Free Memorandum in Opposition - District Court of California - California

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Matthew S. Hale, Esq. HALE & ASSOCIATES Calif. State Bar No. 136690 45 Rivermont Drive Newport News, VA 23601 Mailing Address: P.O. Box 1951 Newport News, VA 23601 Telephone No. (757) 596-1143 E-Mail: [email protected] Attorney for Plaintiffs, DAVID J. LEE and DANIEL R. LLOYD UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA ) Case No.: C-07-4765 CRB ) ) ) MEMORANDUM OF POINTS AND ) AUTHORITIES FILED IN SUPPORT ) OF PLAINTIFFS' OPPOSITION TO Plaintiffs, DEFENDANT AMERICAN EXPRESS ) ) BANK, FSB'S MOTION TO DISMISS vs. ) PLAINTIFFS' COMPLAINT ) ) ) AMERICAN EXPRESS TRAVEL DATE: November 30, 2007 RELATED SERVICES, INC., a New York ) ) TIME: 10.00 a.m. corporation, AMERICAN EXPRESS ) PLACE: Courtroom 8 CENTURION BANK, a Utah corporation, ) 19th Floor AMERICAN EXPRESS BANK, FSB, a ) 450 Golden Gate Ave. San Francisco, Calf. 94102 Utah corporation, and DOES 1, through ) ) 100, inclusive, ) ) ) ) Defendants. ) ) DAVID J. LEE, and DANIEL R. LLOYD, as individuals and, on behalf of others similarly situated,

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES .............................................................................. ii I. II. SUMMARY OF ARGUMENT .................................................................. 1 INTRODUCTION ................................................................................. 3 ARGUMENT ....................................................................................... 8 A. Plaintiff's Complaint Is Not Preempted By HOLA And/Or 12 C.F.R. § 560.2(b)(9) ................................................................... 8 The UCL, CLRA, And Common Law In The Context Of Plaintiffs' Complaint Have, At Most, Only An Incidental Effect On Defendants' Credit Operation .............................................. 13

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III.

B.

IV.

CONCLUSION ....................................................................................... 18

ADDENDUM A. "Preemption of State Laws Applicable to Credit Card Transactions" (Opinion of OTS Chief Counsel, December 24, 1996), 1996 OTS LEXIS 25 "California Unfair Competition Act" (Opinion of OTS Chief Counsel, March 10, 1999), 1999 OTS LEXIS 4

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B.

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TABLE OF AUTHORITIES Page[s] Cases Alkan v. Citimortgage, Inc. 336 F.Supp.2d 1061 (N.D.Cal. 2004) ................................................ 8 Brinetti v. Washington Mutual Bank, 446 F.Supp.2d 217 (S.D.N.Y. 2006) .................. 2, 7, 13, 16 Commercial Capital Bankcorp, Inc. v. St Paul/Mercury Ins. Co., 2006 U.S.Dist.LEXIS 26340 (N.D.Cal. 2006)...................................................................................................................... 2, 12 Doe v. Kamehameha Schools, 470 F.3d 827 (9th Cir. 2007) ........................................................ 13 Douglas v. United States District Court, 495 F.3d 1062 (9th Cir. 2007)......................................... 5 Haehl v. Washington Mutual Bank, 277 F.Supp.2d 933 (S.D.Ind. 2003) .................................... 10 In re First Alliance Mortgage Company, 280 B.R. 246 (C.D.Cal.2002) ...................................... 11 In re: Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, 491 F.3d 638 (7th Cir. 2007)2, 7, 11, 13 Jeff D. v. Andrus, 899 F.3d 753, 759 (9th Cir. 1989).................................................................... 13 Lozano v. AT&T Wireless Servs., 2007 U.S.App.LEXIS 22430 (9th Cir. 2007)........................... 9 Montgomery v. Bank of America Corp., 2007 U.S.Dist.LEXIS 76268 (C.D.Cal. 2007) ........... 11 Public Service Co. v. Batt, 67 F.3d 234 (9th Cir. 1995)................................................................ 13 Rosenberg v. Washington Mutual Bank, F.A., 369 N.J.Super. 456, 849 A.2d 566 (N.J. 2004) 1, 6, 11, 12 Shroyer v. New Cingular Wireless Servs., 498 F.3d 976 (9th Cir. 2007) ....................................... 5 Silvas v. E*Trade Mortgage Corp., 421 F.Supp.2d 1315 (S.D.Cal. 2006)................................... 10 Sunset Importers, Ltd. v. Continental Vintners, 790 F.2d 775 (9th Cir. 1991) ............................. 13 Statutes 12 U.S.C. §§ 1462 et seq......................................................................................................... 1, 4, 5 15 U.S.C. §§ 1601 et seq......................................................................................................... 10, 12 California Bus. & Prof. Code § 17283............................................................................................ 9
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California Bus. & Prof. Code §§ 17200 et seq. ..................................................................... passim California Civil Code § 1670.5................................................................................................. 9, 13 California Civil Code § 1750 et seq....................................................................................... passim California Civil Code § 1770(a)(19)........................................................................................... 3, 9 California Civil Code § 1780(a) ................................................................................................... 10 California Code of Civil Proc. § 1281.4 ......................................................................................... 9 Other Authorities "California Unfair Competition Act" (Opinion of OTS Chief Counsel, March 10, 1999), 1999 OTS LEXIS 4............................................................................................................................. 16 "Preemption of State Laws Applicable to Credit Card Transactions" (Opinion of OTS Chief Counsel, December 24, 1996), 1996 OTS LEXIS 25.............................................................. 2, 7 61 Fed.Reg. 50951 (September 30, 1996) ...................................................................................... 2 United States Constitution, Article III ............................................................................................ 3 Regulations

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12 C.F.R. § 226 ............................................................................................................................. 12
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12 C.F.R. § 226.5b ........................................................................................................................ 12
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12 C.F.R. § 226.9 .......................................................................................................................... 12
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12 C.F.R. § 560(b) .......................................................................................................................... 6
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12 C.F.R. § 560.2 ............................................................................................................................ 6
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12 C.F.R. § 560.2(a)........................................................................................................................ 6
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12 C.F.R. § 560.2(b) ................................................................................................................. 8, 13
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12 C.F.R. § 560.2(b)(9).......................................................................................................... passim
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12 C.F.R. § 560.2(c)............................................................................................................... passim
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12 C.F.R. § 560.2(c)(a) ................................................................................................................. 17
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12 C.R.R. § 560.2(b)(5) ................................................................................................................ 10
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I.

