Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-03295/USCOURTS-cand-3_05-cv-03295-14/pdf.json

Nature of Suit Code: 790
Nature of Suit: Other Labor Litigation
Cause of Action: 28:1331 Fed. Question

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

NANCY LENDALL,

Plaintiff,

 v.

CHASE MANHATTAN MORTGAGE

CORPORATION,

Defendant. /

No. C 05-03295 WHA

ORDER DENYING MOTION 

FOR SUMMARY JUDGMENT 

AND DENYING MOTION 

FOR LEAVE TO AMEND 

AND RESCHEDULING

DISCOVERY HEARING

INTRODUCTION

In this diversity action for breach of contract and fraud, the basic question is whether

plaintiff can recover roughly $350,000 she previously reimbursed to her employer, Chase

Manhattan Mortgage Corporation. The latter has moved for summary judgment pursuant to

Federal Rule of Civil Procedure 56. As part of her opposition, plaintiff Nancy Lendall has

moved for leave to amend her complaint so as to add a new claim under California Labor

Code § 221. Plaintiff’s request to amend, at the end of the discovery period and so close to

trial, is far too late and unjustified. Plaintiff, however, has established triable issues of fact as to

the two claims in her operative complaint. Accordingly, plaintiff’s motion for leave to amend is

DENIED and defendant’s motion for summary judgment is also DENIED.

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STATEMENT

Defendant Chase Manhattan Mortgage Corporation provides home-finance products

such as home loans. Chase funds its home loans through money it draws from elsewhere. 

Chase’s home loans are brokered by loan officers, who are employees of Chase. In February

1997, Chase hired Nancy Lendall to be such a loan officer.

At the time in question, the price of home loans at Chase consisted of two components,

the interest rate and the points (Schilling Decl. ¶ 7). A “point” was equal to one percent of the

loan amount (ibid.). A borrower would usually pay more points in order to secure a lower

interest rate (ibid.). If a borrower chose to enter into a loan with Chase, the borrower either

elected to “float” or to “lock in” the loan rate (id. at ¶ 6). If the borrower chose the float option,

the borrower took the risk that the market rate (i.e., the rate at which Chase itself would acquire

the money) for the loan would go up prior to closing. If the borrower chose to lock in the loan

rate, the borrower paid the locked in rate regardless of fluctuations in the market rate.

The borrower would make his or her initial agreement to a loan over the phone with a

Chase loan officer. The loan officer offered a certain rate depending on the credit history and

circumstances of the particular borrower. If the borrower chose to take out a loan with Chase,

the borrower indicated his or her desire to “lock in” or “float” over the phone. The borrower

then confirmed his or her preference to lock in or to float the loan rate on a form provided by

Chase to the borrower within several days. Within roughly two weeks, the borrower was to

complete further paperwork in order to finalize the loan. The borrower could back out at any

time prior to accepting the loan proceeds, subject to the loss of certain fees if he or she backed

out after processing the loan application. Critically, if the customer wanted to lock in the rate,

the loan officer was required to specify this fact in the firm’s computer system so that it could

reserve the funds at the designated rate and thereby avoid being burned by a rise in interest

rates.

Chase’s loan officers negotiated loans directly with the potential borrowers. These loan

officers were paid through commissions on the loans they generated (id. at ¶ 8; Compl. Exh. A). 

If a loan officer closed a loan for more than the market rate, an “overage” or premium was

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created (Schilling Decl. ¶ 8). An overage was created, for example, if Chase made a loan at

seven percent even though the market rate that day was five percent. In contrast, if the officer

closed a loan for less than the price of the product, an “underage” or loss on the loan was

created (ibid).

There were two distinct scenarios where an underage resulted (id. at ¶ 9). First, an

underage occurred where the loan officer and the borrower agreed to a price below the market

price for the loan. Chase apparently sometimes encouraged its loan officers to create underages

in this first manner in order to keep a valuable client with the company or to assure that certain

referral services continued to promote Chase’s products. Second, an underage could occur if

the loan officer neglected to reserve or lock in the funds and the interest rate increased by the

time of closing. In this scenario, the customer got the rate promised and Chase absorbed the

underage. This scenario was not supposed to happen.

