Hovsepian v. Apple, Inc.

Filing 152

Hovsepian v. Apple, Inc.

Doc. 152

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JOHN B. SULLIVAN (State Bar No. 96742) REGINA J. McCLENDON (State Bar No. 184669) [e-mail] ERIK KEMP (State Bar No. 246196) [e-mail] SEVERSON & WERSON A Professional Corporation One Embarcadero Center, Suite 2600 San Francisco, CA 94111 Telephone: [phone] Facsimile: [phone] Attorneys for Defendant EMC MORTGAGE CORPORATION UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

12 ARMANDO PLASCENCIA and MELANIA PLASCENCIA, individually and on behalf of all 13 others similarly situated, 14 15 vs. Plaintiffs,

Case No.: C-07-04485-CW EMC MORTGAGE CORPORATION'S NOTICE OF MOTION AND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF [Fed R. Civ. P., Rule 12(b)(6)]; [PROPOSED] ORDER Date: Time: Courtroom: Judge: September 25, 2008 2:00 p.m. 2 Hon. Claudia Wilken

16 LENDING 1st MORTGAGE; LENDING 1st MORTGAGE, LLC; EMC MORTGAGE 17 CORPORATION; and DOES 1 through 10 inclusive, 18 Defendants. 19 20 21 22 23 24 25 26 27 28
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 VII. V. VI. IV. III.

TABLE OF CONTENTS Page NOTICE OF MOTION AND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED..............................1 MEMORANDUM OF POINTS AND AUTHORITIES.................................................2 I. II. INTRODUCTION ............................................................................................................... 2 STATEMENT OF FACTS..................................................................................................4 A. B. The Underlying Facts .............................................................................................. 4 The Complaint's Claims..........................................................................................6

PLAINTIFFS STATE NO CLAIM FOR RELIEF UNDER TILA.....................................8 A. B. Plaintiffs Refinanced and So Cannot Rescind.........................................................8 Plaintiffs Sued Too Late to Recover Damages........................................................8

PLAINTIFFS STATE NO CLAIM FOR VIOLATION OF THE UCL ........................... 11 A. B. EMC Cannot Be Vicariously Liable Under the UCL............................................11 TILA Preempts Plaintiffs' Second Cause of Action for Unlawful Practices ........ 12

PLAINTIFFS HAVE NO CLAIM FOR FRAUDULENT OMISSIONS ......................... 14 THE FIFTH AND SIXTH CLAIMS SHOULD BE DISMISSED ................................... 19 A. B. C. D. Basic Principles Of Contract Interpretation Under California Law ...................... 19 Defendants Did Not Promise To Apply A Portion Of Each Payment To Principal20 Defendants Did Not Promise To Keep The Interest Rate Constant ...................... 22 The Fifth And Sixth Claims Are Not Legally Viable............................................23

CONCLUSION ................................................................................................................. 24

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TABLE OF AUTHORITIES FEDERAL CASES Page(s)

Alexiou v. Brad Benson Mitsubishi 127 F.Supp.2d 557 (D. N.J. 2000)..................................................................................... 13 Alperin v. Vatican Bank 410 F.3d 532 (9th Cir. 2005) ............................................................................................... 4 Anderson v. Wells Fargo Home Mortg., Inc. 259 F.Supp.2d 1143 (W.D. Wash. 2003) ............................................................................ 9 Barrett v. J.P. Morgan Chase Bank, N.A. 445 F.3d 874 (6th Cir. 2006) ............................................................................................... 8 Bell Atlantic Co. v. Twombly, ___U.S. ___ 127 S.Ct. 1955 (2007) ......................................................................................................... 4 Bryant v. Mortgage Capital Resource Corp. 197 F.Supp.2d 1357 (N.D. Ga. 2002).................................................................................. 9 Cada v. Baxter Healthcare Corp. 920 F.2d 446 (7th Cir.1991) ................................................................................................ 9 Conmar Corp. v. Mitsui & Co. (U.S.A.) 858 F.2d 499 (9th Cir. 1988) ............................................................................................. 10 Durning v. First Boston Corp. 815 F.2d 1265 (9th Cir. 1987) ............................................................................................. 4 Eubanks v. Liberty Mortg. Banking Ltd. 976 F.Supp. 171 (E.D. N.Y. 1997)................................................................................ 8, 10 Giles v. General Motors Acceptance Corp. 494 F.3d 865 (9th Cir. 2007) ....................................................................................... 10, 17 Grimmett v. Brown 75 F.3d 506 (9th Cir. 1996) ........................................................................................... 9, 10 Guerrero v. Gates 442 F.3d 697 (9th Cir. 2006) ............................................................................................... 9 Handy v. Anchor Mortg. Corp. 464 F.3d 760 (7th Cir. 2006) ............................................................................................... 8 Hubbard v. Fidelity Fed. Bank 91 F.3d 75 (9th Cir. 1996) ................................................................................................... 9 Huynh v. Chase Manhattan Bank 465 F.3d 992 (9th Cir. 2006) ............................................................................................... 9 In re Verifone Secs. Litig. 11 F.3d 865 (9th Cir. 1993) ................................................................................................. 4
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King v. State of California 784 F.2d 910 (9th Cir. 1986) ................................................................................. 2, 8, 9, 16 Kourtis v. Cameron 419 F.3d 989 (9th Cir. 2005) ............................................................................................... 4 Mir v. Little Co. of Mary Hosp. 844 F.2d 646 (9th Cir. 1988) ............................................................................................... 4 Miscellaneous Service Workers Drivers & Helpers, Teamsters Local # 427 v. Philco-Ford Corporation, WDL Division, 661 F.2d 776 (9th Cir. 1981.) ............................................................................................ 15 Palda v. v. General Dynamics Corp. 47 F.3d 872 (7th Cir. 1995) ............................................................................................... 23 Perfect 10, Inc. v. Visa Intern. Service Ass'n. 494 F.3d 788 (9th Cir. 2007) ............................................................................................. 11 Pincay v. Andrews 238 F.3d 1106 (9th Cir. 2001) ............................................................................................. 9 Salois v. Dime Sav. Bank 128 F.3d 20 (1st Cir. 1997) ............................................................................................... 10 Silvas v. ETrade Mortg. Corp. 421 F.Supp.2d 1315 (S.D. Cal. 2006) ................................................................... 14, 16, 17 Swartz v. KPMG LLP 476 F.3d 756 (9th Cir. 2007) ............................................................................................. 15 Thompson v. Illinois Department of Professional Regulations 300 F.3d 750 (7th Cir. 2002) ............................................................................................. 23 Thorman v. American Seafoods Co. 421 F.3d 1090 (9th Cir. 2005) ........................................................................................... 10 Zuniga v. United Can Co. 812 F.2d 443 (9th Cir. 1987) ............................................................................................... 8 STATE CASES Agosta v. Astor, 120 Cal. App. 4th 596, 15 Cal.Rptr.3d 565 (2004), citing Guz v. Bechtel National, Inc., 24 Cal.4th 317 100 Cal. Rptr. 2d 352 (2000)............................................................................................. 23 Bond v. Fleet Bank (RI), N.A. 2002 WL. 373475 (D. R.I. 2002) ...................................................................................... 16 Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. 2 Cal.4th 342, 6 Cal. Rptr. 2d 467 (1992) ..................................................................... 4, 24

