Court: District Court, E.D. New York; July 14, 2014; Federal District Court
The document is a memorandum and order from Senior District Judge Jack B. Weinstein, addressing a case involving Samuel Friedman against Maspeth Federal Savings and Loan Association regarding the improper assessment of late fees on mortgage payments. Friedman asserts violations of the Real Estate Settlement Procedures Act (RESPA) and New York General Business Law, as well as claims for breach of implied duty of good faith and fair dealing, breach of contract, and unjust enrichment, proposing a class action.
Friedman, who owns two adjacent properties in Brooklyn, financed his purchase of one with a $437,500 mortgage, designating the property as an "investment" despite occupancy by his daughter and son-in-law. From 2009 to 2013, Friedman and his family made significant payments towards the mortgage.
Payments were due on the first of each month, with a 15-day grace period before late fees could be charged. Friedman claims that Maspeth incorrectly charged late fees for seven specific months, asserting that his payments were sent in time to avoid these fees, supported by mail receipts not provided to the bank prior to the lawsuit. The court denied Maspeth's motion to dismiss the case.
By January 2014, the plaintiff had incurred $457.83 in late fees on a loan that was fully paid off. The plaintiff sent a letter on March 28, 2012, to the defendant regarding these late charges, which was deemed a qualified written request (QWR) under the Real Estate Settlement Procedures Act (RESPA), requiring a response from the defendant. The defendant replied on April 3, 2012, providing a payment history and noting when late fees were assessed. On October 31, 2012, the plaintiff informed the defendant that he had receipts proving timely payments and requested reversal of all late fees and correction of the payment history. The defendant's response on November 20, 2012, cited the mortgage coupon book's stipulation that timely mailing does not guarantee receipt within the grace period, claiming the plaintiff’s payments were late according to their records. The plaintiff disputed the accuracy of this response.
Payments on the loan commenced in January 2009, with the plaintiff initially making the payments independently. From May 2009 for two years, the plaintiff's children contributed, covering the entire payment from August 2012 to December 2013. Over the loan period, the plaintiff contributed 43% ($80,229.62) of the total payments, while the children contributed 55% ($103,756.71), with the remaining 2% from others. In January 2014, the plaintiff paid off the mortgage balance of $415,561.40 and transferred the deed to his daughter and son-in-law.
Regarding the motion to dismiss, the court must accept the plaintiff's factual allegations as true and draw reasonable inferences in their favor. A complaint must state a plausible claim for relief based on sufficient factual matter. The court considers any written instruments attached to or referenced in the complaint, and the focus is on the legal feasibility of the complaint rather than the likelihood of the plaintiff's success.
RESPA, enacted to provide residential real estate owners with essential information regarding loan costs and protect against abusive practices in loan agreements and settlements, mandates that lenders disclose relevant information in writing (12 U.S.C. 2601(a), (b); 12 U.S.C. 2603-2610). Congress aimed for significant reforms to ensure consumers receive timely information about the settlement process and safeguard against excessive charges stemming from abusive practices (12 U.S.C. 2601(a)). The Act broadly encompasses aspects such as post-settlement late charges and defines 'servicer' as the entity managing loan payments (12 U.S.C. 2602(1)(A), 2605(i)(3)). Courts have interpreted RESPA as protective and remedial, allowing for recovery of non-pecuniary damages as 'actual damages' (Rawlings v. Dovenmuehle, 64 F.Supp.2d 1156; McLean v. GMAC Mortg. Corp., 2008 WL 1956285).
Transactions primarily for business, commercial, or agricultural purposes are exempt from RESPA (12 U.S.C. 2606(a)(1); 12 C.F.R. 1204.5(b)). The burden is on the plaintiff to prove that a transaction qualifies as consumer credit rather than a business transaction (Muia v. Brookview Rehab Funding, 2011 WL 1748190). Five factors help determine the primary purpose of credit: 1) the relationship of the borrower's occupation to the acquisition, 2) the borrower’s personal management involvement, 3) the income ratio from the acquisition to total income, 4) the transaction size, and 5) the borrower's stated purpose for the loan (12 C.F.R. 226.3, Supp. I, Cmt. 3)(i)(A)).
A rental property that the borrower does not intend to occupy is classified as a business purpose loan, as established in Mauro v. Countrywide Home Loans, Inc. Loans for investing in non-owner occupied rental properties are treated as business loans according to the Official Staff Commentary and relevant regulations. If a family member occupies the property without paying rent, the loan may be considered for non-business purposes. Distinct rules apply to owner-occupied versus non-owner-occupied rental properties: non-owner-occupied credit for acquisition, improvement, or maintenance is deemed for business purposes regardless of the number of housing units. For owner-occupied properties, credit is considered for business purposes if involving more than 2 housing units for acquisition or more than 4 for improvement or maintenance. Properties with fewer units require evaluation based on specific factors to determine the purpose of the credit.
The rise of non-owner occupied family homes and multi-generational living arrangements reflects changing socio-economic conditions, with parents increasingly providing financial support to adult children. This trend results in more young adults returning to live with their parents, influenced by factors like college debt and housing costs. Additionally, parents often gift assets to assist their children while still alive, fostering stability for education and career development.
