Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_09-cv-01985/USCOURTS-casd-3_09-cv-01985-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1331 Fed. Question

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09cv1985

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

ADEMAR A. MARQUES,

Plaintiff,

v.

WELLS FARGO HOME MORTGAGE,

INC. dba AMERICA’S SERVICING CO.,

Defendant.

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Civil No. 09-cv-1985-L(RBB)

ORDER GRANTING IN PART AND

DENYING IN PART DEFENDANT’S

MOTION TO DISMISS

In this mortgage foreclosure action, Defendant Wells Fargo Home Mortgage, Inc. dba

America’s Servicing Company filed a motion to dismiss or transfer venue pursuant to Federal

Rule of Civil Procedure 12(b)(3), or dismiss for failure to state a claim pursuant to Rule

12(b)(6). Plaintiff filed an opposition and Defendant replied. For reasons stated below,

Defendant’s motion to dismiss or transfer for improper venue is DENIED and its motion to

dismiss for failure to state a claim is GRANTED WITH LEAVE TO AMEND.

Plaintiff alleges that he owns a residence located at 4431 Paola Way in San Diego. 

(Compl. at 2.) The Property is a single-family residence and Plaintiff’s primary residence. (Id.

at 4.) In September 2005 Plaintiff refinanced the mortgage on the Property. (Id. at 2, 3.) 

Defendant is the servicer on Plaintiff’s current loan. (See id. at 3.) A notice of default was

recorded on August 11, 2008, the Property was sold, and on December 8, 2008 a Trustee’s Deed

upon Sale was recorded. (Id. at 5 & Ex. 4.) The sale, however, was rescinded and Plaintiff

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09cv1985

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remained the trustor and assessed owner of the Property. (Id. at 5.) On or about April 13, 2009

Defendant entered into the Commitment to Purchase Financial Instrument and Servicer

Participation Agreement for the Home Affordable Modification Program under the Emergency

Economic Stabilization Act of 2008 (“Agreement”) with Federal National Mortgage Association

(“Fannie Mae”) and agreed to perform certain loan modification and foreclosure prevention

services for eligible loans. (Id. at 3-4 & Ex. 1 (Agreement).) On July 17, 2009 Plaintiff came

into possession of a copy of an unrecorded Notice of Trustee’s Sale with an August 6, 2009 sale

date (Id. at 5 & Ex. 5), which appears to have prompted the filing of this action. 

Plaintiff filed a complaint in San Diego County Superior Court alleging breach of the

Agreement on the theory that he is a third-party beneficiary under California Civil Code Section

1559, that his loan was eligible for modification, Defendant refused to offer to modify it under

the Agreement, but instead commenced foreclosure proceedings. (See Compl. at 3-5 &

Agreement at 1.) Based on breach of contract, he also alleged that Defendant violated the Unfair

Competition Law, Cal. Bus. & Prof Code § 17200 et seq. (“UCL”). He seeks damages and

declaratory judgment that Defendant does not have the right to foreclose on the Property.

Defendant removed the action to this court based on federal question jurisdiction pursuant

to 28 U.S.C. Section 1331 and diversity jurisdiction pursuant to 28 U.S.C. Section 1332, and

then filed a motion to dismiss. Defendant claims that under the Agreement’s forum selection

clause venue is improper in this district and that the complaint fails to state a claim.

Defendant argues that pursuant to the forum selection clause, proper venue lies in the

District of Columbia and that the case should either be dismissed of transferred for improper

venue. (See Agreement ¶ 11(a).) A motion to dismiss based on a forum selection clause is

construed as a Rule 12(b)(3) motion to dismiss for improper venue. Argueta v. Banco Mexicano,

S.A., 87 F.3d 320, 324 (9th Cir. 1996). On a Rule 12(b)(3) motion, the allegations in the

complaint need not be accepted as true and the court may consider facts outside the complaint. 

Murphy v. Schneider Nat’l, Inc., 362 F.3d 1133, 1137 (9th Cir. 2004). The court “must draw all

reasonable inferences in favor of the non-moving party and resolve all factual conflicts in [his]

favor . . ..” Id. at 1138. 

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09cv1985

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Federal law governs the enforceability of the forum selection clause. See Carnival Cruise

Lines, Inc. v. Shute, 499 U.S. 585, 590 (1991) (federal question cases); Manetti-Farrow, Inc. v.

Gucci Am., Inc., 858 F.2d 509, 513 (9th Cir. 1988) (diversity cases). A forum selection clause

may restrict a third-party beneficiary to the selected forum. TAAG Linhas Aereas de Angola v.

