Rose v. Wachovia Mortgage, FSB et al
Filing
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ORDER denying 76 Motion for Sanctions and denying Motion to Dismiss Third Amended Complaint. Defendant Hagobian shall file an answer within thirty (30) days of service of this Order. Signed by Judge Anthony J. Battaglia on 1/2/13. (cge)
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UNITED STATES DISTRICT COURT
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SOUTHERN DISTRICT OF CALIFORNIA
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MARCELLA ROSE, an individual,
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Case No.: 11cv00240 AJB (KSC)
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Plaintiff,
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v.
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ORDER:
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SEAMLESS FINANCIAL CORPORATION )
(1) DENYING DEFENDANT’S MOTION
INC., a Nevada Corporation; MICHAEL
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TO DISMISS PLAINTIFF’S THIRD
MCDEVITT, an individual; CHAD
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AMENDED COMPLAINT; AND
HAGOBIAN, an individual; JEAN-PIERRE )
RADTKE, an individual; PREMIERE
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(2) DENYING DEFENDANT’S MOTION
CAPITAL ESCROW, INC., a California
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FOR RULE 11 SANCTIONS
corporation; LUIS ANTONIO VENEGAS, an )
individual; and DOES 1-100,
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(Doc. No. 76)
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Defendants.
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Presently before the Court are Defendant Chad Hagobian’s (“Defendant” or “Hagobian”) motion
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to dismiss Plaintiff’s Third Amended Complaint and motion for sanctions pursuant to Rule 11. (Doc.
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No. 76.) Plaintiff filed a response in opposition on November 26, 2012, (Doc. No. 78), and Defendant
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filed a reply on December 10, 2012, (Doc. No. 80). On December 21, 2012 the Court took both motions
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under submission and vacated the hearing scheduled for January 10, 2013. (Doc. No. 83.) For the
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reasons set forth below, the Court DENIES Defendant’s motion to dismiss and DENIES Defendant’s
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motion for Rule 11 sanctions pursuant.
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BACKGROUND
I.
Factual Background
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On or around April 2008, Plaintiff Marcella Rose (“Plaintiff”) executed a loan in the amount of
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$510,000 (the “Loan”).1 The Loan was secured by a first deed of trust on the property located at 3665
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Trenton Avenue, San Diego, California 92117 (the “Property”). (Doc. No. 78, Ex. 3, p. 4.) Prior to
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executing the Loan, Plaintiff alleges that on or about April 8, 2009, Premiere Capital Escrow, Inc.
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(“Premiere”) requested a preliminary title report on the Property through Ms. Evelyn Ortega. Plaintiff
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then received a telephone call from Michael McDevitt (“McDevitt”), an individual employed by
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Seamless Financial Corporation, Inc. (“Seamless”). (TAC, Doc. No. 74 ¶ 19.) McDevitt requested
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information from Plaintiff regarding the possibility of refinancing the loan on her current mortgage. (Id.)
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During initial conversations between McDevitt and Plaintiff, Plaintiff disclosed that she had a
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savings account containing approximately $85,000. (Id. ¶ 20.) Plaintiff also provided McDevitt with
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proof of income showing she received monthly social security benefits in the amount of $1,077, and
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pension payments in the amount of $338.83. (Id.) McDevitt then informed Plaintiff that if she could
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contribute $27,000 from her saving account up front, she could get a loan with a 3.75% interest rate
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fixed for fifteen years. (Id. ¶ 24.) Plaintiff further alleges that Seamless, through Ms. Grosser
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(“Grosser’), Mr. Radtke (“Radtke”), and/or McDevitt, caused Plaintiff’s loan application to state that her
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monthly income was $9,600 ($7,800 from her pension and retirement and $1,800 a month in pension
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benefits) and forged her signature on the typewritten loan application documents to falsely state her
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monthly income to ensure she would qualify for the Loan. (Id. at ¶ 23.)
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After the Loan documents were finalized, Plaintiff made payments on the Loan for over a year.
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Plaintiff then became aware that her Loan was in fact a “Pick-A-Payment” mortgage rather than a loan
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with a fixed interest rate of 3.75%.2 (Id. ¶ 26.) Soon thereafter, the Loan payments became unafford-
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able and Plaintiff defaulted on the Loan. (Id. ¶ 26-29.) On August 11, 2009, after several unsuccessful
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The Loan was originally obtained from Wachovia Mortgage, FSB (“Wachovia”) and later
transferred to Wells Fargo Bank, NA (“Wells Fargo” ) as a result of a merger.
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Plaintiff further alleges that her “Pick-A-Payment” mortgage loan was an Option Adjustable
Rate Mortgage (“ARM”), which had a variable rate feature, payment caps, and charged a much greater
interest rate than Plaintiff was originally promised by McDevitt. (Doc. No. 74 ¶ 26.)
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attempts to modify the terms of Plaintiff’s Loan, foreclosure proceeding commenced against the
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Property. (Id. ¶ 30.) Shortly thereafter, the Property was sold in a short sale to avoid foreclosure. (Id.)
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II.
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Procedural Background
Plaintiff originally filed this action in state court on December 29, 2010, against Defendants
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Wachovia, Wells Fargo, Seamless, McDevitt, and Hagobian (collectively, “Defendants”). (Doc. No. 1.)
