Hon. Cynthia Bashant, United States District Judge.
This matter is before the Court on notice to Plaintiffs Michael Pemberton and Sandra Collins-Pemberton (the "Pembertons") of a possible Rule 12(b)(6) dismissal of the claims raised in the First Amended Complaint ("FAC"). (ECF No. 53.) The Pembertons have filed a response (ECF No. 54), Defendant Nationstar Mortgage LLC ("Nationstar") has opposed the response (ECF No. 55), and the Pembertons have replied (ECF No. 60). The parties appeared before the Court on June 7, 2018 for oral argument and the case was submitted. (ECF No. 69.) The matter is ripe for decision.
This case involves pressing questions about the scope of 26 U.S.C. § 6050H, a federal statute which requires an individual who receives at least $600 in home mortgage interest payments during a calendar year to report the amount of interest received to the IRS and the individual who paid the interest. 26 U.S.C. §§ 6050H(a), (d). The fundamental dispute between the parties is whether Section 6050H requires Nationstar to report deferred interest payments.
In 2005, the Pembertons obtained a home mortgage loan which permitted them to defer mortgage interest for payment at a later date and added that deferred interest to principal. The Pembertons deferred interest during the earlier years of their loan, which caused the outstanding principal on their loan to increase above the original amount. In 2013, Nationstar became the Pembertons' loan servicer and received mortgage payments from them, which Nationstar applied to interest and principal due on the loan. Thereafter, Nationstar respectively provided the IRS and the Pembertons with Forms 1098, which reported the Pembertons' payments on interest and principal for 2013. The amount of interest reported did not reflect deferred interest, which the Pembertons contend violated Section 6050H.
Federal courts have proceeded with caution in addressing challenges to mortgage lender and servicer Section 6050H reporting, like the challenge the Pembertons raise, even when those challenges present familiar state law claims.
After careful consideration, this Court has determined that the Pembertons' state law claims generally may be resolved based on each claim's elements. For the reasons herein, the Court concludes that (1) the Pembertons' claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, UCL fraudulent and unlawful prong claims, and their declaratory judgment claim (as it is pleaded) must be dismissed with prejudice; (2) the Pembertons' claim for a preliminary and permanent injunction must be dismissed without prejudice; and (3) the Pembertons' UCL unfair prong claim and negligence claim are plausible.
Congress permits taxpayers to claim as a deduction from their taxes all interest paid during a given year. 26 U.S.C. § 163(a) ("There shall be allowed as a deduction all interest paid ... within the taxable year on indebtedness."). This deduction may be claimed for interest payments a homeowner makes on his or her home mortgage loan. 26 U.S.C. § 163(h). Generally, this deduction must be claimed within three years of the filing of a tax return. 26 U.S.C. § 6511(a).
Congress enacted Section 6050H, an information reporting statute, to "assist the [IRS] in verifying the accuracy of claimed mortgage interest deductions." Joint Comm. on Taxation, H.R. 4170, 98th Cong. P. L. 98-369, Gen. Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 488 (Dec. 31, 1984). Section 6050H requires any individual who receives
By statute and regulation, monetary penalties may be imposed on an interest recipient who intentionally disregards the requirement to provide a Form 1098 or who includes "incorrect information" on a form. See 26 U.S.C. § 6722(a)(2)(B) (imposing penalties for "inclusion of incorrect information" on a "payee statement" required under Section 6050H(d)); 26 U.S.C. § 6721(a)(2)(B) (imposing penalties for "inclusion of incorrect information" on a "payee statement" to IRS required under Section 6050H(a)); 26 U.S.C. §§ 6721(e), 6722(e); see also 26 C.F.R. § 1.6050H-2(e)(2)(i)-(iii).
The Pembertons are California homeowners who obtained an Option ARM mortgage loan in 2005, the terms of which provided an option to make a monthly interest payment less than the full amount due. Under this option, the monthly interest the Pembertons did not pay was added to the principal amount of their loan and treated as principal for the purposes of the loan. When Nationstar began servicing their loan in July 2013, the Pembertons' loan balance was $7,575.41 above the original balance, an amount which the Pembertons allege was charged as interest in the earlier years of their loan but not paid, i.e. deferred interest.
Nationstar provided the Pembertons with a Form 1098 showing the amount of mortgage interest it received from them during the 2013 tax year. According to the Pembertons, the amount reported did not account for deferred interest payments despite the presence of deferred interest. The Pembertons allege that interest does not lose its character as interest and so Nationstar was required to apply their payments to retirement of deferred interest before ever applying such payments to principal. When the Pembertons realized the interest amount reported in their Form 1098 did not account for deferred interest payments, they brought the issue to Nationstar's attention. Nationstar contended that the Pembertons had not deferred interest while it serviced their loan and that it had not received any previously deferred interest amounts from the Pembertons' prior servicer. Nationstar did not issue the Pembertons a revised Form 1098 that accounted for deferred interest payments.
Because the IRS allegedly maintains a policy of rejecting taxpayer attempts to
The Pembertons initially brought suit against Nationstar for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligence, California's unfair competition law, and directly under Section 6050H. (ECF No. 1.) Nationstar moved to dismiss the original complaint under Rule 12(b)(6), which the parties fully briefed. (ECF Nos. 11, 15, 16.) In resolving that motion, the Court dismissed the Pembertons' claim brought directly under Section 6050H on the ground that there is no federal private right of action under the statute. (ECF No. 17.) Without otherwise addressing the merits, the Court imposed a primary jurisdiction stay, reasoning that the Pembertons' claims raised a matter of "first impression" regarding whether Section 6050H requires the reporting of deferred interest. (Id.) As a result of the stay, the Court deferred consideration of the Pembertons' state law claims to permit the IRS to weigh in on the scope of Section 6050H in the first instance. (Id.) During the two-year duration of the stay, the Pembertons submitted status reports to advise the Court of any IRS developments. (ECF Nos. 18, 30.) The reports did not reveal any IRS actions that would help resolve the Pembertons' claims in this case.
In April 2017, the Court dismissed the original complaint when the Pembertons conceded that the complaint failed to show Article III standing in view of the Ninth Circuit's decision in Smith v. Bank of America, N.A., 679 Fed. App'x 549 (9th Cir. 2017). (ECF Nos. 39, 42.) The Pembertons subsequently filed the First Amended Complaint ("FAC"). (ECF No. 43.) After Nationstar moved to dismiss for lack of Article III standing (ECF No. 47), the Court held that the Pembertons have standing to assert their state law claims and declined to impose another primary jurisdiction stay. (ECF No. 53.)
Federal Rule of Civil Procedure 8(a)(2) requires that a complaint set forth "a short and plain statement of the claim showing that the pleader is entitled to relief," in order to "give the defendant fair notice of what the ... claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955,
A Rule 12(b)(6) motion tests the sufficiency of a complaint's allegations. N. Star Int'l v. Ariz. Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983). To survive a Rule 12(b)(6) motion, a plaintiff is required to set forth "enough facts to state a claim for relief that is plausible on its face." Twombly, 550 U.S. at 570, 127 S.Ct. 1955. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw reasonable inferences that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted). Factual allegations must be enough to raise a right to relief above the speculative level. Twombly, 550 U.S. at 556, 127 S.Ct. 1955. "Where a complaint pleads facts that are `merely consistent with' a defendant's liability, it `stops short of the line between possibility and plausibility of entitlement to relief.'" Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955). In assessing the sufficiency of a complaint, a court accepts as true the complaint's factual allegations and construes them in the light most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). Yet, the court need not accept as true legal conclusions pled in the guise of factual allegations. Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994). A pleading is insufficient if it offers only "labels and conclusion" or "a formulaic recitation of the elements of a cause of action," without adequate factual allegations. Twombly, 550 U.S. at 555, 127 S.Ct. 1955; Iqbal, 556 U.S. at 676, 129 S.Ct. 1937. Although a court assesses a complaint's sufficiency based on its allegations, a court may consider materials properly submitted as part of the complaint in deciding a Rule 12(b)(6) motion. Lee v. City of L.A., 250 F.3d 668, 688-89 (9th Cir. 2001).
The Pembertons plead a breach of contract claim under two theories: (1) Section 6050H establishes a legal duty incorporated as a term into their contract, such that a violation of the statute also constitutes a breach of the contract, and (2) Nationstar breached provisions of the contract which allocate monthly payments between interest and principal. (ECF No. 54 at 28.) Nationstar contends that neither theory provides a plausible basis for the Pembertons' breach of contract claim. (ECF No. 55 at 16-20.) The Court agrees.
