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Tentative Ruling
Judge Thomas Anderle
Department 3 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

CIVIL LAW & MOTION

Terence Mix et al vs Ing Bank fsb

Case No: 1397068
Hearing Date: Tue Oct 08, 2013 9:30

Nature of Proceedings: Demurrer First Amend.Complt

Demurrer of Defendant to First Amended Complaint Ruling: For the reasons set forth herein, the demurrer of defendant Capital One to the first amended complaint is sustained with leave to amend as to the first through sixth causes of action and is overruled as to the seventh cause of action. Plaintiffs shall file and serve their second amended complaint on or before October 23, 2013. Background: On or about May 3, 2007, plaintiffs Terrence J. Mix and Janet L. Mix executed a series of documents with ING Bank to refinance an existing mortgage loan on their home. (First Amended Complaint [“FAC”], ¶ 6.) (Note: ING Bank, FSB, appears here by its successor by merger, defendant Capital One, N.A.) Among these documents were an interest only adjustable rate note (the “Note”) and a deed of trust (“DOT1”). (FAC, ¶ 6 & exhibits 1, 2.) The DOT1 did not contain a legal description of the property it secured at the time it was executed. (FAC, ¶ 6.) Accompanying the DOT1 was an adjustable rate rider (“Rider1”) Contemporaneous with the execution of the Note and DOT1, ING Bank through its employees and agents delivered to plaintiffs, and plaintiffs executed, a Notice of Right of Rescission (“NRR”). (FAC, ¶ 7 & exhibit 3.) The NRR contained neither a commencement date nor an expiration date. (FAC, ¶ 8.) When plaintiffs executed the loan documents, ING Bank understood and intended that the loan would not be assumable throughout its entire term, including through June 1, 2012. (FAC, ¶ 9.) At the same time, plaintiffs understood that the loan would be assumable throughout its entire term, including through June 1, 2012. (Ibid.) Although ING Bank was required by federal law to provide plaintiffs with a disclosure statement, ING Bank never provided plaintiffs with an adequate and accurate disclosure statement regarding assumption of the loan. (FAC, ¶ 10.) The NRR provided that in the event plaintiffs exercised their right to rescind, ING Bank’s mortgage security interest would be immediately cancelled and that ING Bank would return to plaintiffs any and all money paid by plaintiffs to ING Bank or to anyone else in connection with the mortgage refinance. (FAC, ¶ 11.) The NRR further provided that plaintiffs were required to offer money or property back to ING Bank in exchange for payment of the money, and that in the event that ING Bank did not take possession of any money or property offered by plaintiffs within 20 calendar days after plaintiffs’ offer, plaintiffs could keep the money or property without further obligation. (Ibid.) On February 20, 2008, plaintiffs executed an initial interest adjustable rate rider (“Rider2”) attached to a second deed of trust (the “DOT2”). (FAC, ¶ 12.) The DOT2 is dated May 2, 2007, and is the same as the DOT1 except (1) the DOT2 for the first time contains a legal description of the property it secures and (2) Rider2 contains different loan assumption terms than Rider1. (FAC, ¶ 12 & exhibit 4.) Plaintiffs received for execution Rider2 along with a planned unit development rider (“PUD Rider”) and did not know that Rider2 contained a material amendment to the DOT2 in that it eliminated the assumability of the loan during the first five years of its term (that is, until June 2, 2012). (FAC, ¶ 14.) At no time did ING Bank provide a new disclosure statement concerning this amendment. (Ibid.) In June 2010, plaintiffs reviewed Rider2 for the first time and, believing it to be identical to Rider1, understood for the first time that the loan was not assumable during the first five years of its term. (FAC, ¶ 15.) On December 3, 2010, ING Bank recorded a notice default and election to sell in the Santa Barbara County real estate records. (FAC, ¶ 17.) On or about January 17, 2011, plaintiffs rescinded the refinance mortgage in the manner and as specified in the NRR. Plaintiffs requested in writing that ING Bank return any and all funds paid by plaintiffs to ING Bank, including interest payments from July 1, 2007, through May 2010. (FAC, ¶ 16.) Plaintiffs also offered to tender title to the real property in exchange for the funds, at which time the property had a fair market value significantly above the principal owed by plaintiffs to ING Bank arising out of the mortgage loan. (Ibid.) Since on or about February 7, 2011, ING Bank did not return to plaintiffs the money demanded by them and did not take possession of the real property offered by plaintiffs. (FAC, ¶ 19.) On October 6, 2011, ING Bank acquired title to the real property at a foreclosure sale. (FAC, ¶ 22.) The trustee’s deed conveying title was recorded on October 10, 2011. (FAC, ¶ 22 & exhibit 6.) On April 24, 2012, plaintiffs filed this action. The operative complaint is the FAC, filed on July 23, 2013, which asserts seven causes of action: (1) quiet title; (2) violation of the Truth in Lending Act (15 U.S.C. § 1635(a)); (3) fraud and deceit—denial of right to