Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-03327/USCOURTS-cand-5_06-cv-03327-11/pdf.json

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

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United States District Court

For the Northern District of California

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 No class has been certified under Fed. R. Civ. P. 23 in this action.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

SPT

United States District Court

For the Northern District of California

E-FILED on 7/31/07

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

ARMANDO AND ALINDA MARTINEZ, on

behalf of themselves and a class of others

similarly situated,

Plaintiffs,

v.

WELLS FARGO BANK, N.A.; WELLS

FARGO HOME MORTGAGE, INC.; WELLS

FARGO FINANCIAL SERVICES, INC.; and

WELLS FARGO REAL ESTATE TAX

SERVICES, LLC,

Defendants.

No. C-06-03327 RMW

ORDER GRANTING DEFENDANTS'

MOTION TO DISMISS COUNTS TWO

THROUGH FOUR OF SECOND AMENDED

COMPLAINT

[Re Docket No. 55]

Defendants Wells Fargo Bank, N.A., Wells Fargo Home Mortgage, Inc., Wells Fargo

Financial Services, Inc., and Wells Fargo Real Estate Tax Services, LLC (collectively, "Wells")

move to dismiss counts two through four of plaintiffs' second amended complaint ("SAC") for

failure to state a claim. Plaintiffs Armando and Alinda Martinez (together, "plaintiffs") purport to

bring this action on behalf of themselves and a class of similarly situated individuals.1

 Plaintiffs

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2

 The complaint does not indicate what such other services are and how the related fees are

marked up. 

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

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oppose the motion. The court has read the moving and responding papers and considered the

arguments of counsel. For the reasons set forth below, the court GRANTS defendants' motion to

dismiss counts two through four of plaintiffs' second amended complaint.

I. BACKGROUND

Plaintiffs allege that they are home mortgage borrowers from whom Wells wrongfully

charged and collected fees for settlement services related to the refinancing of their home mortgage

in May of 2005. SAC ¶ 4. Wells is a financial services company that provides, inter alia, settlement

services in connection with residential mortgage loans. According to the complaint, plaintiffs were

given a good faith estimate for closing costs by a loan broker which included an estimate of $350 for

an underwriting fee. Id. ¶ 33. Six days later, Wells charged plaintiffs an underwriting fee of $800. 

Plaintiffs assert that both the good faith estimate and the actual charge were excessive. Id. In

particular, the risk assessment that is involved in underwriting a loan is performed "by a

computerized automated underwriting system by a loan broker or loan officer before Wells Fargo's

loan clerks ever receive the application," and Wells "merely runs information collected by others

about the borrower and the proposed loan through the automated program "at a de minimus cost." 

Id. ¶ 15. Plaintiffs were also charged a tax service fee of $75 for service provided by Wells Fargo

Real Estate Tax Services, LLC ("WFRETS") even though WFRETS purportedly charged Wells less

than $75 for providing the service. Id. Plaintiffs also assert on information and belief that Wells

marks up fees for other services.2

 Id.

Plaintiffs further allege that because the Federal National Mortgage Association ("Fannie

Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the federally-created

entities that will purchase the federally-related loans processed by Wells, determine the requisite

underwriting criteria for loans they will buy, Wells has no interest in the underwriting criteria at all. 

Id. ¶ 16. According to plaintiffs, only those borrowers who meet Fannie Mae's and Freddie Mac's

underwriting criteria for their loans are passed along to Wells. Id. ¶ 25. Plaintiffs also allege that

the loans at issue are made for the purpose of immediately selling them to investors, principally

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ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

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Fannie Mae and Freddie Mac. Id. ¶ 19. Only borrowers with loans that qualify for immediate

purchase by Fannie Mae and Freddie Mac are members of the proposed class. Specifically,

plaintiffs purport to bring this action as a class action on behalf of a class defined as:

All persons and entities who, on or after January 1, 1998, obtained a federally-related

home mortgage (1) whose automated underwriting score was "Accept," "AcceptPlus," "Approve" or a similar code indicating an acceptable loan for purchase by

FANNIE MAE or FREDDIE MAC and paid one or more defendants an underwriting

fee, or (2) was charged a fee by one or more defendants for tax services in an amount

that exceeded the amount charged by the service entity. 

Id. ¶ 1. 

