Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_09-cv-02133/USCOURTS-caed-1_09-cv-02133-2/pdf.json

Parties Involved:
Bank of America, N.A.
Defendant
Juvenal Chavez
Plaintiff
Veronica Chavez
Plaintiff
PRLAP, Inc.
Defendant

Document Text:

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

JUVENAL CHAVEZ and VERONICA )

CHAVEZ, )

)

)

)

Plaintiffs, )

)

vs. )

)

)

BANK OF AMERICA, N.A., )

PRLAP, INC., et al., )

)

)

Defendants. )

)

)

NO. CV-F-09-2133 OWW/SKO

MEMORANDUM DECISION GRANTING

IN PART WITH LEAVE TO AMEND

AND DENYING IN PART

DEFENDANTS' MOTION TO

DISMISS (Doc. 8)

On October 16, 2009, Plaintiffs Juvenal and Veronica Chavez,

represented by Chapin Fitzgerald Sullivan LLP (formerly Chapin

Wheeler LLP), filed in the Merced County Superior Court a

Complaint for Damages and Equitable Relief for (1) fraud, (2)

fraud in the inducement, (3) conversion, (4) quiet title, (5)

defamation, (6) violation of California Business and Professions

Code §§ 17200, and (7) civil conspiracy. The Complaint also

contains a “Petition for Interlocutory Injunctive Relief,” which

seeks to enjoin foreclosure of the Subject Property. Defendants

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are the Bank of America and PRLAP, Inc., and Does 1-50. The

action was removed to this Court on December 4, 2009.

Plaintiffs allege that they own property at 1231 Center

Lane, Los Banos, California (the "Subject Property"). Paragraphs

19-56 of the Complaint set forth allegations concerning subprime

loans and Defendants' alleged participation in that market. 

Paragraphs 57-77 set forth allegations pertaining to Plaintiffs:

57. The loans at issue were the product of a

home purchase, through which Plaintiffs were

attempting to obtain a safe, affordable

residential mortgage loan. Plaintiffs had

received advertisement for refinancing from

Defendant BoA marketing its ability to

refinance quickly, purportedly at the best

interest rates and with the best loan terms. 

This marketing prompted Plaintiffs to contact

and speak with a representative of BoA, whose

name is Ms. Fong, primarily over the

telephone.

58. From the outset of these conversations,

Defendants' representative aggressively

marketed the company's stated-income lending

program and made clear to Plaintiffs that

Defendants required no verification of their

financial status to issue a quick approval

for a refinance. Defendants' representative

reassured Plaintiffs that, even without any

financial verification, they would obtain a

loan package appropriate for their financial

status, that they would obtain the loan

package with the best terms available, and

that they had no other options.

59. Defendants' representative submitted a

loan application on Plaintiffs' behalf on

merely a stated-income basis, which

Defendants approved. This approval,

communicated by BoA's representative, with

the full knowledge and consent of its

trustees, insurers, underwriters, servicers,

and assignees, constituted a

misrepresentation to Plaintiffs that the loan

package they obtained was in fact appropriate

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for their financial condition.

60. On April 25, 2006, Plaintiffs purchased

the Subject Property, through a primary loan

they purchased from BoA for $260,000 and a

secondary loan, also with BoA, for $32,500,

with 100% financing. Defendants induced

Plaintiffs to purchase a hybrid ARM with a

piggyback balloon loan, even though

Plaintiffs qualified for other loan options

that were safer and more reasonable. This

piggyback balloon loan provided for payments

that covered only interest during the entire

loan term meaning that Plaintiffs could find

themselves owing the entire original loan

balance at the end of the interest-only

period.

61. As was typical of piggyback balloon

loans Defendants sold, the length of

Plaintiffs' secondary loan here was fifteen

years, shorter than the thirty year term of

Plaintiffs' primary loan. This meant that

Plaintiffs' balloon payment, for the entire

balance of the secondary loan, would come due

while Plaintiffs were still making payments

on their primary loan.

62. Defendants steered Plaintiffs into such

a risky loan package in order to increase

their own profits, knowing that the loan

package provided to Plaintiffs was

complicated and deceiving, the actual cost

and risk of a default inherent in which

Plaintiffs would not understand.

63. Plaintiffs’ primary loan provided for an

initial ‘teaser’ interest rate of 6.375% for

a temporary period of five years. 

Thereafter, Plaintiffs’ yearly interest rate

could adjust up to 11.375% with a margin of

2.25% plus prime.

64. Plaintiffs’ secondary loan provided for

an interest rate of 8.25% with interest-only

payments for ten years, at which time a

balloon payment for the total amount of the

loan was due.

65. Defendant PRLAP served as the trustee

for the loans BoA originated to Plaintiffs.

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66. Defendants offered Plaintiffs only this

single lending option. By offering

Plaintiffs only one lending option and then

approving, closing on, and servicing these

loans, Defendants misrepresented that this

loan package, with its particular terms, was

the only one available, was appropriate, and

was the most effective for Plaintiffs.

67. Contrary to these representations,

Defendants offered Plaintiffs only this risky

lending package even though Plaintiffs

qualified for other lending options that were

safer and more reasonable. Defendants

bundled this package with additional risky

features that made it ever riskier, including

illusory interest rates, a high LTV ratio,

loan qualification based on a ‘teaser’

interest rate, and illusory underwriting

procedures. These features all worked

together to guarantee Plaintiffs’ eventual

default and foreclosure.

68. Defendants’ representative

misrepresented to Plaintiffs that the loans’

rate structure was extremely cheap and lowrisk, focusing on the temporary, fixed

‘teaser’ rate period and falsely stating that

the adjustable interest rate structure was

not relevant to what Plaintiffs would later

have to pay. Defendants made this

representation despite their awareness that

this adjustable rate structure would cause

Plaintiffs’ monthly payment amount to

increase sharply, setting Plaintiffs up for

default and foreclosure. Defendants did this

to induce Plaintiffs into purchasing the

loans for Defendants’ own immediate profit.

69. None of Defendants ever provided

Plaintiffs with any disclosures or estimates

prior to closing. In addition, no one ever

explained to them the inherent risks of an

Option ARM loan coupled with an initial

‘teaser’ interest rate, interest-only

payments, and a piggyback balloon loan,

especially the devastating effect of negative

amortization.

70. When entered into loan agreements with

Plaintiffs, Defendants, by and through their

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representatives, employees, fiduciaries, and

agents, again failed to disclose and

knowingly misrepresented key terms of the

loans sold to Plaintiffs, including the risks

inherent in a Hybrid ARM coupled with an

initial ‘teaser’ interest rate, interest-only

payments, and a piggyback balloon loan. At

closing, Defendants simply told Plaintiffs to

sign without any explanation, brief or

otherwise, as to the terms and risks of such 

a loan package.

71. Defendants disregarded and ignored

Plaintiffs’ actual ability to pay off the

loans they sold by failing to conduct

meaningful underwriting. Plaintiffs did not

realize or understand that they were being

sold a loan package that they could not

afford and were not qualified to receive

until they were facing default and

foreclosure.

72. Defendants also grossly inflated the

value of the Subject Property in order to

give Plaintiffs the false impression that

they had substantial equity above and beyond

the loan amounts. Defendants never provided

Plaintiffs with documentation supporting

their valuation.

73. When Plaintiffs expressed any

apprehension about their ability to afford

the loans long-term, Defendants

misrepresented to Plaintiffs their ability to

afford the loans, should the terms later

become unaffordable. Defendants told

Plaintiffs, throughout the loan application

and approval process, that their purported

equity in the property would allow then to

refinance with a lower interest rate and at a

principal amount lower than the property’s

market value. Defendants also assured

Plaintiffs that the Subject Property’s value

would continue to rise, and that Defendants

would approve any subsequent refinance

request due to the inevitable and perpetual

rise of Plaintiffs’ property value.

74. Defendants knew or should have known

that Plaintiffs’ loans would likely result in

default and foreclosure, particularly in

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light of their qualifying Plaintiffs in

reliance on a false promise of serial

refinancing, which in turn relied on a false

promise of perpetual property price

appreciation. In conjunction with their

employees, agents, sale representatives, and

mortgage brokers, Defendants failed to

meaningfully account for payment adjustments

in approving and selling Plaintiffs’ loans,

thereby failing to meaningfully account for

Plaintiffs’ ability to repay the loans longterm. This illusory underwriting inevitably

led to Plaintiffs’ defaulting on their loans.

75. Defendants, along with their employees,

agents, brokers, appraisers, and codefendants, sold these loans to Plaintiffs

with the intent and design to fraudulently

maximize profits. Defendants, along with

their employees, agents, brokers, appraisers,

and co-defendants, induced Plaintiffs to

accept this risky loan package with

misleading and false statements and by

withholding material information as to the

loans’ true costs and risks. For their role,

Defendants rewarded their agents and brokers

with excessive commissions and passed this

compensation on to Plaintiffs in the form of

increased origination fees, higher interest

rates, and credit spreads above the index

value of their loans.

76. These activities of Defendants combined

to inflate the value of the Subject Property,

further increasing Defendants’ revenues at

the severe expense of Plaintiffs’ financial

health. Because of the high LTV ratio on the

loans Defendants sold and the characteristics

of Plaintiffs’ loan package, Plaintiffs were

acutely susceptible to being turned ‘upside

down’ on their mortgage and incurring

substantial negative equity in their

property, which is precisely what occurred as

soon as the real estate market flattened. 

