United Guar. Mortg. v. Countrywide Financial

660 F.Supp.2d 1163

UNITED GUARANTY MORTGAGE INDEMNITY CO., Plaintiff, v. COUNTRYWIDE FINANCIAL CORP., et al., Defendants.

Case No. CV-09-1888-MRP (JWJx).

United States District Court, C.D. California.

October 5, 2009.

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Neil G. Cave, Peter N. Tsapatsaris, Philippe Z. Selendy, Quinn Emanuel Urquhart Oliver & Hedges LLP, New York, NY, Richard A. Schirtzer, Randa A. F. Osman, Quinn Emanuel Urquhart Oliver and Hedges LLP, Los Angeles, CA, for Plaintiff.

David Martin Halbreich, Lilit Asadourian, Reed Smith LLP, Los Angeles, CA, David Evan Weiss, Reed Smith, LLP, San Francisco, CA, Douglas E. Cameron, Reed Smith LLP, Pittsburgh, PA, Hamish P. M. Hume, Boies Schiller & Flexner LLP, Washington, DC, Jonathan D. Schiller, Boies Schiller & Flexner LLP, New York, NY, Kieran P. Ringgenberg, Boies Schiller and Flexner LLP, Oakland, CA, Tricia J. Bloomer, Boies Schiller & Flexner LLP, Albany, NY, for Defendants.

ORDER Granting Motions to Dismiss the Amended Complaint

MARIANA R. PFAELZER, District Judge.

In this mortgage insurance case, an insurer ("United Guaranty")¹ sues two affiliated mortgage companies (collectively, "Countrywide"; separately, "Countrywide Financial" and "Countrywide Home")² and a mortgage securitization trustee ("BNY Trust").³

The original complaint asserted contract, tort, and statutory claims. Countrywide and BNY Trust moved to dismiss the original complaint. The claims for breach of contract and breach of implied covenant survived. The other claims were dismissed with leave to amend, primarily for failure to overcome the economic loss rule, which generally bars tort claims for contractual breaches.

United Guaranty then filed the Amended Complaint ("AC"). Now before the Court are motions to dismiss the tort and statutory claims reasserted in the AC. The motions are granted in their entirety.

I. BACKGROUND

A. Procedural posture.

This insurance dispute has generated three court cases and several arbitrations. Two of the cases are pending before this Court.

United Guaranty filed the present case in this Court. The other case was filed by Countrywide in California state court; United Guaranty subsequently removed that case to this Court. United Guaranty filed the third case in North Carolina federal court, citing forum selection clauses. Each side also initiated arbitration proceedings against the other. A prior order, the "Omnibus Order Resolving Three Jurisdiction-Related Motions," details the parties' procedural maneuvers. Docket no. 84 (July 1, 2009).

Of the two cases before this Court, the present case is narrower in factual scope and broader in legal theories. In it, United Guaranty sues on eleven "Master Policies" that insure first-lien mortgages that Countrywide securitized.⁴ United Guaranty asserts claims in contract, in tort, and under California statutory law.

B. The securitizations.

In the securitizations, Countrywide affiliates conveyed a pool of mortgages to a first trustee. In exchange for the mortgages, this first trustee issued debt instruments that represent a right to proceeds from trust assets (such as incoming mortgage payments by homeowners or, perhaps, mortgage insurance proceeds).

Countrywide and a second trustee, BNY Trust, obtained mortgage insurance on a subset of the securitized loans from United Guaranty. BNY Trust (in its role as a trustee) is the sole named "insured" on the policies. The first trustee is not party to the mortgage insurance transaction; it is likewise not a party to this case.⁵

Altogether, the securitizations in issue "encompass[] over $13 billion" of mortgage loans. AC 1135.

C. The complaints.

United Guaranty's original complaint asserted seven claims. Countrywide and BNY Trust each filed a motion to dismiss. Two contract claims survived the motions. They are: (claim 1) breach of contract against Countrywide Home and BNY Trust; and (claim 2) breach of the implied duty of good faith and fair dealing against Countrywide Home. In granting the remainder of the motions, the Court provided United Guaranty brief statements of its reasoning. The Court further granted United Guaranty leave to amend.⁶

United Guaranty amended by filing the AC. The AC substantially reasserts the dismissed claims, though it adds allegations, attaches two appendices, and rearranges some defendants. Countrywide and BNY Trust each filed a motion to dismiss the AC. These motions are now before the Court.