Plaintiffs also allege that Wells "overcharges in violation of state and federal laws,

misrepresenting the costs of underwriting and tax services, failing to disclose the actual cost of these

services and imposing illegally marked up underwriting, tax service and related costs of the

mortgage contract" Id. ¶ 2. According to the complaint, the government charters for Fannie Mae

and Freddie Mac provide that they are charged with increasing the affordability of home ownership

by reducing costs to borrowers. Id. ¶ 10. Plaintiffs allege that Wells undermines these efforts by

improperly charging for underwriting, tax services, and related services and keeping cost savings for

itself. Id. ¶ 11. According to plaintiffs, Wells' conduct "frustrates and violates federal laws and

policy, hurts competition among banks by allowing dishonest banks such as [Wells] obtain an unfair

advantage over those banks that follow the law, and diminishes the safety and soundness of

defendants and other banks." Id. In addition, "the fees charged do not relate in any manner to

deterring any misuse by customers of banking services." Id. The fees vary depending on the branch

office from which the loan originates and do not vary based on any differences among class

members. Id. ¶ 27. 

As pled, Wells requires its borrowers to pay the cost of automatic underwriting and tax

services as a condition to obtaining a loan, and additionally, charges borrowers not only the cost of

such services but an added markup from cost that Wells pockets. Id. ¶ 13. Wells also intentionally

conceals its practices by listing the inflated underwriting charge on the HUD-1 Settlement Statement

while failing to disclose that the listed charge is not the actual cost incurred. Id. ¶ 30. Further,

Wells allegedly fails to make the required disclosures pursuant to 24 C.F.R. § 3500.7(e)(1). Id. ¶ 31. 

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ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

SPT 4

Counts two, three, and four all assert violations of Cal. Bus. & Prof. Code § 17200 et seq.

Count two of plaintiffs' complaint alleges that Wells engaged in unlawful business acts and

practices, count three alleges that Wells engaged in unfair business acts and practices, and count four

alleges that Wells engaged in fraudulent business acts and practices. 

II. ANALYSIS

Wells moves to dismiss plaintiffs' state law claims in counts two through four on the basis

that they are preempted by federal law and otherwise fail to state a claim. This court previously

concluded that plaintiffs' § 17200 claims of unfair and deceptive business acts and practices were

preempted by the National Bank Act ("NBA") and regulations enacted thereunder. See Mar. 30,

2007 Order Granting Motion to Dismiss Counts Two through Six of First Amended Complaint

("March 30, 2007 Order") at 10:15-12:15. The court concluded that plaintiffs failed to state a claim

as to their § 17200 claim for unlawful business acts and practices. Id. at 13:4-15. However, the

court granted plaintiffs leave to amend such claims.

A. Legal Standard

A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint.

Dismissal can be based on the "lack of a cognizable legal theory" or "the absence of sufficient facts

alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th

Cir. 1988). When evaluating a Rule 12(b)(6) motion, the court must accept all material allegations

in the complaint as true and construe them in the light most favorable to the non-moving party. 

Barron v. Reich, 13 F.3d 1370, 1374 (9th Cir. 1994). "[A] plaintiff's obligation to provide the

'grounds' of his 'entitlement to relief' requires more than labels and conclusions." Bell Atlantic Corp.

v. Twombly, 530 U.S. __, 127 S. Ct. 1955, 1964-65 (2007) (citations and edit marks omitted). 

Moreover, "[f]actual allegations must be enough to raise a right to relief above the speculative level

on the assumption that all the allegations in the complaint are true." Id. (citations omitted). The

court is not required to accept conclusory legal allegations "cast in the form of factual allegations if

those conclusions cannot reasonably be drawn from the facts alleged." Clegg v. Cult Awareness

Network, 18 F.3d 752, 754-55 (9th Cir. 1994). 

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3

 More specifically, § 24 addresses corporate powers authorized pursuant to a national bank's

corporate form following the filing of its articles of association and organization certificate.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

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B. Section 17200 Claims

For the reasons set forth below, the court finds that plaintiffs' amended § 17200 claims are

either preempted by the National Bank Act and regulations thereunder or that plaintiffs have

otherwise failed to state a § 17200 claim.

1. Unfair and Deceptive Business Acts or Practices

As this court stated in the March 30, 2007 Order, Congress expressly authorizes national

banks to engage in real estate lending under the NBA: 

(a) Authorization to make real estate loans; orders, rules, and regulations of

Comptroller of the Currency

Any national banking association may make, arrange, purchase or sell loans or

extensions of credit secured by liens on interests in real estate, subject to section

1828(o) of this title and such restrictions and requirements as the Comptroller of the

Currency may prescribe by regulation or order.

