Moran v. HSBC Bank USA, N.A., as Trustee et al

Filing 19

ORDER by Judge Lucy H. Koh granting 12 Motion to Dismiss (lhklc3S, COURT STAFF) (Filed on 8/4/2014)

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UNITED STATES DISTRICT COURT

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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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KELLY MORAN,

) Case No. 5:14-cv-00633-LHK
)
Plaintiff,
)
v.
) ORDER GRANTING DEFENDANTS’
) MOTION TO DISMISS
HSBC BANK USA, N.A., as Trustee for Luminent )
Mortgage Trust 2006-7, Mortgage Pass Through
)
Certificates, Series 2006-7; WELLS FARGO
)
BANK, N.A.; POWER DEFAULT SERVICES, )
INC.; OCWEN LOAN SERVICING, LLC;
)
MORTGAGE ELECTRONIC REGISTRATION )
)
SYSTEMS, INC.; and DOES 1-100, inclusive,
)
)
Defendants.
)
)

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Plaintiff Kelly Moran (“Moran”) brings this action against HSBC Bank USA, N.A.

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(“HSBC”), as Trustee for Luminent Mortgage Trust 2006-7; Wells Fargo Bank (“Wells Fargo”);

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Power Default Services, Inc. (“Power Default”); Ocwen Loan Servicing, LLC (“Ocwen”);

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Mortgage Electronic Registration Systems, Inc. (“MERS”); and Does 1-100 (collectively,

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“Defendants”). (“Compl.”) ECF No. 1, Ex. A. Before the Court is Defendants’ Motion to Dismiss

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the Complaint. (“Mot.”) ECF No. 12. Moran opposes the Motion. (“Opp’n”) ECF No. 13. Pursuant

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to Civil Local Rule 7-1(b), the Court finds this matter appropriate for resolution without oral

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argument and hereby VACATES the hearing and case management conference scheduled for
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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August 7, 2014, at 1:30 p.m. ECF No. 11. Having considered the submissions of the parties and the

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relevant law, the Court hereby GRANTS Defendants’ Motion to Dismiss with leave to amend.

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I.

BACKGROUND

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A.

Factual Background

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Except where otherwise noted, the Court draws the following facts, taken as true for

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purposes of a motion to dismiss, from Moran’s Complaint. On September 1, 2006, Moran recorded

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a deed of trust in favor of American Brokers Conduit (“American Brokers”) on real property

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located at 73 Piazza Court, San Jose, CA 95127 (“Subject Property”). Compl. ¶ 16. The deed of

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trust named Alliance Title as trustee and MERS as beneficiary. Id.

United States District Court
For the Northern District of California

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On or around December 2006, American Brokers sold Moran’s deed of trust and

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promissory note to a mortgage-backed securitized trust entitled the “Luminent Mortgage Trust

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2006-7, Mortgage Pass-Through Certificates, Series 2006-7” (“LMT 2006-7 Trust” or “Trust”). Id.

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¶ 17. Moran’s promissory note and deed of trust were securitized pursuant to the Pooling and

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Servicing Agreement (“PSA”) of the LMT 2006-7 Trust. Id. ¶ 18. HSBC acted as trustee for the

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LMT 2006-7 Trust, which was formed under New York law. Id. The LMT 2006-7 Trust is a tax-

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exempt Real Estate Mortgage Investment Conduit (“REMIC”) trust. Id. ¶ 21.

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The Complaint identifies two rules that allegedly apply to the LMT 2006-7 Trust. First, the

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Trust’s PSA provides that: “None of the Depositor, the Trustee, Master Servicer . . . shall . . .

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accept any contributions to any REMIC . . . after the Closing Date, unless it has received an

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Opinion of Counsel . . . .” Id. ¶ 22. Moran alleges that the provision’s reference to a “Closing Date”

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is the closing date for the LMT 2006-7 Trust, which was December 27, 2006. Id. Second, as a tax-

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exempt REMIC trust, all transfer of assets to the LMT 2006-7 Trust must have been made within

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ninety days of LMT 2006-7 Trust’s startup date. Id.

