Opinion
Case No. 2:22-cv-05006-MCS-PVC
2022-10-31
Patrick NAZEMI, Plaintiff, v. SPECIALIZED LOAN SERVICING, LLC et al., Defendants.
Ronald D. Tym, The Tym Firm, Agoura Hills, CA, for Plaintiff. Andrew Jonathan Mase, Katherine K. Meleski, Ryan Firm APC, Irvine, CA, for Defendants Specialized Loan Servicing LLC, Computershare Holdings, Inc.
Ronald D. Tym, The Tym Firm, Agoura Hills, CA, for Plaintiff. Andrew Jonathan Mase, Katherine K. Meleski, Ryan Firm APC, Irvine, CA, for Defendants Specialized Loan Servicing LLC, Computershare Holdings, Inc.
ORDER RE: DEFENDANTS' MOTION TO DISMISS FIRST AMENDED COMPLAINT UNDER FED. R. CIV. P. 12(B)(6) (ECF NO. 16)
MARK C. SCARSI, UNITED STATES DISTRICT JUDGE
Defendants Specialized Loan Servicing, LLC and Computershare Holdings, Inc. move to dismiss the First Amended Complaint of Plaintiff Patrick Nazemi. (Mot., ECF No. 16.) Plaintiff opposes the motion, (Opp'n, ECF No. 17), and Defendants filed a reply, (Reply, ECF No. 18). The Court heard argument on October 24, 2022. (Mins., ECF No. 19.)
I. BACKGROUND
According to the First Amended Complaint, Plaintiff obtained two loans secured by his home. (FAC ¶¶ 10, 12, ECF No. 10.) Due to the economic crisis of 2008, Plaintiff became unable to pay the loan and ceased making payments. (Id. ¶ 11.) Beginning in February 2013, Defendants became the servicer of one of the two loans. (Id. ¶ 13.) In March 2014, the lender of the other loan foreclosed on Plaintiff's home. (Id. ¶ 12.) Immediately after the foreclosure sale, Defendants wrote off the loan as a loss for accounting purposes but did not file with the Internal Revenue Service ("IRS") the cancellation of debt Form 1099-C until early 2022. (Id. ¶¶ 14, 18-19.) Defendants reported the discharge of $2,549,296.21 in debt with $810,443.75 in interest. (Id. ¶ 20(c).) After receiving Defendants' Form 1099-C filing, the IRS attributed $1,738,853.46 of income to Plaintiff for the 2021 tax year. (Id. ¶ 22.) Due to a change in tax law taking effect in 2021, Plaintiff was only able to exclude up to $750,000 of the cancelled debt. (Id. ¶ 24.) Had Defendants filed the Form 1099-C for the 2014 tax year, Plaintiff would have been entitled to exclude up to $2,000,000 of cancelled debt. (Id.) This increased tax liability "caused Plaintiff serious physical harm in the form of exacerbation of a serious medical condition thereby accelerating cognitive decline, high levels of anxiety, sleeplessness, night sweats, depression, and stroke-like symptoms, as well as other physical ailments." (Id.) Accordingly, Plaintiff brings claims of intentional and negligent misrepresentation and fraudulent or unfair business practices under the California Unfair Competition Law ("UCL"). (See generally id. ¶¶ 9-39.)
II. LEGAL STANDARD
Federal Rule of Civil Procedure 12(b)(6) allows an attack on the pleadings for "failure to state a claim upon which relief can be granted." "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937.
The determination of whether a complaint satisfies the plausibility standard is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679, 129 S.Ct. 1937. Generally, a court must accept the factual allegations in the pleadings as true and view them in the light most favorable to the plaintiff. Park v. Thompson, 851 F.3d 910, 918 (9th Cir. 2017); Lee v. City of Los Angeles, 250 F.3d 668, 679 (9th Cir. 2001). But a court is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Similarly, "conclusory allegations of law and unwarranted inferences are insufficient to avoid a Rule 12(b)(6) dismissal." Turner v. City & County of San Francisco, 788 F.3d 1206, 1210 (9th Cir. 2015) (internal quotation marks omitted).
