Ellsworth v. U.S. Bank, N.A., No. C 12-02506 LB

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
Writing for the CourtLAUREL BEELER
PartiesSTEPHEN ELLSWORTH, as an individual and as a Representative of the classes and on behalf of the general public, Plaintiff, v. U.S. BANK, N.A., and AMERICAN SECURITY INSURANCE COMPANY, Defendants.
Decision Date11 December 2012
Docket NumberNo. C 12-02506 LB

STEPHEN ELLSWORTH, as an individual and as a Representative of the classes and on behalf of the general public, Plaintiff,

No. C 12-02506 LB

UNITED STATES DISTRICT COURT Northern District of California San Francisco Division

Dated: December 11, 2012


[ECF Nos. 57, 68 ]


In this putative class action, Stephen Ellsworth challenges his lender U.S. Bank's alleged force-placing of backdated flood insurance on his real property and receiving kickbacks from the insurance company, American Security Insurance Company ("ASIC"). First Amended Class Action Complaint ("FAC"), ECF No. 26, ¶ 13.1 Ellsworth states six claims: (1) breach of contract against U.S. Bank; (2) breach of the covenant of good faith and fair dealing against U.S. Bank; (3)-(4) unjust enrichment against U.S. Bank and ASIC; and (5)-(6) violations of California Business &

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Professions Code section 17200 et seq. against U.S. Bank and ASIC.2 See id., ¶¶ 58-102.

ASIC and U.S. Bank move to dismiss the complaint, arguing that the claims are (1) preempted by the National Bank Act, (2) barred by the filed rate doctrine, (3) barred by the voluntary payment doctrine, and (4) fail to state a claim. See ASIC's Motion to Dismiss ("ASIC Mot."), ECF No. 57; U.S. Bank's Motion to Dismiss ("U.S. Bank Mot."), ECF No. 68. For the reasons stated below, the court DENIES the motions to dismiss.


A. Facts From FAC

On or about July 2, 2007, Ellsworth obtained a $393,892 mortgage loan from U.S. Bank that was secured by the deed of trust (the "Mortgage") on his Napa County, California home. See FAC, ECF No. 26, ¶ 13; id. Ex. 1, ECF No. 26-1 at 3-4. U.S. Bank is the lender-in-interest and servicer of Ellsworth's mortgage loan. See id. ¶ 14. The Mortgage includes a provision that allows U.S. Bank, in its discretion, to require that Ellsworth maintain flood insurance on the property.

5. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term "extended coverage," and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires Insurance. This Insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan. The insurance carrier providing the insurance shall be chosen by Borrower subject to Lender's right to disapprove Borrower's choice, which right shall not be exercised unreasonably.

FAC Ex. 1, ECF No. 26-1 at 7. The same provision permits U.S. Bank to force-place flood insurance at Ellsworth's expense. Id.

If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender's option and Borrower's expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower's equity in the Property, or the contents of the Property, against any risk, hazard or liability and might provide greater or lesser coverage than was previously in effect. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained. Any amounts disbursed by Lender under this Section 5 shall become additional debt of Borrower secured by this Security Instrument.

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These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.

Id. Ellsworth alleges that U.S. Bank's discretion to force-place insurance is constrained by the Mortgage's paragraph 9, which provides:

9. Protection of Lender's Interest in the Property and Rights Under this Security Instrument. If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, . . . then Lender may do and pay for whatever is reasonable or appropriate to protect Lender's interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property.

Id. Ex. 1, ECF No. 26-1 at 8. The Mortgage also contains a provision titled "Loan Charges," which provides that U.S. Bank "may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting [U.S. Bank's] interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys' fees, property inspection and valuation fees." Id. at 11.

