Schneider et al v. CitiMortgage, Inc. et al
Filing
20
MEMORANDUM AND ORDER granting in part and denying in part 7 Motion to Dismiss; denying 19 Motion for Oral Argument. See order for details. Signed by U.S. District Senior Judge Sam A. Crow on 1/21/2014. (mb)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
RANDALL A. SCHNEIDER
and AMY L. SCHNEIDER
Plaintiffs,
v.
No. 13-4094-SAC
CITIBANK, NA,
CITIGROUP, INC., and
PRIMERICA FINANCIAL SERVICES
HOME MORTGAGES, INC.
Defendants.
MEMORANDUM AND ORDER
This case, removed from state court on the basis of diversity and
federal question jurisdiction, comes before the court on Defendants’ motion
to dismiss for failure to state a claim pursuant to Fed. R. Civ. Pro. 12(b)(6).
In response to the motion, Plaintiffs have “withdrawn” the only two counts
that facially provided federal question jurisdiction: Count II, the Equal Credit
Opportunity Act; and Count III, the Real Estate Settlement Procedures Act,
12 USC § 2601 et seq. Dk. 13, p. 30. The following state law claims remain:
breach of contract, conversion, fraud, and violation of the Kansas Consumer
Protection Act, K.S.A. 50-623 et seq. (deceptive and unconscionable acts).
Because the complaint asserts over $75,000 in damages by the in-state
party, and the notice of removal states the underlying facts supporting the
assertions that the amount in controversy exceeds that jurisdictional amount
and that the parties are diverse, the court exercises diversity jurisdiction
over these claims. See McPhail v. Deere & Co., 529 F.3d 947 (10th Cir.
2008).
I. Standard for Motion to Dismiss
To survive a motion to dismiss, a complaint must have facial
plausibility.
To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to “state a claim for relief that is
plausible on its face.” Id. [Bell Atl. Corp. v. Twombly, 550 U.S. 544,
570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)) at 570. A claim has
facial plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the Defendant is liable
for the misconduct alleged. Id. at 556. The plausibility standard is not
akin to a “probability requirement,” but it asks for more than a sheer
possibility that a Defendant has acted unlawfully. Id. Where a
complaint pleads facts that are “merely consistent with” a Defendant's
liability, it “stops short of the line between possibility and plausibility of
‘entitlement to relief.’ “ Id. at 557.
Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868, 884
(2009). “Threadbare recitals of the elements of a cause of action, supported
by mere conclusory statements, do not suffice.” Id. “[C]ourts should look to
the specific allegations in the complaint to determine whether they plausibly
support a legal claim for relief.” Alvarado v. KOB–TV, L.L.C., 493 F.3d 1210,
1215 n. 2 (10th Cir. 2007). “While the 12(b)(6) standard does not require
that Plaintiff establish a prima facie case in [his] complaint, the elements of
each alleged cause of action help to determine whether Plaintiff has set forth
2
a plausible claim.” Khalik v. United Air Lines, 671 F.3d 1188, 2012 WL
364058, at *3 (10th Cir. Feb. 6, 2012).
“The court's function on a Rule 12(b)(6) motion is not to weigh
potential evidence that the parties might present at trial, but to assess
whether the plaintiff's ... complaint alone is legally sufficient to state a claim
for which relief may be granted.” Miller v. Glanz, 948 F.2d 1562, 1565 (10th
Cir. 1991). The court accepts all well-pled factual allegations as true and
views these allegations in the light most favorable to the nonmoving party.
United States v. Smith, 561 F.3d 1090, 1098 (10th Cir. 2009), cert. denied,
558 U.S. 1148 (2010). The court, however, is not under a duty to accept
legal conclusions as true. Iqbal, 556 U.S. 662. “Thus, mere ‘labels and
conclusions' and ‘formulaic recitation of the elements of a cause of action’
will not suffice.” Khalik, 2012 WL 364058, at *2 (10th Cir. Feb.6, 2012)
(quoting Twombly, 550 U.S. at 555).
In evaluating a Rule 12(b)(6) motion to dismiss, the court is limited to
assessing the legal sufficiency of the allegations contained within the four
corners of the complaint. Archuleta v. Wagner, 523 F.3d 1278, 1281 (10th
Cir. 2008). But in considering the complaint in its entirety, the Court also
examines any documents “incorporated into the complaint by reference,”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct.
