Pemberton et al v. Nationstar Mortgage LLC, No. 3:2014cv01024 - Document 114 (S.D. Cal. 2019)

Court Description: ORDER Denying 100 Plaintiff's Motion to Supplement the Second Amended Complaint. Signed by Judge Cynthia Bashant on 4/23/2019. (tcf)(jrd)

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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 MICHAEL PEMBERTON, et al., Plaintiffs, 12 13 14 Case No. 14-cv-01024-BAS-MSB v. NATIONSTAR MORTGAGE LLC, ORDER DENYING PLAINTIFFS’ MOTION TO SUPPLEMENT THE SECOND AMENDED COMPLAINT [ECF No. 100] Defendant. 15 16 Plaintiffs Michael Pemberton and Sandra Collins-Pemberton (the “Pembertons”) 17 request leave to file a “Supplemented Second Amended Complaint” pursuant to Rule 18 15(d). (ECF Nos. 100, 106.) The Pembertons seek to supplement the SAC with 19 factual allegations and related proposed supplemental claims for breach of contract, 20 breach of the implied covenant of good faith and fair dealing, fraud, and a third-party 21 beneficiary breach of contract claim. (Id.) Observing that “while plaintiffs did 22 uncover some new facts [during discovery], their underlying claims are still largely 23 the same,” Defendant Nationstar Mortgage LLC (“Nationstar”) opposes the 24 Pembertons’ motion. (ECF No. 104 at 16.) For the reasons herein, the Court denies 25 the Pembertons’ motion. 26 27 28 RELEVANT BACKGROUND Factual Background. As the Court has previously recounted, the Pembertons –1– 14cv1024 1 are California homeowners who obtained an Option ARM mortgage loan in 2005 from 2 First Magnus Financial Corporation. During the first five years of the loan’s duration, 3 the Pembertons’ loan provided an option that allowed the Pembertons to make a 4 monthly interest payment less than the full amount of interest due. Under this option, 5 the monthly interest the Pembertons did not pay was added to the amount of their 6 loan’s unpaid principal with interest accruing on this added amount at the same rate 7 as the original principal. The Pembertons’ loan passed to various owners and 8 servicers, with Bank of America, N.A. (“BANA”) owning and servicing the 9 Pembertons’ loan immediately prior to Nationstar. When Nationstar began servicing 10 the Pembertons’ loan in July 2013, the Pembertons’ loan balance was $7,575.41 above 11 the original balance, an amount which the Pembertons allege was charged as interest 12 in the earlier years of their loan but which they did not pay, i.e. the amount constitutes 13 “deferred interest.” The Pembertons made $12,097.80 in mortgage payments to 14 Nationstar in 2013. According to the Pembertons, Nationstar failed to credit any 15 payments to retire outstanding deferred interest before applying the payments to their 16 loan’s principal amount. 17 18 Although the Pembertons raise various California state law claims against 19 Nationstar, a federal statute is at the core of the Pembertons’ contention that Nationstar 20 was legally required to credit and report payments on deferred interest for their home 21 mortgage. The statute, 26 U.S.C. § 6050H, requires any individual who receives 22 interest aggregating over $600 on a home mortgage in a given year from another 23 individual to furnish the Internal Revenue Service (“IRS”) with an information return 24 identifying the amount of interest received. 26 U.S.C. § 6050H(a); 26 U.S.C. § 25 6050H(b)(2)(B). The interest recipient must also furnish a statement to the individual 26 who provided the interest, which also identifies the amount of interest received during 27 the year. 26 U.S.C. § 6050H(d). By regulation, the interest recipient meets its 28 statutory reporting obligations by providing the IRS and the interest provider with a –2– 14cv1024 1 Form 1098. 26 C.F.R. §§ 1.605H-2(a), (b). The Pembertons contend that Section 2 6050H reaches deferred interest and, consequently, Nationstar unlawfully failed to 3 credit or properly report their 2013 payments on deferred interest in the corresponding 4 Form 1098 that Nationstar provided to the IRS and the Pembertons. 5 6 Procedural History. The Pembertons first brought suit against Nationstar in 7 April 2014, alleging claims for breach of contract, breach of the implied covenant, 8 violation of Section 6050H, violation of California’s Unfair Competition Law 9 (“UCL”), declaratory and injunctive relief, fraud, and negligence. (ECF No. 1 (the 10 “Original Complaint”).) In February 2015, upon Nationstar’s Rule 12(b)(6) motion 11 to dismiss (ECF No. 11), the Court dismissed the Pembertons’ direct claim under 12 Section 6050H on the ground that there is no express or implied federal private right 13 of action under the statute. (ECF No. 17.) The Court otherwise stayed the case under 14 the primary jurisdiction doctrine to permit the IRS to interpret Section 6050H’s 15 application to deferred interest in the first instance. (Id.) Over two years after 16 imposing the stay, the Court dismissed the Original Complaint when the Pembertons 17 conceded that they lacked Article III standing in view of the Ninth Circuit’s decision 18 in Smith v. Bank of America, N.A., 679 Fed. App’x 549 (9th Cir. 2017). (ECF Nos. 19 39, 42.) The Pembertons subsequently filed the First Amended Complaint (“FAC’), 20 which raised the same claims as the Original Complaint. (Compare ECF No. 1 with 21 ECF No. 43 (FAC).) 