MARGARET M. MANN, Bankruptcy Judge.
The Court has considered the Motions ("Motions") to Dismiss the Second Amended Complaint ("SAC") of debtor and plaintiff Cirilo E. Cruz
All Truth-In-Lending-Act ("TILA") related causes of action are dismissed with prejudice. The Court concludes that Cruz cannot state a cause of action under any theory challenging the TILA disclosure because his claims are either unripe or barred by the statute of limitations. The TILA allegations cannot be stated as state law claims because of federal preemption as an alternative ground for dismissal. The Motions are granted to the additional extent they assert the foreclosure of the Property was wrongful due to MERS' unauthorized substitution of trustee.
The Court denies the Motions to the extent that they assert ING was not required to record its assignment of beneficial interest before it foreclosed. The Motions request the Court reconsider its holding in U.S. Bank N.A. v. Skelton (In re Salazar), 448 B.R. 814, 822-24 (Bankr. S.D.Cal.2011), that California Civil Code § 2932.5
The Court assumes the allegations of the SAC are true for purposes of the Motions and construes them liberally in favor of Cruz. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Gilligan v. Jamco Development Corp., 108 F.3d 246, 249 (9th Cir.1997). However, the Court must also find that the SAC pleads sufficient facts to state a claim of relief that is "plausible on its face." Twombly, 550 U.S. at 570, 127 S.Ct. 1955; Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citing Twombly). The SAC allegations must "raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S.Ct. 1955; see also Iqbal, 129 S.Ct. at 1950 (citing Fed. R.Civ.P. 8(a)(2)).
The SAC allegations relate to the 2004 financing of Cruz's residence located at 3148 Toopal Drive, Oceanside, CA 92054 ("Property"), by a loan provided by SCME ("Loan") documented by a variable interest rate note ("Note") and deed of trust ("DOT"). Aurora was the servicer of the Loan and MERS was the initial nominal beneficiary of the Loan. Cruz claims the TILA disclosure provided to him when the Loan was made was misleading by understating
After Cruz defaulted on the Loan, Defendants commenced the foreclosure process. ING had become the successor beneficiary under the DOT at some time before, but never recorded an assignment of beneficial interest. Cruz then entered into a forbearance agreement with Aurora. ING foreclosed on the Property on June 2, 2010 during the extended forbearance period agreed to by Aurora, even though Cruz was current on his payments at the time. ING's interest, as assignee beneficiary, first appeared of record in the Trustee's Deed Upon Sale ("Trustee's Deed"), recorded a few weeks after the foreclosure. The Trustee's Deed identified ING as the foreclosing beneficiary.
Cruz and his wife filed their joint Chapter 13 bankruptcy petition on January 25, 2011, and Cruz filed his First Amended Complaint ("FAC") about a month thereafter. Defendants responded to the FAC with motions to dismiss brought pursuant to Fed. R. Bankr.P. 7012, incorporating by reference Fed.R.Civ.P. 12(b)(6) ("First Motions"). These were denied in part and granted in part in this Court's order entered May 24, 2011 ("FAC Order"). The First Motions were denied to the extent they related to Aurora's forbearance agreement. The Court also denied the First Motions pertaining to whether causes of action were stated under TILA and under California Business and Professions Code § 17200 ("Section 17200"). The Court granted the First Motions with leave to amend as to whether the TILA causes of action were barred by the statute of limitations; whether MERS had authority to substitute the trustee under the DOT; whether ING's interest was required to be of record; and whether Cruz could allege facts to tender the Loan amount to set aside the foreclosure under TILA or to claim damages. The Court also granted leave to amend for Cruz to clarify which Defendants were named in the different causes of action.
