Encore Bank, N.A. v. Bank Of America, N.A. et al
Filing
42
OPINION AND ORDER GRANTING PARTIAL DISMISSAL AND LEAVE TO AMEND granting 37 Motion to Dismiss. The motion to dismiss specified causes of action is GRANTED, with leave to amend the complaint where permissible as a matter of law. Encore shall file its Second Amended Complaint within 20 days. Because the Court has chosen to dismiss rather than strike the allegations in dispute, the motion to strike is MOOT.(Signed by Judge Melinda Harmon) Parties notified.(htippen, )
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
ENCORE BANK, N.A.,
§
§
Plaintiff,
§
§
VS.
§
§
BANK OF AMERICA, N.A., BAC HOME §
LOAN SERVICING, L.P., AND
§
COUNTRYWIDE HOME LOANS, INC.,
§
§
Defendants.
§
CIVIL ACTION H-11-3552
OPINION AND ORDER GRANTING
PARTIAL DISMISSAL AND LEAVE TO AMEND
Pending before the Court in the above referenced cause,
alleging
Defendants’
failure
to
perform,
under
the
parties’
Mortgage Loan Purchase and Servicing Agreement, proper mortgage
servicing on multiple pools of mortgage loans sold by Defendants to
Plaintiff Encore Bank, N.A. (“Encore”), is a motion to dismiss
under Federal Rule of Civil Procedure 12(b)(6) and a motion to
strike certain portions of Encore’s First Amended Complaint under
Federal Rule of Civil Procedure 12(f)(2)(instrument #37), filed by
Defendants Bank of America, N.A. (“BofA”), for itself and as
successor by merger to BAC Home Loans Servicing, LP (“BAC”),1 and
by
Countrywide
1
Home
Loans,
Inc.
(“Countrywide”)(collectively
BAC is the mortgage loan servicing division of BofA.
-1-
“BofA2“).
Allegations in Encore’s First Amended Complaint
The First Amended Complaint (#35) asserts the following causes
of
action
in
seven
counts:
(1)
equitable
relief–-partial
rescission; (2) termination rights and specific performance; (3)
breach of contract--monetary damages; (4) breach of duty of good
faith and fair dealing; (5) breach of fiduciary duty and punitive
damages; (6) indemnification and attorneys’ fees; and (7) alter
ego/successor liability.
In 1998 Countrywide, arguably the most successful mortgage
lender in the United States, served as the servicer of mortgage
loans and often as the seller of packages of mortgage loans to
investors.
Encore, then known as Guardian Savings and Loan
Association (“Guardian”), a regional savings and loan association
located in Houston, Texas, purchased packages of mortgage loans
from Countrywide, over which Countrywide retained loan servicing
rights and responsibilities in return for compensation in the form
of mortgage loan servicing fees, which over time mounted to more
than $4.7 million.
On November 6, 1998 Countrywide and Guardian executed a
Mortgage Loan Purchase and Servicing Agreement (as amended on March
31, 1999 and February 8, 2001)(“the “Agreement,” filed under seal
2
Effective as of July 1, 2008, the parent company of BofA,
Bank America Corporation, acquired the parent corporation of
Countrywide, Countrywide Financial Corporation.
-2-
as #2 and #32, and governed by California law under § 8.09 of the
Agreement).
Under the Agreement, Countrywide
was to provide a
variety of services for all the mortgage loans contained in the
Agreement:
as to performing loans, the collection of mortgage
payments, property taxes and insurance payments, proper accounting
for such amounts, and proper remittance of principal and interest
to Guardian (now Encore) as owner of the loans; as to default
loans, Countrywide was to enforce the loan obligations, including
collection
efforts,
foreclosure,
properties,
and
the
proper
funds
to
collected
re-sale
accounting
Guardian/Encore.
for
of
the
and
Under
mortgaged
remittance
the
of
Agreement
Countrywide promised to “employ procedures in accordance with the
customary and usual standards of practice of prudent mortgage
servicers.” Countrywide’s specific obligations under the Agreement
are defined in the First Amended Complaint, ¶ 12, pp. 4-6.
In 2007-08, when the financial crisis severely impacted the
residential mortgage industry, Countrywide’s parent, Countrywide
Financial, was purchased and merged into the parent company of
BofA.
BofA assumed Countrywide’s servicing obligations and first
combined them with other service obligations under the operations
of BAC.
Defendants
In July 2011 BAC was merged into BofA.
after
the
2008
transaction
operated
The three
jointly
and
regularly contacted Encore regarding the mortgage loans at issue in
this suit and the loan servicing obligations of the three have been
-3-
integrated, merged, and/or assumed so that each entity is liable
for the obligations of the others by merger or successor liability
or assumption of liability or alter ego or other veil-piercing
theory of liability.
Thus they are jointly and severally liable
for the obligations of Countrywide under the Agreement.
For the
sake of simplifying, the Court henceforth will refer to the parties
by
the
names
defendants
of
will
their
be
successors
referred
to
(BofA
and
collectively
Encore)
as
and
BofA
all
unless
specified otherwise.
In 2009 Encore noted and informed BofA that its default
portfolio had not been and was not being serviced in accordance
with the terms of the Agreement and that the standards of practice
applicable to prudent mortgage loan servicers, including
(1)
collateral documentation deficiencies were not being cured, (2)
standard and customary collection processes were not followed, and
(3) the timing of loss mitigation and foreclosure proceedings was
improperly delayed.
these problems.
Despite being notified, BofA did not cure
Highly concerned, Encore insisted on an audit of
the mortgage loan portfolio, as allowed under the Agreement.
The
audit, which focused on the default and liquidated loans, revealed
systematic failures by BofA to meet its obligations under the
Agreement, including the following: (1) frequent failure to record
Encore’s ownership upon purchase of the mortgage loans and to
inform HUD of the transfer of title as to HUD-related mortgages;
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(2) failure to initiate loss mitigation and work-out procedures,
such as loan modifications, short sales, and deeds-in-lieu; (3)
when such loss mitigation procedures were discussed with the
mortgagor, failure to decide upon adoption of a loss mitigation
approach in an adequate and timely matter; (4) failure to modify
loans in a manner to protect the collateral owned by Encore or in
a manner that allowed mortgagors to know how to deal with BofA in
a mutually effective way, in violation of standards of practice
applicable to prudent mortgage servicers; (5) occasional failure to
obtain approval from Encore for loan modifications; (6) numerous
failures to initiate timely foreclosure proceedings relating to
mortgages owned by Encore; (7) improper placement of a hold on
foreclosures, purportedly due to a Consent Order with the Office of
the Comptroller of Currency (“OCC”), which Encore argues did not
justify or excuse BofA’s failure to perform or prohibit BofA from
taking action on numerous default loans; (8) occasional failure to
maintain
or
provide
its
counsel
with
documentation
that
was
necessary to foreclose timely; (9) failure to properly manage
third-party attorneys responsible for foreclosure proceedings,
resulting in delays and errors, after which BofA transferred the
foreclosure
proceedings
to
new
attorneys,
causing
additional
delays; (10) stoppage of some pending foreclosures just before sale
date
due
to
unapproved
loss
mitigation
reviews
and
allowing
defaulting mortgagors to remain in properties for several years due
-5-
to lack of timely and coherent foreclosure processing by BofA; (11)
on some loans, failure to obtain and remit private mortgage
insurance proceeds to Encore following liquidation of loans that
should have qualified for insurance and failure to inform Encore of
the eventual denial of insurance by the private mortgage insurance
providers; (12) failure to perform required servicing to comply
with the FHA program for government guaranteed loans, resulting in
the placement of “FHA holds” by BofA on Encore’s delinquent
government guaranteed loans; and (13) failure to oversee subservicers during the loss mitigation, modification, foreclosure,
and liquidation processes.
