EDWARD M. CHEN, United States District Judge.
Plaintiffs Monica Chandler, Susan McShannock, and Mohamed Meky (collectively "Plaintiffs") filed suit against JPMorgan Chase Bank ("Chase") on behalf of a putative class. Plaintiffs assert claims under the California Unfair Competition Law, Ca. Bus. & Prof. Code § 17200 et seq. ("UCL"), based on Chase's alleged violation of a California law requiring mortgage lenders to pay interest to mortgagors on funds held in escrow accounts for residential mortgages. Currently pending before the Court is Chase's motion to dismiss or, in the alternative, stay the case. Docket No. 38 ("Mot."). For the reasons discussed below, the Court
The Consolidated Class Action Complaint alleges the following. Plaintiffs took out mortgage-secured loans from Washington Mutual Bank ("WaMu"), a federal savings bank, between 2005 and the end of 2007. Docket No. 37 (Consolidated Class Action Complaint, hereinafter "Con. Compl.") ¶¶ 5, 9, 13. When WaMu failed in 2008, its assets, including Plaintiffs' mortgages, were acquired by Chase via the Federal Deposit Insurance Corporation ("FDIC"). Id. ¶ 5; Mot. at 1.
The mortgage agreements at issue required Plaintiffs to make payments into escrow accounts held by the lender, in order to cover any potential taxes and
Docket No. 38-2, Exhs. A-F § 3.
Plaintiffs assert that Chase's failure to pay escrow interest on their mortgage accounts violates California Civil Code § 2954.8 and 15 U.S.C. § 1639d(g). Con. Compl. ¶¶ 35-37. According to Plaintiffs, these violations constitute "unlawful" conduct within the meaning of the UCL. They also assert that Chase's alleged conduct violates the "unfair" prong of the UCL. Id. ¶¶ 38-40.
Plaintiff McShannock and Plaintiff Chandler initially filed separate class action suits against Chase asserting the same underlying claims. See Docket No. 19 (Motion to Relate Case). The parties stipulated to consolidate the two cases. See Docket No. 33. In the ensuing Consolidated Complaint, Plaintiffs proposed the following class for certification pursuant to Federal Rule of Civil Procedure 23:
Con. Compl. ¶ 26.
Chase now moves to dismiss under Rule 12(b)(6) on two bases: first, that Plaintiffs failed to comply with the provisions in their mortgage contracts requiring them to provide Chase with notice and an opportunity to cure alleged misconduct before bringing a judicial action; and second, that Plaintiffs' state law claims are preempted by the Home Owners' Loan Act. In the alternative, Chase seeks to stay the case pending the resolution of Lusnak v. Bank of America, N.A., which concerns whether California's mortgage escrow law is preempted by the National Banking Act. 883 F.3d 1185 (9th Cir. 2018), petition for cert. filed, (U.S. Aug. 14, 2018) (No. 18-212).
For a plaintiff to survive a Rule 12(b)(6) motion to dismiss after Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), her factual allegations "must ... suggest that the claim has at least a plausible chance of success." Levitt v. Yelp! Inc., 765 F.3d 1123, 1134-35 (9th Cir. 2014). In other words, the complaint "must allege `factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Id. (citations omitted). "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." Iqbal,
The Ninth Circuit has outlined a two-step process for evaluating pleadings against this standard. "First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively. Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation." Levitt, 765 F.3d at 1135 (citations omitted).
Chase first argues that Plaintiffs' Deeds of Trust contain provisions that require them to give Chase notice and an opportunity to cure any alleged wrongdoing, including actions relating to escrow accounts, before seeking judicial remedies. Mot. at 4. Under the terms of the notice and cure provision:
Docket No. 38-2, Exhs. A-F § 20. The Deed also provides that "[t]he covenants and agreements of this Security Instrument shall bind ... and benefit the successors and assigns of Lender." Id., Exhs. A-F § 13.
The Consolidated Complaint does not contain any allegation that Plaintiffs have complied with the notice and cure provisions in their Deeds of Trust. Plaintiffs state in their opposition to the motion to dismiss that McShannock and Meky sent notices of dispute to Chase after Chase moved to dismiss the original complaint and before Plaintiffs filed the Consolidated Complaint. Id. at 5. Plaintiffs contend Meky gave Chase notice "on behalf of the class before he filed his complaint" because he was not a part of the original action. Id. (emphasis in original). According to Plaintiffs, "Chase rejected these opportunities to cure the breach." Id.
