Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_13-cv-05927/USCOURTS-cand-5_13-cv-05927-10/pdf.json

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

---

1

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

LISA STRUGALA, an individual, on behalf 

of herself and on behalf of the class of all 

others similarly situated,

Plaintiff,

v.

FLAGSTAR BANK, FSB,

Defendant.

Case No. 5:13-cv-05927-EJD 

ORDER GRANTING IN PART AND 

DENYING IN PART DEFENDANT’S 

MOTION TO DISMISS

Re: Dkt. No. 55

In this putative class action, Plaintiff Lisa Strugala (“Strugala”) challenges her former 

mortgage lender’s practice of first reporting, and then not reporting, capitalized interest on 

borrowers’ tax forms. Presently before the court is a Motion to Dismiss filed by the lender, 

Flagstar Bank, FSB (“Flagstar”).1 See Docket Item No. 55. Strugala opposes the motion. See

Docket Item No. 59. 

Federal jurisdiction arises pursuant to 28 U.S.C. § 1332. Having carefully reviewed the 

parties’ briefing, the court finds that Strugala’s withdrawn claims should be dismissed, and that 

Flagstar’s alternative request under the primary jurisdiction doctrine is meritorious. Accordingly, 

Flagstar’s motion will be granted in part and denied in part for the reasons explained below. 

I. BACKGROUND

Flagstar is “one of the nation’s leading federal savings banks” and is headquartered in 

Michigan. See First. Am. Compl. (“FAC”), Docket Item No. 18, at ¶¶ 3, 55. This case involves 

 

1

Flagstar also filed a Request for Judicial Notice (Docket Item No. 56), which is GRANTED. 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 1 of 10
2

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

one of Flagstar’s financial products known as the “negative amortization” loan. According to the 

FAC, “‘negative amortization’ loans generally provide the borrower the option in any given month 

to pay a ‘Minimum Payment,’ which is generally, but not always, less than the interest due for the 

month.” Id. at ¶ 3. Under the “Minimum Payment” option, the unpaid monthly interest is then 

“deferred” and added to the loan balance to be repaid on a later date. Id. at ¶ 4. This arrangement 

usually causes the overall loan balance to increase rather than decrease while the interest is 

deferred, even though the borrower is making monthly payments. Id. at ¶ 5. 

A Form 1098 is a tax document issued by a lender which the tax-payer borrower utilizes to 

determine the amount of mortgage interest that should be reported to the Internal Revenue Service 

(“IRS”) with annual income taxes. Id. at ¶ 1. The statute that obligates lenders to issue Forms 

1098 is 26 U.S.C. § 6050H. Id. 

Strugala alleges that prior to 2011, Flagstar reported on annual tax Forms 1098 both the 

amount of actual interest it received from a negative amortization borrower as well as the amount 

of interest the borrower “deferred” by exercising the “Minimum Payment” option. Id. at ¶ 7. 

Strugala contends this practice violated § 6050H because that statute requires lenders to report

only interest they “receive,” and not unpaid interest that accrued back to principal during a 

calendar year. Id. at ¶¶ 1, 7. As a result of this over-reporting, Strugala alleges that “tens of 

thousands” of tax returns were filed incorrectly. Id. at ¶ 9. 

Flagstar eventually changed its practice in 2011 and ceased reporting “deferred interest” on 

Forms 1098. Id. at ¶ 10. It apparently did so without notice to borrowers and did not issue 

amended Forms 1098 to correct the errors. Id. at ¶¶ 10, 11. Instead, Strugala alleges that “when 

Flagstar decided to change its interest reporting policy in 2011, it determined that it would try to 

make up for its prior over-reporting of interest by under-reporting consumers interest payments in 

later years.” Id. at ¶ 17. It does this, Strugala claims, by refusing to provide Forms 1098 to 

borrowers who have actually paid back previously-deferred interest in years subsequent to 2011, if 

that amount is less than that which Flagstar over-reported in prior Forms 1098. Id. at ¶ 22. Since 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 2 of 10
3

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

there is a three year statute of limitations for amending tax returns, Strugala alleges that borrowers 

affected by Flagstar’s interest reporting are now precluded from correcting errors on prior years’ 

returns. Id. at ¶ 15. 

