Xu v. Better Mortgage Corporation

• Court: District Court, N.D. California
• Decided: January 3, 2025
• Docket: 5:23-cv-05510
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 JING XU, Case No. 5:23-cv-05510-PCP

8 Plaintiff, ORDER GRANTING IN PART AND 9 v. DENYING IN PART MOTION TO DISMISS 10 BETTER MORTGAGE CORPORATION, et al., Re: Dkt. No. 56 11 Defendants.

12 13 Plaintiff Jing Xu brings this lawsuit against defendants Better Mortgage Corporation and 14 The Money Source alleging negligent misrepresentation and violations of the Fair Credit 15 Reporting Act (FCRA) and California’s Unfair Competition Law (UCL). Better Mortgage moves 16 to dismiss Xu’s first amended complaint under Rule 12(b)(6). For the following reasons, the Court 17 grants in part and denies in part Better Mortgage’s motion to dismiss. 18 BACKGROUND 19 In September 2021, Xu sought to refinance his home and obtained a loan of nearly $2 20 million from Better Mortgage.1 In October 2021, Xu purportedly received an email from Better 21 Mortgage instructing him to set up an online account with The Money Source, Better Mortgage’s 22 loan servicer, and stating that automatically recurring loan payments would be turned on unless his 23 loan was transferred, in which case Xu would get an email notification. Xu thereafter set up an 24 account with The Money Source and made his first loan payment. 25 In January 2022, Xu allegedly received an alert from Chase Bank informing him that 26 derogatory information about him had been reported by a credit agency due to a late payment. Xu 27 1 alleges that he then learned that automatic payments had not started after his first payment because 2 his loan had been transferred from The Money Source to Ally Bank. Xu alleges that Better 3 Mortgage failed to notify him of this change. 4 According to Xu, neither Better Mortgage nor The Money Source informed him that a 5 second loan payment due in November 2021 had not been made, after which the defendants 6 allegedly furnished a derogatory report to various credit agencies. Specifically, Xu alleges that 7 The Money Source sent a derogatory report to TransUnion stating that Xu’s account was 30 days 8 past due. When Xu contacted The Money Source about the report, The Money Source purportedly 9 acknowledged that the defendants were at fault but nonetheless refused to correct it. Xu also 10 allegedly contacted TransUnion and other national credit reporting agencies to dispute the report, 11 and The Money Source was notified by TransUnion about the dispute. The Money Source and 12 Better Mortgage allegedly took no action to correct the report by modifying, deleting, or blocking 13 it. Xu alleges that the derogatory report and defendants’ failure to correct it adversely affected his 14 ability to access loans at a lower rate and to qualify for a loan to purchase an additional property. 15 Xu originally brought a claim solely under the FCRA. He claimed that defendants violated 16 that federal law by willfully or negligently failing to review all relevant credit information 17 available to them, conduct a reasonable investigation after being notified of Xu’s dispute, or 18 correct inaccurate information provided to the credit reporting agencies. Better Mortgage moved 19 to dismiss Xu’s complaint for failure to state a claim. The Court granted the motion to dismiss 20 with leave to amend. Xu then filed an amended complaint. 21 LEGAL STANDARDS 22 Federal Rule of Civil Procedure 8(a)(2) requires a complaint to include a “short and plain 23 statement of the claim showing that the pleader is entitled to relief.” If the complaint does not do 24 so, the defendant may move to dismiss the complaint under Federal Rule of Civil Procedure 25 12(b)(6). Dismissal is required if the plaintiff fails to allege facts allowing the Court to “draw the 26 reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 27 U.S. 662, 678 (2009). “Dismissal under Rule 12(b)(6) is appropriate only where the complaint 1 theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). To 2 survive a Rule 12(b)(6) motion, a plaintiff need only plead “enough facts to state a claim to relief 3 that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). 4 In considering a Rule 12(b)(6) motion, the Court must “accept all factual allegations in the 5 complaint as true and construe the pleadings in the light most favorable” to the non-moving 6 party. Rowe v. Educ. Credit Mgmt. Corp., 559 F.3d 1028, 1029–30 (9th Cir. 2009). While legal 7 conclusions “can provide the [complaint’s] framework,” the Court will not assume they are correct 8 unless adequately “supported by factual allegations.” Iqbal, 556 U.S. at 679. Courts do not “accept 9 as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable 10 inferences.” In re Gilead Scis. Secs. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (quoting Sprewell 11 v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001)). 12 ANALYSIS 13 I. Xu plausibly alleges that Better Mortgage violated the FCRA. 14 Xu contends that Better Mortgage violated the FCRA because The Money Source, when 15 acting as Better Mortgage’s agent, furnished inaccurate information to TransUnion concerning 16 Xu’s missed payment on his loan and failed to correct its inaccurate report after it was notified of 17 Xu’s dispute. Xu argues that an agency relationship existed between Better Mortgage and The 18 Money Source because Better Mortgage’s designation of The Money Source as its loan servicer 19 and its instruction to Xu to establish an online account with The Money Source to make payments 20 on his loan created the reasonable impression that The Money Source was its authorized agent. 21 The FCRA requires, among other things, that persons “not furnish any information relating 22 to a consumer to any consumer reporting agency if the person knows or has reasonable cause to 23 believe that the information is inaccurate,” and “not furnish information relating to a consumer to 24 any consumer reporting agency if – (i) the person has been notified by the consumer … that 25 specific information is inaccurate; and (ii) the information is, in fact, inaccurate.” 15 U.S.C. 26 § 1681s-2(a). It also requires that “a person who (A) regularly … furnishes information to one or 27 more consumer reporting agencies … and (B) has furnished to a consumer reporting agency 1 consumer reporting agency of that determination and provide to the agency any corrections to that 2 information.” Id. 3 The FCRA further requires that any furnisher of credit information “conduct an 4 investigation with respect to the disputed information” after receiving notice of “a dispute with 5 regard to the completeness or accuracy of any information provided by a person to a consumer 6 reporting agency” and, “if the investigation finds that the information is incomplete or inaccurate, 7 report those results to all other consumer reporting agencies to which the person furnished the 8 information.” 15 U.S.C. § 1681s-2(b). Finally, the statute requires that the credit reporting agency 9 that received derogatory information “provide notification of the [consumer] dispute to any person 10 who provided any item of information in dispute.” 15 U.S.C. § 1681i(a)(2). 11 Xu’s original complaint lacked factual allegations showing that Better Mortgage had 12 furnished derogatory information to a credit agency because the complaint did not identify what 13 information was conveyed or which credit reporting agencies were contacted. Xu also had not 14 adequately alleged that the relevant credit reporting agencies had notified Better Mortgage that Xu 15 disputed the report. Xu has remedied those defects in his first amended complaint. He now alleges 16 that The Money Source reported to TransUnion that Xu’s account was 30 days past due and that, 17 on February 8, 2022 and March 10, 2022, TransUnion notified The Money Source that Xu 18 disputed the report. Although Xu does not allege that TransUnion notified Better Mortgage 19 directly, Xu alleges that Better Mortgage is liable for the actions of its agent, The Money Source. 20 Better Mortgage again moves to dismiss Xu’s FCRA claim, now contending that he fails to 21 plausibly allege that The Money Source acted as Better Mortgage’s agent. 22 An agency relationship is created when one entity—the agent—possesses actual or 23 apparent authority to represent another entity—the principal—in dealings with third persons. 24 Frankl v. HTH Corp., 650 F.3d 1335, 1367 (9th Cir. 2011). “An agency relationship may be 25 created through actual or apparent authority. Actual authority arises through the principal’s assent 26 that the agent take action on the principal’s behalf …. Apparent [or ostensible] authority arises by 27 a person’s manifestation that another has authority to act with legal consequences for the person 1 and the belief is traceable to the manifestation.” Mavrix Photographs, LLC v. Livejournal, Inc., 2 873 F.3d 1045, 1054 (9th Cir. 2017) (cleaned up). A principal may be vicariously liable for acts of 3 its agents that fall within the scope of their authority. Meyer v. Holley, 537 U.S. 280, 280 (2003). 4 Vicarious liability under an apparent agency theory is limited to the scope of responsibility that is 5 apparently authorized. Am. Soc. of Mech. Eng’rs, Inc. v. Hydrolevel Corp., 456 U.S. 556, 566 6 (1982). 