After
the
audit
confirmed
Encore’s
suspicions,
it
hired
counsel, who provided a notice of default and demand under the
Agreement by letter dated January 7, 2011.
BofA’s
defaults
and
demanded
that
the
The letter described
mortgage
loans
be
repurchased, reserving all rights under the Agreement.
BofA, claiming that a prior release provided to it by Encore
in connection with the sale of a small number of loans to a third
party released BofA from all past and future servicing defaults on
the mortgage loans retained by Encore, responded by ceasing to
provide Encore with information on the status of the mortgage loans
that it had previously provided, including the following:
(1)
monthly delinquent loan status reports; (2) current real estate
owned reports; (3) monthly conference calls regarding delinquent
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accounts; and (4) contact with the usual investor representatives.
These actions deprived Encore of the ability and information
required to monitor and manage the mortgage loan assets that it had
invested in and for which it bore financial risk.
BofA made
misrepresentations about whether nonperforming loans were being
serviced by proper foreclosure or otherwise, and it sometimes said
the loans were subject to a hold in the foreclosure proceedings,
but later stated that no hold applied.
Because of these loan
servicing failures, lack of communication, stonewalling, and the
results of the audit, Encore had to file this action on October 23,
2011.
On March 8, 2012 Encore sent BofA a letter (Exhibit B)
containing a 44-page memorandum (Exhibit A) detailing multiple loan
servicing deficiencies by BofA.
The letter invoked a provision of
the Agreement allowing for termination of BofA’s servicing rights
if events of default were not cured within thirty days.
Encore
received no response to the March 8, 2012 letter within the thirtyday cure period.
On April 10, 2012 Encore sent a follow-up letter
(Exhibit C), stating that in light of BofA’s failure to timely
remedy its defaults, Encore was invoking its right to terminate
BofA’s servicing rights under the Agreement.
According to the pleadings, BofA has acknowledged its systemic
servicing failures.
A Consent Decree (#35, Ex. D at pp. 19-22),
dated April 13, 2011, issued by the OCC and consented to by BofA,
-7-
found inter alia that BofA failed to devote sufficient financial,
staffing, and managerial resources to ensure proper administration
of its foreclosure processes; failed to devote adequate oversight,
internal
controls,
policies
and
procedures,
compliance
risk
management and training; and failed to sufficiently oversee outside
counsel and other third party providers handling foreclosurerelated services.
#35 at ¶ 22.
The OCC ordered BofA to perform
comprehensive remedial steps, including an action that would at
minimum address the following : (1) financial resources to develop
and implement an adequate infrastructure to support existing and/or
future
Loss
compliance
Mitigation
with
the
and
Order;
foreclosure
and
(2)
activities
organizational
and
ensure
structure,
managerial resources and staffing to support existing and/or future
Loss Mitigation and foreclosure activities and ensure compliance
with the Order.
#35, OCC Order, Exhibit D.
For its first cause of action, partial rescission, Encore
claims that BofA materially failed to fulfill its contractual
obligations, which deprived Encore of the consideration promised it
under the Agreement and which entitles it to rescission.
It seeks
only “partial” rescission because it does not seek to unwind the
Agreement from its commencement in 1998, but only back to 2007 or
2008 when BofA deprived Encore of the consideration (its material
and essential servicing obligations) supporting the Agreement.
Encore states it will specifically identify the proper date after
-8-
discovery.
California
law
allows
for
rescission
when
the
consideration for a contract has failed in whole or in part.
California Civ. Code § 1689.
Rescission is appropriate because BofA has been collecting
servicing fees for services not performed or performed well below
the standard required under the Agreement.
Rescission is a
feasible remedy because servicing is done on a loan by loan basis
and BofA’s fees are identifiable and severable, being deducted by
BofA from the principal and interest otherwise due to be paid to
Encore as owner of the mortgage loans.
Encore states that it did
not become aware of the pervasive nature of the servicing failures
until approximately 2009 and can only rescind up to four years
prior
to
the
filing
consideration failed.
of
suit,
back
to
the
date
when
the
Encore seeks to return the parties to the
status they would have occupied if BofA had been required at the
time
when
consideration
failed
to
return
to
Encore
the
consideration Encore paid to purchase the loans and the servicing
fees and other sums collected by BofA from Encore, in return for
which Encore would convey and assign the loans back to BofA.
If the Court finds that the original payment for the current
loan portfolios is not capable of determination, Encore requests,
as an alternative, relief that “would in substance return the
parties to their respective positions before BofA’s failures.”
Encore lists types of alternative relief, which does not differ
-9-
substantially from the relief it has requested for rescission.
#35, ¶ 28, pp. 14-15.
Count
2
seeks
termination
rights
performance of § 7.01 of the Agreement.3
under
and
specific
Having provided BofA with
notice of default and notice that it was terminating BofA’s
servicing rights, Encore seeks not only to have BofA terminate and
transfer its servicing rights on all mortgage loans to Encore, but
also to repurchase from Encore the loans that are more than ninety
days delinquent, in litigation, or certain FHA/VA loans.
Encore
claimed it purchased the loans in reliance on BofA’s representation
that it would properly service the loans; the intent of the parties
3
The relevant portion of section 7.01 provides,
In case one or more Event of Default by Countrywide shall occur and
shall not have been remedied, the Purchaser, by notice in writing
to Countrywide may, in addition to whatever rights Purchaser may
have at law or equity to damages, including injunctive relief and
specific performance, terminate all the rights and obligations of
Countrywide under this Agreement and in and to the Mortgage Loans
and the proceeds thereof. On or after the receipt by Countrywide
of such written notice, all authority and power of Countrywide
under this Agreement, whether with respect to the Mortgage Loans
or otherwise, shall pass to and be vested in Purchaser.
Under
written request from Purchaser, Countrywide shall prepare, execute
and deliver, any and all documents and other instruments, placed in
such successor’s possession all Credit Files, and do or accomplish
all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the
transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at Countrywide’s sole expense.
Countrywide agrees to cooperate with Purchaser in effecting the
termination of Countrywide’s responsibilities and rights hereunder,
including the transfer to Purchaser, for administration by it, of
all cash amounts which shall at the time be credited by Countrywide
to the Custodial Account, REO Account or Escrow Account or
thereafter received with respect to the Mortgage Loans.
-10-
was to exchange loan servicing for the purchase of the mortgage
loans.
BofA has frustrated that intent.
Equitable relief is
required to do justice between Encore and BofA.
Encore seeks (1)
specific performance of Section 7.01 of the Agreement; (2) transfer
of all servicing rights on all mortgage loans and REO currently
covered by the Agreement (except that BofA should be required to
repurchase those mortgage loans and REO covered by the Agreement
that (i) are currently over 90 days delinquent on the date of
termination or (ii) are in litigation or (iii) are FHA or VA loans
where Encore is not registered with HUD or VA as the holder of the
loan) and termination of all rights to service or to receive fees
and benefits under the Agreement, without any cost to Encore; (3)
reimbursement ot Encore of all fees it paid to BofA and all costs,
expense of damages incurred by Encore as a result of BofA’s
improper servicing.
Count 3 claims monetary damages for breach of contract.
Encore is entitled to recover, among other damages, its expenses,
as authorized under Cal. Civ. Code § 3300.
In particular it seeks
service fees paid to BofA during the four years prior to filing
suit, amounting to not less than $981,265.77, prejudgment and postjudgment interest, and costs of suit.
Regarding Count 4, breach of duty of good faith and fair
dealing, Encore asserts that BofA failed to keep it apprised of the
real status of BofA’s servicing of the mortgage loans.
