Opinion
No. C 10-0367 CRB.
May 18, 2010
ORDER
Pro se Plaintiffs John and Becky Geist seek an injunction that would prevent Defendants from conducting a foreclosure sale of their home in Marin County. Now pending before the Court is Defendants' Motion to Dismiss the Geists' Complaint.
For the reasons discussed below, the Court GRANTS, with prejudice, Defendants' Motion to Dismiss Plaintiffs' federal claims. The Court declines to exercise supplemental jurisdiction over Plaintiffs' remaining state law claims. See 28 U.S.C. § 1367(c)(3). Accordingly, those claims are dismissed for lack of subject matter jurisdiction. If they so desire, Plaintiffs may re-file their state contract law claims in California Superior Court.
BACKGROUND
In July 2006, Plaintiffs John and Becky Geist obtained a home equity line of credit from Washington Mutual Bank. Compl. ¶ 10. The loan, which was subsequently acquired by Defendant JP Morgan Chase, was secured by a Deed of Trust ("DOT") encumbering property owned by the Geists in San Rafael, California. Id. The DOT contained a "Power of Sale" clause permitting Defendant JP Morgan Chase to institute non-judicial foreclosure proceedings in the event of a default. Id.
On or about September 2009, Defendants invoked their power of sale, and a foreclosure sale was set for January 27, 2010. Compl. ¶ 8. Plaintiffs filed the current action on January 26, 2010. In their Complaint, they ask this Court to declare the DOT's "Power of Sale" clause invalid and to issue an injunction barring the foreclosure sale, which has yet to occur.
Now pending before the Court is Defendants' Motion to Dismiss Plaintiffs' Complaint.
LEGAL STANDARD
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed against a defendant for failure to state a claim upon which relief can be granted against that defendant. A motion to dismiss under Rule 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal "is proper only where there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory." Id. A motion to dismiss should be granted if a plaintiff fails to plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007).
DISCUSSION
Plaintiffs allege two federal law and several state contract law causes of action. Neither of Plaintiffs' federal claims is legally cognizable. Accordingly, those claims are dismissed, with prejudice. Plaintiffs' remaining state law claims, including, for example, Plaintiffs' claim that the relevant power of sale clause is unconscionable and therefore void, are dismissed for lack of subject matter jurisdiction. Plaintiffs may re-file these claims in California Superior Court.
A. Plaintiffs' First Cause of Action: Deprivation of Due Process Rights
In their first cause of action, Plaintiffs allege that the non-judicial foreclosure proceedings instituted by Defendants deprived them of their Fourteenth Amendment rights to due process. As explained below, it is well-settled law that non-judicial foreclosure proceedings do not involve "state action," even though such proceedings are regulated by state law. See Apao v. Bank of New York, 324 F.3d 1091 (9th Cir. 2003). Because the Fourteenth Amendment applies only to actions by state actors, Plaintiffs' Fourteenth Amendment claim fails as a matter of law.
"The Fourteenth Amendment provides: `No state shall . . . deprive any person of life, liberty, or property, without due process of law.' It thus shields citizens from unlawful governmental actions, but does not affect conduct by private entities." See id. at 1093. To survive a motion to dismiss a Fourteenth Amendment claim, a plaintiff must therefore allege facts sufficient to establish that the defendant's purportedly unlawful conduct qualifies as "state action." Id.
Here, Plaintiffs assert that the non-judicial foreclosure proceedings implemented by Defendants are state actions because they are "conducted under the auspices of State law." Opp. at 6. In Plaintiffs' view, "the state of California, having enacted statutes allowing nonjudicial foreclosure, is complicit in allowing banks to operate outside the courts and take private property without a hearing." Id. In short, Plaintiffs argue that Defendants' use of non-judicial foreclosure proceedings qualifies as "state action" because California law both authorizes non-judicial foreclosures and regulates the manner in which such foreclosures are conducted.
This argument was expressly rejected by the Ninth Circuit in Apao v. Bank of New York, a case materially indistinguishable from this one. See 324 F.3d at 1093. In Apao, the plaintiff challenged, on due process grounds, the validity of the "foreclosure and sale [of her home] under procedures provided for in her mortgage contract and authorized under Hawaii's non-judicial foreclosure statute." Id. at 1092. Like the Geists, Apao argued that the state's regulation of non-judicial foreclosure proceedings rendered those proceedings state actions. Id. at 1094.
