2011-00102701-CU-BT

Ronald L Losel vs. Chase Bank USA NA

Nature of Proceeding:    Hearing on Demurrer

Filed By:  Yoo, Jason S.

***  If oral argument is requested, the parties are directed to notify the clerk and
opposing counsel at the time of the request which causes of action will be
addressed at the hearing. Counsel are reminded that pursuant to Local Rules,
only limited oral argument is permitted on law and motion matters.  *** Defendant Chase Bank, USA, N.A.’s (“Bank”) demurrer to the Second Amended
Complaint (“2AC”) is SUSTAINED but with leave to amend, as follows.

Moving counsel is admonished because the notice of demurrer does not provide notice
of the Court’s tentative ruling system, as required by Local Rule 1.06.  Moving counsel
is directed to contact opposing counsel and advise him/her of Local Rule 1.06 and the
Court’s tentative ruling procedure and the manner to request a hearing.  If moving
counsel is unable to contact opposing counsel prior to hearing, moving counsel
is ordered to appear at the hearing in person or by telephone.

This action arises out of plaintiff’s “no interest” loan from Bank to pay for certain pain
relief treatment by a chiropractor in Sacramento.  Plaintiff alleges that on his first visit
to the chiropractor, he received no treatment whatsoever but Bank nevertheless paid
the chiropractor in full for the treatment plan ($3,877), thereby commencing plaintiff’s
obligation to repay Bank despite the lack of treatment. (2AC, ¶21.)  The 2AC also
asserts that although the loan was described as “no interest,” there were various
provisions which negated this and that Bank unreasonably acted in certain ways in
order to expose plaintiff to significant interest and other fees, all of which rendered the
“no interest” feature illusory. (2AC, ¶¶24-29.)  Plaintiff further contends that Bank’s
“Account Agreements” were deceptive and misleading in several respects and
unlawfully obligated plaintiff to repay the entire debt regardless of the healthcare
provider performed the requested services or did so competently. (2AC, ¶¶30-43.)  In
this case, plaintiff claims that he “never received any pain relief” and this particular
chiropractor’s “treatment program was a complete sham.” (2AC, ¶31 (italics in
original).)

The 2AC alleges four (4) causes of action (“COA”) for declaratory relief (including a
request for a permanent injunction), breach of the implied covenant of good faith and
fair dealing, unfair business practices, and financial elder abuse.  Bank now demurs to
the 2AC on various grounds and plaintiff opposes.

Uncertainty.  Bank first contends the entire 2AC is fatally uncertain because it
remains unclear which “Account Agreement” plaintiff claims is the operative
agreement, the original or the “amended,” both of which are attached to the 2AC as
Exhibits C and D, respectively.  Moreover, to the extent plaintiff appears to concede
the “amended” agreement superseded the original, the latter’s terms and conditions
are of no longer of any consequence but are nevertheless referenced throughout the
2AC.

The Court agrees and sustains the demurrer on this ground.

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1   COA for Declaratory Relief.  Bank demurs to this COA arguing it fails as a matter
of law since plaintiff’s allegation that Bank’s agreements’ “Non-Responsibility Clauses”
contradict the FTC’s “Holder Rule” is without merit.  According to Bank, the Holder
Rule permits a buyer on credit who is aggrieved by a seller to “defend a creditor suit
for payment of an obligation by raising a valid claim against the seller as a
setoff” (Mov. Memo. P&A, p.6:26-28 (citing 40 Fed.Reg. at 53,524)(emphasis added))
but here, Bank has not brought any collection action against plaintiff.  Still, Bank
appears to concede that an aggrieved buyer on credit may in certain limited cases
bring “an affirmative action against a creditor who has received payments for a return
of monies paid on account” but Bank contends that this type of affirmative claim “will
only be available where a seller’s breach is so substantial that a court is persuaded  that rescission and restitution are justified,” such as where they buyer has “actually
commenced payments and received little or nothing of value from the seller…” (Mov.
Memo. P&A, p.7:1-9 (citing 40 Fed.Reg. at 53,524, 53,527).)  In the end, Bank insists
that the 2AC includes no allegations sufficient to satisfy this high standard of “total
failure of performance” but rather merely alleges the healthcare provider failed to cure
plaintiff’s pain which is not a legitimate, legal basis for refusing to pay for the treatment.

