APPLING v. WACHOVIA MORTGAGE

In his third cause of action, Plaintiff claims that Defendants violated the Fair Credit Reporting Act, 15 U.S.C. § 1681, et seq., by failing to provide Plaintiff with documents and information regarding his credit score. Compl. ¶¶ 44-46. Defendants argue that this claim is time-barred and facially deficient. Defs.' Mot. 8. At the hearing, Plaintiff conceded an inability to state a claim under the FCRA and indicated his intent to withdraw this claim. Accordingly, Plaintiff's third cause of action for violations of the FCRA is dismissed with prejudice. C. Preemption of State Law Claims in Plaintiff's Second, Fourth, and Fifth Causes of Action

In addition to the federal claims asserted under TILA and FCRA, Plaintiff alleges three state law claims that Defendants argue are preempted by the Home Owners' Loan Act ("HOLA"), 12 U.S.C. § 1461, et seq., and, to a lesser extent, by TILA.

Because the Court finds that HOLA preemption bars Plaintiff's claims, the Court does not address the issue of TILA preemption.

Before addressing Defendants' preemption arguments, the Court must determine whether HOLA applies to this action. Federal savings associations, including federal savings banks, are subject to HOLA and regulated by the Office of Thrift Supervision (OTS). 12 U.S.C. § 1464; Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1005 (9th Cir. 2008). In contrast, federally chartered banks are subject to regulation by the Office of the Comptroller of the Currency under the National Banking Act. See Bank of America v. City and County of San Francisco, 309 F.3d 551, 561-62 (9th Cir. 2002). Plaintiff argues that HOLA does not apply to this case because the only surviving Bank Defendant is Wells Fargo, a federally chartered bank not subject HOLA. However, Plaintiff's loan originated with World Savings Bank, which was a federal savings bank subject to HOLA and OTS regulations. RJN Ex. 1. World Savings Bank later changed its name to Wachovia Mortgage, FSB, remaining under the regulatory authority of OTS and subject to HOLA. RJN Ex. 2. Wachovia Mortgage is now a division of Wells Fargo. Thus, although Wells Fargo itself is not subject to HOLA and OTS regulations, this action is nonetheless governed by HOLA because Plaintiff's loan originated with a federal savings bank and was therefore subject to the requirements set forth in HOLA and OTS regulations. Lopez v. Wachovia Mortg., 2010 WL 2836823, at *2 (N.D. Cal. 2010) (finding that although Wells Fargo is a federally chartered national bank, the action is governed by HOLA because the loan originated with World Savings Bank, which was regulated by OTS and subject to HOLA).

Plaintiff also claims that Wells Fargo is collaterally estopped from arguing that HOLA applies to preempt state claims asserted against it because Wells Fargo unsuccessfully litigated this claim in two prior cases. Pl.'s Opp'n 5. However, the issue considered in the cases Plaintiff cites is not identical to the issue presented here. In those cases, the court found that HOLA preemption did not apply because Wells Fargo did not allege or argue any facts establishing that it fell within OTS jurisdiction. Juarez v. Wells Fargo Bank, N.A., 2009 No. CV 09-3104, U.S. Dist. LEXIS 110892, at *5 (C.D.Cal. Nov. 11, 2009); Tsien v. Wells Fargo Home Mortg., No. C 09-04790, 2010 U.S. Dist. LEXIS 52804, at *12 (N.D.Cal. May 28, 2010). Here, Wells Fargo does not argue that it is subject to HOLA or OTS jurisdiction; rather, it argues that HOLA governs because the loan originator was subject to HOLA, and the Court has taken judicial notice of documents establishing HOLA's applicability.

Since this action is governed by HOLA, the court next must consider the scope of HOLA preemption. The Ninth Circuit has described HOLA and OTS regulations as a "radical and comprehensive response to the inadequacies of the existing state system." Silvas, 514 F.3d at 1004 (quoting Conference of Fed. Sav. Loan Ass'ns v. Stein, 604 F.2d 1256, 1257, 1260 (9th Cir. 1979), aff'd, 445 U.S. 921 (1980)). In its role as principal regulator of federal savings associations, OTS promulgated an express field preemption regulation codified at 12 C.F.R. § 560.2. The regulation states that "OTS hereby occupies the entire field of lending regulation for federal savings associations." 12 C.F.R. § 560.2(a). The effect of this regulation is to leave virtually "no room for state regulatory control." Silvas, 514 F.3d at 1004 (quoting Conference of Fed. Sav., 604 F.2d at 1257, 1260).