In this particular case, plaintiff Lendall’s employment as a loan officer with Chase was

governed by two agreements. First, there was an employment agreement specific to Lendall

entitled “Terms of Agreement — Retail Loan Officer” (Compl. Exh. A). The agreement, signed

by Lendall, provided the following provision regarding overages and underages (ibid.)

Overages and Underages will be calculated as follows:

Overages — Based on tier

Maximum of 2 pts.

Underages — Based on tier

Split up to a maximum of 1 pt.; any losses

exceeding 1 pt. will be the responsibility of

the participant.

Payment shall be made based on the net results of all Overages

and Underages after each one has been separately calculated in

the above rates.

In other words, Lendall was to receive a commission equal to the total of her overages minus

any underages as calculated above.

Second, Lendall’s employment was also governed by the “CMMC Retail Channel Loan

Officer — Compensation Plan and Policy Statement California Division” (Compl. Exh. B). The

compensation plan stated that it “is to be read along with any applicable Terms of Agreement

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(“Terms”) and both are subject to change, only in writing, at anytime and for any reason, at the

discretion of the Channel Executive” (ibid.). The compensation plan provided for no base

salary (ibid.). The plan also contained a provision regarding overages and underages (ibid.)

(emphasis in original):

Overage/Underage: As set forth in Terms of Agreement, will be

paid on a monthly basis on the last payroll of the following

month. Difference between actual revenues collected and revenue

requirements will be treated as follows:

Overage amounts will be split with loan officers as per the

divisional overage policy, up to maximum allowable

overage limits.

Underage amounts will be split with loan officers as per

the divisional underage policy, up to normal divisional

underage rules.

The compensation plan required officers to “[b] e certain that in all cases, when loans are rate

locked, the lock expiration date is the sales date or exceeds the closing date specified in the

sales contract. Any exceptions must be authorized in writing by the next level manager” (ibid.). 

Similarly, the plan provided that loan officers “cannot originate an underage in excess of

divisional policy without approval from the next level manager” (ibid.).

* * *

From January 2002 to June 2003, mortgage rates were generally declining (Lendall

Dep. 89; Schilling Decl. ¶ 10), a circumstance that might induce a loan officer to “play the

market,” as we shall see below. In July 2003, however, there was a sharp increase in the

interest rates (ibid.). In a market of increasing rates, Chase was forced to fight harder to get

loans because the high rates reduced the number of consumers able to afford the loans. At

around this time, therefore the competition for home loans became very competitive due to

rising rates. In her complaint, plaintiff alleged that her division manager, Rick Cossano, “acting

on behalf of CMMC, made an oral offer to permit Ms. Lendall to negotiate rates with underages

without being charged for those underages in order to secure or maintain CMMC’s market

share” (Compl. ¶ 16) (emphasis added). During oral argument, plaintiff’s counsel clarified that

this promise was apparently made to plaintiff several times in mid-2003.

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Plaintiff’s manager, Cossano, learned in late 2003 that Lendall had accrued significant

underages. At that time, Cossano discovered that plaintiff had over thirty loans in the system

from July 2003 alone where the borrower’s desired rate, contrary to the ground rules, had not

been locked in (Cossano Dep. 35). Cossano was alerted to this situation on a tip from Lendall’s

assistant, Christina Fang (ibid.; Lendall Dep. 90). By late 2003, Lendall’s loans had over fifty

loans with underages amounting to more than $350,000 (Schilling Decl. Exh. D). Cossano thus

became concerned that Lendall was “playing the market” (Cossano Dep. 37).