To state a claim for breach of contract under California law, plaintiffs must plead four elements: (1) the existence of a contract, (2) plaintiffs' performance or excuse for nonperformance, (3) defendant's breach, and (4) damage to the plaintiffs as a result of that breach. Misha Consulting Grp., Inc. v. Core Ed. & Consulting Solutions, Inc., No. C-13-04262-RMW, 2013 WL 6073362, at *1 (N.D. Cal. Nov. 15, 2013) (citing CDF Firefighters v. Maldonado, 158 Cal.App.4th 1226, 70 Cal.Rptr.3d 667, 679 (2008)). There is no dispute that a contract existed. The Pembertons allege that Nationstar breached the terms of the "promissory note" which originated with their home mortgage loan. (FAC ¶ 7, 42.) Plaintiffs have submitted that note, titled the "Adjustable Rate Note" (the "Note") with the FAC. (Id. ¶ 7, Ex. A.) Defendant relies on the terms of the Note to challenge the plausibility of
The parties' primary dispute is whether the Pembertons have adequately pleaded that Nationstar breached a term of the contract. "Under California law, the interpretation of a written contract is a matter of law for the court even though questions of fact are involved." Britz Fertilizers, Inc. v. Bayer Corp., 665 F.Supp.2d 1142, 1159 (E.D. Cal. 2009) (quoting Southland Corp. v. Emerald Oil Co., 789 F.2d 1441, 1443 (9th Cir. 1986)). Where the parties have reduced their contract to writing, the parties' mutual intent at the time of the contract is determined from the writing alone if possible. Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal.App.4th 944, 135 Cal.Rptr.2d 505, 513 (2003). When interpreting a contract, "[t]he whole of a contract is to be taken together" with "each clause helping to interpret the other." Cal. Civ. Code § 1641. Unless the contract uses words in a technical manner or defines certain terms, the words of a contract are understood in their ordinary and popular sense. See Britz Fertilizers, Inc., 665 F.Supp.2d at 1159-60 (citing Superior Dispatch, Inc. v. Ins. Corp. of N.Y., 176 Cal.App.4th 12, 97 Cal.Rptr.3d 533, 548 (2009); Newport Beach Country Club, Inc., 109 Cal.App.4th 944, 135 Cal.Rptr.2d 505 at 513). Although a contract is ambiguous if it is capable of two different reasonable interpretations, a court will not strain to create an ambiguity where none exists. See Kashmiri v. Regents of the Univ. of Cal., 156 Cal.App.4th 809, 67 Cal.Rptr.3d 635, 660 (2007) ("[L]anguage in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract.") (quoting Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619, 627 (1995)).
When a dispute centers on the contract's terms, a breach of contract claim may be dismissed for failure to state a claim if the contract's terms are unambiguous. See Consul, Ltd. v. Solide Enters., Inc., 802 F.2d 1143, 1149 (9th Cir. 1986); Leghorn v. Wells Fargo Bank, N.A., 950 F.Supp.2d 1093, 1117 (N.D. Cal. 2013). However, "[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); see also Trs. of Screen Actors Guild-Producers Pension & Health Plans v. NYCA, Inc., 572 F.3d 771, 777 (9th Cir. 2009). With these principles in mind, the Court turns to the Pembertons' breach of contract claim.
The Pembertons allege that Section 6050H is a term of their contract and, therefore, Nationstar's alleged violation of the statute also constitutes a breach of the parties' contract. (FAC ¶¶ 43-44.)
Generally, a party may not rely on a statute or regulation to state a breach of contract claim when the underlying contract does not incorporate the statute or regulation. See, e.g., Johnson v. World Alliance Fin. Corp., 830 F.3d 192, 196 (5th Cir. 2016) ("HUD regulations do not give the borrower a private cause of action unless the regulations are expressly incorporated into the lender-borrower agreement.") (affirming dismissal of breach of contract claim); Smith v. JPMorgan Chase Bank, N.A., 519 Fed. App'x 861, 864 (5th Cir. 2013) ("Federal statutes and regulations can form the basis of a breach-of-contract claim if the parties expressly incorporate them into their contract."); see also Sybrandy v. U.S. Dep't of Agric., Agric. Stabilization & Conservation Serv., 937 F.2d 443, 445-46 (9th Cir. 1991) ("This regulatory provision was expressly incorporated into the Termination Program contract signed by the Sybrandys.").
Under California law, the terms of an extrinsic document may be incorporated by reference in a contract if: "(1) the reference is clear and unequivocal, (2) the reference is called to the attention of the other party and he consents thereto, and (3) the terms of the incorporated document are known or easily available to the contracting parties." DVD Copy Control Ass'n, Inc. v. Kaleidescape, Inc., 176 Cal.App.4th 697, 97 Cal.Rptr.3d 856, 870 (2009). This includes specific statutes or regulations. "When statutory language in included in a contract, it assumes a new legal identity: that of contractual language." 300 DeHaro St. Investors v. Dep't of Hous. & Cmty. Dev., 161 Cal.App.4th 1240, 75 Cal.Rptr.3d 98, 111 (2008). The inclusion of such language makes the statute or regulation "enforceable as a term of the contract." Fowler v. Wells Fargo Bank, N.A., No. 17-cv-02092-HSG, 2017 WL 3977385, at *4 (N.D. Cal. Sept. 11, 2017) (citing Bushell v. JPMorgan Chase Bank, N.A., 220 Cal.App.4th 915, 163 Cal.Rptr.3d 539, 547-49 & n.9 (2013)).
Plaintiffs readily concede in the FAC that their contract "do[es] not contain any provision specifically governing the manner in which Nationstar would report mortgage interest to Plaintiffs[.]" (FAC ¶ 43.) This allegation understates the limitations of the contract because in fact no provision incorporates Section 6050H by reference or through use of any of its language. The absence of such a provision precludes the Pembertons from asserting a breach of contract based on Nationstar's alleged violation of Section 6050H. Compare Chandler v. Wells Fargo Bank, N.A., No. 11-03831 S.C. 2014 WL 31315, at *5-6 (N.D. Cal. Jan. 3, 2014), aff'd 637 Fed. App'x 413, 414 (9th Cir. 2016) ("To the extent that Chandler relies on HUD regulations to support his breach of contract claim, his argument fails because the HECM does not incorporate them.") with Fowler, 2017 WL 3977385, at *4 (finding incorporation of HUD regulations because plaintiff alleged contractual term in note that "Lender shall accept prepayment on
Despite the absence of such a contractual provision, the Pembertons allege that Nationstar's reporting of mortgage interest is "nonetheless a term of each contract because Nationstar has a legal duty to provide accurate Forms 1098" under Section 6050H. (FAC ¶¶ 43-44.) The Court is not required to accept this conclusory allegation which contradicts the Note's express terms and will not accept it to defeat dismissal. Steckman v. Hart Brewing Inc., 143 F.3d 1293, 1295 (9th Cir. 1998) (a court is "not required to accept as true conclusory allegations which are contradicted by documents referred to in the complaint"); Abbit v. ING United States Annuity & Life Ins. Co., 999 F.Supp.2d 1189, 1197 (S.D. Cal. 2014) (dismissing breach of contract claim based on allegations contradicted by terms of agreement submitted with complaint).
The Pembertons cannot save the claim from dismissal by relying on the principle that a contract is deemed to incorporate all applicable statutes in effect at the time the contract is made. (ECF No. 54 at 29.) The Pembertons point to two California state court cases which applied this principle. (Id. (citing Mercury Cas. Co. v. Scottsdale Indem. Co., 156 Cal.App.4th 1212, 68 Cal.Rptr.3d 123, 132 (2007); Grubb v. Ranger Ins. Co., 77 Cal.App.3d 526, 143 Cal.Rptr. 558, 559 (1978)).) However, both cases applied the principle to insurance contracts to define the scope of substantive provisions directly regulated by the relevant law. For example, Grubb determined that a city ordinance governing insurance coverage requirements entered into an insurance contract to define the scope of insurance coverage. Grubb, 143 Cal.Rptr. at 559. Similarly, Mercury Casualty Company determined that a California statute establishing an automobile liability insurance requirement "automatically became a part of any new personal automobile liability policies issued in California as a matter of law." Mercury Cas. Co., 68 Cal. Rptr.3d at 132. As a reporting statute, Section 6050H simply does not operate in either manner — it says nothing about mortgage loan contracts, nor does it purport to impose substantive limits on them.
California courts have also applied the principle on which the Pembertons rely to ascertain or limit the meaning of terms in a contract. See, e.g., Klein v. Chevron U.S.A., Inc., 202 Cal.App.4th 1342, 137 Cal.Rptr.3d 293, 330 (2012) (applying principle to conclude that plaintiff's interpretation of the term "gallon" in the parties' sales agreement "had a specified meaning that plainly conflicts with plaintiffs' proposed definition of that term") (affirming dismissal of breach of contract claim); Miracle Auto Ctr. v. Superior Court, 68 Cal.App.4th 818, 80 Cal.Rptr.2d 587,
The Pembertons also argue that they have stated a breach of contract claim based on the allocation provisions of their contract. (ECF No. 54 at 8, 28.) The allocation provisions require that Nationstar apply the Pembertons' payments to interest before principal. (FAC Ex. A at 2.) The specific allegations set forth as part of the Pembertons' breach of contract claim do not allege that Nationstar breached these provisions. (See generally FAC ¶¶ 42-46.) The Court thus construes the Pembertons' argument as a request for leave to amend the FAC to plead a claim on this basis. See, e.g., Lennar Mare Island, LLC v. Steadfast Ins. Co., 139 F.Supp.3d 1141, 1162 (E.D. Cal. 2015) (construing argument raised in legal memorandum in response to motion to dismiss as request for leave to amend). The Court finds that amendment on this basis would be futile.