Creditors who violate RESPA regulations face penalties, including actual damages to the borrower and possible additional damages up to $2,000 for patterns of noncompliance.
A borrower who successfully pursues an action is entitled to recover costs and reasonable attorneys' fees as determined by the court. Under New York General Business Law § 349, consumers are protected against deceptive practices, requiring that claims demonstrate the defendant's actions were directed at consumers, misleading in a material way, and resulted in injury to the plaintiff. Additionally, there is an implied covenant of good faith and fair dealing inherent in contracts, prohibiting parties from undermining each other's contractual rights. Breach of this covenant necessitates a direct violation of obligations presumed to be intended by the parties and is treated as a breach of the underlying contract. To establish a breach of contract claim, three elements must be proven: the existence of a contract, a breach of that contract, and damages from the breach. A claim for unjust enrichment requires proof that the defendant was enriched at the plaintiff's expense, and that fairness dictates the defendant should not retain that benefit. The plaintiff has demonstrated that a transaction falls under RESPA protections by satisfying relevant factors indicating it was for personal, family, or household use, despite owning other properties, with his primary occupation being a restaurant operator.
Properties owned by the plaintiff were primarily inherited, held in trust, or occupied by family, with no connection to the home purchased for his daughter. The plaintiff has not maintained the property, aside from making mortgage payments, while his children have taken care of upkeep. He asserts that his intent was to provide a home for his daughter and her family without deriving income from it. The mortgage for the property was $437,000, representing 70% of the purchase price, which aligns with typical residential loans. Although the loan application classified the purchase as an 'investment,' this was primarily due to the limited options available and does not reflect his actual intent, as he did not intend to reside there or profit from it. The classification of the mortgage as residential is supported by statutory definitions rather than the application’s terminology.
The plaintiff's daughter lives nearby and has received substantial financial support, indicating a familial arrangement aimed at fostering close relationships and addressing potential future care needs for the plaintiff. His financial capability to purchase the home for his child does not negate his eligibility for protections under federal homeowner statutes.
The parties dispute whether the mortgage payments made by the plaintiff’s daughter and son-in-law qualify as rent. The defendant claims these payments constitute rent, citing case law that supports treating such payments as rent for land use. However, the court finds the relevance of a note on the loan application regarding rental income unclear and gives it little weight. There is no evidence suggesting a landlord-tenant relationship was intended; rather, the plaintiff asserts that the funds provided were meant to teach financial responsibility.
Mortgage payments made by the plaintiff's children are not classified as rental payments, as the family intended to share resources without establishing a landlord-tenant relationship. The plaintiff claims that Maspeth failed to adequately investigate and respond to issues concerning late payments, noting that the loan payment booklet indicated payments must be received by 8:00 P.M. on the 16th to avoid late fees. The plaintiff has provided mail receipts for four of seven contested late payments, suggesting timely receipt by Maspeth. The defendant argues it complied with the Real Estate Settlement Procedures Act (RESPA) during its investigation and did not receive the plaintiff's receipts to amend errors. However, the plaintiff's evidence supports a valid RESPA claim.
Regarding supplemental jurisdiction, a district court can hear state claims related to federal claims under 28 U.S.C. 1367(a). Given the court's familiarity with the case and the resources expended by the parties, it is appropriate to exercise supplemental jurisdiction. Under New York General Business Law § 349, the plaintiff alleges that Maspeth's practices concerning late fees are misleading to consumers, as the payment booklet is standard for all mortgage customers and likely misleads reasonable consumers about payment deadlines. The plaintiff asserts he suffered economic and emotional harm due to the defendant's actions, including frustration and anxiety, which may constitute a valid injury independent of a breach of contract.
Lastly, under New York law, the same facts cannot support both a breach of contract claim and a breach of the implied duty of good faith and fair dealing claim.
The breach of contract claim hinges on the defendant's incorrect assessment of late fees, while the implied duty claim involves allegations of misrepresentation by Maspeth, which allegedly caused emotional harm to the plaintiff. This implied duty claim survives the motion to dismiss. The defendant does not seek to dismiss the breach of contract claim but argues against the court exercising supplemental jurisdiction over it. However, since the court is exercising such jurisdiction, this claim also survives dismissal.
In terms of unjust enrichment, the defendant contends this claim should be dismissed due to the existence of a valid contract regarding late fees, though the parties dispute the contract's documents. The plaintiff asserts that the mortgage, bond, and payment book form the contract, which the defendant partially acknowledges. The plaintiff maintains that the defendant was unjustly enriched by imposing late fees on timely payments and must demonstrate that equity prevents the defendant from retaining the fees. The plaintiff's receipts, indicating payments made before deadlines, support this unjust enrichment claim.
Regarding class allegations, the defendant's motion to dismiss is based on a perceived lack of factual detail, which the court rejects. The plaintiff provides sufficient allegations regarding the defendant's uniform mishandling of late fees affecting many clients. Consequently, the motion to dismiss is denied, and discovery is to be expedited.
