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holding that while no controlling Ninth Circuit precedent "requires application of Rule 9(b) to negligent misrepresentation claims," the negligent misrepresentation claim in that case sounded in fraud and therefore was subject to Rule 9(b)
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Case No. 20-cv-00799-PJH
10-09-2020
NAJARIAN HOLDINGS LLC, et al., Plaintiffs, v. COREVEST AMERICAN FINANCE LENDER LLC, Defendant.
ORDER GRANTING MOTION TO DISMISS AND DENYING MOTIONS TO STRIKE
Re: Dkt. Nos. 45, 50
Before the court is defendant Corevest American Finance Lender LLC's ("Corevest" or "defendant") motion to dismiss and motion to strike. Also before the court is plaintiffs' motion to strike. The matters are fully briefed and suitable for resolution without oral argument. Having read the papers filed by the parties and carefully considered their arguments and the relevant legal authority, and good cause appearing, the court rules as follows.
The complaint originally named CAF Lending LLC as defendant. Pursuant to a stipulation between the parties, Corevest was substituted as the named defendant as it is the successor in interest to CAF Lending LLC. See Dkt. 37.
BACKGROUND
On February 3, 2020, plaintiffs Najarian Holdings LLC and Najarian Capital LLC (collectively "Najarian" or "plaintiffs") filed a complaint alleging five causes of action. Dkt. 1. The parties stipulated to plaintiffs filing both an amended complaint (Dkt. 19) and a second amended complaint, (Dkt. 22). On July 9, 2020, the court granted in part and denied in part defendant's motion to dismiss, (Dkt. 38), and plaintiffs have filed a Third Amended Complaint, ("TAC," Dkt. 39).
The TAC alleges five causes of action: (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) fraud; (4) negligent misrepresentation; and (5) unfair competition. The court previously dismissed with prejudice portions of the second claim and dismissed the remaining claims with leave to amend. Defendant now moves to dismiss the third through fifth claims pursuant to Federal Rule of Civil Procedure 12(b)(6) and moves to strike certain allegations pursuant to Rule 12(f). Dkt. 45. In response, plaintiffs move to strike portions of defendant's motion to dismiss. Dkt. 50.
Najarian Holdings LLC and Najarian Capital LLC are Georgia limited liability companies with their principal place of business in Atlanta, Georgia. TAC ¶ 2. The defendant at the time of the incident, CAF Lending LLC, was a Delaware limited liability company with a principal place of business in New York, New York. Id. ¶ 3. Plaintiffs are in the business of purchasing residences at foreclosure sales and then reselling those residences. Id. ¶ 6. Starting in 2014, defendant would loan money to plaintiffs and the parties entered into revolving loan agreements and revolving promissory notes secured by deeds of trust, which the parties collectively label as the "Loan Documents." Id.
In the normal course of business, defendant would render invoices to plaintiffs in a timely manner, which permitted plaintiffs to assess, challenge, and validate each invoice within a fifteen-day grace period permitted under the promissory notes. Id. ¶ 8. Under the terms of the Loan Documents, plaintiffs were obligated to pay outstanding sums due on the first day of each month and, after the fifteen day grace period, defendant was permitted to charge a default interest rate on the entire amount of loans that had matured or otherwise come due in full. Id. ¶ 7. The agreements also permitted defendant to collect a "late or collection charge, as liquidated damages, equal to ten percent (10%) of the amount of such unpaid payment or deposit" that had become due. Id.
The conduct at issue in the TAC arose in March 2016 when defendant allegedly changed its billing practices to send invoices after the first of each month resulting in less time for plaintiffs to assess and challenge the invoices prior to the expiration of the grace period. Id. ¶ 8. Due to defendant's practice of sending late invoices, plaintiffs frequently made payments that defendant deemed late; in 2016 and early 2017, defendant assessed, and plaintiffs paid, late fees in excess of $75,000. Id. ¶ 9. Defendant also charged plaintiffs late fees calculated as a percentage of the outstanding principal balance of loans that had matured. Id. ¶ 10. Plaintiffs characterize these late fees based on matured amounts as illegal because they are void as a matter of public policy and contrary to California Civil Code § 1671. Id. ¶ 11.