22 23 After denying Nationstar’s motion to dismiss the FAC for lack of standing and 24 declining to impose another stay, the Court ordered the Pembertons to show cause 25 why their claims should not be dismissed pursuant to Rule 12(b)(6). (ECF No. 53.) 26 The Pembertons filed a brief and reply brief directly responding to the Court’s order, 27 (ECF Nos. 54, 60), Nationstar presented its dismissal arguments, (ECF No. 55), and 28 the Court held oral argument, (ECF No. 69). After over four years, the legal –3– 14cv1024 1 sufficiency of the Pembertons’ concededly novel claims was ripe for adjudication. 2 The Court issued an extensive order that sustained in part and dismissed in part the 3 Pembertons’ claims. Pemberton v. Nationstar Mortgage LLC, 331 F. Supp. 3d 1018 4 (S.D. Cal. 2018). The Court dismissed with prejudice the Pembertons’ claims for 5 breach of contract, breach of the implied covenant, a UCL claim under the UCL’s 6 unlawful and fraudulent prongs, the declaratory judgment request as pleaded in the 7 FAC, and fraud. Id. at 1034–49, 1061–62. The Court dismissed without prejudice the 8 Pembertons’ claim for a preliminary and permanent injunction. Id. at 1063–64. The 9 Court allowed the Pembertons’ UCL unfair prong and negligence claims and 10 permitted the Pembertons to file a Second Amended Complaint (“SAC”) consistent 11 with the order. Id. at 1050–61. 12 13 In accordance with the Court’s order, the Pembertons filed the SAC in July 14 2018, alleging claims against Nationstar for violation of the UCL (unfair prong), 15 declaratory relief, and negligence based on Nationstar’s alleged failure to report the 16 Pembertons’ deferred interest payments. (ECF No. 76.) Nationstar answered the SAC 17 in August 2018, (ECF No. 80), and the case proceeded to discovery. The Pembertons 18 timely filed the present Rule 15(d) motion for leave to file a “supplemented [SAC]” 19 in December 2018. (ECF No. 100.) The Pembertons have submitted a copy of the 20 proposed “Supplement Second Amended Complaint” (“PSSAC”), which reveals 21 some 107 paragraphs of “supplemental” allegations for four additional claims, 22 dwarfing the operative complaint’s 54 paragraphs and three claims. (Compare SAC 23 ¶¶ 1–54 with ECF No. 101-1 PSSAC ¶¶ 55–161.) The Pembertons do not offer any 24 proposed supplemental factual allegations to supplement the claims the Court has 25 already allowed. 26 27 28 LEGAL STANDARD “[T]he court may, on just terms, permit a party to serve a supplemental pleading –4– 14cv1024 1 setting out any transaction, occurrence, or event that happened after the date of the 2 pleading to be supplemented.” Fed. R. Civ. P. 15(d). “Rule 15(d) provides a 3 mechanism for parties to file additional causes of action based on facts that didn’t 4 exist when the original complaint was filed.” Eid v. Alaska Airlines, Inc., 621 F.3d 5 858, 874 (9th Cir. 2010). New claims, parties, and allegations regarding events that 6 occurred after the original complaint are properly raised in a Rule 15(d) motion. 7 Griffin v. Cty. Sch. Bd., 377 U.S. 218, 226 (1964); Lyon v. United States Immigration 8 & Customs Enforcement, 308 F.R.D. 203, 214 (N.D. Cal. 2015). Yet, “[s]ome 9 relationship must exist between the newly alleged matters and the subject of the 10 original action” in order for a party to rely on Rule 15(d). Keith v. Volpe, 858 F.2d 11 467, 473 (9th Cir. 1988). 12 13 A Rule 15(d) motion is otherwise evaluated pursuant to the same standard as a 14 Rule 15(a) motion to amend. See Glatt v. Chicago Park Dist., 87 F.3d 190, 193 (7th 15 Cir. 1996); Yates v. Auto City 76, 299 F.R.D. 611, 614 (N.D. Cal. 2013). A court may 16 deny leave for: “(1) ‘undue delay, bad faith or dilatory motive on part of the movant,’ 17 (2) ‘repeated failure to cure deficiencies by amendments previously allowed,’ (3) 18 ‘undue prejudice to the opposing party,’ or (4) ‘futility.’” Acosta v. Austin Elec. Servs. 19 LLC, 325 F.R.D. 325, 330 (D. Ariz. 2018) (quoting Wash. State Republican Party v. 20 Wash. State Grange, 676 F.3d 784, 797 (9th Cir. 2012)). A district court has broad 21 discretion over whether to allow supplemental or amended pleadings. Volpe, 858 F.2d 22 at 473. A court “examine[s] each case on its facts” to determine the propriety of 23 granting leave to supplement or amend the pleadings. See SAES Getters S.p.A. v. 24 Aeronex, Inc., 219 F. Supp. 2d 1081, 1086 (S.D. Cal. 2002) (citation omitted). 