Abdelfattah v. Carringhton Mortgage Services, LLC

Filing 30

Order by Hon. Ronald M. Whyte granting in part and denying in part 20 Motion to Dismiss(rmwlc1, COURT STAFF) (Filed on 2/7/2013)

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E-FILED on 2/7/13

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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United States District Court
For the Northern District of California

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SAN JOSE DIVISION

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AHMED ABDELFATTAH, an individual,

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No. C-12-04656-RMW

Plaintiff,
v.
CARRINGTON MORTGAGE SERVICES
LLC, a limited liability corporation,
Defendant.

ORDER GRANTING-IN-PART AND
DENYING-IN-PART DEFENDANT'S
MOTION TO DISMISS
[Re Docket No. 20]

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Defendant Carrington Mortgage Services ("CMS") moves pursuant to Federal Rule of Civil

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Procedure 12(b)(6) to dismiss all claims asserted by plaintiff Ahmed Abdelfattah in his First

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Amended Complaint ("FAC"). The main issues addressed in this motion are whether: (1) California

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Code of Civil Procedure section 580d ("Cal. Code of Civ. P. § 580d") precludes the reporting of a

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deficiency to credit reporting agencies following a non-judicial foreclosure sale; (2) whether

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Abdelfattah has pled sufficient facts to support a theory that CMS supplied incomplete or inaccurate

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information to credit reporting agencies when it reported the full unpaid balance due on his home

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loan after the property securing the loan had been sold at a non-judicial foreclosure sale; (3) whether

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CMS failed to investigate and correct the allegedly misleading information after it was notified of

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the alleged inaccuracies; and (4) if the answer to (2) and (3) is "yes," whether Abdelfattah is entitled
ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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—No. C-12-04656-RMW

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to damages under the Fair Credit Reporting Act ("FCRA") or California's Consumer Credit

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Reporting Agencies Act ("CCRAA").

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The court grants in part and denies in part defendant's motion as explained below.

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I. BACKGROUND

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Plaintiff Abdelfattah originally secured a home loan for $540,000 in 2005. FAC ¶ 8, Dkt.

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No. 16. The loan was later acquired by CMS. After failing to make payments as agreed, a non-

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judicial foreclosure sale of Abdelfattah's home was conducted on May 21, 2008. Id. ¶ 9.1 In June of

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2012, Abdelfattah discovered that CMS had last reported to credit reporting agencies in June 2008

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and had stated that he had a balance of $596,870 on his home loan, with $59,547 past due. Id. ¶¶

United States District Court
For the Northern District of California

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10-11. Abdelfattah contends that the foreclosure sale of the home to CMS for $547,200 should have

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eliminated the loan balance or at least reduced it by the sale amount. Id. ¶ 10. On June 20, 2012,

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Abdelfattah sent a letter to the credit reporting agencies (Equifax, Experian and Transunion) and

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CMS "disputing the reported account and requesting that they cease reporting that Mr. Abdelfattah

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owes the entire amount of the loan when all or part of the loan was satisfied in the foreclosure sale."

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Id. ¶ 14. CMS responded with a letter dated July 17, 2012, indicating that it would not stop

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reporting the entire balance because "the amounts past due were an accurate statement of what was

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due at the time of the report." Id. ¶ 16. The letter also stated that "[t]he balances reflected in your

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credit report would not reflect a zero balance on your personal credit report because the final status

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of your account was reported based as of the time your property was acquired through the

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foreclosure sale, not at the time of the later sale of the property." Id., Ex.1.

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Abdelfattah now brings this action against CMS contending that California's anti-deficiency

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law as set forth in Cal. Code of Civ. P. § 580d precludes deficiency judgments after non-judicial

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foreclosure sales and, therefore, makes CMS' reporting of a purported balance of $596,870

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inaccurate and incomplete. Abdelfattah alleges willful violations of FCRA and CCRAA, both of

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which require a reasonable investigation of disputes and prohibit reporting inaccurate or incomplete

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information to credit reporting agencies. Id. ¶¶ 28-39. Because of these alleged violations,

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CMS' July 17, 2012 letter to plaintiff says the property was acquired through foreclosure
proceedings on June 3, 2008.
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ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
TMDH
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Abdelfattah contends that he has suffered emotional distress and humiliation, has been denied credit,

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and has been unable to refinance his automobile loan or secure a home or automobile loan. Id. ¶ 17.

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II. ANALYSIS
To survive a motion to dismiss, Abdelfattah's complaint must contain factual allegations that

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are "enough to raise a right to relief above the speculative level on the assumption that all of the

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complaint's allegations are true." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007).

