JOSEPH F. BIANCO, District Judge:
Defendants move to dismiss this action alleging fraud and other claims related to plaintiffs' mortgage agreements with defendant Countrywide.
For the reasons discussed herein, the Court grants defendants' motion in part and denies it in part. The complaint's core
Plaintiffs filed this suit on June 7, 2013, in the Supreme Court of the State of New York, Nassau County. Defendants timely removed the case to this Court on July 8, 2013, on the basis of diversity jurisdiction. On July 15, 2013, defendants moved to dismiss. On September 3, 2013, plaintiffs filed a brief in opposition to the motion to dismiss, and also filed a motion to remand. Defendants opposed the remand motion and replied in support of their motion to dismiss on October 3, 2013.
The following facts are taken from the complaint. The Court assumes these facts to be true for the purpose of deciding this motion, and construes them in the light most favorable to plaintiffs, the non-moving party.
Plaintiffs are the deeded owners of a home in Oyster Bay, New York. (Compl. ¶ 1.) On April 23, 2004, plaintiffs mortgaged their home to Countrywide, a transaction with an original principal balance of $329,000.00. (Id. ¶ 5.) In January 2008, plaintiffs experienced severe credit card debt and were concerned that they might face bankruptcy and foreclosure. (Id.) Plaintiffs contacted several lenders to obtain a home equity loan, but were unsuccessful until they approached Countrywide. (Id. ¶¶ 4-7.) Based on plaintiffs' respective credit scores, Countrywide agreed to make a loan to Diana Knox only. (Id. ¶ 7.) Plaintiffs informed Countrywide of their desire to close on the loan before Diana was scheduled to leave the country on February 15, 2008. (Id. ¶ 8.)
On February 12, 2008, a Countrywide official sent Philip Knox paperwork for Diana to sign, and said that if she signed and returned it right away, the closing could occur that same evening. (Id. ¶ 9.) The paperwork included a loan application, which already contained data stating Diana's income as $9,000.00 per month, and stating that she had $18,515.01 in a 401k plan. (Id. ¶¶ 10-11.) The complaint states that these figures were inaccurate, and that on February 12, 2008, Diana's income was actually $2,130.00 per month, with no money invested in a 401k. (Id. ¶ 12.) Philip informed Countrywide of the inaccurate data, but was allegedly told that the application needed to remain as received. (Id. ¶ 13.) Countrywide also told Philip that, in order to close on the loan that evening, he should sign the application in Diana's name, since Diana would
Philip then signed the loan application on his wife's behalf, and plaintiffs closed on the loan that evening. (Id. ¶¶ 14-15.) At the closing, Diana received additional paperwork containing false income data, but signed it nonetheless. (Id. ¶ 18(c).) The result of the closing was that the 2004 mortgage and note were consolidated with the second, 2008 mortgage and note, in the form of a new loan with a value of $585,000.00, as reflected in the "Consolidation, Extension, and Modification Agreement" ("CEMA"). (Id. ¶ 15; Def. Mot. at 2.)
These plaintiffs are not the first to allege that the splitting of a mortgage from its note invalidates those instruments. Similar claims have been made in many cases involving defendant Mortgage Electronic Registration Systems ("MERS"). In this case, plaintiffs allege that the 2004 note was split from the mortgage when the latter was assigned to MERS, thereby invalidating both instruments and making their consolidation into the CEMA an act of fraud by Countrywide.
Although the complaint is not particularly clear concerning how the 2004 mortgage and note were split, the note shows that while Countrywide held the note, MERS was the mortgagee of record. (Ex. B to Compl.) The complaint alleges that, in consolidating the 2004 mortgage and note into the CEMA, Countrywide was attempting to "bury" instruments it knew to be defective.
In recent years, MERS has faced similar arguments in litigation around the country. The New York Court of Appeals has provided useful background information concerning the history and operation of MERS:
Matter of MERSCORP, Inc. v. Romaine, 8 N.Y.3d 90, 96, 828 N.Y.S.2d 266, 861 N.E.2d 81 (2006) (footnotes omitted).
