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Montgomery v. Soma Financial Corporation

United States District Court, W.D. Washington, Seattle

May 19, 2014

DENNIS LEE MONTGOMERY, et al. Plaintiffs,
v.
SOMA FINANCIAL CORPORATION, et al., Defendants.

ORDER

RICHARD A. JONES, District Judge.

This matter comes before the court on a motion to dismiss the second amended complaint ("SAC") by defendants Bank of America, N.A., as successor by merger to Countrywide Bank, FSB and BAC Home Loans Servicing, LP ("BAC"), Countrywide Home Loans, Inc. (the "Countrywide defendants"), and Bank of America Corporation[1] for itself and as successor by merger to Countrywide Financial Corporation (collectively, "defendants"). Dkt. # 32 at 2 n.2.[2]

On October 24, 2013, the court dismissed plaintiffs' first amended complaint because it was largely devoid of factual allegations specific to plaintiffs Dennis and Brenda Montgomery (the "Montgomerys") or Michael Flynn, contained numerous legal conclusions and conclusory allegations, went on at length regarding the allegedly improper practices of the mortgage industry in general, and the court could not discern the factual basis for plaintiffs' allegations as they were largely identical to those alleged in the District of Columbia case. United States v. Bank of America Corp., Case No. 12-361-RMC, District of Columbia, Dkt. # 1 at ¶¶ 47-89. Plaintiffs' SAC alleges claims for violation of the Consumer Protection Act ("CPA") with respect to loan servicing, loan modification, and foreclosure processing, violation of the Racketeer Corrupt and Influenced Organizations Act ("RICO"), and tortious infliction of emotional distress. Dkt. # 31. On April 29, 2014, the court ordered plaintiffs to file a redline copy of the SAC against the first amended complaint. Dkt. # 37. The court will refer to the redline copy of the SAC throughout this order. Dkt. # 38.

According to the complaint and documents subject to judicial notice, [3] plaintiffs allege the following:

(1) On September 5, 2006, the Montgomerys obtained a $2.28 million loan to purchase their Yarrow Point property that was secured by a deed of trust naming Chicago Title as Trustee and Mortgage Electronic Registration Systems, Inc. ("MERS") as the nominal beneficiary for the lender SOMA Financial. Dkt. # 38 (SAC) ¶ 2.1; Dkt. # 16-1 at 1-3 (Ex. A to McCormick Decl.).

(2) The Countrywide defendants merged into BoA, and ceased to exist. Dkt. # 38 (SAC) ¶¶ 2.4-2.6. BoA is the successor in interest to the Montgomerys' loan and its current servicer. Id.

(3) On June 26, 2009, the Montgomerys filed a petition for bankruptcy under Chapter 7. Id. ¶ 2.1. The Montgomerys' claims are limited to conduct that occurred after the filing of the petition. Id.

(4) With respect to their claim for violation of the CPA in loan servicing, Plaintiffs allege that BoA (a) failed to timely and accurately apply at least two mortgage payments made by the Montgomerys to Countrywide after BoA purchased Countrywide and took over operations; (b) charged excessive or improper fees for default-related services; (c) failed to properly oversee third-party vendors involved in servicing activities on behalf of defendants; (d) imposed force-placed insurance in the amount of $5, 000 in annual premiums without properly notifying the Montgomerys and when they already had coverage of $1, 700 in annual premiums, thereby unnecessarily increasing amounts due under the loan in terms of additional fees, charges, interest, and principal; and (e) provided the Montgomerys false or misleading information in response to their complaints. Id. ¶ 5.5a-e. With respect to the failure to timely and accurately apply mortgage payments, plaintiffs clarify, that it was BAC, as BoA's agent, that failed to timely and accurately apply mortgage payments and failed to maintain accurate account statements that resulted in account statements being in excess of what the Montgomerys actually owed. Id. ¶ 5.5a. The Montgomerys made at least two monthly mortgage payments totaling $34, 000, but BoA never applied these payments to its account balance, which resulted in BoA charging excessive late fees and interests. Id. The failure to apply these payments also resulted in the account balances showing that the Montgomerys were in default when they were not. Id. In BAC's motion for relief filed in the Montgomerys bankruptcy case, BAC represented that the Montgomerys had missed three mortgage payments totaling $44, 000 prior to filing for bankruptcy, when in fact they were not in default on the loan at all. Id. With respect to providing false or misleading information, plaintiffs allege that BoA represented that it would impose forced-place insurance that provided the same insurance they already had, which was false because the force-placed insurance did not cover liability and accident risks, but only casualty losses to the property itself. Id. ¶ 5.5e. The Montgomerys allege that they were harmed by this representation because they incurred $40, 000 liability as a result of an accident to a non-resident in 2012, and the insurance company that issued the force-placed insurance denied the claim due to lack of coverage. Id. Had BoA not made the representation that the force-placed insurance was the same as the coverage they were already paying for, they would have purchased their own liability insurance. Id.