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On October 5, 2010, a notice of default was recorded against the Subject property. Compl.

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¶ 19. Although Moran’s mortgage had by that point been sold to the LMT 2006-7 Trust, the notice

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of default continued to list MERS as the beneficiary. Id.

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On January 7, 2011, MERS recorded an assignment of deed of trust to assign all beneficial

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interest in the deed of trust on the Subject Property to HSBC as Trustee of the LMT 2006-7 Trust.
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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Id. ¶ 20. On the same day, HSBC recorded a substitution of trustee to appoint Power Default as

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trustee under the deed of trust. Compl. ¶ 25. Fidelity, acting as agent for Power Default, recorded a

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notice of trustee’s sale against the Subject Property. Id.

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On August 17, 2011, Fidelity recorded a notice rescinding the earlier October 5, 2010

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Notice of Default. Id. ¶ 26. On or around September 6, 2013, a new notice of default was issued

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against Moran. Id. ¶ 27. The new notice of default listed HSBC, in its capacity as trustee for the

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LMT 2006-7 Trust, as the beneficiary . Id.

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Moran claims that the foreclosure proceedings initiated in September 2013 were unlawful,

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because the entities seeking foreclosure “did not hold any beneficial interest in his deed of trust.”

United States District Court
For the Northern District of California

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Id. ¶ 28. According to Moran, American Brokers’s 2006 sale of Moran’s mortgage to the LMT

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2006-7 Trust was ineffective because MERS, the beneficiary, did transfer Moran’s mortgage to the

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trust pool at that time. Id. Moran further contends that MERS’s subsequent assignment of its

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beneficial interest in Moran’s mortgage to the LMT 2006-7 Trust in January 2011 was “void, and

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not merely voidable,” because the assignment took place years after the LMT 2006-7 Trust’s

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December 27, 2006 closing date, in violation of both the Trust’s PSA and the rules governing tax-

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exempt REMIC trusts. Id. ¶ 29. As a consequence of the allegedly “void” transfer of Moran’s

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mortgage, Moran asserts that his mortgage no longer belongs to either MERS or HSBC, but has

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instead become the property of “an unknown beneficiary.” Id. ¶ 24.

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B.

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Moran filed his Complaint in the Superior Court of California, Santa Clara County on

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December 19, 2013. Id. at 1. The Complaint lists the following seven causes of action: (1) violation

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of California Civil Code Sections 2923.55 and 2924; (2) wrongful foreclosure; (3) breach of

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express agreement; (4) breach of implied agreement; (5) slander of title, (6) violation of 18 U.S.C

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§ 1962; and (7) violation of California Business and Profession Code Section 17200. Id.

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Procedural Background

Defendants removed the case to this Court on February 11, 2014 pursuant to 28 U.S.C

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§§ 1331, 1441(a), because Moran’s sixth cause of action (for violation of 28 U.S.C. § 1962) arises

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under federal law. ECF No. 1. Defendants subsequently filed a Motion to Dismiss on March 17,

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2014. ECF No. 12. Moran filed his Opposition on March 31, 2014. ECF No. 13.
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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II.

LEGAL STANDARD

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A.

Rule 12(b)(1)

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A defendant may move to dismiss an action for lack of subject matter jurisdiction pursuant

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to Federal Rule of Civil Procedure 12(b)(1). A motion to dismiss for lack of subject matter

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jurisdiction will be granted if the complaint on its face fails to allege facts sufficient to establish

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subject matter jurisdiction. See Savage v. Glendale Union High Sch., 343 F.3d 1036, 1039 n.2 (9th

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Cir. 2003). If the plaintiff lacks standing under Article III of the U.S. Constitution, then the court

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lacks subject matter jurisdiction, and the case must be dismissed. See Steel Co. v. Citizens for a

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Better Env’t, 523 U.S. 83, 101-02 (1998). In considering a Rule 12(b)(1) motion, the Court “is not

United States District Court
For the Northern District of California

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restricted to the face of the pleadings, but may review any evidence, such as affidavits and

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testimony, to resolve factual disputes concerning the existence of jurisdiction.” McCarthy v. United

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States, 850 F.2d 558, 560 (9th Cir. 1988). Once a party has moved to dismiss for lack of subject

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matter jurisdiction under Rule 12(b)(1), the opposing party bears the burden of establishing the

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court’s jurisdiction, see Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1122 (9th Cir.