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The complaint contained six causes of action: (1) violation of the Real Estate Settlement Procedures
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Act, 12 U.S.C. § 2605 (“RESPA”); (2) violation of the Federal Fair Debt Collection Practices Act, 15
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U.S.C. § 1692 (“FDCPA”); (3) violation of the California Rosenthal Fair Debt Collection Practices Act,
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Cal. Civ. Code §§ 1788 et seq. (“Rosenthal Act”); (4) unfair competition under California Business and
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Professions Code §§ 17200 et seq. (“UCL”); (5) fraud and deceit; and (6) violation of the Elder Abuse
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and Dependent Adult Civil Protection Act, Cal. Welfare & Institutions Code § 15610.30 (the “Elder
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Abuse Act”). The first, second, and third causes of action were alleged solely against Wachovia and
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Wells Fargo, whereas the remaining state law causes of action were alleged against all Defendants. (Id.)
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On February 4, 2011, Defendants removed this action to federal court on the basis of federal
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question jurisdiction and supplemental jurisdiction over the related state law claims. (Id.) On February
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11, 2011, Defendant Wells Fargo filed a motion to dismiss the complaint, (Doc. No. 2), which was
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subsequently denied as moot after Plaintiff filed a First Amended Compliant (“FAC”). (Doc. No. 7.)
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On March 18, 2011, Wells Fargo moved to dismiss Plaintiff’s FAC, (Doc. No. 13.), and on May 25,
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2011, Plaintiff and Hagobian filed a joint motion for an extension of time for Hagobian to respond to the
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FAC.3 (Doc. No. 23.) While Wells Fargo’s motion to dismiss was pending, Wells Fargo and Plaintiff
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entered into a good faith settlement. (Doc. No. 32.) The settlement was approved by the Court on
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March 2, 2012, (Doc. No. 50), and Wells Fargo and the federal causes of action alleged against Wells
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Fargo were thereby dismissed, (Doc. No. 56).
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Plaintiff filed a Second Amended Complaint (“SAC”) on April 2, 2012. (Doc. No. 53.) The
SAC alleged four causes of action: (1) violation of the Elder Abuse Act; (2) fraud and deceit; (3) breach
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The parties disagree over the purpose of the joint motion. Plaintiff alleges the stipulation was
entered into in “an effort to avoid Mr. Hagobian [from] filing a motion to dismiss,” (Doc. No. 78, p. 3:23), and Hagobian alleges the stipulation was entered into because Plaintiff “acknowledged that the FAC
was frivolous and agreed to amend her complaint.” (Doc. No. 76, p. 5:13-14.)
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of fiduciary duty; and (4) unlawful, unfair, and deceptive practices under the UCL.4 (Doc. No. 53.) On
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May 1, 2012, Defendant Hagobian filed a motion to dismiss the SAC, (Doc. No. 59), and on June 1,
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2012, Plaintiff filed a motion to remand, (Doc. No. 61). On September 10, 2012, the Court denied
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Plaintiff’s motion to remand and granted in part and denied in part Defendant’s motion to dismiss the
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SAC. (Doc. No. 73.) The Court granted Hagobian’s motion to dismiss with respect to the first three
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causes of action without leave to amend, and granted the motion with leave to amend with respect to the
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fourth cause of action alleging violation of the UCL. Plaintiff filed a Third Amended Complaint
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(“TAC”) on October 10, 2012. (Doc. No. 74.) On November 2, 2012, Defendant filed the two motions
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presently before the Court. (Doc. No. 76.) Each will be discussed in turn.
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DISCUSSION
I.
Motion to Dismiss
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Hagobian argues the Court should dismiss the only remaining cause of action alleged against
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him in the TAC because it is unintelligible, pled without particularity, and cannot be advanced based
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solely on his position as the designated broker of Seamless. For the reasons set forth below, the Court
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finds Plaintiff has pled sufficient facts—at this stage in the proceedings—to allege an agency relation-
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ship between Hagobian and Radtke, and a plausible claim for relief under the unlawful, unfair, and
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fraudulent prongs of the UCL based on an alleged violation of TILA.
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A.
Legal Standard
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Federal Rule of Civil Procedure 8(a)(2) requires that a complaint contain a “short and plain
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statement of the claim showing that the pleader is entitled to relief.” A complaint must therefore
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provide a defendant with “fair notice” of the claims against it and the grounds for relief. See Bell
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Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quotation and citation omitted). A motion to
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dismiss under Federal Rule of Civil Procedure 12(b)(6) tests the legal sufficiency of the pleadings and
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allows a court to dismiss a complaint upon a finding that the plaintiff has failed to state a claim upon
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which relief may be granted. See Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). The court may
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dismiss a complaint as a matter of law for: (1) “lack of cognizable legal theory,” or (2) “insufficient
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The SAC named Seamless, McDevitt, Hagobian, Radtke, Premiere, and Luis Antonio Venegas
(“Venegas”) as defendants. Defendants Radtke, Premiere, and Venegas were added as additional
defendants by Plaintiff for the first time in the SAC.
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facts under a cognizable legal claim.” SmileCare Dental Grp. v. Delta Dental Plan of Cal., 88 F.3d 780,
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783 (9th Cir. 1996) (citation omitted). However, a complaint survives a motion to dismiss if it contains
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“enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570.
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Notwithstanding this deference, the reviewing court need not accept “legal conclusions” as true.