2499, 168 L.Ed.2d 179 (2007), and documents attached to the complaint,
3
Rosenfield v. HSBC Bank, USA, 681 F.3d 1172, 1189 (10th Cir. 2012)
(quotations and citations omitted)..
II. Facts
In 2007, Plaintiffs took a residential mortgage loan originated by
Defendant Citicorp Trust Bank, fsb, now known as Citibank, N.A. (“Citicorp”).
Citicorp originated the loan through communications Plaintiffs had with a
representative of Defendant Primerica Financial Services Home Mortgages,
Inc. (“Primerica”). Plaintiffs also chose to participate in a Payment Waiver
Protection Program and an Equity Builder Interest Rate Discount Program.
Plaintiffs allege that Citicorp failed to properly administer the loan,
including overcharging them interest on the loan in violation of the Equity
Builder Interest Rate Discount Program, not properly processing their
request to use the Payment Waiver Protection Program, and overcharging
them. Plaintiffs allege they applied in 2010 to Citicorp for refinancing of the
loan, but were denied despite their good credit and qualifications. But on
August 2, 2010, Plaintiffs obtained refinancing from HomeQuest. In
connection with that closing, Plaintiffs allege Citicorp required them to pay a
prepayment penalty of $829.42 in breach of the terms of the Note, and that
Citicorp otherwise misrepresented the true amount needed to satisfy the
loan, and overcharged them $6.76 as a payoff amount as a condition of
4
releasing its lien on the mortgage. Other facts will be discussed below as
relevant to the issues.
III. HOLA Preemption
Defendants contend that Plaintiffs’ claims concerning the origination,
processing and payoff of their 2007 loan and Plaintiffs’ request for
refinancing are preempted by the Home Owners’ Loan Act, 12 USC § 1461 et
seq. (HOLA). Defendants assert that these claims purport to impose on
Citicorp, a federal savings bank (or its successors,) requirements regarding
the “processing, origination, servicing, sale or purchase of, or investment or
participation in, mortgages.” 12 CFR § 560.2(b)(10). Defendants contend
that the OTS regulations occupy the field of lending regulation for federal
savings associations.
But Defendants show no precedent construing HOLA preemption as
broadly as they do. Instead, precedent consistently illustrates that at most,
HOLA preempts the field of regulatory control over federal savings
associations. See e.g., Fidelity Federal Sav. and Loan Ass'n v. de la Cuesta,
458 U.S. 141, 151, 102 S.Ct. 3014, 3021 (1982) (finding FHLB regulations
have the force and effect of statute and preempt all conflicting state laws);
Home Mortg. Bank v. Ryan, 986 F.2d 372 (10th Cir. 1993) (finding Office of
Thrift Supervision (OTS) regulation requiring approval for thrift to bank
conversion preempted state law); Federal Home Loan Bank Bd., Washington,
5
D.C. v. Empie, 778 F.2d 1447, 1448 (10th Cir. 1985) (finding state statute
prohibiting entities not conducting a banking business under the state
banking laws to use various forms of the word “bank” in advertising was
preempted by federal law).
Plaintiffs’ complaint primarily seeks damages, fees and costs arising
from alleged misrepresentations, and does not seek an injunction or attempt
to impose any regulation upon any Defendant or to effect any ongoing
change in Defendants’ manner of doing business regarding mortgages. In
such cases, preemption is not the norm. See e.g., Watkins v. Wells Fargo
Home Mortg., 631 F.Supp.2d 776, 787-88 (S.D.W.Va. 2008) (finding no
HOLA preemption of fraud claim but finding preemption of claim attacking
the appraisal methodology used by the bank); DeLeon v. Wells Fargo Bank,
N.A., 2011 WL 311376, *7 (N.D.Cal. Jan. 28, 2011) (finding plaintiffs'
intentional misrepresentation claim not preempted by HOLA because it “d[id]
not attempt to impose substantive requirements regarding loan terms,
disclosures, or servicing or processing procedures”); Becker v. Wells Fargo
Bank, N.A., 2011 WL 1103439 (E.D.Cal. Mar. 22, 2011) (finding no HOLA
preemption where the plaintiff “allege[d] that he was promised a
modification even though [the lender] never intended to modify his loan or
seriously consider his application,” because the “plaintiff's fraud claim
6
appears to arise from a more ‘general duty not to misrepresent material
facts,’ and therefore it does not necessarily regulate lending activity.”)
