Courtesy of Bergman & Gutierrez LLP

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA

RONAL VARGAS, et al.,
Plaintiffs,

vs.

HSBC BANK USA, N.A., et al.,
Defendants.

ORDER DENYING DEFENDANTS’
MOTION TO STRIKE AND
GRANTING IN PART
DEFENDANTS’ MOTION TO
DISMISS, WITH LEAVE TO
AMEND

Excerpts:

Presently before the Court is the joint motion to strike and motion to dismiss of Defendants
HSBC Bank USA, N.A., Litton Loan Servicing, LP, and Ocwen Loan Servicing, LLC. For the
reasons stated below, the motion to strike is denied. The motion to dismiss is granted in part, with
leave to amend.

BACKGROUND

On September 27, 2011, Plaintiffs Ronal Vargas and Maria Vargas (husband and wife)
filed suit against Defendants HSBC Bank U.S.A, National Association (“HSBC Bank”); Litton
Loan Servicing, LP (“Litton”); and Ocwen Loan Servicing, LLC (“Ocwen”) in the Central District
of California. Defendants filed a motion to dismiss. Plaintiffs filed an amended complaint.
Thereafter, the United States District Court for the Central District of California transferred the
case to this Court, based on improper venue.

Plaintiffs allege in the First Amended Complaint (“Complaint”) that in September 2006,
Plaintiffs obtained a loan for $480,000 to purchase real property in Chula Vista, California (FAC
¶ 1.) A promissory note in favor of the lender, Bridgefield Mortgage Corporation1 (formerly
known as ResMAE Mortgage Corporation), was executed along with a deed of trust. On April 11,
2008, a notice of default was recorded reflecting HSBC as Trustee of the loan and the amount of
$20,127.22 due.

According to the Complaint, in March 2009, Plaintiffs initiated loan modification
negotiation efforts with Litton to reduce the total amount of their mortgage. (FAC ¶ 20.) After
three months of negotiation, Litton offered Plaintiffs a trial plan, effective July 1, 2009. After
collecting Plaintiffs’ first trial plan payment, Litton rejected their second payment. (FAC ¶ 21.)
Following multiple attempts by Plaintiffs to reinstate the cancelled trial plan, the modification was
re-approved, effective January 1, 2010. (FAC ¶ 24.) After collecting five modified payments,
Litton denied the loan modification.

In the Complaint, Plaintiffs allege three federal claims for relief and a number of ancillary
state law claims: (1) violation of 15 U.S.C. § 1641(g) (The Helping Families Save Their Homes
Act of 2009); (2) violation of 12 U.S.C. § 2605 (Real Estate Settlement Procedures Act); (3)
violation of 15 U.S.C. § 1692e (Fair Debt Collection Practices Act); (4) negligence; (5) quasi
contract; (6) California Business and Professions Code Section 17200; (7) accounting; (8) quiet
title; (9) breach of contract; (10) breach of implied covenant of good faith and fair dealing; and
(11) declaratory relief.

A. Violation of TILA (15 U.S.C. § 1641(g)) Against HSBC Bank

For its fifth claim for relief, Plaintiffs allege that Defendant HSBC violated 15 U.S.C.
§ 1641(g) of the Truth in Lending Act (“TILA”) by failing to provide Plaintiffs written notice
within 30 days after HSBC was assigned the original promissory note. Plaintiffs also allege that
they never received notice of the date of any assignment. Under § 1641(g), a creditor that is the
new owner or assignee of a debt must notify the borrower in writing of such transfer no later than
30 days after the date on which a mortgage loan is sold or otherwise transferred. Significantly,
TILA’s “notice requirement” clause was added in 2009. Pub. L. No. 111-22, 123 Stat. 1632.
Defendants move to dismiss for failure to state a claim arguing this subsection did not exist
when the note was sold to HSBC in 2007. In support of their argument, Defendants rely on the
truth of matters contained in a judicially noticable document, the “Notice of Default.” The Notice
of Default reflects HSBC Bank as the trustee and Mortgage Electronic Registration Systems as the
beneficiary of the note, at the time it was filed with the San Diego Recorder’s Office on April 14,
2008. The problem with Defendants’ argument is that it requires the Court to prematurely decide a
genuine issue of material fact: if and when HSBC became Plaintiffs’ “creditor.”4 Defendant’s
second argument, that the claim is time-barred by the one-year statute of limitations on TILA
claims, is likewise premature. Without deciding the factual issue of when HSBC became a
creditor, one cannot say when the statue of limitations began to run. Even if it were undisputed as
to when HSBC became a creditor, neither party has addressed the question of whether § 1641(g)
has retroactive application, whether § 1641(g) imposes a continuing duty on a creditor, or whether
the statute of limitations may be tolled.

