City of Los Angeles v. Wells Fargo & Co et al

Filing 37

ORDER DENYING DEFENDANTS MOTION TO DISMISS 21 AND DENYING DEFENDANTS MOTION TO STRIKE 22 by Judge Otis D. Wright, II: The Court DENIES Defendants Motion to Dismiss and DENIES Defendants Motion to Strike. Defendants shall file their answer to the Complaint within 14 days. (lc). Modified on 5/28/2014. (lc).

O

1
2
3
4
5
6
7

United States District Court
Central District of California

8
9
10
11
12

Case No. 2:13-cv-9007-ODW(RZx)

CITY OF LOS ANGELES,
Plaintiff,

13

ORDER DENYING DEFENDANTS’

v.

14

WELLS FARGO & CO. and WELLS

MOTION TO DISMISS [21] AND

15

FARGO BANK, N.A.,

DENYING DEFENDANTS’ MOTION

16

TO STRIKE [22]

Defendants.

17
18

I.

INTRODUCTION

19

This action arises from Defendants Wells Fargo & Co. and Wells Fargo Bank,

20

N.A.’s alleged discriminatory lending practices. However, unlike many of the home-

21

mortgage cases before this Court, Plaintiff in this action is not a mortgagor but rather

22

the City of Los Angeles (“the City”). The City is seeking damages in the form of lost

23

property tax revenue and increased municipal services stemming from foreclosures

24

that were allegedly a result of Defendants’ discriminatory lending practices.

25

Before the Court is Defendants’ Motion to Dismiss the Complaint under

26

Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (ECF No. 21.) The Motion is

27

based on several grounds including lack of Article III and statutory standing,

28

expiration of the statute of limitations, and failure to state a claim. Also before the

1

1

Court is Defendants’ Motion to Strike Portions of Plaintiff’s Complaint.

2

No. 22.) For the reasons discussed below, the Court DENIES both Motions.
II.

3

(ECF

FACTUAL BACKGROUND

4

The City filed the Complaint on December 5, 2013, asserting two claims for (1)

5

violating the federal Fair Housing Act (“FHA”), 42 U.S.C. §§ 3601–19, and (2)

6

common-law restitution. (ECF No. 1.)

7

According to the City, Defendants have engaged in discriminatory lending

8

practices that have resulted in a disparate number of foreclosures in minority areas of

9

Los Angeles. (See Compl. ¶ 2.) Specifically, the City alleges that Defendants have

10

engaged in “redlining” and “reverse redlining.” (Id. ¶ 4.) Redlining is the practice of

11

denying credit to particular neighborhoods based on race. (Id. ¶ 4 n.2.) Reverse

12

redlining is the practice of flooding a minority neighborhood with exploitative loan

13

products. (Id. ¶ 4 n.3.) The 69-page, 209-paragraph Complaint includes a regression

14

analysis based on Wells Fargo loans issued in Los Angeles. (See, e.g., id. ¶¶ 152–56.)

15

The City alleges numerous statistics based on this regression analysis. One example

16

is that from 2004 to 2011, an African-American borrower was more than twice as

17

likely to receive a “predatory loan” as a white borrower with similar underwriting and

18

borrower characteristics. (Id. ¶ 152.) Also in the Complaint are confidential witness

19

statements from former employees of Defendants who describe how allegedly

20

predatory loans were specifically marketed to minorities and minority communities in

21

Los Angeles. (See, e.g., Id. ¶¶ 101–126.)

22

Based on publically available loan data, the City alleges that it has identified

23

1,447 “discriminatory loans” issued by Defendants in Los Angeles that resulted in

24

foreclosure. (Id. ¶ 196.) The City expects that number to rise during the course of

25

discovery. (Id. ¶ 196 n.41.) According to the City, these discriminatory loans were

26

more likely to result in foreclosure, which in turn diminished the City’s tax base and

27

led to blight. (Id. ¶¶ 166–72.) The City is seeking to recover lost property-tax

28

///

2

1

revenue as well as expenses incurred for increased municipal services.

2

(Id.

¶¶ 173–95.)

3

On March 3, 2014, Defendants filed the instant Motions. (ECF Nos. 21, 22.)

4

Due to the complexity of the Motion to Dismiss and the numerous grounds upon

5

which it is based, the Court granted the parties’ request for an extended briefing

6

schedule. (ECF No. 16.) On May 8, 2014, the Court ordered supplemental briefing

7

on the limited issue of statutory standing in light of the Supreme Court decision in

8

Lexmark International, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377

9

(decided Mar. 25, 2014). The Court held a hearing on both Motions on May 27, 2014.
III.

10
11

A.

LEGAL STANDARD

Rule 12(b)(1)

12

Federal Rule of Civil Procedure 12(b)(1) provides for dismissal of a complaint

13

for lack of subject-matter jurisdiction. The Article III case or controversy requirement

14

limits a federal court’s subject-matter jurisdiction, which includes the requirement that

15

plaintiffs have standing to bring their claims. Chandler v. State Farm Mut. Auto. Ins.

16

Co., 598 F.3d 1115, 1121–22 (9th Cir. 2010). When a motion to dismiss attacks

17

subject-matter jurisdiction under Rule 12(b)(1) on the face of the complaint, the court

18

assumes the factual allegations in the complaint are true and draws all reasonable

19

inferences in the plaintiff’s favor. Doe v. Holy See, 557 F.3d 1066, 1073 (9th Cir.

20

2009). Moreover, the standards set forth in Bell Atlantic Corp. v. Twombly, 550 U.S.

