Rovai v. Select Portfolio Servicing, Inc.

Decision Date27 June 2018
Docket NumberCase No. 14-cv-1738-BAS-WVG
CourtU.S. District Court — Southern District of California



This matter is before the Court on a notice to Plaintiff Adriana Rovai of a possible Rule 12(b)(6) dismissal of the claims alleged in the First Amended Complaint ("FAC"). (ECF No. 53.) Rovai has filed a response (ECF No. 54), Defendant Select Portfolio Servicing, Inc. ("SPS") has opposed the response (ECF No. 66), and Rovai has filed a reply (ECF No. 70). The parties appeared before the Court on June 7, 2018 for oral argument and the case was submitted. (ECF No. 82.) The matter is ripe for decision.


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 SPS to report deferred interest payments.

In 2005, Rovai obtained a home mortgage loan which permitted her to defer mortgage interest for payment at a later date and added that deferred interest to principal. She deferred interest during the earlier years of her loan, which caused the outstanding principal on her loan to increase above the original amount. In 2011, SPS became Rovai's loan servicer and received mortgage payments from her, which SPS applied to interest and principal due on the loan. Thereafter, SPS respectively provided the IRS and Rovai with Forms 1098, which reported Rovai's payments on interest and principal for 2011. The amount of interest reported did not reflect deferred interest, which Rovai contends violated Section 6050H. She also alleges that the 2012 Form 1098 she received similarly failed to report deferred interest payments.

Federal courts have proceeded with caution in addressing challenges to mortgage lender and servicer Section 6050H reporting, like the challenge Rovai raises, even when those challenges present familiar state law claims.1 This isbecause "[n]either § 6050H nor its implementing regulations provide explicit direction to recipients on how, whether 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 6050Hreporting, 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 Rovai's state law claims generally may be resolved based on each claim's elements. For the reasons herein, the Court concludes that (1) Rovai's claims for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, UCL fraudulent and unlawful prong claims, and her declaratory judgment claim (as it is pleaded) must be dismissed with prejudice; (2) Rovai's claim for a preliminary and permanent injunction must be dismissed without prejudice; and (3) Rovai's UCL unfair prong claim and negligence claim are plausible.

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 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). Byregulation, 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. Rovai's Loan and 2011 and 2012 Forms 1098 From SPS3

Rovai is a California homeowner 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 Rovai did not pay was added to the principal amount of her loan and treated as principal for the purposes of the loan. When SPS took over servicing her mortgage loan in December 2011, Rovai's loan balance was $9,013.02 above her original loan balance, an amount which was charged as interest in the earlier years of her loan, i.e. deferred interest.

SPS provided Rovai with Forms 1098 for the 2011 and 2012 tax years, which showed the amount of mortgage interest it received from her during the relevant taxyears. According to Rovai, the amounts reported did not account for deferred interest payments despite the presence of deferred interest. Rovai alleges that interest does not lose its character as interest and so SPS was required to apply her payments to retirement of deferred interest before ever applying such payments to principal. When Rovai realized the interest amounts reported in her Forms 1098 did not account for deferred interest payments, she brought the issue to SPS's attention. SPS, however, refused to provide corrected Forms 1098 that accounted for deferred interest.

Because the IRS allegedly maintains a policy of rejecting taxpayer attempts to seek a tax deduction for mortgage interest payments higher than the amount reported on a Form 1098, Rovai alleges that SPS's refusal to provide revised Forms 1098 harmed her. She relied on the interest amounts stated in her 2011 and 2012 Forms 1098 when she filed her taxes, and received smaller mortgage interest deductions for those years than she would have if SPS had reported deferred interest payments. Rovai sues to recover the damages allegedly caused by SPS and to require SPS to report deferred interest payments in the Forms 1098 it issues.

C. Procedural Posture

Rovai initially brought suit against SPS for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, negligence, California's unfair competition law, and directly under Section 6050H. (ECF No. 1.) SPS moved to dismiss the original complaint under Rule 12(b)(6), which the parties fully briefed. (ECF Nos. 11-13.) In resolving that motion, the Court dismissed Rovai's claim brought directly under Section 6050H on the ground that there is no federal private right of action under the statute. (ECF No. 16.) Without otherwise addressing the merits, the Court imposed a primary jurisdiction stay, finding that its reasoning for imposing a stay in Pemberton v. Nationstar Mortgage LLC, No. 14-cv-1738-BAS-WVG, ECF No. 17 (S.D. Cal. Feb. 5, 2015), "applie[d] equally" to Rovai's claims. (ECF No. 16 at 5.) As a result of the stay, the Court deferred consideration of Rovai's state law claims to permit the IRS to weigh in on the scope of Section 6050H in thefirst instance. (Id.) During the two-year duration of the stay,...

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