Plaintiffs are now faced with monthly

payments that they cannot afford, and are

unable to refinance the Subject Property.

77. Defendants, and each of them, acted with

full knowledge of the terms of Plaintiffs’

loans and that these terms were inappropriate

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given the Subject Property’s actual value and

Plaintiffs’ actual financial qualifications. 

In particular, Defendants, and each of them,

acted with full knowledge as to how

misleading, deceptive, and unduly risky such

loan packages were, particularly when sold on

a stated-income basis with only illusory

underwriting procedures. Defendants where

[sic] therefore fully aware that Plaintiffs

were likely to become trapped in a loan for

which they were not appropriately qualified

and would certainly become unaffordable once

the ‘teaser’ period reset. Most importantly

for Defendants, they had full knowledge of

the opportunities available to them on the

securities market, where the transfer and

dispersal of risk meant that profits derived

from indiscriminate volume and costly loan

terms [sic].

Defendants move to dismiss the Complaint for failure to

state a claim upon which relief can be granted. Defendants did

not file a reply brief. The parties submitted the motion for

resolution on the papers without oral argument.

A. GOVERNING STANDARDS.

A motion to dismiss under Rule 12(b)(6) tests the

sufficiency of the complaint. Novarro v. Black, 250 F.3d 729,

732 (9 Cir.2001). Dismissal is warranted under Rule 12(b)(6) th

where the complaint lacks a cognizable legal theory or where the

complaint presents a cognizable legal theory yet fails to plead

essential facts under that theory. Robertson v. Dean Witter

Reynolds, Inc., 749 F.2d 530, 534 (9 Cir.1984). In reviewing a th

motion to dismiss under Rule 12(b)(6), the court must assume the

truth of all factual allegations and must construe all inferences

from them in the light most favorable to the nonmoving party. 

Thompson v. Davis, 295 F.3d 890, 895 (9 Cir.2002). However, th

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legal conclusions need not be taken as true merely because they

are cast in the form of factual allegations. Ileto v. Glock,

Inc., 349 F.3d 1191, 1200 (9 Cir.2003). “A district court th

should grant a motion to dismiss if plaintiffs have not pled

‘enough facts to state a claim to relief that is plausible on its

face.’” Williams ex rel. Tabiu v. Gerber Products Co., 523 F.3d

934, 938 (9 Cir.2008), quoting Bell Atlantic Corp. v. Twombly,

th

550 U.S. 544, 570 (2007). “‘Factual allegations must be enough

to raise a right to relief above the speculative level.’” Id. 

“While a complaint attacked by a Rule 12(b)(6) motion to dismiss

does not need detailed factual allegations, a plaintiff’s

obligation to provide the ‘grounds’ of his ‘entitlement to

relief’ requires more than labels and conclusions, and a

formulaic recitation of the elements of a cause of action will

not do.” Bell Atlantic, id. at 555. A claim has facial

plausibility when the plaintiff pleads factual content that

allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged. Id. at 556. The

plausibility standard is not akin to a “probability requirement,’

but it asks for more than a sheer possibility that a defendant

has acted unlawfully, Id. Where a complaint pleads facts that

are “merely consistent with” a defendant’s liability, it “stops

short of the line between possibility and plausibility of

‘entitlement to relief.’” Id. at 557. In Ashcroft v. Iqbal, ___

U.S. ___, 129 S.Ct. 1937 (2009), the Supreme Court explained:

Two working principles underlie our decision

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in Twombly. First, the tenet that a court

must accept as true all of the allegations

contained in a complaint is inapplicable to

legal conclusions. Threadbare recitations of

the elements of a cause of action, supported

by mere conclusory statements, do not suffice

... Rule 8 marks a notable and generous

departure from the hyper-technical, codepleading regime of a prior era, but it does

not unlock the doors of discovery for a

plaintiff armed with nothing more than

conclusions. Second, only a complaint that

states a plausible claim for relief survives

a motion to dismiss ... Determining whether a

complaint states a plausible claim for relief

will ... be a context-specific task that

requires the reviewing court to draw on its

judicial experience and common sense ... But

where the well-pleaded facts do not permit

the court to infer more than the mere

possibility of misconduct, the complaint has

alleged - but it has not ‘show[n]’ - ‘that

the pleader is entitled to relief.’ ....

In keeping with these principles, a court

considering a motion to dismiss can choose to

begin by identifying pleadings that, because

they are no more than conclusions, are not

entitled to the assumption of truth. While

legal conclusions can provide the framework

of a complaint, they must be supported by

factual allegations. When there are wellpleaded factual allegations, a court should

assume their veracity and then determine

whether they plausibly give rise to an

entitlement to relief.

 Immunities and other affirmative defenses may be upheld on

a motion to dismiss only when they are established on the face of

the complaint. See Morley v. Walker, 175 F.3d 756, 759 (9th

Cir.1999); Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th

Cir. 1980) When ruling on a motion to dismiss, the court may

consider the facts alleged in the complaint, documents attached

to the complaint, documents relied upon but not attached to the

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complaint when authenticity is not contested, and matters of

which the court takes judicial notice. Parrino v. FHP, Inc, 146

F.3d 699, 705-706 (9 Cir.1988). th

B. FIRST CAUSE OF ACTION FOR FRAUD AND SECOND CAUSE OF

ACTION FOR FRAUD IN THE INDUCEMENT.

The First and Second Causes of Action for fraud and fraud in

the inducement allege:

79. As set forth herein, Defendants

misrepresented and concealed from Plaintiffs,

via advertisements, conduct, and affirmative

statements, key facts related to the loans

here at issue. When Defendants made these

misrepresentations to Plaintiffs, Defendants

made them without regard for the truth, with

knowledge of their falsity, and deceptive

nature, and with the intent that Plaintiffs

would rely on these misrepresentations and,

as a product of this reliance, sign loan

documents and secure the Subject Property for

said loans.

80. Each defendant, by and through its

agents and representatives, engaged in these

misrepresentations and/or concealments and

profited from this deception. Defendants,

and all of them, acted in concert,

participated in, had full knowledge of, and

wrongfully benefitted from the fraudulent

acts described in this Complaint.

81. Specifically, Defendants fraudulently

induced Plaintiffs to accept Defendants’

risky loan products by (1) failing to clearly

and conspicuously disclose the risks and

eventual ‘payment shock’ inherent in a Hybrid

ARM that provided an initial ‘teaser’

interest rate and interest-only payments

coupled with a piggyback balloon loan; (2)

failing to clearly and conspicuously disclose

whether Plaintiffs’ stated monthly payments

included amounts due for insurance and taxes,

which they generally did not; (3) failing to

clearly and conspicuously disclose closing

costs and fees; (4) making false promises

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that Defendants would refinance the loan

prior to a rate increase; (5) failing to

disclose the true costs and risks associated

with the false promise that refinancing would

be available as an exit strategy when

Plaintiffs’ loans became unaffordable; (6)

fraudulently promising that the value of the

Subject Property would increase and,

therefore, that Plaintiffs could easily

refinance; (7) steering Plaintiffs away form

safer, fixed interest rate prime loans that

they could afford and instead toward a Hybrid

ARM providing for an initial ‘teaser’

interest rate and interest-only payments,

coupled with a piggyback balloon loan that

was based on an inflated loan amount; (8)

false marketing acts designed to mask the

true costs and risks of Plaintiffs’ loans and

to hide the benefits of other, safer loan

products, and (9) inducing Plaintiffs to

accept an adjustable, teaser interest rate

loan, coupled with interred-only payments and

a piggyback loan, with the false promise of a

lower interest rate.

82. Defendants represented to Plaintiffs

that all the statements made to them during

the origination and underwriting of the loans

at issue, including those concerning the

purported value of the property supporting

the loans, were true, and Defendants did so

while concealing their mortgage lending

scheme from Plaintiffs.

83. These misrepresentations, deceptions,

false promises, and concealments of material

information occurred during the loan

application process, the underwriting

process, at the time of the loans’ subsequent

approval, at the loans’ closing, and even

post-closing. These misrepresentations and

concealments in fact continue, as Defendants

insist on collecting on the loans and

pursuing their purported interest in the

Subject Property based on loans that

Defendants know were and continue to be

fraudulent.

84. Plaintiffs justifiably relied on

Defendants’ statements as true and complete

because Defendants purported to be duly

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licensed professionals and corporations

authorized to broker, issue, process, and

purchase residential mortgage loans, subject

to and purportedly following the laws and

regulations particular to their practice of

engaging consumers in mortgage lending. 

Defendants had resources, knowledge, and

expertise in mortgage lending far surpassing

that of Plaintiffs and, moreover, Defendants

represented themselves, their employees, and

their agents to be experts in the field.

85. Defendants, and all of them, knew of and

participated in this system of fraud, acting

in concert to communicate their

misrepresentations to Plaintiffs via conduct,

lack of disclosure, and false statements. 

Defendants effectuated this fraud via a

system obsessed with their own profit,

rewarding agents, brokers, and fiduciaries

that produced the highest volume of loans

with the most costly terms as to borrowers,

while turning a blind eye to reckless and

desceptive misconduct via their illusory

underwriting procedures. The secondary

mortgage market enabled and incentivized this

systemized fraud by enabling Defendants o she

the risk of the loans at issue and maximize

their own short terms gain, all at

Plaintiffs’ expense. Without Defendants

working together, such a fraud would have

been neither possible nor profitable.