On February 1, 2017, plaintiffs' managing member, Zareh Najarian, sent an email to defendant's vice president, Stephanie Casper, complaining about $30,000 in late fees. Id. ¶ 12. The same day Casper responded that "the late fees cannot be waived. As we discussed on the phone, I can offer a rebate on the new line [of credit's] advance fees, but I cannot waive [the late fees]." Id. On February 9, 2020, Casper sent a second email to Najarian:
Zareh, When we spoke last week Wednesday I explained that there would be 5% late fee calculated on the principal balance of the matured assets to the tune of $56,000 or so, over and above the late fees charged on interest late pays (Roughly $14K in yet to be assessed via the payoff quotes). As you will recall, we had encouraged you to execute the extension agreement in December, this would have only cost you only [sic] $11K. The late fees, per the loan agreement, are calculated on any past due amounts, interest and/or principal.Id. ¶ 13 (alteration in original). Casper sent a third email a few weeks later stating "We will do an extension for .5% for 30 days on the 4 assets. This will prevent you from having to pay 5% on the principal and interest saving you over $20,000!!" Id. ¶ 14. Plaintiffs characterize these emails from Casper as an attempt to coerce plaintiffs into paying illegal fees with a promise to rebate some of the late fees if plaintiffs agreed to sign a new line of credit agreement. Id. ¶ 13.
Plaintiffs add allegations to the TAC that defendant is a market leader in financing residential real estate investors, closing over $2.8 billion in loans on over 20,000 properties since defendant's inception in 2014 until mid-2017. Id. ¶ 16. Plaintiffs then allege that defendant knew or should have known that the late fees it charged plaintiffs were illegal and unenforceable penalties because, in part, defendant is a sophisticated commercial lender. Id. ¶ 17. Plaintiffs allege that in each case in which late fees were paid to defendant, the payment was made directly by a plaintiff entity to defendant's loan servicing agent or from escrow on plaintiffs' behalf. Id. ¶ 18.
Separate from the late fees, plaintiffs allege that defendant demanded that plaintiffs pay a $250 release fee in exchange for defendant's releases of its security interests in properties sold by plaintiffs. Id. ¶ 19. These release fees are not mentioned in the Loan Documents. Id. When Najarian protested the imposition of the release fees, Casper replied stating, "I will need to check with Asset Management, as they work and manage the servicer. I seem to recall, however, that the pricing is fixed on that line item." Id. ¶ 21. According to plaintiffs, defendant knew or should have known that it had no contractual right to charge such a fee because it was a sophisticated real estate lender. Id. ¶ 22.
Plaintiffs also allege that defendant provided them with payoff statements for properties for which the loan was about to mature or had recently matured. Id. ¶ 23. Plaintiffs allege that the payoff statements materially misstated the amounts later invoiced by defendant such that defendant would end up charging amounts substantially more than the sums earlier communicated to plaintiffs. Id.
DISCUSSION
A. Legal Standard
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) tests for the legal sufficiency of the claims alleged in the complaint. Ileto v. Glock Inc., 349 F.3d 1191, 1199-1200 (9th Cir. 2003). Under Federal Rule of Civil Procedure 8, which requires that a complaint include a "short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), a complaint may be dismissed under Rule 12(b)(6) if the plaintiff fails to state a cognizable legal theory, or has not alleged sufficient facts to support a cognizable legal theory. Somers v. Apple, Inc., 729 F.3d 953, 959 (9th Cir. 2013).
While the court is to accept as true all the factual allegations in the complaint, legally conclusory statements, not supported by actual factual allegations, need not be accepted. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009). The complaint must proffer sufficient facts to state a claim for relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 558-59 (2007).
"A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not 'show[n]'—'that the pleader is entitled to relief.'" Id. at 679 (quoting Fed. R. Civ. P. 8(a)(2)). Where dismissal is warranted, it is generally without prejudice, unless it is clear the complaint cannot be saved by any amendment. In re Daou Sys., Inc., 411 F.3d 1006, 1013 (9th Cir. 2005).
