Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_09-cv-00937/USCOURTS-caed-1_09-cv-00937-4/pdf.json

Nature of Suit Code: 220
Nature of Suit: Foreclosure
Cause of Action: 28:1441 Petition for Removal

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

MARY AMARAL, et al., )

)

)

)

Plaintiffs, )

)

vs. )

)

)

WACHOVIA MORTGAGE )

CORPORATION, et al., )

)

)

Defendants. )

)

)

No. CV-F-09-937 OWW/GSA

MEMORANDUM DECISION AND

ORDER GRANTING PLAINTIFFS’

REQUEST FOR AMENDMENT TO

AVOID HOLA PREEMPTION

Plaintiff’s Complaint alleged as general allegations that

Plaintiffs are the owners of real property located in Lemoore,

California, which is their residence, and further alleged:

9. On or about April 27, 2006, plaintiffs

obtained two loans from Fremont Investment &

Loan ....

10. Plaintiffs made all monthly payments to

Fremont through and including March 2008.

11. In approximately January 2008,

plaintiffs approached Wachovia to obtain a

refinance loan to pay off the First Loan and

the Second Loan [obtained from Fremont]. 

Plaintiffs’ loan officer at Wachovia, Heather

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Vasquez, told plaintiffs to cease making

payments to Fremont on the First or Second

Loan for April 2008 or May 2008, while the

Wachovia refinance loan was being processed.

12. On or about April 1, 2008, servicing of

the First Loan was taken over by Carrington

without notice to plaintiffs and without

their knowledge. Plaintiffs were not given

notice of the transfer of servicing ....

13. On or about April 30, 2008, Wachovia

purportedly wired $594,806.14 to Fremont to

pay off the First Loan and Second Loan.

14. Wachovia, through Vasquez and other

employees and agents, presented plaintiffs

with documentation showing that plaintiffs’

refinance loan had been approved, that

Fremont had been paid off in full, and that

plaintiffs were obligated to repay the

refinance loan to Wachovia. Wachovia gave

plaintiffs copies of loan paperwork showing

loan numbers ... for their Wachovia refinance

loan. Wachovia failed to give plaintiffs a

complete set of executed documents regarding

their refinance loan. Plaintiffs received

statements from Wachovia stating their

monthly payment was due.

15. Beginning in June 2008, Vasquez

instructed plaintiffs to make monthly

payments to Wachovia ... in repayment of the

Wachovia refinance loan. Beginning in June

2008, Wachovia accepted plaintiffs’ loan

payments.

16. Since the inception of the Wachovia

loan, plaintiffs made all payments to

Wachovia ... through and including November

2008. Wachovia gave plaintiffs receipts

showing the payment on their mortgage loan. 

Beginning in December 2008, Wachovia refused

to accept plaintiffs’ payments on the

Wachovia loan. Thereafter, Wachovia refused

to give plaintiffs any information regarding

the loan or their payments.

17. Plaintiffs are informed and believe and

thereon allege that Wachovia negotiated some

or all of the payments tendered.

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18. On May 13, 2008, Carrington sent to

plaintiffs a Notice of Intent to Foreclose on

that First Loan stating that monthly payments

‘due on and after 3/1/2008 have not been

received.’ ....

...

20. In November or December 2008, Wachovia

presented plaintiffs with newly created

receipts purporting to show that plaintiffs

had received cash back from payments made on

the Wachovia loan, and/or that payments were

deposited in another account held by

plaintiffs at the Wachovia bank. Plaintiffs

never received any cash back from any of the

monthly payments made on the mortgage loan,

and never deposited the money for the

mortgage payments into any other Wachovia

account. 

In the Memorandum Decision and Order filed on February 17,

2010, (Doc. 43; February 17 Memorandum), Plaintiff’s causes of

action against Defendant Wachovia Mortgage Bank (“Wachovia”) for

fraud and conversion were dismissed as preempted by the federal

Home Owners Loan Act (“HOLA”):

a. Fraud Claim

As to the fraud claim, Plaintiffs allege

Wachovia ‘made material false representations

to plaintiffs that their refinance loan was

approved by Wachovia, that all loan documents

had been processed, and that plaintiffs had

incurred an obligation to make monthly

payments to Wachovia to repay the refinance

loan.’ (Doc. 24-2 at 8). This fraud claim

concerns lending and revolves around the

‘processing, origination [and/or] servicing’

of a mortgage. As applied, this fraud claim

is a type of state law contemplated in §

560.2(1)(10) and is preempted.

Plaintiffs’ fraud claim also alleges that

‘[t]here was no documents indicating the

Wachovia loan had been processed or approved,

or that plaintiffs had any obligation to pay

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any money to Wachovia.’ (Doc. 24-2 at 8.) 

