Change Lending LLC v. Federal Home Loan Bank of San Francisco

Background

Change Lending LLC, formerly known as Commerce Home Mortgage LLC, alleged that it was a mortgage banking company certified as a Community Development Financial Institution. It applied for membership in the Federal Home Loan Bank of San Francisco (FHLB-SF). FHLB-SF allegedly approved the application in December 2018 and required Change to purchase $450,000 of FHLB-SF stock. Change paid that amount and alleged that FHLB-SF said it would soon provide access to a credit facility.

Change alleged that FHLB-SF delayed providing credit, later required Change to purchase an additional $643,000 of stock, and ultimately declared the membership approval void in September 2019. FHLB-SF and the Federal Housing Finance Agency (FHFA) stated that Change had not met an operating-liquidity-ratio requirement for membership. Change reapplied for membership, exhausted administrative appeals concerning the denial of that application, and later submitted a third application that remained unresolved when Change filed this action.

Claims and analysis

The defendants moved to dismiss the Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally recognized claim or does not allege enough facts to make the claim plausible.

First count—fraud. Change alleged that FHLB-SF falsely represented that Change had been accepted as a member and would receive membership benefits, including access to credit. The court held that the allegations did not satisfy the heightened pleading requirement for fraud under Rule 9(b). In particular, Change did not allege facts showing that FHLB-SF’s statements were false when made, that FHLB-SF employees knew Change would not receive credit within the estimated time, or that the stated reasons for the delays were false.

Second count—California Business and Professions Code section 17200. To the extent this claim relied on the same conduct as the fraud claim, it failed for the same reasons. To the extent it alleged that FHLB-SF used a fraudulent scheme when it rescinded Change’s membership, Change did not allege facts showing that it met the applicable operating-liquidity requirement. The court also noted that Change did not allege actual reliance on deceptive statements, as required for a claim under the statute’s fraud prong.

Third count—Administrative Procedure Act. Change alleged that FHFA unlawfully directed or approved the retroactive nullification of its membership. The court assumed, for purposes of analysis, that Change could be correct that FHFA lacked authority to direct that action. But the court explained that the likely remedy for that procedural defect would be to vacate the agency action and send the matter back to the agency for further action, not automatically reinstate Change’s membership. Because Change did not allege facts showing that it met the operating-liquidity requirement, it did not adequately support reinstatement as the requested remedy. The court therefore dismissed the claim.

Fourth count—declaratory judgment. Change sought a declaration that the actions voiding or rescinding its membership were invalid and that it remained a member. The court dismissed this claim for the same reasons given for the second and third counts: Change did not allege facts supporting a finding that it met the membership requirements.

Fifth count—declaratory judgment. Change sought a declaration that its third membership application was complete. The court found this claim premature because Change had not alleged that FHLB-SF had made a decision on that application. The court also questioned whether Change had alleged facts showing that its position about completeness was legally viable, but it did not need to resolve those additional issues.

Sixth count—Administrative Procedure Act. Change alleged that the FHFA defendants failed to fulfill statutory oversight duties by authorizing the nullification of Change’s membership and accepting FHLB-SF’s analysis. The court dismissed the claim because Change had not adequately alleged that reinstatement would be the proper remedy or that Change met the operating-liquidity requirement.

Seventh and eighth counts—Administrative Procedure Act. These counts alleged that the FHFA defendants allowed FHLB-SF to deny membership benefits, nullify Change’s membership, retaliate against Change, and act with racial animus. The court dismissed the portions concerning the membership nullification for the reasons stated in its discussion of the sixth count. It dismissed the retaliation and racial-animosity allegations because the Second Amended Complaint contained no facts supporting those allegations. The eighth count was based on essentially the same allegations as the seventh and was dismissed for the same reasons.

Ninth count—implied-in-fact contract. Change alleged that FHLB-SF’s approval of its initial membership application created an implied contract, which FHLB-SF breached by withholding membership benefits and attempting to rescind the membership. The court dismissed the claim because Change did not allege facts showing that it was eligible for membership and did not identify another basis for formation of an implied-in-fact contract.

Tenth count—implied covenant of good faith and fair dealing. Change alleged that FHLB-SF breached the implied covenant by withholding credit and rescinding the membership. Because Change had not adequately alleged that it was eligible for membership under the governing regulations, the court dismissed this count as well.

Disposition

The court granted defendants’ motions to dismiss and dismissed the Second Amended Complaint. The court allowed Change to file a Third Amended Complaint by July 8, 2022, but prohibited Change from adding new claims without first obtaining the court’s permission. The court continued the case-management conference from July 8, 2022, to September 30, 2022.