Often, as in this case, MERS holds the mortgage interest as the mortgagee of record while the original lender, or some other entity, holds the underlying note. Homeowners have argued that this practice
In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86, 91 (2d Cir.2010). "In order to survive a motion to dismiss under Rule 12(b)(6), a complaint must allege a plausible set of facts sufficient `to raise a right to relief above the speculative level.'" Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
The Supreme Court clarified the appropriate pleading standard in Ashcroft v. Iqbal, setting forth two important considerations for courts deciding a motion to dismiss. 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Court instructed district courts to first "identify[ ] pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Id. at 679, 129 S.Ct. 1937 (explaining that though "legal conclusions can provide the framework of a complaint, they must be supported by factual allegations"). Second, if a complaint contains "well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. A claim has "facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a `probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. at 678, 129 S.Ct. 1937 (quoting and citing Twombly, 550 U.S. at 556-57, 127 S.Ct. 1955 (internal citation omitted)).
However, where a case concerns allegations of fraud or mistake under Rule 9(b) of the Federal Rules of Civil Procedure, claims must be pled with particularity. See Fed.R.Civ.P. 9(b) ("In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake."). Generally, to comply with Rule 9(b)'s specificity requirements, "the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)) (internal quotation mark omitted). Conclusory allegations of fraud will not survive Rule 9(b)'s heightened pleading standard, and therefore, will be subject to dismissal at the motion to dismiss stage. See Nasso v. Bio Reference Labs., Inc., 892 F.Supp.2d 439, 446 (E.D.N.Y.2012) (citing Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444 (2d Cir.1971)).
Plaintiffs in this case are proceeding pro se, and courts are obliged to construe the pleadings of a pro se plaintiff liberally. Sealed Plaintiff v. Sealed Defendant, 537 F.3d 185, 191 (2d Cir.2008); McEachin v. McGuinnis, 357 F.3d 197, 200 (2d Cir.2004). Pro se complaints should be read to raise the strongest arguments they suggest, Triestman v. Fed. Bureau of Prisons, 470 F.3d 471, 474 (2d Cir.2006) (per curiam), but a complaint must nonetheless "`state a claim to relief that is plausible on its face.'" Mancuso v. Hynes, 379 Fed.Appx. 60, 61 (2d Cir.2010) (citing Iqbal, 129 S.Ct. at 1949, 129 S.Ct. 1937); see also Harris v. Mills, 572 F.3d 66, 72 (2d Cir.2009) (applying Twombly and Iqbal to pro se complaint).
The following discussion first considers plaintiffs' argument that the splitting of the 2004 mortgage and note invalidated those instruments, and then turns to plaintiffs' claims of fraud, deceptive practices, and other statutory and common law theories of liability.
As discussed above, homeowners around the country have argued that the MERS practice of separating mortgages from their underlying notes invalidates those instruments. Many of these challenges have failed, but in Bank of New York v. Silverberg, the Second Department held that there was no standing to foreclose where the bank held a mortgage interest assigned to it by MERS, but not the underlying note. 86 A.D.3d 274, 926 N.Y.S.2d 532 (2011). Like this case, Silverberg involved a Consolidation Agreement in which Countrywide was the original lender and MERS was named as Countrywide's nominee and the mortgagee of record. Id. at 534. MERS assigned the mortgage interest to the Bank of New York, who attempted to foreclose. Id. The case was dismissed because, under New York law, mortgages pass as incidents to their underlying notes, and "a transfer of the mortgage without the debt is a nullity, and no interest is acquired by it." Id. at 537 (quoting Merritt v. Bartholick, 36 N.Y. 44, 45 (1867)).
Plaintiffs rely on the preceding quote in several places in their submissions to this Court, but in doing so, they have missed part of the broader rule quoted in Merritt and still followed in New York today. Stated completely, the "principal-incident rule" is as follows:
Id. In other words, while a mortgage (the incident) is unenforceable apart from its
Silverberg did not change the principal-incident rule. As one court has since explained, even after Silverberg, "the focus, under the `principal-incident' rule, should be on the mortgage note and not, as in various cases, upon the mortgage as a security instrument." Deutsche Bank Nat'l Trust Co. v. Pietranico, 33 Misc.3d 528, 928 N.Y.S.2d 818, 833 (N.Y.Sup.Ct. 2011). That court explained that under New York law, including Silverberg:
Id. at 830; Silverberg, 926 N.Y.S.2d at 539 (distinguishing a case where MERS had standing to foreclose because the lender had transferred the promissory note to MERS); see also In re Escobar, 457 B.R. 229, 239-40 (E.D.N.Y.2011) ("Silverberg followed a long, long line of New York cases which held or stated that, as a general matter, once a promissory note is tendered to and accepted by an assignee, the mortgage passes as an incident to the note.... Similarly, New York has long recognized that assignment of the mortgage carries with it no rights to enforce the debt.").