Strugala obtained a 30-year “negative amortization” adjustable rate mortgage loan from 

Flagstar on or about July 13, 2007, in connection with a home she previously owned in Los Gatos, 

California. Id. at ¶¶ 24, 25. Strugala’s loan provided for the “Minimum Payment” option. Id. at ¶ 

25. She and her tax preparer relied on the Forms 1098 issued by Flagstar for tax years 2007 

through 2011, and did not cross-check the amount of interest listed on those forms with the 

amount Strugala actually paid. Id. at ¶ 28. Unbeknownst to Strugala, those 1098 Forms included 

interest that had been deferred. Id. at ¶¶ 32, 34. 

Strugala’s Los Gatos home was sold at a short sale in 2012. Id. at ¶ 35. By her 

calculation, this sale resulted in Flagstar receiving an interest payment that was more than the total 

amount of interest Flagstar over-reported on her Forms 1098 between 2007 and 2011. Id. at ¶ 38. 

Flagstar, however, did not issue Strugala a Form 1098 for 2012, and would not do so after 

receiving requests from Strugala. Id. at ¶¶ 39, 41. 

Strugala alleges harm from Flagstar’s interest reporting practice. Id. at ¶ 46. Because her 

income was significantly higher in 2011 and 2012 than it was in the years when Flagstar was overreporting interest, the tax deductions she took in the earlier years “were worth significantly less 

than they would be for her in 2012.” Id. at ¶ 47. Due to the statute of limitations, Strugala cannot 

now amend her prior returns. Id. at ¶ 48. She also alleges damages in the form of accountancy 

fees necessary to investigate and correct prior tax returns. Id. at ¶ 51. 

Strugala initiated this action on December 23, 2013, and filed the FAC on February 26, 

2014. She asserts six causes of action against Flagstar on behalf of herself and two purported 

classes, a “damage” class and an “injunctive” class, including (1) breach of contract, (2) breach of 

the covenant of good faith and fair dealing, (3) violation of § 6050H, (4) violation of the Unfair 

Competition Law (“UCL”), California Business and Professions Code § 17200, (5) declaratory 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 3 of 10
4

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

relief, (6) injunctive relief, and (7) fraud. 

II. LEGAL STANDARD

Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient 

specificity to “give the defendant fair notice of what the . . . claim is and the grounds upon which 

it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A 

complaint that falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim 

upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). “Dismissal under Rule 12(b)(6) is 

appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support 

a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th

Cir. 2008). Moreover, the factual allegations “must be enough to raise a right to relief above the 

speculative level” such that the claim “is plausible on its face.” Twombly, 550 U.S. at 556-57.

When deciding whether to grant a motion to dismiss, the court generally “may not consider 

any material beyond the pleadings.” Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 

1542, 1555 n. 19 (9th Cir. 1990). However, the court may consider material submitted as part of 

the complaint or relied upon in the complaint, and may also consider material subject to judicial 

notice. See Lee v. City of Los Angeles, 250 F.3d 668, 688-69 (9th Cir. 2001).

In addition, the court must generally accept as true all “well-pleaded factual allegations.” 

Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). The court must also construe the alleged facts in the 

light most favorable to the plaintiff. Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1988). 

However, “courts are not bound to accept as true a legal conclusion couched as a factual 

allegation.” Id.

III. DISCUSSION

Flagstar raises a number of arguments in support of dismissal under Rule 12(b)(6). 

Alternatively, it argues the court should stay or dismiss this action based on the primary 

jurisdiction doctrine. After dismissing those claims that have been withdrawn, this court finds the

alternative relief best suited to the circumstances that result.