Playing the market involved loan officers accruing the second type of underages, i.e.,

underages in which the officer delayed in locking in a lock-in loan at the borrower’s requested

rate. Loan officers might have done so, contrary to the ground rules, with the expectation that

the market rate would drop prior to closing. If the market rate dropped, the loan officer would

close the loan with an overage, thereby boosting the loan officer’s commission. Of course, a

significant risk was involved with this gaming of the market. If the market rate turned upward

after the borrower had asked for a locked rate, Chase had to make up the difference; in turn, the

agreements in place shifted part of the burden of this shortfall (i.e., underage) to the loan

officer. As stated, underages were not supposed to be created in this manner. The only

acceptable way to create an underage was to do so knowingly up front, as in quoting a discount

up front for business development reasons.

At Cossano’s request, Lendall’s branch and regional managers, Todd Brebner and Ed

Vaccaro, investigated the loans brokered by plaintiff during the second half of 2003. Based on

the investigation, Lendall’s managers confirmed Cossano’s suspicions that Lendall was playing

the market (Cossano Dep. 37). According to Vaccaro, at a meeting with him, Brebner and

Cossano, “Ms. Lendall admitted that ‘she had made a mistake’ in failing to lock the loans at the

rates that borrowers expected” (Vaccaro Decl. ¶ 4).

During oral argument, Lendall’s counsel proffered the theory that Lendall’s assistants,

including Christina Fang, were to blame for the delay in locking in the loans in a timely fashion,

or at least for failing to secure extensions of time in which to lock in the loans. This argument,

however, was contradicted, at least in part, by the loan-inventory cards submitted by Chase

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(Schilling Decl. Exh. E). The loan-inventory cards tracked the loans on which Lendall accrued

her underages during the contested time period. According to these inventory cards, Lendall

herself failed to lock in the loans in a timely fashion in 42 out of the 50 loans on which

underages were accrued. On the other hand, that leaves eight candidates to possibly support

Lendall’s theory.

Furthermore, plaintiff’s counsel argued during the hearing that the policy expressed in

her written employment agreements that required deduction of underages out of her commission

was not followed by Chase with respect to other loan officers. The only other officer, however,

that Lendall pointed to as receiving different treatment than Lendall was Jason Aiello. Lendall

did not depose Aiello apparently because she could not track him down. In any event, Aiello’s

commission statements produced by Chase seem to indicate that he too received deductions

from his commission for underages (Gillespie Reply Decl. Exhs. at CMMC 1277).

Plaintiff resigned, or at least attempted to resign, in October 2003 (Compl. ¶ 22). 

Shortly thereafter, Cossano “represented to Ms. Lendall that her actions in closing loans that did

not get into the system on time, where the rates were not locked in and where the lock-in was

not extended were fraudulent, a breach of contract and criminal” (id. ¶ 21). Similarly, Lendall’s

regional manager Ed Vaccaro allegedly “represented to Ms. Lendall that CMMC would bring

criminal charges against her which would result in her losing her home if she did not rescind her

resignation and return to her employment with CMMC” (ibid.). Cossano testified during his

deposition that he indeed discussed with Lendall the possible criminal and civil ramifications of

her failure to repay Chase (Cossano Dep. 44). After these discussions, Lendall sought legal

counsel to analyze her potential risk for civil and criminal liability arising from the underages

(Lendall Dep. 135). Lendall, scared of losing her house and assets and even suffering criminal

penalties, chose to return to work at Chase.

In the months following July 2003, Chase and Lendall negotiated a manner for dealing

with the losses (Lendall Dep. 155, 193; Cossano Dep. 23). In December 2003, Lendall and

Chase reached a purported agreement regarding Lendall’s losses. The December 2003

agreement primarily involved crediting Lendall with a higher commission rate than her ordinary

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 This Court issued an order on January 19, 2006, denying plaintiff’s motion for a trial by jury. The

January 2006 held that plaintiff’s undue delay in demanding a jury effected a waiver of that right.