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Casa Herrera, Inc. v. Beydoun 32 Cal.4th 336, 9 Cal.Rptr.3d 97 (2004) ........................................................................... 24 Continental Cas. Co. v. Phoenix Constr. Co. 46 Cal.2d 423, 296 P.2d 801 (1956).................................................................................. 19 Cortez v. Purolator Air Filtration Prod. Co. 23 Cal.4th 163 (2000)........................................................................................................ 13 Emery v. Visa International Service Association 95 Cal.App.4th 952 (2002)...................................................................................... 3, 11, 12 Farmers Ins. Exchange v. Superior Court 2 Cal.4th 377 (1992).......................................................................................................... 12 In re Ameriquest Mortg. Co. Mortg. Lending Practices Litig. 2007 WL. 1832113 (N.D. Ill. 2007) .................................................................................. 16 Kasky v. Nike, Inc. 27 Cal.4th 939, 119 Cal. Rptr. 2d 296 (2002) ................................................................... 12 LiMandri v. Judkins 52 Cal.App.4th 326 (1997)................................................................................................ 17 Madrid v. Perot Systems Corp. 130 Cal.App.4th 440 (2005).............................................................................................. 12 Marketing West, Inc. v. Sanyo Fisher (USA) Corp. 6 Cal.App.4th 603 (1992).................................................................................................. 15 Mirkin v.Wasserman 5 Cal.4th 1082 (1993)........................................................................................................ 18 National City Police Officers' Ass'n v. City of National City 87 Cal.App.4th 1274, 105 Cal. Rptr. 2d 237 (2001) ......................................................... 19 Nymark v. Heart Fed. Savings & Loan Assn. 231 Cal.App.3d 1089, 283 Cal. Rptr. 53 (1991) ......................................................... 10, 17 OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp. 157 Cal.App.4th 835 (2007).............................................................................................. 15 Oceanside 84, Ltd. v. Fidelity Federal Bank 56 Cal.App.4th 1441, 66 Cal. Rptr. 2d 487 (1997) ........................................................... 19 Pacific Shore Funding v. Lozo 138 Cal.App.4th 1342, 42 Cal.Rptr.3d 283 (2006) ............................................................. 8 Palmer v. Truck Ins. Exchange 21 Cal.4th 1109, 90 Cal. Rptr. 2d 647 (1999) ................................................................... 19 Pardee Constr. Co. v. Ins. Co. of the West 77 Cal.App.4th 1340, 92 Cal. Rptr. 2d 443 (2000) ........................................................... 19
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People v. Toomey 157 Cal.App.3d 1 (1984) ................................................................................................... 11 Safeco Ins. Co. v. Robert S. 26 Cal.4th 758, 110 Cal. Rptr. 2d 844 (2001) ................................................................... 19 Warner Constr. Corp. v. City of Los Angeles 2 Cal.3d 285 (1970)........................................................................................................... 17 STATUTES AND ADMINISTRATIVE MATERIALS California Code of Civil Procedure § 338(d) ................................................................................................................. 16, 19, 20 Code of Federal Regulations, Title 12 § 226.2 ............................................................................................................................. 6, 8 Federal Rules of Civil Procedure Rule 9...........................................................................................................................15, 16 Rule 10(c) .......................................................................................................................... 14 Rule 12(b)(6) .................................................................................................................1, 2 S. Rep. 96-73, at 7(Apr. 24, 1979) ............................................................................................................ 13 United States Code, Title 15 § 1601 .............................................................................................................. 1, 2, 3, 4, 6, 7 § 1610 ...................................................................................................................... 3, 13, 14 § 1635 .............................................................................................................................. 2, 8 § 1640 .................................................................................................................. 2, 8, 10, 16 § 1641 ...................................................................................................................... 8, 13, 14

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NOTICE OF MOTION AND MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD: PLEASE TAKE NOTICE that on September 25, 2008, at 2:00 p.m., or as soon thereafter as the matter may be heard, in Courtroom 2 of the above-entitled Court, located at 1301 Clay Street, Suite 400 S, Oakland, California 94612, Oakland, CA, the Honorable Claudia Wilken presiding, defendant EMC Mortgage Corporation will and hereby does move for an order dismissing plaintiffs Armando and Melania Plascencia's third amended complaint without leave to amend and with prejudice pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. This motion is made pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and is based on the following grounds: (1) Plaintiffs are entitled to neither rescission nor damages under the Truth-in-Lending Act, 15 U.S.C. § 1601 et seq.; (2) There is no vicarious liability under the Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq.; (3) Plaintiffs' UCL claim for unlawful practices and their claim for fraudulent omissions are preempted by TILA; (4) EMC had no duty to disclose that would support plaintiffs' fraudulent omissions claim; (5) Plaintiffs' promissory note expressly authorizes the conduct challenged in their claims for breach of contract and breach of the implied covenant of good faith and fair dealing; and (6) Plaintiffs have failed to state a claim upon which relief can be granted against EMC. This motion is based on this notice of motion and motion, the memorandum of points and authorities that follows, the accompanying request for judicial notice, the pleadings and records on file in this action, and upon such other oral and documentary evidence that may be presented at the hearing on this motion. DATED: August 14, 2008 SEVERSON & WERSON A Professional Corporation By:
I hereby attest that I have on file all holograph signatures for any signatures indicated by a "conformed" signature (/s/) within this e-filed document.
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/s/

Erik Kemp Erik Kemp

Attorneys for Defendant EMC MORTGAGE CORPORATION
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MEMORANDUM OF POINTS AND AUTHORITIES I. INTRODUCTION