21

544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009) apply in equal force to Article

22

III standing when it is being challenged on the face of the complaint. See Perez v.

23

Nidek Co., 711 F.3d 1109, 1113 (9th Cir. 2013); Terenkian v. Republic of Iraq, 694

24

F.3d 1122, 1131 (9th Cir. 2012). Thus, in terms of Article III standing, the complaint

25

must allege “sufficient factual matter, accepted as true, to ‘state a claim to relief that is

26

plausible on its face.’” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).

27

///

28

///

3

1

B.

Rule 12(b)(6)

2

Under Rule 12(b)(6), a court may dismiss a complaint for lack of a cognizable

3

legal theory or insufficient facts pleaded to support an otherwise cognizable legal

4

theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). To

5

survive a dismissal motion, a complaint need only satisfy the minimal notice pleading

6

requirements of Rule 8(a)(2)—a short and plain statement of the claim. Porter v.

7

Jones, 319 F.3d 483, 494 (9th Cir. 2003). The factual “allegations must be enough to

8

raise a right to relief above the speculative level” and a claim for relief must be

9

“plausible on its face.” Twombly, 550 U.S. at 555, 570.

10

The determination whether a complaint satisfies the plausibility standard is a

11

“context-specific task that requires the reviewing court to draw on its judicial

12

experience and common sense.” Iqbal, 556 U.S at 679. A court is generally limited

13

to the pleadings and must construe all “factual allegations set forth in the complaint

14

. . . as true and . . . in the light most favorable” to the plaintiff. Lee v. City of L.A., 250

15

F.3d 668, 688 (9th Cir. 2001).

16

allegations, unwarranted deductions of fact, and unreasonable inferences. Sprewell v.

17

Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001).

18

C.

But a court need not blindly accept conclusory

Rule 12(f)

19

Under Rule 12(f), a court “may order stricken from any pleading . . . any

20

redundant, immaterial, impertinent, or scandalous matter.” The essential function of a

21

Rule 12(f) motion is to “avoid the expenditure of time and money that must arise from

22

litigating spurious issues by dispensing with those issues prior to trial.” Fantasy, Inc.

23

v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993), rev’d on other grounds, 510 U.S. 517

24

(1994). Rule 12(f) motions to strike are generally disfavored. Bureerong v. Uvawas,

25

922 F. Supp. 1450, 1478 (C.D. Cal. 1996); see also Stanbury Law Firm v. I.R.S., 221

26

F.3d 1059, 1063 (8th Cir. 2000).

27

///

28

///

4

IV.

1

DISCUSSION

2

Defendants move to dismiss the Complaint on a number of grounds—all of

3

which address the sufficiency of the City’s allegations with respect to standing, the

4

statute of limitations, and overall ability to state a claim.

5

dismissal of the entire Complaint, Defendants also move to strike certain paragraphs

6

as impertinent or immaterial. The Court addresses each of Defendants’ grounds for

7

dismissal and then turns to the Motion to Strike.

8

A.

As an alternative to

Article III Standing

9

Article III standing requires a plaintiff to plead three elements. First, a plaintiff

10

must plead an injury in fact, which must be “concrete and particularized” and “actual

11

or imminent.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992). Second,

12

there must be a “causal connection between the injury and the conduct complained

13

of”—that is the injury must be “fairly traceable” to the challenged conduct. Id.

14

(internal quotations omitted). Third, it must be likely that plaintiff’s injury will be

15

“redressed by a favorable decision.”

16

Here, Defendants claim that the City has failed to plead the second requirement

17

for Article III standing—causation—thus necessitating dismissal of the Complaint for

18

lack of subject-matter jurisdiction under Rule 12(b)(1). (MTD 9:15–23.) According

19

to Defendants, the causal chain between the City’s alleged injury and Defendants’

20

alleged conduct is too attenuated because there are “too many links” in the causal

21

chain and the City’s causation theory relies on too many independent parties over too

22

long a period of time. (Id. at 9:25–14:7.) On the other hand, the City contends that

23

Defendants’ description of the causal chain is too long. The City articulates the causal

24

chain as having only three parts: (1) Defendants engaged in discriminatory lending

25

practices, (2) that resulted in foreclosures, (3) which in turn caused a reduction in

26

property values that diminished the tax base and increased the need for city services.

27

(MTD Opp’n 4:19–22.) The City then points to specific examples in the Complaint

28

that support its theory of causation. (Id. at 4:19–6:4.)

5

1

The Court finds that the City has adequately pleaded causation for the purposes

2

of Article III standing. “To survive a motion to dismiss for lack of constitutional

3

standing, plaintiffs must establish a ‘line of causation’ between defendants’ action and

4

their alleged harm that is more than ‘attenuated.” Maya v. Centex Corp., 658 F.3d

5

1060, 1070 (9th Cir. 2011) (citing Allen v. Wright, 468 U.S. 737, 758 (1984)). But a

6

causal chain “does not fail simply because it has several ‘links,’ provided those links

7

are ‘not hypothetical or tenuous’ and remain ‘plausible.’” Id. (quoting Nat’l Audubon

8

Soc., Inc. v. Davis, 307 F.3d 835, 849 (9th Cir. 2002)).

9

The City’s lengthy Complaint relies on a regression analysis to support its

10

claims and theory of causation. The regression analysis is based on data reported by

11

Defendants and available through public and private databases. (Compl. ¶ 151.)

12

Supporting the first link in the City’s proffered causal chain—Defendants’

13

discriminatory lending practices—are statistics such as from 2004 to 2011 an African-

14

American borrower was more than twice as likely to receive a predatory loan as a

15

white borrower with similar underwriting and borrower characteristics. (Id. ¶ 152.)

