Kilgore v. Keybank

Decision Date12 April 2010
Docket NumberNo. C08-2958 TEH.,C08-2958 TEH.
Citation712 F.Supp.2d 939
PartiesMatthew C. KILGORE, et al., Plaintiffs,v.KEYBANK, National Association, et al., Defendants.
CourtU.S. District Court — Northern District of California




Andrew A. August, Kevin Francis Rooney, Pinnacle Law Group, LLP, James C. Sturdevant, Monique Olivier, Whitney Huston, The Sturdevant Law Firm A Professional Corporation, San Francisco, CA, for Plaintiffs.

Todd C. Toral, Stephanie Ann Karnavas, Nixon Peabody LLP, San Francisco, CA, Courtney Erin Quinn Brooks, W. Scott O'Connell, Nixon Peabody LLP, Manchester NH, John Noble Giftos, Michael Best & Friedrich, LLP, Madison, WI, for Defendants.



This matter came before the Court on March 29, 2010, on the motion to dismiss filed by Defendants KeyBank, National Association and Great Lakes Educational Loan Services, Inc. For the reasons set forth below, the motion is GRANTED.


Plaintiffs and putative class representatives Matthew C. Kilgore and William Bruce Fuller (Plaintiffs) are California residents who enrolled in a helicopter flight academy operated in Oakland, California by Silver State Helicopters, LLC (Silver State). The Third Amended Complaint alleges that Plaintiffs-and the class of student loan borrowers they seek to represent-paid Silver State nearly $60,000 in tuition to be trained as commercial helicopter pilots, but failed to complete the educational program before Silver State filed for bankruptcy on February 4, 2008. Plaintiffs financed their tuition by obtaining student loans from KeyBank, National Association and its education lending division, Key Education Resources (collectively KeyBank). Plaintiffs allege that KeyBank defied its own risk management policies to partner with Silver State, ignoring red flags-including the school's recent founding, deficient credentials, and poor student placement rates-that should have signaled Silver State's risk of failure. Plaintiffs now seek to enjoin KeyBank and Great Lakes Educational Loan Services, Inc. (“Great Lakes”)-which services their loans-from collecting the loans or reporting the loan balances to credit reporting agencies.

Plaintiffs instituted this putative class action in Alameda County Superior Court on May 12, 2008, against KeyBank and Great Lakes. Student Loan Xpress, Inc. (“SLX”) and American Education Services (“AES”)-which allegedly made and serviced loans to Silver State students-were added as defendants in a First Amended Complaint filed four days later. After Plaintiffs filed a Second Amended Complaint (“SAC”), KeyBank removed the action to federal court, and a settlement with SLX led to its and AES's dismissal on October 27, 2009.

After an unsuccessful mediation, KeyBank and Great Lakes (collectively Defendants) responded to the SAC on April 24, 2009 by moving to dismiss and to compel arbitration. The Court denied the motion to compel arbitration on July 8, 2009, 2009 WL 1975271-a ruling Defendants have appealed to the Ninth Circuit-and continued the motion to dismiss. On August 17, 2009, this matter was stayed except for document discovery and the motion to dismiss. Defendants filed a new motion to dismiss on October 5, 2009, in response to which Plaintiffs amended the complaint. Defendants moved to dismiss the Third Amended Complaint (“TAC”) pursuant to Federal Rules of Civil Procedure 12(b)(6) and 12(b)(3) on January 11, 2010. Plaintiffs opposed the motion.


Dismissal is appropriate under Federal Rule of Civil Procedure 12(b)(6) when a plaintiff's allegations fail “to state a claim upon which relief can be granted.” In ruling on a motion to dismiss, the Court must “accept all material allegations of fact as true and construe the complaint in a light most favorable to the non-moving party.” Vasquez v. L.A. County, 487 F.3d 1246, 1249 (9th Cir.2007). Courts are not, however, “bound to accept as true a legal conclusion couched as a factual allegation.” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009).

A complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief,” Fed.R.Civ.P. 8(a)(2), in order to ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.’ Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). A Rule 12(b)(6) dismissal “can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1990). To survive a motion to dismiss, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955. Plausibility does not equate to probability, but it requires “more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 129 S.Ct. at 1949. “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Dismissal of claims that fail to meet this standard should be with leave to amend unless it is clear that amendment could not possibly cure the complaint's deficiencies. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1296 (9th Cir.1998).

