Lane et al v. Wells Fargo Bank NA
Filing
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ORDER DENYING MOTION TO DISMISS AND VACATING HEARING by Judge William Alsup [denying 84 Motion to Dismiss]. (whasec, COURT STAFF) (Filed on 4/24/2013)
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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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DANNY LANE, BEVERLY LANE, and
MERCEDES GUERRERO, individually,
and for other persons similarly situated,
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Plaintiffs,
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v.
ORDER DENYING MOTION
TO DISMISS AND
VACATING HEARING
WELLS FARGO BANK, N.A.,
Defendant.
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No. C 12-04026 WHA
INTRODUCTION
In this putative class action involving flood and hazard insurance on home mortgages,
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defendant moves to dismiss plaintiffs’ claims under the Bank Holding Company Act and under
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California’s Unfair Competition Law. Defendant also moves to dismiss plaintiffs’ theory that
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defendant wrongfully backdated insurance policies. For the reasons stated below, defendant’s
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motion is DENIED.
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STATEMENT
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Defendant Wells Fargo Bank, N.A. serviced the home loans of plaintiffs Danny and
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Beverly Lane and Mercedes Guerrero.* Both homes were located in flood hazard areas, and
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* The Lanes have a mortgage under the laws of Arkansas, while Guerrero has a deed of trust under the
laws of California. For simplicity, this order will refer to both of plaintiffs’ home loans as mortgages.
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plaintiffs were required to maintain flood insurance. If plaintiffs did not maintain adequate
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flood insurance, defendant could purchase flood insurance on the property and charge the cost
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back to plaintiffs in a process known as “force-placement” of insurance.
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The amended complaint alleges defendant force-placed flood insurance on plaintiffs’
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homes throughout 2010 and 2011. In doing so, defendant allegedly entered into exclusive
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purchasing agreements with two insurers and received “kickbacks” in the form of unearned
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commissions to its subsidiary, Wells Fargo Insurance (“WFI”) (Amd. Compl. ¶¶ 4–5).
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Under plaintiffs’ backdating theory, to maximize the kickbacks, defendant force-placed
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insurance policies with retroactive effective dates, even though defendant was aware that there
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For the Northern District of California
United States District Court
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were no claims during the lapsed period (id. at ¶¶ 71–72).
In November 2012, defendant moved to dismiss the complaint (Dkt. No. 45). In January
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2013, an order issued granting in part and denying in part defendant’s motion to dismiss (Dkt.
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No. 70). The order permitted plaintiffs to move to file an amended complaint (id. at 23).
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Plaintiffs did so, adding a new plaintiff to raise California claims and a new claim under the
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Bank Company Holding Act (Dkt. No. 76). Defendant opposed because the additions violated
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Rule 16(b) in modifying a scheduling order (Dkt. No. 77). On March 20, an order issued
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granting leave to amend (Dkt. No. 82).
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Defendant now moves again to dismiss a number of plaintiffs’ claims for failure to state a
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cognizable legal theory: plaintiffs’ backdating theory; plaintiffs’ claim under the Bank Holding
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Company Act, 12 U.S.C. 1972(1)(B); and, plaintiffs’ claim under California’s Unfair
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Competition Law, California Business and Professions Code Section 17200 et seq. This order
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finds that oral argument is unnecessary, and the hearing for May 2 is VACATED.
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REQUEST FOR JUDICIAL NOTICE
Defendant requests judicial notice be taken of the mortgage for plaintiff Guerrero (Dkt.
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No. 89), which plaintiffs do not oppose. Guerrero’s mortgage is referenced in the amended
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complaint; however, a blank form mortgage is appended thereto because Guerrero has not
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located the actual mortgage (Amd. Compl. ¶ 41, Exh. B). It appears that both parties’ versions
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of Guerrero’s mortgage have identical language (RJN Exh. 1; Amd. Compl. Exh. B).
