FYI: Cal App Ct Reverses Dismissal of Borrowers' Contract Claims Alleging Breach of HAMP TPP Where No Permanent Mod Was Offered

The California Court of Appeal, Third Appellate District, recently held that the borrower plaintiffs stated a claim for breach of contract and related causes of action, by alleging that they had complied with all of the terms of their HAMP Trial Period Plan ("TPP") but did not receive a permanent modification.  According to the Court, the lender or servicer must offer the borrower a permanent loan modification in such cases.

 

A copy of the opinion is available at: http://www.courts.ca.gov/opinions/documents/C070643.PDF

 

After the plaintiffs ("Borrowers") defaulted on their mortgage loan, they received and signed a trial modification plan, or Trial Period Plan ("TPP"), from the defendant ("Lender"), which stated:

 

If you qualify under the federal government's Home Affordable Modification [P]rogram [(HAMP)] and comply with the terms of the [trial modification plan], we will modify your mortgage loan and you can avoid foreclosure.

 

Shortly thereafter, Borrowers received a confirmation letter from Lender, which stated that if Borrowers made all three trial period payments and complied with all of the applicable HAMP guidelines, they "will have qualified for a final [permanent] modification."

 

Between June 2009 and August 2011, Borrowers allegedly made twenty-six (26) trial modification payments, as Lender allegedly advised.  In November, 2010, Borrowers received a letter requesting updated information, which they subsequently provided.  On January 27, 2011, they received a notice of trustee's sale regarding their property.

 

Borrowers sued, alleging breach of contract (as well as breach of implied covenant of good faith and fair dealing), promissory estoppel, and fraud, based on supposed intentional misrepresentations and false promises.  The trial court sustained Lender's demurrer without leave to amend, and dismissed the case.  Borrowers appealed.

 

As you may recall, to allege a cause of action for breach of contract in California, a plaintiff must allege, "(1) the contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) the resulting damages to plaintiff."  Reichert v. General Ins. Co., 68 Cal,2d 822, 830 (1968).

 

The Appellate Court relied on two recent appellate opinions addressing similar issues.  See West v. JPMorgan Chase Bank, N.A., 214 Cal.App.4th 780 (2013); Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012).  According to the Court, those rulings provided that "when a borrower has alleged that he or she has complied with all the terms of a trial modification plan offered under HAMP – including making all required payments and providing all required documentation – and if the borrower's representations on which the modification is based remain true and correct, the lender or loan servicer (collectively, hereafter, the lender) must offer the borrower a food faith permanent modification."  Bushell v. JPMorgan Chase Bank, N.A., slip op. at 2 (emphasis added).  If the lender fails to do so, "the borrower may sue the lender, under state law, for breach of contract of the trial modification plan, among other causes of action."  Id.

 

Applying these rulings to the breach of contract claim, the Appellate Court held that Borrowers had alleged a cause of action for breach of contract under the TPP.  According to the Court, the cause of action turned on whether Borrowers had alleged performance of the conditions precedent to forming the TPP contract to permanently modify the terms of their loan – namely, compliance with the TPP's terms and HAMP.

 

Based upon its interpretation of certain Treasury HAMP regulations, the Court held that, "when a lender offers a TPP to a distressed borrower, the lender effectively has already determined that the borrower qualifies for HAMP," assuming that the borrower's representations are true and correct.  Bushell, slip op. at 9.  Further, if the borrower has complied with all terms of the TPP, "including making all required trial payments and providing all required documentation," then the lender "must offer" the borrower a permanent loan modification.  Id. at 10 (citing West, 214 Cal.App.4 at 768, 788; Wigod, 673 F.3d at 557).

 

In support of its ruling, the Court noted that "similar TPP language in Wigod, and even less contractually certain TPP language in West, yielded similar conclusions."  Bushel, slip op. at 13; see also West, 214 Cal.App.4 at 789, 97-98; Wigod, 673 F.3d at 558.  Notably, the Court rejected Lender's contention that the TPP was a mere promise to consider Borrowers for a permanent modification, as well as Lender's argument that Borrowers cannot allege damages because they were merely making monthly mortgage payments which they were already obligated to make.

 

Additionally, the Appellate Court held that Borrowers adequately alleged a claim for breach of covenant of good faith and fair dealing, stating that Lender was "required to act in accord with the TPP and HAMP regulations."  Bushell, slip op. at 16. 

