Reagan et al v. American Home Mortgage Servicing, Inc.

Filing 25

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS OR TO STRIKE AND FOR A MORE DEFINITE STATEMENT, Motions terminated: 13 Amended MOTION for Hearing re 6 Request for Judicial Notice, And Motion To Dismiss, Or In The Alternative, For A More Definite StatementAmended MOTION for Hearing re 6 Request for Judicial Notice, And Motion To Dismiss, Or In The Alternative, For A More Definite Statement filed by American Home Mortgage Servicing, Inc. Signed by Judge Alsup on May 31, 2011. (whalc2, COURT STAFF) (Filed on 5/31/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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For the Northern District of California

United States District Court

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JAMES O REAGAN, JR. and DEBORAH
REAGAN,
Plaintiffs,

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No. C 11-00704 WHA

ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANT’S
MOTION TO DISMISS OR TO
STRIKE AND FOR A MORE
DEFINITE STATEMENT AND
VACATING HEARING

v.
AMERICAN HOME MORTGAGE
SERVICING INC.,
Defendant.
/

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INTRODUCTION

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In this fair credit reporting case, the complaint states a claim under the state credit

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reporting act but not the federal act. Accordingly, the defendant’s motion to dismiss is

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GRANTED IN PART and DENIED IN PART. In addition, defendant’s motion to strike punitive

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damages and its motion for a more definite statement are DENIED.

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STATEMENT
In 2005, James O. Reagan, Jr. and Deborah Reagan contracted to mortgage their house

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with defendant American Home Mortgage Servicing, Inc. AHMSI is one of the country’s

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largest servicers of Alt-A and subprime loans. By 2010, the value of plaintiffs’ house had

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decreased to less than their mortgage-loan balance. To avoid foreclosure, the parties agreed to a

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short sale. Plaintiffs allege that the short sale, finalized on May 28, 2010, was in “full

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satisfaction of the mortgage loan” (Compl. ¶ 9). Plaintiffs also contend that around three days

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later, AHMSI “reported to Experian, Equifax, and Trans Union,” that plaintiffs were 30 days

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past due on their payments and that they still owed a balance on their mortgage (Compl. ¶ 12).

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The complaint states that plaintiffs were adversely affected as a result of the inaccurate

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reporting to these agencies. Plaintiffs allege that on June 1, the financing of their prospective

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home in Georgia fell through. Instead of moving to Georgia, plaintiffs unpacked their U-Haul

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and rented a house in California.

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The complaint further states, also in June 2010, that plaintiffs contacted AHMSI to
explain that the credit report was inaccurate (Compl. ¶ 16). Plaintiffs next allege that AHMSI
sent them a letter in July notifying them that AHMSI had furnished credit reporting bureaus

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For the Northern District of California

United States District Court

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with the following information: “June 2010–Account paid in full for less than full balance due”

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(Compl. ¶ 17). On January 17, plaintiffs allegedly notified Experian, Equifax, and Trans Union

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directly that their credit report was inaccurate: that the house was not foreclosed upon, that no

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balance was due, and that there were no late payments (Compl. ¶ 19). AHMSI responded to

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credit verification letters from these credit reporting bureaus. Plaintiffs contend that as a result

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of inaccurate responses, Experian, Equifax, and Trans Union continue to report that the

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mortgage loan had been “30 days late” (Compl. ¶ 22).

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ANALYSIS

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The complaint sets forth two claims: (1) violation of Section 1681s-2(b) of the federal

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Fair Credit Reporting Act, and (2) violation of Section 1785.25(a) of the California Consumer

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Credit Reporting Agencies Act.
STANDARD OF REVIEW.

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1.

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To survive a motion to dismiss, a complaint must contain sufficient factual matter,

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accepted as true, to state a claim for relief that is plausible on its face. FRCP 12(b)(6);

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Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). A claim is facially plausible when there are

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sufficient factual allegations to draw a reasonable inference that defendants are liable for the

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misconduct alleged. While a court “must take all of the factual allegations in the complaint as

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true,” it is “not bound to accept as true a legal conclusion couched as a factual allegation.” Id.
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at 1949–50 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). “[C]onclusory

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allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for

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failure to state a claim.” Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir. 1996)

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(citation omitted).