The AC claims addressed in the motions⁷ are: (claim 3) fraudulent inducement against Countrywide Home and Countrywide Financial; (claim 4) negligent misrepresentation against Countrywide Home and Countrywide Financial; (claim 5) negligence against Countrywide Home and BNY Trust; (claim 6) rescission against Countrywide Home and BNY Trust; and (claim 7) California's statutory Unfair Competition Law against Countrywide Home and Countrywide Financial.

For the reasons that follow, claims 3-7 are DISMISSED WITH PREJUDICE as to all defendants.

II. LEGAL STANDARD

A motion to dismiss tests whether properly pled allegations, if true, amount to an actionable claim. Ashcroft v. Iqbal, ___ U.S. ____, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009). In evaluating a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a court must accept as true all properly pled allegations of material fact in the complaint and read the complaint in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.2001); Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). However, a court will not accept as true unreasonable inferences; nor will it accept legal conclusions cast in the form of factual allegations. Iqbal, 129 S.Ct. at 1949.

A complaint may be read together with documents incorporated by reference and facts appropriate for judicial notice. Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir.1998); Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir.2001).⁸

Pleading generally requires a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. Proc. 8(a)(2). Showing entitlement to relief requires "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This "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, 129 S.Ct. at 1949 (citing and quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955 (internal quotations omitted)).

Plausibility is "context-specific" and takes into account "judicial experience and common sense." Iqbal, 129 S.Ct. at 1950. But plausibility analysis does not license judicial whim; nor does it allow a court to blur the line between dismissal and summary judgment. See Twombly, 550 U.S. at 556, 127 S.Ct. 1955 ("[O]f course, a wellpleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely." (internal quotations omitted)).

In addition, "the circumstances constituting fraud or mistake"—as opposed to "conditions of mind"—must be alleged "with particularity." Fed. R. Civ. Proc. 9(b). Rule 9(b) ensures that defendants have adequate notice of the fraud's "who, what, when, where, and how." Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir.2009). Even if fraud is not "an essential element" of a claim, Rule 9(b) still applies to claims that "are grounded in fraud" (also known as claims that "sound in fraud") and to "averments of fraud." Kearns, 567 F.3d at 1124-25. Allegations that do not meet Rule 9(b) are "disregarded" or "stripped from" the complaint. Id. at 1124.

A complaint that fails to meet these standards will be dismissed. Leave to amend should be given "freely ... when justice so requires." Fed. R. Civ. Proc. 15(a)(2). However, dismissal with prejudice is appropriate if amendment would be "futile." Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir.1990).

III. ALLEGATIONS

The following allegations come from the AC, are assumed true, and are stated in the light most favorable to United Guaranty. No allegations have yet been "stripped" for failure to comply with Rule 9(b).

A. United Guaranty and its business with Countrywide.

United Guaranty provides mortgage insurance, which "shifts some of the risk of default from the lender to the insurer." 112. Mortgage insurance covers the difference between the lender's loss "after foreclosure and sale" of a mortgaged property. ¶ 27.

United Guaranty has extensive experience in mortgage insurance, having sold it "to a wide variety of clients" since 1963. Id. United Guaranty and Countrywide have done business "for over forty years." Id.

During its business relationship with United Guaranty, Countrywide "made specific oral representations" to United Guaranty, such as that "Countrywide had developed stringent underwriting procedures [and that] Countrywide strictly followed those procedures. . . ." ¶ 44-45. Countrywide also provided "Technical Manuals" that represented that Countrywide "rarely underwrote loans that were exceptions to its underwriting guidelines, and, when it did, it required significant documentation to justify the exception." ¶ 46.

Since 1990, United Guaranty has used a "delegated model" for underwriting Countrywide loans. 1129. This means it chose to "rel[y] on Countrywide to represent information on the loans to be insured." Id. Such information includes borrowers' minimum credit scores and the mortgages' loan-to-value ratio (i.e., the amount loaned versus the property value). Id.; 1144. United Guaranty used this information to decide whether to offer insurance on those loans. ¶ 29.

B. The eleven policies in suit.

Countrywide obtained the eleven policies at issue between ...