Northern California Judges Rule in Banking and Investment Cases

Courtesy of FreeFoto.com

In DeLeon v. Wells Fargo Bank, Gabriel and Shawna DeLeon purchased a home in San Benito County secured by a mortgage from World Savings Bank that later became Wachovia Mortgage (and later merged with Wells Fargo Bank). According to court documents, the DeLeons became unable to pay the mortgage in August 2008 and received a notice of default. In December 2009, the DeLeons sought a loan modification. The allege that Wells Fargo expressed confidence that it could give them a modification, but it foreclosed on the property and ordered the occupants to leave. The DeLeons stat that this violated California law by 1) not informing them of the trustee’s sale or posting that notice on the property and 2) they were never provided a phone number to find a HUD-Certified Housing Counseling Agency. They are using this violation of law as a basis for a claim under California’s Unfair Competition Law (UCL). Wells Fargo claims that these state requirements are preempted either by the Home Owners Loan Act (HOLA) or the National Banking Act (NBA) depending on whether the alleged conduct occurred when Wachovia or Wells Fargo was in charge of the mortgage. The relevant regulations at 12 C.F.R. § 560.2(a) expressly list “Disclosure…statements… affecting the processing, servicing and participation in mortgages” as state laws which are preempted. Judge Lucy Koh agreed with Wells Fargo and dismissed that claim with prejudice. Other claims were dismissed without prejudice and with leave to amend.

Nguyen v. Wells Fargo Bank raises virtually identical issues to the DeLeon case above, but also contains an interesting discussion on federal jurisdiction. On June 12, 2006 Plaintiff and World Savings Bank entered into a refinance loan secured by a deed of trust on his property. In 2008, the plaintiff tried to avoid foreclosure and enter into a loan modification without success. On December 19, 2008 ETS (the substitute trustee) recorded a notice of default and election to sell under the deed of trust. On May 27, 2009, Mr. Nguygen declared chapter 7 bankruptcy. On July 22, 2009 ETS executed and recorded a notice of trustee’s sale, but no sale has occurred. Plaintiff sued Wells Fargo for a number of state law claims and Wells Fargo removed the action on diversity grounds. Now, the Mr. Nguygen moves to remand the case stating the parties are not diverse.

Plaintiff relies on Wells Fargo & Company’s by-laws which state that its principal place of business in San Francisco. Wells Fargo states that in its FDIC profile its main office is in South Dakota. The U.S. Supreme Court has explained that a national banking association is a citizen of the state of “both the State of its main office and the State of its principal place of business.” Schmidt v. Wachovia Bank, N.A. (U.S. 2006). In Mount v. Wells Fargo Bank, N.A. (C.D. Cal. 2008) (via CAFA Blog), Judge Gary Allen Feess stated that Wells Fargo is a citizen of two states: California and South Dakota thereby defeating diversity jurisdiction. However, Magistrate Elizabeth D. Laporte notes that this is the only court post-Schmidt to reach that conclusion. Notably, in Lowdermilk v. U.S. Bank, N.A. (9th Cir. 2007) the 9th Circuit explained that a national bank’s citizenship is based on the location of its main office. She denied the motion to remand and granted the motion to dismiss citing preemption and a lack of specificity in the complaint in the same style as DeLeon above.

Smith v. Franklin Templeton Distributors is a shareholder derivative action where the plaintiff tries to assert a claim under 15 U.S.C. § 80a-47(b).  Mr. Smith claims that the defendant is paying its broker-dealers with asset based compensation in violation of the Investment Advisers Act of 1940.  He notes that Financial Planners Association v. SEC (D.C. Cir. 2007) found that rules allowing asset based compensation were found to be contrary to the IAA.  Under Section 47(b) of the IAA, he can file an action in court to void any transaction contrary to law.  Since the D.C. Circuit found asset-based compensation was contrary to the IAA, it is inconsistent with IAA and the compensation agreements should be void and the money returned to the trust.  Franklin/Templeton disagrees and states that Section 47(b) does not provide a private right of action, rather there must be a predicate violation of some other section of law.  In an earlier motion to dismiss, the court agreed with the defendants and dismissed the case with leave to amend.  In its current form, Judge Phyllis J. Hamilton found that Mr. Smith could not correct the pleading deficiencies and dismissed the case with prejudice.

Benson v. JPMorgan Chase Bank is a fraud case which alleges that Washington Mutual Bank (WaMu) knew that three ponzi scheme operators set up corporations in Nevada and accounts  at WaMU to shuffle the proceeds of their fraudulent activity.  WaMu is a failed bank, taken over by the FDIC and later acquired by JPMorgan Chase Bank (Chase).  Chase moves to dismiss the lawsuit alleging that the FDIC took over WaMu under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and that the plaintiffs failed to exhaust their administrative remedies under that law because the plaintiffs did not file an administrative claim with the FDIC. Magistrate Maria-Elena James granted the motion to dismiss with prejudice. In the present action, the plaintiffs move for relief from judgment under Fed. R. Civ. P. 60(b)(1) stating that the court committed unintentional error on the previous ruling because the Plaintiffs had note received the FIRREA notice required by law.  Judge James stated that an internet posting is sufficient notice and denied the motion for relief from judgment.