Review is generally limited to the contents of the complaint, although the court can also consider documents "whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the plaintiff's pleading." Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) (quoting In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999), superseded by statute on other grounds as stated in In re Quality Sys., Inc. Sec. Litig., 865 F.3d 1130 (9th Cir. 2017)); see also Sanders v. Brown, 504 F.3d 903, 910 (9th Cir. 2007) ("[A] court can consider a document on which the complaint relies if the document is central to the plaintiff's claim, and no party questions the authenticity of the document." (citation omitted)). The court may also consider matters that are properly the subject of judicial notice (Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001)), and exhibits attached to the complaint (Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 896 F.2d 1542, 1555 n.19 (9th Cir. 1989)).
For plaintiffs' claims that sound in fraud, the complaint must also meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b). See Kearns v. Ford Motor Co., 567 F.3d 1120, 1125 (9th Cir. 2009). Rule 9(b) requires a party alleging fraud or mistake to state with particularity the circumstances constituting fraud or mistake. "To satisfy Rule 9(b)'s particularity requirement, the complaint must include an account of the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentations." Depot, Inc. v. Caring for Montanans, Inc., 915 F.3d 643, 668 (9th Cir. 2019) (internal quotation marks omitted). In other words, "[a]verments of fraud must be accompanied by 'the who, what, when, where, and how' of the misconduct charged." Kearns, 567 F.3d at 1124. Plaintiffs must also offer "an explanation as to why the statement or omission complained of was false or misleading." In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994) (en banc), superseded by statute on other grounds as stated in SEC v. Todd, 642 F.3d 1207, 1216 (9th Cir. 2011).
2. Rule 12(f)
Federal Rule of Civil Procedure 12(f) provides that the court "may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed. R. Civ. P. 12(f). "The function of a [Rule] 12(f) motion to strike is to avoid the expenditure of time and money that must arise from litigating spurious issues by dispensing with those issues prior to trial." Whittlestone, Inc. v. Handi-Craft Co., 618 F.3d 970, 973 (9th Cir. 2010) (quoting Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993), rev'd on other grounds, 510 U.S. 517 (1994)).
Motions to strike are not favored and "should not be granted unless it is clear that the matter to be stricken could have no possible bearing on the subject matter of the litigation." Colaprico v. Sun Microsystem, Inc., 758 F. Supp. 1335, 1339 (N.D. Cal. 1991) (citing Naton v. Bank of Cal., 72 F.R.D. 550, 551 n.4 (N.D. Cal. 1976)). When a court considers a motion to strike, it "must view the pleadings in light most favorable to the pleading party." Uniloc v. Apple, Inc., No. 18-CV-00364-PJH, 2018 WL 1640267 (N.D. Cal. Apr. 5, 2018) (quoting In re 2TheMart.com, Inc., Sec. Litig., 114 F. Supp. 2d 955, 965 (C.D. Cal. 2000)). A court must deny the motion to strike if there is any doubt whether the allegations in the pleadings might be at issue in the action. In re 2theMart.com, 114 F. Supp. 2d at 965 (citing Fantasy, Inc., 984 F.2d at 1527). However, a motion to strike is proper when a defense is insufficient as a matter of law. Chiron Corp. v. Abbot Labs., 156 F.R.D. 219, 220 (N.D. Cal. 1994).
B. Analysis
1. Third Claim: Fraud
Plaintiffs' third claim is for fraud. TAC ¶ 31. "The elements of a cause of action for fraud in California are: '(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or 'scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.'" Kearns, 567 F.3d at 1126 (quoting Engalla v. Permanente Med. Grp., Inc., 15 Cal. 4th 951, 974 (1997)).
Defendant points out that this court's prior order determined that the economic loss rule bars plaintiffs' fraud claim. Mtn. at 7. Defendant argues that plaintiffs have simply repeated and realleged the same fraud claim in the TAC and other than replacing "CAF" with "Defendant" the claim is identical. Id. According to defendant, plaintiffs still have not alleged any fraudulent conduct independent of their breach of contract claim. Id. In response, plaintiffs advance no argument in support of their fraud claim, instead arguing that they state a claim for negligent misrepresentation. Opp. at 8. Further, in their separately filed motion to strike, plaintiffs concede that they cannot meet the requirements of Rule 9(b) and seek leave to amend to remove their fraud claim. Dkt. 50 at 7.
