Akins v. Seterus, Inc.

Opinion

KENNETH AKINS and BONNIE No. 2:16-cv-01656-TLN-KJN MORRIS AKINS, Plaintiffs, ORDER GRANTING DEFENDANT’S v. MOTION TO DISMISS SETERUS, INC., and BANK OF Defendants. This matter is before the Court on Defendant Seterus, Inc.’s1 (“Defendant”) Motion to Dismiss. (ECF No. 36.) Plaintiffs Kenneth and Bonnie Akins (“Plaintiffs”) oppose Defendant’s motion. (ECF No. 38.) Defendants filed a reply. (ECF No. 40.) Having carefully considered the briefing filed by both parties, the Court hereby GRANTS Defendant’s Motion to Dismiss. (ECF No. 36.) /// /// /// ///

1 Defendant Bank of America, N.A. does not join in this motion. This case involves a dispute between homeowners and their mortgage loan servicing company.2 On or around September 16, 2013, Plaintiffs sent Bank of America, N.A. (“BANA”), the loan servicer for their mortgage at the time, a check which they allege was intended to satisfy both the September and October 2013 payments. (ECF No. 35 at ¶ 21.) Plaintiffs allege they were unaware that rather than being applied as the October 2013 payment, excess funds from this check were applied to the principal and BANA considered the mortgage in arrears. (Id. at ¶ 24.) Around December 1, 2013, BANA transferred the mortgage to Defendant for servicing. (Id. at ¶ 23.) After the transfer, Defendant began charging Plaintiffs late fees. (Id. at ¶ 26.) Defendant explained it considered Plaintiffs’ loan delinquent from the moment it began servicing the account, as the September 2013 payment satisfied the installment for September, but the excess funds were applied as a principal balance reduction rather than an October 2013 payment because there was no open installment. (Id. at ¶¶ 27–28.) Defendant had been applying Plaintiffs’ payments to what Defendant considered prior outstanding monthly payments. (Id. at ¶ 27.) Plaintiffs filed the operative Third Amended Complaint (“TAC”) on September 23, 2019, alleging claims against Defendant for specific harms related to loan servicing. (See id.) Defendant filed the instant Motion to Dismiss on October 9, 2019. (ECF No. 36.) Plaintiff filed an opposition on November 20, 2019 (ECF No. 38), and Defendant filed a reply on November 26, 2019 (ECF No. 40). A motion to dismiss for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure (“Rule”) 12(b)(6) tests the legal sufficiency of a complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Rule 8(a) requires that a pleading contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” See Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009). Under notice pleading in federal court, the 2 The Court need not recount all background facts of the instant case here, as they are set forth fully in the Court’s September 6, 2019 Order granting in part and denying in part Defendant’s Motion to Dismiss. (ECF No. 34.) The factual allegations in the Second Amended Complaint and the TAC are substantially the same. (Compare ECF No. 29, with ECF No. 35.) complaint must “give the defendant fair notice of what the claim . . . is and the grounds upon which it rests.” Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). “This simplified notice pleading standard relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002). On a motion to dismiss, the factual allegations of the complaint must be accepted as true. Cruz v. Beto, 405 U.S. 319, 322 (1972). A court is bound to give the plaintiff the benefit of every reasonable inference to be drawn from the “well-pleaded” allegations of the complaint. Retail Clerks Int’l Ass’n v. Schermerhorn, 373 U.S. 746, 753 n.6 (1963). A plaintiff need not allege “‘specific facts’ beyond those necessary to state his claim and the grounds showing entitlement to relief.” Twombly, 550 U.S. at 570. Nevertheless, a court “need not assume the truth of legal conclusions cast in the form of factual allegations.” United States ex rel. Chunie v. Ringrose, 788 F.2d 638, 643 n.2 (9th Cir. 1986). While Rule 8(a) does not require detailed factual allegations, “it demands more than an unadorned, the defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678. A pleading is insufficient if it offers mere “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Twombly, 550 U.S. at 555; see also Iqbal, 556 U.S. at 678 (“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”). Moreover, it is inappropriate to assume the plaintiff “can prove facts that it has not alleged or that the defendants have violated the . . . laws in ways that have not been alleged.” Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). Ultimately, a court may not dismiss a complaint in which the plaintiff has alleged “enough facts to state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 697 (quoting Twombly, 550 U.S. at 570). “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 680. While the plausibility requirement is not akin to a probability requirement, it demands more than “a sheer possibility that a defendant has acted unlawfully.” Id. at 678. This plausibility inquiry is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. In ruling on a motion to dismiss, a court may only consider the complaint, any exhibits thereto, and matters which may be judicially noticed pursuant to Federal Rule of Evidence 201. See Mir v. Little Co. of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988); Isuzu Motors Ltd. v. Consumers Union of United States, Inc., 12 F. Supp. 2d 1035, 1042 (C.D. Cal. 1998). If a complaint fails to state a plausible claim, “‘[a] district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts.’” Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (en banc) (quoting Doe v. United States, 58 F.3d 484, 497 (9th Cir. 1995)). Plaintiffs’ TAC alleges two claims — (1) negligence and (2) a violation of California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code §§ 17200–17210. (See ECF No. 35.) Defendant moves to dismiss both of these claims for failure to state a claim upon which relief may be granted.3 (See ECF No. 36.) The Court will evaluate each of Plaintiffs’ claims in turn. A. Negligence Plaintiffs allege Defendant breached a duty of care owed to Plaintiffs as its loan servicer due to its failure to “use ordinary care in performing the transactions described [in the TAC],” “competently monitor and supervise [its] agents and employees,” “adequately investigate the concerns raised by [Plaintiffs],” and “meet the industry standard of care in performing the

3 Defendant also requests the Court take judicial notice of Exhibits 1 through 7. (ECF No. 37 at 1–3.) Under Federal Rule of Evidence 201, a court can take judicial notice of facts that can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” With regard to the publicly-recorded documents — Exhibits 1 through 5 — the accuracy of such records is not subject to reasonable dispute. See Armacost v. HSBC Bank USA, No. 10-CV-274-EJL-LMB, 2011 WL 825151, at *1 n.1 (D. Id. Feb. 9, 2011) (taking judicial notice of documents filed in a county’s public record, including deeds of trust); Pantoja v. Countywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1189 n. 12 (N.D. Cal. 2009); W. Fed. Sav. & Loan Ass’n v. Heflin Corp., 797 F. Supp. 790, 792 (N.D. Cal. 1992). Exhibits 6 and 7 are “proceedings and determinations” of this Court, which are also suitable for judicial notice. Emrich v. Touche Ross & Co., 846 F.2d 1190, 1198 (9th Cir. 1988). For these reasons and noting no opposition from Plaintiffs, Defendant’s Request for Judicial Notice of Exhibits 1 through 7 is transactions described [in the TAC].” (ECF No. 35 at ¶ 42–45.) In moving to dismiss the negligence claim, Defendant argues BANA is the only entity responsible for the purported breach and Plaintiffs fail to allege facts to warrant application of the “successor liability” theory. (ECF No. 36 at 10–11.) Defendant contends it does not owe Plaintiffs any duty of care, but even if there were such a duty, neither BANA nor Defendant breached the duty. (Id. at 11–14, 18–19.) Defendant also maintains the “economic loss rule” bars Plaintiffs’ negligence claim, BANA’s application of the September 2013 payment was lawful, and Plaintiffs have not suffered any harm. (Id. at 14–19.) As the Court finds BANA’s application of the September 2013 payment was lawful and there was no subsequent breach of duty by Defendant, the Court declines to address the remainder of Defendant’s arguments. i. BANA’s Application of the September 2013 Payment Defendant argues even if it owed a duty to Plaintiffs, the negligence claim still fails as Plaintiffs “cannot demonstrate that the principal wrongdoing alleged in the TAC and this claim for relief — BANA’s application or misapplication of the September 2013 payment at issue — was contractually unlawful.” (ECF No. 36 at 16–17.) In opposition, Plaintiffs assert that Section Four of the promissory note (“Note”) governs this scenario and, at best, contains ambiguous language that should be construed against Defendant, the drafter. (ECF No. 38 at 