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Accordingly, for the purposes of this order, defendant’s request for judicial notice is GRANTED.
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ANALYSIS
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Defendant moves to dismiss a number of plaintiffs’ claims for failure to state a
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“cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal
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theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). Defendant does
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not specify under which rule its motion is made, but invokes the pleading standard set forth in
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Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Accordingly, this order will analyze defendant’s
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motion under Rule 12(b)(6).
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For the Northern District of California
United States District Court
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BACKDATING THEORY.
Defendant moves to dismiss claims based on plaintiffs’ backdating theory. None of
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plaintiffs’ claims exclusively relies on the backdating theory; rather, the theory supports several
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of plaintiffs’ claims (Amd. Compl. ¶¶ 106, 131). Defendant contends that because federal law
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allegedly permits backdating of flood insurance policies to ensure continuous coverage and
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because plaintiffs’ mortgages allegedly permit backdating, plaintiffs have failed to state a
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cognizable legal claim (Br. 8, 19). Neither of these arguments is persuasive.
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A.
Federal Law.
Defendant points to various statutory and administrative sources to show that federal law
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requires backdating of flood insurance policies to the date upon which the coverage lapsed, but
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none of these authorities is persuasive.
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The National Flood Insurance Program prohibited lenders from issuing loans for any
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property unless flood insurance is in place “for the term of the loan.” 42 U.S.C. 4012a(b)(1)(A).
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Defendant contends that this language required continuous coverage, and accordingly,
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backdating force-placed insurance was also required (Br. 15). While the statute suggests that
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continuous coverage was necessary, the plain language of the statute did not require backdating
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force-placed insurance and charging borrowers the increased cost. Moreover, the language did
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not even appear in the section that permits force-placement of insurance. The statute cannot be
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reasonably read to have required backdating of force-placed insurance.
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force-placed insurance. In late 2011, the Office of the Comptroller of the Currency and various
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other banking agencies issued new guidance regarding continuous coverage of force-placed
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insurance. Interagency Questions and Answers Regarding Flood Insurance, 76 Fed. Reg. 64175,
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64180 (Oct. 17, 2011). The guidance stated that a servicer may charge a borrower for expired
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insurance during the notice period “if the borrower has given . . . its servicer the express
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authority to charge the borrower for such coverage as a contractual condition of the loan being
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made.” Ibid. The understanding from administrative agencies did not square with defendant’s
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interpretation that the statute requires backdating of insurance. Moreover, defendant’s alleged
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practice did not appear to comply with these requirements because plaintiffs’ mortgages did not
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For the Northern District of California
Administrative guidance also suggests that the statute did not require backdating
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United States District Court
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expressly permit charging for backdated force-placed insurance (RJN Exh. 1 ¶ 4; Amd. Compl.
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Exh. A ¶ 5).
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Defendant also points to two other federal authorities that allegedly permit backdating,
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but both are recent changes and were not in effect at the time of the alleged backdating.
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Effective January 2013, the statute provided that servicers “may charge the borrower for . . .
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premiums or fees incurred for coverage beginning on the date on which flood insurance coverage
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lapsed or did not provide a sufficient coverage amount.” 42 U.S.C. 4012a(e)(2). Defendant
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contends that the amendment was meant to clarify existing law that permitted backdating, citing
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House Report No. 112-102 (2011). The House Report, however, was part of a different bill that
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never passed the Senate and never became law; it therefore has little persuasive value in
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interpreting the law that Congress did, in fact, enact.
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Similarly, defendant cites a recent comment from the Consumer Financial Protection
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Bureau that permits retroactive force-placement of hazard insurance policies. Mortgage
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Servicing Rules, 78 Fed. Reg. 10696, 10891–92 (Feb. 14, 2013). This comment, however, will
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not be in effect until January 2014. Id. at 10696. Defendant’s assertion that this comment
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clarified existing law is also unpersuasive.
