Maganallez v. Hilltop Lending Corp.

• Decision Date: 25 April 2007
• Docket Number: No. C 06-07340 SI.,C 06-07340 SI.
• Citation: 505 F.Supp.2d 594
• Parties: Marino MAGANALLEZ and Mary M. Magallanez, Plaintiffs, v. HILLTOP LENDING CORPORATION, et al., Defendants,
• Court: U.S. District Court — Northern District of California

505 F.Supp.2d 594

Marino MAGANALLEZ and Mary M. Magallanez, Plaintiffs, v. HILLTOP LENDING CORPORATION, et al., Defendants,

No. C 06-07340 SI.

United States District Court, N.D. California.

April 25, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jeff Pollack, Robert Alan Goldstein, A Professional Law Corporation, Oakland, CA, for Plaintiffs.

Byron H. Done, Attorney at Law, Walnut Creek, CA, for Defendants.

ORDER DENYING DEFENDANTS' MOTION TO COMPEL ARBITRATION AND GRANTING IN PART DEFENDANTS' MOTION TO DISMISS

SUSAN ILLSTON, District Judge.

Defendants have filed a motion to compel arbitration, and a motion to dismiss. Hearing on the motion is currently scheduled for April 27, 2007. Pursuant to Civil Local Rule 7-1(b), the Court determines that defendants' motions are appropriate for resolution without oral argument and hereby VACATES the April 27, 2007 hearing. For the following reasons and for good cause shown, the Court DENIES defendants' motion to compel arbitration, and GRANTS IN PART defendants' motion to dismiss.

The Case Management Conference scheduled for April 27, 2007 remains on calendar. The parties are ORDERED to prepare and file a joint case management conference statement in advance of the conference.

BACKGROUND

This case centers on allegations that defendants misled plaintiffs into placing an economically burdensome mortgage on their home.¹ In August 2005, defendant Lisa Kaur called plaintiff Marino Magallanez at his home in San Leandro, California to discuss a home loan. Lisa Kaur was an employee of defendant Hilltop Lending Corporation, but she did not have a real estate license. At the time that Kaur solicited Marino, he and his wife Mary had a home loan of approximately $320,000.00. That loan had a fixed interest rate of 5.125% and a monthly payment of $1,770.00. Plaintiffs also had a line of credit of $30,000.00 with an interest rate of 7.25% and a monthly payment of $136.00.

Kaur suggested that plaintiffs consolidate these loans into a variable interest rate loan. She described a loan with an interest rate of 1% during the first year, which would increase by 1% each year until the fifth year, when it would reach 5%. After the fifth year, the interest would be based on the market rate. Kaur promised to refinance the loan within those five years to a loan with the same or better terms. She also promised that there would be no penalty if plaintiffs sold their home and that she would refund the costs of the loan above $2,000.00. On August 30, 2005, Kaur sent plaintiffs a letter setting forth these terms. The letter also stated that there would be a "3-year pre-payment penalty, if you choose to refinance within the first 3 years of this program."

Kaur assisted plaintiffs through the entire process of securing their loan. She obtained an appraisal of the home and gathered financial information about plaintiffs, including their credit score. Kaur wrote Downey Savings and Loan and requested certain loan terms for plaintiffs and a rebate of $11,862.50, 3.25% of the loan, for Hilltop Lending. Downey agreed to lend plaintiffs $365,000.00 and rebate Hilltop Lending $11,862.50. This rebate is referred to as the yield spread premium.²

Prior to the loan closing, Marino called Kaur to discuss the loan. She confirmed that the loan terms were those terms set forth in August 30, 2005 letter. Kaur subsequently faxed another letter to plaintiffs on December 6, 2005. This letter also confirmed the terms set forth in the August 30, 2005 letter, except that it stated that "[y]ou will not have a pre-payment penalty if you choose to pay your loan within 3 years. If such charge occurs, you will NOT be responsible for it. We guarantee that you will have no pre-payment penalty." Relying on the terms set forth in this letter, plaintiffs executed the loan on December 6, 2005. Plaintiffs would not have taken out the loan unless it included the terms set forth in the December 6, 2005 letter.

