Strugala v. Flagstar Bank
| Decision Date | 04 September 2015 |
| Docket Number | Case No. 5:13-cv-05927-EJD |
| Court | U.S. District Court — Northern District of California |
| Parties | LISA STRUGALA, an individual, on behalf of herself and on behalf of the class of all others similarly situated, Plaintiff, v. FLAGSTAR BANK, FSB, Defendant. |
In this putative class action, Plaintiff Lisa Strugala ("Strugala") challenges her former mortgage lender's practice of first reporting, and then not reporting, capitalized interest on borrowers' tax forms. Presently before the court is a Motion to Dismiss filed by the lender, Flagstar Bank, FSB ("Flagstar").1 See Docket Item No. 55. Strugala opposes the motion. See Docket Item No. 59.
Federal jurisdiction arises pursuant to 28 U.S.C. § 1332. Having carefully reviewed the parties' briefing, the court finds that Strugala's withdrawn claims should be dismissed, and that Flagstar's alternative request under the primary jurisdiction doctrine is meritorious. Accordingly, Flagstar's motion will be granted in part and denied in part for the reasons explained below.
Flagstar is "one of the nation's leading federal savings banks" and is headquartered in Michigan. See First. Am. Compl. ("FAC"), Docket Item No. 18, at ¶¶ 3, 55. This case involvesone of Flagstar's financial products known as the "negative amortization" loan. According to the FAC, "'negative amortization' loans generally provide the borrower the option in any given month to pay a 'Minimum Payment,' which is generally, but not always, less than the interest due for the month." Id. at ¶ 3. Under the "Minimum Payment" option, the unpaid monthly interest is then "deferred" and added to the loan balance to be repaid on a later date. Id. at ¶ 4. This arrangement usually causes the overall loan balance to increase rather than decrease while the interest is deferred, even though the borrower is making monthly payments. Id. at ¶ 5.
A Form 1098 is a tax document issued by a lender which the tax-payer borrower utilizes to determine the amount of mortgage interest that should be reported to the Internal Revenue Service ("IRS") with annual income taxes. Id. at ¶ 1. The statute that obligates lenders to issue Forms 1098 is 26 U.S.C. § 6050H. Id.
Strugala alleges that prior to 2011, Flagstar reported on annual tax Forms 1098 both the amount of actual interest it received from a negative amortization borrower as well as the amount of interest the borrower "deferred" by exercising the "Minimum Payment" option. Id. at ¶ 7. Strugala contends this practice violated § 6050H because that statute requires lenders to report only interest they "receive," and not unpaid interest that accrued back to principal during a calendar year. Id. at ¶¶ 1, 7. As a result of this over-reporting, Strugala alleges that "tens of thousands" of tax returns were filed incorrectly. Id. at ¶ 9.
Flagstar eventually changed its practice in 2011 and ceased reporting "deferred interest" on Forms 1098. Id. at ¶ 10. It apparently did so without notice to borrowers and did not issue amended Forms 1098 to correct the errors. Id. at ¶¶ 10, 11. Instead, Strugala alleges that "when Flagstar decided to change its interest reporting policy in 2011, it determined that it would try to make up for its prior over-reporting of interest by under-reporting consumers interest payments in later years." Id. at ¶ 17. It does this, Strugala claims, by refusing to provide Forms 1098 to borrowers who have actually paid back previously-deferred interest in years subsequent to 2011, if that amount is less than that which Flagstar over-reported in prior Forms 1098. Id. at ¶ 22. Sincethere is a three year statute of limitations for amending tax returns, Strugala alleges that borrowers affected by Flagstar's interest reporting are now precluded from correcting errors on prior years' returns. Id. at ¶ 15.
Strugala obtained a 30-year "negative amortization" adjustable rate mortgage loan from Flagstar on or about July 13, 2007, in connection with a home she previously owned in Los Gatos, California. Id. at ¶¶ 24, 25. Strugala's loan provided for the "Minimum Payment" option. Id. at ¶ 25. She and her tax preparer relied on the Forms 1098 issued by Flagstar for tax years 2007 through 2011, and did not cross-check the amount of interest listed on those forms with the amount Strugala actually paid. Id. at ¶ 28. Unbeknownst to Strugala, those 1098 Forms included interest that had been deferred. Id. at ¶¶ 32, 34.
