United States District Court, D. New Jersey
June 13, 2005.
JOSEPH B. WARBURTON and EMMA M. WARBURTON, Individually and on Behalf of a Class of Similarly Situated Individuals Plaintiffs,
FOXTONS, INC., FOXTONS NORTH AMERICA, INC., FOXTONS FINANCIAL, INC., FOXTONS REALTOR, WORLDWIDE FINANCIAL RESOURCES, INC., NEW CENTURY MORTGAGE CORP., COMPANY X, Y, Z, JOHN DOES 1-10 Defendants.
The opinion of the court was delivered by: FREDA WOLFSON, Magistrate Judge
Presently before the Court are three separate Motions to
Dismiss Plaintiffs' Class Action Complaint*fn1 pursuant to
Fed.R.Civ.P. 12(b)(6), filed by Defendants Foxtons Inc.,
Foxtons North America, Inc., Foxtons Financial, Inc., and Foxtons
Realtor ("Foxtons Defendants"); Defendants New Century Financial
Corporation and New Century Mortgage Corporation ("New Century
Defendants"); and Worldwide Financial Resources, Inc. ("Financial
Resources"). Plaintiffs' Class Action Complaint alleges
violations of the Real Estate Settlement Procedures Act
("RESPA"); the Truth in Lending Act ("TILA"); the New Jersey
Consumer Fraud Act ("CFA"); the New Jersey Real Estate Sales Full
Disclosure Act ("RESFDA"); breach of contract; breach of the
covenant of good faith and fair dealing; and unjust enrichment.
The Court has jurisdiction over Counts I and II pursuant to
28 U.S.C. § 1331, and over the remaining claims pursuant to
28 U.S.C. § 1367(a). Plaintiffs do not contest dismissal of (1) its
RESPA claim arising under 12 U.S.C. § 2604; or (2) its TILA claim
based upon the failure to provide a Notice of Rescission pursuant
to 15 U.S.C. § 1635, but oppose dismissal of the remainder of
their RESPA and TILA claims. As such, the Court will dismiss
Plaintiffs' claims pursuant to 12 U.S.C. § 2604 and
15 U.S.C. § 1635 as unopposed. For the reasons stated herein, the Court also
will dismiss the remainder of Plaintiffs' RESPA and TILA claims,
with a right to amend. The Court will further deny without
prejudice Defendants' Motions to Dismiss the state law claims,
since I decline to exercise supplemental jurisdiction over
Plaintiffs' state law claims pursuant to 28 U.S.C. § 1367(c)
unless Plaintiffs amend their Complaint to state viable federal
claims. I. BACKGROUND
Defendant Foxtons Realtor, a division of Foxtons North America,
is a residential real estate brokerage firm that conducts
business in New Jersey. Complaint ("Compl.") at ¶¶ 10-12. On
March 16, 2003, Plaintiff Emma Warburton called Foxtons
requesting to see a house listed with Foxtons in Sewell, New
Jersey ("the property"). Id. at ¶ 27. Foxtons told Ms.
Warburton that in order to see the property, she was required to
be pre-qualified for a mortgage. Id. at ¶ 28. Ms. Warburton was
not informed at that time that she would be able to be
pre-qualified by another lender, or that the Foxtons
prequalification process would cost $199.00. Id. at ¶¶ 31-32.
Foxtons then transferred Ms. Warburton to a loan officer from
Foxtons Financial, Inc., a mortgage brokerage firm that is a
wholly owned subsidiary of Foxtons North America, who took her
application over the phone and told her that he would call her
back to let her know whether she was prequalified. Id. at ¶¶
12, 29. About one hour later, the financial loan officer called
Ms. Warburton to tell her that she was approved for a
conventional fixed-rate mortgage at a rate of 5.875%, and that
she would have to pay the $199.00 application fee to complete the
process. Id. at ¶ 32.
Although Plaintiffs did not pay the application fee at that
time, they were permitted to view the property on March 19, 2003.
Id. at ¶ 34. On March 20, 2003, Plaintiffs contacted Foxtons to
place a bid on the property, but were told that their bid would
not be accepted until they paid the application fee. Id. at ¶
35-36. Ms. Warburton provided Foxtons Financial with a credit
card number to pay the fee at that time, and provided all of the
documents required by Foxtons Financial on March 24, 2003. Id.
at ¶ 37-38. On March 25, 2003, Plaintiffs received a letter from Foxtons
Financial, dated March 24, 2003, stating that they had been had
been approved for a mortgage in the amount of $340,000.00. Id.
at ¶ 39 and Exh. 1 to Foxton Defendants' Motion to Dismiss. The
Plaintiffs also received the Contract of Sale on March 25, 2003,
which they executed and faxed to Foxtons' closing coordinator.