-11-
California
law
implies
a
duty
of
good
faith
and
fair
dealing
in
the
performance of every contract, which BofA has breached by engaging
in practices relating to the Agreement that lacked good faith and
fair dealing. Count 4 claims that BofA breached its fiduciary duty
in failing to protect Encore as the beneficiary in connection with
maximizing the value of the mortgage loans and preserving the value
of the loans and underlying collateral.
Encore further alleges
that BofA acted with malice in stonewalling Encore regarding the
status of the servicing, so Encore is entitled to recover punitive
damages.
Regarding Count 5's claim for breach of fiduciary duty and
punitive
damages,
Encore
alleges
that
BofA
undertook
its
obligations to Encore Bank “for the benefit” of Encore, that the
parties agreed that Encore was relying upon the integrity and
ability of BofA to service the mortgage loans properly, with BofA
subject to the duty of a fiduciary, and that BofA was required to
act with the highest degree of prudence and care.
Relating to Count 6 for indemnification and attorneys’ fees,
BofA’s defaults triggered the provisions set forth in sections 3.03
(fees) and 6.01 (indemnification) of the Agreement
Count 7 alleges that in light of their merged mortgage loan
servicing operations, Defendants are now jointly and severally
liable for the obligations of Countrywide under the Agreement.
Standards of Review
-12-
Federal Rule of Civil Procedure 8(a)(2) provides, “A pleading
that states a claim for relief must contain . . . a short and plain
statement of the claim showing that the pleader is entitled to
relief.”
pursuant
When a district court reviews a motion to dismiss
to
Fed.
R.
Civ.
P.
12(b)(6),
it
must
construe
the
complaint in favor of the plaintiff and take all well-pleaded facts
as true. Randall D. Wolcott, MD, PA v. Sebelius, 635 F.3d 757, 763
(5th Cir. 2011), citing Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir.
2009).
“While a complaint attacked by a Rule 12(b)(6) motion to
dismiss does not need detailed factual allegations, . . . a
plaintiff’s
obligation
‘entitle[ment]
to
to
relief’
provide
the
‘grounds’
requires
more
than
of
his
labels
and
conclusions, and a formulaic recitation of the elements of a cause
of action will not do . . . .”
S.
Ct.
1955,
1964-65
Bell Atlantic Corp. v. Twombly, 127
(2007)(citations
omitted).
“Factual
allegations must be enough to raise a right to relief above the
speculative level.”
Federal
Practice
Id. at 1965, citing 5 C. Wright & A. Miller,
and
Procedure
§
1216,
pp.
235-236
(3d
ed.
2004)(“[T]he pleading must contain something more . . . than . . .
a statement of facts that merely creates a suspicion [of] a legally
cognizable right of action”).
“Twombly jettisoned the minimum
notice pleading requirement of Conley v. Gibson, 355 U.S. 41 . . .
(1957)[“a complaint should not be dismissed for failure to state a
-13-
claim unless it appears beyond doubt that the plaintiff can prove
no set of facts in support of his claim which would entitle him to
relief”], and instead required that a complaint allege enough facts
to state a claim that is plausible on its face.”
St. Germain v.
Howard,556 F.3d 261, 263 n.2 (5th Cir. 2009), citing In re Katrina
Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir. 2007)(“To survive
a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough
facts to state a claim to relief that is plausible on its face.’”),
citing Twombly, 127 S. Ct. at 1974).
“‘A claim has facial
plausibility when the pleaded factual content allows the court to
draw the reasonable inference that the defendant is liable for the
misconduct alleged.’”
Montoya v. FedEx Ground Package System,
Inc., 614 F.3d 145, 148 (5th Cir. 2010), quoting Ashcroft v. Iqbal,
129 S. Ct. 1937, 1940 (2009).
Dismissal is appropriate when the
plaintiff fails to allege “‘enough facts to state a claim to relief
that is plausible on its face’” and therefore fails to “‘raise a
right to relief above the speculative level.’”
Montoya, 614 F.3d
at 148, quoting Twombly, 550 U.S. at 555, 570.
“[T]hreadbare
recitals of the elements of a cause of action, supported by mere
conclusory statements do not suffice” under Rule 12(b). Iqbal, 129
S. Ct. at 1949.
Rule 8 ”does not unlock the doors of discovery for
a plaintiff armed with nothing more than conclusions.”
plaintiff
must
plead
specific
allegations, to avoid dismissal.
-14-
facts,
not
merely
Id.
The
conclusory
Collins v. Morgan Stanley Dean
Witter, 224 F.3d 496, 498 (5th Cir. 2000).
As noted, on a Rule 12(b)(6) review, although generally the
court may not look beyond the pleadings, the Court may examine the
complaint, documents attached to the complaint, and documents
attached to the motion to dismiss to which the complaint refers and
which are central to the plaintiff’s claim(s), as well as matters
of public record.
Lone Star Fund V (U.S.), L.P. v. Barclays Bank
PLC, 594 F.3d 383, 387 (5th Cir. 2010), citing Collins, 224 F.3d at
498-99; Cinel v. Connick, 15 F.3d 1338, 1341, 1343 n.6 (5th Cir.
1994).
See also United States ex rel. Willard v. Humana Health
Plan of Tex., Inc., 336 F.3d 375, 379 (5th Cir. 2003)(“the court may
consider . . . matters of which judicial notice may be taken”).
Taking judicial notice of public records directly relevant to the
issue in dispute is proper on a Rule 12(b)(6) review and does not
transform the motion into one for summary judgment.
Stryker Corp., 631 F.3d 777, 780 (5th Cir. 2011).
Funk v.
“A judicially
noticed fact must be one not subject to reasonable dispute in that
it
is
either
(1)
generally
known
within
the
territorial
jurisdiction of the trial court or (2) capable of accurate and
ready determination by resort to sources whose accuracy cannot
reasonably be questioned.”
Fed. R. Evid. 201(b).
Under Federal Rule of Civil Procedure 12(f),
The court may strike from a pleading an insufficient
defense or any redundant, immaterial, impertinent, or
scandalous matter. The court may act:
-15-
(1) on its own; or
(2) on motion made by a party either before responding to
the pleading or, if a response is not allowed, within 21
days after being served with the pleading.
Motions to strike are usually viewed with disfavor and rarely
granted since they seek a drastic remedy and are frequently sought
merely to delay.
1st United Telecom, Inc. v. MCI Communications
Services, Inc., Civ. A. No. 3:10-CV-2255-B, 2011 WL 2292265,*1
(N.D. Tex. June 8, 2011).
Such motions should be denied if there
is any question concerning law or fact.
Id.
“[A] Rule 12(f)
motion to dismiss is proper when the defense is insufficient as a
matter of law.” Kaiser Aluminum & Chemical Sales, Inc. v. Avondale
Shipyards, Inc., 677 F.2d 1045, 1057 (5th Cir. 1982), cert. denied,
459 U.S. 1105 (1983).
The court has considerable discretion
whether to grant a motion to strike.
FDIC v. Niblo, 821 F. Supp.
441, 449 (N.D. Tex. 1993).
Defendants’ Motion to Dismiss and Motion to Strike (#37)
Defendants contend that the First Amended Complaint fails to
cure the fatal defects of the original Complaint and fails to state
a claim upon which relief can be granted as to Encore’s claims for
Equitable Relief-–Rescission (Count 1), Termination Rights and
Equitable Relief (Count 2), Breach of Duty of Good Faith and Fair
Dealing (Count 4), and Breach of Fiduciary Duty and Punitive
Damages (Count 5).
Noting that the financial crisis of 2008 negatively impacted
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the entire economy of the United States, and especially of the
residential mortgage industry, Defendants charge that Encore’s suit
is an attempt to shield itself from the effect of the recession and
to avoid investment risks it assumed when it purchased the mortgage
loans.
By claiming that Defendants breached a servicing duty,
Encore is manufacturing a damage model to place itself in the same
economic position it held 2006, thereby sloughing off losses
suffered because of the residential mortgage meltdown.