Strugala's Los Gatos home was sold at a short sale in 2012. Id. at ¶ 35. By her calculation, this sale resulted in Flagstar receiving an interest payment that was more than the total amount of interest Flagstar over-reported on her Forms 1098 between 2007 and 2011. Id. at ¶ 38. Flagstar, however, did not issue Strugala a Form 1098 for 2012, and would not do so after receiving requests from Strugala. Id. at ¶¶ 39, 41.
Strugala alleges harm from Flagstar's interest reporting practice. Id. at ¶ 46. Because her income was significantly higher in 2011 and 2012 than it was in the years when Flagstar was over-reporting interest, the tax deductions she took in the earlier years "were worth significantly less than they would be for her in 2012." Id. at ¶ 47. Due to the statute of limitations, Strugala cannot now amend her prior returns. Id. at ¶ 48. She also alleges damages in the form of accountancy fees necessary to investigate and correct prior tax returns. Id. at ¶ 51.
Strugala initiated this action on December 23, 2013, and filed the FAC on February 26, 2014. She asserts six causes of action against Flagstar on behalf of herself and two purported classes, a "damage" class and an "injunctive" class, including (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) violation of § 6050H, (4) violation of the Unfair Competition Law ("UCL"), California Business and Professions Code § 17200, (5) declaratoryrelief, (6) injunctive relief, and (7) fraud.
Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient specificity to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A complaint that falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). "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). Moreover, the factual allegations "must be enough to raise a right to relief above the speculative level" such that the claim "is plausible on its face." Twombly, 550 U.S. at 556-57.
When deciding whether to grant a motion to dismiss, the court generally "may not consider any material beyond the pleadings." Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). However, the court may consider material submitted as part of the complaint or relied upon in the complaint, and may also consider material subject to judicial notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-69 (9th Cir. 2001).
In addition, the court must generally accept as true all "well-pleaded factual allegations." Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). The court must also construe the alleged facts in the light most favorable to the plaintiff. Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1988). However, "courts are not bound to accept as true a legal conclusion couched as a factual allegation." Id.
Flagstar raises a number of arguments in support of dismissal under Rule 12(b)(6). Alternatively, it argues the court should stay or dismiss this action based on the primary jurisdiction doctrine. After dismissing those claims that have been withdrawn, this court finds the alternative relief best suited to the circumstances that result.
In her opposition to the motion to dismiss, Strugala concedes that two of her claims, asserting a direct violation of § 6050H and for injunctive relief, should be withdrawn. On that basis, those claims will be dismissed without further leave to amend.
Central to all of Strugala's remaining claims is one key allegation: that Flagstar's interest reporting policy both before and after 2011 violates § 6050H. Under § 6050H, "[a]ny person . . . who is engaged in a trade or business, and . . . who, in the course of such trade or business, receives from any individual interest aggregating $ 600 or more for any calendar year on any mortgage," must prepare an information return (such as a Form 1098) providing the IRS with the amount of interest paid and the identity of the person from whom the interest was received. 26 U.S.C. § 6050H(a), (b). This information must also be provided to the borrower along with certain statements disclosing that the amount of interest listed on the Form 1098 may not be fully deducted in certain circumstances. 26 C.F.R. § 1.6050H-2(b). Monetary penalties may be imposed on an interest recipient who fails to provide the form required by § 6050H, or who fails to provide accurate information on the form. 26 C.F.R. § 1.6050H-2(e)(2) ().
But aside from what the statute says, of equal note for this case is what it does not say. Neither § 6050H nor its implementing regulations provide explicit direction to recipients on how, whether and when to report capitalized interest. Nor has the IRS taken a formal position on the issue, as other courts have observed. See Horn v. Bank of America, No. 3:12 cv-1718-GPC-BLM, 2014 WL 1455917, at *3 (S.D. Cal. Apr. 14, 2014) (...
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