(5) With respect to plaintiffs' claim for a violation of the CPA regarding loan modification, plaintiffs allege that defendants (a) represented to the Montgomerys from 2008 through 2013 that their loan documents were lost, that no one was sure who had authority to modify the loan or whether the loan qualified for modification, and that those representations were false because the loan documents were electronically stored in BoA's computers and available in late 2012; (b) represented that the Montgomerys qualified for loan modification and would be approved for loan modification, for which the Montgomerys had applied and provided all documents to prove eligibility, and that the pending modification would cure any default and reduce the principal and interest owed by them, and that those representations were false and caused the Montgomerys to incur debt and interest charges in excess of what they were entitled to under the modification programs; (c) encouraged and induced the Montgomerys to default on their loan in 2008 because they would only be eligible for loan modification if they defaulted on the loan. Id. ¶ 5.7a-c. Plaintiffs also allege that BoA (a) presented an inapplicable loan modification program they claimed would only remove interest and penalties, which was false because the Montgomerys were entitled to a full reduction of all principal and interest "because of systemic frauds involved in their Loan"; (b) failed to provide adequate staffing, training to staff, or processes for loan modification programs; (c) failed to respond to inquiries from the Montgomerys; (d) provided "false or misleading information" while referring their loan to foreclosure, initiating foreclosure during the loan modification process, or scheduling and conducting proceedings in bankruptcy; (e) represented that loss mitigation programs would provide relief from foreclosure, which was a misrepresentation, and failed to provide information regarding loss mitigation services, including loan modifications of full principal and interest; (f) advised that the Montgomerys must be at least 60 days delinquent in loan payments to qualify for a loan modification, which was false; and (g) represented that loan modification applications would be handled promptly, but delayed the loan modification for over three years. Id. ¶¶ 5.12a-s.[4]

(6) With respect to plaintiffs' claim for a violation of the CPA regarding foreclosure processing, plaintiffs claim that defendants (a) attempted to foreclose on the deed of trust after inducing the Montgomerys to default on their loan; (b) prepared, executed, filed or presented false, perjured, and misleading documents as part of its motion to lift the stay in the bankruptcy case; and (c) dual-tracked foreclosure and loan modification activities, and failed to communicate with the Montgomerys regarding foreclosure activities. Id. ¶ 5.19.

(7) On February 28, 2013, the trustee of the Montgomerys' estate entered into an Asset Purchase Agreement to sell the Yarrow Point property to plaintiff Flynn. Id. ¶ 2.2; Dkt. # 31 at 40 (Ex. 1 to SAC). Pursuant to that agreement, Flynn acquired all of the Montgomerys' interest in the Yarrow Point property together with any rights or claims for damages against the lender, servicer, and assignees that hold an encumbrance on the property. Dkt. # 31 at 40 (Ex. 1 to SAC at 6 ¶ 14.h). On April 4, 2013, the trustee executed a quit claim deed that transferred title to the property to plaintiff Flynn. Dkt. # 16-1 at 59 (Ex. D to McCormick Decl.).

When considering a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), "the court is to take all well-pleaded factual allegations as true and to draw all reasonable inferences therefrom in favor of the plaintiff." Wyler Summit P'ship v. Turner Broadcasting Sys., Inc., 135 F.3d 658, 663 (9th Cir. 1998). However, the complaint must indicate more than mere speculation of a right to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "[F]or a complaint to survive a motion to dismiss, the non-conclusory factual content, ' and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Service, 572 F.3d 962, 969 (9th Cir. 2009). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009). Additionally, the court is not required to accept as true conclusory allegations that are contradicted by documents referred to in the complaint. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295 (9th Cir. 1998). Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). If the court dismisses the complaint or portions thereof, it must consider whether to grant leave to amend. Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000).