Defendants move to dismiss these causes of action on the

grounds that they are barred by the statute of limitations and

the Complaint does not allege any fraudulent conduct with the

required particularity.

1. Statute of Limitations.

Defendants move to dismiss these causes of action as barred

by the three year statute of limitations in California Code of

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Civil Procedure § 338(d):1

Within three years:

...

(d) An action for relief on the ground of

fraud or mistake. The cause of action in

that case is not deemed to have accrued until

the discovery, by the aggrieved party, of the

facts constituting the fraud or mistake.

Defendants note that the loans were originated on April 25, 2006

and that this action was not filed until October 16, 2009, more

than three years later. 

Plaintiffs respond that dismissal on this ground is not

appropriate because Plaintiffs were not aware of Defendants’

allegedly fraudulent conduct until on or about September of 2009.

As explained in Neveu v. City of Fresno, 392 F.Supp.2d 1159,

1169 (E.D.Cal.2005):

‘Where the facts and dates alleged in a

complaint demonstrate that the complaint is

barred by the statute of limitations, a

Federal Rule of Civil Procedure 12(b)(6)

motion should be granted.’ ... There is no

requirement, however, that affirmative

defenses, including statutes of limitation,

appear on the face of the complaint ... ‘When

a motion to dismiss is based on the running

of the statute of limitations, it can be

granted only if the assertions of the

complaint, read with the required liberality,

would not permit the plaintiff to prove that

the statute was tolled.’

Defendants’ motion to dismiss the First and Second Causes of

Action as barred by the statute of limitations is DENIED because

Defendants’ brief refers to Section 338(j), which provides 1

for a three year statute of limitations for “[a]n action to recover

for physical damage to private property under Section 19 of Article

I of the California Constitution.”

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the allegations present factual issues to be resolved at summary

judgment or trial.

2. Particularity.

Defendants move to dismiss these causes of action on the

ground that the alleged fraud is not pleaded with the

particularity required by Rule 9(b), Federal Rules of Civil

Procedure.

Rule 9(b) requires that, in all averments of fraud, the

circumstances constituting fraud be stated with particularity. 

One of the purposes behind Rule 9(b)’s heightened pleading

requirement is to put defendants on notice of the specific

fraudulent conduct in order to enable them to adequately defend

against such allegations. See In re Stac Elec. Litig., 89 F.3d

1399, 1405 (9 Cir.1996). Furthermore, Rule 9(b) serves “to th

deter the filing of complaints as a pretext for the discovery of

unknown wrongs, to protect [defendants] from the harm that comes

from being subject to fraud charges, and to prohibit plaintiffs

from unilaterally imposing upon the court, the parties and

society enormous social and economic costs absent some factual

basis.” Id. 

Rule 9(b) requires that allegations of fraud be specific

enough to give defendants notice of the particular misconduct

which is alleged to constitute the fraud charged so that they can

defend against the charge and not just deny that they have done

anything wrong. Celado Int’l., Ltd. v. Walt Disney Co., 347

F.Supp.2d 846, 855 (C.D.Cal.2004); see also Neubronner v. Milkin,

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6 F.3d 666, 671 (9 Cir.1993). As a general rule, fraud th

allegations must state “the time, place and specific content of

the false representations as well as the identities of the

parties to the misrepresentation.” Schreiber Distrib. v. ServWell Furniture Co., 806 F.2d 1393, 1401 (9 Cir.1986). As th

explained in Neubronner v. Milken, supra, 6 F.3d at 672:

This court has held that the general rule

that allegations of fraud based on

information and belief do not satisfy Rule

9(b) may be relaxed with respect to matters

within the opposing party’s knowledge. In

such situations, plaintiffs cannot be

expected to have personal knowledge of the

relevant facts ... However, this exception

does not nullify Rule 9(b); a plaintiff who

makes allegations on information and belief

must state the factual basis for the belief.

Defendants assert that Plaintiffs’ fraud allegations lack

any of the “who, what, when, where, and how” required for

pleading fraud and that the Complaint “simply sets forth

allegations that appear, often verbatim, in countless other

complaints involving different borrowers and different lenders.”

Defendants contend that, other than the allegations in Paragraphs

57-77 quoted above:

The remaining allegations are mere filler

that appear in every complaint that Chapin

Wheeler [sic] has filed against mortgage

lenders in California this year, including

the following: Diaz v. America’s Servicing

Co., et al., (Super.Ct. Santa Clara Co.,

2009, No. 109-CV-155020); Lim v. HSBC

Mortgage Corp, (USA), et al. (Super.Ct.San

Joaquin Co., 2009 39-2009-00215519-CU-ORSTK); Nguyen v. Wells Fargo Bank, N.A., et

al. (Super.Ct. Santa Clara Co., 2009, No.

199-CV-144605); Parent v. Bank of America,

N.A., et al. (Super.Ct. Santa Clara Co.,

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2009, No. 109-CV-143479); Va v. Wells Fargo

Bank (Super.Ct. Santa Clara Co., 2009 No.

109-CV-143478).

Defendants do not request the Court take judicial notice of

the Complaints filed in these other listed actions and do not

provide copies of these Complaints. Plaintiffs, citing Stop

Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal.4th 553, 577

n.13), that “‘”[m]atters otherwise subject to judicial notice

must be relevant to an issue in the action,”’” argue that

Defendants should not be allowed to request judicial notice of

these Complaints:

Defendants cannot show that the other

complaints are relevant to the present

action. Defendants have failed to explicitly

assert or prove that the facts,

circumstances, or legal issues in the present

case are similar to the facts, circumstances,

or legal issues presented in other complaint

[sic]. Indeed, Defendants’ action in

referencing other complaints that have no

bearing to this case is a deliberate

distortion of the facts, is highly and

improperly prejudicial to Plaintiffs’ case,

and should not be permitted. Contrary to the

Defendants’ implicit allegation of

similarity, this case is distinguishable in

numerous regards, including the facts, loans

at issue, and parties from other complaints. 

Indeed, it is readily apparent that there is

no co-relation between the other complaints

and the present action, other than loans

being made by lenders on a broad level.

Rule 201, Federal Rules of Evidence, provides:

(b) Kinds of facts. A judicially noticed fact must be one not 

dispute in that it is either (1) generally known within the

territorial jurisdiction of the trial court or (2) capable of

accurate and ready determination by resort to sources whose

accuracy cannot reasonably be questioned.

(c) When discretionary. A court may take

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judicial notice, whether requested or not.

(d) When mandatory. A court shall take

judicial notice if requested by a party and

supplied with the necessary information.

(e) Opportunity to be heard. A party is

entitled upon timely request to an

opportunity to be heard as to the propriety

of taking judicial notice and the tenor of

the matter noticed. In the absence of prior

notification, the request may be made after

judicial notice has been taken.

The Court may take judicial notice of matters of public record,

including duly recorded documents, and court records available to

the public through the PACER system via the internet. See Fed.

R. Evid. Rule 201(b); United States v. Howard, 381 F.3d 873, 876,

fn.1 (9th Cir. 2004).

Because the Court is not provided copies of the Complaints

in the described actions, Defendants’ assertions concerning them

are unverifiable. If these Complaints contain allegations

similar to those in this action, that does not, ipso facto,

establish that Plaintiffs have not pleaded fraud in this action

with the specificity required by Rule 9(b).

Plaintiffs argue that the Complaint sufficiently alleges

fraud pursuant to the Rule 9(b) standards.

Plaintiffs have not satisfied Rule 9(b). Other than Ms.

Fong, no one associated with Defendants is named and the alleged

misrepresentations are very generically described as are the

times when the misrepresentations were made, i.e., at every stage

of the loan process and thereafter. As an example, it is alleged

that Defendants promised that the value of the Subject Property

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would increase and that Plaintiffs could then refinance; who made

this promise and when. Plaintiffs allege that Defendants

inflated the value of the Subject Property; who did so and when

(and do Plaintiffs mean that the market value was incorrectly

stated at the time of the appraisal or are they stating that the

market value subsequently fell and Defendants should have

anticipated that).

Defendants’ motion to dismiss the First and Second Causes of

Action is GRANTED WITH LEAVE TO AMEND to specifically allege

fraud and fraud in the inducement in compliance with Rule 9(b).

C. THIRD CAUSE OF ACTION FOR CONVERSION.

The Third Cause of Action, after incorporating all preceding

allegations, alleges:

89. As set forth herein, Defendants induced

Plaintiffs to accept the unduly risky loans

at issue in this case through fraud, deceit,

and unfair business practices, in violation

of California law. Defendants also set the

interest rate on Plaintiffs’ loans unjustly

high and artificially inflated the value of

the Subject Property so as to fraudulently

justify larger loans, increasing Plaintiffs’

monthly mortgage payments in the process.

90. By increasing Plaintiffs’ monthly

mortgage payments, Defendants extracted from

Plaintiffs more money than they legitimately

should have paid. Further, as Defendants’

own policies require, any payments Plaintiffs

made in excess of the amount they owed should

have been applied directly to the loans’

principal. Defendants violated California

law, and their own policies, by applying the

excess amount of Plaintiffs’ monthly payments

to interest that they did not legitimately

owe and improperly converting said funds to

Defendants’ own use and benefit.