The starting point for the Court is the allocation provision of the Pembertons' Note and the conduct alleged in the FAC. Section 3(A) of the Pembertons' Note provides that "[e]ach monthly payment ... will be applied to interest before Principal." (FAC Ex. A at 2.) By its terms, the Note identifies only two categories for payment allocation: interest and principal. There is no separate category for "deferred interest." Thus, the Pembertons must be able to plausibly allege that Nationstar's treatment of deferred interest violated the Note's allocation between interest and principal.
The Pembertons attempt to allege a violation of the allocation provision by identifying the deferred interest on their loan. They allege that $7,575.41 of their "loan balance" was deferred interest at the time Nationstar took over their mortgage loan. (Id. ¶ 9.) Although they made all payments to Nationstar due under their Note in 2013 — an amount of $12,097.80 — the 2013 Form 1098 they received from Nationstar reflected $4,197.66 in payments of principal and $7,302.06 in interest. (Id. ¶¶ 10-11.) The Pembertons contend that these reported amounts reflect a "method" of calculating mortgage interest that is "wrong" because it "assumes that the entire loan balance constitutes principal and fails to recognize that interest that was previously deferred does not lose its character as interest[.]" (Id. ¶ 12; ECF No. 60 at 2.) Central to the Pembertons' allocation theory is their allegation that interest "does not lose its character as interest." (FAC ¶ 12.) Assuming that premise, the Pembertons allege that Nationstar violated the allocation provision by not crediting payments toward retiring all deferred interest before crediting any payments to principal. (Id.; ECF No. 54 at 9.)
The Pembertons' allocation theory is implausible because multiple provisions of
The Pembertons' Note further specifies precisely how the principal amount of the Note would increase: through deferment of interest. Specifically, through the Pembertons' exercise of their option to make a "minimum payment" "not sufficient to cover the amount of interest due," resulting in negative amortization. (Id. § 3(C).) Section 3(E), titled "Additions to my Unpaid Principal," expressly discusses how exercising this option would affect principal. The Section provides that "for each month that my monthly payment is less than the interest portion, the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid Principal..." (Id. § 3(E) (emphasis added).) Section 3(E) further states that "interest will accrue on the amount of this difference at the interest rate required by Section 2," which in turn, sets the interest rate for "unpaid Principal." (Id. §§ 2(A); 3(E).) Section 3(E) thus unambiguously adds deferred interest to unpaid principal to be treated, for the purposes of the payments due under the Note, as payments on principal.
Based on these unambiguous provisions, the Pembertons cannot plausibly plead that Nationstar breached the Note's "allocation formula" by allocating the Pembertons' payments in the manner reflected on their 2013 Form 1098. (ECF No. 54 at 9.) As the Pembertons concede, they "elected, pursuant to their note, to defer payment of some of their interest that was due for a given month," and that such interest "was capitalized." (ECF No. 54 at 2 n.3; (emphasis added); see also FAC ¶ 5.) In accordance with the Note's treatment of deferred interest as principal, the principal amount increased in the amount of interest the Pembertons' deferred.
Ignoring the Note, the Pembertons direct the Court to the allocation provision of their deed of trust instead. (ECF No. 54 at 8-9, 28.) Although they are "not in possession of their deed of trust," the Pembertons "are prepared to allege" that it contains an allocation provision similar to the one in the Rovai case because both loans originated with First Magnus Financial Corporation.
Even assuming that the terms of the Pembertons' deed of trust are identical or substantially similar to those in the Rovai case, the Pembertons' attempt to save their breach of contract claim by shifting to its allocation provision is unavailing. The Pembertons' breach of contract claim concerns how Nationstar allocated payments with respect to deferred interest. As the Pembertons concede, the Note permitted them to defer interest otherwise due. (FAC ¶ 5; ECF No. 54 at 2 n.3.) It is the Note which specifies the treatment of deferred interest as principal. (See also FAC Ex. A.) The Pembertons offer no explanation as to how the allocation provision in their deed of trust — a document whose terms do not even identify "deferred interest" or "additions to unpaid Principal" (in the Note's language) — overcomes, controls, or otherwise limits the meaning of the specific provisions in the Note dealing with deferred interest.
Nor can they. The Note's specific terms necessarily qualify the allocation provision in the deed of trust. See Pecarovich v. Allstate Ins. Co., 309 F.3d 652, 658 (9th Cir. 2002) (quoting Brinderson-Newberg Joint Venture v. Pac. Erectors, Inc., 971 F.2d 272, 278 (9th Cir. 1992) ("It is well settled that `[w]here there is an inconsistency between general provisions and specific provisions [in a contract], the specific provisions ordinarily qualify the meaning of the general provisions.'")); Quezada v. Loan Ctr. of Cal., Inc., No. 08-177 WBS KJM, 2008 WL 5100241, at *7-8 (E.D. Cal. Nov. 26, 2008) (determining that specific provisions of adjustable rate note qualified general terms on which plaintiff's breach of contract claim was premised and required dismissal).
The absence of any textual basis in the Note for the Pembertons' allocation argument underscores to the Court that the Pembertons' true aim is once more to imply a contractual term that does not exist. The Pembertons' argument that Nationstar's "method" of calculating interest is "wrong" because interest "does not loses its character as interest" substantively derives from tax law, not from their contract with Nationstar. (FAC ¶ 12.) In fact, the
Even if the Pembertons are right that deferred interest qualifies as interest for tax purposes, the claim before the Court is one for breach of contract. The terms of the Pembertons' contract plainly treat deferred interest as principal and authorize Nationstar to allocate the Pembertons' payments accordingly. Concluding otherwise is possible only on the assumption that Section 6050H is a term of the Pembertons' contract — an assumption that finds no support in the contract. Accordingly, the Pembertons cannot allege a claim under the allocation provisions and the breach of contract claim is dismissed with prejudice. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962) (denial of leave to amend is permissible if amendment would be futile).
The Pembertons' second cause of action is for breach of the implied covenant of good faith and fair dealing. They allege that the covenant imposes duties on Nationstar "not to conceal and/or fully and unambiguously disclose to Plaintiffs ... that the way it was treating `deferred interest' payments was against [their] interests and contrary to established tax law." (FAC ¶ 48.) Nationstar allegedly breached the covenant when it failed to report to the IRS deferred interest payments it received from the Pembertons. (Id. ¶ 49.) The Pembertons further allege that Nationstar had a duty to research their contentions that it had failed to accurately report their interest payments and further breached the covenant when it failed to issue revised a Form 1098 to the Pembertons after receiving their complaint. (Id.) Nationstar argues that the Pembertons have failed to allege any specific contractual provision with which Nationstar interfered, nor can they plausibly do so. (ECF No. 55 at 21.) The Court agrees with Nationstar.
To plead a breach of the implied covenant, a plaintiff must allege: (1) the parties entered into a contract; (2) the plaintiff fulfilled his or her obligations under the contract; (3) the defendant unfairly interfered with the plaintiff's rights to receive the benefits of the contract; and (4) the plaintiff was harmed by the defendant's conduct. See Rosenfeld v. JPMorgan Chase Bank, N.A., 732 F.Supp.2d 952,
The Pembertons' implied covenant claim fails because no provision of the Note or the deed of trust requires Nationstar to disclose its treatment of deferred interest payments in its Form 1098 reporting. In fact, the Pembertons disavow that any provision governing how Nationstar would report mortgage interest existed. (FAC ¶ 43.) The Pembertons do not identify any express contractual provision that required Nationstar to investigate the Plaintiffs' contentions regarding Nationstar's allegedly inaccurate reporting in a Form 1098, or to issue a corrected Form 1098. Nor can the Pembertons identify such provisions because no such provisions exist. The absence of these provisions defeats the Pembertons' claim. See Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619, 639 (1995) ("Absent [a] contractual right ... the implied covenant has nothing upon which to act as a supplement, and should not be endowed with an existence independent of contractual underpinnings.").
The Pembertons nevertheless contend that they can ground their implied covenant claim on their contract's allocation provisions as well as on the purported incorporation of Section 6050H as a contractual term.
The Court has already concluded that the contract, in unambiguous terms, specifically requires that deferred interest be treated as principal for the purposes of the Note. Nationstar in turn had the contractual right to treat deferred interest as principal, which in turn determined the allocation of the Pembertons' payments between principal and interest. The Pembertons "cannot state a claim for
The Pembertons assert a fraud claim against Nationstar based on Nationstar's alleged failure to report deferred interest payments. They allege that "Nationstar knowingly and intentionally misrepresented the correct amount of interest that plaintiffs paid to it in 2013" on their Form 1098, and "intentionally concealed" its wrongful reporting. (FAC ¶ 73.) The basis of the Pembertons' assertion of falsity is that "Nationstar was under a legal duty pursuant to the 26 U.S.C. § 6050H to report accurately only the interest Nationstar `received' during each calendar year" and "was further under a duty to correct any mistakes on Forms 1098[.]" (Id. ¶ 74.)