In short, Silverberg was a case about standing, holding that an entity with a mortgage but no note lacked standing to foreclose. Although Silverberg provided support to mortgagors defending a foreclosure, it did not provide a windfall to all mortgagors who transacted with MERS.
The foregoing discussion demonstrates the flaw in plaintiffs' primary theory of fraud, which rests on their legal conclusion that Countrywide was not the "holder in due course" of the 2004 note because it was split from the mortgage. Of course, a legal conclusion of this nature is not entitled to the presumption of truth. Iqbal, 556 U.S. at 679-80, 129 S.Ct. 1937. There appear to be two factual elements to plaintiffs' theory that the Court accepts as true for the purposes of this motion. First, plaintiffs allege that the mortgage was split from the note, with Countrywide holding the note and MERS, or its assignee, holding the mortgage. As a matter of law, however, that fact does not extinguish plaintiffs' debt — at most, after Silverberg, the split could affect a mortgage-holder's standing in a foreclosure case, which this is not. Thus "[i]t is the interest in the note that is controlling and it is irrelevant if a nominee for the beneficial owner of the note is listed as the mortgagee of record." Pietranico, 928 N.Y.S.2d at 833.
Plaintiffs also appear to allege, as a factual matter, that Countrywide lost ownership of the 2004 note at some point. This allegation refers directly to a printout from the MERS website, and attached to the complaint, stating that Fannie Mae was the "investor" in the 2004 note. (Ex. E to Compl.) Even viewed in a light most favorable to plaintiffs, this allegation is insufficient by itself to plausibly state a fraud claim. The printout is dated February 9, 2011, and thus even if the Court assumed, in an abundance of caution, that Fannie Mae's status as "investor" meant that Countrywide no longer held the 2004 note, its lack of ownership of the note in February of 2011 is not a sufficient allegation to state a claim that Countrywide committed fraud in 2008. The MERS printout does not state, nor does the complaint allege, anything concerning who held the note when Countrywide executed the CEMA.
Plaintiffs' second theory of fraud alleges that Countrywide wrote false financial information into their application for the 2008 mortgage, and instructed plaintiffs to sign the application even after plaintiffs told Countrywide that the information was false. Though both plaintiffs
Plaintiffs' financial situation does not convert their knowing submission of false information into a cause of action for fraud against Countrywide. "Under New York law, the elements of common law fraud are "a material, false representation, an intent to defraud thereby, and reasonable reliance on the representation, causing damage to the plaintiff."" Chanayil v. Gulati, 169 F.3d 168, 171 (2d Cir.1999) (quoting Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir.1987)).
Assuming in a light most favorable to plaintiffs that the complaint alleges a material false representation, and even assuming that Countrywide's conduct exhibits an intent to defraud, the complaint does not allege facts showing reasonable reliance. It is unreasonable to rely on a lender's misstatement of one's own income, which one knows to be false.
To the extent that plaintiffs' second fraud claim seeks damages, it is also barred by the doctrine of in pari delicto. "The in pari delicto defense prohibits suits in which the plaintiff is as or more culpable than the defendant in the conduct forming the basis for the complaint." UCAR Int'l, Inc. v. Union Carbide Corp., 119 Fed.Appx. 300, 301-02 (2d Cir.2004). Though the culpability must be similar, "the law does not require [the parties'] wrongdoing to be of an identical nature for the in pari delicto defense to apply." Id. at 302. The Court of Appeals recently reaffirmed the importance of the in pari delicto defense:
Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 912 N.Y.S.2d 508, 938 N.E.2d 941 (2010) (internal quotation marks and citations omitted).