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The Court agrees and sustains the demurrer to the 1   COA.  Although Paragraph 31
of the 2AC purports to allege that plaintiff’s chiropractor’s “treatment program was a
complete sham,” no specific facts are pled to support this conclusory allegation and
thus, it need not be considered for purposes of this demurrer.  (If plaintiff contends the
chiropractor and/or Bank engaged in some fraudulent conduct (e.g., false promise,
misrepresentation, concealment), factual specificity is required and conclusory
allegations will not suffice.)  Disregarding for the purposes of this demurrer the
conclusory allegation in Paragraph 31 of a “complete sham,” the only factual claim
here is that plaintiff never received any pain relief but healthcare is not a perfect
science and a provider ordinarily does not guaranty or ensure any particular outcome
of treatment.  Therefore, in the absence of specific facts constituting actionable fraud,
the Court finds that the 2AC does not currently state facts which establish an adequate
justification for rescission and restitution consistent with the FTC Holder Rule.
Because it is on this basis plaintiff alleges in Paragraph 45 that Bank’s “Non-
Responsibility Clauses” are unenforceable and therefore require a declaration of the
parties’ respective rights and duties under Bank’s agreements, the 2AC does not
currently include facts sufficient to demonstrate an actual controversy required for a
declaratory relief claim.

The Court notes that the opposition contends, in part, the gravamen of this COA is that
Bank’s use of the “Non-Responsibility Clauses” is itself unfair and deceptive because
the clauses suggest, contrary to the Holder Rule, the consumer’s obligation to pay is
independent of the seller’s duty to perform. (Oppos., p.4:22-p.5:28.)  However, this is
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not an accurate characterization of the only substantive allegations in the 1   COA:

“Plaintiff is informed and believes [Bank] disputes this claim and contends it has
the right to collect principle [sic] or interest even when the healthcare provider
has failed to perform. Plaintiff desires a declaration of his and other consumers’
rigths [sic] and of [Bank’s] respective rights and duties under the Account
Agreement and Amended Account Agreement.” (2AC, ¶45.)

But even if the opposition’s characterization of this COA were accurate, plaintiff
overlooks the other allegations in the 2AC which effectively admit that Bank’s
agreements do specifically provide the consumer with the right to withhold payment for
any disputed amounts while the dispute is investigated. (2AC, ¶¶39, 41-42, 58.)  Thus,
the suggestion that the Non-Responsibility Clauses” are unfair and deceptive is not
borne out by the facts actually alleged in the 2AC and thus, do not show any actual
dispute which justifies declaratory relief.

2nd COA for Breach of Covenant of Good Faith & Fair Dealing.   Bank maintains
that this COA, which is premised on plaintiff being charged interest on a “no interest”
loan, is deficient because the applicable agreement expressly permitted interest to be
charged if plaintiff failed to make the minimum payments and a claim for breach of the
implied covenant cannot be stated if the offending conduct is permitted by the
agreement.
In opposition, plaintiff cites several Delaware court decisions ostensibly holding that
the covenant of good faith & fair dealing prohibits a party from exercising its
contractual discretion in an underhanded, arbitrary or unreasonable way and then
argues that here, Bank “consistently exercised its discretion in arbitrary and
unreasonable ways,” including the imposition of high interest rates when a consumer
failed to make timely minimum payments or made no payment in connection with a
dispute over certain charges to the account. (Oppos., p.6:6-p.7:10.)  In short, plaintiff
maintains that Bank always acted in such a way as to defeat the “no interest” bargain it
struck with consumers. (Oppos., p.6:18-19.)  The opposition further contends that
ambiguities in the Bank’s agreements, including the application of the FTC Holder Rule
discussed above, may act as the basis for the 2nd COA since it is unfair for a seller to
employ financing which separates the buyer’s duty to pay from the seller’s reciprocal
obligation to perform as promised and in the present case, plaintiff and other
consumers had the right to withhold payment for the healthcare providers’ failure to
perform without automatically triggering high interest rates. (Oppos., p.7:11-p.8:17.)

