Jordan v. Paul Financial Llc

• Decision Date: 30 September 2010
• Docket Number: No. C 07–04496 SI.,C 07–04496 SI.
• Citation: 745 F.Supp.2d 1084
• Court: U.S. District Court — Northern District of California
• Parties: Gregory M. JORDAN, Eli Goldhaber, and Josephina Goldhaber, individually and on behalf of all others similarly situated, Plaintiffs,v.PAUL FINANCIAL, LLC, Luminent Mortgage Capital, Inc., HSBC Bank USA, N.A., as Trustee of Luminent Mortgage Trust 2006–2, RBS Financial Products, Inc., and Does 2 through 10 inclusive, Defendants.

745 F.Supp.2d 1084

Gregory M. JORDAN, Eli Goldhaber, and Josephina Goldhaber, individually and on behalf of all others similarly situated, Plaintiffs,

v.PAUL FINANCIAL, LLC, Luminent Mortgage Capital, Inc., HSBC Bank USA, N.A., as Trustee of Luminent Mortgage Trust 2006–2, RBS Financial Products, Inc., and Does 2 through 10 inclusive, Defendants.

No. C 07–04496 SI.

United States District Court, N.D. California.

Sept. 30, 2010.

OPINION TEXT STARTS HEREWest CodenotesLimited on Preemption GroundsWest's Ann.Cal.Bus. & Prof.Code § 17200

David M. Arbogast, Jeffrey K. Berns, Arbogast & Berns LLP, Woodland Hills, CA, Jonathan Shub, Seeger Weiss LLP, Philadelphia, PA, Christopher A. Seeger, Lee A. Weiss, Rebecca Tingey, Browne Woods George LLP, New York, NY, Gerson Harry Smoger, Steven Michael Bronson, Smoger & Associates, P.C., Oakland, CA, Michael A. Bowse, Brown Woods George LLP, Los Angeles, CA, for Plaintiffs.Irene C. Freidel, Phoebe S. Winder, Kirkpatrick & Lockhart Preston Gates Ellis LLP, Brian M. Forbes, David D. Christensen, K & L Gates LLP, Boston, MA, John Patrick Christian, Tobin & Tobin, Matthew Gordon Ball, Rachel Chatman, K & L Gates, Paul S. Rosenlund, Terrance James Evans, Duane Morris LLP, San Francisco, CA, Benjamin B. Klubes, Michelle L. Rogers, Buckleysandler LLP, Caitlin M. Kasmar, Washington, DC, Richard J. Sahatjian, Buckleysandler LLP, Santa Monica, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT RBS' MOTION TO DISMISS

SUSAN ILLSTON, District Judge.

Defendant RBS Financial Products, Inc. Has moved to dismiss plaintiffs' Fourth Amended Complaint. As set forth below and for good cause shown, the Court GRANTS in part and DENIES in part defendant's motion to dismiss.

BACKGROUND

Plaintiffs filed a class action complaint against Paul Financial, LLC (“Paul Financial”) and Does 1–10 on August 30, 2007. The complaint was amended four times to add plaintiffs Eli Goldhaber and Josephina Goldhaber, as well as add defendants Luminent Mortgage Capital, Inc., Luminent Mortgage Trust 2006–2, HSBC National Association (“HSBC”), and RBS Financial Products, Inc. (“RBS”). The operative complaint is now the Fourth Amended Complaint (“FAC”), filed on October 13, 2009.¹

I. The Parties

Plaintiff Gregory Jordan was an individual residing in Discovery Bay, California who on or about December 30, 2005 refinanced his home loan with a payment-option adjustable rate mortgage (“Option ARM”) from Paul Financial. FAC, ¶ 2. Plaintiffs Eli Goldhaber and Josephina Goldhaber at all times relevant to this complaint were individuals residing in Valencia, California. Mr. and Mrs. Goldhaber entered into an Option ARM agreement with Paul Financial to refinance their home on July 28, 2005. FAC, ¶ 3.

Defendant Paul Financial is a California corporation which at all times relevant to this action engaged in the business of originating, underwriting, funding and servicing Option ARM loans. FAC, ¶ 4. While Paul Financial provided these loans directly to the public, the company re-sold approximately 75% of its loans to third party investors, and then sold the servicing rights of those loans to other investors.² Decl. of Dennis Tussey (“Tussey Decl.”) ¶ 4, 26.