7 The Ninth Circuit has not decided whether a party can be vicariously liable under the 8 FCRA. Generally, however, courts presume that well-established common law principles apply to 9 federal statutes absent statutory text or congressional intent to the contrary. See, e.g., State Eng’r 10 of State of Nevada v. S. Fork Band of Te-Moak Tribe of W. Shoshone Indians of Nevada, 339 F.3d 11 804 (9th Cir. 2003) (cleaned up) (“It is axiomatic that statutes are presumed not to disturb the 12 common law, unless the language of a statute be clear and explicit for this purpose.); Astoria Fed. 13 Sav. & Loan Ass’n v. Solimino, 501 U.S. 104, 108 (1991) (cleaned up) (“Congress is understood to 14 legislate against a background of common law adjudicatory principles …. [W]here a common law 15 principle is well established … , the courts may take it as given that Congress has legislated with 16 an expectation that the principle will apply.”). Consistent with this principle, both district courts 17 within the Ninth Circuit and other Circuits have permitted vicarious liability for FCRA violations. 18 See, e.g., Edwards v. Toys “R” Us, 527 F. Supp. 2d 1197, 1212 (C.D. Cal. 2007) (holding that 19 corporations can be held vicariously liable for the FCRA violations of their agents); Myers v. 20 Bennett Law Offices, 238 F. Supp 2d 1196, 1202 (D. Nev. 2002) (same); Mahajan v. Kumar, No. 21 CV F06-1728AWISMS, 2007 WL 1279504, at *5 (E.D. Cal. Apr. 30, 2007) (explaining that 22 although “[t]he FCRA provides no statutory basis for vicarious liability,” “courts look to common 23 law bases for holding an entity vicariously liable for the actions of its agent”); Yohay v. City of 24 Alexandria Employees Credit Union, Inc., 827 F.2d 967, 972–973 (4th Cir. 1987) (applying the 25 common law doctrines of respondeat superior and apparent authority to permit vicarious liability 26 for violations of the FCRA). 27 The Court finds the Sixth Circuit’s reasoning in Jones v. Federated Financial Reserve 1 examined of the purpose of the FCRA to determine whether it permits vicarious liability. Id. at 2 965–66. It explained that Congress enacted the FCRA to “protect[] consumers from inaccurate 3 information in consumer reports and [establish] credit reporting procedures that utilize correct, 4 relevant, and up-to-date information in a confidential and responsible manner.” Id. at 965. The 5 Court determined that allowing vicarious liability for FCRA violations is consistent with the 6 statute’s ultimate deterrent purpose because it allocates responsibility to those in the best position 7 to protect consumers, explaining that “[t]he FCRA’s deterrence goal would be subverted if a 8 corporation could escape liability for a violation that could only occur because the corporation 9 cloaked its agent with the apparent authority.” Id. at 966. Because nothing in the text or purpose of 10 the FCRA suggests Congress sought to depart from background common law principles of 11 liability, this Court agrees with Jones that the FCRA should be construed to permit vicarious 12 liability. 13 A loan servicer is undoubtedly an agent of the lender whose loan is being serviced. The 14 question remains, however, how far that agency extends. Because liability on an ostensible agency 15 theory does not extend beyond the scope of responsibility that is apparently authorized, Better 16 Mortgage is liable for The Money Source’s credit reporting actions if those actions fell within The 17 Money Source’s apparent authority. 18 There can be no dispute that Better Mortgage’s instructions to Xu to set up an account with 19 The Money Source to make payments on his loan gave Xu a reasonable understanding that The 20 Money Source was authorized to act as Better Mortgage’s agent for the purposes of collecting and 21 processing Xu’s loan payments. Xu contends that Better Mortgage’s representation that The 22 Money Source would act as its agent for purposes of servicing his loan also created the reasonable 23 understanding that The Money Source would act as Better Mortgage’s agent for purposes of credit 24 reporting. 25 Better Mortgage disputes this contention. But the precise scope of The Money Source’s 26 apparent authority is a factual matter that cannot be definitively resolved on the pleadings. For the 27 purposes of Rule 12(b)(6), Xu has pleaded enough facts to plausibly allege that he reasonably 1 well as collecting and processing payments. 2 Better Mortgage also argues that Xu fails to state an FCRA claim because he does not 3 plausibly allege that The Money Source furnished inaccurate credit information to TransUnion. 