Transam. Airlines, Inc., 915 F.2d 1351, 1354 (9th Cir. 1990). “[F]orum selection clauses are

presumptively valid” and “should be honored absent some compelling and countervailing

reason.” Murphy, 362 F.3d at 1140, quoting Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972)

(internal quotation marks omitted). Three reasons make enforcement of a forum selection clause

unreasonable: 

(1) if the inclusion of the clause in the agreement was the product of fraud or

overreaching; (2) if the party wishing to repudiate the clause would effectively be

deprived of his day in court were the clause enforced; and (3) if enforcement

would contravene a strong public policy of the forum in which suit is brought.

Id. at 1140 (internal citation and quotation marks omitted). 

Plaintiff argues that enforcing the clause would be unreasonable because it would

effectively deprive him of his day in court. The court agrees. That Plaintiff is financially

distressed is obvious from the nature of this action and Defendant does not dispute it. Where a

party’s financial circumstance would effectively preclude him from a day in court, enforcing the

forum selection clause would be unreasonable. Murphy, 362 F.3d at 1142. Defendant’s motion

to dismiss or transfer for improper venue is therefore DENIED.

Defendant next maintains that the complaint should be dismissed for failure to state a

claim pursuant to Rule 12(b)(6). A Rule 12(b)(6) motion tests the sufficiency of the complaint. 

Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is warranted under Rule 12(b)(6)

where the complaint lacks a cognizable legal theory. Robertson v. Dean Witter Reynolds,

Inc.,749 F.2d 530, 534 (9th Cir. 1984); see Neitzke v. Williams, 490 U.S. 319, 326 (1989) ("Rule

12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law"). 

Alternatively, a complaint may be dismissed where it presents a cognizable legal theory yet fails

to plead essential facts under that theory. Robertson, 749 F.2d at 534. “While a complaint

attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a

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09cv1985

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plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels

and conclusions, and a formulaic recitation of the elements of a cause of action will not do. 

Factual allegations must be enough to raise a right to relief above the speculative level.” Bell

Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotation marks, brackets and

citations omitted). In reviewing a motion to dismiss under Rule 12(b)(6), the court must assume

the truth of all factual allegations and must construe them in the light most favorable to the

nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Legal

conclusions, however, need not be taken as true merely because they are cast in the form of

factual allegations. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); W. Mining

Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). Similarly, “conclusory allegations of law

and unwarranted inferences are not sufficient to defeat a motion to dismiss.” Pareto v. Fed.

Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998). 

Plaintiff alleged that Defendant breached the Agreement because his loan qualified for

loan modification and other conditions for loan modification under the Agreement were met, but

Defendant refused to modify the loan and instead commenced foreclosure proceedings. (Compl.

at 3-5.) Plaintiff contends that he has a right to enforce the Agreement as a third-party

beneficiary. (Compl. at 5-6.) Defendant argues that Plaintiff is not a third-party beneficiary. 

Federal law controls the interpretation of a contract entered into pursuant to federal law

and to which the United States is a party. County of Santa Clara v. Astra USA, Inc., 588 F.3d

1237, 1243 (9th Cir. 2009), pet. for cert. filed, 78 U.S.L.W. 3644 (U.S. Apr. 21, 2010) (No. 09-

1273). The Agreement was entered into between Defendant and Fannie Mae in its capacity as a

financial agent of the United States. (See Agreement at 1.) Furthermore, the Agreement

provides that it “shall be governed by and construed under Federal law and not the law of any

state or locality, without reference to or application of the conflicts of law principles.” 

(Agreement ¶11(A).) Whether Plaintiff is a third-party beneficiary is therefore determined by

federal law. 

Under federal common law only an intended beneficiary may enforce a contract as a

third-party beneficiary:

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09cv1985

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[B]efore a third party can recover under a contract, it must show that the

contract was made for its direct benefit - that it is an intended beneficiary of

the contract. A promisor owes a duty of performance to any intended beneficiary

of the promise, and the intended beneficiary may enforce the duty by suing as a

third party beneficiary of the contract, whereas an incidental beneficiary acquires

no right against the promisor. 

Astra, 588 F.3d at 1244 (internal quotation marks, brackets and citations omitted, emphases in

Astra).

To qualify as an intended beneficiary, the third party must show that the contract

reflects the express or implied intention of the parties to the contract to benefit the

third party. Although intended beneficiaries need not be specifically or

individually identified in the contract, they still must fall within a class clearly

intended by the parties to benefit from the contract. 

Id. 

It is particularly difficult for parties to government contracts to demonstrate third-party

beneficiary status. Id. “Parties that benefit from a government contract are generally assumed to

be incidental beneficiaries rather than intended ones, and so may not enforce the contract absent

a clear intent to the contrary.” Id. (internal quotation marks and citations omitted, emphasis in

original). 

