Munoz v. Financial Freedom Senior Funding Corp.

• Decision Date: 18 August 2008
• Docket Number: Case No. SACV 07-00710-CJC(ANx).
• Citation: 573 F.Supp.2d 1275
• Court: U.S. District Court — Central District of California
• Parties: Mary P. MUNOZ, individually, and on behalf of herself and all others similarly-situated, Plaintiff, v. FINANCIAL FREEDOM SENIOR FUNDING CORPORATION, Carteret Mortgage Corporation, Kathleen M. Miller, and Louis Soqui, Defendants.

573 F.Supp.2d 1275

Mary P. MUNOZ, individually, and on behalf of herself and all others similarly-situated, Plaintiff, v. FINANCIAL FREEDOM SENIOR FUNDING CORPORATION, Carteret Mortgage Corporation, Kathleen M. Miller, and Louis Soqui, Defendants.

Case No. SACV 07-00710-CJC(ANx).

United States District Court, C.D. California, Southern Division.

August 18, 2008.

Ingrid M. Evans, David Cheng, Steven Shaw, Renne Sloan Holtzman Sakai LLP, San Francisco, CA, Garrett Wotkyns, Bonnett Fairbourn Friedman and Balint PC, Phoenix, AZ, for Plaintiffs.

Thomas M. Hanson, Stephen C. Borgsdorf, Dykema Gossett PLLC, Ann Arbor, MI, Anthony J. Oliva, Andrew Miller, Allen Matkins Leck Gamble Mallory & Nastis LLP, for Defendant Financial Freedom Senior Funding Corporation.

Henry Ben-Zvi, Ben-Zvi and Associates, Santa Monica, CA, for Defendants Carteret Mortgage Corp. and Louis Soqui.

Michael Wilk, Lewis Brisbois, Bisgaard & Smith LLP, Los Angeles, CA, for Defendant Kathleen Miller. Proceedings:

DEFENDANT FINANCIAL FREEDOM SENIOR FUNDING CORPORATION'S MOTION TO DISMISS (FLD 7/14/08)

CORMAC J. CARNEY, District Judge.

Court's tentative ruling issued to counsel before case called. Court hears oral argument.

Court rules in accordance with the tentative. Final order to be issued.

ORDER GRANTING WITH PREJUDICE DEFENDANT FINANCIAL FREEDOM'S MOTION TO DISMISS

Defendant Financial Freedom Senior Funding Corporation ("Financial Freedom") moves to dismiss the second amended class action complaint of Plaintiff Mary P. Munoz. Ms. Munoz, a senior citizen, alleges that Financial Freedom preyed upon her by selling her a reverse mortgage and failing to prohibit her from purchasing a deferred annuity with the proceeds of that reverse mortgage. Second Amended Complaint ("SAC") ¶ 1. Financial Freedom moves to dismiss Ms. Munoz's claims on the ground that they are preempted by federal law, which exclusively regulates the activities of federal savings associations. Ms. Munoz opposes Financial Freedom's motion, arguing that her claims are not preempted by federal law because they implicate only a lender's common law obligations in the marketplace, and are not specific to its lending activity. For the following reasons, Financial Freedom's motion is GRANTED WITH PREJUDICE.

BACKGROUND

On June 2, 2008, the Court granted in part and denied in part Financial Freedom's motion for judgment on the pleadings with respect to Ms. Munoz's first amended complaint. Munoz v. Financial Freedom Senior Funding Corp. et al., 567 F.Supp.2d 1156 (C.D.Cal.2008). The Court held that Ms. Munoz's claims against Financial Freedom predicated upon allegedly deceptive or illegal fees, disclosures and advertising were preempted by the Home Owners Loan Act of 1933 ("HOLA") 12 U.S.C. § 1461 (1933). However, because the Court could not definitively conclude that Ms. Munoz was unable to allege any non-preempted claims against Financial Freedom, she was afforded leave to amend her complaint. Id.

In her second amended complaint, Ms. Munoz, age seventy-eight, makes new allegations about the reverse mortgage transaction that she claims has caused her financial injury. In September 2004, defendant Kathleen Miller offered financial advisory services to Ms. Munoz. SAC ¶ 33. During the course of their relationship, Ms. Miller advised Ms. Munoz that a reverse mortgage would suit her financial needs by giving her ready access to the equity in her home. Id. The reverse mortgage was brokered by defendant Louis Soqui, a broker employed by defendant Carteret Mortgage Corporation. Id. Financial Freedom, the lender, "originated and/or underwrote the reverse mortgage loan entered into by Ms. Munoz." Id. at ¶ 18. After closing costs and fees, Ms. Munoz received $118,174, and Financial Freedom obtained a mortgage on her property as security. See id. at ¶ 34. One month later, in October 2004, Ms. Miller sold Ms. Munoz a deferred annuity, claiming that it was a suitable financial vehicle to provide her a steady income for the remainder of her life and to pay off her outstanding debts and expenses. Id. at ¶ 35. With an initial investment of $60,000 in the deferred annuity, Ms. Munoz received a monthly payment of approximately $200 per month. Id. When this monthly payment proved insufficient to cover her monthly and other expenses, Ms. Munoz was forced to withdraw over $26,000 from the annuity early, incurring significant penalties and fees. Id. at ¶ 37.