Plaintiffs’ claims relate to Defendants’ issuance, servicing, and refusing
to refinance the loan, “[b]ut the standard for express preemption is more
than “relates to.” See Coffman v. Bank of America, NA, 2010 WL 3069905,
at *6 (S.D.W.Va. 2010) (citing In re Ocwen Loan Servicing, 491 F.3d at
643–44). The claim must “purport[ ] to impose requirements” regarding loan
servicing for express preemption to apply. 12 C.F.R. § 560.2(b).” Dixon v.
Wells Fargo Bank, N.A., 798 F.Supp.2d 336, 357 (D.Mass. 2011) (finding no
HOLA preemption where the borrower did not attack the lender’s underlying
loan servicing policies and practices, but rather sought to hold the lender to
its word, noting “requiring a bank to perform the obligations of its contract in
good faith implicates none of the concerns embodied in HOLA.”) quoting
Bishop v. Ocwen Loan Servicing, LLC., 2010 WL 4115463 at *5 (S.D.W.Va.
2010).
Importantly, the plain language of the regulation Defendants cite
states that the types of claim brought by Plaintiffs (contract and tort claims)
are not preempted by HOLA:
… OTS hereby occupies the entire field of lending regulation for federal
savings associations. OTS intends to give federal savings associations
maximum flexibility to exercise their lending powers in accordance
with a uniform federal scheme of regulation. Accordingly, federal
savings associations may extend credit as authorized under federal
law, including this part, without regard to state laws purporting to
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regulate or otherwise affect their credit activities, except to the extent
provided in paragraph (c) of this section or § 560.110 of this part. For
purposes of this section, “state law” includes any state statute,
regulation, ruling, order or judicial decision.
12 CFR § 560.2(b)(10). The excepted paragraph (c) encompasses the types
of claims Plaintiffs bring here:
(c) State laws that are not preempted. State laws of the following
types are not preempted to the extent that they only incidentally affect
the lending operations of Federal savings associations or are otherwise
consistent with the purposes of paragraph (a) of this section:
(1) Contract and commercial law;
(2) Real property law;
…
(4) Tort law;
Id. Thus the “OTS's assertion of plenary regulatory authority does not
deprive persons harmed by the wrongful acts of savings and loan
associations of their basic state common-law-type remedies.” In re Ocwen
Loan Servicing, 491 F.3d at 643-44 (giving the illustrations of nonpreempted claims of fraud and breach of contract related to mortgage
servicing).
The Court has looked beyond the labels given to Plaintiffs’ claims to
the substance of each claim and determined that enforcement of Plaintiffs’
causes of action will not interfere with or contravene lending, the regulation
of which Congress has committed exclusively to a federal agency. See In re
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Ocwen Loan Servicing, 491 F.3d at 643; Watkins, 631 F.Supp.2d at 782–83.
Accordingly, the Court is not persuaded that HOLA preempts any of Plaintiffs’
remaining claims. Cf Watkins, at *26 (finding no conflict preemption on
fraud claim because “[n]o federal law permits a national bank to
misrepresent to borrowers the nature of its charges.” ).
IV. Breach of Contract
Defendants assert several reasons why Count I, breach of contract,
fails to state a claim for relief.
A. No Contract
First, Defendants contend that the note which was allegedly breached
is not a valid contract between Plaintiffs and Citicorp because Citicorp never
signed that document, citing Demaras v. Smith, 176 Kan. 416 (1954). But
Demaras, in addressing the effect of the lender’s failure to sign the note on
the application of the statute of frauds, stated the court’s view that the
lender’s “acceptance of that instrument made it a contract in writing upon
which suit could be instituted and the same rights maintained as though it
had been signed by him.” 176 Kan. at 421 (citing other Kansas decisions in
support and noting that “the only signatures necessary to the validity of a
promissory note are the makers thereof …”). Here, the note specifically
references “a Mortgage, Deed of Trust, or Security Deed [the “Security
Instrument”], dated the same date as this Note,” which relates to the
9
promises made by the borrower in the Note. Under Kansas law, when two or
more instruments are executed by the same parties at or near the same
time in the course of the same transaction and concern the same subject
matter, they will be read and construed together to determine the intent,
rights and interests of the parties. In re Villa West Associates, 146 F.3d 798,
803 (10th Cir. 1998). Defendants treated the promissory note and its related
documents as a valid contract in seeking to collect mortgage payments from
Plaintiffs. See Dk. 1, Exh. E. This Court shall do no less.