This “clear intent” hurdle is not satisfied by a contract's recitation of interested

constituencies, vague, hortatory pronouncements, statements of purpose, explicit

reference to a third party, or even a showing that the contract operates to the third

parties' benefit and was entered into with them in mind. 

Id. (internal quotation marks, brackets and citations omitted). 

To determine whether a party is an intended beneficiary of a government contract, the

court must examine “the precise language of the contract for a clear intent to rebut the

presumption that the third parties are merely incidental beneficiaries.” Astra, 588 F.3d at 1244

(internal quotation marks, brackets and citations omitted). Specifically, the court examines the

contract as a whole and “weigh[s] the circumstances of the transaction.” Id. at 1245 (internal

quotation marks and citations omitted). “[W]hen a contract is mandated by a federal statute,

[this] includes the governing statute and its purpose.” Id. (internal quotation marks and citations

omitted).

/ / / / /

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09cv1985

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The United States Department of the Treasury (“Treasury”) established the Home

Affordable Modification Program (“Program”) pursuant to the Emergency Economic

Stabilization Act of 2008 (“Act”). (Agreement at 1.) The Act directed the Treasury to use its

authority and facilities in a manner consistent with protecting home values and other assets of

individuals, preserving home ownership, maximizing returns to the taxpayers, and providing

public accountability. Id. The Program was established pursuant to 12 U.S.C. Sections 5211

and 5219. (Agreement at 1.) It was a part of the Troubled Asset Relief Program, which gave the

Treasury authority to purchase certain troubled assets, id. § 5211, and, to the extent the Treasury

acquired any mortgages, the Act directed the Treasury to implement a plan to maximize

assistance to homeowners and encourage mortgage servicers to take advantage of government

programs to minimize foreclosures, id. § 5219. In furtherance of these goals, the Treasury,

through Fannie Mae, entered into agreements with loan servicers. Defendant entered into such

an agreement. 

“In determining the central question of the contracting parties’ intent, [the court] looks at

the contract’s text and purpose.” Astra, 588 F.3d at 1245 (internal quotation marks and citation

omitted). The court “interpret[s] every part of a written contract with reference to the whole and

give[s] terms their ordinary meaning unless a contrary intent appears. When possible, [the court]

ascertain[s] the intent of the parties from the contract itself.” Id. at 1244 (citations omitted). If

the contract expresses a clear intent to directly benefit a third party, the third party is an intended

beneficiary with the right to enforce the contract, even if the contract does not expressly grant

the third party the right to sue. Id. at 1244-45.

That the Agreement does not expressly state that it was entered into for the borrowers’

benefit (see Agreement ¶ 11(E)) is not fatal to Plaintiff’s claim because the analysis of intended

beneficiary status is not conditioned on such “formalistic recitals.” Astra, 588 F.3d at 1246 n.8. 

Reading the Agreement in its entirety evinces a clear intent to directly benefit eligible borrowers.

The Agreement expressly provides, “Servicer shall perform the loan modification and

other foreclosure prevention services (collectively, the ‘Services’) described in” other

documentation, including Program Guidelines. (Agreement ¶1(A) (italicized emphasis added.) 

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1 Excepted from Defendant’s obligation to modify are the loans for which

Defendant is unable to obtain the necessary consents and waivers or where the modification is

prohibited by a prior contract. (Id. ¶2(B).) Plaintiff alleged that the current investor on his loan

allows loan modification. (Compl. at 4.)

09cv1985

7

Furthermore, 

Servicer shall perform the Services for all mortgage loans it services, whether it

services such mortgage loans for its own account or for the account of another

party, including any holders of mortgage-backed securities (each such other party,

an “Investor”). Servicer shall use reasonable efforts to remove all prohibitions or

impediments to its authority, and use reasonable efforts to obtain all third party

consensus and waivers that are required, by contract or law, in order to effectuate

any modification of a mortgage loan under the Program.

(Id. ¶2(A) (italicized emphases added); see also id. Ex. A (“Financial Instrument”) ¶5(b).)1

 In

exchange for Defendant’s modification of eligible loans, the Agreement requires Fannie Mae to

pay Defendant, investors and eligible borrowers certain sums up to a cap of approximately $2.8

billion dollars in aggregate for all of Defendant’s loan modifications under the Agreement. (Id.

¶4(B)&(D).) Defendant has an opportunity to opt out of the Agreement if the Treasury changes

the Program terms. (Id. ¶10(C).)