In response to the FAC Order, Cruz filed his SAC,
Cruz attempts in the first, third and tenth causes of action to allege his TILA claims indirectly under Section 17200, and as state law fraud and negligent misrepresentation claims. Since these causes of action rely upon the TILA disclosures made to Cruz when the Loan was made, they must be dismissed with prejudice due to federal preemption. In Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1003 (9th Cir.2008), the Section 17200 claims were alleged based upon TILA disclosures. The Ninth Circuit dismissed these claims, finding Congress intended for TILA to preempt the field. Id. at 1004-06. Here as well, although the deceit and Section 17200 claims do not reference TILA, they are based solely upon the representations mandated by TILA. As in E*Trade Mortg. Corp., id., attempts to
Even if the preemption bar did not apply, the Court concludes the first, third and tenth causes of action should still be dismissed. The FAC Order at ¶¶ 12-14 granted leave to amend the TILA causes of action to specify when Cruz discovered, or should have discovered, the harm of the alleged TILA inaccuracy. Gutierrez v. Mofid, 39 Cal.3d 892, 897-98, 218 Cal.Rptr. 313, 705 P.2d 886 (1985) (relevant discovery time is of the nature of the harm, not the existence of legal remedies). This is the date of discovery under state law for statute of limitations tolling purposes. See Grisham v. Philip Morris USA, Inc., 40 Cal.4th 623, 646, 54 Cal.Rptr.3d 735, 151 P.3d 1151 (2007) (personal injury claim for a tobacco company's misrepresentation accrued at the time that "the physical ailments themselves were, or reasonably should have been, discovered").
Rather than providing more detail on when the harm was discovered, as required by the FAC Order, the SAC hedges the issue. It alleges that Cruz could not have discovered the understatement of the cost of the 2004 Loan until the TILA disclosure was reviewed by an expert in 2010. Alternatively, the SAC alleges that the harm could not be discovered until 2015, when the interest rate will become variable. SAC ¶ 23. But under either discovery date, Cruz cannot state a cause of action.
If the alleged harm occurred when the Loan was made in 2004 by misleading Cruz into a bad financing choice, then the cause of action is barred by the three year statute of limitations for state law deceit claims. Cal.Code Civ. Pro. § 338(d). Even though a complicated analysis is required, it is possible to discern from the Loan documents attached to the SAC that the total cost of financing on the TILA disclosure differed from the stated interest rate. Although Cruz only alleges state law deceit claims, the Court finds persuasive Ninth Circuit authority that addressed when the harm of TILA misrepresentations should be discovered. Although these claims are alleged under state law, both federal and state courts have applied TILA to assess related state law claims. See e.g. Pacific Shore Funding v. Lozo, 138 Cal.App.4th 1342, 1347, 42 Cal.Rptr.3d 283 (2006); Rubio v. Capital One Bank, 613 F.3d 1195, 1203 (9th Cir.2010). Under Meyer v. Ameriquest Mortgage Co., 342 F.3d 899, 902 (9th Cir.2003), because the plaintiffs "were in full possession of all information relevant to the discovery of a TILA violation and a § 1640(a) damages claim on the day the loan papers were signed," they could not toll the statute of limitations.
Cruz was in full possession of the Loan documentation in 2004. Because there are no allegations of fraudulent concealment, or any other action on the part of any Defendant to cover up the misrepresentations, the deceit causes of action accrued when the Loan was made. Id. This was the date the harm to Cruz could have been determined from the face of the Loan documents.
The alternative explanation of the discovery of the harm is that it has not yet occurred and will not occur, if at all, until the interest rate on the Loan becomes variable in 2015. SAC ¶¶ 23-33. Whether the Loan will be more or less expensive than either the stated 5.85% initial contract rate, or the projected variable index rate of 4.85% starting in 2015, cannot be known until 2015. It is beyond the capabilities of this Court, or any expert or jury, to speculate about future interest rates. If
The first, third and tenth causes of action, to the extent they are related to the TILA disclosures,
There are two separate factual scenarios alleged in the wrongful foreclosure causes of action: 1) that MERS lacked authority to substitute Quality as trustee of the DOT; and 2) that ING had no recorded beneficial interest at the time it foreclosed. The second scenario, but not the first, alleges a viable cause of action.
In the FAC Order, Cruz was directed to specifically allege why MERS, as the nominee of the Lender under the DOT and the beneficiary of record, lacked authority under § 2934a(a)(1)(A) to substitute the trustee. The Court earlier ruled in the FAC Order that if MERS was authorized by the Lender under the DOT to substitute the trustee, this substitution would be valid.