Compl. at ¶ 40. The seller completed the contract on March 29,
2003; on March 30, 2003, Plaintiffs gave Foxtons a $5,000.00
deposit, and received a copy of the fully executed contract.
Id. at ¶ 41.
On March 26, 2003, Plaintiffs requested a first mortgage for
80% and a second mortgage (a line of credit) for 10%, instead of
the $340,000 loan referenced in the March 24 letter. Id. at ¶
42. Plaintiffs then scheduled a closing date for May 30, 2003.
Id. at ¶ 43. Also on March 26, 2003, Plaintiffs received an
updated Good Faith Estimate from Foxtons of a 5.875% interest
rate on the loan. Id. at ¶ 44.
On May 19, 2003, Plaintiffs received a call from Foxtons
Financial notifying them that Fannie Mae had not accepted their
loan, but that Foxtons would get a loan from another lender.
Id. at ¶ 47. As such, the Foxtons representative asked for
updated pay stubs and bank statements. Id. Plaintiffs allege
that until that time, they were unaware that Foxtons was having
difficulty obtaining a lender for the mortgage. Id. at ¶ 46.
Foxtons called Plaintiffs on May 21, 2003 to tell them that
their loan had not yet been accepted, but was able to tell them
on May 25, 2003 that they had finally located a lender. Id. at
¶¶ 48, 49. On May 27, 2003, Plaintiffs received a telephone call
from a representative of Defendant Worldwide Financial Resources
("Financial Resources"), who told them that they were not able to
provide the loan at a fixed rate of 5.875%. Id. at ¶ 50. The
Financial Resources representative told Plaintiffs that because of the number of
inquiries on their credit, the best rate that they could offer
was a 2-year Adjustable Rate Mortgage at a rate of 8.75%, and
that he needed updated financial information. Id.
On May 30, 2003, Plaintiffs closed on their mortgage loan with
New Century Mortgage Corporation, the approving lender. HUD-1
Settlement Statement attached as Foxtons Defendants Exh. 3 and
Plaintiffs Exh. 2 ("HUD-1"). According to the HUD-1, among the
"Items Payable in Connection with Loan," were a $500.00
application fee and a 2% yield spread premium paid by New Century
to Financial Resources. Id. at 2.
Plaintiffs argue that the Foxtons Defendants real estate
marketing and loan brokering practices were "unscrupulous," and
that Plaintiffs and other members of the class were victimized
through a scheme that ties real estate services with loan
financing services to enhance profits. They argue that by failing
to disclose fees, Foxtons makes itself more attractive to
homebuyers, and put itself in a position to gain a commission
that it might not have earned had the homebuyers been aware of
these additional fees, in particular, the $199.00
prequalification fee, the $500.00 application fee, and the
alleged commission paid in the form of a yield spread premium
from the mortgage lender.
Plaintiffs also allege that Foxtons encourages home buyers to
utilize their in-house financial services by immediately
transferring potential buyers to Foxtons Financial, which takes a
loan application over the telephone. Compl. at ¶ 24. Foxtons
allegedly neither informs potential buyers that it is affiliated
with Foxtons Financial, nor advises them of their ability to
obtain prequalification from another lender. Id. Plaintiffs
maintain that Foxtons offers consumers mortgage loans at interest
rates that Foxtons agrees to honor upon receipt of certain documents, but fails to take the actions necessary to provide the
loans at the rates and terms disclosed. Id. at ¶ 25.
Plaintiffs also argue that when Foxtons is unable to fulfill
the promises that it allegedly made to induce the sale and market
its loan brokering services, it will pass off potential
homebuyers to other brokers and lenders, for which it receives a
commission in the form of a yield spread fee. Id. at ¶ 26. When
it does so, Foxtons benefits from lenders offering higher
mortgage rates, because it receives a percentage of the loan as
commission. Id. at ¶ 7. Homebuyers are allegedly not notified
of the switch to a higher interest rate loan until days prior to
closing. Id. at ¶ 6. With respect to the non-Foxtons
Defendants, Plaintiffs allege that the "in processing Plaintiffs'
loans, the non-Foxtons defendants failed to comply with
disclosure laws to the detriment of the Plaintiffs," and
generally engaged in fraudulent and deceptive practices. Id. at
¶ 8; Plaintiffs' Opposition Brief ("Pl. Opp. Br.") at 1.
