Black v. Financial Freedom Senior Funding

• Decision Date: 05 October 2001
• Docket Number: No. A092156.,A092156.
• Court: California Court of Appeals Court of Appeals
• Parties: Corinne E. BLACK, as Trustee, etc., Plaintiff and Appellant, v. FINANCIAL FREEDOM SENIOR FUNDING CORPORATION, et al., Defendants and Respondents.

112 Cal.Rptr.2d 445

92 Cal.App.4th 917

Corinne E. BLACK, as Trustee, etc., Plaintiff and Appellant, v. FINANCIAL FREEDOM SENIOR FUNDING CORPORATION, et al., Defendants and Respondents.

No. A092156.

Court of Appeal, First District, Division 2.

October 5, 2001.

Review Denied January 23, 2002.

Dario de Ghetaldi, George R. Corey, Millbrae, Corey, Luzaich, Manos & Pliska LLP, Attorneys for Appellant.

James H. Fleming, Edward Romero, Walnut Creek, Fleming & Phillips, LLP, Attorneys for Respondents (Financial Freedom Senior Funding Corp., Beverly Mirtle, MRCo., ULLICO, Inc., Union Labor Life Insurance Co.).

Michael P. Verna, Walnut Creek, Donald A. Velez, Lawrence D. Goldberg,

Bowles & Verna, Attorneys for Respondent (James R. Mahoney).

Bill Lockyer, Attorney General, Richard M. Frank, Chief Assistant Attorney General, Herschel T. Elkins, Senior Assistant Attorney General, Ronald Reiter, Supervising Deputy Attorney General, Michele R. Van Gelderen, Deputy Attorney General, Attorney General for the State of California as Amicus Curiae.

HAERLE, J.

I. INTRODUCTION

In 1994, Charles T. Black¹ and Corinne E. Black (the Blacks), then 68 and 67 years of age respectively, entered into a reverse mortgage with Freedom Investment Fund, Inc. (Freedom Investment), using their home as the basis for the mortgage. In 1998, the Blacks, as trustees for the Charles T. Black and Corinne E. Black Trust Agreement, brought this action against Freedom Investment and a host of other corporations, companies and individuals, alleging that the manner of their marketing of the reverse mortgage violated various state laws. The defendants moved for summary judgment, arguing that the Blacks' claims were preempted by three federal statutes and their implementing regulations: the Alternative Mortgage Transaction Parity Act of 1982 (the Parity Act) (12 U.S.C. §§ 3801-3806), the Truth in Lending Act (TILA) (Pub.L. No. 90-321, § 101 (May 29, 1968) 82 Stat. 146; see also 15 U.S.C. § 1601-1667f) and the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDCA) (Pub.L. No. 96-221, § 1 (March 31, 1980) 94 Stat. 132 (codified as amended in scattered sections of 12 U.S.C. & 15 U.S.C.)). The trial court granted the motion. This appeal followed. We reverse.

II. BACKGROUND

A. Reverse Mortgages

Reverse mortgages have been described as a financial planning device for the elderly who are often "house rich, but cash poor." (See Hammond, Reverse Mortgages: A Financial Planning Device for the Elderly (1993) Elder L.J. 75, 76 (hereafter Hammond).) A reverse mortgage can address this dilemma by providing a means for converting home equity into cash. (Ibid.) In a reverse mortgage, as in a conventional mortgage, the mortgagee or lender advances money to the borrower or mortgagor. However, in a reverse mortgage the borrower is often times not obligated to repay any portion of the loan or the interest on the loan amount until the property is sold, the loan matures or the borrower dies or experiences an extended absence from the premises. (Id. at p. 86; see also 15 U.S.C. § 1602(bb)².) The interest on the borrowed sums is added to the principal loan amount and the lender acquires a lien against the house in the amount of the initial principal and accumulated interest. (Hammond, supra, 1 Elder L.J. at p. 86.)

B. The Blacks' Reverse Mortgage

On March 28, 1994, the Blacks entered into a reverse mortgage with Freedom Investment, a non-federally chartered lender, secured by a deed of trust on their home, then valued at $1,060,000. Pursuant to this transaction, the Blacks received $305,455 and Freedom Investment received an interest equal to 70.75% of the "maturity value" of the mortgaged property.³ From the $305,455 that the Blacks borrowed, they paid $11,249.89 as a loan origination fee and $5,583.47 in other fees, taxes and expenses.

The loan amount of $305,455 was calculated as the present value of $749,950 (representing 70.75% of the value of the Blacks' home) using a 3.75% discount rate over a period of 24.4 years (the Blacks' joint life expectancy). In other words, $305,455 brought forward with 3.75% interest for each year of the Blacks' joint life expectancy should equal $749,950.⁴

The amount ultimately due on the loan, however, would most likely exceed $749,950. If the home appreciated in value, Freedom Investment acquired an interest in a portion of that appreciation, thus increasing the amount ultimately due on the loan and simultaneously increasing the interest rate on the initial borrowed sum.