On January 24, 2006 Jordan's loan was sold to defendant Luminent Mortgage Capital, Inc. (“Luminent Capital”), a Maryland corporation, which at all times relevant to this action was in the business of securitizing home mortgage loans and packaging those loans into trusts to be sold as bonds to investors. FAC, ¶ 6. Jordan's loan was pooled by Luminent Capital with other Option ARM loans and put into a mortgage-backed securities trust called Luminent Mortgage Trust 2006–2, a defendant in this case. FAC, ¶ 11. HSBC Bank USA, N.A., a national banking association, is the trustee of Luminent Mortgage Trust 2006–2 and also a defendant in this case. FAC, ¶ 11.

Similarly, Paul Financial sold Mr. and Mrs. Goldhaber's mortgage to Greenwich Capital Financial Products, Inc., a Delaware corporation, on August 4, 2005. FAC, ¶ 7. Greenwich Capital Financial Products, Inc. changed its name to RBS and is in the business of packaging loans into mortgage trusts or other financial products to be sold as bonds to investors. Id. Plaintiffs filed the FAC in order to add RBS as a defendant. According to the complaint, RBS had a “Master Loan Purchase and Interim Servicing Agreement” (“MLPA”) with Paul Financial wherein both parties agreed that Paul Financial would originate loans and sell them to RBS, and RBS agreed to purchase those loans. FAC ¶ 38.

II. The Loans

The loans Paul Financial provided to plaintiffs were option adjustable rate mortgages ³ which pegged their interest rate at 3.525% above a variable ⁴ index for Jordan, and 3.825% above the index for the Goldhabers. Tussey Decl., ex. 18, ¶ 2(D), (E). The Annual Percentage Rate (“APR”) stated in the Truth in Lending Disclosure Statement (TILDS) was 6.990% for Jordan, and 6.619% for the Goldhabers. Ex. 1, at 47. Ex. 2, at 52. However, the initial “teaser” interest rate was a promotional rate of 1% in the case of Jordan's loan and 1.375% in the case of the Goldhabers' loan. FAC, ¶ 74. This promotional rate was only offered for a brief period before the higher variable rate, which could change each month, took effect. Tussey Decl., ex. 18, ¶ 2(B). The TILDS Paul Financial gave to plaintiffs did disclose the actual APR listed on plaintiffs' loans. However, when Paul Financial gave plaintiffs their payment schedule outlining the first five years of the loan, the stated payments were calculated based upon the promotional rate and not the much higher APR which took effect soon after closing. The loan agreement specifically provided that monthly payments could only be increased once per year, and such increases were capped at an increase of 7.5%. Tussey Decl., ex. 18 ¶¶ 2(A), 3(D).

Additionally, because the payment schedule was based upon a low “teaser” interest rate and not the substantially higher APR, the minimum monthly payments for the first year would not cover the interest charged for the remaining months of the payment schedule, which was based upon the APR. ⁵ Thus, if plaintiffs paid only the monthly payment listed on the payment schedule, the outstanding interest would add to the principal owed on the loan. This process is known as negative amortization, and the borrower actually loses equity in the home with each monthly payment which fails to cover the interest due on the mortgage. The loan agreement referred to the possibility that negative amortization “could” occur:

E. Additions to my Unpaid Principal

My monthly payment could be less than the amount of the interest portion of the monthly payment that would be sufficient to repay the unpaid principal I owe at the monthly payment date in full on the Maturity Date in substantially equal payments. If so each month that my monthly payment is less than the interest portion, the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid principal. The Note Holder will also add interest on the amount of this difference to my unpaid principal each month.

Tussey Decl., ex 18. at 92. Another provision stated that “my unpaid principal can never exceed a maximum amount equal to one hundred ten percent (110%) of the principal amount I originally borrowed.” Id.

Plaintiffs allege that these aspects of the loan agreement constituted a violation of TILA, California's Unfair Competition Law (“UCL”), and amounted to a fraudulent omission under common law. On December 3, 2009, defendant RBS filed a motion to dismiss plaintiff's FAC on several grounds, including that the TILA claims against RBS are time-barred, that the state and common law claims are preempted by TILA, and that plaintiffs fail to state a claim in any event.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether the plaintiff is entitled to offer evidence in support of the claim. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012, 82 L.Ed.2d 139 (1984).

To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This “facial plausibility” standard requires the plaintiff to allege facts that add up to “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). While courts do not require “heightened fact pleading of specifics,” a plaintiff must allege facts sufficient to “raise a right to relief above the speculative level.” Twombly, 550 U.S. at 544, 555, 127 S.Ct. 1955.

In deciding whether the plaintiff has stated a claim upon which relief can be granted, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). However, the court is not required to accept as true “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir.2008).

If the Court dismisses the complaint, it must then decide whether to grant leave to amend. The Ninth Circuit has “repeatedly held that a district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir.2000) (citations and...