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2.

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Defendant argues that the complaint fails to state any actionable injury under the federal

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Fair Credit Reporting Act. Section 1681s-2 sets forth the duties that lenders, like AHMSI, have

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to furnish information to agencies, like Experian, Equifax, and Trans Union. The Act provides

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consumers with a private right of action against these “furnishers” of information. 15 U.S.C.

FEDERAL FAIR CREDIT REPORTING ACT

1681(n) and 1681(o). This federal right of action is only “triggered,” however, when a

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For the Northern District of California

United States District Court

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furnisher receives notice from an agency that a consumer disputes the information. Gorman v.

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Wolpoff & Abramson, LLP, 584 F.3d 1147, 1154 (9th Cir. 2009). Neither a false report itself

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nor a consumer’s direct complaint to a furnisher triggers a right of action. Ibid. Once a

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furnisher receives notification of disputed information from an agency, the furnisher must:

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(1) conduct an investigation, (2) review all relevant information, (3) report the results of its

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investigation to the notifying agency, (4) report any incomplete or inaccurate information to all

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agencies to which the furnisher reported, and (5) modify, delete or block incomplete or

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inaccurate information. 15 U.S.C. 1681s-2(b)(1)(A–E).

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In order to recoup damages under Section 1681s-2(b), three events must happen: first, an

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agency must notify the furnisher about disputed information; second, the furnisher must fail to

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perform its statutory duties; third, the plaintiff must be injured as a result of that failure. 15

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U.S.C. 1681s-2(b), 1681(n), and 1681(o).

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In the instant action, plaintiffs satisfy the first element of the claim. They allege that in

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January 2011, Experian, Equifax, and Trans Union sent AHMSI notification of a disputed credit

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report (Compl. ¶¶ 19–20).

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The complaint is devoid of factual allegations to satisfy the second element of the claim,

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however. Plaintiffs complain that AHMSI did not “conduct an appropriate investigation . . .

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review all relevant information . . . report the results to the credit reporting agencies . . . [and]
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modify, delete or permanently block the reporting of the inaccurate information concerning

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plaintiffs’ mortgage loan” (Compl. ¶ 30). These allegations are a recitation of Section

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1681s-2(b)(1)(A–E), however, and as such are legal conclusions “couched in a factual

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allegation.” Iqbal, 129 S.Ct. at 1950.

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Yet, most importantly, the complaint does not contain any factual allegations of injury

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as a result of the alleged federal violation. The only injuries identified in the complaint

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occurred before the agencies notified AHMSI of disputed information and before AHMSI failed

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to perform the statutory duties that the notification triggered. The only injuries alleged are

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plaintiffs’ inability to finance the Georgia house, expenses incurred as a result of renting a
U-Haul, and being forced to rent a home in California. These all occurred in June 2010. The

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For the Northern District of California

United States District Court

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alleged breach by AHMSI occurred in January 2011. Thus, the latter cannot have caused the

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former — the former being the only injuries supported by factual allegations in the complaint.

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Although the complaint asserts that emotional distress and incidental and consequential

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damages occurred after January 2011 — when AHMSI supposedly breached its statutory

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duties — such supposed injury is only supported by conclusory allegations, and thus does not

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save the claim.

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For these reasons, the complaint does not state a complaint for relief under the federal

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Fair Credit Reporting Act, and defendant’s motion to dismiss the first claim is GRANTED.

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Accordingly, defendant’s motion to strike plaintiffs’ request for punitive damages in

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conjunction with this claim is DENIED AS MOOT.

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3.

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Contrary to plaintiffs’ first claim, the complaint includes enough factual allegations to

CALIFORNIA CONSUMER CREDIT REPORTING AGENCIES ACT

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state a claim for violation of the California Consumer Credit Reporting Agencies Act.

