Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_09-cv-02964/USCOURTS-cand-3_09-cv-02964-4/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Contract Dispute

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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

MARY J. YAKAS, on behalf of herself and

all others similarly situated,

Plaintiff,

 v.

CHASE MANHATTAN BANK, U.S.A.,

N.A., predecessors, successors, and

subsidiaries, and DOES 1-100, names and

addresses currently unknown,

Defendants. /

No. C 09-02964 WHA

ORDER DENYING

DEFENDANT’S MOTION TO

DISMISS

INTRODUCTION

In this proposed class action, defendant Chase Manhattan Bank moves to dismiss

plaintiff’s breach-of-contract and unjust-enrichment claims. For the reasons stated below, the

motion to dismiss is DENIED.

STATEMENT

On July 1, 2009, plaintiff commenced this action. Defendant moved to dismiss. That

motion was granted with leave to amend. On November 19, plaintiff filed a first amended

complaint alleging breach of contract and unjust enrichment. Now ripe for decision is a new

motion to dismiss. 

Plaintiff is a resident of Concord, California. She desires to represent a class of borrowers

who entered into home equity lines of credit also known as HELOCs. Defendant is a national

retail banking institution with branch offices throughout California and across the United States.

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In April 2004, plaintiff entered into her HELOC agreement with defendant. Plaintiff’s

HELOC had a $71,750 credit limit that was secured by her Concord property. In order to obtain

this HELOC, defendant required plaintiff to submit an appraisal by a licensed appraiser of her

property. The appraisal valued plaintiff’s property at $718,000. 

Paragraph 14 of the HELOC agreement required plaintiff to pay a non-refundable annual

fee. Paragraph 14 stated:

14. ANNUAL PARTICIPATION FEE. You agree to pay us a nonrefundable Annual Participation Fee of $20.00 during the Draw Period and any

extension of the Draw Period. Unless you terminate your Credit Account and pay

the outstanding balance, the Annual Participation Fee will be charged to your

Credit Account annually during the Draw Period in the Monthly Statement Period

ending in your anniversary month which we assign to your Credit Account.

Oddly, the term Draw Period was not defined in the HELOC agreement, and the parties dispute

its meaning. Plaintiff says it meant, “any period during which the borrower could draw from the

HELOC account.” Defendant says it meant the same as Advance Period, which was defined in

the HELOC agreement as “a period of 120 Monthly Statement Periods after the date [plaintiff’s]

Credit Account is opened.” Defendant also asserts that the term was defined in defendant’s initial

loan application disclosure to plaintiff and that that definition was consistent with the definition

of Advance Period. The initial disclosure stated, “You can obtain credit advances (“Advances”)

for 10 years (the “draw period”) in all states . . .”. Oddly, this document has a place for the

customer’s initials in the lower right, but none were inserted.

Plaintiff paid the annual fee in April 2004 when she opened her account, and then

annually on her anniversary month up to April 2008.

Paragraph 16 of the HELOC agreement allowed defendant to alter plaintiff’s credit

privileges. Paragraph 16 stated:

16. CANCELLATION OF CREDIT PRIVILEGES. We can refuse

to make additional extensions of credit, or reduce your Credit Limit if:

a.) The value of the Property declines significantly below its original

appraised value for purposes of this Credit Account.

The HELOC agreement did not define “significantly” or specify how the value of plaintiff’s

property should be determined for purposes of altering plaintiff’s credit privileges.

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Given that plaintiff had a $71,750 credit limit, she must have drawn already $47,569 from her account

in order to have had $24,181 available on her account when it was suspended. 

3

On December 13, 2008, defendant unilaterally suspended future draws on plaintiff’s

HELOC, stating that the valuation of plaintiff’s property no longer supported her line of credit. 

Defendant used an Automated Valuation Model (“AVM”) to assess the value of plaintiff’s

property. How the AVM model worked is a mystery on the present record. At the time defendant

suspended plaintiff’s HELOC, the AVM estimated the value of plaintiff’s property at $674,000. 

After the estimate, plaintiff had $24,181 available to draw upon her HELOC. In April 2009,

plaintiff’s anniversary month, defendant charged plaintiff the $20 annual fee.1 

In connection with the valuation of plaintiff’s property, the parties dispute at least two

things. First, the parties dispute how the value of plaintiff’s property should have been

determined for purposes of altering plaintiff’s credit privileges. Plaintiff alleges that an

established “course of dealing” required defendant to obtain an appraisal by a licensed appraiser

prior to altering her credit privileges. Defendant replies that it was not limited to any specific

valuation method, let alone an appraisal by a licensed appraiser. Defendant relies on the Federal

Reserve Board’s Official Staff Interpretations (“FRB Official Interpretations”) to Regulation Z,

which implemented the Truth in Lending Act, to argue that an appraisal was not required before

suspending plaintiff’s credit privileges.