4 The Money Source purportedly reported to TransUnion that Xu had failed to make a loan payment 5 and Xu concedes that he did, in fact, fail to make that payment. According to Better Mortgage, this 6 means that the information that that The Money Source furnished was factually accurate and thus 7 provides no basis for FCRA liability. 8 Even though the FCRA “does not on its face require that an actual inaccuracy exist for a 9 plaintiff to state a claim, many courts, including [the Ninth Circuit], have imposed such a 10 requirement.” Carvalho v. Equifax Info. Servs., LLC, 629 F.3d 876, 890 (9th Cir. 2010). Better 11 Mortgage’s argument is nonetheless unavailing because factually accurate information can be 12 inaccurate within the meaning of the FCRA if its presentation is misleading. See Gorman v. 13 Wolpoff & Abramson, LLP, 584 F.3d 1147, 1163 (9th Cir. 2009) (quoting Sepulvado v. CSC 14 Credit Servs., Inc., 158 F.3d 890, 895 (5th Cir. 1998)) (“[A] credit entry can be ‘incomplete or 15 inaccurate’ within the meaning of the FCRA ‘because it is patently incorrect, or because it is 16 misleading in such a way and to such an extent that it can be expected to adversely affect credit 17 decisions.’”). In Gorman, the Ninth Circuit held that “a consumer report that contains technically 18 accurate information may be deemed ‘inaccurate’ if the statement is presented in such a way that it 19 creates a misleading impression.” Gorman, 584 F.3d at 1163 (quoting Saunders v. Branch 20 Banking & Trust Co. of Va., 526 F.3d 142, 150 (4th Cir. 2008)). The court explained that “holding 21 otherwise would create a rule that, as a matter of law, an omission of the disputed nature of a debt 22 never renders a report incomplete or inaccurate,” and concluded that such a rule would not only 23 “intimidate consumers into giving up bona fide disputes by paying debts not actually due to avoid 24 damage to their credit ratings, but … also contravene[] the purpose of the FCRA, to protect 25 against ‘unfair credit reporting methods.’” Gorman, 584 F.3d at 1163. 26 Here, Xu plausibly alleges that the technically accurate information The Money Source 27 allegedly furnished to TransUnion—that Xu’s loan payment was overdue—was “misleading in 1 Gorman, 584 F.3d at 1163. A report that Xu’s payment was 30 days past due without an 2 accompanying explanation that Xu had followed his lender’s instructions to set up automatic 3 payments and believed he was, in fact, making timely payments can plausibly be considered 4 misleading in such a way as to unfairly and adversely affect credit decisions—as Xu alleges The 5 Money Source’s report actually did in his individual case. 6 Better Mortgage also contends that even if technically accurate information can be 7 misleading under certain circumstances, a complaint must still contain specific allegations that 8 demonstrate how that information was misleading. See, e.g., Ohaion v. Bank of Am., N.A., 2023 9 WL 2349377, at *5 (D. Nev. Mar. 2, 2023). But Xu’s first amended complaint does exactly that. 10 He alleges that he reasonably assumed, following Better Mortgage’s express representations to 11 him, that automatic payments on his loan were activated and that he was making his payments. 12 Those facts make clear that a report that his account was overdue, without an explanation that his 13 missed payment occurred through no fault of Xu’s own, could plausibly be misleading. 14 II. Xu fails to state a claim for negligent misrepresentation. 15 Xu also contends that Better Mortgage negligently misrepresented that it would notify him 16 if his loan was transferred to a different servicer and automatic payments were accordingly 17 terminated. Better Mortgage contends, however, that such predictions about the future cannot 18 provide the basis for negligent misrepresentation claims. 19 The elements of negligent misrepresentation are a (1) misrepresentation of a past or 20 existing material fact, (2) without reasonable ground for believing it to be true, (3) with intent to 21 induce another’s reliance on the fact misrepresented, (4) with ignorance of the truth and justifiable 22 reliance on the misrepresentation by the party to whom it was directed, and (5) resulting damage. 23 Home Budget Loans, Inc. v. Jacoby & Meyers L. Offs., 207 Cal. App. 3d 1277, 1285 (1989). 