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2010), by putting forth “the manner and degree of evidence required” by whatever stage of the

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litigation the case has reached, Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992); see also

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Barnum Timber Co. v. Envtl. Prot. Agency, 633 F.3d 894, 899 (9th Cir. 2011) (at the motion to

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dismiss stage, Article III standing is adequately demonstrated through allegations of “specific facts

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plausibly explaining” why the standing requirements are met).

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B.

Leave to Amend

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If the Court determines that the complaint should be dismissed, it must then decide whether

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to grant leave to amend. Under Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend

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“should be freely granted when justice so requires,” bearing in mind that “the underlying purpose

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of Rule 15. . . [is] to facilitate decision on the merits, rather than on the pleadings or technicalities.”

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Lopez v. Smith, 203 F.3d 1122, 1127 (9th Cir. 2000) (en banc) (internal quotation marks omitted).

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Nonetheless, a court “may exercise its discretion to deny leave to amend due to ‘undue delay, bad

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faith or dilatory motive on part of the movant, repeated failure to cure deficiencies by amendments

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previously allowed, undue prejudice to the opposing party . . . , [and] futility of amendment.’”
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 892-93 (9th Cir. 2010) (alterations in

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original) (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)).

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III.

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DISCUSSION
At the outset, the Court determines that Moran lacks Article III standing to assert any of the

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claims in his Complaint. As standing is a prerequisite to federal subject matter jurisdiction, the

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conclusion that Moran lacks standing requires dismissal of this case.

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To have Article III standing, a plaintiff must plead and prove that he or she has suffered

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sufficient injury to satisfy the “case or controversy” requirement of Article III of the United States

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Constitution. See Clapper v. Amnesty Int’l, --- U.S. ---, 133 S. Ct. 1138, 1146 (2013) (“One

United States District Court
For the Northern District of California

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element of the case-or-controversy requirement’ is that plaintiffs ‘must establish that they have

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standing to sue.’” (quoting Raines v. Byrd, 521 U.S. 811, 818 (1997))). Therefore, for Article III

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standing, a plaintiff must establish: (1) injury-in-fact that is concrete and particularized, as well as

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actual or imminent; (2) that this injury is fairly traceable to the challenged action of the defendant;

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and (3) that this injury is redressable by a favorable ruling from the court. Monsanto Co. v.

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Geertson Seed Farms, --- U.S. ---, 130 S. Ct. 2743, 2752 (2010); Friends of the Earth, Inc. v.

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Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180-81 (2000).

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All seven of Moran’s causes of action are premised on the theory that the original owners of

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his mortgage failed to actually transfer ownership of his loan. See generally Compl. Accordingly,

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whether Moran has standing to assert any of his claims hinges on whether he has standing to

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challenge the loan assignment. For the reasons discussed below, the Court finds that Moran lacks

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standing to challenge the allegedly defective loan transfer.

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“Third-party borrowers lack standing to assert problems in the assignment of the loan”

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because the borrowers have not suffered an injury in fact. Flores v. GMAC Mortg., LLC, No. 12-

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794, 2013 WL 2049388, at *3 (N.D. Cal. May 14, 2013); see also Jenkins v. JP Morgan Bank,

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N.A., 216 Cal. App. 4th 497, 513-14 (2013). Assignment defects do not injure borrowers because

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“even if there were some defect in the [subsequent] assignment of the deed of trust, that assignment

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would not have changed plaintiff’s payment obligations.” Simmons v. Aurora Bank, FSB, No. 13-

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482, 2013 WL 5508136, at *2 (N.D. Cal. Sept. 30, 2013); see also Apostol v. CitiMortgage, Inc.,
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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No. 13-1983, 2013 WL 6328256, at *7 (N.D. Cal. Nov. 21, 2013) (“There is no dispute on the

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record before the Court that the Beneficiary (whoever plaintiff believes that is) was entitled to

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pursue foreclosure . . . .”); Siliga v. Mortg. Elec. Registration Sys., Inc., 219 Cal. App. 4th 75, 85

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(2013) (“The assignment of the deed of trust and the note did not change [Plaintiffs’] obligations

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under the note, and there is no reason to believe that . . . the original lender would have refrained

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from foreclosure in these circumstances.”).