This fraud allegation fits squarely within §

560.2(b)(10), and likely within §

560.2(b)(9), which deals with information in

‘credit-related documents,’ and §

560.2(b)(11), which deals with ‘repayments.’

Finally, Plaintiffs’ fraud claim alleges that

Wachovia ‘made false representations with the

intent to induce plaintiffs to make monthly

mortgage payments to Wachovia.’ (Doc. 24-2

at 8.) As applied, this claim is also within

§ 560.2(b)(10) as it is based on, and seeks

to impose liability for and regulate, alleged

false statements made in connection with the

‘[p]rocessing, origination [and/or] servicing

... of ... or participation in,’ a mortgage.

Because Plaintiffs’ fraud claim, as applied,

bears on lending activities expressly

contemplated by § 560.2(b), it is preempted. 

No further analysis is necessary. Wachovia’s

motion to dismiss the fraud claim is GRANTED

and this claim is DISMISSED.

b. Conversion Claim

The conversion claim alleges ‘Wachovia

converted the personal property of

plaintiffs, in the form of mortgage payments

made on a fraudulent and non-existent loan,

to its own use or control.’ (Doc. 24-2 at

8.) This claim, as applied, also fits within

§ 560.2(b). The alleged wrongful conversion

of Plaintiffs’ ‘mortgage payments’ made on a

‘fraudulent loan’ is a state law claim that

is based on alleged wrongful conduct in the

‘processing, origination [and/or] servicing’

of a mortgage, § 560.2(b)(10), and also

concerns ‘repayment[],’ § 560.2(b)(11). 

Because Plaintiffs’ conversion claim, as

applied, would regulate lending activities

expressly contemplated by § 560.2(b), it is

preempted, and no further analysis is

necessary. Wachovia’s motion to dismiss the

conversion claim is GRANTED and this claim is

DISMISSED.

c. Requested Amendment.

At the hearing on the motion, Plaintiffs

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argued that their fraud and conversion claims

are not preempted because Wachovia did not,

in fact, issue them a loan. Plaintiffs

requested leave to amend to clarify that

Wachovia did not issue them a loan, and

Plaintiffs believe that such an amendment

would save their fraud and conversion claims

from preemption.

The preceding analysis on preemption is

predicated on the understanding that

Plaintiffs were, in fact, issued a loan by

Wachovia. Numerous allegations in the

complaint suggest that Wachovia actually

issued them a loan (See, e.g., Doc. 24-2 at 4

(alleging, among other things, ‘Wachovia

failed to give plaintiffs a complete set of

executed documents regarding their refinance

loan,’ ‘[s]ince the inception of the Wachovia

loan, plaintiffs made all monthly payments to

Wachovia,’ and ‘[b]eginning in December 2008,

Wachovia refused to accept plaintiffs’

payment on the Wachovia loan.’)). In

addition, the allegation in the conversion

claim that Wachovia ‘made’ a ‘fraudulent

loan’ is based on the necessary premise that

Wachovia actually made a loan to Plaintiffs. 

Either a loan was made which was fraudulent

or there was no loan at all, but there cannot

be both a loan which was fraudulent and no

loan at all. The allegation in the

conversion claim that the ‘fraudulent loan’

was ‘non-existent’ can be read to mean, as it

was here, that Wachovia actually made the

loan to Plaintiffs but formalities were not

followed and there is no definitive

documentation that affirms the loan’s

existence, i.e., the loan does not exist on

paper. 

Even if Plaintiffs amend their complaint, as

requested, to allege that Wachovia never

issued a loan to Plaintiffs, it is not clear

that this would impact the preemption

analysis. One stated purpose for the

regulatory preemption provision is to ensure

‘uniform federal scheme of regulation’ for

federal savings associations. 12 C.F.R. §

560.2(a). Under Plaintiffs’ analysis,

however, in any give situation, the lending

activities of federal savings associations

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would be subject to both federal and state

regulations so long as no loan is ultimately

issued to the borrower. Nevertheless,

supplemental briefing is requested to

properly analyze this preemption issue.

On or before February 22, 2010, Wachovia

shall file supplemental briefing, not to

exceed seven (7) pages, to address whether

Plaintiffs’ proposed amendment to their fraud

and conversion claims is futile because these

claims will still be preempted even if

Wachovia did not issue a loan to Plaintiffs. 

Any opposition to Wachovia’s supplemental

briefing is due by February 26, 2010, and

shall not exceed five (5) pages. There is no

need for a reply.

...

Once the supplemental briefing is received

and the preemption issue resolved, an order

will issue specifying the due date for any

amended complaint and any corresponding

responsive pleading.

Wachovia timely filed its supplemental brief, addressing

whether HOLA preemption applies even if Wachovia did not issue a

loan to Plaintiffs.

