LAUREL BEELER, United States Magistrate Judge.
In this putative class action, Stephen Ellsworth challenges his lender U.S. Bank's alleged force-placing of backdated flood insurance on his real property and receiving kickbacks from the insurance company, American Security Insurance Company ("ASIC"). First Amended Class Action Complaint ("FAC"), ECF No. 26, ¶ 13.
On or about July 2, 2007, Ellsworth obtained a $393,892 mortgage loan from U.S. Bank that was secured by the deed of trust (the "Mortgage") on his Napa County, California home. See FAC, ECF No. 26, ¶ 13; id. Ex. 1, ECF No. 26-1 at 3-4. U.S. Bank is the lender-in-interest and servicer of Ellsworth's mortgage loan. See id. ¶ 14. The Mortgage includes a provision that allows U.S. Bank, in its discretion, to require that Ellsworth maintain flood insurance on the property.
FAC Ex. 1, ECF No. 26-1 at 7. The same provision permits U.S. Bank to force-place flood insurance at Ellsworth's expense. Id.
Id. Ellsworth alleges that U.S. Bank's discretion to force-place insurance is constrained by the Mortgage's paragraph 9, which provides:
Id. Ex. 1, ECF No. 26-1 at 8. The Mortgage also contains a provision titled "Loan Charges," which provides that U.S. Bank "may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting [U.S. Bank's] interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys' fees, property inspection and valuation fees." Id. at 11.
U.S. Bank initially did not require Ellsworth to maintain flood insurance on the property. See FAC ¶ 18. On or about June 9, 2010, U.S. Bank sent Ellsworth a notice (the "Notice"), informing him that "[o]ur records indicate your property is located in a Special Flood Hazard Area (SFHA) as determined by the Federal Emergency Management Agency (FEMA)" and that the Mortgage and the Flood Disaster Protection Act of 1973 required Ellsworth to purchase flood insurance. Id. ¶ 18; id. Ex. 2, ECF No. 26-2 at 2. The Notice explained that U.S. Bank had purchased temporary flood insurance coverage on Ellsworth's property from ASIC. Id. ¶ 19, Ex. 2 at 2-3. The insurance coverage was effective as of July 3, 2009 and would expire 45 days after the June 9, 2010 notice. Id. ¶ 20, Ex. 2 at 2-3. If Ellsworth failed to provide adequate proof of flood insurance within 45 days, "this temporary coverage will convert to a full year policy and the annual premium [$2,250] will be added to your escrow account." Id. ¶ 20, Ex. 2 at 3. The Notice also informed Ellsworth that "[i]n many instances, the insurance we purchase for you may be more expensive than you are able to obtain on your own" and provided the telephone number of another insurance agency that could also provide Ellsworth with adequate flood insurance. Id. ¶ 20, Ex. 2 at 2-3.
On August 18, 2010, U.S. Bank sent Ellsworth a second notice ("Second Notice") informing him that it had not received evidence that he had purchased flood coverage. Id. Ex. 3, ECF No. 26-3 at 2. Accordingly, U.S. Bank explained that it had force-placed the flood insurance described in the June 9, 2010 notice. Id. Ellsworth alleges that the force-placed flood insurance policy was backdated so that it was effective from July 3, 2009 to July 3, 2010, though it was not issued until August 18, 2010. Id. ¶¶ 21-22, Ex. 4., ECF No. 26-4 at 2. ASIC allegedly paid U.S. Bank a commission or kickback for force-placing ASIC's flood insurance policy, U.S. Bank kept the commission, and Ellsworth paid the full $2,250 premium. Id. ¶¶ 23-24.
In August 2010, Ellsworth purchased a one-year flood insurance policy through State Farm effective September 1, 2010. See id. ¶ 25, Ex. 5, ECF No. 26-5. This policy provided $250,000 in flood insurance coverage like the ASIC policy, but it was not backdated and cost only $276. Id.
Ellsworth alleges that ASIC's standard business practice is to pay kickbacks or commissions (a percentage of the premium) to banks issuing force-placed coverage, including U.S. Bank. Id. ¶ 23, 27. ASIC's practice of paying commissions to its lender-clients has been documented in numerous court opinions, in publicly-filed deposition testimony, and American Banker magazine. Id. ¶¶ 29-31. In addition, ASIC discloses details of its commission payments in public regulatory filings, including filings with the California Department of Insurance. Id. ¶ 32.
According to Ellsworth, many institutions have criticized the allegedly unfair business practices in the force-placed insurance business, including kickbacks and backdating. For example, numerous courts have condemned the practice of
On April 9, 2012, Ellsworth sent a letter to U.S. Bank stating that the force-placed flood insurance policies violated the deed of trust and requesting a refund of the premiums he paid. See id. ¶ 26; id. Ex. 6, ECF No. 26-6 at 2. Ellsworth did not receive a response from U.S. Bank. Id. ¶ 26.
On May 16, 2012, Ellsworth filed this lawsuit against U.S. Bank and ASIC on behalf of himself and nationwide and California classes of similarly situated individuals. See Complaint, ECF No. 1. Ellsworth alleges that he is a California resident, U.S. Bank is a national bank based in Ohio, and ASIC is a Delaware corporation with its principal place of business in Atlanta, Georgia. FAC, ECF No. 26, ¶¶ 7-9. Ellsworth alleges that this court has jurisdiction under the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2), based on his allegations of minimal diversity, a putative class with more than 100 members, and an amount in controversy greater than $5,000,000. FAC, ECF No. 26, ¶ 10.