B. No Breach of Good Faith and Fair Dealing
Defendants also assert that Plaintiffs’ claims for breach of good faith
and fair dealing cannot be brought in the absence of a valid contract
between the parties. See Mountain Highlands, LLC v. Hendricks, 616 F.3d
1167, 1171 (10th Cir. 2010). Because Defendants have not shown, as a
matter of law, that Plaintiffs’ action is not based on a valid contract between
the parties, this argument fails.
C. Merger Doctrine
Defendants contend that the merger doctrine applies, so that prior
communications or agreements are merged into the final contract executed
by the parties, and evidence of conflicting oral communications is barred.
Dk. 8, p. 16. But Defendants do not show that the note contains a merger or
integration clause, which gives rise to the presumption that the writing is
10
fully integrated. See Rajala v. Allied Corp, 66 B.R. 582, 594 (Dk. Kan. 1986),
citing J. White & R. Summers, Uniform Commercial Code, § 2-13 (1972).
Instead, the note reflects the parties’ intent to the contrary by specifically
referencing the Mortgage, Deed of Trust, and Security Deed, dated the same
date as the Note, which concern the same subject matter, which are read
and construed together to determine the intent, rights and interests of the
parties. In re Villa West Associates, 146 F.3d 798. Accordingly, Defendants
have not shown that the Kansas doctrine of merger applies to these
documents. See Avien Corp v. First Nat’l Oil, Inc., 32 Kan. App.2d 106, 111
(2003) (noting the importance of the parties’ intent to the doctrine of
merger).
D. Kansas Credit Agreement Statute
Defendants also contend that K.S.A. 16-118(c) bars admission of oral
agreements outside the written contract. That statute, which subjects “credit
agreements” to a rule analogous to the statute of frauds, prohibits actions
on a credit agreement unless the agreement is in writing and is signed by
both the debtor and creditor. See Wells v. State Bank of Kingman, 24
Kan.App.2d 394 (1997). It also requires credit agreements to “contain a
clear, conspicuous and printed notice to the debtor” informing the debtor
that the credit agreement overrides all prior and contemporaneous oral
agreements.
11
But the definition of “credit agreement” expressly excludes promissory
notes, mortgages, security agreements and other specified agreements
which are usually signed only by the debtor. See K.S.A. 16-117(a). The
allegations in this case involve a promissory note and real estate mortgage,
making this statute inapplicable. See In re Bryant Manor, LLC, 434 B.R. 629
(2010).
E. Untimely Claim re: Interest
Defendants additionally contend that even if the Note constitutes a
contract, Plaintiffs’ claim alleging that Defendant(s) overcharged interest is
time-barred by the five-year statute of limitations. Defendants show that a
cause of action for breach of contract accrues when the contract is breached,
that Citicorp allegedly failed to apply the correct interest rate on the loan
beginning on September 17, 2007, when the loan was first consummated,
and that Plaintiffs’ suit was not filed until over five years and six months
thereafter.
Plaintiffs agree that Kansas’ five-year statute of limitations for actions
based on breach of a written contract applies to this claim. Dk. 13, p. 17.
See K.S.A. 60–511(1). But Plaintiffs contend that their breach of contract
claim accrues not on the date they entered the loan agreement, but each
time they made a recurring monthly payment which included the
overcharged interest.
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Kansas law establishes the general rule that a cause of action for a
breach of contract accrues at the time the contract is breached. Holder v.
Kansas Steel Built, Inc., 224 Kan. 406, 410 (1978); Beckman v. Kansas
Dept. of Human Resources, 30 Kan.App.2d 606 (2002). “A cause of action
for breach of contract accrues when a contract is breached by the failure to
do the thing agreed to, irrespective of any knowledge on the part of the
plaintiff or of any actual injury it causes.” Pizel v. Zuspann, 247 Kan. 54
(1990).
