Pemberton v. Nationstar Mortg. LLC, Case No. 14-cv-1024-BAS-WVG

CourtUnited States District Courts. 9th Circuit. United States District Court (Southern District of California)
Writing for the CourtHon. Cynthia Bashant, United States District Judge
Citation331 F.Supp.3d 1018
Decision Date26 June 2018
Docket NumberCase No. 14-cv-1024-BAS-WVG
Parties Michael PEMBERTON, et al., Plaintiffs, v. NATIONSTAR MORTGAGE LLC, Defendant.

331 F.Supp.3d 1018

Michael PEMBERTON, et al., Plaintiffs,
v.
NATIONSTAR MORTGAGE LLC, Defendant.

Case No. 14-cv-1024-BAS-WVG

United States District Court, S.D. California.

Signed June 26, 2018


331 F.Supp.3d 1029

David J. Vendler, Law Offices of David J. Vendler, San Marino, CA, Michael R. Brown, Michael R. Brown APC, Irvine, CA, for Plaintiffs.

Erik Wayne Kemp, John B. Sullivan, Mary C. Kamka, Severson and Werson, PC, San Francisco, CA, for Defendant.

ORDER DISMISSING IN PART AND SUSTAINING IN PART THE FIRST AMENDED COMPLAINT UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6)

[ECF No. 54]

Hon. Cynthia Bashant, United States District Judge

331 F.Supp.3d 1030

This matter is before the Court on notice to Plaintiffs Michael Pemberton and Sandra Collins-Pemberton (the "Pembertons") of a possible Rule 12(b)(6) dismissal of the claims raised in the First Amended Complaint ("FAC"). (ECF No. 53.) The Pembertons have filed a response (ECF No. 54), Defendant Nationstar Mortgage LLC ("Nationstar") has opposed the response (ECF No. 55), and the Pembertons have replied (ECF No. 60). The parties appeared before the Court on June 7, 2018 for oral argument and the case was submitted. (ECF No. 69.) The matter is ripe for decision.

Overview

This case involves pressing questions about the scope of 26 U.S.C. § 6050H, a federal statute which requires an individual who receives at least $600 in home mortgage interest payments during a calendar year to report the amount of interest received to the IRS and the individual who paid the interest. 26 U.S.C. §§ 6050H(a), (d). The fundamental dispute between the parties is whether Section 6050H requires Nationstar to report deferred interest payments.

In 2005, the Pembertons obtained a home mortgage loan which permitted them to defer mortgage interest for payment at a later date and added that deferred interest to principal. The Pembertons deferred interest during the earlier years of their loan, which caused the outstanding principal on their loan to increase above the original amount. In 2013, Nationstar became the Pembertons' loan servicer and received mortgage payments from them, which Nationstar applied to interest and principal due on the loan. Thereafter, Nationstar respectively provided the IRS and the Pembertons with Forms 1098, which reported the Pembertons' payments on interest and principal for 2013. The amount of interest reported did not reflect deferred interest, which the Pembertons contend violated Section 6050H.

Federal courts have proceeded with caution in addressing challenges to mortgage lender and servicer Section 6050H reporting, like the challenge the Pembertons raise, even when those challenges present familiar state law claims.1 This is because "[n]either § 6050H nor its implementing regulations provide explicit direction to recipients on how, whether

331 F.Supp.3d 1031

and when to report capitalized interest." Strugala v. Flagstar Bank, FSB , No. 5:13-cv-5927-EJD, 2015 WL 5186493, at *3 (N.D. Cal. Sept. 4, 2015) ; see also Pemberton v. Nationstar Mortgage LLC , No. 14-cv-1024-BAS-WVG, ECF No. 17 at 5–6 (S.D. Cal. Feb. 5, 2015) (implicitly recognizing lack of clarity under Section 6050H and existing IRS regulations and revenue ruling). State law claims incorporating Section 6050H -based challenges raise "novel" issues that have given federal courts pause, particularly because of the IRS's role in the federal tax scheme.2 See Horn v. Bank of Am., N.A. , No. 3:12 cv-1718-GPC-BLM, 2014 WL 1455917, at *3 (S.D. Cal. Apr. 14, 2014) ; see also Strugala , 2015 WL 5186493, at *5 ("Strugala's claims raising a novel question of taxation policy in the context of th[e] form [1098] are the types on which the agency should have the first word in accordance with Congress' broad mandate."); Smith v. Bank of Am., N.A. , No. CV 14-6668 DSF (PLA), 2015 WL 12979198, at *1, *3–5 (C.D. Cal. Feb. 3, 2015) (initially dismissing all claims on the ground that failure to comply with Section 6050H"fall[s] within the Internal Revenue Service's (IRS) exclusive enforcement regime"), vacated by , 679 Fed. App'x 549 (9th Cir. 2017). Despite the filing of five class actions in federal courts concerning Section 6050H reporting, with the earliest filed some six years ago, the IRS has not weighed in on Section 6050H's scope.

