McShannock v. JP Morgan Chase Bank N.A.

354 F.Supp.3d 1063

Susan MCSHANNOCK, et al., Plaintiffs,

v.JP MORGAN CHASE BANK N.A., Defendant.

Case No. 18-cv-01873-EMC

United States District Court, N.D. California.

Signed December 7, 2018

Michael Francis Ram, Susan S. Brown, Robins Kaplan LLP, Mountain View, CA, Harold Mitchell Jaffe, Attorney at Law, Dublin, CA, for Plaintiffs.

Alexander Jacob Gershen, David Carlyle Powell, McGuireWoods LLP, San Francisco, CA, Benjamin Jefferson Sitter, McGuireWoods LLP, Pittsburgh, PA, for Defendant.

ORDER DENYING DEFENDANT'S MOTION TO DISMISS

Docket No. 38

EDWARD M. CHEN, United States District Judge

Plaintiffs Monica Chandler, Susan McShannock, and Mohamed Meky (collectively "Plaintiffs") filed suit against JPMorgan Chase Bank ("Chase") on behalf of a putative class. Plaintiffs assert claims under the California Unfair Competition Law, Ca. Bus. & Prof. Code § 17200 et seq. ("UCL"), based on Chase's alleged violation of a California law requiring mortgage lenders to pay interest to mortgagors on funds held in escrow accounts for residential mortgages. Currently pending before the Court is Chase's motion to dismiss or, in the alternative, stay the case. Docket No. 38 ("Mot."). For the reasons discussed below, the Court DENIES the motion to dismiss and DENIES as moot the motion to stay.

I. FACTUAL AND PROCEDURAL BACKGROUND

The Consolidated Class Action Complaint alleges the following. Plaintiffs took out mortgage-secured loans from Washington Mutual Bank ("WaMu"), a federal savings bank, between 2005 and the end of 2007. Docket No. 37 (Consolidated Class Action Complaint, hereinafter "Con. Compl.") ¶¶ 5, 9, 13. When WaMu failed in 2008, its assets, including Plaintiffs' mortgages, were acquired by Chase via the Federal Deposit Insurance Corporation ("FDIC"). Id. ¶ 5; Mot. at 1.

The mortgage agreements at issue required Plaintiffs to make payments into escrow accounts held by the lender, in order to cover any potential taxes and assessments, leasehold payments, and insurance premiums on the property. Con. Compl. ¶¶ 6, 10, 14. Plaintiffs have each made payments into the escrow accounts as required, but have never received any interest on the escrow funds from Chase. Id. ¶¶ 7, 11, 14. The mortgage agreement contains a provision addressing interest on escrow accounts:

Unless an agreement is made in writing or Applicable Law requires interest to be paid on the Funds [in the escrow account], Lender shall not be required to pay Borrower any interest or earnings on the funds. Borrower and Lender can agree in writing, however, that interest shall be paid on the Funds.

Docket No. 38-2, Exhs. A–F § 3.

Plaintiffs assert that Chase's failure to pay escrow interest on their mortgage accounts violates California Civil Code § 2954.8 and 15 U.S.C. § 1639d(g). Con. Compl. ¶¶ 35–37. According to Plaintiffs, these violations constitute "unlawful" conduct within the meaning of the UCL. They also assert that Chase's alleged conduct violates the "unfair" prong of the UCL. Id. ¶¶ 38–40.

Plaintiff McShannock and Plaintiff Chandler initially filed separate class action suits against Chase asserting the same underlying claims. See Docket No. 19 (Motion to Relate Case). The parties stipulated to consolidate the two cases. See Docket No. 33. In the ensuing Consolidated Complaint, Plaintiffs proposed the following class for certification pursuant to Federal Rule of Civil Procedure 23 :

All mortgage loan customers of Chase (or its subsidiaries), whose mortgage loan is for a one-to-four family residence located in California, and who paid Chase money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, and to whom Chase failed to pay interest as required by Cal. Civ. Code § 2954.8(a). Excluded from the above Class is any entity in which Chase has a controlling interest, and officers or directors of Chase. The judge assigned to this case and the judge's staff members are also excluded from the Class.

Con. Compl. ¶ 26.