rescind; (4) fraud and deceit—Rider2; (5) fraudulent representations—misrepresentations in NRR; (6) fraud and deceit—trustee’s sale; and (7) violation of Civil Code section 2924h, subdivision (g). Defendant Capital One now demurs to each of the causes of action of the FAC. Capital One argues that each cause of action is barred by the applicable statute of limitations, that the notice of rescission was untimely, that the fraud causes of action do not sufficiently allege justifiable reliance or resulting damages, and that the claims for quiet title and section 2924h fail as a matter of law. With the exception of agreeing that the FAC is not verified as require for an action to quiet title, plaintiffs oppose the demurrer asserting that each cause of action is adequately alleged and not barred by the statute of limitations. Analysis: “We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed. [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.]” (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6, internal quotation marks omitted.) (1) Request for Judicial Notice Defendant requests that the court take judicial notice of: (exhibit A) the Note; (exhibit B) the DOT; (exhibit C) the notice of default, recorded on December 3, 2010; (exhibit D) the trustee’s deed upon sale, recorded on October 11, 2011; (exhibit E) a grant deed, recorded on July 2, 2013, transferring title in the real property from defendant to a third party; (exhibit F) the summons and complaint in Mix, et al., v. ING Bank, FSB, et al., Santa Barbara County Superior Court case number 1380142, filed on March 30, 2011; (exhibit G) the court’s ruling in case number 1380142 denying plaintiffs’ application for issuance of a preliminary injunction; (exhibit H) a notice of right to rescission, dated May 3, 2007. Exhibits B, C, D and E are all recorded documents. The court will grant judicial notice as to the contents and recording of these documents. (Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1117.) Exhibit A is the Note. The Note is not a recorded document and its contents are alleged by plaintiffs as exhibit 1 to the FAC. Exhibit H is a notice of right of rescission, dated May 3, 2007. This, too, is not a recorded document. Plaintiffs allege a different form of this document as exhibit 3 to the FAC. While defendant’s exhibit H includes the date of the transaction, plaintiffs allege that the date of the transaction was missing from the document and that this date was an alteration by ING Bank. (FAC, ¶ 43.) Neither of these documents is a proper subject for judicial notice and, in the case of exhibit H, is factually contested in the FAC. The court will deny the request for judicial notice as to exhibits A and H. Exhibit F is the complaint in a prior action between the parties. Exhibit G is the court’s ruling on a preliminary injunction in that prior action. While the proceedings in the prior action add to the historical narrative, the complaint in the prior action is not at issue in the demurrer to this action. “A demurrer tests the pleading alone, and not the evidence or the facts alleged.” (City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 459.) Defendant does not argue that the resolution of the prior action constitutes res judicata or collateral estoppel in this proceeding and defendant provides insufficient information for the court to make any such determination. (Cf. Goddard v. Security Title Ins. & Guarantee Co. (1939) 14 Cal.2d 47, 52.) Moreover, “[t]he granting or denying of a preliminary injunction does not constitute an adjudication of the ultimate rights in controversy.” (Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286.) Consequently, the court’s ruling in the prior action is irrelevant to the determination of the sufficiency of plaintiffs’ allegations in this action. Defendant’s request for judicial notice will be denied as to exhibits F and G. (2) Violation of Truth in Lending Act Plaintiffs’ second cause of action is for violation of the federal Truth in Lending Act, title 15 United States Code section 1635(a). “Except as otherwise provided in this section, in the case of any consumer credit transaction (including opening or increasing the credit limit for an open end credit plan) in which a security interest, including any such interest arising by operation of law, is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this title [15 U.S.C. §§ 1601 et seq.], whichever is later, by notifying the creditor, in accordance with regulations of the Bureau, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Bureau, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Bureau, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section.” (15 U.S.C. § 1635(a).) Plaintiffs allege that ING Bank breached section 1635(a) by failing to deliver to plaintiffs disclosure statements that comply with this section. In particular, plaintiffs allege that the NRR was defective by failing to include on the form the commencement date and expiration date of the three-day period for rescission and by failing to provide two copies of the same. (FAC, ¶ 28.) Defendants argue that this claim is barred by the limitations period provided by section 1635. “An obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this chapter [15 U.S.C. §§ 1631 et seq.] have not been delivered to the obligor ….” (15 U.S.C. § 1635(f).) “Consummation means the time that a consumer becomes contractually obligated on a credit transaction.” (12 C.F.R. § 226.2(a)(13) (2013).) Defendants argue that the date plaintiffs became contractually obligated on the loan was May 3, 2007. Even assuming that the documents were noncompliant, plaintiffs’ right of rescission expired on May 3, 2010. Plaintiffs allege that they rescinded the loan on January 17, 2011. (FAC, ¶ 16.) Thus, argues defendant, plaintiffs’ claims based upon this rescission are ineffective. Plaintiffs respond that the consummation of the transaction did not take place until June 2010. Plaintiffs argue that there was no mutual consent to the contract because there was no mutual consent on the assumability of the loan. Plaintiffs understood and intended that the loan would be assumable. (FAC, ¶ 9.) The Note and DOT1 reflect that the loan was assumable. (FAC, exhibits 1, 2.) However, plaintiffs allege that defendants understood and intended that the loan would not be assumable. (FAC, ¶ 9.) Consequently there was no mutual intention and no agreement on whether the loan was assumable at the time the loan documents were signed and the loan funded. According to plaintiffs, the transaction was consummated in June 2010 when plaintiff for the first time understood that that the loan was not assumable during the first five years of its term. (FAC, ¶ 15.) Plaintiffs argue that its allegations of fact must be taken as true for purposes of this demurrer so that no contract was actually formed in 2007. Plaintiffs argue a subtle distinction regarding mistake in the formation of contracts. If both parties have a different understanding as to the identity of the subject matter or if the subject matter or something essential to performance ceases to exist before the agreement is reached, there is no contract. (French v. Construction Laborers Pension Trust (1975) 44 Cal.App.3d 479, 488.) For example, in Balistreri v. Nevada Livestock Production Credit Association (1989) 214 Cal.App.3d 635, the plaintiffs signed a deed of trust in favor of the defendant in order to help their son get a loan. (Id. at p. 637.) The plaintiffs believed that the deed of trust covered a house in Sebastopol, which they owned with their son and where he resided. (Ibid.) In fact, the deed of trust encumbered the plaintiffs’ house in Petaluma where they resided. (Id. at p. 638.) The Court of Appeal held that the deed of trust was made under a mutual mistake of the parties, each believing that that the deed of trust encumbered different property. (Id. at p. 641.) In the absence of agreement as to the property to be encumbered, there was no “consensus ad idem” and “therefore no binding contract.” (Id. at p. 642, internal quotation marks and citation omitted.) “Mutual assent is necessary for contract formation. [Citations.] ‘Mutual assent is determined under an objective standard applied to the outward manifestations or expressions of the parties, i.e., the reasonable meaning of their words and acts, and not their unexpressed intentions or understandings.’ [Citation.]” (Chicago Title Insurance Co. v. AMZ Insurance Services, Inc. (2010) 188 Cal.App.4th 401, 422.) Thus, “uncommunicated subjective intent is irrelevant. [Citations.]” (Reigelsperger v. Siller (2007) 40 Cal.4th 574, 579.) “Under the objective test, a ‘meeting of the minds’ is unnecessary, and a party may be bound though he misunderstood the terms of a proposed contract and actually had a different undisclosed intention.” (Myers v. Carter (1963) 215 Cal.App.2d 238, 241.) “Nevertheless, … ‘There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and [¶] (a) neither party knows or has reason to know the meaning attached by the other; or [¶] (b) each party knows or each party has reason to know the meaning attached by the other.’ Under these rules no contract is formed if neither party is at fault or if both parties are equally at fault. [Citation.]” (Merced County Sheriff’s Employees’ Assn. v. County of Merced (1987) 188 Cal.App.3d 662, 670.) Under these standards, plaintiffs do not allege mutual mistake. As of May 3, 2007, the written agreements (the Note and the DOT1, as modified by Rider1) contained the terms of agreement that plaintiffs allege they understood as the agreement, in particular, that the loan was assumable from its inception. Plaintiffs further allege that Rider2 “contained a material amendment” to DOT2 “that eliminated assumability of the loan during the first 5 years of its term.” (FAC, ¶ 14.) Under these allegations, the undisclosed intention of ING Bank that the loan would not be assumable is irrelevant because the objective manifestation of agreement, namely, acceptance and funding of the loan following plaintiffs’ execution of the Note and DOT1, provides the objective manifestation of mutual assent necessary to form the contract. The allegation that Rider2 amended the agreement necessarily implies that that the agreement contained the terms set forth in the Note and DOT1 both as written and as understood and intended by plaintiffs. Consequently, plaintiffs have not alleged facts sufficient to show that no contract was formed when the parties executed the original loan documents and funded the loan on May 3. 