Westfall v. Mortgage Electronic Registration Systems, Inc. et al

Filing 38

ORDER granting in part and denying in part 26 Motion to Dismiss for Failure to State a Claim. Signed by Judge M. James Lorenz on 9/29/2017. (sjt)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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KATHY WESTFALL,

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Case No.: 3:15-cv-01403-L-NLS
Plaintiff,

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v.

ORDER GRANTING IN PART AND

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MORTGAGE ELECTRONIC

DENYING IN PART DEFENDANTS'

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REGISTRATION SYSTEMS, INC. et al.,

MOTION TO DISMISS

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Defendants.

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Pending before the Court in this mortgage foreclosure action is a motion to dismiss the

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first amended complaint ("FAC") pursuant to Federal Rule of Civil Procedure 12(b)(6),

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filed by Defendant Bank of America, N.A. (“Bank of America”). Defendants Nationstar

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Mortgage Servicing (“Nationstar”), Mortgage Electronic Registration Systems, Inc.

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(“MERS”) and Deutsche Bank National Trust Company (“Deutsche Bank,” collectively

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"Defendants") filed a notice of joinder in Bank of America’s motion. Plaintiff filed an

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opposition and Defendant replied. For the reasons which follow, the motion is granted

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with respect to Plaintiff's seventh cause of action for unjust enrichment and the third

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cause of action for wrongful foreclosure, to the extent Plaintiff seeks damages. The

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motion is denied in all other respects. Plaintiff's request for leave to amend is denied.
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I.

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Plaintiff owns a secondary residence in Carlsbad, California ("Property"). (FAC at

Background

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2.) In June 2006, she refinanced it by signing a deed of trust securing a promissory note

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for $795,000 from Aegis Wholesale Corporation (“Aegis”), the lender ("Deed of Trust"

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and "Note," respectively). (Id. Ex. C.) The Deed of Trust listed Commonwealth Land

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Title (“Commonwealth”) as the trustee, and MERS as the beneficiary, solely as nominee

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for the lender Aegis. (Id.) Plaintiff alleges that unbeknownst to her, Aegis was not the

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lender but a loan broker who immediately sold the loan to Countrywide Bank, FSB

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("Countrywide") in exchange for a yield spread premium. (FAC at 8-9.)

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On December 19, 2012, an Assignment of Deed of Trust was recorded, transferring

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the Deed of Trust from Aegis to Deutsche Bank "as Trustee for Harborview Mortgage

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Loan Trust ['Trust'] Mortgage Loan Passthrough Certificates, Series 2006-9." (FAC at 13

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& Ex. H.) Plaintiff claims that the assignment was invalid for many reasons. (See FAC

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at 13 & 16-19.) For example, Plaintiff alleges that it was not properly signed by a MERS

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representative and that the Deed of Trust was not endorsed to Greenwich Capital

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Assurance, Inc., the Depositor of the Trust, as required by the Pooling and Servicing

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Agreement, but to Deutsche Bank, the Trustee of the Trust.

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Another Assignment of Deed of Trust was recorded on September 16, 2014,

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whereby Deutsche Bank transferred its interest in the Deed of Trust to Nationstar. (FAC

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at 14 & Ex. J.) Plaintiff alleges that the assignment is void because it is signed by

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Nationstar as attorney-in-fact for Deutsche Bank rather than by Deutsche Bank itself.

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On the same day, a Substitution of Trustee was recorded whereby Nationstar

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substituted Veriprise Processing Solutions LLC ("Veriprise") as the trustee in place of

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Commonwealth. (FAC Ex. K.) Plaintiff claims that it is void, because it is signed by

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Nationstar, which has no interest in the Deed of Trust because the assignment to

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Nationstar was void. (FAC at 14.)

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Finally, a Notice of Default and Election to Sell Under Deed of Trust ("NOD") was
recorded on the same day. (FAC at 13 & Ex. I.) It stated that Plaintiff had to pay
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$185,160.16 to reinstate her loan. Plaintiff was instructed to contact Nationstar directly

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or through Veriprise to determine the payoff amount. Plaintiff claims the NOD is invalid

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because it is allegedly in conflict with the allonge to the Note. (FAC at 14-15; see also

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Exs. C at 25 (Note) & L (allonge).) The allonge was initially filled out to pay to the order

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of Aegis, the lender. Subsequently, it was endorsed by Aegis to pay to the order of

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Countrywide, then by Countrywide to Countrywide Home Loans, Inc., and finally by

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Countrywide Home Loans, Inc. in blank. (FAC Ex. L.) Although the Deed of Trust was

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allegedly assigned to Deutsche Bank (see FAC Ex. H), the allonge does not show that the

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note was assigned as well (cf. id. Ex. L).
Plaintiff argues that the alleged defects in the assignment of the Deed of Trust to

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Deutsche Bank and lack of endorsement of the promissory note to Deutsche Bank caused

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a break in the chain of title which ultimately rendered the NOD invalid. (See FAC at 19-

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20.) Plaintiff reasons that California Civil Code § 2924(a)(1) provides that only the

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trustee, mortgagee or beneficiary under a deed of trust, or any of their authorized agents

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may file an NOD. According to Plaintiff, the alleged defects in the assignments of the

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Deed of Trust and the Note, there is no party who could validly foreclose, and all the

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foreclosure documents are void and fraudulent. (FAC at 20.)
According to the record before the Court, the Property has not yet been foreclosed.