In their third amended complaint, plaintiffs Armando and Melania Plascencia have added a new party to their attack on Option ARM loans, defendant EMC Mortgage Corporation. EMC is the purported assignee of plaintiffs' loan. Although plaintiffs indiscriminately refer to EMC as one of the "defendants," the gravamen of plaintiffs' complaint has nothing to do with EMC. As the Court is aware, plaintiffs allege, on their own behalf and on behalf of a putative class, that they were misled into obtaining their Option ARM loan and that the loan's terms were not adequately disclosed at origination. As a mere assignee, EMC did not originate the allegedly offensive loan, solicit plaintiffs to obtain it through supposedly deceptive means, or provide the purportedly inadequate disclosures. If plaintiffs have a grievance about the origination of their loan, then, it is not with EMC. And, plaintiffs point to no other conduct of EMC post-assignment that would support any viable claim. EMC therefore moves to dismiss plaintiffs' third amended complaint and each of its purported causes of action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The first cause of action for violation of the federal Truth-in-Lending Act ("TILA"), 15 U.S.C. § 1601 et seq., should be dismissed because plaintiffs cannot recover any relief under that statute. Only two forms of relief are available: rescission and damages. Plaintiffs cannot rescind their loan under 15 U.S.C. § 1635 because they have paid their loan in full through a refinance. Therefore, there is nothing left to rescind. King v. State of California, 784 F.2d 910, 913 (9th Cir. 1986). Plaintiffs cannot recover actual or statutory damages under TILA because they filed suit more than a year after consummation of their loan and because they do not allege facts sufficient to toll TILA's one-year limitations period. 15 U.S.C. § 1640(e). The second and fourth causes of action for unlawful, unfair, and fraudulent acts in violation of the California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq., should be dismissed because the UCL does not recognize vicarious liability. Just like their TILA claim, plaintiffs' claims for violation of the UCL are predicated on supposedly inadequate disclosures and misleading representations made at origination. It is settled, however, that a defendant is only
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liable for a UCL violation if it "personally participates" in the allegedly wrongful act. Emery v. Visa International Service Association, 95 Cal.App.4th 952, 960 (2002). Because EMC is the purported assignee, it could not and did not participate in the alleged wrongful act--the origination of plaintiffs' loan. Therefore, plaintiffs have no claim for violation of the UCL against EMC. Moreover, plaintiffs' UCL claim for unlawful practices (second cause of action) fails for the additional reason that it is preempted by TILA. This claim is based solely on the defendants' alleged noncompliance with TILA. Yet, plaintiffs seek to take advantage of the UCL's more favorable statute of limitations, and to recover additional remedies not allowed by TILA. Plaintiffs cannot use the UCL to seek relief that is foreclosed by TILA, which preempts "inconsistent" state laws. 15 U.S.C. § 1610(a). For this same reason, plaintiffs' third cause of action for fraudulent omissions should also be dismissed. Again, plaintiffs challenge the same alleged omissions as they do in their TILA claim, but try to avail themselves of the state law claim's longer statute of limitations and more expansive remedies. This is directly inconsistent with TILA--and impermissible. Further, to the extent that plaintiffs claim that EMC had a duty to disclose separate from TILA, the claim fails because EMC did not originate the loan. EMC thus had no opportunity, much less a duty, to disclose anything. Plaintiffs' fifth cause of action for breach of contract should be dismissed because plaintiffs' promissory note refutes their assertion that EMC breached any contractual duty by "failing to apply any portion of [plaintiffs'] monthly payments toward their principal loan balances." Third Amended Complaint ("TAC"), ¶ 155. The note clearly provides that payments may be less than the amount of interest accruing each month and that, if so, "the Note Holder will subtract the amount of my monthly payment from the amount of the interest portion and will add the difference to my unpaid Principal." Id., Ex. 1, ¶ 5(c). That is just what plaintiffs say EMC did. Because the note expressly permits that conduct, it cannot be a breach of the contract. Plaintiffs' sixth cause of action for breach of the implied covenant of good faith should be dismissed for a similar reason. The note expressly permits EMC to engage in the conduct that plaintiffs claim breached the implied covenant--raising the interest rate monthly, even if the new
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interest rate results in interest charges exceeding the required monthly payment. The covenant of good faith cannot be read to prohibit a party from doing that which the agreement expressly permits.1 In short, plaintiffs have no grievance with EMC. EMC did not originate their loan or give them the TILA disclosures they challenge. And plaintiffs' note expressly authorizes EMC to apply plaintiffs' payments in the manner alleged to be wrongful. Accordingly, the Court should dismiss plaintiffs' third amended complaint as to EMC without leave to amend. II. STATEMENT OF FACTS

On a motion to dismiss, the Court accepts as true the facts properly pleaded in the complaint, but not conclusions of law. Alperin v. Vatican Bank, 410 F.3d 532, 541 (9th Cir. 2005); In re Verifone Secs. Litig., 11 F.3d 865, 868 (9th Cir. 1993). A plaintiff must plead sufficient facts "to provide the `grounds' of his `entitle[ment] to relief,' [which] requires more than labels and conclusions, and [for which] a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Co. v. Twombly, ___U.S. ___, 127 S.Ct. 1955, 1964-65 (2007) (citations omitted). Documents attached to pleadings as exhibits are deemed part of the complaint and may be considered by the Court in deciding the motion. Fed. R. Civ. P., Rule 10(c); Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir. 1987). Also, "it is proper for the district court to `take judicial notice of matters of public record outside the pleadings' and consider them for purposes of the motion to dismiss." Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988); accord Kourtis v. Cameron, 419 F.3d 989, 994 n. 2 (9th Cir. 2005). In keeping with these rules, and without conceding for any other purpose the truth of plaintiffs' allegations, EMC sets forth the facts pertinent to this motion. A. The Underlying Facts

On May 16, 2006, plaintiffs refinanced the loan on their San Leandro, California home, obtaining an option ARM loan from defendant Lending 1st Mortgage.2 TAC, ¶¶ 2, 3, Ex. 1;

Carma Developers (Cal.), Inc. v. Marathon Development California, Inc., 2 Cal.4th 342, 374-75, 6 Cal.Rptr.2d 467 (1992).
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Request for Judicial Notice ("RJN"), Ex. A. Plaintiffs are informed and believe that Lending 1st, at some unspecified time, sold plaintiffs' loan to EMC.3 Id. at ¶¶ 6, 19. Plaintiffs' promissory note is labeled an "ADJUSTABLE RATE NOTE," in boldface capital letters at the very top of the first page. TAC, Ex. 1, p. 1; emphasis in original. Just below that label, also in boldface capital letters, the note avers: THIS NOTE ALLOWS MONTHLY RATE CHANGES AND ANNUAL PAYMENT CHANGES. THIS NOTE MAY REQUIRE UNPAID INTEREST TO BE ADDED TO LOAN PRINCIPAL AND REQUIRE ME TO PAY ADDITIONAL INTEREST ON THE UNPAID INTEREST (NEGATIVE AMORTIZATION). TAC, Ex. 1, p. 1; emphasis in original. Plaintiffs' loan had a low initial interest rate, which adjusted to the full indexed rate when the first payment was due, and then readjusted monthly thereafter according to changes in the index. TAC, ¶¶ 24, 32(a); Ex. 1, ¶¶ 2, 4. Plaintiffs' loan also featured low minimum monthly payments, at least during the first three to five years of the loan. TAC, ¶¶ 24, 32(b). In the initial year, minimum monthly payments were set at an amount which would fully amortize the loan if the low initial interest rate remained applicable during the loan's entire term. Id., ¶ 32(c). Thereafter, the required monthly payment amount changed annually to the amount needed to fully amortize the loan if at the prior month's interest rate. Id. at Ex. 1, ¶ 5(A). During the first five years, however, the minimum payment amount could not be increased by more than 7.5% each year. TAC, Ex. 1 § 5(B); TAC, ¶ 32(d). After five years, or if loan principal ever equaled 115% of the amount originally borrowed, the minimum payment amount would be readjusted without regard to this cap. Id., Ex. 1, §§ 5(D), (E).

