Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-00240/USCOURTS-cand-3_05-cv-00240-0/pdf.json

Nature of Suit Code: 371
Nature of Suit: Truth in Lending
Cause of Action: 15:1601 Truth in Lending

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

NONA KNOX, ALBERT KNOX, MARIA

TORRES, HELADIO ARELLANES AND MARIA

ARELLANES on behalf of themselves

and those similarly situated,

Plaintiffs,

 v.

AMERIQUEST MORTGAGE COMPANY, a

Delaware corporation, ARGENT

MORTGAGE COMPANY, LLC, a Delaware

Limited Liability Company, AND DOES

1-100, inclusive,

Defendants. 

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No. C-05-00240 SC

ORDER RE: DEFENDANTS'

MOTION TO DISMISS

FIRST AMENDED

COMPLAINT AND MOTION

TO STRIKE PORTIONS OF

FIRST AMENDED

COMPLAINT 

I. INTRODUCTION

Plaintiffs Nona Knox, Albert Knox, Maria Torres, Heladio

Arellanes, and Maria Arellanes ("Plaintiffs") brought this action

against Defendants Ameriquest Mortgage Company and Argent Mortgage

Company, LLC ("Defendants"), alleging that Defendants had engaged

in a variety of predatory lending practices in violation of

federal and state laws. Defendants now move for dismissal

pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

For the following reasons, the Court GRANTS Defendants' Motion to

Dismiss ("Motion") with respect to any claims brought under 15

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U.S.C. § 1640(e). The Court DENIES the Motion with respect to all

other claims. Furthermore, the Court GRANTS Defendants' Motion to

Strike Portions of the First Amended Complaint ("Motion to

Strike").

II. BACKGROUND

Defendant Ameriquest is a privately held corporation

organized under the laws of Delaware with its principal place of

business in California. Ameriquest offers mortgages with a focus

on the "subprime" market. First Amended Complaint ("FAC") at 3. 

Ameriquest is a "retail lender" which uses its own employees to

market its loans directly to potential and existing customers. 

Motion at 3. Defendant Argent is a limited liability company

organized under the laws of Delaware with its principal place of

business in California. Argent is a wholly owned subsidiary of

Defendant Ameriquest. FAC at 3. Argent is a "wholesale lender"

which does not deal directly with borrowers. Rather, Argent makes

its loan product available to third-party mortgage brokers, who in

turn market the products to individual borrowers. Motion at 3.

Plaintiffs allege that Defendants have engaged in a series of

predatory lending practices. Specifically, Plaintiffs allege,

"Defendants teach their employees to lure borrowers with promises

that their loans will have certain terms and conditions, knowing

Defendants have no intent of providing such loans, and then use

tricks and high-pressure sales tactics to induce borrowers to sign

loan contracts with significantly less favorable terms and

conditions." Opposition at 2. For example, Plaintiffs allege

that Defendants fail to provide required disclosures, fail to

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leave a true copy of loan documents in borrowers' possession, and

provide contracts for borrowers' signatures only in English

despite conducting misleading contract discussions in other

languages. FAC at 28-33. In addition, Plaintiffs allege that

Defendants unlawfully induce borrowers to enter into mortgages in

which monthly payments exceed the monthly income or excessive or

unfair fees are levied. Id. Plaintiffs also allege that mortgage

salespeople and broker forged applicants' data on loan

applications. Id.

Plaintiffs Mr. and Ms. Knox signed their loan contract on May

13, 2002. Id. at 29. Plaintiff Ms. Torres signed her loan

contract on December 21, 2002. Id. at 31. Plaintiffs Mr. and Ms.

Arellanes signed their loan contract on January 15, 2003. Id. at

33. The original complaint was filed January 14, 2005.

The First Amended Complaint states ten causes of action for

violations of Federal laws, including the Truth in Lending Act,

Federal Reserve Regulation Z, the Fair Housing Act, and the Equal

Credit Opportunity Act; California laws, including the Fair

Employment and Housing Act, the Unruh Civil Rights Act, the Unfair

Competition Act, the False Advertising Act, and the Consumer Legal

Remedies Act; and common law negligent training and negligent

supervision standards. First Amended Complaint at 33-43.

III. LEGAL STANDARD

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure,

a party may move for dismissal "for failure to state a claim upon

which relief can be granted." When presented with a motion to

dismiss, "[a]ll allegations of material fact are taken as true and

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construed in the light most favorable to the nonmoving party." 

Jacobellis v. State Farm Fire & Cas. Co., 120 F.3d 171, 172 (9th

Cir. 1997). "[A] complaint should not be dismissed for failure to

state a claim unless it appears beyond doubt that the plaintiff

can prove no set of facts in support of his claim which would

entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46

(1957); see also Gompper v. VISX, Inc., 298 F.3d 893, 896 (9th

Cir. 2002).

