Court: District Court, N.D. California; May 9, 2012; Federal District Court
The order addresses Wells Fargo Bank, N.A.'s motion to dismiss a class action complaint filed by plaintiffs Vicki and Richard Sutcliffe, who allege that Wells Fargo provides misleading trial loan modification programs without the intention of offering permanent modifications. The Court considered arguments for dismissal under Federal Rules of Civil Procedure 12(b)(6), 12(b)(1), and 9(b) during a hearing on April 27, 2012. The Court's decision grants the motion in part and denies it in part.
The Sutcliffes, residents of Kansas City, Missouri, took out a loan of $140,000 in July 2006. Due to financial difficulties stemming from a reduction in Richard's income and increased medical expenses for Vicki, they sought a loan modification from Wells Fargo. In December 2009, Wells Fargo provided them with a 'Home Affordable Modification Program Trial Period' (TPP) document outlining the conditions for qualifying for a permanent loan modification.
The TPP indicated that the loan modification would only take effect once both parties signed the agreement, and it required the Sutcliffes to certify their inability to afford mortgage payments along with other financial disclosures. Key representations included confirming their principal residence status, the lack of property condemnation, and providing income documentation.
Under penalty of perjury, the individual affirms that all documents and information provided to the Lender regarding eligibility for the program are accurate. If required, they agree to obtain credit counseling. In the event of a Chapter 7 bankruptcy discharge after signing the Loan Documents, the Lender will not hold them personally liable for the debt under the Plan. The Lender's obligation to modify the Loan Documents hinges on receiving acceptable title endorsements and subordination agreements to maintain the mortgage's first lien position.
The Trial Payment Plan (TPP) outlines a schedule requiring the Sutcliffes to make three payments of $787.71 each on January 1, February 1, and March 1, 2010. If the Lender does not provide a fully executed Plan and Modification Agreement, if the Sutcliffes fail to make required payments, or if their representations cease to be accurate, the Loan Documents will remain unchanged, and any payments made under this Plan will be applied to existing obligations without refunds.
The TPP clarifies that it does not constitute a modification of the Loan Documents, which will only be modified if all conditions are met, a fully executed Modification Agreement is received, and the Modification Effective Date has passed.
On December 12, 2009, the Sutcliffes signed and returned the TPP and a Hardship Affidavit, making all three trial payments but not receiving modification paperwork afterward. They continued trial payments until July 2010. A series of letters from Wells Fargo indicated loan defaults and a failure to adjust mortgage terms under the Home Affordable Modification Program, although alternative solutions were suggested. On July 28, 2010, Wells Fargo offered a Special Forbearance Plan, requiring three payments of $1,179.31 from August to October 2010, which the Sutcliffes accepted and executed.
After making three payments under the Initial Forbearance Plan, the Sutcliffes received default notices from Wells Fargo on October 31 and November 28, 2010. They made additional partial payments of $693.14 on November 24 and $880.00 on December 28, 2010; however, a subsequent $800.00 payment was returned, and they were advised not to make further payments. From January to March 2011, no payments were made. On January 4, 2011, they were notified by a law firm that foreclosure proceedings were initiated, and a Notice of Trustee’s Sale indicated an auction date of March 24, 2011.
On January 31, 2011, Vicki Sutcliffe requested a reconsideration of loan modification. A response from Wells Fargo’s law firm on March 8 required a reinstatement payment of $9,930.93 for missed payments. On March 31, Wells Fargo offered a new 'Special Forbearance Agreement' for seven installments, but the letter lacked specific terms. An April 15 letter (the 'Second Forbearance Offer') clarified the payment schedule, requiring $867.23 monthly from April through July 2011. The Sutcliffes signed this offer on May 3, 2011, having begun payments on April 22, 2011.
Despite continuing their payments on time, the Sutcliffes received a second Notice of Trustee’s Sale for a May 2, 2011 auction. On July 19, 2011, they reiterated their financial hardship, noting this was their fourth request for assistance, having submitted similar documentation previously. In July, their case was assigned to a Wells Fargo case manager, who instructed them to maintain their payments. By December 13, 2011, the case manager continued to request updated documentation, despite the Sutcliffes having fulfilled all conditions of the agreements and being informed of their loan's default status and the threat of imminent foreclosure.