The Ninth Circuit concluded otherwise, holding that "[w]hile the bar for state action is low, non-judicial foreclosure procedures like Hawaii's nevertheless slip under it for want of direct state involvement." Id. at 1095 (internal citation omitted). In reaching this conclusion, the court relied on the fact that Hawaii's non-judicial foreclosure statute "neither encourage[d] nor compe[lled] the [non-judicial foreclosure] procedure, but merely recognize[d] its legal effect." Id. at 1094. The court also noted that "self-help foreclosure remedies have existed since early in the common law, and thus one cannot say that the power of foreclosure is one traditionally belonging to the government." Id.
Like Hawaii's non-judicial foreclosure statute, the relevant California statutes neither "encourage" nor "compel" the use of non-judicial foreclosure procedures, but "merely recognize [their] legal effect." See id.; see also Cal. Civ. Code §§ 2924- 2924i; and Garfinkle v. Superior Ct., 21 Cal. 3d 268, 276 (1978) (holding that, because California's "nonjudicial foreclosure statutes do not . . . compel inclusion of a power of sale in a deed of trust or provide for such a power of sale when one has not been included by the parties," the statutes do not render non-judicial foreclosure proceedings state actions).
Apao therefore squarely controls this case and compels a finding that Defendants' use of non-judicial foreclosure procedures does not qualify as "state action." Accordingly, Plaintiffs' Fourteenth Amendment claim fails as a matter of law.
B. Plaintiffs' Second Cause of Action: Cognovit Note
Plaintiffs next allege that the "Power of Sale" clause in the DOT is "akin in performance to an [unconstitutional] cognovit note and/or confession of judgment." Compl. ¶ 22. This claim also fails as a matter of law.
A cognovit is "an ancient legal device by which the debtor consents in advance to the holder's obtaining a judgment without notice or hearing, and possibly even with the appearance, on the debtor's behalf, of an attorney designated by the holder." D. H. Overmyer Co. Inc., of Ohio v. Frick Co., 405 U.S. 174, 176 (1972). "It is written authority of a debtor and direction by him for the entry of judgment against him if the obligation set forth in the note is not paid when due. . . . [I]t cuts off every defense which the maker of the note may otherwise have. It likewise cuts off all rights of appeal from any judgment taken on it." Id. at 176 n. 2. A cognovit may be unconstitutional under certain circumstances. Id. at 185.
Plaintiffs' claim fails in this case because the power of sale clause at issue is not a cognovit. The relevant clause allows the Defendants to sell the Geists' property in the event of the Geists' default on their home equity loan. It does not permit the Defendants to obtain a judgment against the Plaintiffs from a court of law without notice or a hearing. Nor does it preclude Plaintiffs from challenging the foreclosure sale in a judicial proceeding or prevent Plaintiffs from raising any defenses they may have to the validity of the debt contract. It similarly fails to cut off Plaintiffs' rights to appeal any judgment that Defendants' obtain through a judicial proceeding. In short, the power of sale clause is not a cognovit. Plaintiffs' claim therefore fails.
C. Plaintiffs' Remaining Causes of Arise
Plaintiffs' remaining causes of action arise under California law. These claims include Plaintiffs' assertions that the power of sale clause is unenforceable because (1) it is both procedurally and substantively unconscionable, and (2) Defendants' obtained Plaintiffs' consent to it through fraud and/or by making material misrepresentations. The Court declines to exercise supplemental jurisdiction over these claims and therefore dismisses them for lack of subject matter jurisdiction.
The Court's subject matter jurisdiction over this action was initially premised on the Geists' constitutional claims. See Compl. at 1. Having dismissed those claims with prejudice, federal question jurisdiction under 28 U.S.C. § 1331 no longer exists. In such circumstances, the Court may decline to exercise supplemental jurisdiction over any remaining state and local law claims. See 28 U.S.C. § 1367(c)(3) ("The district court may decline to exercise supplemental jurisdiction . . . if . . . the district court has dismissed all claims over which it has original jurisdiction. . . ."). The Court chooses to do so here. Accordingly, the Geists' remaining claims are dismissed for lack of subject matter jurisdiction.
CONCLUSION
For the reasons discussed above, the Court:
(1) GRANTS Defendants' Motion to Dismiss with respect to Plaintiffs' federal claims;
(2) DISMISSES Plaintiffs' remaining claims for lack of subject matter jurisdiction.