A. Motion to Dismiss Standard
In considering Defendants' Motion to Dismiss for failure to
state a claim pursuant to Fed.R.Civ.P. 12(b)(6), the Court
accepts as true all of the factual allegations contained in
Plaintiffs' complaint and any reasonable inferences that can be
drawn therefrom. Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996).
A claim should be dismissed pursuant to Rule 12(b)(6) only if "it
appears beyond doubt that the plaintiff[s] can prove no set of
facts in support of [their] claim which would entitle [them] to
relief." Conley v. Gibson, 355 U.S. 41, 45-6 (1957). However, a
"court need not credit a complaint's bald assertions or legal
conclusions when deciding a motion to dismiss." Morse v. Lower
Merion School District, 132 F.3d 902, 906 (3d Cir. 1997). In deciding Defendants' Motion to Dismiss pursuant to
Fed.R.Civ.P. 12(b)(6), the Court may consider the allegations in the
complaint, exhibits attached to the complaint, matters of public
record, and documents that form the basis of Plaintiffs' claim.
Lum v. Bank of Am., 361 F.3d 217, 222 n. 3 (3d Cir. 2004). A
document forms the basis of a claim if it is "integral to or
explicitly relied on in the complaint." Id., citing In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d
Cir. 1997). To the extent that Plaintiff's allegations are
contradicted by the documents attached to the Complaint upon
which its claims are based, the Court need not accept such
allegations as true. See Genesis Bio-Pharmaceuticals, Inc. v.
Chiron Corp., 27 Fed. Appx. 94, 99-100 (3d Cir. Jan. 10, 2002)
(unpublished decision); Doug Grant, Inc. v. Greate Bay Casino
Corp., 232 F.3d 173, 183-84 (3d Cir. 2000); Centrella v.
Barth, 633 F. Supp. 1016, 1019 (E.D.Pa. 1986).
B. Real Estate Settlement Procedures Act ("RESPA")
Plaintiffs' Complaint asserts claims against all Defendants
under the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601
et seq. Plaintiffs do not contest dismissal of their claims
pursuant to 12 U.S.C. § 2604, for failure to timely provide a
good faith estimate, in light of the substantial authority that
there is no private right of action to enforce this section of
RESPA. See Pl. Opp. Br. at 9. Plaintiffs' remaining RESPA claim
is for violations of Section 8(b) of RESPA, 12 U.S.C. § 2607(b),
"Splitting Charges," which provides:
No person shall give and no person shall accept any
portion, split or percentage of any charge made or
received for the rendering of a real estate
settlement service in connection with a transaction
involving a federally related mortgage loan other
than for services actually performed.
12 U.S.C. § 2607(b). The allegation central to Plaintiffs' § 2607(b) claim is found
in ¶¶ 71 and 72 of the Complaint, which state as follows:
71. A brokerage fee, undisclosed until Plaintiffs
were actually at settlement, was paid by New Century
Mortgage Corp. to Foxtons in the amount of a 2% yield
72. The payment of this brokerage fee is in violation
of RESPA, and consequently, Plaintiffs and members of
the Class have suffered damages.
Defendants argue that Plaintiffs' § 8(b) claim fails because
Plaintiffs are required to allege a (1) a "split" of (2) a charge
"other than for services actually performed," i.e., that the
charge was unearned in order to state a claim under that
The Court will turn first to the question of whether Plaintiffs
have adequately alleged that New Century paid an unearned yield
spread premium. RESPA does not explicitly address the legality of
yield spread premiums, which are payments made by a lender to a
broker in exchange for the broker delivering a mortgage that is
above the "par rate" being offered by the lender. The payment is
usually made as a percentage of the loan, with the percentage
being determined by the extent to which the actual interest rate
exceeds the par rate. See, e.g., Schuetz v. Banc One
Mortgage Corp., 292 F.3d 1004, 1010 (9th Cir. 2002) (quoting
Real Estate Settlement Procedures Act (RESPA) Statement of Policy
1999-1 Regarding Lender Payments to Mortgage Brokers,
64 Fed. Reg. 10080, 10081 (1999)).*fn2 Yield spread premiums are not illegal if they are "earned" in
accordance with § 8(c), which provides that:
"Nothing in this section shall be construed as
prohibiting (1) the payment of a fee . . . (C) by a
lender to its duly appointed agent for services
actually performed in the making of a loan, (2) the
payment to any person of a bona fide salary or
compensation or other payment for goods or facilities
actually furnished or for services actually
performed, (3) payments pursuant to cooperative
brokerage and referral arrangements or agreements
between real estate agents and brokers."
