Fuoco v. Bank of America

Citations: 115 F. Supp. 3d 874; 2015 U.S. Dist. LEXIS 84539; 2015 WL 3968565Docket: Civil Action No. 13-cv-13512

Court: District Court, E.D. Michigan; June 30, 2015; Federal District Court

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Defendants Bank of America and Seterus, Inc. successfully moved to dismiss Joseph Fuoco's mortgage foreclosure complaint, which was dismissed with prejudice. Fuoco acknowledged his delinquency in property tax payments and claimed that the defendants wrongfully enforced an escrow account, increasing his monthly payments. The court determined that the defendants did not waive their right to impose an escrow and acted appropriately given Fuoco's failure to make timely tax payments.

Fuoco had originally executed a note and mortgage with Quicken Loans in 2007, along with a Waiver of Escrow, which made him responsible for timely property tax payments. The waiver allowed the lender to establish an escrow account if Fuoco failed to pay taxes promptly. After falling behind on taxes in 2010 and 2011, Fuoco discovered that Bank of America had paid his overdue taxes without imposing an escrow. Following this, Bank of America imposed an escrow after accepting late tax payments from Fuoco. Despite ongoing payments made only for principal and interest, Seterus, which took over servicing, began rejecting these payments and ultimately initiated foreclosure proceedings.

Plaintiff asserts three causes of action: breach of contract, declaratory judgment, and violation of the Michigan Mortgage Brokers, Lenders, and Servicers Licensing Act (MBLSLA). The core of these claims is the allegation that Defendants acted in bad faith by imposing an escrow account, which Plaintiff contends constitutes a waiver of Defendants’ right to do so. Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint that fails to state a plausible claim for relief. Courts must evaluate the complaint favorably towards the plaintiff, accepting well-pled factual allegations as true, while also requiring specific factual support for each claim, rather than mere legal conclusions. The court may consider the entire complaint, referenced documents, and judicially noticeable matters.

Despite acknowledging his own failure to pay taxes timely, Plaintiff argues that Defendants waived their right to enforce the escrow account. He cites three examples of conduct that he believes demonstrate this waiver. Primarily, he claims that Bank of America acted in bad faith by enforcing the escrow after he ultimately made his tax payments, noting that he reimbursed Bank of America for taxes it had paid on his behalf. However, the court finds that Bank of America had the right to impose the escrow, as the mortgage documents explicitly warned that failure to pay taxes promptly could lead to such an action. The Waiver of Escrow clarifies that the lender may establish an escrow account if the borrower fails to pay taxes in a timely manner.

Plaintiff did not identify any provisions in the mortgage documents that would allow for the rescission of the servicer's right to impose and enforce the escrow after paying taxes, whether directly or through reimbursement. The mortgage explicitly required Plaintiff to reimburse the lender for any payments made on Escrow Items when no escrow was established. If the Borrower is required to pay Escrow Items directly and fails to do so, the Lender can pay the amount and the Borrower must repay it. The mortgage documents also reserve the Lender's right to revoke the escrow waiver at any time, obligating the Borrower to pay all required funds upon revocation. The Plaintiff’s reimbursement of taxes does not signify bad faith from Defendants. 

Regarding Plaintiff's claim that Bank of America and Seterus waived the right to impose an escrow due to previous late payments, Defendants reference anti-waiver provisions in the mortgage documents, asserting that even if the Lender does not immediately enforce rights in the event of default, those rights remain intact. Plaintiff argues that these anti-waiver clauses do not prevent a waiver claim and asserts that the determination of waiver is a factual issue for a jury. Both parties cite the Michigan Supreme Court case, Quality Products and Concepts Co. v. Nagel Precision, Inc., which involves issues of contractual modifications and waivers despite explicit anti-waiver clauses. In that case, the defendant refused to pay commissions based on the plaintiff's sales to excluded suppliers, despite the defendant's prior knowledge and lack of objection, asserting the contractual language as a defense.

The Michigan Supreme Court addressed the balance between the freedom to contract and the restrictions in an original contract regarding waivers or modifications. It ruled that parties can mutually waive or modify a contract despite any written modification or anti-waiver clauses, but unilateral alterations are not permitted. To establish mutuality for waivers or modifications, clear evidence of an agreement—whether written, oral, or through affirmative conduct—is required. When a party relies on a course of conduct to claim waiver, the presence of restrictive clauses becomes more significant in interpreting the parties' intent, as these clauses reflect mutual expectations.

