AMPARAN v. PLAZA HOME MORTG., INC.

• Decision Date: 17 December 2008
• Docket Number: Case No. C 07-4498 JF (RS).
• Citation: 678 F. Supp.2d 961
• Court: U.S. District Court — Northern District of California
• Parties: Eneida AMPARAN, individually and on behalf of others similarly situated, Plaintiff, v. PLAZA HOME MORTGAGE, INC.; Washington Mutual Mortgage Securities Corp., Defendants.

678 F.Supp.2d 961

Eneida AMPARAN, individually and on behalf of others similarly situated, Plaintiff, v. PLAZA HOME MORTGAGE, INC.; Washington Mutual Mortgage Securities Corp., Defendants.

Case No. C 07-4498 JF (RS).

United States District Court, N.D. California, San Jose Division.

December 17, 2008.

David M. Arbogast, Jeffrey K. Berns, Arbogast & Berns, LLP, Tarzana, CA, Jonathan Shub, Seeger, Weiss, LLP, Philadelphia, PA, Patrick Deblase, Paul R. Kiesel, Michael C. Eyerly, Kiesel, Boucher & Larson, LLP, Beverly Hills, CA, Rebecca Tingey, Lee A. Weiss, Rebecca Tingey, Dreier, LLP, New York, NY, for Plaintiff.

John Dominic Alessio, Procopio, Cory, Hargreaves & Savitch, LLP, San Diego, CA, Deborah E. Barack, Stroock & Stroock & Lavan, LLP, Los Angeles, CA, for Defendants.

ORDER¹ GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS AND TO STRIKE

JEREMY FOGEL, District Judge.

Plaintiff Eneida Amparan bring this putative class action for violations of the federal Truth in Lending Act ("TILA"), as well as state-law claims for unfair business practices, breach of contract, and breach of the implied covenant of good faith and fair dealing. Plaintiff alleges that Defendant Plaza Home Mortgage ("Defendant") failed to disclose important information about her residential mortgage in the clear and conspicuous manner required by law.² Defendant moves to dismiss the complaint for failure to state a claim upon which relief may be granted, and to strike from the complaint requests for certain forms of relief. For the reasons set forth below, the motions will be granted in part and denied in part.

I. BACKGROUND

In January 2006, Plaintiff obtained an Option Adjustable Rate Mortgage ("Option ARM") from Defendant. The terms of the mortgage are contained in the Adjustable Rate Note ("Note") executed by Plaintiff in connection with the loan. A central feature of the loan is its early interest rate adjustment. While the interest rate on the loan is pegged to a variable index and changes over time, the loan offered a low initial interest rate of 1.5%, which resulted in an initial minimum monthly payment of $1,628.97.³ After one month, the interest rate increased substantially from the low initial rate of 1.5% to the substantially higher index-based rate, which was and continues to be calculated by adding a 3.4% "margin" to an indexed figure.

Despite the almost immediate rise in the applicable interest rate, Plaintiff's minimum monthly payment remained level because the Note permits only one annual increase to the minimum monthly payment. In addition, the Note imposes a "payment cap" on the amount of each such annual increase to the minimum monthly payment, limiting that increase to 7.5%. However, if the loan's unpaid principal balance reaches 115% of its original value, the payment cap no longer applies and the remaining principal is paid off in equal monthly payments over the remaining term of the loan. Because the initial monthly payment was based on a 1.5% interest rate and did not rise with the actual interest rate that was charged, Plaintiff's mortgage began to accrue interest each month in an amount greater than the amount of her monthly payment. The remaining interest was added to the balance of unpaid principal and itself began accumulating interest. Consequently, the principal balance has increased even as Plaintiff has made the minimum monthly payment. This situation is known as negative amortization, the result of which is an ultimate reduction in the borrower's equity.

In connection with the loan transaction, Plaintiff received a federally mandated Truth in Lending Disclosure Statement ("Statement") and a Loan Program Disclosure ("Disclosure") with information specific to the loan she was considering.⁴ The Statement specifies that the annual percentage rate ("APR") on the mortgage is 7.136%. The Statement also includes a schedule of estimated payments ("Payment Schedule") based in part on the initial 1.5% interest rate and in part on the subsequent index-based rate. The Payment Schedule lists an initial minimum payment of $1,628.97 that increases by 7.5% on March 1 of each year. In the fifth year, the payment increases to $3,759.72, which apparently reflects the point at which the principal balance exceeds 115% of its original value as a result of negative amortization, thus overriding the payment cap. The Payment Schedule assumes that Plaintiff will make only the minimum monthly payment.

