Markle v. HSBC Mortgage Corp. (USA)

Citations: 844 F. Supp. 2d 172; 2011 U.S. Dist. LEXIS 147349; 2011 WL 6944911Docket: Civil Action No. 10-40189-FDS

Court: District Court, D. Massachusetts; July 12, 2011; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Breach of contract claims have been brought against HSBC Mortgage Corporation by plaintiffs Becky and Derek Markle after falling behind on mortgage payments, leading to foreclosure proceedings. The Markles argue that HSBC violated obligations under the Home Affordable Modification Program (HAMP), a component of the Emergency Economic Stabilization Act aimed at preventing foreclosure and assisting homeowners. They assert claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, and violations of the Massachusetts Consumer Protection Act. Jurisdiction is based on diversity of citizenship, and HSBC has filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6), which will be granted.

The statutory framework includes TARP, which was established to mitigate the foreclosure crisis and requires the Secretary of the Treasury to support homeowners and encourage mortgage servicers to minimize foreclosures. HAMP, introduced in February 2009, aims to reduce mortgage payments for borrowers in default and incentivizes servicers with payments for completed modifications. Servicers managing loans owned by Fannie Mae must comply with HAMP guidelines as part of their contractual obligations under the Mortgage Selling and Servicing Contract (MSSC). Additionally, servicers of non-Fannie Mae loans may voluntarily participate in HAMP. The program includes specific eligibility criteria for borrowers seeking modifications, such as the loan's origination date and the percentage of income represented by mortgage payments.

Borrowers participating in HAMP must open an escrow account and submit an affidavit of financial hardship. A servicer conducts a Net Present Value (NPV) test to determine if cash flow from a modified loan exceeds that of an unmodified loan. If eligible, borrowers receive a Trial Period Plan (TPP), where they agree to modified payments for three months, with the expectation of a permanent modification if compliant. Servicers cannot foreclose on properties in default until evaluating HAMP eligibility and must make reasonable efforts to contact borrowers facing foreclosure.

In the case of Derek and Becky Markle, they refinanced their mortgage in 2006 with HSBC Mortgage Corporation, secured by their home. After experiencing financial hardship, they defaulted on payments, leading HSBC to schedule a foreclosure sale in September 2010. The Markles allege that HSBC failed to evaluate their HAMP eligibility before scheduling the sale and wrongfully denied their permanent loan modification, not providing the NPV data used for this determination. Their counsel sent a demand letter alleging unfair practices after HSBC denied their modification application. HSBC responded, stating they had offered a modification in April 2010, but later claimed the Markles did not execute or comply with the agreement.

HSBC has denied engaging in unfair or deceptive practices and liability under Massachusetts General Laws Chapter 93A. In September 2010, plaintiffs filed a complaint asserting claims including breach of contract as third-party beneficiaries, breach of the implied covenant of good faith and fair dealing, negligence, and a violation of the Consumer Protection Act. They seek an order for HSBC to assess their mortgage for HAMP eligibility or provide alternatives to foreclosure, and to offer a loan modification per HAMP guidelines, along with a declaration of violation of Chapter 93A, including damages, costs, and attorney's fees. After the complaint was filed, HSBC canceled the foreclosure sale.

Regarding the motion to dismiss under Fed. R. Civ. P. 12(b)(6), the court must accept all well-pleaded facts as true and draw reasonable inferences in favor of the plaintiffs. To survive dismissal, plaintiffs must present a plausible claim, raising the right to relief above mere speculation. The plausibility standard requires more than a mere possibility of unlawful conduct by the defendant.

The breach of contract claim is based on the assertion that plaintiffs can enforce the Master Servicing and Servicing Agreement (MSSC) as third-party beneficiaries. The HAMP guidelines, applicable to HSBC, prohibit foreclosure if a homeowner has not been evaluated for a modification. Plaintiffs allege HSBC breached its contract with Fannie Mae by scheduling foreclosure without assessing their HAMP eligibility. HSBC argues the MSSC does not confer enforceable rights to plaintiffs as third-party beneficiaries. There is a disagreement among federal courts regarding whether federal or state law governs the interpretation of the MSSC, with state law typically applying under the normal presumption due to the diverse citizenship of the parties involved.

