Lyons et al v. JPMorgan Chase Bank, N.A.
Filing
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ORDER GRANTING DEFENDANT'S 52 MOTION TO DISMISS THE FIRST AMENDED COMPLAINT. Signed by Judge Claudia Wilken on 11/2/2011. (ndr, COURT STAFF) (Filed on 11/2/2011)
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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LAURA B. LYONS and ELAINE RUTH
LEE, individually and on behalf
of all others similarly situated,
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United States District Court
For the Northern District of California
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No. C 10-5166 CW
ORDER GRANTING
DEFENDANT'S MOTION
TO DISMISS THE
FIRST AMENDED
COMPLAINT
(Docket No. 52)
Plaintiffs,
v.
JPMORGAN CHASE BANK, N.A.,
Defendant.
________________________________/
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Plaintiffs Laura B. Lyons and Elaine Ruth Lee charge
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Defendant JPMorgan Chase Bank, N.A., (Chase) in an amended
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complaint, with violations of California common and statutory law
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based on fraud, in connection with Option Adjustable Rate
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Mortgages (OARMs) that it obtained from Washington Mutual Bank.
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Chase moves to dismiss their complaint.
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motion and Chase has replied to the opposition.
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taken under submission on the papers.
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papers submitted by the parties, the Court GRANTS Chase’s motion.
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Plaintiffs oppose the
The motion was
Having considered the
BACKGROUND
According to the complaint, on or about March 9, 2005, Lyons
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obtained an OARM from Washington Mutual.
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2005, Lee obtained an OARM from Washington Mutual.
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allege that Washington Mutual knew and fraudulently concealed from
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borrowers that these were negative amortization loans, in which
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the scheduled monthly payments would be insufficient to cover the
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interest owed and thus result in increasing principal balances,
On or about July 21,
Plaintiffs
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causing the payments to "recast" to higher amounts needed to pay
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off the principal owed.
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concealed the true interest rate that borrowers would pay.
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They also allege that Washington Mutual
On September 25, 2008, the Office of Thrift Supervision
closed Washington Mutual and the Federal Deposit Insurance
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Corporation (FDIC) was appointed as receiver.
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Washington Mutual's assets from the FDIC.
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Plaintiffs brought their original complaint pleading 1) breach of
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contract; 2) violation of California’s Unfair Competition Law
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United States District Court
For the Northern District of California
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(UCL), Cal. Bus. & Prof. Code § 17200, et seq.; and 3) unjust
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enrichment.
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11, 2011, the Court dismissed these claims with leave to amend
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because it found that the complaint did not allege that Chase had
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breached any terms of its contract with Plaintiffs.
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Chase purchased
On November 15, 2010
Plaintiffs also sought declaratory relief.
On July
In their first amended complaint (1AC) filed July 26, 2011,
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Plaintiffs repeat unamended their claims for breach of contract
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and violation of the UCL based on "unlawful" business practices to
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preserve the claims for appeal.
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based on the theory that at the time Chase acquired and serviced
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these loans, it was aware that they were fraudulently obtained:
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violations of the UCL based on "unfair" business practices; and
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unjust enrichment based on fraud.
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declaratory relief.
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They allege the following claims
Again, Plaintiffs seek
Plaintiffs plead that Chase was aware that the loan
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agreements were so misleading as to be fraudulent and that after
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Chase purchased Washington Mutual’s OARMs it unjustly enriched
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itself by collecting payments and loan servicing fees based on an
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agreement that it knew was fraudulently obtained.
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Plaintiffs cite several provisions in their loan agreements
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as evidence of fraud.
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previous order, and found that the complaint did not allege that
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Chase had breached any terms of the loan agreement.
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noted that some of the language therein might be considered
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confusing and contradictory, potentially supporting a claim for
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fraud.
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The Court addressed these provisions in its
The Court
As evidence of Chase's knowledge of the alleged fraud,
Plaintiffs point to Chase's 2008 annual report to its shareholders
United States District Court
For the Northern District of California
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in which OARM loans were characterized as "possibly the worst
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mortgage product" and a product that was not "consumer friendly."
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1AC ¶ 5.
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loans knowing that borrowers were contesting the balances and it
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continued to collect the payments, rather than correcting the
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alleged fraud, thus unjustly enriching itself.
Plaintiffs also allege that Chase purchased the OARM
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As evidence of Chase's participation in securing the
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allegedly fraudulent loan documents, Plaintiffs assert that in
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2005 Chase sent several of its executives with knowledge of the
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home mortgage business to "infiltrate Washington Mutual".
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¶ 32.