In their supplemental brief, Plaintiffs abandon their

contention made at the hearing that claims for fraud and

conversion based on the failure to issue a loan are not preempted

by HOLA:

At oral argument, counsel for plaintiffs

articulated one possible amendment, i.e.,

that plaintiffs could clarify that a loan was

never made by plaintiffs. Plaintiffs should

not be limited to the example given at oral

argument, but should be given leave to amend

that complaint in keeping with the Court’s

decision on the motion to dismiss. Wachovia

will have ample opportunity to challenge the

First Amended Complaint once it is filed. 

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Plaintiffs now contend that state law claims of fraud and

conversion are not preempted by HOLA “where, as here, the claims

do not involve systemic practices.” Plaintiffs assert that they

can amend “to clarify that their causes of action based on fraud

and conversion implicate only isolated conduct and not the

lending practices of Wachovia.” Plaintiff asserts:

The First Amended Complaint will clarify that

plaintiffs seek to recover based on the

single, isolated and presumably aberrant

incident of their funds being taken by a

Wachovia employee in the guise of extending a

‘mortgage loan.’ The only argument Wachovia

can advance to defeat plaintiffs’ proposed

amendments is to contend that Heather Vasquez

and any other offending agents of Wachovia

were acting pursuant to Wachovia’s policies

and procedures when they absconded with

plaintiffs’ money while fraudulently leading

plaintiffs to believe they had obtained a

mortgage loan. Only under those

circumstances would plaintiff’s [sic]

attempts to address this isolated incident of

fraud impede the ‘lending activities’ of

Wachovia. 

The issue is whether leave to amend should be denied on the

ground of futility. Leave to amend may be denied if the proposed

amendment is futile or would be subject to dismissal. Saul v.

United States, 928 F.2d 829, 843 (9 Cir.1991). Leave to amend th

may be denied based upon futility alone. Bonin v. Calderon, 59

F.3d 815, 845 (9 Cir.1995). A claim is considered futile and th

leave to amend shall not be given if there is no set of facts

that can be proved under the amendment that would constitute a

valid claim. Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214

(9 Cir.1988). However, denial on this ground is rare and th

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courts generally defer consideration of challenges to the merits

of a proposed amended pleading until after leave to amend is

granted and the amended pleading is filed. Netbula, LLC v.

Distinct Corp., 212 F.R.D. 534, 539 (N.D.Cal.2003), citing

Schwarzer, California Practice Guide: Federal Civil Procedure

Before Trial at 8:422 (The Rutter Group, 2002).

Congress enacted HOLA “to charter savings associations under

federal law,” Bank of America v. City and County of San

Francisco, 309 F.3d 551, 559 (9 Cir.2002), cert. denied, 538 th

U.S. 1069 (2003), and “to restore public confidence by creating a

nationwide system of federal savings and loan associations to be

centrally regulated according to nationwide ‘best practices,’”

Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 160-

161 (1982). HOLA and its regulations are a “radical and

comprehensive response to the inadequacies of the existing state

system,” and “so pervasive as to leave no room for state

regulatory control.” Conference of Fed. Sav. & Loan Ass’ns v.

Stein, 604 F.2d 1256, 1257, 1260 (9 Cir.1979), aff’d, 445 U.S. th

921 (1980). “[B]ecause there has been a history of significant

federal presence in national banking, the presumption against

preemption of state law is inapplicable.” Bank of America, id.,

309 F.3d at 559. 

Through HOLA, Congress gave the Office of Thrift Supervision

(“OTS”) broad authority to issue regulations governing thrifts. 

Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1005 (9th

Cir.2008); 12 U.S.C. § 1464. OTS promulgated 12 C.F.R. § 560.2

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as a preemption regulation, which “‘has no less preemptive effect

than federal statutes.’” Silvas, id., 514 F.3d at 1005. 

Section 560.2(a) provides:

OTS is authorized to promulgate regulations

that preempt state laws affecting the

operations of federal savings associations

when deemed appropriate to facilitate the

safe and sound operation of federal savings

associations, to enable federal savings

associations to conduct their operations in

accordance with the best practices of thrift

institutions in the United States, or to

further other purposes of the HOLA. To

enhance safety and soundness and to enable

federal savings associations to conduct their

operations in accordance with best practices

(by efficiently delivering low-cost credit to

the public free from undue regulatory

duplication and burden), OTS hereby occupies

the entire field of lending regulation for

federal savings associations. OTS intends to

give federal savings associations maximum

flexibility to exercise their lending powers

in accordance with a uniform federal scheme

of regulation. Accordingly, federal savings

associations may extend credit as authorized

under federal law, including this part,

without regard to state laws purporting to

regulate or otherwise affect their credit

activities, except to the extent provided in

paragraph (c) or § 560.10 of this part. For

purposes of this section, ‘state law’

includes any state statute, regulation,

ruling, order, or judicial decision. 