13–15.) When interpreting a contract, a court is to “give effect to the mutual intention of the parties as it existed at the time of contracting.” Cal. Civ. Code § 1636. “When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible.” Id. § 1639; MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 647 (2003). “Next, and most importantly, ‘[t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.’” Int’l Bhd. Of Teamsters v. NASA Servs., Inc., 957 F.3d 1038, 1042 (9th Cir. 2020) (citing Cal. Civ. Code § 1641). Ambiguous contract provisions are to be construed against the drafter. Id. “A [contract] provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable . . . But language in a contract must be interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract.” MacKinnon, 31 Cal. 4th at 648 (quoting Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18 (1995)). Moreover, “courts will not strain to create an ambiguity where none exists,” nor is “[t]he language of a contract . . . made ambiguous simply because the parties urge different interpretations.” Int’l Bhd. Of Teamsters, 957 F.3d at 1044 (citing Waller, 11 Cal. 4th at 18–19; Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992)). Section Four of the Note reads in its entirety:

I have the right to make payments of Principal at any time before they are due. A payment of Principal is only known as a “Prepayment.” When I make a Prepayment, I will tell the Note Holder in writing that I am doing so. I may not designate a payment as a Prepayment if I have not made all the monthly payments due under the Note.

I may make a full Prepayment or partial Prepayments without paying a Prepayment charge. The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note. However, the Note Holder may apply my Prepayment to the accrued and unpaid interest on the Prepayment amount, before applying my Prepayment to reduce the Principal amount of the Note. If I make a partial Prepayment, there will be no changes in the due date or in the amount of my monthly payment unless the Note Holder agrees in writing to those changes. (ECF No. 35 at 11.) In Busch v. Wells Fargo Home Mortg. Inc., a district court within the Eastern District of Kentucky interpreted a section of a promissory note that is word-for-word identical to Section Four of the Note in this case. No. 5:16-cv-210-JMH, 2017 WL 82473, at *2 (E.D. Ky. Jan. 9, 2017). Similar to the instant case, the Busches alleged Wells Fargo breached the terms of the promissory note and mortgage by “misapplying payments and by providing inaccurate information to the three major credit bureaus concerning the Busches’ account.” Id. at *6. The court held that while “the Note and Mortgage grant the Busches the right to make prepayments on principal, so long as they were identified in writing, there is no contractual language indicating that they enjoyed a similar right to make advance monthly payments.” Id. The court clarified further that Wells Fargo “did not have a contractual obligation to process the plaintiffs’ payments” as covering monthly payments, rather than using part of the payments to cover the principal. Id. at *2, 6. The court ultimately dismissed the Busches’ breach of contract claim. Additionally, in Chungag v. Wells Fargo Bank, N.A., the Sixth Circuit affirmed a district court’s dismissal of the Chungags’ claim to quiet title. 489 F. App’x 820, 824 (6th Cir. 2012). The Sixth Circuit found the Chungags defaulted on their loan when they failed to make their monthly payments, as “the mortgage and note did not create a duty for Wells Fargo to treat the excess payments as advance payments.” Id. The Sixth Circuit treated the matter as a contract interpretation question, noting the district court highlighted several provisions from the mortgage agreement to support its contention that the Chungags had defaulted. Id. at 823. Such provisions include the following: • The borrower has “the right to make payments of principal at any time before they are due. A payment of principal only is known as a ‘prepayment.’” • When the borrower makes a prepayment, the borrower “will tell the Note Holder in writing that I am doing so.” • The borrower “may make a full prepayment or partial prepayments without paying any prepayment charge. The Note Holder will use all of [the borrower’s] prepayments to reduce the amount of principal that [the borrower] owe[s] under this Note.” • If [the borrower] makes “a partial prepayment, there will be no changes in the due date or in the