Kelley v. JP Morgan Chase Bank, NA

OCR transcription for search; preserved printed pages are authoritative

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For The Northern District Of California

UNITED STATES BANKRUPTCY COURT

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AUTHENTICAT
U.S. GOVERNMENT,
INFORMATION

GPO

Entered on Docket
February 01, 2012

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

FILED

4 20
cre 9
court
grates eankuera
united SW Yose, CUNT TED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re Case No. 08-55305-ASW

JAMES MADISON KELLEY, Chapter 11

Debtor.

JAMES MADISON KELLEY Adv. Proc. No. 10-5245
Plaintiff,
Vs.

JPMORGAN CHASE BANK, N.A., ET AL.,

Defendants.

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MEMORANDUM DECISION RE MOTION FOR LEAVE
TO AMEND FIRST AMENDED COMPLAINT

Before the Court is the motion of plaintiff and debtor James
Madison Kelley (“Plaintiff”) to amend Plaintiff's First Amended
Complaint (“Motion”). In the Motion, Plaintiff seeks to add new
claims for: (1) lack of prudential standing; (2) lack of
constitutional standing; (3) lack of enforceability under Uniform

Commercial Code Article 9; (4) Fair Credit Reporting Act (‘“FCRA”)

violations; (5) Fair Debt Collection Practices Act (‘“FDCPA”)

MEMORANDUM DECISION RE

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violations; (6) Deceptive Practices Act violations; (7) slander of
title; and (8) quiet title. Plaintiff also seeks to add Quality
Loan Service Corporation (“Quality”) as a defendant for Quality’s
alleged FDCPA violations. Defendant JPMorgan Chase Bank, N.A.
(“Defendant”) opposes the Motion on the grounds that Plaintiff
failed to attach a proposed amended pleading so that Defendant and
the Court can assess the allegations of the new causes of action
against Defendant and the proposed new defendant, Quality, under
Federal Rule of Civil Procedure 15 (“Rule 15”). Defendant also
opposes the Motion on the ground that the proposed claims are
unnecessary, fail to state a claim, and are barred.

“At the hearing on the Motion, the Court heard oral argument on
the Motion and the matter was taken under submission. Debtor is
appearing in propria persona. Defendant is represented by
Christopher Yoo, Esq. of Alvarado Smith, P.C. This Memorandum
Decision constitutes the Court’s findings of fact and conclusions
of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy

Procedure.

I.
PROCEDURAL HISTORY

On September 19, 2008, Plaintiff filed a voluntary chapter il
petition. On July 15, 2010, Plaintiff filed this adversary
proceeding seeking to invalidate two home mortgage loans
(collectively, “Loans”) or rescind the Loans under the Truth In
Lending Act on Plaintiff’s property at 14390 Douglass Lane,
Saratoga, CA (“Property”). On August 17, 2010, Defendant filed a

motion to dismiss the adversary complaint which Plaintiff opposed.

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At a hearing on October 8, 2010, the Court granted Defendant’s
motion to dismiss the complaint with leave to amend. On
October 29, 2010, Plaintiff filed a First Amendment Complaint
(“FAC"). The FAC seeks rescission of the first and second deeds of
trust against the Property as well as declaratory relief seeking to
invalidate the Loans. On September 28, 2011, after the close of
discovery, Plaintiff filed this Motion for leave to amend the FAC.
Plaintiff did not attach a proposed amended complaint to the
Motion. In Defendant’s opposition, Defendant also requests the
Court to take judicial notice of several documents relating to the
Loans as well as Defendant’s purchase agreement (“Purchase
Agreement”) with the Federal Deposit Insurance Corporation

(“FDIC”). Plaintiff opposes the request to take judicial notice.