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91. Defendants knew that Plaintiffs’ loans

posed a very high risk of default, and

Defendants mitigated this risk for themselves

by simply calculating uncollected interest on

Plaintiffs’ loans as additional principal. 

In so doing, Defendants violated California

law, as well as their own policies, by

applying a portion of Plaintiffs’ monthly

payments to interest that Plaintiffs did not

legitimately owe, improperly converting said

funds for their own use and benefit. 

97. Defendants’ conversion has caused

Plaintiffs to suffer severe financial

hardship resulting in damages to be proved at

trial.

Defendants move to dismiss the Third Cause of Action. 

Defendants cite McKell v. Washington Mutual, Inc., 147

Cal.App.4th 1457 (2006). In McKell, home mortgagors brought a

class action against the lender, alleging various causes of

action, including conversion, in connection with alleged

overcharging of underwriting, tax services, and wire transfer

fees in connection with their home loans. The Court of Appeal

ruled:

A cause of action for conversion requires

allegations of plaintiff’s ownership or right

to possession of property; defendant’s

wrongful act toward or disposition of the

property, interfering with plaintiff’s

possession; and damage to plaintiff ... Money

cannot be the subject of a cause of action

for conversion unless there is a specific,

identifiable sum involved, such as where an

agent accepts a sum of money to be paid to

another and fails to make the payment ...

Thus, in Chavez v. Centennial Bank (1998) 61

Cal.App.4th 532, 542 ..., the plaintiffs

stated a cause of action for conversion where

the bank took funds from trust accounts to

pay the trustee’s personal indebtedness.

Here .... plaintiffs did not allege that

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defendants were holding their payments on

behalf of another, in essence in trust for

the third party vendors. Plaintiffs cite no

authority for the proposition that a cause of

action for conversion may be based on an

overcharge. Consequently, they have failed

to demonstrate that they have stated a cause

of action for conversion.

Defendants assert that Plaintiffs owed their loan payments to

Bank of America and lost title to the payments when they were

made and cannot recover their loan payments because they no

longer have title to the money.

Plaintiffs respond that California Courts recognize that

“[m]oney can be the subject of an action for conversion if a

specific sum capable of identification is involved.” Farmers

Ins. Exchange v. Zerin, 53 Cal.App.4th 445, 452 (1997). 

Plaintiff also cite McCaffey Canning Co. v. Bank of America, 109

Cal.App. 415, 424 (1930), that “[a]n unjustified claim of title

may amount to conversion.” Plaintiffs argue:

Plaintiffs specifically plead that they are

the owners of the [Subject Property] ...

Plaintiffs also state that, ‘by increasing

Plaintiffs’ monthly payments, Defendants

extracted from Plaintiffs more money than

they legitimately should have paid.’ ...

Because of Defendants’ conduct, Plaintiffs

have a right to the monies that were

unlawfully converted as payments to

Defendants. Each time Plaintiffs rendered

payments under the loans, Defendants took

such inflated payments under their control

for their own profit. Plaintiffs argue that

the initial rate and principal on the loans

were inflated and did not correlate with

Plaintiffs’ income. BOA is liable for

conversion because it is the originator and

servicer of both the primary and secondary

loans if a more specific amount of conversion

is warranted then Plaintiff [sic] should be

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allow [sic] to amend the complaint. 

Moreover, BOA continues to demand payments

from the Plaintiffs pursuant to the unlawful

loans. PRLAP is named as trustee of the

subject loans.

In Zerin, Farmers Insurance Exchange sued an attorney for

reimbursement of money received from third-party tortfeasors on

behalf of defendant clients injured in automobile accidents

involving plaintiff’s insureds, who had been paid medical

benefits by plaintiff, pursuant to a policy provision stating:

“When a person has been paid damages by us under this policy and

also recovers from another, the amount recovered from the other

shall be held by that person in trust for us and reimbursed to us

to the extent of our payment.” The trial court sustained a

demurrer to the cause of action for conversion. The Court of

Appeals ruled:

‘Conversion is the wrongful exercise of

dominion over the property of another. The

elements of a conversion are the plaintiff’s

ownership or right to possession of the

property at the time of the conversion; the

defendant’s conversion by a wrongful act or

disposition of property rights; and damages. 

It is not necessary that there be a manual

taking of the property; it is only necessary

to show an assumption of control or ownership

over the property or that the alleged

converter has applied the property to his own

use ...’ ... Money can be the subject of an

action for conversion if a specific sum

capable of identification is involved ....

Neither legal title nor absolute ownership of

the property is necessary ... A party need

only allege it is ‘entitled to immediate

possession at the time of conversion ...’ ...

However, a mere contractual right of payment,

without more, will not suffice ....

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53 Cal.App.4th at 451-452. The Court of Appeals rejected

Farmers’ contention that it had a sufficient property interest in

the third party recoveries by virtue of the policy language

which, it argued, created an actual or equitable lien on the

funds and sustained the demurrer to the conversion causes of

action. Id. at 452-457. 

In McCaffey, the plaintiff had brought an action in which it

obtained a judgment and had caused a writ of attachment to issue

to the sheriff to attach certain enumerated canned goods in the

judgment debtor’s possession. The sheriff took custody of the

canned goods pursuant to the writ. Thereafter, the Bank of

America made a third-party claim to certain of the canned goods,

averring that it had a security interest in those goods. Upon

receipt of the bank’s claim the sheriff notified plaintiff. The

plaintiff refused to furnish an indemnity bond to the sheriff on

the ground that the bank’s claim was legally insufficient and

that there had been no change of possession required by law for

consummation of a pledge. The sheriff released from his custody

all of the canned goods, including those subject to the writ of

attachment. The canned goods were subsequently sold by the bank

for its own account, the entire proceeds being applied toward

satisfaction of its loans. The Court of Appeals held that

“unless the Bank of America was in fact legally justified in

claiming as a pledgee, the plaintiff should be entitled to

recover in conversion for the nullification of its attachment

lien.” Id. at 426.

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In Kelley v. Mortgage Electronic Registration Systems, Inc.,

642 F.Supp.2d 1048, 1057 (N.D.Cal.2009), the District Court held:

Here, the alleged conversion is that

defendants ‘established an unwarranted high

monthly payment by artificially inflating the

value of the property to fraudulently justify

a larger mortgage.’ ... This is not a

conversion because it does not constitute an

exercise of dominion by defendants over

plaintiffs’ property. Plaintiffs have not

alleged any of the elements of a conversion.

In Montoya v. Countrywide Bank, 2009 WL 1813973 at *8-9

(N.D.Cal., June 25, 2009), the District Court addressed a motion

to dismiss a claim for conversion:

In this case, Plaintiffs allege as follows:

Defendants ... entered a conspiracy

to induce the Plaintiffs to agree

to the [residential mortgage loan]

through fraud, deceit, and unfair

business practices ... Defendant

Countrywide, at the direction of

all Defendants as part of this

conspiracy, set an unjustly high

monthly payment by artificially

inflating the value of the property

to fraudulently justify a larger

mortgage.

By raising the monthly payment

rate, Defendants extracted from the

Plaintiffs Montoya [sic] a higher

amount than the Plaintiffs

legitimately should have paid ...

[A]s required by Defendant

Countrywide’s own policies, any

payments made in excess of the

amount owed should [have been]

applied directly to the principle

of the account. Defendant

Countrywide violated the RML

contract and their own policies by

applying the extra payments to

interest that was not legitimately

owed by the Plaintiff. The

Defendants as part of their

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conspiracy, improperly converted

said funds of Plaintiffs Montoya

for their own use.

... Plaintiffs’ conversion allegations fails

to allege facts that make it plausible that

Defendants exercised dominion and control

over Plaintiffs’ personal property in manner

[sic] that was inconsistent with Plaintiffs’

rights at the time. Plaintiffs’ claim is

premised on a fraudulently obtained loan by

Defendants. However, as discussed above,

Plaintiffs have not adequately alleged any

causes of action sounding in fraud. Further,

the allegations of the Complaint make it

clear that Plaintiffs entered into multiple

loans that required interest-only payments to

Defendants for the first ten years ... Based

on these allegations, Defendants’ acceptance

of Plaintiffs’ monthly payments could not

plausibly be deemed wrongful. Thus, the

Court finds Plaintiffs have not adequately

alleged a claim for conversion.

In Somsanith v. Bank of America, 2009 WL 3755593 at *4

(E.D.Cal., Nov. 6, 2009), the District Court ruled:

[P]laintiff’s conversion allegations fail to

allege facts that make it plausible that Bank

of America exercised dominion over

plaintiff’s personal property in manner [sic]

that was inconsistent with plaintiff’s rights

at the time. Plaintiff’s claim is premised

on a fraudulently obtained loan by defendants

... While plaintiff does allege that Bank of

America ‘set an unjustly high monthly payment

by artificially inflating the value to the

property to fraudulently justify a larger

mortgage,’ ... this allegation does not

constitute an exercise of dominion by Bank of

America over plaintiff’s property.