Federal common law governs the interpretation of contracts made under federal law involving the United States. Both Massachusetts law and federal common law utilize the Restatement (Second) of Contracts to evaluate the rights of third-party beneficiaries. The primary focus is on the intent of the contracting parties regarding whether a nonparty can act as a third-party beneficiary. Contracts can directly or indirectly benefit nonparties, classified as 'intended beneficiaries' or 'incidental beneficiaries.' Intended beneficiaries, who have standing to enforce contract duties, are those for whom the performance of the contract is intended to fulfill an obligation or provide a benefit, whereas incidental beneficiaries hold no enforceable rights. The contracting parties’ intent is determined through the contract's language; intended beneficiaries need not be explicitly named but must be part of an identifiable class. If ambiguities exist, courts may evaluate the reasonableness of the beneficiary's reliance on the promise's intent. Generally, unless explicitly stated otherwise, public citizens benefiting from government contracts are presumed to be incidental beneficiaries. Any recognition of third-party beneficiary status in government contracts must align with the contract's terms and underlying policy.

The enforcement clause of the Fannie Mae Single Family Mortgage Selling and Servicing Contract (MSSC) explicitly states that rights and remedies are for the benefit of the contracting parties and their successors and assigns, without indicating any intention to allow third parties, including borrowers, to enforce these rights. The Selling Guide further clarifies that borrowers are not intended beneficiaries and do not receive enforceable rights or entitlements through the contract. While plaintiffs argue that the Home Affordable Modification Program (HAMP) aims to assist homeowner-borrowers at risk of default, this does not imply that borrowers have the right to enforce servicers' obligations under the MSSC. The court maintains that the clear language of the MSSC and the Selling Guide precludes plaintiffs from being classified as intended beneficiaries. Allowing such a classification would unreasonably extend enforcement rights to an indefinite number of homeowner-borrowers, contradicting the intent of government contracts as defined by the Restatement. This conclusion is consistent with precedents from other courts in the district and beyond, which have similarly determined that homeowners lack standing to claim breach of contract as third-party beneficiaries under the MSSC and related agreements.

Plaintiffs' breach of contract claim as third-party beneficiaries is distinct from claims based on non-compliance with a Trial Period Plan (TPP). Previous cases allowed breach of contract claims from homeowners under TPPs who met their obligations but were denied permanent modifications. However, the plaintiffs here lack standing as they are not parties to the Master Servicer Settlement Contract (MSSC) and cannot enforce its terms. Consequently, the motion to dismiss the breach of contract claim is granted. 

Regarding the breach of the implied covenant of good faith and fair dealing, this covenant operates only between parties to a contract. Since plaintiffs are neither parties nor intended beneficiaries of the MSSC, there is no implied covenant breached, leading to the dismissal of this claim as well.

In the negligence claim, plaintiffs allege that the defendant's failure to assess their eligibility for a HAMP modification before foreclosure constitutes negligence. To succeed, they must demonstrate that the defendant owed a legal duty, breached it, and caused actual harm. The defendant argues that no such legal duty exists for mortgage servicers under HAMP, seeking dismissal of the claim as an improperly constructed private right of action. Plaintiffs counter that the Helping Families Save Their Homes Act of 2009 establishes the duty not to foreclose without evaluating HAMP eligibility.

Congress identified the mortgage foreclosure crisis as a significant issue affecting homeownership, property values, and local economies, leading to the authorization of mortgage servicers to modify loans in line with HAMP guidelines to mitigate these effects. Section 201 of the Act amends the Truth in Lending Act, establishing that servicers fulfill their duty to investors by modifying mortgages according to HAMP criteria, which includes a safe harbor from liability for these modifications. The Act also indicates that HAMP guidelines represent standard industry practice under federal and state law.

Plaintiffs argue that this provision imposes a legal duty of care on servicers to comply with HAMP guidelines, potentially exposing them to state tort claims. However, this argument is rejected as the statute aims to encourage servicer participation in HAMP without creating new liabilities. No Massachusetts authority establishes a duty of care based on HAMP guidelines, although a regulatory violation could suggest negligence. Courts have clarified that while HAMP violations may indicate an existing duty, they do not create new duties. Therefore, the court declines to recognize a new duty of care under HAMP, consistent with Congressional intent, leading to the dismissal of Count 3.

Additionally, with respect to the Chapter 93A claim, plaintiffs allege that the failure to assess HAMP eligibility constitutes an unfair or deceptive act under the Massachusetts Consumer Protection Act. To succeed on this claim, plaintiffs must demonstrate that the defendant engaged in unfair or deceptive practices in trade or commerce, resulting in financial loss.

In Bosque, the Court established that while there is no private right of action under HAMP, violations of HAMP guidelines can potentially support a claim under chapter 93A in certain situations. Other district courts have similarly ruled that the lack of a private right to enforce HAMP does not preclude chapter 93A claims based on noncompliance with HAMP. However, to succeed under chapter 93A, a plaintiff must demonstrate that the HAMP violation is unfair or deceptive and that recovery aligns with the statute's enforcement goals. Specific allegations, such as misrepresentations regarding HAMP applications or foreclosure statuses, can substantiate claims under chapter 93A.