In the case of Quality Products, the court found insufficient evidence of conduct to support a waiver claim due to the existing written clauses. The plaintiff's demonstration of the defendant's knowledge and silence regarding the plaintiff's actions was deemed inadequate to establish an intentional relinquishment of contract limitations. In the current matter, the plaintiff acknowledges the anti-waiver clauses but contends that Bank of America’s silence after two missed payments indicates a relinquishment of its right to enforce an escrow account for a third missed payment. However, the court stated that such silence does not meet the legal standard for waiver as outlined in Quality Products.

Plaintiff contends that Defendants’ acceptance of principal-and-interest-only payments shortly after the escrow was imposed indicates a waiver of their right to enforce the escrow. The Court disagrees, citing the mortgage documents which explicitly state that accepting partial payments does not constitute a waiver of rights. The anti-waiver clauses clarify that any forbearance in enforcing rights, including acceptance of less than full payments, does not preclude future enforcement. The mortgage required Plaintiff to include escrow items in monthly payments after the escrow's imposition, and his failure to do so resulted in overdue payment obligations. Thus, the acceptance of partial payments does not waive Defendants' rights or diminish their ability to refuse such payments in the future. Additionally, Plaintiff's claims are insufficient to meet the legal standards established in Quality Products, as he acknowledges that the acceptance of non-escrow payments was brief and fails to demonstrate mutual intent to waive escrow enforcement. The Complaint lacks allegations that Defendants did not follow proper procedures for the escrow's implementation, did not notify Plaintiff of the escrow's imposition or increased payment amount, or denied him the chance to remedy the shortfall before foreclosure actions. Plaintiff's arguments are solely focused on waiver, based on lawful acceptance of partial payments, which would lead to unreasonable conclusions if accepted.

A borrower contracted to make monthly payments of $1,000 to a lender but unilaterally reduced payments to $10. The lender accepted these partial payments initially, possibly as a grace period, but later decided to stop accepting them. The borrower argued that this acceptance constituted a waiver of the right to demand the full payment, contradicting the contract's anti-waiver provisions. The court emphasized that acceptance of partial payments does not equate to waiver when explicit contractual language allows such acceptance without waiver implications. Citing relevant case law, the court affirmed that the lender's conduct did not demonstrate a waiver of rights under the contract. Consequently, the court ruled that the acceptance of principal-and-interest-only payments by the lender did not indicate waiver. As a result, the court concluded that all of the plaintiff's claims, including breach of contract and violation of the Michigan Business and Residential Lending Act (MBLSLA), failed due to the incorrect assumption about the escrow account's imposition and enforcement. The court granted the defendants' motions to dismiss the complaint with prejudice, with a judgment to be issued in favor of the defendants.

The mortgage required the borrower to make monthly payments that included taxes, insurance, and other items, which would be managed in an escrow account by the lender. The lender had the discretion to waive this escrow requirement, allowing the borrower to pay these amounts directly. Initially, the lender agreed to waive the escrow requirement. During a motion hearing, Plaintiff's counsel indicated that Seterus accepted two monthly principal-and-interest payments but later rejected them. The Plaintiff has claims against both "Bank of America" and "Seterus, Inc." Bank of America, N.A. asserted that it was exempt under the MBLSLA and argued that it represented "Bank of America." The Plaintiff countered that further discovery was needed to ascertain whether Bank of America, N.A. was the true party in interest, as the complaint generically named "Bank of America." The Court, however, determined that the Plaintiff failed to state a claim and did not require further exploration of this issue. Additionally, the Plaintiff sought injunctive relief but withdrew this claim during the hearing, leading to its dismissal. Bank of America submitted relevant documents, including the note and mortgage, which the Court found central to the Plaintiff's claims concerning tax payments, escrow, waiver, and alleged bad faith. The mortgage defined "Loan" to include all amounts due under the Security Instrument, meaning that the failure to incorporate escrow amounts rendered the loan not current. Since the Plaintiff did not adequately state a claim for waiver or bad faith, the Court did not address the Defendants' further arguments regarding insufficient pleadings, breach of agreement, availability of declaratory relief, or the nature of injunctive relief.