As Chase points out, however, Plaintiffs cannot fix their pleading deficiencies by alleging new facts in their opposition brief. "In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff's moving papers, such as a memorandum in opposition to a defendant's motion to dismiss." Broam v. Bogan, 320 F.3d 1023, 1026 n.2 (9th Cir. 2003) (emphasis in original) (quoting Schneider v. Cal. Dep't of Corr., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998)).
Moreover, even if the Court were to accept Plaintiffs' assertion that they provided notice to Chase after they filed the initial complaint, their actions would not satisfy the notice and cure provision. "If the Notice Provision has any legitimate purpose, it is to promote the resolution of contractual disputes without the expense of litigation—`compliance' after litigation has been initiated is no compliance at all." Gerber v. First Horizon Home Loans
Nor would the purported notice given by Meky "on behalf of the class" suffice, even though he joined as a plaintiff after the original complaint was filed. The notice and cure provision in Plaintiffs' Deeds of Trust specifies that no borrower "may commence, join, or be joined to any judicial action (as either an individual litigant or the member of a class)" prior to giving notice. Docket No. 38-2, Exhs. A-F § 20 (emphases added). The notice provision thus applies to borrowers like Meky who "join" the suit after it is initiated.
The question therefore becomes whether Plaintiffs' failure to comply with the notice and cure provisions warrants dismissal of their suit. Chase contends that such failure is "fatal" to their claims. Mot. at 4. Plaintiffs respond that their "claims are not predicated on any violation of the mortgage contract, but only on violations of § 2954.8
As an initial matter, Plaintiffs' threshold argument that their "statutory rights under Civil Code section 2954.8(a) and the UCL ... are unwaivable as a matter of public policy" is without merit. Opp. at 3. Providing notice to Chase pursuant to the notice and cure provision does not foreclose Plaintiffs from vindicating their statutory rights. "The purpose of this provision is `to give the allegedly breaching party an opportunity to cure its breach.'" Sigwart v. U.S. Bank, 713 F. App'x 535, 537 (9th Cir. 2017) (quoting Higley v. Flagstar Bank, FSB, 910 F.Supp.2d 1249, 1253 (D. Or. 2012)). If Chase had been put on notice of its breach and failed to take corrective action, Plaintiffs could then bring suit under § 2954.8(a) and the UCL. Plaintiffs make no showing that providing such notice would be so burdensome as to impede enforcement of their statutory rights. Requiring compliance with the notice and cure provision therefore is not the equivalent of a coerced waiver of those statutory rights.
Turning to the merits of the notice and cure question, courts have reached differing conclusions. In Giotta v. Ocwen Financial Corporation, the plaintiffs sued the defendant companies for allegedly working in concert to charge inflated fees for servicing mortgage loans that were billed through to the homeowners. No. 15-CV-00620-BLF, 2016 WL 4447150, at *1 (N.D. Cal. Aug. 24, 2016). The plaintiffs' Deeds of Trust contained notice and trust provisions identical in wording to those in this case, and the plaintiffs did not allege that they
At least three other cases have reached the opposite conclusion. In Gerber v. First Horizon Home Loans Corporation, the plaintiff alleged that his mortgage lender charged him a fee not included in his mortgage agreement, and brought causes of action for both breach of contract and violations of the Washington Consumer Protection Act. No. 05-1554P, 2006 WL 581082, at *1 (W.D. Wash. Mar. 8, 2006). The court distinguished the causes of action. It dismissed the breach of contract claim for failure to satisfy the notice provision, since the very purpose of the provision was "to promote the resolution of contractual disputes without the expense of litigation." Id. at *2. In contrast, it found that the state statutory cause of action "involves allegations of deceptive business practices, clearly exists independent of any contract between the parties," and was thus not barred by the plaintiff's failure to give notice. Id. at *3. Next, the court in Kim v. Shellpoint Partners, LLC, held that the notice and cure provision in the plaintiff's deed of trust did not require dismissal of plaintiff's claims under the UCL and the California Homeowners' Bill of Rights because those claims, which challenged mortgage servicing fees, "arise under statute, not the agreement." No. 15CV611-LAB (BLM), 2016 WL 1241541, at *7 (S.D. Cal. Mar. 30, 2016). And in Beyer v. Countrywide Home Loans Servicing LP, the court considered claims similar to those in Gerber and concluded the plaintiff's "unjust enrichment and [Washington Consumer Protection Act] claims exist independently of the parties' mortgage contract" and therefore are not foreclosed by his failure to notify the defendant. No. C07-1512MJP, 2008 WL 1791506, at *3 (W.D. Wash. Apr. 18, 2008), aff'd, 359 F. App'x 701 (9th Cir. 2009).