Here, plaintiffs are "admitted wrongdoer[s]" — they admit in their complaint that they signed a mortgage application which they knew contained false financial information. Though plaintiffs allege that Countrywide pressured them, even in a light most favorable to plaintiffs, Countrywide's statement was that they should sign the paperwork "if the Plaintiffs wanted to close on the loan that evening." (Compl. ¶ 13.) It was the plaintiffs who had insisted on an expedited closing schedule because of Diana's trip abroad (id. ¶ 8), and they chose the immediacy of the loan over the accuracy of the application. Thus, they are at least as culpable as Countrywide, and their fraud claim must be dismissed. See Donovan v. Rothman, 302 A.D.2d 238, 756 N.Y.S.2d 514, 515 (N.Y.App.Div.2003) (affirming dismissal where "[p]laintiffs were signatories to the allegedly illegal agreement"); cf. UCAR, 119 Fed.Appx. at 302 (noting that in pari delicto does not apply where a plaintiff is forced to act through "domination and control" but finding none where plaintiff admitted engaging in willful behavior).
Plaintiffs also allege that Countrywide engaged in deceptive business practices
Even if the Court considered the merits of the § 349 claim, it would fail because the complaint does not allege consumer-oriented conduct. "Generally, to state a claim for violation of Section 349, a plaintiff must allege facts showing `first, that the challenged act or practice was consumer-oriented.'" Hayrioglu, 794 F.Supp.2d at 410 (quoting Stutman v. Chemical Bank, 95 N.Y.2d 24, 29, 709 N.Y.S.2d 892, 731 N.E.2d 608 (2000)). "To satisfy this requirement in the context of a real estate transaction, courts have generally required that a plaintiff allege that the defendant affirmatively and publicly sought transactions with consumers." Id. (citations omitted). These cases have addressed "a broad scheme involving affirmative efforts to mislead home purchasers about the condition of the homes being sold, the terms of their loans, or the lenders' interests." Id. at 412. Here, plaintiffs make no allegations about Countrywide's broader practices, nor that Countrywide sought out transactions like the CEMA among the public — in fact, plaintiffs sought out Countrywide because they could not obtain a loan elsewhere, and they wanted one quickly. Thus, plaintiffs allegations describe a "[p]rivate contract dispute[ ], unique to the parties, [which do] not fall within the ambit of the statute." Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 25, 623 N.Y.S.2d 529, 647 N.E.2d 741 (1995).
Other than the New York quiet-title statute (discussed infra), plaintiffs did not specify any statutes giving rise to their causes of action. Defendants have nonetheless argued that the complaint does not state claims under the federal Truth in Lending Act (TILA). In their opposition brief, plaintiffs did not address TILA, but wrote that the complaint contains "recognizable pleadings regarding NYS common law and Statutes." (Pl. Mem. at 12.) Therefore, the Court concludes that plaintiffs did not intend to assert any federal claims, to include a TILA claim; in any event, a TILA claim would be time-barred. See Cardiello v. The Money Store, 29 Fed. Appx. 780, 781 (2d Cir.2002) (recognizing that claims for damages under TILA are
With respect to other possible statutory claims, defendants note that the term "predatory lending" is used throughout the complaint, but argue that plaintiffs have not stated a claim under any state predatory lending statute. The Court agrees. Viewing the complaint as a whole, and construing it liberally, the term "predatory lending" does not describe a separate claim, but is instead used within the complaint's core assertions of fraud and deceptive practices. The Court concludes that the complaint lacks allegations that would state a separate claim for predatory lending.
The complaint makes frequent use of common-law terminology, some of which consists of defenses that plaintiffs attempt to convert into affirmative claims for relief. Therefore, to the extent that the complaint alleges causes of action based on unclean
Plaintiffs' claim that defendants breached the duty of good faith and fair dealing fails because the allegations relate solely to the formation of the CEMA. (Compl. ¶ 35.) "New York law does not recognize a duty of good faith in the formation of a contract.... A good faith duty only exists in a party's performance or enforcement of a contract." Mendez v. Bank of Am. Home Loans Servicing, LP, 840 F.Supp.2d 639, 653 (E.D.N.Y.2012). There is no allegation that defendants performed or enforced the CEMA in breach of any duty, and thus the claim alleging a breach of the duty of good faith and fair dealing is dismissed.