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commission rate for her 2003 loans so as to help her offset the losses (id. at Exh. A; Lendall

Dep. 155; Cossano Dep. 23). An email from Cossano explained the benefits of the agreement

to the other managers (Vaccaro Decl. Exh. A):

Nancy [Lendall] has agreed to pay us the subtotal before the end

of 2003. I recommend accepting her proposal, because we will

immediately collect $19,675 from Nancy. If we do not accept, I

predict that she will resign and will be forced to sue her for the

balance.

Plaintiff testified that she only expressed “general agreement” with the proposal (Lendall

Dep. 155). In any event, it seems that plaintiff was paid consistently with the December 2003

agreement, continuing to work as a loan officer to pay off the underages (Brebner Decl. Exh.

B). Lendall apparently accrued no new underages (at least in the manner of delaying to lock in

requested rates) following her return to Chase in late 2003. In June 2005, plaintiff ultimately

left her post as a loan officer, transferring to one of Chase’s joint ventures.

* * *

On June 13, 2005, plaintiff filed her complaint in California Superior Court for the

County of Contra Costa. Chase removed this action to federal court on August 12, 2005, on

grounds of diversity jurisdiction. In her complaint, plaintiff listed two claims: (1) breach of

oral contract and (2) fraud. Plaintiff based her breach of contract claim on Chase’s purported

failure to abide by the alleged oral promise (or promises) that Lendall could “negotiate rates

with underages without being charged for those underages in order to secure or maintain

CMMC’s market share” (Compl. ¶ 16). As to her fraud claim, plaintiff alleged that the

representations by Cossano and Vaccaro that Lendall’s actions would subject her to civil and

criminal penalties were false misrepresentations.*

Chase moved for summary judgment on September 21, 2006. Along with filing

opposition papers, plaintiff filed a motion for leave to amend her complaint. By that motion to

amend, plaintiff seeks to add a claim under California Labor Code § 221.

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ANALYSIS

This order addresses both Chase’s motion for summary judgment and plaintiff’s motion

for leave to amend.

1. MOTION FOR SUMMARY JUDGMENT.

Summary judgment is proper where the pleadings, discovery and affidavits show “that

there is no genuine issue as to any material fact and that the moving party is entitled to

judgment as a matter of law.” FRCP 56(c). The moving party has the initial burden of

production to demonstrate the absence of any genuine issue of material fact. Playboy

Enterprises, Inc. v. Netscape Communications Corp., 354 F.3d 1020, 1023–24 (9th Cir. 2004). 

Once the moving party meets its initial burden, the nonmoving party must “designate specific

facts showing there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 323–24

(1986). Thus Celotex creates a burden-shifting analysis for purposes of motions for summary

judgment. “If the moving party shows the absence of a genuine issue of material fact, the

non-moving party must go beyond the pleadings and ‘set forth specific facts’ that show a

genuine issue for trial.” Leisek v. Brightwood Corp., 278 F.3d 895, 898 (9th Cir. 2002) (citation

omitted).

A. Fraud.

As noted above, plaintiff claimed that Chase is liable for fraud as a result of her

managers’ threats to take civil and criminal action against her if she quit Chase without

repaying the underages she owed to them. Accordingly, Lendall returned to work for Chase in

late 2003, continuing to work with Chase for over a year, working to pay back the underages

she had accrued in mid-2003.

In the Court’s experience, threats of criminal prosecution in the civil context are so

unusual and severe that, in the absence of a decision directly on point, this order must allow

plaintiff to develop her fraud claim on a full record at trial. Neither party has provided a

decision directly on point. Therefore, on this record, this order cannot find that defendant’s

threats of criminal prosecution are immune from liability for fraud as a matter of law.

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B. Breach of Oral Contract.