Under California law, "the necessary elements of fraud are: (1) misrepresentations (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; and (5) resulting damage." Alliance Mortgage Co. v. Rothwell, 10 Cal.4th 1226, 44 Cal.Rptr.2d 352, 900 P.2d 601, 608 (1995). Rule 9(b) in turn requires — even when a claim is raised under state law — that, "[i]n all averments of fraud or mistake, the circumstances constituting fraud ... shall be stated with particularity." Fed. R. Civ. P. 9(b); Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). Allegations supporting a fraud claim thus must move beyond Rule 8(a)(2)'s general requirement that a party plead "a short and plead statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2).
To avoid dismissal under Rule 9(b), a "complaint [must] state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation." Edwards v. Marin Park, Inc., 356 F.3d 1058, 1066 (9th Cir. 2004) (internal quotations omitted). These averments give "defendants notice of the particular misconduct
The Court initially rejects Nationstar's argument that the Pembertons cannot allege a misrepresentation simply because their claim concerns interest information provided on a Form 1098. Nationstar argues that its Form 1098 interest information is merely "an opinion on a question of federal law," suggesting that such information can never be challenged as fraudulent. (ECF No. 55 at 21.) Yet, as Nationstar acknowledges, the information on a Form 1098 "reflects what § 6050H and applicable regulations require to be reported on a Form 1098." (Id. at 23 (emphasis added).) Those requirements do not call for Nationstar's legal opinion on what is and is not reportable mortgage interest, but rather for factual information whose accuracy can be assessed.
Congress has authorized the imposition of statutory penalties for the provision of "incorrect information" regarding home mortgage interest received, whether provided to the IRS or individuals like the Pembertons. Compare 26 U.S.C. § 6721(a)(2)(B) (imposing penalties for "inclusion of incorrect information" in an "information return") with 26 U.S.C. § 6724(d)(1)(B)(v) (defining "information return" to mean "any return required by... section 6050H(a)", i.e. a return provided to the IRS); compare 26 U.S.C. § 6722(a)(2)(B) (imposing penalties for "inclusion of incorrect information" on a "payee statement") with 26 U.S.C. § 6724(d)(2)(M) (defining "payee statements" to include statements required by "section 6050H(d)", i.e. a statement provided to the individual from whom interest was received). IRS regulations in turn impose penalties for incorrect information in a Form 1098. 26 C.F.R. § 1.6050H-2(e)(2)(iii). Given this scheme, the Court cannot agree with Nationstar that the information it provides in a Form 1098 is a "legal representation" or "opinion" immune from charges of fraud.
Although the Court acknowledges that interest information in a Form 1098 can provide a basis for an actionable misrepresentation, the Pembertons' allegations fail to plausibly establish that Nationstar made representations that were false when made and cannot do so. See Cafasso, 637 F.3d at 1055 ("[C]laims of fraud ... must, in addition to pleading with particularity, also
The crux of the Pembertons' allegation of falsity is that (1) Section 6050H's use of the term "interest" includes "deferred interest" and (2) the amount of interest stated in their 2013 Form 1098 was false because it did not account for deferred interest. (FAC ¶ 73; see also ECF No. 54 at 33.) The Pembertons defend this assertion by pointing the Court to the same cases they rely on to argue that the term "interest" in Section 6050H includes deferred interest as a matter of statutory construction. (Compare ECF No. 54 at 3-6 with id. at 33-34.) In particular, they point to Old Colony Railroad Company for the proposition that interest is the price charged for the use of money and assume that their deferred interest satisfies that meaning. (Id. at 33.)
Fatal to the Pembertons' statutory construction-based assertion of falsity is Section 6050H's ambiguity and the lack of regulatory guidance at the time Nationstar issued its Form 1098. While the Pembertons "would characterize the question as a simple undertaking of statutory construction, that is quite frankly not the case." Strugala, 2015 WL 5186493, at *4. "It cannot be said based on a plain reading of § 6050H whether or not the statute's use of the term `interest' encompasses capitalized interest." Id. As multiple courts have expressly acknowledged, "[n]either § 6050H nor its implementing regulations provide explicit direction to recipients on how, whether and when to report capitalized interest." Id. at *3; see also Rovai v. Select Portfolio Servicing, Inc., No. 14-cv-1738-BAS-WVG, 2015 WL 3613748, at *3 (S.D. Cal. May 11, 2015) (observing that whether Section 6050H reaches deferred interest and thus requires reporting of deferred interest on a Form 1098 is an "issue of first impression").
The Pembertons implicitly recognize that Section 6050H cannot do the work of showing falsity because they do not rely on Section 6050H itself, or cases or revenue rulings interpreting Section 6050H. They instead direct the Court to several cases interpreting the term "interest" in other provisions of the Internal Revenue Code and on revenue rulings that do not facially address deferred mortgage interest. (ECF No. 54 at 2-7.) The Court cannot conclude that these cases and revenue rulings provide a plausible basis for showing that Nationstar's Form 1098 interest reporting was false when made.
Instructive for the Court is Brakke v. Economic Concepts, Inc., 213 Cal.App.4th 761, 153 Cal.Rptr.3d 1 (2013), a case involving alleged misrepresentations of federal tax information. The Brakke plaintiffs sued a defendant corporation which marketed and administered pension plans, and which had made representations to the plaintiff in 2002 that its pension plans were legal, complied with the Internal Revenue Code, and would be tax deductible. Id. at 3. The plaintiffs alleged these representations were false because a 2004 IRS audit concluded that the plaintiffs' plan did not comply with relevant Internal Revenue Code provisions and disallowed tax deductions. Id. at 4. Relying on Berry v. Indianapolis Life Insurance Company, 638 F.Supp.2d 732 (N.D. Tex. 2009), the Brakke court held that the plaintiffs failed to allege that statements by the defendants' agents were false when made and, to the extent they were, the plaintiffs could not have reasonably relied on representations
Unlike in the Brakke and Berry cases, the IRS has not made any pronouncement regarding what Section 6050H requires with respect to reporting of deferred interest. Nor has any federal court adopted the statutory construction the Pembertons advance here based on non-Section 6050H cases and different revenue rulings. Even if this Court did so now, Brakke and Berry counsel that it could not be used to show that Nationstar's reporting in 2013 was false when made because the law did not unambiguously set forth clear requirements for reporting deferred interest payments. See Berry, 638 F.Supp.2d at 739; Brakke, 153 Cal.Rptr.3d at 7. Stripping away the FAC's assertions of a false representation based on the failure to report deferred interest, there are no other allegations that can sustain the Pembertons' fraud claim. With no factual allegations showing plausible false representations in the 2013 Form 1098 Nationstar provided and the fact that the Pembertons cannot plausibly allege any with respect to Section 6050H, the Court dismisses with prejudice their fraud claim.
Under the allegations specific to their fraud claim, the Pembertons allege that "Nationstar knowingly and intentionally misrepresented the correct amount of interest that plaintiffs paid to it in 2013." (FAC ¶ 73.) The Court finds that the Pembertons' fraud claim fails because the Pembertons cannot plausibly allege that Nationstar knowingly and intentionally defrauded them.
For the purposes of Rule 9(b), "[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally" by a plaintiff. Fed. R. Civ. P. 9(b); see also Odom v. Microsoft Corp., 486 F.3d 541, 554 (9th Cir. 2007). Although this general averment of intent and knowledge may be sufficient for Rule 9(b), "Twombly and Iqbal's pleading standards must still be applied to test complaints that contain claims of fraud." Eclectic Props. East, LLC v. Marcus & Millichap Co., 751 F.3d 990, 995 n.5 (9th Cir. 2014). This means that "[p]laintiffs must still plead facts establishing scienter with the plausibility standard required under Rule 8(a)." DeLeon v. Wells Fargo Bank, N.A., No. 10-CV-01390-LHK, 2011 WL 311376, at *8 (N.D. Cal. Jan. 28, 2011) (citing Iqbal, 556 U.S. at 686, 129 S.Ct. 1937) (conclusory allegations regarding knowledge of falsity fails to plausibly show scienter or knowledge of falsity necessary for fraud claim); Gilliland v. Chase Home Fin., LLC, No. 2:13-cv-02042 JAM-AC, 2014 WL 325318, at *6 (E.D. Cal. Jan. 29, 2014) (same); see also Tabletop Media, LLC v. Citizen Systems of Am. Corp., No. CV16-7140 PSG, 2017 WL 3081690, at *4 C.D. Cal. June 16, 2017 (same). The Pembertons cannot plausibly satisfy this standard. The Pembertons allege that Nationstar's "method of calculating mortgage
The Pembertons' allegations regarding Nationstar's intent to defraud fare no better. "Intent to defraud is defined as the intent to induce reliance on a knowing misrepresentation or omission." Moss v. Kroner, 197 Cal.App.4th 860, 129 Cal.Rptr.3d 220, 226 (2011). "[M]ere conclusory allegations" that representations or omissions "were intentional and for the purpose of defrauding and deceiving plaintiffs... are insufficient." Linear Tech. Corp. v. Applied Materials, Inc., 152 Cal.App.4th 115, 61 Cal.Rptr.3d 221, 234 (2007); see also see also Sukonik v. Wright Med. Tech., Inc., No. CV 14-08278 BRO (MRWx), 2015 WL 10682986, at *15 (C.D. Cal. Jan. 26, 2015) ("[A]llegations of intent must still meet Rule 8(a)'s plausibility standard under Twombly and Iqbal."). The Pembertons allege that Nationstar "knowingly started to purchase Option Arm Mortgages that had a separately reportable income component to the seller (i.e. unpaid deferred interest) ... with the intent to convert it into an asset note" so that there was "no separately reportable income component." (FAC ¶ 18.) In the Pembertons' view, "[t]hrough its purchase Nationstar effectively transformed interest to principal without notice to borrowers[.]" (Id. ¶ 18.) However, whatever Nationstar's alleged motive was for purchasing a portfolio of Option ARM loans, the Pembertons' allegations do not plausibly show an intent to defraud with respect to Nationstar's Section 6050H reporting. The Pembertons' Note, which Nationstar did not create, treats deferred interest as principal and did so before Nationstar ever began to service the Pembertons' loan. As the Court has discussed, the Pembertons' Note also gave them clear and repeated notice that deferred interest would be treated as principal under the contract. Given these facts, the Pembertons cannot plausibly allege that Nationstar intended to defraud them. Accordingly, the Court dismisses the Pembertons' fraud claim with prejudice.