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Ashcroft v. Iqbal, 556 U.S. 662 (2009). It is also improper for the court to assume “the [plaintiff] can
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prove facts that [he or she] has not alleged.” Associated Gen. Contractors of Cal., Inc. v. Cal. State
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Council of Carpenters, 459 U.S. 519, 526 (1983). On the other hand, “[w]hen there are well-pleaded
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factual allegations, a court should assume their veracity and then determine whether they plausibly give
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rise to an entitlement to relief.” Iqbal, 129 S.Ct. at 1950. The court only reviews the contents of the
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complaint, accepting all factual allegations as true, and drawing all reasonable inferences in favor of the
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nonmoving party. See al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir. 2009) (citations omitted).
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Federal Rule of Civil Procedure 9(b) states that an allegation of “fraud or mistake must state with
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particularity the circumstances constituting the fraud.” The “circumstances” required by Rule 9(b) are
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the “who, what, when, where, and how” of the fraudulent activity. Vess v. Ciba-Geigy Corp. USA, 317
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F.3d 1097, 1106 (9th Cir. 2003); Neubronner v. Milken, 6 F.3d 666, 672 (9th Cir. 1993) (“[Rule 9(b)
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requires] the times, dates, places, benefits received, and other details of the alleged fraudulent activ-
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ity.”). In addition, the allegations “must set forth what is false or misleading about a statement, and why
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it is false.” Vess, 317 F.3d at 1106. Rule 9(b)’s heightened pleading standard applies not only to federal
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claims, but also to state law claims brought in federal court. Id. at 1103. This heightened pleading
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standard ensures that “allegations of fraud are specific enough to give defendants notice of the particular
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misconduct which is alleged to constitute the fraud charged so that they can defend against the charge
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and not just deny that they have done anything wrong.” Semegen v. Weidner, 780 F.2d 727, 731 (9th
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Cir. 1985); Concha v. London, 62 F.3d 1493, 1502 (9th Cir. 1995).
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B.
Defendant Hagobian’s Liability under the UCL
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Hagobian’s primary contention is that he is neither directly or vicariously liable for any of the
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alleged wrongful conduct. Hagobian argues he is not directly liable because he was not Plaintiff’s
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broker, had no direct contact with Plaintiff, and did not review Plaintiff’s Loan documents. Second, and
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more hotly contested in the instant motion, Hagobian argues he is not vicariously liable for any of the
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11cv00240 AJB (KSC)
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alleged wrongdoing because, as a matter of law, a “designated broker” is not personally liable for the
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failure to supervise corporate employees, and Plaintiff has not sufficiently pled the existence of an
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agency relationship.
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This precise issue was considered by the United States Supreme Court on appeal from the Ninth
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Circuit in Meyer v. Holley, 537 U.S. 280 (2003), reconsidered by the Ninth Circuit on remand in Holley
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v. Crank, 400 F.3d 667 (9th Cir. 2005) (Holley II), and recently analyzed in a case similar to the present
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action by the California Court of Appeal in Sandler v. Sanchez (2012) 206 Cal. App. 4th 1431. Based
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on this case law, it is now well established that a designated broker is not personally liable for the acts of
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corporate employees based “solely” on his or her failure to supervise. Sandler, 206 Cal. App. 4th at
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1444-45. However, a designated broker may be held vicariously liable for the misconduct of corporate
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employees in accordance with traditional agency principles. Meyer, 537 U.S. at 291-92. Because this
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issue is central to Hagobian’s present motion, the Court sets forth the governing law regarding real
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estate brokers, followed by the standard for pleading vicarious liability at the motion to dismiss stage.
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1.
Governing Law Regarding Real Estate Brokers
In California both corporations and individuals are required to be licensed to operate as real
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estate brokers.5 See Cal. Bus. & Prof. Code §10006. However, if a corporation holds a real estate
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broker license it must delegate to an officer of the corporation to serve as the “designated broker.” See
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Cal. Bus. & Prof. Code §§ 10158, 10211; see also Cal. Code Regs., tit. 10, § 2740 (“[n]o acts for which
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a real estate license is required may be performed for or in the name of, a corporation when there is no
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officer of the corporation” licensed under § 10211). Under Section 10159.2(a), the designated broker is
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“responsible for the supervision and control of the activities conducted on behalf of the corporation by
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its officers and employees . . . including the supervision of salespersons licensed to the corporation in
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the performance of acts for which a real estate license is required.” Failure to comply with Section
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California defines a real estate broker as a person who, for a compensation or in expectation of
a compensation, assists people in certain statutorily defined licensed activity, including soliciting
borrowers or lenders or performing services for borrowers or lenders in connection with loans secured
by real property. See § 10131, subds.(a), (d).
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10159.2 is grounds for the Real Estate Commission to suspend or revoke the designated broker’s real
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estate license. See Cal. Bus. & Prof. Code §10177(h).6
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In Holley v. Crank, 258 F.3d 1127 (9th Cir. 2001) (Holley I), rev’d, 537 U.S. 280 (2003), the
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Ninth Circuit reversed the decision of the district court, and held that a designated broker may be held
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vicariously liable for an employee’s violations of the Fair Housing Act, based solely on the designated
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broker’s ability to direct or control the conduct of the employee.7 In doing so, the Holley I court relied
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on Section 10159.2, and the purpose and express language of the Fair Housing Act, stating that: “If
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Meyer was indeed an officer of the corporation and the designated officer/broker of Triad Realty at the
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time of the alleged conduct, it is difficult to see how he could be excused from the obligation imposed
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by the [Fair Housing Act] to prohibit discrimination in the housing field.” 258 F.3d 1127, 1135. The
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Supreme Court reversed, finding that nothing in the Fair Housing Act suggested a congressional intent
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to expand traditional principles of vicarious liability. Meyer, 537 U.S. at 286. The Supreme Court held
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that Section 10159.2’s duty to supervise was not—by itself—sufficient to create a principal-agent
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relationship between a designated broker and the corporation’s employees. Id. at 290-91 (“the ‘right to
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control’ is insufficient by itself, under traditional agency principles, to establish a principal/agent or
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employer/employee relationship.”). However, because the Ninth Circuit did not address “whether other
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aspects of the California broker relationship, when added to the ‘right to control,’ would, under
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traditional legal principles and consistent with the ‘general common law of agency,’ establish the
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necessary relationship,” the Supreme Court did not consider what facts were necessary to create an
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agency relationship in this context. Id. at 292.