In Gerber, Kim, and Beyer, the plaintiffs were challenging fees that were allegedly not specified in their loan agreements, so the mortgage lenders' attempts to impose the fees were clearly not "actions pursuant to" the agreements. See Gerber, 2006 WL 581082, at *1; Kim, 2016 WL 1241541, at
Per the notice and cure provision, Plaintiffs are obligated to give notice in two circumstances: first, where their grievance "arises from" Chase's "actions pursuant to" the Deeds of Trust, and second, where they "allege[] that [Chase] has breached any provision of, or any duty owed by reason of," the Deeds of Trust. Docket No. 38-2, Exhs. A-F § 20. As to the first prong, the Deeds of Trust provide that, "Unless an agreement is made in writing or Applicable Law requires interest to be paid on the Funds [in the escrow account], Lender shall not be required to pay Borrower any interest or earnings on the funds." Docket No. 38-2, Exhs. A-F § 3. The "Applicable Law" here is § 2954.8, which requires lenders to pay two percent interest on escrow funds. Cal. Civ. Code § 2954.8(a). The Deeds of Trust, by incorporating § 2954.8, arguably require Chase to pay escrow interest to Plaintiffs. Thus, there is a fair argument that Chase's alleged non-payment of escrow interest is not "pursuant to" the Deeds of Trust, and Plaintiffs were therefore not required to give notice before bringing this suit.
As to the second prong, Plaintiffs allege that Chase is not complying with its duty to pay escrow interest under § 2954.8 and the UCL. This statutory duty "exists independent of any contract between the parties." Gerber, 2006 WL 581082, at *3. It is therefore not "owed by reason of" the Deeds of Trust. This conclusion comports with the purpose of the notice and cure provision, which is to give the defendant an opportunity to correct conduct that is violating the terms of a contract. As in Gerber, Kim, and Beyer, the Plaintiffs' claim has an independent basis in statute, not the contract.
Further, to the extent there is any ambiguity regarding the scope of the notice and cure provision, it must be construed against Chase, the drafter of the contract. See Cal. Civ. Code § 1654 ("In cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist."). To deprive Plaintiffs of recourse to their statutory rights based on an ambiguous contractual provision would also frustrate the consumer protection purposes of those statutes.
Accordingly, Plaintiffs' failure to comply with the notice and cure provisions does not foreclose their claims.
Plaintiffs' UCL claim is premised on the allegation that Chase's failure to pay interest on Plaintiffs' mortgage escrow accounts violates California Civil Code § 2954.8 and 15 U.S.C. § 1639d(g), a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") governing the administration of mandatory escrow accounts. Under the Ninth Circuit's Lusnak ruling, however, Plaintiffs cannot rely on 15 U.S.C. § 1639d(g), because their mortgages all predate the enactment of § 1639d(g). See Lusnak, 883 F.3d at 1197 ("Congress intended the detailed requirements in section 1639d to apply to accounts established pursuant to that section after it took effect in 2013."). Plaintiffs must therefore rest their UCL claims upon § 2954.8.
