Court: District Court, N.D. California; December 6, 2018; Federal District Court
Plaintiffs Monica Chandler, Susan McShannock, and Mohamed Meky filed a class action lawsuit against JPMorgan Chase Bank, alleging violations of the California Unfair Competition Law (UCL) related to the failure to pay interest on escrow funds from their residential mortgages. The mortgages were originally issued by Washington Mutual Bank and were transferred to Chase after WaMu's acquisition by Chase through the FDIC following its 2008 failure. Plaintiffs had made required payments into escrow accounts but did not receive interest on these funds, which they argue violates California Civil Code § 2954.8 and federal law under 15 U.S.C. § 1639d(g).
The mortgage agreements state that lenders are not obliged to pay interest unless there is a written agreement or applicable law mandates it. Plaintiffs assert that Chase's failure to pay escrow interest constitutes "unlawful" and "unfair" business practices under the UCL. They propose a class action for all California mortgage customers of Chase who made advance payments for taxes and insurance but did not receive due interest.
Chase's motion to dismiss is based on two arguments: that the plaintiffs did not follow the contractual notice requirements before filing the lawsuit, and that their state law claims are preempted by the Home Owners' Loan Act. Alternatively, Chase requested a stay pending the outcome of a related case, Lusnak v. Bank of America, N.A., concerning the preemption of California's mortgage escrow law by federal law. The court denied both the motion to dismiss and the motion to stay.
To withstand a Rule 12(b)(6) motion to dismiss, a plaintiff must provide factual allegations that suggest a plausible chance of success, as established in Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly. The allegations must contain sufficient factual content to allow for a reasonable inference of the defendant's liability, going beyond mere possibility. The Ninth Circuit requires a two-step evaluation: first, complaints must provide fair notice with adequate underlying facts; second, these facts must plausibly indicate entitlement to relief, justifying the costs of discovery and litigation.
Chase contends that the Plaintiffs’ Deeds of Trust include a notice and cure provision, which mandates that neither party can initiate legal action regarding breaches of the agreement until they have notified the other party and allowed a reasonable time for correction. The Deeds state that such provisions bind successors and assigns. However, the Consolidated Complaint fails to allege that Plaintiffs adhered to these notice and cure requirements. Plaintiffs assert that they sent notices to Chase after the motion to dismiss was filed, claiming that Meky provided notice on behalf of the class prior to filing his complaint. Nonetheless, Chase argues that new facts cannot remedy pleading deficiencies in opposition briefs, and that any post-filing compliance does not meet the notice and cure criteria, as the purpose of such provisions is to resolve disputes without litigation. Compliance after litigation initiation is deemed insufficient.
McShannock's post-suit notice is deemed ineffective, and Meky's notice "on behalf of the class" is insufficient as he joined after the original complaint. The Deeds of Trust stipulate that no borrower may initiate or join any legal action without first providing notice. The crux of the issue is whether the plaintiffs' failure to adhere to this notice requirement justifies dismissal of their case. Chase argues this failure is "fatal" to the claims, while plaintiffs assert their claims are based on violations of California Civil Code 2954.8 and the UCL, not the mortgage contract, thus exempting them from the notice requirement. However, the plaintiffs' assertion that their rights under these statutes are unwaivable is rejected; complying with the notice provision does not negate their ability to pursue statutory rights. The provision's intent is to allow the breaching party an opportunity to rectify the breach, after which plaintiffs could seek legal remedy if the breach is not cured. The document references various cases, including Giotta v. Ocwen Financial Corporation, where the court held the claims fell within the notice-and-cure requirement, contrasting with Gerber v. First Horizon Home Loans Corporation, where the court dismissed a breach of contract claim for not satisfying the notice provision, emphasizing its purpose in resolving disputes without litigation.
The court determined that the state statutory cause of action related to deceptive business practices exists independently of any contractual obligation, thus the plaintiff's failure to provide notice does not bar the claims. In Kim v. Shellpoint Partners, LLC, the court ruled that the notice and cure provision in the deed of trust did not warrant dismissal of claims under the Unfair Competition Law (UCL) and the California Homeowners' Bill of Rights, as these claims arise from statutory rights rather than the contract itself. Similarly, in Beyer v. Countrywide Home Loans Servicing LP, the court found the plaintiff's unjust enrichment and Washington Consumer Protection Act claims were independent of the mortgage contract, allowing for claims despite the lack of prior notification.
The plaintiffs in these cases challenged fees not specified in their loan agreements, indicating that the lenders’ actions were not "pursuant to" those agreements. In the current case, the court agreed with the plaintiffs that notice to Chase was not required. The notice and cure provision necessitates notification only when grievances arise directly from Chase's actions under the Deeds of Trust or when alleging a breach of duty therein. The Deeds of Trust reference California Civil Code 2954.8, which mandates a two percent interest payment on escrow funds. The court posited that Chase's alleged failure to pay this interest does not stem from actions "pursuant to" the Deeds of Trust, thus the plaintiffs were not obligated to give notice.
Additionally, the plaintiffs claimed that Chase failed to comply with its statutory duty to pay escrow interest under California law and the UCL, which exists independently of any contract. The court noted that the purpose of the notice and cure provision is to allow defendants to rectify contractual violations; hence, statutory claims should not be impeded by ambiguous contract terms. Any ambiguity in the notice requirement must be interpreted against Chase, the contract drafter, ensuring that the plaintiffs retain their statutory rights. Consequently, the plaintiffs' failure to adhere to the notice and cure provisions does not preclude their claims.
