Ouch et al v. Federal National Mortgage Association et al

Filing 180

Judge Rya W. Zobel: Memorandum of Decision entered denying 126 Motion to Amend; denying 135 Motion for Sanctions; denying 144 Motion for Sanctions; denying 166 Motion. Judgment may be entered dismissing the action. (Urso, Lisa)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 11-12090-RWZ

HEANG OUCH, et al.,
on behalf of themselves and all others similarly situated
v.
FEDERAL NATIONAL MORTGAGE ASSOCIATION, et al.
MEMORANDUM OF DECISION
January 10, 2013

ZOBEL, D.J.
This putative class action raises a range of claims against a variety of mortgage
originators, loan servicers, trustees of mortgage-backed securitization trusts, and law
firms. Plaintiffs have conceded that their second amended complaint is facially deficient
and should be dismissed. They now seek leave to file a third amended complaint, along
with a later supplement. Defendants oppose plaintiffs’ motions as futile, and three law
firms named as defendants move for sanctions.
I.

Motion for Leave to Amend
The court “should freely grant leave” to amend a complaint “when justice so

requires.” Fed. R. Civ. P. 15(a)(2). However, the court need not grant leave to amend if
amendment would be futile—that is, if the complaint as amended would still fail to state
a viable claim. Abraham v. Woods Hole Oceanographic Inst., 553 F.3d 114, 117 (1st
Cir. 2009).

To state a claim, a complaint must contain a “short and plain statement of the
claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). Plaintiffs
have apparently ignored the word “short”; their second amended complaint reached
170 pages, and the proposed third amended complaint adds 24 pages more. And
despite its bulk, the proposed complaint still fails to state any plausible claim against
any defendant. The motion for leave to amend is therefore denied.
A.

Count 1

The proposed complaint seeks damages in Count 1 from a number of financial
institutions referred to collectively as the “originator defendants.”1 The complaint
alleges that these defendants “fraudulently lower[ed] mortgage underwriting standards
and the financial soundness of their mortgages [sic] products,” and “were negligent in
their marketing of their mortgage products and ignored their duty of care to Plaintiff
borrowers and others.” Docket # 126, Ex. A (“Proposed Compl.”) ¶ 2; see id. at ¶¶ 88489.
Count 1 fails to state a claim for several reasons. First, plaintiffs’ fraud claims fail
to “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). “In
such cases, the pleader usually is expected to specify the who, what, where, and when
of the allegedly false or fraudulent representation.” Alt. Sys. Concepts, Inc. v. Synopsis,
Inc., 374 F.3d 23, 29 (1st Cir. 2004); see McKenna v. Wells Fargo Bank, 693 F.3d 207,
1

These defendants are identified in the proposed complaint as “Independent
National Mortgage Corporation also known as IndyMac Bank, Countrywide, Bank of
America, N.A., EMC Mortgage Corporation, Washington Mutual, Inc., Bear Sterns
Residential Mortgage Corporation, VirtualBank a Division of Lidia Private Bank.”
Docket # 126, Ex. A (“Proposed Compl.”) ¶ 2.
2

218 (1st Cir. 2012). Here, as in McKenna, the proposed complaint “fails to specify the
time or place of these misrepresentations or their real content.” 693 F.3d at 218.
Instead, plaintiffs allege a grand “fraudulent scheme” by the originator defendants,
“based on the systematic fraudulent business practice of originating mortgage loans
using significantly reduced underwriting standards.” Proposed Compl. ¶¶ 84, 86; see id.
¶¶ 83-96. The proposed complaint fails to state who made what alleged
misrepresentations when and where to each named plaintiff. See, e.g., Proposed
Compl. ¶¶ 234-35.2 As such, plaintiffs’ fraud claims fail to meet the heightened pleading
standard of Rule 9(b).
Second, to the extent that plaintiffs raise separate negligence claims against the
originator defendants, the proposed complaint does not plausibly allege any facts
showing a duty of care by these defendants to plaintiffs. See Frappier v. Countrywide
Home Loans, 645 F.3d 51, 58-59 (1st Cir. 2011) (no common law negligence claim
available against a bank that carelessly overextends credit).
Third, plaintiffs’ claims are barred by Massachusetts’ three-year statute of
limitations on tort claims (including fraud claims). See Mass. Gen. Laws ch. 260, § 2A.
All of the allegedly fraudulent mortgages pleaded in the proposed complaint were
originated by March 30, 2007 at the latest, well more than three years before plaintiffs’
complaint was filed. Although plaintiffs allege they were not aware of the fraud until July
2