A. Article III Standing

To have standing under Article III, a plaintiff must demonstrate that (1) he has suffered an actual or threatened injury in fact; (2) the injury is causally connected to the conduct complained of; and (3) it is likely, and not merely speculative, that his injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). The requisite injury-in-fact pursuant to Article III must be actual or threatened, and not merely speculative. See id. "In essence the question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues." Warth v. Seldin, 422 U.S. 490, 498 (1975). Standing "often turns on the nature and source of the claim asserted. The actual or threatened injury required by Art. III may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing." Id. at 500 (internal quotations omitted).

Defendants argue that plaintiffs entire suit fails for lack of Article III standing because plaintiffs do not plausibly allege an injury in fact that is traceable to conduct complained of where (1) borrowers are not entitled to loan modification, (2) there was no foreclosure, and (3) there are no allegations that link Mr. Montgomery's brain aneurism to BoA's promises of loan modification over the years alleged. Dkt. # 32 at 8-9.[5]

However, plaintiffs have alleged that BoA failed to timely and accurately apply at least two mortgage payments totaling $34, 000, which resulted in BoA charging excessive late fees and interest and resulted in account balances showing that the Montgomerys were in default when they were not. Dkt. # 38 ¶ 5.5a. Plaintiffs also allege that BoA represented to them that they qualified for loan modification, would be approved, and the modification would cure any default and reduce the principal and interest owed by them. Id. ¶ 5.7b. Plaintiffs allege that such representations were false and caused the Montgomerys to incur debt and interest charges far in excess of what they would have received under modification. Id. Plaintiffs also allege that BoA encouraged and induced them to default because BoA represented that it was the only way to obtain loan modification. Id. ¶ 5.7c. Finally, plaintiffs allege that BoA imposed force-placed insurance in the amount of $5, 000 in annual premiums without properly notifying them when they already had coverage of $1, 700 in annual premiums, which caused an increase in the amounts due under the loan in fees, charges, interest, and principal. Id. ¶ 5.5d-e.

These factual allegations are sufficient, at this stage of the proceedings, to demonstrate that plaintiffs suffered an actual injury in fact and that the injuries were causally connected to BoA's conduct. The court addresses whether these allegations plausibly allege a cause of action below.

B. CPA

To state a CPA claim, the plaintiff must allege an (1) unfair or deceptive act or practice, (2) occurring in trade or commerce, (3) that impacts the public interest, (4) that injures plaintiff in her business or property, and (5) causation. Klem v. Wn. Mut. Bank, 176 Wn.2d 771, 782, 295 P.3d 1179, 1185 (Wn. 2013). A claim under the CPA "may be predicated on a per se violation of statute, an act or practice that has the capacity to deceive substantial portions of the public, or an unfair or deceptive act or practice not regulated by statute but in violation of public interest." Id. at 1187. "To prove that an act or practice is deceptive, neither intent nor actual deception is required. The question is whether the conduct has the capacity to deceive a substantial portion of the public." Bain v. Metro. Mortg. Group, Inc., 175 Wn.2d 83, 115, 285 P.3d 34 (Wn. 2012) (internal quotations and emphasis omitted). Even accurate information may be deceptive if there is a representation, omission or practice that is likely to mislead. Id. "Misrepresentation of material terms of a transaction or the failure to disclose material terms violates the CPA." Id. at 116. Whether particular actions are deceptive is a question of law. Id.

Plaintiffs have alleged several deceptive acts with respect to loan servicing and loan modification. Plaintiffs allege that BoA charged the Montgomerys excessive or improper fees and interest after failing to apply at least two monthly mortgage payments. Dkt. # 38 ¶ 5.5a. Plaintiffs also allege that BoA excessively charged the Montgomerys for the force-placed insurance without properly notifying the Montgomerys, and falsely represented that the more expensive force-placed insurance was the same type of coverage as the coverage carried by the Montgomerys. Id. ¶ 5.5d-e. Plaintiffs also allege that BoA repeatedly and falsely informed the Montgomerys that their loan documents were lost and that nobody was sure who had authority to modify the loan, resulting in excessive interest because the loan could not be modified. Id. ¶ 5.7a. Plaintiffs also allege that BoA falsely represented that the loan modification would be approved and would cure any default and reduce the principal and interest owed. Id. ¶ 5.7b. Finally, plaintiffs allege that BoA encouraged and induced default because BoA informed the Montgomerys that they would only be eligible for loan modification if they defaulted on their loan. Id. ¶ 5.7c.