The demurrer to the 2nd COA is sustained as well.  First, Bank is correct that as a
general rule a breach of the implied covenant cannot be based on conduct which is
expressly permitted by the applicable contract and here, the 2AC clearly admits that
plaintiff’s agreement with Bank permitted the imposition of interest charges upon
certain specified conditions, including non-payment or untimely payment.  Second,
plaintiff failed to explain why the Delaware law cited in the opposition is applicable to
this COA (and even argues that it does not (see below)) but even if it does apply,
plaintiff has failed to plead facts which affirmatively establish Bank acted in “an
underhanded, arbitrary or unreasonable way.”  The Court finds nothing objectively
“underhanded” or “unreasonable” with Bank doing what was expressly permitted under
the contract.  While plaintiff also attempts to characterize Bank’s conduct as “arbitrary,”
the 2AC simultaneously indicates Bank “consistently” used its discretion to hike the
interest rates (2AC, ¶¶52-54) which itself contradicts the suggestion of arbitrariness.
Additionally, the opposition’s claim that Bank’s conduct defeated the bargain it struck
with plaintiff is not borne out by the record since the substantive bargain struck
between the parties appears to be the financing for treatment and not the “no interest”
aspect because, as the 2AC concedes, this feature of the loan was subject to various
express exceptions.  Finally, plaintiff’s reliance on the FTC Holder Rule as support for
the 2nd COA is misplaced because, as discussed above, the 2AC does not currently
allege specific facts which establish plaintiff’s right to rescission and restitution.

3rd and 4th COA for Unfair Business Practices and Financial Elder Abuse.  Bank
demurs to both of these COA on the ground that both are California statutory claims,
whereas plaintiff’s agreement includes a choice-of-law provision in favor of Delaware
state law or federal law “without regard to conflicting choice-of-law principles,” a
provision which is generally enforceable even under California law.

The opposition insists that this choice-of-law issue requires consideration of various
factors, including whether the chosen state has a substantial relationship to the parties
or their transaction or whether there is a reasonable basis for the choice-of-law; if
either test is met, the Court must determine if the chosen state’s law is contrary to a
fundamental policy of California and if it is, then the question is whether California has
a “materially greater interest…in the determination of the particular issue.” (Oppos.,
p.8:18-p.9:2.)  Although plaintiff concedes Delaware has a substantial relationship to
the parties because Bank is a Delaware corporation, he insists that Delaware law
presents a conflict with a fundamental policy of California and that the latter has a
“materially greater interest” in resolving the claims asserted here. (Oppos., p.9:3-9.)
Specifically, the opposition asserts that Delaware law does not provide consumers with
the right to sue for unfair competition nor elders with the right to sue for financial abuse
and that Delaware’s Consumer Fraud Act only affords protection for transactions
occurring in Delaware, its Deceptive Trade Practices Act is not intended to redress
wrongs by a business to its customers and Delaware has no special protection for the
elderly. (Oppos., p.9:10-26.)  Plaintiff further states that the rights created by California
relative to unfair competition and elder abuse demonstrates a strong, fundamental
policy protecting consumers and the elderly and favoring significant remedies where
violations occur and that this state therefore has a materially greater interest in the
resolution of the claims posed here, thereby requiring the application of California law
not Delaware law. (Oppos., p.10:1-p.12:3.)

rd       th
The Court also sustains the demurrer to the 3              and 4   COA based on the express
choice-of-law provision favoring Delaware law.  In light of plaintiff’s concession that
Delaware has a “substantial relationship to the parties,” the threshold question to be
resolved here is whether Delaware’s state law is somehow “contrary to a fundamental
policy” of California. (Nedlloyd Lines B.V. v. Superior Court (Seawinds Limited) (1992)
3 Cal.4th 459, 466 (italics in original).)  However, none of the authorities cited by the
opposition actually shows that Delaware law is “contrary to a fundamental policy” of
California.  First, in Nedlloyd Lines B.V., the California Supreme Court found no
fundamental state policy which required the application of California law to Seawinds
Limited’s contractual claims. (Nedlloyd Lines B.V., at 468.)  Plaintiff’s reliance on
Premier Technical Sales, Inc. v. Digital Equipment Corp. (1998 N.D.Cal.) 11 F.Supp.2d
1156 is also misplaced because this decision nowhere describes California’s unfair
competition law as representing a fundamental policy of California; instead, the Court
there merely explained in dicta that California’s “Unfair Practices Act…contained in…
Business and Professions Code §17200, et seq., codifies California public policy
against unfair competition, and ‘prohibits wrongful business conduct in whatever
context such activity might occur.’” (Premier Technical Sales, at 1166-1167 (emphasis
added).)  Similarly, Fitzhugh v. Granada Healthcare and Rehabilitation Center, LLC
(2007) 150 Cal.App.4th 469 which was cited in the opposition merely states in closing:

“Consequently, we conclude that upholding the trial court is consistent with
public policy expressed in the [Elder Abuse Act] statutes…‘to protect a
particularly vulnerable portion of the population from gross mistreatment in the
form of abuse and custodial neglect’…and to ensure appropriate relief for such
mistreatment.” (Fitzhugh, at 476 (emphasis added).)