Plaintiffs assert class allegations in their complaint on behalf of all homeowners nationwide who received a trial loan modification proposal similar to the Trial Payment Plan (TPP) from any Defendant, made the required payments, provided accurate information, and were either denied a permanent loan modification, offered a modification similar to their original loan, or entered into and complied with Forbearance Plans from Wells Fargo. They bring forward three main claims:
1. **Claim One**: Violation of Unfair Competition Law (UCL), alleging that Defendants' actions are 'unlawful' under the Fair Debt Collection Practices Act (FDCPA), 'fraudulent' due to misrepresentations about trial modifications preventing foreclosure, and 'unfair' for violating California's legislative policy requiring mortgagee contact before default notices. Plaintiffs argue they suffered financial injury from being misled into making payments that should not have been collected.
2. **Claim Two**: Breach of Contract/Implied Covenant of Good Faith and Fair Dealing, alleging that the TPP constituted a binding contract with Wells Fargo, which was breached by failing to provide a loan modification despite the Sutcliffes' full performance. It also claims that Wells Fargo's assertion of discretion over modifications violates the implied covenant of good faith.
3. **Claim Three**: Rescission and Restitution under California Civil Code, seeking to rescind the TPPs and Forbearance Plans and recover payments made under those agreements.
Additionally, Wells Fargo stated that the Sutcliffes have since accepted a permanent loan modification. In its motion, Wells Fargo argues that the claims are not ripe for decision, as the determination of a permanent modification had not been made at the time the action was filed.
Wells Fargo argues that Plaintiffs, being non-residents of California and with no alleged conduct occurring in the state, are barred from asserting California statutory claims. Furthermore, even if California law were applicable, Wells Fargo contends that the Plaintiffs fail to adequately state a claim under the Unfair Competition Law (UCL). The claims cited by Plaintiffs include alleged violations of the Fair Debt Collection Practices Act (FDCPA), fraudulent promises of a permanent loan modification, and unfair collection of reduced payments, all of which Wells Fargo disputes.
Wells Fargo specifically contends that it is not subject to the FDCPA as it is the original creditor, not a debt collector. Regarding the claim of fraudulent representation for a permanent modification, Wells Fargo asserts that this claim is not ripe, contradicts the terms of relevant agreements, and fails to meet the heightened pleading standard under Rule 9(b) since the Plaintiffs have not identified specific misleading statements. For the reduced payment collection claim, Wells Fargo argues that California law does not prohibit collecting reduced payments before foreclosure.
Additionally, Wells Fargo challenges the breach of contract claim, asserting that Plaintiffs have not provided sufficient facts to establish the existence of a contract for a permanent modification, as the relevant agreements were conditional and lacked mutual assent. Citing case law, Wells Fargo maintains that a trial plan similar to the one in question does not create an enforceable contract for a permanent modification. Lastly, Wells Fargo argues that Plaintiffs have not demonstrated consideration, as the submission of financial documents and reduced payments do not constitute adequate consideration for a contract under the Home Affordable Modification Program (HAMP).
Reduced mortgage payments on a preexisting loan do not constitute valid consideration, according to Wells Fargo. Even if a loan modification contract exists, Wells Fargo claims that Plaintiffs' breach of contract claim fails due to a lack of alleged cognizable damages. Wells Fargo argues that Plaintiffs’ assertion of damages—based on California's non-recourse status—does not apply since Plaintiffs reside in Missouri, which allows deficiency judgments. Furthermore, even under California law, Wells Fargo contends that the anti-deficiency statute does not provide relief before foreclosure, referencing prior case law.
Wells Fargo also asserts that Plaintiffs fail to state claims for rescission and restitution. For rescission, it argues that the claim lacks specificity, particularly regarding alleged fraud and failure of consideration, as Plaintiffs did not specify what consideration was promised. The restitution claim is dismissed by Wells Fargo on the grounds that Plaintiffs have not shown unjust enrichment, given that Wells Fargo was entitled to the mortgage payments. Additionally, any claims related to Wells Fargo’s failure to provide a loan modification under HAMP are described as improper attempts to leverage state law for remedies unavailable under HAMP.
