Pennington v. HSBC Bank USA, N.A.

Citation: 493 F. App'x 548Docket: No. 12-50064

Court: Court of Appeals for the Fifth Circuit; October 3, 2012; Federal Appellate Court

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Ellery and Laura Pennington, along with Traci Smith, filed a lawsuit against HSBC Bank USA and Wells Fargo Bank in state court, asserting claims such as breach of contract, negligent misrepresentation, and violations of the Texas Constitution and the Texas Deceptive Trade Practices Act, while seeking injunctive relief to prevent foreclosures. The banks removed the case to federal court citing diversity of citizenship, where the district court granted their motion to dismiss, a decision that was affirmed on appeal.

The Penningtons took out a home equity loan in 2004 and sought a modification in 2009 after Ellery lost his job. The banks provided a Trial Period Plan (TPP) under the federal HAMP program, which required the Penningtons to make three trial payments less than the full loan amount and certify their inability to afford current payments. After making ten payments without receiving a modification, they were informed that Texas law prevented modifying loans exceeding the original borrowed amount. 

Traci Smith, also seeking a modification, was instructed to stop her regular payments and enter the TPP. Despite initial approval for a second step in the modification process, she was later denied a modification. Smith claims that had she not entered the process, she would not have missed payments. The plaintiffs argue that the TPP violated Texas constitutional protections against forced sales and that the banks breached their TPP contracts by failing to provide loan modifications, alleging negligent misrepresentation regarding the legality of HAMP modifications in Texas. Smith further contends that the bank should be estopped from denying her modification request based solely on perceived illegality.

The court determined that it need not assess whether the TPP constituted a loan modification under Texas law since the plaintiffs did not fulfill the TPP's conditions. The initial loans complied with Texas law, and any potential violation would arise only if the TPP or subsequent agreements modified those loans. The court concluded that the TPP does not modify a loan if the borrower fails to meet the specified conditions, thus rejecting the plaintiffs' claims of breach regarding the TPP and the Step Two Modification Agreement.

To establish a breach-of-contract claim, Smith must demonstrate: 1) a valid contract exists; 2) she has performed or tendered performance; 3) the defendant breached the contract; and 4) she suffered damages. In Texas, a valid contract necessitates an offer, acceptance in strict compliance, mutual consent, intent for it to be binding, and consideration. The status of the Trial Payment Plan (TPP) as a contract and its obligations is a novel issue in this circuit, with courts divided on whether TPPs require lenders to offer permanent modifications under the Home Affordable Modification Program (HAMP) to compliant borrowers. Some courts argue that TPPs lack consideration because their terms are either mandated by the original loan or serve merely as conditions for HAMP. Conversely, other courts assert that certain additional TPP terms do constitute consideration. A few courts maintain that state breach-of-contract claims do not independently arise from HAMP, leading to dismissal as HAMP does not provide a private right of action. Some courts have ruled that TPPs do not obligate lenders to offer permanent modifications unless the lender acknowledges the borrower's compliance or there are executed loan documents for modification. Additionally, some courts require that a TPP becomes effective only after both parties sign it and the lender provides a signed copy to the borrower. In reviewing a motion to dismiss, all well-pleaded facts are accepted as true. Smith's claims fail because she did not satisfy the TPP conditions, and the bank did not sign the TPP or Modification Agreement, which is necessary for the agreements to be enforceable. Additionally, Smith's own allegations indicate she does not meet the financial hardship requirement for a HAMP loan modification.

Section 1 of the TPP mandates that for a borrower to be eligible for loan modification, they must be currently unable to make payments. Smith claims that if she had not entered the loan modification process and had continued making payments, she would not have fallen behind. However, her assertion does not support her eligibility, indicating that her financial hardship representations were untrue, thus disqualifying her from loan modification benefits. The TPP and Modification Agreement impose ongoing financial eligibility requirements, and if these are not met before the Modification Effective Date, the TPP terminates, preventing any modification.