The court agrees with defendant. In its prior order, the court determined that the economic loss rule barred plaintiffs' fraud claim. Dkt. 38 at 10-13. The court dismissed plaintiffs' claims with leave to amend. Id. at 15. Plaintiffs alleged no new factual allegations with regard to fraud, (TAC ¶ 31), make no argument in their opposition regarding fraud, and concede in their motion to strike that they cannot state a claim for fraud. It is clear that further amendment would be futile.
For the foregoing reasons, defendant's motion to dismiss plaintiffs' third cause of action for fraud is GRANTED and the claim is DISMISSED WITH PREJUDICE.
2. Fourth Claim: Negligent Misrepresentation
Plaintiffs' fourth claim is for negligent misrepresentation. TAC ¶ 33. The elements of negligent misrepresentation are (1) the misrepresentation of a past or existing material fact; (2) without reasonable ground for believing it to be true; (3) with intent to induce another's reliance on the fact misrepresented; (4) justifiable reliance on the misrepresentation; and (5) resulting damage. Apollo Cap. Fund, LLC v. Roth Cap. Partners, LLC, 158 Cal. App. 4th 226, 243 (Ct. App. 2007). "In contrast to fraud, negligent misrepresentation does not require knowledge of falsity." Id. Instead, "[a] person who makes false statements, honestly believing that they are true, may still be liable for negligent misrepresentation if he or she has no reasonable grounds for such belief." Id. (quotations omitted).
Defendant acknowledges that the court's prior order did not find the economic loss rule bars plaintiffs' negligent misrepresentation claim, but urges the court to apply the rule to the negligent misrepresentation claim because the conduct alleged in support of the negligent misrepresentation claim directly relates to the same conduct supporting the breach of contract claim. Mtn. at 8-9. Alternatively, defendant argues that plaintiffs cannot plead factual allegations sufficient to sustain their negligent misrepresentation claim because they have not alleged any new statements made by defendant's representative. Id. at 12-13. The new allegations in the TAC, according to defendant, relate to a series of legal conclusions concerning both the late fee and release fee provisions. Id. at 13-15. Finally, defendant argues that plaintiffs cannot plead reliance on any misrepresentation because plaintiffs easily could have discovered the fees were not due simply by reviewing the loan documents. Id. at 16-17.
Plaintiffs argue that the Ninth Circuit has yet to determine whether Rule 9(b) or Rule 8 applies to a negligent misrepresentation claim. Opp. at 8. Plaintiffs then assert that their pleading now meets Rule 8 because it now explains how the late fee provision was illegal. Id. at 9 (citing TAC ¶ 11). Plaintiffs now allege that defendant has a large "market footprint," which they interpret as plausibly establishing defendant "was a huge player in this market with (no doubt) sophisticated legal advisors and auditors" such that they should have known the fees were illegal. Id. at 10-11.
The court declines to revisit its finding regarding the economic loss rule's application to plaintiffs' negligent misrepresentation claim. Despite plaintiffs' new allegations, the TAC still fails to state a claim under both Rule 9(b) and Rule 8.
a. Whether Rule 9(b) Applies to Negligent Misrepresentation Claims
In their opposition, plaintiffs contend that the Ninth Circuit has yet to determine whether Rule 9(b) or Rule 8 applies to a negligent misrepresentation claim. Id. at 8. While plaintiffs cite no authority for this proposition, they are nonetheless correct that no controlling authority requires application of Rule 9(b) to negligent misrepresentation claims. "The Ninth Circuit has not yet decided whether Rule 9(b)'s heightened pleading standard applies to a claim for negligent misrepresentation, but most district courts in California hold that it does." Villegas v. Wells Fargo Bank, N.A., 2012 WL 4097747, at *7 (N.D. Cal. Sept. 17, 2012) (citations omitted). While some district courts in this circuit have concluded that Rule 9(b) does not apply to negligent misrepresentation claims, Petersen v. Allstate Indem. Co., 281 F.R.D. 413 (C.D. Cal. 2012); see also Bernstein v. Vocus, Inc., 2014 WL 3673307, at *5 (N.D. Cal. July 23, 2014), other courts continue to apply Rule 9(b) to negligent misrepresentation claims, Gilmore v. Wells Fargo Bank N.A., 75 F. Supp. 3d 1255, 1270 (N.D. Cal. 2014) ("The Court agrees with the line of cases that hold that negligent misrepresentation is a species of fraud, and, hence, must be plead in accordance with Rule 9(b)."); see also Microsoft Corp. v. Hon Hai Precision Indus. Co., 2020 WL 5128629, at *10 (N.D. Cal. Aug. 31, 2020). Also persuasive, two unpublished Ninth Circuit opinions have affirmed a district court's dismissal of negligent misrepresentation claims for failing to plead the circumstances surrounding the alleged misrepresentation with particularity. Vidor v. Am. Int'l Group, Inc., 491 Fed. App'x 828, 829 (9th Cir. 2012); Kelley v. Rambus, Inc., 384 Fed. App'x 570, 573 (9th Cir. 2010).