Wells Fargo further contends that Plaintiffs' claims are preempted by the National Bank Act, which restricts state law actions that interfere with a national bank's real estate lending operations. In response, Plaintiffs challenge Wells Fargo's claim that the action is not ripe, arguing that the case became ripe when Wells Fargo informed them it would not provide a loan modification despite their compliance with requirements. Plaintiffs emphasize the imminent threat of losing their home, rendering their claims urgent rather than hypothetical. They assert that Wells Fargo's potential future offer of a loan modification does not affect the ripeness of their case, noting that waiting for an impossible remedy before suing is not necessary. Plaintiffs also reject Wells Fargo's preemption argument, asserting their claims only incidentally affect lending operations and are based on general legal duties applicable to all businesses, not specifically tied to Wells Fargo's lending practices.
Plaintiffs contend that Wells Fargo mischaracterizes their claims regarding loan modifications under HAMP. They clarify that they are not demanding a modification but assert that Wells Fargo cannot misrepresent the status of their qualification for a modification after a minor confirmation process. Plaintiffs distinguish their situation from cases cited by Wells Fargo, such as Parmer v. Wachovia, and reject Wells Fargo's argument of state law preemption, citing Wigod v. Wells Fargo Bank, N.A. on this issue.
Regarding choice of law, Plaintiffs argue that their claims are valid under California law, based on allegations that relevant conduct occurred in California, including Wells Fargo's principal place of business and communications sent to them from California. They assert claims for violations of the UCL, breach of contract, and restitution/rescission. Specifically, for the UCL claim, they allege fraudulent and unfair conduct by Wells Fargo in misrepresenting their loan modification status while failing to provide it. Plaintiffs argue their pleadings meet Rule 9(b) requirements and clarify that they are not asserting a UCL claim based on illegal conduct under the FDCPA, but may seek to amend their claim to include such allegations under California's Rosenthal Act if necessary.
On the breach of contract claim, Plaintiffs refute Wells Fargo's assertion that the Trial Payment Plan (TPP) was not a contract for a permanent modification, referencing the Seventh Circuit's findings in Wigod. They argue there was mutual assent, the TPP was definite, and consideration was present, countering a contrary California case, Nungaray v. Litton Loan Servicing, LP, as poorly reasoned. Plaintiffs emphasize the damages they incurred due to the prolonged trial period, noting significant payments made while awaiting a modification decision.
Plaintiffs assert that their breach of contract claim is supported by sufficient damages as established in Wigod, including incurred costs, lost opportunities, negative credit impact, absence of a Modification Agreement, and loss of incentive payments. For their Rescission/Restitution claim, Plaintiffs argue that California Civil Code Section 1691 permits unilateral rescission through notice and restoration of value, which they intend to pursue. Alternatively, they claim rescission as a remedy for fraud, linked to their UCL claim.
In response, Wells Fargo contends that Plaintiffs have abandoned any claims related to two Special Forbearance Agreements, warranting dismissal of those claims. It argues that claims based on the Trial Payment Plan (TPP) are moot due to a permanent modification being granted. Wells Fargo disputes the existence of damages related to the breach of contract claim, asserting that any damages from reduced TPP payments are offset by the value of residing in the home without charge.
Wells Fargo challenges the applicability of California law, deeming Plaintiffs' allegations too vague, especially considering their Missouri residency. It dismisses the UCL claim as lacking specificity regarding fraudulent conduct and references a prior court decision (Reyes) to counter Plaintiffs’ argument about unfair payment collection. On contract existence, Wells Fargo insists that the court should follow the precedent set in Nungaray, which found no contractual agreement due to the absence of a signed TPP, distinguishing it from Wigod.
Regarding the rescission claim, Wells Fargo argues it is implausible since a permanent modification was offered and accepted. It emphasizes that claims of fraud must meet specificity requirements, which Plaintiffs have allegedly failed to do. Additionally, Wells Fargo claims that state law claims are an improper evasion of HAMP regulations and argues they are central to its lending practices, thus preempted under the National Bank Act. Lastly, Wells Fargo states that Plaintiffs should not be allowed to amend their claims without filing a proper motion for the court’s consideration.
