The U.S. Court of Appeals for the First Circuit recently held that:
(1) a borrower sufficiently plead a claim for breach of a HAMP Trial Period Plan, by claiming that the permanent modification agreement was not received before the modification effective date, the first day of the month after the final trial period payment;
(2) the borrower would have failed to state a breach of contract claim based on the mere fact that a modification increased Borrower's monthly payments from those made under the TPP; and
(3) the borrower's allegations of loss of equity in home and damage to credit rating were sufficient to plead injury under Massachusetts Consumer Protection Act.
A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/12-1405P-01A.pdf.
The borrower alleged that, in 2008, Plaintiff-borrower ("Borrower") began falling behind on her mortgage payments and sought a modification from the loan owner ("Trustee"), the current mortgagee. In October, 2009, Borrower allegedly received written confirmation that she was eligible for a HAMP loan modification and a Trial Period Plan ("TPP"). The trial period of the TPP supposedly began on the plan's effective date and ended on the earlier of either the "modification effective date" or the plan's termination. Borrower alleged that the modification effective date, in turn, was defined as the first day of the month after the due date of the last trial period payment – here, the modification effective date was February 1, 2010.
Borrower also alleged she executed the TPP, and claimed she made all the payments required to qualify for a permanent loan modification. Following the last payment, in January, 2010, Borrower allegedly received a notice sent "in error" denying her a modification. The alleged notice supposedly left the Borrower "emotionally traumatized." Five months later, after the modification effective date had passed, Borrower allegedly received the modification which required a higher monthly payment than under the TPP.
Subsequently, Borrower sued Trustee and the loan servicer (collectively, "Defendants") in state court, alleging that their conduct during her attempts to modify her mortgage loan supposedly violated Massachusetts law. The Defendants removed the case to federal court, where Defendants' motion to dismiss was granted in its entirety. On appeal, the Court affirmed in part and vacated in part the lower court's decision.
On the breach of contract claim, Borrower alleged that Defendants breached the TPP by: (i) supposedly requiring higher payments under the permanent loan modification agreement; and (ii) supposedly failing to proffer the modification before the modification effective date.
As to the first ground, requiring higher payments, the First Circuit noted that the TPP "unambiguously distinguishes" between the payments under the TPP and the modification. Furthermore, the Court noted that Trustee was not obligated to give notice of intent to alter Borrower's monthly payments. See NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012). As such, the First Circuit held that Borrower failed to state a claim for breach of contract "based on the mere fact that the…modification agreement increased her monthly payments."
As to the second ground, failure to timely proffer the modification, the Court vacated the lower court's dismissal. When contract terms are ambiguous, the intent of the parties is a question of fact to be determined at trial. See Seaco Ins. v. Barbosa, 761 N.E.2d 946, 951 (Mass. 2002). Although the "time is of the essence" provision does not apply to Trustee's obligations, other provisions of the TPP allegedly contemplated that Trustee would offer the modification prior to the modification effective date. Defendants' arguments that they had no obligation to tender a permanent loan modification merely "inject a degree of ambiguity into the contract." The First Circuit held that, under a "reasonable reading of the TPP," the Borrower should have received her permanent modification agreement "sometime before the modification effective date."
The Court held that a second count for breach of contract was properly dismissed as duplicative.
On Borrower's claim for breach of the covenant of good faith and fair dealing, the Court also affirmed the lower court's dismissal. To find a breach, the core question is whether the alleged conduct was motivated by the "desire to gain an unfair advantage" or otherwise injure the other party's rights to the "fruits of the contract." See T.W. Nickerson, Inc. v. Fleet Nat'l Bank, 924 N.E.2d 696, (Mass. 2010). The First Circuit noted that, although Trustee could have been more diligent in its monitoring of Borrower's account, see Shawmut Bank, N.A. v. Wayman, 606 N.E.2d 925, 928 (Mass. App. Ct. 1993), the Complaint, while supporting a breach of contract, does not describe conduct that deprived Borrower of the contract's fruits. Indeed, the Court noted that the Complaint alleges that Borrower did eventually receive a modification.
Borrower also asserted a claim under the Massachusetts Consumer Protection Act ("Chapter 93A"), which "provides a cause of action for a plaintiff who has been injured by unfair or deceptive acts or practices." See Mass. Gen. Laws ch. 93A; Rule v. Fort Dodge Animal Health, Inc., 607 F.3d 250, 253 (1st Cir. 2010). Under Chapter 93A, injury means "economic injury in the traditional sense." See Rule, 607 F.3d at 255. Without delineating the outer boundaries of what constitutes "injury," under Chapter 93A, the Court held that the Complaint sufficiently alleged that Borrower experienced economic damages as a result of Defendants' conduct. Drawing all inferences in Borrower's favor, the Court held that the Complaint alleges loss in equity of her home and damage to her credit ratings, which show economic damages that have and will adversely affect her. See Stagikas v. Saxon Mortg. Servs., Inc., 795 F. Supp. 2d 129, 137 (D. Mass. 2011). Therefore, the Court vacated dismissal of Borrower's claim for violations of Chapter 93A.
Furthermore, the First Circuit upheld the lower court's dismissal of the negligent and intentional infliction of emotional distress claims, as proper due to the nonexistence of a tort duty and failure to plead intent, respectively.
Finally, the Court vacated the dismissal of Borrower's claim for equitable relief, seeking a permanent injunction against foreclosure, as it was derivative of Borrower's other claims.
Accordingly, the Court affirmed the district court's dismissal of Borrower's second breach of contract claim, claim for breach of implied covenant of good faith and fair dealing, and claims for intentional and negligent infliction of emotional distress; but vacated the dismissal of Borrower's first breach of contract claim, Chapter 93A claim, and derivative claim for equitable relief, and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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