Romero v. Countrywide Bank, N.A.

• Decision Date: 27 July 2010
• Docket Number: Case No. C 07-4491 JF (PVT)
• Citation: 740 F.Supp.2d 1129
• Parties: Bertha ROMERO, et al., Plaintiff, v. COUNTRYWIDE BANK, N.A., Country Wide Home Loans, Inc., and Does 7 through 10 inclusive, Defendants.
• Court: U.S. District Court — Northern District of California

740 F.Supp.2d 1129

Bertha ROMERO, et al., Plaintiff,

v.COUNTRYWIDE BANK, N.A., Country Wide Home Loans, Inc., and Does 7 through 10 inclusive, Defendants.

Case No. C 07-4491 JF (PVT).

United States District Court,

N.D. California,

San Jose Division.

July 27, 2010.

David M. Arbogast, Jeffrey K. Berns, Arbogast & Berns LLP, Woodland Hills, CA, Jonathan Shub, Seeger Weiss LLP, Philadelphia, PA, Lee Weiss, Rebecca Tingey, Browne Woods George LLP, New York, NY, Christopher A. Seeger, Seeger Weiss LLP, New York, NY, for Plaintiff.

Brooks Russell Brown, Goodwin Procter LLP, Los Angeles, CA, Robert Bader, Goodwin Procter LLP, San Francisco, CA, James Matthew Goodin, Phillip Russell Perdew, Locke Lord Bissell & Liddell LLP, Chicago, IL, Thomas J. Cunningham, Locke Lord Bissell & Liddell LLP, Sacramento, CA, David A. Super,Richard P. Sobiecki, Ryan E. Bull, Richard P. Sobiecki, Baker Botts LLP, Washington, DC, Kevin E. Cadwell, Baker Botts L.L.P., Palo Alto, CA, Ryan E. Bull, Baker Botts LLP, Washington, DC, for Defendant.

ORDER ¹ GRANTING COUNTRYWIDE DEFENDANTS' MOTION TO DISMISS

JEREMY FOGEL, District Judge.

I. BACKGROUND

A. The Loan Documents

Between June 1, 2005 and December 7, 2006 Plaintiffs Bertha Romero, James Ruiz, Margarita Castro, Teresa Aguilera, Gilbert Gomez, Edward Tenorio, and Donna Tenorio applied for primary residence mortgages through First Magnus. ² Third Amended Complaint ("TAC") ¶¶ 2-6. In each instance, the parties' obligations are governed by a Note and a Truth-in-Lending Disclosure Statement ("TILDS") (collectively, the "Loan Documents"). Plaintiffs allege that First Magnus provided them with the Loan Documents, but that Defendants Countrywide Bank, N.A. ("Countrywide Bank") and Countrywide Home Loans, Inc. ("CHL") (collectively, "the Countrywide Defendants") "dictated the terms of, selected, pre-approved, and/or drafted" them. Id. ¶ 54(e). The TAC states that after closing, Plaintiffs' Adjustable Rate Mortgages ("Option ARM loans") were sold to the Countrywide Defendants. Id. ¶ 7.

With respect to each Option ARM loan, the Note states "I will make a payment every month" and "I will make these payments every month until I have paid all the Principal and Interest and any other charges described below that I may owe under this Note." Id., Exs. 1-5 ¶ 3(A).³ Plaintiffs claim that the TILDS contains an annual percentage rate ("APR") that they anticipated would be the interest rate for the life of the loan, and also provided a payment schedule that purported to reflect the amounts due each month under the loan terms. See TAC Exs. 1-5 ("Your payment schedule will be"). However, Plaintiffs allege that in fact the payment schedule was not based upon or related to the APR listed in their TILDS but rather was based upon a rate specified in the Note that would apply only for the first thirty days. Id. ¶ 74-76. Plaintiffs also assert that the only payment amount reflected in the Note was one based upon this "teaser rate." Id. ¶ 22, Exs. 1-5, ¶ 3(B).

Plaintiffs allege that after the first thirty days, the applicable interest rate for theirloans increased so dramatically that the monthly payments they made pursuant to the payment schedule were not even sufficient to cover the monthly interest. Id. ¶¶ 23, 26-27, 78. This led to negative amortization. Id. ¶¶ 23-25.

The TAC claims that the Loan Documents failed to disclose clearly and conspicuously that negative amortization was certain to occur under the terms of the loans, indicating instead that the "Minimum Payment could be less" than the full amount of monthly interest owed. Id. ¶¶ 23-24, 31, Exs. 1-5 ¶ 3(E). Along with this allegedly inconspicuous disclosure, the initial monthly payment in the Note and the payment schedule in the TILDS were premised upon a minimum payment that would guarantee negative amortization. Plaintiffs allege that the combined effect of these misleading statements has resulted in their stated principal balances increasing substantially over time, despite the fact that they have made all of their required payments. Id. ¶ 24.