There is, however, in neither this decision nor the statutory provisions also cited in the
opposition any language which affirmatively indicates that California’s Elder Abuse Act
represents a fundamental policy which might otherwise justify the rejection of a choice-
of-law provision.  Finally, Brack v. Omni Loan Company, LTD. (2008) 164 Cal.App.4th
1312 does not support plaintiff’s claim that there is in the present case an issue
involving a fundamental policy of California.  To be clear, plaintiff is correct that the
Court of Appeal held that the defendant’s choice-of-law provision was unenforceable
but this conclusion was based on the determination that the requirements of California
Finance Lenders Law, with which defendant had admittedly not complied, “are matters
of fundamental public policy which cannot be waived by way of agreement between
the parties.” (Brack, at 1316-1317, 1326-1328.)  However, unlike Brack, there are in
the present case no allegations that Bank violated any aspect of California’s Finance
Lenders Law and thus, the Court cannot find any fundamental policy implicated by the
claims for unfair business practices and financial elder abuse.

All COA.  Bank’s final contention is that all of plaintiff’s state law COA are completely
preempted by the National Bank Act (“NBA”) enacted by the federal government
despite the allegation to the contrary in Paragraph 63 of the 2AC, particularly since the
California Supreme Court has expressly adopted the “broad preemption analysis”
previously used by the Ninth Circuit Court of Appeals. (Parks v. MBNA Am. Bank
(2012) 54 Cal.4th 376, 381.)

Plaintiff opposes, arguing that the 2AC does not challenge Bank’s credit terms, interest
rates or disclosures but rather merely challenges Bank’s deceptive practices, including
the offer of “no interest” loans when Bank routinely triggers higher rates and the use of
“Non-Responsibility Clauses” in an attempt to negate consumer rights under the FTC’s
“Holder Rule.”  The opposition further insists that the NBA does not under established
precedent preclude enforcement of state laws which are of “general application,” such
as those relating to contracts and torts.  As an example, plaintiff maintains that the 2nd
COA for breach of the covenant of good faith is a common law claim which applies
generally to everyone and thus, the enforcement of this law is permissible since it
would not unduly hinder Bank’s role in the national banking system.  The opposition
insists that the same is true with respect to the three other COA in the 2AC and
consequently, that Bank’s preemption argument should be disregarded.

Since the demurrers to all four COA have been sustained on the other grounds
discussed above, the Court declines to rule on this final preemption argument,
particularly since leave to amend is being granted.  Bank remains free to raise this
issue again, if warranted, in response to any amended complaint filed by plaintiff.

Since this Court believes plaintiff has a reasonable probability of pleading some valid
claim, leave to amend is granted.  Plaintiff may file and serve an amended complaint
no later than 1/3/2014.  Although not required by court rule or statute, plaintiff is
directed to present a copy of this order when the amended complaint is
presented for filing.

Defendant to respond within 10 days if the amended complaint is personally served,
15 days if served by mail.

If defendant intends to demur to the amended complaint or move to strike, it shall
determine if any other defendant who has appeared in this action also intends to
demur or move to strike.  If so, all such defendants shall coordinate a single hearing
date for the demurrers and motions to strike.  Additionally, a copy of the amended
complaint shall be included with the moving papers.

This minute order is effective immediately.  No formal order or other notice is required.
(Code Civ. Proc. §1019.5; CRC Rule 3.1312.)

Item  4     2011-00102701-CU-BT

Ronald L Losel vs. Chase Bank USA NA

Nature of Proceeding:  Motion to Strike

Filed By: Yoo, Jason S. Defendant Chase Bank, USA, N.A.’s (“Bank”) motion to strike portions of the Second
Amended Complaint (“2AC”) is GRANTED with and without leave to amend, as
follows.

Moving counsel is admonished because the notice of motion does not provide notice
of the Court’s tentative ruling system, as required by Local Rule 1.06.  Moving counsel
is directed to contact opposing counsel and advise him/her of Local Rule 1.06 and the
Court’s tentative ruling procedure and the manner to request a hearing.  If moving
counsel is unable to contact opposing counsel prior to hearing, moving counsel
is ordered to appear at the hearing in person or by telephone.