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Accordingly, federal law did not require backdating of insurance during the relevant time
frame alleged in plaintiffs’ amended complaint. While this order finds that federal law did not
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require backdating at the time, plaintiffs’ mortgages provide that the lender may take
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“reasonable and appropriate” or “necessary” actions to secure its interest in the collateral for the
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mortgages (Amd. Compl. Exh. A ¶ 9; RJN Exh. 1 ¶ 7). Defendant may still be able to show that
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its actions complied with these contractual requirements, but this analysis is inappropriate to
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undertake on a motion to dismiss.
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B.
Judicial Decisions.
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Defendant contends that three other district courts have read similar mortgage language
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to permit charging borrowers for backdated force-placed insurance, but these authorities are not
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persuasive.
Defendant’s primary authority was decided on summary judgment and not on a motion
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For the Northern District of California
United States District Court
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to dismiss. Webb v. Chase Manhattan Mortg. Corp., 2:05-0548, 2008 WL 2230696, *9 (S.D.
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Ohio May 28, 2008) (Judge George Smith). Defendant’s next decision relied on Webb and
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the plaintiff’s failure to show an intent to deceive, a required element under Connecticut law.
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LaCroix v. U.S. Bank, N.A., 11-3236 DSD/JJK, 2012 WL 2357602, *5 (D. Minn. June 20, 2012),
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appeal dismissed (Oct. 16, 2012) (Judge David Doty). Finally, defendant cites a published
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decision where the court interpreted the mortgage language to permit backdating of force-placed
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insurance. Schilke v. Wachovia Mortg., FSB, 820 F. Supp. 2d 825, 834 (N.D. Ill. 2011)
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(Judge Robert Dow, Jr.). Numerous other decisions from district courts in our circuit, however,
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have disagreed with this decision. See, e.g., Cannon v. Wells Fargo Bank, N.A., No. 12-1376
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EMC, 2013 WL 132450 (N.D. Cal. Jan. 9, 2013) (Judge Edward Chen); Ellsworth v. U.S. Bank,
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N.A., 12-02506 LB, 2012 WL 6176905, *16 (N.D. Cal. Dec. 11, 2012) (Judge Laurel Beeler);
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Gustafson v. BAC Home Loans Servicing, LP, No. 11-915-JST (ANx), 2012 WL 4761733
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(C.D. Cal. Apr. 12, 2012) (Judge Josephine Tucker); McNeary-Calloway v. JP Morgan Chase
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Bank, N.A., 863 F. Supp. 2d 928 (N.D. Cal. 2012) (Magistrate Judge Joseph Spero); see also
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Montanez v. HSBC Mortg. Corp. (USA), 876 F. Supp. 2d 504 (E.D. Pa. 2012) (Judge Jan
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DuBois); Gallo v. PHH Mortg. Corp., No. 12-1117 (NLH/KMW), 2012 WL 6761876 (D.N.J.
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Dec. 31, 2012) (Judge Noel Hillman). Because there is a dispute on the interpretation of the
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mortgage language, it is not appropriate to determine the issue on a motion to dismiss.
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Accordingly, defendant’s arguments that the backdating theory fails as a matter of law
is unpersuasive. Defendant’s motion to dismiss plaintiffs’ backdating theory is DENIED.
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2.
BANK HOLDING COMPANY ACT.
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Plaintiffs bring a claim under the Bank Holding Company Act, specifically, 12 U.S.C.
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1972(1)(B). This section provides that a “bank shall not in any manner . . . furnish any
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service . . . on the condition or requirement . . . that the customer shall obtain some additional
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credit, property, or service from . . . any other subsidiary of such bank holding company.” Ibid.
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To show a violation of the Act, “a plaintiff must show that (1) the banking practice in question
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was unusual in the banking industry, (2) an anti-competitive tying arrangement existed, and
(3) the practice benefits the bank.” S & N Equip. Co. v. Casa Grande Cotton Fin. Co., 97 F.3d
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For the Northern District of California
United States District Court
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337, 345 (9th Cir. 1996) (quotation omitted). Defendant contends that plaintiffs cannot show a
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tying arrangement that was both anti-competitive and unusual.