Plaintiffs' Unfair Competition Law (UCL) claim against Chase is based on the assertion that Chase's failure to pay interest on mortgage escrow accounts violates California Civil Code § 2954.8 and 15 U.S.C. § 1639d(g) from the Dodd-Frank Act. However, the Ninth Circuit's Lusnak ruling indicates that Plaintiffs cannot invoke § 1639d(g) since their mortgages predate its enactment in 2013, and Congress intended that section to apply only to accounts established after that date. Instead, Plaintiffs must rely solely on California Civil Code § 2954.8(a), which mandates at least two percent annual interest on funds in escrow accounts.
Chase argues that this California law is preempted by the Home Owners' Loan Act (HOLA) because the loans were originated by WaMu, a federal savings bank under HOLA's jurisdiction. HOLA allows the Office of Thrift Supervision (OTS) to preempt state laws related to lending, including those regarding escrow accounts. Chase claims that since the loans originated with WaMu, California's escrow interest requirements do not apply.
In contrast, Plaintiffs contend that their claims are directed at Chase's behavior after it acquired WaMu's assets, asserting that HOLA preemption does not extend to national banks for actions taken after such acquisitions. The applicability of HOLA to claims against a national bank for loans originated by a federal savings association remains unresolved in the Ninth Circuit. Both parties cite various cases to support their positions, reflecting a split in district court rulings on this matter.
HOLA preemption is analyzed through three positions: (1) it applies to all conduct related to loans from federal savings banks; (2) it does not apply to national banks; and (3) its applicability depends on whether claims arise from actions of the federal savings association or the national bank. Under the third position, only claims from actions of the federal savings association are subject to HOLA preemption, while claims arising from the national bank's actions post-sale are not. Most district courts in the relevant Circuit align with the first position, as noted in a 2012 ruling which stated that claims regarding federally originated loans remain under HOLA even if later managed by a national bank. However, the plaintiffs argue that recent trends favor the third position, citing multiple cases where courts have determined HOLA preemption applies solely to actions by the federal savings association. This shift indicates a recognition that HOLA aims to stabilize federal savings associations rather than shield national banks from liability for their own actions. The courts emphasize that state police powers should not be overridden unless Congress's intent is clear.
Claims based on California's consumer-protection laws are within the state's police powers, specifically regarding banking and consumer protection. The presumption against preemption in national bank regulation does not apply here, as congressional intent is central to preemption analysis. The Home Owners' Loan Act (HOLA) does not clearly indicate that its preemptive effect extends to loans sold by federal savings associations. At HOLA's enactment in 1933, there was no expectation that federal savings associations would sell residential mortgage loans to entities outside of HOLA's jurisdiction. The creation of Fannie Mae in 1938 to purchase these loans marked a significant development, yet the legislative history does not suggest that HOLA was intended to govern the secondary mortgage market or non-federal savings associations.
Subsequent legislative actions recognized the authority of federal savings associations to sell loans, with regulations from 1938 and the enactment of the Federal Home Loan Mortgage Corporation Act in 1970. However, these later actions do not override the original intent of HOLA. Even if Congress and the Office of Thrift Supervision (OTS) acknowledged the secondary market, there is no evidence that Congress intended for HOLA preemption to apply to loans sold to non-HOLA entities. Moreover, applying preemption would contradict HOLA's original purpose of consumer protection, established during a time of widespread mortgage defaults and bank insolvency, aiming to foster lending stability and protect consumers.
HOLA's preemption defense could undermine homeowners' protections by allowing national banks to evade state laws based on their original lenders, potentially permitting illegal conduct. The Act aims to provide emergency relief for homeowners facing foreclosure, not to shield actions that violate consumer protection laws. Preemption may contradict HOLA's intent and could lead to significant injustices. Chase claims that preemption ensures market continuity for thrift-originated loans; however, there is no evidence that enforcing state laws, such as California's escrow interest law, would destabilize the secondary mortgage market. Thus, HOLA does not preempt California Civil Code 2954.8(a) concerning the plaintiffs' loans.
Chase's request for a stay pending the Supreme Court's decision in Lusnak is moot due to the Court's denial of the writ of certiorari. The motion to dismiss is denied, and the motion to stay is denied as moot, resolving Docket No. 38. California Civil Code 2954.8(a) mandates that financial institutions must pay at least 2% simple interest on advance payments for taxes, assessments, or insurance related to residential loans. The plaintiffs' cited cases involving the Truth in Lending Act (TILA) differ because TILA focuses on ensuring meaningful disclosure of credit terms prior to contract commitment. Enforcing notice and cure provisions in relation to escrow interest nonpayment does not significantly undermine the objectives of California Civil Code 2954.8 or the Unfair Competition Law (UCL).
Courts have determined that when a loan's terms incorporate federal regulations applicable to federal savings associations, those regulations also bind successors to the loan, regardless of their status as federal savings associations. In the present case, the loan agreements specify that they are governed by federal law and the law of the property’s jurisdiction. A cited case, Smith v. Flagstar Bank, asserted that the Dodd-Frank Act, which overhauled the Office of Thrift Supervision (OTS) framework, now governs preemption law, stating that courts must apply national bank standards for state law preemption. This is significant, as prior rulings indicated that the National Bank Act did not preempt certain state laws, suggesting similar outcomes for federal savings banks under the revised Dodd-Frank framework.
However, Smith does not adequately address a Dodd-Frank provision that maintains the applicability of OTS regulations, including the original Home Owners' Loan Act (HOLA) preemption scheme, for contracts made before July 21, 2010, which affects the mortgage agreement in question. Therefore, the logic in Smith is inapplicable here. Additionally, in Flagg v. Yonkers Savings and Loan Association, the court did not resolve the preemption issue directly; it involved a federal savings association and did not clarify the scope of HOLA’s preemption concerning national banks. The court notes that other recent decisions continue to uphold the original preemption stance, but it respectfully disagrees with those conclusions.