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Plaintiff does not dispute that she is in default.
Faced with impending foreclosure, Plaintiff filed a wrongful foreclosure complaint

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in this Court. The Court has federal question jurisdiction over the federal claims alleged

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in the complaint and supplemental jurisdiction over the state law claims. See 28 U.S.C. §

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1331 & 1367.1

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Bank of America filed a motion to dismiss the initial complaint, which was granted
in part and denied in part. (See doc. no. 18 ("Order").) Plaintiff was granted leave to

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Although Plaintiff alleges that the Court also has diversity jurisdiction under 28
U.S.C. § 1332, she has not alleged sufficient information regarding citizenship of each
party to make that determination. (See FAC at 2-3.)
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amend. (Id.) In her first amended complaint she alleges claims for (1) violations of the

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Real Estate Settlement Procedures Act, 12 U.S.C. §2601 et seq. (“RESPA”), (2)

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violations of the Truth in Lending Act, 15 U.S.C. §1601 et seq. (“TILA”), (3) wrongful

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foreclosure, (4) quiet title, (5) cancellation of instruments, (6) violation of California

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Unfair Competition Law, Cal. Bus. & Profs. Code §17200, et. seq. (“UCL”), and (7)

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unjust enrichment. She requests an order enjoining foreclosure of the Property and

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declaring the she owns the Property free and clear of Defendants' claims or liens,

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disgorgement of Defendants' alleged unjust enrichment, return of all Plaintiff's payments

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with interest, and damages. Pending before the Court is Bank of America's motion to

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dismiss the first amended complaint for failure to state a claim. All remaining

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Defendants have joined in the motion.

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II.

Discussion

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A motion under Rule 12(b)(6) tests the sufficiency of the complaint. Navarro v.

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Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is warranted where the complaint

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lacks a cognizable legal theory. Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d

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1035, 1041(9th Cir. 2010) (internal quotation marks and citation omitted). Alternatively,

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a complaint may be dismissed where it presents a cognizable legal theory, yet fails to

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plead essential facts under that theory. Robertson v. Dean Witter Reynolds, Inc., 749

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F.2d 530, 534 (9th Cir. 1984).

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In reviewing a Rule 12(b)(6) motion, the Court must assume the truth of all factual

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allegations and construe them most favorably to the nonmoving party. Huynh v. Chase

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Manhattan Bank, 465 F.3d 992, 997, 999 n.3 (9th Cir. 2006). However, legal conclusions

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need not be taken as true merely because they are couched as factual allegations. Bell

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Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007); Papasan v. Allain, 478 U.S. 265,

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286 (1986). Similarly, "conclusory allegations of law and unwarranted inferences are not

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sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696,

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699 (9th Cir. 1998).

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A.

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In her first cause of action Plaintiff alleges three RESPA violations: 12 U.S.C. §

RESPA

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2601,2 § 2605 regarding mortgage servicing, and § 2607 prohibiting kickbacks and

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unearned fees. (FAC at 22-23.) Defendants challenge only the alleged violations of §

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2607.

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Initially, Defendants argue that the claim is time barred. RESPA claims for § 2607

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violations are subject to a one year statute of limitations from the date of the occurrence

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of the violation. 12 U.S.C. § 2614. The claim, which relates to the initial purchase of the

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Property in 2006, was previously dismissed as time barred on the face of the complaint.

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(See Order at 4.) Plaintiff was granted leave to amend, to allege facts in support of her

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equitable tolling argument.

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RESPA's statute of limitations is subject to equitable tolling, Merritt v.

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Countrywide Fin. Corp., 759 F.3d 1023 (9th Cir. 2014), in "appropriate circumstances,"

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King v. California, 784 F.2d 910, 915 (9th Cir. 1986). Such circumstances are present

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until the plaintiff can gather the necessary information, if a reasonable plaintiff would not

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have earlier known of the existence of a possible claim; or when the plaintiff is prevented

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from asserting a claim by wrongful conduct on the part of the defendant, including

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fraudulent conduct, so long as the plaintiff is not on inquiry notice; and when

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extraordinary circumstances beyond the plaintiff's control make it impossible to file the

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claim on time. Huynh, 465 F.3d at 1004. In the mortgage lending context, the statute of

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limitations is tolled "until the borrower discovers or had reasonable opportunity to

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discover the fraud or nondisclosures that form the basis." King, 784 F.2d at 916.