12 U.S.C. § 2607(c).*fn3
The sharing of fees is prohibited where one or more parties has
not earned compensation as detailed in § 8(c).
12 U.S.C. § 2607(b).
Plaintiffs argue that the Complaint sufficiently alleges that
the fee here was unearned because "the loan ultimately given to
Plaintiffs was handled by Defendant Financial Resources . . .
[y]et, the Complaint alleges that the YSP was paid to Foxtons
if Plaintiffs can prove this then it would appear that the YSP
was unearned." Pl. Opp. Br. at 12-13. However, the Court finds
that the Complaint as written solely alleges the payment of a
yield spread fee, which is not per se illegal. The Complaint
does not allege that Financial Resources, Foxtons, or both,
received the fee for "other than for services actually
performed." It is also unclear whether Plaintiffs are alleging
that the New Century Defendants paid an unearned referral fee to
Financial Resources, or Foxtons, or both, for sending business to New Century; and/or
whether there was a feesplitting arrangement between Financial
Resources and Foxtons.
Furthermore, Plaintiffs' reliance on Brazier III v. Security
Pacific Mortg., Inc., et al., 245 F. Supp.2d 1136 (W.D. Wash.
2003) to support the proposition that they have alleged an
unearned fee is inapposite. HUD has defined the § 8(c) exception
in terms of a "reasonable relationship," proscribing such fees
where "the payment of a thing of value bears no reasonable
relationship to the market value of the goods or services
provided." 24 C.F.R. § 3500.14(g)(2).*fn4 In Brazier III,
the Court found that there were genuine issues of fact precluding
summary judgment with respect to whether the yield spread premium
was unearned under the test set forth by HUD to determine whether
or not a yield spread premium is reasonably related to the work
performed and in line with market rates. Brazier III,
245 F. Supp. 2d at 1143. Here, the Court does not reach the question of
whether the yield spread premium was reasonably related to the
work performed because the face of the Complaint fails to allege
an unearned fee. The Court will therefore dismiss Plaintiffs'
claim under § 2607(b), but with leave to amend within thirty (30)
days if Plaintiffs are able to do so in good faith.
Defendants also argue that Plaintiffs have not sufficiently
alleged a "split" between Financial Resources and Foxtons. The
vast majority of courts have found that the language of § 8(b)
prohibiting a "portion, split, or percentage" of an unearned
charge is clearly and unambiguously aimed at a sharing agreement
rather than a unilateral overcharge. As such, these courts have
determined that the plain meaning of the statute controls, and
that the judicial inquiry should end there, rather than proceeding to the second step of
the analysis set forth in Chevron U.S.A. Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 842-43 (1984), to determine
whether deference should be accorded to agency interpretation.
They have thus ignored HUD's interpretation of § 8(b) set forth
in the 2001 Statement, which rejects the notion that at least two
parties are required to split an unearned fee for the provision
to be violated.*fn5 See, e.g., Haug v. Bank of Am.,
N.A., 317 F.3d 832, 836 (8th Cir. 2003) (holding that
district court erred in denying defendant's motion to dismiss
based on HUD Secretary's interpretation of § 8(b) as not
requiring split of overcharge for loan related services);
Krzalic v. Republic Title Co., 314 F.3d 875, 879-81 (7th
Cir. 2002) ("there is not enough play in the statutory joints to
allow HUD to impose its own `interpretation' under the aegis of
Chevron"); Boulware v. Crossland Mortgage, 291 F.3d 261, 265
(4th Cir. 2002) ("the view that § 8(b) only applies when
there is a kickback or split with a third party is actually the
view that is consistent with RESPA's stated purposes"); Santiago
v. GMAC Mortgage Group, Inc., 2002 WL 32173572, at *8 (E.D.Pa.
