Montanez v. HSBC Mortgage Corp.

Citations: 876 F. Supp. 2d 504; 2012 U.S. Dist. LEXIS 99692; 2012 WL 2899371Docket: Civil Action No. 2:11-cv-4074-JD

Court: District Court, E.D. Pennsylvania; July 17, 2012; Federal District Court

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Defendants HSBC Mortgage Corporation, HSBC Mortgage, and HSBC Mortgage Services, Inc. are accused by borrowers LaQuenta and Sergio Montanez of unlawfully force-placing high-cost insurance policies on their mortgaged property, profiting from kickbacks and purchasing unnecessary coverage. The plaintiffs claim breach of contract, unjust enrichment, and violations of Pennsylvania's Unfair Trade Practices and Consumer Protection Law (UTPCPL). 

The mortgage contract required the borrowers to maintain insurance, allowing HSBC Mortgage to force-place insurance at their expense if they failed to do so. The Montanezes initially obtained a homeowner's policy with a premium of $698 but had to secure a new policy at $1,016.40 after the first was canceled. HSBC Mortgage requested proof of insurance and threatened to force-place coverage unless it was provided within ten days. Despite the plaintiffs submitting proof of their current policy, HSBC Mortgage force-placed insurance with a premium of $1,302. Later, they received another letter indicating the purchase of a different force-placed policy effective February 21, 2008, at an annual premium of $1,271. The court granted HSBC Services' motion to dismiss and partially granted and denied HSBC Mortgage's motion to dismiss.

The policy in question was renewed three times from February 2009 to February 2011. On April 5, 2011, the property was foreclosed and sold to HSBC Mortgage for $8,500. Although HSBC Services was not directly involved with the plaintiffs' mortgage, the plaintiffs allege it received financial benefits linked to "force-placed insurance policies." The Amended Complaint does not detail how HSBC Services benefited, only noting its affiliation with HSBC Mortgage. 

HSBC Mortgage, a residential mortgage lender and servicer, managed the plaintiffs' loan. The plaintiffs accuse both HSBC Mortgage and HSBC Services of profiting from force-placed insurance practices at the borrowers' expense through two primary methods: kickbacks and redundant charges. 

1. **Kickbacks**: The plaintiffs allege that defendants receive kickbacks from insurers for force-placed insurance policies, purchasing them at inflated prices, which the borrowers ultimately pay. The insurers allegedly compensate the lenders through commissions or captive reinsurance arrangements, where a portion of the premium is returned to the lender.

2. **Redundant Charges**: The plaintiffs claim that defendants unnecessarily force-place insurance to maximize kickbacks. This includes requiring borrowers to pay for excessive coverage, backdating policies to cover periods without risk, and insuring properties after coverage lapses despite existing protection under a standard mortgage clause. The plaintiffs assert that HSBC Mortgage engaged in backdating and force-placed insurance when coverage was already provided.

To withstand a motion to dismiss, a plaintiff must present factual allegations that establish a plausible claim for relief, demonstrating the defendant's liability is more than a mere possibility.

A complaint that presents facts merely consistent with a defendant's liability does not meet the threshold of plausibility required for relief, as established by the Supreme Court in Twombly and refined in Iqbal. The two-pronged approach involves first discarding any legal conclusions or naked assertions that do not warrant an assumption of truth, and then evaluating the well-pleaded, nonconclusory factual allegations to determine if a plausible claim exists.

The plaintiffs have filed three claims against HSBC Mortgage: (1) a breach-of-contract claim for alleged violation of the implied covenant of good faith and fair dealing related to force-placed insurance, (2) a claim for unjust enrichment, and (3) a claim under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) for fraudulent or deceptive conduct. Additionally, two claims against HSBC Services include unjust enrichment and a violation of the UTPCPL, based on the same facts as those against HSBC Mortgage.

HSBC Mortgage seeks dismissal of all claims, arguing that the mortgage contract allowed it discretion in force-placing insurance, that unjust enrichment claims cannot co-exist with an express contract, and that the economic loss doctrine bars the UTPCPL claim. HSBC Services contends that the plaintiffs lack standing to sue because it was not involved in the force-placing of policies and that they have failed to state a claim for unjust enrichment or under the UTPCPL.