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A.
Tying Arrangement.
A tying arrangement is “an arrangement by one party to sell one product (the tying
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product), but only on the condition that the buyer also purchase a different . . . product (the tied
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product).” Id. at 346 (quotation omitted). The amended complaint alleges that the tying product
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is Wells Fargo’s purchase of flood insurance and that the tied product is the commission to WFI
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for unspecified services (Amd. Compl. ¶ 142).
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Defendant first contends that the tying product — force-placing insurance — is not a
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service to the borrower (Br. 20). This order disagrees. While defendant may purchase insurance
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to protect itself and the equity in the borrower’s home, by protecting borrower’s home,
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purchasing insurance also protects the borrower. Thus, force-placing insurance could be a tying
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product under the Act.
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Defendant next contends that the tied product — the insurance brokerage services
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provided by WFI — is not a service because the amended complaint alleges that WFI never
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performed a service for its commissions (Br. 20). The amended complaint plausibly pleads that
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even a non-existent service for which borrowers must pay may be a tied product under the Act.
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The amended complaint alleges that borrowers pay commissions, and, on a motion to dismiss,
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it is inappropriate to consider defendant’s assertion to the contrary. Ultimately, the existence
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of a tying arrangement will turn on the characterization of the two products. For purposes of a
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motion to dismiss, plaintiffs have shown that the commissions to WFI are a tied product.
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Defendant also appears to contend that the two services are actually one service because
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WFI’s services are directed at defendant and not at plaintiffs. To the extent that defendant
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contends this, determining whether two products are actually one is a fact-heavy inquiry. S & N
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Equip., 97 F.3d at 346–47. As such, it is inappropriate to determine whether the two products
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are separate on a motion to dismiss.
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For the Northern District of California
United States District Court
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B.
Anti-competitive.
Parties dispute whether plaintiffs must allege the tying arrangement is anti-competitive.
The most recent decision from our court of appeals states that:
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a plaintiff claiming an unlawful tie-in under [the Act] . . . need
not establish the anti-competitive effects of the tie-in . . . . In light
of the unique economic role that banks play, Congress perceived
conditional transactions involving credit as inherently
anti-competitive. . . . Thus, while our test speaks in terms of
an “anti-competitive” tying, the modifier either drops out or is
presumed to exist. The deletion from the test of the misleading
term “anti-competitive” or the substitution of the word “unlawful”
might be helpful.
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S & N Equip., 97 F.3d at 346 (quotation and citations omitted). Plaintiffs need not show that the
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defendant’s practice is anti-competitive.
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Defendant attempts to read into this decision that the tying arrangement must still be
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unlawful (Reply 4–5). This order disagrees that the decision requires a showing of unlawfulness
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and rather that portion of the opinion is dicta. Thus, plaintiffs need not show the tying
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arrangement is unlawful.
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C.
Unusual Banking Practice.
As an initial matter, plaintiffs contend that showing the banking practice is unusual is
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only required under Section 1972(1)(C) (Opp. 23). Although our court of appeals has not
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analyzed a claim under Section 1972(1)(B), it has always held that unusual is a requirement
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under Section 1972(1), regardless of the specific subsection of the claim. See S & N Equip.,
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97 F.3d at 345; Bieber v. State Bank of Terry, 928 F.2d 328, 330 (9th Cir. 1991); Rae v. Union
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Bank, 725 F.2d 478, 480 (9th Cir. 1984). Plaintiffs assert that the inclusion of the word
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“usually” in Section 1972(1)(C) shows that the unusual requirement only applies to claims under
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that particular subsection (Opp. 22). This order disagrees. Section 1972(1)(A) also does not
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include the word “usually,” but our court of appeals requires proof of an unusual practice for
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claims under Section 1972(1)(A). Rae, 725 F.2d at 480. Accordingly, plaintiffs must show that
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the banking practice was unusual.