Sept. 30, 2003).*fn6 As noted above, the Complaint inadequately alleges why the
yield spread premium at issue here is an unearned fee pursuant to
§ 8(b), and Plaintiffs' RESPA claim is subject to dismissal on
that basis alone. The Court additionally concludes, moreover,
that the more convincing reading of the language of § 8(b) is
that it unambiguously requires a split of an unearned fee, and
agrees with the various courts that have held that the inquiry
ends with straightforward statutory interpretation.*fn7
Indeed, Plaintiffs do not appear to contest that § 8(b) requires
a split, but rather argue solely that their Complaint
sufficiently alleges such a split. To the extent that the Complaint as written could be read to
allege any split, it would be between New Century and Foxtons.
The Foxtons Defendants argue that Plaintiffs cannot state a claim
for such a split because the HUD-1 Settlement Statement
demonstrates that New Century paid the 2% yield spread premium to
Financial Resources, not Foxtons. See Def. Exh. 3; Pl. Exh. 2.
Although Plaintiffs acknowledge that the HUD-1 Settlement
Statement shows that the 2% yield spread premium was paid to
Financial Resources, Plaintiffs assert that Foxtons received a
yield spread fee based upon their "good faith belief that Foxtons
received compensation for referring the loan to the broker and
lender that Foxtons finally located." Pl. Opp. Br. at 7.
Plaintiffs suggest that the HUD-1 Settlement Statement does not
disprove their allegation, but rather supports their theory that
a split occurred in violation of § 8(b). Id. At 11.
A complaint may not be amended by a brief in opposition to a
Motion to Dismiss. Eli Lilly and Co. v. Roussel Corp.,
23 F. Supp. 2d 460, 493 (D.N.J. 1998). To the extent that the Complaint
is attempting to allege that the yield spread fee was improperly
paid by New Century to Foxtons, that "split" is directly
contradicted by the Settlement Statement, and Plaintiffs do not
allege the involvement of Financial Resources in any
split.*fn8 Thus, the current Complaint also does not sufficiently allege which parties Plaintiffs believe
were splitting the unearned fee, and any amended Complaint must
Plaintiffs also request that if the Court determines that its
8(b) claim fails, it should be granted leave to amend to assert a
claim under § 8(a).*fn9 Section 8(a), "Business Referrals"
No person shall give and no person shall accept any
fee, kickback, or thing of value pursuant to any
agreement or understanding, oral or otherwise, that
business incident to or a part of a real estate
settlement service involving a federally related
mortgage loan shall be referred to any person.
12 U.S.C. § 2607(a).
Both § 8(a) and § 8(b) "seek to eliminate kickback or referral
fees paid to a third party, but they do so by prohibiting
different actions." Boulware, 291 F.3d at 266. "Section 8(a)
prohibits the payment of formal kickbacks or fees for the
referral of business and does not require an overcharge to a
consumer . . . Section 8(b) . . . requires an overcharge and
prohibits conduct where money is moving in the same way as a
kickback or referral fee even though there is no explicit
referral agreement." Id.
Plaintiffs' claim as currently pled thus appears to attempt to
state a violation of § 8(a) despite nominally referencing § 8(b).
In its current form, however, the Complaint would be insufficient
to state a claim under § 8(a), which requires Plaintiffs to
allege not just the payment of a yield spread fee, but also that
the yield spread fee was not paid for services actually performed such that it does not fall within the exemptions set forth in §
8(c). See Heimmermann v. First Union Mortg. Corp.,
305 F.3d 1257, 1261 (11th Cir. 2002); Schuetz, 292 F.3d at 1009;
Glover, 283 F.3d at 964.
RESPA does not speak directly to whether a yield spread premium
falls within the boundaries of § 8(c). As the Court has briefly
discussed, HUD defines the § 8(c) exception in terms of a
reasonable relationship, stating that where "the payment of a
thing of value bears no reasonable relationship to the market
value of the goods or services provided, then the excess is not
for goods or services actually performed or provided."
24 C.F.R. § 3500.14(g)(2). In contrast to § 8(b), courts have found that
the reasonable relationship test set forth by HUD in the Policy
Statements is not forbidden by the text of § 8(c), and that
deference to the Policy Statements on this issue is
appropriate.*fn10 See, e.g., Heimmermann,
205 F.3d at 1261, Schuetz, 292 F.3d at 1263; Glover, 283 F.3d at 961,
965. The test requires examination of the individual facts of
each case for reasonableness. See 2001 Statement,
66 Fed. Reg. 53052, 53054 ("The legality of any yield spread premium can only
be evaluated in the context of the test HUD established and the
specific factual circumstances applicable to each transaction in
which a yield spread premium is used.").*fn11 In light of the need to examine the individual facts of each
case for reasonableness under this test, class certification of §
8(a) claims is inappropriate. See, e.g., O'Sullivan v.