25 DISCUSSION 26 27 28 A. The Pembertons’ Improper Reliance on Rule 15 The Pembertons improperly rely on Rule 15(d) for many of the claims with –5– 14cv1024 1 which the Pembertons seek to “supplement” the SAC. “Rule 15(d) permits the filing 2 of a supplemental pleading which introduces a cause of action not alleged in the 3 original complaint and not in existence when the original complaint was filed.” 4 Cabrera v. City of Huntington Park, 159 F.3d 374, 382 (9th Cir. 1998) (citation 5 omitted). The Original Complaint asserted claims for breach of contract, breach of 6 the implied covenant of good faith and fair dealing, and fraud for Nationstar’s alleged 7 failure to report deferred interest on the Pembertons’ 2013 Form 1098. (Original 8 Compl. ¶¶ 41–46 (breach of contract); id. ¶¶ 47–52 (breach of the implied covenant); 9 id. ¶¶ 73–80 (fraud).) Any proposed supplemental claims which seek to reintroduce 10 these original claims are not properly raised in a Rule 15(d) motion. 11 12 A review of the underlying supplemental factual allegations also reveals that 13 the proposed supplemental claims are based on facts that existed before the filing of 14 the Original Complaint. For example, the Pembertons’ breach of contract and implied 15 covenant claims are based on conduct that occurred before the Original Complaint 16 because the claims are grounded in the Pembertons’ home mortgage contract. 17 (PSSAC ¶¶ 83–88, 90, 121.) The Pembertons’ proposed supplemental fraud claim is 18 based in part on conduct that occurred before the filing of the Original Complaint 19 because the claim concerns Nationstar’s alleged misrepresentations to and 20 concealments from the Pembertons when Nationstar investigated in 2014 the 21 Pembertons’ assertions about Nationstar’s reporting of deferred interest payments. 22 (Id. ¶¶ 147–50.) Although the Pembertons’ third-party beneficiary breach of contract 23 claim concerning the BANA-Nationstar loan transfer agreement is a newly raised 24 claim, the claim is necessarily premised on conduct before the Original Complaint 25 because the Pembertons have only challenged Nationstar’s conduct after it took over 26 servicing the Pembertons’ home mortgage loan. (Id. ¶¶ 103–09.) As such, Rule 27 15(a)—not Rule 15(d)—is the proper vehicle for the Pembertons to alter their 28 pleadings. See Eid, 621 F.3d at 87; Fresno Unified Sch. Dist. v. K.U., 980 F. Supp. –6– 14cv1024 1 2d 1160, 1174 (E.D. Cal. 2013) (“An amended complaint under Rule 15(a) permits 2 the party to add claims or to allege facts that arose before the original complaint was 3 filed.”). 4 5 The Pembertons’ Rule 15 motion is otherwise improper because the 6 Pembertons effectively rely on supplemental factual allegations to seek 7 reconsideration of the Court’s prior conclusions regarding the Pembertons’ dismissed 8 claims for breach of contract, breach of the implied covenant, and fraud. A motion 9 for reconsideration would have been the proper means for the Pembertons to challenge 10 the Court’s prior dismissal order. See Wright v Old Gringo, Inc., No. 17-cv-1966- 11 BAS-MSB, 2018 WL 6778215, at *2 (S.D. Cal. Dec. 26, 2018) (“District courts may 12 entertain a motion for reconsideration of an interlocutory order at any time before 13 entry of final judgment.”). 14 reconsideration because the present motion comes six months after the Court’s ruling. 15 See S.D. Cal. Civ. L.R. 7.1.i.2 (requiring a motion for reconsideration to be filed 16 within 28 days of the order for which reconsideration is sought). The Pembertons, however, have not timely sought 17 18 Even if the Court construed the Pembertons’ present motion as a motion for 19 reconsideration and further excused the motion’s untimeliness, the Pembertons have 20 failed to show reconsideration is warranted. “A motion to reconsider must (1) show 21 some valid reason why the court should reconsider its prior decision, and (2) set forth 22 facts or law of a strongly convincing nature to persuade the court to reverse its prior 23 decision.” Cancino-Castellar v. Nielsen, 338 F. Supp. 3d 1107, 1110 (S.D. Cal. 24 2018). The Pembertons’ motion identifies no valid reason for reconsideration of a 25 strongly convincing nature because the motion is premised on legal theories the Court 26 has already thoroughly considered and rejected. A motion for reconsideration is not 27 an avenue for the Pembertons to relitigate issues and arguments the Court has already 28 addressed. Brown v. Kinross Gold, U.S.A., 378 F. Supp. 2d 1280, 1288 (D. Nev. –7– 14cv1024 1 2005). And although the Pembertons disagree with the Court’s prior analysis in form 2 and in spirit, the Pembertons’ “[m]ere disagreement with a previous order is an 3 insufficient basis for reconsideration.” Haw. Stevedores, Inc. v. HT&T Co., 363 F. 4 Supp. 2d 1253, 1269 (D. Haw. 2005). Although the Court evaluates the Pembertons’ 5 proposed claims pursuant to the familiar considerations applicable to both a Rule 15(a) 6 and 15(d) motion, the Court’s conclusions largely track the reasoning of its prior 7 dismissal order insofar as the Pembertons seek to reintroduce claims dismissed with 8 prejudice. 