Northern California Judges Rule in Banking and Investment Cases

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In DeLeon v. Wells Fargo Bank, Gabriel and Shawna DeLeon purchased a home in San Benito County secured by a mortgage from World Savings Bank that later became Wachovia Mortgage (and later merged with Wells Fargo Bank). According to court documents, the DeLeons became unable to pay the mortgage in August 2008 and received a notice of default. In December 2009, the DeLeons sought a loan modification. The allege that Wells Fargo expressed confidence that it could give them a modification, but it foreclosed on the property and ordered the occupants to leave. The DeLeons stat that this violated California law by 1) not informing them of the trustee’s sale or posting that notice on the property and 2) they were never provided a phone number to find a HUD-Certified Housing Counseling Agency. They are using this violation of law as a basis for a claim under California’s Unfair Competition Law (UCL). Wells Fargo claims that these state requirements are preempted either by the Home Owners Loan Act (HOLA) or the National Banking Act (NBA) depending on whether the alleged conduct occurred when Wachovia or Wells Fargo was in charge of the mortgage. The relevant regulations at 12 C.F.R. § 560.2(a) expressly list “Disclosure…statements… affecting the processing, servicing and participation in mortgages” as state laws which are preempted. Judge Lucy Koh agreed with Wells Fargo and dismissed that claim with prejudice. Other claims were dismissed without prejudice and with leave to amend.

Nguyen v. Wells Fargo Bank raises virtually identical issues to the DeLeon case above, but also contains an interesting discussion on federal jurisdiction. On June 12, 2006 Plaintiff and World Savings Bank entered into a refinance loan secured by a deed of trust on his property. In 2008, the plaintiff tried to avoid foreclosure and enter into a loan modification without success. On December 19, 2008 ETS (the substitute trustee) recorded a notice of default and election to sell under the deed of trust. On May 27, 2009, Mr. Nguygen declared chapter 7 bankruptcy. On July 22, 2009 ETS executed and recorded a notice of trustee’s sale, but no sale has occurred. Plaintiff sued Wells Fargo for a number of state law claims and Wells Fargo removed the action on diversity grounds. Now, the Mr. Nguygen moves to remand the case stating the parties are not diverse.

Plaintiff relies on Wells Fargo & Company’s by-laws which state that its principal place of business in San Francisco. Wells Fargo states that in its FDIC profile its main office is in South Dakota. The U.S. Supreme Court has explained that a national banking association is a citizen of the state of “both the State of its main office and the State of its principal place of business.” Schmidt v. Wachovia Bank, N.A. (U.S. 2006). In Mount v. Wells Fargo Bank, N.A. (C.D. Cal. 2008) (via CAFA Blog), Judge Gary Allen Feess stated that Wells Fargo is a citizen of two states: California and South Dakota thereby defeating diversity jurisdiction. However, Magistrate Elizabeth D. Laporte notes that this is the only court post-Schmidt to reach that conclusion. Notably, in Lowdermilk v. U.S. Bank, N.A. (9th Cir. 2007) the 9th Circuit explained that a national bank’s citizenship is based on the location of its main office. She denied the motion to remand and granted the motion to dismiss citing preemption and a lack of specificity in the complaint in the same style as DeLeon above.

Smith v. Franklin Templeton Distributors is a shareholder derivative action where the plaintiff tries to assert a claim under 15 U.S.C. § 80a-47(b).  Mr. Smith claims that the defendant is paying its broker-dealers with asset based compensation in violation of the Investment Advisers Act of 1940.  He notes that Financial Planners Association v. SEC (D.C. Cir. 2007) found that rules allowing asset based compensation were found to be contrary to the IAA.  Under Section 47(b) of the IAA, he can file an action in court to void any transaction contrary to law.  Since the D.C. Circuit found asset-based compensation was contrary to the IAA, it is inconsistent with IAA and the compensation agreements should be void and the money returned to the trust.  Franklin/Templeton disagrees and states that Section 47(b) does not provide a private right of action, rather there must be a predicate violation of some other section of law.  In an earlier motion to dismiss, the court agreed with the defendants and dismissed the case with leave to amend.  In its current form, Judge Phyllis J. Hamilton found that Mr. Smith could not correct the pleading deficiencies and dismissed the case with prejudice.

