Hubbard v. Fidelity Federal Bank, CV 92-3939 MRP.
| Decision Date | 09 June 1993 |
| Docket Number | No. CV 92-3939 MRP.,CV 92-3939 MRP. |
| Citation | 824 F. Supp. 909 |
| Court | U.S. District Court — Central District of California |
| Parties | Monica J. HUBBARD, formerly known as Monica J. Roegler, Earle S. Humphreys, and Nicette M. Humphreys On Behalf of Themselves and All Others Similarly Situated, Plaintiffs, v. FIDELITY FEDERAL BANK, a Federal Savings Bank, formerly known as Fidelity Federal Savings and Loan Association, Defendant. |
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Marie Seth Weiner, Cotchett, Illston & Petre, Burlingame, CA, George M. Plews, Peter M. Racher, Timothy J. Paris, M. Scott Barrett, Plews & Shadley, Henry J. Price, Price & Barker, Indianapolis, IN, for plaintiffs.
Martin C. Washton, Alicia J. Bentley, Gibson, Dunn & Crutcher, Los Angeles, CA, for defendant.
Plaintiff Monica J. Hubbard initiated this action on July 1, 1992 by filing a class action complaint alleging violations of the Truth in Lending Act ("TILA") and Regulation Z thereto, breach of contract, and negligence. Following the hearing on defendant's Motion for Summary Judgment or Summary Adjudication of Issues ("Motion") on February 8, 1993, Hubbard filed a First Amended Class Action Complaint ("Complaint") which added plaintiffs Earle S. Humphreys and Nicette M. Humphreys as class representatives and also new claims for fraud and negligent representation. Treating defendant's Motion as a motion for summary judgment or summary adjudication as to plaintiff's First Amended Class Action Complaint, the Court issued a proposed memorandum of decision and invited the parties to comment on the memorandum at a hearing on April 29, 1993. The Court now grants summary judgment in favor of defendant.
On November 11, 1983, Hubbard obtained a loan from defendant Fidelity Federal Bank (the "Bank") to finance the acquisition of her home. Hubbard signed a variable rate promissory note in the principal amount of $94,000 and gave the Bank a mortgage on her home as security for the note. At approximately the same time, the Bank provided Hubbard with certain disclosures required under the Truth in Lending Act.
Hubbard's loan was an adjustable rate mortgage ("ARM") loan; i.e., the interest rate varied over the life of the loan and was subject to periodic adjustments by the Bank. Hubbard's note provided for interest rate adjustments twice every year, with the change in the interest rate becoming effective on June 1 and December 1 of each year. Payments, however, were adjusted once a year on January 1. Payments were due in arrears; thus, a payment adjustment was based on the interest rate adjustment made effective December 1 of the preceding year.1
Motion, Mueller Decl., Exh. A at 29 () (emphasis added).2
The second provision stated:
Id. at 35 ("Adjustable Mortgage Loan Facts") (emphasis added).
In addition, at the time of the origination of Hubbard's loan, applicable federal regulations required lenders to give borrowers notice of adjustments to interest rates at least 30 but not more than 120 days prior to an interest rate adjustment immediately preceding a payment adjustment. 12 C.F.R. § 545.33(e) (1986) (48 Fed.Reg. 23,058).3
Over the course of Hubbard's loan, the Bank sent periodic notices to her informing her of the interest rate adjustments on her loan. From 1983 to 1991, Hubbard made timely payments on her loan; in July 1991, she paid off the loan.
In July 1991, Hubbard received a letter from LoanChek, an adjustable rate mortgage audit company, questioning the Bank's calculations of the interest rate on Hubbard's note. On or about July 3, 1991, Hubbard contacted the Bank and requested verification of the accuracy of the interest rates on her loan.
On August 22, 1991, the Bank wrote to Hubbard, stating that all interest and payment adjustments were correct. Hubbard filed this action against the Bank on July 1, 1992.
Hubbard alleges that the Bank used three different methods to select the index value upon which it based her interest rate.