The Pembertons assert a claim against Nationstar under California's Unfair Competition Law ("UCL"), which prohibits "any unlawful, unfair or fraudulent business act or practice." Cal. Bus. & Prof. Code § 17200. "Each prong of the UCL is a separate and distinct theory of liability" and "an independent basis for relief." Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 731 (9th Cir. 2007) (citation omitted); see also Cel-Tech Commc'ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal.4th 163, 83 Cal.Rptr.2d 548, 973 P.2d 527, 539 (1999). The Pembertons argue that they have stated a UCL claim under any of its prongs. (ECF No. 54 at 25-28.) Nationstar disputes this and further argues that even if a UCL claim is plausible, the Court should abstain from resolving it. (ECF No. 55 at 29-32.) The Court concludes that while the Pembertons have failed to state a claim under the fraudulent and unlawful prongs and cannot plausibly do so, the Pembertons have stated a claim under the unfair prong that does not warrant UCL abstention.
"A business practice is fraudulent under the UCL if members of the public are likely to be deceived." Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152, 1169 (9th Cir. 2012) (citation omitted). The fraudulent prong thus requires a plaintiff to "show deception to some members of the public, or harm to the public interest," or to allege that "members of the public are likely to be deceived," by the defendants' conduct. Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F.Supp.2d 1099, 1121 (C.D. Cal. 2001); Schnall v. Hertz Corp., 78 Cal.App.4th 1144, 93 Cal.Rptr.2d 439 (2000). A fraudulent prong claim must also satisfy Rule 9(b)'s heightened pleading standard by stating with particularity the circumstances constituting the allegedly fraudulent practice, including the who, what, when, where, and how of the misconduct charged. Ebeid ex rel. United States, 616 F.3d at 998; Kearns, 567 F.3d at 1125.
The Pembertons defend their fraudulent prong claim by asserting that "Nationstar made misrepresentations to the public" without expressly spelling out what those misrepresentations were. (ECF No. 54 at 28.) The Court does not doubt that the misrepresentations to which the Pembertons refer is that the interest amount Nationstar reports in Forms 1098 does not include deferred interest payments. The Court has already rejected as implausible the Pembertons' allegations that such interest amounts were misrepresentations when made in its analysis of the Pembertons' common law fraud claim. Although a fraudulent prong claim "is distinct from common law fraud and does not require a plaintiff to plead and prove the elements of a tort," "courts have been unwilling to impose liability under the fraudulent prong of the UCL" when "a defendant lacked knowledge of the facts that rendered its representations misleading at the time it made the representations." Kowalsky v. Hewlett-Packard Co., 771 F.Supp.2d 1156, 1159-60, 1161 (N.D. Cal. 2011); see also Neu v. Terminix Int'l, Inc., No. C 07-6472 CW, 2008 WL 2951390, at *3-4 (N.D. Cal. July 24, 2008) (finding UCL fraudulent prong claim implausible when studies relied on by plaintiff to show falsity of representations were published after the defendant's statements at issue in case). For the reasons set forth in the Court's analysis of the Pembertons' fraud claim, the Court concludes that the Pembertons cannot plausibly allege that Nationstar made a false representation to them when it issued their 2013 Form 1098 and dismisses with prejudice the Pembertons' UCL fraudulent prong claim.
The FAC alleges that Nationstar violated the terms of Section 6050H by failing to include on its Forms 1098 mortgage interest payments the Pembertons made. (FAC ¶ 60.) The Pembertons in turn argue that they have stated a UCL claim under the unlawful prong because Nationstar violated Section 6050H by not reporting deferred interest payments, as shown by the Pembertons' construction of Section 6050H. (ECF No. 54 at 25.) Nationstar contends that that "nothing in [S]ection 6050H addresses whether deferred interest must be included in the amounts reported" in a Form 1098. (ECF No. 55 at 8, 29.) Nationstar therefore argues that the Pembertons have failed to satisfy the "unlawful" aspect of an unlawful prong claim because it did not violate Section 6050H. (Id. at 29.)
The basis of the Pembertons' unlawful prong claim is that Section 6050H requires Nationstar to report deferred interest payments, which Nationstar failed to satisfy when it issued the Pembertons' 2013 Form 1098. (FAC ¶ 60.) As discussed, a plain reading of Section 6050H does not address whether, when, or how to report deferred interest payments, nor do Section 6050H's implementing regulations provide guidance on these issues. See Strugala, 2015 WL 5186493, at *4; Rovai, 2015 WL 3613748, at *3. The Court is not persuaded that the Pembertons have alleged factual allegations which plausibly satisfy the unlawful prong's requirement that the defendant's conduct "must violate" a borrowed statute or "be forbidden by law." See Webb, 499 F.3d at 1082; McVicar v. Goodman Global, Inc., 1 F.Supp.3d 1044, 1053 (C.D. Cal. 2014). If the Pembertons had contended that Nationstar failed to report interest that it is undoubtedly required to report, such as accrued monthly interest the Pembertons paid, the Court would sustain this claim. But this has never been the Pembertons' assertion. Nor do the Pembertons point this Court to any other law to sustain their unlawful prong claim. (See ECF No. 54 at 25-27) (solely discussing alleged violation of Section 6050H.) Accordingly, the Court dismisses the Pembertons' UCL unlawful prong claim.
The UCL does not define the term "unfair" and the proper definition of what qualifies as "unfair" conduct against consumers is currently in flux among California courts. Davis v. HSBC Bank, 691 F.3d 1152, 1169 (9th Cir. 2012) (citation omitted). Despite this flux, California courts have used two tests for consumer claims of unfair conduct: the "public policy" test and the "balancing test."
Under the public policy test, a plaintiff must show that the defendant's alleged practice violates some public policy. See Fraley v. Facebook, Inc., 830 F.Supp.2d 785, 813 (N.D. Cal 2011). This test requires that the claim "be tethered to some specific constitutional, statutory, or regulatory provisions." McVicar, 1 F.Supp.3d at 1054 (citing Scripps Clinic v. Superior Court, 108 Cal.App.4th 917, 134 Cal.Rptr.2d 101 (2003) and Gregory v. Albertson's, Inc., 104 Cal.App.4th 845, 128 Cal.Rptr.2d 389 (2002) (internal quotation marks omitted)). By doing so, some courts have suggested that the public policy test potentially "collaps[es] the `unfair' prong' into the `unlawful' prong." McVicar, 1 F.Supp.3d at 1054. This Court sees no such issue because a business practice may be "unfair ... in violation of the UCL even if the practice does not violate any law."
The Pembertons' allegations are sufficient to state an unfair prong claim under the public policy test. The Pembertons allege that as a result of Nationstar's conduct, "Plaintiffs have not been able to correctly state their taxes or obtain the full mortgage interest deduction they are entitled to under 26 U.S.C. [§] 163." (FAC ¶ 21.) Section 163 permits taxpayers to deduct home mortgage interest payments. 26 U.S.C. §§ 163(a), (h). It undeniably represents an established public policy, which Section 6050H reporting facilitates.