But Kansas recognizes an exception for continuing contracts, thus a
breach of an obligation to make payments under a continuing contract
generally accrues at the time each payment becomes due.
As stated previously, the law in Kansas is well-settled that
breach of contract accrues at the time of the alleged breach regardless
of the knowledge of the breach by the plaintiff at the time.
Nevertheless, a continuing contract concept does exist in Kansas
where a party is required to make payments pursuant to a contract.
“Under Kansas law, a cause of action, thus giving rise to a separate
cause of action for each failure to make payment when due.” G.N.
Rupe v. Triton Oil & Gas Corp., 806 F.Supp. 1485, 1498 (D.Kan.1992).
This theory has only been applied where continuing payments are
required. See, e.g., Oakview Treatment Centers of Kansas, Inc. v.
Garrett, 53 F.Supp.2d 1184, 1190 (D.Kan.1999); Beltz, 6 P.3d at 429;
In re Estate of Moe, 240 Kan. 242, 729 P.2d 447, 449 (1986).
Bagby v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 174 F.Supp.2d 1199,
1203 (D.Kan.2001). See Beckman, 30 Kan.App.2d 606 (finding cause of
action for unpaid wages accrued monthly when employer failed to pay
earned wages on the regularly monthly payday); Beltz v. Dings, 27
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Kan.App.2d 507, 512 (2000) (finding “[a] cause of action for usury accrues
with each payment made on a continuing contract.”).
Thus under Kansas law, Plaintiffs’ claims for breach of the
contractually-agreed rate of interest accrued each time Plaintiffs paid the
overcharged interest, not solely at the time the note was executed.
Accordingly, the challenged payments made within the five years
immediately preceding the filing of this action are timely, while those made
earlier are time-barred.
V. Conversion
Count IV of the Complaint alleges that Defendants converted Plaintiffs’
money by charging and failing to return unearned fees.
Under Kansas law, conversion is an unauthorized assumption and
exercise of the right of ownership over goods or personal chattels belonging
to another. Bomhoff v. Nelnet Loan Servs., 279 Kan. 415, 421 (2005)). Thus
an action will not lie for conversion of a mere debt or chose in action.
Temmen v. Kent–Brown Chev. Co., 227 Kan. 45, 50 (1980). Where there is
no obligation to return identical money, but only a relationship of debtor and
creditor, an action for conversion of the funds representing the indebtedness
will not lie against the debtor. Id. Compare Claytor v. Computer Associates
Intern., Inc., 262 F.Supp.2d 1188 (D.Kan. 2003) (finding that a dispute over
wages owed does not state a claim for conversion under Kansas law); with
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Carmichael v. Halstead Nursing Center, Ltd., 237 Kan. 495, 501 (1985)
(holding that a check was specific property that could be converted).
The Kansas Supreme Court has held that where a debtor-creditor
relationship exists between a bank and a depositor, the proper action to
challenge a setoff of funds by the bank is one in contract, rather than
conversion. Moore v. State Bank of Burden, 240 Kan. 382, 387-388 (1986).
(finding no conversion where the bank unilaterally applied to the plaintiff’s
outstanding balance on a car loan funds that Social Security had directly
deposited into plaintiff’s account). There may, however, be a conversion of
funds in a depositor's account if the bank knows the funds are the property
of a third party, Iola State Bank v. Bolan, 235 Kan. 175, Syl. ¶ 8, 679 P.2d
720 (1984)). Here, no showing has been made that the Defendants may
have converted commercial paper or that the challenged funds belonged to a
third party. Instead, Plaintiffs’ claim alleges solely that Defendants
overcharged her. This fails to state a claim for conversion under Kansas law.
VI. Fraud
The complaint alleges fraud in connection with Citicorp’s requiring
Plaintiffs to pay a prepayment penalty of $829.42 in August 2010 when
Plaintiffs refinanced their loan with an unrelated creditor. The alleged false
statement is that “$84,496.36 was due to clear the title to their real
property.” Also, fraud is alleged in Defendants’ overcharging Plaintiffs $6.76
15
as a payoff amount as a condition of releasing its lien on the mortgage in
August of 2010, as was necessary for refinancing.