Plaintiff claims that the loan documents failed clearly and conspicuously to disclose the interest rate structure applicable to her loan and the consequent certainty that negative amortization would occur if she made only the minimum payments. On this basis, Plaintiff alleges multiple violations of TILA's implementing regulations, contained in Title 12 of the Code of Federal Regulations ("Regulation Z"). Specifically, she claims that Defendant violated 12 C.F.R. § 226.19 by failing adequately to disclose (1) the actual cost of her loan, as expressed as an annual percentage rate ("APR"), (2) that the initial interest rate on the loan was discounted, and (3) that negative amortization was certain to occur if Plaintiff followed the Payment Schedule. Plaintiff claims that Defendants violated 12 C.F.R. §§ 226.17 & 226.18 by failing adequately to disclose: (1) the APR upon which the Payment Schedule was based, (2) the effect of the payment cap, and (3) the composite APR.⁵ Plaintiff also alleges that Defendant committed unlawful, unfair, and fraudulent business practices in violation of § 17200 of the California Business and Professions Code, and committed fraud by failing adequately to make the foregoing disclosures. Finally, Plaintiff claims that Defendant, by failing to apply a low, "fixed" interest rate for the first three to five years of the loan term, and by failing to apply each payment to "principal and interest," breached both the express terms of the Note and the implied covenant of good faith and fair dealing contained in every contract under California law.

II. LEGAL STANDARD FOR MOTIONS TO DISMISS AND TO STRIKE

A complaint may be dismissed for failure to state a claim upon which relief may be granted for one of two reasons: (1) lack of a cognizable legal theory; or (2) insufficient facts under a cognizable legal theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir.1984). For purposes of a motion to dismiss, all allegations of material fact in the complaint are taken as true and construed in the light most favorable to the nonmoving party. Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir.1994). A complaint should not be dismissed "unless it appears beyond doubt the plaintiff can prove no set of facts in support of his claim that would entitle him to relief." Clegg, 18 F.3d at 754. In addition, leave to amend must be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. Lucas v. Dep't of Corrs., 66 F.3d 245, 248 (9th Cir.1995). Conversely, dismissal may be ordered with prejudice when amendment would be futile. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir.1996).

Pursuant to Rule 12(f), a court may "order stricken from any pleading . . . any redundant, immaterial, impertinent, or scandalous matter." Fed.R.Civ.P. 12(f). While a motion to strike "should be denied unless it can be shown that the challenged matter could have no possible bearing on the issues in the litigation," Buick v. World Savings Bank, 565 F.Supp.2d 1152, 1159 (E.D.Cal.2008), such a motion may be used to strike requests for relief that is unavailable as a matter of law. See Wilkerson v. Butler, 229 F.R.D. 166, 172 (E.D.Cal.2005); Bureerong v. Uvawas, 922 F.Supp. 1450, 1479 n. 34 (C.D.Cal.1996).

III. DISCUSSION

A. TILA Claims

TILA is a consumer protection statute that seeks to "avoid the uninformed use of credit." 15 U.S.C. § 1601(a). The statute is designed "to protect consumers' choice through full disclosure and to guard against the divergent and at times fraudulent practices stemming from uninformed use of credit." King v. California, 784 F.2d 910, 915 (9th Cir.1986). See also Semar v. Platte Valley Fed. Sav. & Loan Ass'n, 791 F.2d 699, 705 (9th Cir.1986) ("Congress designed TILA to apply to all consumers, who are inherently at a disadvantage in loan and credit transactions."). Because the statute is remedial in nature, it is to be applied broadly in favor of the consumer. Jackson v. Grant, 890 F.2d 118, 120 (9th Cir.1989); see also Plascencia v. Lending 1st Mortgage, No. C 07-4485 CW, 2008 WL 1902698, *3 (N.D.Cal. Apr. 28, 2008) ("TILA has been liberally construed in the Ninth Circuit.") (internal quotations and citation omitted). Thus, even "technical or minor violations" of TILA or its implementing regulations may impose liability on the creditor. Semar, 791 F.2d at 704 (noting also that "to insure that the consumer is protected . . . TILA and its implementing regulations must be absolutely complied with and strictly enforced").

TILA focuses not only on the form of a disclosure but also on its accuracy. See Rossman v. Fleet Bank (R.I.) Nat'l Ass'n, 280 F.3d 384, 390-91 (3d Cir.2002) ("The issuer must not only disclose the required terms, it must do so accurately."). "The accuracy demanded excludes not only literal falsities, but also misleading statements." Id. (citation omitted). In that respect, the adequacy of TILA disclosures is to be assessed "from the standpoint of an ordinary consumer, not the perspective of a Federal Reserve Board member, federal judge, or English professor." Smith v. Cash Store Mgmt., 195 F.3d 325, 327-28 (7th Cir.1999) (citation omitted).

TILA is implemented by the Federal Reserve Board of Governors ("FRB") through regulations found in 12 C.F.R. § 226 and through the FRB's Official Staff Commentary ("Commentary"). The Commentary is binding on all lenders, and compliance with it shields an issuer from civil liability pursuant to TILA's...