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                                       LEXSEE 2009 U.S. DIST. LEXIS 31111

                   ELVIN AND PHYLLIS VALENZUELA, Plaintiffs, vs. AMERICAN HOME
                       MORTGAGE INVESTMENT TRUST 2005-2, et al., Defendants.

                                            No. CV-F-08-1179 OWW/SMS


                                             2009 U.S. Dist. LEXIS 31111

                                               March 30, 2009, Decided
                                                March 30, 2009, Filed

COUNSEL:        [*1] For Elvin Valenzuela, Phyllis           17200 et seq. [*2] - Unlawful Business Practice (TILA);
Valenzuela, Plaintiffs: Jeffrey Keith Berns, LEAD AT-        (3) fraudulent omissions; (4) violation of California
TORNEY, David M Arbogast, Arbogast and Berns, LLP,           Business and Professions Code § 17200 et seq. - Unfair
Tarzana, CA; Lee A. Weiss, PHV, Rebecca Tingey,              and Fraudulent Business Practices; (5) breach of con-
PHV, PRO HAC VICE, Browne Woods George LLP,                  tract; and (6) tortious breach of the covenant of good
New York, NY.                                                faith and fair dealing.
                                                                   Plaintiffs allege that they refinanced their home in
For American Home Mortgage Investment Trust 2005-2,
                                                             Visalia, California on June 23, 2005 and entered into an
Wells Fargo Bank, N.A., Deutsche Bank National Trust
                                                             Option ARM loan agreement with American Home
Company, Defendants: Erik Wayne Kemp, LEAD AT-
                                                             Mortgage Acceptance, Inc. Because American Home
TORNEY, Severson & Werson, PC, San Francisco, CA;
                                                             Mortgage Acceptance, Inc. filed a Chapter 11 bankruptcy
Michael J. Steiner, Regina J. McClendon, LEAD AT-
                                                             petition on August 7, 2007, Plaintiffs have not named it
TORNEYS, Severson & Werson, San Francisco, CA.
                                                             as a defendant in this action. The Complaint alleges
                                                             American Home Mortgage Investment Trust 2005-2
                                                             (hereinafter "Investment Trust 2005-2" or the "Trust") is
                                                             a Delaware statutory trust that presently owns Option
                                                             ARM loans that are the subject of the Complaint, includ-
OPINION BY: Oliver W. Wanger
                                                             ing Option ARM loans originated, recorded and held in
                                                             Tulare County. Defendant American Home Mortgage
                                                             Securities LLC (hereinafter "Mortgage Securities LLC"
   MEMORANDUM DECISION GRANTING DE-                          was and is engaged in the business of purchasing, pack-
FENDANTS' MOTION TO DISMISS FIFTH AND                        aging and securitizing the Option ARM loans and owned
SIXTH CAUSES OF ACTION WITHOUT LEAVE TO                      the Option ARM loans that are the subject of this Com-
AMEND (Docs. 21-22, 29 & 30)                                 plaint after it purchased [*3] them from American Home
                                                             Mortgage Acceptance, Inc. Defendant Wells Fargo Bank
     On August 12, 2008, Plaintiffs Elvin and Phyllis
                                                             (hereinafter "Wells Fargo") was and is engaged in the
Valenzuela (hereinafter "Plaintiffs") filed a Class Action
                                                             business of servicing the Option ARM loans that are the
Complaint against Defendants American Home Mort-
                                                             subject of the Complaint. Defendant Deutsche Bank Na-
gage Investment Trust 2005-2; American Home Mort-
                                                             tional Trust Company (hereinafter "Deutsche Bank" or
gage Securities LLC; Wells Fargo Bank, N.A.; Deutsche
                                                             the "Trustee") is the Trustee of the Trust, American
Bank National Trust Company and Does 1-10. The
                                                             Home Mortgage Investment Trust 2005-2. The Option
Complaint alleges causes of action for: (1) violations of
                                                             ARM loans which are the subject of the Complaint and
the Truth in Lending Act, 15 U.S.C. § 1601 et seq.; (2)
                                                             all rights and interest under those loans were assigned to
violation of California Business and Professions Code §
                                                                                                                     Page 2
                                            2009 U.S. Dist. LEXIS 31111, *

the Trustee by American Home Mortgage Securities                    Defendants failed to make these disclo-
LLC.                                                                sures in connection with the Option ARM
                                                                    loans sold to Plaintiffs and the Class.
   As the facts common to all causes of action, the
Complaint alleges:                                                       22. At all relevant times, Defendants
                                                                    sold their Option ARM loan to consum-
        18. The instant action arises out of resi-                  ers, including Plaintiffs, in a false or de-
      dential mortgage loan transactions in                         ceptive manner. Defendants represented
      which Defendants failed to disclose perti-                    to the general public that their Option
      nent information in a clear and conspicu-                     ARM loan would provide a very low,
      ous manner to Plaintiffs and Class mem-                       fixed interest rate for a period of three to
      bers, in writing, as required by law.                         five years and no negative amortization.
                                                                    Defendants used this "teaser" rate to lure
          19. This action also concerns Defen-
                                                                    Plaintiffs into purchasing Defendants' Op-
      dants' unlawful, fraudulent and unfair
                                                                    tion ARM loan. However, the low fixed
      business acts or practices. Defendants en-
                                                                    rate was illusory -- a false promise. Plain-
      gaged in a campaign of deceptive conduct
                                                                    tiffs and others similarly situated did not
      and concealment aimed at maximizing the
                                                                    receive the benefit of the low rate prom-
      number of consumers who would accept
                                                                    ised to them. Once signed on to Defen-
      Option ARM loans in order to maximize
                                                                    dants' loan, the interest rate applied to
      Defendants' profits, even as Defendants
                                                                    Plaintiffs' and Class members' loans was
      knew their conduct would cause [*4]
                                                                    immediately and significantly increased.
      many of these consumers to lose their
      homes through foreclosure.                                         23. Plaintiffs and others similarly
                                                                    situated were consumers who applied for
           20. Plaintiffs, along with thousands
                                                                    a mortgage loan through Defendants. Dur-
      of other similarly situated consumers,
                                                                    ing the loan application process, in each
      were sold an Option ARM home loan by
                                                                    case, Defendants represented to Plaintiffs
      Defendants. The Option ARM loan sold
                                                                    and Class members that in accepting these
      to Plaintiffs and Class members is a de-
                                                                    loan terms, they would be able to lower
      ceptively devised financial product. The
                                                                    their [*6] mortgage payments and save
      loan has a variable rate feature with pay-
                                                                    money. Defendants initiated this scheme
      ment caps. The product was sold based on
                                                                    in order to maximize the amount of loans
      the promise of a low fixed payment result-
                                                                    it sold to consumers and to maximize their
      ing from a prominently featured low in-
      terest rate. In fact, Plaintiffs and Class
      members were charged a different, much                             24. Based on Defendants' representa-
      greater interest rate than promised. Fur-                     tions, and the misconduct alleged herein,
      ther, Defendants disguised from Plaintiffs                    Plaintiffs and Class members agreed to fi-
      and Class members that Defendants' Op-                        nance their primary residences through
      tion ARM loan was designed to, and did,                       Defendants' Option ARM loan. Plaintiffs
      cause negative amortization to occur. Fur-                    and Class members were told they were
      ther still, once lured into these loans, con-                 being sold a home loan with a low interest
      sumers could not easily extricate them-                       rate of between 1% and 3% (the "teaser"
      selves from the loans because Defendants                      rate), and that the interest rate was fixed
      included in the loans a stiff and onerous                     for the first three to five years of the loan.
      prepayment penalty making it extremely                        Defendants also informed Plaintiffs, and
      difficult, if not impossible, for borrowers                   Plaintiffs were led to believe, that if they
      to pay off the loans.                                         made payments based on the promised
                                                                    low interest rate, which were the pay-
           21. The methods used by Defendants
                                                                    ments reflected in the written payment
      to sell the Option ARM loans to Plaintiffs
                                                                    schedule provided to them by Defendants,
      and Class members violate TILA. TILA is
                                                                    that the loan was a no negative amortiza-
      supposed to protect consumers; it man-
                                                                    tion home loan. Plaintiffs' payments were
      dates certain disclosures be made by lend-
                                                                    to be applied to their principal loan bal-
      ers [*5] to borrowers concerning the
                                                                    ance as well as interest.
      terms and conditions of their home loans.
                                                                                                              Page 3
                                       2009 U.S. Dist. LEXIS 31111, *

      25. After the purported three to five                    Plaintiffs and Class members over and
year fixed interest period, Plaintiffs and                     above the fixed interest payment rate were
Class members reasonably believed,                             added to the principal balance on their
based on the representations contained in                      home loans in ever increasing increments,
the documents Defendants provided to                           substantially reducing the equity in these
Plaintiffs and Class members, that they                        borrowers' homes.
would be able [*7] to refinance their
                                                                    28. In stark contrast to this reality,
loans and obtain a new loan before their
                                                               Defendants, through the standardized loan
scheduled payments increased. However,
                                                               documents they created and supplied to
the payment schedule provided by Defen-
                                                               Plaintiffs and Class members, stated that
dants failed to disclose to, and by omis-
                                                               negative amortization was only a mere
sion failed to inform these consumers that
                                                               possibility. Defendants concealed and
due to the negative amortization that was
                                                               failed to disclose to Plaintiffs and the
purposefully built into these loans, Plain-
                                                               Class the fact that the loan, as presented
tiffs and Class members would be unable
                                                               [*9] and designed, in fact, guaranteed
to refinance their loans as there would be
                                                               negative amortization. Defendants failed
little or no equity left to refinance, and in-
                                                               to disclose and omitted the objectively
deed, the principal balance owed on the
                                                               material fact that negative amortization
loan would be more than Plaintiffs had
                                                               was absolutely certain to occur if con-
originally borrowed.
                                                               sumers followed the payment schedule
     26. Plaintiffs believed these facts to                    listed by Defendants in the TILDS. This
be true because that is what the Defen-                        information was objectively material and
dants wanted consumers to believe. De-                         necessary for consumers to make an in-
fendants aggressively positioned their                         formed decision because this would have
product as a fixed, low interest home loan.                    revealed that the loan's principal balance
Defendants knew that if it was positioned                      would increase if the payment schedule
in such a manner, their Option ARM loan                        was followed, thereby rendering it impos-
would be a hugely popular and profitable                       sible to refinance the loan at or around the
product for them. Defendants also knew,                        time the prepayment penalty expired
however, that they were selling the prod-                      and/or by the time the interest and pay-
uct in a false and deceptive manner.                           ment rates re-set. In this respect, Defen-
While Defendants trumpeted the low rate                        dants utterly failed to place any warning
loans to the public, Defendants knew their                     on the TILDS about negative amortiza-
promise of a low interest rate was illu-                       tion.
                                                                    29. At all relevant times, once Plain-
     27. In fact, Defendants' Option ARM                       tiffs and Class members accepted Defen-
loan possessed a low, fixed payment but                        dants' Option ARM loan contract, they
not a low, fixed interest rate. [*8] Unbe-                     had no viable option by which to extricate
knownst to Plaintiffs and Class members,                       themselves because these Option ARM
the actual interest rate they were charged                     loan agreements included a draconian pre-
on their loans was not fixed, was not the                      payment penalty for a period of up to
low teaser interest rate stated in the loan                    three years.
documentation, and was in fact consid-
                                                                   30. The Option ARM loans sold by
erably higher than going market rates.
                                                               Defendants all have the following uniform
And after purchasing Defendants' Option
ARM loan product, Plaintiffs and Class
members did not actually receive the
                                                                          (a) There is an initial low
benefit of the low teaser rate at all in some
                                                                        interest rate or "teaser" rate
cases, or at best, they received that rate
                                                                        that was used [*10] to en-
for only a single month. Immediately
                                                                        tice the borrower into en-
thereafter, Defendants in every instance
                                                                        tering into the loan. The
and for every loan, increased the interest
                                                                        rate offered was typically
rate they charged to consumers. The now-
                                                                        1% - 3%;
increased interest charges incurred by
                                                                                                               Page 4
                                       2009 U.S. Dist. LEXIS 31111, *

