The U.S. Court of Appeals for the Seventh Circuit recently held that a borrower stated valid state law claims in connection with a mortgage servicer's alleged refusal to make a HAMP loan modification permanent after the borrower complied with a "trial" modification. A copy of the opinion is attached.
The borrower allegedly entered into a four month "trial" loan modification pursuant to a Trial Period Plan ("TPP") with the mortgage loan servicer ("Servicer"), wherein Servicer agreed to permanently modify the loan if she qualified under the HAMP guidelines. The borrower alleged that she timely made all four payments under the TPP, and that she otherwise qualified for a permanent modification, but that Servicer nevertheless refused to grant her a permanent modification.
The borrower then brought a putative class action asserting seven counts: (1) breach of contract; (2) promissory estoppel; (3) breach of the Servicer Participation Agreement; (4) negligent hiring; (5) fraudulent misrepresentation or concealment; (6) negligent misrepresentation or concealment; and (7) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA").
The district court dismissed the lawsuit in its entirety pursuant to Rule 12(b)(6). The district court reasoned that the borrower's claims were premised on Servicer's obligations under HAMP, which does not confer a private federal right of action on borrowers to enforce its requirements. The borrower then appealed with respect to all claims except the alleged breach of the Service Participation Agreement.
On appeal, the Seventh Circuit noted there were "two sets of issues." The first issue concerned "whether [the borrower] stated viable claims under Illinois common law and ICFA." The second issue concerned whether the state-law claims were "preempted or otherwise barred by federal law." The Seventh Circuit concluded that the borrower stated viable causes of action with respect to her breach of contract, promissory estoppel, fraudulent misrepresentation and ICFA claims, and that HAMP does not preempt otherwise viable state-law claims.
The Seventh Circuit held that the borrower asserted a valid common law claim for breach of contract, by properly pleading the six elements: (1) offer and acceptance, (2) consideration, (3) definite and certain terms, (4) performance by the plaintiff of all required conditions, (5) breach, and (6) damages.
Servicer argued that there was no "offer" because the TPP was not an enforceable offer to permanently modify the mortgage, as it was conditioned on further review of financial information following its completion to make sure the borrower qualified under HAMP. The Court disagreed, and noted that the promise was conditioned on acts by the borrower to comply with the requirements of the TPP and on her financial information remaining true and accurate. The Court held that "[o]nce [Servicer] signed the TPP Agreement and returned it to [the borrower], an objectively reasonable person would construe it as an offer to provide a permanent modification agreement if she fulfilled its conditions."
The Seventh Circuit further held that the TPP contained sufficient consideration because the borrower "incurred cognizable legal detriments," and "agreed to open new escrow accounts, to undergo credit counseling (if asked), and to provide and vouch for the truth of her financial information."
Moreover, the requirement "definite and certain terms" was met because although "the trial terms were just an 'estimate' of the permanent modification terms, the TPP fairly implied that any deviation from them in the permanent offer would also be based on [Servicer's] application of the established HAMP criteria and formulas." Thus, "[t]he terms of the TPP [were] clear and definite enough to support [the borrower's] breach of contract theory."
The Seventh Circuit further also that the borrower asserted a valid promissory estoppel claim, by pleading the elements that (1) defendant made an unambiguous promise to plaintiff; (2) plaintiff relied on such promise; (3) plaintiff's reliance was expected and foreseeable; and (4) plaintiff relied on the promise to her detriment. The Court held that the borrower properly alleged that Servicer made an unambiguous offer to give her a permanent loan modification if she complied with the terms of the TPP, that the borrower reasonably relied on that promise, and that the reliance led to her detriment because she lost the opportunity to use other remedies to save her home, or simply default.
The Seventh Circuit held that the borrower's claims based on negligence were barred by the economic loss doctrine, which "bars recovery in tort for purely economic losses arising out of a failure to perform contractual obligations." While there are a number of exceptions to the economic loss doctrine, each are rooted in the general rule that "[w]here a duty arises outside of the contract, the economic loss doctrine does not prohibit recovery in trot for the negligent breach of that duty." The Court held that "[t]o the extent [Servicer] had a duty to service [the borrower's] home loan responsibly and with competent personnel, that duty emerged solely out of its contractual obligations." Therefore, the Seventh Circuit ruled the claims based on negligence were properly dismissed.
However, the Court held that the borrower stated a claim for fraudulent misrepresentation, noting that there is an exception to the economic loss doctrine "where the plaintiff's damages are proximately caused by a defendant's intentional, false representation, i.e., fraud." The Seventh Circuit further held that the borrower adequately pled the elements of a fraudulent misrepresentation claim, which are (1) a false statement of material fact; (2) known or believed to be false by the party making it; (3) intent to induce the other party to act; (4) action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from that reliance.
The Seventh Circuit noted that "the only element seriously at issue on the pleadings is reasonable reliance." The Court held that "the TPP as a whole supports [the borrower's] reading of it to require [Servicer] to offer her a permanent loan modification once it determined she was qualified and sent her an executed copy, and she satisfied the conditions precedent."