16

As for the second link—discriminatory loans resulted in foreclosures—the City

17

alleges, for example, that “[a] Wells Fargo loan in a predominantly African-American

18

or Latino neighborhood is 4.982 times more likely to result in foreclosure as is a

19

Wells Fargo loan in a predominantly white neighborhood.” (Id. ¶ 161.) Also, a

20

“predatory loan made to a Latino borrower was 1.947 times more likely to result in

21

foreclosure as was a non-predatory loan made to a white borrower with similar risk

22

characteristics.” (Id. ¶ 171.) These foreclosures are then alleged to have caused a

23

reduction in property values that diminished the tax base (Id. ¶¶ 176–90) and created

24

an increased need for city services (Id. ¶¶ 191–95), which demonstrate the third and

25

final link in the causal chain. C.f. Gladstone Realtors v. Vill. of Bellwood, 441 U.S.

26

91, 111 (1997) (“A significant reduction in property values directly injures a

27

municipality by diminishing its tax base, thus threatening its ability to bear the costs

28

of local government and provide services.”).

6

1

In contrast to the City, Defendants describe the alleged causal chain as having

2

seven “links”: (1) Defendants engaged in discriminatory mortgage-origination

3

practices; (2) those practices led to minority borrowers being issued subprime loans;

4

(3) borrowers defaulted because of the discriminatory loan terms; (4) the loan servicer

5

decided to foreclose; (5) the foreclosures caused the homes to be abandoned and not

6

resold to a new buyer; (6) the foreclosed vacant properties, and adjacent parcels, lost

7

value because of the foreclosures and some became blighted; and (7) the decreased

8

property values reduced the City’s property tax revenues and led to increased

9

municipal services to address blight. (Id. at 10:7–24.) Defendants’ seven-link causal

10

chain is intended to demonstrate that too many independent parties had to act between

11

Defendants’ challenged conduct and the City’s alleged harm. But “[w]hile . . . it does

12

not suffice if the injury complained of is the result of the independent action of some

13

third party not before the court, that does not exclude injury produced by

14

determinative or coercive effect upon the action of someone else.” Bennett v. Spear,

15

520 U.S. 154, 169 (1997) (internal quotations and citations omitted). The Court finds

16

that many of the independent actions that Defendants contend defeat causation are

17

produced by or the result of Defendants’ challenged conduct. For example, based on

18

the allegations in the Complaint, minority borrowers are issued predatory loans

19

because Defendants steered them toward those loans as opposed to less predatory

20

loans. (See, e.g., Compl. ¶¶ 12–13.) While the issues raised by Defendants’ causal

21

chain may be subject to proof at a later stage in the litigation, the pleading standards

22

for Article III standing are not so burdensome.

23

opportunity to conduct discovery and obtain more property-specific information to

24

meet its burden of actually proving its claims.

The City must be afforded an

25

Furthermore, the Court is unpersuaded by Defendants’ reliance on the facts of

26

Maya and City of Birmingham v. Citigroup Inc., No. CV-09-BE-467-S, 2009 WL

27

8652915 (N.D. Ala. 2009). In Maya, the Ninth Circuit found that homeowners lacked

28

standing to sue developers for injuries allegedly caused by the developers’ practice of

7

1

marketing and financing neighboring homes to individuals at a high risk of

2

foreclosure. 658 F.3d at 1072 (“[P]laintiffs have not established how defendants’

3

actions necessarily resulted in foreclosure . . . .”). But the Maya court also held that

4

the district court erred in not granting leave to amend because the homeowners

5

proffered an expert report that allegedly distinguished the effect of the developers’

6

actions from general economic influences. Id. at 1072–73. The allegations in Maya

7

were much more generalized than the allegations in the Complaint at issue here, and

8

the City alleges that Defendants’ contribution can be parceled out from the losses

9

attributable to non-Wells Fargo foreclosures and other causes through Hedonic

10

regression analysis. (See Compl. ¶¶ 185–90; MTD Opp’n 7:5–18.)

11

Moreover, while the court in City of Birmingham dismissed similar claims for

12

lack of standing, the opinion is devoid of detail regarding the allegations in the

13

complaint and makes no mention of a regression analysis or confidential witness

14

statements. See 2009 WL 8652915, at *3–4. More persuasive are the more recent

15

district court cases where courts have found that municipalities have Article III

16

standing at the pleadings stage to sue banks for discriminatory lending practices based

17

on similar statistical evidence and allegations specific to the defendant banks. See

18

Dekalb Cnty. v. HSBC North Am. Holdings, Inc., No. 1:12-CV-03640-SCJ, 2013 WL

19

7874104, at *7 (N.D. Ga. Sept. 25, 2013) (holding that government and industry

20

findings along with empirical data raised the pleadings above the speculative level to

21

meet Article III’s “fair traceability” requirement); Mayor & City Council of Balt. v.

22

Wells Fargo Bank, N.A., No. JFM-08-62, 2011 WL 1557759, at *3–6 (D. Md. Apr.

23

22, 2011) (holding that the third amended complaint plausibly alleged standing with

24

property-specific allegations and specific illegal lending practices identified);1 City of

25
26
27
28

1

Defendants cite an earlier decision in City Council of Baltimore where the first amended complaint
was dismissed because the causation allegations were not “plausible.” 677 F. Supp. 2d 847, 850 (D.
Md. Jan. 6, 2010). But curiously, Defendants neglect to mention the case’s subsequent history and
dismissal of the first amended complaint was based on generalized allegations regarding foreclosures
in the city, as opposed to the bank-specific allegations alleged in the City’s Complaint here. See id.