1

Section 560.2(b) provides:

Except as provided in § 560.110 of this part,

the types of state laws preempted by

paragraph (a) of this section include,

without limitation, state laws purporting to

impose requirements regarding:

...

12 C.F.R. § 560.110 pertains to “most favored lender usury 1

preemption” and has no apparent relevance to this action.

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(4) The terms of credit, including

amortization of loans and the

deferral and capitalization of

interest and adjustments to the

interest rate, balance, payments

due, or term to maturity of the

loan, including the circumstances

under which a loan may be called

due and payable upon the passage of

time or a specified event external

to the loan;

(5) Loan-related fees, including 

without limitation, initial

charges, late charges, prepayment

penalties, servicing fees, and

overlimit fees; 

(6) Escrow accounts, impound

accounts, and similar accounts;

...

(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 creditrelated documents and laws

requiring creditors to supply

copies of credit reports to

borrowers or applicants;

(10) Processing, origination,

servicing, sale or purchase of, or

investment or participation in,

mortgages

....

Section 560.2(c) provides:

State laws of the following types are not

preempted to the extent that they only

incidentally affect the lending operations of

Federal savings associations or are otherwise

consistent with the purposes of paragraph (a)

of this section:

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...

(4) Tort law

....

As noted by the Ninth Circuit in Silvas, 514 F.3d at 1005,

OTS has outlined a proper analysis in evaluating whether a state

law is preempted under Section 560.2:

When analyzing the status of state laws under

§ 560.2, the first step will be to determine

whether the type of law in question is listed

in paragraph (b). If so, the analysis will

end there; the law is preempted. If the law

is not covered by paragraph (b), the next

question is whether the law affects lending. 

If it does, then, in accordance with

paragraph (a), the presumption arises that

the law is preempted. This presumption can

be reversed only if the law can clearly be

shown to fit within the confines of paragraph

(c). For these purposes, paragraph (c) is

intended to be interpreted narrowly. Any

doubt should be resolved in favor of

preemption.

OTS, Final Rule, 61 Fed.Reg. 50951, 50966-50967 (Sept. 30, 1996).

In Silvas, supra, 514 F.3d 1001, mortgage applicants filed a

putative class action in state court alleging that a federal

savings and loan association’s policy not to refund lock-in fees

after applicants cancelled the transaction within the three-day

window provided by TILA violated California’s Unfair Competition

Law. The Ninth Circuit ruled:

I UCL § 17500: Unfair Advertising

As outlined by OTS, the first step is to

determine if UCL § 17500, as applied, is a

type of state law contemplated in the list

under paragraph (b) of 12 C.F.R. § 560.2. If

it is, the presumption analysis ends. Here,

Appellants allege that E*TRADE violated UCL §

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17500 by including false information on its

website and in every media advertisement to

the California public. Because this claim is

entirely based on E*TRADE’s disclosures and

advertising, it falls within the specific

type of law listed in § 560.2(b)(9). 

Therefore, the presumption analysis ends. 

UCL § 17055 as applied in this case is

preempted by federal law.

II UCL § 17200: Unfair Competition

Again, the first step is to determine if UCL

§ 17200, as applied, is a type of state law

contemplated in the list under paragraph (b)

of 12 C.F.R. § 560.2. Appellants allege

E*TRADE’s practice of misrepresenting

consumer’s legal rights in advertisements and

other documents is contrary to the policy of

California and thus violates UCL § 17200. 

This claim, similar to the claim under §

17500, fits within § 560.2(b)(9) because the

alleged misrepresentation is contained in

advertising and disclosure documents. 

In addition, Appellants’ claim under UCL §

17200 alleges that the lock-in fee itself is

unlawful. That allegation triggers a

separate section of paragraph (b). Section

560.2(b)(5) specifically preempts state laws

purporting to impose requirements on loan

related fees. See Jones v. E*Trade Mortgage

Co., 397 F.3d 810, 813 (9 Cir.2005)(finding th

E*TRADE’s lock-in fee is not a separate

transaction, but a loan related fee). 

Because the UCL § 17200 claim, as applied, is

a type of state law listed in paragraph (b) -

in two separate sections - the preemption

analysis ends there. Appellants’ claim under

UCL § 17200 is preempted.

514 F.3d at 1006. The Ninth Circuit then addressed the

incidental affect analysis under Section 560.2(c):

Section 560.2(c) provides that state laws of

general applicability only incidentally

affecting federal savings associations are

not preempted. Appellants argue that both of

their state law claims fit under §

560.2(c)(1) and (4) because they are founded

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on California contract, commercial, and tort

law, merely enforcing the private right of

action under TILA. They further contend that

their claims use a predicate legal duty

supplied by TILA, and therefore only have an

incidental affect on lending.