Ellsworth seeks to represent a class consisting of "[a]ll persons who have or had a loan or line of credit with U.S. Bank secured by their residential property in the United States, and who were charged for lender-placed flood insurance by U.S. Bank within the applicable limitations period." Id. ¶ 47. Ellsworth also proposes several claim-specific sub-classes: (1) to the extent that claims 1-4 are based on backdating, Ellsworth proposes a sub-class of all class members who were charged for backdated lender-placed flood insurance within the limitations period; (2) under claims 5 and 6, Ellsworth proposes a sub-class of all persons who have or had a loan or line of credit with U.S. Bank secured by their residential property in the State of California, and who were charged for lender-placed flood insurance by U.S. Bank on or after May 16, 2008; and (3) to the extent that claims 5 and 6 are based on backdating, Ellsworth proposes a sub-class of all persons who have or had a loan or line of credit with U.S. Bank secured by their residential property in the State of California and who were charged for backdated lender-placed flood insurance by U.S. Bank on or after May 16, 2008. Id. ¶¶ 48-50.
ASIC moved to dismiss the FAC on August 31, 2012. ECF No. 57. U.S. Bank moved to dismiss the FAC on September 27, 2012. ECF No. 68. All parties consented to the undersigned's jurisdiction. See ECF Nos. 19, 23, 41.
Dismissal of a claim is appropriate under Federal Rule of Civil Procedure Rule 12(b)(1) when the court lacks subject-matter
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. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quotation and citation omitted).
To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "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, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (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, 127 S.Ct. 1955). "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, 127 S.Ct. 1955 (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. See id. at 550, 127 S.Ct. 1955; Erickson v. Pardus, 551 U.S. 89, 93-94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007); Vasquez v. Los Angeles County, 487 F.3d 1246, 1249 (9th Cir.2007). In addition, courts may consider documents attached to the complaint.
If the court dismisses the complaint, it should grant leave to amend even if no request to amend is 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) (quoting Cook, Perkiss and Liehe, Inc. v. Northern California Collection Serv., Inc., 911 F.2d 242, 247 (9th Cir.1990)). But when a party repeatedly fails to cure deficiencies, the court may order dismissal without leave to amend. See Ferdik v. Bonzelet, 963 F.2d 1258, 1261 (9th Cir.1992) (affirming dismissal with prejudice where district court had instructed pro se plaintiff regarding deficiencies in prior order dismissing claim with leave to amend).
Under the National Flood Insurance Act of 1968 ("NFIA") and the Flood Disaster Protection Act of 1973, as amended, the Office of the Comptroller of Currency ("OCC") is charged with promulgating regulations that require lending institutions and servicers to ensure that properties subject to their mortgage loans have adequate flood insurance. See 42 U.S.C. §§ 4012a(b)(1), 4003(a)(5). The OCC regulations that control a lender's powers and obligations related to flood insurance provide that a national bank "shall not make, increase, extend, or renew any designated loan unless the building ... securing the loan is covered by flood insurance for the term of the loan."
42 U.S.C. § 4012a(e)(1). "If the borrower fails to purchase such flood insurance within 45 days after notification ... the lender or servicer for the loan shall purchase the insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance." 42 U.S.C. § 4012a(e)(2).
The court first considers Defendants' arguments that the National Bank Act preempts Ellsworth's claims, then turns to the filed rate and voluntary payment doctrine arguments, and finally considers Defendants' attacks on the sufficiency of the claims in the first amended complaint.
Defendants argue that Ellsworth's claims are preempted entirely under the National Bank Act ("NBA"), 12 U.S.C. § 21 et seq., and related regulations promulgated by the OCC. See USB Mot., ECF No. 68 at 12-21; ASIC Mot., ECF No. 57 at 17-18.
The NBA vests federally chartered banks with the power "[t]o exercise ... subject to law, all such incidental powers as shall be necessary to carry on the business of banking." 12 U.S.C. § 24 (Seventh). The "business of banking" authorized by the NBA extends beyond those events specifically enumerated in the Act. See NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 258 n. 2, 115 S.Ct. 810, 130 L.Ed.2d 740 (1995). For example, the NBA authorizes federally chartered banks to engage in real estate lending. See 12 U.S.C. § 371.
The OCC "has the power to promulgate regulations and to use its rulemaking authority to define the `incidental powers' of national banks beyond those specifically enumerated in the statute." Martinez v. Wells Fargo Home Mortg., Inc., 598 F.3d 549, 555 (9th Cir.2010) (citing 12 U.S.C. § 93a (OCC authorized to "prescribe rules and regulations to carry out the responsibilities of the office"); Wachovia Bank, N.A. v. Burke, 414 F.3d 305, 312 (2d Cir.2005)); see also 12 U.S.C. § 43; Watters v. Wachovia Bank, N.A., 550 U.S. 1, 127 S.Ct. 1559, 1564, 167 L.Ed.2d 389 (2007). In addition, the OCC can issue legislative rules that preempt state law. 12 U.S.C. § 43(a); see 12 U.S.C. § 93a. "OCC regulations possess the same preemptive effect as the [NBA] itself." Martinez, 598 F.3d at 555 (citing Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982)).
As the Ninth Circuit has explained:
Martinez, 598 F.3d at 555 (citing OCC Advisory Letter, Guidance on Unfair or Deceptive Acts of Practices, 2002 WL 521380, at *2, *7 n. 2 (Mar. 22, 2002)).