Countrywide Home Loans, Inc., 319 F.3d 732, 741-42 (5th Cir.
2003); Heimmermann, 205 F.3d at 1263-64; Schuetz,
292 F.3d at 1014; Glover, 283 F.3d at 966.*fn12 A district court has
discretion to deny a request to amend if it is apparent that the
amendment would be futile. Fraser v. Nationwide Mut. Ins. Co.,
352 F.3d 107, 116 (3d Cir. 2003) (citations omitted). Because §
8(a) claims are not appropriate for class certification, the
Court finds that allowing Plaintiffs to amend their Class Action
Complaint to assert claims on behalf of the class under § 8(a)
would be futile.
Defendants' Motion to Dismiss Plaintiffs' § 8(b) claim is
hereby granted, and Plaintiffs may make a motion for leave to
amend their Complaint to allege that the yield spread fee was
paid for "other than services actually performed," and the
relevant split. Plaintiffs also may make a motion for leave to
amend their Complaint to assert individual but not class claims
under § 8(a).
C. Truth in Lending Act ("TILA") Plaintiffs' claim under the Truth in Lending Act,
15 U.S.C. § 1601 et seq., is asserted solely against the New Century
Defendants. Plaintiffs allege that the TILA was violated because
the New Century Defendants failed to provide timely disclosures
of the costs associated with the extension of credit, and to
accurately disclose those costs in a manner that is clear and
conspicuous and not misleading, and are therefore liable for
damages in accordance with 15 U.S.C. § 1640.*fn13
Defendant New Century Financial Corporation ("NCFC") first
seeks dismissal of Plaintiffs' TILA claim on the ground that it
is not a "creditor." TILA defines a "creditor" as a "person who
both (1) regularly extends . . . consumer credit . . . and (2)
is the person to whom the debt arising from the initial consumer
credit transaction is initially payable on the face of the
evidence of indebtedness." (emphasis added). NCFC argues that
because it is not listed on Plaintiffs' Note as the person to
whom the debt is payable, and it is not alleged to be the
assignee of the loan, it does not fit within the TILA definition
of creditor. The Note names "New Century Mortgage Corporation" as
the Lender. Pl. Exh. 3.*fn14
Plaintiffs argue that the Complaint alleges that New Century
Mortgage Corporation is a wholly owned subsidiary of NCFC, and as
such, is viewed as the same entity for the purpose of liability
under TILA. Plaintiffs incorrectly cite Burns v. Bank of Am.,
2003 WL 22990065, at *3 (S.D.N.Y. Dec. 18, 2003), vacated by Burns v. Bank of Am.,
115 Fed. Appx. 105, 2004 WL 2861929 (2d Cir. Dec 14, 2004)
(unpublished opinion), for this proposition. In Burns, the
issue was whether Bank of America, an assignee rather than a
creditor, could be held liable, not whether a parent could be
held liable for the actions of its subsidiary.
Contrary to Plaintiffs' argument, a parent is not a "creditor"
for the purposes of TILA or Regulation Z solely by virtue of
ownership of a subsidiary that fits that definition. See,
e.g., In re Currency Conversion Fee Antitrust Litig., 265 F.
Supp.2d 385, 425 (S.D.N.Y. 2003). Rather, the corporate veil will
be pierced, and a parent company will be held liable, only where
a subsidiary functions as an instrumentality or alter ego of the
parent, and that "the parent has abused the privilege of
incorporation by using the subsidiary to perpetrate a fraud or
injustice, or otherwise to circumvent the law." Coyer v.
Hemmer, 901 F.Supp. 872, 883 (D.N.J. 1995) (quoting State Dep't
of Envtl. Prot. v. Ventron, 94 N.J. 473, 501 (1983)). Plaintiffs
here make no such allegations, and their TILA claim against NCFC
will be dismissed.
New Century also argues that Plaintiffs' TILA claim should be
dismissed as to New Century Mortgage Corporation because they are
not able to demonstrate either statutory or actual
damages.*fn15 Plaintiffs' alleged TILA disclosure violations
arise under § 1632(a) and 1638(b), which govern the appearance
and order of certain disclosures, and the form and timing of
disclosures in residential mortgage transactions, respectively.