 

As to the promissory estoppel claim, the Court held that the Borrowers' allegations were sufficient because they had shown a "clear and unambiguous promise" – the TPP contract – and damage caused by their detrimental reliance.  Id. at 17.  Finally, the Court held that Borrowers also sufficiently stated a fraud claim for false promise, noting that they had met the specificity and damages elements.

 

Accordingly, the Court reversed as to the claims for breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel, and fraud based on false promise, but affirmed the dismissal of the fraud claim based on intentional misrepresentation.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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FYI: 4th Cir Affirms Dismissal of ECOA Claims as Waived in Loan Mod Docs

The U.S. Court of Appeals for the Fourth Circuit recently affirmed the dismissal of a borrower's spouse's federal Equal Credit Opportunity Act claims, finding that they were waived pursuant to several loan modification agreements. 

 

A copy of the opinion is available at http://www.ca4.uscourts.gov/Opinions/Published/131418.P.pdf

 

A borrower ("borrower") who owned and operated a food-packing company took out a loan with a bank (the "bank").  The borrower's spouse, who neither owned nor operated the company, was required to sign the loan agreement as a guarantor. 

 

The borrower later defaulted on the loan several times, each time entering into a loan modification agreement with the bank.  The modification agreements all required both the borrower and his spouse to waive any and all claims against the bank. 

 

The loan was secured by several assets co-owned by the borrower's spouse.  After the final default, the bank recorded consensual liens on several of these assets. 

 

The borrower's spouse then filed the instant litigation against the bank, arguing that the bank had violated the Equal Credit Opportunity Act ("ECOA") by requiring her to serve as her husband's guarantor. 

 

The lower court dismissed the complaint with prejudice, finding that the borrower's spouse failed to state a claim upon which relief could be granted, and also held that the claims were waived. The spouse appealed. 

 

As you may recall, the ECOA makes it unlawful for "any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of...marital status."  15 U.S.C. Sec. 1691(a)(1) (2006).  Specifically, lenders cannot require a spouse's signature on a loan agreement where the applicant individually qualifies for the requested credit.  12 C.F.R. Sec. 202.7(d)(1) (2013).   

   

On appeal, the Fourth Circuit began by surveying the applicable statutory scheme. It noted that although the ECOA was enacted to protect married women - whom "many creditors had traditionally refused to consider for individual credit" and that "[n]ot every signature required of a borrower's spouse...constitutes credit discrimination under ECOA." 

 

The Fourth Circuit then enumerated certain of those exceptions, which include among others an exception permitting lenders to require the non-applicant spouse to sign a loan where the applicant spouse does not independently qualify for the loan.  In addition, lenders may require the signature of a spouse where two spouses co-own property designated as collateral for said loan, to ensure that the collateral is available for to satisfy the debt in the event of default. 

 

Here, the spouse argued that the bank did not evaluate her husband's independent creditworthiness before requiring her signature on the loan.  In addition, although the spouse "apparently conceded" that the bank could have required her signature for the limited purpose of waiving her rights to the collateral property, she nevertheless contended that the bank was not permitted to require her to provide an unlimited guarantee of the loan. 

 

The Fourth Circuit acknowledged that the ECOA "appears to prohibit lenders from demanding that a spouse guarantee the full loan without first appraising the borrower's creditworthiness," and further opined that the bank "may well have violated ECOA" by its actions.

 

Nevertheless, the Fourth Circuit ruled in favor of the bank, on the grounds that the spouse waived her claim in connection with the various loan modification agreements she executed.  Although the spouse argued that lenders should not be able to both violate the ECOA and induce borrowers to waive their ECOA rights at the same time, the Fourth Circuit disagreed.  It noted that the waiver in the loan modification agreements merely provided a "negotiated benefit" to both the bank and the borrowers. 

 

Accordingly, the Fourth Circuit affirmed the judgment of the lower court.   

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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FYI: 4th Cir Affirms Bankruptcy Court's Refusal to "Strip Off" a "Valueless Lien" on Property Owned by Debtor and Non-Debtor Spouse in Tenancy by the Entirety

In an issue of first impression in the federal appellate courts, the U.S. Court of Appeals for the Fourth Circuit recently ruled that the statutory provisions authorizing a "strip off" of a "valueless" lien under 11 U.S.C. § 506(a), and applicable Maryland property law, do not permit a bankruptcy court to alter a non-debtor's interest in property held in a tenancy by the entirety, and that the filing of a joint complaint against a lien holder in bankruptcy court is not sufficient to satisfy the Maryland law requirement that tenants by their entireties act together to alter their interests in their entireties property.