Chase now moves to dismiss under Rule 12(b)(6) on two bases: first, that Plaintiffs failed to comply with the provisions in their mortgage contracts requiring them to provide Chase with notice and an opportunity to cure alleged misconduct before bringing a judicial action; and second, that Plaintiffs' state law claims are preempted by the Home Owners' Loan Act. In the alternative, Chase seeks to stay the case pending the resolution of Lusnak v. Bank of America, N.A. , which concerns whether California's mortgage escrow law is preempted by the National Banking Act. 883 F.3d 1185 (9th Cir. 2018), petition for cert. filed , (U.S. Aug. 14, 2018) (No. 18-212).

II. DISCUSSION

A. Legal Standard

For a plaintiff to survive a Rule 12(b)(6) motion to dismiss after Ashcroft v. Iqbal , 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) and Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), her factual allegations "must ... suggest that the claim has at least a plausible chance of success." Levitt v. Yelp! Inc. , 765 F.3d 1123, 1134-35 (9th Cir. 2014). In other words, the complaint "must allege ‘factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ " Id. (citations omitted). "The plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully."

Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility ‘of entitlement to relief.’ " Id.

The Ninth Circuit has outlined a two-step process for evaluating pleadings against this standard. "First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively. Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation." Levitt , 765 F.3d at 1135 (citations omitted).

B. Notice and Cure Provisions

Chase first argues that Plaintiffs' Deeds of Trust contain provisions that require them to give Chase notice and an opportunity to cure any alleged wrongdoing, including actions relating to escrow accounts, before seeking judicial remedies. Mot. at 4. Under the terms of the notice and cure provision:

Neither Borrower nor Lender may commence, join, or be joined to any judicial action (as either an individual litigant or the member of a class) that arises from the other party's actions pursuant to this Security Instrument or that alleges that the other party has breached any provision of, or any duty owed by reason of, this Security Instrument, until such Borrower or Lender has notified the other party ... of such alleged breach and afforded the other party hereto a reasonable period after the giving of such notice to take corrective action.

Docket No. 38-2, Exhs. A–F § 20. The Deed also provides that "[t]he covenants and agreements of this Security Instrument shall bind ... and benefit the successors and assigns of Lender." Id. , Exhs. A–F § 13.

The Consolidated Complaint does not contain any allegation that Plaintiffs have complied with the notice and cure provisions in their Deeds of Trust. Plaintiffs state in their opposition to the motion to dismiss that McShannock and Meky sent notices of dispute to Chase after Chase moved to dismiss the original complaint and before Plaintiffs filed the Consolidated Complaint. Id. at 5. Plaintiffs contend Meky gave Chase notice "on behalf of the class before he filed his complaint" because he was not a part of the original action. Id. (emphasis in original). According to Plaintiffs, "Chase rejected these opportunities to cure the breach." Id.

As Chase points out, however, Plaintiffs cannot fix their pleading deficiencies by alleging new facts in their opposition brief. "In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff's moving papers, such as a memorandum in opposition to a defendant's motion to dismiss." Broam v. Bogan , 320 F.3d 1023, 1026 n.2 (9th Cir. 2003) (emphasis in original) (quoting Schneider v. Cal. Dep't of Corr. , 151 F.3d 1194, 1197 n.1 (9th Cir. 1998) ).

Moreover, even if the Court were to accept Plaintiffs' assertion that they provided notice to Chase after they filed the initial complaint, their actions would not satisfy the notice and cure provision. "If the Notice Provision has any legitimate purpose, it is to promote the resolution of contractual disputes without the expense of litigation—‘compliance’ after litigation has been initiated is no compliance at all."

Gerber v. First Horizon Home Loans Corp. , No. 05-1554P, 2006 WL 581082, at *2 (W.D. Wash. Mar. 8, 2006) (rejecting plaintiff's argument "that his post-lawsuit notice to Defendant is somehow ‘substantial compliance’ with the provision"); Kim v. Shellpoint Partners, LLC , No. 15CV611-LAB (BLM), 2016 WL 1241541, at *6 (S.D. Cal. Mar. 30, 2016) (explaining that accepting plaintiff's notice to defendant "during the pendency of this action" would "gut the ‘notice and cure’ provision, the purpose of which is to give each party an opportunity to cure problems and prevent the need for litigation"). McShannock's post-suit notice is therefore ineffective.

Nor would the purported notice given by Meky "on behalf of the class" suffice, even though he joined as a plaintiff after the original complaint was filed. The notice and cure provision in Plaintiffs' Deeds of Trust specifies that no borrower "may commence, join, or be joined to any judicial action (as either an...