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Furthermore, it "must contain sufficient factual matter, accepted as true, to state a claim to relief that

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is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that

United States District Court
For the Northern District of California

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allows the court to draw the reasonable inference that the defendant is liable for the misconduct

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alleged." Ashcroft v. Iqbal, 556 U.S. 662, 668 (2009). It is with this standard in mind that the court

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addresses CMS' motion.

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A. Section 580d

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The first issue is whether section 580d, which bars deficiency judgments following non-

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judicial foreclosure sales, necessarily precludes a creditor from reporting a deficiency to credit

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reporting agencies following a non-judicial foreclosure sale. CMS contends that section 580d's

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reach applies only to the obtaining of deficiency judgments, and, therefore, does not bar a creditor

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from furnishing deficiency information. Plaintiff claims that the sale extinguishes the debt.

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Section 580d prevents a creditor from obtaining a deficiency judgment after a non-judicial

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foreclosure proceeding. Cal. Civ. P. Code § 580d; Espinoza v. Bank of Am., N.A., 823 F. Supp. 2d

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1053, 1056-57 (S.D. Cal. 2011). By its terms, section 580d applies "only when a personal judgment

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against a debtor is sought after a foreclosure." Dreyfuss v. Union Bank of Cal., 24 Cal. 4th 400, 407

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(2000). However, Abdelfattah contends that section 580d has the effect of entirely extinguishing the

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debt and, therefore, precludes the party barred from obtaining a deficiency judgment from reporting

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the existence of any deficiency. He argues that "courts have consistently taken a more policy based

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approach, which compels them to look beyond the plain language of the statute." Opp. 5, Dkt. No. 23.

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CMS points out in its reply that "if the statutory language is clear and unambiguous, our task is at an

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ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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end, for there is no need for judicial construction." Rep. at 6, Dkt. No. 26 (quoting MacIsaac v.

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Waste Mgmt. Collection & Recycling, Inc., 134 Cal. App. 4th 1076 (2005)).

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Section 580d makes no reference to the way a furnisher, defined as a "source that provides

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credit information to credit reporting agencies," Gorman v. Wolpoff & Abramson, LLP, 584 F.3d

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1147, 1153 (9th Cir. 2009), may or may not report a deficiency to a credit reporting agency. The

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statute only bars a creditor from obtaining a deficiency judgment from a borrower after the creditor

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has completed non-judicial foreclosure. To preclude the reporting of a deficiency would seem

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inconsistent with the purpose of a credit report, namely to provide accurate credit information to

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potential creditors. Although a deficiency may not be reducible to a judgment or even collectible, it

United States District Court
For the Northern District of California

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does show that the debtor did not fully pay the balance due on his debt. See Redingler v. Imperial

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Sav. & Loan Ass'n, 47 Cal. App. 3d 48, 50 (1975) (debtor-creditor relationship between the parties

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not totally extinguished during the foreclosure proceedings because creditor purchased the property

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for less than the amount of the balance due under the deed of trust); Mortg. Guar. Co. v. Sampsell,

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51 Cal. App. 2d 180, 185 (1942) (anti-deficiency statutes do not even purport to wipe out the debt,

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but only to apply in the contingency that a deficiency judgment is sought).

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Because Abdelfattah's claims only relate to the reporting of debt, section 580d does not

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preclude the reporting of a deficiency. The court dismisses Abdelfattah's claims based on the theory

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that section 580d precludes the reporting of a deficiency following a non-judicial foreclosure.

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However, the reported information must be accurate and complete.

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B. Allegedly Incomplete or Inaccurate Information

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The second issue is whether Abdelfattah has pled sufficient facts to support a theory that

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CMS supplied incomplete or inaccurate information to the credit reporting agencies in violation of

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FCRA or CCRAA. In his FCRA claim he alleges that both he and the credit reporting agencies

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notified CMS that he was disputing the amount shown as due on his credit report. He further

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contends that thereafter CMS conducted an inadequate investigation which included "a failure to

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take into consideration the fact that the foreclosure sale had yielded proceeds which should be

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credited to loan balance, and failure to consider the application of the relevant anti-deficiency laws."

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FAC ¶ 37. In his CCRAA claim he contends that CMS provided information it knew to be
ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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inaccurate or incomplete to the credit reporting agencies by stating that Abdelfattah owed a balance

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of "$596,870 as of Jun 2008" when, in fact, "the loan balance was eliminated or greatly reduced by

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the foreclosure sale and, therefore, the credit reporting should reflect this amount." FAC ¶ 37. CMS

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argues that Abdelfattah's claim that CMS' report was inaccurate is "unsupported, conclusory and

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fails as a matter of law." Mot. at 6.