 

In so ruling, the Fourth Circuit upheld the district court's opinion that the bankruptcy court lacked authority to "strip off" the debtor's "valueless" lien because only the debtor's interest in the estate, rather than the complete entireties estate, was before the bankruptcy court.

 

A copy of the reported opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/121156.P.pdf

 

At the time the debtor filed his Chapter 13 petition, the value of the property he owned with his non-debtor spouse was allegedly less than the full amount owed on the first-priority lien.  The debtor and his non-debtor spouse jointly filed a complaint in the bankruptcy court to strip off the allegedly valueless second-priority lien, arguing that because the Second Lien Holder's lien was completely valueless -- and therefore unsecured under 11 U.S.C. § 506(a) -- they were entitled to strip off the lien. 

 

Denying the request, the bankruptcy court held that a lien on property held in a tenancy by the entirety cannot be stripped when only one tenant by the entirety had filed for bankruptcy.  The district court affirmed, and this appeal followed.

 

As you may recall, to effectuate a lien strip, a bankruptcy court first considers the valuation provision contained in § 506(a), which states:

 

An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.

 

A bankruptcy court next applies § 1322(b)(2), which addresses the debtor's reorganization plan and permits debtors in such plans to modify the rights of holders of unsecured claims. "The end result is that section 506(a)… operates with section 1322(b)(2) to permit a bankruptcy court, in a Chapter 13 case, to strip off a lien against a primary residence with no value." Branigan, 716 F.3d at 335.  A lien strip becomes effective and permanently eliminates a lienholder's in rem rights against the collateral property upon completion of a debtor's reorganization plan. Branigan, 716 F.3d at 338.

 

In addition, in Maryland, "a tenancy by the entirety is a joint tenancy of spouses with rights of survivorship between the spouses."  See Slip Op. at 9.  The marital unit owns the property, "with each spouse having an undivided interest in the whole property."  See Slip Op. at 9.  In addition, until one spouse dies, "a tenancy by the entirety can be severed only by divorce or by the joint action of both spouses.  One spouse alone cannot alienate, convey, or encumber his or her interest in the entireties property."  See Slip Op. at 10 (internal citations omitted).

 

Identifying an issue of first impression among federal appellate courts, the Fourth Circuit, agreeing with the lower courts, held that while generally "a creditor's lien on real property passes through bankruptcy unaffected," a bankruptcy court in a typical Chapter 13 proceeding does have "the authority to strip off a completely valueless lien . . . ."  See Slip Op. at 4 (citing Branigan v. Davis, 716 F.3d 331 (4th Cir. 2013)).  However, such authority does not extend to liens on entireties property when only one spouse has filed for bankruptcy. 

 

In reaching this conclusion, the Fourth Circuit relied on Greenblatt v. Ford, 638 F.2d 14 (4th Cir. 1981), in which the Court held that a bankruptcy filing by only one spouse "'does not sever the estate of tenancy by the entirety' created under Maryland law."  See Slip Op. at 11 (quoting Greenblatt, 638 F.2d at 14-15).  The Court's prior decision also recognized that only a debtor's individual undivided interest in a tenancy by the entirety is transferred into the bankruptcy estate upon filing.  Because by statute confirmation of a Chapter 13 plan only binds the debtor and his creditors, "the bankruptcy court is without authority to modify a lienholder's rights with respect to a non-debtor's interest in a property held in a tenancy by the entirety."  See Slip Op. at 13.  Consequently, the Court held that only the debtor's interest in the entireties property, and not the whole of the entireties property, became part of his bankruptcy estate.

 

In addition to rejecting their argument that jointly filing a complaint brought the entireties property into the estate, the Fourth Circuit also rejected the debtor's and his spouse's argument that a bankruptcy court can remove the lien under 11 U.S.C. § 363(h), which permits the trustee in limited circumstances to dispose of a non-debtor spouse's interest in entireties property. 

 

Instead, the Court held that "the Bankruptcy Code does not authorize a bankruptcy court to eliminate a lienholder's rights with respect to a non-debtor's interest in property or to contravene state law regarding entireties property to eliminate an in rem component of a lien."  See Slip Op. at 15.   

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

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