Section 1640(a) provides the method of calculating damages for TILA violations, and allows for
actual and statutory damages. See
15 U.S.C. § 1640(a)(1),(2).*fn16
Courts have held that statutory damages pursuant to § 1640(a)
are only available for the items specifically referenced in that
section of the statute. As such, courts have concluded that
statutory damages are unavailable for violations of § 1632(a) and
§ 1638(b). See Brown v. Payday Check Advance, Inc.,
202 F.3d 987, 992 (7th Cir. 2000) (holding that "§ 1640(a) means what
it says, that `only' violations of the subsections specifically
enumerated in that clause support statutory damages, and that the
TILA does not support plaintiffs' theory of derivative violations under which errors in the form of disclosure must be
treated as non-disclosure of the key statutory terms," and that
claims under § 1632 and § 1638(b) therefore did not support
statutory damages). See also Baker v. Sunny Chevrolet, Inc.,
349 F.3d 862, 869 (6th Cir. 2003) (holding that form and
timing violations pursuant to § 1638(b) do not warrant statutory
damages award); Graham v. RRR, LLC, 202 F. Supp. 2d 483, 488
(E.D.Va. 2002) ("[t]he only remedy for failing to timely make
disclosures is actual damages") (citations omitted); Wojcik v.
Courtesy Auto Sales, Inc., 2002 WL 31663298, at *5 (D. Neb. Nov.
25, 2002) (holding that alleged TILA violations based on timing
of disclosures was did not entitle plaintiffs to statutory
damages); Turk v. Chase Manhattan Bank, USA, NA, 2001 WL
736814, at *2-*3 (S.D.N.Y. June 11, 2001) (holding that statutory
damages are unavailable for violations of § 1632(a)). The Court
agrees, and finds that statutory damages are not available for
the alleged violations of § 1632(a) and § 1638(b).
With respect to actual damages, Section 1640(a)(1) provides
that individual or class action plaintiffs may recover "any
actual damages sustained by such person as a result of the
failure." 15 U.S.C. § 1640(a)(1). New Century argues that in
order to recover actual damages, Plaintiffs must demonstrate that
they relied to their detriment on a disclosure. New Century
argues that a showing of detrimental reliance is impossible based
on the allegations in the Complaint, as Plaintiffs do not allege
that they read and relied upon a disclosure, but rather that they
did not receive the TILA disclosure until the closing.
The majority of courts that have considered whether detrimental
reliance is an element in a TILA claim for actual damages have
found such reliance to be required. See Cannon v. Cherry Hill
Toyota, Inc., 161 F. Supp. 2d 362, 369 (D.N.J. 2001) (collecting
authority). See also Turner v. Beneficial Corp., 242 F.3d 1023, 1026 (11th Cir. 2001)
(citations omitted); Perrone v. General Motors Acceptance
Corp., 232 F.3d 433, 436 (5th Cir. 2000) ("Evaluating
whether an actual harm results from a disclosure violation
requires, first, that the consumer relied on the particular lease
terms; second, that the disclosure violation deterred him from
inquiring into other lease alternatives; and third, that the
alternatives would save money. In essence, the statute is
addressing and seeking to combat detrimental reliance.").
In so holding, courts have noted that the legislative history
behind TILA supports this interpretation:
Congress provided for statutory damages because
actual damages in most cases would be nonexistent or
extremely difficult to prove. To recover actual
damages, consumers must show that they suffered a
loss because they relied on an inaccurate or
incomplete disclosure. H.R. Rep. No. 193,104, 104th
Cong., 1st Sess. (1995). The legislative history
emphasizes that TILA provides for statutory remedies
on proof of a simple TILA violation, and requires the
more difficult showing of detrimental reliance to
prevail on a claim for actual damages.
Turner, 242 F.3d at 1028. See also Cannon,
161 F. Supp. 2d at 269; In re Currency Conversion Fee Antitrust Litig.,
265 F. Supp. 2d at 429.
In Peters v. Jim Lupient Oldsmobile Co., 220 F.3d 915
(8th Cir. 2000), the Eighth Circuit set forth several
required elements for establishing actual damages that has been
adopted by numerous courts, including Cannon in this district.