The Court further held that though the claim represented promissory fraud (i.e. a false statement of intent regarding future conduct), it was nevertheless actionable because the plaintiff alleged it was part of a scheme to defraud, where she accused [Servicer] of a deliberately implementing a "system designed to wrongfully deprive its eligible HAMP borrowers of an opportunity to modify their mortgages."
However, the Seventh Circuit held that the borrower failed to state a claim for fraudulent concealment, which requires a plaintiff to plead all the elements of fraudulent misrepresentation, as well as alleging "the defendant intentionally omitted or concealed a material fact that it was under a duty too disclose to the plaintiff." The Court held that Servicer did not have a "fiduciary or confidential relationship" with the borrower, nor did it involve a "situation where plaintiff places trust and confidence in defendant, thereby placing defendant in a position of influence and superiority over plaintiff."
The Seventh Circuit held the borrower adequately pled a ICFA claim, which requires pleading (1) a deceptive or unfair act or practice by the defendant; (2) the defendant's intent that the plaintiff rely on the deceptive or unfair practice; and (3) the unfair or deceptive practice occurred during the course of conduct involving trade or commerce. Moreover, "a plaintiff must demonstrate that the defendant's conduct is the proximate cause of her injury." In asserting her claim, the borrower incorporated her common law fraud claims. Additionally, she alleged that Servicer "dishonestly and ineffectually implemented HAMP."
In holding that all the elements for ICFA were met, the Seventh Circuit disagreed with the district court, which dismissed the claim on the grounds that the borrower did not alleged Servicer acted with intent to deceive and because she did not allege pecuniary damages. The Seventh Circuit stated that "'intent to deceive' is not a required element of a claim under the ICFA, which provides redress 'not only for deceptive business practices, but also for business practices that, while not deceptive, are unfair.'" The Court also held that the borrower alleged actual pecuniary loss because, among other things, she "incurred costs and fees" and "lost other opportunities to save her home."
After ruling that the borrower asserted several valid state law causes of action, the Seventh Circuit further held that federal law did not preempt or displace the borrower's claims arising out of state law. In so holding, the court noted that "[p]reemption can take on three different forms: express preemption, field preemption, and conflict preemption." Servicer conceded that express preemption did not apply, but argued for both field and conflict preemption. Servicer further argued what the Court called a "novel theory" that the borrower's claims were displaced because they attempt an "end-run" on the lack of a private right of action under HAMP. The Seventh Circuit held that none of the theories applied.
A state law is preempted under field preemption "if federal law so thoroughly occupies the legislative field 'as to make reasonable the inference that Congress left no room for the States to supplement it.'" Servicer argued that the Home Owners Loan Act ("HOLA") occupies the relevant field, and that HOLA and the corresponding Office of Thrift Supervision ("OTS") regulations displace state common-law suits that effectively impose any standards for the processing and servicing of mortgage loans, whether the conflict with federal policy or not.
The Seventh Circuit held that such a reading was "directly at odds with the saving clause of 12 C.F.R. § 560.2(c), and inconsistent with [its] decision in [In re Ocwen Loan Servicing, LLC Mortg. Servicing Litigation, 491 F.3d 638 (7th Cir. 2007]." In Ocwen, the court held that "HOLA and the OTS regulations did not preempt suits by 'persons harmed by the wrongful acts of savings and loan associations' seeking 'basic state common-law-type remedies.'" The court further noted that Ocwen "stands for the principle that HOLA preempts generally applicable state laws only when they 'could interfere with federal regulation' – that is, those that actually conflict with the regulatory program." Thus, the Court held that field preemption did not apply.
Implied conflict preemption may apply where either (1) it is impossible for a private party to comply with both state and federal requirements, or (2) where sate law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Servicer did not contend it would be impossible to comply with state-law duties without violating federal law. Instead, it argued the second version of conflict preemption, known as "obstacle" preemption.
Servicer argued that allowing the borrower's state-law claims would undermine the purposes of Congress by substantially interfering with Servicer's ability to service residential mortgage loans," and "frustrate Congressional objectives in enacting [the 2008 Act] . . . to stabilize the economy and provide a program to mitigate 'avoidable' foreclosures."
The Seventh Circuit held that the first argument was inconsistent with Ocwen, because there the court held that "conventional" state law claims for breach of contract, fraud, and deceptive business practices complemented rather than conflicted with HOLA. The Court also found that the second argument lacked merit, holding "[t]here is no indication that Congress meant to foreclose suits against servicers for violating state laws that impose obligations parallel to those established in a federal program."
Finally, the Seventh Circuit held that the "end-run" theory to preemption did not apply. "The end-run theory is built on the novel assumption that where Congress does not create a private right of action for violation of a federal law, no right of action may exist under state law, either." However, the Seventh Circuit noted that the issue was not "whether federal law itself provides private remedies, but whether it displaces remedies otherwise available under state law." The Court held that "[t]he absence of a private right of action from a federal statute provides no reason to dismiss a claim under a state law just because it refers to or incorporates some element of the federal law."
"To find otherwise would required adopting the novel presumption that where Congress provides no remedy under federal law, state law may not afford one in its stead."
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com
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