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The court is not persuaded by CMS's arguments. Abdelfattah has pled sufficient facts to

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plausibly support a theory that the reported balance of $596,870 was inaccurate or incomplete. A

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credit entry can be "incomplete or inaccurate" if it is actually incorrect or if it is misleading "to such

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an extent that it can be expected to adversely affect credit decisions." Gorman, 584 F.3d at 1163

United States District Court
For the Northern District of California

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(quoting Sepulvado v. CSC Credit Servs., Inc., 158 F.3d 890, 895 (5th Cir.1998)). The Ninth Circuit

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has explained that the purpose of the FCRA is "to require furnishers to investigate and verify that

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they are in fact reporting complete and accurate information to the CRAs [sic] after a consumer has

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objected to the information in his file." Id. at 1164. In Gorman, the Ninth Circuit reversed the

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district court's grant of summary judgment finding that a credit file that was not marked as disputed,

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when it was, could be sufficiently misleading to form the basis of a claim. Id. The court noted that

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"a consumer's failure to pay a debt that is not really due does not reflect financial irresponsibility and

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thus the omission of the disputed nature of a debt could render the information sufficiently

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misleading so as to be 'incomplete or inaccurate' within the meaning of the statute." Id. at 1163.

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Here, CMS has refused to change allegedly inaccurate and incomplete information after

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receiving notice in June 2012 of a dispute. The FAC alleges that Abdelfattah's credit report for June

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2008 states he owes $596,870 when that amount had been largely satisfied by the foreclosure sale of

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his former home. While CMS emphasizes in its letter sent to Abdelfattah addressing his request for

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an investigation that the outstanding balance at the time of the account closure on May 21, 2008 was

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$590,818.43, it has not sufficiently explained why the balance was not reduced after CMS purchased

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the home for $547,200 in May 2008. As the court held in Gorman, even the technical accuracy of a

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reported figure does not necessarily insulate a creditor from liability if the report is misleading. 584

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F.3d at 1163. Abdelfattah has sufficiently pled that the $596,870 figure that allegedly remains on

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his credit report is incomplete or inaccurate given the amount realized by CMS on the foreclosure
ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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sale of Abdelfattah's home. Therefore, since CMS did not correct the report after notice and time to

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investigate, plaintiff's FCRA claim survives dismissal at this pleading stage. See id. at 1162; Nelson

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v. Chase Manhattan Mortg. Corp., 282 F.3d 1057 (9th Cir. 2002).2
The court does not intend to imply, however, that CMS could not lawfully report the unpaid

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balance due on the loan at the time of the foreclosure sale, the credit given for the non-judicial

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foreclosure sale, and the amount of the deficiency. What is potentially misleading, however, is a

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report that there remains $596,870 owed when that is no longer the case following the foreclosure

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sale.
CMS contends that the CCRAA does not allow private actions by consumers against

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United States District Court
For the Northern District of California

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furnishers such as CMS for supplying incomplete or inaccurate information to credit reporting

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agencies. However, Cal. Civ. Code § 1785.25(a) provides that: "[a] person shall not furnish

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

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person knows or should know the information is incomplete or inaccurate." Section 1681t(b)(1)(F),

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FCRA's preemption provision, expressly exempts § 1785.25(a) from its general exclusion of state

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law claims. In Gorman, the Ninth Circuit expressly held that a private right of action to enforce Cal.

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Civ. Code § 1785.25(a) is not preempted by the FCRA. 584 F.3d at 1172-73. Therefore, plaintiff's

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claim that CMS provided inaccurate and misleading information to the credit reporting agencies

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following the foreclosure sale is viable.

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C. Reasonable Investigation

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CMS argues that Abdelfattah "fails to allege any facts to support his legal conclusion that

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CMS' investigation was unreasonable or that CMS failed to review all relevant information." Mot. 9.

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However, Abdelfattah has pled sufficient facts to support his claim that CMS deliberately or

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negligently ignored the foreclosure sale and its effect on plaintiff's loan balance. A reasonable

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investigation would have determined that that information affected the plaintiff's account balance.
D. Damages

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1. Damages Under FCRA

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The parties do not appear to dispute that a consumer has no private cause of action against a
furnisher of information prior to the time that the furnisher is advised of the disputed issue with the
credit report.