Plaintiffs’ allegations are no different from those in

McKell. The cases upon which Plaintiffs rely are significantly

different from Plaintiffs’ claimed conversion in this action. As

noted, District Courts addressing similar allegations have ruled

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that a conversion claim does not lie. Plaintiffs have not stated

a claim for conversion. The motion to dismiss is GRANTED WITH

LEAVE TO AMEND.

D. FOURTH CAUSE OF ACTION FOR QUIET TITLE.

The Fourth Cause of Action is for quiet title. Plaintiff

alleges that they own the Subject Property and further allege:

96. As described herein, Defendants have

committed acts of misrepresentation and fraud

with respect to the terms of Plaintiffs’

loans and the value of the Subject Property,

with the intent to exert undue influence.

97. Defendants’ acts subjected Plaintiffs to

unfair persuasion amounting to undue

influence because the parties had a

relationship by which Plaintiffs were

justified in assuming that Defendants would

not act in a manner inconsistent with

Plaintiffs’ welfare and best interests.

98. Defendants gained unfair persuasion over

and undue influence of Plaintiffs by improper

means, including but not limited to

misrepresentation, undue flattery, and fraud.

99. As a result of this unfair persuasion

over and undue influence of Plaintiffs,

Defendants received a Deed of Trust to the

Subject Property for loans that Plaintiffs

should not ever have been given or allowed to

take. Plaintiffs would not have received

these loans but for Defendants’ wrongful

deceptive conduct.

100. Defendants have all worked and colluded

together, acting individually in their

respective roles as lender, trustee,

fiduciary agent, beneficiary, debt collector,

and foreclosing agent in clouding Plaintiffs’

title to the Subject Property. Defendants

now seek possession of the Subject Property

via default and foreclosure. In the process,

they seek to cloud title and/or have already

clouded Plaintiffs’ title by acting on a

wrongful security deed that is based on

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wrongful loans, specifically by recording

notices of default and notices of sale on the

Subject Property’s deed records, thus

creating wrongful title.

101. Defendants’ actions were intentional,

oppressive, and conducted with fraud or

malice, in conscious disregard of Plaintiffs’

consumer protection rights, justifying an

award of punitive damages ....

102. Defendants’ unfair persuasion over and

undue influence of Plaintiffs has caused

Plaintiffs to suffer severe financial

hardship and forced Plaintiffs to grant deeds

of trust to Defendants. Plaintiffs request

that this Court invalidate the deeds of trust

on the Subject Property.

Defendants move to dismiss the Fourth Cause of Action on

several grounds.

Defendants argue that the Complaint does not allege facts

sufficient to demonstrate undue influence, citing California

Civil Code § 1575:

Undue influence consists:

1. In the use, by one in whom a confidence

is reposed by another, or who holds a real or

apparent authority over him, of such

confidence or authority for the purpose of

obtaining an unfair advantage over him; 

2. In taking an unfair advantage of

another’s weakness of mind; or,

3. In taking a grossly oppressive and unfair

advantage of another’s necessities or

distress.

Defendants contend that the Complaint does not allege that

Plaintiffs were of unsound mind or that they had “necessities or

distress” that Defendants to grossly oppressive and unfair

advantage. With respect to the allegation that “the parties had

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a relationship by which Plaintiffs were justified in assuming 

that Defendants would not act in a manner inconsistent with

Plaintiffs’ welfare and best interests,” Defendants note that,

under California law, no such special relationship exists between

a bank and a borrower from a bank. See Kim v. Sumitomo Bank, 17

Cal.App.4th 974, 979-981 (1993); Nymark v. Heart Fed. Savings &

Loan Assn., 231 Cal.App.3d 1089, 1093 n.1 (1991); Price v. Wells

Fargo Bank, 213 Cal.App.3d 465, 476 (1989).

Plaintiffs do not respond to this aspect of the motion to

dismiss the Fourth Cause of Action and thereby concede that the

Complaint does not allege facts from which undue influence within

the meaning of Section 1575 may be inferred or that a special

relationship existed between them and the Bank of America.

Defendants further argue that Plaintiffs cannot rescind

their loans or the Deeds of Trust securing those loans without

repaying the money they borrowed. See California Civil Code §

1691. Quiet title is an equitable claim, a plaintiff in equity

must do equity in order to obtain relief. In these

circumstances, this means repaying the money borrowed before

voiding the security for the loan. See 4 Miller & Starr, Cal.

Real Estate § 10:212, pp. 686-87 (3d ed. 2003). As explained in

Gaitan v. Mortgage Electronic Registration System, 2009 WL

3244729 at *12 (C.D.Cal.2009):

A basic requirement of an action to quiet

title is an allegation that plaintiffs ‘are

the rightful owners of the property, i.e.,

that they have satisfied their obligations

under the Deed of Trust.’ Kelley v. Mortgage

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Elec. Reg. Sys., Inc. ..., 2009 WL 2475703 at

*7 (N.D.Cal., Aug.12, 2009). ‘[A] mortgagor

cannot quiet his title against the mortgagee

without paying the debt secured.’ Watson v.

MTC Financial, Inc. ..., 2009 WL 2151782

(E.D.Cal., Jul. 17, 2009), quoting Shimpones

v. Stickney, 219 Cal. 637, 649 (1934).

Plaintiffs respond:

[I]t would be inequitable to require

Plaintiffs to first tender amounts owed in

order to quiet title in this instance since

Plaintiffs’ consent to the alleged security

deed was procured by Defendants through fraud

and violation of California’s unfair

Competition laws. Thus, Plaintiff’s tender

obligations are excused. In essence,

Defendants are wrongfully attempting to

prevent Plaintiffs from having their day in

court by attempting to dismiss Plaintiffs’

case on the basis that they have failed to

tender amounts owed on a fraudulent loan. 

Moreover, such an argument is not the basis

for dismissal but at a minimum requires a

hearing on Plaintiffs’ grounds for temporary

injunctive relief and Defendants to prove

which if any damage they may incur by the

prevention of foreclosure during the

resolution of the issues at hand.

Plaintiffs cite no authority for their position that their

tender obligation is excused and that Plaintiffs can keep both

the Subject Property and the loan amounts. Plaintiffs’ response

infers that they are unable to make the tender, i.e., they do not

have the present financial ability to make it. 

Defendants’ motion to dismiss the Fourth Cause of Action is

GRANTED WITH LEAVE TO AMEND. Plaintiffs shall plead facts, if

they can, from which it may be ascertained, consistent with Rule

11, Federal Rules of Civil Procedure, that they were subjected to

undue influence or had a legally cognizable special relationship

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with the Bank of America, and that they have the present ability

to tender the loan payments. 

E. FIFTH CAUSE OF ACTION FOR DEFAMATION.

The Fifth Cause of Action for defamation, after

incorporating all preceding allegations, alleges:

104. Defendants threatened to report and

actually reported to credit agencies and

other third parties that Plaintiffs were in

default on their loans with respect to

monthly payments that Defendants incorrectly

assessed.

105. These reports were false, and

Defendants made these statements with clear

knowledge of their wrongful acts: that they

issued Plaintiffs loans illegally: and that

they incorrectly assessed Plaintiffs’ monthly

payments. 

106. Despite this knowledge, Defendants made

false statements to third parties concerning

the amount Plaintiffs owed and did not pay. 

Defendants made these false statements in an

attempt to defame Plaintiffs’ reputations and

lower their credit scores.

107. Defendants’ purported right to report

to credit bureaus as creditors does not

bestow upon them a right to report to credit

bureaus as creditors of wrongfully obtained

debt upon which a borrower exercises its

legal right not to pay. Reporting to credit

agencies late payment or nonpayment on a loan

known to be fraudulent manifests a specific

intent to defame, with malice against the

borrower. 

108. Defendants have also attempted to

foreclose by recording a notice of default on

the Subject Property’s deed records,

publicizing false and very damaging

information about Plaintiffs in the process. 

Defendants conducted these acts with the

specific intent to damage Plaintiffs, knowing

their false statements would be exposed to

the public, for not making monthly mortgage

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payments that Plaintiffs believe in good

faith to be fraudulent.

Defendants move to dismiss the Fifth Cause of Action on the

ground that “the federal Fair Credit Reporting Act preempts state

law defamation claims arising from inaccurate reports to credit

reporting agencies, at least absent a pleading of facts showing

malice - i.e., publication with knowledge that the defamatory

credit report was false or with reckless disregard of whether it

was false or not.”

15 U.S.C. § 1681h(e) provides:

Except as provided in sections 1681n and

1681o of this title, no consumer may bring

any action or proceeding in the nature of

defamation ... with respect to the reporting

of information against any ... person who

furnishes information to a consumer reporting

agency, based on information disclosed

pursuant to section 1681g, 1681h, or 1681m of

this title ..., except as to false

information furnished with malice or willful

intent to injure such consumer.

15 U.S.C. §§ 1681t(a) and (b)(1)(F) provide:

(a) Except as provided in subsection[](b) ...

of this section, this subchapter does not

annul, alter, affect, or exempt any person

subject to the provisions of this subchapter

from complying with the laws of any State

with respect to the collection, distribution,

or use of any information on consumers, or

for the prevention or mitigation of identity

theft, except to the extent that those laws

are inconsistent with any provision of this

subchapter, and then only to the extent of

the inconsistency.

(b) No requirement or prohibition may be

imposed under the laws of any State -

(1) With respect to any subject 

matter regulated under -

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...