Under the NBA, "[a]ny national banking association may make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate, subject to section 1828(o) of this title and such restrictions and requirements as the Comptroller of the Currency may prescribe by regulation or order." 12 U.S.C. § 371. The OCC defined the preemptive scope of a bank's real estate lending power in 12 C.F.R. § 34.4, the applicable version
12 C.F.R. § 34.4(a). In addition, "[s]tate laws purporting to regulate national bank fees and charges that do not constitute interest are addressed in 12 C.F.R. 7.4002." 12 C.F.R. § 34.4(a)(12) n. 1. Section 7.4002 provides that "[t]he establishment of non-interest charges and fees, their amounts, and the method of calculating them are business decisions to be made by each bank, in its discretion, according to sound banking judgment and safe and sound banking principles." 12 C.F.R. § 7.4002(b)(2). It then goes on to list a set of considerations that should be used to determine whether any charge or fee is appropriate. Id.
While the OCC granted banks broad powers to conduct business, it also limited the preemptive effect of these powers. For example, section 34.4(b) provides, in relevant part:
12 C.F.R. § 34.4(b). Similarly, section 7.4002 provides, "[t]he OCC applies preemption principles derived from the United States Constitution, as interpreted through judicial precedent, when determining whether State laws apply that purport to limit or prohibit charges and fees described in this section." 12 C.F.R. § 7.4002(d).
The first issue is whether Ellsworth's claims — all "contract or tort claims of general applicability" under OCC regulation 34.4(b) — thus are categorically not preempted. See U.S. Bank Opp'n, ECF No. 73 at 22. The court applies Martinez and holds that it must consider the conduct on which the claims are based (and not just the categories of the claims).
In Martinez, the Ninth Circuit found that the NBA preempted the plaintiffs' section 17200 claims. 598 F.3d 549 at 552. The plaintiffs challenged two fees that Wells Fargo charged when they refinanced their home mortgage loan: an $800 underwriting fee, which plaintiffs claimed was "not reasonably related to Wells Fargo's actual costs of performing the underwriting;" and a $75 fee for tax services that Wells Fargo allegedly marked up and passed on to the plaintiffs. Id. at 552, n. 2. The plaintiffs claimed that the practice of overcharging and marking up fees constituted unfair competition under section 17200. Id. at 556. The Ninth Circuit held that the plaintiff's claims conflicted with Wells Fargo's fee-setting power
In Martinez, the court relied on the same OCC advisory letter that Ellsworth cites and also acknowledged that some claims based on generally applicable laws might not be preempted by the NBA. U.S. Bank Reply, ECF No. 74 at 8-9. Nonetheless, the court focused on whether plaintiffs claims "`would as a practical matter impose on the Bank's operations limitations concerning' the ability to require or obtain insurance, the imposition of fees and charges, the terms of credit, escrow accounts, and servicing of mortgages." Id. at 9 (quoting Larin v. Bank of Am., N.A., 475 Fed.Appx. 121, 122 (9th Cir.2012)).
Similarly, "the proper inquiry here is whether the legal duty that is the predicate of" Ellsworth's claims "falls within the preemptive scope of the NBA or regulations promulgated thereunder." Rose v. Chase Bank USA, N.A., 513 F.3d 1032, 1038 (9th Cir.2008) (cited in Larin, 475 Fed.Appx. at 122). Causes of action sounding in contract and tort are not necessarily preempted, see U.S. Bank Opp'n at 22-23 (collecting cases), but the conduct at issue can be at core about fees, and those claims — like the claims in Martinez — would be preempted.
The next issue is whether Ellsworth's claims are at their core about fees (and preempted) or are about practices that are not preempted. Ellsworth claims Defendants are liable for two allegedly prohibited practices: (a) kickbacks to U.S. Bank in that "U.S. Bank and/or its affiliates received a kickback or commission from ASIC on this lender-placed coverage" and "U.S. Bank did not subtract this commission from the premium cost, which was passed along in full to Plaintiff;" and (b) backdating of insurance coverage in that U.S. Bank purchased and charged Ellsworth for a backdated and expired policy. FAC ¶¶ 23, 2. The court holds that the claims are not preempted.
U.S. Bank contends that claims based on the kickback allegations are preempted because they substantially interfere with national banks' fee setting power under 12 C.F.R. § 7.4002 and real estate lending power under 12 C.F.R. § 34.4(a).
Ellsworth does not challenge "the premium that was charged by ASIC, but rather U.S. Bank's selection of ASIC in the first place," meaning, U.S. Bank's practice of selecting an insurance carrier to earn compensation for itself (in the form of kickbacks or commissions) as opposed to selecting a carrier through a competitive bidding practice. U.S. Bank Opp'n, ECF No. 73 at 24. Ellsworth disavows any challenge to U.S. Bank's fee-setting power. Id.
An analysis of the complaint confirms that Ellsworth does not challenge U.S. Bank's right to establish or charge fees. As to his breach of contract (and related) claims, he alleges that the kickback arrangement was unreasonable under the express terms of the mortgage. See FAC ¶ 61. Ellsworth alleges that U.S. Bank agreed to limit its discretion in force placing flood insurance to "do[ing] and pay[ing] whatever is reasonable or appropriate to protect [its] interest in the Property."