In describing the Program, the Treasury stated that the Program, comprising of loan

modification and refinance services, “will offer assistance to as many as 7 to 9 million

homeowners, making their mortgages more affordable and helping to prevent the destructive

impact of foreclosures on families, communities and the national economy.” (Compl. Ex. 3

(Summary of Guidelines (“Summary”)) (emphasis in original).) According to the Treasury, the

loan modification part of the Program “will help up to 3 to 4 million at-risk homeowners avoid

foreclosure by reducing monthly mortgage payments.” (Id.) 

The Program, however, goes beyond the hortatory pronouncements by providing that the

participating servicers are “required to service all eligible loans under the rules of the program

unless explicitly prohibited by contract.” (Id. (emphases added).) 

Participating servicers are required to consider all eligible loans under the program

guidelines unless precluded by the rules of the applicable [pooling and servicing

agreements] and/or other investor servicing agreements. Participating servicers are

required to use reasonable efforts to remove any prohibitions and obtain waivers

or approvals from all necessary parties.

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2 Program Guidelines, the Financial Instrument and other documentation provide

specific terms for Defendant’s performance under the Agreement. (Agreement ¶ 1(A))

09cv1985

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(Compl. Ex. 2 (Home Affordable Modification Program Guidelines (“Guidelines”))2 at 2

(emphases added).) Furthermore, “[e]very potentially eligible borrower who calls or writes in to

their servicer in reference to a modification must be screened for hardship.” (Id. at 5 (emphasis

added).) When a loan is at risk of imminent default or at least 60 days delinquent, the servicers

are required to use a particular net present value test on each such loan. (Summary (emphasis

added); see also Guidelines at 5-6.) If the test is positive, “the servicer must modify absent

fraud or a contract prohibition.” (Summary (emphasis added); see also Guidelines at 6.) The

Program requires suspension of foreclosure proceedings during a borrower’s trial modification

period. (Guidelines at 3.) 

Based on the foregoing, the Agreement unambiguously directs Defendant to modify

loans, identifies criteria to determine which loans are eligible for modification, and specifies

how to modify them. (Guidelines at 2-10, 16-17.) Other provisions explain in detail the

compensation for Defendant, investors and borrowers under the Program, information keeping

requirements, and other particulars. (Guidelines at 1-17; Financial Instrument ¶3 (information

keeping and reporting requirements).) Upon a fair reading of the Agreement in its entirety and

in the context of its enabling legislation, it is difficult to discern any substantial purpose other

than to provide loan modification services to eligible borrowers. See Astra, 588 F.3d at 1246. 

Defendant does not offer any other purpose for the Agreement. The Agreement on its face

expresses a clear intent to directly benefit the eligible borrowers.

Relying on United States v. FMC Corporation, Defendant contends that Plaintiff cannot

be an intended third-party beneficiary. 531 F.3d 813 (9th Cir. 2008). The plaintiff in FMC, an

Indian tribe, was held not to be an intended third-party beneficiary of a consent decree between

the United States government and FMC. Id. Defendant points to the fact that the tribe was

involved in the consent decree negotiations, was referred to several times in the consent decree,

and was given certain rights in the decree, but all of this was insufficient to make it an intended

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beneficiary. (Def.’s Mem. of P.&A. at 10-11; Reply at 6 n.2.) The primary reason for finding

that the tribe was not an intended beneficiary was a provision in the consent decree expressly

stating that it was not intended either to create any rights or grant any cause of action to any

person not a party to the consent decree. FMC, 531 F.3d at 821. FMC is distinguishable

because the Agreement between Defendant and Fannie Mae does not contain this or an

equivalent provision.

Next, Defendant argues that the contracting parties could not have intended to give third

parties the right to sue because the Agreement gives the right to determine compliance to Federal

Home Loan Mortgage Corporation (“Freddie Mac”) and the right to enforcement in the event of

default to Fannie Mae. The court disagrees. 

The Agreement’s remedy and default provisions, including Freddie Mac’s role in

overseeing Defendant’s compliance, are designed to ensure Defendant’s accountability and

protect the Treasury from overpaying for loans which were modified, paying for modifying

ineligible loans, or being otherwise overcharged. (See Agreement ¶4(A)(d).) They do not

address disputes between Defendant and borrowers which arise when Defendant refuses to

modify a loan, as is the case here, because Fannie Mae’s obligation to pay Defendant under the

Agreement arises only when Defendant modifies a loan under the Agreement. It does not arise

for the loans which Defendant does not modify. (See id. ¶¶ 3 & 4.) The Agreement’s default

and remedy provisions therefore do not come to bear when Defendant does not modify a loan. 