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Prior to the enactment of Section 10159.2 there was not an explicit duty on behalf of the
designated broker to supervise the corporate broker’s employees. In March 1979, the Department of
Real Estate sponsored legislation to add Sections 10159.2 and 10177(h), which made the designated
broker statutorily responsible for supervision of the corporation’s employees, and subject to discipline
for the breach of such duty. See Historical and Statutory Notes, 4B West’s Ann. Bus. & Prof. Code
(2008 ed.) foll. § 10177 p. 194.
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In the Holley line of cases, an interracial couple sued their corporate real estate broker, Triad,
and Triad’s designated officer, David Meyer, alleging Triad’s real estate salesperson, Grove Crank,
violated racial discrimination prohibitions in the federal Fair Housing Act. The complaint sought to
hold Meyer, who was also the owner and president of Triad, and Triad itself vicariously responsible for
Crank’s violation. The case originated in the Central District of California, 1999 WL 34789281 (C.D.
Cal. Jul. 26, 1999).
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On remand, the Ninth Circuit considered the question left unresolved by the Supreme
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Court—whether, based on all the evidence presented on summary judgment, the designated broker
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(Meyer) could be held liable for the corporate employee’s (Crank) unlawful conduct under traditional
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agency principles. Holley, 400 F.3d 667, 669 (9th Cir. 2004) (Holley II). After considering all the
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evidence, the Holley II court held that an agency relationship was present between Crank and Meyer,
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such that Meyer could be held vicariously liable for the unlawful conduct of Crank. Id. at 673-74. The
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Holley II court based this determination in part on the fact that Meyer intended to turn the real estate
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enterprise over to Crank to pursue an alternate career; Meyer understood his supervisory duty under
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California law and agreed to delegate such duties to Crank; and Crank agreed to carry out this duty on
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behalf of Meyer, subject only to Meyer’s ultimate control. Id.
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The California Court of Appeal recently considered a similar issue in Sandler v. Sanchez,
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wherein the plaintiff attempted to impose vicarious liability on a designated broker by alleging that the
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broker “implicitly” agreed to delegate his duty to supervise to a corporate employee. Sandler v. Sanchez
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(2012) 206 Cal. App. 4th 1431, 1445. Pleading facts similar to those alleged in the Holley line of cases,
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the plaintiff in Sandler argued that because the designated broker had no involvement in the day-to-day
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activities of the corporation, he effectively lent his license to the corporation, which in essence delegated
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his statutory duty to supervise. Id. Accordingly, the plaintiff in Sandler argued that if the alleged
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wrongful conduct was committed by the corporate employee within the scope of the agency, the
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designated broker should be held vicariously liable. Id. The Court of Appeal rejected the plaintiff’s
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analogy, finding that to the extent the Ninth Circuit found an “express agreement” between Meyer and
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Crank, it did so based on the Supreme Court’s finding that “more is needed to create such a unique
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agency relationship between two employees than the [designated broker’s] mere inaction.” Id. (“Even
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if such a relationship could exist, as the United States Supreme Court explained, more is needed to
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create such a unique agency relationship between two employees than the officer's mere inaction.”)
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Based on the above mentioned cases, imposition of liability on a designated broker depends on
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whether or not an agency relationship has been created between the designated broker and the corporate
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employee alleged to have committed the unlawful conduct. Mere inaction on behalf of the designated
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broker, or allegations of an “implicit agreement” is not sufficient. Id.
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2.
Vicarious Liability and Agency Principles
As a general rule, corporate employers may be held vicariously liable for the acts of their agents
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committed within the scope of the agency or employment. See Perez v. Van Groningen & Sons, Inc.
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(1986) 41 Cal.3d 962, 967. However, absent an independent agency relationship, it is the corpora-
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tion—not its owner or officer—that is subject to vicarious liability for the unlawful conduct committed
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by its agents or employees. See Holley, 537 U.S. at 286 (“[a] corporate employee typically acts on
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behalf of the corporation not its owner or officer”); United States Liability Ins. Co. v. Haidinger–Hayes,
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Inc. (1970) 1 Cal.3d 586, 595 (same).