SUMMARY OF ARGUMENT 1 Defendant American Express Bank, FSB has moved to dismiss the Complaint on the

basis that the statutes under which its causes of action arise including California's Consumer Legal Remedies Act ("CLRA") 2 and California's Unfair Competition Law ("UCL"), 3 and common law are each preempted by the Home Owners Loan Act ("HOLA) 4 and its implementing regulations (specifically 12 C.F.R. § 560.2(b)(9)). Defendant forwards that

preemption occurs because the Complaint, by seeking to render certain terms of Defendant's cardmember agreement unenforceable due to their patent unconscionability, seeks to "rewrite" the terms found to be unconscionable and unenforceable and to otherwise have this Court include "specific statements, information, or other content" in Defendant's cardmember

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agreement. Defendant places primary reliance on Rosenberg v. Washington Mutual Bank, F.A., 369 N.J.Super. 456, 849 A.2d 566 (N.J. 2004). However, Plaintiffs disagree and forward, based upon controlling and persuasive federal precedent, that no preemption obtains. First, the predicate requirement for application of 12

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C.F.R. § 560.2(b)(9) ­ i.e., that the laws underlying Plaintiffs' complaint "require[] specific statements, information, or other content" to be included in the agreement ­ is not met. The Complaint is clear that Plaintiffs do not seek to "rewrite the agreement" or to have any "specific

The Summary of Argument is made in compliance with this Court's Standing Order requiring such a Summary for briefs exceeding ten pages in length. California Civil Code § 1750 et seq. California Bus. & Prof. Code §§ 17200 et seq. 12 U.S.C. §§ 1462 et seq.
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2

3

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statements, information, or other content included in" it. Instead, Plaintiffs' Complaint seeks only to enjoin the enforcement of unconscionable terms written and voluntarily included in the cardmember agreement by Defendant. Not one of those unconscionable terms deals with fees or fee disclosures, and their inclusion is neither authorized nor required by any Federal or State law or regulation. Instead, they are included only because Defendant voluntarily chose to include

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them in order to gain additional advantage over the cardholder. Neither the CLRA, nor the UCL, nor common law fraud principles, explicitly or impliedly empower or approve the inclusion of any "specific" term in the cardmember agreement on any subject. And, the Courts are without the power (even if they wanted to) to rewrite the cardmember agreement so as to reform presently unconscionable terms and thereby include "statements" (terms) in the

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agreement. Further, preemption does not occur under Subsection 560.2(c) since the effect, if any, of the statutes upon which Plaintiffs' claims are based is, at most, "incidental" to the Defendant's lending business. Rather, these laws merely "preserve the traditional infrastructure of basic state laws that undergird commercial transactions" and do not open the door to state

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regulation of lending. In these regards, Plaintiffs rely primarily on: Section 560.2, In re: Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, 491 F.3d 638 (7th Cir. 2007); Brinetti v. Washington Mutual Bank, 446 F.Supp.2d 217 (S.D.N.Y. 2006); "Preemption of State Laws Applicable to Credit Card Transactions" (Opinion of OTS Chief Counsel, December 24, 1996), 1996 OTS LEXIS 25; 61 Fed.Reg. 50951 (September 30, 1996); and, Commercial Capital

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Bankcorp, Inc. v. St Paul/Mercury Ins. Co., 2006 U.S.Dist.LEXIS 26340 (N.D.Cal. 2006).

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II.

INTRODUCTION Defendant has voluntarily chosen to author and place unconscionable terms in the charge

and credit card cardmember agreement (including, but not limited to, an arbitration provision that contains a waiver of judicial or arbitral class actions, consolidation of claims, and injunctive relief). Those terms ­ none of which relate to fees or financial disclosures required by Federal

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law and regulations or, for that matter, are not even terms that are otherwise required by Federal or California law and regulations to be included in a cardmember agreement -- are, as a matter of law, unconscionable under controlling California and Ninth Circuit precedents. As a result, Defendant has violated not only the CLRA 5 which makes it unlawful to "insert[] an unconscionable provision in the contract" 6 but also the UCL 7 which, because of Defendant's

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6

violation of a variety of California statutes and common law, makes Defendant's actions unlawful and unfair. Defendant also has, due to misrepresentations it made relative to those agreements and terms to Plaintiffs individually as well as to all cardholders consistent with its continuing practice, committed common law fraud. 8 The primary relief sought by Plaintiffs is statutory:
5

an

injunction

enjoining

Defendant

from

enforcing

the

unconscionable

California Civil Code § 1750 et seq. California Civil Code § 1770(a)(19). California Bus. & Prof. Code §§ 17200 et seq.

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7

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Defendant American Express Bank FSB has also joined in a motion to dismiss filed by its co-defendants in which, among other things, it argues that dismissal is required because of, among other things, Plaintiffs' lack of standing (both under Article III as well as the CLRA and UCL). The facts as pled and controlling law that rebut and defeat that other motion to dismiss are discussed fully in Plaintiffs' Opposition thereto and are not, in the interests of economy, repeated here.
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provisions/terms/agreement, and restitution. 9

Plaintiffs do not seek to have any "specific

statement, information, or other content" included in the Defendant's cardmember agreement, however. After the terms of the agreement and its arbitration provision are found by this Court to be unconscionable and unenforceable, it will be singularly up to Defendant, if it so chooses, to rewrite its own agreement. If Defendant wants to, for instance, include a rewritten arbitration

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provision that does not contain unconscionable terms in its agreement, Defendant (and Defendant alone) will make that decision and write that provision. No requirement of California law or action of this Court can require it to do so. Defendant seeks to escape the liability that must flow from its voluntary placement of unconscionable terms in its cardmember agreement by claiming that because it is a "federal

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savings bank" under the supervision of the Office of Thrift Supervision ("OTS") and is governed by HOLA and 12 C.F.R. § 560.2(b)(9)), it effectively holds a blanket immunity to Plaintiffs' suit and, resultantly, is above the law and can completely ignore California's law relating to unconscionability as well as California's consumer protection laws that undergird

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commercial transactions for all non-FSB's in the state. "California legal theories may not be used to challenge the validity of a contract with a federal savings bank located outside California," 10 or so it argues. Defendant's argument has two premises. First, it argues that

Plaintiffs also seek a non-predominating award of punitive damages under the CLRA (as specifically authorized by that statutory regime) and the fraud claims.
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Defendant's Memorandum of Points and Authorities at 1:6. The "outside California" comment is interesting in that it seemingly reflects Defendant's untoward belief that Utah law (the law of the State designated in the cardmember agreement as being the choice of controlling law) provides the law of decision or, for that matter, is even relevant in this lawsuit. Defendant is, of course, wrong in believing that since, as the Ninth Circuit recently held in Douglas v.