OTS regulations provide guidance on determining whether a state law is preempted. Section 560.2(b) provides a nonexclusive list of the types of state laws preempted by the regulation. This list includes "state laws purporting to impose requirements regarding . . . (9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents and laws requiring creditors to supply copies of credit reports to borrowers or applicants." 12 C.F.R. § 560.2(b)(9). OTS further instructs that the first step in a preemption analysis is to determine whether the state law at issue is of a type listed in paragraph (b). Silvas, 514 F.3d at 1005. In doing so, the court does "not look merely to the abstract nature of the cause of action allegedly preempted but rather to the functional effect upon lending operations of maintaining the cause of action." Naulty v. GreenPoint Mortg. Funding, Inc., Nos. C 09-1542, C 09-1545, 2009 WL 2870620, at *4 (N.D. Cal. 2009). If an application of the state law to the activities of the federal savings bank would "impose requirements" regarding the lending activities listed in paragraph (b), then the analysis ends there; the law is preempted. Silvas, 514 F.3d at 1005. Paragraph (c), which lists certain state laws that are not necessarily preempted, comes into play only if the state law is not covered by paragraph (b). Id.

1. Negligent Misrepresentation

Plaintiff's second cause of action, as stated in the Complaint, is a state law claim for negligent misrepresentation. Defendant asserts several defenses against this claim, including preemption by HOLA. There is some confusion over what, exactly, Plaintiff intends to allege in this claim. Though styled as a claim for "negligent misrepresentation" in the Complaint, Compl. 6, Plaintiff acknowledges that the title of this claim may have been a misnomer and attempts to reframe the claim as one for intentional deceit or fraudulent misrepresentation. Pl.'s Opp'n 8-9. What matters for purposes of Defendant's preemption defense, however, is not the label Plaintiff affixed to his claim, but whether Plaintiff's allegations, however styled, fall within the scope of the OTS preemption regulations.

In his misrepresentation claim, Plaintiff alleges that Defendants "concealed the nature and extent of negative amortization" and "failed to disclose and by omission failed to inform Plaintiff" that he would be unable to refinance his home due to the certain negative amortization built into his payment schedule. Compl. ¶¶ 38-39. Plaintiff also alleges that Defendants' representative at the closing did not provide Plaintiff the loan documentation in advance or give him an opportunity to review the documents before closing. Compl. ¶ 40. Because this claim is entirely based on Defendants' disclosures and the provision of credit-related documents, it falls within the specific type of preempted state laws listed in § 560.2(b)(9). Silvas, 514 F.3d at 1006. See also, e.g., Newsom v. Countrywide Home Loans, Inc., ___ F. Supp. 2d ___, 2010 WL 2034769, at *10 (N.D. Cal. 2010) (finding that HOLA preempted fraud claim alleging that defendant failed to provide disclosures and misrepresented interest rates and fees); Amaral v. Wachovia Mortg. Corp., 692 F. Supp. 2d 1226, 1237-38 (E.D. Cal. 2010) (finding that HOLA preempted fraud claim alleging that defendant made material false representations regarding plaintiffs' loan); Reyes v. Premier Home Funding, Inc., 640 F. Supp. 2d 1147, 1156 (N.D. Cal. 2009) (finding that HOLA preempted negligence claim alleging that Defendants failed to explain material terms of a loan agreement). Therefore, under the approach put forth by OTS and adopted by the Ninth Circuit, the preemption analysis ends, and Plaintiff's misrepresentation claim is preempted. Because the preemption of Plaintiff's claim cannot be cured by amendment, Plaintiff's second cause of action is dismissed with prejudice as to the Bank Defendants.