Defendants maintain that Encore’s claim that it is entitled to
partially
rescind
the
Agreement
for
failure
of
consideration
because of BofA’s failure to perform its servicing obligations
fails for two reasons:
(1) although Encore claims it is willing
and ready to restore BofA to the status quo, Encore refuses to pay
back the benefits it received; and (2) Encore’s request for
rescission is untimely and barred by the doctrine of laches.
To rescind an agreement, the party seeking rescission must
“[r]estore to the other party everything of value which he has
received from him under the contract or offer to restore the same
upon condition that the other party do likewise.”
§ 1691(b).
party
Cal. Civ. Code
The statute “generally requires that the rescinding
return
any
consideration
received
as
a
condition
rescission before judgment in the rescission action.”
of
Village
Northridge Homeowners Ass’n v. State Farm Fire and Cas. Co., 50
Cal. 4th 913, 922 (2010), 237 P.2d 598, 602 (Cal. 2010); Viterbi v.
-17-
Wasserman, 191 Cal. App. 4th 927, 935 (Cal. App. 4 Dist. 2011)(a
party seeking rescission must restore the other party to status quo
ante).
Encore refuses to tender repayment of interest advances
paid directly by BofA to Encore, escrow advances paid by BofA for
taxes and insurance on properties subject to Encores’s loans, or
corporate advances for expenses paid by BofA in connection with
servicing the loans.
Thus the rescission claim fails.
A party waives its right to rescind an agreement when the
delay substantially prejudices the other party.
1693.
Cal. Civ. Code §
Wilke v. Coinway, Inc., 257 Cal. App.2d 126, 140 (Cal. App.
1 Dist. 1967)(“The requirement is essentially one of freedom from
laches.
facts,
Its application depends on whether, under the particular
the
delay
has
in
any
[internal citations omitted]”).
way
prejudiced
the
defendants.
Encore entered into the Agreement
in 1998 and seeks to rescind it back to 2007 or 2008, just before
the
height
of
the
financial
crisis,
now
that
the
value
and
performance of the loans Encore purchased have suffered from the
economic downturn, the loans are defaulting, and the value of its
collateral is significantly depreciated.
Meanwhile Encore has
accepted the benefits of BofA’s servicing for the past thirteen
years.
Rescission now would be highly prejudicial to BofA.
See
Kornblum v. Arthurs, 154 Cal. 246, 249 (1908)(refusing to rescind
property sale after finding that plaintiff had purchased for
speculative purposes “during a time that the real estate market was
-18-
feverishly active” and only sought to rescind after the value of
the property dropped); McCray v. Title Ins. & Trust Co., 12 Cal.
App. 2d 537, 540 (1936)(where plaintiff waited over two years to
rescind sale of real property during a serious depression, the
court observed, “The value of the lot during said period had
seriously depreciated.
With such facts and others in the record
before us, we hold that the trial court was justified in finding
that plaintiffs had waited too long to rescind, and the right of
action here asserted was barred by laches.”).
Encore’s second claim for Termination Rights and Equitable
Relief, i.e., that BofA terminate and transfer its servicing rights
on all mortgage loans and then repurchase from Encore those loans
that are more than 90 days delinquent, in litigation, or certain
FHA/VA loans, fails because Encore is not entitled to the relief it
seeks under the Agreement’s termination clause.
The Agreement
provides that upon receipt of notice of termination, “all authority
and power of Countrywide under this Agreement, whether with respect
to the Mortgage Loans or otherwise, shall pass to and be vested in
Purchaser.”
#35, Am. Compl., Ex. A at ¶ 7.01(a) at p. 2 of 91.
The Agreement does not contemplate BofA’s reimbursement of the
servicing fees it received from Encore, selective repurchasing of
non-performing loans, payment of “damages” to Encore, or any other
relief requested in ¶¶ 24 and 25 of the Amended Complaint. Instead
Sections 4.09, 5.01, and 5.03 of the Agreement expressly provide
-19-
that
BofA
is
entitled
to
make
advances
of
taxes,
insurance
premiums, principal and interest which were due and unpaid by
borrowers on the Mortgage Loans, and costs and expenses incurred by
BofA in the performance of its servicing obligations on the
properties subject to the Mortgage Loans.
Under Sections 4.05(b)
and (c) of the Agreement, BofA is entitled to reimbursement for
those advances paid by it.
In sum, Encore is not entitled to the
relief it seeks in its second claim for relief.
BofA also maintains that to the extent that Encore contends
that it is entitled to termination due to frustration of intent or
mistake, the claim fails.
A claim based on frustration of intent
only provides an excuse for non-performance of an agreement, not
the re-writing of the contract. Gold v. Salem Lutheran Home Ass’n,
53 Cal. 2d 289, 291 (1959)(describing frustration of intent as an
defense for non-performance because the events which prevented his
performance
were
not
reasonably
foreseeable
at
the
time
of
contracting); PeopleSoft U.S.A., Inc. v. Softek, Inc., 227 F. Supp.
2d 1116, 1119 (N.D. Cal. 2002)(same).
Nor does Encore plead any
facts demonstrating mistake or that the contract does not express
the parties’ intent.
Hess v. Ford Motor Co., 27 Cal. 4th 516, 524
(2002)(holding that the doctrine of mistake cannot be used to
create a new contract between the parties).
allegations
negate
its
claim
of
mistake
Instead, Encore’s
since
the
Agreement
reflects an intent to retain loan servicing in connection with the
-20-
purchase of mortgage loans.
Regarding Encore’s fourth claim for breach of the duty of good
faith and fair dealing based on BofA’s failure to keep Encore
informed
about
status
of
the
mortgage
loans
or
problems
in
servicing the loans, indeed even stonewalling efforts by Encore to
discover these matters, BofA maintains that Encore again fails to
state a claim because an implied covenant of good faith and fair
dealing applies only to the enforcement of the terms of a contract,
and not to expansion of the rights or obligations of the parties.
Guz v. Bechtel National, Inc., 24 Cal. 4th 317, 349-50 (Cal.
2000)(“The covenant of good faith and fair dealing, implied by law
in every contract, exists merely to prevent one contracting party
from unfairly frustrating the other party’s right to receive the
benefits of the agreement actually made . . . .
It cannot impose
substantive duties or limits on the contracting parties beyond
those
incorporated
[emphasis
in
in
the
original]).
specific
“[T]he
terms
covenant
of
is
the
agreement.
implied
as
a
supplement to the express contractual covenants, to prevent a
contracting party from engaging in conduct that frustrates the
other party’s rights to the benefits of the agreement.”
Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 36 (Cal. 1995).
Waller v.
“Absent
that contractual right, however, the implied covenant has nothing
upon which to act as a supplement, and should not be endowed with
an existence independent of its contractual underpinnings.”
-21-
Id.
Encore alleges as the basis for its breach of good faith and fair
dealing claim that some time after January 7, 2011 BofA stopped
sending Encore “(a) monthly delinquent loan status reports; (b)
current real estate owned reports; (c) monthly conference calls
regarding delinquent accounts; and (d) contract with the usual
investor representative.” #35, ¶ 18. Encore argues that while the
Agreement calls for monthly delinquency and REO reports in Sections
5.02(a) (monthly reports) and (b) (miscellaneous reports), it does
not provide for monthly conference calls or contact with the “usual
investor representative.” Thus Encore fails to state a claim based
on the last two matters.
Fifth, Encore’s allegation that BofA breached its fiduciary
duty also fails under Rule 12(b)(6).
The claim rests on the
allegation that BofA undertook its obligations under the Agreement
“for the benefit” of Encore. #35, ¶ 44. “[F]iduciary duties among
loan
participants
depend
upon
the
terms
of
their
contract.”
