Posted on: 5/16/2012
Annmarie Giblin,Goldberg Segalla
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In the midst of economic uncertainty and a poor housing market, home owners are not the only ones suffering from the damage of foreclosures. Indeed, in Maya v. Centex Corp., 658 F.3d 1060, 2011 U.S. App. LEXIS 19344, (9th Cir. 2011), the Ninth Circuit reversed the dismissal for lack of standing of a lawsuit against eight large national developers of housing complexes. The plaintiffs were individual home buyers who purchased newly built homes between 2004 and 2006. The defendants are the developers that built the complexes and their parent companies. Plaintiff asserted two major causes of action against the defendants. The Ninth Circuit boiled the buyers' claims down "overpayment and rescission" claims and "decreased value and decreased desirability" claims. Id. at 7-8.
The buyers made down payments of at least twenty percent of the homes purchase price.
First, with respect to the overpayment and rescission claims, plaintiffs alleged that they paid more for their homes at the time of purchase than they were actually worth because of the actions of defendants. Specifically, plaintiffs alleged that defendants were marketing and selling the homes to "unqualified" buyers. The defendants, who also provided mortgages for the buyers, did not disclose this practice to the plaintiffs, which plaintiff aver led to their detrimental buying of the homes at issue. Plaintiffs further asserted that they would not have bought their homes had they known about this practice.
Second, with respect to , plaintiffs alleged that when the unqualified buyer defaulted on their mortgage obligations, the neighborhoods became an undesirable place to live and significantly lowered their home and property values. The plaintiffs asserted that after the foreclosures, several families would live in a single family home, owners would abandon homes, and crime in the neighborhoods went up as a result, all resulting in decreased desirability and value.
In response to plaintiffs action, all defendants filed motions to dismiss, arguing that the plaintiffs lacked constitutional standing to bring these claims, that they failed to plead their fraud based claims with particularity, and that they failed to state a cause of action pursuant to Rule 12(b)(6). The lower court granted all of the defendants' motions for lack of constitutional standing. Further, the court denied plaintiffs' request to amend their pleadings and bring in an expert to cure the defects. Plaintiffs appealed.
The Ninth Circuit noted that the lower court relied on three main arguments to support its dismissal. First, the lower court reasoned that because none of the homeowners had actually sold or attempted to sell her home, that any alleged loss in value to the "homes caused by the builders' wrongful acts and omissions was conjectural. In other words, the loss in value could not be ascertained, nor measured against the initial purchase price unless and until the owner sells the house." Id. at 8 (internal quotation marks omitted).Second, the lower court reasoned the plaintiffs' claims with regard to the decreased value and alleged overpayment of the homes had the capacity to change with the economy and suggested that again this was too "conjectural and speculative, not actual or imminent." Finally, the lower court held that none of the alleged injuries was traceable to the defendant's actions. The lower court then concluded that plaintiffs lacked standing, dismissed the action for lack of subject matter jurisdiction and declined to reach the remaining arguments.
The Ninth Circuit framed the issue on appeal as:
whether individuals who purchased homes in new developments have standing to sue the developers for injuries allegedly caused by the developer's practice of marketing neighboring homes to individuals who presented a high risk of foreclosure and abandonment of their homes, financing those high-risk buyers, concealing that information, and misrepresenting the character of the neighborhoods.
Id. at 3-4. In answering that question in the affirmative, the Ninth Circuit went through the elements required to establish standing pursuant to Article III of the Constitution. The court held that a plaintiff must show three elements: 1) that the plaintiff has suffered an injury in fact; 2) that the injury is traceable to the challenged actions of the defendants; and 3) it is likely that the injury will be redressed by a favorable decision. The court noted that the injury in fact is one that is concrete and particularized, and actual or imminent, not conjectural or hypothetical.
On appeal the Ninth Circuit noted that the "district court erroneously concluded that lack of Article III standing was grounds for dismissal under Federal Rule of Civil Procedure 12(b)(6)." Id. at 11. The court explained that lack of standing under Article III requires a dismissal for lack of subject matter jurisdiction, not failure to state a claim. Because of this initial error, the Ninth Circuit noted that the district court unnecessarily limited the scope of its review. Indeed, when analyzing whether a plaintiff has failed to state a cause of action, the court is generally confined to the complaint. But on the contrary, when determining whether or not the plaintiff lacks constitutional standing, "it is within the trial court's power to allow or to require the plaintiff to supply, by amendment to the complaint or by affidavits, further particularized allegations of fact deemed supportive of plaintiff's standing." Id. at 11.
Using this framework, the court addressed the two main claims by plaintiffs. The court reasoned that the overpayment and rescission claims were actual and concrete. The plaintiffs were alleging that their homes were worth less than what they paid for them at the time of the sale and that had defendant made the necessary disclosures about the homes and their lending practices, they would have never bought them in the first place. The court explained that because the plaintiffs were alleging that the homes were worth less than what they paid for them, then selling them in the open market would not cure their injuries. Further, because the plaintiffs alleged that they would not have purchased the homes at all, "the injury was created at the moment of fraudulent purchase, and is not affected by any change in the housing market." Id. at 18.
The defendants argued in opposition that plaintiffs could not establish that the defendant's actions were the proximate cause of plaintiffs' injuries. The court held that the plaintiffs need not prove proximate cause and in fact the plaintiffs' burden is not that high. Instead, the plaintiffs only have to establish a "line of causation" between the actions of defendant and their injuries in order to survive a motion to dismiss for lack of standing.
The court addressed this issue and noted that the causal connection was strong because plaintiffs alleged that they would not have purchased their homes had defendants disclosed their lending practices. Further, the court noted that this was not a case where the real estate bubble burst out of the control of the defendants. Rather the plaintiffs were alleging that defendants inflated their own bubble in the particular neighborhoods by financing a number of buyers and creating a demand that would not have otherwise existed. All of these factors established the necessary line of causation.
Second, with respect to their decreased value and decreased desirability claims, the court noted that "[a] current reduction in the economic value of one's home is a cognizable injury for constitutional standing purposes." Id. at 21. The court explained that plaintiffs alleged that the defendants' actions caused their home values to be reduced beyond the losses that would have been felt because of the current housing market. Thus the injury was not speculative as reasoned below.
The court reached the same conclusion with the decreased desirability claim, holding that this alleged loss of desirability decreased the plaintiff's quality of life, which was sufficient to support standing. However, with respect to causation, the court held that the plaintiffs did not establish how the defendants' actions resulted in the foreclosure of these homes thereby causing the claims. As a result, the court permitted the plaintiffs to amend their complaint and attach expert testimony on causation to cure this defect. The case was then remanded for further proceedings.
It remains to be seen if such a decision opens the flood gates to similar litigation. Indeed, the country is in the midst of a housing market crisis, and foreclosures are widespread. Further, several related allegations of fraud and shady lending practices go-hand-in hand with these foreclosures. Thus, a lawsuit of this kind is not surprising. This case warrants attention because any substantive decisions could not only affect the way builders conduct their business, but also how many new similar cases will be filed as a result.
Annmarie Giblin
Goldberg Segalla LLP
Garden City, NY 11530
agiblin@goldbergsegalla.com