Averments of fraudulent conduct are subject to the heightened pleading standard of Rule 9(b). Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir. 2003). To meet Rule 9(b), a plaintiff must "state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b). The complaint must identify the "who, what, when, where, and how" of the fraudulent misconduct, "as well as what is false or misleading about" it, and "why it is false." Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (internal quotation marks omitted).
III. DISCUSSION
Defendants argue that Plaintiff fails to plausibly allege any of his claims for relief. For the reasons set forth below, the Court agrees.
A. Misrepresentation Claims
Plaintiff's misrepresentation claims both suffer the same defect. Plaintiff fails to state a claim for intentional or negligent misrepresentation because Defendants owed no duty to avoid causing Plaintiff's emotional injury.
Under California law, a claim of negligent misrepresentation requires a showing of: "(1) a misrepresentation of a past or existing material fact, (2) made without reasonable ground for believing it to be true, (3) made with the intent to induce another's reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage." Ragland v. U.S. Bank Nat'l Ass'n, 209 Cal. App. 4th 182, 196, 147 Cal.Rptr.3d 41 (2012). And to plead a claim of intentional misrepresentation under California law, a plaintiff must plead: "(1) a misrepresentation, (2) knowledge of falsity, (3) intent to induce reliance, (4) actual and justifiable reliance, and (5) resulting damage." Chapman v. Skype, Inc., 220 Cal. App. 4th 217, 230-31, 162 Cal.Rptr.3d 864 (2013). While duty is not an explicit element in either negligent or intentional misrepresentation, a defendant is liable to a third person injured as a result of the misrepresentation if the defendant owes that person a duty of care. See Randi W. v. Muroc Joint Unified Sch. Dist., 14 Cal. 4th 1066, 1076, 60 Cal.Rptr.2d 263, 929 P.2d 582 (1997); Murphy v. BDO Seidman, LLP, 113 Cal. App. 4th 687, 697, 6 Cal.Rptr.3d 770 (2003).
Normally, a plaintiff "must plead that he or she actually relied on the misrepresentation." Mirkin v. Wasserman, 5 Cal. 4th 1082, 1088, 23 Cal.Rptr.2d 101, 858 P.2d 568 (1993). However, California law imposes a duty of care to third parties where the misrepresentation "would present a substantial, foreseeable risk of physical injury" to a third party. Randi W., 14 Cal. 4th at 1081, 60 Cal.Rptr.2d 263, 929 P.2d 582. This exception does not apply where the plaintiff alleges "only economic losses." Gawara v. U.S. Brass Corp., 63 Cal. App. 4th 1341, 1354, 74 Cal.Rptr.2d 663 (1998). Rather, "actual physical harm must result." Friedman v. Merck & Co., 107 Cal. App. 4th 454, 477, 131 Cal.Rptr.2d 885 (2003).
Defendants argue that Randi W. does not apply here because Plaintiff's alleged physical injuries are disanalogous to Randi W. and its progeny. (Reply 3-6.) While Plaintiff asserts that the Randi W. standard applies, he fails to address the obvious factual distinctions between the instant case and Randi W., which involved allegations of a school administrator sexually abusing a student. 14 Cal. 4th at 1071, 60 Cal.Rptr.2d 263, 929 P.2d 582. Further, the Randi W. court specifically noted strong public policy considerations meriting the extension of a duty of care, including that "[o]ne of society's highest priorities is to protect children from sexual or physical abuse." Id. at 1078-79, 60 Cal.Rptr.2d 263, 929 P.2d 582. Plaintiff's First Amended Complaint does not present either analogous factual circumstances or strong policy considerations as in Randi W. Nonetheless, in erring on the side of caution, the Court assumes Randi W. applies.
