Strugala v. Flagstar Bank, FSB

LISA STRUGALA, Plaintiff, v. FLAGSTAR BANK, FSB, Defendant.

Case No. 5:13-cv-05927-EJD

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

May 24, 2019

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS; DENYING DEFENDANT'S MOTION TO STRIKE CLASS ALLEGATIONS

Re: Dkt. No. 102

Presently before the Court is Defendant Flagstar Bank FSB's ("Flagstar Bank") Motion to Dismiss the Second Amended Complaint ("SAC") filed by Plaintiff Lisa Strugala, an individual, on behalf of herself and on behalf of others similarly situated ("Strugala"), and Flagstar Bank's Motion to Strike Class Allegations. See Dkt No. 102. The overarching issue in this case stems from the parties' differing interpretations of 26 U.S.C. § 6050H, which generally describes how financial institutions who "receive" mortgage "interest" from their borrowers, report that interest on tax Form 1098. Strugala alleges that Flagstar Bank knowingly reported her mortgage interest incorrectly by reporting both paid and unpaid interest, which prevented her from filing her own correct tax returns, required her to file amended tax returns, and caused permanent loss of past valuable tax deductions. Strugala seeks declaratory and injunctive relief and monetary damages.

The Court heard oral argument on the motions on October 24, 2018. Dkt. No. 107. Having carefully reviewed the parties' arguments, the Motion to Dismiss will be GRANTED in part and DENIED in part. The Motion to Strike will be DENIED.

I. BACKGROUND¹

Strugala obtained a 30-year "negative amortization" adjustable rate mortgage loan from Flagstar Bank in 2007, for a home she previously owned in Los Gatos, California. SAC ¶¶ 24, 25. Strugala's loan provided for the "minimum payment" option, which is generally, but not always, less than the interest due for the month." Id. ¶¶ 3, 25. Under this option, the unpaid monthly interest is "deferred" and added to the principal balance to be paid on a later date. Id. ¶ 4. This arrangement usually causes the overall loan balance to increase rather than decrease while the interest is deferred, even though the borrower is making monthly payments. Id. ¶ 5. As mortgagee, Flagstar Bank is required to issue a Form 1098 to the borrower and the Internal Revenue Service ("IRS") stating the amount of mortgage interest "received" from a borrower during that year.² 26 U.S.C. § 6050H(a)-(b).

Strugala initiated this action in 2013 and filed her First Amended Complaint in early February ("FAC"). Dkt. Nos. 1, 18. Strugala asserted seven causes of action against Flagstar Bank on behalf of herself and two purported classes, a "damage" class and an "injunctive" class, including: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) violation of 26 U.S.C. § 6050H, (4) violation of the Unfair Competition Law ("UCL"), California Business and Professions Code § 17200, (5) declaratory relief, (6) injunctive relief, and (7) fraud.

In September of 2015, the Court granted in part and denied in part Flagstar Bank's Motion to Dismiss Strugala's FAC. Dkt. No. 69. The Court dismissed without leave to amend Strugala's claims for violation of 26 U.S.C. § 6050H and injunctive relief because Strugala withdrew these claims in her opposition to Flagstar Bank's motion to dismiss. Id at 5. The Court did not address the five remaining claims. Instead, the Court granted Flagstar Bank's motion to stay the actionbased on the primary jurisdiction doctrine and referred the matter to the IRS to determine whether Flagstar Bank's reporting practice complied with 26 U.S.C. § 6050H. In November of 2016, the IRS accepted Strugala's amended 2012 tax return and issued her a refund based on the mortgage interest she paid to Flagstar Bank in 2012 from her short sale. Dkt. No. 81 at 3.³

In June of 2017, the Court partially lifted the stay to allow Flagstar Bank to file a motion to address Strugala's Article III standing. See Dkt. No. 84. In September of 2017, the Court granted in part and denied in part Flagstar Bank's Second Motion to Dismiss Strugala's FAC with leave to amend. Dkt. No. 91. The Court held that Strugala lacked standing to seek redress for the alleged loss she suffered because the amount of deferred interest she paid in 2012 was greater than the amount of deferred interest Flagstar reported in 2007-2010, and that she lacked standing for the alleged loss she suffered because she was forced to take mortgage deductions in 2007-2010 instead of in 2012. Id. at 4. Strugala did have standing to seek redress for accountancy fees that she incurred to prepare and file her amended tax return. Id. at 5.

