Tuesday, January 12, 2010

Eastern District of California Denies Certification of Negative Amortization Related Claims in Quezada v. Loan Center of California, Inc.

On December 17, 2009, Judge William B. Shubb of the Eastern District of California issued an opinion denying certification in Quezada v. Loan Ctr. of Cal., 2009 U.S. Dist. LEXIS 122537, 11-12 (E.D. Cal. Dec. 17, 2009). Plaintiff’s motion sought certification of fraud and UCL claims brought against various defendants based on an alleged failure to disclose material risks posed by defendants’ Option Adjustable Rate Mortgages, including an alleged failure to disclose that loans were based on an artificially low “teaser” interest rate that was “guaranteed” with certainty to increase. See id. at 2-3. In denying certification, the court relied heavily on the defendant’s evidence establishing that the named plaintiff “[did] not speak English, had the loan documents explained to her via translation, and admitted at her deposition that she did not read the terms of the loan documents outside of recognizing several numbers on the pages of those documents.” See id., at 11-12.

With regard to Plaintiff’s fraud claim, the Court reasoned that Plaintiff’s claim was rendered atypical, and subject to a unique defense, based on the fact she did not read the documents, and in the court’s view, likely would have been unable to appreciate a distinction between the term “may” and “will” due to her limited grasp of English:
Plaintiff did not read any of the loan documents at issue and likely could not have understood the distinction between a loan that "may" negatively amortize and "will" negatively amortize regardless, due to her limited grasp of the English language. Thus, plaintiff may have particular difficulty, which other members of the class may not share, in proving reliance on the loan terms that may become the focus of the litigation.
See Quezada, 2009 U.S. Dist. LEXIS 122537, at 12-13.

[I don’t know about you, but I am a bit confused at this stage of the court’s analysis. Didn’t the opinion just state the documents were explained to the plaintiff via translation?  The Court even later acknowledges that record contained evidence that "the notary at closing explained the loan documents to plaintiff."  See id., at 19]

Thereafter, the court further reasoned that the plaintiff was not entitled to a presumption of reliance based its determination that “[i]n all scenarios it is clear that plaintiff did not rely on the misrepresentations and omissions in the loan documents”:
Regardless of which version of the events surrounding the consummation of plaintiff's loan is true, it is clear that plaintiff did not rely on the loan documents that plaintiff contends are the unifying element between the class members. Either plaintiff did not read the terms at all, was not explained the terms, and simply relied on the representations of Ortega, or was explained the terms of the OARM by Ornelas or the notary at closing and was aware of the terms of the loan when she signed the loan documents. In all scenarios it is clear that plaintiff did not rely on the misrepresentations and omissions in the loan documents. As defendants have rebutted any presumption of reliance that plaintiff may be entitled to, plaintiff's fraud claim fails to meet the typicality requirement because plaintiff's claim is subject to a unique defense that threatens to dominate the proceedings.
See Quezada, 2009 U.S. Dist. LEXIS 122537, at 19-20.

This line of analysis is a bit troubling, as the court appears to be rendering a ruling on the merits of the underlying claim as a basis for its finding that typicality is not met. Even then, the Court is drawing upon inferences from the various facts in the defendant's favor to arrive at its own conclusion that the plaintiff is foreclosed from a availing herself presumption of reliance. Even in the confines of summary judgment (where consideration of the merits is appropriate), this analysis would likely constitute an abuse of discretion, as it is established that materiality cannot be overcome absent “evidence conclusively rebutting reliance.” See Engalla v. Permanente Medical Group, Inc., 15 Cal. 4th 951, 977 (1997) (reasoning that “the Engallas need only make a showing that the misrepresentations were material, and that therefore a reasonable trier of fact could infer reliance from such misrepresentations, in order to survive this summary-judgment-like proceeding, absent evidence conclusively rebutting reliance.”). Here, it remains entirely possible that the plaintiff in fact did rely on the alleged misrepresentations and omissions in the loan documents via the interpretive explanation notwithstanding the existence of the scenarios explained by the court.

With regard to the plaintiff’s UCL claim, the court similarly denied certification based on issues relating to typicality:
Plaintiff will have unique difficulty in proving her "unfair" and "fraudulent" theories of liability on her UCL claim for the same reasons she will have difficulty on her common law fraud claim. Plaintiff's unfair and fraudulent business practices theories allege that defendant's business practices were unfair and fraudulent because they were based on "a pattern of deceptive conduct and concealment" aimed at misrepresenting the true terms of their OARM loans. (TAC P 151.) Whether or not plaintiff actually relied on these fraudulent representations will become a major focus of this litigation. In fact, defendants have filed a motion for summary judgment that argues plaintiff's UCL claim should be dismissed because she cannot prove reliance on the fraudulent practices at issue. (See Docket No. 85.)
While only the named plaintiff in a UCL class action based on fraudulent conduct must demonstrate reliance and causation, In re Tobacco II Cases, 46 Cal. 4th at 321, plaintiff's unique susceptibility to a challenge based on her standing to pursue a UCL claim is fatal. Were the court to certify plaintiff as a class representative and later rule at summary judgment that plaintiff lacks standing to pursue her UCL claim, the class would be left without a representative to pursue this claim. For the same reasons articulated above, plaintiff is particularly susceptible to the argument that she did not rely on the loan documents when she agreed to her loan. Accordingly, the court finds that plaintiff has not satisfied the typicality requirement for her UCL claim since whether she relied on the loan documents will become a focus of the litigation.
See Quezada, 2009 U.S. Dist. LEXIS 122537, at 22-23.

In addition to the issues discussed above, however, the court’s analysis also appears to tread into another problematic area. Significantly, the court’s analysis appears to turn in large part on the fact that a summary judgment motion concerning the named plaintiff’s reliance was pending, and that certification was denied out of concern that the plaintiff may possibly not prevail on this issue. However, as discussed in my previous post (here), this very line of reasoning was deemed an abuse of discretion by the Ninth Circuit in United Steel v. ConocoPhillips.

While the court subsequently found predomiance lacking with regard to the plaintiff's fraud claim due to individualized issues relating to reliance [See id., at 27-28], the court did not conclude that predominance was lacking with regard to the plaintiff's UCL claim under the deceptive prong (and could not do so on such grounds).  To that end, the court's denial of certification on that claim rested solely upon its analysis re typicality.

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