B. Countrywide's alleged role in the option arm loan origination process

The TAC asserts that "Countrywide is in the business of ... securitizing home mortgage loans by packaging those loans into trusts or other vehicles in order to sell bonds to investors based on the income to be derived from those loans." Id. ¶ 54(a). Plaintiffs allege that the Countrywide Defendants developed a plan to have third-party originators such as First Magnus sell loans on their behalf in order to increase the number of loans they could securitize. Id. ¶ 54(b). The TAC alleges that First Magnus agreed with the Countrywide Defendants that it would sell certain Option ARM loans to homeowners and that First Magnus funded those Option ARM loans using monies available to it through its warehouse lines of credit (often provided by the Countrywide Defendants) or through other means. The Countrywide Defendants then would purchase the loans from the originators. Id. ¶ 54(d). Plaintiffs allege that pursuant to this arrangement, First Magnus would collect fees from the homeowners to whom it sold the Option ARM loans as well as from the Countrywide Defendants, while the Countrywide Defendants would collect revenues through the securitization process and in connection with servicing rights they retained on the loans after the loans were securitized. Id.

Plaintiffs allege that the Countrywide Defendants dictated the terms of, selected, pre-approved, and/or drafted the Loan Documents at issue in this case with the intention that First Magnus would utilize and provide them to Plaintiffs and putative class members in conjunction with originating and selling the Option ARM loans. Id. ¶ 54(e). The TAC asserts that the Countrywide Defendants and First Magnus jointly approved the characteristics of the Option ARM loans First Magnus sold to Plaintiffs and that the use of these Loan Documents by First Magnus was a precondition the Countrywide Defendants imposed for purchasing the loans. Id. Plaintiffs allege that it was only by using the Loan Documents prepared by and/or pre-approved by the Countrywide Defendants that First Magnus could be assured that it would be able to resell quickly the Option ARM loans it issued to Plaintiffs. Id. ¶ 54(g).

C. Procedural History

Plaintiff Romero filed her original class action complaint on August 30, 2007, asserting claims under the Truth in Lending Act ("TILA") and California law against First Magnus and Does one through ten. First Magnus did not answer or otherwise respond to the complaint. On October 11,2007, Romero filed a first amended complaint ("FAC") against First Magnus and Does one through ten asserting the same claims. On December 10, 2007, before First Magnus responded to the FAC, Romero filed a Notice of Bankruptcy Filing by First Magnus. Thereafter, on September 22, 2008, Romero moved for leave to file a second amended complaint ("SAC"), asserting, upon information and belief, that the Countrywide Defendants purchased Plaintiffs' mortgage loans and "serviced or currently services" the mortgage loans of Romero, Castro and the Tenorios. The Court granted the motion.

Romero filed her SAC on November 17, 2008, adding Ruiz, Castro, Aguilera, Gomez and the Tenorios as plaintiffs, deleting First Magnus as a defendant, and naming the Countrywide Defendants, Homecomings Financial LLC, Washington Mutual Bank, Aurora Loan Services, and Does six though ten as additional defendants. On March 9, 2009, Plaintiffs moved for leave to file a third amended complaint. After receipt of that motion, Defendants' counsel advised Plaintiffs' counsel of certain deficiencies in the proposed pleading. On April 20, 2009, Plaintiffs withdrew their motion for leave to file the then-proposed third amended complaint. On July 10, 2009, Plaintiffs filed a new motion for leave to file a revised third amended complaint, asserting, upon information and belief, that First Magnus had sold Plaintiffs' mortgage loans to the Countrywide Defendants. The Court granted that motion on August 21, 2009. Finally, the operative TAC was filed on September 14, 2009 against the Countrywide Defendants and Does seven through ten, alleging violations of TILA and California's Unfair Competition Law ("UCL"), Bus. & Prof.Code § 17200 et seq. , as well as a fraudulent omissions claim. The Countrywide Defendants, who are the only remaining named defendants, move to dismiss for failure to state a claim upon which relief may be granted.

II. LEGAL STANDARD

"Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory." Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir.2008). For purposes of a motion to dismiss, the plaintiff's allegations are taken as true, and the court must construe the complaint in the light most favorable to the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' 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." Ashcroft v. Iqbal, ---U.S. ----, ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009), Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Thus, a court need not accept as true conclusory allegations, unreasonable inferences, legal characterizations, or unwarranted deductions of fact contained in the complaint. Clegg v. Cult Awareness Network, 18 F.3d 752, 754-755 (9th Cir.1994).

Leave to amend must be granted unless it is clear that the complaint's deficiencies cannot be cured by amendment. Lucas v. Dep't of Corr., 66 F.3d 245, 248 (9th Cir.1995). When amendmen...