II.
FACTS

The following facts are taken from Defendant’s opposition as
allegations. . Plaintiff obtained a mortgage loan in the sum of
$2,992,265.00 secured by a deed of trust (“DOT”) encumbering the
Property. The DOT was recorded on July 31, 2007, with the Santa
Clara County official records as instrument number 19532063. The
DOT identifies Washington Mutual Bank, FA (“WAMU”) as the lender
and beneficiary, California Reconveyance Company (“CRC”) as the
trustee and Plaintiff as the borrower. Plaintiff also obtained a
home equity line of credit with a maximum credit line of
$250,000.00 (“HELOC”) secured by a deed of trust (“HELOC DOT")
encumbering the Property. The HELOC DOT was recorded on October 3,

2007. The HELOC DOT identifies WAMU as the lender and beneficiary,

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CRC as the Trustee and Plaintiff as the borrower. Plaintiff
defaulted on the Loans and a notice of default to sell under the
DOT was signed on September 26, 2007 (“NOD”). The NOD was recorded
by Quality on or around June 30, 2008 with the Santa Clara County
official records as instrument number 19902698, though Quality was
not substituted as the trustee until August 12, 2008. The NOD
indicates that, as of June 30, 2008, the amount in arrears was
$39,087.37. <A substitution of trustee in connection with the DOT
was recorded on or around August 12, 2008 with the Santa Clara
County records as instrument number 19952396. Quality was
substituted as the new trustee. On September 25, 2008, the Office
of Thrift Supervision closed WAMU and appointed the FDIC as
receiver. On the same date, Defendant entered into the Purchase
Agreement with the FDIC acting in the FDIC’s corporate capacity as
well as receiver for WAMU.

Plaintiff’s Motion alleges that Defendant has violated the
FCRA and the FDCPA. Specifically, Defendant allegedly violated the
FCRA based on discovery showing that Defendant allegedly,
intentionally and deceptively, altered Plaintiff’s credit history
with Equifax, TransUnion, and Experian to show falsely that
Plaintiff made loans in 2005 and 2007 with Chase. Defendant
allegedly is a not a real party in interest and lacks
constitutional and prudential standing to bring proofs of claim on
both of the Loans because there are no documents which evidence a
chain of assignments from the original lender to Defendant. The
Motion contends that, according to the evidence in the Purchase

Agreement and in the FDIC v. LSI appraisal case filed in the

Central District of California on May 9, 2011 (Case No. SACV11-706

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JST), the Loans were charged off. Because there are no documents
showing that the Loans were transferred to Defendant via
receivership, Defendant paid nothing for the Loans and cannot have
damages in connection with any contract. The DOTs and the
adjustable rate rider offered by Defendant in support of
Defendant’s proofs of claim 2 and 3 are not original and therefore
do not prove that Defendant has standing. There are no
assignments, allonges or endorsements in evidence transferring the
Loans to WAMU or to Defendant. Plaintiff further alleges that
Defendant and Quality intentionally caused a false notice of
default as well as substitution of trustee to be recorded in Santa
Clara County which misrepresented the lender. Defendant and
Quality persisted in foreclosing on the Property based on the
allegediy false NOD and DOT after being notified of the
misrepresentations in those documents. Quality used the
foreclosure process to attempt to collect the debt on the home loan
note and clearly indicated on the NOD that Quality was attempting

to collect a debt.

IiItl.
ANALYSTS

A. Failure to Attach a Proposed Amended Complaint

Bankruptcy Local Rule 1001-2 incorporates Civil Local Rule
10-1 which provides: “Any party filing or moving to file an amended
pleading must reproduce the entire proposed pleading and may not
incorporate any part of a prior pleading by reference.” C.L.R.
10-1. Plaintiff has not attached a proposed amended complaint to

the Motion. The Court has discretion to deny a motion to amend for

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the failure to attach a proposed pleading as required by local
rule. Waters v. Weyerhaeuser Mortgage Co., 582 F.2d 503, 507
(9th Cir. 1978). Because the form and substance of the Motion are
sufficiently unclear, the Court exercises its discretion in this
case to require a proposed amended complaint, and the Motion is
denied without prejudice to Plaintiff filing another motion to
amend that includes a proposed amended complaint.

B. Notice to Plaintiff of Possible Deficiencies in the

Proposed Amendments

In the interest of judicial efficiency, this Court points out
certain deficiencies in the proposed amendments, which Plaintiff
may want to address before filing another motion to amend. Though
the Motion is in the improper form, the Motion contains claims and
allegations which the Court will take to be the basis for
Plaintiff's proposed amended complaint.

1. Legal Standard Applicable to All Amendments

Federal Rule of Bankruptcy Procedure 7015 incorporates
Rule 15. Under Rule 15, leave to amend pleadings should be freely
given in the interest of justice by applying Rule 15 liberally to
carry out the rule’s policy in favor of amendments. Fed. R. Civ.

P. 15(a) (2); Ascon Props., Inc. v. Mobil Oil Co., 866 F.2d 1149,

1160 (9th Cir. 1989). A pro se litigant, especially, must be given
leave to amend and notice of the deficiencies in a proposed
amendment unless it is absolutely clear that no amendment would

cure the deficiencies. Cato v. U.S., 70 F.3d 1103, 1106 (9th Cir.

1995).
The court’s discretion to allow an amended pleading freely is

limited by consideration of the four Foman factors -- bad faith,

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Case:

undue delay, prejudice, and futility -- which are not given equal

weight. Foman v. Davis, 371 U.S. 178 (1962); Bonin v. Calderon,

59 F.3d 815, 845 (9th Cir. 1995); Roth v. Garcia Marquez, 942 F.2d

617, 628 (9th Cir. 1991). At this juncture, the Court will only
address futility.

A proposed amendment is futile only if no set of facts can be
proven that amount to a legally sufficient claim or defense.

Miller v. Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988).

This broad standard encompasses many of the more narrow frameworks
courts commonly apply such as the standards governing Rule 12(b) (6)
failure to state a claim, summary judgment, and frivolousness among
others. A proposed amendment is futile if allowing the amendment
would merely result in the amended cause of action or defense
failing any of the more specific standards in the next stage of
litigation. As explained in Moore’s Federal Practice:

Courts have denied leave to amend in the following situations:

1. Amendment could not withstand Rule 12 motion to
dismiss for failure to state a claim.

2. The plaintiff is unable to allege facts sufficient
to support the complaint.

3. The claims are frivolous, and no additional facts
would cure the deficiency.

4. The plaintiff is unable to plead with particularity
all the specific elements necessary to support the
claim.

5. Plaintiff could not cure defect with amendment

because claim had no basis in law.

6. The amendment would be futile because it would not
withstand a summary judgment motion.

7. The amendment is a reassertion of a previously
abandoned claim or claims already dismissed.

MEMORANDUM. DECISION

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Case

8. The amendment does not present any new facts -- only
theories -- and provides no satisfactory explanation
for failure to originally develop the claim.

9. The plaintiff could not set forth any circumstances
that would state a claim because the cause of action
was cut off by an intervening court ruling.

3 Daniel R. Coquillette, Gregory P. Joseph, Sol Schreiber, Chilton
Davis Varner, Georgene M. Vairo, Moore’s Federal Practice § 15.15
at 15-57 to 15-61 (3d ed. 2011) (footnotes omitted and enumeration
added).

The Ninth Circuit has held that the specific test applied for

the futility analysis when evaluating whether an amendment states a

claim upon which relief can be granted is the same test used in
considering the sufficiency of a pleading under Federal Rule of
Civil Procedure 12(b)(6). Miller, 845 F.2d at 214. Ninth Circuit
law also supports denial of an amendment if a claim is frivolous,
has no basis in law, or does not plead with particularity all the
required elements to the support the claim. Albrech v. Lund,

845 F.2d 193, 195 (9th Cir. 1988) (frivolous claims); Partington v.

Bugliosi, 56 F.3d 1147, 1162 (9th Cir. 1995) (failure to plead
elements).
2. Plaintiff’s Proposed Amendment for “Unenforceability of
Mortgage Note Under UCC” is Likely Futile.
Piaintiff’s third proposed amendment is formulated as an
objection to Defendant’s secured proofs of claim 2 and 3 on the
notes underlying the Loans.’ Specifically, Plaintiff's third

proposed amendment appears to object to Defendant’s standing to

1 Claim #2 filed by JP Morgan Chase, total amount claimed:
$3,189,960.65, filed on October 17, 2008. Claim #3 filed by |
JPMorgan Chase Bank, National Association, total amount claimed:
$253,884.38, filed on December 2, 2008.

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enforce the loan notes because the notes are not negotiable
instruments under Article 3 of the Uniform Commercial Code
(“Article 3”) and Defendant is not a holder in due course.’
Defendant opposes on the ground that Defendant is not required to
be holder of the note in order to foreclose under California law
and that the Uniform Commercial Code is inapplicable.’

Plaintiff claims that the negative-amortization feature of the
loan’s “option adjustable rate mortgage” does not meet the
requirements of being a fixed amount of money due in a prescribed
time under Article 3.* However, California Commercial Code section
3112(b) -- which enacts the Article 3 provisions in California --
provides in relevant part that:

Interest may be stated in an instrument as a fixed or

variable amount of money or it may be expressed as a

fixed or variable rate or rates. The amount or rate of

interest may be stated or described in the instrument in

any manner and may require reference to information not

contained in the instrument.

Cal. Comm. Code § 3112(b) (West 2011). Because the variable
interest rate would not make either note non-negotiable,
Plaintiff’s claim regarding “UCC enforceability” is likely futile
because it would not survive dismissal for failure to state a
legally sufficient claim.

Plaintiff also claims that Defendant did not give value for

the note, implying that Defendant was not a holder in due course.°®

However, California Commercial Code section 3301 provides:

2 Motion at 5:16-23.
Opposition at 8:20-25.
“Motion at 5:10-14.

> Motion at 5:16-20.

MEMORANDUM_ DECISION RE

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Cas

a)

Ds

“Person entitled to enforce” an instrument means (a) the

holder of the instrument, (b) a nonholder in possession

of the instrument who has the rights of a holder, or

(c) a person not in possession of the instrument who is

entitled to enforce the instrument pursuant to Section

3309 or subdivision (d) of Section 3418. A person may be

a person entitled to enforce the instrument even though

the person is not the owner of the instrument or is in

wrongful possession of the instrument.

Cal. Comm. Code § 3301 (West 2011). Because Defendant does not
need to be a holder in due course in order to enforce the notes,
Plaintiff’s claim regarding “UCC enforceability” is likely futile
because it would not survive dismissal for failure to state a
legally sufficient claim.

3. Plaintiff’s Claim for FCRA and “Deceptive Practices Act”

Violations is Unclear.

Plaintiff’s fourth claim against Defendant is for FCRA and
“Deceptive Practices Act” violations. The Motion is unclear as to
whether Plaintiff asserts a cause of action for unfair credit
practices under California law in addition to a federal cause of
action under the FCRA. Plaintiff's oblique references to the
“Deceptive Practices Act” in the caption of the Motion and the
allegations in the fourth claim are unclear because the Court
cannot determine under which statute the cause of action arises.
It is possible Plaintiff means to assert a claim based on
California Civil Code section 1785.25(a) allowed under the
exception to state law preemption which exists in FCRA
section 1681t(b) (1) (f£). Section 1785.25(a) of the California Civil
Code, which has provisions similar to the FCRA, creates a private
right of action to prevent false credit reporting. To cure the

ambiguity, any proposed amended complaint should plead specifically

whether Plaintiff asserts a cause of action arising under section

MEMORANDUM DECISION RE
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Cast

1785.25(a) of the California Civil Code, some other state law
provision, or whether only a federal claim under the FCRA is
intended.

4. Plaintiff’s Claim for Slander of Title is Unclear.

Plaintiff’s sixth claim alleges slander of title. The Motion
is unclear whether the claim is against Defendant alone or against
Defendant and Quality.® Based on the allegations, Quality seems to
be the defendant who filed the NOD and Substitution of Trustee, but
the Motion has an unclear reference to Chase at page 6, line 21.
Plaintiff should cure this ambiguity and specifically plead the
claim against one or both defendants in any proposed amended

complaint attached to a further motion for leave to amend.

IV.

CONCLUSION

For the forgoing reasons, Plaintiff’s Motion is denied without
prejudice. Counsel for Defendant shall prepare a form of order and

submit the proposed order to the Court after service on Plaintiff.

Dated: e[i/ie bitter §. We a _

ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE

6 Motion at 9:22-25.

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Case

Court Service List

S. Christopher Yoo

Alvarado Smith

1 MacArthur Place, Suite 200
Santa Ana, California 92707

James M. Kelley
14390 Douglass Lane
Saratoga, CA 95070

Office of the U.S. Trustee / SJ

280 South Ist St. #268
San Jose, CA 95113-3004

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