8

1

Memphis v. Wells Fargo Bank, N.A., No. 09-2857-STA, 2011 WL 1706756, at *9

2

(W.D. Tenn. Mar. 4, 2011) (holding that plaintiffs’ injuries were fairly traceable

3

because they did not allege that “lending practices resulted in a host of social and

4

political ills plaguing entire sections of the community,” but rather that defendants

5

“targeted individual property owners with specific lending practices (reverse-

6

redlining), resulting in specific effects (foreclosures and vacancies) at specific

7

properties, which in turn created specific costs (services and tax revenue) for local

8

government”).

9

Defendants’ lending practices.

The City’s allegations are extremely detailed and specific to
The City has already identified through publicly

10

available loan data 1,447 discriminatory loans issued by Defendants that have resulted

11

in foreclosures in Los Angeles. (Compl. ¶ 196.) The City anticipates that it will learn

12

of more loans over the course of discovery. (Id. ¶ 196 n.41.)

13

For the reasons discussed above, the Court finds that the allegations in the

14

Complaint are sufficient to establish causation at this stage of the litigation and

15

support Article III standing.

16

B.

Statutory Standing

17

Defendants next argue that the FHA claim must be dismissed because the City

18

lacks statutory standing.2 Statutory standing is a different inquiry from Article III

19

standing. Canyon Cnty. v. Syngenta Seeds, Inc., 519 F.3d 969, 974 n.7 (9th Cir. 2008)

20

(explaining that Article III standing is a jurisdictional requirement while statutory

21

standing is resolved under Rule 12(b)(6)); see also Cetacean Comm. v. Bush, 386 F.3d

22

1169, 1175 (9th Cir. 2004). Statutory standing looks at whether Congress intended to

23

allow the City to recover for its alleged harm under the FHA. See Lexmark, 134 S. Ct.

24

at 1388. In the recent Lexmark decision, the Supreme Court explained that answering

25

this question involves two principles. First, it is “presume[d] that a statutory cause of

26

action extends only to plaintiffs whose interests ‘fall within the zone of interests

27

2

28

Defendants’ Motion initially labels the issue “prudential standing,” but the Supreme Court made
clear in Lexmark that the issue is more appropriately classified as “statutory standing.” Lexmark,
134 S. Ct. at 1388.

9

1

protected by the law invoked.’” Id. (quoting Allen, 468 U.S. at 751). Second, it is

2

also presumed that a statutory cause of action “is limited to plaintiffs whose injuries

3

are proximately caused by violations of the statute.” Id. at 1390. Defendants dispute

4

the City’s statutory standing under both principles.

5

1.

Zone of Interests

6

The zone-of-interests test for statutory standing is not “especially demanding”

7

and the benefit of the doubt goes to the plaintiff. Lexmark, 134 S. Ct. at 1389. “[T]he

8

test ‘forecloses suit only when a plaintiff’s interests are so marginally related to or

9

inconsistent with the purposes implicit in the statute that it cannot reasonably be

10

assumed that” Congress authorized the plaintiff to sue. Id. (quoting Match-E-Be-

11

Nash-She-Wish Band of Pottawatomi Indians v. Patchak, 132 S. Ct. 2119, 2210

12

(2012)).

13

Defendants, relying on Thompson v. North American Stainless, L.P., 131 S. Ct.

14

863 (2011), argue that the City falls outside the FHA’s zone of interests because the

15

FHA’s purpose is only to provide redress to victims of discrimination in housing

16

transactions and the City itself has not suffered discrimination. (MTD 14:9–16:1.)

17

But the City contends that its injuries clearly fall within the FHA’s zone of interests.

18

(MTD Opp’n 10:22–11:15.) While Thompson was recently decided, the City points

19

out that the case involved Title VII and not Title VIII, which encompasses the FHA.

20

Instead, the City urges the Court to rely on prior Supreme Court precedent holding

21

that Congress intended standing under the FHA to be as broad as Article III standing.

22

See Havens Realty Corp. v. Coleman, 455 U.S. 363, 372 (1982) (finding that statutory

23

standing under the FHA is coextensive with Article III standing); Gladstone, 441 U.S.

24

at 110 (holding that a municipality has standing under the FHA); Trafficante v. Metro.

25

Life Ins. Co., 409 U.S. 205, 209 (1972) (stating that the language of the FHA is “broad

26

and inclusive” and that Congress intended to define standing as broadly as permitted

27

by Article III). The Court agrees with the City.

28

///

10

1

Under the FHA, an “aggrieved person” is defined as “any person who claims to

2

have been injured by a discriminatory housing practice; or believes that such person

3

will be injured by a discriminatory housing practice that is about to occur.” 42 U.S.C.

4

§ 3602(i). In Thompson, the Supreme Court interpreted the same “aggrieved person”

5

language in the context of an employment-discrimination suit under Title VII to limit

6

statutory standing by only allowing suit to be brought by employees. 131 S. Ct. at

7

870. Thus, Defendants argue that Thompson alters the holdings in Havens Realty,

8

Thompson, and Gladstone. But the Supreme Court explicitly stated otherwise. Id. at

9

869 (“[I]t is Title VII rather than Title VIII that is before us here . . . .”) The Court in

10

Thompson also found that the holding in Gladstone remained consistent with its

11

analysis of the “zone of interests” limitation. Id. Therefore, the Court declines to

12

apply Defendants’ selective reading of Thompson to limit the zone of interests and

13

statutory standing under the FHA. Since the Court has already found that the City has

14

adequately alleged Article III standing, the City’s alleged injuries fall within the

15

FHA’s zone of interests.