Southern Pacific Thrift & Loan Assn. v. Savings Assn. Mortgage Co.,
70 Cal. App. 4th 634, 638 (1999), citing First Citizens Fed. Sav.
and Loan v. Worthen Bk., 919 F.2d 510, 513 (9th Cir. 1990).
Agreement
specifically
administration
and
states
servicing
that
BofA
obligations
undertook
as
an
its
The
loan
“independent
contract servicer,” rather than a fiduciary. #2, Agreement § 4.01.
See City of Hope Nat’l Medical Center v. Genentech, Inc., 43 Cal.
4th 375, 389 (2008)(setting aside portion of jury verdict based on
-22-
finding of breach of fiduciary duty where contract to develop,
patent and market a product provided that defendant “was to be an
independent contractor.”).
BofA also moves to strike Encore’s punitive damages claim for
malicious stonewalling under Rule 12(f).
BofA
reiterates that
Encore cannot state a claim for breach of fiduciary duty, its only
tort claim. Furthermore under California law, punitive damages are
available only in an action for the breach of an obligation not
arising from contract.
California Civil Code § 3294(a) provides,
In an action for the breach of an obligation not arising
from contract, where it is proven by clear and convincing
evidence that the defendant has been guilty of
oppression, fraud, or malice, the plaintiff, in addition
to the actual damages, may recover damages for the sake
of example and by way of punishing the defendant.
Here, Encore’s claims of breaches of various obligations arise out
of a contract between the parties, and punitive damages are not
available; that BofA’s conduct was purportedly malicious makes no
difference.
See Cates Construction, Inc. v. Talbot Partners, 21
Cal. 4th 28, 61 (Cal. 1999)(“in the absence of an independent tort,
punitive damages may not be awarded for breach of contract ‘even
where defendant’s conduct in breaching the contract was willful,
fraudulent or malicious.’”), quoting Applied Equipment Corp. v.
Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 516 (Cal. 1994).
BofA also requests the Court to strike Encore’s requests in
the portions of the Complaint (#35) indicated below because they
are irrelevant to the subject matter of the litigation, immaterial
-23-
or impertinent. Sections 4.09, 5.01 and 5.03 of the Agreement (#2)
expressly provide that BofA is entitled to make advances of taxes,
insurance premiums, principal and interest which were due and
unpaid by borrowers on the Mortgage Loans, and costs and expenses
incurred by BofA in the performance of its servicing obligations on
the properties subject to the Mortgage Loans.
The Agreement
further provides in Sections 4.05(b) and 4.05(c) that BofA is
entitled to reimbursement for advances paid by BofA. Therefore the
Court should strike the following requests:
(1) (¶ 28(a))
“[A]ll existing mortgage loans and REO
covered by the Agreement are to be repurchased by BofA at
the legal principal balance thereof as of the effective
date of the rescission, without deduction for the bid or
credit amount received on REO through foreclosure or
equivalent process”’;
(2) (¶ 28(a)) all “REO covered by the Agreement are to be
repurchased by B of A at the legal principal balance [of
the mortgage loan] as of the effective date of the
rescission, without deduction for the bid or credit
amount received on REO through foreclosure or equivalent
process”;
(3) (¶ 28(b)(ii)) “[T]he interest amount of such P&I
Advances be retained by Encore Bank”;
(4) (¶ 28(b)(iv)) “[A]ll ‘Escrow Advances (which Escrow
-24-
Advances are made by BofA for tax, insurance and other
matters related to mortgage loans and REO) be borne by,
and not be reimbursed to, BofA”;
(5) (¶ 28(c)) “That all servicing fees paid by Encore
Bank
to
BofA
on
default
loans
more
than
90
days
delinquent (at the time of rescission) and paid on REO be
reimbursed by BofA to Encore Bank”;
(5) (¶ 33(a)) That BofA transfer servicing rights on all
mortgage loans and REO “without cost to Encore Bank
(including
any
reimbursement
servicing
of
P&I
rights
Advances,
release
Escrow
fees
or
Advances
and
Corporate Advances . . .”;
(6) (§ 33(b)) “BofA should be required to repurchase the
mortgage loans and REO covered by the Agreement that (i)
are currently over 90 days delinquent (on the date of
termination) or (ii) are in litigation, or (iii) are FHA
or VA loans where Encore Bank is not registered with HUD
or VA as the holder of the loan.
The purchase price
shall be the legal principal balance thereof as of the
effective date of the repurchase (and as to both mortgage
loans and REO, with appropriate credit to BofA for the
principal
portion
of
P&I
Advances,
but
without
reimbursement for the interest portion of P&I Advances or
for the Escrow and Corporate Advances); and that Encore
-25-
Bank
receive
interest
on
the
legal
balance
of
the
mortgage loans and REO from the date, if it has occurred,
when Encore Bank stopped receiving interest advances
thereon through the effective date of the repurchase at
prejudgment rate of interest”;
(7) (¶ 34) “that all servicing fees paid by Encore Bank
to BofA on default loans and REO be reimbursed by BofA to
Encore Bank”; and
(8) (¶ 47) requesting damages.
Encore’s Response (#38)
Pointing out that BofA moves to dismiss only four of Encore’s
claims (Count 1 for Equitable Relief--Partial Rescission, Count 2
for Termination Rights and Specific Performance, Count 4 for Breach
of Duty of Good Faith and Fair Dealing, and Count 5 for Breach of
Fiduciary Duty and Punitive Damages), Encore argues that the motion
should be denied because BofA is wrongly using Rule 12(b)(6) in
lieu of summary judgment, without any evidence or legal basis and
often based on affirmative defenses not yet pleaded, insufficient
to meet BofA’s heavy burden of proof for dismissal.4
Encore also
contends that in discussing Count 2, BofA erroneously relies on
language in the Original Complaint which has been superseded by the
First Amended Complaint.
4
This Court reviews the Amended Complaint strictly under Rule
12(b)(6) standards, stated earlier in this Opinion and Order.
-26-
Regarding Count 1, Encore asserts that BofA now argues that
the restoration of the consideration is a condition precedent to
seeking a claim of rescission, but fails to cite legal authority
for its assertion5; instead it cites a case that actually holds
that restoration of the consideration is only needed before a
judgment can be entered on a rescission claim. Village Northridge,
50 Cal. 4th at 921-22.
California Civil Code § 1693 states, “A
party who has received benefits by reason of a contract that is
subject to rescission and who in an action or proceeding seeks
relief based upon rescission shall not be denied relief because of
a delay in restoring or in tendering restoration of such benefits
before
judgment
unless
such
delay
has
been
substantially
prejudicial to the other party; but the court may make a tender of
restoration a condition of its judgment.”
Id. at 929.
Similarly
California Civil Code § 16916 also implies that actual tender of
consideration is not required before a pleading or a judgment.
It
states that a pleading for rescission is deemed to be an offer to
5
BofA replies that Encore ignores its citation to Viterbi,
191 Cal. App. 4th at 935 (a party seeking rescission must restore
the other party to status quo ante.).
6
Section 1691(b) states in relevant part,
When notice of rescission has not otherwise been given or
an offer to restore the benefits received under the
contract has not otherwise been made, the service of a
pleading in an action or proceeding that seeks relief
based on rescission shall be deemed to be such notice or
offer or both.
-27-
restore
consideration;
logically
an
offer
of
restoration
different from a prior tender of consideration.
is
BofA seeks a
disguised summary judgment based on laches, which is a fact-based
defense, as BofA concedes. Encore complains that BofA conclusorily
asserts,
with
no
evidence
such
as
affidavits
or
deposition
testimony, that rescission would be highly prejudicial to it, and
any evidence based on facts outside of the complaint would be
improper for Rule 12(b)(6) consideration.7
Such an issue cannot be
determined on a Rule 12(b)(6) motion to dismiss. Wilke v. Coinway,
Inc., 257 Cal. App. 2d at 1140 (“[Laches’] application depends on
whether, under the particular facts, the delay has in any way
prejudiced the defendants.”). Second, BofA’s argument is erroneous
also
because
the
pleader
of
a
complaint
is
not
required
to
anticipate an affirmative defense such as laches and plead facts
that negate that defense.