            (b) The loan has a cor-                                 32. Defendants uniformly failed to
       responding low payment                                  disclose to, and by omission failed to in-
       schedule. The documenta-                                form, consumers, including Plaintiffs and
       tion provided intended to                               Class members, that the payments set
       misleadingly portray to                                 forth in the TILDS were insufficient to
       consumers that the low                                  cover the actual charges and that this was,
       payments for the first sev-                             in fact, a loan that would cause Plaintiffs
       eral years were a direct re-                            and Class members to lose the equity they
       sult of the low interest rate                           had in their homes.
       being offered;
                                                                    33. Defendants uniformly failed to
            (c) The initial pay-                               disclose to, and by omission failed to in-
       ments in the required dis-                              form, consumers, including Plaintiffs and
       closures were precisely the                             Class members, that when the principal
       amount that would be re-                                balance increased to a certain level, they
       quired to pay both interest                             would no longer have the option of mak-
       and principal in a fully                                ing the fixed interest payment amount.
       amortized 30 year loan
                                                                    34. Disclosing whether a payment
       based upon the low interest
                                                               will result in negative amortization is of
       rate being offered. The
                                                               critical importance to consumers. If the
       purpose was to assure that
                                                               disclosed payment rate is insufficient to
       if someone were to calcu-
                                                               pay both principal and interest, one of the
       late what the payment
                                                               consequences of negative amortization is
       would be at the low offered
                                                               a loss of equity. Defendants, and each of
       interest rate, it corre-
                                                               them, are, and at all relevant times [*12]
       sponded to the payment
                                                               hereto have been, aware that clear and
       schedule. This portrayal
                                                               conspicuous disclosure of the actual inter-
       was intended to further
                                                               est rate and a payment rate sufficient to
       mislead consumers into be-
                                                               avoid negative amortization and the con-
       lieving that the payments
                                                               comitant loss of equity is extremely im-
       were enough to cover all
                                                               portant, material information.
       principal and interest;
                                                                    35. At all relevant times, Defendants,
            (d) The payment has a
                                                               and each of them, knew or should have
       capped annual increase on
                                                               known, or were reckless in not knowing,
       the payment amount; and
                                                               that: (i) the payment rate provided to
           (e) A substantial num-                              Plaintiffs and Class members was insuffi-
       ber of the loans include a                              cient to pay both interest and principal;
       prepayment penalty pre-                                 (ii) that negative amortization was sub-
       venting consumers from                                  stantially certain to occur if Plaintiffs and
       securing a new loan for a                               Class members made payments according
       period of up to three years.                            to the payment schedule provided by De-
                                                               fendants; and (iii) that loss of equity
                                                               and/or loss of Plaintiffs' and Class mem-
                                                               bers' residences was substantially certain
     31. Defendants uniformly failed to
                                                               to occur if Plaintiffs and Class members
disclose to, and by omission, failed in-
                                                               made payments according to the payment
form to consumers, including Plaintiffs
                                                               schedule provided by Defendants.
and Class members, in [*11] a clear and
conspicuous manner that the "teaser" rate                           36. In spite of their knowledge, De-
offered by Defendants was actually a dis-                      fendants sold their Option ARM loans as
counted rate and only applied to the loans                     a product that would provide Plaintiffs
for thirty (30) days. Thereafter, the true                     and Class members with a low interest
interest charged on the loans was signifi-                     rate for the first three to five years of the
cantly higher than the promised rate.                          loan, and at all relevant times, failed to
                                                               disclose and/or concealed this information
                                                                                                             Page 5
                                      2009 U.S. Dist. LEXIS 31111, *

by making partial representations of mate-                    any benefit that could be attributed to
rial facts [*13] when Defendants had ex-                      them.
clusive knowledge of material facts that
                                                                   41. Knowing the truth and motivated
negative amortization was certain to oc-
                                                              by profit and market share, Defendants
cur. This concealed and omitted informa-
                                                              knowingly and willfully engaged in the
tion was not known to Plaintiffs and Class
                                                              acts and/or omissions to mislead and/or
members. Because the Option ARM loans
                                                              deceive Plaintiff and all others similarly
did not provide a low interest rate for the
first three to five years of the Note and the
payment amounts set forth by Defendants                             42. Defendants' failures of disclosure
were insufficient to pay both principal and                   regarding their Option ARM loans have
interest, negative amortization occurred.                     resulted and will continue to result in sig-
                                                              nificant loss [*15] and damage to Plain-
     37. The true facts about Defendants'
                                                              tiffs and Class members, including but not
Option ARM loans are that they do not
                                                              limited to the loss of equity these con-
provide the low interest rate promised and
                                                              sumers have or had in their homes.
they are certain to result in negative amor-
tization.                                                          43. The facts which Defendants mis-
                                                              represented and concealed, as alleged in
     38. Disclosure of a payment rate that
                                                              the preceding paragraphs, were material
is sufficient to pay both principal and in-
                                                              to the decisions about whether to purchase
terest on the loans is of critical importance
                                                              Option ARM loans in that Plaintiffs and
to consumers. If the disclosed payment
                                                              Class members would not have purchased
rate is insufficient to pay both principal
                                                              these loans but for Defendants' unlawful,
and interest, one of the consequences is
                                                              unfair, fraudulent and/or deceptive acts
that negative amortization or loss of eq-
                                                              and/or practices as alleged herein.
uity will occur. Defendants, and each of
them are, and at all relevant times have                           44. Defendants' unlawful, unfair,
been, aware that the ability of the dis-                      fraudulent, untrue and/or deceptive acts
closed payment rate to pay both principal                     and/or practices were committed with
and interest so as to avoid negative amor-                    willful and wanton disregard for whether
tization is one of the most important terms                   or not Plaintiffs and Class members
of a loan.                                                    would receive a home loan that would ac-
                                                              tually provide the low interest and pay-
     39. To this day, Defendants continue
                                                              ment rate, as promised, for the first three
to conceal [*14] material information
                                                              to five years of the loan that would be suf-
from consumers and the public that: (i)
                                                              ficient to pay both principal and interest.
the payment amounts on the payment
schedules provided to Plaintiffs and Class                         45. Upon information and belief, at
members are and were insufficient to pay                      all relevant times during the liability pe-
both principal and interest; (ii) if the dis-                 riod, Defendants possessed full knowl-
closed payment schedule is followed,                          edge and information concerning the
Plaintiffs and Class members will suffer                      above facts about the Option ARM loans,
negative amortization; and (iii) loss of eq-                  and nevertheless sold these Option ARM
uity and/or loss of the property is substan-                  loans throughout the United States, in-
tially certain to occur if the disclosed                      cluding in the State of California.
payment schedule is followed. Neverthe-
less, Defendants have refused to clearly
and conspicuously disclose to Plaintiffs
and Class members the existence of this                     The Fifth [*16] Cause of Action for Breach of Con-
                                                       tract is alleged against all Defendants. After incorporat-
important material information and the in-
jury caused thereby, including but not                 ing all preceding paragraphs by reference, the Fifth
limited to the loss of equity.                         Cause of Action alleges:

    40. In the end, the harm caused by                          179. Plaintiffs and Class members en-
Defendants' failures to disclose and omis-                    tered into written home loan agreements
sions, as alleged herein, grossly outweighs                   with American Home Mortgage Accep-
                                                                                                              Page 6
                                       2009 U.S. Dist. LEXIS 31111, *

tance, Inc., which agreements were sub-                        payments would be applied to both prin-
sequently sold or assigned to American                         cipal and interest. Those schedules show
Home Mortgage Investment Trust 2005-2;                         that the payment amounts owed by Plain-
American Home Mortgage Securities                              tiffs and [*18] Class members in year one
LLC; Deutsche Bank National Trust                              are exactly equal to the amount required
Company and Does 1-10. Defendant                               to pay off the loan if, indeed, the interest
Wells Fargo Bank, N.A. is the "Master                          actually charged on the loan was the low
Servicer" on the loans at issue here and, in                   interest rate promised. Had the Defen-
that capacity, is responsible for enforcing                    dants done as promised, the payments
provisions of the Note relevant to this                        would have been sufficient to pay both
claim and applying Plaintiffs' and Class                       principal and interest.
members' payments in the manner re-
                                                                     184. Instead, Defendants immediately
quired by the Notes.
                                                               raised Plaintiffs' and Class members' in-
     180. The Notes were drafted by De-                        terest rates and applied no part of Plain-
fendants and could not be modified by                          tiffs' or Class members' payments to the
Plaintiffs or Class members due to Defen-                      principal balances on their loans. In fact,
dants' superior bargaining position. The                       because Defendants charged more interest
Notes were offered to Plaintiffs and the                       than was agreed to, the payments, as dis-
Class on a take it or leave it basis. As                       closed by Defendants, were insufficient to
such, the Notes at issue are contracts of                      cover the interest charge and thus princi-
adhesion. The Notes describe the terms                         pal balances increased (which is the nega-
and respective obligations applicable to                       tive amortization built into the loan).
the parties herein.
                                                                    185. Defendants breached the written
      181. The Notes describe Plaintiffs'                      contractual agreement by failing to apply
and Class members' interest rate on [*17]                      any portion of Plaintiffs' and Class mem-
the loan as a low interest rate, typically                     bers' monthly payments towards their
between 1% and 3%. In addition, as re-                         principal loan balances.
quired by federal law, Defendants pro-
                                                                    186. Plaintiffs and Class members, on
vided a TILDS concerning the home loan
                                                               the other hand, did all of the things the
agreement that shows a payment sched-
                                                               contract required of them. Plaintiffs and
uled based on the that low 1% to 3% in-
                                                               Class members made monthly payments
terest rate. For the first three to five years
                                                               in the amount required by the terms of the
the payment schedule shows that Plain-
                                                               Note and reflected in the payment sched-
tiffs' and Class members' monthly pay-
                                                               ule prepared by Defendants.
ment obligations to Defendants are the
exact payments necessary to pay off all                             187. As a result [*19] of Defendants'
principal and interest during the terms of                     breach of the agreement, Plaintiffs and
the loans if, indeed, the interest rate actu-                  Class members have suffered harm. Plain-
ally charged by Defendants on the loans                        tiffs and Class members have incurred
was the low interest rate promised.                            additional charges to their principal loan
                                                               balance. Plaintiffs and Class members
     182. Defendants expressly and/or
                                                               have incurred and will continue to incur
through their conduct and actions impli-
                                                               additional interest charges on the principal
edly agreed that Plaintiffs' and Class
                                                               loan balance and surplus interest added to
members' monthly payment obligations
                                                               Plaintiffs' and Class members' principal
would be sufficient to pay and would be
                                                               loan balance. Furthermore, Defendants'
applied to pay both the principal and in-
                                                               breach has placed Plaintiffs and Class
terest owed on the loans. Defendants
                                                               members in danger of losing their homes
breached this agreement and never ap-
                                                               through foreclosure as Defendants have
plied any of Plaintiffs' and Class mem-
                                                               caused Plaintiffs' and Class members'
bers' payments to principal.
                                                               principal loan balances to increase and
    183. The written payment schedules                         limited these consumers' ability to make
provided to Plaintiffs reinforced the prom-                    their future house payments or obtain al-
ise that Plaintiffs' and Class members'                        ternative home loan financing.
                                                                                                                      Page 7
                                             2009 U.S. Dist. LEXIS 31111, *