Defendants’ sole challenge to Plaintiffs’ fraud claim is timeliness.1
Defendants assert that a fraud claim in Kansas must be brought within two
years of discovery of the alleged fraud, see K.S.A. § 60-513(a)(3), that
Plaintiffs are deemed to have discovered such fraud in August of 2010 when
Defendants made the allegedly false statement, and that Plaintiffs allegedly
paid the prepayment penalty and overcharge, rendering Plaintiffs’ action
untimely because it was not filed until over two years later, on May 24,
2013.
Plaintiffs respond that the cause of action for fraud did not accrue until
2011 when the Plaintiffs discovered various overcharges and Defendants
refused to remit payment, revealing Defendants’ “intent for the scheme at
failure to return the funds.” Dk. 13, p. 21. Plaintiffs’ counsel sent Defendants
a certified letter dated May 26, 2011, threatening litigation about how the
2007 loan was administered, about loan refinance issues surrounding broken
promises, and about the pre-payment penalty, and requesting refunds.
Plaintiffs contend that “it was not until there was no response to the May
2011 letter that Defendants displayed any actual intent which continues in
1
The Court does not take any position on whether Plaintiffs’ fraud claim contains the
elements necessary to state a claim for relief, since Defendants have not raised this issue.
16
their failure to return money which is known or should be known by them to
be the rightful property of Schneiders.” Dk. 13, p. 19. See Dk. 1, p. 73; Dk.
13, p. 20.
K.S.A. 60–513(a)(3) provides that an action for relief on the ground of
fraud shall be brought within two years, “but the cause of action shall not be
deemed to have accrued until the fraud is discovered.” The Kansas Supreme
Court has interpreted “discovered” to mean a cause of action for fraud
accrues when the defrauded party possesses actual or constructive notice of
the fraud or when, with reasonable diligence, the fraud could have been
discovered. Miller v. Foulston, Siefkin, Powers & Eberhardt, 246 Kan. 450,
465 (1990). See Gates v. Kansas Farmers' Union Royalty Co., 153 Kan. 459
(1941) (finding “discovery of the fraud” means discovery by person
defrauded of such facts indicating he had been defrauded as would cause a
reasonably prudent person to investigate, and which if investigated with
reasonable diligence would lead to knowledge of the fraud).
Here, by exercising reasonable diligence, the Plaintiffs could have read
their note and discovered in 2007 that it stated, “I may make a full
Prepayment or partial Prepayments without paying a Prepayment charge.”
Dk. 1, Exh. A. Plaintiffs knew or should have known in 2010 when
Defendants required them to make the prepayment charge and other alleged
overpayments that they were damaged by the alleged misrepresentations.
17
Plaintiffs’ purported fraud claim, brought more than two years thereafter, is
thus barred by the two-year statute of limitations.
VII. KCPA Claim
Defendants contend that the acts alleged to support a violation of the
Kansas Consumer Protection Act (KCPA) are outside the scope of that Act.
A. No Consumer Transaction
The KCPA prohibits deceptive or unconscionable acts in connection
with a “consumer transaction.” Defendants contend that no “consumer
transaction” occurred regarding the 2010 refinance because Plaintiffs did not
obtain their desired refinancing with any Defendant. "’Consumer
transaction’" means a sale, lease, assignment or other disposition for value
of property or services within this state (except insurance contracts
regulated under state law) to a consumer; or a solicitation by a supplier with
respect to any of these dispositions.” K.S.A. 50-624(c).
The Court declines to read the Act so restrictively. See Via Christi
Regional Medical Center, Inc. v. Reed, __ Kan. __, 2013 WL 6714017, 16
(2013) (“the KCPA prohibits unconscionable acts and practices—not simply
unconscionable outcomes. K.S.A. 50–627(b) specifically states that an
unconscionable act or practice violates the KCPA “whether it occurs before,
during or after a transaction.”). “[T]he guiding principle to be applied in
interpreting the KCPA is that the act is to be liberally construed in favor of
18
the consumer.” State ex rel. Stephan v. Brotherhood Bank & Trust Co., 8
Kan.App.2d 57 (1982) (citing K.S.A. § 50–623).
