Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—D. Del.: California’s Consumers Legal Remedies Act did not apply to mortgage loans, (Sep 23, 2013)

By Peter Reap, J.D., LL.M.

Loan customer Jeffrey Gerbitz’s claim, on behalf of himself and all other similarly situated individuals, against ING Bang (“ING”) for violation of the California Consumers Legal Remedies Act (“CLRA”) in connection with a mortgage loan failed because the CLRA did not apply to mortgage loans, the federal district court in Wilmington, Delaware, has held (Gerbitz v. ING Bank, FSB, September 19, 2013, Stark, J.). However, ING’s motion to dismiss the other claims brought by Gerbitz, for violations of California’s Unfair Competition Law (“UCL”), and for breach of the implied covenant of good faith and fair dealing, was denied.

Background. Gerbitz filed a class action complaint on December 7, 2012 on behalf of himself and all other similarly situated individuals. In his complaint, Gerbitz states that in or around October 2005, ING began marketing Orange Loans with a Rate Renewal Guarantee. Gerbitz contends that the Orange Loans were marketed with a $500 Rate Renew Guarantee from about October 2005 through May 2008, and a $750 Rate Renew Guarantee from about May 2008 through April 2009. Gerbitz obtained an Orange Loan in or around September 2007.

On January 28, 2013, ING filed the instant motion to dismiss.

Motion to dismiss: generally. ING argued that the court should ignore Gerbitz’s allegations that: (1) the Orange Loans “necessarily included and were marketed with a guaranteed right to a flat-fee ‘rate renew’ for $500 or $750 for the remaining life of the loan”; and (2) ING’s advertising and marketing gave rise to the purported guarantee. In support of its position, ING submitted loan documents, a Deed of Trust, and Agreements to Modify Note. Gerbitz contended that ING should have moved for summary judgment if it intended to rely on these documents.

Pursuant to Federal Rule of Civil Procedure 12(d), “[i]f, on a motion under Rule 12(b)(6) …, matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56.” This was known as “conversion,” the court observed.

The documents relied upon by ING were undisputedly authentic, according to the court. Further, Gerbitz’s claims, particularly the breach of implied covenant of good faith and fair dealing claim, were based, in part, on the documents. Because the documents had been explicitly relied upon in the complaint, the court refused to convert the motion.

ING argued that its documents contradicted Gerbitz’s allegation that the Orange Loans “necessarily [included and] were marketed with a guaranteed right to a flat-fee ‘rate renew’ for $500 or $750 for the remaining life of the loan.” The court did not agree. Taking Gerbitz’s well-pleaded allegations as true, and considering the marketing documents in the light most favorable to Gerbitz, he adequately alleged facts to support its claim that ING’s marketing materials gave rise to the Rate Renew Guarantee, the court held.

Motion to dismiss: particularity in pleading. ING argued that the court should grant its motion to dismiss because the complaint failed to meet the pleading standard required by Federal Rule of Civil Procedure 9(b). However, Gerbitz explicitly pled “the who, what, where, when, how, and why” of his fraud claims, the court ruled.

Further, Gerbitz provided examples of lNG advertisements (in place of the actual advertisements received by Gerbitz because he was no longer in possession of them). Although the advertisements supporting the complaint postdated the time when Gerbitz obtained his lNG loan, the complaint alleged that Gerbitz saw an lNG advertisement containing the Rate Renew Guarantee prior to purchasing his loan.

Gerbitz met the pleading standard of Rule 9(b) and provided ING sufficient notice as to the misconduct with which it was charged, the court decided. The Court was satisfied that the complaint, attached advertisement samples, and Gerbitz’s representation that the case was based on an “express misrepresentation” made by lNG promising a rate renew guarantee, combined to provide ING with sufficient notice of the claims against it. Thus, the Court denied the motion to dismiss to the extent it was based on Rule 9(b).

CLRA claim. ING argued that the CLRA did not apply to loan transactions and, therefore, Gerbitz could not state a claim on which relief could be granted.

The CLRA prohibits specified unfair and deceptive acts and practices in a transaction intended to result or which results in the sale or lease of goods or services to any consumer. The CLRA defines “goods” as “tangible chattels bought or leased,” and “services” as “work, labor, and services for other than a commercial or business use, including services furnished in connection with the sale or repair of goods,” the court noted.

Historically, claims arising out of financial transactions, including mortgage loans, were properly brought under the CLRA because they typically involved additional services beyond a credit transaction. In 2009, the California Supreme Court addressed whether a financial transaction, specifically life insurance, was subject to the CLRA. Fairbanks v. Superior Court, 205 P.3d 201, 202 (Cal. 2009) (quoting Cal. Civ. Code§ 1770(a)). The Court concluded that life insurance, a contract of indemnity in exchange for premium payments, was not a “good” or “service” under the CLRA.

To the extent that there was disagreement among the courts, the court agreed with those decisions that concluded the California Supreme Court would find the service of mortgage loans to be outside the scope of the CLRA. The court was not persuaded that Gerbitz’s loan was distinguishable from life insurance simply because it could involve “ongoing interactions each time a refinancing need arises.” Thus, ING’s motion to dismiss the CLRA claim was granted.

UCL claim. The UCL prohibits three types of practices: (1) unlawful; (2) unfair; and (3) fraudulent. Gerbitz met the fraudulent and unfair prongs of the UCL, the court determined.

As discussed above, the court concluded that Gerbitz met the pleading standard under Rule 9(b), which also satisfied the fraudulent prong of a UCL claim.

Gerbitz also met the unfair prong of the UCL. There were three tests for determining whether a practice was unfair, including the “balancing test,” which considered the practice’s impact on its alleged victim and the reasons of the alleged wrongdoer.

ING’s contention that Gerbitz failed to meet the balancing test was based on Gerbitz’s contention that the complaint failed to satisfy the pleading standards of Rule 9(b), a proposition with which the court had already disagreed. Therefore, the unfair practice allegation at least met the balancing test, and the UCL claim was not dismissed.

Implied covenant claim. ING argued that Gerbitz failed to state a claim for violation of the implied covenant of good faith and fair dealing for three reasons: (1) he failed to state with sufficient particularity that there was a “guarantee”; (2) the claim was based on pre-contractual conduct, which could not support a breach argument; and (3) the express terms of the contract precluded a good faith and fair dealing claim.

The court disagreed. As discussed above, Gerbitz adequately pled that the marketing materials created a Rate Renew Guarantee. Moreover, ING’s fact based-defense was not appropriately resolved at the motion to dismiss stage of the proceedings, the court held. Gerbitz sufficiently pled that ING breached the implied covenant when it unilaterally modified terms of the loans. The modification “prevent[ed] Plaintiff and the Class from receiving the benefits of the Rate Renew Guarantee,” “violat[ing] the spirit of the agreements.” Therefore, the motion to dismiss the implied covenant of good faith and fair dealing claim was denied.

The case is C.A. No. 12-1670-LPS.

Attorneys: Jeffrey S. Goddess (Rosenthal, Monhait, & Goddess, P.A.) for Jeffrey Gerbitz. R. Montgomery Donaldson (Montgomery, McCracken, Walker & Rhoads, LLP) for ING Bank.

Companies: ING Bank, FSB

Cases: StateUnfairTradePractices Advertising DelawareNews