            188. At all relevant times, there ex-                    monthly payments in the amount pre-
       isted a gross inequality of bargaining                        scribed by Defendants, no negative amor-
       power between the parties to the Option                       tization would occur. The Note expressly
       ARM loan contracts. At all relevant times,                    states and/or implies that Plaintiffs' and
       Defendants unreasonably and uncon-                            Class members' monthly payment obliga-
       scionably exploited their superior bargain-                   tion will be applied to pay both principal
       ing position and foisted upon Plaintiffs                      and interest owed on the loan.
       and Class members extremely harsh, one-
                                                                          194. The written payment schedules
       sided provisions in the contract, which
                                                                     prepared by Defendants that were appli-
       Plaintiffs and Class members were not
                                                                     cable to Plaintiffs' and Class members'
       made aware of and did not comprehend
                                                                     loans, show that the payment amounts
       (e.g., Defendants' fraud and failures to
                                                                     owed by Plaintiffs and Class members to
       clearly [*20] and conspicuously disclose
                                                                     Defendants in year one are exactly equal
       as alleged herein), and which attempted to
                                                                     to the amount required to pay off the loan
       severely limit Defendants' obligations un-
                                                                     pursuant to an amortization schedule
       der the contracts at the expense of Plain-
                                                                     based upon the low interest rate promised.
       tiffs and Class members, as alleged
                                                                     If Defendants acted as they promised, the
       herein. As a result of these extremely
                                                                     payments would have been sufficient to
       harsh, one-sided provisions, including but
                                                                     pay both principal and interest.
       not limited to the provisions which limit
       the "teaser" interest rate for one month or                        195. Instead, Defendants immediately
       less, these provisions are unconscionable                     raised Plaintiffs' and Class members' in-
       and therefore unenforceable.                                  terest rate and applied no part of Plaintiffs'
                                                                     and Class members' payments to [*22]
            189. WHEREFORE, Plaintiffs and
                                                                     principal. Moreover, because Defendants
       Class members are entitled to declaratory
                                                                     charged more interest than was disclosed
       relief, compensatory damages proxi-
                                                                     and agreed to in the loans, Plaintiffs' and
       mately caused by Defendants' breach of
                                                                     Class members' payments were insuffi-
       contract as alleged herein, pre-judgment
                                                                     cient to cover the interest that Defendants
       interest, costs of suit and other relief as
                                                                     charged resulting in an increase in the
       the Court deems just and proper.
                                                                     amount of principal Plaintiffs and Class
                                                                     members owed on their homes.
                                                                          196. Defendants unfairly interfered
     The Sixth Cause of Action for Tortious Breach of
                                                                     with Plaintiffs' and Class members' rights
the Implied Covenant of Good Faith and Fair Dealing is
                                                                     to receive the benefits of the contract.
alleged against the Trust, American Home Securities
                                                                     These loans will cost Plaintiffs and Class
LLC, the Trustee and Does 1-10. After incorporating all
                                                                     members thousands of dollars more than
preceding allegations, the Sixth Cause of Action alleges:
                                                                     represented by Defendants. Plaintiffs and
                                                                     Class members did not receive the fixed
         191. Defendants entered into or were
                                                                     low interest rate home loan promised
       the assignees of written agreements with
                                                                     them by Defendants. Defendants have
       Plaintiffs and Class members based on
                                                                     caused Plaintiffs and Class members to
       representations Defendants made directly
                                                                     lose equity in their homes and therefore
       and indirectly to Plaintiffs and Class
                                                                     have denied Plaintiffs and Class members
       members about the terms of their loans.
                                                                     the enjoyment and security of one of their
            192. Defendants [*21] expressly rep-                     most important investments.
       resented to Plaintiffs and Class members
                                                                          197. Plaintiffs and Class members, on
       that they would provide loans secured by
                                                                     the other hand, performed all of the ac-
       Plaintiffs' and Class members' homes, and
                                                                     tions that the contract required of them.
       that the loans would have a promised
                                                                     Plaintiffs and Class members made
       fixed low interest rate for a period of three
                                                                     monthly payments in the amount required
       to five years.
                                                                     by the terms of the Note and reflected in
            193. Defendants also represented that                    the payment schedule prepared by Defen-
       if Plaintiffs and Class members made the                      dants.
                                                                                                              Page 8
                                       2009 U.S. Dist. LEXIS 31111, *

     198. At all relevant times, Defendants                    rights and safety of others, including
unreasonably denied [*23] Plaintiffs and                       Plaintiffs and Class members.
Class members the benefits promised to
                                                                    203. At all relevant times, Defen-
them under the terms of the Note, includ-
                                                               dants' conduct, as alleged herein, was ma-
ing but not limited to a low interest rate
                                                               licious, oppressive, and/or fraudulent.
for the first three to five years of the loan,
clear and conspicuous disclosure of a                                204. As a result of Defendants' con-
payment amount sufficient to pay both                          duct, Plaintiffs and Class members have
principal and interest so as to avoid nega-                    suffered harm. Plaintiffs and Class mem-
tive amortization, and the other failures to                   bers have incurred additional charges to
comply with the disclosure requirements                        their principal loan balance. Plaintiffs and
mandated by TILA, 15 U.S.C. § 1601, et                         Class members have incurred and will
seq., Regulation Z and FRB Commentary,                         continue to incur additional interest
as alleged herein.                                             charges on the principal loan [*25] bal-
                                                               ance and surplus interest added to Plain-
     199. Knowing the truth and moti-
                                                               tiffs' and Class members' principal loan
vated by profit and market share, Defen-
                                                               balance. Furthermore, Defendants' breach
dants have knowingly and willfully
                                                               has caused and/or otherwise placed Plain-
breached the implied covenant of good
                                                               tiffs and Class members in danger of los-
faith and fair dealing by engaging in the
                                                               ing their homes through foreclosure and,
acts and/or omissions to mislead and/or
                                                               as a direct and proximate result of said
deceive Plaintiffs and others similarly
                                                               misconduct, caused Plaintiffs' and Class
situated as alleged herein.
                                                               members' principal loan balances to in-
     200. Defendants' breaches, as alleged                     crease, which has limited these consum-
herein were committed with willful and                         ers' ability to make their future mortgage
wanton disregard for whether or not                            payments or obtain alternative home loan
Plaintiffs or Class members would actu-                        financing.
ally receive a home loan that would pro-
                                                                    205. WHEREFORE, Plaintiffs and
vide the promised low interest and pay-
                                                               Class members are entitled to declaratory
ment rate for the first three to five years of
                                                               relief, all damages proximately caused by
the loan sufficient to pay both principal
                                                               Defendants' breach of the implied cove-
and interest.
                                                               nant of good faith and fair dealing as al-
     201. Upon information and belief and                      leged herein, punitive damages, pre-
at all relevant times, Defendants pos-                         judgment interest, costs of suit and other
sessed full knowledge [*24] and informa-                       relief as the Court deems just and proper.
tion concerning the above facts about the
Option ARM loans, and otherwise sold
these Option ARM loans throughout the
                                                             Defendants Wells Fargo and Deutsche Bank move
United States, including in the State of
                                                        to dismiss the Fifth and Sixth Causes of Action pursuant
                                                        to Rule 12(b)(6), Federal Rules of Civil Procedure, for
     202. Defendants' placing of their cor-             failure to state a claim upon which relief can be granted.
porate and/or individual profits over the               The motion to dismiss is joined in by Investment Trust
rights of others is particularly vile, base,            2005-2. 1 Defendants contend that the Fifth and Sixth
contemptible, and wretched and said acts                Causes of Action should be dismissed because the prom-
and/or omissions were performed on the                  issory [*26] note's express words refute the Complaint's
part of officers, directors, and/or manag-              allegations about the Option ARM loan agreement's
ing agents of each corporate defendant                  terms and because California law does not recognize a
and/or taken with the advance knowledge                 claim for tortious breach of the duty of good faith except
of the officers, directors, and/or managing             against an insurer. 2
agents who authorized and/or ratified said
acts and/or omissions. Defendants thereby                      1 Wells Fargo, Deutsche Bank, and Investment
acted with malice and complete indiffer-                       Trust 2005-2 are represented in this action by the
ence to and/or conscious disregard for the                     same attorneys.
                                                                                                                       Page 9
                                              2009 U.S. Dist. LEXIS 31111, *

       2 Defendants do not move to dismiss the Fifth            B. DOCUMENTS ATTACHED TO COMPLAINT OR
       Cause of Action on the ground that they are not          RELIED UPON.
       liable for the origination claims alleged in the
                                                                     All parties make extensive reference to documents
       Complaint (although they assert that they will
                                                                referred to in the Complaint or to documents not attached
       "vigorously dispute" that liability at a later date in
                                                                to the Complaint but whose authenticity is not contested.
       this action).
                                                                No objection is made by the parties to these references.
                                                                1. Plaintiffs' Option ARM Note.
     A motion to dismiss under Rule 12(b)(6) tests the
                                                                    Attached to the Complaint as Exhibit 1 is Plaintiffs'
sufficiency of the complaint. Navarro v. Block, 250 F.3d
                                                                Option ARM Note. The Note provides in relevant part:
729, 732 (9th Cir.2001). "A district court should grant a
motion to dismiss if plaintiffs have not pled 'enough facts
                                                                         THIS NOTE CONTAINS PROVI-
to state a claim to relief that is plausible on its face.'"
                                                                       SIONS ALLOWING FOR CHANGES IN
Williams ex rel. Tabiu v. Gerber Products Co., 523 F.3d
                                                                       MY INTEREST RATE AND MY
934, 938 (9th Cir.2008), quoting Bell Atlantic Corp. v.
                                                                       MONTHLY         PAYMENT.     MY
Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1974, 167 L.
                                                                       MONTHLY PAYMENT INCREASES
Ed. 2d 929 (2007). "'Factual allegations must be enough
                                                                       WILL HAVE LIMITS WHICH COULD
to raise a right to relief above the speculative level.'" Id.
                                                                       RESULT      IN   THE  PRINCIPAL
"While a complaint attacked by a Rule 12(b)(6) [*27]
                                                                       AMOUNT I MUST REPAY [*29] BE-
motion to dismiss does not need detailed factual allega-
                                                                       ING LARGER THAN THE AMOUNT I
tions, a plaintiff's obligation to provide the 'grounds' of
                                                                       ORIGINALLY BORROWED, BUT NOT
his 'entitlement to relief' requires more than labels and
                                                                       MORE THAN 125.000% OF THE
conclusions, and a formulaic recitation of the elements of
                                                                       ORIGINAL       AMOUNT    (OR  $
a cause of action will not do." Bell Atlantic, id. at 1964-
                                                                       364,375.00). MY INTEREST RATE
1965. Dismissal of a claim under Rule 12(b)(6) is appro-
                                                                       CAN NEVER EXCEED THE LIMIT
priate only where "it appears beyond doubt that the
                                                                       STATED IN THIS NOTE OR ANY
plaintiff can prove no set of facts in support of his claim
                                                                       RIDER TO THIS NOTE. A BALLOON
which would entitle him to relief." Conley v. Gibson, 355
                                                                       PAYMENT MAY BE DUE AT MATUR-
U.S. 41, 45-46, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). Dis-
missal is warranted under Rule 12(b)(6) where the com-
plaint lacks a cognizable legal theory or where the com-                  1. BORROWER'S PROMISE TO
plaint presents a cognizable legal theory yet fails to plead           PAY
essential facts under that theory. Robertson v. Dean Wit-
ter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.1984). In                    In return for a loan that I have re-
reviewing a motion to dismiss under Rule 12(b)(6), the                 ceived, I promise to pay U.S. $
                                                                       291,500.00, plus any amounts added in
court must assume the truth of all factual allegations and
must construe all inferences from them in the light most               accordance with Section 4(G) below, (this
favorable to the nonmoving party. Thompson v. Davis,                   amount is called 'Principal'), plus interest,
                                                                       to the order of the Lender ....
295 F.3d 890, 895 (9th Cir.2002). However, legal con-
clusions need not be taken as true merely because they                     2. INTEREST
are cast in the form of factual allegations. Ileto v. Glock,
Inc., 349 F.3d 1191, 1200 (9th Cir.2003). [*28] Immu-                       Interest will be charged on unpaid
nities and other affirmative defenses may be upheld on a               Principal until the full amount has been
motion to dismiss only when they are established on the                paid. First, I will pay interest at a yearly
face of the complaint. See Morley v. Walker, 175 F.3d                  rate of 1.000 %. The interest rate I will
756, 759 (9th Cir.1999); Jablon v. Dean Witter & Co.,                  pay may change ....
614 F.2d 677, 682 (9th Cir. 1980) When ruling on a mo-                     3. PAYMENTS
tion to dismiss, the court may consider the facts alleged
in the complaint, documents attached to the complaint,                     (A) Time and Place of Payments
documents relied upon but not attached to the complaint                   I will pay Principal and interest by
when authenticity is not contested, and matters of which               making payments every month ....
the court takes judicial notice. Parrino v. FHP, Inc, 146
F.3d 699, 705-706 (9th Cir.1988).                                           I Will make my monthly payments on
                                                                       1st day of each month beginning on Au-
                                                                       gust, 2005. I will make these payments
                                                                                                       Page 10
                                    2009 U.S. Dist. LEXIS 31111, *