After careful consideration, this Court has determined that the Pembertons' state law claims generally may be resolved based on each claim's elements. For the reasons herein, the Court concludes that (1) the Pembertons' claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, UCL fraudulent and unlawful prong claims, and their declaratory judgment claim (as it is pleaded) must be dismissed with prejudice; (2) the Pembertons' claim for a preliminary and permanent injunction must be dismissed without prejudice; and (3) the Pembertons' UCL unfair prong claim and negligence claim are plausible.

I. BACKGROUND

A. Relevant Statutory and Regulatory Background

Congress permits taxpayers to claim as a deduction from their taxes all interest paid during a given year. 26 U.S.C. § 163(a) ("There shall be allowed as a deduction all interest paid ... within the taxable year on indebtedness."). This deduction may be claimed for interest payments a homeowner makes on his or her home mortgage loan. 26 U.S.C. § 163(h). Generally, this deduction must be claimed within three years of the filing of a tax return. 26 U.S.C. § 6511(a).

Congress enacted Section 6050H, an information reporting statute, to "assist the [IRS] in verifying the accuracy of claimed mortgage interest deductions." Joint Comm. on Taxation, H.R. 4170, 98th Cong. P. L. 98-369, Gen. Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, at 488 (Dec. 31, 1984). Section 6050H requires any individual who receives

331 F.Supp.3d 1032

interest aggregating over $600 on a mortgage in a given year from another individual to furnish the Internal Revenue Service ("IRS") with an information return identifying the amount of interest received. 26 U.S.C. § 6050H(a) ; 26 U.S.C. § 6050H(b)(2)(B). The interest recipient must also provide a statement to the individual who provided the interest, which also identifies the amount of interest received during the year. 26 U.S.C. § 6050H(d). By regulation, the interest recipient meets its statutory obligations by providing the IRS and the interest provider with a Form 1098. 26 C.F.R. §§ 1.605H-2(a), (b). Existing regulations provide some guidance on how to calculate the amount of interest received on a mortgage during a calendar year and identify certain payments that do not qualify as reportable interest. 26 C.F.R. § 1.6050H-1(e). However, neither the statute, nor the implementing regulations address deferred interest.

By statute and regulation, monetary penalties may be imposed on an interest recipient who intentionally disregards the requirement to provide a Form 1098 or who includes "incorrect information" on a form. See 26 U.S.C. § 6722(a)(2)(B) (imposing penalties for "inclusion of incorrect information" on a "payee statement" required under Section 6050H(d) ); 26 U.S.C. § 6721(a)(2)(B) (imposing penalties for "inclusion of incorrect information" on a "payee statement" to IRS required under Section 6050H(a) ); 26 U.S.C. §§ 6721(e), 6722(e) ; see also 26 C.F.R. § 1.6050H-2(e)(2)(i)-(iii).

B. The Pembertons' Loan and 2013 Form 1098 From Nationstar3

The Pembertons are California homeowners who obtained an Option ARM mortgage loan in 2005, the terms of which provided an option to make a monthly interest payment less than the full amount due. Under this option, the monthly interest the Pembertons did not pay was added to the principal amount of their loan and treated as principal for the purposes of the loan. When Nationstar began servicing their loan in July 2013, the Pembertons' loan balance was $7,575.41 above the original balance, an amount which the Pembertons allege was charged as interest in the earlier years of their loan but not paid, i.e. deferred interest.

Nationstar provided the Pembertons with a Form 1098 showing the amount of mortgage interest it received from them during the 2013 tax year. According to the Pembertons, the amount reported did not account for deferred interest payments despite the presence of deferred interest. The Pembertons allege that interest does not lose its character as interest and so Nationstar was required to apply their payments to retirement of deferred interest before ever applying such payments to principal. When the Pembertons realized the interest amount reported in their Form 1098 did not account for deferred interest payments, they brought the issue to Nationstar's attention. Nationstar contended that the Pembertons had not deferred interest while it serviced their loan and that it had not received any previously deferred interest amounts from the Pembertons' prior servicer. Nationstar did not issue the Pembertons a revised Form 1098 that accounted for deferred interest payments.