Strugala asserts that for each year from 2007 through 2011, Flagstar Bank submitted a Form 1098 that overreported interest because it included both the amount of actual interest Strugala paid as well as the amount of unpaid interest she "deferred." SAC ¶ 7. Strugala contends that this practice violates § 6050H and IRS requirements because lenders should report only interest they actually "receive" (paid) and not interest that is deferred (unpaid). SAC ¶¶ 1, 7. Strugala alleges three categories of damages that were allegedly caused by this overreporting. First, Strugala "has paid more in taxes than she would have paid had Flagstar correctly reported her interest payments" in tax years 2007-2009. Id. ¶¶ 45-47. Second, she incurred costs to amend her 2012 tax return. Id. ¶ 48. Third, Strugala incurred late fees to amend her federal and state tax returns. Id. ¶ 49.

Now before the Court is Flagstar Bank's Motion to Dismiss Strugala's SAC and a Motion

to Strike Class Allegations. Strugala's SAC includes the same seven claims that were asserted in her FAC. Dkt. No. 92. Strugala seeks to bring this suit on her own behalf and two purported classes: (1) a "damage" class and (2) an "injunctive" class.

II. LEGAL STANDARDS

A. Motion to Dismiss

Federal Rule of Civil Procedure 8(a) requires a plaintiff to plead each claim with sufficient specificity to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal quotations omitted). A complaint which falls short of the Rule 8(a) standard may be dismissed if it fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). "Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory." Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). Moreover, the factual allegations "must be enough to raise a right to relief above the speculative level" such that a claim "is plausible on its face." Twombly, 550 U.S. at 556-57. When deciding whether to grant a motion to dismiss, the court generally "may not consider any material beyond the pleadings." Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990). The court must accept as true all "well-pleaded factual allegations." Ashcroft v. Iqbal, 556 U.S. 662, 664 (2009). The court must also construe the alleged facts in the light most favorable to the plaintiff. Love v. United States, 915 F.2d 1242, 1245 (9th Cir. 1998). But "courts are not bound to accept as true a legal conclusion couched as a factual allegation." Twombly, 550 U.S. at 555.

Additionally, fraud-based claims are subject to heightened pleading requirements under Federal Rule of Civil Procedure 9(b). In that regard, a plaintiff alleging fraud "must state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). The allegations must be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that theyhave done anything wrong." Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). To that end, the allegations must contain "an account of the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Swartz v. KPMG LLP, 476 F.3d 756, 764 (9th Cir. 2007).

B. Leave to Amend

"[A] district court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the pleading could not possibly be cured by the allegation of other facts." Lopez v. Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995)).

III. DISCUSSION

Flagstar Bank moves to dismiss all of Strugala's claims on four grounds. First, Flagstar Bank argues that Strugala is not entitled to relief under Section 6050H because the Court previously dismissed this claim without leave to amend. Dkt. No. 102 at 16-17. Second, Flagstar argues that Strugala's requests for declaratory and injunctive relief are improper because this Court previously dismissed the injunctive claim without leave to amend; Strugala lacks standing for either form of relief; and the Declaratory Judgment Act ("DJA") and the Anti-Injunction Act ("AIA") forbid declaratory and injunctive relief with respect to federal taxes. Dkt. No. 102 at 19-22. Third, Flagstar Bank contends that Strugala fails to plead the elements of her state law claims. Fourth, Flagstar Bank argues that Strugala's class allegations should be stricken because her claims are not typical of the class she seeks to represent and her class definition is geographically overbroad. Dkt. No. 102 at 29-32. The Court addresses each in turn.

A. Section 6050H Violation

Strugala realleges a cause of action for a violation of Statute 6050H in her SAC. The Court previously dismissed this claim without leave to amend. Dkt. No. 69. Strugala contends that she is not reasserting the claim, but instead preserving for appeal. Dkt. No. 104 at 5. Thus, the third count for violation of 26 U.S.C. 6050H will again be dismissed without leave to amend.

B. Declaratory and...