Kivett v. Flagstar Bank, FSB

506 F.Supp.3d 749

William KIVETT and Bernard and Lisa Bravo, individually, and on behalf of others similarly situated, Plaintiffs,

v.FLAGSTAR BANK, FSB, a federal savings bank, Defendant.

No. C 18-05131 WHA

United States District Court, N.D. California.

Signed December 10, 2020

Peter B. Fredman, Law Office of Peter Fredman PC, Berkeley, CA, Thomas Eric Loeser, Pro Hac Vice, Hagens Berman Sobol Shapiro LLP, Seattle, WA, for Plaintiffs Lowell Smith, Gina Smith.

Peter B. Fredman, Law Office of Peter Fredman PC, Berkeley, CA, Thomas Eric Loeser, Hagens Berman Sobol Shapiro LLP, Seattle, WA, for Plaintiff William Kivett.

Thomas Eric Loeser, Hagens Berman Sobol Shapiro LLP, Seattle, WA, for Plaintiffs Lisa Bravo, Bernard Bravo.

Carolee Anne Hoover, David Carlyle Powell, Aaron Robert Marienthal, Alexander Jacob Gershen, Alicia Anne Baiardo, Jamie Danielle Wells, McGuireWoods LLP, San Francisco, CA, for Defendant Flagstar Bank, FSB.

Thomas Eric Loeser, Hagens Berman Sobol Shapiro LLP, Seattle, WA, for Defendant Bernard Bravo.

ORDER RE PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT

WILLIAM ALSUP, United States District Judge

INTRODUCTION

In this certified class action against defendant bank for non-payment of interest on escrows for California borrowers, as required under Section 2954.8(a) of California's Civil Code, brought under Section 17200 of California's Business and Professions Code, plaintiffs move for summary judgment, requesting restitution and injunctive relief. A prior order already determined the bank's liability, finding it in violation of Section 2954.8(a), and thereby liable under the "unlawful" prong of Section 17200. This order grants plaintiffs’ request for restitution of accrued and outstanding interest on escrows that the bank failed to pay to class members. Because its violations of Section 2954.8(a) are ongoing with respect to a subclass of class members whose loans it continues to service, this order certifies a subclass under Rule 23(b)(2), appoints subclass representatives, and grants injunctive relief thereunder. To the extent stated herein, therefore, plaintiffs’ motion for summary judgment is GRANTED .

STATEMENT

Section 2954.8(a) of California's Civil Code requires:

Every financial institution that makes loans upon the security of real property containing only a one-to four-family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, shall pay interest on the amount so held to the borrower. The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum. Such interest shall be credited to the borrower's account annually or upon termination of such account, whichever is earlier.

In short, California's interest-escrow-law requires financial institutions to pay certain borrowers at least two percent annual interest on funds held in borrowers’ escrow accounts. Such accounts are typically set up in conjunction with a home loan — indeed often as a condition by a lender — to ensure payment of property obligations associated with a home loan, such as property taxes.

Defendant Flagstar Bank, FSB, is a federally chartered savings bank, which originates, purchases, sells, and services home loans covered by Section 2954.8(a). After a loan is originated, it is typically sold in the secondary market to third-party investors. This leads to a bifurcation of the loan into two main assets: "[o]ne is the beneficial ownership of the loan and the other would be the income received to do the actual servicing activities" (Chang. Dep. 13:21–14:19). The latter creates the mortgage servicing right ("MSR") asset.

From at least 2014 until January 28, 2017, Flagstar categorically failed to pay or credit interest on escrow ("IOE") to California borrowers’ whose loans Flagstar serviced (Ryan Dep. 47:4–7). More specifically, when Flagstar collected money in advance from California borrowers for payment of taxes and assessments on a property mortgaged as security for a home loan, or for insurance, for example, it failed to pay them the two percent interest per annum required under Section 2954.8(a). Beginning on January 28, 2017, however, Flagstar began a phased-out process of prospectively paying IOE for loans that it subserviced on behalf of third-party investors who owned the mortgage servicing rights (Ryan Dep. 46:21–47:2). Though Flagstar now complies with Section 2954.8(a) for all loans it subservices for third-party investors, it still does not pay IOE on loans for which it owns the mortgage servicing rights (Ryan Dep. 34:13–19; 45:14–16); nor does it plan to (Ryan Dep. 47:24–48:2) (see also Stip. Fact ¶ 6). Its reason: federal preemption. More specifically, Flagstar says that the Home Owner's Loan Act ("HOLA") — applicable to federal savings associations such as itself — preempts Section 2954.8(a) and thus exempts it from paying IOE.

