Drakeford v. Capital Benefit, Inc.

[3] 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA [6] 7 RHONDA DRAKEFORD, et al., Case No. 20-cv-04161-WHO 8 Plaintiffs, ORDER GRANTING TEMPORARAY 9 v. RESTRAINING ORDER 10 CAPITAL BENEFIT, INC., et al., Re: Dkt. No. 8 Defendants. [11] 12 Having considered plaintiffs’ motion for a temporary restraining order (TRO) to prevent 13 defendants from proceeding with a non-judicial foreclosure on their residence set for July 2, 2020 14 (Dkt. No. 8) and defendants’ opposition (Dkt. No. 13), as well as the supporting declarations and 15 exhibits, plaintiffs’ motion is GRANTED.1 16 The main, and for purposes of this TRO, only dispute between the parties is whether the 17 loan provided by defendants, secured by plaintiffs’ residence, was made primarily for “business 18 purposes.” If it was, the loan is exempt from the protections provided for consumers under the 19 federal Truth in Lending Act (TILA) and the foreclosure may procced. If it was not made 20 primarily for business purposes, then the loan is arguably subject to rescission under TILA, was 21 made in violation of federal and California consumer protection provisions, and the foreclosure 22 should be enjoined. See Complaint (Dkt. No. 1-1, attached to the Notice of Removal). 23 “The Truth-in-Lending Act specifically exempts from its scope extensions of credit for [25] 1 The standards for a TRO are the same as those for a preliminary injunction. See Stuhlbarg Int'l Sales Co., Inc. v. John D. Brush & Co., Inc., 240 F.3d 832 , 839 n.7 (9th Cir. 2001). A plaintiff [26] must demonstrate (1) a likelihood of success on the merits, (2) a likelihood of irreparable harm that would result if an injunction were not issued, (3) the balance of equities tips in favor of the [27] plaintiff, and (4) an injunction is in the public interest. See Winter v. Natural Res. Defense 1 business or commercial purposes.” Poe v. First Nat. Bank of DeKalb County, 597 F.2d 895 , 896 2 (5th Cir., 1979), citing 15 U.S.C. 1603(1) and 12 C.F.R. 226.3(a). “Whether an investment loan is 3 for a personal or a business purpose requires a case by case analysis.” Thorns v. Sundance 4 Properties, 726 F.2d 1417, 1419 (9th Cir.1984). That analysis considers a number of factors, only 5 one of which is the disclosed intent of the borrower.2 6 In support of the TRO plaintiffs declare (consistent with the allegations in their Complaint) 7 that the loan documents “were presented for our signatures with minimal explanation,” the notary 8 “said that the lender prohibited her from providing us copies or allowing us to make copies of 9 most of them,” and that plaintiffs “never told anyone that the loan was for a ‘business purpose’ or 10 the like” and the “primary purpose of the loan was to pay off our prior second mortgage.” See 11 Declaration of Plaintiffs Reginald and Rhonda Drakeford, ¶¶ 4,5, 7 (Dkt. No. 8-1). 12 Plaintiffs admit they signed at least two documents regarding their intent to use the loan’s 13 proceeds, after payoff of their prior second mortgage, as follows. First, in the “Declaration of 14 Loan Purpose” the Drakefords disclosed they intended to use the loan proceeds for, first, “home 15 improvement major landscaping” and, second, “rental improvement.” Dkt. No. 8-4. The 16 Drakefords also signed a “Certificate of Business Purpose Loan” form where they wrote that the 17 purpose of the proceeds on the loan were first for “home + rental improvements” and second to 18 “pay down credit cards.” Id.3 19 Defendants contend that the loan was indisputably a business purpose loan that TILA does [20] 2 In Thorns, the Ninth Circuit relied on “Regulation Z,” 12 C.F.R. § 226 Supp.1, § [21] 226.3(a)(2)(1983) and identified five factors to determine whether a loan is covered by TILA, specifically: “[1] The relationship of the borrower’s primary occupation to the acquisition. The [22] more closely related, the more likely it is to be business purpose. [2] The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the [23] more likely it is to be business purpose. [3] The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose. [4] The [24] size of the transaction. The larger the transaction, the more likely it is to be business purpose. [5] The borrower’s statement of purpose for the loan.” Thorns, 726 F.2d at 1419 ; see also Daniels v. [25] SCME Mortg. Bankers, Inc., 680 F. Supp. 2d 1126, 1129 (C.D. Cal. 2010). [26] 3 Plaintiffs declare that the actual use of the loan proceeds was: “about $126,000 on home improvements, furnishings, and the like; at least $13,000 to pay down our prior credit card debt, [27] which we incurred for typical consumer purposes; and $11,650 to put a new roof on our rental 1 not regulate. Defendants contend, first, that they specialize in placing and funding business 2 purpose loans that are exempt from TILA. See Declaration of Marcel Breutsch (Dkt. No. 16) ¶ 8. 