Instead of alleging specific facts that MERS was not authorized by the Lender to substitute the trustee, Cruz relies upon general allegations that two parties cannot both be the beneficiary. SAC ¶ 101. These allegations seem to leave the resolution of whether MERS was authorized to substitute the trustee to the outcome of the litigation. But California law does not provide a cause of action to determine whether or not a party has authority to institute foreclosure proceedings. Gomes v. Countrywide Home Loans, 192 Cal.App.4th 1149, 1154-56, 121 Cal.Rptr.3d 819 (2011).
Cruz separately alleges that ING was the beneficiary throughout the foreclosure process.
Leave to amend the substitution of trustee claim will not be granted because Cruz' allegations that ING was the beneficiary throughout the foreclosure process disprove this claim. Abagninin v. AMVAC Chem. Corp., 545 F.3d 733, 742 (9th Cir. 2008) (leave to amend may be denied if the allegation of other facts, consistent with those plead, cannot cure the deficiency).
Although Cruz's other causes of action are fatally defective, Cruz has properly stated claims for wrongful foreclosure and quiet title based upon ING's non-judicial foreclosure of the DOT.
To reevaluate whether § 2932.5 concerns both mortgages and deeds of trust, the Court has carefully considered the "intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance ..." to attempt to determine how the California Supreme Court would rule. Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir.1996). The Court remains convinced that the highest court in this state would hold that § 2932.5 requires an assignee trust deed beneficiary to record its interest before it non-judicially forecloses.
Defendants first contend the plain language of § 2932.5
(Emphasis added). The statute does not only apply to mortgagees but also to other encumbrancers. That a beneficiary under a deed of trust is an encumbrancer is confirmed by the California Supreme Court. "(M)ortgagees and trust deed beneficiaries alike hold security interests in property encumbered by mortgages and deeds of trust." Monterey S.P. P'ship v. W.L. Bangham, 49 Cal.3d 454, 461, 261 Cal.Rptr. 587, 777 P.2d 623 (1989) (rejecting that a deed of trust conveyed true title to the trustee). Section 2932.5 further provides that the "power [of sale] is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument." As the assignee of the Note, ING was the party entitled to the payment of money. It took title to the Property in satisfaction of the secured debt at the time of the foreclosure sale. Each of the clauses of § 2932.5 applies comfortably to deeds of trust.
The legislative history of § 2932.5 also supports its application to deeds of trust as well as mortgages. Section 2932.5 succeeded to § 858 verbatim as part of the 1986 technical revisions to California trust law. See Recommendation Proposing the Trust Law (Dec. 1985) 18 Cal. Law Revision Rep. (1985) p. 764; Selected 1986 Trust and Probate Legislation, (Sept. 1986) 18 Cal. Law Revision Com. Rep. (1986) p. 1483, available at http://www.clrc. ca.gov/Mreports-publications.html#V18. These technical revisions included two changes to California foreclosure law pertaining to deeds of trust—to renumber § 2932.5 as part of the non-judicial foreclosure statute, and to add § 2934b to apply Probate Code §§ 15643 (vacancy in the office of trustee) and 18102 (protections for third persons dealing with former trustee.) Had § 2932.5 been limited to mortgages, there would have been no need to revise it at the time of the other revisions to California trust law.