With respect to injury, plaintiffs argue that they adequately allege investigative expenses, [6] excessive fees and interest and imposition of force-placed insurance. Dkt. # 35 at 5-6 (citing to ¶¶ 5.5b & d-e, & 6.3). Each of these alleged injuries relates only to the loan servicing allegations, not loan modification. Plaintiffs also argue that the Montgomerys were injured by BoA keeping them ignorant of their legal protections, but have failed to direct the court to any allegations in the complaint that plausibly allege an injury under the dicta in Bain. Id. at 6; 174 Wn.2d at 118 ("But there are many different scenarios, such as when homeowners need to deal with the holder of the note to resolve disputes or to take advantage of legal protections, where the homeowner does need to know more and can be injured by ignorance. Further, if there have been misrepresentations, fraud, or irregularities in the proceedings, and if the homeowner borrower cannot locate the party accountable and with authority to correct the irregularity, there certainly could be injury under the CPA.").

The court finds that plaintiffs have adequately alleged injury and a causal connection with respect to (1) the excessive fees and interest charged after failing to apply at least two monthly mortgage payments, and (2) excessive charges for the force-placed insurance without proper notice. However, plaintiffs have not plausibly alleged an injury flowing from BoA's alleged misconduct involving loan modification or loss mitigation relief. Plaintiffs have not plausibly alleged an obligation by BoA to modify plaintiffs' loan, or provided legal authority that would require BoA to modify plaintiffs' loan on terms that were acceptable to plaintiffs.[7] While BoA may have had an obligation to be honest with plaintiffs about the loan modification and foreclosure process and not make false promises (neither of which have been pled), plaintiffs have not plausibly alleged an injury resulting from these alleged misrepresentations.

With respect to public interest, "it is the likelihood that additional plaintiffs have been or will be injured in exactly the same fashion that changes a factual pattern from a private dispute to one that affects the public interest." Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 105 Wn.2d 778, 790, 719 P.2d 531 (Wn. 1986). Factors indicating public interest in essentially a private dispute include whether the alleged acts were committed in the course of defendant's business, whether defendant advertised to the public in general, whether defendants actively solicited this particular plaintiff, indicating potential solicitation of others, and whether plaintiff and defendant occupy unequal bargaining positions. Id. at 790-91. Plaintiffs have alleged that BoA's conduct and practices in connection with the Montgomerys' loan is typical and similar to its practices as alleged in a Consent Judgment entered into by defendants in another case, which indicates the likelihood that others are affected by the same or similar conduct. Dkt. # 38 ¶¶ 1.1, 5.1-5.4, 5.5. Plaintiffs' allegations are also sufficient to demonstrate that BoA's conduct was committed in the course of its business. Id. ¶ 5.2. Although close, the court believes that these allegations are sufficient to plausibly allege the public interest factor to survive a Rule 12(b)(6) motion.

With respect to the foreclosure processing, plaintiffs allege the following deceptive acts: (1) BoA attempted to foreclose on the deed of trust after inducing the Montgomerys to default, and (2) BoA dual-tracked foreclosure and loan modification by failing to communicate with the Montgomerys regarding foreclosure activities and misleading them about loan modification approval.[8] Dkt. # 38 ¶¶ 5.13, 5.19a-c. With respect to injury plaintiffs argue that they adequately alleged investigative expenses, excessive interest, improper fees and charges, and expenses to obtain loss mitigation relief. Dkt. # 35 at 7 (citing ¶ 7.3). The court's findings above with respect to the alleged injury of investigative expenses and expenses to obtain loss mitigation relief apply equally here. Additionally, plaintiffs have failed to plausibly allege how the excessive interest, improper fees and charges flowed directly from the foreclosure process, as opposed to the loan servicing.[9]

Accordingly, the court finds that plaintiffs have failed to state a CPA claim based on foreclosure processing, loan modification and loss mitigation relief.

C. RICO

Defendants argue that plaintiffs have not sufficiently alleged at least two predicate acts. Dkt. # 32 at 14-17.[10] Plaintiffs argue that it has sufficiently alleged bankruptcy fraud and at least fifteen separate occasions of wire fraud. Dkt. # 35 at 8 (citing ¶¶ 5.13 & 8.4 for bankruptcy fraud and ¶¶ 5.7a-c, 5.12i-l, s, 5.13, 8.4 for wire fraud).