Plaintiffs name both Lending 1st Mortgage and Lending 1st Mortgage, LLC as defendants. TAC, ¶¶ 3, 4. Apparently, Lending 1st Mortgage LLC was formerly known as Lending 1st Mortgage.
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EMC disputes this allegation. Nevertheless, EMC will treat this allegation as true, as it must for purposes of this motion.
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Under their promissory note, plaintiffs could choose to pay more than the minimum payment each month. The note lists three increased payment options: interest only payment (the amount of interest accrued each month so as to avoid negative amortization), fully amortized payment (the amount needed to repay the loan in full by its maturity date), or a 15-year amortized payment (the amount needed to repay the loan within 15 years of the initial payment). TAC, Ex. 1, ¶ 5(F). A rider to plaintiffs' deed of trust provided for a prepayment penalty if plaintiffs prepaid more than 20% of their loan in any of the first three years of its term. TAC, ¶ 32(e); Ex. 1, pp. 8-9, ["Prepayment Rider."] Plaintiffs' TILA Disclosure Statement ("TILDS") revealed that the loan had a vari-able rate feature, that the loan's annual percentage rate was 7.680%,4 and that there might be a prepayment penalty if the plaintiffs repaid the loan early. FAC, Ex. 1, p. 7. In May 2007, plaintiffs refinanced their home again, obtaining a new first mortgage from Cameron Financial Group, Inc. dba 1st Choice Mortgage. RJN, Ex. B. As a result, plaintiffs repaid, in full, the option ARM loan that Lending 1st had made to them in May 2006, and the deed of trust securing that loan was reconveyed. RJN, Ex. C. B. The Complaint's Claims

Plaintiffs claim that they and other similarly situated borrowers were led to believe that the low initial interest rate on their option ARM loan was fixed for three to five years and that if they made payments based on that rate there would be no negative amortization on their loans, but that their payments would be applied to loan principal as well as interest. TAC, ¶ 26. In fact, the interest rate readjusted to the full indexed rate shortly after the loan was made. When it did so, interest accrued at a rate exceeding the required monthly payments, guaranteeing negative amortizetion, and application of monthly payments solely to interest, not loan principal. Id., ¶¶ 29, 30.

Because the initial interest rate was lower than the fully indexed rate, the TILA disclosure was required to state an annual percentage rate that "reflect[ed] a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation." 12 C.F.R. pt. 226, Supp. I, §17(c)(1) ¶¶8, 10.
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Plaintiffs say they were prevented from refinancing out of these disadvantageous loans by the loans' prepayment penalty provisions and by plaintiffs' loss of equity due to negative amortization. Id., ¶¶ 30, 32(e) 174. Based on these allegations, plaintiffs assert the same six causes of action against EMC and 1st Lending, who are jointly referred to throughout the complaint as the "defendants." The first cause of action alleges four violations of TILA: 1) failure to clearly disclose the actual interest rate (TAC, ¶¶ 57-65); 2) failure to disclose that the payment schedules are not based on the annual percentage rate in the TILA Disclosure Statement (id., ¶¶ 66-78); 3) failure to disclose negative amortization (id., ¶¶ 79-86); and 4) failure to clearly disclose that the initial interest rate was discounted (id., ¶¶ 87-95). Plaintiffs seek actual and statutory damages, attorneys' fees, and rescission of their loans. Id., ¶ 96. The second and fourth causes of action are based on California's UCL. The second alleges that the defendants committed unlawful business practices by violating TILA in the manner just described. TAC, ¶¶ 102-03. The fourth alleges that the defendants' practices were unfair and deceptive because they misled borrowers about the terms of their loans in the ways discussed above. Id., ¶¶ 129-30. The third cause of action is for fraudulent omissions. It contends that the defendants had a duty to disclose the actual interest rate being charged on the note, that negative amortization would occur, and that the initial interest rate was discounted. TAC, ¶¶ 110-11. The fifth cause of action is for breach of contract (TAC, ¶¶ 147-159), and the sixth cause of action, which is based on the same set of allegations, is for breach of the implied covenant of good faith. Id., ¶¶ 160-75. Plaintiffs allege that the defendants indicated to plaintiffs that their monthly payments would be applied to payment of both principal and interest, but that the defendants breached this promise by never applying any of the payments to principal. Id., ¶¶ 151-52, 154-55, 163-64. Plaintiffs also allege that the defendants charged more interest than agreed by readjusting the interest rate shortly after loan origination rather than keeping the rate constant for three to five years, as they anticipated. Id., ¶¶ 149, 162, 168.
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III.

PLAINTIFFS STATE NO CLAIM FOR RELIEF UNDER TILA

"TILA provides borrowers only two remedies for disclosure violations: (1) rescission, see 15 U.S.C. § 1635 and (2) damages. See 15 U.S.C. § 1640." Eubanks v. Liberty Mortg. Banking Ltd., 976 F.Supp. 171, 174 (E.D. N.Y. 1997). Plaintiffs seek both rescission and damages, but they are entitled to neither.5 A. Plaintiffs Refinanced and So Cannot Rescind

Again, plaintiffs refinanced in May 2007, obtaining a new first mortgage in the amount of $450,000. RJN, Ex. B. The deed of trust securing the loan originated by 1st Lending has been reconveyed. RJN, Ex. A and C. "The loan of [May 2006] cannot be rescinded, because there is nothing to rescind. [Plaintiffs] refinanced that loan in [May 2007], and the deed of trust underlying the [May 2006] loan has been superseded." King, 784 F.2d at 913.6 B. Plaintiffs Sued Too Late to Recover Damages

"[A]n action for damages under TILA must be brought within one year from the alleged violation. See 15 U.S.C. §1640(e)." Eubanks, 976 F.Supp. at 174; accord: King, 784 F.2d at 913. "[T]he limitations period in Section 1640(e) runs from the date of consummation of the transaction ...." King, 784 F.2d at 915. For TILA purposes, "consummation" occurs when "a consumer becomes contractually obligated on a credit transaction." 12 C.F.R. § 226.2(a)(13). Plaintiffs' loan was "consummated" in May 2006. TAC, ¶ 2; Ex. 1; RJN, Ex. A. This action was not filed until August 29, 2007 (see Docket no. 1), more than a year later, and thus too late to recover damages under section 1640(e). Again, plaintiffs' TILA claim against EMC is based on their allegation that EMC is the assignee of their loan. TILA strictly limits assignee liability to those violations that are "apparent on the face" of the TILA disclosure statement. 15 U.S.C. § 1641(e)(1)(A).
5