Under the balancing test, a business practice is "unfair" "when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers." S. Bay Chevrolet v. Gen. Motors Acceptance Corp., 72 Cal.App.4th 861, 85 Cal.Rptr.2d 301, 316 (1999); see also Hodsdon v. Mars, Inc., 162 F.Supp.3d 1016, 1026 (N.D. Cal. 2016). This test requires courts to "examine the practice's impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer," and "weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim." Davis, 691 F.3d at 1169 (quotations and citation omitted); McKell, 49 Cal.Rptr.3d at 240. The balancing test should not be a particularly difficult test to satisfy at the motion to dismiss stage. See Ellsworth v. U.S. Bank, N.A., 908 F.Supp.2d 1063, 1090 (N.D. Cal. 2012) (finding that plaintiff's allegations "satisf[y] the balancing test given the lenient standard on a motion to dismiss").
The Pembertons allege that Nationstar has failed to report millions of dollars in mortgage interest that it has actually received from consumers with Option ARM loans, caused taxpayers to "unknowingly file erroneous tax returns" and "permanently los[e] valuable tax deductions," and caused the Pembertons to take a smaller tax deduction in 2013 and file an incorrect tax return. (FAC ¶¶ 2, 12, 21-22.) They further allege that the IRS rejects attempts by taxpayers to seek a deduction for an interest amount higher than that reported in a Form 1098. (Id. ¶¶ 13-14.) Taking these allegations as true, they
Nationstar, however, contends that its reporting does not pose substantial and unavoidable injury to the Pembertons because the Pembertons "could have avoided injury by attempting to claim a greater deduction than the amount of interest reported on the Forms 1098." (ECF No. 55 at 31.)
As for the utility of Nationstar's conduct, the Court presently has no basis to find that Nationstar's failure to report deferred interest payments has any utility, let alone utility that outweighs the gravity of the alleged harm to the Pembertons. See Fraley, 830 F.Supp.2d at 813 (reaching the same conclusion in sustaining UCL unfair prong claim under balancing test). Nationstar has never argued that reporting deferred interest payments would impose any meaningful burden on it. At oral argument, it was suggested that reporting deferred interest may be as simple as establishing a computer program that tracks deferred interest and reporting those numbers to the IRS and individuals like the Pembertons. Accordingly, the Court cannot find a meritorious defense of Nationstar's practice at this stage. See, e.g., Backus v. General Mills, 122 F.Supp.3d 909, 930 (N.D. Cal. 2015) (sustaining unfair prong claim when plaintiff alleged harms "that could be avoided in a cost-effective way" and "because [the defendant] has not submitted a meritorious argument regarding the utility of the practice").
Nationstar does not expressly assert a justification for not reporting deferred interest, but the Court finds two grounds asserted in Nationstar's briefing, neither of which is compelling or outweighs the harm the Pembertons allege. First, while Nationstar points to the contract as permitting it to treat deferred interest as
Nationstar argues that if the Court finds that the Pembertons have stated a UCL claim, the Court should nevertheless abstain from adjudication due to the IRS's administration of the federal tax scheme. (ECF No. 55 at 29.) The Court declines to do so because abstention is not warranted on the unfair prong claim.
Arising from the equitable nature of the injunction and restitution remedies available under the UCL is a court's discretion to abstain from employing these remedies. Alvarado v. Selma Convalescent Hospital, 153 Cal.App.4th 1292, 64 Cal.Rptr.3d 250, 253 (2007). California courts have recognized that abstention from deciding a UCL claim may be proper "in the rare instance." Rex. v. Chase Home Fin. LLC, 905 F.Supp.2d 1111, 1134 (C.D. Cal. 2012). For example, courts may abstain when a lawsuit involves wholesale policy determinations better suited for a legislature or an administrative agency, rather than a judge. See Cal. Grocers Ass'n v. Bank of Am., 22 Cal.App.4th 205, 27 Cal.Rptr.2d 396, 404 (1994) (finding court abused discretion by granting injunctive relief under UCL because "this case implicates a question of economic policy: whether service fees charged by banks are too high and should regulated."); see also Shamsian v. Dep't of Conservation, 136 Cal.App.4th 621, 39 Cal.Rptr.3d 62, 78 (2006). Judicial abstention may be appropriate if granting injunctive relief would be unnecessarily burdensome for the trial court to monitor and enforce. See Diaz v. Kay-Dix Ranch, 9 Cal.App.3d 588, 88 Cal.Rptr. 443, 451 (1970) (affirming judgment that declined to impose injunctive relief that "would subject farm operators to burdensome, if bearable, regulation, and the courts to burdensome, if bearable, enforcement responsibilities"). Beyond these limited circumstances, "it is an abuse of discretion to use the equitable abstention doctrine to deny relief where plaintiffs' claims require the court `to perform the basic judicial functions of contractual and statutory interpretation,' even where a government agency offers an `administrative process by which' plaintiffs can seek relief." Rex, 905 F.Supp.2d at 1134-35 (quoting Shamsian, 39 Cal.Rptr.3d at 78).
Any persuasive force that Nationstar's abstention argument may have had is blunted by the Court's dismissal of the Pembertons' fraudulent and unlawful prong claims — the only claims which could possibly raise the specter of policymaking by calling for a definitive interpretation of Section 6050H's treatment of deferred interest and applying that to the Pembertons' circumstances in the absence of IRS guidance. Because the Pembertons cannot plead plausible claims under the fraudulent or unlawful prongs, the Court is not "assum[ing]
As for the Pembertons' unfair prong claim, the specter of making legislative policy determinations is not presented based on the application of the unfair prong tests to the conduct the Pembertons allege. To the extent the Pembertons' claim is premised on Section 163, that provision itself reflects a legislative policy, the soundness of which this Court does not second-guess. To the extent the Pembertons' claim is premised on balancing the harms alleged versus the justifications for and utility of Nationstar's reporting practice, Nationstar has not shown "the analyses required to adjudicate Plaintiff[s]' UCL claim ... to be overly complex[.]" Wehlage v. EmPres Healthcare, Inc., 791 F.Supp.2d 774, 786 (N.D. Cal. 2011).
Nationstar has also failed to show how injunctive relief might burden the Court, or require the imposition of burdensome regulation. See McMillan v. Lowe's Home Ctrs., LLC, No. 1:15-cv-00695 DAD SMS, 2016 WL 2346941, at *5 (E.D. Cal. May 4, 2016) (case involved injunctive relief against only two parties, as opposed to the "issu[ance of] a network of injunctions across the state or to engage in a longterm monitoring process"). The relief the Pembertons request is simply an order that Nationstar report deferred interest payments and provide corrected forms for prior years. (FAC ¶ 71.) While the Court lacks the power to order Nationstar to specifically report deferred interest payments in Forms 1098, as the Court discusses herein, Nationstar has failed to show that any other injunctive relief this Court could order will upset any administrative scheme.
The Pembertons allege a negligence claim against Nationstar in the alternative to their fraud claim. (FAC ¶ 83 ("Assuming that Nationstar did not intentionally report incorrect amounts of mortgage interest on the Forms 1098 that it sent to plaintiffs[.]").) They allege that "Nationstar had a legal duty [under Section 6050H] to report accurately only the interest Nationstar `received' during each calendar year" and a further "duty to correct any mistakes on an incorrect Form 1098 as soon as possible after determining that a wrong amount had been reported." (Id. ¶ 82.) Nationstar allegedly breached its legal duties to the Pembertons by its respective failures to accurately report their interest payments in their 2013 Form 1098 and to correct the information reported after the
To state a negligence claim under California law, a plaintiff must allege: (1) a legal duty of care owed by the defendant to her, (2) a breach of that duty, and (3) proximate causation of that breach to (4) the plaintiff's injury. Merrill v. Navegar, Inc., 26 Cal.4th 465, 110 Cal.Rptr.2d 370, 28 P.3d 116, 123 (2001); see also Steinle v. City & Cty. of San Francisco, 230 F.Supp.3d 994, 1019 (N.D. Cal. 2017). "The threshold element of a cause of action for negligence is the existence of a duty to use due care toward an interest of another that enjoys legal protection against an unintentional invasion." Paz v. State of California, 22 Cal.4th 550, 93 Cal.Rptr.2d 703, 994 P.2d 975, 981 (2000). The existence of a duty is a question of law to be resolved by a court on a case-by-case basis. Id.; Alvarez v. BAC Home Loans Servicing, L.P., 228 Cal.App.4th 941, 176 Cal.Rptr.3d 304, 306 (2014); see also Flores v. EMC Mortg. Co., 997 F.Supp.2d 1088, 1113 (E.D. Cal. 2014) ("The existence of a legal duty to use reasonable care in a particular factual situation is a question of law for the court to decide."). Both parties dispute extensively whether Nationstar owed any duty to the Pembertons — there is no dispute about whether the Pembertons have adequately alleged a breach or resulting harm if a duty exists. Accordingly, the Court focuses solely on whether a duty of care exists in this case.
In California, "as a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money."
California courts apply a non-exhaustive six-factor test to determine "whether a financial institution owes a duty of care to a borrower-client" even when the financial institution has not exceeded its role as a mere lender. See Nymark v. Heart Fed. Savings & Loan Ass'n, 231 Cal.App.3d 1089, 283 Cal.Rptr. 53, 58 (1991). A court "balanc[es] various factors, including: (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to the plaintiff, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct, and (6) the policy of preventing future harm." Id. (applying six-factor test set forth in Biakanja v. Irving, 49 Cal.2d 647, 320 P.2d 16 (1958), to determine whether financial institution owed a duty of care to borrower).