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Plaintiffs "attempt to rewrite the terms of the agreement."11 Second and arising there from, it argues that this "rewrite" causes HOLA and Section 560.2(b)(9) to preempt the CLRA, the UCL, and common law fraud under the Complaint because they "impose requirements regarding "9. Disclosure and Advertising, including laws requiring specific statements, information, or other content to be included in credit applications forms, credit solicitations, billing statements, credit contracts or other creditrelated documents and laws requiring creditors to supply copies of credit reports to borrowers or applicants." (Emphasis added) With all due respect, Defendant's argument is poppycock. 12 A review of Defendant's argument reveals that it is nothing more than a "straw man" based entirely on a situational misrepresentation of the Complaint's allegations and the relief sought. Resultantly, Defendant's motion just makes up the "facts" and "theories" Defendant apparently believes are necessary to

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12

sketch out its preemption position.

However, in the final analysis, Defendant's argument

amounts to nothing more than an argument mired in generalities, inapposite precedents, and misrepresentations.

United States District Court, 495 F.3d 1062 (9th Cir. 2007), and Shroyer v. New Cingular Wireless Servs., 498 F.3d 976 (9th Cir. 2007), California law is controlling when it comes to the matters raised in the Complaint concerning the unconscionability of Defendant's cardmember agreements, including notably its arbitration provision. That is, of course, consistent with a long line of California precedents as well.
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Defendant's Memorandum of Points and Authorities at 1:6.

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It is ironically interesting that in the concurrently filed Motion to Dismiss, the American Express Defendants (including FSB which joined in that motion) take the position that the CLRA does not even cover lending (due to the credit element that must definitionally be a part of the "loan"). How is the CLRA preempted if, as Defendant forwards, it has no relationship to lending (which involves credit) and so cannot cover Defendant's lending operation? The two arguments are obviously at odds with each other. Notably, the arguments made by Defendants on the CLRA coverage issue in the concurrently filed motion actually supports Plaintiffs' position that the CLRA is not preempted.
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Defendant's position is without substantive merit for at least two reasons. First, the necessary predicate for the application of Subsection 560.2(b)(9) ­ that the CLRA, UCL, and common law fraud "requir[e] specific statements, information, or other content to be included in credit applications forms, credit solicitations, billing statements, credit contracts..." -- is not met or in any way implicated by the allegations of or relief sought by

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Plaintiffs.

Indeed, the essential doctrine relative to unconscionable contractual terms is

"severability" and not "inclusion" under both Federal and State law. That being so, the inquiry ends and, on that basis alone, Defendant's motion must be denied. Second, and although this does not appear to be a position explicitly raised by Defendant as a basis of its motion, preemption 12 C.F.R. § 560.2 does not otherwise exist. 13 It is the

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position of the OTS that "State laws prohibiting deceptive acts and practices in the course of commerce are not included in the illustrative list of preempted laws in § 560(b)"

The reason for this uncertainty as discussed below is that Defendant for whatever reason is somewhat inconsistent on this point. In the conclusory comments in its memorandum, Defendant states: "Here, Plaintiffs' claims against FSB are all based on the alleged violations of the UCL, CLRA, and common law in FSB's Agreements, including the arbitration provision. Thus, by their Complaint, Plaintiffs improperly seek to use state laws to impose specific requirements regarding FSB's Agreements. As the foregoing authorities attest, and as the appellate court in Rosenberg properly found, such claims are expressed barred by federal preemption under 12 C.F.R. § 560.2(a) and (b)(9)." Defendant's Memorandum at 6:19-24 (emphasis added). Insofar as this might be construed to refer to an argument that California's consumer protection laws and Section 560.2(c) are not implicated and cannot serve as a basis for "non-preemption" here, it behooves Plaintiffs to counter such foolishness.

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and it is OTS's policy not "to preempt state laws that establish the basic norms that undergird commercial transactions." 14 Embodying this policy, 12 C.F.R. § 560.2(c) sets the parameters for what "State laws are not preempted": e.g., "(a) contract and commercial law[s]" "to the extent that they only incidentally affect the lending operation..." The UCL, CLRA, and

common law fraud, under the Plaintiff's allegations and theory, fall squarely within the
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14

parameters of Subsection (c). 15 In that instance, preemption does not occur since those matters, at most, "only incidentally affect the lending operations ..." The point that Defendant has simply chosen to miss or otherwise not come to grips with is that this result is ineluctable when, as here, the determining standard is "whether any impact on lending operations is incidental to the statute's primary purpose ­ not whether the impact of the statue on a bank's lending operation is `incidental' (which for defendant seems to mean de minimis)." (Italics in original) Brinetti v. Washington Mutual Bank, 446 F.Supp.2d at 221. 16 Accord "Preemption of State Laws Applicable to Credit Card Transactions," at 10: "While the [consumer protection statute] may affect lending relationships, the impact on lending appears to be only incidental to the primary purpose of the state ­ the regulation of the ethical practices of all businesses engaged in commerce..."