Even though Plaintiffs did not obtain refinancing from Defendants in
2010, Defendants’ grant of a home loan mortgage to Plaintiffs from 20072010 is a consumer transaction, and is the subject of Plaintiffs’ claims. The
Kansas Court of Appeals (KCOA) has held that the grant of a home loan
mortgage by a bank to an individual is a “consumer transaction,”
Brotherhood Bank and Trust Co., 8 Kan.App.2d 57, and the Court believes
the Kansas Supreme Court would do the same.
B. One-Time Events
Defendants also contend that the KCPA covers only one-time, singleoccurrence events, not the servicing of a loan taken out months or even
years earlier, citing Queen v. Lynch Jewelers, LLC, 30 Kan. App.2d 1026
(2002) (sale of diamond ring), Porras v. Bell, 18 Kan. App.2d 569 (1993)
(sale of home), and Haag v. Dry Basement, Inc., 11 Kan. App.2d 649 (1987)
(faulty repair of basement). But these cases, while examining single events,
do not establish that only one-time transactions qualify as consumer
transactions under this Act.
C. Mortgage Loan Servicing
Defendants next contend that the KCPA is inapplicable to complaints
about the servicing of a mortgage loan after its origination, so Plaintiffs’
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allegations concerning issuance of allegedly inaccurate billing statements,
inaccurate use of the equity builder program, and charging a prepayment
penalty fail to state a claim. Defendants rely on a statement by the KCOA
that “the provisions of K.S.A. 50-626(b)(8) … make no mention of debt
collection practices or the manner in which a seller might exercise its
remedies.” Cornerstone Homes, LLC v. Skinner, 44 Kan. App.2d 88, 100
(2010). But the specific subsection cited in that case was to only one
example of a deceptive practice, and provides no support for the contention
that the KCPA is inapplicable to all debt collection practices.
Defendants’ assertion is refuted by the Kansas comment to K.S.A. 50627(b), which states that this subsection “forbids unconscionable advertising
techniques, unconscionable contract terms, and unconscionable debt
collection practices.” K.S.A. 50–627, comment 1 (emphasis added). See
State ex rel. Miller v. Midwest Service Bureau of Topeka, Inc., 229 Kan. 322
(1981) (stating, “It is clear that the act does apply to debt collection
activities when engaged in by a creditor or his agent.”; finding independent
debt collection agency falls within definition of a “supplier” so as to be
subject to provisions of Consumer Protection where various circumstances
are met); Cf, In re Kinderknecht, 470 B.R. 149 (D. Kan. 2012) (finding fact
questions precluded summary judgment where Plaintiff alleged that a
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consumer debt settlement service engaged in unconscionable acts violative
of the KCPA).
Similarly, the KCOA has found that the grant of a home loan mortgage
by a bank to an individual is a “consumer transaction” within the meaning of
the KCPA. KSA 50-624(c). Brotherhood Bank and Trust Co., 8 Kan.App.2d
57 (relying on the plain language of the KCPA section defining “consumer
transaction,” coupled with preference for liberal construction of KCPA). And
the Kansas Supreme Court, although not squarely addressing the issue, has
resolved KCPA lender cases on their merits, rather than by finding the KCPA
inapplicable. See e.g., Gonzales v. Associates Financial Service Co. of
Kansas, Inc., 266 Kan. 141 (1998) (finding insufficient facts to establish that
a lender purposefully withheld relevant information or misstated facts with
the intention to deceive the borrower in connection with origination fees
charged on multiple loan refinancings). See also Mortgage Electronic
Registration Systems, Inc. v. Graham, 247 P.3d 223, 231 (2010) (KCOA
finding insufficient facts to show any unconscionable acts by mortgage
lender under KCPA).
Federal courts, too, have recently applied the KCOA to mortgage
transactions, finding that refinancing of a mortgage loan is a “consumer
transaction” subject to the KCPA. See Shane v. CitiMortgage, Inc., 2012 WL
3111730 (D.Kan. 2012) (rejecting the contention that the KCPA does not
21
apply to loan refinancing or other activity done during the servicing of a
loan). But see Bowers v. Mort. Elec. Registration Sys., Inc., No. 10-4141,
2012 WL 4747162, at *16 (D. Kan. Oct. 4, 2012) (finding “financial
communications relating to a mortgage obligation… do not fall within the
scope of the KCPA.”). Having reviewed the Kansas cases cited in Bowers, the
Court finds the rationale in Shane to be better reasoned and more
persuasive than the rationale in Bowers. Accordingly, the Court is not
persuaded that the KCPA is inapplicable to the facts in this case.