amount of [the borrower’s] monthly payments unless the Note Holder agrees in writing to those changes.” • If [the borrower] do[es] not pay the full amount of each monthly payment on the date it is due, [the borrower] will be in default.” Id. at 823–24 (emphasis in original). The court found the mortgage agreement does not address what should happen if a “borrower makes an excess payment without an accompanying written statement, and there is nothing in the contract that prohibits Wells Fargo from treating excess payments as prepayments, which is the most natural and logical course of action.” Id. at 824. The Chungags argued Wells Fargo had a duty to treat the excess payments as “advance payments” and that the district court’s interpretation is “ludicrous and contrary to common sense . . . because it would cause numerous people to default on their mortgage simply by making a late payment.” Id. The Sixth Circuit rejected both arguments and agreed with Wells Fargo that there is nothing in the note or mortgage “that requires, or even allows, Wells Fargo to treat excess payments made by plaintiffs as advance payments.” Id. Here, Plaintiffs rely on the text from Section Four that provides: “When I make a Prepayment, I will tell the Note Holder in writing that I am doing so.” (ECF No. 38 at 14; see also ECF No. 35 at 11.) Plaintiffs maintain the Note does not provide guidance “to the determination of how a payment is designated as a Prepayment in the first instance . . . and a borrower might expect the monthly payments to lower following a Prepayment.” (Id. at 14–15.) Plaintiffs imply that since BANA did not provide them with written authorization that BANA was applying the excess September 2013 payment to the principal balance of the loan, BANA acted unlawfully. (See id.) Plaintiffs maintain that “[a]t best, Section [Four] is ambiguous, necessitating the application of California rules of contractual interpretation,” which dictate that Defendant’s interpretation should be rejected as it is “absurd and giv[es] rise to an extraordinarily inequitable outcome” in which a lender can “unilaterally decide to apply a monthly payment that arrives one day before the first of any given month to the principal balance, almost certainly forcing the borrower into arrears and default.” (Id. at 13–16.) Conversely, Defendant contends the Note provides that “if Plaintiffs made a loan payment before it was due, it would be considered a ‘Prepayment’ and ‘will’ be used to reduce the principal balance of the loan” and identifies “Prepayment” as loan payments submitted “at any time before they are due.” (ECF No. 36 at 17.) The Note further clarifies Prepayment has “no effect on the monthly payment schedule set forth in the Note,” nor does the Note condition the ability of the lender or its agents to apply excess proceeds to the principal balance on written authorization from the borrower. (Id. at 17–18.) Defendant has the better argument. The Court has reviewed the Note and there is no contractual language to support Plaintiffs’ argument that the Note created a duty on BANA to treat the excess payments as advance monthly payments. Similar to Busch and Chungag, the Note requires the borrower to state in writing that he or she intends an excess payment to be treated as a prepayment of the principal. (See ECF No. 35 at 10–13.) However, the Note does not specify what should happen when the borrower makes an excess payment without an accompanying written statement. (Id.) Plaintiffs do not allege they made any written statements requesting that BANA apply the excess monies from the September 2013 payment to the principal. (See ECF No. 35 at 3–6.) Nor do the Plaintiffs allege they submitted any written statements requesting the excess amount be applied to the October 2013 payment. (Id.) The Note explicitly allows BANA to treat excess payments as partial prepayments or payments toward the principal. (See ECF No. 35 at 10–13.) Meanwhile, the Note does unambiguously state the borrower must make payments on the first of the month. (Id.) The Note also states the amount and due date of the monthly payments will not change based on partial prepayments. (Id.) Therefore, Section Four of the Note put Plaintiffs on notice that BANA was permitted to apply the excess amount from the September 2013 payment to the principal without affecting the amount or due date of future monthly payments, and the Note did not impose a duty on BANA to provide further notice in these circumstances. Accordingly, BANA’s