The memorandum will first address the standing issue under Article III, which requires an actual case or controversy for federal jurisdiction, emphasizing that standing is crucial to a litigant's ability to invoke the court's authority.

The standing requirement under Article III necessitates that the party invoking federal jurisdiction demonstrates three elements: (1) the plaintiff must have suffered an "injury in fact," which is concrete, particularized, and actual or imminent; (2) there must be a causal connection between the injury and the defendant's conduct, meaning the injury should be fairly traceable to the defendant's actions; (3) it must be likely that the injury will be redressed by a favorable decision. In the context of a putative class action, plaintiffs must show personal injury rather than rely on injuries suffered by class members. The plaintiffs have successfully established these elements regarding their claims against HSBC Services by alleging they overpaid for force-placed insurance, demonstrating a causal link to HSBC Services' actions with HSBC Mortgage in concealing kickbacks, and seeking conventional money damages as redress.

For the breach of contract claim against HSBC Mortgage under Pennsylvania law, the plaintiff must prove the existence of a contract, a breach by the defendant, and resultant damages. HSBC Mortgage contends that the plaintiffs did not demonstrate a breach since the mortgage contract allowed it to obtain insurance at its discretion and at the plaintiffs' expense. The plaintiffs counter that HSBC Mortgage breached the implied covenant of good faith and fair dealing by force-placing unnecessary insurance with excessive premiums while receiving kickbacks. This covenant is inherent in all contracts under Pennsylvania law, as articulated in the Restatement (Second) of Contracts.

The Pennsylvania Superior Court recognized the duty of good faith in contracts in cases such as Creeger Brick, Building Supply Inc. v. Mid-State Bank and Baker v. Lafayette College. This duty restricts parties from acting unreasonably against each other's legitimate expectations. Breaches can occur if a party unreasonably exercises discretion allowed by the contract, as noted in Phila. Plaza-Phase II v. Bank of Am. and Burke v. Daughters of the Most Holy Redeemer. Plaintiffs allege that HSBC Mortgage abused its power to force-place insurance, prioritizing profit over its obligation to protect its interests, thus breaching the implied covenant of good faith and fair dealing. Although the mortgage contract did not mandate the acquisition of the cheapest insurance, HSBC was not permitted to obtain kickbacks or charge for insurance covering past periods without damage. This behavior violated plaintiffs' reasonable expectations, supporting their claim, consistent with similar rulings in other jurisdictions. HSBC Mortgage contends that the implied duty of good faith cannot override explicit contract terms, referencing cases like Middletown Carpentry and Lorah v. SunTrust Mortgage, where claims for breach of the implied covenant were dismissed due to adherence to contractual rights. However, the circumstances of Lorah differ significantly from the current case.

In the referenced case, plaintiffs allege that HSBC Mortgage engaged in a deceptive scheme regarding force-placed insurance, which violated the intended purpose of that provision and contradicted their reasonable expectations. The court contrasts this with a prior case where the bank was not implicated in wrongdoing. It emphasizes that a lender typically is not liable for not advancing additional funds or assisting borrowers in obtaining loans from third parties. The court notes that Pennsylvania law does not allow the implied covenant of good faith and fair dealing to alter express contract terms, although it may apply to discretionary acts. Despite HSBC Mortgage's arguments, the court finds the plaintiffs’ claims for breach of the implied covenant valid and denies HSBC Mortgage’s motion to dismiss Count II. 

Regarding Count III, the plaintiffs claim unjust enrichment against both defendants, but the court dismisses these claims against HSBC Mortgage, asserting that the existence of a written mortgage contract precludes unjust enrichment claims. Although plaintiffs argue they should be allowed to plead both breach of contract and unjust enrichment in the alternative, the court maintains that unjust enrichment does not apply when a valid contract governs the relationship, thereby affirming the dismissal of the unjust enrichment claim against HSBC Mortgage.

Plaintiffs may plead both breach-of-contract and unjust-enrichment claims only when there is a dispute regarding the existence of a valid, enforceable contract. Courts have allowed such alternative claims when the validity of the contract is questioned. In this case, since the mortgage contract is undisputedly valid, the plaintiffs cannot assert an unjust-enrichment claim based on its absence, leading to the dismissal of their claim against HSBC Mortgage. 

