stated claim for copyright infringement where the "allegations based on `information and belief' [were] bolstered by specific facts and many allegations gleaned directly from comparing the works at issue and from [d]efendants' public postings on social media."). As noted above, a judicial determination could support his contention, but even if one does not exist, there are other ways to plausibly show the value of his property. But without such facts to substantiate his claims, Plaintiff's bare allegations do not meet the plausibility standard under Twombly/Iqbal at this point.
In sum, the Court does not have grounds at this juncture to find Plaintiff's reinstatement claim predicated on 11 U.S.C. § 506(b) necessarily futile; however, Plaintiff has not currently alleged plausible facts to support the underlying elements of such a claim. Consequently, the Court will grant leave to amend.
Based on the foregoing analysis, the Court
Additionally, pursuant to Federal Rule of Civil Procedure 16(b) and Civil Local Rule 16-10, the Court will hold a Case Management Conference
FAC ¶ 73.
11 U.S.C. § 506(a).