Under Rule 12(b)(1) of the Federal Rules of Civil Procedure, a party may move to dismiss an action for lack of subject matter jurisdiction, which requires the plaintiff to demonstrate standing and ripeness. Standing determines the appropriateness of the plaintiff as the party to bring the case, while ripeness addresses the readiness of the matter for adjudication, preventing courts from reviewing speculative injuries. Mootness is also relevant under Rule 12(b)(1) and can be raised when circumstances change after the filing of the complaint. Dismissal motions can be either facial, presuming the truth of the allegations, or factual, allowing external evidence to assess jurisdiction.
Rule 12(b)(6) allows for dismissal for failure to state a claim upon which relief can be granted, focusing on the legal sufficiency of the complaint. The plaintiff's burden at the pleading stage is minimal, requiring only a short and plain statement of the claim under Rule 8(a). The court must accept all material facts as true and view them in the light most favorable to the nonmoving party. Dismissal may occur if the complaint lacks a viable legal theory or sufficient supporting facts. A complaint must contain allegations that establish the elements necessary for recovery under a legal theory and must be plausible without requiring detailed factual allegations.
Pleadings must include factual allegations that suggest a right to relief, aligning with the requirement of Federal Rule of Civil Procedure (Fed. R. Civ. P.) 8(a)(2). For claims of fraud or mistake, Rule 9(b) mandates particularity in the allegations, specifying the "who, what, when, where, and how" of the fraud. Failure to meet these heightened pleading standards can lead to dismissal of fraud claims. The specificity of the allegations is critical to provide defendants adequate notice of the misconduct they must defend against.
Regarding subject matter jurisdiction under Rule 12(b)(1), Wells Fargo argues for dismissal of Plaintiffs’ claims on the basis of ripeness and mootness, asserting that the claims were unripe at initiation and moot due to a later permanent modification offer. The Court disagrees, finding the claims ripe at filing because they pertained to conduct that had already occurred, specifically Wells Fargo's failure to offer a permanent modification under a Trial Payment Plan (TPP). The Court emphasizes that withholding judicial consideration would impose significant hardship on the Plaintiffs, who faced foreclosure proceedings. The Court distinguishes its ruling from the precedent cited by Wells Fargo, determining that the circumstances in the current case warranted judicial intervention.
Plaintiffs claimed that Wal-Mart underpaid contributions to profit-sharing and 401(k) plans due to gender discrimination, resulting in lower wages. The court deemed these claims unripe, as no prior ruling had established Wal-Mart's gender discrimination. Although plaintiffs intended to file a discrimination claim, the court maintained that the underlying issue must be resolved first. Unlike the claims in Alexander-Jones, the plaintiffs' situation reflected a legitimate threat of foreclosure, not conjectural claims. The court rejected Wells Fargo's argument that the claims were moot due to a permanent modification offered to the plaintiffs, emphasizing that a claim is moot only if it ceases to be a live controversy. While wrongful foreclosure claims may become moot if a foreclosure is canceled, claims related to wrongful conduct beyond the foreclosure can persist. The plaintiffs' allegations against Wells Fargo were based on perceived unfair and deceptive practices, rather than actions taken during foreclosure. Finally, Wells Fargo's assertion that the plaintiffs could not pursue claims under California law due to vague allegations was found to be incorrect, as established standards from a relevant case were agreed upon by both parties.
The court determined that out-of-state parties can only invoke California's state statutory remedies if they suffer harm from wrongful conduct occurring within California. This ruling led to the reversal of a trial court's decision to certify a nationwide class under the Unfair Competition Law (UCL) for members residing outside California, as their injuries arose from conduct outside the state. The court emphasized that although the defendant was incorporated and operated in California, this did not justify applying California law to nonresident plaintiffs.
In the current case, plaintiffs allege injuries resulting from conduct in California, supported by the defendant's incorporation in California, correspondence sent from a California address, and instructions to send payments to a California address. These allegations distinguish this case from prior rulings and provide a basis for applying California law at the pleading stage.
Wells Fargo's argument that relevant conduct did not occur in California is a factual matter for summary judgment, not grounds for dismissal. The plaintiffs' UCL claim is based on conduct deemed "unfair" and "fraudulent." Wells Fargo asserts that the claim fails due to insufficient fraud allegations and a lack of evidence showing unfair practices. However, the court finds that the plaintiffs have adequately identified fraudulent representations that could deceive the public, thus meeting the heightened pleading standard. Additionally, the court recognizes a valid claim under the unfair prong of the UCL.