Strike v. Trans-West Discount Corp., 92 Cal.App.3d 735, 742, 155 Cal.Rptr. 132 (1979) cited the predecessor to § 2932.5; i.e., § 858 to validate the exercise of the power of sale by a trust deed beneficiary of record. Tamburri v. Suntrust Mortg., Inc., 2011 WL 2654093 *4-5, 2011 U.S. Dist. LEXIS 72202 *12-13 (N.D.Cal. July 6, 2011) recognized that whether § 2932.5 applies to deeds of trust raises a serious question sufficient to grant a preliminary injunction against the sale of foreclosed property. The two authoritative treatises that discuss § 2932.5 also agree that deeds of trust fall within its purview. 4 Harry D. Miller & Marvin B. Starr, California Real Estate, §§ 10.2, 10:38, 10:39
Defendants do not discuss the interpretation of § 2932.5 by these persuasive treatises and other authorities. They point instead to the conveyance language of the DOT, which conveys title to the Property, "with power of sale," to the trustee, to claim the beneficiary cannot be the "encumbrancer" in whom a power of sale is vested. Not only does this contention ignore that the power of sale in the DOT is controlled and must be invoked by the beneficiary, it seeks to revive the outdated title distinction between mortgages and deeds of trust rejected by the California Supreme Court.
Defendants primarily
In Stockwell, id. at 415, 94 P. 400, an assignee of a note and deed of trust failed to record her interest before the property was sold at a foreclosure sale. Before the foreclosure sale, the borrower had conveyed the property to someone else. Stockwell held that the purchaser at the foreclosure sale had superior title over the successor owner because the predecessor statute to § 2932.5 only applied to mortgages. Id. Its reason for the distinction
This reasoning of Stockwell is now inapposite. Under Monterey, 49 Cal.3d at 461, 261 Cal.Rptr. 587, 777 P.2d 623, a deed of trust is no longer a conveyance of actual title to the Property, but merely a lien. The borrower now retains actual title to the property. Bank of Italy Nat. Trust & Sav. Assn. v. Bentley, 217 Cal. 644, 656, 20 P.2d 940 (1933). That this title theory is discredited by the Supreme Court is recognized by the Ninth Circuit. Olympic Federal Sav. & Loan Asso. v. Regan, 648 F.2d 1218, 1221 (9th Cir.1981) (mortgages and deeds of trust are "legally identical," so that the borrower retains actual title to the property that the Internal Revenue Service can redeem despite the presence of a junior deed of trust). See also Aviel v. Ng, 161 Cal.App.4th 809, 816, 74 Cal.Rptr.3d 200 (2008) (to interpret a subordination clause in a lease, the terms mortgages and deeds of trust were treated as synonymous based upon Bank of Italy, 217 Cal. at 656, 20 P.2d 940).
This Court finds the California Supreme Court is likely to overrule Stockwell's holding that the trustee of a deed of trust holds actual legal title, rather than a lien. It has done so before. Monterey, 49 Cal.3d at 463, 261 Cal.Rptr. 587, 777 P.2d 623 (overruling Johnson v. Curley 83 Cal.App. 627, 257 P. 163 (1927), which held that beneficiaries under a deed of trust were not necessary parties to an action to have that deed declared void for fraud).
A better predictor than Stockwell, 7 Cal.App. at 416-17, 94 P. 400, of whether the California Supreme Court would apply § 2932.5 to deeds of trust, is that Court's analysis of the respective roles of trust deed trustees and beneficiaries found in Monterey, 49 Cal.3d at 463, 261 Cal.Rptr. 587, 777 P.2d 623. The trustee merely holds bare legal title to the extent necessary to reconvey the lien if the debt is paid, or to foreclose the security interest if it is not. Id. at 460, 261 Cal.Rptr. 587, 777 P.2d 623. The trustee is bound by no fiduciary duties, and has no duty to defend the rights of the beneficiary, or authority to appear in the suit in its behalf. Id. at 462, 261 Cal.Rptr. 587, 777 P.2d 623. The trustee of a deed of trust serves merely as a common agent of both parties. Vournas v. Fidelity Nat. Tit. Ins. Co. 73 Cal.App.4th 668, 677, 86 Cal.Rptr.2d 490 (1999). Because the beneficiary's economic interests are threatened when the existence or priority of the deed of trust is challenged, it is the real party in interest under a deed of trust. Monterey, 49 Cal.3d at 461, 261 Cal.Rptr. 587, 777 P.2d 623 (trust deed beneficiary must be named in a mechanics lien foreclosure suit since trustee does not protect its interests). See also Diamond Heights Village Assn., Inc. v. Financial Freedom Senior Funding
To claim the trustee, rather than the beneficiary, is the party who holds the power of sale under the deed of trust, elevates form over substance. The beneficiary is the real party in interest and should comply with § 2932.5.