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Under traditional agency principles, a principal may be liable for the acts of his agent if the
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principle consents to the “agent acting on his behalf and subject to his control, and the agent [consents]
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to act for the principal.” Holley II, 400 F.3d at 673; Restatement (2d) of Agency § 1. Accordingly, the
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“ordinary principal/agency relationship demands not only control (or the right to direct or control) but
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also ‘the manifestation of consent by one person to another that the other shall act on his behalf . . . and
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consent by the other so to act.’” Nevis v. Wells Fargo Bank, 2009 WL 1458042 * 4 (N.D. Cal. May 26,
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2009) (citing Holley, 537 U.S. at 286). Thus, in the designated broker context, the designated broker’s
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right to control the employee/salesperson is not enough; there must be a finding of an explicit agreement
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between the principal and the agent. Holley, 537 U.S. at 291. 292; Holley II, 400 F.3d at 670-75.8
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3.
Hagobian May be Vicariously Liable For the Unlawful Conduct of Radtke
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Here, Plaintiff does not allege any actual misconduct on behalf of Hagobian in the solicitation,
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preparation, or execution of Plaintiff’s Loan. Nor does Plaintiff allege that Hagobian was aware of the
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alleged wrongful conduct and ratified such conduct after the fact. Instead Plaintiff argues that Hagobian
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is vicariously liable for the alleged misconduct because: “Mr. Hagobian consented to Mr. Radkte acting
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on Mr. Hagobian’s behalf, and [] Mr. Radkte consented to act for Mr. Hagobian . . .” (TAC ¶ 8.) Thus,
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Plaintiff alleges that because there was an actual agreement between Hagobian and Seamless—that
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Hagobian would review loan documents each week, and Radtke and Noland Nelson would be responsi-
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ble for the day-to-day supervision of the corporations employees, including McDevitt—Hagobian is
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The Supreme Court also noted that an agency relationship could exist under a “piercing the
corporate veil” or “independent contractor” theory. Meyer, 537 U.S. at 291. However, the Court need
not address these as Plaintiff does not raise factual allegations that would support either claim.
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vicariously liable for other Defendants, more specifically Radtke’s, failure to comply with TILA.9
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(Dickenson Decl. ¶3.) Moreover, Plaintiff distinguishes Sandler v. Sanchez (2012) 206 Cal. App. 4th
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1431, a case relied on by Hagobian, stating that where the plaintiff in Sandler alleged an “implicit”
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agreement between the designated broker and the corporate employee, here Plaintiff alleges there was
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an “actual” agreement between Hagobian and Radtke to ensure compliance with TILA.10 (Doc. No. 78,
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p. 11.)
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Therefore, although Hagobian ardently contends that Plaintiff raises the notion of an agency
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relationship between Hagobian and Radtke as a “sham” to “artfully” plead around the clear bar to
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recovery against Hagobian, the Court finds Plaintiff has sufficiently plead—at this stage in the
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proceeding—an agency relationship between Hagobian and Radtke. Seneris v. Haas (1955) 45 Cal.2d
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811, 831 (“Unless the evidence is susceptible of but a single inference, the question of agency is one of
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fact for the jury”); Dion LLC v. Infotek Wireless, Inc., No. C07–1431 SBA, 2007 WL 3231738 at *4
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(N.D. Cal. Oct. 30, 2007) (denying motion to dismiss vicarious liability claim where plaintiffs alleged
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agency relationship between parties without additional factual allegations); but compare Hawkins v.
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First Horizon Home Loans, 2010 WL 4823808 (E.D. Cal. Nov. 22, 2010) (“[P]laintiffs do not allege any
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facts to show how Horizon authorized any other defendant to represent and/or bind it. Plaintiffs must
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allege such facts to sufficiently apprise defendants of the nature of the agency relationship.”).
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Accordingly, even though Hagobian is not directly liable under Cal. Bus. & Prof. Code § 10240,
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because Seamless, and not Hagobian was Plaintiff’s broker, Plaintiff’s claim under the UCL, and more
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specifically alleged violations of TILA, may proceed under a theory of vicarious liability.
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C.
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Plaintiff alleges Hagobian violated the UCL by failing to ensure the TILA disclosures
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Unfair Competition Under California Business and Professions Code § 17200
(“TILDS”) provided to Plaintiff were clear and conspicuous. Section 17200, also known as California’s
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Plaintiff must be cognizant however that she has only alleged an explicit agency agreement
between Radtke and Hagobian.
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Hagobian contends there was no such agreement. (Doc. No. 80, p. 9 n. 7.) However, for
purposes of the present motion, the Court must take Plaintiff’s allegations as true. Nevertheless,
Plaintiff must be cognizant that as the Ninth Circuit noted in Holley II, and the Supreme Court noted in
Meyer, special circumstances—beyond the mere right to control—must be present to impose vicarious
liability on a designated broker.
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“Unfair Competition Law,” prohibits “any unlawful, unfair or fraudulent” business practices. “Since
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section 17200 is [written] in the disjunctive, it establishes three separate types of unfair competition.
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The statute prohibits practices that are either ‘unfair’ or ‘unlawful,’ or ‘fraudulent.’ “ Pastoria v.
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Nationwide Ins. (2003) 112 Cal. App. 4th 1490, 1496; see also Cel-Tech Commc’ns, Inc. v. Los Angeles
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Cellular Tel. Co. (1999) 20 Cal. 4th 163, 180. Plaintiff’s alleges Defendants’ conduct was unlawful,
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unfair, and deceptive.11
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1.