The one statutory provision cited in the complaint is the New York Real Property Actions and Proceedings Law ("RPAPL") Article 15, which establishes a "quiet title" action under New York law. Although the term "quiet title" was used in common law, the statutory cause of action does not use that term. It exists "to compel the determination of any claim adverse to that of the plaintiff which the defendant makes." N.Y.R.P.A.P.L. § 1501(1). The Second Circuit has explained this important distinction between the common-law and statutory causes of action:
W. 14th St. Comm. Corp. v. 5 W. 14th Owners Corp., 815 F.2d 188, 196 (2d Cir. 1987).
The absence of a requirement that a plaintiff asserting a statutory quiet title claim plead "invalidity" is especially significant in this case, where plaintiffs have not plausibly claimed that defendants' mortgage interest in invalid, but where the complaint sufficiently alleges the statutory elements described in RPAPL § 1515. Under that section, an Article 15 claim
Here, the complaint sufficiently alleges all four elements. The third and fourth elements do not appear to be disputed, and plaintiffs have adequately alleged that they are the deeded owners of the property, and that defendants claim to have an interest in the property. (Compl. ¶¶ 1-3.) Although the complaint does not sufficiently allege that defendants' interest was invalidated by fraud or the other alleged wrongdoing, the statutory quiet-title claim does not require that plaintiffs plead anything other than that defendants have an interest. As noted above, the stated purpose of the statutory cause of action is to determine "any" claim against plaintiff's interest. N.Y.R.P.A.P.L. § 1501(1): W. 14th St. Comm. Corp., 815 F.2d at 196. Moreover, "[t]he fact that plaintiff executed the mortgage which he now seeks to remove as a cloud on title does not deprive him of the right to maintain the action." Greenberg v. Schwartz, 273 A.D. 814, 76 N.Y.S.2d 95 (1948); see also Barberan, 706 F.Supp.2d at 420 ("However weak Defendants believe Plaintiffs' factual claims regarding the enforceability of the mortgage, the note, and the assignment to be, the Court will not decide which Party's claims are stronger on a motion to dismiss.").
For these reasons, the motion to dismiss is denied with respect to plaintiffs' claim under RPAPL Article 1501.
Leave to amend should be freely granted when justice so requires. Fed.R.Civ.P. 15(a)(2). "This relaxed standard applies with particular force to pro se litigants." Pangburn v. Culbertson, 200 F.3d 65, 70 (2d Cir.1999). The Second Circuit has emphasized that because "[a] pro se complaint is to be read liberally," courts "should not dismiss without granting leave to amend at least once when a liberal reading of the complaint gives any indication that a valid claim might be stated." Cuoco v. Moritsugu, 222 F.3d 99, 112 (2d Cir.2000) (internal quotation marks and citations omitted). Nonetheless, "[a] district court has discretion to deny leave for good reason, including futility." See McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir.2007). Leave to amend is futile if the amended complaint is meritless and would fail to state a claim. Ho Myung Moolsan Co., Ltd. v. Manitou Mineral Water, Inc., 665 F.Supp.2d 239, 250 (S.D.N.Y.2009); see also Ashmore v. Prus, 510 Fed.Appx. 47, 49 (2d Cir.2013) (holding that denial of leave to amend was proper where barriers to relief for pro se plaintiff "cannot be surmounted by reframing the complaint").
Here, amending the complaint to re-plead the dismissed claims would futile. The first fraud theory is premised on an inaccurate view of the law, and thus cannot be repaired through amendment. The second fraud theory fails because of admissions contained in the complaint itself, and any amendment would necessarily conflict with those admissions. The § 349 claim and any possible TILA claim are timebarred, and plaintiffs have not shown any circumstance warranting equitable tolling. They knew of the falsity of the income data when they executed the CEMA in 2008, and the only new information they claim to have discovered relates to the
Therefore, leave to amend the complaint is denied.
Defendants' motion to dismiss is granted in part and denied in part. The complaint's core assertions of fraud are dismissed because the alleged splitting of the 2004 mortgage and note does not invalidate the 2004 note or the CEMA, and because plaintiffs could not reasonably have relied on income data that they knew to be false (as conceded in the complaint). The latter fraud claim is also barred by the doctrine of in pari delicto. The remaining statutory claims, except for the claim under RPAPL 1501, are time-barred and in any event fail to allege sufficient facts to support a plausible claim. The purported common-law claims are not cognizable as affirmative claims for relief. Leave to amend the fraud, statutory, and purported common-law claims would be futile and is denied. However, plaintiffs' quiet title cause of action under RPAPL Article 1501 does state a claim, and the motion to dismiss is denied with respect to that claim only. As discussed supra at note 2, plaintiffs' motion to remand is denied.
SO ORDERED.