2. Breach of Fiduciary Duty

Plaintiff's fourth cause of action alleges that Defendant Banks aided and abetted the IQ Defendants' breach of fiduciary duty. Compl. ¶¶ 61-62. Plaintiff's claim of breach of fiduciary duty is grounded in allegations that the IQ Defendants failed to make disclosures about the loan required by state and federal law, misrepresented the terms of the loan and the viability of refinancing, and serviced the loan out of compliance with TILA. Compl. ¶ 50-51, 59-62. The first step of the preemption analysis asks whether the cause of action for breach of fiduciary duty, as applied, is a type of state law contemplated in paragraph (b) of 12 C.F.R. § 560.2. Silvas, 514 F.3d at 1006. Here, the claim is entirely based on lending activities listed in paragraph (b), including terms of credit, § 560.2(b)(4), loan-related fees, § 560.2(b)(5), disclosures and advertising, § 560.2(b)(9), and processing, origination, and servicing of mortgages, § 560.2(b)(10). Thus, Plaintiff's breach of fiduciary duty claim is preempted by federal law. See, e.g., Naulty v. GreenPoint Mortg. Funding, Inc., Nos. C 09-1542, C 09-1545, 2009 WL 2870620, at *4 (N.D. Cal. 2009) (finding that OTS regulations preempted breach of fiduciary duty claim based on terms of credit provided by Wachovia, lack of disclosures, underwriting standards, and marketing and servicing of loans); Bassett v. Ruggles, No. CV-F-09-528, 2009 WL 2982895, at *16, 22 (E.D. Cal. 2009) (finding that HOLA preempted claim of conspiracy to breach fiduciary duty alleging that bank paid broker an undisclosed yield spread premium in exchange for inducing borrower to agree to a higher interest rate than he could afford). Plaintiff's fourth cause of action is therefore dismissed with prejudice as to the Bank Defendants.

3. Violation of Business and Professional Code

Plaintiff's fifth cause of action, for unlawful business acts or practices in violation of California's Unfair Competition Law (UCL), Cal. Bus. and Prof'l Code § 17200, et seq., is also preempted. Plaintiff predicates his UCL claim on violations of "the aforementioned laws and/or regulations," Compl. ¶ 70, that is, the violations of TILA and FCRA and the state common law claims of misrepresentation and aiding and abetting breach of fiduciary duty alleged in the complaint. As discussed above, the state law claims bear directly on lending activities listed in 12 C.F.R. § 560.2(b) and are preempted by OTS regulation; a UCL claim predicated on these preempted state laws is therefore also preempted. To the extent that the UCL claim is predicated on violations of TILA and FCRA, it is based on allegations that Defendants failed to disclose credit-related information and therefore falls into the category of preempted state laws listed in § 560.2(b)(9). Plaintiff's UCL claim is thus preempted by federal law and dismissed with prejudice.

D. Remaining State Law Claims

1. Conversion

Plaintiff's sixth cause of action alleges that Defendant committed conversion by wrongfully retaining the $9,915 held in escrow pursuant to the Holdback Agreement entered into by Plaintiff and Defendant World Savings Bank. Compl. ¶¶ 77-82. The Holdback Agreement authorized World Savings to retain $9,915 from the loan amount in a non-interest bearing escrow account, to be distributed upon completion of certain work on Plaintiff's property to Plaintiff or to persons who performed the work. Comp. ¶ 77; TRO Decl. Ex. 1. According to Plaintiff, since no work was ever performed on the property, the funds held in the escrow account should have been returned to Plaintiff. Compl. ¶ 79. Plaintiff alleges, however, that none of the money in the escrow account was distributed to Plaintiff or applied to the loan amount Defendants claimed Plaintiff owed in the Notice of Default and Notice of Trustee's Sale. Compl. ¶¶ 80-81.

To state a claim for conversion, a plaintiff must allege: (1) ownership or right to possess the subject property; (2) the defendant's conversion by a wrongful act or disposition of the property; and (3) damages. Spates v. Dameron Hospital Ass'n, 114 Cal.App.4th 208, 221, 7 Cal.Rptr.3d 597 (2003). Defendants argue that Plaintiff has failed to state a claim for conversion because the allegations in the complaint do not establish that Plaintiff had a right to ownership or possession of the funds held in escrow at the time of the alleged conversion. Defs.' Mot 10. This Court agrees.