every month until I have paid all of the                    available twelve months and dividing by
principal and interest and any other                        12.
charges described below that I may owe
                                                                 The most recent Index figure avail-
under this Note. Each monthly payment
                                                            able at the 15 days before each interest
will be applied to interest before Princi-
                                                            rate Change Date is called the 'Current In-
pal. If, on July 1, 2033, I still owe
                                                            dex.' ....
amounts under this Note, I will pay those
amounts in [*30] full on that date, which                       (C) Calculation of Changes
is called the 'Maturity Date.'
                                                                 Before each Change Date, the Note
    ...                                                     Holder will calculate my new interest rate
                                                            by adding Three and 440 Thousandths
   (B) Amount of My Initial Monthly
                                                            percentage points 3.440 % ('Margin') to
                                                            the Current Index. The Note Holder will
     Each of my monthly payments until                      then round the result of this addition to
the first Payment Change Date will be in                    the nearest one-thousandth of one per-
the amount of U.S. $ 937.57, unless ad-                     centage point (0.001). Subject to the lim-
justed at an earlier time under Section                     its stated in Section 4(D) below, this
4(H) of this Note.                                          rounded amount will be my new interest
                                                            rate until the next Change Date ....
    (C) Payment Changes
                                                                (D) Interest Rate Limit
     My monthly payment will be recom-
puted,       according     to     Sections                      My interest rate will never be greater
4(E)(F)(G)(H) and (I) of this Note, to re-                  than Nine and 950 Thousandths percent-
flect changes in the Principal balance and                  age points 9.950 % ('Cap') ....
Interest rate that I must pay. The Note
                                                                (E) Payment Change Dates
Holder will determine my new interest
rate and the changed amount of my                                Effective every year commencing
monthly payment in accordance with Sec-                     August 1, 2006, and on the same date
tion 4 of this Note.                                        each twelfth month thereafter ('Payment
                                                            Change Date'), the Note Holder will de-
                                                            termine the amount of the monthly pay-
                                                            ment that would be sufficient to repay the
    (A) Change Dates                                        projected principal balance I am expected
                                                            to owe as of the Payment [*32] Change
     The interest rate I will pay may fur-
                                                            Date in full on the Maturity Date at the in-
ther change on the 1st day of August,
                                                            terest rate in effect 45 days prior to the
2005, and on that day every month there-
                                                            Payment Change Date in substantially
after. Each such day is called a 'Change
                                                            equal payments. The result of this calcula-
                                                            tion is the new amount of my monthly
    (B) The Index                                           payment, subject to Section 4(F) below,
                                                            and I will make payments in the new
     On each Change Date, my interest
                                                            amount until the next Payment Change
rate will be based on an Index. The 'Index'                 Date unless my Payments are changed
is the Twelve-Month Average, determined                     earlier under Section 4(H) of this Note.
as set forth below, of the annual yields on
actively traded United States Treasury Se-                      (F) Monthly Payment Limitations
curities adjusted to a constant maturity of
                                                                 Unless Section 4(H) and 4(I) below
one year as published by the Federal Re-
                                                            apply, the amounts of my new monthly
serve Board in the Federal Reserve Statis-
                                                            payment, beginning with a Payment
tical Release entitled 'Selected Interest
                                                            Change Date, will be limited to 71/2 %
[*31] Rates (H. 15)(the "Monthly
                                                            more or less than the amount I have been
Yields'). The Twelve-Month Average is
                                                            paying. This payment cap applies only to
determined by adding together the
                                                            the principal payment ....
Monthly Yields for the most recently
                                                                                                               Page 11
                                             2009 U.S. Dist. LEXIS 31111, *

            (G) Changes in My Unpaid Principal                3. Truth in Lending Act ("TILA")'s Requirements for
       Due to Negative Amortization or Acceler-               ARM Loans.
       ated Amortization
                                                                   12 C.F.R. § 226.19(b) provides that, "[i]f the annual
            Since my payment amount changes                   percentage rate may increase after consummation in a
       less frequently than the interest rate and             transaction secured by the consumer's principal dwelling
       since the monthly payment is subject to                with a term greater than one year," disclosure must be
       the payment limitations described in Sec-              provided at the time an application form is provided or
       tion 4(F), my monthly payment could be                 before a consumer pays a non-refundable fee of the fol-
       less or greater than the amount of the in-             lowing: (1) The booklet entitled Consumer Handbook on
       terest portion of the monthly payment that             Adjustable Rate Mortgages published by the Board and
       would be sufficient to repay the unpaid                the Federal Home Loan Bank Board, or a suitable substi-
       Principal I owe at the monthly payment                 tute; and (2) a loan program disclosure for each variable-
       date in full on the maturity date in sub-              rate program in which the consumer expresses an inter-
       stantially equal payments. For each [*33]              est. 12 C.F.R. § 226.19(b)(1) & (2).
       month that the monthly payment is less
                                                                  a. Federal Reserve Board's Consumer Handbook on
       than the interest portion, the Note Holder
                                                              Adjustable Rate Mortgages.
       will subtract the monthly payment from
       the amount of the interest portion and will                 Defendants request the Court take judicial notice of
       add the difference to my unpaid Principal,             the Federal Reserve Board's Consumer Handbook on
       and interest will accrue on the amount of              Adjustable Rate Mortgages ("Consumer Handbook") and
       this difference at the current interest rate.          the Adjustable Rate Mortgage Loan Disclosure State-
       For each month that the monthly payment                ment attached to Defendants' motion to dismiss as Ex-
       is greater than the interest portion, the              hibit A. 3 Page 1 of the Consumer Handbook states:
       Note Holder will apply the excess towards
       a principal reduction of the Note.                              Adjustable-rate mortgages (ARMs) are
                                                                     loans with interest      [*35] rates that
           (H) Limit on My Unpaid Principal;
                                                                     change. ARMs may start with lower
       Increased Monthly Payment
                                                                     monthly payments than fixed-rate mort-
            My unpaid principal can never ex-                        gages, but keep the following in mind:
       ceed a maximum amount equal to 125.000
                                                                          . Your monthly payments could
       % of the principal amount originally bor-
                                                                     change. They could go up - sometimes by
       rowed. In the event my unpaid Principal
                                                                     a lot - even if the interest rates don't go
       would otherwise exceed that 125.000 %
                                                                     up. See page 20.
       limitation, I will begin paying a new
       monthly payment until the next Payment                           . Your payments may not go down
       Change Date notwithstanding the 71/2 %                        much, or at all - even if interest rates go
       annual payment increase limitation. The                       down. See page 11.
       new monthly payment will be an amount
       which would be sufficient to repay my                             . You could end up owing more
                                                                     money than you borrowed - even if you
       then unpaid Principal in full on the matur-
       ity date at my interest rate in effect the                    make all your payments on time. See page
       month prior to the payment due date in                        22.
       substantially equal amounts.

                                                                     3 Plaintiffs do not dispute that they were given
2. Truth-In-Lending Disclosure Statement.                            copies of both of these documents.
                                                                  Page 13 of the Consumer Handbook, in the section
    Also attached to the Complaint as an exhibit is the
Truth-In-Lending Disclosure [*34] Statement, which            captioned "Payment Caps," states:
provides in pertinent part:
                                                                       In addition to interest-rate caps, many
    [SEE CHART IN ORIGINAL]                                          ARMs - including payment-option ARMs
                                                                     - limit, or cap, the amount your monthly
                                                                     payment may increase at the time of each
                                                                                                               Page 12
                                            2009 U.S. Dist. LEXIS 31111, *

      adjustment. For example, if your loan has                     the principal on your mortgage, and you
      a payment cap of 71/2%, your monthly                          will owe more than you originally bor-
      payment won't increase more than 71/2%                        rowed. This can happen because you are
      over your previous payment, even if inter-                    making only minimum payments on a
      est rates rise more. For example, if your                     payment-option mortgage or because your
      monthly payment in year 1 of your mort-                       loan has a payment cap.
      gage was $ 1,000, it could only go up to $
                                                                         For example, suppose you have a $
      1,075 in year 2 (71/2% of $ 1,000 is an
                                                                    200,000, 30-year payment-option ARM
      additional $ 75). Any interest you don't
                                                                    with a 2% rate for the first 3 months and a
      pay because of the payment cap will be
                                                                    6% rate for the remaining 9 months of the
      added to the balance [*36] of your loan.
                                                                    year. Your minimum payment for the year
      A payment cap can limit the increase to
                                                                    if $ 739.24, as shown in your previous
      your monthly payments but also can add
                                                                    graph. However, once the 6% rate is ap-
      to the amount you owe on the loan. (This
                                                                    plied to your loan balance, you are no
      is called negative amortization, a term that
                                                                    longer covering the interest costs. If you
      is explained on page 22.)
                                                                    continue to make minimum payments on
                                                                    this loan, your loan balance at the end of
                                                                    the first year of your mortgage would be $
    Page 17 of the Consumer Handbook, in the section                201,118 - or $ 1,118 more than you origi-
captioned "Payment-option ARMs," states:                            nally borrowed.
                                                                         Because payment caps limit only the
        The interest rate on a payment-option
                                                                    amount of payment increases, and not in-
      ARMS is typically very low for the first
                                                                    terest-rate increases, payments sometimes
      few months (for example, 2% for the first
                                                                    do not cover all the interest due on your
      1 to 3 months). After that, the interest rate
                                                                    loan. This means that the unpaid interest
      usually rises to a rate closer to that of
                                                                    is automatically [*38] added to your debt,
      other mortgage loans. Your payments dur-
                                                                    and interest may be charged on that
      ing the first year are based on the initial
                                                                    amount. You might owe the lender more
      low rate, meaning that if you only make
                                                                    later in the loan term than you did at the
      the minimum payment each month, it will
      not reduce the amount you owe and it
      may not cover the interest due. The un-                            A payment cap limits the increase in
      paid interest is added to the amount you                      your monthly payment by deferring some
      owe on the mortgage, and your loan bal-                       of the interest. Eventually, you would
      ance increases.                                               have to repay the higher remaining loan
                                                                    balance at the interest rate then in effect.
           This is called negative amortization.
                                                                    When this happens, there may be a sub-
      This means that even after making many
                                                                    stantial increase in your monthly pay-
      payments, you could owe more than you
      did at the beginning of the loan. Also, as
      interest rates go up, your payments are                            Some mortgages include a cap on
      likely to go up.                                              negative amortization. The cap typically
                                                                    limits the total amount you can owe to
                                                                    110% to 125% of the original loan
                                                                    amount. When you reach that point, the
     Pages 22 and 23 of the Consumer Handbook, cap-
                                                                    lender will set the monthly payment
tioned "Negative Amortization - When you owe more
                                                                    amounts to fully repay the loan over the
money than you borrowed," states:
                                                                    remaining term. Your payment cap will
                                                                    not apply, and your payments could be
        Negative amortization means [*37] that
                                                                    substantially higher. You may limit nega-
      the amount you owe increases even when
                                                                    tive amortization by voluntarily increas-
      you make all your required payments on
                                                                    ing your monthly payment.
      time. It occurs whenever your monthly
      mortgage payments are not large enough                           Be sure you know whether the ARM
      to pay all of the interest due on your                        you are considering can have negative
      mortgage - the unpaid interest is added to                    amortization.
                                                                                                                Page 13
                                            2009 U.S. Dist. LEXIS 31111, *

