The U.S. Court of Appeals for the Eighth Circuit recently upheld the dismissal of a complaint against MERS and a loan servicer based on the servicer's supposed fraudulent and negligent misrepresentations, where the complaint failed to establish a causal link between the alleged misrepresentations and borrowers' claimed damages from the subsequent foreclosure.
The Court further ruled that the complaint failed to state claims based on supposed violations of: (1) the duty of good faith and fair dealing, under a Minnesota statute authorizing mortgagees to purchase foreclosed properties at foreclosure sales; and (2) an implied duty of good faith and fair dealing under the mortgage agreement.
A copy of the opinion is attached.
Plaintiffs-borrowers ("Borrowers") were having trouble making the payments on their home mortgage loan, and submitted an application to the loan servicer ("Servicer") for a loan modification under the Home Affordable Mortgage Program ("HAMP"). Servicer subsequently informed Borrowers that they "potentially qualified for a modification," and would be placed on a trial loan modification plan.
After making the trial payments for three months, Borrowers were allegedly informed by an employee of Servicer to discontinue making payments pursuant to the trial plan, as the Borrowers had already demonstrated their ability to make payments pursuant to the modification. Borrowers were also allegedly told that they could shortly expect a notice that the loan modification had been approved. Supposedly in reliance on these statements, Borrowers stopped making their trial payments.
Several months later, Servicer sent Borrowers a letter denying their loan modification application. The letter also allegedly informed Borrowers that a foreclosure action would ensue if they failed to bring their loan current immediately. Borrowers later received another letter from Servicer allegedly informing them that, although they may not be eligible for a HAMP modification, the loan had been placed under review, that Borrowers should continue making their monthly trial payments in order to "continue to be eligible for HAMP consideration," and that Borrowers would be notified at the end of the review period as to the status of the modification. Before the end of the review period, however, Borrowers were served with notice of a foreclosure sale and informed that they needed to pay almost $32,000 to bring the loan up to date. The property was eventually sold at the foreclosure sale to the owner of the loan.
Several months later, Servicer sent Borrowers a letter denying their loan modification application. The letter also allegedly informed Borrowers that a foreclosure action would ensue if they failed to bring their loan current immediately. Borrowers later received another letter from Servicer allegedly informing them that, although they may not be eligible for a HAMP modification, the loan had been placed under review, that Borrowers should continue making their monthly trial payments in order to "continue to be eligible for HAMP consideration," and that Borrowers would be notified at the end of the review period as to the status of the modification. Before the end of the review period, however, Borrowers were served with notice of a foreclosure sale and informed that they needed to pay almost $32,000 to bring the loan up to date. The property was eventually sold at the foreclosure sale to the owner of the loan.
A month after the foreclosure sale, Borrowers filed suit in Minnesota state court against Servicer and Mortgage Electronic Registration Systems, Inc. ("MERS") (collectively, "Defendants"), seeking a "detailed accounting" of the steps taken in response to Borrowers' request for a loan modification. The complaint also sought damages for: violation of the duty of good faith and fair dealing required by Minnesota's "foreclosure-by-advertisement" statute, Minn. Stat. §580.11; breach of the implied duty of good faith and fair dealing arising from the original mortgage agreement; and, fraudulent and negligent misrepresentation. Borrowers further sought a preliminary injunction staying the foreclosure proceedings.
Removing the case to federal court, Defendants moved to dismiss or alternatively for summary judgment. The district court granted Defendants' motion to dismiss, ruling that there was no private right of action, because Borrowers' claims were based entirely on a request for a HAMP loan modification. The district court also ruled that Borrowers failed to plead their claims with sufficient particularity. The Eighth Circuit affirmed.
Removing the case to federal court, Defendants moved to dismiss or alternatively for summary judgment. The district court granted Defendants' motion to dismiss, ruling that there was no private right of action, because Borrowers' claims were based entirely on a request for a HAMP loan modification. The district court also ruled that Borrowers failed to plead their claims with sufficient particularity. The Eighth Circuit affirmed.
Addressing whether the complaint contained sufficient facts to state plausible claims, the Court of Appeals ruled, first, that Borrowers' request for an accounting was unwarranted, as they had an available remedy through normal discovery requests, but had failed to explain why discovery was not an adequate remedy in this case.
Next, rejecting Borrowers' assertion that Minn. Stat. §580.11 imposed a duty on Defendants to act fairly and in good faith "while foreclosing," the Eighth Circuit ruled that this provision merely authorized mortgagees to purchase foreclosed premises at the foreclosure sale, as long as the mortgagee's actions relating specifically to the sale are fair and done in good faith. See Minn. Stat. §580.11 (authorizing "[t]he mortgagee, the mortgagee's assignee, or the legal representative of either or both [to purchase the premises] fairly and in good faith"). See also Sprague Nat'l Bank v. Dotty, 415 N.W.2d 725, 726-27 (Minn. App. 1987)(ruling that Section 580.11 imposes a duty on mortgagees to act fairly and in good faith when purchasing property at a foreclosure sale).