The district court in U.S. Capital Partners, LLC v. AHMSA International, Inc., 2013 WL 594285, at *3-4 (N.D. Cal. Feb. 14, 2013), explained why district courts arrive at different conclusions with regard to negligent misrepresentation. The court reasoned that opinions applying Rule 9(b) to negligent misrepresentation claims involved instances where the negligence claim was grounded in fraud. Id. at *3 (citing, e.g., Rankine v. Roller Bearing Co. of Am., Inc., 2013 WL 55802, at *4 (S.D. Cal. Jan. 2, 2013)). Conversely, where a claim is not based in fraud and involves simple negligence, then it would be in error to apply Rule 9(b)'s heightened pleading requirements. Id. at *4 (citing Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1107 (9th Cir. 2003)).
A brief review of the allegations in the TAC confirms why, in this case, plaintiffs' negligent misrepresentation claim sounds in fraud and application of Rule 9(b) is warranted. Each iteration of plaintiffs' complaint alleges both a claim for fraud and a claim for negligent misrepresentation under a similar theory: either defendant knew or should have known that the release fees and late fees were illegal. TAC ¶¶ 31, 33. The underlying conduct for the two claims are the same, (id. ¶¶ 30, 32), and both claims involve alleged false statements "with the intention of deceiving Najarian," (id. ¶¶ 31, 33). Accordingly, plaintiffs' negligent misrepresentation claim must meet Rule 9(b)'s pleading requirements. Further, even if the court applies Rule 8's less stringent pleading requirements, the TAC still fails to state a claim.
b. Whether Plaintiffs State a Claim
As was the case in the second amended complaint, the TAC fails to state a claim for negligent misrepresentation. Plaintiffs have not alleged any new factual allegations regarding statements by defendant's employee. Rather, the new allegations in the TAC describe legal contentions by plaintiffs explaining why the late fees in the loan documents constituted an illegal and unenforceable penalty. See TAC ¶ 11. The claim fails for two reasons.
First, because plaintiffs adduce no new factual allegations regarding specific statements by defendant's representatives, the TAC does not cure the deficiencies noted in the court's prior order. The prior order reasoned that plaintiffs' assertions regarding California Civil Code § 1671 were legal conclusions but there was no factual allegation that defendant knew or should have known the fees were illegal. Dkt. 38 at 15. The court's reasoning derived from the fact that whether a liquidated damages clause is unreasonable and unenforceable under section 1671(b) requires an inquiry into whether "it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach." Greentree Fin. Grp., Inc. v. Execute Sports, Inc., 163 Cal. App. 4th 495, 499 (Ct. App. 2008) (quoting Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal. 4th 970, 977 (1998)).
Plaintiffs' new allegations are not factual in nature and instead seek to establish, as a legal matter, why the late fee provision in the loan documents was unreasonable at the time each contract at issue was entered into by the parties. TAC ¶ 11. Plaintiffs allege that defendant "knows that the late fee provision included in the Loan Documents was not the result of a reasonable endeavor by the parties to estimate a fair average compensation for any loss that might be sustained as a consequence of a late payment because Defendant knows that the provision was not negotiated by the parties." Id. ¶ 17. They also allege that defendant is a sophisticated real estate lender that closed over $2.8 billion in loans on over 20,000 in properties since its inception until mid-2017. Id. ¶ 16.