                                                                    tion feature by letting the interest defer
                                                                    and become part of the principal balance
                                                                    to be paid by future monthly payments, or
   b. ARM Loan Disclosure Statement.
                                                                    you may also choose to limit any negative
    American Home Mortgage Company's Adjustable                     amortization by increasing the amount of
Rate Mortgage Loan Disclosure Statement states:                     your monthly payment or by paying any
                                                                    deferred interest in a lump sum at any
       HOW YOU INTEREST RATES AND                                   time.
           Your Initial Interest Rate may be an
      amount which is lower than the sum of                  C. Fifth Cause of Action for Breach of Contract.
      [*39] the Margin plus the Index pub-                        Defendants move to dismiss the Fifth Cause of Ac-
      lished. (This is called a 'Discounted                  tion for breach of contract on the ground that the promis-
      Rate.') If your Initial Interest Rate is a
                                                             sory note's express words refute the allegations about the
      Discounted Rate, at the first interest rate            Option ARM loan agreement's terms.
      adjustment you rate may increase even if
      the Index remains the same or decreases
                                                             1. Standards Governing Breach of Contract Claims.
                                                                  The elements of a claim for breach of contract are:
           Your initial monthly payment amount               (1) the contract; (2) Plaintiff's performance; (3) Defen-
      will be established by calculating the
                                                             dant's breach; (4) Damage to Plaintiff. See McDonald v.
      amount necessary to pay the loan off in                John P. Scripps Newspaper, 210 Cal.App.3d 100, 104,
      full (principal and interest) at the maturity          257 Cal. Rptr. 473 (1989).
      date in substantially equal installments of
      principal and interest, based on the loan                   Resolution of contractual claims on a motion to dis-
      balance, term, and the Initial Interest Rate           miss is proper if the terms of the contract are unambigu-
      in effect at the time of loan closing and              ous. Monaco v. Bear Stearns Residential Mortgage
      assuming that such interest rate will re-              Corp., 554 F.Supp.2d 1034, 1040 (C.D.Cal.2008); [*41]
      main in effect throughout the loan term.               see also Westlands Water Dist. v. U.S. Dept. of Interior,
                                                             850 F.Supp. 1388, 1408 (E.D.Cal.1994)("A motion to
                                                             dismiss cannot be granted against a complaint to enforce
      AND MONTHLY PAYMENT CAN                                an ambiguous contract."). A contract provision is am-
      CHANGE                                                 biguous when it is capable of two or more constructions
          ...                                                both of which are reasonable. Bay Cities Paving & Grad-
                                                             ing, Inc. v. Lawyers Mutual Ins. Co., 5 Cal. 4th 854, 867,
           e. Increase in Principal Balance                  21 Cal. Rptr. 2d 691, 855 P.2d 1263 (1993). Courts will
      (Negative Amortization): The principal                 not adopt a strained or absurd interpretation in order to
      balance on your loan can increase even                 create an ambiguity where none exists. Id. Language in a
      though you are making the required                     contract must be construed in the context of that instru-
      monthly payments. This is called 'Nega-                ment as a whole, and in the circumstances of the case,
      tive Amortization.' This can happen if, as             and cannot be found to be ambiguous in the abstract. Id.;
      a result of adjustments in the interest rate,          see also Bank of the West v. Superior Court, 2 Cal.4th
      the required monthly payment is insuffi-               1254, 1265, 10 Cal. Rptr. 2d 538, 833 P.2d 545 (1992). 4
      cient to pay the amount of the interest that           Under California law, "[t]he whole of a contract is to be
      is then due. In that event, the accrued but            taken together, so as to give effect to every part, if rea-
      unpaid interest that is not included as part           sonably practicable, each clause helping to interpret the
      of the monthly payment will be added                   other." Navarro v. Mukasey, 518 F.3d 729, 734 (9th
      each month to [*40] the principal balance              Cir.2008), citing California Civil Code § 1641. "A con-
      of the loan and will accrue interest at the            tract must be so interpreted to give effect to the mutual
      interest rate that is in effect during that            intentions of the parties as it existed at the time of con-
      month.                                                 tracting, so far as the same is ascertainable [*42] and
          If your monthly payment is not suffi-              lawful." Id., citing California Civil Code § 1636. "It is
      cient to pay monthly interest, you may                 well settled that '[w]here there is an inconsistency be-
      take advantage of the negative amortiza-               tween general provisions and specific provisions, the
                                                                                                                  Page 14
                                             2009 U.S. Dist. LEXIS 31111, *

specific provisions ordinarily qualify the meaning of the          Defendants argue that the provisions do not support
general provisions.'" Brinderson-Newberg Joint Venture         Plaintiffs' claims for two reasons.
v. Pacific Erectors, Inc., 971 F.2d 272, 279 (9th
                                                                   First, Defendants argue, neither of these provisions
Cir.1992), cert. denied, 507 U.S. 914, 113 S. Ct. 1267,
                                                               impose any obligation on the Note Holder: [*44] "Since
122 L. Ed. 2d 663 (1993).
                                                               the quoted sentences impose no obligation on defen-
                                                               dants, defendants could not have breached them."
       4 The Fifth Cause of Action alleges that the Op-
       tion ARM is a contract of adhesion. "'The term               Plaintiffs respond that Defendants' contention is "il-
       [contract of adhesion] signifies a standardized         logical", arguing that "[i]f Plaintiffs were required to pay
       contract, which, imposed and drafted by the party       principal and interest, then how could Defendants not be
       of superior bargaining strength, relegates to the       required to apply those payments correctly to principal
       subscribing party only the opportunity to adhere        and interest?"
       to the contract or reject it.'" Armendariz v. Foun-
       dation Health Psychcare Services, Inc., 24                  Plaintiffs contention is misplaced. The Promissory
       Cal.4th 83, 113, 99 Cal. Rptr. 2d 745, 6 P.3d 669       Note sets forth specific provisions for the application of
                                                               monthly payments to principal and interest. Neither
       (2000). "[A] contract of adhesion is fully en-
       forceable according to its terms," except that          Paragraph 3(A) or 3 (B) impose an obligation on Defen-
       "[t]he rule requiring the resolution of ambiguities     dants to apply each payment to principal and interest.
       against the drafting party 'applies with peculiar            Secondly, Defendants contend, neither Paragraph
       force in the case of a contract of adhesion.'" Gra-     3(A) or 3(B) promise that each monthly payment will be
       ham v. Scissor-Tail, Inc., 28 Cal.3d 807, 819, 171      applied to principal as well as interest and do not address
       Cal. Rptr. 604, 623 P.2d 165 & n.16 (1981).             the subject of payment application at all. Other provi-
       However, "[t]here are two judicially imposed            sions of the Promissory Note address payment applica-
       limitations on the enforcement of adhesion con-         tion specifically, the statement in Paragraph 3(A) that
       tracts or provisions thereof. [*43] The first is that   "[e]ach monthly payment will be applied to interest be-
       such a contract or provision which does not fall        fore Principal." Defendants contend: "Implicitly, if a
       within the reasonable expectations of the weaker        payment is applied to interest first and unpaid interest
       or 'adhering' party will not be enforced against        exceeds the payment amount, none of the payment will
       him . . . The second - a principle of equity appli-     be left to apply to loan principal." Defendants [*45] also
       cable to all contracts generally - is that a contract   refer to the sentence in Paragraph 4(G) of the promissory
       or provision, even if consistent with the reason-       note: "For each month that the monthly payment is less
       able expectations of the parties, will be denied        than the interest portion, the Note Holder will subtract
       enforcement if, considered in its context, it is un-    the amount of the monthly payment from the amount of
       duly oppressive or 'unconscionable.'" Id. at 819-       the interest portion and will add the difference to my
       820.                                                    unpaid Principal ...."

2. Monthly Payments Applied To Principal As Well as                 As Defendants argue, that these provisions deal spe-
Interest.                                                      cifically with payment application and even more spe-
                                                               cifically with application of payments which are less
      Defendants argue that the Promissory Note does not       than the monthly accrued interest and refute any notion
promise that each of Plaintiffs' monthly payments will be      that the Note Holder must apply any of the monthly
applied to principal as well as interest on the loan. Plain-   payment to loan principal in that circumstance. Defen-
tiffs rely on the following sentences from Paragraph 3(A)      dants contend:
& (B) of the Promissory Note:
                                                                        If there were any inconsistency between
         I will pay principal and interest by mak-                    these specific payment application provi-
       ing payments every month.                                      sions and the above-quoted sentences on
            ...                                                       which plaintiffs rely, the provisions deal-
                                                                      ing specifically with payment application
            Each of my monthly payments until                         would prevail over the general statements
       the first Payment Change Date will be in                       on which plaintiffs rely. But, of course,
       the amount of U.S. $ 937.57, unless ad-                        there is no inconsistency. The borrower's
       justed at an earlier time under Section                        promise to pay is entirely separate from
       4(H) of this Note.                                             the Note Holder's obligation to apply
                                                                      those payments in a particular manner.
                                                                      Plaintiff's sentences address their payment
                                                                                                                   Page 15
                                              2009 U.S. Dist. LEXIS 31111, *

       obligation; the note's other provisions                             First, the meaning Defendants would
       govern the Note Holder's obligation [*46]                      ascribe to the statement would likely ren-
       to apply those payments to specific                            der it superfluous in light of other provi-
       charges. The two sets of provisions are                        sions in Section 3, a result that is to be
       thus easily harmonized, giving separate                        avoided. See Cal. Civ. Code § 1641 ('The
       effect to each.                                                whole of a contract is to be taken together,
                                                                      so as to give effect to every part, if rea-
                                                                      sonably practicable, each clause helping
                                                                      to interpret the other.') Immediately below
      Plaintiff responds that the sentence in Paragraph
                                                                      the disputed statement is the following
3(A), "I will pay principal and interest by making pay-
                                                                      provision: 'I will make these payments
ments every month," promises that Plaintiffs' monthly
                                                                      [*48] every month until I have paid all of
payments would be applied to both principal and interest
                                                                      the principal and interest and any other
or is at least ambiguous as to whether interest and princi-
                                                                      charges described below that I may owe
pal would be satisfied by each monthly payment. Plain-
                                                                      under this Note.' The Court finds that this
tiffs cite Reyes v. Downey Savings and Loan Ass'n, F.A.,
                                                                      latter statement more accurately describes
541 F.Supp.2d 1108, 1116 (C.D.Cal.2008):
                                                                      Plaintiffs' payment obligations. On this
                                                                      basis, it is certainly reasonable, if not pre-
         Plaintiffs demonstrate that the loan con-
                                                                      ferred, to interpret the former disputed
       tract states, 'I will pay Principal and inter-
                                                                      statement along the lines suggested by
       est by making a payment every month.' ...
       This could easily be understood to mean
       that, if Plaintiffs made payments every                             Second, later provisions of the Note
       month, their payments would be applied                         arguably support Plaintiffs' interpretation.
       to both principal and interest. Plaintiffs                     In Section 5(F), the Note describes three
       have alleged that they were led to under-                      additional payment options, which speak
       stand the contract in that way, and that                       specifically to the question of how pay-
       Defendants breached that contract. Thus,                       ments are to be allocated between interest
       Plaintiffs have sufficiently alleged that the                  and principal. Two of these payment op-
       terms of the contract were ambiguous.                          tions are for amortized payments, and
                                                                      they are described as follows: 'Pay the
                                                                      amount necessary to pay the loan off
Plaintiffs also cite Monaco v. Bear Stearns Residential               (Principal and interest) . . . .' This lan-
Mortgage Corp., supra, 554 F.Supp.2d at 1041-1042:                    guage is quite similar to the language em-
          As to Plaintiffs' second claim - that De-                   ployed in Section 3: 'I will pay principal
        fendants [*47] breached the Note by not                       and interest ....' On this basis, one could
        applying monthly payments to principal                        reasonably conclude that the statement in
        and interest -the Court finds that the rele-                  Section 3 refers to an amortized payment
        vant contractual language is ambiguous in                     plan.
        the context of the Note as a whole. Sec-
                                                                           Third, in light of the Court's finding
        tion 3 states 'I will pay principal and in-
                                                                      that the Note is ambiguous as to the appli-
        terest by making a payment every month.'
                                                                      cable interest rate that will apply, one
        According to Plaintiffs, one could rea-
                                                                      could reasonably conclude that monthly
        sonably interpret this statement to mean
                                                                      payments [*49] will amortize the loan.
        that payments will be applied to both
                                                                      Indeed, were the interest rate to remain at
        principal and interest, in spite of later
                                                                      1%, a possibility under Section 3 of the
        statements in the Note that negative amor-
                                                                      Note as discussed above, the initial
        tization is a possibility. Defendants con-
                                                                      monthly payment would fully amortize
        tend that the only reasonable interpreta-
                                                                      the loan.
        tion of the statement is that it describes
        Plaintiffs' obligation to make payments,                           For the above reasons, the Court
        leaving the question of how those pay-                        finds that, despite language in the Note
        ments will be applied to other sections.                      indicating that negative amortization is a
        The Court agrees with Plaintiffs.                             possibility,<11> one could reasonably
                                                                      conclude that monthly payments will be
                                                                      applied to both principal and interest.
                                                                                                                 Page 16
                                             2009 U.S. Dist. LEXIS 31111, *