The gist of Plaintiffs’ Complaint is that they do not know when, if ever, the note was
transferred to HSBC, but they do know that HSBC took actions as if it were their creditor. On
summary judgment or at trial, it may well become clear that HSBC did not violate § 1641(g) or
that the claim is time-barred. But at this point, Plaintiffs have plausibly pled a claim for relief.
Defendants’ motion to dismiss this claim is denied.

B. Violation of RESPA (12 U.S.C. § 2605(e)) Against Litton

In their sixth claim for relief, Plaintiffs allege that Defendant Litton violated the Real
Estate Settlement Procedures Act (“RESPA”) when Litton failed to respond to a qualified written
request (“QWR”) mailed in March 2011.

RESPA requires any servicer of a federally regulated mortgage loan to take any of several
actions within 60 days of receiving a qualified written request. 12 U.S.C. § 2605(e)(3). The Act
requires that a servicer: (1) make any applicable changes to the borrower’s account as requested;
(2) explain in writing why such changes cannot be made; (3) provide the borrower the information
requested; or (4) explain why that information is unavailable. 12 U.S.C. § 2605(e)(2).

To constitute a QWR, the written correspondence must meet certain requirements. First, it
has to request “information relating to the servicing” of his loan. 12 U.S.C. § 2605(e)(1)(A).
RESPA defines “servicing” as “receiving any scheduled periodic payments from a borrower
pursuant to the terms of any loan . . . and making the payments of principal and interest . . . with
respect to the amounts received from the borrower . . . .” 12 U.S.C. § 2605(i)(3). Second, the
letter must include sufficient information to allow the loan servicer to identify the borrower’s
name and account. 12 U.S.C. § 2605(e)(1)(B)(I). Third, the letter must “include[ ] a statement of
the reasons for the belief of the borrower . . . that the account is in error or provides sufficient
detail to the servicer regarding other information sought by the borrower.” 12 U.S.C. §
2605(e)(1)(B)(ii).

In their letter to Litton, Plaintiffs wrote that the letter concerned “sales and transfers of
mortgage servicing rights; deceptive and fraudulent servicing practices to enhance balance sheets;
deceptive, abusive, and fraudulent accounting tricks and practices that may also negatively affect
any credit rating, mortgage account and/or the debt or payments” for which they may be legally
obligated. The letter sought at least 10 different items of information. (FAC Ex. B.) The letter
also included the borrower’s name and the loan number. The letter in this case is quite similar to
the one in Fazio v. Experian Info. Solutions, Inc., 2012 WL 2119253, at *3-4 (N.D. Cal. June 11,
2012). In that case the court determined that the letter constituted a QWR.

Litton argues that Plaintiffs’ letter sought information and documents relating to ownership
of the loan, rather than servicing of the loan. Defendant also argues that to constitute a QWR, the
Plaintiffs’ letter had to state why the account was in error. Relying on MorEquity v. Nameem,
(118 F. Supp. 2d 885, 900-01 (N.D. Ill. 2000)), Litton argues that Plaintiffs failed to state a claim
for relief. MorEquity is not persuasive. In fact, the Seventh Circuit (the appeals court having
supervision over the MorEquity court) has recently rejected this argument. Catalan v. GMAC
Mortg. Corp., 629 F.3d 676, 687 (7th Cir. 2011); see also Burton v. Countrywide Bank, FSB, 2012
WL 976151 (D. Idaho Mar. 1, 2012) (agreeing with and describing Catalan’s disagreement with
MorEquity); Luciw v. Bank of America, N.A., 2010 WL 3958715, at *2-3 (N.D. Cal. Oct. 7, 2010)
(borrower may assert error or request other information). The Seventh Circuit held that “RESPA
does not require any magic language.” Catalan, 629 F. 3d at 687. “Any reasonably stated written
request for account information can be a qualified written request.” Id. The Seventh Circuit
concluded that the plaintiff had made a QWR, rejecting MorEquity and similar cases.

Catalan is persuasive. Applying Catalan to this case, Plaintiffs’ letter would be considered
a QWR because it included enough details on information – not only on the ownership of the loan
but also the servicing of the loan. Because it is alleged that Litton failed to respond to the QWR,
Plaintiffs state a plausible claim for relief.

