Wednesday, January 30, 2013

FYI: 8th Cir Affirms Dismissal of Loan Mod Allegations of Fraud and Promissory Estoppel

The U.S. Court of Appeals for the Eighth Circuit recently upheld the dismissal of allegations by borrowers against their mortgage servicer for allegedly misrepresenting that the servicer would, and had the authority to, modify their loan under the federal HAMP program, because the borrowers: (1) failed to state a claim for fraudulent misrepresentation "with particularity," as required; and (2) failed to plead a sufficiently definite promise to support a claim for promissory estoppel. 
In so ruling, the Court reasoned that: (1) there was no valid reason to relax the heightened federal pleading standards for fraud, because the borrowers always had the information in their possession to enable them meet those higher standards; and (2) under Missouri law, inconsistent information provided to the borrowers about a possible loan modification did not support a conclusion that the loan servicer had made a promise as "definite and delineated as an offer under contract law" to support a promissory estoppel claim.  A copy of the opinion is attached.
Borrowers with a home mortgage loan attempted to negotiate a loan modification with their loan servicer ("Servicer") under the federal Home Affordable Modification Program ("HAMP").  After supposedly receiving conflicting information from Servicer, and allegedly believing they would be eligible for a HAMP loan modification, Borrowers stopped making their mortgage payments.  Servicer initiated foreclosure proceedings. 
Seeking injunctive relief, Borrowers filed a lawsuit in Missouri state court, alleging fraudulent misrepresentation and promissory estoppel.   Borrowers alleged that unnamed Servicer representatives assured them that Borrowers would qualify for a modification, and that their mortgage would be modified upon receipt of certain documentation.  The complaint further alleged that Borrowers had been unable to receive "a consistent and candid answer from [Servicer] representatives regarding a loan modification" and that they stopped paying their mortgage supposedly in "reliance on [Servicer's] promise."
Servicer removed the action to federal court invoking diversity jurisdiction, and then moved to dismiss for failure to state a claim.  The lower court granted Servicer's motion.  Borrowers appealed.
The Eighth Circuit affirmed, ruling that the Borrowers failed to plead fraud with sufficient particularity, and that the supposedly inconsistent information from Servicer did not constitute a definite promise on which Borrowers could reasonably rely.
As you may recall, under the Federal Rules of Civil Procedure, a party must state with particularity the circumstances constituting the fraud.  Fed. R. Civ. P. 9(b) ("Rule 9(b)").
Noting that under Missouri law, fraudulent misrepresentation consists of nine different elements, and that under the Federal Rules of Civil Procedure, claims for fraud must state with particularity the circumstances constituting the fraud, the Court observed that the complaint must thus plead such matters as the time, place and contents of false representations, and must also identify the specific person(s) "making the misrepresentation and what was obtained or given up thereby."  See Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8th Cir. 2001)(ruling that under Rule 9(b), fraud requires pleading time, place and contents of false representations, identity of person making misrepresentation, and statement of what was obtained or given up  as a result); Renaissance Leasing, LLC v. Vermeer Mg. Co., 322 S.W.3d 112, 131-32 (Mo. 2010)(listing elements of fraudulent misrepresentation under Missouri law). 
Applying this standard, the Eight Circuit agreed with the lower court that Servicer's "representations as to expectations and predictions for the future [were] insufficient to authorize a recovery for fraudulent misrepresentation."  In so doing, the Court noted Borrowers' assertion that the lower court had "misunderstood" their claim as being based simply on a promise that they "would" qualify for a modification, and that Borrowers further argued that Servicer had knowingly misrepresented that it had the authority to modify their loan.  On this latter point, the Court explained that because Borrowers had failed to argue for a private right of action under HAMP, any supposed representation by Servicer as to its authority to modify their loan under federal law was irrelevant to their common-law state claims. 
Moreover, in observing that Borrowers also failed to identify the specific employees alleged to have made the representations, as well as the times and places at which such representations were made, the Eighth Circuit declined to apply a relaxed pleading standard to the fraudulent misrepresentation claim, as Borrowers requested, reasoning that Borrowers had always been in possession of the information that would have enabled them to "state with particularity" the circumstances of Servicer's alleged misrepresentations, such as the exact dates, times, and nature of the representations.  Compare Doran v. Wells Fargo Bank, CIV. 11-00132 LEK, 2012 WL 1066879 (D. Haw. Mar. 28, 2012)(slip op.)(finding inter alia that heightened pleading standards of Rule 9(b) were met, even though plaintiff failed to name individuals who made the alleged misrepresentations) with Emery v. Am. Gen. Fin., Inc., 134 F.3d 1321, 1323 (7th Cir. 1998)(relaxing the heightened Rule 9(b) pleading standards upon showing that plaintiff was unable, without pre-trial discovery, "to obtain essential information peculiarly in the possession of the defendant.").
As for Borrowers' promissory estoppel claim, the Eighth Circuit focused on the requisite element of a definite promise in order to state such a claim.  See Prenger v. Baumhoer, 939 S.W.2d 23, 27 n.4 (Mo. Ct. App.  1997)("In Missouri, . . . it is required that a promise be as definite and delineated as an offer under contract law").  Thus, noting that Borrowers themselves had alleged, on the one hand, that Servicer represented that their mortgage "would be modified upon receipt of requested documentation," but, on the other, that Borrowers never received "a consistent and candid answer from [Servicer]" about a loan modification, the Court ruled that such inconsistent allegations "negated any inference that this representation was a 'promise' sufficient to meet the first requisite element of promissory estoppel, namely that there be a "definite and delineated" representation.
Accordingly, the Court ruled that Borrowers had failed to state plausible claims for fraudulent misrepresentation, or for promissory estoppel, and thus affirmed the lower court's dismissal. 

Ralph T. Wutscher
McGinnis Wutscher LLP
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Chicago, Illinois 60602
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