Plaintiffs have added to their proposed complaint the name of each originator
defendant’s CEO, apparently to satisfy the “who” element of their fraud claims. But the
“who” required by Rule 9(b) is the person who actually made the fraudulent
misrepresentation. Plaintiffs do not claim that any CEO actually made any fraudulent
misrepresentation directly to them. As such, the CEO names are irrelevant.
3

2011, see, e.g., Proposed Compl. ¶ 236, a reasonable person could have discovered
the alleged fraud as soon as each mortgage closed based on the mortgage terms. See
Salois v. Dime Sav. Bank of N.Y., 128 F.3d 20, 26 (1st Cir. 1997); Mantz v. Wells Fargo
Bank, Civil Action No. 09-12010-JLT, 2011 WL 196915, at *6 (D. Mass. Jan. 19, 2011)
(“In the context of mortgage loan transactions, the statute of limitations on fraud claims
begins to run on the date of closing, as potential plaintiffs are on notice for fraud when
they sign loan documents.”).
B.

Count 2

Count 2 seeks damages against the “servicer defendants,” a number of
mortgage servicing entities.3 Plaintiffs claim that these defendants violated the
Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A, by “fraudulently,
deceptively misleading Plaintiffs and others by exploiting homeowners [sic] attempts to
modify their mortgages as part of an overall fraudulent scheme to maximize mortgage
servicing profitability.” Proposed Compl. ¶ 2.
The complaint alleges a vast fraudulent scheme by the servicer defendants to
maladminister the government’s Home Affordable Mortgage Program (HAMP). Plaintiffs
3

The servicer defendants are identified in the proposed complaint as “OneWest
Bank and its consortium of Investors; IMB HoldCo, LLC, IMB Management Holdings,
LP, Dune Capital, LLC, J.C. Flowers & Co., MSD Capital, L.P., Stone Point Capital,
Soros Fund Management, LLC, SSP Offshore, LLC, Paulson & Co. Silar Advisors, LP,
SILAR MCF-1, LLC . . . Bank of America, N.A. & BAC Home Loans Servicing, LP . . .
JPMorgan Chase Bank, Chase Home Finance, LLC & EMC Mortgage Corporation . . .
Wells Fargo Bank, Wachovia & Americas Servicing Company . . . Ocwen Loan
Servicing, LLC, American Home Loan Servicing, Inc., Barclays Capital Real Estate,
Inc., d.b.a., HomEq Servicing, Taylor Bean & Whitaker, MidFirst Bank, Sovereign Bank,
and Capital One.” Proposed Compl. ¶ 2. Plaintiffs subsequently dismissed several of
these defendants voluntarily. See Docket # 176.
4

concede that they have no private right of action under HAMP, but argue that the
servicer defendants “fraudulently misrepresented their intentions . . . to properly
administer and adhere to the guidelines and supplemental directives of the HAMP
program, and made fraudulent misrepresentations to homeowners regarding HAMP.”
Proposed Compl. ¶ 170. This claim fails for at least two reasons. First, plaintiffs have
again failed to plead the alleged fraudulent misrepresentations with the particularity
required by Rule 9(b). In most cases, they have entirely failed to plead the required
“who, what, where, and when,” see Alt. Sys. Concepts, 374 F.3d at 29, and have only
alleged a general policy of fraud and deception. See, e.g., Proposed Compl. ¶ 304.
Even when the proposed complaint provides more details as to what was said and by
whom, see, e.g., id. ¶ 309-17, the allegations do not raise a plausible inference of fraud
as opposed to mere incompetence. Cf. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 55657 (2007) (plaintiff must plead facts suggesting liability, not merely consistent with
liability). Second, the complaint fails to allege that the plaintiffs sent each defendant a
demand letter at least thirty days before filing suit, as required for claims under Mass.
Gen. Laws ch. 93A. See Rodi v. S. New England Sch. of Law, 389 F.3d 5, 19 (2004).
Plaintiffs’ general allegation that “various Plaintiffs have sent many of the Defendants in
this case demands for relief pursuant to G.L. c. 93A,” Proposed Compl. ¶ 901, is not
sufficient to show that this requirement has been fulfilled as to each 93A claim alleged
against each defendant.
C.