16

2.

17

General tort principles of causation apply to damages actions under the FHA,

18

and a plaintiff can establish proximate causation if “the defendant’s wrongful conduct

19

was a substantial factor in bringing about the harm in question.” Pac. Shores Props.,

20

LLC v. City of Newport Beach, 730 F.3d 1142, 1167–68 (9th Cir. 2013).

21

principle of proximate causation “reflects the reality that ‘the judicial remedy cannot

22

encompass every conceivable harm that can be traced to wrongdoing.’” Lexmark, 134

23

S. Ct. at 1390 (quoting Associated Gen. Contractors of Cal. v. Cal. State Council of

24

Carpenters, 459 U.S. 519, 536 (1983)). A plaintiff’s alleged harm is “too remote” if it

25

is “purely derivative of misfortunes visited upon a third person by the defendant’s

26

acts.” Id.

27
28

Proximate Cause

The

The Ninth Circuit uses the following three-factor “remoteness” test to assess
proximate causation:

11

1

(1) whether there are more direct victims of the alleged wrongful conduct

2

who can be counted on to vindicate the law as private attorneys general;

3

(2) whether it will be difficult to ascertain the amount of the plaintiff’s

4

damages attributable to defendant’s wrongful conduct; and (3) whether

5

the courts will have to adopt complicated rules apportioning damages to

6

obviate the risk of multiple recoveries.

7

Oregon Laborers-Employers Health & Welfare Trust Fund v. Philip Morris, Inc., 185

8

F.3d 957, 963 (9th Cir. 1999).

9

Defendants claim that the City’s alleged injuries—lost property-tax revenue and

10

increased municipal services—are too remote.

(MTD 16:7–18:20.)

Instead,

11

Defendants argue that the City was only “secondarily injured as the speculative

12

consequence of the alleged injuries suffered by mortgagors.” (Id. at 15:25–16:1.)

13

Citing the first factor from Oregon Laborers, Defendants argue that the mortgagors

14

are more direct victims than the City and the Department of Justice (“DOJ”) has

15

already brought suit on behalf of the mortgagors. (Id. at 17:10–25.) Furthermore, it

16

will be nearly impossible to ascertain the amount of the City’s damages attributable to

17

Defendants’ conduct. There is also a risk of multiple recoveries since the City has

18

brought suit against other lenders and the DOJ has already sued. (Id. at 17:27–18:20.)

19

However, the City contends that it was directly injured by Defendants’ discriminatory

20

lending practices and that its injuries are not derivative of the injuries suffered by

21

borrowers. (MTD Opp’n 14:1–12.) In addition, the City argues that Defendants’

22

proximate-causation arguments require the Court to go beyond the constraints of a

23

Rule 12(b)(6) motion. (Id. 13–14.)

24

The Court finds that the City has met the minimum pleading standards for

25

proximate causation under the FHA. Turning to the first factor of Oregon Laborers,

26

the mortgagors are certainly direct victims of Defendants’ alleged conduct, but the

27

City is correct in its assertion that its injuries are separate and distinct from the injuries

28

of the mortgagors. Moreover, the City alleges in the Complaint that its injuries—just

12

1

like the injuries suffered by the mortgagors—were direct and a foreseeable result of

2

predatory lending practices. (See, e.g., Compl. ¶¶ 74–76, 169–70.) Also, as discussed

3

above with respect to Article III standing, the City alleges in the Complaint that

4

Defendants’ contribution to the City’s injuries can be calculated through Hedonic

5

regression analysis—distinguishing Defendants’ conduct from other causes. (See id.

6

¶¶ 185–90.)

7

Furthermore, the Court also finds no danger of multiple recoveries—the third factor of

8

Oregon Laborers. The DOJ’s recovery was for injuries suffered by mortgagors, and,

9

while the City has filed suit against other lenders, the allegations in the Complaint are

10

This favors the City under the second factor in Oregon Laborers.

lender-specific and property-specific. (See, e.g., id. ¶ 196.)

11

In weighing the three factors set forth in Oregon Laborers, the Court finds that

12

proximate causation has been adequately pleaded to survive the present Motion to

13

Dismiss. The Court emphasizes that Oregon Laborers sets forth a three-factor test

14

and not an elements test, so even if one factor tips in favor of Defendants’ position,

15

the totality of the circumstances compels the Court to find in favor of the City. But

16

the issue of proximate cause—along with many of the issues raised in this Motion to

17

Dismiss—will be revisited at later stages of the litigation where the City’s allegations

18

will be put to evidentiary proof.

19

C.

Statute of Limitations

20

Defendants also argue that the statute of limitations on the City’s FHA claim

21

has already run. Under the FHA, claims must be filed “not later than 2 years after the

22

occurrence or termination of an alleged discriminatory housing practice . . . .” 42

23

U.S.C. § 3613(a)(1)(A).

24

According to Defendants, the mortgage-origination practices that the City

25

alleges were discriminatory terminated long before the Complaint was filed on

26

December 5, 2013. Defendants point to certain allegations in the Complaint arguing

27

that the City itself admits that various mortgage-origination practices—in particular

28

subprime lending—ended between 2007 and 2009. (MTD 21:2–17.) Furthermore,

13

1

Defendants argue that the City is improperly attempting to mix and match lending

2

practices to demonstrate a “continuing violation” of the FHA and avoid the statute-of-

3

limitations problem.

4

Defendants claim that the City’s allegations of post-2008 conduct fail to meet the

5

pleading standards set out in Iqbal. (MTD 21–24.)