Regarding HSBC Services, the claim for unjust enrichment fails due to a lack of an applicable contract. The plaintiffs did not demonstrate that they conferred any benefit upon HSBC Services, which neither serviced their mortgage contract nor benefited from HSBC Mortgage’s actions related to insurance policies. The only assertion that HSBC Services received any benefit is a vague claim in the Amended Complaint that lacks detail and cannot be assumed as true. Additionally, claims that HSBC Services assisted in executing and concealing HSBC Mortgage's actions do not establish a benefit to HSBC Services from the plaintiffs. Thus, the court finds no valid unjust enrichment claim against HSBC Services.

As for the claims under the Unfair Trade Practices and Consumer Protection Law (UTPCPL), plaintiffs allege violations against both defendants, citing the law's prohibition of unfair competition and deceptive practices in trade or commerce.

Section 201-2(4)(xxi) defines "unfair methods of competition and unfair or deceptive acts or practices" as any fraudulent or deceptive conduct that creates confusion or misunderstanding. The plaintiffs allege that the defendants profited from force-placed insurance, constituting deceptive conduct under the UTPCPL. Both defendants seek dismissal of Count IV, with HSBC Mortgage claiming the economic loss doctrine bars the plaintiffs' claim. This doctrine prevents tort claims for economic loss without physical injury or damage to property, initially developed in product liability contexts but later expanded to include claims under the UTPCPL. The Third Circuit's decision in Werwinski established that the economic loss doctrine applies to UTPCPL claims only if they do not arise from the underlying contract. The plaintiffs in this case have suffered purely economic losses, alleging that HSBC Mortgage's actions caused them to overpay for insurance, which is intertwined with the mortgage contract. Consequently, the economic loss doctrine applies, leading to the dismissal of Count IV against HSBC Mortgage.

HSBC Services argues that the plaintiffs failed to provide sufficient facts to support a claim of deception under the UTPCPL. To succeed in such a claim, a plaintiff must demonstrate a deceptive act likely to mislead a reasonable consumer under similar circumstances.

The plaintiff must demonstrate justifiable reliance on the product due to the defendants' misrepresentation or deceptive conduct, leading to ascertainable loss. The court indicates that a plaintiff can allege deceptive conduct without adhering to the particularity requirement of Federal Rule of Civil Procedure 9(b). However, in this case, the plaintiffs did not establish that HSBC Services engaged in deceptive conduct as defined by intentional misleading through falsehoods. The court references the case of Christopher, where deception claims were dismissed due to a lack of representations and interactions between the plaintiff and the defendants. The plaintiffs' assertion that HSBC Services concealed a scheme lacks specific allegations of deceptive acts or falsehoods. Consequently, claims against HSBC Services under the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) are dismissed. The court grants in part and denies in part HSBC Mortgage's Motion to Dismiss, dismissing Counts III (unjust enrichment) and IV (UTPCPL) against HSBC Mortgage but allowing Count II (breach of contract) to proceed. All claims against HSBC Services are dismissed, with plaintiffs permitted to file a Second Amended Class Action Complaint if justified by facts. An order detailing these decisions was issued on July 17, 2012.

All rulings in this Order allow plaintiffs to file a Second Amended Class Action Complaint within twenty days, contingent on the facts. A telephone conference to schedule further proceedings will be arranged. The document explains force-placing insurance as a scenario where a lender purchases insurance at a borrower's expense due to the borrower's failure to maintain required property insurance. The plaintiffs had previously made claims under the Real Estate Settlement Procedures Act (RESPA), but these were dismissed by mutual agreement on May 3, 2012.

The Court affirms that it accepts all plausible factual allegations in the plaintiffs' Amended Complaint as true for the purpose of a motion to dismiss. There is ambiguity regarding why HSBC Mortgage force-placed insurance on the plaintiffs' property, given that the plaintiffs claim to have had a policy in effect during a relevant period. The Amended Complaint does not clarify if the plaintiffs made necessary interest payments after 2006, although neither party states that mortgage payments were missed. HSBC Mortgage initiated foreclosure in 2011.