9 10 B. Futility Warrants Denial of Leave to Amend for Repleaded Claims 11 “Futility alone can justify the denial of a motion to amend.” Johnson v. 12 Buckley, 356 F.3d 1067, 1077 (9th Cir. 2004); Bonin v. Calderon, 59 F.3d 815, 845 13 (9th Cir. 1995) (same). A proposed amendment is futile if it could not withstand a 14 Rule 12(b)(6) motion to dismiss. Moore v. Kayport Package Express, Inc., 885 F.2d 15 531, 538 (9th Cir. 1989) (“Leave to amend need not be given if a complaint, as 16 amended, is subject to dismissal.”). To survive a Rule 12(b)(6) motion to dismiss, a 17 plaintiff is required to set forth “enough facts to state a claim for relief that is plausible 18 on its face,” which allows “the court to draw reasonable inferences that the defendant 19 is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) 20 (citation omitted); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A court 21 accepts as true factual allegations and construes them in the light most favorable to 22 the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). A court does not 23 accept legal conclusions pleaded in the guise of factual allegations, nor does a court 24 accept formulaic recitations of the elements of a cause of action. Iqbal, 556 U.S. at 25 676; Twombly, 550 U.S. at 555; Clegg v. Cult Awareness Network, 18 F.3d 752, 754– 26 55 (9th Cir. 1994). 27 28 Nationstar opposes the Pembertons’ Rule 15 motion primarily on the ground –8– 14cv1024 1 that the proposed claims are futile. (ECF No. 104 at 7–15.) The Pembertons protest 2 that “the claims should be aired out in a motion to dismiss where plaintiffs will have 3 more than the space of a reply to defend the claims.” (ECF No. 106 at 6.) This 4 protestation is unavailing. The Pembertons have had ample opportunity to defend the 5 legal sufficiency of their breach of contract, implied covenant, and fraud claims for 6 Nationstar’s Form 1098 reporting in response to the Court’s previous order to show 7 cause. (ECF No. 54 at 8–10, 25–33; ECF No. 60 at 7–8, 10; ECF No. 69.) The 8 Pembertons clearly recognize that futility is the “hump” they must overcome. (ECF 9 No. 106 at 8.) The PSSAC and the Pembertons’ opening brief seek to engage directly 10 with the Court’s analysis in its dismissal order. (PSSAC ¶¶ 83–90, 113, 115–16, 118– 11 19, 130–31, 134–35, 140–41; ECF No. 100 at 3–4, 6–8, 11–12.) After consideration 12 of the parties’ arguments, the Court rejects the Pembertons’ attempt to reintroduce 13 claims the Court previously dismissed with prejudice because the claims are futile. 14 15 1. Breach of Contract 16 Since this case’s inception, the Pembertons have sought to hold Nationstar 17 liable for allegedly breaching the Pembertons’ relevant mortgage contract by failing 18 to report deferred interest payments in the Pembertons’ 2013 Form 1098. The relevant 19 contract in this case is the Pembertons’ “Adjustable Rate Note” (the “Note”), which 20 the Pembertons have presented with each of their pleadings and the PSSAC. (SAC 21 Ex. A; ECF No. 101-2 Ex. A (PSSAC with exhibits).) The Note is properly considered 22 in the Court’s futility analysis. United States v. Ritchie, 342 F.3d 903, 907–08 (9th 23 Cir. 2003) (a court may consider documents attached to a complaint to resolve a 24 motion to dismiss). 25 26 “To state a claim for breach of contract under California law, plaintiffs must 27 plead four elements: (1) the existence of a contract, (2) plaintiffs’ performance or 28 excuse for nonperformance, (3) defendant’s breach, and (4) damage to the plaintiffs –9– 14cv1024 1 as a result of that breach.” Pemberton, 331 F. Supp. 3d at 1034 (citations omitted). 2 “[T]he interpretation of a written contract is a matter of law for the court[.]” Britz 3 Fertilizers, Inc. v. Bayer Corp., 665 F. Supp. 2d 1142, 1159 (E.D. Cal. 2009) (quoting 4 Southland Corp. v. Emerald Oil Co., 789 F.2d 1441, 1443 (9th Cir. 1986)). When the 5 parties have a written contract, the parties’ mutual intent at the time of the contract is 6 determined from the writing alone if possible. Founding Members of the Newport 7 Beach Country Club v. Newport Beach Country Club, Inc., 135 Cal. Rptr. 2d 505, 513 8 (Cal. Ct. App. 2003). “A breach of contract claim may be dismissed for failure to 9 state a claim if the contract’s terms are unambiguous.” Pemberton, 331 F. Supp. 3d 10 at 1035. 