See "Preemption of State Laws Applicable to Credit Card Transactions" P IIC (Opinion of OTS Chief Counsel, December 24, 1996), 1996 OTS LEXIS 25, (a copy of which is attached as Addendum A hereto), quoted in, among other precedents, In re: Ocwen Loan Servicing, LLC Mortgage Servicing Litigation, supra.. As set forth a length below, the OTS and informed Courts have uniformly held that "contract and commercial" statutes, within this subsection, include consumer protection statutes like the UCL and the CLRA as well as common law fraud. The fact that this Defendant may miss the point is not due to its attorneys. In fact, Defendants' counsel in this case also served as counsel for the defense (representing Washington Mutual Bank) in Brinetti and, hence, are well aware of this undeniable fact.
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Id. Under controlling and persuasive precedents, Plaintiffs' claims and the statutes/common law from which they arise have, at most, only an "incidental" affect on Defendant's lending operation. Denial of Defendant's motion to dismiss is thus appropriate. III. ARGUMENT A. Plaintiff's Complaint Is Not Preempted By HOLA And/Or 12 C.F.R. § 560.2(b)(9) The entirety of Defendant's motion to dismiss is based upon the overbroad misrepresentation of Plaintiffs' claims and the relief which they seek: i.e., that by this action

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Plaintiffs "attempt to rewrite the terms of the agreement." Defendant's Memorandum at 1:6. That is most assuredly not what Plaintiffs seek, what the UCL/CLRA/common law authorize, or, for that matter, what this Court may order. Defendant's overbroad misrepresentations are, however, transparently necessary to its argument. After all and at least according to Defendant, preemption arises because "rewriting" the cardmember agreement necessarily entails a violation

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12 C.F.R. § 590.2(b)(9)'s proscription against any State law or judicial action "requiring specific statements, information, or other content to be included in ... credit contracts." Defendant thus changes the facts to fit the theory. But the Complaint, the UCL, the CLRA, the common law, and this Court's authority admit to only one reality: Defendant's factual scenario

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will not and can never happen. 17

Defendant's overstatements to the contrary notwithstanding that it is literal grab bag in which all State laws reside, As stated by Judge Whelan in Alkan v. Citimortgage, Inc. 336 F.Supp.2d 1061 (N.D.Cal. 2004), "the illustrative examples of lending regulations [in Subsection 560.2(b)] deal with laws affecting the terms of the loan, the rate of interest, the type or amount of security required, any loan-related fees, escrow account requirements, and processing or servicing issues."

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The Complaint does not contain any request or, by any means, even a suggestion or inference of a request that any "specific statements, information, or other content" be included in the cardmember agreement. With regard to the contents of the cardmember agreement and/or arbitration provision, all the Complaint requests is 1. a judicial finding that the designated terms be declared and otherwise found to be unconscionable, [Complaint, ¶¶ 135-138], that an injunction be issued enjoining the application of those unconscionable provisions, [Complaint, ¶¶ 4, 5; pages 68-69], that the Court find that the inclusion of the unconscionable terms violates the CLRA (specifically Civil Code § 1770(a)(19)), [Complaint, ¶¶ 4,5, 80-93, 108-119], that the Court find that the inclusion of the unconscionable terms violates the "illegal" and "unfair" prongs of the UCL (specifically California Civil Code § 1670.5, and California Code of Civil Proc. § 1281.4), [Complaint, ¶¶ 66-79, 80-102, 120-134], and that Defendant committed fraud in the inducement arising from various misrepresentations, including misrepresentations contained in the agreement itself. Complaint, ¶¶ 103-107.

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2.

3.

4.

5.

The relief sought is a statutory injunction, statutory restitution, and, secondarily, punitive
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damages. Complaint, pp. 68-69. Nor does the CLRA, the UCL, and the common law authorize or, by any means, even suggest or infer that a remedy for their violation is that "specific statements, information, or other content" must be included in the cardmember agreement. In fact, the UCL specifically limits the relief available under it to restitution and injunctive relief. See California Bus. & Prof.

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Code § 17283; Lozano v. AT&T Wireless Servs., supra, 2007 U.S.App.LEXIS 22430 at *9 (9th Cir. 2007) ("The only types of relief available under the UCL actions are injunctive and restorative.") The CLRA also specifies the relief that a court may give for its violation and, as

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with the UCL, does not admit as a remedy the rewriting of the unconscionable terms of the cardmember agreement. See California Civil Code § 1780(a)(limiting remedies to "(1) Actual damages... (2) An order enjoining such methods, acts, or practices. (3) Restitution of property. (4) Punitive damages..."). These are all a far cry from the preempted statutes or statutory regimes forwarded by

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Defendant as being so-called persuasive examples of why the instant statutes must also be preempted. 18 Primary amongst these is Rosenberg v. Washington Mutual Bank, FA., 369

One example of that is Haehl v. Washington Mutual Bank, 277 F.Supp.2d 933 (S.D.Ind. 2003), which involved a claim that Section 560.2(b)(5) preempted Indiana's consumer protection law relating to reconveyance fees on real estate mortgages. The Court, correctly, found that such fees fell squarely within the parameters of Subsection (b)(5)'s preemption of State laws dealing with "loan-related fees": "By asserting that Washington Mutual Bank violated Ind. Code § 24-4.5-2-203(3) by charging a reconveyance fee that allegedly was neither bona fide nor reasonable, plaintiffs seek to impose requirements of Indiana state law on the types of loan-related fees that a federal savings association may charge. That is exactly the type of state regulation that is expressly preempted by § 560.2(b)(5). Thus, plaintiffs' under § 24-4.5-2-203(3) is preempted..." 277 F.Supp.2d at 941. That a consumer protection law dealing with fees and financial disclosures can fall within one of the specified areas of preemption is neither novel nor apposite here. Of course one can. It is just that the setting here does not admit to being the type to which preemption applies. By the same means, Defendant's reliance on Silvas v. E*Trade Mortgage Corp., 421 F.Supp.2d 1315 (S.D.Cal. 2006), is also misplaced. Silvas involved a challenge under the UCL's "unlawful" prong to a $400.00 lock-up fee for interest rates paid by the plaintiff which were not refundable when the plaintiff cancelled the transaction (a claimed violation of the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq. ("TILA"). The court held that even the UCL/TILA claim was preempted because "[a]lthough Plaintiffs' UCL claims do not impose any substantive requirements on Defendant's lending activities beyond those already provided by federal law, they do provide remedies for violations of federal law in a field preempted entirely by federal law." 421 F.Supp.2d at 1319. It can be easily concluded as a matter of common sense that that case was wrongly decided: after all, each of the statutes falling within the
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N.J.Super 456, 849 A.2d 566 (N.J. 2004), a decision of an appellate division of the New Jersey Superior Court and the only case relied upon by Defendant that directly implicated Section 560.2(b)(9). 19 While Rosenberg may be cited in support of the proposition that in the proper

factual setting preemption may arise under Subsection (b)(9), it is clear that it is inapposite to the present dispute, and, in fact supports Plaintiffs' opposition rather than Defendant's motion.