The statements by Casper do not have any connection to whether or not the late fee provision was the result of a reasonable endeavor between the parties or whether the provision was negotiated by the parties. Rather, as plaintiffs point out, they were "efforts to coerce Najarian into signing a new loan agreement using the threat and imposition of illegal penalties." Id. ¶ 13. Similarly, while plaintiffs establish defendant is a sophisticated entity that has entered into loans for over 20,000 properties from its inception until mid-2017, that fact does not cure plaintiffs' legal conclusion that the late fee was illegal.
Second, plaintiffs have not sufficiently alleged reliance on the purported misrepresentations made by defendant's representative. By failing to plausibly allege facts establishing this element of a negligent misrepresentation claim, the TAC fails Rule 8's pleading requirement. Plaintiffs' theory of negligent misrepresentation is that defendant represented to plaintiffs that the release fees and late fees on outstanding balances were due to defendant and would have to be paid in order to obtain releases of defendant's liens on plaintiffs' properties. Id. ¶ 33.
Yet, according to plaintiffs, the statements made by Casper were meant to "coerce Najarian into signing a new loan agreement using the threat and imposition of illegal penalties." Id. ¶ 13 (emphasis added). Indeed, the statements by Casper relate to signing a new extension agreement: "As you will recall, we had encouraged you to execute the extension agreement in December, this would have only cost you [sic] $11K. The late fees, per the loan agreement, are calculated on any past due amounts, interest and/or principal." Id. A few weeks later, Casper wrote: "We will do an extension for .5% for 30 days on the 4 assets. This will prevent you from having to pay 5% on the principal and interest, saving you over $20,000!!" Id. ¶ 14. Thus, while plaintiffs might allege reliance on Casper's statements with regard to signing a new extension agreement using the threat of illegal penalties, there is no discussion from Casper about paying release fees and late fees to obtain releases of defendant's liens on plaintiffs' properties.
Plaintiffs have not alleged sufficient factual allegations to state a claim. The fact that plaintiffs have not identified any new factual allegations in the TAC compared to the second amended complaint demonstrates that further amendment would be futile.
For the foregoing reasons, defendant's motion to dismiss plaintiffs' fourth claim for negligent misrepresentation is GRANTED and the claim is DISMISSED WITH PREJUDICE.
3. Fifth Claim: Unfair Competition
Plaintiffs' fifth cause of action is for a violation of California's unfair competition law ("UCL"). TAC ¶ 35. The UCL creates a cause of action for business practices that are (1) unlawful, (2) unfair, or (3) fraudulent. Cal. Bus. & Prof. Code § 17200. "Each prong of the UCL [provides] a separate and distinct theory of liability." Lozano v. AT & T Wireless Servs., Inc., 504 F.3d 718, 731 (9th Cir. 2007) (citation omitted). "The UCL limits the remedies available for UCL violations to restitution and injunctive relief . . . ." Madrid v. Perot Sys. Corp., 130 Cal. App. 4th 440, 452 (Ct. App. 2005).
Restitution under [Business and Professions Code] section 17203 is confined to restoration of any interest in money or property, real or personal, which may have been acquired by means of such unfair competition. A restitution order against a defendant thus requires both that money or property have been lost by a plaintiff, on the one hand, and that it have been acquired by a defendant, on the other. [C]ompensatory damages are not recoverable as restitution.Zhang v. Superior Ct., 57 Cal. 4th 364, 371 (2013) (alterations in original) (internal quotation marks and citations omitted).
Defendant asserts that plaintiffs' purported restitutionary remedy is identical to their breach of contract claim. Mtn. at 18. According to defendant, plaintiffs' TAC and prior pleadings confirm that they are seeking restitution only in the event they are not afforded complete relief on their legal claims. Id. (citing TAC ¶ 35). Defendant also argues because plaintiffs receive bona fide mortgage products and services from CAF Lending, any purported restitution would constitute impermissible nonrestitutionary disgorgement. Id. at 19.
Plaintiffs contend that the TAC now alleges specific money or property that defendant acquired from plaintiffs. Opp. at 11. They argue that each release fee and late fee paid to defendant was money that was paid to defendant either directly by a Najarian entity or indirectly by a closing escrow account. Id. at 12. Plaintiffs acknowledge that if they prevail on their breach of contract claim, they will not also recover restitution on a UCL claim for those same late fees and release fees. Id. Instead, they assert that they are entitled to plead alternative claims and theories of recovery. Id.