IV. DISCUSSION

Defendants have put forth a variety of theories to support

the Motion to Dismiss. The Court will consider each one in turn.

A. Whether TILA Claims are Time-barred

Plaintiffs bring their First Cause of Action pursuant to the

Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq. FAC at

33. Defendants assert that TILA damage claims are controlled by a

one year statute of limitations, and therefore, this claim is time

barred since Plaintiffs filed suit approximately two years after

the last of the named plaintiffs signed their loan documents. 

Motion at 8. The Court agrees that a one year statute of

limitations period controls. 15 U.S.C. § 1640(e). Plaintiffs

acknowledge the one year statute of limitations, but allege that

the doctrine of equitable tolling has suspended the limitations

period. Opposition at 6. With respect to Plaintiffs Torres and

Arellanes, Plaintiffs argue that the statute of limitations should

be tolled because Defendants carried out extensive loan

discussions with Ms. Torres and Mr. and Ms. Arellanes in Spanish

but presented loan documents to them only in English, a language

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which they do not speak. Opposition at 6-7. With respect to

Plaintiffs Mr. and Ms. Knox, Plaintiffs argue that Defendants'

alleged failure to grant the Knoxes an opportunity to read the

loan documentation provides a sufficient basis for this Court to

toll the statute of limitations. Id. Having read the parties'

papers and considered the relevant case law, the Court disagrees

that the doctrine of equitable tolling applies here.

The doctrine of equitable tolling is only applicable where,

"despite all due diligence, a plaintiff is unable to obtain vital

information bearing on the existence of his claim." Santa Maria

v. Pacific Bell, 202 F.3d 1170, 1178 (9th Cir. 2000). However, in

order to apply the doctrine of equitable tolling, a Court must

find that "a reasonable plaintiff would not have known of the

existence of a possible claim within the limitations period." Id.

at 1178. Having reviewed the parties' papers, the Court finds

little support for such a finding. For example, Plaintiffs Mr.

and Ms. Knox allege that they received a cash disbursement check

of only $8,000, not the $20,000 which they expected. FAC at 30. 

Or, Plaintiffs generally allege that Defendants wrongfully induced

Plaintiffs to enter into loan contracts in which the monthly

payment was greater than the borrower's monthly income. Id. at 1. 

The Court finds that such actions are sufficient to put a

reasonable person on notice that a potential claim exists. In any

equitable tolling analysis, "[t]he touchstone for determining the

commencement of the limitations period is notice: a cause of

action generally accrues when a plaintiff knows or has reason to

know of the injury which is the basis of his action." Ernst &

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Young v. Matsumoto, 14 F.3d 1380, 1386 (9th Cir. 1994) (internal

quotations and citations omitted). The Court finds that the

allegations of dramatically smaller cash-out proceeds than

expected and dramatically larger monthly payments than expected

put plaintiffs on notice. Therefore, the Court declines to apply

the doctrine of equitable tolling on this basis.

Plaintiffs also argue that the doctrine of equitable tolling

should apply due to Defendants' "failure to effectively provide

the disclosures and notices." FAC at 33. This appears not to be

an assertion of equitable tolling, but of equitable estoppel, also

termed fraudulent concealment. "Equitable estoppel focuses

primarily on the actions taken by the defendant in preventing a

plaintiff from filing suit ..." Santa Maria, 202 F.3d at 1176. 

However, in order for a Court to estop Defendants from relying on

the statute of limitations, there must have been "conduct by a

defendant, above and beyond the wrongdoing upon which the

plaintiff's claim is filed, to prevent the plaintiff suing in

time." Id. at 1177. While Defendants' alleged conduct may have

prevented Plaintiffs from suing in time, it was not conduct "above

and beyond" the underlying wrongdoing. Rather, a failure to

provide Plaintiffs with disclosures and notices to which they were

entitled is the crux of the TILA claim itself. Therefore, the

Court declines to apply the doctrine of equitable estoppel.

Plaintiffs Mr. and Ms. Arellanes transacted with Defendants

most recently, but their loan documents were finalized

approximately two years before the instant suit was filed. 

Because the Court finds that neither the doctrine of equitable

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tolling nor the doctrine of equitable estoppel are applicable

here, the Court finds that any claims brought pursuant to 15

U.S.C. § 1640 are barred by the one year statute of limitations.

Notwithstanding this Court's finding that the TILA damages

claims are precluded by the one year statute of limitations, the

Court does not find that all of Plaintiff's TILA claims are

precluded. Plaintiffs' First Cause of Action requests "equitable

restitution and disgorgement of profits realized by Defendants." 