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their oversight "with an eye towards forcing the collapse or sale
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of Washington Mutual."
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Chase purchased Washington Mutual's loans for a small fraction of
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the amounts claimed to be owed on the loans, and thus are being
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unjustly enriched from inflated balances caused by the practices
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alleged above.
1AC
Chase also purportedly pressured regulators to tighten
1AC ¶ 33.
Finally Plaintiffs plead that
1AC ¶¶ 33, 52, 53.
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LEGAL STANDARD
A complaint must contain a “short and plain statement of the
claim showing that the pleader is entitled to relief.”
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Civ. P. 8(a).
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state a claim, dismissal is appropriate only when the complaint
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does not give the defendant fair notice of a legally cognizable
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claim and the grounds on which it rests.
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Twombly, 550 U.S. 544, 555 (2007).
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complaint is sufficient to state a claim, the court will take all
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United States District Court
For the Northern District of California
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material allegations as true and construe them in the light most
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favorable to the plaintiff.
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896, 898 (9th Cir. 1986).
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to legal conclusions; “threadbare recitals of the elements of a
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cause of action, supported by mere conclusory statements,” are not
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taken as true.
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(citing Twombly, 550 U.S. at 555).
On a motion under Rule 12(b)(6) for failure to
Bell Atl. Corp. v.
In considering whether the
NL Indus., Inc. v. Kaplan, 792 F.2d
However, this principle is inapplicable
Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009)
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Fed. R.
DISCUSSION
Chase argues that Plaintiffs' claims must again be dismissed
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because, insofar as they are predicated on Chase collecting on
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loans that were allegedly procured by fraud on the part of
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Washington Mutual, they are barred by the Purchase and Assumption
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Agreement (P&A agreement).
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fraudulent conduct by Washington Mutual is the basis for both
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Plaintiffs' common law unjust enrichment claim and their
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unfairness claim under the UCL.
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not bar Plaintiffs’ action, Chase argues, Plaintiffs fail to state
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any of their claims sufficiently.
Chase further asserts that the alleged
Even if the P&A Agreement does
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I.
Claims of Breach of Contract and Violation of UCL Under
"Unlawful" Prong
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In their opposition to the motion to dismiss, Plaintiffs
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acknowledge that they included the claims for breach of contract
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and violation of the "unlawful" prong of the UCL in this complaint
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only to preserve these claims for appeal.
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the deficiencies found by the Court and merely reassert the
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previous dismissed claims.
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dismissed.
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II.
They fail to address
Accordingly, these claims are
Effect of the P&A Agreement
United States District Court
For the Northern District of California
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The P&A Agreement between Chase and the FDIC provides,
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[A]ny liability associated with borrower claims for
payment of or liability to any borrower for monetary
relief, or that provide for any other form of relief to
any borrower, whether or not such liability is reduced
to judgment, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, legal or equitable, judicial or extrajudicial, secured or unsecured, whether asserted
affirmatively or defensively, related in any way to any
loan or commitment to lend made by the Failed Bank prior
to failure, or to any loan made by a third party in
connection with a loan which is or was held by the
Failed Bank, or otherwise arising in connection with the
Failed Bank’s lending or loan purchase activities are
specifically not assumed by the Assuming Bank.
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First Amended Complaint (1AC), Ex. 3 § 2.5.
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In its previous order, this Court held that Plaintiffs'
claims would not be barred by the P&A agreement only to the extent
that they were based on Chase's actions after it acquired the
loans from Washington Mutual.
In the 1AC, Plaintiffs make claims
for unjust enrichment under the common law and the "unfair" prong
of the UCL that are based on the allegation that Washington Mutual
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committed fraud in the procurement of Plaintiffs' loans and Chase
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knew of this and continues to benefit from it.
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Plaintiffs offer two responses to Chase's assertions that
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these claims are precluded by the P&A agreement.
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state that their claims are based on Chase's conduct after it
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acquired the loans.
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loans were fraudulently obtained, they were never enforceable, and
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therefore remain unenforceable after the transfer.
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United States District Court
For the Northern District of California
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First, they
Second, Plaintiffs argue that because the
A. Chase's Post-Acquisition Conduct
Both the unjust enrichment claim and the UCL unfairness claim
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are based on Chase's post-acquisition conduct in applying
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Plaintiffs' payments and servicing the loan.
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the initial complaint, Plaintiffs allege that Chase engaged in bad
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faith conduct by failing to apply Plaintiffs' payments to both
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principal and interest, allowing the interest to increase and the
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loans to negatively amortize, increasing the principal through
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negative amortization, charging an interest rate that was not
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disclosed and collecting profits by servicing these loans.