In 2018, however, our court of appeals held that the passage of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act changed the federal preemption scheme. Lusnak v. Bank of Am., N.A. , 883 F.3d 1185, 1194 (9th Cir. 2018). In so holding, it found that the National Bank Act does not preempt Section 2954.8(a). Id. at 1197. Various actions against banks, including this one, ensued. See McShannock v. JP Morgan Chase Bank N.A. , 354 F.Supp.3d 1063 (N.D. Cal. 2018) (Judge Edward Chen); see also Wilde v. Flagstar Bank FSB , No. 18-cv-1370-LAB (BGS), 2019 WL 1099841 (S.D. Cal. Mar. 8, 2019) (Chief Judge Larry Alan Burns).

In April 2018, Lowell and Gina Smith brought this civil action against Flagstar. They alleged that in October 2004, they'd obtained a loan to finance their purchase of real property located in California. They had executed a deed of trust as security for the loan. The deed of trust called for the establishment of an escrow impound account and required that interest be paid on funds in the escrow account if doing so was required by applicable law. Flagstar then took over the servicing of the Smiths’ mortgage account and remained the loan servicer until August 2015. No interest accrued on their escrow funds (Case No. 18-02350, Dkt. No. 1).

The Smiths’ complaint alleged two claims against Flagstar: (i) breach of contract, and (ii) violation of California's Unfair Competition Law, California Business & Professions Code §§ 17200 et seq. In August 2018, a Rule 12 order dismissed that complaint without prejudice due to the Smiths’ failure to comply with a threshold notice-and-cure requirement provided by the deed of trust. Judgment then entered in favor of Flagstar and against the Smiths (Case No. 18-02350, Dkt. Nos. 1, 38). The Smiths quickly provided Flagstar written notice and an opportunity to cure, which Flagstar refused. Having fixed the cure issue, the Smiths filed the instant suit, alleging the same claims on the same facts as before (Case No. 18-05131, Dkt. No. 1).

In October 2018, William Kivett came in as another plaintiff. He only alleged a violation of Section 17200 (Dkt. No. 30 at 2). In 2012, Kivett and Flagstar had executed a promissory note reflecting a $400,610 mortgage loan secured by a deed of trust on a California residential property. Flagstar serviced Kivett's loan from its inception until 2015 when he refinanced his loan with another institution. Pursuant to the deed of trust, Flagstar "established and maintained an escrow account for the payment of [Kivett's] property taxes and insurance premiums and other potential charges related to the property" throughout that time (Stip. Fact ¶ 5).

Following discovery and motion practice, summary judgment issued in favor of Flagstar, dismissing the Smiths from this action. In brief, that order found that the Smiths’ claims were still preempted by HOLA because Section 1043 of the Dodd-Frank Act preserved HOLA's preemption scheme for any contract entered into on or before July 21, 2010, "by national banks, [f]ederal savings associations, or subsidiaries thereof ..." 12 U.S.C. § 5553. Because Flagstar, a federal savings association, had participated in the origination of the Smiths’ 2004 loan, their claims were dismissed.

Kivett pressed on. Then, a November 2019 order appointed Kivett as class representative and certified the following class pursuant to Rule 23(b)(3) (Dkt. No. 120):

All persons who on or after April 18, 2014 had mortgage loans serviced by Flagstar Bank FSB ("Flagstar") on 1–4 unit residential properties in California and paid Flagstar money in advance to hold in escrow for the payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, but did not receive interest on the amounts held by Flagstar in their escrow accounts (excluding, however, any such persons whose mortgage loans originated on or before July 21, 2010) (the "Class").

That class was "certified as to plaintiff Kivett's Section 17200 claim, except for prospective injunctive relief" (id. at 13). But, in express contemplation of seeking injunctive relief, Kivett had also moved for leave to amend in order to add Bernard and Lisa Bravo as named plaintiffs. On December 1, 2017, the Bravos had executed a promissory note with California Financial Real Estate Center, Inc., secured by a deed of trust on a California property. The servicing rights to the Bravos’ loan were almost immediately transferred from Financial Real Estate Center to Flagstar (Mansell Decl. ¶¶ 6–7). Pursuant to the terms of the deed of trust, Flagstar "maintained an escrow account for the Bravos upon servicing the loan from origination through present" (id. at ¶¶ 8–9). Unlike Kivett's loan, therefore, Flagstar currently services the Bravos’ loan for which Flagstar still does not pay any IOE to.

Accordingly, the "primary purposes" for seeking leave to amend, as stated in the class certification order, was to add the Bravos as...