2007. As a result, the allegations of plaintiffs’ FAC show that plaintiffs were contractually obligated under the terms of the loan as of May 3, 2007. Thus, plaintiffs’ right to rescind under title 15 United States Code section 1635(a) expired on May 3, 2010, prior to when plaintiffs allege having rescinded the loan agreement. Accordingly, plaintiffs have failed to state facts sufficient to state a cause of action for violation of section 1635(a) and defendant’s demurrer to the second cause of action will be sustained. (3) Fraud Claims Plaintiffs’ third through sixth causes of action all assert claims of fraud. “The elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.) “In California, fraud must be pled specifically; general and conclusory allegations do not suffice.” (Id. at p. 645.) Defendant argues that plaintiffs have not alleged the elements of reliance and damages. Plaintiffs assert that the third and fourth causes of action state claims for fraud by concealment. “There are ‘four circumstances in which nondisclosure or concealment may constitute actionable fraud: (1) when the defendant is in a fiduciary relationship with the plaintiff; (2) when the defendant had exclusive knowledge of material facts not known to the plaintiff; (3) when the defendant actively conceals a material fact from the plaintiff; and (4) when the defendant makes partial representations but also suppresses some material facts. [Citation.]’ [Citation.]” (LiMandri v. Judkins (1997) 52 Cal.App.4th 326, 336.) The third cause of action alleges concealment of the alteration of the NRR. (FAC, ¶ 43.) Plaintiffs effectively concede that they do not expressly allege reliance and, instead, plaintiffs argue in opposition that the court should infer from the FAC that if plaintiffs had known that defendant had altered the NRR for the express purpose of denying plaintiffs the three-year rescission period, plaintiffs would not have waited until January 17, 2011, to exercise their right to rescind and would have done so at a substantially earlier date. (Opposition, at p. 15.) The court does not make this inference for two reasons. First, as noted above, fraud must be alleged with particularity. Plaintiffs’ allegations supporting this element inferentially are conclusory. Second, this inference does not reasonably follow from the allegations in the FAC. Plaintiffs assert that the alterations to the NRR were without their knowledge or consent and thus ineffective for all purposes. Because the alterations made to the NRR were legally ineffective, plaintiffs’ three year time period in which to rescind was unaffected by the alterations. Plaintiffs first became aware of their reason for rescinding when they inspected the loan documents in June 2010, after the expiration of the three year period in May 2010. It does not follow that if plaintiffs had earlier learned that ING Bank had altered the NRR to fill in the date of the transaction and of the expiration date for rescission that plaintiffs would have rescinded within the statutory time period. The demurrer to the third cause of action will be sustained. Plaintiffs’ fourth cause of action is for concealment of the terms of Rider2 by not disclosing that Rider2 made a material alteration to the assumption terms of the loan. (FAC, ¶ 55.) Again, plaintiffs effectively concede that they have not expressly alleged reliance and argue that the court should infer that had plaintiffs’ known the truth, i.e., the difference between Rider1 and Rider2, plaintiffs would not have signed new loan documents. (Opposition, at p. 16.) Although this inference has a greater connection to plaintiffs’ claims than the inference argued with respect to the third cause of action, this inference is still incomplete within the specific pleading required for a fraud claim. Plaintiffs allege that the DOT2 and Rider2 were presented for signature, but there are no facts alleged which show what was represented to plaintiffs in presenting the documents for signature. In particular, there are no facts alleged as to why new documents were needed. Absent an explanation of the circumstances in which the documents were presented, the court cannot infer that plaintiffs’ reasonably relied upon those circumstances to explain plaintiffs’ execution of documents containing materially different terms. Plaintiffs have not adequately alleged reliance in this cause of action. The demurrer to the fourth cause of action will be sustained. Plaintiffs’ fifth cause of action is for fraudulent misrepresentations regarding plaintiffs’ ability to rescind as stated in the NRR. As discussed above, plaintiffs’ claim for breach of defendant’s obligation to accept rescission, explained by the NRR, fails because the rescission rights were not exercised within the longest of the time periods permitted by law. Thus, even if as alleged by plaintiffs that ING Bank had no intention to perform according to the terms of the NRR, plaintiffs allege no damages resulting from those fraudulent misrepresentations. Accordingly, the