            Defendants' Motion to Dismiss on                         to cover the entire amount of interest that
       this basis is thus DENIED.                                    had accrued during the preceding month.
                                                                     Because Plaintiffs could choose to pay
                                                                     more than the minimum payment, they
<11> Just as the Note uses the term 'may' to warn of an              had the option of making payments large
interest rate change that is certain to occur, the Note de-          enough to reduce their principal each
scribes negative amortization as a possibility when in               month. Plaintiffs do not allege that they
fact it is certain to occur under the terms set by Defen-            actually made payments that were greater
dants. At the top of the Note's first page, the borrower is          than the amount of accrued interest, and
warned that the Note 'may require' - as opposed to, more             the EMC nonetheless failed to apply the
accurately, 'will require' - unpaid interest to be added to          payments to principal. If this were the
loan principal. Defendants have drafted a Note that cre-             case, they would have stated a breach of
ates uncertainty about its provisions and that precludes             contract claim. As the complaint now
the Court from ascertaining the intent of the parties                stands, they have not. Accordingly, the
solely on the basis of the written instrument.                       breach of contract claim is dismissed.
     Plaintiffs argue that the decisions in Plascencia v.
Lending 1st Mortgage, 583 F. Supp. 2d 1090, 2008 WL
                                                              Amparan v. Plaza Home Mortgage, Inc., followed Plas-
4544357 (N.D.Cal. 2008); [*50] Amparan v. Plaza
                                                              cencia in dismissing the breach of contract claim. In Qu-
Home Mortgage, Inc., 2008 U.S. Dist. LEXIS 109148,
                                                              ezeda, Judge Shubb ruled:
2008 WL 5245497 (N.D.Cal.2008); and Quezada v. Loan
                                                                        Plaintiff's second ground for breach of
Ctr. of Cal., Inc., 2008 U.S. Dist. LEXIS 96479, 2008 WL
                                                                      contract relies on the following provision
5100241 (E.D.Cal.2008), are incorrectly decided and
                                                                      in the Note: 'I will pay principal and inter-
ignore the Notes' plain meaning, which would deprive
                                                                      est by making a payment every month.'
them of legal effect, citing California Civil Code § 1643
                                                                      (Id. §3(A).) [*52] Plaintiff alleges that
("A contract must receive such interpretation as will
                                                                      this provision is a promise by defendants
make it lawful, operative, definite, reasonable, and capa-
                                                                      to apply a portion of each monthly pay-
ble of being carried into effect, if it can be done without
                                                                      ment to her principal balance ....
violating the intention of the parties.").
                                                                          When read in isolation, this provision
     In Plascencia, the Northern District held that the re-
                                                                     may be susceptible to plaintiff's interpre-
liance on the provision "I will pay principal and interest
                                                                     tation; however, under California contract
by making payments every month" in Section 3(A) of the
                                                                     law, '[t]he whole of a contract is to be
Note to make the contract ambiguous was without merit:
                                                                     taken together, so as to give effect to
                                                                     every part, if reasonably practicable, each
          Although the Court has held that Plain-
                                                                     clause helping to interpret the other.'
       tiffs may be able to show that, considered
                                                                     Navarro v. Mukasey, 518 F.3d 729, 734
       as a whole, the disclosures provide con-
                                                                     (9th Cir.2008) (quoting Cal. Civ. Code §
       fusing and seemingly contradictory in-
       formation concerning the terms of the
       loan, the disclosures nonetheless accu-                            Furthermore, '[i]t is well settled that
       rately describe the relationship between                      "[w]here there is an inconsistency be-
       the minimum monthly payment and the                           tween general provisions and specific
       accrued interest. The Agreement states                        provisions [in a contract], the specific
       that each monthly payment 'will be ap-                        provisions ordinarily qualify the meaning
       plied to interest before Principal.' Id. It                   of the general provisions."' Pecarovich v.
       states elsewhere that the 'monthly pay-                       Allstate Ins. Co., 309 F.3d 652, 658 (9th
       ment could be less [*51] than or greater                      Cir.2002)(quoting Brinderson-Newberg
       than the amount of interest each month.'                      Joint Venture v. Pac. Erectors, Inc., 971
       Id. § 5(C).                                                   F.2d 272, 278 (9th Cir.1992) ....
             The Agreement thus contains no                               The Note contains several specific
       promise, express or implied, that Plain-                      provisions that contradict plaintiff's inter-
       tiffs' payment would always be applied to                     pretation. In section 4(G), the Note pro-
       both principal and interest. Whether the                      vides the following language under the
       payment would be applied to principal                         heading 'Changes to My Unpaid Principal
       depended on whether it was large enough
                                                                                                          Page 17
                                       2009 U.S. Dist. LEXIS 31111, *

Due to Negative Amortization or Acceler-                       tions, the court should give the construc-
ated Amortization':                                            tion that will make the instrument ... rea-
                                                               sonable and capable of being carried into
          [M]y monthly payment                                 effect ....' ....).
        could be less or greater
                                                                    Accordingly, because plaintiff's Note
        [*53] than the amount of
                                                               is not reasonably susceptible to the only
        the interest portion of the
                                                               interpretation giving rise to her breach of
        monthly payment that
                                                               contract claim, plaintiff's breach of con-
        would be sufficient to re-
                                                               tract claim must be dismissed.
        pay the unpaid Principal ...
        For each month that the
        monthly payment is less
        than the interest portion,                           Plaintiffs further argue that other provisions of the
        the Note Holder will sub-                       promissory note "create the impression that the payments
        tract the monthly payment                       made by Plaintiffs pursuant to the Note were fully amor-
        from the amount of the in-                      tizing payments." Plaintiffs refer to Paragraph 3(B):
        terest portion and will add
        the difference to my un-                                (B) Amount of My Initial Monthly
        paid Principal ....                                    Payments
                                                                    Each of my monthly payments until
                                                               the first Payment Change Date will be in
     In addition, at the top of the first page                 the amount of U.S. $ 937.57, unless ad-
fo the Note, the following text appears in                     justed at an earlier time under Section
bold typeface: 'MY MONTHLY PAY-                                4(H) of this Note.
PRINCIPAL AMOUNT I MUST REPAY                           Plaintiffs argue that, although Paragraph 3(B) does not
BEING        LARGER         THAN          THE           indicate how many monthly payments would be [*55]
AMOUNT I ORIGINALLY BOR-                                fixed at $ 937.57, "it clearly contemplates more than one
ROWED.' (Id. at 1.)                                     payment would be fixed at that amount (because it uses
                                                        the term 'monthly payments,' rather than 'monthly pay-
     Collectively, these provisions indi-
                                                        ment')." Plaintiff contends that Loan Disclosure State-
cate that monthly payments could be in-
                                                        ment attached to Defendants' motion as Exhibit B states
sufficient to cover the interest owed on
                                                        that Plaintiffs' initial monthly payment would be a fully
the OARM. If monthly payments fell be-
                                                        amortizing payment because of the statement in the Loan
low the interest owed, the Note Holder
                                                        Disclosure Statement:
would apply the payment to the interest
                                                                  Your initial monthly payment amount
owed and add the difference to the princi-
                                                                will be established by calculating the
pal balance. In light of these provisions, it
                                                                amount necessary to pay the loan off in
would be unreasonable to interpret the
                                                                full (principal and interest) at the maturity
language "I will pay principal and interest
                                                                date in substantially equal installments of
by making a payment every month,' as re-
                                                                principal and interest, based on the loan
quiring defendants to necessarily apply a
                                                                balance, term, and the Initial Interest Rate
portion of each monthly payment toward
                                                                in effect at the time of loan closing and
plaintiff's principal balance. Rather, con-
                                                                assuming that such interest rate will re-
sistent with the provision's location [*54]
                                                                main in effect throughout the loan term.
under the heading 'Time and Place of
Payments,' it is properly viewed as de-
scribing the timing of loan payments, not
                                                        Plaintiffs argue:
dictating how the Note Holder will dis-
                                                                  Thus, since Plaintiffs' monthly payment
tribute payments to principal or interest.
                                                                in the second month remained at $ 937.57,
See City of El Cajon v. El Cajon Police
                                                                Paragraph 3(B) indicates that the low
Officers' Ass'n, 49 Cal. App. 4th 64, 71,
                                                                monthly payments for the first five years
56 Cal. Rptr. 2d 723 (1996)('When an in-
                                                                of the loan were fully amortizing pay-
strument is susceptible to two interpreta-
                                                                ments. After all, if the first month's pay-
                                                                                                                 Page 18
                                           2009 U.S. Dist. LEXIS 31111, *

       ment at $ 937.57 was fully amortizing,                      that each of their monthly payments will
       there would be no reason why that same                      be in the amount of $ 937.57 until the first
       payment amount would not be fully amor-                     payment change date ... Pairing this provi-
       tizing [*56] in months two, three, four                     sion with a statement in the loan disclo-
       and so on. Indeed, this is further rein-                    sure that the initial payment is set at an
       forced by Paragraph 3(A)'s statement that                   amount that would fully amortize the loan
       Plaintiff will pay 'principal and interest'                 if the initial interest rate remained in ef-
       by making those monthly payments, and                       fect throughout the entire loan term, plain-
       by Paragraph 8(A)'s provision for calcu-                    tiffs assert that the initial payment amount
       lating late payment charges, which pro-                     must be 'fully amortizing' for at least the
       vides that '[T]he amount of the charge will                 first year, if not longer ....
       be 5.000% of my overdue payment of
                                                                         This argument overlooks the obvious
       principal and interest.'
                                                                   'if.' The disclosure statement says that the
             Once the payment amount did change                    initial [*58] payment amount would be
       (after 12 months), it increased by 7.5%                     'fully amortizing' only 'if' the initial inter-
       pursuant to the payment cap in the Note.                    est rate remained in effect throughout the
       Naturally, if a borrower had reason to be-                  entire loan term. The initial interest rate
       lieve that the monthly payments for the                     did not remain in effect, however. So the
       first year would be applied to principal                    initial payment amount was not fully am-
       and interest, he or she would also believe                  ortizing, and plaintiffs' argument built on
       that an increased payment would also be                     that false foundation collapses.
       applied to principal and interest. More-
       over, even though the monthly payment
       amount changed, the Note once again
                                                                 After detailed review, the terms of the Promissory
       represents that the new payment will by
                                                            Note, taken as a whole, do not support Plaintiffs' conten-
       fully amortizing. Paragraph 4(E) of Plain-
                                                            tion that Defendants promised that each monthly pay-
       tiffs' Note, entitled 'Payment Change
                                                            ment on the loan would be applied to principal and inter-
       Dates,' states that '[e]ffective every year
                                                            est. The express terms of the Promissory Note belie such
       commencing August 1, 2006, and on the
                                                            an interpretation. Plaintiffs' argument that the Promissory
       same date each twelfth month thereafter
                                                            Note is at least ambiguous in this regard is without merit.
       ('Payment Change Date'), the Note Holder
                                                            Plaintiffs' attempts to manufacture an ambiguity by fo-
       will determine the amount of the monthly
                                                            cusing on small excerpts of the Promissory Note's provi-
       payment that would be sufficient to repay
                                                            sions without construing the Promissory Note as a whole
       the projected principal balance [*57] I am
                                                            are without merit.
       expected to owe.' ...
            Accordingly, as the Loan Disclosure             3. Failure to Apply Correct Interest Rate.
       Statement stated that Plaintiffs' initial
                                                                Defendants move to dismiss the claim for breach of
       monthly payment would be a fully amor-
                                                            contract that Defendants failed to apply the introductory
       tizing payment and Plaintiffs' Note states
                                                            1.000% interest rate for a period of three to five years.
       that the initial monthly payment amount
       of $ 937.57 would not change for the first               Defendant refers to Paragraphs 2 and 4(A) of the
       year, the loan documents would cause a               promissory note:
       reasonable consumer to reasonably be-
       lieve that the subsequent payment                             2. INTEREST
       amounts provided in the TILDS would
       also be fully amortizing payments.                               Interest will be charged on [*59] un-
                                                                   paid Principal until the full amount has
                                                                   been paid. First, I will pay interest at a
                                                                   yearly rate of 1.000 %. The interest rate I
    Defendants reply that Plaintiffs' reliance on Para-            will pay may change ....
graph 3(B) to establish ambiguity is misplaced:
         [P]laintiffs pluck another snippet of                       4.  INTEREST  RATE   AND
       contractual language from context, claim-                   MONTHLY PAYMENT CHANGES
       ing to find ambiguity in § 3(B)'s statement
                                                                                                                     Page 19
                                               2009 U.S. Dist. LEXIS 31111, *

           (A) Change Dates                                            tible or when the contract is ambiguous.'
                                                                       ... Plaintiffs allege that 'Defendants impli-
            The interest rate I will pay may fur-
                                                                       edly and expressly represented to Plain-
       ther change on the 1st day of August,
                                                                       tiffs and Class members that ... said loans
       2005, and on that day every month there-
                                                                       would have [*61] a fixed interest rate
       after. Each such day is called a 'Change
                                                                       equal to a low promised interest rate for a
                                                                       period of three (3) to five (5) years.' ...
                                                                       Because the Note is ambiguous as to the
                                                                       applicability of Section 4, parol evidence
     Plaintiffs argue that Defendants's actions were not               is admissible to ascertain the intent of the
authorized by generalized statements in the Note that the              parties. On the basis of the allegations in
interest rate "may change." Plaintiffs rely on Monaco v.               the First Amended Complaint, Plaintiffs
Bear Stearns Residential Mortgage Corporation, supra,                  have put forth facts sufficient to state a
554 F.Supp.2d at 1040-1041:                                            claim for relief.