We do not reach the question of whether the

law fits within the confines of paragraph (c)

because Appellants’ claims are based on types

of laws listed in paragraph (b) of § 560.2,

specifically (b)(9) and (b)(5).3

If we did reach the issue, we would reach 3

the same result. When federal law preempts a

field, it leaves ‘no room for the States to

supplement it.’ ... When an entire field is

preempted, a state may not add a damages

remedy unavailable under the federal law ...

An integral part of any regulatory scheme is

the remedy available against those who

violate the regulations ....

In this case, it is clear that the UCL has a

much longer statute of limitations than does

TILA ... It is also clear that Appellants

seek to take advantage of the longer statute

of limitations under UCL to remedy TILA

violations, because without the extended

limitations period their claims would be

barred.

An attempt by Appellants to go outside the

congressionally enacted limitation period of

TILA is an attempt to enforce a state

regulation in an area expressly preempted by

federal law.

Id. at 1006-1007.

Plaintiffs argue that Fenning v. Glenfed, Inc., 40

Cal.App.4th 1285 (1995) is “almost directly on point.” In the

February 17 Memorandum, holding that Plaintiffs’ conversion

claim, which alleged that “Wachovia converted the personal

property of plaintiffs, in the form of mortgage payments made on

a fraudulent and non-existent loan, to its own use and control,”

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was preempted by HOLA, the Court noted:

 Plaintiffs’ reliance on Fenning v. 5

Glenfield [sic], 40 Cal.App.4th 1285 (1995)

is unpersuasive. Fenning is materially

distinguishable. See In re Wash. Mut.

Overdraft Prot. Litig., 539 F.Supp.2d 1136,

1155 (C.D.Cal.2008) (noting that Fenning

involved ‘claims for fraud related to a

bank’s sale of uninsured investment

securities, not its deposit or lendingrelated activities’).

Plaintiffs contend that the Court’s ruling is incorrect:

As Fenning states: ‘Plaintiff sued both the

Bank, a federal savings association, and

three affiliated companies, none of which is

a federal savings association. Consequently,

we must make independent determinations of

whether Congress intended to preempt

plaintiff’s claims against the Bank and the

other defendants. We begin with a discussion

of Glenfed Brokerage, the service corporation

wholly owned by the Bank. Fenning, supra, 40

Cal.App.4th at 1292-1293. The analysis cited

by plaintiffs begins under the ‘Claims

Against the Bank’ section of Fenning, which

begins at page 1296.

In Fenning, a class action was brought against Glendale

Federal Bank, its former and current parent companies, and its

securities brokerage subsidiary. The complaint alleged that

Plaintiff walked into a branch of the Bank where he maintained a

checking account, seeking to reinvest the proceeds of a

certificate of deposit from his pension and employee benefit

plans. After explaining his investment objectives to the

“investment consultant” whom he believed to be a Bank employee,

the plaintiff was persuaded to invest his money in two mutual

funds, neither of which was FDIC insured. The Plaintiff first

learned that his investment was not with the Bank, and not FDIC

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insured, when he received his first quarterly statement, which

reported an investment loss. Plaintiff filed his class action,

alleging causes of action for unfair and deceptive business

practices in violation of the California Business and Professions

Code, fraud, and negligent misrepresentation. The gravamen of

the class action complaint was that the advertising and sales

practices of Glenfed Brokerage purposefully deceive customers by

blurring the distinction between the Bank, whose investments are

safe and FDIC insured, and Glenfed Brokerage, which sells

uninsured investments subject to substantial risks of loss, in

order to induce customers to purchase investment products from

Glenfed Brokerage. Plaintiff maintained that these advertising

and sales practices were unfair and deceptive, in direct

violation of federal regulations applicable to service

corporations such as Glenfed Brokerage, and that the Bank is

separately liable for this conduct because, by means of the

improper and misleading use of the Bank’s personnel, logo, and

facilities, the Bank actively engaged in consumer fraud. The

Defendants demurred to the Complaint on the ground of HOLA

preemption. The trial court granted the demurrer and the Court

of Appeals reversed. As to the Bank, the Court of Appeals ruled:

... The question with which we are faced here

... is whether plaintiff’s lawsuit for fraud,

negligent misrepresentation (which is, of

course, a species of fraud), and unfair and

deceptive business practices in effect

regulates the ‘operations’ of a savings

association. We conclude that it does not.

Plaintiff’s complaint alleges that the Bank,

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in soliciting the sale of securities, engaged

in deceptive advertising practices,

intentionally or negligently made material

misrepresentations and omissions, and engaged

in other misleading and deceptive acts,

causing plaintiff and the class to ‘believ[e]

that the GlenFed Brokerage employees they

were dealing with were Glenfed Bank employees

and that the mutual funds or other securities

purchased had substantially the same safety

features as a federally insured Certificate

of Deposit.’ Plaintiff further alleged that

he and the class were misled by the Bank’s

deceptive advertising and reasonably relied

on the Bank’s misrepresentations and

omissions, all to their detriment.