The California Supreme Court is clear that the distinction between mortgages and deeds of trust is inapplicable where necessary to protect a borrower's rights. Bank of Italy, 217 Cal. at 658, 20 P.2d 940. Even though other statutes address the notices required to be sent to the borrower,
MERS argues that the assignee beneficiary need not record its interest to prevent a gap in title. It again confuses the title to the lien of the deed of trust with title to the Property. That MERS was the beneficiary of record even though ING was the foreclosing beneficiary created a gap in title to the lien. ING was a stranger to the record before the foreclosure giving rise to suspicion that the sale was not authorized. This is the very risk that § 2932.5 was intended to safeguard. Stockwell, 7 Cal.App. at 416-17, 94 P. 400 ("the record should correctly show the authority of a mortgagee or his assigns to sell" to ensure that the title so conveyed be free from suspicion).
MERS seeks to dismiss the only two causes of action against it in the SAC, the eighth (wrongful foreclosure) and the tenth (Section 17200). MERS remains a party to the wrongful foreclosure cause of action due to this Court's ruling on § 2932.5, even though the substitution of trustee claims found in that cause of action are dismissed. Because MERS may be liable for wrongful foreclosure on that basis, Cruz has also stated a viable 17200 claim as well.
Since MERS is not alleged to have participated in any fraudulent activity, the last prong is not at issue. Under its "unlawful" prong, Section 17200 borrows violations of other laws and makes them independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527 (1999). Although not a criminal statute, violation of other civil statutes can satisfy Section 17200. State Farm Fire & Casualty Co. v. Superior Court, 45 Cal.App.4th 1093, 1103, 53 Cal.Rptr.2d 229 (1996) (unlawful prong includes "anything that can properly be called a business practice and that at the same time is forbidden by law," including antidiscrimination laws, antitrust laws, environmental protection laws, fish and game laws, housing laws, labor laws, vehicle laws, and criminal laws (citations omitted)); Rubio, 613 F.3d at 1204 (TILA violation). The "unfair" prong is measured by the alternative public policy test adopted by Rubio, 613 F.3d at 1205, citing Gregory v. Albertson's, Inc., 104 Cal.App.4th 845, 854, 128 Cal.Rptr.2d 389 (2002). This test looks to whether the practice violates public policy as declared by "specific constitutional, statutory or regulatory provisions." Rubio, 613 F.3d at 1205. In Rubio, the Ninth Circuit simply noted that the statutory policy behind TILA would satisfy the "unfair" prong of the test. It in effect collapsed the two prongs where statutory violations are alleged. Id.
The allegations of the SAC support MERS' involvement in the violation of § 2932.5. MERS was the beneficiary of record, even though ING was the foreclosing beneficiary. The "unlawful" prong is met; as is the "unfair prong" under these allegations, and MERS will not be dismissed from either the eighth or tenth causes of action.
The distinction between mortgages and deeds of trust is more one of terminology than substance as Monterey, 49 Cal.3d at 464, 261 Cal.Rptr. 587, 777 P.2d 623 stated: "Regrettably, it appears to be too late in the development of our vocabulary to rename deeds of trust and the `trustees' who act under those instruments." Weighing the dubious continuing viability of the Stockwell case against the other authority cited in this Memorandum Decision, the Court concludes that ING as the foreclosing beneficiary under the DOT is as subject to the mandates of § 2932.5 as if it held a mortgage. The DOT gives the authority to exercise the power of sale to ING, who is the real party in interest by law for foreclosure matters. For the same reasons as a mortgagee must record its interest before it forecloses, so must a beneficiary of a deed of trust under § 2923.5. The ministerial role of the trustee does not justify any distinction between the two instruments for purposes of § 2932.5 because the trustee as agent simply acts at the direction of the beneficiary.
This Memorandum Decision will constitute the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. Counsel for Cruz is directed to prepare an order in accordance with
IT IS SO ORDERED.