Friedman v. Merck & Co. is instructive. There, the California Court of Appeal considered, inter alia, whether the plaintiff stated a claim for negligent misrepresentation. Friedman, 107 Cal. App. 4th at 475-87, 131 Cal.Rptr.2d 885. The plaintiff, a strict ethical vegan, alleged that the defendant misrepresented the chemical composition of a tuberculosis ("TB") test as "vegan safe" or "vegan friendly." Id. at 461, 131 Cal.Rptr.2d 885 (cleaned up). But after learning that the TB test involved injecting the plaintiff with a bovine serum, the plaintiff alleged serious emotional and subsequent physical injuries, "including but not limited to, injuries to his body, physical health, strength and activity and shock and injuries to his nervous system, and . . . severe physical and mental pain and anguish in connection therewith, all of which have caused and continue to cause [him] great mental, physical, spiritual, emotional and nervous pain and suffering." Id. at 461-62, 131 Cal.Rptr.2d 885 (alteration in original). Put simply, the plaintiff "was so upset he became physically ill." Id. at 480, 131 Cal.Rptr.2d 885. Finding that no physical injury "flowed directly from" or "was a direct result of" the misrepresentation, the Court of Appeal held that the plaintiff failed to state a cause of action for negligent misrepresentation. Id. at 480-81, 131 Cal.Rptr.2d 885. Similarly, Plaintiff here fails to plead any facts indicating a duty owed to him because "the gist of his claim is for emotional injury," not direct physical harm resulting from the false tax filing. Id. at 487, 131 Cal.Rptr.2d 885. Thus, as in Friedman, Plaintiff fails to allege intentional or negligent misrepresentation.
To argue that Defendants owed him a duty of care, Plaintiff points to Biakanja v. Irving, 49 Cal. 2d 647, 649, 320 P.2d 16 (1958), which involved a third party's economic injury arising from the negligent performance of a contract. (Opp'n 11-13.). Courts apply the Biakanja factors to determine whether an exception to the economic loss rule is warranted when an injured third party is not in privity of contract. See Centinela Freeman Emergency Med. Assocs. v. Health Net of Cal., Inc., 1 Cal. 5th 994, 1013-14, 209 Cal.Rptr.3d 280, 382 P.3d 1116 (2016). Here, Plaintiff claims damages "in excess of $10,000,000 because of the physical injury done to him and the reduction in his quality of life as a result," which is not a purely economic loss. (FAC ¶¶ 26, 30 (emphases added).) Given Biakanja's limited application, see United Guar. Mortg. Indem. Co. v. Countrywide Fin. Corp., 660 F. Supp. 2d 1163, 1180 n.18 (2009) (citing Stop Loss Ins. Brokers, Inc. v. Brown & Toland Med. Grp., 143 Cal. App. 4th 1036, 1042-43, 49 Cal. Rptr.3d 609 (2006)), the Court disregards Plaintiff's Biakanja argument.
B. Fraudulent or Unfair Business Acts or Practices
The UCL prohibits "unlawful, unfair or fraudulent business act[s] or practice[s]." Cal. Bus. & Prof. Code § 17200. "Each of these three adjectives captures a separate and distinct theory of liability." Rubio v. Cap. One Bank, 613 F.3d 1195, 1203 (9th Cir. 2010) (internal quotation marks omitted). A business practice can violate one or each of the three prongs. Berryman v. Merit Prop. Mgmt., Inc., 152 Cal. App. 4th 1544, 1554, 62 Cal. Rptr.3d 177 (2007). The UCL's coverage is "sweeping, embracing anything that can properly be called a business practice and that at the same time is forbidden by law." Cel-Tech Commc'ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 180, 83 Cal. Rptr.2d 548, 973 P.2d 527 (1999) (internal quotation marks omitted). Despite the UCL's breadth, Plaintiff cannot plead around an absolute bar to relief simply by recasting the cause of action as one for unfair competition. Id. at 182, 83 Cal. Rptr.2d 548, 973 P.2d 527.