Second, the parties dispute the reliability of the AVM. Again, the specifics of the model

actually used are completely unknown on the immediate record. Aside from that, plaintiff alleges

that the AVM was unreliable because it did not take into account any improvements made to her

property or the unencumbered equity in her property. Plaintiff also alleges that the AVM was

unreliable because in November 2008, a month before her account was suspended, the Office of

Assessor for Contra Costa County valued her property at $705,000, which is more than the

$674,000 estimated by the AVM. Plaintiff alleges that the disparity in the valuations — $705,000

in November 2008 and $674,000 in December 2008 — shows the AVM was unreliable. 

Defendant counters that the November 2008 valuation of $705,000 now referenced by plaintiff

was actually made as of January 1, 2008 — not November 2008 or even December 2008 when

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plaintiff’s account was suspended. Furthermore, defendant counters that as of January 1, 2009,

plaintiff’s property was valued at $615,000 by Contra Costa County. Defendant argues that the

progressive decline in plaintiff’s property — $674,000 in December 2008 and $615,000 in

January 2009 — renders the AVM reliable. Defendant alleges that the AVM was reliable because

the proposed revision to the FRB Official Interpretations deems the use of an AVM to be an

appropriate property valuation method. 

Paragraph 26 of the HELOC agreement contained a choice-of-law provision. Paragraph

26 stated:

26. APPLICABLE LAW. Except to the extent that federal law shall

be controlling, your rights, our rights, and the terms of this Agreement shall be

governed by Delaware law.

The parties agree that Delaware law should be applied to resolve any disputes arising out

of the HELOC agreement.

ANALYSIS

A motion to dismiss under Rule 12(b)(6) tests for the legal sufficiency of the claims

alleged in the complaint. See Parks Sch. of Business v. Symington, 51 F.3d 1480, 1484 (9th. Cir.

1995). All material allegations of the complaint are taken as true and construed in the light most

favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337–38 (9th. Cir.

1996). “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed

factual allegations, a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’

requires more than labels and conclusions, and a formulaic recitation of a cause of action’s

elements will not do. Factual allegations must be enough to raise a right to relief above the

speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545 (2007) (citation omitted).

Although materials outside of the pleadings should not be considered without converting

the motion to a motion for summary judgment, a district court may consider all materials

submitted as part of the complaint including exhibits and documents to which the complaint

specifically refers and whose authenticity is not questioned even if they are not physically

appended to the complaint. A district court may take judicial notice of its own orders and of

records in a case before it as well as other matters of public record that are properly subject to

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judicial notice. Hal Roach Studios v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th

Cir. 1990).

This order involves a review of at least some documents essential to the claims,

documents specifically referred to in the complaint, and published reports regarding the value of

plaintiff’s property. This does not mean that all materials necessary to finally interpret the

contract are before the Court.

1. FIRST CLAIM: BREACH OF CONTRACT.

Plaintiff’s first claim alleges breach of contract. In order to survive a motion to dismiss

for failure to state a breach-of-contract claim, plaintiff must establish the existence of a contract,

the breach of an obligation imposed by that contract, and the resultant damage to plaintiff. VLIW

Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003). 

Here, plaintiff entered into a HELOC agreement with defendant in April 2004. Plaintiff

alleges that defendant breached the HELOC agreement in three different ways. First, plaintiff

alleges that defendant breached the HELOC agreement when it failed to obtain an appraisal by a

licensed appraiser prior to suspending her line of credit. In support of this allegation, plaintiff

asserts that defendant was obligated to obtain an appraisal because the parties established a course

of dealing. Plaintiff asserts that a “course of dealing” was established in three different ways: 

plaintiff was required to obtain an appraisal prior to receiving her HELOC account; Paragraph 10

of the HELOC agreement allowed defendant to conduct an appraisal at any time during the life of

the HELOC; and plaintiff was required to obtain an appraisal in order to dispute defendant’s

suspension of her account. (Actually, this is not a “course of dealing” per se but an interpretation

of a term by reference to the remainder of the agreement.) As a result of defendant’s conduct,

plaintiff alleges that she was damaged because her property value was assessed incorrectly, which

directly led to the suspension of her line of credit. 

In response to plaintiff’s allegation that defendant was required to obtain an appraisal by a

licensed appraiser, defendant counters that the HELOC agreement was silent as to how the value

of plaintiff’s property would be determined for purposes of altering her credit privileges. 

Defendant replies that it was not limited to any specific valuation method and that using an AVM

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was not a breach of the agreement. Furthermore, defendant references the FRB Official

Interpretations to argue that an appraisal was not required to suspend plaintiff’s credit privileges. 