In considering whether the complaint is sufficient to state a claim, the court must accept as true all of the factual allegations contained in the complaint. Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). However, the court need not accept as true "allegations that contradict matters properly subject to judicial notice or by exhibit." St. Clare v. Gilead Scis., Inc. (In re Gilead Scis. Sec. Litig.), 536 F.3d 1049, 1055 (9th Cir. 2008). In this case, the allegations in the Complaint are contradicted by the terms of the Holdback Agreement submitted by Plaintiff in support of his TRO application. The Holdback Agreement provides for disbursal of the holdback funds only upon satisfactory completion of the work on Plaintiff's property. TRO Decl. Ex. 1. The Holdback Agreement explicitly states that if Plaintiff fails to fulfill any terms or conditions of the Agreement, the Lender may apply any remaining holdback funds to the balance of principal and interest due on Plaintiff's loan. Id. The Agreement also provides that "[i]f any amount remains in the Restricted Escrow Account after payment has been made for work done or materials supplied, Lender will apply such amount to the loan." Id. Nothing in the Agreement provides for disbursal of funds to Plaintiff except to pay for work performed on Plaintiff's property. Rather, the Agreement quite clearly provides that any funds not disbursed in payment for such work shall be applied to the principal and interest due on Plaintiff's loan. Since no work was ever performed, Plaintiff never acquired any right to ownership or possession of the holdover funds. Defendant is therefore correct that Plaintiff has failed to plead his ownership or right to possess the funds and, accordingly, has failed to state a claim for conversion. Moreover, Plaintiff's counsel conceded at the motion hearing that Plaintiff cannot allege any facts to cure this deficiency. Accordingly, Plaintiff's sixth cause of action is dismissed with prejudice.

2. Breach of Contract

Plaintiff's seventh cause of action alleges breach of contract. As Defendants note, Plaintiff's statement of this claim is quite cursory. However, liberally construed alongside Plaintiff's claim for conversion, the claim appears to allege that Defendants breached the Holdback Agreement by failing to apply the funds held in the escrow account to the amount due on Plaintiff's loan. To state a claim for breach of contract under California law, Plaintiff must plead facts establishing the following elements: "(1) existence of the contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) damages to plaintiff as a result of the breach." CDF Firefighters v. Maldonado, 158 Cal.App.4th 1226, 1239, 70 Cal.Rptr.3d 667 (2008). Defendants argue that Plaintiff's claim fails because Plaintiff has not alleged that he performed his obligations under the contract or was excused from performing. Defs.' Mot. 11. Plaintiff responds that Plaintiff in fact had no obligations under the contract. Pl.'s Opp'n. 14 n. 4. However, the Holdback Agreement clearly imposes an obligation on Plaintiff to complete work on the Property. TRO Decl. Ex. 1 ("Lender has made the loan to Borrower on condition that Borrower complete certain work on the Property. . . ."). Plaintiff concedes that "[n]o work was in fact performed on the property," Compl. ¶ 78, and does not allege any facts that would excuse his nonperformance. Additionally, Plaintiff conceded at the motion hearing that he cannot in fact allege any such facts. Accordingly, Plaintiff fails to state a claim for breach of contract, and the seventh cause of action is dismissed with prejudice.

3. Wrongful Foreclosure

Plaintiff's eighth and final cause of action alleges wrongful foreclosure. In his opposition, Plaintiff concedes that this claim is now moot. Accordingly, the eighth cause of action is dismissed with prejudice.

V. CONCLUSION

For the foregoing reasons, Defendant's motion to dismiss is granted in part and denied in part. The motion is denied as to Plaintiff's claim in his first cause of action that Defendant violated TILA by failing to disclose the certainty of negative amortization. The remainder of Plaintiff's first cause of action is dismissed with leave to amend. Plaintiff's second, fourth, and fifth causes of action for negligent misrepresentation, aiding and abetting breach of fiduciary duty, and violations of the UCL are dismissed with prejudice as to the Bank Defendants only, on preemption grounds. Plaintiff's third, sixth, seventh, and eighth causes of action for violations of the FCRA, conversion, breach of contract, and wrongful foreclosure are dismissed with prejudice. Any amended pleading shall be filed within 30 days of the date of this Order.

IT IS SO ORDERED.

Dated: September 17, 2010