Chase has a stronger argument on plaintiff’s claim for breach of oral contract. On the

current record, the facts seem strong in favor of Chase. Nevertheless, since the same facts are

likely to be evidence in background for plaintiff’s fraud claim, this order denies summary

judgment as to the contract claim as well. In addition, the Ninth Circuit might not agree with

Chase on the instant record that summary judgment is warranted. While it is true that Lendall

did not respond to defendant’s motion for summary judgment with respect to her contract claim

in her opposition papers, this failure was due to Lendall’s belief that her motion to amend would

be granted. For the reasons stated below, her motion to amend is denied. Plaintiff’s counsel

made clear during the oral argument that she could go forward with her contract claims as pled

if the Court denied her motion to amend.

* * *

Counsel are reminded that the trial record will be a new record. The ultimate findings of

fact and conclusions of law will be made on the trial record, not on the instant

summary-judgment record. Any indication in this order as to which party has a stronger case

has no necessary predictive value on the outcome at trial.

2. MOTION TO AMEND.

Plaintiff’s also moves for leave to amend so as to add a new claim for violation of

California Labor Code § 221. Leave to amend a complaint shall be freely given when justice so

requires under Federal Rule of Civil Procedure 15(a). This standard is a liberal one. Rule

15(a), however, does not apply when a district court has established a deadline for amended

pleadings under Rule 16(b). See Johnson v. Mammoth Recreations, Inc., 975 F.2d 604, 607–08

(9th Cir. 1992). Once a scheduling order has been entered, the liberal policy favoring

amendments no longer applies. Subsequent amendments are not allowed without a request to

first modify the scheduling order. Id. at 608–09. Any modification of the scheduling order

must be based on a showing of good cause:

Rule 16(b)’s ‘good cause’ standard primarily considers the

diligence of the party seeking the amendment. . . . Although the

existence or degree of prejudice to the party opposing the

modification might supply additional reasons to deny a motion, the

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focus of the inquiry is upon the moving party’s reasons for seeking

modification. If that party was not diligent, the inquiry should end.

Id. at 609 (citation omitted). Seeking leave to amend while a motion for summary judgment is

pending “is precisely the kind of case management that Rule 16 is designed to eliminate.”

Id. at 610.

Under the case management order in effect in this case, “[l]eave to add any new parties

or pleading amendments must be sought by February 16, 2006” (Case Management Order at 1). 

The non-expert discovery cut-off, July 28, 2006, also already passed (ibid.). The last day for

dispositive motions was September 14, 2006 (id. at 3).

Plaintiff’s delay of seven months beyond the deadline for amendments evidences a total

lack of diligence. California Labor Code § 221 provides that “[i]t shall be unlawful for any

employer to collect or receive from an employee any part of wages theretofore paid by said

employer to said employee.” It should have been clear to plaintiff at the outset of this action,

prior even to any discovery, whether or not this code provision was implicated. Plaintiff cannot

articulate any “new” facts that suddenly alerted her to this possible claim over a year after she

filed her complaint in state court.

Moreover, while prejudice to Chase is not dispositive, the prejudice to Chase is

persuasive here. Defendant fully proceeded with discovery in this action on the assumption that

only two claims, breach and fraud, were in issue. The discovery deadline has passed. 

Suddenly, after Chase filed its motion for summary judgment, plaintiff sought to inject an

entirely new legal theory into the action. Had Chase known of this claim earlier in the

litigation, Chase could have sought experts regarding Section 221, taken relevant depositions,

and propounded affirmative discovery requests relating to this claim. Adding this claim at the

last minute would strip Chase of the opportunity to fully defend this claim. This order will not

countenance such dilatory tactics.

CONCLUSION

For the foregoing reasons, defendant’s motion for summary judgment is DENIED and

plaintiff’s motion for leave to amend is also DENIED. The hearing scheduled for plaintiff’s

motion to amend is hereby VACATED. The discovery hearing, currently scheduled for

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November 2, 2006, must be moved due to a conflict with the Court’s schedule. The hearing

will now be held on NOVEMBER 6, 2006 AT 1:15 P.M.

IT IS SO ORDERED.

Dated: October 27, 2006 

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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