Moreover, the interest rate was 3.75% only if one of the Blacks survived for the length of their joint life expectancy of 24.4 years and continued to reside at their house. However, if they did not, the effective interest rate would exceed 3.75% because the Blacks' liability was 70.75% of the maturity value of their home regardless of the actual duration of the mortgage (subject to a limited exception).

C. The Annuity

The Blacks used $178,333.33 of the loan proceeds to purchase an annuity from the Union Labor Life Insurance Company (Union Labor Life), the terms of which provided for monthly payments of $1,701.30 for life provided that the Blacks made a second payment on the annuity four years later in the amount of $105,926.48. If the Blacks failed to make the second payment, the monthly annuity benefit was reduced to $719.58. The Blacks apparently did not make this second payment.

D. This Litigation

1. The parties

The Blacks filed this action against 15 defendants.⁵ The Blacks contend, without citation to the record, that they dismissed their complaint as to five defendants and took the defaults of four defendants, including Freedom Investment. The defendants that allegedly remained thereafter, and which are the respondents herein, are ULLICO, Inc. (ULLICO), MRCo, Inc. (MRCo), Union Labor Life, Financial Freedom Senior Funding Corporation (Financial Freedom Senior Funding), Beverly Mirtle, and James R. Mahoney. The complaint alleges an intricate relationship between the corporate respondents and Freedom Investment and concludes that the individuality and separateness of these entities ceased and that they should not be permitted to adhere to the fiction of their separate existence. As to the individual respondents, the complaint alleges that Mirtle was a sales person for Freedom Investment and Mahoney the executive vice-president of Financial Freedom Senior Funding.

2. The allegations

The Blacks' complaint includes causes of action for elder abuse (Welf. & Inst.Code, §§ 15600 et seq.), unlawful business practices (Bus. & Prof.Code, § 17200),⁶ fraudulent concealment and negligent misrepresentation.⁷ The complaint generally alleges that respondents used "deceptive advertising [and] misleading transactional documents" and that the reverse mortgage was "written in a manner which was designed to disorient, confuse, and upset the average homeowner ...." The complaint identifies the following representations as false and misleading: (1) assurances of uninterrupted monthly annuity income, (2) guarantees of the highest monthly payments and the lowest fees and expenses of any home equity conversion plan being offered, and (3) promises of no prepayment charge and the preservation for the Blacks of 25% of the home's future value. The complaint also alleges that Freedom Investment used an unreasonably low projection of home appreciation for its illustrations and inaccurately described the tax characterization of the reverse mortgage transaction.

Another component of the complaint is its allegation that Freedom Investment did not advise the Blacks that they would effectively be prepaying interest inasmuch as Freedom Investment immediately acquired a 70.75% interest in the home even though the amount disbursed to the Blacks was a much smaller amount.⁸

3. The motion for summary judgment

Respondents moved for summary judgment solely on the ground that the Parity Act, DIDMCA, TILA and their related regulations preempted the Blacks' causes of action.⁹ The Blacks opposed the motion and interjected numerous objections to the evidence on which the motion relied. The trial court granted the motion, concluding that federal law preempted the subject matter of the action.

III. DISCUSSION

A. General Principles of Preemption

The supremacy clause of the United States Constitution (art. VI, cl.2) grants Congress the power to preempt state law. (Crosby v. National Foreign Trade Council (2000) 530 U.S. 363, 372, 120 S.Ct. 2288, 147 L.Ed.2d 352.) "Whether federal law preempts state law is fundamentally a question whether Congress has intended such a result. [Citations.] The `starting presumption' is that Congress has not so intended. [Citations.] Preemption of state law by federal law is found in `three circumstances.' [Citations.] First, there is so-called `express preemption': `Congress can define explicitly the extent to which its enactments pre-empt state law.' [Citations.] Second, there is socalled `field preemption': `[S]tate law is pre-empted where it regulates conduct in a field that Congress intended the Federal Government to occupy exclusively.' [Citations.] Third, there is so-called `conflict preemption': `[S]tate law is pre-empted to the extent that it actually conflicts with federal law.' [Citations.] Such conflict must be `of substance and not merely trivial or insubstantial.' [Citation.] It exists when it is `impossible ... to comply with both state and federal requirements' [citations] or when state law `stands as an obstacle to the accomplishment and execution of the full purposes and objectives' underlying federal law [citations]. Although `state law is pre-empted to the extent that it actually conflicts with federal law' [citation], it is preempted only to that extent and no further [citation]." (Peatros v. Bank of America (2000) 22 Cal.4th 147, 157-158, 91 Cal.Rptr.2d 659, 990 P.2d 539.)

"Federal regulations have no less pre-emptive...