3 Defendants also dispute plaintiffs’ professed ignorance of the alleged business purpose of the loan 4 by noting that plaintiffs’ Uniform Residential Loan Application, signed by the Drakefords, 5 disclosed the purpose of their “refinance” as “business capital.” Id., Ex. 6. Defendants also point 6 to the Drakefords’ signing the “Certificate of Business Purpose Loan” which Rhonda Drakeford – 7 as a licensed real estate broker – should have known signified the “business purpose” of the loan. [8] Id., Ex. 7. 9 Considering the record before the Court on the TRO, plaintiffs have shown a likelihood of 10 success on the merits of at least their TILA claim because there is significant evidence that the 11 disclosed primary purpose of the loan both at the time it was sought and at the time of its 12 origination was for non-business uses. Assuming the truth of the allegations in plaintiffs’ 13 Complaint and the assertions in their declaration in support of the TRO, there is support for 14 plaintiffs’ position that they did not inform the mortgage broker who sourced the loan they 15 intended the loan for business purposes, that they did not have an adequate opportunity to review 16 the loan disclosure forms before signing them, that they truthfully disclosed on “Declaration of 17 Loan Purpose” and the “Certificate of Business Purpose Loan” forms their intent to use the 18 proceeds of the loan (after their existing second mortgage was paid off) first for improvements to 19 their home and second for rental improvements. These assertions may be undercut – at the 20 preliminary injunction stage or on summary judgment – by evidence regarding who filled out 21 plaintiffs’ Uniform Residential Loan Application (disclosing the purpose of the refinance was 22 “business capital”) as well as evidence or argument that Rhona Drakeford, as a licensed real estate 23 broker, should be bound by having signed a “Certificate of Business Purpose Loan” form, despite 24 also contemporaneously signing a “Declaration of Loan Purpose” form and disclosing the intent to 25 use the loan proceeds first for non-business uses (“home improvements” and paying off credit 26 cards) and secondarily for the disclosed business uses (“rental improvements”). 27 Turning to the other relevant factors to be considered before granting a TRO, irreparable [1] 2016 WL 5662030 , at *4 (N.D. Cal. Sept. 28, 2016) (“the loss of a residence through foreclosure 2 || presents an irreparable injury”). The balance of equities also tips sharply in plaintiffs’ favor as 3 there appears to be sufficient equity in plaintiffs’ residence to secure defendants’ interest. 4 || Plaintiffs estimate they have “at least $1 million in equity in the property exclusive of defendants’ 5 interest.” See Declaration of Plaintiffs Reginald and Rhonda Drakeford, {| 3. Defendants object to 6 this estimate, see Dkt. No. 14 at 2-3 (Evidentiary Objections), but they do not offer any evidence 7 in response to show that their interests are not adequately protected by the existing equity in the 8 || residence. Because it appears that defendants’ secured interest will adequately protect them 9 || pending final resolution of plaintiffs’ claims, I will not require plaintiffs to post a bond at this 10 time. See, e.g., Lewis v. U.S. Bank Natl. Assn., 16-CV-05490-JSW, 2016 WL 5662030 , at *4 11 (N.D. Cal. Sept. 28, 2016) (“Because Defendant has a secured interest in the Property and will be 12 || permitted to proceed with foreclosure if the Court determines that Plaintiff does not have 5 13 meritorious claims, the Court does not require Plaintiff to post a bond at this time.”). 14 Therefore, plaintiffs’ request for an entry of a TRO enjoining the scheduled July 2, 2020 15 foreclosure sale on their residence is GRANTED. 16 Absent agreement of the parties to a different schedule, plaintiffs shall file their motion for 5 17 a preliminary injunction to extend the injunctive relief by July 13, 2020. Defendants shall file 18 || their opposition to a preliminary injunction by July 27, 2020. Plaintiffs may file a reply by August 19 3, 2020, and a hearing on the motion for a preliminary injunction shall be held at 2:00 p.m. on 20 August 12, 2020. 21 IT IS SO ORDERED. 22 Dated: June 30, 2020 24 7k 25 fi J itffey S. White as Duty Judge for {/ William trick 26 / United States District Judge