The Federal Home Loan Bank ("FHLB") releases its monthly cost-of-funds index on or near the last business day of every month. For the June 1, 1984 interest rate adjustment, the Bank selected the index value released by the FHLB on May 25, 1984. Thus, that value, 10.135, was the monthly figure "most recent" to the interest rate adjustment date.4 According to Hubbard, this method of selecting an index value was consistent with the initial disclosures set forth in her loan documents. Plaintiff's Opposition at 8.
According to Hubbard, for the second interest rate adjustment, effective December 1, 1984, the Bank used a second method of selecting an index value. FHLB released an index value of 10.994 on November 30, 1984. Opposition, Exh. C. Rather than using this figure, which would have been consistent with Method 1, the Bank used the index released on October 26, 1984. This value was 11.039 and resulted in a higher interest rate than Hubbard would have been charged under Method 1.
Hubbard alleges further that in the fall of 1986, the Bank used a third method of selecting an index value.5 For the January 1, 1987 payment adjustment, the Bank adjusted the interest rate effective December 1, 1986. Instead of using the index value "most recent" to the interest rate adjustment date (Method 1), or using the preceding month's index value (Method 2), the Bank looked back sixty-some days to the index value released by the FHLB on September 29, 1986. In effect, it used the index value "most recent" to the notice period required by the loan documents — 30 to 45 days prior to the interest rate adjustment date which was December 1, 1986. The Bank used this method for the remaining term of Hubbard's loan. The Bank contends that it was justified, under the loan contract provisions and the regulations, in using this method for determining Hubbard's interest rate.
In the First Amended Complaint, Hubbard adds Earle S. Humphreys and Nicette M. Humphreys as class representatives in an attempt to cure any statute of limitations problems inherent in the initial complaint. The Humphreys obtained an ARM loan from defendant for $152,000 principal and gave the Bank a mortgage on their home on February 7, 1986. The Humphreys' note contained terms identical to Hubbard's concerning adjustment of the interest rate, except that the changed interest rate was to become effective on September 1 and March 1 of each year, and payments were to be adjusted every six months on October 1 and April 1. In addition, the Humphreys' note provided that the interest rate would not increase or decrease by more than 1.0 percent every six months.6
Plaintiffs allege that the Bank failed to use the index "most recent" to the interest rate adjustment date for the Humphreys' first interest rate adjustment, effective September 1, 1986, and that the Bank also changed its method for the second interest rate adjustment, effective March 1, 1987. According to plaintiffs, the Bank's last erroneous interest rate adjustment for the Humphreys' loan occurred on September 1, 1992. The Humphreys paid off their loan in November 1992.
Plaintiffs bring claims for violation of the Truth in Lending Act and Regulation Z, breach of contract, negligence, fraud, and negligent misrepresentation. Plaintiffs' TILA and breach of contract claims rest on two distinct and contradictory theories. With respect to their TILA claim, plaintiffs argue that the Bank's loan documents failed to specify the date to which the index value was to be "most recent" and therefore the Bank violated TILA provisions requiring disclosures in conjunction with consumer loans. With respect to their breach of contract claim, however, plaintiffs argue that the loan documents did specify the date to which the index was to be "most recent" — the effective date of the interest rate adjustment — and that the Bank breached the loan contract by failing to select the appropriate index.
Plaintiffs cannot prevail on both of these theories in the same lawsuit. The loan contract must first be interpreted. If plaintiffs' interpretation is correct, there has been an adequate disclosure of the loan terms under TILA; if defendant's interpretation is correct, it is clear that there has not been an adequate disclosure. Put differently, if, after interpreting the loan contract, the Court finds a breach of contract, it cannot find a TILA violation, and if it finds a TILA violation, it cannot find a breach of contract. Upon interpreting the loan documents in light of applicable regulations, the Court finds that plaintiffs' TILA claims have merit, but their breach of contract claims do not.
The loan documents require the following:
In addition, the...
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