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However, the applicability of equitable tolling often depends on matters outside the

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pleadings. Huynh, 465 F.3d at 1003. It is therefore "rarely appropriate to grant a Rule

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12(b)(6) motion to dismiss (where review is limited to the complaint) if equitable tolling

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is at issue." Id. at 1003-04; see also King, 784 F.2d at 915 ("fraudulent concealment and

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Plaintiff cites to § 2601 (Congressional Findings and Purpose). It appears that she
may have intended to reference a different provision.
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equitable tolling involve factual determinations"); Merritt, 759 F.3d at 1040 (on remand,

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the district may consider evidence).

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Plaintiff alleges she had no reason to investigate until she received the NOD,

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which was recorded in September 2014. This is apparent from the record. Defendants

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have presented no reason to infer to the contrary. Plaintiff filed this action less than a

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year after the NOD, on June 25, 2015. This is sufficient at this stage of proceedings to

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deny dismissal based on statute of limitations. This finding is without prejudice to

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Defendants raising this issue again in an appropriate motion or at trial.

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Defendants next argue that the claim should be dismissed because the allegations

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of fraudulent conduct related to the alleged kickbacks do not meet Rule 9(b) specificity

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requirements. Claims “grounded in fraud ... must satisfy the particularity requirement of

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Rule 9(b).” Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003)

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(internal quotation marks and citation omitted); see also Kearns v. Ford Motor Co., 567

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F.3d 1120, 1124-25 (9th Cir. 2009) (Rule 9(b) applies to the extent a claim is based on a

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misrepresentation). To meet the hightened pleading standard for averments of fraud, a

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plaintiff must allege the "who, what, when, where and how of the misconduct charged."

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Vess, 317 F.3d at 1106 (internal quotation marks and citation omitted). Here, Plaintiff

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has sufficiently identified the transaction and the parties to it to meet this requirement and

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enable Defendants to formulate a response. (FAC at 22-23.)

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Finally, Defendants contend that Plaintiff failed to allege pecuniary loss. The

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Court disagrees. Plaintiff expressly alleged that she was charged "excessive, uneraned

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and duplicative fees." (FAC at 22; see also id. at 23 (illegal fees).) To the extent

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Defendants are seeking dismissal of the RESPA claim, their motion is denied.

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B.

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Plaintiff alleges that Bank of America and Aegis failed to make the requisite

TILA

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disclosures and to properly underwrite the loan. (FAC at 25-26.) The statute provides

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for a three-day unconditional right to rescind, or a three-year conditional right to rescind,

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even if the required disclosures were not made at all. 15 U.S.C. § 1635(f); Jesinoski v.
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Countrywide Home Loans, Inc., __ U.S. __; 135 S. Ct. 790 (2015). Plaintiff's loan was

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consummated in June 2006; accordingly, a rescission claim is time barred on the face of

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the complaint. Equitable tolling does not apply to TILA's three-year statute of

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limitations. See Beach v. Ocwen Fed. Bank, 523 U.S. 410, 414-19 (1998).

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Alternatively, TILA provides for damages. 15 U.S.C. § 1640. A claim for

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damages is subject to a one-year statute of limitations from the date of the occurrence.

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Id. § 1640(e). Equitable tolling applies to TILA damages claims in "appropriate

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circumstances." King, 784 F.2d at 914-15.

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Because the loan closed and all related disclosures were made in June 2006, the

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claim for damages is time barred on the face of the complaint. As with the RESPA

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claim, Defendants had previously moved to dismiss it as time barred. Their motion was

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granted with leave to amend. (See Order at 5-6.) In her amended complaint, Plaintiff

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makes the same allegations as in support of tolling the statute with respect to the RESPA

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claim. (See FAC at 26.) She claims she did not discover the violations sooner because

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she had no reason to question the transaction before the NOD. (Id. at 26-27.)

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Defendants' statute of limitations argument is rejected for the same reasons as it was

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rejected in the RESPA context.

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Alternatively, Bank of America contends the TILA claim should be dismissed

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because it was not the creditor on Plaintiff's loan. TILA liability applies to the creditor

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on the original loan and its assignees. 15 U.S.C. §§ 1640(a), 1641. Bank of America was

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not the creditor or assignee. (See FAC at 21.) Plaintiff counters that Bank of America

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was the creditor in its capacity as the sole owner of Countrywide, and that Countrywide

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was the actual lender because unbeknownst to her, Aegis allegedly was not the lender but

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a loan broker who immediately sold the loan to Countrywide in exchange for a yield

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spread premium. (FAC at 8-9.) Defendants do not respond to this successor liability

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argument in their reply. Accordingly, Defendants' motion is denied to the extent they

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seek dismissal of the TILA claim.