Case decisions confirm that plaintiffs who charge a manipulation of the force-placed insurance do not challenge a bank's fee setting power. For example, in Gutierrez v. Wells Fargo & Co., the court denied Wells Fargo's post-Martinez motion to reconsider an earlier ruling that the NBA did not preempt the plaintiffs' claims. No. C 07-05923 WHA, 2010 WL 1233885 (N.D.Cal. Mar. 26, 2010). The Gutierrez plaintiffs claimed that Wells Fargo's practice of posting larger checking account withdrawals before smaller ones was an unfair business practice because it was designed to cause account holders to accrue multiple overdraft fees. Id. at *1. That court distinguished Martinez and held that the Gutierrez plaintiffs were not challenging fees:
Id. at *2.
Similarly, in Williams v. Wells Fargo Bank N.A., another district court found that the NBA did not preempt claims that were nearly identical to Ellsworth's. No. 11-21233-CIV, 2011 WL 4901346 (S.D.Fl. Oct. 14, 2011). As that court explained, unlike the claims in Martinez:
Id. at *11 n. 7 (also finding Gutierrez to be analogous).
Like the plaintiff in Williams v. Wells Fargo Bank N.A., Ellsworth challenges the allegedly unfair practice of arranging for kickbacks in return for force-placing unfairly expensive insurance policies. The increased premiums (including the kickbacks) are the measure of damages caused by the allegedly unfair business practices.
U.S. Bank's argument is that Ellsworth's claims would limit its discretion to
U.S. Bank also argues that "claims that would require a national bank `to alter the manner in which [its] program actually operates' is precisely what is preempted." U.S. Bank Reply, ECF No. 74 at 9 (quoting Larin, 475 Fed.Appx. at 122 (emphasis and alterations in U.S. Bank's motion)). In Larin, the Ninth Circuit reversed the district court and held that the plaintiff's claims were not preempted by the NBA. Id. at 121. The plaintiff challenged the bank's "practice of making deposited funds immediately available to [overdraft protection program (ODP)] customers, without placing a hold on a larger or suspicious deposit, [which] increases the customers' risk of fees." Id. at 123 (Callahan, J., dissenting). That implicated the bank's deposit-taking power and the related power to regulate "funds availability" under 12 C.F.R. § 7.4002(b)(2)(ii)-(iv). Id. In reversing the district court, the majority held that Larin challenged only the Bank's misrepresentation of the value of its ODP program, not the Bank's operation of the program, and the claims thus were not preempted. Id. at 122.
Larin is a non-precedential memorandum opinion, and the majority opinion is only four paragraphs long and does not provide the context that allows the court to accord it the persuasive weight that U.S. Bank suggests. Also, the weight of authority supports the conclusion that the allegations about kickbacks and backdating here are not about the fees themselves and instead challenge practices and U.S. Bank's compliance with its contractual obligations.
U.S. Bank challenges Ellsworth's kickback claims as preempted under the NBA's real estate lending powers — the power to "make, arrange, purchase, or sell... real estate loans, subject to ... such restrictions and requirements as the Comptroller of the Currency may proscribe by regulation or order," 12 C.F.R. § 34.3(a), "but without regard to state law limitations," 12 C.F.R. § 34.4(a). U.S. Bank Mot., ECF No. 68 at 18. U.S. Bank argues that the OCC regulations interpreting the NFIA "say nothing to prohibit a national bank from receiving a commission or other compensation" from the premiums on force-placed flood insurance. Id. at 18. U.S. Bank concludes that Ellsworth's claims are preempted based on Martinez because charging kickbacks is "in accord with [U.S. Bank's] federally-authorized powers in protecting its interest in the property." Id.
12 C.F.R. § 34.4(b)'s preemption limitation allows for contract and tort claims "that only incidentally affect the exercise of national banks' real estate lending powers." Ellsworth challenges conduct that is related to the real estate lending powers regulated by the OCC regulations. That is different from obstructing, impairing, or conditioning a national bank's ability to fully exercise its federally-authorized real estate lending powers under section 34.4(a). The court rejects this as a basis for preemption.
U.S. Bank also argues that Ellsworth's claims about backdated insurance coverage interfere with its real estate lending powers, specifically its powers "[t]o require or obtain ... insurance for other collateral," and over "[t]he terms of credit." U.S. Bank Mot., ECF No. 68 at
Under 12 C.F.R. § 22.7,
12 C.F.R. § 22.7.
U.S. Bank argues that its backdating practice is authorized by this section. See U.S. Bank Mot., ECF No. 68 at 20 n. 8. U.S. Bank's position is that § 22.7's requirement that upon discovery of a lapse, adequate insurance should be purchased "for the remaining term of the loan" can reasonably be construed as meaning "for the remaining term of the loan from the date of lapse." Id. The court does not find that interpretation unassailable. The phrase "for the remaining term of the loan" perhaps more arguably is prospective beginning no earlier then when the bank determines there is inadequate flood insurance and more likely from the end of the 45-day notice period.
The court follows the weight of authority and finds that the NBA does not preempt the challenges that Ellsworth raises to the alleged kickbacks and backdating.
Defendants also argue that the claims are barred by the California insurance code.
To the extent that Defendants argue that a filed rate doctrine bars suit, Ellsworth argues — and Defendants do not really dispute — that there is no doctrine that applies.
ASIC's argument is that "Ellsworth suffered no legally cognizable injury by virtue of having paid a filed and approved" insurance premium and that the claims are barred by the California Insurance Code. ASIC Mot., ECF No. 57 at 12-16.
California law requires property and casualty insurance premiums, including those for flood insurance, to be approved by the commissioner of the California Department of Insurance before their use. See ASIC Mot., ECF No. 57 at 12; see also Cal. Ins.Code § 1861.01(c). The insurance code bars the commissioner from approving
The argument is that ASIC's compliance with these provisions shields it from Ellsworth's claims. ASIC Mot., ECF No. 57 at 13. The relevant section provides:
Cal. Ins.Code § 1860.1.