1. "Fraudulent" Prong
To state a claim under the "fraudulent" prong of the UCL, Plaintiff must allege that the conduct is likely to deceive members of the public, which is evaluated from the vantage of a reasonable consumer. Freeman v. Time, Inc., 68 F.3d 285, 289 (9th Cir. 1995). A plaintiff must plead that there is a probability "that a significant portion of the general consuming public or of targeted consumers, acting reasonably in the circumstances, could be misled." Lavie v. Procter & Gamble Co., 105 Cal. App. 4th 496, 508, 129 Cal.Rptr.2d 486 (2003). UCL fraud is distinct from common law fraud and does not require a showing of intent, scienter, actual reliance, or damage. See id. While fraud is not an essential element of a UCL claim, the heightened pleading standard of Rule 9(b) applies. See Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009).
Plaintiff, by referencing the underlying conduct of filing a false Form 1099-C, alleges that "[t]he acts of Defendants are fraudulent," (FAC ¶ 35), a legal conclusion that is not entitled to the presumption of truth, see Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. Plaintiff explains that "Defendants, through their acts of unfair competition, have received money in the form of tax benefits to which they are not entitled at the expense of Plaintiff and other borrowers who have improperly incurred tax liability." (Id. ¶ 37.) And absent injunctive relief, "Plaintiff and other members of the public will continue to be damaged by Defendants' unfair competition." (Id. ¶ 38.) However, it is unlikely that Defendants' allegedly false Forms 1099-C would deceive members of the public. For one, filing a false tax form is a deception against the IRS, not Plaintiff or the public. Further, a reasonable debtor (i.e., consumer) who knows or believes that a 1099-C event has occurred would expect an increase in attributed income for that tax year. Where no Form 1099-C has been filed, it would be unreasonable for a discharged debtor, who enjoyed a liability-free discharge of debt for several years, to later assert deceit despite knowing or believing that the IRS should have already attributed the income. And given the heightened pleading standard for actions sounding in fraud, see Vess, 317 F.3d at 1103-05, Plaintiff fails to state a UCL claim under the "fraudulent" prong.
2. "Unfair" Prong
When a business competitor brings a theory of anticompetitive business practices in violation of the UCL, California courts consider whether the conduct "threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition." Cel-Tech, 20 Cal. 4th at 187, 83 Cal.Rptr.2d 548, 973 P.2d 527; see id. at 186-87 & n.12, 83 Cal.Rptr.2d 548, 973 P.2d 527; accord Graham v. Bank of Am., N.A., 226 Cal. App. 4th 594, 612, 172 Cal.Rptr.3d 218 (2014). But in consumer actions, California courts have split on a single definition of unfair business practices. See Graham, N.A., 226 Cal. App. 4th at 612-13, 172 Cal.Rptr.3d 218. As the Ninth Circuit noted, courts consider "(1) whether the challenged conduct is 'tethered to any underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law," (2) "whether the practice is 'immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,' " or (3) "whether the practice's impact on the victim outweighs 'the reasons, justifications and motives of the alleged wrongdoer.' " Doe v. CVS Pharmacy, Inc. 982 F.3d 1204, 1214-15 (9th Cir. 2020) (quoting Durell v. Sharp Healthcare, 183 Cal. App. 4th 1350, 1366, 108 Cal.Rptr.3d 682 (2010), and Morgan v. AT&T Wireless Servs., Inc., 177 Cal. App. 4th 1235, 1254, 99 Cal.Rptr.3d 768 (2009)).
Plaintiff does not clearly invoke a consumer-based or business competitor-based theory for his UCL claim. (See FAC ¶¶ 31-39.) But because Plaintiff makes no allegation that he is or will be in direct competition with Defendants' loan servicing business, the Court construes Plaintiff's First Amended Complaint as bringing a consumer action.
Plaintiff fails to address any of the applicable "unfair" definitions in his First Amended Complaint, instead making a singular, conclusory allegation of law that "[t]he acts are also unfair within the meaning of the [UCL]." (Id. ¶ 36.) In any event, the Court applies each of the tests defining an unfair business practice and finds that Plaintiff has failed to state a claim.
