Court: District Court, N.D. California; June 14, 2010; Federal District Court
Plaintiffs Sound Appraisal and Savage Appraisal Services, Inc. alleged that Defendants Wells Fargo Bank, N.A. and Valuation Information Technology, LLC (d/b/a Rels Valuation) violated California's common law right to fair procedures. The court reviewed the motions to dismiss filed by the Defendants and granted these motions after considering the parties' filings.
Sound Appraisal operates in Puyallup, Washington, while Savage Appraisal Services is based in Vail, Colorado, both providing residential real estate appraisals. Wells Fargo, a national banking association headquartered in San Francisco, is a major player in residential mortgages, being the largest originator and second largest servicer in the U.S. Rels, the other Defendant, is a joint venture between First American Solutions and Wells Fargo Foothill, providing real estate settlement services, including appraisals.
The complaint noted that appraisers, typically retained by mortgage brokers and lenders, must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP), which mandates impartiality and objectivity in property valuations. In 2004, Wells Fargo altered its hiring process for appraisers by engaging them through an affiliate management company, ValueIT, which later became Rels Valuation. This change shifted the direct relationship between Wells Fargo and the appraisers to a mediated one through Rels.
Plaintiffs argue that Rels Valuation operates as a controlled entity for Wells Fargo due to shared ownership and Wells Fargo's dominant economic influence. They contend that Wells Fargo prioritizes appraisals that meet specific value expectations over fair and accurate assessments compliant with USPAP standards. If an appraiser does not align with these expectations, Wells Fargo, through Rels, suspends or blacklists them.
In June 2007, Don Pearsall of Sound Appraisal was asked by Rels to modify an appraisal report to omit details about ongoing remodeling. Pearsall refused, citing ethical obligations, which led to threats of suspension from Rels. Subsequently, Sound Appraisal's business with Rels significantly declined, and Pearsall was told he was suspended for not complying with an “OPUS issue,” with no further explanation provided.
In April 2009, Pearsall was contacted for a job but was informed he was not supposed to be contacted due to being blacklisted. Similarly, Savage Appraisals, which had previously worked with Rels for twelve years, was removed from the approved panel after refusing to adjust property valuations to higher amounts suggested by Rels. The removal came without explanation, and Savage reported that Rels constituted a significant portion of its income prior to the exclusion.
Confidential witnesses from multiple states corroborate claims that Rels ceased hiring appraisers who refused to alter their reports as requested. The complaint, filed on April 14, 2009, alleges that Wells Fargo systematically pressures appraisers to produce inflated valuations to facilitate loan approvals, employing indirect methods to communicate desired outcomes, as evident in their appraisal order forms indicating a 'Borrower Estimated Value.'
Plaintiffs assert that an appraiser's value expectations are central to their case. Initially, they filed three claims: 1) violation of the federal RICO Act; 2) interference with prospective economic advantage; and 3) violation of California's Unfair Competition Law. Defendants sought to dismiss all claims, to which Plaintiffs agreed to dismiss the Unfair Competition claim with prejudice. The court dismissed the other two claims but allowed Plaintiffs to amend their complaint. In the amended complaint, Plaintiffs maintain the same facts but focus solely on the common law duty to provide fair procedures.
The legal standard dictates that a complaint must provide a clear claim for relief per Fed. R. Civ. P. 8(a). Under Rule 12(b)(6), dismissal is warranted only if the complaint fails to notify the defendant of a recognizable claim and its basis. Courts must accept all factual allegations as true, interpreting them favorably towards the plaintiff, though legal conclusions and conclusory statements are not accepted as true.
Regarding California law, the court addressed Defendant Rels' claim of insufficient connection to California. The court previously dismissed this argument regarding the original interference claim and does so again. Despite Rels being based in Iowa and Minnesota, Plaintiffs have demonstrated adequate connections to California, especially as Rels allegedly conspired with Wells Fargo, a California entity. The conspiracy's planning and wrongful acts are tied to California, justifying the application of California law to Rels.
The common law right to fair procedures in California safeguards against arbitrary actions by private organizations. This doctrine mandates that decisions must be both rational and fair in process, applicable in various contexts.
James v. Marinship Corp. established that labor unions can exert a monopoly over labor supply, while Pinsker v. Pacific Coast Society of Orthodontists addressed professional associations that set practice standards. The Marinship-Pinsker cases highlight that certain private entities can significantly impede an individual's pursuit of a lawful profession or dictate the terms of practice. Ezekial v. Winkley further applied this principle to managed care organizations that hold considerable economic power over physicians and patients. The fair process doctrine is applicable to private organizations that impact public interest, particularly those deemed quasi-public due to their essential services, public representations, or legislative recognition. Liability for violating fair procedures arises when a private entity's substantial power significantly hinders individuals' ability to work in their profession. The judicial inquiry focuses on the entity's practical power to affect an important economic interest rather than requiring monopolistic control or total termination of the right to practice. For instance, if a managed care entity has a near-monopoly, exclusion from its networks could severely impact a physician's practice. While loss of income due to exclusion is relevant, it is not definitive proof of impaired professional ability. The fair procedure doctrine does not universally apply to all private economic decisions, as noted in Yari v. Producers Guild of America. The case involving Wells Fargo Home Mortgage presents allegations regarding its dominant position in the mortgage industry.
Wells Fargo operates over 1,200 home mortgage stores across all 50 states. Prior to the removal of Sound Appraisal from the list of eligible appraisers, 21-37% of its business came from Wells Fargo. For Savage Appraisal, the percentage was 11-17%. However, these figures do not establish a duty for Wells Fargo to provide fair procedures. Plaintiffs did not claim that their removal impacted their ability to work with other mortgage companies, as they also engaged with other lenders such as Washington Mutual and Countrywide. Plaintiffs failed to demonstrate that Wells Fargo has significant control over the appraisal profession in their geographic areas, nor did they show that the removal from the approved list substantially impaired their ability to conduct appraisals. The common law right to fair procedure applies only when an entity has substantial power that significantly affects a professional's ability to practice in a geographic area. The court found that Wells Fargo's decision to cease business with Plaintiffs did not constitute gatekeeping power over the profession, leading to the dismissal of the fair procedure claim. Consequently, the related civil conspiracy claim also fails. The court granted the motions to dismiss with prejudice, as further amendment would be futile, and ordered each party to bear its own costs.