Rule 12(b)(3) governs a motion to dismiss for improper venue. When “resolving motions to dismiss based on a forum selection clause, the pleadings are not accepted as true, as would be required under a Rule 12(b)(6) analysis.” Argueta v. Banco Mexicano, S.A., 87 F.3d 320, 324 (9th Cir.1996). To the contrary, it “is consistent with the Supreme Court standard for resolving forum selection clause cases for “the district court to consider facts outside of the pleadings.” Id.


Plaintiffs bring six causes of actions under California's Unfair Competition Law (“UCL”), Cal. Bus. & Prof.Code § 17200. The claims are all premised on the Federal Trade Commission's “Holder Rule,” 16 C.F.R. § 433.2, which “requires purchase money loan agreements (loans supplying money for the purchase of goods or services) arranged by sellers to contain a notice to all loan holders that preserves the borrower's ability to raise claims and defenses against the lender arising from the seller's misconduct.” Armstrong v. Accrediting Council for Continuing Educ. & Training, Inc., 168 F.3d 1362, 1365 (D.C.Cir.1999). Defendants argue that all six of Plaintiffs' causes of action fail to state a claim for relief, and are preempted by the National Bank Act. They also urge the Court to dismiss pursuant to a forum selection clause that calls for an Ohio venue, and argue that Plaintiffs' claims are barred by the economic loss doctrine.

The Court begins by examining the Holder Rule and determining whether any of Plaintiffs' six causes of action state plausible claims for relief under the Rule 12(b)(6) standard. For any claims that overcome that hurdle, the Court will then assess whether they must nevertheless be dismissed due to federal preemption. Since the Court finds that all of Plaintiffs' causes of action falter at one of those two steps, it is unnecessary to address KeyBank's other arguments.1

I. Plaintiffs' Claims Under the Holder Rule and California's Unfair Competition Law

The so-called “Holder Rule” was adopted by the Federal Trade Commission (“FTC”) in 1975 to stem the “unfair practice” of separating “the buyer's duty to pay for goods or services from the seller's reciprocal duty to perform as promised” in the financing of consumer sales. 40 Fed. Reg. 53,522 (Nov. 18, 1975). The Rule makes it an “unfair or deceptive act or practice” under section 5 of the FTC Act “for a seller, directly or indirectly, to”:

(a) Take or receive a consumer credit contract which fails to contain the [Holder Notice], or,
(b) Accept, as full or partial payment for such sale or lease, the proceeds of any purchase money loan (as purchase money loan is defined herein), unless any consumer credit contract made in connection with such purchase money loan contains the [Holder Notice].

16 C.F.R. § 433.2.2 The “Holder Notice” must be written “in at least ten point, bold face, type” and read as follows:


Id. The onus is therefore placed on the seller to ensure the Holder Notice's inclusion in consumer credit contracts, either by refusing a contract that omits the Notice, or by refusing proceeds of a loan made pursuant to such a contract.4 When the Holder Notice appears in a consumer credit contract, a debtor can assert the same defenses against his lender as he could against the seller. “For example, if a used car dealer who fraudulently sells a lemon also arranges the buyer's financing through a bank, the buyer may rely on the dealer's fraud as a defense against repaying the bank loan.” Armstrong, 168 F.3d at 1365. No private right of action exists to enforce the Holder Rule, violations of which can only be pursued by the FTC. See 15 U.S.C. § 45(a)(2) ( section 5 of the FTC Act, empowering the FTC “to prevent persons, partnerships, or corporations ... from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce”); Holloway v. Bristol-Myers Corp., 485 F.2d 986, 987 (D.C.Cir.1973) ([P]rivate actions to vindicate rights asserted under the Federal Trade Commission Act may not be maintained.”).

Plaintiffs allege that they and every member...

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    ...benefits to consumers or competition; and (3) the injury could reasonably been avoided.’ ” Id. at 19 (citing Kilgore v. KeyBank, N.A., 712 F.Supp.2d 939, 951–52 (N.D.Cal.2010)). Plaintiffs argue they were injured because they were required to “pay exorbitant prices for [FPI]” and forced to ......
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    • United States
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    ...court then granted Defendants' motion to dismiss for failure to state a claim upon which relief can be granted. Kilgore v. KeyBank, 712 F.Supp.2d 939, 947–58 (N.D.Cal.2010).6 Plaintiffs appealed, and we have jurisdiction under 28 U.S.C. § 1291.7II. Plaintiffs argue that the district court e......
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