... [A]ctions for fraud are governed almost

exclusively by state law, and do not raise

issues of great federal interest ... There is

no reason to suppose that Congress intended

to preempt common law tort claims,

effectively granting savings associations

immunity from such state law claims, and a

number of courts have so held ... And the

Bank’s argument that, by permitting fraud and

unfair trade practices suits, the state is

regulating the Bank’s conduct, is off the

mark. Plaintiff’s ability to sue the Bank

for fraud does not interfere with what the

Bank may do, that is, how it may conduct its

operations; it simply insists that the Bank

cannot misrepresent how it operates, or

employ fraudulent methods in its operations. 

Put another way, the state cannot dictate to

the Bank how it can or cannot operate, but it

can insist that, however the Bank chooses to

operate, it do so free from fraud and other

deceptive practices.

40 Cal.App.4th at 1298-1299.

However, as noted in Silvas v. E*Trade Mortg. Corp., 421

F.Supp.2d 1315, 1320 n.3 (S.D.Cal.2006), aff’d, 514 F.3d 1001

(9 Cir.2008), Fenning predated the issuance by the Office of th

Thrift Supervision of 12 C.F.R. § 560.2. Moreover, Fenning does

not hold or even suggest that an allegation that a “single,

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isolated and presumably aberrant incident of their funds being

taken by a Wachovia employee in the guise of extending a

‘mortgage loan’” would not be preempted by HOLA. Finally,

California state court decisions interpreting federal preemption

law are not binding on a federal court. Id. at 1321 n.4.

Plaintiffs appear to contend that Wachovia employees did not

transfer money to Fremont to pay off Plaintiffs’ loans and that

Wachovia employees stole the payments made to Wachovia by

Plaintiffs, who believed that their loans to Fremont had been

paid by Wachovia as part of the ostensible refinancing. In other

words, those Wachovia employees defrauded not only Plaintiffs but

Wachovia itself. Plaintiffs have not named those Wachovia

employees as defendants in this action.

Plaintiffs cite Lopez v. Washington Mutual Bank, 284 F.3d

990 (9 Cir.2002) as authority that the proposed amendment will th

not be preempted by HOLA. However, the cited opinion was

withdrawn and superseded by Lopez v. Washington Mutual Bank, 302

F.3d 900 (9 Cir.2002), and amended on denial of rehearing en th

banc by Lopez v. Washington Mutual Bank, 311 F.3d 928 (9th

Cir.2002).2

In Lopez, the plaintiffs claimed that the Bank’s practice of

using directly deposited Social Security and SSI benefits to set

off overdrafts and overdraft fees constituted common law

conversion. In the initial Lopez opinion, the panel ruled that

The amendment on denial of rehearing en banc is not germane

2

to the issue before the Court.

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plaintiffs’ claim for conversion only incidentally affected

deposit-related activities:

It is the federal law, Section 407(a), that

has the primary effect on the bank’s

practices; these state law claims merely

piggy-back on the federal violation and

provide additional state remedies.

See Lopez, 284 F.3d at 998. Plaintiffs contend that “[o]n

rehearing en banc, the court did not reach a conclusion as to

whether the conversion cause of action was precluded by

preemption,” thereby “leaving its prior opinion regarding state

law preemption undisturbed.” 

Plaintiffs cite no authority for this contention. Review of

the Ninth Circuit’s docket in Lopez shows that the Ninth Circuit

panel which issued the initial Lopez opinion granted a petition

for rehearing, not a petition for rehearing en banc, and withdrew

the initial opinion. (See Ninth Circuit Docket No. 01-15303,

Entry 84). In the Lopez opinion cited at 302 F.3d 900, the 3

Ninth Circuit held that it need not reach the question of

preemption of the state law conversion claim because the District

Court had recognized an alternative ground for dismissal of that

claim, i.e., that plaintiffs had not shown a conversion of

plaintiffs’ property by a wrongful act. 302 F.3d at 907. 

Because the initial Lopez opinion was withdrawn by the panel, it

A Court may take judicial notice of matters of public record, 3

including duly recorded documents, and court records available to

the public through the PACER system via the internet. See Fed. R.

Evid. Rule 201(b); United States v. Howard, 381 F.3d 873, 876, fn.1

(9th Cir. 2004).

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has no precedential effect and cannot be relied upon by

Plaintiffs or this Court. 