Although several other courts have recently disagreed with King on this point, Handy v. Anchor Mortg. Corp., 464 F.3d 760 (7th Cir. 2006); Barrett v. J.P. Morgan Chase Bank, N.A., 445 F.3d 874 (6th Cir. 2006); Pacific Shore Funding v. Lozo, 138 Cal.App.4th 1342, 42 Cal.Rptr.3d 283 (2006), this Court remains bound by King, a Ninth Circuit decision that has not been overruled, superseded by a Supreme Court opinion, or abrogated by legislative change. Zuniga v. United Can Co., 812 F.2d 443, 450 (9th Cir. 1987) ("District courts are, of course, bound by the law of their own circuit, and `are not to resolve splits between circuits no matter how egregiously in error they may feel their own circuit to be.'").
6

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TILA's one-year limitations period is subject to equitable tolling "in appropriate circumstances." King, 784 F.2d at 915. However, to claim the benefit of such tolling, a plaintiff must allege circumstances showing that he or she could not have discovered the facts underlying the claim through the exercise of reasonable diligence or that extraordinary circumstances beyond his or her control made it impossible to file the claim on time. Huynh v. Chase Manhattan Bank, 465 F.3d 992, 1004 (9th Cir. 2006).7 Plaintiffs allege no such facts and could not do so even if granted leave to amend. Plaintiffs could easily have discovered the facts underlying their claims by reviewing their loan documents and TILDS before or after closing. "[N]othing prevented [plaintiffs] from comparing the loan contract, [defendants'] initial disclosures, and TILA's statutory and regulatory requirements." Hubbard v. Fidelity Fed. Bank, 91 F.3d 75, 79 (9th Cir. 1996) (fn. omitted).8 Plaintiffs do not and cannot claim that they were otherwise prevented from suing in a timely manner. See Huynh, 465 F.3d at 1004. Equitable estoppel, also known as fraudulent concealment, is another possible basis for tolling a statute of limitations. Guerrero v. Gates, 442 F.3d 697, 706 (9th Cir. 2006). But, to invoke that doctrine, plaintiffs would have to plead with particularity (and later prove) facts showing (a) active misconduct by EMC "above and beyond the wrongdoing upon which plaintiff's claim is [based], to prevent the plaintiff from suing in time," (b) plaintiffs' actual and reasonable reliance on defendants' misconduct in failing to timely file suit, and (c) plaintiffs' lack of actual or constructive knowledge of the facts constituting their claim despite their due diligence.9 Plaintiffs allege no such facts and cannot do truthfully do so. EMC did nothing after being assigned plaintiffs' loan to conceal from them the facts on which they base their TILA claim. See also Cada v. Baxter Healthcare Corp., 920 F.2d 446, 451 (7th Cir.1991) (Equitable tolling "permits a plaintiff to avoid the bar of the statute of limitations if despite all due diligence he is unable to obtain vital information bearing on the existence of his claim.")
7

See also Anderson v. Wells Fargo Home Mortg., Inc., 259 F.Supp.2d 1143, 1148-49 (W.D. Wash. 2003) (no equitable tolling of TILA claim); Bryant v. Mortgage Capital Resource Corp., 197 F.Supp.2d 1357, 1367-68 (N.D. Ga. 2002) (same).
8

Guerrero, 442 F.3d at 706-07; Pincay v. Andrews, 238 F.3d 1106, 1110 (9th Cir. 2001); Grimmett v. Brown, 75 F.3d 506, 514 (9th Cir. 1996).
9

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Affirmative misconduct is required; "[a] failure to `own up' [to prior misconduct] does not constitute active concealment." Grimmett, 75 F.3d at 515. Moreover, a defendant's mere silence cannot sustain a claim of fraudulent concealment unless the defendant owed the plaintiff a fiduciary duty of disclosure. Thorman v. American Seafoods Co., 421 F.3d 1090, 1096 (9th Cir. 2005).10 A lender owes no fiduciary duty to a borrower.11 Accordingly, EMC's " `silence or passive conduct does not constitute fraudulent concealment.' " Thorman, 421 F.3d at 1095 (citations omitted). Moreover, plaintiffs do not and cannot show that they relied on EMC or lacked constructive knowledge of their claims. A decade ago, the First Circuit held that no fraudulent concealment or equitable tolling could be raised to toll TILA's one-year limitations period in a case where the plaintiff alleged similar TILA claims arising from the allegedly non- or mis-disclosure of the negative amortization feature of an option ARM loan. Salois v. Dime Sav. Bank, 128 F.3d 20, 2526 (1st Cir. 1997). The First Circuit's reasoning is equally applicable here: Regardless whether negative amortization was inevitable with [the challenged loans], the documents contained all of the information necessary to determine the interaction of [defendant's] formula with prevailing interest rates. It was attorney consultation, rather than newly-discovered information that prompted plaintiffs' lawsuit. ... As the district court observed, "The loan documents notified plaintiffs of the possibility of negative amortization, when it would apply, and how it would work," so that even "[i]f [defendant] had misrepresented the nature of the loans, the loan documents plaintiffs signed would have put them on notice of the fraud. Id. at 26 (citation omitted). In short, plaintiffs' claim for damages under TILA is time-barred by §1640(e)'s one-year limitations period. Plaintiffs cannot obtain rescission under TILA because they refinanced their home again in June 2007. Therefore, plaintiffs' first cause of action should be dismissed for failure to state a claim on which any relief may be granted to them. Eubanks, 976 F.Supp. at 174.
10 11

See also Conmar Corp. v. Mitsui & Co. (U.S.A.), 858 F.2d 499, 505 (9th Cir. 1988).

Giles v. General Motors Acceptance Corp., 494 F.3d 865, 882-83 (9th Cir. 2007) (applying Nevada law); Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal.App.3d 1089, 1093 n. 1, 283 Cal.Rptr. 53 (1991) ("The relationship between a lending institution and its borrowerclient is not fiduciary in nature.").
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IV.