Another provision provides that "[t]he business of insurance shall be subject to the laws of California applicable to any other business, including, but not limited to ... unfair business practices laws" [including the UCL]. Cal. Ins.Code § 1861.03(a).
The weight of authority in this district and the California Court of Appeals harmonizes sections 1860.1 and 1861.03(a) by narrowly construing the section 1860.1 immunity upon which ASIC relies. See MacKay, 188 Cal.App.4th at 1449-50, 115 Cal.Rptr.3d 893; Wahl, 2010 WL 4509814, at *2-3. As harmonized, "challenges to the reasonableness of an approved rate fall within the exclusive ambit of the chapter and are exempt from the requirements of other laws." Wahl, 2010 WL 4509814, at *3 (discussing the statutory construction articulated in MacKay). On the other hand, "Insurance Code section 1860.1 protects from prosecution under laws outside the Insurance code only acts done, actions taken and agreements made pursuant to the authority conferred by the ratemaking chapter. It does not extend to insurer conduct not taken pursuant to that authority." Id. at *3 (quoting MacKay at 1449, 115 Cal.Rptr.3d 893) (alterations and internal quotation marks omitted).
Thus, the question before the court is whether Ellsworth's claims challenge ASIC's ratemaking authority. They do not.
In Wahl, the plaintiff alleged that ASIC charged force-placed insurance premiums for periods when the homeowner already had insurance. Id. ASIC argued that Wahl's claims improperly challenged insurance rates that had been approved by the commissioner. Id. The court rejected ASIC's argument because the fair reading of Wahl's UCL claim was that it was "directed at ASIC's allegedly unfair conduct and not at the Commissioner's rate." Id. The court found that the insurance code protected ASIC only in "situations where a plaintiff challenged a charged rate as excessive per se, and effectively asked the Court to calculate an alternative it deemed more `fair.'" Id.
Ellsworth does not challenge the rates or the premiums he paid but instead challenges the alleged kickbacks.
ASIC and U.S. Bank argue that Ellsworth paid the $2,250 and thus his claims are barred by the voluntary payment doctrine.
The voluntary payment doctrine is an affirmative defense that bars the recovery of money that was voluntarily paid with knowledge of the facts. See Steinman v. Malamed, 185 Cal.App.4th 1550, 1557, 111 Cal.Rptr.3d 304 (2010); Stern v. AT & T Mobility Corp., No. CV 05-8842, 2008 WL 4382796, at *9 (C.D.Cal. Aug. 22, 2008); Am. Oil Serv. v. Hope Oil Co., 194 Cal.App.2d 581, 586, 15 Cal.Rptr. 209 (1961); Western Gulf Oil Co. v. Title Ins. & Tr. Co., 92 Cal.App.2d 257, 266, 206 P.2d 643 (1949). "Payments of illegal claims enforced by duress, coercion or compulsion, when the payor has no other adequate remedy to avoid it, will be deemed to have been made involuntarily and may be recovered, but the payment must have been enforced by coercion and there must have been no other adequate means available to prevent the loss." Western Gulf Oil, 92 Cal.App.2d at 265, 206 P.2d 643. "Duress for this purpose is shown `where, by reason of the peculiar facts a reasonably prudent man finds that in order to preserve his property or protect his business interests it is necessary to make a payment of money which he does not owe and which in equity and good conscience the receiver should not retain, [and thus] he may recover it.'" Steinman, 185 Cal.App.4th at 1558, 111 Cal.Rptr.3d 304 (quoting Western Gulf Oil, 92 Cal. App.2d at 266, 206 P.2d 643).
Ordinarily, an affirmative defense may not be raised on a motion to dismiss. Scott v. Kuhlmann, 746 F.2d 1377, 1378 (9th Cir.1984). An affirmative defense may be considered if the defense is based on undisputed facts or if the basis for the argument appears on the face of the complaint and any materials the court takes judicial notice of. See id.; Hernandez v. Sutter W. Capital, C 09-03658 CRB, 2010 WL 3385046 (N.D.Cal. Aug. 26, 2010) (granting motion to dismiss on statute of limitations grounds based on judicially noticed dates).
The affirmative defense is not apparent as a matter of law from the face of the complaint.
The allegations are summarized in the fact section. The weight of authority holds similar allegations to be sufficient. See, e.g., McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F.Supp.2d 928, 956 (N.D.Cal.2012); Williams v. Wells Fargo Bank N.A., 2011 WL 4901346.
U.S. Bank's reliance on LaCroix v. U.S. Bank, N.A. does not change this outcome. There, the district court in the District of Minnesota dismissed claims alleging that ASIC paid U.S. Bank kickbacks for force placing flood insurance. No. 11-3236 (DSD/JJK), 2012 WL 2357602 (D.Minn. June 20, 2012). That court found that
This case is different because Ellsworth's allegations are more specific. In LaCroix, the only support for the kickback allegations was "an internet article outlining the procedures that banks take when force placing insurance ... [that] neither identifies U.S. Bank nor LaCroix's insurance provider, [ASIC]." Id. At oral argument, LaCroix's counsel explained that the internet article discussed ASIC's parent company, but the complaint did not allege such a connection. Id. n. 6. Here, Ellsworth has provided ample and reliable evidence not only of an industry-wide practice but also that ASIC in particular pays kickbacks to lenders who force-place its flood insurance. See FAC ¶¶ 28-32.