D. Untimely Claim
Defendants next assert that the KCPA claim is untimely. They assert
that a three year-statute of limitations applies to this claim, that the claim
accrued when Plaintiffs took out the loan and entered the equity builder and
payment waiver protection programs in September of 2007, and that the
time expired before Plaintiffs filed this case in 2013.
Plaintiffs agree that their KCPA claims are governed by a three-year
statute of limitations, but contend these claims did not accrue until
Defendants engaged in their prohibited practices of demanding prepayment
and collecting unearned money in the summer of 2010, and of refusing to
return unearned funds. The court agrees with Plaintiffs.
Actions under the KCPA are subject to the three–year statute of
limitations found in K.S.A. 60–512(2). Alexander v. Certified Master Builders
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Corp., 268 Kan. 812 (2000). Unlike Kan. Stat. Ann. § 60–513, the threeyear statute does not include a period to discover the claim or to assess the
damages before the limitations period begins to run. Four Seasons
Apartments, Ltd. v. AAA Glass Service, Inc., 37 Kan.App.2d 248 (2007). Nor
does the continuing contract exception apply to non-contractual disputes,
such as those brought under the KCPA. In re Long, 2010 WL 2178547, *3
(Bkrtcy. D. Kan. 2010). “A KCPA claim accrues when the KCPA violation
occurs.” Id., p. 4.
Plaintiffs’ complaint alleges multiple misleading statements upon which
their KCPA claim is based, occurring after they took out the loan and entered
the equity builder and payment waiver protection programs. Although the
complaint does not always specify the date on which such statements or
other acts alleged to violate the KCPA occurred, the context is in conjunction
with Plaintiffs’ refinancing of their loan, which occurred in August of 2010.
Plaintiffs’ KCPA claims accrued on or about that date and Plaintiffs’ suit was
timely brought within three years thereafter.
E. Insufficient Allegations
Defendants also contend that Plaintiffs’ allegations fail to raise a triable
claim that Defendants engaged in any deceptive or unconscionable acts
concerning the payoff amount, the prepayment penalty, the equity builder
and payment waiver programs, or the interest rates. Defendants primarily
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contend that even the allegedly fraudulent acts do not reach the level of
unconscionability because the acts are not alleged to be so outrageous or
unfair as to shock the conscience or offend the sensibilities of the court. In
support of this proposition Defendants cite Adams v. John Deere Co., 13
Kan. App.2d 489, 492 (1989). But that case was not a KCPA case, and
nothing in the KCPA requires that conduct shock the conscience to be
unconscionable. See Shane, 2012 WL 3111730, 6 (finding plaintiff had
sufficiently alleged unconscionable acts by pleading that Defendant made
misleading statements upon which she was likely to rely to her detriment).
Whether an action is unconscionable under the KCPA is a legal
question for the court. Via Christi, 2013 WL 6714017, 16. That
determination rests upon the facts, weighed in the sound discretion of the
court.
The determination of unconscionability, however, ultimately depends
upon the facts in a given case, State ex rel. Stovall v. DVM
Enterprises, Inc., 275 Kan. 243, 249, 62 P.3d 653 (2003). And, to a
great extent, the determination is left to the sound discretion of the
trial court. 275 Kan. at 249, 62 P.3d 653.
Via Christi, at 16. Here, Plaintiffs have sufficiently pleaded unequal
bargaining power, and that Defendant willfully misrepresented material facts
regarding payments during the refinance process, and that those
misrepresentations were likely to mislead consumers. The motion to dismiss
these claims at this early stage shall therefore be denied.
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VIII. Motion for Oral Argument
Plaintiffs have moved for oral argument, but the court finds that oral
argument would not substantially assist in its determination of these
matters, so denies this motion.
IT IS THEREFORE ORDERED that Defendants’ motion to dismiss (Dk.
7) is granted in part and denied in part in accordance with the terms of this
memorandum and order.
IT IS FURTHER ORDERED that Plaintiffs’ motion for oral argument (Dk.
19) is denied.
Dated this 21st day of January 2014, at Topeka, Kansas.
s/Sam A. Crow
Sam A. Crow, U.S. District Senior Judge
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