Spencer v. Dhi Mortg. Co., Ltd.

642 F.Supp.2d 1153

Douglas SPENCER, et al., Plaintiffs, v. DHI MORTGAGE COMPANY, LTD., et al., Defendants.

Case No. CV F 09-0925 LJO DLB.

United States District Court, E.D. California.

June 30, 2009.

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Douglas Spencer, Newman, CA, pro se.

Connie Spencer, Newman, CA, pro se.

Jeffrey A. Silvestri, McDonald Carano Wilson LLP, Las Vegas, NV, for Defendants.

ORDER ON DEFENDANT DHI MORTGAGE COMPANY, LTD.'s F.R.Civ.P. 12(b) (6) MOTION TO DISMISS (Doc. 5.)

LAWRENCE J. O'NEILL, District Judge.

INTRODUCTION

Defendant lender DHI Mortgage Company, Ltd. ("DHI Mortgage") seeks to dismiss as meritless pro se plaintiffs Douglas Spencer and Connie Spencers' (collectively "plaintiffs'") 14 claims arising from default and foreclosure on their first and second mortgages on their Newman home ("property"). Plaintiffs filed no opposition papers. This Court considered DHI Mortgage's F.R.Civ.P. 12(b)(6) motion to dismiss on the record and VACATES the July 13, 2009 hearing, pursuant to Local Rule 78-230(c), (h). For the reasons discussed below, this Court DISMISSES this action against DHI Mortgage.

BACKGROUND

Plaintiffs' Loans And Default

On September 1, 2005, plaintiffs purchased the property with funds from DHI Mortgage's first mortgage and defendant Indymac Federal Bank, FSB's ("Indymac's") second mortgage. The mortgages were secured by deeds of trust and promissory notes.

A December 8, 2008 notice of default and intention to sell was recorded for the property with the Stanislaus County Recorder.

Plaintiffs' Claims

On March 24, 2009, plaintiffs filed their complaint ("complaint") to allege that defendants¹ "engaged in unethical business practices" and "induced plaintiffs into purchasing residential loan products that defendants knew or should have known may result in foreclosure, absent serial refinancing into even higher cost loans." The complaint further alleges: "These loans were neither proper nor suitable for [plaintiffs'] condition and station in life. These loans exceeded the reasonable expected value of the property at that time and in the foreseeable future, based upon expected market changes."

The complaint alleges 14 claims which this Court will address below and seeks to recover "personal, mental, physical and economic damages."

DISCUSSION

Pleading And F.R.Civ.P. 12(b)(6) Motion Standards

DHI Mortgage attacks plaintiffs' claims as incognizable and lacking necessary elements and factual allegations.

A F.R.Civ.P. 12(b)(6) motion to dismiss is a challenge to the sufficiency of the pleadings set forth in the complaint. "When a federal court reviews the sufficiency of a complaint, before the reception of any evidence either by affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Gilligan v. Jamco Development Corp., 108 F.3d 246, 249 (9th Cir.1997). A F.R.Civ.P. 12(b)(6) dismissal is proper where there is either a "lack of a cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir.1990); Graehling v. Village of Lombard, Ill., 58 F.3d 295, 297 (7th Cir.1995).

In resolving a F.R.Civ.P. 12(b)(6) motion, the court must: (1) construe the complaint in the light most favorable to the plaintiff; (2) accept all well-pleaded factual allegations as true; and (3) determine whether plaintiff can prove any set of facts to support a claim that would merit relief. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-338 (9th Cir.1996). Nonetheless, a court is "free to ignore legal conclusions, unsupported conclusions, unwarranted inferences and sweeping legal conclusions cast in the form of factual allegations." Farm Credit Services v. American State Bank, 339 F.3d 764, 767 (8th Cir.2003) (citation omitted). A court need not permit an attempt to amend a complaint if "it determines that the pleading could not possibly be cured by allegation of other facts." Cook, Perkiss and Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 247 (9th Cir.1990). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (internal citations omitted). Moreover, a court "will dismiss any claim that, even when construed in the light most favorable to plaintiff, fails to plead sufficiently all required elements of a cause of action." Student Loan Marketing Ass'n v. Hanes, 181 F.R.D. 629, 634 (S.D.Cal.1998). In practice, "a complaint ... must contain either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory." Twombly, 550 U.S. at 562, 127 S.Ct. at 1969 (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir.1984)).