The actual promissory note that plaintiffs signed, for $365,000.00, contained terms, very different from those originally discussed and set forth in the December 6, 2005 letter. The loan had a variable interest rate and allowed negative amortization. The initial monthly payments were fixed for a year beginning on February 1, 2006, and were $1,011.68. After that, the payments could, increase by no more than 7.5% per year, as long as the unpaid balance did not exceed 110% of the initial loan and the loan would become fully amortized by February 1, 2010. The initial interest rate was 6.722%. From January 1, 2006 to January 31, 2006, the interest rate was 1.5%. After February 1, 2006, the interest rate was calculated at 3.5% above the Federal Home Bank of San Francisco Index 15 days before the change date, except the interest rate would not go above 11.5% per year. Thus, in February of 2006, plaintiffs' interest rate was 6.796%. It continued to increase each month, so that in December of 2006, the interest rate was 8.132%. The loan had a prepayment penalty if paid off in the first three years of the loan. Plaintiffs did not discover that the terms of their loan were different from the terms set forth in the December 6, 2005 letter until after the loan closed.

After the loan closed, Hilltop Lending received a check for $13,132.50. This amount included a $1,195.00 processing fee, a $75.00 credit report fee, and the $11,862.50 yield spread premium. Hilltop Lending sent plaintiffs $1,868.00 for the fees in excess of $2,000.00. In the document entitled "Mortgage Loan Disclosure Statement/Good Faith Estimate," defendants indicated to plaintiffs that there would be a "Mortgage Broker Commission/Fee" of $10,350.00 that would not be paid out of the loan proceeds and that there would be no additional compensation from the lender. Kaur did not explain to plaintiffs the effect that the yield spread premium compensation had on their interest rates, nor did any other defendants. Plaintiffs believe that this compensation was paid to Hilltop Lending for arranging a loan on terms less favorable than plaintiffs were eligible for, including the higher interest rate and prepayment penalty.

Plaintiffs filed a complaint in the United States District Court for the Northern District of California on November 30, 2006. Defendants have now filed a motion to compel arbitration and stay the action, and a motion to dismiss.

LEGAL STANDARD

I. Motion to Compel Arbitration and Stay Action

The California Arbitration Act ("CAA"), Code of Civil Procedure § 1281.2 prescribes a summary process for resolving petitions to compel arbitration.³ The CAA embodies a "strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution." Moncharsh v. Heily & Blase, 3 Cal.4th 1, 9, 10 Cal.Rptr.2d 183, 832 P.2d 899 (1992). It does not allow for adjudication of a demand to arbitrate by jury trial, but instead requires that trial courts sit as the trier of fact and weigh all the affidavits, declarations, and other documentary evidence, as well as oral testimony received at the courts' discretion, to reach a final determination. Rosenthal v. Great Western Financial Securities Corp., 14 Cal.4th 394, 413-14, 58 Cal.Rptr.2d 875, 926 P.2d 1061 (1996). A party seeking to compel arbitration bears the burden of proving the existence of a valid and enforceable arbitration agreement by a preponderance of the evidence. Id. On the other hand, a party opposing arbitration bears the burden of proving by a preponderance of the evidence all facts necessary to its defense. Id.

II. Motion to Dismiss

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).

In answering this question, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in the plaintiffs favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow the plaintiff to develop the case at this stage of the proceedings. See United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir.1981).

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 internal quotation marks omitted).

DISCUSSION

I. Motion to Compel Arbitration and Stay Action

Defendants argue that the parties contracted to have any disputes arising out of the transaction resolved by arbitration. Plaintiffs argue that there was no agreement to arbitrate because defendant did not sign the purported arbitration agreement. Plaintiffs further argue that, if there was an agreement, the agreement is unenforceable because there was no meeting of the minds as to several material terms. Alternatively, plaintiffs argue that the agreement is unenforceable because it is procedurally and substantively unconscionable. The Court finds that there was no valid agreement because there was no meeting of minds as to several material terms of the contract.

The document in dispute (hereinafter the "addendum") is a single page entitled "ADDENDUM" that was signed on September 23, 2005, only by plaintiffs. The addendum does not refer to any other documents. It...