(F) SECTION 1681s-2 of 

this title, relating to the responsibilities

of persons who furnish information to

consumer reporting agencies, except that this

paragraph shall not apply -

...

(ii) with respect to 

section 1785.25(a) of the California Civil

Code (as in effect on September 30, 1996)

....

Defendants cite Gorman v. Wolpoff & Abramson, LLP, 584 F.3d

1147, 1165-1168 (9 Cir.2009), petition for cert. filed March th

15, 2010 (No. 09-1142). In Gorman, a cardholder instituted a 2

lawsuit against his credit card issuer, alleging violations of

the Fair Credit Reporting Act (FCRA), libel, and violations of

California’s credit reporting law. The Ninth Circuit, addressing

FCRA preemption, stated in dicta:

Although § 1681t(b)(1)(F) appears to preempt

all state law claims based on a creditor’s

responsibilities under § 1681s-2, § 1681h(e)

suggests that defamation claims can proceed

against creditors as long as the plaintiff

alleges falsity and malice. Attempting to

reconcile the two sections has left district

courts in disarray. The district court in

this case held that § 1681h(e), the more

specific preemption provision, trumped the

more general preemption provision of §

1681t(b)(1)(F) ... Other district courts have

followed different approaches. Some have

concluded that the later-enacted §

1681t(b)(1)(F) effectively repeals the

earlier preemption provision, § 1681h(e) ...

Attempting to give meaning to both sections,

Defendants cited Gorman as 552 F.3d 1008. However, the 2

opinion at that citation was amended and superseded by the opinion 

reported at 584 F.3d 1147.

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other courts have observed that §

1681t(b)(1)(F) relates to ‘any subject matter

regulated under section 1681s-2,’ the section

which regulates the responses to furnishers

to notices of dispute. Hence, these courts

apply a ‘temporal approach,’ holding that

‘causes of action predicated on acts that

occurred before a furnisher of information

had notice of any inaccuracies are not

preempted by § 1681t(b)(1)(F), but are

instead governed by § 1681h(e).’ ....

Gorman advocates a still different

‘statutory’ analysis, under which ‘t(b)(1)(F)

preempts only state law claims against credit

information furnishers brought under state

statutes, just as 1681h(e) preempts only

state tort claims.’ ... Finally, MBNA argues

that § 1681h(e) is not a broad preemption

provision at all, but simply a ‘grant of

protection for statutorily required

disclosures.’ ... But, of course, granting

entities immunity from state law tort suits

is just another way of saying that certain

state law claims are preempted.

In the end, we need not decide this issue. 

As we conclude below, even if Gorman could

bring a state law libel claim under §

1681h(e), and such a claim were not preempted

by § 1681t(b)(1)(F), he has not introduced

sufficient evidence to survive summary

judgment on this claim.

Id. at 1166-1167. The Ninth Circuit further ruled:

The FCRA does not define the appropriate

standard for ‘malice.’ The two circuits that

have interpreted § 1681h(e) have applied the

standard enunciated in New York Times v.

Sullivan, 376 U.S. 254, 279-80 ... (1964),

requiring the publication be made ‘with

knowledge that it was false or with reckless

disregard of whether it was false or not.’

... Under New York Times, to show ‘reckless

disregard,’ a plaintiff must put forth

‘sufficient evidence to permit the conclusion

that the defendant in fact entertained

serious doubts as to the truth of his

publication.’ ... We agree with the courts

that have adopted the New York Times standard

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for purposes of § 1681h(e) and so apply it

here.

Id. at 1168. 

Plaintiffs, relying on Section 1681t(a) and Sanai v. Saltz,

170 Cal.App.4th 746 (2009), argues that there is no implied or

field preemption under the FCRA. 

In Sanai, the Court of Appeals held that the trial court

erred in granting a motion for judgment on the pleadings as to

plaintiff’s cause of action for violation of the California

Consumer Reporting Agencies Act, California Civil Code § 1785.1,

et seq., but properly granted the motion as to the state common

law causes of action for slander, libel, intentional and

negligent interference with prospective economic advantage, and

intentional and negligent infliction of emotional distress. 

Because Plaintiffs have not alleged a violation of Section

1785.1, Sanai is of no assistance to Plaintiffs. Nonetheless,

the law concerning preemption by the FCRA of Plaintiffs’

defamation claim is too unsettled to resolve at this stage of the

proceedings. Defendants’ motion to dismiss on this ground is

DENIED WITHOUT PREJUDICE.

Defendants further argue that, even if the Fifth Cause of

Action is not preempted by the FCRA, Plaintiffs have not stated a

claim upon which relief can be granted:

The defamation claim is based on their

contention that the loans were issued

illegally ... As explained above, there is no

factual allegation of illegality or other

wrongful conduct in the origination of these

loans.

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Plaintiffs are now faced with monthly

payments that they cannot afford, and are

unable to refinance the Subject Property.

In Montoya v. Countrywide Bank, supra, 2009 WL 1813973 at

*10-11, the Northern District held:

Defendants move to dismiss Plaintiffs’

defamation claim on the ground that reporting

a true statement to a credit agency is not

defamation ....

Defamation is ‘the intentional publication of

a statement of fact which is false,

unprivileged, and has a natural tendency to

injury or which causes special damage.’ ... A

credit report, even one that causes harm, is

not defamatory if it is true ... A

plaintiff’s admission of truth will bar a

claim for defamation ....

Here, Plaintiffs allege that they ‘are no

longer able to make the required payments’ on

their loans ... Plaintiffs also allege that:

[i]n an attempt to coerce payments

out of the Plaintiffs in regards to

the fraudulently obtained

[residential mortgage loans], the

Defendant Countrywide threatened

and actually reported to credit

agencies and other third parties

that Plaintiffs were in default on

the [residential mortgage loan] for

a payment that was incorrectly

assessed.

...

Defendants ... conspired to make

these statements with full

knowledge of Defendants’ wrongful

and fraudulent conduct and the

Defendants were full [sic] aware

that the [residential mortgage

loan] was obtained illicitly.

Based on these allegations, Plaintiffs’

defamation claim is premised on Defendants’

statements to credit agencies that Plaintiffs

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were in default on their loan despite knowing

the loan was obtained illicitly. However, as

the Complaint also alleges, Plaintiffs were

unable to pay their mortgage, and therefore,

regardless of how the loan was obtained,

Defendants’ reports to credit agencies, as

alleged, are true. Thus, the Court finds

Plaintiffs have failed to allege a

publication of a false statement.

See also Fortaleza v. PNC Financial Services Group, Inc., 642

F.Supp.2d 1012, 1026 (N.D.Cal.2009)(“Critically, however,

plaintiff does not allege, and has not contested, the

truthfulness of the fact of plaintiff’s default on the subject

loans ... Thus, plaintiff cannot demonstrate the requisite

‘falsity’ of any alleged statements by defendants.’). Here, the

Complaint alleges “Plaintiffs are now faced with monthly payments

that they cannot afford, and are unable to refinance the Subject

Property.” This allegation implies that Plaintiffs are in

default on the loan, thereby making the reports to the credits

agencies true. This pleads the Plaintiffs out of a defamation

claim. 

Defendants’ motion to dismiss the Fifth Cause of Action on

this ground is GRANTED WITH LEAVE TO AMEND.

F. SIXTH CAUSE OF ACTION FOR VIOLATIONS OF CALIFORNIA

BUSINESS AND PROFESSIONS CODE.

The Sixth Cause of Action, after incorporating all preceding

allegations, alleges:

112. As described herein, Defendants, via

deceptive and misleading advertising and

sales practices, misrepresentations,

deceptive conduct, and the withholding of

information, unfairly, unlawfully, and

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fraudulently induced Plaintiffs into

purchasing the mortgage loans here at issue,

to Plaintiffs’ great detriment and

Defendants’ wrongful profit.

113. Defendants’ fraudulent acts, business

model, and illusory underwriting standards

were designed to perpetuate a scheme of

unfair business practices, in violation of

California Business and Professions Code §§

17200 et seq., through which Defendants

wrongfully profited. The components of this

scheme as applied to Plaintiffs included, but

were not limited to, artificially inflating

the Subject Property’s value in order to

increase the loan amount and misleading

Plaintiffs through the use of a Hybrid ARM

that provided an initial ‘teaser’ interest

rate and interest only payments coupled with

a piggyback balloon loan. Defendants’

intended for their misrepresentations to

unfairly prejudice Plaintiffs in order that

Defendants would profit from Plaintiffs’

loss.

114. When issuing this loan package,

Defendants disregarded Plaintiffs’ ability to

repay the loans and failed to disclose the

true cost of the loans, as required by law.

115. Defendants have violated and continue

to violate California Business and

Professions Code §§ 17200 et seq. by making

untrue or misleading statements, or by

causing untrue or misleading statements to be

made to Plaintiffs, with the intent of

inducing Plaintiffs to enter into the risky

loans that are the subject of this Complaint. 

These untrue or misleading statements include

but are not limited to:

a. statements regarding the true

terms and payment obligations

pertaining to the loans, including

statements obfuscating the risks of

Plaintiffs’ loan package;

b. statements as to the Subject

Property’s value at the time of

origination, when the stated value

was in fact inflated, and to the

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effect that said property value

would continue to rise and enable

Plaintiffs to refinance; and

c. statements indicating that

Defendants did not render any

illegal kickbacks, fees, or other

things of value.