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Defendant contends that the amended complaint fails to allege any facts that the practice
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is unusual in the banking industry. The amended complaint alleges that the practice was unusual
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because (1) defendant’s subsidiary did not purchase the best available insurance policy for the
property and (2) Fannie Mae forbids charging borrowers a commission for force-placed
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For the Northern District of California
United States District Court
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insurance (Amd. Compl. ¶¶ 145–46). Moreover, the amended complaint alleges that defendant’s
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motivation for the practice was to earn profits and not to protect its collateral (id. at ¶¶ 8, 11).
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This is sufficient to allege an unusual banking practice. Defendant contends that because there
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are numerous actions on similar commission agreements, the practice is not unusual (Br. 23).
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Whether a practice is unusual or not is a factual inquiry. See S & N Equip., 97 F.3d at 346.
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At this stage in the pleadings, the amended complaint’s allegations are sufficient.
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Accordingly, defendant’s motion to dismiss plaintiffs’ claim under the Bank Holding
Company Act is DENIED.
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3.
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California’s Unfair Competition Law, California Business and Professions Code
SECTION 17200 CLAIM.
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Section 17200 et seq., prohibits business practices that are either “unlawful, unfair, or
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fraudulent.” Section 17200 makes actionable three varieties of business practices under each
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prong of the statute. Cel-Tech Commc’ns., Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180
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(1999). The amended complaint brings a claim under both the unlawful and unfair prongs
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(Amd. Compl. ¶¶ 130–31). Defendant only moves to dismiss plaintiffs’ claim under the
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unlawful prong of Section 17200. Two possible violations could support plaintiffs’ unlawful
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claim: (1) violation of the Bank Company Holding Act and (2) common law breach of contract.
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Defendant contends that both of these underlying violations cannot support a Section 17200
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claim as unlawful business practices (Br. 23). This order finds that the Bank Holding Company
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Act claim supports a Section 17200 claim.
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First, defendant moves to dismiss plaintiffs’ claim under Section 17200 because it
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relies upon the Bank Holding Company Act claim, which defendant has moved to dismiss.
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Because this order does not dismiss plaintiffs’ claim under the Bank Company Holding Act,
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defendant’s argument to dismiss this claim is denied.
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Second, defendant contends that breach of contract cannot support a Section 17200 claim.
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Our court of appeals states that “a common law violation such as breach of contract is
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insufficient” to state a Section 17200 claim under the unlawful prong. Shroyer v. New Cingular
Wireless Servs., Inc., 622 F.3d 1035, 1044 (9th Cir. 2010) (quotation and citation omitted).
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For the Northern District of California
United States District Court
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None of plaintiffs’ authorities support their contention to the contrary. Rather, a breach of
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contract claim can support a Section 17200 claim because it can be an unfair business practice.
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See Smith v. Wells Fargo Bank, N.A., 135 Cal. App. 4th 1463, 1483 (2005).
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Accordingly, defendant’s motion to dismiss plaintiffs’ Section 17200 claim based on the
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Bank Company Holding Act is DENIED and, as to the claim based on breach of contract, is
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GRANTED.
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CONCLUSION
To the extent stated above, defendant’s motion to dismiss plaintiffs’ backdating theory,
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the claim under the Bank Company Holding Act, and the claim under the Unfair Competition
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Law is DENIED. The hearing for MAY 2 is hereby VACATED. Defendant has until NOON ON
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FRIDAY, MAY 3, to file its answer to the amended complaint. Parties should note that a motion
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for class certification is due no later than MAY 10.
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IT IS SO ORDERED.
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Dated: April 24, 2013.
WILLIAM ALSUP
UNITED STATES DISTRICT JUDGE
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