Xechem, Inc. v. Bristol-Myers Squibb
Co., 372 F.3d 899, 901 (7th Cir. 2004)(failure to “plead around” a
likely affirmative defense is typically not a proper basis for
dismissal”).
BofA now urges that Encore’s Count 2 termination claim should
fail because Encore is not entitled to the relief it seeks, but
BofA ignores Encore’s new pleading and cites to the Original
Complaint. See First Amended Complaint at ¶ 32, citing termination
7
This Court notes that to avoid dismissal under Rule 12(b)(6)
Encore does not need documentary evidence, but it must allege facts
that would support its claim of substantial prejudice.
-28-
provision of the Agreement and simply and properly requesting the
Court
to
enforce
Agreement.
#35
the
at
termination
16-17
provision
requesting
of
the
enforcement
performance) of Section 7.01 of the Agreement (#2).
parties’
(specific
The First
Amended Complaint also relies on the termination provision stating
that Encore’s right to terminate is “in addition to whatever rights
[it] may have at law or equity to damages . . . .”
If BofA
believes the remedies sought by Encore relating to its termination
claim cannot be supported, it should file a motion for partial
summary judgment as to those particular remedies. Regardless, Rule
12 motions apply to claims, not to relief.
BofA fails to cite
authority for allowing a Rule 12 dismissal of a claim due to
seeking relief that is allegedly too broad.
Encore states that it does not understand BofA’s argument
about Count 4, breach of good faith and fair dealing.
While
acknowledging that the cause of action exists, BofA disagrees that
it will provide Encore with any additional relief beyond that
requested in other Counts.
Encore maintains that multiple claims
are routinely made that may not increase the remedy requested in
other claims, but that does not require that they be excluded.
Claiming
fiduciary
that
duty,
BofA’s
should
be
argument
dismissed
that
for
Count
5,
breach
of
lack
of
sufficient
relationship between the parties is another disguised summary
judgment matter, Encore argues that such a claim may arise for a
-29-
breach of contract and from a related tort committed in connections
with the parties’ actions while the contract is in effect.
Kangarlou v. Progressive Title Co., Inc., 128 Cal. App. 4th 1174,
1178 (Cal. App. 2 Dist. 2005)(“Whether an action is based on
contract or tort depends upon the nature of the right sued upon,
not the form of the pleading or relief demanded.
If based on
breach of promise it is contractual; if based on breach of a
noncontractual duty it is tortious.
considered
based
omitted]”).
on
contract
If unclear the action will be
rather
than
tort.”
[citations
BofA cites parts of the Agreement stating that BofA
was to be an independent contract servicer, but fails to cite to
other parts that contradict this language and are more specific.
Paragraph 44 of #35, addressing loss mitigation, foreclosure, sale
and
other
obligations
under
the
Agreement,
states
that
BofA
acknowledges that Encore was a beneficiary of these commitments,
that BofA controlled the ability to safeguard these activities, and
that Encore was not positioned to protect itself in these areas;
the language expressly states that BofA was to undertake these
commitments “for the benefit” of Encore. BofA also acknowledged in
the
contract
that
Encore
“acts
in
reliance
upon
[BofA’s]
independent status, the adequacy of its servicing facilities . . .
it integrity, reputation and financial standing and the continuance
thereof.”
#2, Agreement, § 6.05.
Where one party cedes control
over matters and relies upon another to act on his behalf, and the
-30-
other party agrees to do so, a fiduciary relationship is created.
Wolf v. Superior Court, 107 Cal. App. 4th 25, 29 (Cal. App. 2 Dist.
2003), as modified on denial of rehearing (Mar. 20, 2003)(rev.
denied); Eisenbaum v. Western Resources, Inc., 218 Cal. App. 3d
314, 322 (Cal. App. 4 Dist. 1990).
Whether the language here
creates a fiduciary duty under the substantive law of California is
in dispute here and cannot be determined under a Rule 12(b)(6)
review.
Responding to the motion to strike under Rule 12(f), Encore
says because it has properly pleaded the breach of fiduciary duty
claim, the punitive damages claim is also valid.
Cal. App. 4th at 1178.
Kangariou, 128
Moreover, Encore is asserting a tort claim
in addition to a contract claim.
In addition Encore’s claim does
not fall into the categories Rule 12(f) establishes for striking:
redundant, immaterial, impertinent or scandalous.
As for the
requests listed by BofA for striking, the motion to strike is
duplicative
of
the
motion
to
dismiss
and
the
relevancy
and
materiality of the requests are “uncontestable.”
Defendants’ Reply (#39)
Defendants’ reply simply repeats the arguments made in the
motion to dismiss.
Court’s Decision
California Civil Code § 1689(b)(2),(3), and (4) permit a party
to seek rescission for failure of consideration, although the
-31-
failure must be “material” or “go to the essence” of the contract.
Dorado v. Shea Homes Limited Partnership, No. 01:11-cv-01027 OWW
SKO, 2011 WL 3875626, *9 (E.D. Cal. Aug. 31, 2011), citing Wyler v.
Feuer, 85 Cal. App. 3d 392, 403-04 (1978). That “right to rescind”
is available “‘even if there has been a partial performance by the
party against whom the right is exercised.’”
Id., quoting Coleman
v. Mora, 263 Cal. App. 2d 137, 150 (1968).
Nevertheless the Court concludes that as a matter of law
California law does not recognize a claim for partial rescission,
such as Encore’s Count 1.
California Civil Code
§ 1688 provides,
“A contract is extinguished by reason of rescission.” “‘Rescission
of a contract must be of the contract as a whole and not in part.
It is the undoing of a thing and means that both parties to the
contract are entirely released as if it had not been made.’”
Flagship West, LLC v. Excel Realty Partners, L.P., 758 F. Supp. 2d
1004, 1021 (E.D. Cal. 2010), quoting Douglass v. Dahm, 101 Cal.
App. 2d 125, 128, 223 P.2d 914 (Cal. App. 2d Dist. 1950).
“Once a
contract is rescinded, all its provisions cease to have effect.”
Id., citing Larsen v. Johannes, 7 Cal. App. 3d 491, 501 (1970),
citing Lemle v. Barry, 181 Cal. 1, 5 (Cal. 1919); BTS, Inc. v.
Sonitrol Corp. of Contra Costa, No. A093591, 2002 WL 234889, *3
(Cal. App. 1 Dist. Feb. 19, 2002)(same).
Thus if Encore seeks
rescission, it will have to amend its complaint to assert such a
-32-
claim in whole, back to 1998.8
Furthermore, to obtain rescission, “‘the rule is that the
complainant is required to do equity, as a condition to obtaining
relief, by restoring to the defendant everything of value which the
plaintiff has received in the transaction. . . . This rule applies
although the plaintiff was induced to enter into the contract by
the fraudulent representations of the defendant.’” Dorado, 2011 WL
3875626, *14, quoting Fleming v. Kagan, 189 Cal. App. 2d 791, 796
(1961).
“‘The rules that govern tenders are strict and strictly
applied.’”
Id., quoting Nguyen v. Calhoun, 105 Cal. App. 4th 428,
439 (2003).
California
courts,
in
the
context
of
rescission
under
California Civil Code § 1691, “continually treat tender or at least
the allegation of the ability to do so as a necessary part of
valid claim for rescission of a contract.”
Loan
Servicing,
LP.,
725
F.