         As to Plaintiffs' first claim - that Defen-
       dants breached the Note by immediately
                                                                     Defendants reply that Plaintiff's claim that Defen-
       raising the 1% fixed interest rate - the
                                                                dants promised the interest rate would not change for a
       Court finds that the language governing
                                                                period of three to five years is inconsistent with the terms
       the interest rate Plaintiffs must pay is am-
                                                                of the promissory note. Defendants point out that the
       biguous. Section 2 of the Note states that
                                                                introductory sentence to the Note states: "THIS NOTE
       Plaintiffs 'will pay' interest at a yearly rate
                                                                CONTAINS         PROVISIONS          ALLOWING           FOR
       of 1% but that this rate 'may change' pur-
                                                                CHANGES IN MY INTEREST RATE AND MY
       suant to Section 4. However, Section 4
                                                                MONTHLY PAYMENT." Section 2 reiterates that "The
       states that the interest rate 'will change' in
                                                                interest rate I will pay may change." Defendants argue
       the first payment due date and that it 'will
                                                                that Section 4(A) makes clear that the rate change may
       never be lower that 3.500%.' Section 4 is
                                                                occur well before the end of the loan's third or fifth year:
       thus inconsistent with Section 2, whereas
                                                                "The interest rate I will pay may further change on the
       Section 2 states that a change [*60] in the
                                                                1st day of August, 2005, and on that day every month
       interest rate is a mere possibility, Section
                                                                thereafter." Defendants contend that Plaintiffs' attempt to
       4 states that it is an absolute certainty.<9>
                                                                find an ambiguity because of the word "may" is not sup-
       Because the Court is to strive to 'give ef-
                                                                ported by Sections 4(B) and (C):
       fect to every provision' of a contract ...,
       the Court concludes that the Note is rea-
                                                                         This [*62] difference creates no ambi-
       sonably susceptible to the interpretation
                                                                       guity ... There is no 'other' meaning to
       that Section 4 applies and to the interpre-
                                                                       which the note is reasonably susceptible.
       tation that Section 4 may not apply.<10>
                                                                       The note states unequivocally that the in-
            <9> To be consistent with Section 4,                       terest rate may change on August 1, 2005;
       Section 2 should state that the 1% interest                     if the math makes change certain, it
       rate 'will' - not 'may' - change in accor-                      merely increases the likelihood of the
       dance with Section 4. Despite Defendants'                       possibility that 'may' applies. The two
       urging, the Court will not read 'may' to                        provisions are not inconsistent.
       mean 'will,' as the Court is unable to de-
                                                                            Even if the difference between 'may'
       termine on the basis of the Note whether
                                                                       and 'will' created some uncertainty, it
       the parties mutually intended for Section
                                                                       would not help plaintiffs. Their proposed
       4 to apply. The uncertainty created by the
                                                                       interpretation is inconsistent with both
       use of the term 'may' will therefore be 'in-
                                                                       'may' and 'will.' They claim the note
       terpreted most strongly against' Defen-
                                                                       means 'will not' - the interest rate 'will not'
       dants - 'the party who caused uncertainty
                                                                       change on August 1, 2005 or on the first
       to exist.' Cal. Civ. Code § 1654.
                                                                       of the next 36-60 months either. That
           <10> 'Parol evidence may be admit-                          meaning is completely contrary to both §§
       ted to explain the meaning of a writing                         2 and 4(A) which state that the interest
       when the meaning urged is one to which                          rate 'may' change on each of those occa-
       the written contract is reasonably suscep-                      sions, and §§ 4(B) and (C) which indicate
                                                                                                                   Page 20
                                              2009 U.S. Dist. LEXIS 31111, *

       that the interest rate will certainly change                 Defendants move to dismiss the Sixth Cause of Ac-
       on August 1, 2005.                                      tion for tortious breach of the implied covenant of good
                                                               faith and fair dealing for failure to state a claim.
            In other words, even if the note left a
       doubt as to how certain interest rate                        Because the motion to dismiss the Fifth Cause of
       change was, it left no doubt that change                Action for breach of contract has been granted, Plaintiffs'
       was possible. Plaintiffs' reading, which                claim for tortious breach of the implied covenant neces-
       denies that possibility, is completely in-              sarily fails. See Guz v. Bechtel Nat'l Inc., 24 Cal. 4th
       consistent with the note's plain language               317, 349-350, 100 Cal. Rptr. 2d 352, 8 P.3d 1089
       and so is not a meaning of which the note               (2000):
       is reasonably susceptible.
                                                                        The covenant of good faith and fair
                                                                      dealing, implied by law in every contract,
            In [*63] addition to contradicting the                    exists merely to prevent one contracting
       note's clear terms, plaintiffs' interpretation                 party from unfairly frustrating the other
       leads to a clearly unreasonable result.                        party's right to receive the benefits of the
       Plaintiffs could not reasonably have ex-                       agreement actually made ... The covenant
       pected to receive a home loan at 1% inter-                     thus cannot '"be endowed with an exis-
       est rate for three to five years at a time                     tence independent of its contractual un-
       when the Fed Funds rate was 3.25% and                          derpinnings."' ... It cannot impose [*65]
       the Federal Reserve Board's discount rate                      substantive duties or limits on the con-
       was 4.35%.                                                     tracting parties beyond those incorporated
                                                                      in the specific terms of their agreement.

     Plaintiffs have not established that the Promissory
Note is ambiguous. Plaintiffs' contention that the Promis-         However, even if the Fifth Cause of Action sur-
sory Note is reasonably susceptible to the interpretation      vived, the Sixth Cause of Action fails to state a claim
that the interest rate would remain the same for a period      upon which relief can be granted.
of three to five years relies on a nitpicking interpretation
                                                                    "Generally, no cause of action for the tortious breach
of two of the note's provisions and ignores the context of
                                                               of the implied covenant of good faith and fair dealing
the Promissory Note as a whole. Plaintiffs' interpretation
                                                               can arise unless the parties are in a 'special relationship'
is not reasonable under the law governing the construc-
                                                               with 'fiduciary characteristics.'" Pension Trust Fund for
tion of contracts set forth above. 5
                                                               Operating Engineers v. Federal Ins. Co., 307 F.3d 944,
                                                               955 (9th Cir.2002), citing Mitsui Mfts. Bank v. Superior
       5 In their opposition brief, Plaintiffs argue that
                                                               Court, 212 Cal.App.3d 726, 260 Cal. Rptr. 793 (1989).
       the disclosures in the promissory note violate the
                                                               "[T]he implied covenant tort is not available to parties of
       Truth in Lending Act. Although Defendants reply
                                                               an ordinary commercial relationship where the parties
       that the Truth in Lending Act requires disclosures
                                                               deal at arms' length." Id. "A central test of whether a
       in the disclosure statement and adjustable rate
                                                               lender is subject to this tort is whether there is 'a fiduci-
       loan program disclosure statement, not the prom-
                                                               ary relationship in which the financial dependence or
       issory note, these issues are irrelevant to the mo-
                                                               personal security by the damaged party has been en-
       tion to dismiss seeking dismissal [*64] of the
                                                               trusted to the other.'" "[A] lender ... owes a fiduciary
       breach of contract and tortious breach of the im-
                                                               duty to a borrower when it excessively controls or domi-
       plied covenant, not the cause of action for viola-
                                                               nates the borrower." Id.
       tion of the Truth in Lending Act. The Court ex-
       presses no opinion with respect to the parties con-         Defendants cite numerous cases holding that a
       tentions regarding the requirements of the Truth        lender owes no fiduciary duty to a borrower.
       in Lending Act.
                                                                    In Nymark v. Heart Fed. Savings & Loan Assn., 231
    Defendants' motion to dismiss the Fifth Cause of           Cal.App.3d 1089, 283 Cal. Rptr. 53 (1991), [*66] a
Action is GRANTED WITHOUT LEAVE TO AMEND.                      property owner brought an action against a lending insti-
                                                               tution alleging negligence in the institution's appraisal of
D. SIXTH CAUSE OF ACTION FOR TORTIOUS                          property used as security for the loan. The Court of Ap-
BREACH OF IMPLIED COVENANT OF GOOD                             peal noted:
                                                                                                                 Page 21
                                             2009 U.S. Dist. LEXIS 31111, *

          To the extent this cryptic allegation may                  violation of 'an independent duty arising
       be construed as pleading a breach of fidu-                    [*68] from principles of tort law' (Applied
       ciary duty, it fails as a matter of law. The                  Equipment, supra, 7 Cal.4th at p. 515)
       relationship between a lending institution                    other than the bad faith denial of the exis-
       and its borrower-client is not fiduciary in                   tence of, or liability under, the breached
       nature. (Price v. Wells Fargo Bank (1989)                     contract.
       213 Cal.App.3d 465, 476-478, 261 Cal.
       Rptr. 735 ...). A commercial lender is en-
       titled to pursue its own economic interests
                                                                   Plaintiffs argue that the Complaint adequately al-
       in a loan transaction. (Kruse v. Bank of
                                                              leges that Defendants have breached an independent duty
       America (1988) 202 Cal.App.3d 38, 67,
                                                              arising from principles of tort law:
       248 Cal. Rptr. 217 ...). This right is incon-
       sistent with the obligations of a fiduciary
                                                                       [T]he legal duty owed to Plaintiffs and
       which require that the fiduciary know-
                                                                     class members to disclose important mate-
       ingly agree to subordinate its interests to
                                                                     rial facts relating to the Option ARM
       act on behalf of and for the benefit of an-
                                                                     loans (e.g. that (i) the payment amounts
       other. (Committee on Children's Televi-
                                                                     on the payment schedules in the TILDS
       sion, Inc. v. General Foods Corp. (1983)
                                                                     provided to Plaintiffs and Class members
       35 Cal.3d 197, 221, 197 Cal. Rptr. 783,
                                                                     were insufficient to pay both principal and
       673 P.2d 660 ...).
                                                                     interest; and (ii) if the payment schedule
                                                                     in the TILDS is followed, Plaintiffs and
                                                                     Class members will suffer negative amor-
231 Cal.App.3d at 1093 n.1.
     Plaintiffs do not contradict this line of authority.
Rather, they cite Freeman & Mills, Inc. v. Belcher Oil
Co., 11 Cal.4th 85, 102, 44 Cal. Rptr. 2d 420, 900 P.2d
                                                                    Plaintiffs' assertion, Defendants reply, that they may
669 (1995), and contend that tort recovery for breach of
                                                              seek a tort recovery for acts that might otherwise consti-
contract is permissible where there is a violation of an
                                                              tute a breach of contract if those acts constitute breaches
independent duty arising [*67] from principles of tort
                                                              of a legal duty independently arising under principles of
                                                              tort law "may be true." Defendants respond:
     In Freeman & Mills, an oil company retained a law
firm with an understanding that the company was to pay                 [I]t does not aid plaintiffs on this mo-
for costs the law firm incurred on the company's behalf,             tion. Whether Plaintiffs have a viable tort
including fees for accountants. The law firm hired ac-               claim for fraud or fraudulent omission -
countants to work on the company's case. The company                 that is breach of legal duties independ-
eventually terminated the law firm and the accountants               ently arising under tort law - is not [*69]
billed the law firm for its services and costs. When the             an issue now before the Court. All that
law firm did not pay the bill, the accountants sought                Defendants now challenge is the breach of
payment from the company. The company did not pay,                   implied covenant which arises from con-
and the accountants brought an action against it, alleging           tract, not tort principles, and so does not
breach of contract, bad faith denial of contract, and quan-          fall within the 'exception' plaintiffs cite.
tum meriut. The jury found for the accountants, finding
that the company had breached the contract and had
acted in bad faith. The Supreme Court reversed the
                                                                   In Allied Equipment Corp. v. Litton Saudi Arabia
judgment for the accountants on the claim of bad faith
                                                              Ltd., 7 Cal.4th 503, 28 Cal. Rptr. 2d 475, 869 P.2d 454
denial of contract cause of action, specifically overruling
                                                              (1994), Allied Equipment Corp. entered into a subcon-
Seaman's Direct Buying Service, Inc. v. Standard Oil
                                                              tract with Defendant general contractor, which was in-
Co., 36 Cal.3d 752, 206 Cal. Rptr. 354, 686 P.2d 1158
                                                              volved in a general contract to provide military equip-
(1984). The Supreme Court held:
                                                              ment to Saudi Arabia. Plaintiff agreed to procure certain
                                                              equipment from a manufacturer and, with the general
         [The] Seaman's decision should be
                                                              contractor's approval, issued a purchase order for the
       overruled in favor of a general rule pre-
                                                              equipment. The general contractor subsequently decided
       cluding tort recovery for noninsurance
                                                              to obtain some of the equipment directly from the manu-
       contract breach, at least in the absence of
                                                              facturer, thereby reducing the corporation's commission
                                                                                                                Page 22
                                           2009 U.S. Dist. LEXIS 31111, *