The determination of whether a business practice is unfair requires assessing its impact on the victim in comparison to the motives and justifications of the alleged wrongdoer. An unfair business practice is defined as one that contravenes established public policy or is deemed immoral, unethical, oppressive, unscrupulous, or significantly harmful to consumers. Examples include including unlawful terms in contracts. In Reyes, it was found that Wells Fargo's communication could mislead plaintiffs into believing they were offered a compliant trial plan under HAMP, thus satisfying the unfair conduct criteria at the pleading stage. The plaintiffs’ allegations against Wells Fargo sufficiently supported a claim under the Unfair Competition Law (UCL).
Regarding breach of contract, the essential elements include the existence of a contract, plaintiff's performance or excuse for nonperformance, breach by the defendant, and resulting damages. Wells Fargo argued for dismissal of the plaintiffs' breach of contract claim on the grounds that no enforceable contract for permanent modification existed under the Trial Payment Plan (TPP) and that no valid damages were claimed. The enforceability of the TPP has been a contentious issue across various jurisdictions, with many courts affirming its enforceability at least for the purpose of surviving a motion to dismiss. Notable cases have supported the position that allegations regarding the TPP can adequately establish an enforceable contract at the pleading stage.
Plaintiffs successfully stated a breach of contract claim under Rule 12(b)(6) related to an oral offer to modify a loan contingent on their completion of a trial payment plan (TPP). However, some courts have dismissed similar claims, arguing that the TPP does not constitute a contract due to provisions indicating that a loan modification requires a fully executed modification agreement. Notable cases such as *Lucia v. Wells Fargo Bank* and others upheld this view, dismissing claims because plaintiffs did not allege receipt of such agreements, which was deemed necessary under the TPP’s terms.
A California appellate court, in *Nungaray v. Litton Loan Servicing*, affirmed this stance, emphasizing the absence of a contract. Conversely, some rulings, like in *Gaudin v. Saxon Mortg. Services*, challenged this interpretation, suggesting that the requirement for a modification agreement merely explained the legal effect of the documents rather than serving as a condition precedent for the lender's obligation to modify the loan. The court in *Gaudin* ultimately denied a motion to dismiss a breach of contract claim, asserting that the lender's obligation to provide a modification did not hinge on the plaintiffs' receipt of a modification agreement.
The ambiguous language in the loan modification agreement implies that a lender is not obligated to provide a modification agreement solely based on the lack of an executed agreement, despite all other conditions being met. This interpretation conflicts with the overall intent of the document and would render other promises meaningless. A reasonable inference exists that the language serves to clarify that loan agreements remain unchanged until formal modifications are executed. The ambiguity does not grant the lender unrestricted discretion regarding the issuance of a modification agreement upon fulfilling all conditions of the Trial Payment Plan (TPP).
The Seventh Circuit's ruling in Wigod aligns with this interpretation, indicating that a lender's obligation to issue a permanent modification is contingent upon its execution of a modification agreement after the borrower meets the TPP requirements. The court criticized the lender's view, which suggested it could avoid sending a modification agreement for any reason, potentially undermining the borrower's rights under the TPP. The court emphasized that the more logical interpretation recognizes that a permanent modification only occurs once all conditions are satisfied and a modification agreement is executed, thereby ensuring that all provisions of the TPP retain their effect. The reasoning from Wigod and Gaudin is deemed persuasive at this preliminary stage.
Plaintiffs have adequately demonstrated mutual assent under the Trial Period Plan (TPP), with the Court rejecting Wells Fargo's argument based on Nungaray v. Litton Loan Servicing, which found no enforceable contract due to the borrowers' non-compliance with TPP terms. Unlike Nungaray, where borrowers failed to provide required financial information and thus had their trial plan canceled, the current case is distinguishable. Under California law, contracts must be sufficiently definite for the court to ascertain parties' obligations. A contract is void if too uncertain, as established in Ersa Grae Corp. v. Fluor Corp. and Ladas v. California State Auto. Ass’n. Particularly in loan agreements, essential details like lender and borrower identities, loan amount, and repayment terms must be specified to meet definiteness requirements. However, the California Supreme Court favors interpreting contracts in line with the parties' reasonable intentions, as noted in Patel v. Liebermensch.