In this case, plaintiffs alleged that the defendant (1) did not evaluate their HAMP modification eligibility before initiating foreclosure, (2) wrongfully denied them a loan modification, and (3) failed to provide requested NPV data. While these claims may indicate violations of HAMP, they lack additional facts to show unfair or deceptive practices as required for chapter 93A. The complaint does not assert that the defendant misrepresented facts, improperly foreclosed, or acted unethically. The allegations focus solely on failures to evaluate eligibility and grant modifications, which do not constitute sufficient grounds for chapter 93A liability. Furthermore, technical violations of HAMP do not automatically lead to chapter 93A claims, and mere clerical errors cannot sustain such claims. The plaintiffs also have not established that they suffered harm resulting from the alleged violations, as the defendant canceled the foreclosure sale and there is no indication of further sales scheduled. Consequently, the court will dismiss the chapter 93A claim due to insufficient allegations.

The motion to dismiss has been granted. Section 109(c) of the relevant statute requires the Secretary to consent to reasonable loss mitigation requests related to existing investment contracts, considering the net present value to taxpayers. The Making Home Affordable Program was created by the Department of the Treasury in collaboration with Fannie Mae and Freddie Mac. References to the Fannie Mae Selling and Servicing Guides pertain to the versions effective from late 2009 to October 2010, which govern the servicing of mortgages under the contract. All servicers must participate in HAMP for eligible loans within Fannie Mae's portfolio. The complaint mentions a contract and provides a link to it, but the court cannot find the specific contract between Fannie Mae and HSBC on the referenced website. A template version of the Mortgage Selling and Servicing Contract was provided, but HSBC does not dispute its participation in HAMP or existence of the contract. The court accepts as true that HSBC entered into the template version, which incorporates the Selling and Servicing Guides. The Markles claim improved financial capability to make mortgage payments but do not indicate that they requested HSBC to assess their eligibility for HAMP or applied for a loan modification under it. Case law regarding governing law for contracts under federal statutes involving the U.S. is inconsistent, as exemplified by Miree v. DeKalb County, which involved a breach of contract claim with federal jurisdiction based on diversity of citizenship.

Plaintiffs claimed to be intended beneficiaries of contracts between the Federal Aviation Administration and DeKalb County, Georgia, which prohibited certain land uses near airports. They argued that a nearby county-owned garbage dump violated these contracts, attracting birds that caused an aircraft crash. The Fifth Circuit, sitting en banc, ruled that the plaintiffs lacked standing as third-party beneficiaries, determining that Georgia law governed the contracts due to the absence of federal interest or implications on U.S. fiscal responsibilities. The court recognized that federal common law might apply in diversity cases where a uniform national rule is essential for federal interests. 

In contrast, the Seventh Circuit in Price v. Pierce applied federal common law to a similar third-party beneficiary claim involving contracts between the Illinois Housing Development Authority and low-income housing developers, emphasizing the national importance of housing issues. Following Price, several appellate courts have similarly applied federal common law to nonparty breach of contract claims with federal interests involved. 

The Supreme Court case Astra USA, Inc. v. Santa Clara County reaffirmed these principles, ruling that the county could not enforce Pharmaceutical Pricing Agreements (PPAs) as a third-party beneficiary since the agreements were nonnegotiable and tied to a statute that did not provide a private right of action. The Court maintained that allowing such enforcement would contradict Congress's intent and disrupt the statutory enforcement framework.

EESA and the statutes authorizing HAMP do not define terms for Trial Period Plans (TPPs) or related agreements, allowing the Secretary of Treasury discretion in creating loss-mitigation and foreclosure-prevention initiatives. A lawsuit enforcing a TPP—between a homeowner-borrower and a mortgage servicer—differs significantly from one enforcing EESA provisions. Although Treasury and Fannie Mae have established a standardized TPP, the specific terms vary based on individual mortgage obligations. The complaint identifies the relevant contract as pertaining to HAMP eligibility evaluation and the denial of a HAMP application, not the mortgage or promissory note, which are not cited in the complaint. The Court notes that these documents likely do not obligate the servicer to modify the loan or incorporate HAMP guidelines, as they were executed prior to the enactment of EESA. Furthermore, neither EESA nor HAMP provides a private right of action, as established in case law. The Court finds that plaintiffs have not adequately claimed that HAMP violations were unfair or deceptive, so it does not analyze the compatibility of recovery under state law (chapter 93A) with EESA and HAMP objectives. However, other decisions confirm that recovering damages under chapter 93A does not conflict with the goals of EESA and HAMP, which aim to stabilize the housing market and assist homeowners in avoiding foreclosure through loan modifications.