12 U.S.C. § 371(a). Because of the "extensive federal statutory and regulatory scheme" enacted by

Congress in the field of banking, "the usual presumption against federal preemption of state law is

inapplicable to federal banking regulation." Wells Fargo Bank N.A. v. Boutris, 419 F.3d 949, 956

(9th Cir. 2005). Nevertheless, "states may regulate national banks where 'doing so does not prevent

or significantly interfere with the national bank's exercise of its powers.'" Id. at 963 (quoting

Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 33 (1996)).

The extent of the NBA's regulation depends on both the enumerated and incidental powers

conferred upon national banks. Id. "[A] national bank's activity is authorized as an incidental

power, necessary to carry on the business of banking, within the meaning of 12 U.S.C. § 24,

Seventh, if it is convenient or useful in connection with the performance of one of the bank's

established activities pursuant to its express powers under the National Bank Act." Id. at 960

(citation and internal quotations omitted).3

 However, a connection must exist between an incidental

activity and an express power in order for the activity to be authorized as an incidental power. Id.

(citations omitted). As this court held in the March 30, 2007 Order, the express power conferred by

the NBA is the authority to "engage in real estate lending," including to "make, arrange, purchase or

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4

 The NBA confers authority upon the OCC to promulgate regulations implementing the Act. 

See 12 U.S.C. § 371(a) (conferring upon the OCC the authority to set restrictions and requirements

for national banks' real estate lending power). "Federal regulations have no less pre-emptive effect

than federal statutes." Fidelity Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153 (1982).

5

 In addition, 12 C.F.R. § 34.4 provides that "a national bank may make real estate loans under

12 U.S.C. 371 and § 34.3, without regard to state law limitations concerning . . . [t]he terms of credit . . . [and] [p]rocessing, origination, servicing, sale or purchase of, or investment or participation in,

mortgages." 12 C.F.R. § 34.4(4), 34.4(10). 

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

SPT 6

sell loans or extensions of credit secured by liens on interests in real estate." 12 U.S.C. § 371. As

relevant to the present action, the determination of interest and non-interest charges and fees are

incidental powers to the express power of engaging in real estate lending. The Office of the

Comptroller of the Currency ("OCC") has issued regulations that address national banks' powers to

determine interest rates and non-interest charges and fees, including the preemptive effect of such

powers, in Title 12 Title, Chapter I, Part 7, Subpart D.

Here, plaintiffs' amended allegations continue to premise their UCL claims upon Wells'

conduct and discretion in setting, charging, and disclosing settlement service fees, namely for

underwriting services and tax services related to settlement of federally-related home mortgages. 

However, as noted in the March 30, 2007 Order, 12 C.F.R. § 7.4002 specifically provides that a

national bank "may charge its customers non-interest charges and fees, including deposit account

service charges" and that the determination of such charges and fees are "business decisions to be

made by each bank, in its discretion, according to sound banking judgment and safe and sound

banking principles."4

 Further, the OCC regulations provide that a national bank is deemed to

establish such charges and fees in accordance with safe and sound banking principles if "the bank

employs a decision-making process through which it considers the following factors:"

(i) The cost incurred by the bank in providing the service;

(ii) The deterrence of misuse by customers of banking services;

(iii) The enhancement of the competitive position of the bank in accordance with the

bank's business plan and marketing strategy; and

(iv) The maintenance of the safety and soundness of the institution.

12 C.F.R. § 7.4002(b)(2).5

 Because of these regulations, this court held that the settlement fees at

issue in plaintiffs' first amended complaint fell within the scope of the OCC's regulations as set forth

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ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

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in § 7.4002 and, therefore, plaintiffs' claims were preempted under the doctrine of conflict

preemption. 