FAC at 34. Damages such as disgorgement of profits are governed

by § 1640 and are precluded by the one year statute of limitations

discussed above. However, TILA also creates a right of rescission

and a corresponding remedy of restitution. 15 U.S.C. § 1635(a)-

(b). The "obligor shall have the right to rescind the transaction

until midnight of the third business day following consummation of

the transaction or the delivery of the information and rescission

forms required under this section ... whichever is later." Id.

This right to rescind must be exercised within a three year period

from the date of the transaction. Id. at § 1635(f). The Court

finds that Plaintiffs' allegations that Defendants failed to make

certain disclosures with respect to an obligor's right of

rescission are sufficient to support a claim for rescission under

§ 1635. Because three years did not elapse between any of the

Plaintiffs' transactions and the filing of this lawsuit, the Court

finds that any claims brought pursuant to § 1635 are not timebarred. 

In light of the above, the Court grants the Motion with

respect to Plaintiffs' claim for damages under the Truth in

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Lending Act but denies the Motion with respect to Plaintiffs'

claim for rescission. 

B. Appropriateness of UBP Claim as a Class Action

Defendants seek dismissal of Plaintiffs' Unfair Business

Practices Claim to the extent that it is based on fraud or

misrepresentation on the grounds that such a claim is

inappropriate for class action treatment. Motion at 9. 

Defendants state that "fraud claims necessarily raise inherently

individualized questions of fact." Id. Plaintiffs counter that

their claim is based on the "likelihood of deception from

Defendants' overall business practices--and not individual acts of

fraud that may or may not have been perpetrated by Defendants or

their agents against any particular Plaintiff or class member--

that is the focus of Plaintiffs' claim for unfair business

practices." Opposition at 10. A plaintiff is master of his

complaint and may choose which causes of action to bring from the

relevant possibilities. Lingle v. Norge Div. of Magic Chef, 486

U.S. 399, 410 (1988). Therefore, given that Plaintiffs deny that

their claim is based on any individual acts of fraud, the Court at

this time sees no need to rule on the appropriateness of bringing

the unfair business practices claim as a class action.

C. Whether the Consumer Legal Remedies Act Applies to Mortgages

Plaintiffs' Eighth Cause of Action is brought pursuant to

California's Consumer Legal Remedies Act ("CLRA"). Cal. Civ. Code

§ 1750 et seq. Defendants allege that the CLRA is not applicable

to the financial transactions at issue here because such

transactions are not "goods" or "services" as defined by the CLRA. 

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Motion at 12. Defendants rely on the legislative history of the

CLRA as well as a California Supreme Court case which stated in

dicta that an insurance policy was neither a "good" nor a

"service." Civil Service Employees Ins. Co. v. Superior Court,

584 P.2d 497, 505 (Cal. 1978). The Court finds this to be an

insufficient basis for dismissal of the Plaintiffs' CLRA claim. 

Rather, the Court has reviewed the limited case law on this issue

and finds that California courts generally find financial

transactions to be subject to the CLRA. See Corbett v. Hayward

Dodge, Inc., 14 Cal. Rptr. 3d 741 (Cal. Ct. App. 2004) (affirming

denial of attorneys' fees in a case where Plaintiff brought

several claims, including a CLRA claim, against a car dealer and a

bank for allegedly misstating the interest rate on a car loan);

Kagan v. Gibraltar Savings and Loan Ass'n, 676 P.2d 1060 (Cal.

1984) (allowing a CLRA class action to go forward with respect to

management fees on an Individual Retirement Account). While

neither Corbett nor Kagan specifically looked at the question of

whether the respective financial transactions at issue were

covered by the CLRA, both cases assumed that they were. Corbett,

14 Cal. Rptr. 3d at 744-47; Kagan, 676 P.2d at 1061-68. 

Therefore, because other types of financial transactions involving

banking services appear to be covered by the CLRA, the Court finds

that the CLRA covers the mortgages at issue in the instant case

and denies the Motion with respect to this claim.

D. Appropriateness of Plaintiffs' Negligence Claims

Plaintiffs' Ninth and Tenth Causes of Action allege that

Defendants engaged in Negligent Training and Negligent Supervision

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of their employees. FAC at 41-42. In the Motion now before the

Court, Defendants assert that "California law does not recognize a

duty of care between a lender and a borrower sufficient to support

a negligence claim, absent active participation in a 'financed

enterprise' by the lender." Motion at 13. Defendants' theory is

an unrepresentative caricature of the relevant case law. For

example, Defendants rely on Nymark v. Heart Fed. Savings & Loan

Ass'n, 283 Cal. Rptr. 53 (Cal. Ct. App. 1991). Nymark held that

"as a general rule, a financial institution owes no duty of care

to a borrower when the institution's involvement in the loan

transaction does not exceed the scope of its conventional role as

a mere lender of money." Id. at 56. For example, the

Nymark court stated, "a lender has no duty to disclose its

knowledge that the borrower's intended use of the loan proceeds

represents an unsafe investment." Id.