A "standard mortgage clause" in an insurance policy mandates continued coverage to protect the lender’s interest, even if premium payments are unpaid. The plaintiffs initially included a breach-of-contract claim against both defendants but have indicated they do not oppose the dismissal of the claim against HSBC Mortgage Services without prejudice, preserving their right to reassert it as necessary based on future developments. As a result, the Court dismisses Count II of the Amended Complaint against HSBC Services without prejudice, while also addressing the standing question, which is essential for federal court jurisdiction.

In their opposition to HSBC Mortgage’s motion to dismiss, the plaintiffs introduce a new claim regarding breach of an express provision of the mortgage contract, alleging that HSBC Mortgage violated contract terms by force-placing unnecessary insurance. The Court, however, dismisses this argument since it was not included in the Amended Complaint, which only claims a breach based on the implied covenant of good faith and fair dealing.

HSBC Mortgage asserts that the plaintiffs have misinterpreted a clause in the mortgage contract concerning the purchase of insurance. The contract does not impose restrictions on the type or amount of insurance HSBC can mandate. Instead, it obligates plaintiffs to obtain insurance as required by HSBC. HSBC references the case Lass v. Bank of Am., arguing it is unpersuasive because it did not address the issue of backdated policies in relation to the implied covenant of good faith and fair dealing. Additionally, in Lass, the court found the insurance requirement reasonable, while plaintiffs in this case argue HSBC's actions were unreasonable.

HSBC further cites Brisbin v. Superior Valve Co. to underscore that courts cannot modify clear contract terms; however, Brisbin did not involve a breach of the implied covenant. Here, plaintiffs do not seek alterations to the contract but allege that HSBC acted unreasonably in exercising its discretion. Plaintiffs mention Robinson v. Holiday Universal, Inc. and United States v. Kensington Hospital to support their right to plead breach of contract and unjust enrichment alternatively, despite no dispute regarding contract validity. The court finds Robinson's reasoning unconvincing, noting it did not address the core issue of alternative pleading in the absence of a contract dispute. Kensington Hospital is also distinguished, as it involved a contract that only partially covered the parties' relationship.

Plaintiffs did not allege that HSBC Services received direct benefits from them, only from borrowers generally. Defendants enforced unnecessary insurance costs on borrowers, but this does not support the plaintiffs' claims. The court referenced Klein v. General Nutrition Cos., emphasizing that named plaintiffs must demonstrate personal injury rather than relying on injuries to unnamed class members. The case of Werwinski raised significant debate, yet the court is obligated to follow its precedent due to the absence of conflicting authority from the Third Circuit or Pennsylvania Supreme Court. The court noted that while HSBC Services may benefit from affiliate relationships with HSBC Mortgage, a subsidiary is legally distinct and not liable for its parent’s actions. Plaintiffs contended that it was premature to determine the applicability of the economic loss doctrine, but cited cases that pertain to the "gist of the action" doctrine, which differs from the economic loss doctrine focused on personal injury or property damage. The court determined that the economic loss doctrine does not apply due to the lack of contractual privity between plaintiffs and HSBC Services. While some cases allow application of the economic loss doctrine without privity in negligence claims, plaintiffs' claims involve intentional torts, which Werwinski indicated are subject to a different standard, relying on the presence of a contract. The economic loss doctrine prevents recovery for economic losses linked solely to contractual entitlements.

Criticism from both federal and Pennsylvania courts has been directed at the Werwinski decision, which relied on the existence of a contract for its conclusions. The court refuses to extend the Werwinski ruling to scenarios lacking contractual privity, despite some opposing views in other cases. Most courts agree that the Pennsylvania legislature's amendment to section 201-2(4)(xxi) of the Unfair Trade Practices and Consumer Protection Law (UTPCPL), which added the term "deceptive," aimed to broaden the law's application beyond traditional fraud definitions. Plaintiffs argue that actions of each defendant in a scheme should be collectively attributed for liability, referencing civil conspiracy cases; however, they have not claimed civil conspiracy. Without specific facts indicating that HSBC Services committed a deceptive act, the plaintiffs cannot establish a UTPCPL claim against HSBC Services.