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Rosenberg involved a claim dealing with adjustable rate mortgages ("ARMs") disclosures contained in a monthly loan statement sent by the bank to the debtor concerning "the type of interest and loan repayment plan they agreed to." 849 A.2d at 568. Certain allegations were made that the form of the disclosure violated, among other things, New Jersey's consumer protection statutes:

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"the Complaint takes issue with the manner in which [Washington Mutual] advises its customers of the amount due each month and the effect such a monthly payment will have on [Washington Mutual's] New Jersey customers, including Plaintiffs. The Complaint further alleges that [Washington Mutual's] Monthly Loan statement is deceptive in the manner it is presented to Plaintiffs and the class." parameters of Section 560.2(c) carry with them remedies such as those sought here. If the intent was to preempt all laws that might add remedies, Subsection 560.2(c) has no meaning or application. That cannot be. Indeed, Courts that have done more careful and correct analysis of that matter have found to this to be so. See, e.g., In re. Ocwen Loan Servicing, LLC, supra, 491 F.3d at 643 where Judge Posner, writing for the Seventh Circuit, specifically held: "Against this background of limited remedial authority [under HOLA], we read subsection (c) to mean that OTS's assertion of plenary regulatory authority does not deprive persons harmed by the wrongful acts of savings and loan associations of their basic state common-law-type remedies."; In re First Alliance Mortgage Company, 280 B.R. 246 (C.D.Cal.2002). State court decisions (particularly those outside of California and not involving the Supreme Court level of consideration) are of little moment. After all, even though this action arises under diversity jurisdiction, the preemption issue is one of federal procedure rather than State substantive law. That being so, State court precedents like Rosenberg are of no moment and can be ignored by this Court. See, e.g., Montgomery v. Bank of America Corp., 2007 U.S.Dist.LEXIS 76268 at * 17 (C.D.Cal. 2007).
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Ibid. The Court, based upon the Rosenberg's specific request for relief authorized by those statutes, held that preemption existed:

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"Here, plaintiffs' state law claims clearly fall within 12 C.F.R. § 560.2(b)(9) as they assert that [Washington Mutual's] billing statements fail to convey, i.e., disclose, to the debtor that the `total amount due' figure is something other than what one normally would think of as a `total amount due.' By way of either injunctive relief or monetary damages, plaintiffs seek to insert a form of state regulation by compelling a different type of billings statement disclosure." 849 A.2d at 572 (emphasis added). The Rosenberg statement form at issue contained billing and fee disclosures that were specifically required by Federal law to be included in such statements in a given form. See, e.g., Regulation Z (Truth in Lending), 12 C.F.R. Part 226 (including 12 C.F.R. §§ 226.5b, 226.9); Truth in Lending Act, 15 U.S.C. §§ 1601 et seq. Obviously and as

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noted, the unconscionable terms in the cardmember agreement here are not required by any law to be included in a cardmember agreement, and, importantly, Plaintiffs here do not seek to insert any statement into the cardmember agreement that complies with the non-existent requirements of either the CLRA, UCL, or the common law. Again, the decision of whether certain terms

17 18 19 20 21 22

such as the arbitration provision are to be included in the cardmember agreement and the language that is to be used therein is not subject to any compulsory California or Federal law: it is a decision that is solely up to the Defendant. Finally, this Court lacks the authority to add anything to the cardmember agreement by rewriting it or otherwise. That a Court may not rewrite an agreement is too well-known and

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settled to require much elaboration. This Court recognized that principle in Commercial Capital Bankcorp, Inc. v. St. Paul/Mercury Ins. Co., 2006 U.S.Dist.LEXIS 26340 at * 15 ("Under California law, courts do not rewrite any provision of the contract..."). See also Public Service

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Co. v. Batt, 67 F.3d 234 (9th Cir. 1995) ("Courts are not permitted ... in any manner to rewrite agreements reached by parties."); Jeff D. v. Andrus, 899 F.3d 753, 759 (9th Cir. 1989)(same). This lack of authority, of course, also extends to rewriting statutes to allow for non-authorized remedies or relief. See, e.g., Doe v. Kamehameha Schools, 470 F.3d 827 (9th Cir. 2007); Sunset Importers, Ltd. v. Continental Vintners, 790 F.2d 775 (9th Cir. 1991). The sole extent of the Court's authority upon its finding one or more of the challenged terms is unconscionable is the determination of whether that term can be severed or, as will be the case for instance, the entire arbitration provision is rendered unenforceable. See, e.g., California Civil Code § 1670.5. Defendant's motion to dismiss must thus be denied. B. The UCL, CLRA, And Common Law In The Context Of Plaintiffs' Complaint Have, At Most, Only An Incidental Effect On Defendants' Credit Operation Having thus established that no Section 560.2(b) preemption exists here, the question becomes whether or not preemption exists under Section 560.2(c): i.e., whether the effect of the UCL/CLRA/common law on Defendant's credit card lending operation is more than

17 18 19 20 21 22

"incidental."

Using the OTS and judicial definitions and standards for measuring this

phenomenon, it is not and, accordingly, no preemption exists. 20 Although it is often not good form to include lengthy quotes rather than narrative argument in a memorandum, an exception exists when recent precedent sums up controlling and persuasive precedent and its application. In re. Ocwen Loan Servicing, LLC, supra, 491 F.3d at 644-45, presents such a situation. In In

23 24
20

25 26 27

This standard was set forth ante at p. 7 and is "whether any impact on lending operations is incidental to the statute's primary purpose ­ not whether the impact of the statue on a bank's lending operation is `incidental' (which for defendant seems to mean de minimis)." Brinetti v. Washington Mutual Bank, 446 F.Supp.2d at 221 (italics in original).
13