U.S. Bank initially did not require Ellsworth to maintain flood insurance on the property. See FAC ¶ 18. On or about June 9, 2010, U.S. Bank sent Ellsworth a notice (the "Notice"), informing him that "[o]ur records indicate your property is located in a Special Flood Hazard Area (SFHA) as determined by the Federal Emergency Management Agency (FEMA)" and that the Mortgage and the Flood Disaster Protection Act of 1973 required Ellsworth to purchase flood insurance. Id. ¶ 18; id. Ex. 2, ECF No. 26-2 at 2. The Notice explained that U.S. Bank had purchased temporary flood insurance coverage on Ellsworth's property from ASIC. Id. ¶ 19, Ex. 2 at 2-3. The insurance coverage was effective as of July 3, 2009 and would expire 45 days after the June 9, 2010 notice. Id. ¶ 20, Ex. 2 at 2-3. If Ellsworth failed to provide adequate proof of flood insurance within 45 days, "this temporary coverage will convert to a full year policy and the annual premium [$2,250] will be added to your escrow account." Id. ¶ 20, Ex. 2 at 3. The Notice also informed Ellsworth that "[i]n many instances, the insurance we purchase for you may be more expensive than you are able to obtain on your own" and provided the telephone number of another insurance agency that could also provide Ellsworth with adequate flood insurance. Id. ¶ 20, Ex. 2 at 2-3.

On August 18, 2010, U.S. Bank sent Ellsworth a second notice ("Second Notice") informing him

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that it had not received evidence that he had purchased flood coverage. Id. Ex. 3, ECF No. 26-3 at 2. Accordingly, U.S. Bank explained that it had force-placed the flood insurance described in the June 9, 2010 notice. Id. Ellsworth alleges that the force-placed flood insurance policy was backdated so that it was effective from July 3, 2009 to July 3, 2010, though it was not issued until August 18, 2010. Id. ¶¶ 21-22, Ex. 4., ECF No. 26-4 at 2. ASIC allegedly paid U.S. Bank a commission or kickback for force-placing ASIC's flood insurance policy, U.S. Bank kept the commission, and Ellsworth paid the full $2,250 premium. Id. ¶¶ 23-24.

In August 2010, Ellsworth purchased a one-year flood insurance policy through State Farm effective September 1, 2010. See id. ¶ 25, Ex. 5, ECF No. 26-5. This policy provided $250,000 in flood insurance coverage like the ASIC policy, but it was not backdated and cost only $276. Id.

Ellsworth alleges that ASIC's standard business practice is to pay kickbacks or commissions (a percentage of the premium) to banks issuing force-placed coverage, including U.S. Bank. Id. ¶ 23, 27. ASIC's practice of paying commissions to its lender-clients has been documented in numerous court opinions, in publicly-filed deposition testimony, and American Banker magazine. Id. ¶¶ 29-31. In addition, ASIC discloses details of its commission payments in public regulatory filings, including filings with the California Department of Insurance. Id. ¶ 32.

According to Ellsworth, many institutions have criticized the allegedly unfair business practices in the force-placed insurance business, including kickbacks and backdating. For example, numerous courts have condemned the practice of paying and accepting commissions on force-placed insurance coverage, see id. ¶ 36 (collecting cases), and force-placing backdated insurance policies, id. ¶ 45 (collecting cases). Fannie Mae also has issued restrictions on lenders' ability to obtain reimbursement for force-placed insurance commissions and is seeking to entirely eliminate servicers' ability to pass these costs on to it. Id. ¶¶ 38-39. The California Insurance Commissioner has expressed concern about "questionable financial integration between mortgage lenders and insurers providing 'forced-placed' mortgage insurance." Id. ¶ 40. Similarly, in May 2012, the New York Department of Financial Services held public hearings regarding these practices. Id. ¶ 41. Also, the National Association of Insurance Commissioners has expressed its "regulatory concern" about "reverse competition" in the force-placed insurance market and has condemned the practice of

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force-placing backdated policies. Id. ¶¶ 42-43.

On April 9, 2012, Ellsworth sent a letter to U.S. Bank stating that the force-placed flood insurance policies violated the deed of trust and requesting a refund of the premiums he paid. See id. ¶ 26; id. Ex. 6, ECF No. 26-6 at 2. Ellsworth did not receive a response from U.S. Bank. Id. ¶ 26.

B. ...

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