11 12 The Pembertons previously advanced two breach of contract theories that the 13 Court rejected as implausible. First, the Pembertons asserted that their Note 14 incorporates Section 6050H as a term, thereby rendering compliance with Section 15 6050H a contractual as well as a statutory obligation. (FAC ¶¶ 43–44.) The Court 16 rejected this assertion because nowhere does their Note refer to Section 6050H. 17 Pemberton, 331 F. Supp. 3d at 1035–38. Second, the Pembertons asserted that the 18 Note’s provisions allocating payments toward retiring interest before principal 19 contractually required Nationstar to allocate payments toward retiring deferred 20 interest before principal. (ECF No. 54 at 8, 28.) The Court rejected this theory 21 because, even if the Pembertons’ position is correct as a matter of taxation principles, 22 the Note unambiguously treats deferred interest as “unpaid Principal” for the purposes 23 of contractual allocation of the Pemberton’s mortgage payments. Pemberton, 331 F. 24 Supp. 3d at 1038–1041. 25 26 The Pembertons now invoke Rule 15 to dispute the Court’s analysis. (ECF 27 Nos. 100 at 3–4; ECF No. 106 at 6–8.) The PSSAC contains eight allegations that 28 point to Sections 1, 3(A), 3(C), 3(C) of the Note, which the Pembertons now claim – 10 – 14cv1024 1 show that their interpretation of the Note is reasonable. (PSSAC ¶¶ 83–90.) The 2 Court will not retread its prior analysis of the Note’s allocation provisions under 3 California contract law. See Pemberton, 331 F. Supp. 3d at 1038–1041. The Court 4 denies the Pembertons’ motion because a Rule 15 motion to supplement or amend is 5 not a proper basis to seek reconsideration of the Court’s previous Rule 12(b)(6) ruling. 6 7 Recognizing the futility of relying on the Note’s actual language, the 8 Pembertons advance a new and third theory in the event “this Court still believes in 9 its conclusion that the language in the contract . . . unambiguously” forecloses their (ECF No. 106 at 8.) Based on a discovery “bombshell,” the 10 contract claim. 11 Pembertons allege that Nationstar’s own policy is to allocate payments from its 12 borrowers toward retiring deferred interest before principal, allegedly based on 13 Nationstar’s interpretation of the allocation provisions in home mortgage loan 14 contracts like the one the Pembertons hold. (PSSAC ¶¶ 91–98.) The Pembertons 15 therefore contend that the parties’ conduct related to the Note creates a contractual 16 ambiguity sufficient to make their breach of contract claim not futile. (ECF No. 100 17 at 3; ECF No. 106 at 8.) 18 19 Bombshell or not, Nationstar’s alleged conduct cannot save the latest mutation 20 of the Pembertons’ breach of contract claim. “Under California law, the fundamental 21 goal of contract interpretation is to give effect to the mutual intent of the parties as it 22 existed at the time of contracting.” United States Cellular Inv. Co. of L.A., Inc. v. GTE 23 Mobilnet, Inc., 281 F.3d 929, 934 (9th Cir. 2002) (citations omitted) (emphasis 24 added). California law recognizes that a contractual ambiguity may be shown to exist 25 “where the parties have demonstrated by their actions and performance that to them 26 the contract meant something quite different” than what “the words standing alone 27 might mean[.]” Crestview Cemetery Ass’n v. Dieden, 356 P.2d 171, 178 (Cal. 1960). 28 Nationstar is not the original contracting party. The Pembertons do not allege any – 11 – 14cv1024 1 facts which show that the parties mutually agreed to create new contractual obligations 2 or alter the meaning of the Note’s terms after Nationstar began servicing the 3 Pembertons’ loan. To the contrary, the Pembertons have specifically alleged that 4 Nationstar failed to credit their payments toward retiring outstanding deferred interest 5 in the first Form 1098 that Nationstar ever provided to the Pembertons and the IRS. 6 (SAC ¶¶ 11–12.) These allegations critically undermine the Pembertons’ attempt to 7 now rely on Nationstar’s conduct to create a contractual ambiguity. 8 9 Nationstar’s alleged policy of tracking and reporting deferred interest amounts 10 to the IRS and borrowers cannot otherwise sustain the Pembertons’ breach of contract 11 claim. Assertions of ambiguity “do[] not require the district court to allow additional 12 opportunities to find or present extrinsic evidence if the court considers the contract 13 language and the evidence the parties have presented and concludes that the language 14 is reasonably susceptible to only one interpretation.” Skilstaf, Inc. v. CVS Caremark 15 Corp, 669 F. 3d 1005, 1017 (9th Cir. 2012); Hervey v. Mercury Cas. Co., 110 Cal. 16 Rptr. 3d 890, 895 (Cal. Ct. App. 2010) (extrinsic evidence “is not admissible if it 17 contradicts a clear and explicit [contract] provision.”). Nationstar’s