Najarian Holdings LLC v. CoreVest American Finance Lender LLC

Background

Najarian Holdings LLC and Najarian Capital LLC alleged that they entered into revolving loan agreements and promissory notes with the defendant, secured by deeds of trust. The plaintiffs purchase residences at foreclosure sales and resell them. They alleged that the defendant changed its billing practices in March 2016 by sending invoices after the first of the month, leaving less time to review and challenge invoices before the payment grace period expired.

The plaintiffs alleged that they paid more than $75,000 in late fees during 2016 and early 2017. They also alleged that the defendant charged late fees based on the principal balance of matured loans, demanded $250 release fees not mentioned in the loan documents, and provided payoff statements that understated amounts later invoiced. The second amended complaint asserted seven claims: breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; negligent misrepresentation; unfair competition under California law; punitive damages; and attorneys’ fees.

CoreVest moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim, to dismiss the second through seventh claims.

Breach of the Implied Covenant of Good Faith and Fair Dealing

The court held that the plaintiffs had not clearly identified whether this claim was based on a contract theory or a tort theory. A tort claim generally requires a special relationship with fiduciary characteristics, and the court found that the allegations described an arm’s-length commercial lender-borrower relationship rather than excessive control or domination by the defendant.

To the extent the claim sought recovery for the same late fees and release fees challenged in the contract claim, the court found it duplicative and unable to state a separate claim. The court granted the motion to dismiss that portion and dismissed it with prejudice, as stated in the order.

The court reached a different result concerning the payoff statements. The plaintiffs alleged that the defendant materially misstated amounts owed and later demanded more than the amounts stated in those payoff statements. The court found that these allegations plausibly showed conduct frustrating the plaintiffs’ contractual benefits. It denied the motion to dismiss the claim to that extent.

Fraud and Negligent Misrepresentation

The court dismissed both claims. It reasoned that the alleged losses were economic losses—fees, charges, and penalties—and that the same conduct supported the plaintiffs’ breach-of-contract claim. The plaintiffs had not alleged a separate duty arising from tort law that would permit recovery under these theories.

The court also found that the allegations did not satisfy Rule 9(b), which requires fraud-based claims to describe the alleged misconduct with particularity. Although the plaintiffs identified statements by the defendant’s vice president, they did not adequately allege why those statements were false or misleading. The court granted the motion to dismiss the fraud and negligent-misrepresentation claims and dismissed both with leave to amend.

Unfair Competition

The plaintiffs alleged that the defendant violated California’s unfair competition law through unlawful, unfair, or fraudulent business practices. The court concluded that the plaintiffs could potentially rely on an alleged violation of California Civil Code section 1671 as the unlawful basis for the claim, but the claim as pleaded sought damages.

The court explained that the unfair competition law allows restitution and injunctive relief, not compensatory damages. It therefore found that the fifth claim failed as pleaded. The court granted the motion to dismiss that claim and dismissed it with leave to amend. The plaintiffs would need to identify money or property that the defendant acquired from them if they sought restitution.

Punitive Damages and Attorneys’ Fees

The court held that punitive damages and attorneys’ fees are remedies, not independent causes of action. Because the plaintiffs had already requested those remedies in their prayer for relief, they could continue to pursue them to the extent supported by surviving underlying claims. The court nevertheless granted the motion to dismiss the sixth and seventh claims and dismissed both claims with prejudice.

Disposition

The court granted in part and denied in part CoreVest’s motion to dismiss the second claim. It granted the motion as to duplicative allegations concerning late fees and release fees and denied it as to allegations concerning payoff statements. It granted the motions to dismiss the third and fourth claims, dismissing them with leave to amend. It granted the motion to dismiss the fifth claim, also with leave to amend. It granted the motions to dismiss the sixth and seventh claims, dismissing them with prejudice.

The plaintiffs could file an amended complaint within 21 days. The order stated that no new parties or causes of action could be added without the court’s permission or the defendant’s agreement.