“Unlawful” Prong
Plaintiff alleges Hagobian’s conduct is unlawful because it violates TILA and its accompanying
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regulations, codified at 12 C.F.R. § 226.1 et seq. Specifically, Plaintiff alleges Hagobian violated 12
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C.F.R. § 226.19, by failing to provide the requisite notices of right to cancel or clearly and conspicu-
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ously disclose the certainty of negative amortization and its effect on the payment cap. Although
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Plaintiff does not set forth whether she is seeking rescission or damages under TILA, because the
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Property was sold at a foreclosure sale in 2009, rescission is no longer available.12 Therefore, the Court
14
infers Plaintiff seeks damages pursuant to § 1640(a), and violation of, among other TILA provisions, 12
15
C.F.R. § 226.19(b)(2)(vii), which regulates disclosure requirements relating to negative amortization
16
and explanation of interest rate or payment limitations.13
17
TILA was enacted by Congress to “avoid the uninformed use of credit.” 15 U.S.C. § 1601.
18
Through TILA, Congress “sought to protect consumers’ choice through full disclosure and to guard
19
against the divergent, and at times, fraudulent practices stemming from uninformed use of credit.” King
20
11
21
22
Plaintiff’s allegations under the UCL allege wrongful conduct against Defendants Seamless,
McDevitt, Radtke, Premiere Capital, Venegas, and Hagobian. Allegations against Hagobian only
concern violation of TILA.
12
23
24
25
See 15 U.S.C. § 1635(f) (“An obligor’s right of rescission shall expire three years after the date
of consummation of the transaction or upon the sale of the property, whichever occurs first . . .”);
Jacobson v. Balboa Arms Drive Trust No. 5402 HSBC Fin. Tr., No. 10–CV–2195–JM (RBB), 2011 WL
3328487 *6 (S.D. Cal. Aug. 1, 2011) (“any right of rescission under TILA is terminated upon
foreclosure sale of the property”).
13
26
27
28
The Court’s prior order dismissing Plaintiff’s SAC instructed Plaintiff to allege “which
specific section or sections [of TILA] were allegedly violated.” (Doc. No. 73, p. 13:22-24) Although
Plaintiff’s TAC did not clearly allege which specific section of TILA was violated, she did provide a
description of the alleged wrongful conduct and provided the Court and Defendant with the
implementing regulation she believed was violated. Therefore, even though Defendant’s Reply points
out that TILA has 77 sections and C.F.R. § 226.19 has 31 subparts, in an abundance of caution, and to
ensure this case is resolved on its merits, the Court finds Plaintiff’s allegations sufficient.
11
11cv00240 AJB (KSC)
1
v. California, 784 F.2d 910, 915 (9th Cir. 1986). In order to effectuate this purpose, TILA “has been
2
liberally construed” in the Ninth Circuit. Jackson v. Grant, 890 F.2d 118, 120 (9th Cir. 1989) (citing
3
Eby v. Reb Realty, Inc., 495 F.2d 646, 650 (9th Cir. 1974)). Even “technical or minor violations” of
4
TILA impose liability on the creditor. Id. (quoting Semar v. Platte Valley Fed. Sav. & Loan Ass’n, 791
5
F.2d 699, 704 (9th Cir.1986)) (finding that TILA and its implementing regulations, must be “absolutely
6
complied with and strictly enforced”). Regulation Z of the Federal Reserve Board of Governors,
7
codified at 12 C.F.R. § 226.1 et seq., implements TILA and imposes specific disclosure requirements on
8
creditors in connection with certain loans. As applicable to this case, Regulation Z requires that the
9
possibility of negative amortization must be clearly disclosed to the borrower, and that no disclosure
10
may cause another disclosure to be obscured or made ambiguous. See 12 C.F.R. Pt. 226, Supp. I, ¶
11
17(a)(1)–1.
12
Plaintiff claims Hagobian violated 12 C.F.R. § 226.19—which imposes specific disclosure
13
requirements in connection with variable rate mortgages—by failing to clearly and conspicuously
14
disclose: (1) that negative amortization was certain to occur; and (2) the effect of the payment cap.
15
(TAC ¶ 56.) Subsection 226.19(b)(2)(vii) requires lenders to disclose “any rules relating to changes in
16
the index, interest rate, payment amount, and outstanding loan balance including, for example, an
17
explanation of interest rate or payment limitations, negative amortization, and interest rate carryover.”
18
The Official Staff Commentary to this subsection elaborates on the requirement with respect to negative
19
amortization:
20
21
22
23
Negative amortization and interest rate carryover. A creditor must disclose, where
applicable, the possibility of negative amortization. For example, the disclosure might
state, “If any of your payments is not sufficient to cover the interest due, the difference
will be added to your loan amount.” . . . If a consumer is given the option to cap monthly
payments that may result in negative amortization, the creditor must fully disclose the
rules relating to the option, including the effects of exercising the option (such as
negative amortization will occur and the principal loan balance will increase) . . .
24
C.F.R. Pt. 226.19(b)(2)(vii)(2). Many courts in the Ninth Circuit have interpreted this to mean that a
25
borrower states a claim for violation of TILA, based on, among other deficiencies in related disclosures,
26
the failure of the lender to clearly state that making payments pursuant to the TILDS payment schedule
27
28
12
11cv00240 AJB (KSC)
1
will result in negative amortization.14 Accordingly, where disclosures framed negative amortization as
2
merely a possibility—and were literally accurate—the failure to state that paying less than the full
3
amount due under the Note would result in negative amortization, violates TILA. Velazquez v. GMAC
4
Mortgage Corp., 605 F. Supp. 2d 1049, 1067 (C.D. Cal. 2008)
5
Moreover, Section 226 applies equally to all loan documents, including but not limited to, the
6
TILDS and the actual note. This is to ensure consumers are not confused as a result of inconsistent
7
disclosures in various loan documents. See, e.g., Amparan v. Plaza Home Mortgage, Inc., 678 F. Supp.