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 4 of 10
5

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

A. Dismissal of Claims 

In her opposition to the motion to dismiss, Strugala concedes that two of her claims, 

asserting a direct violation of § 6050H and for injunctive relief, should be withdrawn. On that 

basis, those claims will be dismissed without further leave to amend. 

B. Application of Primary Jurisdiction Doctrine

Central to all of Strugala’s remaining claims is one key allegation: that Flagstar’s interest 

reporting policy both before and after 2011 violates § 6050H. Under § 6050H, “[a]ny person . . . 

who is engaged in a trade or business, and . . . who, in the course of such trade or business, 

receives from any individual interest aggregating $ 600 or more for any calendar year on any 

mortgage,” must prepare an information return (such as a Form 1098) providing the IRS with the 

amount of interest paid and the identity of the person from whom the interest was received. 26 

U.S.C. § 6050H(a), (b). This information must also be provided to the borrower along with 

certain statements disclosing that the amount of interest listed on the Form 1098 may not be fully 

deducted in certain circumstances. 26 C.F.R. § 1.6050H-2(b). Monetary penalties may be 

imposed on an interest recipient who fails to provide the form required by § 6050H, or who fails to 

provide accurate information on the form. 26 C.F.R. § 1.6050H-2(e)(2) (applying the penalty 

provisions in 26 U.S.C. § 6721 to violations of § 6050H). 

But aside from what the statute says, of equal note for this case is what it does not say. 

Neither § 6050H nor its implementing regulations provide explicit direction to recipients on how, 

whether and when to report capitalized interest. Nor has the IRS taken a formal position on the 

issue, as other courts have observed. See Horn v. Bank of America, No. 3:12 cv-1718-GPC-BLM, 

2014 WL 1455917, at *3 (S.D. Cal. Apr. 14, 2014) (noting that “[t]he IRS has never taken a 

formal position in any published regulation (or even in a private letter ruling)” on whether 

capitalized interest must be reported on a Form 1098, and classifying the plaintiffs’ claims based 

on a violation of § 6050H as “novel”). 

This silence presents a significant challenge to Strugala’s claims given the extent to which 

they rely on a purported violation of § 6050H through the reporting or non-reporting of capitalized 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 5 of 10
6

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

interest. A similar case illustrates why this is so. In Pemberton v. Nationstar Mortgage, LLC, No. 

3:14-cv-1024-BAS-WVG (S.D. Cal. filed Apr. 23, 2014), the district court - faced with the exact 

circumstances presented here - invoked the primary jurisdiction doctrine to stay the action pending 

a determination by the IRS. There, the plaintiffs alleged that Nationstar violated § 6050H by 

classifying their monthly payments of deferred interest as principal payments on a Form 1098. 

Much like Strugala, the Pemberton plaintiffs used that violation to assert claims for breach of 

contract, breach of the covenant of good faith and fair dealing, violation of the UCL, fraud, and 

declaratory and injunctive relief, as well as a direct claim for violation of § 6050H (which Strugala 

has since abandoned).

2

 And much like Flagstar, Nationstar moved to dismiss or stay the case.3 

In its order addressing the motion to dismiss, the district court agreed with Nationstar that 

no private right of action is implied in § 6050H and dismissed that claim with prejudice. As to the 

remaining claims, the court determined that, because “each turn on whether [Nationstar] 

accurately reported the interest paid” on the 1098 Forms, the IRS’ position on the issue was 

“necessary . . . to determine whether [Nationstar’s] actions breached any duties.” After further 

describing the issue as one of “first impression,” the court then referred the matter “to the Internal 

Revenue Service to determine whether the Form 1098s [Nationstar] provided to Plaintiffs 

complied with the requirements of 26 U.S.C. § 6050H” and stayed the case to permit the plaintiffs 

to seek agency direction. 