U.S. Bank also cites Galiano v. Fidelity Nat'l Title Ins. Co., 684 F.3d 309, 315 (2d Cir.2012), but that does not change the outcome here either. There, the plaintiff alleged a section 8 RESPA violation but failed to allege any specifics of the alleged kickback scheme. Id. Instead, the plaintiff relied entirely on vague and general allegations of industry-wide practices. See id. at 312 (quoting allegations from the complaint). In contrast, Ellsworth's allegations are sufficiently specific.
Ellsworth brings two contract-based claims against U.S. Bank: a breach of contract claim based on an express provision and a breach of the implied covenant of good faith and fair dealing claim.
Under California law, to recover damages under a breach of contract claim, Plaintiff must prove the following: (i) Plaintiff and Defendants entered into a contract; (ii) Plaintiff did all, or substantially all, of the significant things that the contract required him to do; (iii) Defendants failed to do something that the contract required them to do; and (iv) Plaintiff was harmed by that failure. Acoustics, Inc. v. Trepte Construction Co., 14 Cal.App.3d 887, 913, 92 Cal.Rptr. 723 (1971); see First Commercial Mortgage Co. v. Reece, 89 Cal.App.4th 731, 745, 108 Cal.Rptr.2d 23 (2001).
A court may resolve contractual claims on a motion to dismiss if the terms of the contract are unambiguous. Barrous v. BP P.L.C., 10-CV-2944-LHK, 2010 WL 4024774 (N.D.Cal. Oct. 13, 2010); Bedrosian v. Tenet Healthcare Corp., 208 F.3d 220 (9th Cir.2000). By contrast, what the parties intended by an ambiguous contract is a factual determination, United States v. Plummer, 941 F.2d 799, 803 (9th Cir.1991), and thus "[w]here the language `leaves doubt as to the parties' intent,' the motion to dismiss must be denied." Monaco v. Bear Stearns Residential Mortg. Corp., 554 F.Supp.2d 1034, 1040 (C.D.Cal. 2008) (quoting Consul Ltd. v. Solide Enters., Inc., 802 F.2d 1143, 1149 (9th Cir. 1986)); see also Trustees of Screen Actors Guild-Producers Pension and Health Plans v. NYCA, Inc., 572 F.3d 771, 777 (9th Cir.2009).
Paragraph 5 in the mortgage allows U.S. Bank to force-place flood insurance. FAC Ex. 1, ECF No. 26-1 at 7. Paragraph 9 requires reasonableness and appropriateness: "if Borrower "fails to perform the covenants and agreements contained in this Security Instrument, ... then Lender may do and pay for whatever is reasonable or appropriate to protect Lender's interest in the Property and rights under this Security Instrument.
Other courts have concluded that identical language "provides a basis for the claim that Defendants may force-place insurance only to the extent such insurance `is necessary' to protect the property's value and [the lender's] rights in the property." See McNeary-Calloway, 863 F.Supp.2d at 956.
McNeary-Calloway was a class action in which borrowers challenged their lenders' force-placed insurance practices and alleged breach of contract based on mortgage terms that are almost identical to Ellsworth's. Compare McNeary at 955-56 with FAC Ex. 1, ECF No. 26-1 at 7-8. The court denied the banks' motion to dismiss the plaintiffs' claims for breach of contract based on the banks' allegedly force-placing overpriced and backdated flood insurance and for taking kickbacks. Id. The court examined contractual language nearly identical to paragraph 5 of Ellsworth's mortgage. Id. The court noted that the contract did not "necessarily authorize charges regardless of amount and regardless of whether Defendants receive a portion of the premium ... [nor] authorize[] backdating...." Id. at 956. Because the court could "not say that the contracts' terms unambiguously authorize Defendants' alleged behavior, the Court denies Defendants' motion to dismiss the California Plaintiffs' breach of contract claim." Id. The court also considered a paragraph nearly identical to Ellsworth's section 9, finding that it "could be interpreted as explicitly restricting the lender's discretion in force-placing insurance."
The court agrees with this analysis. U.S. Bank's arguments do not change the conclusion. First, it contends that the specific contract provision in section 5, "Property Insurance," trumps the more general provision in section 9, "Protection of Lender's Interest in the Property." U.S. Bank Mot., ECF No. 68 at 24. That canon of construction does not render the contract unambiguous so that a motion to dismiss is appropriate. Second, U.S. Bank contends that the mortgage permits the kickbacks and backdating, but it relies on cases that are distinguishable. See Schilke v. Wachovia Mortg., FSB, 820 F.Supp.2d 825, 832-33 (N.D.Ill.2011) (granting motion to dismiss breach of contract claim based on force-placing allegedly over-priced insurance where plaintiff signed mortgage loan that expressly authorized kickbacks, commissions, and force-placed insurance costing two to five times the retail price); Webb v. Chase Manhattan Mortg. Corp., No. 2:05-CV-0548, 2008 WL 2230696, at *19 (S.D.Ohio May 28, 2008) (applying summary judgment standard).