under the subcontract. The corporation sued the general            consequential damages.' ... Focusing on
contractor and the manufacturer for breach of contract             intentional conduct gives substance to the
(the subcontract and the purchase order, respectively)             proposition that a breach of contract is
and for tortious interference with those contracts. Judg-          tortious only when some independent duty
ment was entered in favor of Plaintiff against both De-            arising from tort law is violated ... If every
fendants for contract damages for breach of, and tort              negligent breach of a contract gives rise to
damages for conspiracy to interfere with, the contracts.           tort damages the limitation would be
Punitive damages were assessed against the general                 meaningless, as would the statutory dis-
[*70] contractor. The Supreme Court held that the manu-            tinction between tort and contract reme-
facturer could not be liable for conspiring to interfere           dies.
with its own contract. In its holding the Supreme Court
stated at page 515:
                                                            21 Cal.4th at 553-554.
         Conduct amounting to a breach of con-
                                                                 In Robinson Helicopter Co., Inc. v. Dana Corp., 34
       tract becomes tortious only when it also
                                                            Cal.4th 979, 22 Cal. Rptr. 3d 352, 102 P.3d 268 (2004),
       violates an independent duty arising from
                                                            the Plaintiff Robinson manufactured helicopters using
       principles of tort law. 'The law imposes
                                                            sprag clutches (a safety mechanism) produced by the
       the obligation that 'every person is bound
                                                            Defendant Dana. Robinson was required to produce its
       without contract to abstain from injuring
                                                            helicopters within the exact specifications of the "type
       the person or property of another, or in-
                                                            certificate" issued by the FAA and any proposed changes
       fringing upon any of his rights.' (Sec.
                                                            in design would have to [*72] be approved by the FAA.
       1708, Civ. Code) This duty is independent
                                                            One element of the type certificate was the exact grind-
       of the contract .... "[A]n omission to per-
                                                            ing tolerances for the sprag clutches. For a period of
       form a contract obligation is never a tort,
                                                            years, Robinson purchased many sprag clutches from
       unless that omission is also an omission of
                                                            Dana that were ground to the proper specifications.
       a legal duty."'
                                                            However, at some point Dana changed the grinding
                                                            process but did not notify Dana or the FAA. Nonetheless,
                                                            Dana continued to provide written certificates to Robin-
In Erlich v. Menezes, 21 Cal.4th 543, 87 Cal. Rptr. 2d
                                                            son with each delivery of clutches that the clutches had
886, 981 P.2d 978 (1999), the Supreme Court explained:
                                                            been manufactured in conformance with Robinson's writ-
          Tort damages have been permitted in
                                                            ten specifications (which specifications prohibited unap-
        contract cases where a breach of duty di-
                                                            proved changes in Dana's manufacturing process). Dana
        rectly causes physical injury ...; for breach
                                                            later switched back to the required specifications, again
        of the covenant of good faith and fair
                                                            without notifying Robinson. Id. at 985-986. The sprag
        dealing in insurance contracts ...; for
                                                            clutches manufactured during the period when Dana was
        wrongful discharge in violation of funda-
                                                            not following the specifications experienced a higher
        mental public policy ...; or where the con-
                                                            failure rate than those properly manufactured. Although
        tract was fraudulently induced ... In each
                                                            the increased failure in the clutches did not result in any
        of these cases, the duty arises from con-
                                                            accidents with the helicopters, Robinson was forced to
        duct which is both intentional and in-
                                                            recall the helicopters to replace the clutches. In order to
        tended to harm ....
                                                            recover the cost of replacement, Robinson sued Dana,
           ...                                              alleging causes of action for breach of contract, breach of
                                                            warranty and negligent [*73] and intentional misrepre-
            Generally, outside the insurance
                                                            sentations. The jury found that Dana had made false mis-
       [*71] context, 'a tortious breach of con-
                                                            representations of fact and had knowingly misrepre-
       tract ... may be found when (1) the breach
                                                            sented or concealed facts with the intent to defraud. The
       is accompanied by a traditional common
                                                            California Court of Appeal applied the economic loss
       law tort, such as fraud or conversion; (2)
                                                            rule and found that Robinson could not recover in tort.
       the means used to breach the contract are
                                                            The California Supreme Court, after citing Erlich v.
       tortious, involving deceit or undue coer-
                                                            Menezes, held:
       cion or; (3) one party intentionally
       breaches the contract intending or know-
                                                                     By issuing false certificates of confor-
       ing that such a breach will cause severe,
                                                                   mance, Dana unquestionably made af-
       unmitigable harm in the form of mental
                                                                   firmative representations that Robinson
       anguish, personal hardship, or substantial
                                                                   justifiably relied on to its detriment. But
                                                                                                              Page 23
                                        2009 U.S. Dist. LEXIS 31111, *

for Dana's affirmative misrepresentations                       by encouraging fraudulent conduct at the
by supplying the false certificates of con-                     expense of an innocent party. No public
formance, Robinson would not have ac-                           policy supports such an outcome.
cepted delivery and used the nonconform-
                                                                     Nor do we believe that our decision
ing clutches over the course of several
                                                                will open the floodgates to future litiga-
years, nor would it have incurred the cost
                                                                tion. Our holding today is narrow in scope
of investigating the cause of the faulty
                                                                and limited to a defendant's affirmative
clutches. Accordingly, Dana's tortious
                                                                misrepresentation on which a plaintiff re-
conduct was separate from the breach it-
                                                                lies and which expose a plaintiff to liabil-
self, which involved Dana's provision of
                                                                ity for personal damages independent of
nonconforming clutches. In addition,
                                                                the plaintiff's economic loss. In addition,
Dana's provision of faulty clutches ex-
                                                                '[i]n California, fraud must be pled spe-
posed Robinson to liability for personal
                                                                cifically; general and conclusory allega-
damages if a helicopter crashed and to
                                                                tions do not suffice ... "Thus, '"the policy
disciplinary action by the FAA. Thus,
                                                                of liberal construction of the pleadings ...
Dana's fraud is a tort independent of the
                                                                will not ordinarily be invoked to sustain a
breach ....
                                                                pleading defective in any material re-
    ...                                                         spect."' ... This particularity requirement
                                                                necessitates pleading facts which 'show
     A breach of contract remedy assumes
                                                                how, when, where, to whom, and by what
[*74] that the parties to a contract can ne-
                                                                means the representations were ten-
gotiate the risk of loss occasioned by the
                                                                dered.'"' ... We trust the trial courts of this
breach. '"[W]hen two parties make a con-
                                                                state to enforce this pleading requirement.
tract, they agree upon the rules and regu-
lations which will govern their relation-
ship; the risks inherent in the agreement
                                                         Id. at 992-993.
and the likelihood of its breach. The par-
ties to the contract in essence create a                      These cases do not [*76] support a claim for tor-
mini-universe for themselves, in which                   tious breach of the implied covenant in this action. The
each voluntarily chooses his contracting                 provisions of the Promissory Note disclosed that the
partner, each trusts the other's willingness             payment amounts on the payment schedules in the
to keep his word and honor his commit-                   TILDS provided to Plaintiffs may be insufficient to pay
ments, and in which they define their re-                both principal and interest and that, if the payment
spective obligations, rewards and risks.                 schedule in the TILDS was followed, Plaintiffs will suf-
Under such a scenario, it is appropriate to              fer negative amortization.
enforce only such obligations as each
                                                              Plaintiffs also contend that "these ongoing fraudu-
party voluntarily assumed, and to give
                                                         lent omissions - which Defendant used to secretly nega-
them only such benefits as he expected to
                                                         tively amortize Plaintiffs' and Class members' loans -
receive; this is the function of contract
                                                         prevented Plaintiffs and Class members from receiving
law."' ... However, '[a] party to a contract
                                                         the benefit of the Option ARM Loan Agreements."
cannot rationally calculate the possibility
                                                         Plaintiffs cite Kransco v. Am. Empire Surplus Lines Ins.
that the other party will deliberately mis-
                                                         Co., 23 Cal.4th 390, 400, 97 Cal. Rptr. 2d 151, 2 P.3d 1
represent terms critical to that contract.' ...
                                                         (2000) that "[i]t has long been recognized in California
No rational party would ever enter into a
                                                         that '[t]here is an implied covenant of good faith and fair
contract anticipating that they are or will
                                                         dealing in every contract that neither party will do any-
be lied to. 'While parties, perhaps because
                                                         thing which will injure the right of the other to receive
of their technical expertise and sophistica-
                                                         the benefits of the agreement.'"
tion, can be presumed to understand and
allocate the risks related to negligent                      However, as Defendants note, Kransco involved an
[*75] product design or manufacture,                     insurance policy. Kransco continued:
those same parties cannot, and should not,
be expected to anticipate fraud and dis-                          This principle applies equally to insur-
honesty in every transaction.' ... Dana's                       ance policies, which are a category of
argument therefore proposes to increase                         contracts ... Because the covenant is a
the certainty in contractual relationships                      contract term, in most [*77] cases com-
                                                                                                                Page 24
                                             2009 U.S. Dist. LEXIS 31111, *

       pensation for its breach is limited to con-            under California law in the absence of a special relation-
       tract rather than tort remedies ... But '[a]n          ship with fiduciary characteristics. California case law is
       exception to this general rule has devel-              clear that a commercial loan transaction does not create
       oped in the context of insurance contracts             such a special relationship. Plaintiffs' contentions that
       where, for a variety of policy reasons,                they are entitled to proceed with this cause of action be-
       courts have held that [an insurer's] breach            cause of allegations that Defendants' actions constituted
       of the implied covenant will provide the               breaches of a legal duty independently arising under
       basis for an action in tort.' ... The avail-           principles of tort law is belied by the terms of the Prom-
       ability of tort remedies in the limited con-           issory Note and other disclosures made in documents
       text of an insurer's breach of the covenant            provided to Plaintiffs.
       advances the social policy of safeguarding
       an insured in an inferior bargaining posi-             CONCLUSION
       tion who contracts for calamity protec-
                                                                  For the reasons stated:
       tion, not commercial advantage.
                                                                 1. Defendants' motion to dismiss the Fifth and Sixth
                                                              Causes of Action is GRANTED WITHOUT LEAVE TO
Plaintiffs' reliance on Kransco ignores the case authority    AMEND;
cited above that a claim for tortious breach of the implied
                                                                  2. Counsel for Defendants shall prepare and lodge a
covenant of good faith and fair dealing will not lie in the
context of a commercial loan transaction. Kransco does        form of order consistent with this Memorandum Deci-
no more than state a general contract law, not tort law.      sion within five (5) court days of service of this Memo-
                                                              randum Decision.
Further, Plaintiffs' contention that negative amortization
was secret is belied by the terms of the promissory note          IT IS SO ORDERED.
as well as the FRB's Consumer Handbook and the Loan
Disclosure Statement.                                         Dated: March 30, 2009
    Defendants' motion to dismiss the Sixth Cause of              /s/ Oliver W. Wanger
A claim for tortious breach of contract does [*78] not lie        UNITED STATES DISTRICT JUDGE

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