Consistently, the focus on protecting the public funds from misuse under the Program is

reflected in what the Agreement defines as Events of Default (id. ¶6(A)), and the remedies at

Fannie Mae’s disposal if Defendant defaults: withholding of funds; choosing other means to

channel funds to the investors’ and borrowers’ accounts; reducing the amount payable Defendant

or seeking repayment of previously paid amounts; requiring Defendant to submit to additional

Program administrator oversight, “including, but not limited to, additional compliance controls

and quality control reviews;” termination of the Agreement; and imposing information and

reporting requirements regarding Defendant’s financial condition and ability to perform under

the Agreement (id. ¶6(B); see also id. ¶4(J)&(K)). These provisions are designed to ensure

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09cv1985

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Defendant’s accountability and protect public funds. They are relevant only when Defendant

has modified a loan and Fannie Mae’s obligation to make payments arises. They do not come to

bear when Defendant has not modified an eligible loan, as Plaintiff alleges. Defendant’s

argument that the default and remedies provisions preclude Plaintiff from enforcing his rights

under the Agreement are therefore rejected.

Last, Defendant contends that Plaintiff cannot be an intended third-party beneficiary

because enforcement by all the eligible borrowers would be “unwieldy.” (Reply at 3 n.1.) 

Defendant points to the Treasury’s description of the Program stating that it “will offer

assistance to as many as 7 to 9 million homeowners.” (Summary (emphasis omitted).) Although

“[the breadth and indefiniteness of a class of beneficiaries is entitled to some weight in negating

the inference of intended beneficiary status[, ] numbers alone are not determinative.” Astra, 588

F.3d at 1248 (citation omitted). Unlike the total potential pool of Program beneficiaries

referenced by the Treasury, the class of persons who could potentially enforce the Agreement is

narrow and well-defined. It is limited to eligible borrowers whose loans are serviced by

Defendant. It is therefore “not at all akin to members of the public at large.” Id. Defendant’s

argument that the number of potential beneficiaries negates the beneficiary status is rejected.

Based on the foregoing, Plaintiff may be able to state a claim against Defendant as an

intended beneficiary of the Agreement. Under the unambiguous terms of the Agreement,

Plaintiff at the very least had a right to have his loan considered for modification. He alleged

that he is eligible under the Guidelines and that the current investor allows modification of his

loan. (Compl. at 4.) He further alleged that Defendant had not indicated that his loan could not

be modified, but refused to offer to modify it and instituted foreclosure proceedings. (Id. at 4-5.) 

However, because Plaintiff did not allege whether he contacted Defendant in reference to the

modification and because it is unclear from the allegations whether Defendant considered

Plaintiff’s loan for modification at all, Plaintiff has alleged insufficient facts to state a claim for

breach of the Agreement. Defendant’s motion to dismiss is therefore GRANTED.

/ / / / /

/ / / / /

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Plaintiff’s claim for injunctive relief and restitution under the UCL and for declaratory

relief are entirely premised on the breach of contract claim. Defendant’s motion to dismiss these

remaining claims is therefore GRANTED for the same reasons.

Plaintiff has not requested leave to amend the complaint if the motion to dismiss is

granted. Nevertheless, the court must consider whether a motion to dismiss should be granted

with leave to amend. See Schreiber Distrib. Co. v. Serv-Well Furniture Co., Inc., 806 F.2d 1393,

1401 (9th Cir. 2004). Rule 15 advises the court that leave to amend shall be freely given when

justice so requires. Fed. R. Civ. P. 15(a). “This policy is to be applied with extreme liberality.” 

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (internal quotation

marks and citation omitted). Dismissal with prejudice and without leave to amend is not

appropriate unless it is clear that the complaint could not be saved by amendment. Id. at 1052. 

Because it appears that the complaint could be amended by alleging additional facts, Plaintiff is

granted LEAVE TO AMEND.

Based in on the foregoing, it is hereby ORDERED as follows:

1. Defendant’s motion to dismiss or transfer based on improper venue is DENIED.

2. Defendant’s motion to dismiss for failure to state a claim is GRANTED WITH

LEAVE TO AMEND. 

3. If Plaintiff chooses to file an amended complaint, he must do so no later than August

31, 2010. Defendant shall respond to the amended complaint, if any, within the time set forth in

Federal Rule of Civil Procedure 15(a)(3). 

IT IS SO ORDERED.

DATED: August 12, 2010

M. James Lorenz

United States District Court Judge

COPY TO: 

HON. RUBEN B. BROOKS

UNITED STATES MAGISTRATE JUDGE

ALL PARTIES/COUNSEL

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