Benson v. JPMorgan Chase Bank is a fraud case which alleges that Washington Mutual Bank (WaMu) knew that three ponzi scheme operators set up corporations in Nevada and accounts  at WaMU to shuffle the proceeds of their fraudulent activity.  WaMu is a failed bank, taken over by the FDIC and later acquired by JPMorgan Chase Bank (Chase).  Chase moves to dismiss the lawsuit alleging that the FDIC took over WaMu under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and that the plaintiffs failed to exhaust their administrative remedies under that law because the plaintiffs did not file an administrative claim with the FDIC. Magistrate Maria-Elena James granted the motion to dismiss with prejudice. In the present action, the plaintiffs move for relief from judgment under Fed. R. Civ. P. 60(b)(1) stating that the court committed unintentional error on the previous ruling because the Plaintiffs had note received the FIRREA notice required by law.  Judge James stated that an internet posting is sufficient notice and denied the motion for relief from judgment.

Northern California Daily Digest

Here are some of the other recently decided cases in the U.S. District Court for the Northern District of California.

Brambila v. BAC Home Loans involves a homeowner who questioned the validity of his foreclosure.  For some reason unknown reason, like the plaintiff in Chung v. NBGI this blog profiled yesterday, Mr. Brambila did not respond to Magistrate Maria-Elena James' request to proceed in the case or the plaintiff's motion to dismiss.  Judge James recommended the case be dismissed for lack of prosecution.

In 625 3rd Street Associates v. Board of National Credit Union Association, the plaintiff is suing the defendant for breach of a purchase and lease back agreement.  The defendants argue that the jury should have been given an instruction on the D'Oench, Duhme doctrine. Based on D'Oench, Duhme & Co. v. FDIC (U.S. 1942), the liquidating agent of an insured credit union is not bound by any agreements which tend to diminish an asset of the NCUA Board as liquidator unless the agreement is in writing. However, when the claim is unrelated to the banking business then it is a "free standing tort claim" and may be pursued.  This case is on the line because this is a different transaction  than a traditional borrower/lender mortgage.  Judge William Alsup stated that the jury should not be tasked with making legal determinations and that the defendants can raise the defense after the verdict as a motion for judgment as a matter of law.

Kennedy v. Astrue is a social security disability insurance appeal.  Ms. Kennedy believes she is disabled and argues that the ALJ improperly discounted the findings of her treating physician, Dr. Wren.  However, Dr. Wren suffers from the Katy Perry problem. As this blog has explained before:

In her song, Hot 'n Cold Ms. Perry states, "You change your mind like a girl changes clothes...you overthink [and] always speak cryptically [therefore] I should know that you're no good for me." Similarly, witnesses who later change their mind are unreliable.

Magistrate Edward M. Chen explained:

For example, Dr. Wren noted in one record that he had referred Ms. Kennedy for diagnostic studies,(medical record, dated 4/21/2005, from Dr. Wren) (noting request for authorization for EMG with nerve conduction study of lower back and left leg and authorization for MRI scan of cervical spine and thoracic spine), but those studies largely had normal results.(medical record, dated 5/26/2005, from Dr. Wren) (noting that EMG with nerve conduction studies suggested sciatic nerve or S-1 nerve root irritation but no obvious S1 radiculopathy and that MRIs, as well as x-ray, revealed no significant abnormalities).

Dr. Wren's conclusion of disability was inconsistent with his findings and he failed to explain the discrepancy.  Judge Chen granted summary judgment for the commissioner.

Ferrington v. McAfee involves two customers suing the anti-virus protection provider for fraud.  According to the complaint, after downloading the software, a pop-up appeared inviting customers to "try it now".  The customers claim they thought "it" was the software they just purchased, but it was actually a third party vendor selling them something they purchased (thinking it was McAfee) that they later did not want.  Judge Lucy Koh ruled that these allegations were sufficient to satisfy the fraudulent and unfair prongs of California's Unfair Competition Law (UCL) but not the unlawful prong since trademark infringement and the Consumer Legal Remedies Act (CLRA) were not adequately alleged.  This decision allows the case to proceed into discovery.