alleged policy 18 recognizes “deferred interest” as a payment category and applies payments to retiring 19 deferred interest amounts included in the principal amount before retiring principal 20 for the purposes of tax reporting, specifically Section 6050H. (PSSAC ¶¶ 56–58, 91, 21 96–97.) As the Court has already explained, however, Section 6050H is not a term of 22 the Pembertons’ Note. Even if Nationstar’s alleged policy is appropriate so that 23 Nationstar can fulfill any tax reporting obligations it may have under Section 6050H, 24 “the claim before the Court is one for breach of contract.” Pemberton, 331 F. Supp. 25 3d at 1041. The Note recognizes only two categories for allocation of the Pembertons’ 26 payments—interest and principal—as a contractual matter. (SAC Ex. A at 2); 27 Pemberton, 331 F. Supp. 3d at 1038. Therefore, Nationstar’s alleged policy cannot 28 be used to contravene the Note’s terms. Accordingly, the Court denies leave because – 12 – 14cv1024 1 the claim is futile. 2 3 2. Breach of the Implied Covenant 4 Accompanying the Pembertons’ attempt to replead a breach of contract claim 5 is the Pembertons’ related request to reintroduce a breach of the implied covenant 6 claim. Despite the length of the PSSAC’s allegations for this claim, (PSSAC ¶¶ 112– 7 45), the claim is futile based on the same fatal defect that warranted dismissal of the 8 claim with prejudice: the Pembertons impermissibly rely on the implied covenant to 9 fashion contractual terms that do not exist 10 11 Under California law, every contract carries with it an implied covenant of good 12 faith and fair dealing in the contract’s performance and enforcement. Foley v. 13 Interactive Data Corp., 765 P.2d 373, 389 (Cal. 1988). As the Court has previously 14 admonished, “[t]he implied covenant is inherently limited—it ‘does not extend 15 beyond the terms of the contract at issue.’” Pemberton, 331 F. Supp. 3d at 1042 16 (quoting Sipe v. Countrywide Bank, 690 F. Supp. 2d 1141, 1160 (E.D. Cal. 2010) 17 (emphasis in original). Therefore, a party may not rely on the implied covenant to 18 “impose substantive duties or limits . . . beyond those incorporated in the specific 19 terms of the[] agreement.” Guz v. Bechtel Nat’l, Inc., 8 P.3d 1089, 1110 (Cal. 2000). 20 21 Although presented with new factual allegations, the Court’s prior order largely 22 controls because the Pembertons’ proposed implied covenant claim does not break 23 new ground. 24 “unilateral” issuance of corrected 2013 and 2014 Forms after it revisited the issue of 25 reporting deferred interest payments for the Pembertons’ loan without sending 26 corrected forms to the Pembertons, (PSSAC ¶¶ 127–129, 134–35, 138), and (2) 27 Nationstar’s alleged failure to advise the Pembertons about the issuance of the correct 28 forms, (id. ¶¶ 131–32, 140). The Court, however, has already concluded that “no The Pembertons seek to premise the claim on (1) Nationstar’s – 13 – 14cv1024 1 provision of the Note or the deed of trust requires Nationstar to disclose its treatment 2 of deferred interest payments in its Form 1098 reporting” and “the Pembertons do not 3 identify any express contractual provision that required Nationstar to investigate the 4 Plaintiffs’ contentions regarding Nationstar’s allegedly inaccurate reporting in a Form 5 1098, or to issue a corrected Form 1098.” Pemberton, 331 F. Supp. 3d at 1042. The 6 Pembertons’ proposed allegations about Nationstar’s post-complaint conduct and 7 related assertions that Nationstar “abused” contractual discretion in the issuance of 8 corrected forms or failed to advise the Pembertons of its reporting conduct are 9 therefore unavailing. 10 11 The Pembertons also seek to ground their implied covenant claim in the Note’s 12 allocation provisions. (PSSAC ¶¶ 117–18.) The Court has already rejected the 13 Pembertons’ claim based on these provisions as implausible because “Nationstar . . . 14 had the contractual right to treat deferred interest as principal for the purposes of the 15 Note.” Pemberton, 331 F. Supp. 3d at 1042 (emphasis added); Song Fi Inc. v. Google, 16 Inc., 108 F.Supp.3d 876, 885 (N.D. Cal. 2015) (a party “cannot state a claim for breach 17 of the implied covenant of good faith and fair dealing, because ‘if defendants were 18 given the right to do what they did by the express provisions of the contract there can 19 be no breach.’”). Even accepting as true the Pembertons’ new allegations that 20 Nationstar had an internal tracking and reporting policy for deferred interest (PSSAC 21 ¶¶ 120–21), this policy is not tethered to the actual text of the allocation provisions in 22 the Pembertons’ Note. Therefore, the policy cannot give rise to a breach of the implied 23 covenant claim. 