Maya v Centex Corp. (9th Cir, Sept. 21, 2011, 2011 US App Lexis 19344

Plaintiff Homeowners bought homes in new developments and alleged that defendant national residential developers (and their parent companies and mortgage companies) “financed at least 65% of the mortgages on homes in their communities” and that much of that financing was extended to “unqualified” buyers, who could not afford the loans and were at high risk of default. Plaintiffs claimed that (1) defendants created a “buying frenzy,” which increased the initial sale price of their homes (overpayment claim), and (2) had they known that defendants had misrepresented the future stability of the neighborhood and their intent to sell only to persons who would stay and grow in their homes, plaintiffs would not have bought their homes (rescission claim). Further, once “unqualified” buyers had defaulted and lenders had foreclosed on their homes, plaintiffs suffered a reduction in the economic value of their homes (“above and beyond those losses caused by general economic conditions”) (decreased value claim) and also suffered a decreased desirability of the neighborhood (desirability claims) caused by “abandoned houses, multiple families living in one home, transient neighborhoods, and even increased crime.” The district court dismissed all plaintiffs’ claims; the Ninth Circuit reversed.

Constitutional standing under Fed R Civ P 12(b)(6) requires a plaintiff to show

(1) it has suffered an “injury in fact” that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

All parties conceded that item (3) was satisfied for all claims. As to the overpayment and rescission claims, the district court erred in finding that a future recovery in the housing market would have negated plaintiffs’ injuries, because plaintiffs alleged that they already had paid more than their homes were worth and even with an enhanced economy, they would have made better returns on the sale of their homes had the value not been inflated at initial sale. As alleged, defendants created an inflated housing bubble, particularly since they had financed most of the homes in the newly developed communities.

In contrast, the decreased value and desirability claims were not sufficiently pleaded. Case law established that “a present decrease in the economic value of one’s home is a cognizable and concrete injury-in-fact.” The district court erred in imposing a requirement that plaintiffs must have sought to sell or state an intention to shortly sell their homes to establish an injury in fact. Nevertheless, plaintiffs did not establish a viable causal link between defendants’ actions and their claimed damages. Plaintiffs did not show how defendants’ actions “necessarily” led to multiple foreclosures and decreased home values and neighborhood desirability. But plaintiffs should have been given leave to amend, as they argued, to have experts establish that economic home values were depressed and neighborhood desirability decreased by defendants’ actions as distinguished from the impact of the general economic downturn. The case was remanded to the district court for further proceedings.

The Editor’s Take: The ostensible narrowness of the holding in this case stands in stark contrast to the very broad language included in much of the opinion.

On the one hand, the court announced that it was deciding only that the plaintiffs’ complaint should survive a motion to dismiss based on a constitutional lack of standing under Fed R Civ P 12(b)(1). This was in contrast to three other such cases (brought in California, North Carolina, and South Carolina) in which dismissal was based on the more common ground of failure to state a claim under Fed R Civ P 12(b)(6). (All of these decisions are cited in the court’s published opinion.)

On the other hand, the arguments for dismissal were the same in all of the cases—that the plaintiffs’ claims of injury were too conjectural and that the causal links between defendants’ acts and those injuries were too tenuous—and, in being rejected here, triggered strong language by the Ninth Circuit, language that may easily be quoted against the defendants in other contexts over and above the narrow Article III standing issue:

“Under these circumstances, plaintiffs can plausibly claim that the “artificial demand” created by defendants’ marketing and financing practices had an identifiable effect on the price they paid for their homes....

“There is a direct causal link between defendants’ allegedly faulty disclosure and plaintiffs’ injuries.... In sum we hold that plaintiffs have established both injury and causation sufficient to withstand a motion to dismiss their claims that (1) they paid more for their homes than they were worth, and (2) they would not have purchased their homes had defendants fully disclosed their practices....

“Both reduction in value to one’s property (even if one has not attempted to sell the property) and decreased quality of life are concrete injuries.”

Those statements may well be taken by district court judges in future matters as broad enough to support survival of complaints under Rule 12(b)(6) as well as under Rule 12(b)(1).

This opinion could act as a warning shot across the bow for many major players in the real estate industry. The plaintiffs should not have too much trouble corroborating their factual allegations or obtaining expert testimony to endorse their theories. If they can get the matter to a sympathetic jury, who knows what could happen? —Roger Bernhardt