Because the IRS...

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10 practice notes
  • Copart, Inc. v. Sparta Consulting, Inc., No. 2:14-cv-0046-KJM-CKD
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
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    ..."a UCL claim under the unlawful and fraudulent prongs." Id. ; see also Pemberton v. Nationstar Mortg. LLC , No. 14-CV-1024-BAS-WVG, 331 F.Supp.3d 1018, 1065, 2018 WL 3126102, at *29 (S.D. Cal. June 26, 2018) (same except sustaining "negligence claims" in addition to "UCL unfair prong").This......
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    ...Tucker v. Soy Cap. Bank & Tr. Co., 974 N.E.2d 820, 833-34 (Ill. App. Ct. 2012) (Illinois fraud); Pemberton v. Nationstar Mortg. LLC, 331 F. Supp. 3d 1018, 1043 (S.D. Cal. 2018) (California fraud); Buchanan v. Improved Props., LLC, 7 N.E.3d 634, 642 (Ohio Ct. App. 2014) (Ohio fraud); Ind. Co......
  • Elgindy v. AGA Serv. Co., Case No. 20-cv-06304-JST
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    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
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    ...intentional and for the purpose of defrauding and deceiving plaintiffs . . . are insufficient.'" Pemberton v. Nationstar Mortg. LLC, 331 F. Supp. 3d 1018, 1047 (S.D. Cal. 2018) (quoting Linear Tech. Corp. v. Applied Materials, Inc., 152 Cal. App. 4th 115 (2007)) (ellipsis in original). Beca......
  • Rovai v. Select Portfolio Servicing, Inc., Case No. 14-cv-01738-BAS-MSB
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Southern District of California)
    • April 23, 2019
    ...of Rovai's concededly novel claims was ripe for adjudication. Following the Court's decision in Pemberton v. Nationstar Mortgage LLC, 331 F. Supp. 3d 1018 (S.D. Cal. 2018), aPage 4 case involving the same underlying legal issues, the Court issued an extensive order that sustained in part an......
  • Request a trial to view additional results
10 cases
  • Copart, Inc. v. Sparta Consulting, Inc., No. 2:14-cv-0046-KJM-CKD
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Eastern District of California
    • September 10, 2018
    ..."a UCL claim under the unlawful and fraudulent prongs." Id. ; see also Pemberton v. Nationstar Mortg. LLC , No. 14-CV-1024-BAS-WVG, 331 F.Supp.3d 1018, 1065, 2018 WL 3126102, at *29 (S.D. Cal. June 26, 2018) (same except sustaining "negligence claims" in addition to "UCL unfair prong").This......
  • Ferguson v. Electrolux Home Prods., No. 15-cv-09882
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • June 1, 2020
    ...Tucker v. Soy Cap. Bank & Tr. Co., 974 N.E.2d 820, 833-34 (Ill. App. Ct. 2012) (Illinois fraud); Pemberton v. Nationstar Mortg. LLC, 331 F. Supp. 3d 1018, 1043 (S.D. Cal. 2018) (California fraud); Buchanan v. Improved Props., LLC, 7 N.E.3d 634, 642 (Ohio Ct. App. 2014) (Ohio fraud); Ind. Co......
  • Elgindy v. AGA Serv. Co., Case No. 20-cv-06304-JST
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • March 29, 2021
    ...intentional and for the purpose of defrauding and deceiving plaintiffs . . . are insufficient.'" Pemberton v. Nationstar Mortg. LLC, 331 F. Supp. 3d 1018, 1047 (S.D. Cal. 2018) (quoting Linear Tech. Corp. v. Applied Materials, Inc., 152 Cal. App. 4th 115 (2007)) (ellipsis in original). Beca......
  • Rovai v. Select Portfolio Servicing, Inc., Case No. 14-cv-01738-BAS-MSB
    • United States
    • United States District Courts. 9th Circuit. United States District Court (Southern District of California)
    • April 23, 2019
    ...of Rovai's concededly novel claims was ripe for adjudication. Following the Court's decision in Pemberton v. Nationstar Mortgage LLC, 331 F. Supp. 3d 1018 (S.D. Cal. 2018), aPage 4 case involving the same underlying legal issues, the Court issued an extensive order that sustained in part an......
  • Request a trial to view additional results

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