RICO provides a private cause of action for any person injured in his business or property by reason of a violation of RICO's criminal provisions, 18 U.S.C. § 1962. 18 U.S.C. § 1964. Section 1962(c), which plaintiffs invoke here, makes it "unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect interstate... commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962. "[R]acketeering activity" is defined to include a long list of state and federal crimes. To prove a pattern of racketeering, plaintiffs must allege at least two predicate offenses. Clark v. Time Warner Cable, 523 F.3d 1110, 1116 (9th Cir. 2008).

Civil RICO fraud claims are subject to Rule 9(b)'s heightened pleading standard. See Schreiber Distrib. Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393, 1400 (9th Cir. 1986). Rule 9(b) requires that "the circumstances constituting fraud... be stated with particularity." Fed.R.Civ.P. 9(b). To satisfy Rule 9(b), the pleader must state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations. Schreiber, 806 F.2d at 1401. A wire fraud violation consists of (1) the formation of a scheme or artifice to defraud; (2) use of the United States wires or causing a use of the United States wires in furtherance of the scheme; and (3) specific intent to deceive or defraud. Id. at 400. The only aspects of wire fraud that require particularized allegations are the factual circumstances of the fraud itself. Odom v. Microsoft Corp., 486 F.3d 541, 554 (9th Cir. 2007). Additionally, materiality is an element of wire fraud. Neder v. United States, 527 U.S. 1, 24 (1999). A statement is material for wire fraud purposes only if it has the natural tendency to influence or be capable of influencing the person to whom it is addressed. United States v. Jenkins, 633 F.3d 788, 802 n.3 (9th Cir. 2011).

Neither party has provided sufficient briefing regarding whether plaintiffs' allegations of bankruptcy or wire fraud are adequately pled. Indeed, neither party provided the court with the relevant substantive legal authority cited above, or any analysis regarding the specific allegations in the SAC. Defendants have provided general arguments without referring to specific allegations in the complaint, [11] and raise some arguments for the first time in reply. Plaintiffs fail to cite binding Ninth Circuit authority regarding the applicable pleading standard, and their general arguments also fail to provide specific analysis or substantive legal authority. The court will not undertake counsel's tasks, and declines to address the parties' legally and factually inadequate arguments regarding bankruptcy and wire fraud at this time.[12]

D. Tortious Infliction of Emotional Distress

Plaintiffs allege claims for both intentional and negligent infliction of emotional distress. Dkt. # 38 ¶¶ 9.1-9.3. Defendants have only provided analysis regarding intentional infliction of emotional distress, and only argue that plaintiffs fail to allege extreme or outrageous conduct. Dkt. # 32 at 17-19. Plaintiffs argue that the "SAC alleged numerous misrepresentations and falsities by BOA that violated numerous laws and regulations[, and the] level of deception and callousness of BOA towards the Montgomerys was... outrageous and beyond all possible bounds of decency." Dkt. # 35 at 9.

The tort of outrage requires (1) extreme and outrageous conduct, (2) intentional or reckless infliction of emotional distress, and (3) actual result to plaintiff of severe emotional distress. Kloepfel v. Bokor, 149 Wn.2d 192, 195 (2003). The tort of outrage does not extend to mere insults, indignities, threats, annoyances, petty oppressions, or other trivialities. Id. at 196.

Plaintiffs' allegations supporting their claim for outrage are the same as those underlying their CPA claims, including promises of loan modification, false representations that the loan documents were lost, failing to apply two mortgage payments, inducing the Montgomerys to default in order to qualify for loan modification and then once in default, attempting to foreclose on the property, and using a perjured declaration in an attempt to foreclose[13] on the deed of trust. Dkt. # 38 ¶ 9.3. Of these allegations, the allegation that BoA induced the Montgomerys to default and then attempted to foreclose on the property plausibly alleges extreme or outrageous conduct.

E. Conclusion

For all the foregoing reasons, the court GRANTS in part and DENIES in part defendants' motion to dismiss. Plaintiffs have not requested the opportunity to amend their complaint. If they believe they can cure any of the defects identified by the court, they must file a motion to amend the complaint within 14 days of this order pursuant to the Federal Rules of Civil Procedure and Local Civil Rules. Any amended complaint shall not exceed thirty pages. To the extent that plaintiffs file a third amended complaint, the court directs plaintiffs to eliminate allegations not relevant to the remaining causes of action and to provide the court a redline copy of the third amended complaint against the second amended complaint.


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