demurrer to the fifth cause of action will be sustained. Plaintiffs’ sixth cause of action is for fraud and deceit during the foreclosure auction. Plaintiffs allege that defendant made a credit bid of $1,907,372.19 at the foreclosure auction in order to discourage other bidders where defendant believed the fair market value was only $1,700,000 and defendant actually reported purchasing the property for a credit payment of $1,445,000. (FAC, ¶ 68.) Plaintiffs argue this constitutes fraud and deceit. “Reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff’s conduct which altered his or her legal relations, and when without such misrepresentation or nondisclosure he or she would not, in all reasonable probability, have entered into the contract or other transaction.” (Alliance Mortgage Co. v. Rothwell (1995) 10 Cal.4th 1226, 1239.) Here, plaintiffs do not allege their own reliance upon the truth of the $1,907,372.19 bid, but argue that there was reliance by other bidders. (Opposition, at p. 17.) Reliance by other bidders does not satisfy the element of reliance in a cause of action for fraud brought by plaintiffs. Thus, plaintiffs have not alleged a cause of action sounding in fraud and the demurrer will be sustained to this cause of action. (4) Violation of Civil Code Section 2924h Basing their claim on the same facts as their sixth cause of action for fraud, plaintiffs’ seventh cause of action is for violation of Civil Code section 2924h, subdivision (g). “It shall be unlawful for any person, acting alone or in concert with others, (1) to offer to accept or accept from another, any consideration of any type not to bid, or (2) to fix or restrain bidding in any manner, at a sale of property conducted pursuant to a power of sale in a deed of trust or mortgage.” (Civ. Code, § 2924h, subd. (g).) Defendant argues that plaintiffs fail to establish their standing to assert this claim and that plaintiffs’ allegation that the property had a fair market value of at least $2,000,000 contradicts this claim. Civil Code section 2924h, subdivision (g) “seeks to protect property owners in default by ensuring fair and open bidding and the benefits of competition.” (Lo v. Jensen (2001) 88 Cal.App.4th 1093, 1095.) A debtor who suffers from price manipulation at a foreclosure auction in violation of section 2924h may seek redress by legal action against those violating the statute. (Id. at p. 1098.) Plaintiffs have standing to assert this cause of action. Plaintiffs allege that defendant believed the fair market value was only $1,700,000. (FAC, ¶ 68.) Plaintiffs further allege that the property had an actual value of $2,000,000. (FAC, ¶ 70.) From these allegations, defendant argues that plaintiffs have suffered no damages for violation of this section. Plaintiffs’ claim, however, is that although defendant bid $1.9 million at the auction, in fact, defendant claimed to have paid only $1.4 million exposing plaintiffs to tax liability based on the difference. (FAC, ¶ 68-69.) To the extent that plaintiffs allege that defendant bid $1.9 million at the auction to discourage other bidders and yet, for all other purposes, the auction bid was treated as $1.4 million, plaintiffs state a claim for violation of section 2924h, subdivision (g). The demurrer to the seventh cause of action will be overruled. (5) Quiet Title Plaintiffs’ first cause of action is for quiet title based upon the effectiveness of the rescission on January 17, 2011. (FAC, ¶ 23.) As discussed above, plaintiffs have not established that they had a right to rescind on January 17, 2011. Because plaintiffs have not alleged facts which support a right to rescind, plaintiffs’ claim of title based upon that rescission similarly fails. The demurrer to the first cause of action will be sustained. (6) Leave to Amend This is the first challenge to plaintiffs’ pleadings. Plaintiffs will be given leave to amend to state their best case. (7) Defendant’s Motion to Strike Plaintiffs’ Opposition In reply, defendant moves to strike pages 16 through 23 of the opposition as exceeding the page limit set forth in Rules of Court, rule 3.1113(d): “Except in a summary judgment or summary adjudication motion, no opening or responding memorandum may exceed 15 pages.” Plaintiffs’ opposition is 23 pages long. “A memorandum that exceeds the page limits of these rules must be filed and considered in the same manner as a late-filed paper.” (Rules of Court, rule 3.1113(g).) Defendant has made a thorough reply to the opposition on the merits. The court will consider the oversized opposition and will deny defendant’s request for further briefing. The court also notes that plaintiffs’ opposition contains a table of authorities but does not contain a table of contents. A table of contents is required and is helpful to the court. (Rules of Court, rule 3.1113(f).) Plaintiffs are reminded of their obligations to follow all of the Rules of Court regarding formatting and page length. (See Rules of Court, rule 2.30(b).) Finally, the court notes that defendant has lodged with the court an appendix of federal authorities. Federal cases which are published or available online need not be lodged with the court. (Rules of Court, rule 3.1113(i).)