8
2d 961, 969-70 (N.D. Cal. 2008); Plascencia v. Lending 1st Mortg., No. C 07–4485 CW, 2008 WL
9
1902698, at *4–6 (N.D. Cal. Apr. 28, 2008) (denying motion to dismiss § 226.19 claim predicated on
10
alleged lack of clarity in note agreement with respect to disclosure of APR and possibility of negative
11
amortization); Handy v. Anchor Mortgage Corp., 464 F.3d 760, 764 (7th Cir. 2006) (noting that where a
12
lender provided a borrower with both a correct and an incorrect disclosure, the disclosure was unclear in
13
violation of TILA).
14
Here, the TILDS Plaintiff received and signed on April 10, 2008, represented that the APR was
15
3.376%, describing this figure as the “[t]he cost of your credit as a yearly rate.” (Doc. No. 78; Ex. 2.)
16
The TILDS also stated an amount financed of $525,869.52, with payments in the amount of $2,328.35,
17
starting on July 1, 2008. (Id.) However, the Note signed by Plaintiff on April 25, 2008, represented that
18
“I will pay interest at the yearly rate of 8.000%.” (Id.; Ex. 3.) The Note also stated an amount financed
19
of $510,000.00, with payments in the amount of $2,219.56, starting on June 1, 2008.15 Thus, as
20
acknowledged by Hagobian in his Reply, it is unclear if the TILDS proffered by Plaintiff bears any
21
14
22
23
24
25
26
27
28
See, e.g., Romero v. Countrywide Bank, N.A., 740 F. Supp. 2d 1129, 1132–1133, 1136–1141
(N.D. Cal. 2010); Ralston v. Mortgage Investors Group, Inc., No. C 08–536 JF, 2009 WL 688858,
*1–*2, *5–*6 (N.D. Cal., Mar. 16, 2009); Velazquez v. GMAC Mortgage Corp., 605 F. Supp. 2d 1049,
1053–1056, 1064–1066 (C.D. Cal. 2008); Pham v. T.J. Financial, Inc., No. CV 08–275 ABC, 2008 WL
3485589, *2–*4 (C.D. Cal., Aug. 11, 2008); Plascencia v. Lending 1st Mortgage, No. C 07–4485 CW
2008 WL 1902698, *1–*6 (N.D. Cal., Apr. 28, 2008).
15
Defendant’s Reply objects to the introduction of the TILDS statement and the Note as extrinsic
evidence that may not be considered by the Court on a motion to dismiss. (Doc. No. 80, p. 5:15-22.)
However, certain written instruments attached to pleadings may be considered part of the pleading. See
Fed. R. Civ. P. 10(c). Even if a document is not attached to a complaint, it may be incorporated by
reference into a complaint if the plaintiff refers extensively to the document or the document forms the
basis of the plaintiff's claim. See Van Buskirk v. CNN, 284 F.3d 977, 980 (9th Cir.2002); Barron v.
Reich, 13 F.3d 1370, 1377 (9th Cir.1994). Here, the basis of Plaintiff’s claims concern the alleged TILA
violation, she referred to these documents in the TAC, and attached them to her Opposition.
13
11cv00240 AJB (KSC)
1
relationship to the Note, or whether Plaintiff received an additional TILDS from Wachovia before
2
signing the Note. (Doc. No. 80, p. 6 n. 4.) Accordingly, at this stage in the proceeding, this inconsis-
3
tency renders the disclosure of the actual APR unclear, and substantiates Plaintiff’s factual allegations
4
under TILA.
5
Moreover, Paragraph 3(B) of the Note states: “My initial monthly payment amount was selected
6
by me from a range of initial payment amounts approved by Lender and may not be sufficient to pay the
7
entire amount of interest accruing on the unpaid Principal balance.” (Doc. No. 78; Ex. 3) (emphasis
8
added). Paragraph 3(E) states that: “From time to time my monthly payments may be insufficient to pay
9
the total amount of the monthly interest that is due. If this occurs, the amount of interest that is paid
10
each month, called “Deferred Interest,” will be added to my Principal and will accrue interest at the
11
same rate as the Principal.” Finally, Paragraph 3(D) states that: “my monthly payment may be changed
12
to an amount sufficient to pay the unpaid principal balance together with interest. . .” However,
13
Paragraph 3(D) never sets forth the margin that will be added to the index rate to determine the new
14
interest rate upon the change date. Taken together, this language infers that negative amortization could
15
occur if the minimum payment selected by the lender does not cover the applicable interest, but does not
16
appear to provide the necessary clarity required under case law in this circuit. Accordingly, in addition
17
to the discrepancies noted above between the TILDS and the Note, the Court finds Plaintiff has alleged a
18
plausible cause of action for violation of TILA and 12 C.F.R § 226.19.
19
20
2.