In its prior order, the court determined that because the UCL limits remedies to restitution and injunctive relief and further that plaintiffs were seeking damages under the UCL, they could not state a claim. Dkt. 38 at 17-18. As a general matter, a plaintiff may plead alternative claims and theories of relief. Fed. R. Civ. P. 8(a)(3), (d)(2)-(3). Under California law, however, a UCL claim does not lie where the plaintiff seeks compensatory damages. By arguing that restitution would also provide the measure of damages under a legal claim, plaintiffs implicitly concede that their UCL claim seeks the same remedy as their breach of contract claim. The TAC confirms that the conduct in question relates to a breach of contract, alleging that defendant insisted that the late fees "be incorporated into the parties' agreement" and "Defendant asserted a contractual right to payment of release fees that Defendant did not have . . . ." TAC ¶ 35.
Cortez v. Purolator Air Filtration Products, 23 Cal. 4th 163 (2000), cited by plaintiffs, is helpful in understanding the relationship between compensatory damages and restitution. There, the California Supreme Court addressed whether unlawfully withheld wages could be recovered under the UCL as a form of restitution. Id. at 173. The court cited the rule that "damages are not available under section 17203." Id. (quoting Dean Witter Reynolds, Inc. v. Superior Ct., 211 Cal. App. 3d 758, 774 (Ct. App. 1989)). As plaintiffs point out, the court then noted that in some cases the concept of damages can overlap with "a restitutionary element" such that an award of damages "includes an element of restitution—the return of the excess of what the plaintiff gave the defendant over the value of what the plaintiff received. To that extent the award of damages literally includes restitution." Id. at 174.
Plaintiffs draw the wrong conclusion from this statement. They argue that the fact that money acquired by defendant from plaintiffs might be the basis of an award of either compensatory damages or restitution does not render plaintiffs' UCL claim dismissible. Opp. at 13. As Cortez explains, compensatory damages may have an element of restitution but does not mean that a plaintiff can plead both damages and restitution. This case illustrates why this is true. If plaintiffs prevail on their breach of contract claim, then they would receive compensatory damages based on the funds they paid to defendant. In that sense, a compensatory damages award is restitutionary in nature. But this does not mean that a restitution order is also available under the UCL, where compensatory damages are sufficient.
For the foregoing reasons, defendant's motion to dismiss plaintiffs' fifth claim for unfair competition is GRANTED and the claim is DISMISSED WITH PREJUDICE.
4. Defendant's Motion to Strike
Defendant moves to strike portions of plaintiffs' TAC that reassert the same conduct that the court dismissed with prejudice in its prior order. Mtn. at 21. Defendant contends that the allegations in the TAC regarding plaintiffs' second claim for breach of implied covenant claim are identical to the allegations in the second amended complaint. Id. Plaintiffs respond that they were uncertain how to interpret the court's prior order and seek to preserve the opportunity to appeal the court's finding. Opp. at 14.
In its prior order, the court granted in part defendant's motion and dismissed with prejudice plaintiffs' second cause of action for breach of the implied covenant of good faith and fair dealing to the extent such conduct was identical to plaintiffs' breach of contract claim. Dkt. 38 at 9-10. The court also denied in part defendant's motion to dismiss to the extent plaintiffs' allegations related to payoff statements. Id.
Plaintiffs profess uncertainty whether they need to replead their dismissed claim in order to preserve it for appeal. The Ninth Circuit does not require plaintiffs to replead claims that were dismissed with prejudice in an amended complaint in order to preserve them for appeal. Lacey v. Maricopa Cty., 693 F.3d 896, 928 (9th Cir. 2012) (en banc) ("For claims dismissed with prejudice and without leave to amend, we will not require that they be repled in a subsequent amended complaint to preserve them for appeal.").
The prejudice to defendant stemming from plaintiffs mistakenly repleading portions of their dismissed allegations is minimal. The portions of the claim dismissed by the court remain dismissed with prejudice and CoreVest is not in fact forced to keep bringing the same motion to dismiss regarding plaintiffs' implied covenant claim.