As to the immorality test, Plaintiff's First Amended Complaint does not invoke the applicable legal standard. Instead, Plaintiff mentions the test in passing in his opposition brief without analysis. While counsel did advance a theory at the hearing that Defendants' conduct satisfied the immorality test of the "unfair" prong because filing false tax forms is patently unfair, the Court will not reach into and beyond the opposition brief to sustain an unpleaded or underpleaded claim. See Schneider v. Cal. Dep't of Corr., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998).
As to the tethering test, Plaintiff advances no factual allegations to support any claim that Defendants' conduct violates "any underlying constitutional, statutory or regulatory provision, or that it threatens an incipient violation of an antitrust law, or violates the policy or spirit of an antitrust law." Doe, 982 F.3d at 1214-15 (internal quotation marks omitted). And as to the balancing test, Plaintiff fails to consider the alleged unfair practice's "impact on its alleged victim" against "the reasons, justifications and motives of the alleged wrongdoer." Id. at 1215 (internal quotation marks omitted). The failure to plead these issue leaves the Court "to guess what conduct Plaintiff[ ] alleged satisfied the 'unfair' prong of the UCL." Id. Plaintiff's bare, "conclusory recitation of one of the UCL's legal standards does not clarify" how Defendants' conduct satisfies the tethering or the balancing tests defining the "unfair" prong. Id.
Plaintiff makes no mention of any of the applicable standards defining "unfair" practices. Even applying the allegations to those tests in the light most favorable to him, Park, 851 F.3d at 918; Lee, 250 F.3d at 679, Plaintiff has failed to state a claim under the "unfair" prong.
3. "Unlawful" Prong
A UCL claim under the "unlawful" prong "borrows violations of other laws and treats" them as unlawful business practices "independently actionable under section 17200." Farmers Ins. Exch. v. Superior Ct., 2 Cal. 4th 377, 383, 6 Cal. Rptr.2d 487, 826 P.2d 730 (1992) (internal quotation marks omitted). Thus, to state a UCL claim, Plaintiff must plead a violation of another statute or common law. Krantz v. BT Visual Images, L.L.C., 89 Cal. App. 4th 164, 178, 107 Cal.Rptr.2d 209 (2001) (UCL claims "stand or fall depending on the fate of the antecedent substantive causes of action."). Because Plaintiff has not adequately alleged any predicate violation of law, his UCL claim fails. See Glenn K. Jackson Inc. v. Roe, 273 F.3d 1192, 1203 (9th Cir. 2001) (citing Cel-Tech, 20 Cal. 4th at 182, 83 Cal.Rptr.2d 548, 973 P.2d 527).
C. Leave to Amend
As a general rule, leave to amend a dismissed claim should be freely granted unless it is clear the complaint could not be saved by any amendment. Fed. R. Civ. P. 15(a); Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). "A district court acts within its discretion to deny leave to amend when amendment would be futile, when it would cause undue prejudice to the defendant, or when amendment is sought in bad faith." Chappel v. Lab. Corp. of Am., 232 F.3d 719, 725 (9th Cir. 2000).
Further amendment would be futile. Because the Court finds that Defendants owed no duty of care to Plaintiff, no claim of intentional or negligent misrepresentation may lie. See Friedman, 107 Cal. App. 4th at 480, 131 Cal.Rptr.2d 885. Additionally, no amendment could successfully allege facts to support a fraudulent, unfair, or unlawful business practice. Defendants' underlying conduct is not likely to deceive a reasonable consumer, see Williams v. Gerber Products Co., 552 F.3d 934, 938 (9th Cir. 2008), and fails to satisfy any definition of "unfair," see Doe, 982 F.3d at 1214-15. As such, there are no plausible bases for alleging a predicate violation of law under the "unlawful" prong. Thus, the Court exercises its discretion to decline leave to amend.
IV. CONCLUSION
The Court grants Defendants' motion, dismisses the First Amended Complaint in its entirety and denies leave to amend.