Count 3

Count 3 is brought against the servicer defendants named in Count 2, and also
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against a group identified as the “trustee defendants”: the Federal National Mortgage
Association (“Fannie Mae”), certain financial institutions that organized mortgagebacked securitization trusts, and law firms that represented those financial institutions
in foreclosure proceedings.4 Plaintiffs allege in Count 3 that although they admittedly
stopped making loan payments, their loans were never in default, and so the
subsequent foreclosures were wrongful. Understanding plaintiffs’ theory—and its
obvious flaw—requires some background on the mortgage industry.
As alleged in the proposed complaint, plaintiffs’ mortgages were collected into
large pools held by trusts. The plaintiffs did not make loan payments directly to these
trusts; instead, they made payments to their loan servicers, who in turn made payments
to the trusts. The relationship between the loan servicers and the trusts was governed
by separate contracts known as pooling and servicing agreements (PSAs), to which
plaintiffs were not parties. The PSAs required the loan servicers to make advance
payments to the trusts even if they had not yet collected payment from the borrowers.5
Plaintiffs’ theory is that these advance payments by the servicers were made “on behalf
of” plaintiffs (the borrowers), satisfying plaintiffs’ mortgage obligations even when
plaintiffs made no payments on their loans.

4

The proposed complaint identifies the trustee defendants as “Federal National
Mortgage Association, a.k.a. FNMA and/or Fannie Mae, in its capacity as Trustee for
various, as yet identified [sic] FNMA Trusts, Deutsche Bank National Trust Co., Wells
Fargo Bank, N.A., U.S. Bank, N.A., MidFirst Bank, Doonan, Graves & Longoria, LLC,
Orlans Moran, PLLC, Ablitt Scofield, and Harmon Law, P.C.” Proposed Compl. ¶ 2.
5

For Fannie Mae loans, the servicers submit advance payments to Fannie Mae,
which in turn as “master servicer” makes up any remaining shortfall to the trust
certificate holders.
6

The problem with plaintiffs’ theory is that the servicers’ advance payments were
not made on behalf of plaintiffs. Instead, these payments are made pursuant to
separate contractual obligations between the servicers and the trusts. The PSAs
explicitly contemplate that the servicers’ advance payments are not made on behalf of
the borrowers, and that the borrowers may be in default despite these advance
payments. See, e.g., Docket # 22 (“Fannie Mae Trust Agreement”) § 6.1(2)(a)-(b)
(distinguishing between payments “on behalf of Borrowers” and servicers’ advance
payments); id. § 5.1(4)(c) (borrowers are not third-party beneficiaries of servicing
contracts); id. § 5.1(3)(b)(ix) (servicer is responsible for foreclosing on defaulted loans);
id. § 5.11(1) (providing procedures for foreclosure upon default); Docket # 87, Ex. 1
(“Greenpoint PSA”) §§ 3.01, 3.13, 6.05 (contemplating default despite servicer advance
payments).6 As such, plaintiffs’ theory fails. See Casault v. Fed. Nat’l Mortg. Ass’n, CV
11-10520-DOC(RNBx), slip op. at 26-28 (C.D. Cal. Nov. 26, 2012) (considering the
same legal theory and reaching the same conclusion).
Furthermore, the servicers’ advance payments would only be considered to be
“on behalf of” the plaintiffs if the servicers actually intended to extinguish the plaintiffs’
repayment obligations. See 6A Anderson U.C.C. § 3-603:89 (West 2012); 60 Am. Jur.
2d Payment § 1 (West 2012). The proposed complaint gives no plausible reason to
believe the servicers held that intent.
6