The covenant of good faith and fair dealing is implied in every contract and, in most situations, prevents one party from "unfairly frustrating the other party's right to receive the benefits" of the contract. See, e.g., Guz v. Bechtel Nat. Inc., 24 Cal.4th 317, 349, 100 Cal.Rptr.2d 352, 8 P.3d 1089 (2000); See Wolf v. Wells Fargo Bank, N.A., No. C11-01337 WHA, 2011 WL 4831208, at *4 (N.D.Cal. Oct. 12, 2011) (citing McClain v. Octagon Plaza, LLC, 159 Cal.App.4th 784, 799, 71 Cal.Rptr.3d 885 (2008)). The covenant is a "`supplement
"The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith." Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal.4th 342, 372, 6 Cal.Rptr.2d 467, 826 P.2d 710 (1992); see Perdue v. Crocker Nat'l Bank, 38 Cal.3d 913, 923, 216 Cal.Rptr. 345, 702 P.2d 503 (1985) ("where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing") (internal quotations omitted). "The exercise of discretionary powers is evaluated under the implied covenant to assure that the promises of the contract are effective and in accordance with the parties' legitimate expectations." McNeary-Calloway, 863 F.Supp.2d at 956-57; see Carma, 2 Cal.4th at 373-74, 6 Cal.Rptr.2d 467, 826 P.2d 710; Gabana Gulf Distrib., Ltd. v. GAP Int'l Sales, Inc., No. C 06-02584 CRB, 2008 WL 111223, at *8 (N.D.Cal. Jan. 9, 2008); Schwarzkopf v. Int'l Bus. Machs., Inc., No. C 08-2715 JF (HRL), 2010 WL 1929625, at *13 (N.D.Cal. May 12, 2010). The covenant does not, however, "prohibit a party from doing that which is expressly permitted by an agreement. On the contrary, as a general matter, implied terms should never be read to vary express terms." Carma, 2 Cal.4th at 374, 6 Cal.Rptr.2d 467, 826 P.2d 710.
Here, Ellsworth alleges that his mortgage contract with U.S. Bank gives the bank discretion to, among other things, force-place flood insurance according to the contract's terms. The FAC alleges that "U.S. Bank breached this duty and abused any discretion it may have had" by purchasing backdated flood insurance and arranging for kickbacks in connection with the force-placed flood insurance. FAC ¶ 70.
These allegations are grounded in California precedent, and the McNeary court found similar allegations sufficient at this stage. See McNeary, 863 F.Supp.2d at 958. For example, the California Supreme Court recognizes the covenant's application in situations where one party has discretion to act under a contract. See, e.g., Carma, 2 Cal.4th at 374, 6 Cal.Rptr.2d 467, 826 P.2d 710.
Another example is Gutierrez v. Wells Fargo & Co., 622 F.Supp.2d 946, 954 (N.D.Cal.2009). There, the plaintiff accused Wells Fargo of posting larger withdrawals to his checking account before smaller ones so as to maximize the number of overdraft penalties the bank could charge. On summary judgment, Wells Fargo argued that the consumer account agreement between Wells Fargo and the plaintiff expressly permitted the bank to post items to the plaintiff's checking account "in any order the bank chooses," subject to law. Id. Nonetheless, the court refused to grant summary judgment for the bank because the bank's discretionary authority was still subject to the covenant of good faith and fair dealing. The contract "language does nothing more than give discretion to the bank and once, again, that measure of discretion must be exercised subject to good faith and fair dealing and not so as to maximize bank revenue and to penalize customers as much as possible." Id.
The court finds the detailed analysis in McNeary-Calloway particularly persuasive. That case, which closely parallels this one, stated persuasively that
McNeary-Calloway, 863 F.Supp.2d at 958 (citing Gabana, 2008 WL 111223, at *8; Locke v. Warner Bros., Inc., 57 Cal.App.4th 354, 367, 66 Cal.Rptr.2d 921 (1997)).
U.S. Bank argues that the covenant of good faith and fair dealing requires that "no party to the contract will do anything which would deprive the others of the benefits of the contract." U.S. Bank Mot., ECF No. 68 at 27. It asserts that the cases gloss over this element and Ellsworth fails to identify what benefit of the mortgage he was denied by the force-placement of coverage. Id. at 16. At this pleadings stage, the court finds the complaint's allegations sufficient.
Ellsworth's third and fourth claims are for unjust enrichment or restitution against U.S. Bank and ASIC. See FAC ¶¶ 75-81, 83. Defendants argue that under California law, a party may not assert an unjust enrichment claim when it alleges a violation of an express contract. See, e.g., U.S. Bank Mot., ECF No. 68 at 28. The two contracts here are the mortgage with U.S. Bank and the flood insurance policy that ASIC issued. Ellsworth counters that at the motion to dismiss stage, courts allow both to proceed. Opp'n, ECF No. 73 at 18.
"California courts appear to be split on whether a stand alone cause of action for unjust enrichment is anything more than "a general principle, underlying various legal doctrines and remedies."" Mattel, Inc. v. MGA Entm't, Inc. & Consol. Actions, 782 F.Supp.2d 911, 1014 (C.D.Cal. 2011) (noting that "stand alone claims for unjust enrichment are simply redundant of relief already available under other existing law"). Courts in this district have held that California law permits unjust enrichment claims, in which "restitution may be awarded either (1) in lieu of breach of contract damages, where an asserted contract is found to be unenforceable or ineffective, or (2) where the defendant obtained a benefit from the plaintiff by fraud, duress, conversion, or similar conduct, but the plaintiff has chosen not to sue in tort." Oracle Corp. v. SAP AG, No. C 07-1658 PJH, 2008 WL 5234260, at *8 (N.D.Cal. Dec. 15, 2008) (citing McBride v. Boughton, 123 Cal.App.4th 379, 388, 20 Cal.Rptr.3d 115 (2004)); see also Wolf, 2011 WL 4831208, at *8 ("Restitution [under an unjust enrichment theory] may be awarded in lieu of breach of contract damages when the parties had an express contract, but it was procured by fraud or is unenforceable or ineffective for some reason.") (citing McBride, 123 Cal.App.4th at 388, 20 Cal.Rptr.3d 115).