Supp.
2d
a
Davenport v. Litton
862,
880
(N.D.
Cal.
2010)(plaintiff must at least allege that she has offered to tender
to support a claim for equitably rescission under section 16919;
8
The Court is aware that in California parties to a contract
may agree that a contract is severable. United Guar. Mortg. Indem.
Co. v. Countrywide Financial Corp., 660 F. Supp. 2d 1163, 1190-91
(C.D. Cal. 2009). Nevertheless, the parties do not argue and the
Agreement here does not reflect in its language or subject matter
that the parties contemplated a remedy of rescission of part of the
contract.
9
Section 1691, as amended in 1961, reads,
RESCISSION, HOW EFFECTED.
Rescission, when not effected
-33-
failure to do so means that her state law claim for rescission is
not adequately pleaded and must be dismissed with leave to amend),
citing Periquerra v. Meridas Capital, Inc., No. 09-4748, 2010 WL
295932, *3 (N.D. Cal. Feb. 1, 2010)(“Plaintiffs must allege that
they are willing to tender the loan proceeds to the lender.
This
is a basic tenet of California contract law.”); Ritchie v. Cmty.
Lending Corp., Mo. 09-02484, 2009 WL 2581414, *3 (C.D. Cal. Aug.
12, 2009)(“[I]t is a ‘basic rule’ that ‘[a]n offer of performance
is of no effect if the person making it is not able and willing to
perform according to the offer.’”; holding that “[w]ithout such an
offer and a showing that Plaintiff’s offer is meaningful, the
Complaint must be dismissed”)(quoting Cal. Civ. Code § 149510). See
by consent, can be accomplished only by the use, on the
part of the party rescinding, of reasonable diligence to
comply with the following rules:
1. He must rescind promptly, upon discovering the facts
which entitle him to rescind, if he is free from duress,
menace, undue influence, or disability, and is aware of
his right to rescind; and
2.
He must restore to the other party everything of
value which he has received from him under the contract;
or must offer to restore the same, upon the condition
that such party shall do likewise, unless the latter is
unable or positively refuses to do so.
Davenport distinguished a rescission claim under section 1961 from
a rescission claim under the Truth in Lending Act (“TILA”), 15
U.S.C. § 1601, et seq., which does not require allegation of an
ability to tender to survive a motion to dismiss. 725 F. Supp. 2d
at 879-80.
10
Section 1495 provides, “ABILITY AND WILLINGNESS ESSENTIAL.
An offer of performance is of no effect if the person making it is
-34-
also Karlson v. American Sav. and Loan Ass’n, 15 Cal. App. 3d 112,
118 (1971)(“Simply put, if the offeror is without the money
necessary to make the offer good and knows it the tender is without
legal force or effect. [citations omitted]”); Jacobs v. Bank of
America, N.A.,No. C10-04596 HRL, 2011 WL 250423, *2 (N.D. Cal. Jan.
25, 2011)(granting motion to dismiss with leave to amend because
“[nowhere in the complaint does plaintiff allege credible tender of
the amount of the secured debt”).
The rationale for this rule is
that the language of § 1691 requires a party to “[r]estore to the
other party everything of value which he has received from him
under the contract or offer to restore the same . . . . “
Davenport, 725 F. Supp. 2d at 880.
“‘A tender is an offer of performance made with the intent to
extinguish the obligation.’”
Rojas v. Countrywide Corp., No. CV F
12-1393 LJO JLT, 2012 WL 4363764, *4 (E.D. Cal. Sept. 21, 2012),
quoting Arnolds Management Corp. v. Eischen, 158 Cal. App.3d 575,
580 (1984)(citing Ca. Civ. Code § 1485); Still v. Plaza Marina
Commercial Corp., 21 Cal. App.3d 378, 385 (Cal. App. 5 Dist. 1971).
“A tender must be one of full performance . . . and must be
unconditional to be valid.’”
Cal. App. 3d at 580.
Id., citing Arnolds Management, 158
“‘Nothing short of the full amount due the
creditor is sufficient to constitute a valid tender, and the debtor
must at his peril offer the full amount.’”
Id., citing Rauer’s Law
not able and willing to perform according to the offer.”
-35-
& Collection Co. v. Sheridan Proctor Co., 40 Cal. App. 524, 525
(Cal. App. 1 Dist. 1919).
“The debtor bears ‘responsibility to
make an unambiguous tender of the entire amount due or else suffer
the consequences that the tender is of no effect.’”
Id. citing
Gaffney v. Downey Savings & Loan Assn., 200 Cal. App.3d 1154, 1165
(1988).
Encore’s pleadings also fail to satisfy this pleading
requirement, a second reason why the rescission claim will be
dismissed with leave to amend.
Defendants also contend that although pleading to tender the
amount of indebtedness, Encore is not willing or able to restore
BofA to the status quo ante by tendering repayment of interest
advances paid directly by BofA to Encore, escrow advances paid by
BofA for taxes and insurance on properties subject to Encores’s
loans,
or
corporate
advances
for
expenses
paid
by
BofA
in
connection with servicing the loans. The Court notes that not only
must the tender be in full and unconditional and the party alleging
an offer of tender possess the ability to perform, but the tender
must be made in good faith.
Cal. Civ. Code § 1493-95; Ford v.
Lehman Bros. Bank, FSB, No. C 12-00842 CRB, 2012 WL 2343898, *12
(N.D. Cal. June 20, 2012).11
If it chooses to amend, Encore should
abide by this requirement.
11
As for the question of waiver and laches, the Court
concludes that these factually disputed contentions are not
properly resolved on a Rule 12(b)(6) review. Since the Court has
ruled that partial rescission is not cognizable under California
law, the issue of prejudice to BofA may be moot.
-36-
As for Encore’s Count 2 for Termination Rights and Equitable
Relief, the Court agrees with BofA’s construction of the Agreement
in concluding that Encore requests relief it is not automatically
entitled to, i.e., servicing fees paid to BofA, repurchase of nonperforming loans, advances of taxes, insurance premiums, principal
and interest by BofA, and costs and expenses incurred by BofA in
performing its servicing obligations on the properties subject to
the mortgage loans under Sections 4.09, 5.01, 5.03, and 4.05(b) and
(c) of the Agreement.
No provisions in the contract indicate such
a remedy is required upon termination of the contract by one party
or that the parties intended such relief.12 Encore may seek damages
for breach of contract under its Count 3.
Encore charges in Count 4 that BofA breached its duty of good
faith and fair dealing in failing to keep Encore apprised of the
status of BofA’s servicing of the mortgage loans and problems it
12
In contrast, “‘[t]he consequence of rescission is not only
the termination of further liability, but also the restoration of
the parties to their former positions by requiring each to return
whatever consideration has been received.’” NMSBPCSLDHB v. County
of Fresno, 152 Cal, App. 4th 954, 960-61, 959 61 Cal. Rptr. 2d 425,
429 (Cal. App. 5 Dist. 2007), quoting Imperial Casualty & Indemnity
Co. v. Sogomonian, 198 Cal. App. 3d 169, 184, 243 Cal. Rptr. 639,
646 (Cal. App. 2 Dist. 1988). See also Ogden Martin Systems, Inc.
v. San Berardino County, Cal., 932 F.2d 1284, 1287 (9th Cir.
1990)(“In a rescission action, the complaining party may receive
restitution for all benefits conferred on the other party,
restoring both parties to economic status quo ante, Restitution is
discretionary with the court however, and is not required even when
rescission is ordered.”), citing Cal. Civ. Code § 1692 and St.
Regis Paper Co. v. Royal Industries, 552 F.2d 309, 313 (9th Cir.),
cert. denied, 434 U.S. 996 (1977).
For a cause of action for
rescission, Encore might be entitled to such a remedy.