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re. Ocwen Judge Posner presented the current state of federal precedents relating to Section 560.2(c) which, frankly, is more succinct and persuasive than that which counsel could present and which makes it clear that the present matter is not preempted: "[T]he OTS's statement [in "OTS Final Rule," 61 Fed. Reg. 50951, 50966 (Sept. 30, 1996) introducing the final version of Section 560.2] explains that subsection (c), the list of laws that are not preempted, is designed merely "to preserve the traditional infrastructure of basic state laws that undergird commercial transactions, not to open the door to state regulation of lending by federal savings associations." Id. ... Hence the statement in subsection (c) that state laws escape preemption only "to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section." See also Bank of America v. City & County of San Francisco, 309 F.3d 551, 557-61 (9th Cir. 2002)... The line between subsections (b) and (c) is both intuitive and reasonably clear. The Office of Thrift Supervision has exclusive authority to regulate the savings and loan industry in the sense of fixing fees (including penalties), setting licensing requirements, prescribing certain terms in mortgages, establishing requirements for disclosure of credit information to customers, and setting standards for processing and servicing mortgages. See 12 U.S.C. §§ 1462, 1463, 1464; 12 C.F.R. §§ 500.1, 500.10; "OTS Final Rule," supra, 61 Fed. Reg. at 50965. But though it has some prosecutorial and adjudicatory powers ancillary to its regulatory functions, 12 U.S.C. § 1464(d); 12 C.F.R. § 509.1; Simpson v. Office of Thrift Supervision, 29 F.3d 1418, 1422 (9th Cir. 1994), the Office has no power to adjudicate disputes between the S&Ls and their customers. See OTS, "How to Resolve a Consumer Complaint" 1-2, www.ots.treas.gov/docs/4/480924.pdf (visited June 5, 2007). So it cannot provide a remedy to persons injured by wrongful acts of savings and loan associations, and furthermore HOLA creates no private right to sue to enforce the provisions of the statute or the OTS's regulations. Burns Int'l Inc. v. Western Savings & Loan Ass'n, 978 F.2d 533, 535-37 (9th Cir. 1992). Against this background of limited remedial authority, we read subsection (c) to mean that OTS's assertion of plenary regulatory authority does not deprive persons harmed by the wrongful acts of savings and loan associations of their basic state common-law-type remedies. Suppose an S&L signs a mortgage agreement with a homeowner that specifies an annual interest rate of 6 percent and a year later bills the homeowner at a rate of 10 percent and when the homeowner refuses to pay institutes foreclosure proceedings. It would be surprising for a federal regulation to forbid the homeowner's state to give the homeowner a defense based on the mortgagee's breach of contract. Or if the
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mortgagee (or a servicer like Ocwen) fraudulently represents to the mortgagor that it will forgive a default, and then forecloses, it would be surprising for a federal regulation to bar a suit for fraud. Some federal laws do create such bars, notably ERISA, see 29 U.S.C. §§ 1132(a), (e), but this is recognized as exceptional. [Citations omitted] Enforcement of state law in either of the mortgage-servicing examples above would complement rather than substitute for the federal regulatory scheme. This is well explained in "Preemption of State Laws Applicable to Credit Card Transactions" P IIC (Opinion of OTS Chief Counsel, Dec. 24, 1996, 1996 WL 767462): `State laws prohibiting deceptive acts and practices in the course of commerce are not included in the illustrative list of preempted laws in § 560.2(b). . . . The [Indiana] DAP [deceptive acts and practices] statute prohibits specified acts and representations in all consumer transactions without regard to whether the transaction involves an extension of credit. Although not directly aimed at lenders, this law affects lending to the extent that it prohibits misleading statements and practices in loan transactions by a federal savings association. Accordingly...a presumption arises that the DAP statute would be preempted in connection with loans made by the Association. The OTS has indicated, however, that it does not intend to preempt state laws that establish the basic norms that undergird commercial transactions. . . . The Indiana DAP falls within the category of traditional "contract and commercial" law under § 560.2(c)(1). While the DAP may affect lending relationships, the impact on lending appears to be only incidental to the primary purpose of the statute -- the regulation of the ethical practices of all businesses engaged in commerce in Indiana. There is no indication that the law is aimed at any state objective in conflict with the safe and sound regulation of federal savings associations, the best practices of thrift institutions in the United States, or any other federal objective identified in § 560.2(a). In fact, because federal thrifts are presumed to interact with their borrowers in a truthful manner, Indiana's general prohibition on deception should have no measurable impact on their lending operations. Accordingly, we conclude that the Indiana DAP is not preempted by federal law."

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Ibid. (emphasis added). 21 The impact of the UCL, CLRA, and common law in the context of Plaintiffs' Complaint on Defendant's lending practices is, under this analysis, "incidental."

There was, in addition to the 1996 OTS General Counsel Advisory letter, another letter entitled "California Unfair Competition Act" (Opinion of OTS Chief Counsel, March 10, 1999), 1999 OTS LEXIS 4, which deals specifically with the UCL, a copy of which is Addendum B hereto. It is interesting to note that the 1999 letter specifically states that the CLRA "is structured like the Indiana statute," [1999 Advisory Letter at 5-6], which the OTS found was not preempted. While it might facially appear that the two advisory letters are in conflict, they are not as is obvious from their text and as explained in Brinetti v. Washington Mutual Bank, supra, 446 F.Supp. at 220: "The 1999 OTS opinion ... declared that federal law preempts the application of certain provisions of the California UCA to three specific areas of lending operations, including advertising, forced placement of hazard insurance, and the imposition of certain loan-related fees. However, OTS bent over backwards to distinguish the opinion from its 1996 opinion, and to limit the scope of the opinion to the very "narrow circumstances" presented. While recognizing that the UCA, like the Indiana DAP, "may [] be viewed as a form of contract and commercial law under § 560.2(c)," OTS stated, "In our view the situation [presented in the 1999 opinion] is distinguishable from the issues and facts addressed in the 1996 Opinion because the application of the UCA in the circumstances [] describe[d] seeks to set very particular requirements on the Associations' lending operations." 1999 OTS LEXIS 4, *25 (March 10, 1999). OTS recognized that, in a number of lawsuits, plaintiffs had used the UCA to require particular lending disclosures, limit the Associations' choice of insurers and cap certain fees. Accordingly, "The UCA has been and is being used, by private and governmental parties, in an attempt to set substantive standards for the Associations' lending operations and practices." Id. at *26-27. This has resulted in "a great deal of uncertainty in how the lenders should structure and operate their lending programs to comply with the UCA." Id. at *35. "As such, under § 560.2(c), the application of the UCA as described above has more than an incidental impact on the Associations' lending activities and is contrary to the purpose of uniform standards of operations." Id. at 25. Of critical importance, is OTS's emphasis on "the extremely limited nature of our preemption determination here." OTS expressly stated,
16