24 Xu has alleged facts plausibly establishing the third, fourth, and fifth elements. Better 25 Mortgage’s alleged representation that automatically recurring loan payments would be turned on 26 unless Xu’s loan was transferred, in which case he would be notified, was plausibly intended to 27 induce his reliance, relieving Xu of the responsibility of manually making payments each month 1 of his loan was transferred and that automatic payments had terminated; that he justifiably relied 2 on Better Mortgage’s representation that it would notify him under such circumstances; and that, 3 as a result, his credit score was adversely affected, hindering his ability to access loans at a lower 4 rate and to qualify for a loan to purchase an additional property. 5 Xu has not, however, alleged facts sufficient to show that Better Mortgage did not have 6 reasonable grounds for believing the truth of its statement that Xu would be notified upon the 7 transfer of his loan and termination of automatic payments. And more fundamentally, Xu cannot 8 show the first element: misrepresentation of a past or existing material fact. See Romo v. Wells 9 Fargo Bank, N.A., No. 15-cv-03708-EMC, 2016 WL 324286, at *7, *11 (N.D. Cal. Jan. 27, 2016) 10 (explaining that negligent misrepresentation pertains only to past or existing facts, not predictions 11 or promises about future events). BMC’s representation to Xu about what would happen if his 12 loan was transferred to a different servicer was a statement about a condition that might occur in 13 the future, not about present or existing facts. 14 The facts alleged here are distinguishable from Charnay v. Cobert, 145 Cal. App. 4th 170 15 (2006), on which Xu relies. In that case, the court held that the plaintiff had a claim for negligent 16 representation where her lawyer had lied to her about her likelihood of prevailing in litigation and 17 recovering attorney fees and had done so in order to induce her to continue the litigation. Id. at 18 184–85. Although the lawyer’s misrepresentation concerned certain future events, such as the 19 plaintiff’s ability to recover attorney fees later in the lawsuit, the misrepresentation fundamentally 20 concerned the lawyer’s assessment of the present strength of the plaintiff’s case. Better 21 Mortgage’s representation to Xu, by contrast, exclusively concerned actions that would be taken in 22 the future if specified and uncertain future events came to pass. 23 Because Xu does not allege that Better Mortgage’s purported misrepresentations concerned 24 any past or existing facts or that it had no reasonable grounds for its statement that Xu would be 25 notified by email if his loan was transferred, his amended complaint fails to state a negligent 26 misrepresentation claim. 27 III. Xu plausibly alleges that Better Mortgage violated the UCL. ] unfair competition, “includ[ing] any unlawful, unfair, or fraudulent business act or practice.” Cal. 2 || Bus. & Pros. Code § 17200. Each “prong” of the UCL provides a separate and distinct theory of 3 liability. Lozano v. AT & T Wireless Servs., Inc., 504 F.3d 718, 731 (9th Cir. 2007); see also Cel- 4 |} Tech Commce’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999) (quoting 5 || Podolsky v. First Healthcare Corp., 50 Cal. App. 4th 632, 647 (1996) (“Because Business and 6 || Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair 7 competition—acts or practices which are unlawful, or unfair, or fraudulent. In other words, a 8 || practice is prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ and vice versa.”). “The 9 || unlawful prong of the UCL borrows violations of other laws and treats them as unlawful practices, 10 || which the UCL then makes independently actionable.” Backhaut v. Apple, Inc., 74 F. Supp. 3d 11 1033, 1050 (N.D. Cal. 2014) (cleaned up). Thus, to “state a cause of action based on an unlawful 12 || business act or practice under the UCL, a plaintiff must allege facts sufficient to show a violation 13 || of some underlying law.” Prakashpalan v. Engstrom, Lipscomb and Lack, 223 Cal. App. 4th 1105, 14 || 1133 (2014). 15 Better Mortgage concedes that “[Xu’s] UCL claim rises and falls with his FCRA and a 16 || negligent misrepresentation claims.” Dkt. No. 56, at 16. Because Xu’s amended complaint 2 17 || adequately states an FCRA claim, it also states a valid UCL claim. 18 CONCLUSION 19 For the foregoing reasons, the Court grants Better Mortgage’s motion to dismiss Xu’s 20 || negligent misrepresentation claim but denies its motion to dismiss his FCRA and UCL claims. 21 Because the statement on which Xu premises his negligent misrepresentation claim is a prediction 22 about the future that, as a matter of law, cannot provide the basis for such a claim, no amendments 23 could overcome the legal inadequacy of his negligent misrepresentation claim. The Court’s 24 || dismissal of that claim is therefore without leave to amend. 25 IT IS SO ORDERED. 26 || Dated: January 3, 2025 Ze 27 Coy P. Casey Pitts 28 United States District Judge