PLAINTIFFS STATE NO CLAIM FOR VIOLATION OF THE UCL

Plaintiffs' second and fourth causes of action allege violations of California's UCL. The second cause of action is based on allegedly unlawful acts, whereas the fourth cause of action is based on allegedly unfair and fraudulent acts. TAC, ¶¶ 97-108, 125-146. Both causes of action fail because the UCL does not recognize vicarious liability. Therefore, EMC cannot be liable as a mere assignee of plaintiffs' loan. The second cause of action (for unlawful practices) fails for the additional reason that it is preempted by TILA. A. EMC Cannot Be Vicariously Liable Under the UCL

Just like their TILA claim, plaintiffs' UCL claims are predicated on the allegation that there was something wrongful--namely, unlawful, unfair, or fraudulent--with the disclosures they received and representations that were made when their loan was originated. TAC, ¶¶ 102, 129136. So their UCL claims against EMC are, like their TILA claim against EMC, based on EMC's purported status as an assignee. But it is settled that "the concept of vicarious liability has no application to actions brought under the unfair business practices act." People v. Toomey, 157 Cal.App.3d 1, 14 (1984); see also Emery, 95 Cal.App.4th at 960. "A defendant's liability must be based on his personal `participation in the unlawful practices' and `unbridled control' over the practices that are found to violate section 17200 or section 17500." Emery, 95 Cal.App.4th at 960 [citations omitted]; accord: Perfect 10, Inc. v. Visa Intern. Service Ass'n, 494 F.3d 788, 808-09 (9th Cir. 2007). The California Court of Appeal's decision in Emery, 95 Cal.App.4th 952, is instructive. There, the plaintiff brought an action under the UCL challenging as unlawful and unfair certain solicitations mailed to California residents regarding foreign lotteries. Visa was "not involved in the preparation or distribution of the solicitations." Id. at 956-57. Rather, the solicitations were prepared and distributed by certain merchants who were authorized to use the Visa payment system. These merchants displayed the Visa logo on their solicitations to inform consumers that they could purchase lottery tickets with their Visa credit cards. Id. at 957-59. The plaintiff argued that Visa was liable under various agency theories or an aiding and abetting theory. The court decisively rejected all these arguments, holding that because "Visa itself played no part in
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preparing or sending any `statement that might be construed as untrue or misleading under the unfair business practices statutes," it could not be liable for a UCL violation. Id. at 964. The Court should do the same here. The acts plaintiffs challenge all occurred at or before the origination of the loan, which EMC had no role in. Plaintiffs allege they failed to receive disclosures that complied with TILA when they obtained their loan from 1st Lending. TAC, ¶ 102. They allege that they were solicited to obtain a "deceptively advised financial product," and that the terms of the loan were misrepresented to them during the "loan application process." Id. at ¶¶ 129-131. But EMC could not and did not "personally participate" in such allegedly wrongful practices because it did not originate the loan. Rather, EMC was allegedly assigned the loan after origination. Id. at ¶¶ 6, 19. Because "[EMC] itself played no part in preparing" any disclosure statement required by TILA, or in the origination process at all, it cannot be liable for the UCL violations plaintiffs assert here. See Emery, 95 Cal.App.4th at 964. For this reason, the Court should dismiss both plaintiffs' second and fourth causes of action without leave to amend. B. TILA Preempts Plaintiffs' Second Cause of Action for Unlawful Practices

Plaintiffs' second cause of action should be dismissed for an independent reason. Again, the second cause of action purports to allege an unlawful practice under the UCL. TAC, ¶¶ 97-108. This claim is based solely on EMC's alleged violation of TILA and its implementing regulations. Id. An action under the UCL "to redress an unlawful business practice `borrows' violations of other laws and treats these violations, when committed pursuant to business activity, as unlawful practices independently actionable under [the UCL] and subject to the distinct remedies provided thereunder." Farmers Ins. Exchange v. Superior Court, 2 Cal.4th 377, 383 (1992); accord: Kasky v. Nike, Inc., 27 Cal.4th 939, 949, 119 Cal.Rptr.2d 296 (2002). The "distinct remedies" available under the UCL are limited to restitution and injunctive relief. Cal. Bus. & Prof. Code § 17203; Madrid v. Perot Systems Corp., 130 Cal.App.4th 440, 452 (2005). Any action under the UCL must be commenced within four years after the cause of action accrues. Cal. Bus. & Prof. Code § 17208. This four-year statute of limitations, not the limitations
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period applicable to the predicate law being "borrowed," governs all UCL actions. Cortez v. Purolator Air Filtration Prod. Co., 23 Cal.4th 163, 178-79 (2000). Thus, if allowed to pursue their second cause of action, plaintiffs would, in effect, be permitted to recover additional remedies that Congress did not allow for TILA violations and to do so in a suit filed beyond TILA's limitations period. In both of these respects--additional remedies and longer limitations period--the UCL is "inconsistent" with TILA. TILA's remedies and limitations period are not mere "floors" upon which states are free to erect an additional scaffolding of more generous remedies and harsher sanctions. Instead, particularly in enacting the Truth in Lending Simplification and Reform Act of 1980, Congress carefully limited and tailored the relief that private plaintiffs could obtain for TILA violations, balancing the need for private enforcement of the act against the equally pressing concern that creditors not be over-penalized.12 TILA expressly preempts state laws that are "inconsistent" with the provisions of TILA, to the extent of the inconsistency. 15 U.S.C. §1610(a)(1). This provision has been held to preempt a state's assignee liability statute to the extent it imposed liability on assignees for assignors' TILA violations in situations where the assignee would not be liable under TILA's own assignee liability provision. Alexiou v. Brad Benson Mitsubishi, 127 F.Supp.2d 557, 561, 564-65 (D. N.J. 2000). The Alexiou court's reasoning is instructive: The language of § 1641(a) clearly indicates that in order for an assignee of a loan to be held liable for disclosure violations, the violation alleged by the plaintiff must be apparent on the face of the disclosure statement. The question therefore becomes whether the New Jersey Holder Rule is "inconsistent" with § 1641(a) since it does not require that the alleged violations be apparent on the face of the disclosure statement for assignee liability to attach. * * * ... [I]n light of the congressional intent behind the 1980 Amendments to make creditor compliance with consumer loan laws easier, the Court finds that the New Jersey Holder Rule puts an additional, unwarranted burden on creditors which goes against the See S. Rep. 96-73, at 7, 17-18 (Apr. 24, 1979); reprinted in 1980 U.S.C.C.A. N. 280, 285, 295-96: "This Bill would narrow a creditor's civil liability for statutory penalties to only those disclosure[s] which are of central importance in understanding a credit transaction's cost or terms. ... This is a significant reduction from the current scope of liability." The 1980 act also plugged a hole in TILA's limit on a creditor's liability in class actions and clarified the creditor's bona fide error defense.
12