The reasoning applied by the Pemberton court is likewise applicable here. Indeed, this 

case presents the same critical question under § 6050H, just with a different lender in the place of 

Nationstar. And as the parties’ briefing makes clear, whether and how capitalized interest should 

be reported is an issue of first impression for the courts, raises a topic particularly suited to 

 

2

The similarities between Strugala’s case and Pemberton are not a coincidence since both cases 

involve the same lawyers on the plaintiff’s side. 

3

The court takes judicial notice of the documents filed in the Pemberton action. See Reyn’s Pasta 

Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006) (The court “may take judicial 

notice of court filings and other matters of public record.”).

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 6 of 10
7

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

consideration by the IRS, and poses a risk of inconsistent rulings if the judiciary is left to 

contemplate it in the first instance without the benefit of IRS guidance. It therefore has all the 

makings of an issue that should be allocated to the responsible agency for the purposes of this case 

since Strugala’s claims are otherwise cognizable (as opposed to sufficiently pled, which is an issue 

the court does not take up at this time). See Syntek Semiconductor Co., Ltd. v. Microchip Tech. 

Inc., 307 F.3d 775, 780 (9th Cir. 2002) (“[P]rimary jurisdiction is properly invoked when a claim 

is cognizable in federal court but requires resolution of an issue of first impression, or of a 

particularly complicated issue that Congress has committed to a regulatory agency.”); see also

Maronyan v. Toyota Motor Sales, U.S.A., Inc., 658 F.3d 1038, 1048-49 (9th Cir. 2011) (“The 

primary jurisdiction doctrine prescribes deference to an administrative agency where (1) the issue 

is not within the conventional experiences of judges, (2) the issue involves technical or policy 

considerations within the agency’s particular field of expertise, (3) the issue is particularly within 

the agency’s discretion, or (4) there exists a substantial danger of inconsistent rulings.”). 

Strugala resists a disposition based on the primary jurisdiction doctrine with only 

unpersuasive arguments. She first contends the doctrine generally does not apply when the issues 

being litigated are legal rather than factual. The Pemberton court rejected that argument as an 

inaccurate statement of the authority upon which it relies. This court concurs that Stugala 

overstates the rule. There is no absolute prohibition on the referral of legal issues to an agency. 

See Corneli Seed Co. v. Union P. R. Co., 263 F.2d 127, 130 (9th Cir. 1958). In fact, questions of 

law “requiring the assertion of the expert and specialized knowledge of the agency members” are 

particularly suited to referral under the primary jurisdiction doctrine. Id. 

Here, though Strugala would characterize the question as a simple undertaking of statutory 

construction, that is quite frankly not the case. It cannot be said based on a plain reading of § 

6050H whether or not the statute’s use of the term “interest” encompasses capitalized interest. 

Nor is that question definitively answered with reference to Old Colony Railroad Co. v. 

Commissioner of Internal Revenue, 284 U.S. 552 (1932), or Wilshire Holding Corporation v. 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 7 of 10
8

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

Commissioner of Internal Revenue, 262 F.2d 51, 53 (9th Cir. 1958)), because neither of those 

cases examine whether capitalized interest is contemplated by the common understanding of the 

word “interest,” let alone contain the holdings Strugala attributes to them in her opposition.4

There is a better way to distinguish which issues are appropriately referred to an agency, 

rather than focusing on whether they are factual or legal. “[I]t is the extent to which Congress, in 

enacting a regulatory scheme, intends an administrative body to have the first word on issues 

arising in judicial proceedings that determines the scope of the primary jurisdiction doctrine.” 

United States v. Gen. Dynamics Corp., 828 F.2d 1356, 1362 (9th Cir. 1987). With regard to the 

IRS, it is undebatable that “Congress has given the IRS broad authority to issue rules 

implementing the tax laws.” Tualatin Valley Builders Supply, Inc. v. United States, 522 F.3d 937, 

942 (9th Cir. 2008). Under this authority, the IRS has promulgated rules regulating the content 

and scope of Forms 1098. Accordingly, Strugala’s claims raising a novel question of taxation

policy in the context of that form are the types on which the agency should have the first word in 

accordance with Congress’ broad mandate. 