116. Defendants knew, or by the exercise of

reasonable care should have known that these

statements or omissions were untrue or

misleading at the time they were made.

117. Defendants’ unfair business practices

have caused Plaintiffs to suffer severe

financial hardship resulting in damages in an

amount to be proven at trial.

“The UCL is codified in Business and Professions Code

section 17200 et seq. The UCL prohibits any ‘unlawful, unfair or

fraudulent business act or practice.’ Because Business and

Professions Code section 17200 is written in the disjunctive, it

establishes three varieties of unfair competition - acts or

practices which are unlawful, or unfair, or fraudulent ... An act

can be alleged to violate any or all of the three prongs of the

UCLA - unlawful, unfair, or fraudulent.” Berryman v. Merit

Property Management, 152 Cal.App.4th 1544, 1554 (2007), citing

Podolsky v. First Healthcare Corp., 50 Cal.App.4th 632, 647

(1996).

Defendants move to dismiss the Sixth Cause of Action to the

extent it alleges that Defendants’ practices were “unlawful.” As

explained in Berryman, supra:

Under its ‘unlawful’ prong, ‘the UCL borrows

violations of other laws ... and makes those

unlawful practices actionable under the UCL.’ 

... Thus, a violation of another law is a

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predicate for stating a cause of action under

the UCL’s unlawful prong. 

Here, the Complaint does not specifically allege a violation of

another law. Defendants motion to dismiss is GRANTED WITH LEAVE

TO AMEND to the extent the Sixth Cause of Action alleges that

Defendants’ acts were “unlawful” within the meaning of the UCL. 

As to the unfairness prong, as explained in Schnall v. Hertz

Corp., 78 Cal.App.4th 1144, 1166-1167 (2000):

‘The independent “unfairness” prong of the

UC[L] ‘intentionally broad, thus allowing

courts maximum discretion to prohibit new

schemes to defraud ...’ ... It has been said

that a business practice may be ‘unfair’

within the meaning of the UCL even if it is

not ‘unlawful’; it is enough if the conduct

in question ‘”’offends an established public

policy or when the practice is immoral,

unethical, oppressive, unscrupulous or

substantially injurious to consumers.’ ...”’

... However, in Cel-Tech, our Supreme Court

recently found that this formulation of

unfairness is ‘too amorphous’ and disapproved

its use, at least with respect to claims of

unfair competition between two direct

competitors. (Cel-Tech, supra, 20 Cal.4th at

pp. 184-185.) The Cel-Tech court required

‘that any finding of unfairness to

competitors under section 17200 be tethered

to some legislatively declared policy or

proof of some actual or threatened impact on

competition.’ (Id. at pp. 186-187.)FN 14

 The Cel-Tech court adopted the following FN 14

test: ‘When a plaintiff who claims to have

suffered injury from a direct competitor’s

“unfair’ act or practice invokes section

17200, the word “unfair” in that section

means conduct that threatens an incipient

violation of an antitrust law, or violates

the policy or spirit of one of those laws

because its effects are comparable to or the

same as a violation of the law, or otherwise

significantly threatens or harms

competition.’ (Cel-Tech, supra, 20 Cal.4th

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at p.187.).

Plaintiff citing Scripps Clinic v. Superior Court, 108

Cal.App. 4 917, 939 (2003), asserts that “unfair” conduct is th

conduct that “offends an established public policy or ... is

immoral, unethical, oppressive, unscrupulous or substantially

injurious to consumers.” 

There is a conflict among the California Courts of Appeal

whether the Cel-Tech standard of “unfairness” applies to

consumer cases. See, e.g., Gregory v. Albertson’s, Inc., 104

Cal.App.4th 845, 854 (2002)(reading Cel-Tech ‘to require that the

public policy which is a predicate to the action must be

“tethered” to specific constitutional, statutory or regulatory

provisions’ in consumer cases’); Smith v. State Farm Mut. Auto.

Ins., Co., 93 Cal.App.4th 700, 720 n.23 (2001)(‘[W]e are not to

read Cel-Tech as suggesting that such a restrictive definition of

“unfair” should be applied in the case of an alleged consumer

injury[.]’); see also Kilgore v. Keybank, 2010 WL 1461577 at *8

(N.D.Cal., April 12, 2010); Davis v. Ford Motor Credit Co., 179

Cal.App.4th 581, 594-597 (2009). 

“A fraudulent business practice is one in which ‘”’members

of the public are likely to be “deceived.”’”’ Morgan v. AT & T

Wireless Services, Inc., 177 Cal.App.4th 1235, 1254 (2009). As

explained in In re Tobacco II Cases, 46 Cal.4th 298, 312 (2009):

The fraudulent business practice prong of the

UCL has been understood to be distinct from

common law fraud. ‘A [common law] fraudulent

deception must be actually false, known to be

false by the perpetrator and reasonably

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relied upon by a victim who incurs damages. 

None of these elements are required to state

a claim for injunctive relief’ under the UCL

... This distinction reflects the UCL’s focus

on the defendant’s conduct, rather than the

plaintiff’s damages, in service of the

statute’s larger purpose of protecting the

general public against unscrupulous business

practices.

Plaintiffs cite and quote In re Tobacco Cases II but delete

by ellipsis “injunctive” and imply that this standard applies to

all claims for fraudulent business practices under the UCL. 

However, as stated in In re Tobacco II Cases, “‘[a] UCL action is

equitable in nature; damages cannot be recovered ... We have

stated under the UCL, “[p]revailing plaintiffs are generally

limited to injunctive relief and restitution.” ....’” 46 Cal.4th

at 312. See also Korea Supply Co. v. Lockheed Martin Corp., 29

Cal.4th 1134, 1144 (2003):

While the scope of conduct covered by the UCL

is broad, its remedies are limited ... A UCL

action is equitable in nature; damages cannot

be recovered ... We have stated that under

the UCL, ‘[p]revailing plaintiffs are

generally limited to injunctive relief and

restitution.’ 

Defendants cite Rangel v. DHI Mortg. Co., Ltd., 2009 WL

2190210 at *4 (E.D.Cal., July 21, 2009), where Judge O’Neill, in

dismissing a claim for negligence, alleging that defendants

breached their “professional services” duty in that “plaintiff

was placed into a loan that were [sic] inappropriate for her

personal financial circumstances,” ruled:

DHI Mortgage correctly notes the absence of

an actionable duty between a lender and

borrower in that loan transactions are arms40

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length and do not invoke fiduciary duties. 

Absent ‘special circumstances’ a loan

transaction ‘is at arms-length and there is

no fiduciary relationship between the

borrower and lender.’ ... Moreover, a lender

‘owes no duty of care to the [borrowers] in

approving their loan. Liability to a

borrower for negligence arises only when the

lender “actively participates” in the

financed enterprise “beyond the domain of the

usual money lender.”’ ... ‘[A]s 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.’ ...

DHI Mortgage further notes the absence of a

lender’s duty to ensure a loan is suitable

for a borrower. ‘No such duty exists’ for a

lender ‘to determine the borrower’s ability

to repay the loan ... The lender’s efforts to

determine the creditworthiness and ability to

repay by a borrower are for the lender’s

protection, not the borrower’s.’ Renteria v.

United States, 452 F.Supp.2d 910, 922-923

(D.Ariz.2006)(borrowers ‘had to rely on their

own judgment and risk assessment to determine

whether or not to accept the loan’).

See also Abelyan v. OneWest Bank, 2009 WL 3784610 at *4

(C.D.Cal., Nov. 9, 2009):

To establish a claim under the ‘fraudulent’

prong of the UCL, a plaintiff must

demonstrate that ‘members of the public are

likely to be deceived.’ Williams v. Gerber

Products Co., 523 F.3d 934, 938 (9th

Cir.2008). The gravamen of plaintiff’s claim

is that defendant fraudulently failed to

disclose all the terms of her loan. However,

‘absent a duty to disclose, the failure to do

so does not support a claim under the

fraudulent prong of the UCL.’ Buller v.

Sutter Health, et al., 160 Cal.App.4th 981,

987 (2008). In her complaint, plaintiff does

not specifically allege any required duty to

disclose on the part of defendant. 

Accordingly, the Court concludes that

dismissal of plaintiff’s UCL claim is

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appropriate.

Defendants also cite Nymark v. Heart Federal Savings & Loan

Assn., supra, 231 Cal.App.3d at 1095-1096, 1099-1100. In Nymark,

a property owner brought an action against a lending institution

alleging negligence in the institution’s appraisal of the

property uses as security for a loan. The institution appraised

the property and approved the loan, finding the property was in

good condition. The owner subsequently discovered the property

needed costly repairs. The Court of Appeals held:

The parties have not identified, nor have we

found, any California case specifically

addressing whether a lender has a duty of

care to a borrower in appraising the

borrower’s collateral to determine if it is

adequate security for a loan. However, 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

.... 