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Section 1785.25(a) of the California Civil Code states that “a person shall not furnish

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information on a specific transaction or experience to any consumer credit reporting agency if

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the person knows or should know the information is incomplete or inaccurate.” Unlike the

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federal Act, the state Act does not require that an agency notify the furnisher about disputed

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reports before a consumer gains a private right of action. Rather, a plaintiff must show that the
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party reporting credit information knew or should have known that the information given to the

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agency was incomplete or inaccurate, and the plaintiff must be harmed as a result of that

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inaccurate report.

plaintiffs were 30 days late on their mortgage payment, that $3,607 was past due, and that there

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was an outstanding balance on that account of $240,863 (Compl. ¶ 12). The next day, as a

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result of the adverse credit report, plaintiffs claim that their financing for a house in Georgia fell

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through. The alleged false report torpedoed plaintiffs’ entire move. They unpacked their rented

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U-Haul and “scramble[d]” to find and rent a home in California “at great expense” (Compl. ¶

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15). Thus, plaintiffs have put forth factual allegations to satisfy elements of a claim under the

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For the Northern District of California

Plaintiffs claim that AHMSI inaccurately reported on or about May 31, 2010, that

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United States District Court

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California Act.

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Defendant argues that plaintiffs fail to specify which of AHMSI’s actions violated the

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state Act and how that conduct constituted a violation. In their complaint, plaintiffs assert with

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specificity that the May 31 report was inaccurate. Furnishing an inaccurate credit report is not

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necessarily a violation of Section 1785.25(a) — Section 1785.25(g) affords a safe harbor for

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furnishers with reasonable reporting procedures. Knowingly or negligently furnishing an

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inaccurate report, however, is a violation. Plaintiffs assert that since both parties agreed to a

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short sale that was in full satisfaction of the mortgage loan (Compl. ¶ 9), defendant knew or

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should have known that plaintiffs did not owe any further balance after the close of the short

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sale on May 28 (Compl. ¶ 36).

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Defendant also moves to strike plaintiffs’ request for punitive damages. A court may

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grant a motion to strike matter that is “immaterial.” FRCP 12(f). A prayer for relief that is not

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recoverable as a matter of law is immaterial. Under state law, punitive damages may be

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awarded where there is clear and convincing evidence that the defendant acted with “malice.”

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CAL. CIV. CODE § 3294(a). “Malice” means “despicable conduct . . . with a willful and

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conscious disregard for the rights . . . of others.” Id. § 3294(c). Plaintiffs allege that defendant

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acted “negligently and willfully” by sending inaccurate credit reports to three agencies. If

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AHMSI was aware that the report was false, as the complaint alleges (Compl. ¶ 36), but
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proceeded to send the inaccurate statements regardless, a jury might find that AHMSI acted

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with willful intent. Therefore, defendant’s motion to strike plaintiffs’ punitive damages claim is

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DENIED.

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Although defendant’s motion is captioned in the alternative as a motion for a more

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definite statement, defendant does not analyze FRCP 12(e) in a separate challenge to the

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complaint. Moreover, the complaint is not so “vague or ambiguous that the party cannot

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reasonably prepare a response.” FRCP 12(e). So, the motion for a more definite statement is

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DENIED.

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CONCLUSION
For the foregoing reasons, the motion to dismiss is GRANTED IN PART and DENIED IN

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For the Northern District of California

United States District Court

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PART.

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scheduled for June 9 is VACATED. Plaintiffs’ federal claim is dismissed and only the state

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claim remains. Plaintiffs may seek leave to amend the complaint and will have FOURTEEN

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CALENDAR DAYS from

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track, for leave to file an amended complaint. A proposed amended complaint must be

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appended to the motion. The motion should clearly explain how the amendments to the

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complaint cure the deficiencies identified herein. In addition, the motion and proposed

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amended complaint should address whether and pursuant to what authority this court maintains

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jurisdiction over this action. If plaintiffs do not seek leave to file an amended complaint by the

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deadline, the parties will have SEVEN CALENDAR DAYS thereafter, i.e., 21 CALENDAR DAYS from

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the date of this order, to show cause why this case should not be dismissed for lack of subject

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matter jurisdiction, now that only a state-law claim remains.

The motions to strike and for a more definite statement are DENIED. The hearing

the date of this order to file a motion, noticed on the normal 35-day

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IT IS SO ORDERED.

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Dated: May 31, 2011.

WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE

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