Section 2954.8(a) "requires financial institutions [making mortgage loans] to pay borrowers at least two percent annual interest on the funds held in the borrowers' escrow accounts." Lusnak, 883
"HOLA empowered the regulatory body, which became the [Office of Thrift Supervision ("OTS")], to authorize the creation of federal savings and loan associations, to regulate them, and, by its regulations, to preempt conflicting state law." Campidoglio LLC v. Wells Fargo & Co., 870 F.3d 963, 971 (9th Cir. 2017). By their terms, the regulations promulgated by OTS "occup[y] the entire field of lending regulation for federal savings associations," 12 C.F.R. § 560.2(a), and preempt "state laws purporting to impose requirements regarding ... [e]scrow accounts," 12 C.F.R. § 560.2(b)(6). Chase argues that Plaintiffs' loans fall within the coverage of HOLA because they originated with WaMu, a federal savings bank. See Mot. at 6. Therefore, Chase reasons, California's escrow interest law is preempted by 12 C.F.R. § 560 with respect to Plaintiffs' loans, and Chase does not have to pay Plaintiffs the escrow interest mandated by § 2954.8(a). Plaintiffs disagree, arguing that their complaint pertains only to Chase's non-payment of escrow interest after it acquired WaMu's assets, and "HOLA preemption does not apply to conduct of a national bank that acquires a loan originated by a federal savings bank." Opp. at 7-8.
"Whether, and to what extent, HOLA applies to claims against a national bank when that bank has acquired a loan executed by a federal savings association is an open question" in the Ninth Circuit. Campidoglio, 870 F.3d at 970-71. Chase cites a line of cases supporting its assertion that HOLA extends to loans held by national banks which originated with federal savings banks. See, e.g., Poyorena v. Wells Fargo Bank, N.A., No. CV 14-683 GAF (Ex), 2014 U.S. Dist. LEXIS 49319, at *16 (C.D. Cal. Apr. 3, 2014); Nguyen v. JP Morgan Chase Bank N.A., No. 12-CV-04183, 2013 WL 2146606, at *6 (N.D. Cal. May 15, 2013); Appling v. Wachovia Mortg., FSB, 745 F.Supp.2d 961, 971 (N.D. Cal. 2010). Plaintiffs counter with a line of cases maintaining the opposite position. See, e.g., Davis v. Wells Fargo, N.A., No. 2:16-CV-00890 JAM AC, 2016 WL 7116681, at *7 (E.D. Cal. Dec. 6, 2016), report and recommendation adopted, No. 2:16-CV-00890-JAM-AC, 2017 WL 729541 (E.D. Cal. Feb. 23, 2017); Pimentel v. Wells Fargo, N.A., No. 14-CV-05004-EDL, 2015 WL 2184305, at *3 (N.D. Cal. May 7, 2015); Penermon v. Wells Fargo Bank, N.A., 47 F.Supp.3d 982, 995 (N.D. Cal. 2014). The divergence between the parties reflects "a growing divide in the district courts' treatment of this issue," as Judge Davila delineated in Kenery v. Wells Fargo Bank, N.A.:
No. 5:13-CV-02411-EJD, 2014 WL 129262, at *4 (N.D. Cal. Jan. 14, 2014).
According to Chase, most district courts in this Circuit take the first position.