Wells Fargo argues that the TPP lacks enforceable repayment terms, rendering it indefinite. The Court counters this claim, referencing Wigod, which concluded that although the TPP did not detail repayment specifics, Wells Fargo was obligated to provide a modification aligned with HAMP guidelines, indicating that the agreement was not vague. Additional cases, including In re Ossman and Turbeville, support this view, affirming that TPP terms are sufficiently definite when tied to HAMP compliance. At the pleading stage, the Court finds the TPP's terms sufficiently definite to establish a contract. Lastly, California law defines "good consideration" as any benefit to the promisor or a suffered prejudice, with the caveat that fulfilling pre-existing legal obligations cannot constitute consideration.
Under California law, consideration for a contract exists even if the performance mainly involves what was already required, as long as some additional performance is negotiated and provided. The court in Ansanelli v. JP Morgan Chase Bank found that additional time spent on disclosures not required under the original loan constituted adequate consideration. Similarly, the Seventh Circuit in Wigod determined that the borrower's agreement to open new escrow accounts and undergo credit counseling constituted consideration for a trial payment plan (TPP). The plaintiffs in this case sufficiently alleged that their agreement to submit additional financial documents and participate in credit counseling provided the necessary consideration for their claims.
Regarding the breach of contract claim, Wells Fargo argued that the only alleged damages were reduced payments under the TPP, which did not constitute damages due to a preexisting duty to pay the loan. The court acknowledged this but allowed the plaintiffs to amend their complaint to include claims of other damages, such as adverse credit impacts and increased principal amounts owed, resulting from Wells Fargo's failure to provide a permanent modification after the TPP.
Wells Fargo also contended that the plaintiffs' claims improperly sought to enforce HAMP guidelines under state law, which does not provide a private right of action. However, the court disagreed, noting that several courts have rejected this argument, allowing state-law breach of contract claims not to be preempted by HAMP.
Plaintiffs assert that the TPP Agreements with Litton are binding contracts, claiming Litton breached these contracts. Their claims are based solely on state contract law, not HAMP or federal law, as established in Bosque v. Wells Fargo Bank. The case does not address whether HAMP provides a private right of action. Plaintiffs argue that the TPPs represent contractual obligations which Litton failed to uphold. The court rebuffs the defendants' argument that the absence of a private right of action under HAMP negates the plaintiffs' common law claims, citing multiple precedents that support the viability of such claims. In contrast to Astra USA, where contracts were tied to a federal program, the TPPs lacked statutory incorporation, allowing for breach claims based on compliance with the TPP terms. The court finds the reasoning in cases cited by Wells Fargo unpersuasive, as they either ruled the TPPs were not contracts or involved different legal issues. The court also dismisses Wells Fargo's claim that the plaintiffs' state law claims are preempted by the National Bank Act, asserting that these claims do not significantly interfere with the bank's mortgage servicing.
Under the National Banking Act, national banks are granted specific powers necessary for banking operations, including mortgage lending (12 U.S.C. 24, 371(a)). State laws that hinder a national bank's federally authorized lending powers are inapplicable, allowing banks to operate without state law restrictions on real estate loans (12 C.F.R. 34.4(a)). However, federally chartered banks must still comply with state laws of general application that do not conflict with the National Banking Act's provisions. The court determined that the claims in this case are not preempted by the NBA since they are based on general state laws.
The court partially granted and denied the defendant's motion: it granted the motion concerning the plaintiffs' UCL claim related to FDCPA violations, the breach of contract claim due to lack of cognizable damages, and the rescission claim, which the plaintiffs deemed moot. The plaintiffs are allowed to amend their breach of contract claim to include potential damages, with a 30-day deadline to file the amended complaint. The court also acknowledged the parties' agreement to the jurisdiction of a U.S. Magistrate Judge and granted Wells Fargo's request for judicial notice regarding the loan modification agreement. The plaintiffs claimed damages due to delays affecting their credit rating and an increase in their loan principal, but did not contest Wells Fargo's classification as a non-debt collector under the FDCPA. The breach of contract claim specifically pertains to the Trial Payment Plan (TPP), which has been recognized in other cases as having contractual implications. The court referenced ongoing litigation regarding the TPP as relevant to the plaintiffs' claims.