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The UCL/CLRA/common law are all, in the context of Plaintiff's complaint, "traditional contract and commercial law" under Section 560.2(c)(a). They are not aimed at lending

practices, fees, or fee disclosures and, indeed, do not even address them. They, like the doctrine of unconscionability itself, are actually complementary to and non-substitutive of the Federal regulatory scheme. Indeed, they are the California embodiment of laws that are designed only

6 7 8 9 10 11

to "preserve the traditional infrastructure of basic state laws that undergird commercial transactions." They and the doctrine of unconscionability merely require that certain common standards be observed by businesses, including Defendant, that have chosen to engage in commerce in California. Here, concerning the arbitration provision, for instance, it comes into play only after the "loan" has been made and does not affect the way or the means in which the

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22

loan is made. Preemption does not occur under those circumstances.22

`Our finding of preemption is only based on how the UCA has been used by private and governmental plaintiffs to set standards in the three specific areas of a thrift's lending operations discussed herein, areas that have traditionally been governed by federal law. We do not preempt the entire UCA or its general application to federal savings associations in a manner that only incidentally affects lending and is consistent with the objective of allowing federal savings associations to operate in accordance with uniform standards.' Id. at 37." In this instance, Federal preemption does not ignore common sense: there are simply some actions by entities such as Defendant that are common to all businesses and must be subject to State laws. One is the form of their contracts. When businesses such as Defendant cross over the proverbial line and impose unconscionable terms on their customers, then and only then do the UCL, CLRA, and common law come into play. That is the price that is paid for wanting to tap the lucrative California market. However and as is obvious by the present motion, Defendant does not want to pay it and, yet, still wants to reap the benefits of that market. That is simply too bad and cannot support preemption.
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IV.

CONCLUSION For the reasons stated above, in the Complaint (with attachments and exhibits), and in

II11
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7

the documents of which judicial notice is concurrently sought, Defendant's motion to dismiss should be denied. Dated November Respectfully submitted, ,

8 9 10

Matthew S. -Hale Attorney for Plaintiffs David J. Lee and Daniel R. Lloyd

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Addendum

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LEXSEE 1996 OTS LEXIS 25, *20 Office of Thrift Supervision 1996 OTS LEXIS 25 December 24, 1996 SUBJECT: [*1] Preemption of State Laws Applicable to Credit Card Transactions Dear Text Omitted This responds to your inquiry, submitted on behalf of Text Omitted (the "Association"), to the Office of Thrift Supervision ("OTS") regarding the application of three specific Indiana laws to the Association's proposed Text Omitted credit card loan program. Your inquiry raises issues regarding federal preemption and application of the Most Favored Lender ("MFL") provision of the Home Owners' Loan Act ("HOLA"). n1 n1 12 U.S.C.A. § 1463(g) (West Supp. 1996). In brief, we conclude that federal law does not preempt the cited Indiana law prohibiting fraudulent and deceptive loan practices. Federal law does, however, preempt the cited Indiana laws that pertain to disclosure and loan-related charges (except for charges that constitute "interest" under the MFL provision). Moreover, under the MFL provision, the Association may elect to charge interest (including charges that constitute interest) up to the maximum amount authorized by the laws of Indiana for the state's most favored lender, notwithstanding any contrary provision in Indiana's laws or the laws of any other states where borrowers reside. [*2] I. Background The Association is a federal savings bank Text Omitted located in Indiana. The Association proposes to issue Text Omitted credit cards to customers nationwide. You indicate that the Indiana Uniform Consumer Credit Code (the "UCCC") regulates all persons making consumer loans in Indiana, including unsecured credit card loans. n2 The UCCC addresses two areas: (1) finance charge rates and other charges; n3 and (2) disclosure requirements incorporated from the federal Truth in Lending Act (the "TILA") and Federal Reserve Board Regulation Z. n4 You also represent that the Indiana deceptive acts and practices statute (the "DAP") regulates the activities of lenders by prohibiting specified acts and representations in connection with consumer transactions. n5 n2 See Ind. Code § 24-4.5-1-101 et seq. (1995). n3 Ind. Code § 24-4.5-3-508 (1995), as amended by 750 IAC 1-1-1, provides that the maximum finance charge permissible for supervised consumer loans is 36% for unpaid balances of less than $ 870; 21% for unpaid balances between $ 870 and $ 2,900; and 15% for unpaid loan balances in excess of $ 2,900.

1

A

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n4 The UCCC directs the creditor to "disclose to the debtor to whom credit is extended with respect to a consumer loan the information required by the Federal Consumer Credit Protection Act." Ind. Code § 24-4.5-3-301(2) (1995). The UCCC defines "Federal Consumer Credit Protection Act" to mean the federal Truth in Lending Act (15 U.S.C.A. § 1601 et seq.) as amended by the Truth in Lending Simplification and Reform Act (Pub. L. 96-221, 94 Stat. 168), and any regulations issued thereunder. Ind. Code §§ 24-4.5-1-102(4) and 24-4.5-1-302 (1995). Regulation Z implements TILA and is located at 12 C.F.R. Part 225 (1996). [*3]

n5 See Ind. Code §§ 24-5-0.5-1 et seq. (1995). For example, the statute prohibits a person who regularly engages in consumer transactions from making representations that "a specific price advantage exists as to [the] subject of the consumer transaction, if it does not and the [person] knows or should reasonably know that it does not" and from making oral or written representations that a consumer transaction involves "rights, remedies or obligations, if the representation is false and if the [person] knows or should reasonably know that the representation is false." Ind. Code § 24-5-0.5-3(6) & (8) (1995). You inquire whether the Association must comply with these three Indiana laws in connection with Text Omitted credit card loans issued to borrowers located in Indiana and in other states. II. Discussion A complete response to the Association's inquiry requires examination of both HOLA's MFL provision and OTS's lending regulations. When a savings association issues credit cards, it may utilize the MFL rate authorized by section 4(g) of the HOLA. This provision permits savings associations to charge interest on loans at the most favorable rate allowed any [*4] lender by the laws of the state in which the association is located, notwithstanding any contrary state law. Moreover, a savings association may "export" the favorable MFL rate of the location state when making loans to borrowers who reside in other states. n6 The practical effect of section 4(g) is to preempt state usury laws to a limited extent. n6 See Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 299 (1978). Beyond the MFL provision, the HOLA also authorizes OTS to promulgate regulations that have preemptive effect. Prior to enactment of the HOLA, "'the states had developed a hodgepodge of savings and loan laws and regulations. . . . [When enacting HOLA.] Congress hoped that [the] . . . rules [of the Federal Home Loan Bank Board and now OTS] would set an example for uniform and sound savings and loan regulation.'" n7 Consistent with this intent, courts have long recognized that federal savings associations are uniquely federalized financial institutions - even more so than national banks. n8 As the Supreme Court has recognized:

Congress directed that, in regulating federal [savings associations], the [Bank Board and now OTS should] consider "the [*5] best practices of local mutual thrift and home financing institutions in the United States," which were at the time all state-chartered. By so stating, Congress plainly envisioned that federal savings [associations] would be

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governed by what the [Bank Board and now OTS] - not any particular state - deemed to be the best practices, and approved the . . . promulgation of regulations superseding state law. . . . n9

Consistent with the foregoing, the OTS has authority to issue regulations preempting state laws that affect the operations of federal savings associations. n7 Conference of Federal Savings and Loan Associations v. Stein, 604 F.2d 1256 (9th Cir. 1979) (citations omitted). n8 People v. Coast Federal Savings and Loan Association, 98 F. Supp. 311, 319 (S.D. Calif. 1951). n9 Fidelity Federal Savings and Loan Association v. de la Cuesta, 458 U.S. 141, 153-154 (1982). The OTS and the Bank Board have long taken the position that federal lending laws and regulations are intended to occupy the entire field of lending regulation for federal savings associations, leaving no room for state regulation. n10 For these purposes, the field of lending [*6] regulation has been defined to encompass all laws affecting lending by federal thrifts, except certain specified areas where state law furthers a vital state interest and has only an incidental effect on lending operations. n10 For a general discussion of the principles of federal preemption, see OTS Op. Chief Counsel (Oct. 11, 1991). The preamble to OTS's recent final rule streamlining its lending and investment regulations explains the rationale for this position:

Instead of being subject to a hodgepodge of conflicting and overlapping state lending requirements, federal thrifts [should] be free to originate loans under a single set of uniform federal laws and regulations. This furthers both the "best practices" and safety and soundness objectives of the HOLA by enabling federal thrifts to deliver low-cost credit to the public free from undue regulatory duplication and burden. At the same time, the interests of borrowers are protected by the elaborate network of federal borrowerprotection statutes applicable to federal thrifts . . . . In addition, in those instances where OTS has detected a gap in the federal protections provided to borrowers, the agency has promulgated [*7] regulations imposing additional consumer protection requirements on federal thrifts. n11

n11 61 Fed. Reg. 50951 at 50965-50966 (Sept. 30, 1996). Accordingly, OTS has preempted most state laws affecting lending by federal thrifts. This position was previously reflected in the OTS regulation at 12 C.F.R. § 545.2 (1996), has been confirmed
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and carried forward in OTS's recent final rule updating and streamlining its lending and investment regulations, and will be codified in OTS regulations at 12 C.F.R. § 560.2. n12 n12 See 61 Fed. Reg. at 50972. The preamble to this regulation, which became effective on October 30, 1996, contains an extensive discussion of the scope of, and the legal basis for, the OTS authority to preempt by regulation. See 61 Fed. Reg. at 50965-67. A copy of the preamble is enclosed for your reference. The preamble to OTS's recent final rule describes the analytic framework to be used in determining whether a particular state law that affects lending is, or is not, preempted by federal law. The preamble states:

When analyzing the status of state laws under § 560.2, the first step will be to determine whether the type of law in question [*8] is listed [among the illustrative examples of preempted state laws] in paragraph (b) [of § 560.2]. If so, the analysis will end there; the law is preempted. If the law is not covered by paragraph (b), the next question is whether the law affects lending. If it does, then, in accordance with paragraph (a), the presumption arises that the law is preempted. This presumption can be reversed only if the law can clearly be shown to fit within the confines of [the types of state laws not preempted, as described in § 560.2(c)]. For these purposes, paragraph (c) is intended to be interpreted narrowly. n13

n13 61 Fed. Reg. at 50966. We have examined the three cited Indiana laws under this analytic framework. A. Interest Rates and Related Charges The new OTS lending regulation specifically addresses your inquiry regarding federal preemption of state laws regulating interest rates and related charges. The illustrative list of preempted state laws at § 560.2(b) indicates, in subparagraph (12), that state interest rate ceilings are preempted to the extent provided in the MFL provision of the HOLA. Thus, when the Association issues a credit card under the MFL provision, it may "charge [*9] interest at the maximum rate permitted to any state-chartered or licensed lending institution by the law of [Indiana]," notwithstanding any contrary provisions in Indiana law or the law of the states where borrowers reside. n14 The OTS MFL regulation defines interest as follows:

The term 'interest' . . . includes any payment compensating a creditor or prospective creditor for an extension of credit . . . . It includes, among other things, the following fees connected with credit extension or availability: numerical periodic interest rates, late fees, not sufficient funds (NSF) fees, overlimit fees, annual fees, cash advance fees, and membership fees. It does not ordinarily include appraisal fees, premiums and commissions attributable to insurance guaranteeing repayment of any extension of

4

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credit, finders' fees, fees for document preparation or notarization, or fees incurred to obtain credit reports. n15

n14 The OTS recently conformed the text of its regulation implementing HOLA § 4(g) to the regulation implementing a similar statutory MFL provision for national banks. See 61 Fed. Reg. at 50981 (to be codified at 12 C.F.R. § 560.110). The Office of the Comptroller of the Currency's ("OCC") rule implementing 12 U.S.C.A. § 85 (West 1989) is found at 61 Fed. Reg. 4849, 4869 (Feb. 9, 1996) (to be codified at 12 C.F.R. § 7.4001). [*10]

n15 12 C.F.R. § 560.110(a). Loan-related fees not covered by the definition of interest under the MFL provision of the HOLA are governed by subparagraph (5) of § 560.2(b). n16