24 25 Ultimately, the Pembertons invoke Rule 15 to reintroduce an implied covenant 26 claim that would “impose substantive duties or limits on the contracting parties 27 beyond those incorporated in the[se] specific terms.” Plastino v. Wells Fargo Bank, 28 873 F.Supp.2d 1179, 1191 (N.D. Cal. 2012). And the Pembertons take issue with – 14 – 14cv1024 1 Nationstar’s conduct following the commencement of this suit on the ground that “tax 2 law is plainly not supposed to work” in the way Nationstar’s issuance of corrected 3 Forms 1098 might suggest. (PSAC ¶ 77.) But whatever obligations Nationstar might 4 have under Section 6050H and tax law (PSSAC ¶¶ 126, 130, 140), these are not 5 obligations that the Pembertons can wield against Nationstar through the guise of the 6 implied covenant. Accordingly, the Court denies leave for this claim. 7 8 3. Fraud 9 The third claim the Pembertons seek to reintroduce is a common law fraud 10 claim against Nationstar. (PSSAC ¶¶ 146–61.) The elements of fraud under 11 California law are “(1) misrepresentations (false representation, concealment, or 12 nondisclosure); (2) knowledge of falsity (scienter); (3) intent to defraud (i.e., to induce 13 reliance); (4) justifiable reliance; and (5) resulting damage.” Alliance Mortgage Co. 14 v. Rothwell, 900 P.2d 601, 608 (Cal. 1995). Although the Pembertons’ latest fraud 15 claim contains new factual allegations for post-complaint conduct, the claim falters 16 for the same reasons the Court previously dismissed the Pembertons’ original fraud 17 claim with prejudice. 18 19 20 21 22 23 24 25 26 27 28 The Pembertons’ fraud allegations concerning Nationstar’s Form 1098 reporting and post-complaint conduct and the Pembertons’ related arguments in their Rule 15 motion ignore the Court’s determination that the Pembertons cannot establish falsity insofar as the Pembertons allege that Nationstar acted fraudulently with respect to any reporting obligations for deferred interest that might be deemed to arise under Section 6050H. (PSSAC ¶¶ 148, 152–156; ECF No. 100 at 8–11.) The Court specifically concluded that “[f]atal to the Pembertons’ statutory construction-based assertion of falsity is Section 6050H’s ambiguity and the lack of regulatory guidance at the time Nationstar issued its Form 1098.” Pemberton, 331 F. Supp. 3d at 1045. “[N]either § 6050H nor its implementing regulations provide explicit direction to – 15 – 14cv1024 1 recipients on how, whether and when to report capitalized interest.” Id (quoting 2 Strugala v. Flagstar Bank, FSB, No. 5:13-cv-05927-EJD, 2015 WL 5186493, at *3 3 (N.D. Cal. Sept. 4, 2015)) (emphasis added); Rovai v. Select Portfolio Servicing, Inc., 4 No. 14-cv-1738-BAS-WVG, 2015 WL 3613748, at *3 (S.D. Cal. May 11, 2015)). 5 The Pembertons identify no statutory and regulatory changes that would render false 6 Nationstar’s subsequent Forms 1098, which allegedly account for deferred interest, 7 all of which were allegedly issued before the Court’s dismissal order. 8 Pembertons’ continued reliance on federal tax law and Section 6050H simply cannot 9 establish that Nationstar made false representations to the Pembertons in its Forms 10 1098, whether in the original 2013 Form 1098 that underlies this suit or Nationstar’s 11 subsequent Forms 1098. The 12 13 The Pembertons also seek to premise their fraud claim on Nationstar’s alleged 14 policy of tracking and reporting interest, a policy which Nationstar allegedly had 15 before servicing the Pembertons’ loan. (PSSAC ¶¶ 147–150.) While the PSSAC 16 contains allegations about Nationstar’s alleged misrepresentations to and 17 concealments from the Pembertons in relation to this policy, conspicuously absent 18 from the PSSAC are factual allegations that would plausibly show an intent to defraud. 19 See Sukonik v. Wright Med. Tech., Inc., No. CV 14-08278 BRO (MRWx), 2015 WL 20 10682986, at *15 (C.D. Cal. Jan. 26, 2015) (“[A]llegations of intent must still meet 21 Rule 8(a)'s plausibility standard under Twombly and Iqbal.”). The Court’s previous 22 conclusion regarding the Pembertons’ inability to plausibly plead intent to defraud 23 controls here: “[t]he Pembertons’ Note, which Nationstar did not create, treats 24 deferred interest as principal and did so before Nationstar ever began to service the 25 Pembertons’ loan” and thus “the Pembertons cannot plausibly allege that Nationstar 26 intended to defraud them.” Pemberton, 331 F. Supp. 3d at 1047. Accordingly, the 27 Court denies leave for this claim. 