Next, rejecting Borrowers' assertion that Minn. Stat. §580.11 imposed a duty on Defendants to act fairly and in good faith "while foreclosing," the Eighth Circuit ruled that this provision merely authorized mortgagees to purchase foreclosed premises at the foreclosure sale, as long as the mortgagee's actions relating specifically to the sale are fair and done in good faith. See Minn. Stat. §580.11 (authorizing "[t]he mortgagee, the mortgagee's assignee, or the legal representative of either or both [to purchase the premises] fairly and in good faith"). See also Sprague Nat'l Bank v. Dotty, 415 N.W.2d 725, 726-27 (Minn. App. 1987)(ruling that Section 580.11 imposes a duty on mortgagees to act fairly and in good faith when purchasing property at a foreclosure sale).
Concluding that Section 580.11 did not pertain to conduct that had no material impact on the fairness of the sale, the Court ruled that Borrowers' failure to allege a connection between the fairness of the foreclosure sale itself, and Servicer's supposed failure to work with them to work out their delinquency or to provide them with requested information and documentation, warranted dismissal of the allegations under Section 580.11.
As to Borrowers' allegations that Defendants breached an implied duty of good faith and fair dealing, the Eighth Circuit pointed out that Borrowers did not need to assert an independent breach of an express contractual duty, as long as the claims were based on the underlying agreement and there was a "causal link" between the alleged breach of good faith and fair dealing and any claimed damages.
As to Borrowers' allegations that Defendants breached an implied duty of good faith and fair dealing, the Eighth Circuit pointed out that Borrowers did not need to assert an independent breach of an express contractual duty, as long as the claims were based on the underlying agreement and there was a "causal link" between the alleged breach of good faith and fair dealing and any claimed damages.
However, unable to locate the requisite causal link in the complaint, the Appellate Court dismissed Borrowers' claims that Defendants engaged in an "abuse of a power" and "unjustifiably hindered" performance under the mortgage agreement. In so doing, the Court observed that Borrowers never: (1) identified any particular term in the mortgage agreement that gave rise to the alleged abuse of power; (2) alleged that Defendants' actions somehow prevented Borrowers from performing their obligations under the mortgage agreement; or (3) alleged plausible facts indicating that Borrowers would have been able to pay the mortgage absent their reliance on Servicer's alleged instructions to discontinue payments.
In addition, observing that under Minnesota law any allegation of misrepresentation, whether fraudulent or negligent, is considered an allegation of fraud and must be pled with particularity, the Eighth Circuit ruled that Borrowers had failed to plead their misrepresentation claims with particularity in that they failed to plead "'the time, place, and contents' of the false representations, the identity of the individual who made the representations, and what was obtained thereby." See, e.g., BJC Health Sys. v. Columbia Cas. Co., 478 f.3d 908, 917 (8th Cir. 2007).
The Court pointed out that, by providing only conclusory allegations that they suffered damages in reliance on Servicer's alleged misrepresentations, Borrowers failed to specify how Defendants' various misrepresentations caused either the foreclosure proceedings or Borrowers' inability to pay the mortgage delinquency, especially in light of the communications from Servicer alerting them to the need to bring the loan current immediately to avoid foreclosure. The Court thus ruled that Borrowers failed to state plausible claims for fraudulent or negligent misrepresentation. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)(requiring a complaint to contain sufficient factual matter to state a claim that is plausible on its face).
In addition, observing that under Minnesota law any allegation of misrepresentation, whether fraudulent or negligent, is considered an allegation of fraud and must be pled with particularity, the Eighth Circuit ruled that Borrowers had failed to plead their misrepresentation claims with particularity in that they failed to plead "'the time, place, and contents' of the false representations, the identity of the individual who made the representations, and what was obtained thereby." See, e.g., BJC Health Sys. v. Columbia Cas. Co., 478 f.3d 908, 917 (8th Cir. 2007).
The Court pointed out that, by providing only conclusory allegations that they suffered damages in reliance on Servicer's alleged misrepresentations, Borrowers failed to specify how Defendants' various misrepresentations caused either the foreclosure proceedings or Borrowers' inability to pay the mortgage delinquency, especially in light of the communications from Servicer alerting them to the need to bring the loan current immediately to avoid foreclosure. The Court thus ruled that Borrowers failed to state plausible claims for fraudulent or negligent misrepresentation. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)(requiring a complaint to contain sufficient factual matter to state a claim that is plausible on its face).
Among its other rulings, the Eighth Circuit also dismissed Borrowers' claim for preliminary injunctive relief.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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