(Id. at 22:21–28; MTD Reply 9:25–11:2.)

Regardless,

6

On the other hand, the City claims that Defendants are mischaracterizing the

7

allegations in the Complaint. (MTD Opp’n 15–18.) The City acknowledges that the

8

statute of limitations inquiry focuses on when the alleged discriminatory conduct

9

terminated and not when the City’s injuries occurred. See Garcia v. Brockway, 526

10

F.3d 456, 464 (9th Cir. 2008) (holding that the FHA’s limitations period does not start

11

when the aggrieved person is injured, but rather at the time “the occurrence or

12

termination of an alleged discriminatory housing practice” occurs). But according to

13

the City, the allegations in the Complaint demonstrate an eight-year “unbroken pattern

14

and practice of issuing predatory loans.”

15

Based on the allegations in the Complaint, the City has not run afoul of the

16

statute of limitations. Where a plaintiff challenges not merely a single incident of

17

conduct that violates the FHA, but rather a pattern or practice of discrimination, the

18

statute of limitations runs from the last asserted occurrence. See Havens Realty, 455

19

U.S. at 380–81. This is known as the “continuing violation doctrine.” Id. at 380.

20

Here, the City repeatedly alleges in the Complaint that Defendants have engaged in an

21

“unlawful pattern and practice” of mortgage discrimination and that Defendants

22

“adapted to changing market conditions” while continuing to discriminate against

23

minority borrowers in Los Angeles. (See, e.g., Compl. ¶¶ 3, 8, 43.) The exact type of

24

loan issued to minority borrowers may have changed, but the City alleges the loans

25

issued to minorities continued to be more high-risk than loans issued to white

26

borrowers. (See, e.g., id. ¶¶ 43, 155.) Moreover, confidential witness statements in

27

the Complaint allege discriminatory conduct through 2012. (Id. ¶¶ 101–08.)

28

///

14

1

Defendants’ reliance on the holding of Garcia to reject the City’s application of

2

the continuing-violation doctrine and support a finding that the statute of limitations

3

begins to run at the termination of a specific discriminatory practice—i.e., subprime

4

lending—is sorely misguided. In Garcia, there were no allegations of a pattern or

5

practice of discrimination. Garcia involved a design-and-construction defect, and the

6

Ninth Circuit held that the statute of limitations began to run at the time construction

7

was completed and not when the plaintiffs encountered or discovered the defect. 526

8

F.3d at 462–66. The facts and holding of that case are totally inapposite to the

9

allegations at bar.

In this case, the City is alleging a pattern and practice of

10

“discriminatory lending” on the part of Defendants over at least an eight-year period.

11

While the types of loans that Defendants allegedly issued to minority borrowers may

12

have changed during the relevant time period, the City alleges that they remained

13

high-risk and discriminatory. This is sufficient to apply the continuing-violation

14

doctrine. See O’Loghlin v. Cnty. of Orange, 229 F.3d 871, 875 (“[I]f a discriminatory

15

act takes place within the limitations period and that act is related and similar to acts

16

that took place outside the limitations period, all the related acts—including the earlier

17

acts—are actionable as part of a continuing violation.”)
The Court finds that the City’s FHA claim falls within the statute of limitations

18
19

based on the allegations in the Complaint.

20

D.

Failure to State a Claim Under the FHA

21

Defendants also argue that the City’s FHA claim fails because the City has not

22

properly alleged a pattern or practice of discrimination. Defendants contend that the

23

City’s allegations are insufficient to establish disparate treatment and that a disparate-

24

impact theory of liability is not available under the FHA.

25

1.

Disparate Treatment

26

Discriminatory intent or motive is a necessary element of any disparate

27

treatment claim under the FHA. See Wood v. City of San Diego, 678 F.3d 1075, 1081

28

(9th Cir. 2012) (requiring allegations of discriminatory intent in a disparate treatment

15

1

claim under Title VII); Gamble v. City of Escondido, 104 F.3d 300, 304–05 (9th Cir.

2

1997) (holding that the elements of Title VII discrimination claims, including

3

allegations of disparate treatment, are the same as the elements for FHA

4

discrimination claims under Title VII).

5

According to Defendants, the City has failed to plead that Defendants’ allegedly

6

discriminatory lending practices were intentional or racially motivated. (See MTD

7

24:22–15:13.) But the Court finds no fault with the City’s ample allegations in the

8

Complaint under a theory of disparate treatment.

9

Complaint is rife with allegations that Defendants targeted minority borrowers for

As the City points out, the

10

unfair loan terms based on race or national origin.

(See, e.g., Compl.

11

¶¶ 11–12; 109–26; 159; 162, 199.)

12

probative of motive, and the Complaint contains numerous allegations of statistical

13

patterns of discrimination. See Lowe v. City of Monrovia, 775 F.2d 998, 1008 (9th

14

Cir. 1985) (stating that statistical evidence may be probative of motive). Accordingly,

15

the Court finds that the City’s FHA claim under a theory of disparate treatment is

16

sufficient at the motion-to-dismiss stage.

Moreover, a discriminatory pattern can be

17

2.

Disparate Impact

18

Next, Defendants argue that disparate impact is not a viable legal theory under

19

the FHA. (MTD 26:1–24.) Defendants rely on the Supreme Court’s plurality opinion

20

in Smith v. City of Jackson, Miss., 544 U.S. 228 (2005). But the Court is unpersuaded.

21

Not only were the justices squarely divided on the disparate-impact issue, but Smith

22

involved an Age Discrimination in Employment Act claim under Title VII as opposed

23

to an FHA claim under Title VIII.