“Unfair” Prong
Second, Plaintiff alleges Defendants’ conduct constitutes an unfair business practice because the
21
deceptive nature of the disclosure documents caused substantial injury that was not outweighed by any
22
benefits to consumers, and the disclosures were designed to be misleading to induce Plaintiff, and other
23
consumers like Plaintiff, to enter into loan transactions. (TAC ¶ 57.) Hagobian alleges Plaintiff’s claim
24
must fail because she does not plead the allegation with particularity, and as a matter of law, Hagobian
25
has no legal duty to make any disclosures to Plaintiff.16 Here, even though California appellate courts
26
27
28
16
Defendant cites to the Court’s prior order dismissing claims one, two, and three, for Elder
Abuse, fraud and deceit, and breach of fiduciary duty, respectively. (Doc. No. 73.) However, the
Court’s order never stated Hagobian did not owe Plaintiff a duty under TILA—with respect to the UCL
claim—and dismissed the other claims based on reasons not associated with Hagobian’s duty to make
14
11cv00240 AJB (KSC)
1
disagree on how to define an “unfair” act or practice in the context of a UCL consumer action, because
2
the Court finds Plaintiff has alleged a violation of TILA, she may be able to prove facts showing that
3
“the harm to the consumer” from Defendants’ conduct outweighed the solicitation’s ‘utility.’ ” Rubio v.
4
Capital One Bank, 613 F.3d 1195, 1205 (9th Cir. 2010) (finding that borrower who alleged a violation
5
of TILA also alleged a violation of the “unfair” prong under either the test currently employed by
6
California courts.) Accordingly, the Court finds Plaintiff has also alleged a violation under the unfair
7
prong.
8
9
3.
“Deceptive/Fraudulent” Prong
Finally, Plaintiff alleges Defendants’ conduct was fraudulent in that the “disclosures were
10
incomplete and deceptive, and that the true facts with respect to Plaintiff’s loan were not disclosed to
11
Plaintiff, so as to induce Plaintiff to fork over $27,000 for a loan she could not afford.” (Id. at ¶ 58.)
12
Plaintiff further alleges that the “public would likely be deceived and were in fact deceived because the
13
disclosures did not explain that negative amortization was certain to incur if only the minimum
14
payments were made.” (Id. at ¶ 59.) Defendant argues Plaintiff’s claim must fail because she has failed
15
to state with particularity what specific conduct Defendant is accused of, how the conduct was
16
deceptive, or how members of the public are likely to be deceived by the alleged conduct.17 The Court
17
does not agree.
18
Similar to allegations under TILA, allegations under the “fraudulent prong” of the UCL are
19
“governed by the reasonable consumer test.” Williams v. Gerber Prods. Co., 552 F.3d 934, 938 (9th
20
Cir. 2008). In order to prevail, a plaintiff must demonstrate that “members of the public are likely to be
21
deceived.” Id. The deception need not be intentional. See In re Tobacco II Cases (2009) 46 Cal. 4th
22
298. As stated above, Plaintiff has set forth sufficient allegations to show that Defendants’ conduct,
23
24
25
disclosures required by law under TILA. Moreover, as stated above, the Court finds Plaintiff has pled
sufficient facts to proceed against Hagobian under a theory of vicarious liability.
17
26
27
28
Defendant further contends that “[i]t is simply beyond comprehension how Rose can take the
position that she never received any disclosures, but at the same time state she was deceived by the
language in the disclosures, then also opine that the public would be deceived by the unidentified
language in the disclosures.” Although the Court agrees with Defendant that Plaintiff’s allegation is
misleading, as Plaintiff attaches a TILDS to her opposition, the Court is willing to infer that Plaintiff
was inferring that she never received a TILDS that identified an interest of 8%, the same interest rate for
the Note.
15
11cv00240 AJB (KSC)
1
including the inconsistent disclosure statements, were misleading, and would be misleading to the
2
reasonable consumer. Accordingly, because of the inconsistencies in the TILDS and the Note, and the
3
equivocal language regarding the possibility of negative amortization, the Court finds Plaintiff has stated
4
a plausible claim under the fraudulent prong.
5
II.
6
Motion For Sanctions Pursuant to Rule 11
Defendant seeks Rule 11 sanctions in the form of dismissing the action as to him with prejudice,
7
or in the alternative, striking the TAC as to him, and awarding his reasonable attorneys’ fees and
8
expenses incurred in defending against the TAC. In response, Plaintiff contends sanctions are not
9
procedurally or substantively warranted, and requests the Court order Defendant and his counsel to
10
11
show cause as to why their conduct has not violated Rule 11.
As stated above, because Plaintiff has sufficiently alleged a non-frivolous claim, the Court finds
12
sanctions unwarranted. Fed. R. Civ. P. 11(b); Warren v. Guelker, 29 F.3d 1386, 1388 (9th Cir. 1994)
13
(Rule 11 sanctions are warranted when a party files a lawsuit or motion that is frivolous, legally
14
unreasonable, without factual foundation, or is otherwise brought for an improper purpose). The Court
15
also declines Plaintiff’s request to issue an order to show cause as to why sanctions should not be
16
imposed against Hagobian and his counsel. Nonetheless, as this case progresses, counsel for both
17
parties are reminded of the importance of professional courtesy, and the benefit of continuing discus-
18
sions to facilitate settlement for the benefit of their clients.
19
20
CONCLUSION
For the reasons stated above, the Court DENIES Defendant Hagobian’s motion to dismiss and
21
DENIES Defendant Hagobian’s motion for Rule 11 sanctions. Defendant Hagobian shall file an answer
22
within thirty (30) days of service of this Order.
23
IT IS SO ORDERED.
24
25
DATED: January 2, 2013
26
27
Hon. Anthony J. Battaglia
U.S. District Judge
28
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11cv00240 AJB (KSC)
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