28 – 16 – 14cv1024 1 C. Third-Party Beneficiary Breach of Contract Claim 2 In line with the Pembertons’ interposition of novel state law claims based on 3 Section 6050H, the Pembertons seek to raise a third-party beneficiary breach of 4 contract claim against Nationstar for the first time. (PSSAC ¶¶ 102–10.) According 5 to the Pembertons, BANA and Nationstar entered into a contract pursuant to which 6 Nationstar “assume[d]” BANA’s duties, including that of “prepar[ing] and fil[ing] 7 federal and state informational returns as required by statute, including IRS Form 8 1098.” (Id. ¶ 103–04.) The Pembertons allege, as third-party beneficiaries, that 9 Nationstar breached the agreement by “fail[ing] to provide the benefit of properly 10 servicing their loans by not properly reporting their mortgage interest as required” by 11 the agreement, which caused the Pembertons harm from alleged overpayment of taxes 12 and potential loss of a tax refund. (Id. ¶¶ 108, 110.) 13 14 Under California law, a third party may enforce a contract if the contract is 15 “made expressly for the benefit of a third person. . .” Cal. Civ. Code § 1559. “A third 16 party qualifies as a beneficiary under a contract if the parties intended to benefit the 17 third party and the terms of the contract make that intent evident.” Karo v. San Diego 18 Symphony Orchestra Ass’n, 762 F.2d 819, 821–22 (9th Cir. 1985) (citing Strauss v. 19 Summerhays, 204 Cal. Rptr. 227, 233 (Cal. Ct. App. 1984)); Deerpoint Grp., Inc. v. 20 Agrigenix, LLC, 345 F. Supp. 3d 1207, 1228 (E.D. Cal. 2018) (“[T]he ‘test for 21 determining whether a contract was made for the benefit of a third party is whether an 22 intent to benefit a third person appears from the terms of the contract.’” (citation 23 omitted)). “[A]n intent to make the obligation inure to the benefit of the third party 24 must have been clearly manifested by the contracting parties.” R. J. Cardinal Co. v. 25 Ritchie, 32 Cal. Rptr. 545, 552 (Cal. Ct. App. 1963). 26 27 For reasons the Court has discussed in the concurrently filed Rovai order, the 28 Court has doubts about the legal sufficiency of a breach of contract claim based on – 17 – 14cv1024 1 the BANA-Nationstar agreement, even assuming that the Pembertons are third-party 2 beneficiaries. However, the allegations in the Rovai pleading that render the claim 3 implausible in that case are not pleaded in the Pembertons’ complaint and thus the 4 Court cannot similarly conclude that the third-party beneficiary breach of contract 5 claim would be futile here.1 6 7 The Court, however, does not find necessary a full examination of the legal 8 sufficiency of this claim to conclude that denial of the Pembertons’ motion is also 9 warranted for this claim. “Where—as here—an amended complaint asserts new legal 10 theories, leave to amend does not advance Rule 15(a)’s purpose.” Affiliates, Inc. v. 11 Armstrong, No. 1:09-CV-00149-BLW, 2011 WL 3678938, at *3 (D. Idaho Aug. 23, 12 2011). This case has been pending for nearly five years, during which the Pembertons 13 have not once raised even a whiff of a third-party beneficiary breach of contract claim 14 despite alleging that BANA transferred their loan to Nationstar. A “radical shift in 15 direction posed by these [proposed] claims, their tenuous nature, and the inordinate 16 delay” weigh against granting leave to amend. Morongo Band of Mission Indians v. 17 Rose, 893 F.2d 1074, 1079 (9th Cir. 1990). The Pembertons’ assertion of this claim 18 now—only after the Court has rejected the Pembertons’ contract theories based on the 19 contract to which they are actually a party—raises the additional concern that the 20 Pembertons seek to evade the Court’s previous rulings by seeking to find a new 21 contract for which they can argue Section 6050H is a term. See Fresno Unified Sch. 22 Dist., 980 F. Supp. 2d at 1177–78 (“Courts have been particularly critical of proposed 23 24 25 26 27 28 Rovai expressly alleges that BANA only “now properly includes payments of deferred interest on the Forms 1098 it issues.” (Rovai v. Select Portfolio Servicing, No. 14-cv-1738-BASMSB, (S.D. Cal.) ECF No. 1 ¶ 15; ECF No. 39 ¶ 15; ECF No. 86 ¶ 15).) The only reasonable inference that can be drawn is that BANA did not credit and report deferred interest payments in the manner Rovai alleges Section 6050H requires during the time that BANA serviced her home mortgage loan. Although the Pembertons allege that BANA serviced their loan immediately prior to Nationstar, they do not allege that BANA also failed to report deferred interest payments. Thus, the Court cannot conclude that a breach of contract claim based on the transfer agreement would similarly be futile. 1 – 18 – 14cv1024 1 amendments that appear to ‘game’ the system.”). Under these circumstances, the 2 Court declines to exercise its broad discretion to permit amendment for this claim. 3 CONCLUSION & ORDER 4 5 6 7 8 For the foregoing reasons, the Court DENIES the Pembertons’ motion to supplement. (ECF No. 100.) IT IS SO ORDERED. DATED: April 23, 2019 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 – 19 – 14cv1024

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