24

recognized disparate-impact claims under the FHA subsequent to the Smith decision

25

along with other circuits. Ojo v. Farmers Grp., Inc., 600 F.3d 1205, 1208 (9th Cir.

26

2010); see also Graoch Assoc. # 33, L.P. v. Louisville/Jefferson Cnty. Metro Human

27

Relations Comm’n, 508 F.3d 366, 392 (6th Cir. 2007); Reinhart v. Lincoln Cnty., 482

28

F.3d 1225, 1229 (10th Cir. 2007).

Moreover, the Ninth Circuit has explicitly

16

1

Defendants also argue that a disparate-impact theory of liability requires the

2

City to plead specific practices that have caused the alleged disparate impact. (MTD

3

27:1–28:15.) But the Court finds that the City’s allegations are more than sufficient to

4

survive the instant Motion to Dismiss on a disparate-impact theory. The allegations

5

are specific to Defendants and their lending practices in Los Angeles. (See Compl.

6

¶¶ 151, 196.) Defendants’ arguments are more appropriate for a later stage in the

7

litigation after the City has had the benefit of discovery.

8

E.

Restitution

9

Turning to the City’s second claim for restitution, Defendants argue that the

10

claim must be dismissed because there is no cause of action for restitution in

11

California. (MTD 28:18–25.) Restitution is a remedy and not a right of action. (Id.)

12

Even if the restitution claim is proper, Defendants contend that the City’s claim is a

13

“textbook example” of a formulaic recitation of the elements that fails under

14

Twombly. (Id. at 28:26–28.) Moreover, Defendants argue that there is a disconnect

15

between the dollars the City is seeking to recover and any benefit Defendants may

16

have received. (Id. at 29:1–15.)

17

California courts have stated that “[t]here is no freestanding cause of action for

18

‘restitution’ in California.” Munoz v. MacMillan, 195 Cal. App. 4th 648, 661 (2011);

19

see also Durell v. Sharp Healthcare, 183 Cal. App. 4th 1350, 1370 (2010) (“There is

20

no cause of action in California for unjust enrichment.

21

synonymous with restitution.”). But the inquiry goes beyond that broad statement

22

because, as the City points out in its Opposition, courts in California are actually

23

divided as to whether a claim labeled as “restitution” or “unjust enrichment” should

24

proceed.

25

Supreme Court of California and California Courts of Appeal have recognized actions

26

for relief under the equitable doctrine of unjust enrichment.”) The difference in

27

opinion rests on whether the plaintiff has properly pleaded a claim for quasi-

28

contract—that the defendant has been unjustly enriched at the expense of the

Unjust enrichment is

See Ohno v. Yasuma, 723 F.3d 984, 1006 n.25 (9th Cir. 2013) (“The

17

1

plaintiff—regardless of the label or title the plaintiff puts on the claim. See, e.g., In re

2

TFT-LCD (Flat Panel) Antitrust Litig., No. M 07-1827 SI, 2011 WL 4345435, at *3–4

3

(N.D. Cal. Sept. 15, 2011) (allowing unjust enrichment claim to proceed where the

4

plaintiff invoked a valid theory of recovery). Thus, the Court will not dismiss the

5

City’s claim for restitution based solely on its label and instead reviews the Complaint

6

to determine whether the City has alleged a valid theory of recovery.

7
8

To seek restitution, the City must allege that Defendants were unjustly enriched
at the City’s expense. See McBride v. Boughton, 123 Cal. App. 4th 379, 389 (2004).

9

Under the law of restitution, an individual is required to make restitution

10

if he or she is unjustly enriched at the expense of another. A person is

11

enriched if the person receives a benefit at another’s expense. However,

12

the fact that one person benefits another is not, by itself, sufficient to

13

require restitution. The person receiving the benefit is required to make

14

restitution only if the circumstances are such that, as between the two

15

individuals, it is unjust for the person to retain it.

16

Id. (internal citations and quotations omitted); see also Durell, 183 Cal. App. 4th at

17

1370 (quoting McBride).

18

Here, the City contends that the benefits it conferred on Defendants are the so-

19

called “externalities”—the costs of harm caused by Defendants’ discriminatory

20

lending that the City has had to shoulder. (Opp’n 27:11–28:9; Compl. ¶¶ 173–96.)

21

“Unjust enrichment arises not only where an expenditure by one party adds to the

22

property of another, but also where the expenditure saves the other from expense or

23

loss.” White v. Smith & Wesson Corp., 97 F. Supp. 2d 816, 829 (N.D. Ohio Mar. 14,

24

2000). This Court, in line with similar decisions from trial courts across the country,

25

finds that the City has properly alleged a benefit to state a theory of recovery for

26

restitution.

27

manufacturer for failing to incorporate safety devices into handguns and negligent

28

marketing practices); City of Boston v. Smith & Wesson Corp., No. 199902590, 2000

See id. (allowing unjust-enrichment claim where city sued gun

18

1

WL 1473568, at *18 (Mass. Super. Ct. July 13, 2000) (sustaining unjust-enrichment

2

claim at pleadings stage based on “externalities” that the city covered due to gun

3

manufacturer’s actions); City of N.Y. v. Lead Indus. Ass’n, Inc., 190 A.D. 2d 173, 177

4

(N.Y. App. Div., May 13, 1993) (allowing restitution claim for “reasonable costs of

5

[lead] abatement” to survive motion to dismiss).

6

F.

Allegations Against Wells Fargo & Co.