"To state a claim for restitution, a plaintiff `must plead receipt of a benefit and the unjust retention of the benefit at the expense of another.'" Walters v. Fid. Mortg. of Cal., No. 2:09-cv-3317 FCD/KJM, 2010 WL 1493131, at *12 (E.D.Cal. Apr. 14, 2010) (quoting Lectrodryer v. SeoulBank, 77 Cal.App.4th 723, 726, 91 Cal.Rptr.2d 881 (2000)).
There are two express contracts. Still, given the allegations about undisclosed kickbacks and inappropriate backdating, the court follows McNeary and holds that Ellsworth states a restitution claim.
California Business & Professions Code § 17200, also known as California's "Unfair Competition Law," prohibits "any unlawful, unfair or fraudulent" business practices. Cal. Bus. & Prof.Code § 17200. "Since section 17200 is [written] in the disjunctive, it establishes three separate types of unfair competition. The statute prohibits practices that are either `unfair' or `unlawful,' or `fraudulent.'" Pastoria v. Nationwide Ins., 112 Cal.App.4th 1490, 1496, 6 Cal.Rptr.3d 148 (2003); see also CelTech Commc'ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal.4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527 (1999).
Ellsworth alleges that U.S. Bank and ASIC violated the UCL's "unfair" prong. FAC ¶¶ 89, 97. There is disagreement among California courts regarding the definition of "unfair" business practices in consumer cases such as this. As the district court in Phipps v. Wells Fargo explained, there is a split of authority that has resulted in three different tests:
No. CV F 10-2025 LJO SKO, 2011 WL 302803, at *16 (E.D.Cal. Jan. 27, 2011); see
Ellsworth's claims under the unfair prong are based on the same allegations repeated throughout the complaint: Defendants "manipulat[ed] the force-placed insurance process, arranged for and paid kickbacks in connection with force-placed insurance, and retained money for force-placing backdated flood insurance policies." FAC ¶¶ 89, 97.
The court follows the weight of authority in district court cases that denied motions to dismiss claims supported by similar allegations in force-placed flood insurance cases. See U.S. Bank Opp'n, ECF No. 73 at 19; see also McNeary-Calloway, 863 F.Supp.2d at 961-62 (denying motion to dismiss claims alleging unfair force-placed flood insurance practices under UCL because the court could not determine, as a matter of law, that the allegations would not meet any of the unfairness tests); Hofstetter v. Chase Home Fin., LLC, No. C 10-01313 WHA, 2010 WL 3259773, at *15 (N.D.Cal. Aug. 16, 2010) (denying motion to dismiss unfair UCL claim alleging lender that force-placed flood insurance violated principles articulated in regulations).
U.S. Bank argues that the Ninth Circuit's opinion in Davis v. HSBC Bank Nevada, N.A., 691 F.3d at 1169-71, compels a different result. There, the court addressed the various UCL tests applied in California and dismissed unfair business practice claims against Best Buy that failed the applicable tests. See id. at 1170-71. The plaintiff claimed that Best Buy failed to adequately disclose the annual fee on a credit card it offered. Id. at 1157. The Ninth Circuit affirmed dismissal because Davis failed to allege any facts to support his claim under the tethering test. Id. at 1170. Under the balancing test, the court found that Best Buy sufficiently warned Davis of the fee and gave him 90 days to cancel his account for a full refund. Id. This court, however, finds the present case distinguishable.
Ellsworth satisfies the tethering test, which requires the unfairness alleged to be "tethered to some legislatively declared policy or proof of some actual or threatened impact on competition." Davis, 691 F.3d at 1170. The FAC alleges that the kickback arrangement "is inconsistent with the NFIA, which only allows lenders and servicers to `charge the borrower for the cost of premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance.'" FAC ¶ 37 (quoting 42 U.S.C. § 4012(e)(2); citing 12 C.F.R. § 22.3). U.S. Bank does not dispute that this is a sufficient "tether." Instead, it argues that it did nothing more than what was authorized by statute. U.S. Bank Reply, ECF No. 74 at 21. Though that may be true, it is a fact question to be answered in discovery, not the basis for a motion to dismiss.
As for the backdating allegations, the FAC alleges that "[r]etroactively placing flood insurance policies also is inconsistent with the advance notice requirements of the NFIA." FAC ¶ 44 (citing 42 U.S.C. § 4012a(e) (the statutory analogue to 12 C.F.R. § 22.7)). As discussed above, on the record presented, the court agrees.
Finally, the court rejects ASIC's argument that Ellsworth's claim under the UCL's unfairness prong must allege that ASIC violated a statute to avoid dismissal. ASIC Mot., ECF No. 57 at 25. To hold otherwise would render the UCL's unlawful prong meaningless. While Ellsworth's claims do not implicate the constitutional, statutory, or regulatory provisions under which ASIC is regulated, they do "sugges[]t ASIC engaged in similarly coercive behavior." Wahl v. Am. Sec. Ins. Co., ("Wahl I"), No. C 08-00555 RS, 2010 WL 1881126, at *7 (N.D.Cal. May 10, 2010)
Accordingly, the court denies U.S. Bank's and ASIC's motions to dismiss Ellsworth's fifth and sixth claims for relief.
The court denies the motions to dismiss. This disposes of ECF Nos. 57 & 68.
12 C.F.R. § 22.7.