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ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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Abdelfattah contends that as a result of the erroneous information on his credit report, he has

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been denied credit and thus been unable to refinance his automobile loan or secure a home or

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automobile loan. FAC ¶ 17. He has also allegedly suffered emotional distress. Id. CMS contends

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that Abdelfattah has failed to plead actual damages, arguing that the facts pled do not rise beyond

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the speculative level. CMS argues that Abdelfattah fails to plead "any facts showing that plaintiff's

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purported actual damages were caused by CMS . . . rather than [his] recent bankruptcy filing,

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defaulting on his loan, or the foreclosure of his home." Reply 11.

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Under the FCRA, Abdelfattah can obtain actual damages and attorneys' fees if he
successfully shows that CMS negligently failed to comply with any provision of FCRA. 15 U.S.C.

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United States District Court
For the Northern District of California

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§ 1681o. The Ninth Circuit has interpreted "actual damages" under FCRA to include recovery for

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emotional distress and humiliation. Guimond v. Trans Union Credit Info. Co., 45 F.3d 1329, 1333

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(9th Cir. 1995).

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Although a denial of credit is not a prerequisite to recovery under the FCRA, Abdelfattah has

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marginally pled sufficient facts to support a reasonable inference that the failure to correct his

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account balance after CMS was made aware of the error in the amount reported was a substantial

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factor in his inability to get a new loan or refinancing. When the decision-making process

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implicates a wide range of considerations, all of which factor into the ultimate decision, a plaintiff

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must only show that the alleged wrongful conduct was a substantial factor in bringing about a denial

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of credit. See Bradshaw v. BAC Home Loans Servicing, LP, 816 F. Supp. 2d (D. Or. 2011); Fregoso

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v. Wells Fargo Dealer Servs., Inc., CV 11-10089 SJO AGRX, 2012 WL 4903291 (C.D. Cal. Oct. 16,

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2012); Pourfard v. Equifax Info. Servs. LLC, CIV 07-854-AA, 2010 WL 55446 (D. Or. Jan. 7,

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2010). Thus, although the FCRA limits Abdelfattah's damage claim to damages incurred after CMS

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had notice of the dispute and time to conduct an investigation, plaintiff's damage claim survives at

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this pleading stage. See 15 U.S.C. § 1681s-2(b)(sets deadline for completing actions). Plaintiff

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contends that credit denials have occurred since 2008, citing the "continued reporting" by CMS of

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the deficiency as a "substantial factor" in those denials. FAC ¶ 17; but see FAC ¶ 11 (suggesting

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that last report was June 2008). However, only damages incurred after the deadline for CMS to

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ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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complete its investigation are potentially recoverable under the FCRA (approximately July 22,

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2012).
2. Damages Under CCRAA

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The parties' briefing does not focus on the question of what damages may be recovered under

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the CCRAA. However, the court in Gorman does an extensive analysis and concludes that damages

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are recoverable in a private action for a violation of Cal. Civ. Code § 1725(a), which proscribes the

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providing of information on a specific transaction to a credit reporting agency if the person knows or

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should know the information is incomplete or inaccurate. 584 F.3d at 1169-73. Therefore, if

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plaintiff can establish that in June 2008 CMS knowingly provided incomplete information to the

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United States District Court
For the Northern District of California

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credit reporting agencies, Abdelfattah may recover any damages caused by the reporting of that

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information.

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E. Punitive Damages under the FCRA

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A consumer can recover punitive damages for willful non-compliance with the FCRA. 15

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U.S.C. § 1681n. CMS argues in its motion that Abdelfattah's request for punitive damages is

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"improperly conclusory" and is "not supported by any factual matter." Mot. at 13. Here,

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Abdelfattah alleges that CMS offered to alter or remove the $596,870 balance only if he agreed to

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"make a financial settlement" with CMS. FAC ¶ 13. If Abdelfattah is able to prove that the reported

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balance was in fact inaccurate or incomplete and CMS would only change it if Abdelfattah paid

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CMS to do so, a jury could find such a violation to be willful. Thus, the court will not dismiss the

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claim at this early stage of litigation.
III. ORDER

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For the foregoing reasons, the court:

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1. GRANTS defendant's motion to dismiss the claim that reporting a deficiency following a

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non-judicial foreclosure sale is in and of itself a violation of FCRA or CCRAA;
2. GRANTS defendant's motion to dismiss any claim under FCRA for damages incurred
prior to dispute investigation deadline; and
3. DENIES defendant's motion to dismiss in all other respects.

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ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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DATED:

February 7, 2013

RONALD M. WHYTE
United States District Judge

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United States District Court
For the Northern District of California

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ORDER GRANTING-IN-PART AND DENYING-IN-PART DEFENDANT'S MOTION TO DISMISS
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—No. C-12-04656-RMW