Under this test, "a plaintiff must show that: (1) he read the
TILA disclosure statement; (2) he understood the charges being
disclosed; (3) had the disclosure statement been accurate, he
would have sought a lower price; and (4) he would have obtained a
lower price." Peters, 220 F.3d at 917.
Plaintiffs, citing no authority, argue that the detrimental
reliance test requiring that the disclosure be read only applies
where disclosures are allegedly inaccurate, whereas the
allegations in the instant Complaint are based on the timing of the
disclosures. Because of the difficulty inherent in proving actual
damages, particularly with respect to form and timing violations,
few courts have discussed actual damages pursuant to § 1638(b)
other than to note than, in contrast to statutory damages, they
are available. See, e.g., Nigh v. Koons,
143 F. Supp. 2d 535, 549 (E.D.Va. 2001). This is perhaps why Plaintiffs fail to
uncover any cases supporting their proposition. In Hamilton v.
O'Connor, 2004 WL 1403711 (N.D. Ill. June 23, 2004), however,
the Northern District of Illinois, in an unpublished decision,
articulated an analysis more befitting a TILA violation based on
the form and timing of a disclosure than the test set forth in
In Hamilton, the plaintiffs alleged that the defendant
violated 15 U.S.C. § 1368(b)(1) by failing to provide Plaintiffs
with the required disclosures in a form that they could keep
before credit was extended. Id. at *4. The Court held that in
order to prove actual damages, plaintiffs were required to
demonstrate that they were "effectively prevented from obtaining
better credit terms elsewhere," which required a showing that
"not only that they would have sought a different warranty or
lower price" but also that "they would have obtained another
warranty or a lesser price." Id. at *6 (citations omitted).
Because Plaintiffs in that case did not present evidence that
they would have obtained financing at a better rate, the Court
granted Defendant's motion for summary judgment based on
Plaintiffs' inability to demonstrate actual damages.
The Court finds this analysis convincing, and a better
statement of the type of reliance involved in cases alleging a
timing violation, as opposed to a violation based on the accuracy
of the disclosure. It thus finds that Plaintiffs may state a
claim for actual damages despite a failure to allege that there
was a disclosure that they read, and upon which they relied.
However, Plaintiffs have not alleged in the current Complaint
that they would have sought a loan at a lower price, or that they would have been able to obtain a loan at a lower price,
in order to support a claim for actual damages. The Complaint
alleges solely that Plaintiffs closed on the home that they were
selling and the home that they were purchasing on the same date,
with the closings scheduled at noon and 2:00 P.M., respectively,
and that they did not receive the New Century loan documents with
the required TILA disclosures until 4:10. Compl. at ¶ 46, 52, 53.
Obviously, Plaintiffs need not produce evidence supporting their
actual damage claim, but, at a minimum, must allege the basis for
the claim, if they can do so in good faith. As such, at this
juncture, Plaintiffs have failed to state a claim upon which
relief can be granted. See Haun v. Don Mealy Imports, Inc.,
285 F. Supp. 2d 1297, 1303-04 (M.D. Fla. 2003) (dismissing TILA
claim where plaintiff did not allege any facts that, if proven,
would constitute actual damages).*fn17
Since Plaintiffs have not alleged the basis for a claim for
actual damages, the Court will dismiss Plaintiffs' TILA claim
against Defendant New Century Mortgage Corporation, with leave to
amend within thirty (30) days if Plaintiffs are able to do so in
good faith. The Court also notes the wealth of authority holding
that TILA claims based on actual damages, as opposed to statutory
damages, are inappropriate for class certification,*fn18 and
instructs Plaintiffs to amend their Complaint accordingly.
D. State Law Claims
Because the Court is dismissing Plaintiffs' federal claims, and
thus, there would be no basis for asserting federal jurisdiction,
the Court will deny Defendants' motions as to the state law claims without prejudice. In the event that Plaintiffs amend
their Complaint to state viable federal claims, the Court will
entertain Defendants' Motions to Dismiss Plaintiffs' state law
claims. If no such motion to amend is made, or if the motion is
denied, then the case will be closed since the Court declines to
exercise supplemental jurisdiction over the state law claims
pursuant to 28 U.S.C. § 1367(c).
The Foxtons, Financial Resources, and New Century Defendants'
Motion to Dismiss Count I of Plaintiffs' Complaint is hereby
granted without prejudice. The New Century Defendants' Motion to
Dismiss Count II of Plaintiffs' Complaint is hereby granted
without prejudice. An appropriate order will follow.