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purpose of the 1980 Amendments to the TILA. Section 1641(a) of the TILA provides one clear standard, namely that an assignee may be held liable for the violations of an assignor only when those violations are "apparent on the face of the disclosure statement." § 1641(a). Because the New Jersey Rule puts this additional burden on creditors (including assignees), the state law is contrary to the intent of Congress in enacting the TILA and its amendments, and "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." * * * Moreover, if the conflicting state laws were not preempted, a creditor/assignee who conducts business on a national level would be compelled to research the laws of all of the states to ensure that it is abiding by each and every law promulgated by the states. These burdens are substantial and cumbersome to creditors and contradict the goal behind the TILA and its 1980 Amendments. In the same way, the UCL's additional remedies and longer statute of limitations are

inconsistent with the limited remedies and one-year limitations provision Congress enacted as part of TILA. By imposing liability where none would exist under TILA and by imposing greater liability than the limited remedies Congress so carefully tailored in 1980, the UCL is just as inconsistent with TILA as the New Jersey Holder Rule at issue in Alexiou. Therefore, as in Alexiou, the state law cannot stand. The UCL is preempted by 15 U.S.C. § 1610(a)(1) insofar as it might otherwise allow additional remedies or longer periods for suing based on the "unlawful practice" of violating TILA. As plaintiffs' second cause of action seeks to use the UCL for that precise purpose, it relies on a preempted statute and, hence, fails to state a claim on which relief may be granted. V. PLAINTIFFS HAVE NO CLAIM FOR FRAUDULENT OMISSIONS

Plaintiffs' third cause of action for fraudulent concealment is essentially a rehashing of their TILA claim. It should be dismissed for two reasons. First, to the extent plaintiffs directly invoke TILA to support this claim, it is preempted by federal law. As explained above, plaintiffs cannot give a TILA-based claim a state law name just to take advantage of additional damages and a longer statute of limitations. Second, to the extent plaintiffs allege EMC had a separate common

See also Silvas v. E*Trade Mortg. Corp., 421 F.Supp.2d 1315, 1320 (S.D. Cal. 2006) (additional UCL remedies and longer statute of limitations are inconsistent with TILA and preempted as applied to a federal savings bank).
13

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law duty to disclose, their claim fails because EMC did not originate their loan. Therefore, EMC had no duty to disclose anything and could not have omitted anything, fraudulently or otherwise. "[T]o establish fraud through nondisclosure or concealment of facts, it is necessary to show the defendant `was under a legal duty to disclose them.'"14 OCM Principal Opportunities Fund, L.P. v. CIBC World Markets Corp., 157 Cal.App.4th 835, 846 (2007). Plaintiffs contend that the "defendants" failed to disclose three of the four facts on which their TILA claim is based: 1) the actual interest rate being charged on the note; 2) that negative amortization would occur; and 3) that their initial interest rate was discounted. TAC, ¶¶ 110, 111. They allege that the defendants' duty to disclose these facts stems not only from TILA, but also because the "defendants" made "partial representations of material facts when Defendants had exclusive knowledge of material facts that negative amortization would occur." Id. Neither of these allegations could support any duty of EMC to disclose anything, and plaintiffs' fraudulent omissions claim therefore fails as a matter of a law. As a threshold matter, plaintiffs' conclusory references to the purported omissions of the "defendants" are insufficient under Rule 9(b) of the Federal Rules of Civil Procedure. Rule 9(b) provides that a plaintiff "must state with particularity the circumstances constituting the fraud." Fed. R. Civ. P., Rule 9(b). This requires a plaintiff to "state the time, place and specific content of the false representations as well as the identities of the parties to the misrepresentation." Miscellaneous Service Workers Drivers & Helpers, Teamsters Local # 427 v. Philco-Ford Corporation, WDL Division, 661 F.2d 776, 782 (9th Cir. 1981.) When there are multiple parties, a plaintiff must identify the specific role of each defendant allegedly involved in the fraud. Swartz v. KPMG LLP, 476 F.3d 756, 765 (9th Cir. 2007).

"[T]he elements of an action for fraud and deceit based on concealment are: (1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage." Marketing West, Inc. v. Sanyo Fisher (USA) Corp., 6 Cal.App.4th 603, 612-613 (1992).
14

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Plaintiffs run afoul of these rules here. TAC, ¶¶ 117-124. They allege that the "defendants" had exclusive knowledge of facts that they failed to disclose to the plaintiffs. TAC, ¶ 117. And, they claim that the "defendants" made partial representations of material facts while concealing other qualifying facts. TAC, ¶ 111. But these conclusions have no factual context. Plaintiffs do not allege when and where these representations were made. Nor do they identify what individuals made the representations, or on which "defendants'" behalf they might have been acting. This is nowhere near the heightened standard of pleading required by Rule 9(b). Putting aside this lack of specificity, and construing plaintiffs' references to "defendants" liberally, plaintiffs still fail to plead any facts that would give rise to a duty to disclose in EMC. To the extent plaintiffs seek to incorporate purported TILA violations, their fraudulent omissions claim is preempted for the same reason that their UCL claim for unlawful acts is preempted. Through their fraudulent omissions claim, plaintiffs again attempt to avail themselves of different remedies and a more favorable statute of limitations, both of which are directly "inconsistent" with TILA. Plaintiffs' fraudulent omissions claim is inconsistent with TILA in at least two respects, either of which is sufficient to preempt this portion of their claim. First, as discussed above, an action for damages under TILA must be brought within one year of the alleged violation. 15 U.S.C. § 1640(e); King, 784 F.2d at 913. A fraudulent concealment claim, by contrast, need only be brought within three years after discovery of the claim. Cal. Code Civ. Proc. § 338(d). Because plaintiffs are entitled to neither rescission nor damages under TILA, they apparently seek "to remedy [alleged] TILA violations for which the statute of limitations has already run." Silvas, 421 F.Supp.2d at 1320. To allow plaintiffs to pursue their time-barred TILA claim under the guise of a fraudulent omissions claim would directly contradict the narrow limitations period Congress established for TILA violations. Accordingly, this aspect of plaintiffs' fraudulent omissions claim is preempted by TILA. See id. Second, punitive damages are not recoverable for TILA violations. See 15 U.S.C. § 1640(a); In re Ameriquest Mortg. Co. Mortg. Lending Practices Litig., 2007 WL 1832113 at *2 (N.D. Ill. 2007); Bond v. Fleet Bank (RI), N.A., 2002 WL 373475 at *3 (D. R.I. 2002). By contrast, punitive damages are available for fraud claims (Cal. Civ. Code § 3294(a)), and plaintiffs seek to recover
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them here for the alleged failure to comply with TILA. TAC, ¶¶ 123-24; Prayer, ¶ E. Once again, this additional remedy is directly inconsistent with the limited remedies afforded plaintiffs by TILA. Congress has prescribed what relief is available for plaintiffs seeking to redress TILA violations. Plaintiffs cannot circumvent these rules simply because they choose to call their cause of action another name. As such, plaintiffs' fraudulent omissions claim is preempted for this reason, too. See Silvas, 421 F.Supp.2d at 1319-20. To the extent plaintiffs' fraudulent omissions claim is based on a separate common law duty to disclose, there are no facts alleged supporting such a duty. Absent a fiduciary relationship,15 a duty to disclose only arises when "(1) the defendant makes representations but does not disclose facts which materially qualify the facts disclosed, or which render his disclosure likely to mislead; (2) the facts are known or accessible only to defendant, and defendant knows they are not known to or reasonably discoverable by the plaintiff; (3) the defendant actively conceals discovery from the plaintiff." Warner Constr. Corp. v. City of Los Angeles, 2 Cal.3d 285, 294 (1970). Each of these three circumstances "presupposes the existence of some [sic] relationship between the plaintiff and defendant in which a duty to disclose can arise." LiMandri v. Judkins, 52 Cal.App.4th 326, 337 (1997). "As a matter of common sense, such a relationship can only come into being as a result of some sort of transaction between the parties." Id; emphasis in original. None of these three circumstances are present here. Simply, there was no "transaction" between EMC and plaintiffs that would have given EMC the opportunity, much less a duty, to provide plaintiffs with the disclosures they complain about. Plaintiffs allege that purportedly inadequate disclosures were given at their loan's origination. TAC, ¶¶ 111-124. But again, EMC did not originate plaintiffs' loan; it was just allegedly assigned it at some later time. TAC, ¶¶ 6, 19. Therefore, EMC could not and did not make any representations which would have engendered a duty to disclose other facts qualifying those representations. Nor could EMC have actively concealed any facts from plaintiffs at origination, or have had exclusive knowledge of facts that plaintiffs were unaware of at that time. Again, a lender owes no fiduciary duty to a borrower. Giles, 494 F.3d at 882-83 (9th Cir. 2007) (applying Nevada law); Nymark, 231 Cal.App.3d at 1093, n. 1.
15