Plaintiffs' amended pleadings do not take their § 17200 claims for unfair and deceptive

business acts and practices outside the reach of § 7.4002. Plaintiffs have added allegations that

Wells' conduct "frustrates and violates federal laws and policy, hurts competition among banks by

allowing dishonest banks such as [Wells] obtain an unfair advantage over those banks that follow

the law, and diminishes the safety and soundness of defendants and other banks." SAC ¶ 11. In

addition, "the fees charged do not relate in any manner to deterring any misuse by customers of

banking services." Id. Although these allegations seek to assert that Wells' charges for tax services,

underwriting, and related fees fail to comply with the factors set by the OCC for decisions that

accord with safe and sound banking principles, see § 7.4002(b)(2), plaintiffs' claims are still based

on alleged improprieties in Wells' federally-conferred discretion in setting fees, which is within the

incidental powers authorized by the NBA and the OCC regulations. Moreover, as stated in the July

10, 2007 Order, whether there is conflict preemption does not turn on whether a national bank has

complied with these factors; rather the factors set forth in § 7.4002(b)(2) are merely guidelines

provided by the OCC to banks of criteria banks should consider in setting non-interest charges and

fees. Regulation of a national bank's adherence to these regulations are within the exclusive purview

of the OCC. Watters v. Wachovia Bank, N.A., 127 S. Ct. 1559, 1564 (Apr. 17, 2007). 

The Supreme Court's recent decision in Watters supports the court's conclusion. In Watters,

the issue before the Court was whether the mortgage business conducted by a national bank's

operating subsidiary should be accorded the same preemption from state licensing, reporting, and

visitorial regimes as the bank itself. The Court held that the mortgage business by the operating

subsidiary is subject to the superintendence of the OCC to the exclusion of state registration

requirements to the same extent a national bank's conduct that falls within its express and incidental

powers under the NBA. Id. Although the issue before the Watters Court differs from the issue

before this court, the Court's analysis of the scope of the NBA and OCC regulations in preempting

state laws is instructive. In particular, the Court noted that "[a]s the agency charged by Congress

with supervision of the NBA, [the] OCC oversees the operations of national banks and their

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6

 The court again reiterates that in so holding, the court does not conclude that § 17200 claims

are per se preempted by the NBA and regulations thereunder. Rather, to the extent a § 17200 claim

seeks to contest the exercise of a national bank's enumerated or incidental authority, such a claim

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

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interactions with customers." Id. "The agency exercises visitorial powers, including the authority to

audit the bank's books and records, largely to the exclusion of other governmental agencies." Id.

Although the Court reiterated that there is no field preemption by the NBA, id. at 1567 ("[f]ederally

chartered banks are subject to state laws of general application in their daily business to the extent

such laws do not conflict with the letter or the general purposes of the NBA"), the Court made clear

that the specific grants of enumerated and incidental powers do preempt contrary state law, id.

("[w]e have interpreted grants of both enumerated and incidental powers to national banks as grants

of authority not normally limited by, but rather ordinarily pre-empting, contrary state law") (internal

quotations, edit, and citation omitted). In particular, "[b]eyond genuine dispute, state law may not

significantly burden a national bank's [] exercise of its real estate lending power, just as it may not

curtail or hinder a national bank's efficient exercise of any other power, incidental or enumerated

under the NBA." Id. at 1567-68. Thus, where state law would "significantly impair the exercise of

authority, enumerated or incidental under the NBA, the State's regulations must give way." Id. at

1567.

Here, as stated in the March 30, 2007 Order and above, the NBA explicitly confers upon

national banks such as Wells the authority to engage in real estate lending, and the determination of

interest and non-interest charges and fees associated with the business of real estate lending are

incidental powers of that authority. Were the court to allow plaintiffs' § 17200 claims, which rely

upon state law to contest the fairness of Wells's decision-making and setting of charges that are

clearly authorized by the NBA and within the purview of the OCC's exclusive regulation, the court

would essentially be allowing the superimposition of state law requirements upon the OCC's

exclusive superintendence of Wells' exercise of its federally-conferred powers. Watters counsels

against such a practice. Accordingly, the court concludes that plaintiffs' claims of unfair and

deceptive business acts and practices are preempted by the NBA and the OCC's regulations

thereunder.6

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significantly interferes with the federally-conferred authority of the bank and the exclusive

regulatory authority of the OCC.

7

 Plaintiffs cite to paragraphs 40-43 of their SAC as support for their § 17200 claim. However,

the cited allegations appear to relate to plaintiffs assertion that the doctrines of "accrual, fraudulent

concealment, continuing violation, and equitable tolling" apply to their claims (presumably for

statute of limitations purposes). 