With these standards in mind, this Court turns to DHI Mortgage's challenges to plaintiffs' claims.

Suitability

The complaint's (first) suitability claim alleges that "defendants breached their professional duties and obligations by providing a sub-prime loan that was neither suitable nor appropriate for the plaintiffs' personal financial condition and well-being."

DHI Mortgage notes that suitability is an incognizable claim by a borrower against a lender. "The unsuitability doctrine is premised on New York Stock Exchange Rule 405-Know Your Customer Rule FN3 and the National Association of Securities Dealers Rules of Fair Practice." O'Connor v. R.F. Lafferty & Co., Inc., 965 F.2d 893, 897 (10th Cir.1992). DHI Mortgage further correctly notes that California law does not extend the suitability doctrine to the mortgage lender-borrower relationship. "Public policy does not impose upon the Bank absolute liability for the hardships which may befall the [borrower] it finances." Wagner v. Benson, 101 Cal.App.3d 27, 34, 161 Cal.Rptr. 516 (1980). The success of a borrower's investment "is not a benefit of the loan agreement which the Bank is under a duty to protect." Wagner, 101 Cal.App.3d at 34, 161 Cal.Rptr. 516 (lender lacked duty to disclose "any information it may have had").

Plaintiffs' suitability claim fails as incognizable against DHI Mortgage.

Negligence

The complaint's (second) negligence claim alleges that defendants breached their "professional services" duty in that "plaintiffs were placed into loans that were inappropriate for their personal financial circumstances."

DHI Mortgage contends that the negligence claim fails in absence of "a legally recognized duty that a lender has to a borrower."

"The elements of a cause of action for negligence are (1) a legal duty to use reasonable care, (2) breach of that duty, and (3) proximate [or legal] cause between the breach and (4) the plaintiff's injury." Mendoza v. City of Los Angeles, 66 Cal.App.4th 1333, 1339, 78 Cal.Rptr.2d 525 (1998) (citation omitted). "The existence of a legal duty to use reasonable care in a particular factual situation is a question of law for the court to decide." Vasquez v. Residential Investments, Inc., 118 Cal.App.4th 269, 278, 12 Cal.Rptr.3d 846 (2004) (citation omitted).

DHI Mortgage correctly notes the absence of an actionable duty between a lender and borrower in that loan transactions are arms-length and do not invoke fiduciary duties. Absent "special circumstances" a loan transaction "is at arms-length and there is no fiduciary relationship between the borrower and lender." Oaks Management Corp. v. Superior Court, 145 Cal.App.4th 453, 466, 51 Cal. Rptr.3d 561 (2006). Moreover, a lender "owes no duty of care to the [borrowers] in approving their loan. Liability to a borrower for negligence arises only when the lender `actively participates' in the financed enterprise `beyond the domain of the usual money lender.'" Wagner, 101 Cal.App.3d at 35, 161 Cal.Rptr. 516 (citations several cases). "[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution's involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money." Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal.App.3d 1089, 1096, 283 Cal.Rptr. 53 (1991).

DHI Mortgage further notes the absence of a lender's duty to ensure a loan is suitable for a borrower. "No such duty exists" for a lender "to determine the borrower's ability to repay the loan.... The lender's efforts to determine the creditworthiness and ability to repay by a borrower are for the lender's protection, not the borrower's." Renteria v. United States, 452 F.Supp.2d 910, 922-923 (D.Ariz.2006) (borrowers "had to rely on their own judgment and risk assessment to determine whether or not to accept the loan").

The negligence claim lacks a recognized legal duty owed by DHI Mortgage. The complaint lacks allegations that plaintiffs relied on DHI Mortgage's loan processing to ensure plaintiffs' ability to repay the loan. The complaint further lacks facts of special circumstances to impose duties on DHI Mortgage in that the complaint depicts an arms-length home loan transaction, nothing more.

DHI Mortgage contends that the economic loss doctrine further bars the negligence claim in that plaintiffs seek only unrecoverable "purely economic damages."

"[P]laintiffs may recover in tort for physical injury to person or property, but not for purely economic losses that may be recovered in a contract action." San Francisco Unified School District v. W.R. Grace & Company, 37 Cal....