Class Action Complaint Alleging Homebuilder Inflated Purchase Price of New Homes and Loaned Money to High Foreclosure Risk Purchasers Failed to Adequately Allege Damages so Plaintiff Lacked Standing to Prosecute Class Action Claims California Federal Court Holds
Plaintiff filed a putative class action against various Pulte Home entities arising out of her purchase from Pulte of a newly-constructed single-family residence; the class action complaint alleged that Pulte – which both manufactures homes and provides financing for their purchase – induced plaintiff to obtaining financing through Pulte by “provid[ing] significant financial incentives” to her and others, without disclosing that they would not otherwise qualify for a home loan and were at high risk of foreclosure. Kaing v. Pulte Homes, Inc., ___ F.3d ___ (N.D.Cal. February 18, 2010) [Slip Opn., at 1-3]. According to the allegations underlying the class action complaint, plaintiff was told she would receive a $75,000 reduction from the home’s $575,000 sales price if she financed through Pulte, and that she would not receive this discount if she went to a different lender, id., at 3. The class action alleges that “Pulte knew from appraisals on other homes in the subdivision, that the house was worth less than $500,000” but that the Pulte-selected appraiser “inflated” the value to $518,000 – proving it was not worth $575,000 and that the $575,000 sales price plus $75,000 discount were “phony numbers from the start.” Id. Plaintiff ultimately paid $518,000 for the home, and financed the purchase with Pulte, but that “she ‘would not have and could not have qualified for her loan’ if she had been working with a ‘lender acting in good faith in an arms-length transaction.’” Id. The class action complaint alleged violations of California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA), as well as negligent misrepresentation and breach of an implied covenant of good faith and fair dealing. Id., at 5. Defense attorneys moved to dismiss the class action complaint for lack of standing, id., at 1. The district court granted the motion.
In ruling on the motion to dismiss, the district court observed that while plaintiff had alleged monthly income of “less than $3500,” she “has not indicated that she has been unable to make her regular payments on the mortgage, nor does she allege that she has been harmed by any of the terms in the loan documents to which she is a party.” Kaing, at 3-4. Rather, the thrust of her class action complaint was that Pulte had failed to “provide Plaintiff with any disclosure that Defendants had sold houses, and would sell houses in the future, to unqualified and high foreclosure-risk buyers” or that “they had sold houses, and planned to sell houses in the future, to investors who would not occupy the houses or to owners who were not financially qualified.” Id., at 4. In essence, the complaint alleged that Pulte’s “questionable loan practices” increased the risk of foreclosure which, in turn, “had a ‘devastating’ impact on the value and desirability of the neighborhoods.” Id. Plaintiff alleges “her home decreased in value by over 50%.” Id., at 5.
Defense attorneys argued that plaintiff lacked standing because she failed to adequately allege an “injury in fact” and that her damages are purely speculative and “not ‘fairly traceable’” to defendants’ conduct. Kaing, at 6. The class action complaint alleged two forms of injury: (1) that plaintiff “paid an inflated purchase price for her home,” and (2) that defendants’ marketing and lending practices caused “a decrease in property value…greater than has been suffered by houses in the surrounding areas.” Id. On the first issue, which plaintiff characterized as a “bait-and-switch,” id., at 7, the district court held that standing “requires a plausible claim of causation, which in turn requires a showing of reliance,” id., at 8 (citations omitted). Here, plaintiff alleges that she knew the appraised value of the home was only $518,000 before she agreed to purchase the property, so plaintiff “cannot plausibly claim that she relied on the higher initial representation.” Id. Accordingly, plaintiff lacked standing under California’s UCL and CLRA. Id., at 8-9.
With respect to the class action’s “reduced-value” theory, the district court held that plaintiff’s failure to even attempt to sell her property undercut her claim; she had not demonstrated an injury in fact. Kaing, at 10-11. Put simply, if plaintiff stays in her home until the real estate market recovers, then she will not suffer any injury. Id., at 11 (citation omitted). In the district court’s words, “Plaintiff faces a similarly insurmountable problem with respect to the causation element of standing.” Id., at 12. Plaintiff cannot trace her injury to the defendants’ conduct – there are simply too many factors that influence whether owners of neighboring properties will default on their loans. Id. Accordingly, the district court held that plaintiff lacked standing to pursue her class action claims based on “any subsequent reduction in value of the house resulting from the economic consequences of Pulte’s practices.” Id., at 13. The court therefore granted defendants’ motion to dismiss the class action complaint with prejudice, id.