Here, defendant performed the appraisal of

plaintiff’s property in the usual course and

scope of its loan processing procedures to

protect defendant’s interest by satisfying it

that the property provided adequate security

for the loan. The complaint does not allege,

nor does anything in the summary judgment

papers indicate, that the appraisal was

intended to induce plaintiff to enter into

the loan transaction or to assure him that

his collateral was sound. Accordingly, in

preparing the appraisal, defendant was acting

in its conventional role as a lender of money

to ascertain the sufficiency of the

collateral as security for the loan. ‘Normal

supervision of the enterprise by the lender

for the protection of its security interest

in loan collateral is not “active

participation” [in the financed enterprise

beyond that of the ordinary role of a lender

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in a loan transaction.’ ... Thus, we conclude

that defendant owed no duty of care to

plaintiff in the preparation of the property

appraisal.

...

... In California, the test for determining

whether a financial institution owes a duty

of care to a borrower-client ‘involves the

balancing of various factors, among which 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.’ ....

...

While it was foreseeable the appraisal might

be considered by plaintiff in completing the

loan transaction, the foreseeability of harm

was remote. Plaintiff was in as good a

position as, if not better position than,

defendant to know the value and condition of

the property. One who seeks financing to

purchase real property has many means

available to assess the property’s value and

condition, including comparable sales, advice

from a realtor, independent appraisal,

contractors’ inspections, personal

observation and opinion, and the like. Here,

plaintiff already had purchased the house and

had lived in it for two years, apparently

without complaint, before applying to

defendant for a refinancing loan. We believe

it is not reasonably foreseeable that a

borrower will be influenced to his or her

detriment by an appraisal prepared by the

lender for its own benefit because the

borrower is in a position in which he or she

knows or should know the value and condition

of the property independent of the appraisal

made for the lender’s protection. Stated

another way, the borrower should be expected

to know that the appraisal is intended for

the lender’s benefit to assist it in

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determining whether to make the loan, and not

for the purpose of ensuring that the borrower

has made a good bargain, i.e., not to insure

the success of the investment.

Plaintiffs argue that they have stated a claim upon which

relief can be granted:

Plaintiffs sufficiently allege how Defendants

conducted fraudulent business practices

likely to mislead and deceive the consumer,

including Plaintiffs, with their teaser

interest rates, inflation of property value,

misrepresentation as to affordability,

misrepresentations as to true risk factors

and costs of loans, unscrupulous

incentivizing of brokers and agents to

aggressively and deceptively market, and

concealment of Defendants’ system of transfer

and securitization of the Plaintiffs’ loans

which offset BOA’s liability and inflated

Defendants’ profitability while burdening

Plaintiff [sic] with undue cost and risk. 

BOA is the originator and servicer of the

loans, and PRLAP is the trustee per deed of

trust. As the originator, BOA has full

knowledge of the loan terms that these terms

were inappropriate for the Subject Property

and Plaintiffs’ actual financial

qualifications when BOA approved, closed, and

serviced the loan [sic]. BOA also had full

knowledge of how misleading, deceptive, and

unduly risky the loans were for Plaintiffs. 

However, rather than warn Plaintiffs, BOA

steered Plaintiffs into a Hybrid ARM loan

originated from the stated income program

because these loans were highly profitable,

thereby perpetuating the misrepresentation

that Plaintiffs were qualified for the loan. 

Most importantly, BOA and PRLAP had full

knowledge of the profitability of the

secondary securities market where the margin

of profit was driven by indiscriminate volume

and risky loans. This margin of profit was

Defendants’ only consideration when selling

Plaintiff’s loan [sic].

Defendants’ motion to dismiss the Sixth Cause of Action is

GRANTED WITH LEAVE TO AMEND as to the “unfair” and “fraudulent”

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prongs of the UCL. Plaintiffs shall plead specific facts from

which it may be inferred that Defendants owed a legal duty to

Plaintiffs.

G. SEVENTH CAUSE OF ACTION FOR CIVIL CONSPIRACY.

After incorporating all preceding allegations, the Seventh

Cause of Action alleges:

119. Defendants acted in concert and

partnership with one another to commit the

wrongful acts alleged in this Complaint. 

Defendants created this multi-party system

and scheme in order to facilitate and

perpetuate their unlawful profiteering

through subprime residential home mortgage

lending, on a national scale. Plaintiffs are

merely two of many injured as a consequence

of Defendants’ systemized conduct.

120. Defendants knowingly participated in a

conspiracy to violate laws protecting

consumers, including Plaintiffs, from fraud

and unfair competition. Specifically, this

conspiracy related to the processing of loan

applications in a manner that each defendant

knew or should have known was malicious,

wrongful, and unlawful. Defendants

intentionally created and perpetuated risky

loan products, including the loan package at

issue in this action, and aggressively

marketed their risky loan products to

consumers. In their interactions with

Plaintiffs concerning these risky loan

products, Defendants, and each of Defendants,

purposely concealed or failed to disclose

their risky and dangerous nature, including

the risks inherent in a Hybrid ARM that

provided an initial ‘teaser’ interest rate

and interest-only payments, coupled with a

piggyback balloon loan, to Plaintiffs’

detriment.

121. All Defendants turned a blind eye to

this known fraud and to the risks inherent in

the loans BoA originated because they all

profited, and even now continue to profit off

of such loans, despite their astronomical

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default and foreclosure rates.

122. Defendants’ business relationships

allowed Defendants to perpetuate and to

expand this conspiracy, as they provided for

one another the right to service, assign,

sell, or otherwise transfer for a profit,

which each defendant did, in turn, acquire.

123. Defendants’ conspiracy included their

collective efforts to profit through the

securitization process, which was beneficial

to all of Defendants because it both

generated massive capital and allowed

Defendants to shed credit risk from the

likely failure of the underlying mortgage

loans, including Plaintiffs’. Defendants

often securitized their risky loan products

themselves, that is they sold, purchased,

aggregated, and issued securities based on

the loans themselves. Defendants had strong

incentives to securitize the loans quickly,

and in fact the same corporate executives

often signed off on securitization contracts

as both the originator and purchaser of the

same underlying mortgage loan.

124. Defendants’ scheme was to profit

through the securitization of their loans fed

their motivation to commit the unlawful acts

described herein. For example, in order for

an asset-backed security to ostensibly

satisfy Securities and Exchange Commission

regulations, such a security may not contain

non-performing loans and delinquent loans may

not constitute 50% or more of the asset’s

pool on the date that pool is readied for

sale. Because their risky loan products

ultimately default at a rate exceeding 50%,

Defendants needed to perpetually originate

more and more of such risky loans, including

the loan package here at issue, in order to

give a false impression of a lower

delinquency rate.

Defendants move to dismiss the Seventh Cause of Action on

the ground that civil conspiracy is not a cause of action, citing

Applied Equipment Corp. v. Litton Saudi Arabia Ltd, 7 Cal.4th

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503, 510-511 (1994):

Conspiracy is not a cause of action, but a

legal doctrine that imposes liability on

persons who, although not actually committing

a tort themselves, share with the immediate

tortfeasors a common plan or design in its

perpetration ... By participation in a civil

conspiracy, a coconspirator effectively

adopts as his or her own the torts of other

conspirators within the ambit of the

conspiracy ... In this way, a coconspirator

incurs tort liability co-equal with the

immediate tortfeasors.

Standing alone, a conspiracy does no harm and

engenders no tort liability. It must be

activated by the commission of an actual

tort. ‘”A civil conspiracy, however

atrocious, does not per se give rise to a

cause of action unless a civil wrong has been

committed resulting in damage.”’ 

Defendants assert that “[a]s the complaint does not

otherwise allege a viable claim, these appendages have no body on

which to hang, and so must be dismissed along with the rest of

the complaint.”

Because Defendants’ motion to dismiss is granted with leave

to amend, the motion to dismiss the Seventh Cause of Action is

GRANTED WITH LEAVE TO AMEND. As to allegations of conspiracy,

heightened pleading is required by Rule 9(b) when the object of

the conspiracy is fraudulent. See Wasco Products v. Southwell

Technologies, 435 F.3d 989, 991 (9 Cir.), cert. denied, 549 th

U.S. 817 (2006)(“Based on these precedents and the plain language

of Rule 9(b), we hold that under federal law a plaintiff must

plead, at a minimum, the basic elements of a civil conspiracy if

the object of the conspiracy is fraudulent.”). As explained in

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Alfus v. Pyramid Technology Corp., 745 F.Supp. 1511, 1521

(N.D.Cal.1990):

To survive a motion to dismiss, plaintiff

must allege with sufficient factual

particularity that defendants reached some

explicit or tacit understanding or agreement

... It is not enough to show that defendants

might have had a common goal unless there is

a factually specific allegation that they

directed themselves towards the wrongful goal

by virtue of a mutual understanding or

agreement.

Plaintiffs have not satisfied the requirements of Rule 9(b) with

regard to the Seventh Cause of Action. Defendants’ motion to

dismiss the Seventh Cause of Action is GRANTED WITH LEAVE TO

AMEND.

CONCLUSION

For the reasons stated:

1. Defendants’ motion to dismiss is DENIED IN PART AND

GRANTED IN PART WITH LEAVE TO AMEND as described above;

2. Counsel for Defendants shall prepare and lodge a form of

order consistent with this Memorandum Decision within five (5)

court days following service of this Memorandum Decision 

2. Plaintiffs shall file a First Amended Complaint in

accordance with the rulings herein within thirty (30) days of the

filing date of the Order.

IT IS SO ORDERED.

Dated: May 5, 2010 /s/ Oliver W. Wanger 

668554 UNITED STATES DISTRICT JUDGE

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