Strugala’s second argument fares no better. She attempts to distinguish her case from 

Pemberton by pointing out that her request for damages is primarily related to prior tax years for 

which she can no longer file an amended return. But this distinction makes no difference because 

she must obtain another form of relief requested in the FAC - the issuance of corrected Forms 

1098 - before damages related to prior tax years can be calculated. Without doubt, whether or not 

that relief should be awarded will depend on whether the prior Forms 1098 were non-compliant. 

In sum, the court finds it cannot proceed with Strugala’s claims without the expertise of the 

 

4 Another case cited by Strugala, Smoker v. Commissioner of Internal Revenue, Nos. 31130-09, 

28928-10, 2013 WL 645265 (T.C. Feb. 21, 2013), is also of little assistance. Notwithstanding the 

Pemberton court’s description of that opinion as having “no precedential value at law,” it does not 

resolve the issue raised in this case. In Smoker, the tax court only held that capitalized interest 

cannot be deducted until it is actually paid; it did not designate how or whether a lender should 

report such interest on a Form 1098. 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 8 of 10
9

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

IRS. For that reason, this court, like the Pemberton court,5 will refer the matter to the IRS under 

the primary jurisdiction doctrine and stay this case until such formal commentary is obtained.6 

IV. ORDER

Based on the foregoing, Flagstar’s Motion to Dismiss (Docket Item No. 55) is GRANTED

IN PART and DENIED IN PART as follows:

1. The motion to dismiss is GRANTED as to Strugala’s claims for violation of § 

6050H and for injunctive relief, which claims are DISMISSED WITHOUT LEAVE TO AMEND. 

2. The motion to dismiss is DENIED WITHOUT PREJUDICE as to the remaining 

claims. 

3. The motion to stay this action and refer this matter to the IRS under the primary 

jurisdiction doctrine is GRANTED.

The court REFERS to the IRS the following question: whether Flagstar’s practice of 

reporting capitalized interest before and after 2011 complied with the requirements of 26 U.S.C. § 

6050H and its related regulations. Plaintiff is responsible for initiating proceedings before the IRS 

with sufficient formality so as to result in the agency’s official position on the issue. 

This action is otherwise STAYED. The clerk shall ADMINISTRATIVELY CLOSE this 

file.

So that the ongoing appropriateness of the stay can be monitored, Strugala shall submit a 

brief Status Report which describes the status of proceedings before the IRS on March 6, 2016, 

and continuing every six months thereafter. Furthermore, within 10 days of obtaining an official 

opinion from the IRS, Strugala shall file a Notice informing the court of such development and 

 

5

The court is aware of the district court’s decision in another similar case, Smith v. Bank of 

America, N.A., No. CV 14-6668 DSF (PLA), but finds the court’s approach in Pemberton more 

persuasive. 

6

The court has reviewed Strugala’s request for judicial notice filed on July 2, 2015 (Docket Item 

No. 64). In this court’s opinion, the letter from the Department of Treasury dated June 10, 2015, 

is not a formal agency opinion and, in any event, does not describe the IRS’ position on the matter 

referred by the Pemberton court. 

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 9 of 10
10

Case No.: 5:13-cv-05927-EJD

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT’S MOTION TO 

DISMISS

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

United States District Court

Northern District of California

request that this matter be reopened and that a Case Management Conference be scheduled.

The Case Management Conference scheduled for November 19, 2015, is VACATED. 

IT IS SO ORDERED.

Dated: September 4, 2015

______________________________________

EDWARD J. DAVILA

United States District Judge

Case 5:13-cv-05927-EJD Document 69 Filed 09/04/15 Page 10 of 10