Regarding the Penningtons, their claim for breach of the TPP fails because no binding contract was formed. The TPP requires that the lender provide a signed copy to the borrower for it to take effect, and the Penningtons did not allege receipt of such a document. Their situation parallels that in the case of Soin, where lack of a signed contract meant no enforceable agreement existed. They acknowledged that their application was still "in review" and did not receive confirmation of approval, further demonstrating the TPP's ineffectiveness. Texas courts prioritize the necessity of contract execution, viewing express requirements for signatures as critical. Although the bank accepted trial payments, this does not imply binding intent as the Penningtons still owed regular payments. Ultimately, without a binding contract, both Smith's and the Penningtons' claims for breach of contract cannot succeed.

Smith contends that the bank should be considered to have signed the loan modification due to its mistaken belief that the modification was illegal. However, the absence of the bank's signature indicates it did not intend to be bound by the Modification Agreement. The Step Two agreement explicitly states that it will not take effect unless specific preconditions are met, including the bank's signature, which is necessary to express intent to be bound.

The plaintiffs allege negligent misrepresentation by the bank regarding the legality of the modification. The elements of negligent misrepresentation include a false representation made in a business context, the provision of false information without reasonable care, and resultant pecuniary loss from reliance. While the first three elements may be met, the plaintiffs fail to demonstrate the fourth: the accrued interest and fees during the Trial Payment Plan (TPP) were inevitable due to their inability to make payments, not a consequence of negligent misrepresentation.

Smith also claims promissory estoppel, arguing that the bank's assurances about a loan modification led her to rely on those promises. However, there were no definitive promises, as any approval was contingent upon her continuing inability to make payments. Furthermore, her reliance on potential modification was unreasonable since she was capable of making payments. Though she claims reliance damages from house renovations and TPP payments, these do not meet the necessary criteria, as the bank could not have foreseen her spending on renovations, and the TPP payments did not constitute detrimental reliance.

The Wigod court identified that the detriment arises from the lost opportunity to reduce home-equity debt by not pursuing bankruptcy. Smith's claim is hindered as she did not specify any alternative actions besides not falling behind, which disqualifies her from claiming promissory estoppel. The court affirmed the dismissal of her case. The complaint lacks specific details about late charges but notes that to exit foreclosure, the Penningtons had to pay $21,477.39 in late payments and penalties. Section 50(a)(6) protects homesteads from forced sale to pay debts unless certain credit extensions are met. The Trial Payment Plan (TPP) clarifies that it does not modify the loan unless specific conditions are met, emphasizing that it is a forbearance agreement until a modification under HAMP is granted. Plaintiffs' certification under the TPP indicates they expect to default due to financial hardship, and thus initiating TPP payments is not a 'foreclosure trap.' The appeal's dismissal is based on the pleadings, assuming allegations as true. The TPP stipulates that if a modification is not executed before the Modification Effective Date, the loan remains unchanged, and the lender is not obligated to modify if the borrower fails to meet requirements. The court declined to follow Wigod in a manner permitting income verification for hardship only pre-signature of the TPP.

Plaintiffs contest the bank's claim that they do not appeal the rejection of the Penningtons’ breach-of-contract claim regarding the Trial Payment Plan (TPP). They assert that the bank was obligated to provide the Step Two Permanent Loan Modification once the Penningtons met the conditions of Step One, despite the bank's argument that no such obligation existed. The brief references a split in court opinions on whether the TPP constitutes a binding contract, acknowledging that some courts find it lacks consideration. The plaintiffs argue they have demonstrated sufficient consideration for the TPP to be considered a contract. Relevant case law is cited to illustrate scenarios where agreements were deemed non-binding due to essential execution requirements, underscoring the necessity of formal contract execution for validity. The plaintiffs also face challenges regarding their financial qualifications for Step Two, which parallels issues raised in Smith’s related complaint. Furthermore, while the plaintiffs could potentially claim damages from the TPP if it hindered their ability to make regular payments, they have not provided evidence of any pecuniary damages resulting from the TPP or indicated they would have made payments exceeding those under the TPP. Thus, their claims regarding damages from the representation that the TPP was legal lack sufficient factual basis.