The FRB Official Interpretations stated:

This provision does not require a creditor to obtain an appraisal before suspending

credit privileges although a significant decline must occur before suspension can

occur.

12 C.F.R. Part 226, Supp. I, ¶5b(f)(3)(vi) at 6. 

Though defendant’s arguments are plausible, they do not prove that plaintiff has failed to

state a breach-of-contract claim. It may well be that a licensed appraiser was not required

(without so holding), but that does not translate to an allowance of an AVM, much less a mystery

AVM whose particulars are totally a secret. 

To be sure, Regulation Z placed some constraints on HELOC loans; but otherwise,

Regulation Z left it to the parties and their contracts to regulate their own relationship. So if the

parties had agreed that an appraisal was required that would be enforceable, even though not

required by Regulation Z. In other words, Regulation Z imposed some minimum requirements,

but the bank in its agreement was free to acquiesce in more limitations. Whether or not this

particular contract did so is the basic issue that will have to be decided either on summary

judgment or trial after a more full record. Therefore, Regulation Z in no way disposes of this

claim.

Second, plaintiff alleges that defendant breached the HELOC agreement because the

AVM was unreliable. In support of this allegation, plaintiff asserts that the defendant’s AVM

was unreliable because it did not take into account any improvements made to plaintiff’s

property, and it did not account for the equity in plaintiff’s property. Plaintiff also asserts that the

AVM was unreliable because in November 2008, her property was valued at $705,000, whereas

the AVM valued her property at $674,000 a month later. Plaintiff relies on Wilder v. JPMorgan

Chase Bank, N.A., No. 09-0834, slip op. at 5 (C.D. Cal. Nov. 25, 2009), to argue that this

decrease in valuation suggests that the AVM was unreliable. In Wilder, the defendant obtained an

AVM valuing the plaintiff’s property at $811,800 in April 2009. The plaintiff, however, obtained

an appraisal from a licensed appraiser valuing the property at $970,000 in June 2009. The court

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declined to dismiss the plaintiff’s breach-of-contract claim holding that the difference between the

AVM and the full appraisal raised doubts as to the accuracy of the AVM. As a result of the

AVM, plaintiff alleges that she was damaged because her property value was assessed

incorrectly, which directly led to the suspension of her line of credit. 

Defendant replies that the proposed revision to the FRB Official Interpretations states that

an AVM is an appropriate property valuation method. The proposed revision to the FRB Official

Interpretations states:

If not prohibited by state law, property valuation methods other than an appraisal

that may be appropriate to use under this provision include, but are not limited to,

automated valuation models, tax assessment valuations, and broker price

opinions. Any property valuation method must, however, consider specific

characteristics of the property, such as square footage and number of rooms, and

not merely estimate the value based on property values or re-sale prices generally

in a particular geographic area.

Proposed Rule, 74 Fed. Reg. 43,595 (Aug. 26, 2009) (to be codified at 12 C.F.R. Part 226). 

Defendant also argues that plaintiff’s reliance on Wilder is misplaced because here, plaintiff did

not allege that she ever obtained an appraisal valuing her property differently from defendant’s

AVM. Defendant adds that as of January 1, 2009, plaintiff’s property was valued at $615,000 by

Contra Costa County, which defendant argues validates the AVM’s assessment of $674,000

because both demonstrate a decline in property value. 

Though defendant’s arguments are plausible, they cannot carry the day at the pleading

stage. As a preliminary matter, the proposed revision to the FRB Official Interpretations was

written well after the parties entered into the HELOC agreement, and it is hard to see how it could

have informed the contractual intent of the parties. Additionally, the proposed revision insists

that square footage, number of rooms, and other “specific characteristics” of the property be

considered. Did the AVM in question do so? Who knows? On this record, the AVM is a

complete secret. Discovery is essential. Consequently, plaintiff has alleged sufficient facts with

regards to the unreliability of the AVM to survive a motion to dismiss.

Third, plaintiff alleges that defendant breached the HELOC agreement by not pro rating

the $20 annual fee after it suspended her credit line and by charging her yet another $20 annual

fee after it suspended her credit line. Plaintiff asserts that Paragraph 14 of her HELOC agreement

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permitted the bank to charge an annual fee only if she could draw from her HELOC account. 

Plaintiff asserts that she paid the $20 annual fee in April 2008 so that she could draw on her

account from April 2008 to April 2009, but because defendant suspended her account in

December 2008, she was prematurely prohibited from drawing from her account. Adding insult

to injury, plaintiff also asserts that defendant charged her another $20 annual fee in April 2009,

even though her account remained suspended, i.e., she was forced to pay a fee, but was denied the

benefits of the agreement. 