Plaintiffs also cite Lopez v. World Savings & Loan Assn.,

105 Cal.App.4th 729, 742 (2005). In Lopez, a homeowner brought an

action against World, alleging that World have charged a fee for

the transmission of a payoff demand by fax in excess of the fee

authorized by California Civil Code § 2943(e)(6) for furnishing

such a statement. The trial court dismissed the plaintiff’s

claims as preempted and the Court of Appeals affirmed. In the

portion of the opinion cited by Plaintiffs here, the Court of

Appeals, referring to Gibson v. World Savings and Loan Assn., 103

Cal.App.4th 1291 (2003), which held that 12 C.F.R. § 560.2 does

not preempt a class action under the UCL alleging that World

charges borrowers more for replacement hazard insurance than

authorized by the terms of the governing deeds of trust, and that

World fraudulently misrepresents the cost of replacement

insurance, stated:

We agree fully with the court there that ‘the

duties of a contracting party to comply with

its contractual obligations and to act

reasonably to mitigate its damages in the

event of a breach by the other party, ... not

to misrepresent material facts, and ... to

refrain from unfair or deceptive business

practices’ (Gibson, at p. 1301), upon which

the claims in that case were based, ‘are not

requirements or prohibitions of the sort that

[part] 560.2 preempts (id. at p. 1302). As

the court explained, these duties are not

directed towards federal savings

associations, but to ‘anyone engaged in any

business and anyone contracting with anyone

else,’ so that ‘they do not purport to

regulate federal savings associations and are

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not specifically directed towards them ...

Any effect they have on the lending

activities of a federal savings association

is incidental rather than material. 

Plaintiffs also cite McKell v. Washington Mutual, Inc., 142

Cal.App.4th 1457, 1485 (2006).

However, in Munoz v. Financial Freedom Senior Funding Corp.,

567 F.Supp.2d 1156, 1162-1163 (C.D.Cal.2008), the plaintiff

relied on Fenning, Gibson, and McKell, in arguing that state laws

of general applicability are not preempted by HOLA. The District

Court, citing the Ninth Circuit’s decision in Silvas, ruled:

The Ninth Circuit drew no distinction between

a law of general applicability and one

specifically designed to regulate savings

associations. Thus, state court decisions

cited by Ms. Munoz, to the extent they hold a

law of general applicability cannot be

preempted by HOLA, are in conflict with this

recent decision of the Ninth Circuit.

Plaintiffs cite Burns International, Inc. v. Western Savings

and Loan Association, 978 F.2d 533 (9 Cir.1992). In Burns,

th

borrowers filed an action against Western and its officers,

alleging fraud and negligent misrepresentation in connection with

negotiating a line of credit. The action was dismissed for lack

of subject matter jurisdiction. The Ninth Circuit addressed

“whether an action for fraud and negligent misrepresentation may

be brought against an officer of a savings and loan association

under federal common law” and ruled that “there is no paramount

federal interest that compels the recognition of a federal common

law cause of action against an individual officer in a case where

a borrower from a federal savings and loan association alleges

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that a loan agreement was induced by means of a fraudulent

representation.” Id. at 534. Plaintiff argued to the Ninth

Circuit that “the regulation of federal savings and loan

associations ... under 12 U.S.C. § 1464 is a uniquely federal

interest, demanding recognition of federal common law causes of

action for fraud and negligent misrepresentation against

executives, officers, and directors of such institutions.” Id.

at 535. The Ninth Circuit, following Taylor v. Citizens Fed.

Sav. & Loan Assn., 846 F.2d 1320 (11 Cir.1988), which held that th

a private cause of action cannot be maintained by a borrower

against a S & L for alleged violations by the S & L of HOLA,

agreed that “the creation of new federal common law causes of

action is unnecessary for allegations of fraudulent

misrepresentations in connection with a bank loan because the

remedy under state law is adequate.” Id. at 536. The Ninth

Circuit concluded:

Contrary to the Burnses’ contentions, a cause

of action alleging that a loan agreement was

obtained by means of a fraudulent

representation does not implicate the

internal affairs of an S & L. The Burnses

have failed to demonstrate that state law is

inadequate to resolve their pending action

against the Drigges in the Arizona courts

involving the same claims.

Id. at 537.

Burns is not determinative because the decision did not

involve HOLA preemption; rather, it involved subject matter

jurisdiction based on an alleged violation of HOLA by a

defendant. Whether Plaintiffs’ proposed amendment will be

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preempted by HOLA is a defense to Plaintiffs’ claims. See

Fidelity Federal Savings & Loan Assn. v. de la Cuesta, 458 U.S.

141 (1982).