"Motions to strike are generally disfavored and 'should not be granted unless the matter to be stricken clearly could have no possible bearing on the subject of the litigation' or 'unless prejudice would result to the moving party from denial of the motion.'" Snap! Mobile, Inc. v. Croghan, 2019 WL 884177, at *3 (N.D. Cal. Feb. 22, 2019) (quoting Platte Anchor Bolt, Inc. v. IHI, Inc., 352 F. Supp. 2d 1048, 1057 (N.D. Cal. 2004). "If there is any doubt whether the portion to be stricken might bear on an issue in the litigation, the court should deny the motion." Id. (quoting Platte Anchor Bolt, 352 F. Supp. 2d at 1057). At this early stage in the litigation it is not clear whether the portion to be stricken might bear on a later issue.
For the foregoing reasons, defendant's motion to strike is DENIED.
5. Plaintiffs' Motion to Strike
Plaintiffs move to strike portions of the motion to dismiss because defendant's arguments purportedly seek reconsideration of arguments previously made but defendant failed to seek leave for such reconsideration. Dkt. 50 at 6. These arguments include whether the economic loss rule bars plaintiffs' negligent misrepresentation claim and whether plaintiffs plead reasonable reliance in support of the misrepresentation claim. Id. Plaintiffs also argue that defendant's motion to dismiss raises novel arguments that were not proffered in its first motion to dismiss. Id.
Defendant responds that it is not seeking reconsideration of the court's prior order expressly declined to resolve a perceived split in authority regarding economic loss doctrine and instead dismissed plaintiffs' claims under Rule 9(b). Dkt. 53 at 4. Defendant advances the same argument with regard to reasonable reliance; the court did not address reasonable reliance. Id. at 5. Defendant further argues that its prior motion to dismiss expressly challenged plaintiffs' UCL claim on the ground that it improperly seeks damages. Id. at 6.
Plaintiffs' motion to strike is illustrative of why such motions are disfavored. First, defendant's motion to dismiss is not seeking reconsideration of a previous ruling. The court's prior order which expressly declined to resolve whether the economic loss rule applied to plaintiffs' negligent misrepresentation claim. Dkt. 38 at 13. The court also determined that plaintiffs' negligent misrepresentation claim failed to satisfy Rule 9(b) and did not address reasonable reliance. Id. at 15.
With regard to the purported novel arguments raised by defendant, plaintiffs' motion fails. Rule 12(g)(2) generally prohibits a party that makes Rule 12 motion from making another motion raising a defense or objection that was available to the party but omitted from its earlier motion. Fed. R. Civ. P. 12(g)(2). See Hernandez v. City of San Jose, 241 F. Supp. 3d 959, 984 (N.D. Cal. 2017), aff'd in part, dismissed in part, 897 F.3d 1125 (9th Cir. 2018) ("[U]nder Rule 12(g)(2) and Rule 12(h)(2), a party that seeks to assert a defense pertaining to a failure to state a claim that was available but omitted from an earlier Rule 12 motion can only do so in a pleading, a Rule 12(c) motion, or at trial.").
Here, defendant's current motion to dismiss argues that any attempt to seek restitution would constitute impermissible nonrestitutionary disgorgement. Mtn. at 19. Defendant raised an argument in its first motion to dismiss that money damages are unavailable under the UCL. Dkt. 26 at 17. Therefore, defendant did not omit a defense that was available to it previously.
For the foregoing reasons, plaintiffs' motion to strike is DENIED.
CONCLUSION
For the foregoing reasons, defendant's motion to dismiss plaintiffs' third cause of action for fraud is GRANTED, and the claim is DISMISSED WITH PREJUDICE; defendant's motion to dismiss plaintiffs' fourth cause of action for negligent misrepresentation is GRANTED, and the claim is DISMISSED WITH PREJUDICE; defendant's motion to dismiss plaintiffs' fifth cause of action for unfair competition is GRANTED, and the claim is DISMISSED WITH PREJUDICE. The court further DENIES both defendant's and plaintiffs' motions to strike. / / / / / / / / / Accordingly, the case will proceed on plaintiffs' first claim for breach of contract and second claim for breach of the covenant of good faith and fair dealing to the extent the claim is not duplicative of plaintiffs' first claim.
IT IS SO ORDERED. Dated: October 9, 2020
/s/ Phyllis J. Hamilton
PHYLLIS J. HAMILTON
United States District Judge