To assess whether a duty exists, a court must first "identify[] the specific conduct by [the defendant] which [the plaintiff] claims was negligent so to limit our analysis `the specific action the plaintiff claims the particular [defendant] had a duty to undertake in the particular case.'" Jolley, 153 Cal.Rptr.3d at 568 (quoting Vasquez v. Residential Investments, Inc., 118 Cal.App.4th 269, 12 Cal.Rptr.3d 846 (2004)). The allegations show that Nationstar allegedly failed (1) to accurately report the interest it received from the Pembertons during the calendar year in accordance with Section 6050H and, relatedly, (2) to correct any mistakes on the Form 1098 it provided "as soon as possible after determining that a wrong amount
The Pembertons argue that a duty exists because Section 6050H requires an interest recipient to report interest payment information to the interest payor, as opposed to just the IRS. (ECF No. 54 at 22.) They further argue that the Biakanja factors support a duty because: (1) the transaction, i.e., provision of a Form 1098 and calculation of the amounts reported therein, was intended to affect them, (2) they have no input whatsoever in how Nationstar reports interest in a Form 1098, (3) borrowers, tax preparers and the IRS all rely on the Forms 1098, (4) there is a "dollar for dollar" connection between the amount of misreported interest and their injury, (5) Nationstar has moral blame as a "sophisticated financial institution whose very business it is to correctly service loans," and (6) the policy of preventing future harm favors them because Nationstar can prevent the harm to the Pembertons by simply changing its reporting policy. (Id. at 24-25.) For its part, Nationstar argues that "[a] lender owes its borrower no duty with respect to the borrower's tax obligations" and, in this instance, an information return issuer "owes a duty only to the IRS, not the taxpayer." (ECF No. 55 at 26.) Nationstar makes no other argument regarding the Biakanja factors, but instead asserts that the lack of a federal right of action under Section 6050H forecloses the Pembertons' negligence claim. (Id. at 27.)
After completion of the parties' briefing in this case, one district court dismissed with prejudice a negligence claim concerning Section 6050H reporting. Applying the Biakanja factors, the court determined that the defendant bank's issuance of a Form 1098 is "for its own benefit, to fulfill its own statutory obligations." Neely v. JP Morgan Chase Bank, N.A., No. 16-cv-01924, ECF No. 72 at 7 (C.D. Cal. April 10, 2018). The court then determined that the foreseeability of harm was "remote" because a taxpayer has an "independent duty to keep records of his interest payments" under IRS Revenue Ruling 70-647, which attenuated the relationship between the plaintiff's injury and the alleged misreporting. Id. (citing IRS Rev. Rul. 70-647, 1970-2 C.B. 38, 1970 WL 21200, at *2 (1970).) The court further reasoned that "placing the burden of accurate reporting on Chase would negate Neely's independent duty." Id. This Court respectfully departs from this reasoning.
Neither party disputes that Section 6050H imposes a statutory obligation on Nationstar, as an interest recipient, to report interest payments it receives. That obligation does not make Nationstar responsible for the Pembertons' tax obligations, but it plainly requires Nationstar to provide "correct information" in its reporting, even accepting that the Pembertons have their own independent duties in respect of their tax obligations.
More fundamentally, Nationstar's statutory obligation to the Pembertons does not foreclose a duty of care in how it discharges that obligation, but rather may properly serve as the basis for a duty.
The Pembertons' allegations otherwise support a duty of care under the Biakanja factors. Consistent with the Court's determination that the Pembertons have standing to pursue their claims, the allegations show that their injury was foreseeable and sufficiently closely connected to Nationstar's alleged failure to account for deferred interest. See Pemberton v. Nationstar Mortgage LLC, No. 14-cv-1024-BAS-WVG, 2017 WL 4759018, at *5-6 (S.D. Cal. Oct. 20, 2017). The Court does not find that Nationstar's conduct is particularly morally blameworthy insofar as it concerns Nationstar's initial provision of Forms 1098. However, the allegations show that the injury the Pembertons allege — which assumes that the IRS rejects attempts by taxpayers to claim a higher deduction than the amount reported on a Form 1098 — could easily be prevented by Nationstar merely reporting deferred interest. Accordingly, the Pembertons' allegations are sufficient to show a duty of care at the pleading stage.
As a final issue on the duty alleged to arise from Section 6050H, Nationstar relies on Sierra-Bay to argue that California law does not permit the Pembertons to sue in negligence because Section 6050H lacks a private cause of action. (ECF No. 55 at 27.) A close review of Sierra-Bay shows it has limited application to the Pembertons' claim. The Sierra-Bay defendants had exercised their power of sale in certain deeds of trust after the plaintiff borrower failed to repay loans he obtained through the federal Farm Credit System. Sierra-Bay, 277 Cal.Rptr. at 754. The plaintiff attempted to raise a claim under the Farm Credit Act of 1971 and several negligence claims. The plaintiff invoked Section 669 of the California Evidence Code to state a negligence claim, a provision which treats the violation of a statute as negligence per se.
Sierra-Bay further determined, even if a duty of care could be implied, a negligence claim in that case would stand as an obstacle to the federal statutory scheme. Id. at 763 ("Since we may not recognize a state cause of action if to do so would stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, it follows that we may not recognize a private cause of action for damages here."). This reasoning clearly sounds in preemption. See Wash. Mut. Bank v. Superior Court, 75 Cal.App.4th 773, 89 Cal.Rptr.2d 560, 571 n.16 (1999) (noting that Sierra-Bay relied on an earlier "implied preemption case" and concluding that "[w]e also read Sierra-Bay as an implied preemption case."). The Court has noted that Nationstar concedes it does not raise a preemption argument at this stage and the Court declines to undertake such an analysis now. Thus, Sierra-Bay does not foreclose the Pembertons' negligence claim.
The Pembertons also allege that Nationstar had "a duty to correct any mistakes on Forms 1098 as soon as possible after determining that a wrong amount had been reported." (FAC ¶ 82.) This duty is related to the duty of care concerning Nationstar's initial Section 6050H reporting, but it separately arises from how Nationstar allegedly investigated and responded to the Pembertons' complaint. Nationstar makes no argument that a duty of care cannot arise from this conduct. (ECF No. 55 at 25-29 (not addressing the issue).)
The Pembertons allege they brought to Nationstar's attention its alleged failure to report deferred interest payments in their 2013 Form 1098 and requested a revised Form 1098. (FAC ¶ 15.) Nationstar acknowledged the Pembertons' complaint and referred it to the "Research Department." (Id., Ex. D.) Nationstar subsequently responded to the Pembertons on March 27, 2017 — a response which expressly acknowledged that it concerned Form 1098 reporting. (Id. ¶ 16, Ex. E) ("This is in response to your request received March 3, 2014 regarding the 2013 Mortgage Interest Statement Form (Form 1098).") Nationstar did not contend that deferred interest is not deductible or that it could not report deferred interest amounts in a Form 1098. (Id. ¶ 16, Ex. E.) Rather, Nationstar rejected the Pembertons' claim on the grounds that: (1) "[t]here was [sic] no deferred amounts or negative amortization on your loan for the period of time that Nationstar has been the servicer" and (2) "we (sic) were not provided with any previously deferred interest amounts from the prior servicer nor is there any way for us to calculate amounts prior to when we acquired your loan." (Id. ¶ 16, Ex. E.) The Pembertons challenge Nationstar's investigation into their complaint by alleging that they were "easily able" to obtain their payment history from their prior loan servicer. (Id. ¶ 17.)
Applying the Biakanja factors to these allegations, the Court finds that the Pembertons have adequately alleged a separate duty. First, Nationstar's investigation of the Pembertons' complaint and response was intended to affect them because it was expressly directed to the Pembertons and impacted whether they could amend their tax return. See, e.g., Dougherty v. Bank of Am., N.A., 177 F.Supp.3d 1230, 1258 (E.D. Cal. 2016) (defendant bank's and loan servicer's efforts to assist plaintiff were intended to affect plaintiff because the result of those efforts would affect plaintiff).
Second, although the Pembertons expressly told Nationstar the basis for their
Nationstar's moral blame is also greater with respect to the Pembertons' allegations on this issue given its role. Nationstar purchased the Pembertons' loan from a different servicer, services their loan, undertook an investigation into the Pembertons' complaint, and, based on the allegations, had the discretion regarding whether to issue a revised Form 1098. See Gerbery, 2013 WL 3946065, at *12. The policy of preventing future harm is particularly compelling. The Pembertons' allegations show that borrowers who have deferred interest and whose loans Nationstar services face the risk of future harm, even when they expressly inform Nationstar regarding its lack of reporting deferred interest. Nationstar acknowledges that loan servicers have "divergent practices regarding the reporting of capitalized interest." (ECF No. 55 at 10.) At oral argument, it became clear that some loan servicers and banks do in fact report deferred interest, even in the absence of clear guidance from the IRS about whether and when to do so. In this context, the Pembertons' allegations counsel that the policy of preventing future harm points toward a duty. Accordingly, the Court finds that the Biakanja factors support finding a duty of care on this conduct.