This action arises out of plaintiff’s “no interest” loan from Bank to pay for certain pain
relief treatment by a chiropractor in Sacramento.  Plaintiff alleges that on his first visit
to the chiropractor, he received no treatment whatsoever but Bank nevertheless paid
the chiropractor in full for the treatment plan ($3,877), thereby commencing plaintiff’s
obligation to repay Bank despite the lack of treatment. (2AC, ¶21.)  The 2AC also
asserts that although the loan was described as “no interest,” there were various
provisions which negated this and that Bank unreasonably acted in certain ways in
order to expose plaintiff to significant interest and other fees, all of which rendered the
“no interest” feature illusory. (2AC, ¶¶24-29.)  Plaintiff further contends that Bank’s
“Account Agreements” were deceptive and misleading in several respects and
unlawfully obligated plaintiff to repay the entire debt regardless of the healthcare
provider performed the requested services or did so competently. (2AC, ¶¶30-43.)  In
this case, plaintiff claims that he “never received any pain relief” and this particular
chiropractor’s “treatment program was a complete sham.” (2AC, ¶31 (italics in
original).)

The 2AC alleges four (4) causes of action (“COA”) for declaratory relief (including a
request for a permanent injunction), breach of the implied covenant of good faith and
fair dealing, unfair business practices, and financial elder abuse.  Bank now moves to
strike various portions of the 2AC and plaintiff opposes.

Class Action Allegations.  Bank first contends these allegations should be stricken
because they are, on their face, inconsistent with the substantive allegations against
Bank.  According to Bank, plaintiff alleges in Paragraph 22 that the former “unilaterally
amended its Account Agreement, while Plaintiff’s account was still open,” with the
amended agreement attached to the 2AC as Exhibit D, and on this basis, plaintiff
specifically asserts in that his claims are not subject to mandatory arbitration since the
amended agreement deleted the arbitration clause (which also prohibited claims on
behalf of a class) found in the original, superseded agreement, attached as Exhibit C.
(2AC, ¶15.)  Plaintiff further alleges “this action was commenced at a time when
[Bank’s] operative Account Agreement neither required arbitration nor prohibited class
actions or any joinder of claims” (emphasis added), meaning that the 2AC effectively
admits that the amended agreement attached as Exhibit D, not the original agreement
attached as Exhibit C, is the operative agreement between the parties but the 2AC
currently alleges no specific breach of any term found in the amended agreement
identified as Exhibit D.  Moreover, Bank insists the amended agreement marked as
Exhibit D expressly provides that it becomes effective as of 5/17/2010 (if the consumer
thereafter uses the account or makes a payment) but plaintiff’s class action allegations
describe the proposed class as all persons who between 5/1/2007 and 4/26/2011
entered into the same “no interest” loan agreement with Bank even though a bulk of
this putative “class period” predates the effective date of the amended agreement.
Thus, according to Bank, to the extent plaintiff seeks to rely on the amended
agreement in an attempt to avoid the arbitration clause in the original agreement, the
proposed class should be limited to those who used or made a payment on their
account on or after 5/17/2010, the effective date of the amended agreement.

The Court agrees and grants the motion to strike on these grounds but with leave to
amend.

Exhibit E to 2AC and Related Allegations in Paragraphs 28 and 54.  The 2AC
describes Exhibit E in Paragraph 28 as “examplars of others consumers’ statements
about the arbitrary and unreasonable actions” of Bank, which comments were found
on several “websites during a search on October 19-20, 2011.”  The specific websites
are identified in Footnote 1 on Page 11 of the 2AC.  Paragraph 58 of the 2AC also
refers to Exhibit E, suggesting that it is evidence of Bank’s actions which were
“intended to force Plaintiff and members of the Class to pay a high interest rate…and
late fees on their NO INTEREST FINANCING.”  Bank maintains that the inclusion of
these anonymous, unauthenticated and inflammatory remarks is improper within the
meaning of Code of Civil Procedure §436(a).

The Court agrees and strikes Exhibit E to the 2AC, along with the related allegations
found in Paragraphs 28 and 54, without leave to amend.

Where leave to amend is granted, plaintiff may file and serve an amended complaint
no later than 1/3/2014.  Although not required by court rule or statute, plaintiff is
directed to present a copy of this order when the amended complaint is
presented for filing.

Defendant to respond within 10 days if the amended complaint is personally served,
15 days if served by mail.

If defendant intends to demur to the amended complaint or move to strike, it shall
determine if any other defendant who has appeared in this action also intends to
demur or move to strike.  If so, all such defendants shall coordinate a single hearing
date for the demurrers and motions to strike.  Additionally, a copy of the amended
complaint shall be included with the moving papers.

This minute order is effective immediately.  No formal order or other notice is required.
(Code Civ. Proc. §1019.5; CRC Rule 3.1312.)