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In fact, EMC had no knowledge of plaintiffs--and no knowledge of the circumstances of their loan's origination--until after it was assigned their loan. And plaintiffs fail to plead any facts that would obligate EMC to disclose anything after it was assigned their loan. They point to no specific contact, communication, or correspondence with EMC after assignment. Again, they do not allege that EMC made any representations to them, let alone that it also selectively omitted certain material facts. Nor do they allege that EMC failed to disclose certain facts that it knew plaintiffs were unaware of. Nor do they allege that EMC actively concealed certain facts from plaintiffs. Even if they had made such allegations, plaintiffs' fraud claim would still fail as to EMC because they fail to allege they took any action in reliance on EMC's concealment. Of course, actual reliance is an essential element in any action based on fraud. See e.g., Mirkin v.Wasserman, 5 Cal.4th 1082, 1088 (1993). But plaintiffs fail to allege that they relied on anyone's representations after the loan was assigned to EMC. In fact, plaintiffs allege only a single act of reliance: "had the information been [sic] disclosed, Plaintiffs and each Class member would have not entered into the loans." TAC, ¶¶ 45, 121. This allegation undermines plaintiffs' entire fraudulent omissions claim against EMC. Again, EMC had nothing to do with plaintiffs before their loan was assigned to EMC and, as such, could not have concealed or fraudulently omitted to tell them facts before they entered into the loan. Plaintiffs do not allege that they took any action or refrained from taking any action after the loan was assigned to EMC based on any continued non-disclosure. To the contrary, plaintiffs allege that they could not have taken any action in reliance because they were locked into their loans and could not refinance because of the loan's prepayment penalty. TAC, ¶¶ 30, 32(e), 174. Without an allegation of actual reliance on EMC's representations, plaintiffs have no claim for fraudulent omissions. For all of these reasons, plaintiffs' third cause of action for fraudulent omissions should be dismissed.

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VI.

THE FIFTH AND SIXTH CLAIMS SHOULD BE DISMISSED

The fifth cause of action for breach of contract and sixth cause of action for breach of the implied covenant of good faith and fair dealing are based on the same basic allegations and should be dismissed for the same reason: plaintiffs' promissory note's express words refute plaintiffs' allegations about the terms of their option ARM loan agreement. A. Basic Principles Of Contract Interpretation Under California Law

"The goal of contractual interpretation is to determine and give effect to the mutual intention of the parties."16 "That intent is to be inferred, if possible, solely from the written provisions of the contract."17 "When a dispute arises over the meaning of contract language, the first question to be decided is whether the language is `reasonably susceptible' to the interpretation urged by the party. If it is not, the case is over."18 A contract's words "must be construed in the context of that instrument as a whole."19 A court interprets a contract's terms " `in context', and give[s] effect `to every part' of the [contract] with `each clause helping to interpret the other.' "20 If possible, "the court should give effect to every provision of the contract."21 If they conflict, a contract's specific provision will control over its general language.22 If particular words in a contract are inconsistent with its nature, or with the main intention of the

16 17

Safeco Ins. Co. v. Robert S., 26 Cal.4th 758, 763, 110 Cal.Rptr.2d 844 (2001).

Pardee Constr. Co. v. Ins. Co. of the West, 77 Cal.App.4th 1340, 1352, 92 Cal.Rptr.2d 443 (2000); Cal. Civ. Code, §1639. Oceanside 84, Ltd. v. Fidelity Federal Bank, 56 Cal.App.4th 1441, 1448, 66 Cal.Rptr.2d 487 (1997) (citation and internal quotation marks omitted).
18 19 20 21

Palmer v. Truck Ins. Exchange, 21 Cal.4th 1109, 1118, 90 Cal.Rptr.2d 647 (1999). Id., 21 Cal.4th at 1115.

National City Police Officers' Ass'n v. City of National City, 87 Cal.App.4th 1274, 1279, 105 Cal.Rptr.2d 237 (2001). Continental Cas. Co. v. Phoenix Constr. Co., 46 Cal.2d 423, 431, 296 P.2d 801 (1956); Cal. Code Civ. Proc., §1859.
22

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parties, they are to be rejected.23 "Repugnancy in a contract must be reconciled, if possible, by such an interpretation as will give some effect to the repugnant clauses, subordinate to the general intent and purpose of the whole contract." Cal. Civ. Code, §1652. "When a contract is reduced to writing, the intention of the parties is ascertained from the writing alone ...." Cal. Civ. Code, §1639. The writing "supersedes all the negotiations or stipulations concerning its matter which preceded or accompanied the execution of the instrument."24 In construing a contract, the Court's duty is "simply to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted or omit what has been inserted; and where there are several provisions or particulars, such construction is, if possible, to be adopted as will give effect to all." Cal. Code Civ. Proc., § 1858. B. Defendants Did Not Promise To Apply A Portion Of Each Payment To Principal

The fifth and sixth claims are based, in part, on the allegation that "defendants" agreed that plaintiffs' "monthly payment obligations will be applied to payment of both principal and interest owed on the loan." TAC, ¶ 163. EMC and Lending 1st breached this promise, plaintiffs aver, by not applying any of their payments to principal when the interest accruing on their loans each month exceeded plaintiffs' monthly payments. Id., ¶¶ 152, 154, 165, 166. Apparently, plaintiffs base this assertion on four sentences in §3(A) a