Ms. Munoz seeks to hold Financial Freedom liable for failing to prohibit her from investing the proceeds of her reverse mortgage into a deferred annuity, see id. at ¶¶ 152-58, failing to inform her than an annuity purchase was not required in connection with the reverse mortgage, id. at ¶ 27, and failing to advise her that the annuity was "not proper" in connection with the reverse mortgage, id. She alleges that the practice of selling deferred annuities "concurrently" with reverse mortgages is a prohibited form of elder abuse. Id. at ¶ 17. To that end, Ms. Munoz alleges that Financial Freedom "is and was fully aware of the estate, tax and financial ploys utilized by Sales Agent Defendants [Ms. Miller, Mr. Soqui and Carteret]...." Id. at ¶ 31. She claims the lender took "insufficient action to prevent these abusive marketing and sales tactics and has instead ratified these tactics and continued to accept the benefits of these abusive sales practices." Id.

Based on these allegations, Ms. Munoz asserts the following class claims against Financial Freedom: (1) breach of fiduciary duty by selling Ms. Munoz a reverse mortgage and "permitting unsuitable deferred annuities to be sold concurrently with, its reverse mortgage loans," id. at ¶¶ 101-09; (2) aiding and abetting breach of fiduciary duty, id. at ¶¶ 110-13; (3) fraudulent concealment for failing to disclose the risk of purchasing an annuity with the proceeds of a reverse mortgage, id. at ¶¶ 114-25; (4) unjust enrichment for retaining fees generated by the reverse mortgage practice, id. at ¶¶ 126-29; (5) breach of the implied covenant of good faith and fair dealing for "failing to have a policy prohibiting the sale of deferred annuities in conjunction with the purchase of its reverse mortgage," id. at ¶¶ 152-58; and, (6) negligence/negligent misrepresentation for "failing to have a policy that prohibits the sale of deferred annuities," id. at 159-64.

STANDARD OF REVIEW

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the claims asserted in the complaint. The issue on a motion to dismiss for failure to state a claim is not whether the claimant will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims asserted. Gilligan v. Jamco Dev. Corp., 108 F.3d 246, 249 (9th Cir.1997). When evaluating a Rule 12(b)(6) motion, the Court must accept all material allegations in the complaint as true and construe them in the light most favorable to the non-moving party. Moyo v. Gomez, 32 F.3d 1382, 1384 (9th Cir.1994). Rule 12(b)(6) is read in conjunction with Rule 8(a), which requires only a short and plain statement of the claim showing that the pleader is entitled to relief. FED.R.CIV.P. 8(a)(2). Dismissal of a complaint for failure to state a claim is not proper where a plaintiff has alleged "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, ___ U.S. ___, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). In keeping with this liberal pleading standard, the district court should grant the plaintiff leave to amend if the complaint can possibly be cured by additional factual allegations. Doe v. United States, 58 F.3d 494, 497 (9th Cir.1995).

ANALYSIS

Financial Freedom has again moved to dismiss Ms. Munoz's complaint because her claims are preempted by federal law. Federal law may preempt state law in three ways, two of which are potentially applicable here:

First, Congress may preempt state law by so stating in express terms. Second; preemption may be inferred when federal regulation in a particular field is so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it. In such cases of field preemption, the mere volume and complexity of federal regulations demonstrate an implicitly congressional intent to displace all state law.

Bank of Am. v. City & County of S.F., 309 F.3d 551, 558 (9th Cir.2002) (internal quotation marks and citations omitted).¹ Typically, there is a presumption against federal preemption of state laws. That presumption does not exist, however, "when [a] state regulates in an area where there has been a history of significant federal presence." United States v. Locke, 529 U.S. 89, 108, 120 S.Ct. 1135, 146 L.Ed.2d 69 (2000). Banking is one such area in which Congress has created a long-standing federal regulatory framework. See Bank of Am., 309 F.3d at 558 (citing, e.g., M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 325-26, 4 L.Ed. 579 (1819)). For that reason, courts will not apply a presumption against preemption when analyzing federal banking statutes which are "so pervasive as to leave no room for state regulatory control." Conf. of Fed. Sav. & Loan Ass'ns v. Stein, 604 F.2d 1256, 1257, 1260 (9th Cir.1979), aff'd, 445 U.S. 921, 100 S.Ct. 1304, 63 L.Ed.2d 754 (1980); see Bank of Am., 309 F.3d at 559.

Under the Home Owners' Loan Act of 1933 ("HOLA"), 12 U.S.C. § 1461 (1933), and associated regulations, Congress authorized broad authority to promulgate regulations governing savings and loan institutions to the Office of Thrift Supervision ("OTS").² See 12 U.S.C. § 1464. The regulations authored by OTS pursuant to HOLA include a preemption regulation, 12 C.F.R. § 560.2, which provides as follows:

OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give Federal savings associations maximum flexibility to exercise their lending powers in...