Defendant Litton also argues that to recover damages under this Act, Plaintiffs need to
claim they have incurred “actual damages” as a result of Litton’s failure to reply to their request.
12 U.S.C. § 2605(f)(1)(A). Section 2605(f) provides that “[w]hoever fails to comply with any
provision of this section shall be liable to the borrower” for actual damages. To qualify under
RESPA, Plaintiffs must plead either that they have suffered actual damages or that [Defendant] has
engaged in a pattern or practice of violating RESPA. Luciw, 2010 WL 3958715, at *4. Courts
have liberally interpreted this requirement. See Yulaeva v. Greenpoint Mortg. Funding, Inc., 2009
WL 2880393, at *15 (E.D. Cal. Sept. 3, 2009) (holding that plaintiff’s allegation she was required
to pay a referral fee prohibited under RESPA is sufficient allegation of actual damages to survive
motion to dismiss); Hutchinson v. Del. Sav. Bank FSB, 410 F. Supp. 2d 374, 383 (D. N.J. 2006)
(holding that plaintiffs sufficiently pled actual damages when they alleged “negative credit ratings
on their credit reports [and] the inability to obtain and borrow another mortgage loan and other
financing” where defendant reported delinquency to credit bureaus during 60-day statutory period
following receipt of QWR).

Here, Plaintiffs alleged in their FAC that as a “direct and proximate result of the violations
of RESPA” by Defendants, Plaintiffs have suffered actual damages, including “the over
calculation and overpayment of interest on Plaintiffs’ loan, the costs of repairing Plaintiffs’ credit,
the reduction, and/or elimination of Plaintiffs’ credit limits, costs associated with removing the
cloud on their property title . . . .” (FAC ¶ 108.) In addition, Plaintiffs also alleged the following
damages: “(1) multiple parties may seek to enforce their debt obligation against them; (2) the title
to their home has been clouded; (3) they have been paying the wrong party; (4) they are unable to
determine whether they sent their monthly mortgage payments to the right party; (5) their credit
and credit scores have been damaged; and (6) they have expended significant funds to cover the
cost of attorneys’ fees and related costs.” (FAC ¶ 110.) This is sufficient. Plaintiffs have stated a
plausible claim under RESPA. Accordingly, as to this claim, Defendants’ motion to dismiss is
denied.

C. Violation of FDCPA (15 U.S.C. § 1692) Against All Defendants

Defendants also move to dismiss the fourth claim for relief, wherein Plaintiffs allege that
Defendants engaged in collection activities that violate the Fair Debt Collection Practices Act
(“FDCPA”).5 “To be held liable for violati[ng] the FDCPA, a defendant must, as a threshold
requirement, fall within the Act’s definition of ‘debt collector.’” Izenberg v. ETS Serv., LLC, 589
F. Supp. 2d 1193, 1198 (C.D. Cal. 2008) (citing Heintz v. Jenkins, 514 U.S. 291, 294 (1995) and
Romine v. Diversified Collection Servs., 155 F.3d 1142, 1146 (9th Cir. 1998)).

Defendants do not argue that they are not debt collectors but argue, instead, that FDCPA
does not cover “foreclosure-related debt collection activities,” relying on an interpretation applied
in Gamboa v. Trustee Corps, 2009 WL 656285, at *4 (N.D. Cal. Mar. 12, 2009) and similar cases.
See Izenberg, 589 F. Supp. 2d at 1198-99 (same); Ines v. Countrywide Home Loans, Inc., 2008
WL 4791863 (S.D. Cal. Nov. 3, 2008) (same); Hulse v. Ocwen Fed. Bank, FSB, 195 F. Supp. 2d
1188, 1204 (D. Or. 2002) (foreclosure actions are not debt collections and foreclosure proceedings
are not conducted by debt collectors). These cases are not persuasive.

While the Ninth Circuit has yet to address the question, other circuit courts have. For
example, the argument has been rejected by the Fourth Circuit. Wilson v. Draper & Goldberg,
P.L.L.C., 443 F.3d 373, 378 (4th Cir. 2006) (defendants cannot benefit from § 1692a(6)(F)(i)’s
exception to the definition of debt collector merely because they were trustees foreclosing on a
property pursuant to a deed of trust). It has also been rejected by the Fifth Circuit. Kaltenbach v.
Richards, 464 F.3d 524, 529 (5th Cir. 2006) (“We therefore hold that a party who satisfies
§ 1692a(6)’s general definition of a “debt collector” is a debt collector for the purposes of the
entire FDCPA even when enforcing security interests.”); see also Pizan v. HSBC Bank USA, N.A.,
2011 U.S. Dist. LEXIS 66861 (W.D. Wash. June 23, 2011) (“In asserting that QLS Corp. is not a
‘debt collector’ within the meaning of the FDCPA, defendants rely on Hulse v. Ocwen Fed. Bank,
FSB. Hulse, however, has been called into question by two circuits and at least two district courts
within the Ninth Circuit.”); Castrillo v. Am. Home Mortg. Servicing, Inc., 670 F. Supp. 2d 516,
523-24 (E.D. La. 2009) (same).6

The two circuit decisions are persuasive and apply here to dispatch Defendants’ argument.
Therefore, Plaintiffs have stated a plausible claim for relief and Defendants’ motion to dismiss this
claim is denied.

[…]

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