However, the analysis does not stop there. Rather,

California courts look to six factors in determining whether a

financial institution owes a duty of care to a borrower-client. 

These factors are: "[1] the extent to which the transaction was

intended to affect the plaintiff, [2] the foreseeability of harm

to him, [3] the degree of certainty that the plaintiff suffered

injury, [4] the closeness of the connection between the

defendant's conduct and the injury suffered, [5] the moral blame

attached to the defendant's conduct, and [6] the policy of

preventing future harm." Id. at 58. In the instant matter,

Plaintiffs allege, and this Court must accept as true for purposes

of this Motion, that Defendants' employees engaged in activities

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such as forging borrowers' income and employment data on loan

applications. FAC at 30-32. This Court finds that the fifth

factor alone is enough to establish a duty of care.

Taken to its logical conclusion, Defendants' theory suggests

that commercial lenders in California have no duty to train and

supervise their employees to prevent illegal employment-related

activities by those employees, such as the document forgery

alleged here. This would be an absurd result. In sum, the Court

finds that it would be inappropriate to dismiss the Ninth and

Tenth Causes of Action.

E. Whether Defendant Argent is Potentially Liable

Plaintiffs Heladio Arellanes and Maria Arellanes ("the

Arellanes") approached a third-party mortgage broker, Rogelio

Mota, to refinance their home. FAC at 32. Mr. Mota brokered a

new loan for the Arellanes which was issued by Defendant Argent. 

Id. The parties dispute whether a mortgage broker is an agent of

the lender. Defendants, arguing that he is not, state that

Plaintiffs have only alleged acts and omissions on the part of Mr.

Mota, who is not a defendant, and not on the part of Defendant

Argent. Motion at 17-20. Therefore, Defendants assert that all

claims against Defendant Argent must be dismissed.

In opposition, Plaintiffs make several general allegations to

support a theory that Mr. Mota's alleged wrongdoings were

undertaken either on behalf of or with the knowledge of Defendant

Argent. For example, Plaintiffs allege that Argent induced Mr.

Mota to favor Argent at the expense of the Arellenes. Opposition

at 19. Or, Plaintiffs allege that "Argent enters into agreements

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with mortgage brokers." Opposition at 20. Plaintiffs also put

forth the theory that Defendant Argent has contracted with

mortgage brokers such as Mr. Mota to provide the required

statutory notices which the Arellenes claim to have not received. 

Id. While certain of these theories of liability depend on Mr.

Mota being an agent of Defendant Argent, other theories suggest

primary liability. Allegations of primary liability are enough to

defeat the Motion. Therefore, at this time, the Court declines to

decide the issue of whether as a matter of law a third-party

mortgage broker is or is not an agent of a mortgage lender.

The Court notes that Plaintiffs' allegations with respect to

Defendant Argent lack specificity and, even if taken as true for

purposes of this Motion, provide only a minimal level of support

for any theory of liability on the part of Defendant Argent. 

Still, the Court does not find at this time that it is beyond

doubt that Plaintiffs can prove no set of facts in support of

their claim which would entitle them to relief. Therefore, the

Court denies the Motion with respect to Defendant Argent. 

However, the Court also cautions Plaintiffs that unless

discoverable facts show a deeper relationship between Defendant

and Mr. Mota, the issue of Argent's liability may be ripe for

summary judgment at a later date.

Defendants have separately filed a Motion to Strike Portions

of the First Amended Complaint. Defendants allege, "The majority

of the allegations of Plaintiffs' First Amended Complaint ... bear

absolutely no relation to the Plaintiffs' loan transactions or the

causes of action raised, but instead needlessly cloud the relevant

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issues and improperly seek to prejudice Defendants ..." Motion to

Strike at 1. Generally, a complaint requires only "a short and

plain statement of the claim showing that the pleader is entitled

to relief." Fed. R. Civ. P. 8(a). The Court finds that at this

stage, much of Plaintiff's First Amended Complaint goes well

beyond what is properly included in a complaint. Therefore, the

Court grants Defendants' Motion to Strike with respect to the

seven categories of items listed on page 2 of Defendants' Motion

to Strike. 

V. CONCLUSION

In accordance with the above discussion, the Court hereby

GRANTS the Motion to Dismiss solely with respect to any claims

brought pursuant to 15 U.S.C. § 1640. With respect to all other

claims, the Court hereby DENIES the Motion to Dismiss. 

Furthermore, the Court GRANTS Defendants' Motion to Strike

Portions of the First Amended Complaint.

IT IS SO ORDERED.

Dated: August 10 , 2005

 

UNITED STATES DISTRICT JUDGE

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORN

I

A

Judge Samuel Conti

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