The Pembertons' fifth cause of action is for a declaratory judgment to "resolve the issue as to whether Nationstar is correctly reporting Class Members' mortgage interest payments on Form[s] 1098[] and whether Nationstar should be required to provide corrected [Forms 1098] to the Class Members for all years in which its policies did not conform to law." (FAC ¶ 66.) Nationstar contends that the Declaratory Judgment Act and the Anti-Injunction Act bar the Pembertons' claim
The Declaratory Judgment Act provides that declaratory relief is not available in a case within a court's jurisdiction "with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986 ..." 28 U.S.C. § 2201(a) (emphasis added). The Anti-Injunction Act in turns provides that subject to certain exceptions, "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by an person ..." 26 U.S.C. § 7421(a). "The purpose of the federal tax exception to the Declaratory Judgment Act is to protect the government's ability to assess and collect taxes free from pre-enforcement judicial interference, and to require that disputes be resolved in a suit for refund." California v. Regan, 641 F.2d 721, 722 (9th Cir. 1981). "The federal tax exception of [the Declaratory Judgment Act] is `at least as broad as the Anti-Injunction Act.'" Id. (citing Bob Jones Univ. v. Simon, 416 U.S. 725, 732 n.7, 94 S.Ct. 2038, 40 L.Ed.2d 496 (1974)); Daines v. Alcatel, S.A., 105 F.Supp.2d 1153, 1158 (E.D. Wash. 2000) ("[A]lthough the Declaratory Judgment Act exception would appear to prohibit a wider range of court action than the Anti-Injunction Act, the Declaratory Judgment Act is read to be coextensive with the Anti-Injunction Act.... [T]ogether, [they] prohibit only injunctive relief which would restrain the assessment or collection of federal taxes."). There are only two exceptions to the Declaratory Judgment Act's bar on declaratory relief: (1) when the government could under no circumstances ultimately prevail and where the prerequisites for equity jurisdiction are met and (2) an aggrieved party has no access at all to judicial review. Id. at 723 (citing, inter alia, Bob Jones Univ., 416 U.S. at 742, 746, 94 S.Ct. 2038).
The Court acknowledges that unlike the plaintiffs in Regan and Daines, the Pembertons do not seek to exempt Nationstar from filing a Form 1098, nor to withdraw forms already provided to the IRS, but rather focus on the accuracy of information reported in the forms. See Regan, 641 F.2d at 722 (the State of California sought declaratory and injunctive relief from the requirement that it file an annual information return with the IRS pursuant to ERISA provision governing employee pension benefit plans); Daines, 105 F.Supp.2d at 1154 (plaintiff sought a declaratory judgment that defendants should not have issued certain Form 1099s and an order directing defendants to rescind the forms).
Yet the possibility that the issuance of a declaratory judgment that Nationstar's Form 1098 reporting was and is wrongful under Section 6050H, as a matter of law, may have some impact on the IRS's discretion regarding what an interest recipient must report to comply with Section 6050H and the IRS's implementing regulations. The Pembertons do not assert that any exception to the Declaratory Judgment Act's prohibitions applies. The possibility of interference thus counsels that the relief the Pembertons seek is inappropriate under the Declaratory Judgment Act. See Daines, 105 F.Supp.2d at 1154; see also Neely v. JP Morgan Chase Bank, N.A., No. 16-cv-01924, ECF No. 72 at 7-8 (C.D. Cal. April 10, 2018). The Court concludes that, as pleaded, the declaratory relief the Pembertons seek turns on a controversy "with respect to federal taxes within the meaning of the Declaratory Judgment Act." Regan, 641 F.2d at 722; see also Neely v. JP Morgan Chase Bank, N.A., No. 16-cv-01924, ECF No. 72 at 7-8 (C.D.
The Court, however, does not find that the Declaratory Judgment Act or the Anti-Injunction Act otherwise preclude any declaratory or injunctive relief the Court could order in this case.
For example, this Court could declare Nationstar's investigation of the Pembertons' complaint regarding deferred interest payments and subsequent refusal to provide supplemental information to have been negligent. Relatedly, the Court could properly order Nationstar to provide the Pembertons and similar individuals with supplemental information regarding deferred interest payments. The Court could also properly order Nationstar to provide information to the IRS regarding deferred interest, identified separately from the payments that no one doubts must be reported on a Form 1098 to satisfy Section 6050H and its implementing regulations. The provision of supplemental information on deferred interest would not mandate that such payments must be treated as deductible by the IRS, but it would provide information of which the IRS could take notice to make its own determinations — particularly as it decides how to treat deferred interest payments for the purposes of the home mortgage interest deduction.
Nationstar argues that the Pembertons' sixth cause of action, entitled
As a final matter, the Court addresses Nationstar's "common law exclusive enforcement doctrine" argument. Nationstar argues that the Pembertons' state law claims are "barred by the common-law doctrine of exclusive enforcement." (ECF No. 55 at 5, 10-16.)
Nationstar's reliance on the "exclusive enforcement doctrine" stems from the district court's decision in Smith v. Bank of America, N.A., No. 14-cv-6668-DSF(PLA), 2015 WL 12979198 (C.D. Cal. Feb. 3, 2015), which was vacated and remanded by the Ninth Circuit, 679 Fed. App'x 549, 550 (9th Cir. 2017). In ruling on Bank of America's initial motion to dismiss, the Smith court determined that the plaintiffs sought to enforce a statute that does not create a private right of action and "falls within the IRS's comprehensive enforcement and regulatory scheme." Id. at *3. The Smith court identified five "factors" as ones that courts have considered to determine whether "an agency possesses exclusive authority to enforce a statute or claim": "(1) whether the statute underlying the plaintiff's claim provides for a private right of action; (2) whether the regulatory scheme includes an administrative enforcement mechanism; (3) whether the plaintiff could obtain administrative relief directly from the agency; (4) whether administrative decisions are judicially reviewable; and (5) whether the agency administers and enforces the law on which the defendant's purported liability is based." Id. The Smith court found that the plaintiffs failed each of these factors. Nationstar faults the Pembertons for failing to distinguish their case from the vacated Smith opinion and its "exclusive enforcement doctrine" analysis. (ECF No. 55 at 15.)
This Court can ascertain no "exclusive enforcement doctrine" which mandates dismissal of the Pembertons' state law claims. What Nationstar dubs as the "common law
The remaining four factors of the "exclusive enforcement doctrine" concern the extent and nature of a federal administrative scheme and do not mandate dismissal. Like Bank of America in the Smith case, Nationstar previously asserted that the IRS has "exclusive jurisdiction" over the issues raised in this case. (ECF No. 11 at 12-13.) Although the Court did not explicitly address the argument, the Court suggested that "[i]t is possible that the Form[s] 1098[], if inaccurate, are challengeable with the IRS or under a common law theory[.]" (ECF No. 17 at 4.) That suggestion necessarily rejected Nationstar's exclusive jurisdiction argument. Likewise, this Court's imposition of a primary jurisdiction stay forecloses the argument that the IRS is the "exclusive" authority to address the Pembertons' claims. The primary jurisdiction doctrine "is a prudential doctrine under which courts may, under appropriate circumstances, determine that initial decisionmaking responsibility should be performed by the relevant agency rather than the courts." Syntek Semiconductor Co. v. Microchip Tech. Inc., 307 F.3d 775, 780 (9th Cir. 2002) (emphasis added). The doctrine does not "implicate[] the subject matter jurisdiction of the federal courts." Id. By its nature, the doctrine recognizes that federal courts and administrative agencies have concurrent jurisdiction over an issue for which agency guidance may be appropriate. The Court's decision to implement a primary jurisdiction stay therefore rested on a rejection of Nationstar's exclusive jurisdiction argument for dismissal. Accordingly, the Court rejects Nationstar's "common law exclusive enforcement" argument at this stage as well.
For the foregoing reasons, the Court
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Nationstar relies on two additional cases to argue that no duty of care can exist with respect to its provision of Forms 1098. Neither case supports this. For one, Rumfelt did not find that there was no duty of care regarding W-2 reporting, but rather involved a plaintiff who failed to plead any facts which would show a federal claim. See Rumfelt v. Jazzie Pools, Inc., No. 1:11CV217 JCC TCB, 2011 WL 2144553, at *4 (E.D. Va. May 31, 2011). The court expressly declined to address negligence claims under state law. Id. at *8. Second, Arvin did not concern whether a duty of care exists, but rather whether a private cause of action existed under federal law for the alleged misreporting there. Arvin v. Go Go Inv. Club, No. C 96-3264 FMS, 1996 WL 708589, at *4 (N.D. Cal. Dec. 5, 1996), aff'd, 129 F.3d 124 (9th Cir. 1997). The case is inapposite in light of the Court's dismissal of a claim under Section 6050H.