Defendant responds that plaintiff misinterprets the term Draw Period. Defendant asserts

that Draw Period meant the same as Advance Period, which was defined in the HELOC

Agreement as “a period of 120 Monthly Statement Periods after the date [plaintiff’s] Credit

Account is opened.” Defendant supports this interpretation by referencing its initial loan

application disclosure to plaintiff, which defined Draw Period. The initial disclosure stated, “You

can obtain credit advances (“Advances”) for 10 years (the “draw period”) in all states . . .”. Using

this definition, defendant responds that the annual fee may be charged so long as the HELOC

account is open. As noted, plaintiff’s initials do not appear where they were supposed to be, so

one interpretation is that she never got the form.

Though defendant’s arguments are plausible, they do not defeat plaintiff’s allegations for

the purposes of a motion to dismiss. Why the agreement even uses the term “Draw Period” with

initial caps is a mystery. It appears to be intended as a defined term. Defendant says it was a

mere drafting error and asks the Court to willy-nilly correct it. These arguments are better suited

for a motion for summary judgment or trial — not a motion to dismiss. At this point, plaintiff has

alleged sufficient facts with regards to the annual fee to make her claim plausible.

***

In the briefing and at the hearing, there was a considerable side show over the meaning of

“significant decline.” Strictly speaking, this was not a basis for the motion to dismiss. Both sides

invoked their favorite passages from the pending proposed revision to the FRB Official

Interpretations. While these are interesting arguments, it is again hard to see how a regulation in

mere proposed form could be retroactively read into the instant contract years earlier as the intent

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of the parties. Therefore, this order will place no reliance on the proposed regulation without

prejudice to the possibility that aspects of the proposal will have some relevance to expert

witnesses and subsequent proceedings.

For the reasons stated above, plaintiff has alleged sufficient facts to make her breach-ofcontract claim plausible. Consequently, defendant’s motion to dismiss plaintiff’s breach-ofcontract claim is DENIED.

2. SECOND CLAIM: UNJUST ENRICHMENT.

Plaintiff’s second claim alleges unjust enrichment. In order to survive a motion to dismiss

for failure to state an unjust-enrichment claim, plaintiff must establish “(1) an enrichment, (2) an

impoverishment, (3) a relation between the enrichment and impoverishment, (4) the absence of

justification and (5) the absence of a remedy provided by law.” Cantor Fitzgerald, L.P. v.

Cantor, 724 A.2d 571, 585 (Del. Ch. 1998). Furthermore, “a claim for unjust enrichment is not

available if there is a contract that governs the relationship between parties that gives rise to the

unjust enrichment claim.” Kuroda v. SPJS Holdings, LLC, 971 A.2d 872, 891 (Del. Ch. 2009).

Plaintiff’s allegations establish an unjust-enrichment claim. Here, plaintiff alleges that

defendant was unjustly enriched because it charged her an annual fee the year after it suspended

draws from her HELOC. Defendant was allegedly enriched by the $20 annual fee, and plaintiff

was allegedly impoverished because she was charged the $20 annual fee. There is a relation

between the enrichment and the impoverishment because both derive from the $20 annual fee. 

Furthermore, defendant allegedly lacked justification for charging the annual fee because it

suspended draws from plaintiff’s HELOC account the pervious year, and there is an absence of a

remedy provided by law.

Defendant argues that plaintiff should be barred from bringing an unjust-enrichment claim

because the conduct that forms the basis of plaintiff’s claim — that defendant charged her an

annual fee the year even after it suspended draws from her HELOC — falls within the express

language of the HELOC agreement. Paragraphs 14 and 16 of the HELOC agreement directly

governed the conduct that plaintiff alleges was unjust. Paragraph 14 stated that plaintiff must pay

an annual fee during the draw period, and Paragraph 16 stated that defendant might alter

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plaintiff’s credit privileges if the value of her property declined significantly below its original

appraised value for purposes of her line of credit.

Plaintiff replies that she should be permitted to maintain her unjust-enrichment claim if

the Court finds Paragraph 16 of the HELOC agreement illusory, too ambiguous to be interpreted

or applied, or void. It is true that if plaintiff loses in her interpretation of the HELOC agreement

with respect to the $20 annual fee, then Delaware law would bar her unjust-enrichment claim. On

the other hand, if plaintiff prevails in her interpretation of the HELOC agreement with respect to

the $20 annual fee, the question of remedies will arise, and the Court may conceivably find that

defendant was unjustly enriched. At this point, the Court is unwilling to categorically exclude the

possibility that unjust enrichment will turn out to be an appropriate remedy. Consequently,

defendant’s motion to dismiss plaintiff’s unjust-enrichment claim is DENIED.

CONCLUSION

For the foregoing reasons, defendant’s motion to dismiss is DENIED. Priority in discovery

shall be promptly given to learning the particulars of the AVM method without prejudice to

discovery into other matters.

IT IS SO ORDERED.

Dated: January 25, 2010 WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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