Editor: David Reiss
Brooklyn Law School

March 26, 2013

District Court of Arizona Grants Lender’s Motion to Dismiss in Part, Denying Relief Only on Homeowners’ Quiet Title Claim

By Joseph Kelly

In Higton v. Quicken Loans, Inc., 2:10-CV-01320 JWS, 2011 WL 333357 (D. Ariz. Jan. 31, 2011) the court granted defendant, Quicken Loans, Inc.’s (“Quicken”), motion to dismiss for failure to state a claim in part and denied relief in part.

In 2007, plaintiffs/homeowners Graham and Janet Higton refinanced their home, borrowing $600,000 from Quicken. Plaintiffs claimed Quicken deliberately overstated their monthly income to qualify them for a loan that was “designed for failure.” Plaintiffs claimed the introductory interest rate, applicable only for the first five years, was never disclosed to them. After making payments for three years, they received a letter from Quicken in 2010 informing them that they risked default because the loan to value ratio was approaching its maximum of 115%. In fear they would lose their home, plaintiffs filed this suit asserting claims against Quicken for intentional misrepresentation, consumer fraud, quiet title, and violation of the Truth In Lending Act (“TILA”). In response, Quicken filed a 12(b)(6) motion to dismiss for failure to state a claim.

First, for plaintiffs’ intentional misrepresentation claims, the court noted there is a three-year statute of limitation for actions based on fraud. However, the time is not deemed accrued until the discovery by the aggrieved party of the facts constituting the fraud. Here, the court found it was unclear whether any of the “true facts” were not included in the loan documentation. It concluded by stating “[i]f all of the necessary information was disclosed to the Higtons in the loan documents, then the fraud claim is time-barred.”

Second, the court discussed plaintiffs’ claims of common law fraud. To make a showing of common law fraud, a party must show:

(1)   A representation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity or ignorance of its truth; (5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; (6) the hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his right to rely thereon; (9) his consequent and proximate injury.

In total, the Higtons had five potential bases for their fraud claim.

1. The introductory interest rate was not disclosed to them, and thus they did not realize they had a negative amortization loan

The court concluded that based on the TILA statement provided to the Higtons, “[s]imple multiplication and division are all that would have been necessary to determine the…rate.” Further, the loan documents included “negative amortization” in bold typeface. Thus, plaintiffs failed to show element 5.

2. Quicken fraudulently overstated their income in the loan application

The court found plaintiffs failed to meet the 4th element because the Higtons certified to Quicken that their monthly income figure was “true and correct” as of 2007. The court found the misrepresentation was not to the Higtons, but rather “to employees of Quicken who were evaluating the loan.”

3. The court found this claim identical to the first and did not analyze it

4. Quicken induced the Higtons to enter into the loan transaction on the false belief that the Introductory Payment could be made for five (5) years

Again, the court found the only proof plaintiffs offered of this claim related to the nondisclosure of the introductory rate.

5. Quicken made verbal representations that the Higtons could refinance the loan at a later date

The court again found plaintiffs had failed to describe these assertions in their complaint.

Third, the court discussed plaintiffs’ consumer fraud claim, which has a one year statute of limitation after the cause of action accrues. Here, because reasonable diligence would have uncovered any fraud in the loan documentation at closing, the court concluded this claim was time-barred.

Fourth, the court addressed plaintiffs’ quiet title claim. It agreed with the Higtons that Quicken has an interest in their residence based on the deed of trust. It found that “[a]lthough plaintiffs’ claim does not appear very strong, it does not fail based on Quicken’s disclaimed interest in the property.”

Fifth, the court found plaintiffs’ TILA claims were time-barred as well, since any TILA claim must be brought “within one year from the date of the occurrence of the violation.” Here, the violation would have occurred no later than 2007. The court also rejected plaintiffs’ request for equitable tolling, finding their argument that they “are not mortgage professionals” as insufficient.

Finally, the court agreed with the Higtons that there were sufficient facts plead to support punitive damages. However, it clarified this is not an independent legal claim. It also granted the Higtons leave to amend. Accordingly, it dismissed plaintiffs’ claims based on intentional misrepresentation, consumer fraud, and TILA without prejudice. It also denied Quicken’s motion to dismiss plaintiffs’ quiet title claim.

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