Having surveyed the case law and considered the parties' supplemental briefing on the legislative history of HOLA, the Court concludes, notwithstanding its earlier decision in Castillo, that the third position represents the current trend of court rulings
The emerging line of cases is persuasive for several reasons. First, "[p]reemption analysis `start[s] with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.'" City of Columbus v. Ours Garage & Wrecking Service, Inc., 536 U.S. 424, 438, 122 S.Ct. 2226, 153 L.Ed.2d 430 (2002) (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996)). Claims "rooted in California's consumer-protection laws[ ] fall in an area that is traditionally within the state's police powers to protect its own citizens." Aguayo v. U.S. Bank, 653 F.3d 912, 917 (9th Cir. 2011); see Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 828 (1st Cir. 1992) ("[T]he state statute here at issue visits two areas which are squarely within the ambit of the states' historic powers ... banking ... and consumer protection."). And while "the presumption against preemption is [generally] not applicable in the realm of national bank regulation" because
It is not clear from either the language or legislative history of HOLA that Congress intended the Act's preemptive effect to attach to a loan even after it is sold by a federal savings association. The parties do not seriously dispute that at the time HOLA was enacted in 1933, nothing in its text or legislative history expressly indicated Congress expected that federal savings associations would sell their residential mortgage loans on a secondary market to entities not governed by HOLA, much less intended for HOLA preemption to attach to any such loans. See Docket No. 52 at 1 (Chase conceding that "Congress did not discuss the sale of HOLA-governed loans" when enacting HOLA in 1933). It was not until 1938 that Congress created the Federal National Mortgage Association ("Fannie Mae") to purchase mortgage loans from federal savings associations to resell to investors. Shelley Smith, Reforming the Law of Adhesion Contracts: A Judicial Response to the Subprime Mortgage Crisis, 14 Lewis & Clark L. Rev. 1035, 1065 (2010). It is no surprise that the legislative history is devoid of any references to a secondary market for mortgage loans and of any expressed intent for HOLA to govern the operations of entities other than federal savings associations. See Penermon, 47 F.Supp.3d at 995 ("[I]t is unlikely that HOLA contemplated the ... mortgage crisis" that started in December 2007 "and the resulting mergers of federal savings banks into national banks or loan servicing as it exists today."). Generally, "HOLA is strictly limited to federal savings institutions and is not intended to affect the operations of national banks," and "OTS only regulates federal savings associations." Id. at 993-94 (citing 12 C.F.R. § 560.2).
Chase points to a number of legislative and regulatory actions taken after HOLA was enacted as evidence that "Congress has long recognized the power of federal [savings associations] to sell residential mortgage loans." Docket No. 52 at 5. Specifically, the predecessor agency to OTS "promulgated regulations as early as 1938 recognizing the ability of federal [savings associations] to sell mortgage loans"; Congress in 1970 enacted the Federal Home Loan Mortgage Corporation Act to authorize Freddie Mac to purchase and sell residential mortgages from any Federal home loan bank; and Congress in 1978 amended HOLA to affirm the ability of federal savings associations to sell mortgage loans. See id. at 2-4. A statute's subsequent amendment and its legislative history may be entitled to some limited weight in construing the earlier law, In re Adams, 761 F.2d 1422, 1426 (9th Cir. 1985), but generally "the views of subsequent Congresses cannot override the unmistakable intent of the enacting one," Seatrain Shipbuilding Corp. v. Shell Oil Co., 444 U.S. 572, 596, 100 S.Ct. 800, 63 L.Ed.2d 36 (1980). The problem for Chase is that even if Congress and OTS, subsequent to HOLA's enactment, contemplated federal savings associations' selling of mortgage loans in the secondary market, there is no indication in the subsequent legislative history that Congress intended HOLA preemption to continue to apply to loans sold to non-HOLA entities.
Second, finding preemption here would "run[ ] afoul of one of the original purposes of HOLA enactment: consumer protection." Penermon, 47 F.Supp.3d at
Chase argues that extending HOLA preemption to loans acquired by national banks "provides continuity and certainty that increases the marketability of thrift-originated loans on the secondary market," in part because, in the event a federal savings bank fails, a purchasing bank can "take stock ... of the exposure it is accruing upon its assumption of the failed bank's liabilities." Mot. at 12-13. Although one of the goals of HOLA is to "ensure the stability of federal thrifts," Penermon, 47 F.Supp.3d at 990, nothing in the record before the Court suggests that requiring national banks to comply with state laws such as the escrow interest law here would threaten the stability of the secondary mortgage loan market for federal savings associations. At most, non-preemption would make the loans slightly less attractive to prospective buyers, putting them on a par, in terms of regulation, with national bank loans. Nothing suggests exposure to state regulations undermines the secondary market for loans originating under the NBA.
Accordingly, HOLA does not preempt § 2954.8(a) with respect to Plaintiffs' loans.
In the event the Court denies the motion to dismiss, Chase requests a stay of the case pending the Supreme Court's resolution of Lusnak. The Supreme Court denied the petition for writ of certiorari on November 19, 2018, so this issue is now moot. See Lusnak v. Bank of America, N.A., 883 F.3d 1185 (9th Cir. 2018), cert. denied, (___ U.S. ___, 139 S.Ct. 567, 202 L.Ed.2d 403 (2018)).
For the foregoing reasons, the motion to dismiss is
This order disposes of Docket No. 38.