treatment of the excess funds from the September 2013 monthly payment as a prepayment to the principal rather than an advance to the October 2013 payment was lawful and not a breach of contract. ii. Defendant’s Breach of Duty Defendant further argues “none of [its] independent conduct breached any duty of care that was allegedly owed to Plaintiffs.” (ECF No. 36 at 18.) Having argued BANA’s application of the September 2013 payment was lawful, Defendants contend Plaintiffs breached the terms of the loan by failing to make the October 2013 payment. (Id.) Therefore, since Plaintiffs were in default on the loan, Defendant was “well within its ability to assess late fees against the loan and return the payments at issue.” (Id.) In opposition, Plaintiffs primarily focus on whether there is a duty of care owed to them by Defendant. (ECF No. 38 at 8–11.) Plaintiffs correctly note this Court has already found Defendant likely owed Plaintiffs a duty of care in handling the payments on their mortgage loan.4 (See id.) As previously noted, Defendant argues it “was well within its rights to reject any and all subsequent payments on the loan as . . . insufficient to bring the loan current” after BANA’s lawful application of the September 2013 payment and Plaintiffs’ failure to make the requisite

4 This Court has found Defendant likely owed a duty of care to Plaintiffs in handling the payments on their mortgage loan. (See ECF No. 28 at 11–13.) Plaintiffs have not alleged any new facts nor has Defendant made any new arguments that would alter this determination. October 2013 payment. (ECF No. 36 at 18–19.) Plaintiffs maintain Defendant “misapplied payments made by [Plaintiffs] in April 2014 intended to make up for the September 2013 error,” failed to review the Note “to confirm that the September 2013 payment was applied correctly,” failed to take action “to cure any misapplication,” and “falsely reported to credit reporting agencies that [Plaintiffs were] behind in their payments.” (ECF No. 38 at 17.) Here again, Defendant has the better argument. Considering Plaintiffs were in default after BANA’s proper application of the September 2013 payment and Plaintiffs’ subsequent failure to make their October 2013 payment, it was not a breach of its duty of care in handling the payments on Plaintiffs’ mortgage loan for Defendant to assess late penalty charges. (See ECF No. 36 at 19–20.) Moreover, Paragraph 1 of the Deed of Trust provides: “Lender may return any payment or partial payment if the payment or partial payments are insufficient to bring the Loan current.” (ECF No. 37 at 7.) As such, after Plaintiffs went into default on the loan for failing to make the October 2013 payment, Defendant had the right to return any subsequent payments or partial payments that were insufficient to bring the loan current. The Note does not contain any provisions restricting Defendant from communicating with credit reporting agencies and therefore Defendant did not breach its duty of care when it reported Plaintiffs’ failure to make their monthly payments on time. (See ECF No. 35 at 11–13.) Accordingly, Defendant’s motion to dismiss the first claim is GRANTED. As the Court finds Plaintiffs’ “pleading could not possibly be cured by the allegation of other facts,” the Court denies leave to amend. See Lopez, 203 F.3d at 1130. Plaintiffs allege Defendant engaged in “unlawful, unfair, and/or fraudulent business practices.” (ECF No. 35 at ¶¶ 48–49.) In its motion, Defendant argues Plaintiffs’ UCL claim fails because Plaintiffs’ predicate negligence claim also fails. (ECF No. 36 at 20.) California’s UCL “does not proscribe specific activities, but broadly prohibits ‘any unlawful, unfair or fraudulent business act or practice . . .’” Boschma v. Home Loan Ctr., Inc., 198 Cal. App. 4th 230, 251–52 (2011) (citing Cal. Civ. Code § 17200). “By proscribing ‘any unlawful’ business practice, ‘section 17200 ‘borrows’ violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable.” (citing Cal. Civ. Code § 17200). Here, to the extent Plaintiffs’ UCL claim is predicated on its negligence claim, the former fails because the latter failed to state a claim upon which relief may be granted. Accordingly, Defendant’s motion to dismiss the UCL claim is GRANTED without leave to amend. Based on the foregoing, the Court hereby GRANTS Defendant’s Motion to Dismiss (ECF No. 36) without leave to amend. DATED: March 18, 2021 i / “ \/ Lu — ZA NZ Troy L. Nunley» } United States District Judge