7

Defendant Wells Fargo & Co. (“Parent”) is the parent company of Defendant

8

Wells Fargo Bank, N.A. (“Sub”). Parent seeks to be dismissed from this action

9

because the Complaint makes no allegations relating to Parent except “a conclusory

10

allegation of agency.” (MTD 29:17–26.) According to Parent, the allegations as

11

plead would disturb the “general principle of corporate law deeply ingrained in our

12

economic and legal systems that a parent corporation . . . is not liable for the acts of its

13

subsidiaries.”

14

quotations omitted); see also Doe v. Unocal Corp., 248 F.3d 915, 925–26 (9th Cir.

15

2001) (citing Bestfoods). In addition, Parent argues that the City cannot impose

16

successor liability on Parent for its acquisition of other mortgage lenders such as

17

Wachovia Mortgage. (MTD 29:27–30:16.) In its Opposition, the City contends that

18

the agency and successor-liability allegations in the Complaint are sufficient under

19

Rule 8(a). (MTD Opp’n 28:10–29:15.)

U.S. v. Bestfoods, 524 U.S. 51, 61 (1998) (internal citations and

20

Parent companies may be liable for their own unlawful acts, the unlawful acts

21

of subsidiary companies that act as their agents, and the unlawful acts of their

22

predecessors. See Bestfoods, 524 U.S. at 64–65; Doe v. Unocal Corp., 248 F.3d at

23

926; Monaco v. Bear Stearns Cos., No. CV 09-05438-SJO (JCx), 2011 WL 4059801,

24

at *19 (C.D. Cal. Sept. 12, 2011). Successor liability applies if,

25

(1) the successor expressly or impliedly agrees to assume the subject

26

liability . . . , (2) the transaction amounts to a consolidation or merger of

27

the successor and the predecessor, (3) the successor is a mere

28

continuation of the predecessor, or (4) the transfer of assets to the

19

1

successor is for the fraudulent purpose of escaping liability for the

2

predecessor’s debts.

3

CenterPoint Energy, Inc. v. Super. Ct., 157 Cal. App. 4th 1101, 1120 (2007.)

4

In the Complaint, the City alleges that Parent is the parent of Sub. (Compl.

5

¶ 25.) The City also alleges that each Defendant acted as an agent of the other and

6

that each ratified and adopted acts or omissions of the other. (Id. ¶ 30.) Under

7

Rule 8(a), these agency allegations are sufficient to survive the instant Motion to

8

Dismiss. See, e.g., Reyes v. Premier Home Funding, Inc., 640 F. Supp. 2d 1147, 1160

9

(N.D. Cal. June 17, 2009) (finding general agency allegations sufficient but

10

dismissing on other grounds); Cuevas v. Atlas Realty/Fin. Servs., Inc., No. C 07-

11

02814 JF, 2008 WL 268981, at *4 (N.D. Cal. Jan. 30, 2008) (holding that general

12

agency allegations between lender and mortgage broker were sufficient); Deirmenjian

13

v. Deutsche Bank, A.G., No. CV 06-00774-MMM(CWx), 2006 WL 4749756, at *29

14

(C.D. Cal. Sept. 25, 2006) (holding that general agency allegations are sufficient

15

under Rule 8(a)).

16

The Court also finds that the allegations against Parent based on a theory of

17

successor liability, while limited, are just enough to get the City past the motion-to-

18

dismiss stage. The City alleges that Parent is liable for the loans acquired through

19

other lending entities such as Wachovia Mortgage and World Savings Bank and that it

20

learned about Parent’s responsibility for these acquired loans from information

21

reported through the Home Mortgage Disclosure Act. (Compl. ¶ 2 n.1, ¶ 29.) The

22

Court finds that the allegations are sufficient to put Parent on notice, which is all that

23

is required under the liberal pleading standards of Rule 8(a). See, e.g., Monaco, 2011

24

WL 4059801, at *19 (holding that the liberal requirements of Rule 8(a) apply to

25

allegations concerning successor liability); Pac. Rollforming, LLC v. Trakloc Intern.

26

LLC, No. 07cv1897-L(JMA), 2008 WL 4183916, at *3 (S.D. Cal Sept. 8, 2008)

27

(explaining that successor-in-interest allegations need only meet the liberal pleading

28

standard set forth in Rule 8(a)(2)).

20

1

G.

Motion to Strike

2

Finally, the Court briefly addresses Defendants’ Motion to Strike. Defendants

3

identify numerous paragraphs in the Complaint that they contend are impertinent and

4

immaterial. “‘Impertinent’ matter consists of statements that do no pertain, and are

5

not necessary, to the issues in question.” Fogerty, 984 F.2d at 1527. “Immaterial”

6

matter “has no essential or important relationship to the claim for relief or the defenses

7

being pleaded.” Id. The Court has reviewed the paragraphs identified by Defendants

8

and finds that none rise to the level of being either impertinent or immaterial under

9

Rule 12(f). Every paragraph relates to mortgage-lending practices. The paragraphs

10

that are not specific to Defendants’ lending practices or Los Angeles serve a

11

contextual purpose that the Court finds entirely proper. Defendants’ arguments in the

12

Motion to Strike would be more appropriate at a later stage in the litigation in the form

13

of evidentiary objections.
V.

14

CONCLUSION

15

For the reasons discussed above, the Court DENIES Defendants’ Motion to

16

Dismiss and DENIES Defendants’ Motion to Strike. (ECF Nos. 21, 22.) Defendants

17

shall file their answer to the Complaint within 14 days.

18

IT IS SO ORDERED.

19
20

May 28, 2014

21
22
23

____________________________________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE

24
25
26
27
28

21