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

COMPLAINT—No. C-06-03327 RMW

SPT 9

2. Unlawful Business Practices or Acts

The court previously held that plaintiffs' have failed to state a claim under the unlawful prong

of § 17200 because plaintiffs failed to state a claim that Wells violated the Real Estate Settlement

Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq. based on alleged overcharges, did not

sufficiently allege that Wells has acted unlawfully because it has exceeded its authority conferred by

the NBA or regulations thereunder, and failed to state a claim for violation of 24 C.F.R. § 3500,

App. A. In their opposition, plaintiffs clarify that (1) they do not allege a RESPA violation as an

unlawful predicate act supporting their UCL claim, and (2) they do not allege that Wells purported

exceeding of their NBA authority serves as a predicate unlawful act for their UCL claim. Pls.' Opp'n

at 13:7-14. Rather, plaintiffs appear to contend that the unlawful acts that serve as the predicates for

their § 17200 claim are (1) Wells' non-disclosure of the actual costs of its settlement services and

any mark-ups made to such costs purportedly pursuant to duties under Cal. Civil Code § 1572,7

 and

(2) Wells' alleged non-compliance with the disclosure requirements for the HUD-1 form. 

The court concludes that plaintiffs have failed to state a claim under the unlawful prong of

§ 17200 based on the two asserted predicate acts. Plaintiffs contend that Cal. Civil Code § 1572

"imposes a duty on any party to a contract to not suppress that which is true, with knowledge or

belief of the fact[] and to not make a suggestion, as a fact, when [it] does not believe it is true" and,

further, imposes a duty upon a party to a transaction a duty to disclose material facts in its sole

possession which it knows are not known to or reasonably discoverable by the other party. 

However, as discussed, supra § B.1, a national bank's discretion of what to charge for non-interest

charges related to the enumerated power of providing real estate lending services is governed by the

NBA and the OCC's regulation and regulated by the OCC. Under the federal scheme, Wells is

required to disclose its settlement charges in the HUD-1 form, but is not required to additionally

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8

 As noted above, although plaintiffs' first count, which is not the subject of the present motion

to dismiss, assert that Wells improperly marked up its charges in violation of RESPA, plaintiffs have

conceded that they do not argue that a violation of RESPA serves as a predicate unlawful act for

their § 17200 claim. 

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disclose its actual costs. Therefore, the purported additional or alternate disclosure requirements

imposed by Cal. Civil Code § 1572 are preempted. 

Plaintiffs also contend that Wells' non-compliance with the disclosure requirements of the

HUD-1 form serves as a predicate unlawful act and practice. Plaintiffs argue that Wells has failed to

comply because, although the HUD-1 form requires Wells to list only charges and not actual costs,

Wells improperly lists a charge consisting of a third-party fee plus Wells' purported mark-up instead

of only the fee the third-party charges Wells.8

 However, as the court concluded in the March 30,

2007 Order, the applicable HUD regulation requires Wells to disclose only actual charges. In

particular, the HUD regulation indicates that the HUD form is to disclose in itemized format all

charges imposed upon the borrower by the lender. See Mar. 30, 2007 Order at 13:8-15 ("This form

is to be used as a statement of actual charges and adjustments to be given to the parties in

connection with the settlement. . . . The settlement agent shall complete the HUD-1 to itemize all

charges imposed upon the Borrower and the Seller by the Lender and all sales commissions,

whether to be paid at settlement or outside of settlement, and any other charges which either the

Borrower or the Seller will pay for at settlement.") (quoting 24 C.F.R. § 3500, App. A) (emphases

added). The court does not find that this disclosure requirement further requires Wells to disclose its

actual costs of settlement services or the components making up the actual charges imposed. 

III. ORDER

For the foregoing reasons, the court GRANTS defendants' motion to dismiss counts two

through four of plaintiffs' second amended complaint. 

DATED: 7/31/07 

RONALD M. WHYTE

United States District Judge

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ORDER GRANTING DEFENDANTS' MOTION TO DISMISS COUNTS TWO THROUGH FOUR OF SECOND AMENDED

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Notice of this document has been electronically sent to:

Counsel for Plaintiffs:

Jacquetta Bardacos jbardacos@packard.com

Ronald D. Packard rdpackard@packard.com

Von G. Packard vpackard@packard.com

Timothy G. Blood timb@mwbhl.com 

Counsel for Defendants:

Robert Bader rbader@goodwinprocter.com 

William F. Sheehan wsheehan@goodwinprocter.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not

registered for e-filing under the court's CM/ECF program.

Dated: 7/31/07 SPT

Chambers of Judge Whyte

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