The Fannie Mae Trust Agreement is incorporated into the proposed complaint
by reference as Exhibit 11. The Greenpoint PSA is a PSA of the type referred to in the
proposed complaint, whose terms are central to plaintiffs’ claims; it was submitted by
the trustee defendants in their request for judicial notice, and plaintiffs have not
challenged its authenticity. These documents can therefore be considered on a motion
to dismiss. Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993).
7

Plaintiffs concede they stopped making payments on their loans. The servicers’
advance payments did not satisfy plaintiffs’ repayment obligations; plaintiffs were
therefore in default. The foreclosures thus did not violate Mass. Gen. Laws ch. 106, §§
3-602 and -603, and plaintiffs’ claims in Count 3 collapse.
Count 3 also apparently asserts a common-law negligence claim. That claim
fails because neither a lender nor a loan servicer owes a common-law duty of care to a
borrower. Young v. Wells Fargo Bank, Civil Action No. 11-10757-LTS, 2012 WL
734187, at *4 (D. Mass. Mar. 7, 2012); see Frappier, 645 F.3d at 58-59. Nor do the law
firm defendants named in Count 3 owe a duty of care to their clients’ adversaries.
Manson v. GMAC Mortg., 283 F.R.D. 30, 42-43 (D. Mass. 2012); Lamare v. Basbanes,
418 Mass. 274 (1994).
D.

Other Issues

Defendants’ various motions raise several other flaws in the proposed complaint.
Because the reasons described above are sufficient to require that leave to amend be
denied, I do not address defendants’ other arguments here.
II.

Motion for Leave to Supplement
Plaintiffs have also filed a motion for leave to supplement their third amended

complaint with further allegations derived from a separate qui tam lawsuit against Bank
of America, N.A. Those further allegations do nothing to solve the problems identified
above. Therefore, the motion for leave to supplement is also denied as futile.
III.

Motions for Sanctions
Defendants Harmon Law Offices, PC, Ablitt Scofield, PC, and Doonan, Graves &
8

Longoria, LLC, three law firms named as defendants in Count 3, have moved for
sanctions against plaintiffs’ counsel. Their frustration is understandable, given the
excessive length of the complaint and its implausible allegations. Although the decision
is a close one, I am not convinced that sanctions are required. See United States v.
Figueroa-Arenas, 292 F.3d 276, 279 (1st Cir. 2002) (“[A] judge should resort to
[sanctions] only when reasonably necessary—and then with due circumspection.”) The
motions for sanctions will therefore be denied.
I note, however, that plaintiffs’ counsel in this case is also counsel of record in
three other related cases pending before me. The complaints in these pending cases
appear to be based on allegations and on legal theories similar to the ones found
deficient here. I urge plaintiffs’ counsel to review those cases closely and to ensure that
he is not pressing any claims foreclosed by this opinion.
IV.

Conclusion
Plaintiffs first filed their complaint more than a year ago. As originally submitted,

it covered more than 100 pages, with 500 numbered paragraphs. By the time plaintiffs
had amended it twice, it had grown to 170 pages and 824 numbered paragraphs.
Plaintiffs then conceded that they had failed to state any cognizable claim in those 170
pages. Now they seek leave to amend in order to enter a third amended complaint,
filling 194 pages and a full 923 paragraphs. As described above, the third amended
complaint still fails to state any claim, and so leave to amend must be denied.
Plaintiffs have been unable to plead any viable claim despite their extensive and
repeated efforts. Their continued failure makes it abundantly clear that further attempts
9

at amendment would be equally fruitless.
Plaintiffs’ motion for leave to amend (Docket # 126) and for leave to supplement
(Docket # 166) are DENIED. Defendants’ motions for sanctions (Docket ## 135, 144)
are also DENIED. Judgment may be entered dismissing the action.

January 10, 2013

/s/Rya W. Zobel

DATE

RYA W. ZOBEL
UNITED STATES DISTRICT JUDGE

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