Specifically, as in
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As noted previously, courts have held that the FDIC, not
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Chase, is the party responsible for borrowers' claims arising from
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Washington Mutual's conduct with regard to their loans.
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e.g., Yeomalakis v. FDIC, 562 F.3d 56, 60 (1st Cir. 2009); Hilton
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v. Wash. Mut. Bank, 2009 WL 3485953, at *2-*3 (N.D. Cal.).
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applies even where fraudulent activity is alleged at the inception
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of the loans.
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(N.D. Cal. 2009) (holding that claims based on fraudulently
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originated Washington Mutual loans are barred by the P&A
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Agreement).
See,
This
Biggins v. Wells Fargo & Co., 266 F.R.D. 399, 415
See also Dipaola v. JPMorgan Chase Bank, 2011 WL
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3501756, at *3-*4 (N.D. Cal.)(plaintiffs are barred by the P&A
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agreement from bringing any claims against JPMorgan Chase based on
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fraud at the origination of the loan).
The conduct on which Plaintiffs base their amended claims is
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almost identical to the conduct cited in their original claims, a
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fact which they acknowledge.
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that Chase had no obligation to allocate monthly payments to
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principal and interest.
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proposition that Chase breached the contract as it existed.
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United States District Court
For the Northern District of California
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Plaintiffs claim that Chase was aware of fraud committed by
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Washington Mutual at the inception of the loan but they plead no
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facts to support such a claim.
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The Court held in its previous order
Those claims were based on the
Here,
B. Unenforceable Due to Fraud
Plaintiffs also argue that the loans in question were invalid
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because they were induced by fraud and therefore Chase had no
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legitimate contracts to enforce.
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the fraud when it purchased Washington Mutual's assets, failed to
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correct it, and continued to collect payments based on the
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fraudulently obtained contracts.
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They argue that Chase knew of
In Biggins, the court rejected essentially the same argument
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as the one that Plaintiffs have made here.
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argument that the contract was invalid due to fraud committed by
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Washington Mutual was not sufficient to defeat clause 2.5 of the
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P&A Agreement.
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Order that the allocation and collection of the payments is within
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the bounds of the existing contract between Plaintiffs and Chase.
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Because there are no allegations of any fraud committed after
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Chase acquired the loans, in order to find an actionable claim one
266 F.R.D. at 415.
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It held that the
This Court found in its prior
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must look to fraudulent actions which occurred in the formation of
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the contract.
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Washington Mutual's lending activities by the P&A agreement.
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Newbeck v. Washington Mutual Bank, 2010 WL 3222174, at *2 (N.D.
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Cal.).
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Chase is insulated from claims arising out of
See
Plaintiffs point to footnote four in this Court's previous
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Order, which acknowledges that the language of the original
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contract could potentially support a claim for fraud.
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this same footnote the Court clarified that Chase is not the
However, in
United States District Court
For the Northern District of California
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original lender and is not liable for Washington Mutual's conduct,
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due to the P&A agreement.
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support a charge for fraud against Washington Mutual or its
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successor in interest, the FDIC, does not support a claim against
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Chase.
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by Chase after acquisition.
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written in Chase's 2008 annual report do not support the claim
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that Chase knew that the loans were fraudulently obtained, nor
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does Chase's purchase of Washington Mutual's assets for "pennies
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on the dollar" support such a claim.
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The fact that the language might
Plaintiffs have alleged no fraudulent representations made
Moreover, the comments allegedly
Because the common law unjust enrichment claim and the UCL
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unfairness claim are both based on Chase's culpability for alleged
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fraud committed by Washington Mutual at the inception of the
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loans, these claims fail.
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III. Declaratory Relief
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Plaintiffs seek a declaratory judgment that Chase must cure
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the defects that Plaintiffs have identified in the terms of their
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loan agreement.
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claims adequately, there is no basis for declaratory relief.
Because Plaintiffs have failed to state their
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CONCLUSION
Plaintiffs have failed to cure the deficiencies noted in
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their initial complaint.
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raised against Chase because of the P&A Agreement.
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because Plaintiffs had an opportunity to amend their complaint and
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did not cure the defects identified by the Court, the motion to
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dismiss is GRANTED without leave to amend.
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this file.
The claims plead in the 1AC cannot be
Accordingly,
The Clerk shall close
The parties shall bear their own costs.
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United States District Court
For the Northern District of California
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IT IS SO ORDERED.
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Dated: 11/2/2011
CLAUDIA WILKEN
United States District Judge
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