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Here, Moran has failed to specify an injury “fairly traceable to the challenged action of the

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defendant.” See Lujan, 504 U.S. at 590. Plaintiff does not contend that the initial securitization of

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his loan to American Brokers was improper. Because Moran has not alleged that his obligation to

United States District Court
For the Northern District of California

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repay his mortgage is in any way affected by any assignment defects, the foreclosure

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proceedings—the injury alleged by Moran—also presumably remain unchanged by the alleged

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assignments defects. Therefore, even if a loss in property occurs, “the true victim was not plaintiff

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but the original lender, which would have suffered the unauthorized loss.” Fontenot v. Wells Fargo

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Bank, N.A., 198 Cal. App. 4th 256, 272 (2011). Moran thus cannot claim to be the “true victim” of

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the alleged mistakes in the assignment process. Given that Moran has not identified any injury he

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suffered as a result of the alleged irregularities in the assignment of his mortgage, Moran lacks

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standing to challenge this assignment. See Jenkins, 216 Cal. App. 4th at 511 (“California courts

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have refused to delay the nonjudicial foreclosure process by allowing trustor-debtors to pursue

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preemptive judicial actions to challenge the right, power, and authority of a foreclosing

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‘beneficiary’ or beneficiary’s ‘agent’ to initiate and pursue foreclosure.”)

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Moran’s argument that he has standing relies entirely on a case from the California Court of

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Appeal for the Fifth District, Glaski v. Bank of America National Ass’n, 218 Cal. App. 4th 1079,

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1099 (2013). Glaski held that a borrower, whose loan had been organized into a trust formed under

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New York law, had standing to challenge an assignment of his note because the defendants failed

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to assign the trust before the trust’s closing date, creating a defect in the chain of transfer. See id. at

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1096. The court in Glaski acknowledged “that some federal district courts sitting in California have

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rejected the post-closing date theory of invalidity on the grounds that the borrower does not have

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standing to challenge an assignment between two other parties.” Id. at 1098 (citing Aniel v. GMAC
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

Mortg., LLC, No. 12-4021, 2012 WL 5389706 (N.D. Cal. Nov. 2, 2012); Almutarreb v. Bank of

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N.Y. Trust Co., N.A., No. 12-3061, 2012 WL 4371410 (N.D. Cal. Sept. 24, 2012)). However, the

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Glaski court concluded that “[t]hese cases are not persuasive because they do not address the

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principle that a borrower may challenge an assignment that is void and they do not apply New

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York trust law to the operation of the securitized trusts in question.” Id. The court in Glaski

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explained that if the assignment of a trust was void, the defendant could not initiate a lawful

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foreclosure proceeding against the Plaintiff because it did not have a legal right to the property. Id.

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at 1095-97. The court then went on to find that the trust in Glaski was void under New York trust

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law. Id. at 1097. Because the assignment of the note was void, the defendant in Glaski was not the

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United States District Court
For the Northern District of California

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lawful holder of the plaintiff’s deed of trust and could not initiate a foreclosure proceeding against

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the plaintiff. Id. at 1097-98. This gave the plaintiff standing to challenge the assignment despite

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being a third-party borrower. See id.

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Glaski conflicts with several other California Court of Appeal cases that have held that a

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mortgage borrower, as a third party, does not have a cause of action due to irregularities in the

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chain of transfer. See, e.g., Jenkins, 216 Cal. App. 4th at 515 (“As an unrelated third party to the

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alleged securitization, and any other subsequent transfers of the beneficial interest under the

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promissory note, [Plaintiff] lacks standing to enforce any agreements, including the investment

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trust’s pooling and servicing agreement, relating to such transactions.”); Fontenot, 198 Cal. App.