-37-
faced
relating
to
the
servicing
of
the
loans
and
that
BofA
stonewalled Encore’s efforts to learn the status of these matters.
#35, ¶ 41.
It further asserts, “BofA did not simply breach the
Agreement, it engaged in practices relating to the Agreement that
lacked good faith and fair dealing.”
Id.
As Defendants have argued, the implied covenant of good faith
and fair dealing “‘operates to protect the express covenants or
promises of [a] contract. . . . [It] cannot impose substantive
duties
or
limits
on
the
contracting
parties
beyond
those
incorporated in the specific terms of [the parties’] agreement.’”
Roussel v. Wells Fargo Bank, No. C 12-04057 CRB, 2012 WL 5301909,
*8 (N.D. Tex. Oct. 25, 2012), quoting Perez v. Wells Fargo Bank,
N.A., No. C-11-02279 JCS, 2011 WL 380908, *18 (N.D. Cal. Aug. 29,
2011).
Furthermore, “to state a claim for breach of the implied
covenant of good faith and fair dealing, a plaintiff must identify
the specific contractual provision that was frustrated.”
Id.,
citing id.
Encore claims that at a point after January 7, 2011 BofA
failed to provide Encore with (1) monthly delinquent loan status
reports;
(2)
current
real
estate
owned
reports;
(3)
monthly
conference calls regarding delinquent accounts; and (4) contact
with the usual investor representatives.
require
The Agreement does
monthly delinquency and REO reports in Sections 5.02(a)
and (b), but it does not provide for monthly conference calls or
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contact
with
the
“usual
investor
representative”
are
matters
outside the terms of the agreement; therefore Encore fails to and
cannot identify the specific provision in the Agreement that was
thwarted, and the claims of breach of good faith and fair dealing
for the last two must be dismissed under Rule 12(b).
Encore’s
vague and conclusory statement, “BofA did not simply breach the
Agreement, it engaged in practices relating to the Agreement that
lacked good faith and fair dealing,” fails to state a plausible
claim under Rule 12(b)(6).
Moreover the implied covenant of good faith and fair dealing
is a contractual relationship that does not give rise to an
independent duty of care.
Ragland v. U.S. Bank Nat’l Assoc., 209
Cal App.4th 182, 206 (Cal. App. 4 Dist. September 11, 2012).
Because it only assures compliance with the express terms of the
contract and does not create new obligations not contemplated by
the contract, breach of the implied covenant of good faith and fair
dealing does not give rise to tort damages even when the breach was
willful, fraudulent or malicious.
Id., citing Cates Construction,
21 Cal.4th at 61, and Applied Equipment Corp. v. Litton Saudi
Arabia, Ltd., 7 Cal.4th 503, 516, 869 P.2d 454 (1994).
Thus any
claim Encore may be asserting for punitive damages arising out of
the alleged breach of good faith and fair dealing fails to state a
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claim under Rule 12(b)(6) and is dismissed.13
The breach-of-fiduciary-duty tort claim is based on Encore’s
allegations that “BofA undertook its obligations to Encore Bank
‘for the benefit’ of Encore” and “failed in its obligations to
protect
Encore
Bank
as
the
beneficiary
in
connection
with
maximizing the value of mortgage loans and preserving the value of
the loans and the underlying collateral.” #35, Complaint at ¶¶ 4445.
As highlighted by Defendants, the Agreement expressly states
that
BofA
undertook
its
loan
administration
obligations as an “independent servicer.”
and
servicing
#2, Agreement § 4.01.
To state a claim for breach of fiduciary duty, the plaintiff
must allege the existence of a fiduciary relationship, breach of
that relationship, and damages resulting from that breach. Shopoff
& Cavalli LLP v. Hynon, 167 Cal. App. 4th 1489, (Cal. App. 1 Dist.
2009).
“[B]efore
a
person
can
be
charged
with
a
fiduciary
obligation, he must either knowingly undertake to act on behalf and
for the benefit of another, or must enter into a relationship which
imposes that undertaking as a matter of law.”
Rose v. J.P. Morgan
Chase, N.A., No. Civ. 2:12-225 WBS CMK, 2012 WL 1574821, *2 (E.D.
13
BofA asks to have the prayer for punitive damages stricken
under Rule 12(f) because (1) Encore fails to state a claim for
breach of fiduciary duty because the Agreement expressly states
that Bofa was performing its duties as an independent contractor
and because its claim arises from contract. While the Court agrees
with the bases, it is easier to dismiss the claim for punitive
damages for breach of the duty of good faith and fair dealing with
prejudice.
-40-
Cal. May 3, 2012), quoting Comm. on Children’s Television, Inc. v.
Gen. Foods Corp., 35 Cal. 3d 197, 221, 673 P.2d 660 (1983).
“A
fiduciary is required to give ‘priority to the best interests of
the beneficiary.’”
Id., citing Oakland Raiders v. Nat’l Football
League, 131 Cal. App. 4th 621, 641 (Cal. App. 6 Dist. 2005), quoting
Children’s Television, 35 Cal. 3d at 222.
Encore does not cite any authority, and the Court has not
found one, for the proposition that a fiduciary duty is imposed as
a matter of law on a commercial agreement between two financial
institutions to purchase loans in exchange for an agreement to
provide servicing obligations in return for fees.
Instead, it is
generally established that an arm’s length commercial relationship
between a buyer and seller or servicing entity, or a debtor and a
creditor, between two parties with business expertise ordinarily
does
not
create
a
fiduciary
duty.
Committee
on
Children’s
Television, Inc. v. General Foods Corp., 35 Cal. 3d 197, 222
(1983); Soriano v. Wells Fargo Bank, N.A., Civ. No. 11-00044
SOM/KSC, 2012 WL 1536065, *12 (D. Hawaii Apr. 30, 2012)(and cases
cited therein); Cordero v. America’s Wholesale Lender, No. 1:12-cv00099-CWD, 2012
WL 4895869, *4 (D. Idaho Oct. 15, 2012).
A
fiduciary duty does not arise pursuant to a contract merely because
one party relies on the other to carry out its obligations because
“[e]very contract requires one party to repose an element of trust
and confidence to perform.”
Wolf v. Superior Court, 107 Cal. App.
-41-
4th
25,
31
(2003).
“‘Although
parties
may
create
fiduciary
relationships by contract, mere contractual relationships, without
more, do not give rise to fiduciary relationships.’”
Id. at *3,
quoting Sonoma Foods, Inc. v. Sonoma Cheese Factory, LL, 634 F.
Supp. 2d 1009, 1021 (N.D. Ca. 2007).
In the Agreement BofA agreed
to provide loan servicing and administration to Encore on pools of
mortgage loans that it sold to Encore.
While Encore’s allegations
in the Amended Complaint employ “buzz words” for a fiduciary
relationship (e.g., “for the benefit of,” “relying on the integrity
and ability of BofA,” “highest degree of prudence and care”),
Encore has not pleaded any facts demonstrating that BofA agreed to
undertake a fiduciary relationship and to give priority to the
interests of Encore.
As Defendants point out, “fiduciary duties
among loan participants depend on the terms of their contract.”
Southern Pacific, 70 Cal. App. 4th at 638, citing First Citizens,
919 F.2d at 513.
Accordingly, for the reasons and to the extent indicated
above, the Court
ORDERS that the motion to dismiss specified causes of action
is GRANTED, with leave to amend the complaint where permissible as
a matter of law.
Encore shall file its Second Amended Complaint
within twenty days of entry of this Opinion and Order. Because the
Court has chosen to dismiss rather than strike the allegations in
-42-
dispute, the motion to strike is MOOT.
SIGNED at Houston, Texas, this
23rd
day of
January , 2013.
___________________________
MELINDA HARMON
UNITED STATES DISTRICT JUDGE
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