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C.

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In her wrongful foreclosure claim, Plaintiff contends that Defendants knowingly

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commenced foreclosure proceedings based on fraudulent documents. (FAC at 27-28.)

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As no foreclosure has yet occurred, Plaintiff has no cause of action for damages, but may

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have a claim for injunctive relief.

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Wrongful Foreclosure

California non-judicial foreclosure statutory scheme does not provide for a

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preemptive suit for damages for wrongful initiation of foreclosure. Robinson v.

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Countrywide Home Loans, Inc., 199 Cal. App. 4th 42, 46 (2011). Plaintiff relies on a

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footnote in Robinson that the borrower who believes that the foreclosing entity lacks

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standing can seek to enjoin the trustee's sale or to set the sale aside. Id. at 46 n.5. The

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foreclosure has not yet occurred. Plaintiff therefore cannot request to set it aside.

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However, to the extent she is seeking to enjoin the sale from proceeding, she potentially

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can state a claim. (See FAC at 44; but see id. at 28 (damages).)

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In the reply brief, Bank of America claims that is not involved in the foreclosure

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process, and that the claim should therefore be dismissed against it, if not against other

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Defendants. As this argument was made for the first time in the reply, it will not be

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considered at this time. Ordinarily, the Court does not entertain substantive arguments

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made for the first time in the reply, as it deprives the opposing party of the opportunity to

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respond. See Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007).

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Reading the complaint with the requisite liberality, Plaintiff states a claim for

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injunctive relief based on wrongful foreclosure. Plaintiff, however, does not state a claim

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for damages.

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D.

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Plaintiff requests the cancellation of the Note, Deed of Trust, NOD and Notice of

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Trustee's Sale. Defendants argue the claim should be dismissed with respect to the Note

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and Deed of Trust because it is time barred, the allegations do not meet the hightened

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pleading requirement of Rule 9(b), and because she has not alleged ability to tender. For

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the reasons which follow, the motion is denied.

Cancellation of Instruments

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Defendants contend that cancellation of the Note and Deed of Trust is time barred.

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In the previous Order, the claim was dismissed with leave to amend to allow Plaintiff to

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allege delayed discovery of Defendants' alleged fraud. (Order at 8.) As was the case

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with the tolling of RESPA's statute of limitations, in the amended complaint Plaintiff

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alleges she was not able to discover her cancellation claim sooner because she had no

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reason to question the transaction until the NOD was recorded. (FAC at 31.) As the

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basis for cancellation, Plaintiff alleges that at the time of the sale Defendants concealed

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from her that Aegis was not truly the lender, but a loan broker who would transfer the

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loan to a financial institution upon closing in exchange for unlawful and excessive fees.

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(Id. at 31 & 8-9.) Plaintiffs' discovery allegations sufficiently identify the time, parties

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involved and the transaction to meet the hightened pleading requirement and enable

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Defendants to respond. Defendants' renewed tender argument is rejected for the reasons

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stated in the Order. (Order at 6-7.) Accordingly, to the extent Defendants move to

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dismiss the cancellation claim, their motion is denied.

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E.

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Plaintiff alleges that as a result of various defects and improprieties in the

Unjust Enrichment

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assignment of the Deed of Trust, including that the assignment of the Note did not follow

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the same path as the Deed of Trust, and that the assignment to Deutsche Bank did not

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conform with the proper procedure for assignment to the mortgage passthrough trust,

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there is no party with an interest in the Note and Deed of Trust with authority to

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foreclose. (FAC at 35-44.) She advances this position although she does not deny that

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she received the loan proceeds and is in default. She claims that Defendants are unjustly

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enriched by collecting mortgage payments and encumbering the title to her Property. (Id.

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at 35.)

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Plaintiff's theory of unjust enrichment by collecting her mortgage payments is

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rejected for the same reasons stated in the Order. (Order at 11.) The alleged improper

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securitization of her loan is not a sufficient basis to assert an unjust enrichment claims

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against Defendants. See Saterbak v. JP Morgan Chase Bank, 245 Cal. App. 4th 808
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(2016). Accordingly, Plaintiff's seventh cause of action for unjust enrichment is

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dismissed. As Plaintiff has already been granted leave to amend, and it does not appear

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that she could allege any further relevant facts, her request for leave to amend is denied.

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III.

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For the foregoing reasons, Defendants' motion is granted as to Plaintiff's seventh

Conclusion

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cause of action for unjust enrichment and as to the third cause of action for wrongful

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foreclosure, to the extent Plaintiff seeks damages. The motion is denied in all other

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respects. Plaintiff's request for leave to amend is denied.

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IT IS SO ORDERED.

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Dated: September 29, 2017

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