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4th at 272-73 (stating plaintiff had no cause of action for merely alleging irregularities in the

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assignment process). “Moreover, courts in this District have expressly rejected Glaski and adhered

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to the majority view that individuals who are not parties to a PSA cannot base wrongful foreclosure

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claims on alleged deficiencies in the PSA/securitization process.” Apostol, 2013 WL 6328256 at

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*7; accord Giseke v. Bank of Am., N.A., No. 13-4772, 2014 WL 718463, at *3 (N.D. Cal. Feb. 23,

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2014) (“To the best of the Court’s knowledge, no court has yet followed Glaski on this point, and

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many have pointedly declined to.”).

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Glaski’s reasoning is also unpersuasive. First, it is well-established that a third party should

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not be permitted to enforce covenants made for the benefit of others. See, e.g., Murphy v. Allstate

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Ins. Co., 17 Cal. 3d 937, 944 (1976) (“A third party should not be permitted to enforce covenants
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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made not for his benefit, but rather for others. He is not a contracting party; his right to

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performance is predicated on the contracting parties’ intent to benefit him.”). Second, there is

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persuasive authority that the reasoning in Glaski is based on a flawed reading of New York trust

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law. Glaski held that an act in violation of a trust agreement is void, as opposed to merely voidable.

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218 Cal. App. 4th at 1097. Whether the assignment of a trust is void or merely voidable is

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significant because a foreclosure proceeding involving a void trust assignment can be challenged

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on the basis that the foreclosing entity does not have a legal right to the property, whereas a

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voidable assignment can be challenged only by a directly injured party. See id. at 1095-97. New

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York state appellate courts, however, have consistently found, contrary to the holding in Glaski,

United States District Court
For the Northern District of California

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that an act in violation of a trust agreement is voidable, not void. See, e.g., In re Levy, 893

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N.Y.S.2d 142 (N.Y. App. Div. 2010) (holding that a violation of a trust’s procedural obligations to

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formally inform a beneficiary of a trustee did not void a trust); Mooney v. Madden, 597 N.Y.S.2d

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775 (N.Y. App. Div. 1993) (holding that a trustee excluding beneficiaries in a trust from voting in a

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matter violated the trust agreement but did not make the trust void); see also Anh Nguyet Tran v.

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Bank of N.Y., No. 13-580, 2014 WL 1225575, at *4 (S.D.N.Y. Mar. 24, 2014) (“[T]hough some

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courts have held that non-compliance with the terms of a PSA renders an assignment void under

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[the New York trust statute], the weight of the case law holds that such an assignment is merely

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voidable, and therefore outside the scope of that section.”); Banares v. Wells Fargo Bank, N.A.,

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No. 13-4896, 2014 WL 985532, at *4-5 (N.D. Cal. Mar. 7, 2014) (criticizing Glaski for its flawed

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reading of New York trust law).

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In sum, Moran’s reliance on Glaski is misplaced, both because Glaski does not state the

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majority rule and because its reasoning is unpersuasive. Thus, the Court follows the weight of the

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authority and finds that Moran lacks standing to challenge the alleged assignment defects.

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Consequently, the Court GRANTS Defendants’ Motion to Dismiss. Because Moran may

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conceivably be able to identify some injury he has suffered that is traceable to Defendants’ conduct

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in an amended pleading, this dismissal is without prejudice. See Lopez, 203 F.3d at 1127 (leave to

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amend should be “freely granted”).

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IV.

CONCLUSION
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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

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For the foregoing reasons, Moran’s Complaint is DISMISSED without prejudice. Should

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Moran elect to file an amended complaint curing the deficiencies discussed herein, Moran shall do

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so within 21 days of the date of this Order. Failure to meet the 21-day deadline to file an amended

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complaint or failure to cure the deficiencies identified in this Order will result in a dismissal with

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prejudice. Moran may not add new causes of action or parties without leave of the Court or

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stipulation of the parties pursuant to Federal Rule of Civil Procedure 15.

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IT IS SO ORDERED.

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Dated: August 4, 2014

_________________________________
LUCY H. KOH
United States District Judge

United States District Court
For the Northern District of California

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Case No.: 5:14-cv-00633-LHK
ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS