Tuesday, March 18, 2008

Consumer protection: Bear Sterns edition

Palomares v. Bear Stearns Residential Mortgage Corp., 2008 WL 686683 (S.D. Cal.)

Plaintiffs are suing over allegedly abusive mortgage practices. Plaintiffs speak, read, and write only in Spanish; they were contacted by Yazmin Esparza, who told them she represented a company called Fastlink and promised to consolidate their existing home loans in a mortgage with monthly payments under $2700 and other favorable features. Though plaintiffs told Esparza they wanted a 5-year fixed-rate loan with interest-only payments, and she promised to get it for them, she gave them loan documents to sign that were actually for an adjustable rate mortgage with monthly payments of nearly $3400, as well as a second mortgage. These documents were written in English, but Esparza—who knew of plaintiffs’ status as Spanish-only speakers—assured them that the documents reflected their requests. Plaintiffs signed. Bear Sterns was the lender, and the complaint alleged that Bear Sterns paid Esparza and Fastlink nearly $7400 as an incentive for switching plaintiffs to the more expensive loan.

Plaintiffs alleged that Esparza’s representations were knowingly or recklessly false; that defendants intended plaintiffs to rely on those representations; and that their reliance was reasonable.

The court dismissed the claim of intentional misrepresentation for failure to allege misrepresentation attributable to Bear Sterns with the particularity required by Rule 9(b). Plaintiffs argued that Bear Sterns was a co-conspirator, jointly liable for Esparza and Fastlink’s misrepresentations. Rule 9(b) requires particularity in alleging facts that support the existence of an agency relationship or civil conspiracy; a complaint can’t simply lump multiple defendants together but must identify the role of each defendant in a fraudulent scheme. Though plaintiffs alleged that all the defendants were each other’s agents, they failed to allege that Esparza or Fastlink had the power to alter legal relations between Bear Sterns and plaintiffs, or that Bear Sterns could control Esparza or Fastlink’s conduct. Likewise, plaintiffs didn’t allege with particularity the formation of any agreement between the defendants to misrepresent the loan, as would be required for a civil conspiracy.

The intentional infliction of emotional distress claim, by contrast, survived. Bear Sterns argued that, as a matter of law, the conduct in this case could not be outrageous because Bear Sterns provided a written disclosure that plaintiffs were getting an adjustable-rate mortgage. Plaintiffs responded that defendants intentionally or recklessly gave them a mortgage which they specifically knew plaintiffs couldn’t afford. In California, IIED requires “(1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiff's suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by the defendant's outrageous conduct” (citation omitted). Given the allegations that defendants falsified the loan information and “closed their eyes” to plaintiffs’ ability to repay the loan, the court found that it could not decide that the conduct alleged was not outrageous as a matter of law.

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