Plaintiffs also cite In re Ocwen Loan Servicing LLC Mortgage

Servicing Litigation, 491 F.3d 638 (7 Cir.2007). In Ocwen,

th

borrowers brought a putative class action under the Fair Debt

Collection Practices Act, the Real Estate Settlement Procedures

Act, the Truth in Lending Act, and state law claiming that

excessive service charges were assessed in connection with

mortgage foreclosures. The District Court denied defendant’s

motion to dismiss the pendent state law claims as preempted by

HOLA. In affirming the District Court, the Seventh Circuit,

noting that although the OTS has some prosecutorial and

adjudicatory powers, it has no power to adjudicate disputes

between the S & L and their customers and cannot provide a remedy

to persons injured by the wrongful acts of S & L’s. Citing

Burns, the Seventh Circuit noted that HOLA creates no private

right of action to sue to enforce the statute or the HOLA

regulations. Id. at 643. The Seventh Circuit ruled:

Against this backdrop of limited remedial

authority, we read subsection (c) [of 12

C.F.R. § 560.2] to mean that OTS’s assertion

of plenary regulatory authority does not

deprive persons harmed by the wrongful acts

of savings and loan associations of their

basic state common-law type remedies. 

Suppose an S & L signs a mortgage agreement

with a homeowner that specifies an annual

interest rate of 6 percent and a year later

bills the homeowner at a rate of 10 percent

and when the homeowner refuses to pay

institutes foreclosure proceedings. It would

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be surprising for a federal regulation to

forbid the homeowner’s state to give the

homeowner a defense based on the mortgagee’s

breach of contract. Or if the mortgage (or a

servicer like Ocwen) fraudulently represents

to the mortgagor that it will forgive a

default, and then forecloses, it would be

surprising for a federal regulation to bar a

suit for fraud ... Enforcement of state law

in either of the mortgage-servicing examples

above would complement rather than substitute

for the federal regulatory scheme. 

This is well explained in ‘Preemption of

State Laws Applicable to Credit Card

Transactions’ ¶ 11C (Opinion of OTS Chief

Counsel, Dec. 24, 1996, 1996 WL 767462):

State laws prohibiting deceptive

acts and practices in the course of

commerce are not included in the

list of preempted laws in §

560.2(b) .... The [Indiana] DAP

[deceptive acts and practices]

statute prohibits specified acts

and representations in all consumer

transactions without regard to

whether the transaction involves an

extension of credit. Although not

directly aimed at lenders, this law

affects lending to the extent that

it prohibits misleading statements

and practices in loan transactions

by a federal savings association. 

Accordingly, .... a presumption

arises that the DAP statute would

be preempted in connection with

loans made by the Association.

The OTS has indicated, however,

that it does not intend to preempt

state laws that establish the basic

norms that undergird commercial

transactions .... The Indiana DAP

falls within the category of

traditional ‘contract and

commercial’ law under §

560.2(c)(1). While the DAP may

affect lending relationships, the

impact on lending appears to be

only incidental to the primary

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purpose of the statute - the

regulation of the ethical practices

of all businesses engaged in

commerce in Indiana. There is no

indication that the law is aimed at

any state objective in conflict

with the safe and sound regulation

of federal savings associations,

the best practices of thrift

institutions in the United States,

or any other federal objective

identified in § 560.2(a). In fact,

because federal thrifts are

presumed to interact with their

borrowers in a truthful manner,

Indiana’s general prohibition on

deception should have no measurable

impact on their lending operations. 

Accordingly, we conclude that the

Indiana DAP is not preempted by

federal law. 

However, Fultz v. World Savings & Loan Assn., 571 F.Supp.2d

1195, 1198 (W.D.Wash.2008) notes Ocwen did not discuss or cite

the 1999 OTS opinion that if the California Unfair Competition

Act imposes requirements related to loan disclosures and fees, it

“‘(1) has more than an incidental effect on a federal thrift’s

lending operations and (ii) is inconsistent with the purposes of

§ 560.2(a).’” Because of this lapse, the Fultz court did not find

the Ocwen decision “particularly persuasive.” Id. at 1198 n.4. 

Moreover, this Court is bound by the Ninth Circuit’s opinion in

Silvas and must follow the analytical framework adopted in

Silvas.

Although case authority does not appear to support

Plaintiffs’ contention that a single, isolated instance of a

fraudulent loan will avoid HOLA preemption on that ground alone,

it cannot be concluded at this juncture that the proposed

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amendment is futile as a matter of law and because leave to amend

should be freely granted and leave to amend is without prejudice

to a motion to dismiss, Plaintiffs’ request for leave to amend

the fraud and conversion causes of action against Defendant

Wachovia is GRANTED.

Plaintiffs’ shall file a First Amended Complaint in

accordance with the rulings made in the February 17 Memorandum

and this Order within twenty (20) days following the filing date

of this Order. Defendants’ response shall be filed within twenty

(20) days thereafter.

IT IS SO ORDERED.

DATED: July 2, 2010.

 /s/ Oliver W. Wanger 

 OLIVER W. WANGER

UNITED STATES DISTRICT JUDGE

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