The U.S. Court of Appeals for the First Circuit recently affirmed the dismissal of multiple claims for violations of Massachusetts state law against a bank for allegedly denying the borrowers a loan modification under the Home Affordable Modification Program ("HAMP") and foreclosing on the borrowers' residence.
A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/13-1236P-01A.pdf
Following the assignment of the subject loan to the defendant bank, the bank entered into a Servicer Participation Agreement ("SPA") with Fannie Mae. The SPA required loan servicers to offer loan modifications and foreclosure prevention services pursuant to HAMP. Subsequently, the bank and the borrowers entered into a loan modification agreement reducing the interest rate, extending the maturity date, and capitalizing unpaid interest (the "Modification Agreement").
The borrowers applied for additional loan modifications after the execution of the Modification Agreement. As noted by the Court, the bank allegedly began pursuing two contradictory courses of action by both pursuing a foreclosure sale on the borrowers' residence, and simultaneously, considering the borrowers for another loan modification and determining that the borrowers were eligible pursuant to the HAMP guidelines.
The borrowers then filed their complaint with the Massachusetts Superior Court seeking injunctive relief to prevent the foreclosure. Subsequently, the bank sent the borrowers an offer on a loan modification, but it appears that the borrowers ultimately rejected that offer. Following the removal of the action to the federal court, the borrowers filed an amended complaint raising eleven state law claims.
The bank filed a motion to dismiss which the lower court granted. The borrowers appealed the dismissal as to only five of their eleven counts: breach of contract, based on violations of the implied covenant of good faith and fair dealing; violation of the Massachusetts Consumer Credit Cost Disclosure Act ("MCCCDA"); rescission; negligence; and promissory estoppel.
In affirming the dismissal of the borrowers' count for breach of contract, the Court determined that bank did not breach any implied covenant of good faith under either the SPA or as the mortgagee.
The Court concluded that the borrowers were not third-party beneficiaries under the SPA between the bank and Fannie Mae. The Court noted that it is a well-established principle that "government contracts often benefit the public, but individual members of the public are treated as incidental beneficiaries [who may not enforce a contract] unless a different intention is manifested." Quoting Restatement (Second) of Contracts § 313 cmt. a (1981).
Additionally, the Court looked favorably upon district court opinions applying this general principle in the context of disputes over HAMP modifications and concluding that borrowers are not third-party beneficiaries of agreements between mortgage lenders and the government. Applying the general principle to the SPA, the Court determined that the bank and Fannie Mae did not intend to make the borrowers third-party beneficiaries, and accordingly, the borrowers could not raise a breach of contract claim under the SPA.
The Court also determined that the bank had no duty as mortgagee to consider the borrowers for a loan modification prior to foreclosure in the event of a default. In reaching this decision, the Court noted that "the concept of good faith 'is shaped by the nature of the contractual relationship from which the implied covenant derives,' and the 'scope of the covenant is only as broad as the contract that governs the particular relationship.'" Young v. Wells Fargo Bank, N.A., 717 F.3d 224, 238 (1st Cir. 2013). Under this framework, the Court concluded that nothing in the mortgage imposes a duty on the bank to consider a loan modification.
The borrowers argued in support of their MCCCDA and rescission claims that the bank was required to including make certain disclosures provided for refinancing agreements under the MCCCDA, and that the bank's failure to do so was grounds for rescission.
As you may recall, like TILA, the MCCCDA provides borrowers in certain refinance transactions with a right of rescission and requires lenders to make certain mandatory disclosures. See Mass. Gen. Laws ch. 140D, § 10. Section 10(f) of the statute extends the borrower's right of rescission to a period of four years in the event that the lender fails to make the required disclosures.
In rejecting the borrowers arguments, the Court relied upon Section 32.20 of title 209 of the Code of Massachusetts Regulations, which excludes certain agreements from being treated as refinancing, including: "A reduction in the annual percentage rate with a corresponding change in the payment schedule" and "A change in the payment schedule or a change in collateral requirements as a result of the consumer's default or delinquency."
The Court concluded that the Modification Agreement was not a refinancing agreement. Thus, it was not subject to the disclosure requirements of the MCCCDA, and the borrowers have no right to rescind it under that statute.
For their negligence claim, the borrowers alleged that the bank owed them a duty as third-party beneficiaries under the SPA, and that the bank breached their obligations under HAMP as incorporated by the SPA.
In Massachusetts, to state a claim for negligence the plaintiff must allege "(1) a legal duty owed by defendant to plaintiff; (2) a breach of that duty; (3) proximate or legal cause; and (4) actual damage or injury." Primus v. Galgano, 329 F.3d 236, 241 (1st Cir. 2003).
The First Circuit quickly rejected any argument that the bank owed any duty to the borrowers under the SPA, as it already determined that the borrowers were not third-party beneficiaries under that agreement between the bank and Fannie Mae.
Additionally, the Court rejected the borrowers' argument that a violation of HAMP gave rise to a claim for negligence per se. First, the Court noted that the relationship between a borrower and lender does not give rise to a duty of care under Massachusetts law, and second, that statutory or regulator violations cannot give rise to a negligence claim when there is no independent duty of care between the parties. Thus, the Court concluded, that the district court properly dismissed the borrowers' negligence claim because the bank did not owe any legal duty to the borrowers.
In considering the final claim on appeal, promissory estoppel, the Court determined that the borrowers' allegations in the complaint were a textbook illustration of "formulaic recitation of the elements of a cause of action" that falls below the standard of Federal Rule of Civil Procedure 8(a)(2). See Ashcroft v. Igbal, 556 U.S. 662, 678 (2009).
However, the borrowers argued on appeal that the bank engaged in a course of conduct which led the borrowers to believe that a HAMP modification would result, and that they relied upon these promises to their detriment by foregoing alternatives to foreclosure. The Court begrudgingly dealt with the borrowers' arguments even though it noted that as a rule a party may not advance for the first time on appeal a new argument or an old argument that depends on a new factual predicate. Nevertheless, the Court determined even under these new arguments the borrowers failed to state a claim for promissory estoppel.
Under Massachusetts law, to state a claim for promissory estoppel, a plaintiff must allege that (1) a promisor makes a promise which he should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promise, (2) the promise does induce such action or forbearance, and (3) injustice can be avoided only by enforcement of the promise.
The First Circuit concluded that the mere fact that the bank considered the borrowers for multiple loan modifications over a two-year period is not a promise, implicit or otherwise, to consider them for further loan modifications prior to foreclosure. Moreover, the Court noted that the borrowers completely omit the fact that the bank in fact extended a loan modification offer prior to foreclosure which they apparently rejected. In addition, the Court determined that the borrowers failed to allege any facts to support their contention that they would have successfully avoided foreclosure if they had not pursued a loan modification. Thus, the borrowers failed to properly allege a claim for promissory estoppel.
Lastly, the Court addressed the borrowers' argument alleging a defective assignment of the mortgage from MERS to the bank. The Court noted however that these claims were not tethered to any legal claim before the Court on appeal, and thus, even if the allegations were true, the Court could not provide any relief.
Accordingly, the First Circuit affirmed the lower court's dismissal of the borrowers' complaint.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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