FYI: 8th Cir Rejects Borrower's Negligent Misrepresentation and Other Claims Against Mortgagee

The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a homeowner-borrower's action for wrongful foreclosure, violation of the Missouri Merchandising Practices Act (MMPA), and negligent misrepresentation against his mortgagee. 

 

The lawsuit was initiated in state court, where a motion for temporary restraining order (TRO) was granted to halt a scheduled foreclosure sale before the mortgagee removed the matter to federal court.  The federal trial court dissolved the TRO, and dismissed the borrower's action with prejudice and without leave to amend. 

 

The Eighth Circuit affirmed dismissal, rejecting the borrower's argument that the federal trial court lacked jurisdiction to rule on the motion to dismiss after the TRO dissolved because a live case or controversy existed in the form of the claims raised in his motion to dismiss. 

 

The Eighth Circuit also rejected the borrower's argument that he stated a valid claim for negligent misrepresentation as waived for being raised for the first time on appeal, and concluded that the trial court did not err in denying his request for leave to file a second amended complaint, which was not made by separate motion, but instead raised in a single sentence in response to the motion to dismiss.

 

A copy of the opinion is available at:  Link to Opinion

 

A homeowner borrower-mortgagor ("Borrower") entered into a loan modification agreement with his mortgage lender ("Mortgagee") after falling behind on his mortgage payments.  Because the Borrower did not make any payments on the modified loan, foreclosure proceedings were initiated.  The Mortgagee rejected the Borrower's request for a new modification and set a foreclosure sale date.

 

On the eve of the foreclosure sale, the Borrower initiated a pro se action in Missouri state court by submitting a filing styled as a Motion for Temporary Restraining Order requesting postponement of the sale, and alleging that the Mortgagee misrepresented to him that he was eligible for loan modification assistance and notified him that he was not eligible when it would be too late for him to cure any default before the sale.  The state court entered an ex parte temporary restraining order (TRO) barring the sale from proceeding.

 

The Mortgagee removed the Borrower's state court action to federal court and moved to dismiss the complaint and to dissolve the TRO.  The federal trial court granted the request to dissolve the TRO and ordered the Borrower to respond to the Mortgagee's motion to dismiss. 

 

The Borrower, now represented by counsel, instead sought and obtained leave to file an amended complaint alleging claims of wrongful foreclosure, violations of the MMPA, and negligent misrepresentation, which the Mortgagee again moved to dismiss. The trial court granted the Mortgagee's motion and dismissed the Borrower's amended complaint with prejudice and without leave to amend.  The Borrower timely appealed the judgment. 

 

On appeal, the Borrower primarily argued that the federal trial court lacked jurisdiction to rule on the motion to dismiss because the entirety of this case consisted only of his motion for a temporary restraining order and accompanying state court TRO, and once the court dissolved the TRO, the case became moot because there was no longer any live controversy. Alternatively, the Borrower asserted that he stated a claim for negligent misrepresentation and that the federal trial court should have granted him leave to again amend his complaint.

 

The Eighth Circuit first addressed the Borrower's claim that the case is moot, by determining whether a live case or controversy existed to retain federal court jurisdiction under Article III.  McGehee v. Neb. Dep't of Corr. Servs., 987 F.3d 785, 787 (8th Cir. 2021).   The Court noted that Missouri's rules of civil procedure governed the Borrower's initial filing seeking a temporary restraining order, which require a party to "support that request with a verified petition or affidavit reciting the specific facts that support" that petition (Mo. R. Civ. P. 92.02).

 

Even though the Borrower's filing was styled only as a motion for temporary restraining order, because the pleading was accepted as adequate in state court and in giving the pro se pleading the appropriate liberal construction (See Erickson v. Pardus, 551 U.S. 89, 94 (2007)), it construed the pro se motion for a temporary restraining order as a petition initiating a civil action against the Mortgagee under Missouri law.  Moreover, the Borrower's conduct throughout the course of litigation - specifically, his request for leave to amend the complaint - demonstrated his understanding that the original state court filing was a petition, and not solely a motion for temporary restraining order as he now claimed. 

 

Accordingly, the Eighth Circuit concluded that a live case and controversy remained after the TRO dissolved in the form of the Borrower's wrongful foreclosure, violation of the MMPA, and negligent misrepresentation claims, and that the federal trial court properly considered the Mortgagee's motion to dismiss for failure to state a claim.

 

The Eighth Circuit next evaluated the Borrower's argument that the federal trial court improperly dismissed his negligent misrepresentation for failing to state a claim. 

 

The basis of the dismissal was that the Borrower failed to raise a plausible inference that the Mortgagee did not act with reasonable care, as required under governing Missouri law.  However, on appeal, the Borrower argued that a claim for negligent misrepresentation lies where the alleged statement containing the misrepresentation was within the speaker's control and that he stated a claim by alleging that the Mortgagee falsely represented it would timely process his loan modification application.

 

Because the Borrower did not raise this argument before the federal trial court in opposition to the Mortgagee's motion to dismiss, the argument was waived and could not be considered on appeal. Kosulandich v. Survival Tech., Inc., 997 F.3d 431, 433 (8th Cir. 1993).  Accordingly, the Eighth Circuit held that the federal trial court did not err in dismissing Borrower's negligent misrepresentation claim for failure to state a claim.

 

Lastly, the Borrower argued that the federal trial court erred in denying his request for leave to file as second amended complaint.  While acknowledging that "[t]he court should freely give leave when justice so requires" under Rule 15, here, the Borrower made no motion for leave nor attempted to explain the substance of the proposed motion, instead, including only a conclusory "request" within his response to the Mortgagee's motion to dismiss, which the Eighth Circuit has previously deemed inadequate.  See Misischia v. St. John's Mercy Health Sys., 457 F.3d 800, 805 (8th Cir. 2006).  Thus, the federal trial court did not abuse its discretion in dismissing the complaint with prejudice and without leave to amend.

 

For all of the foregoing reasons, the judgment of dismissal was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Cal App Ct (2nd Dist) Confirms Servicer's Pre-Foreclosure Remedy Barred HBOR Claims

The California Court of Appeal, Second Appellate District, recently affirmed a trial court's grant of summary judgment in favor of a mortgage servicer in a suit filed under the California Homeowner Bill of Rights (HBOR), Civil Code section 2923.4 et seq., seeking to enjoin foreclosure proceedings.

 

In so ruling, the Second District concluded that:

 

1)  The HBOR creates liability only for material violations that have not been remedied before the foreclosure sale is recorded, which was not the situation here;

 

2)  The servicer complied with section 2923.6 as a matter of law by conducting the foreclosure sale only after the homeowner failed to accept an offered trial-period modification plan; and

 

3)  Given the Court's conclusions and the trial court's consideration of the merits of the homeowner's claims, the reinstatement of sections 2923.55 and 2923.6 did not warrant reconsideration.

 

A copy of the opinion is available at:  Link to Opinion

 

The homeowner and his wife obtained a home mortgage in 2006, but only the wife signed the promissory note. After the homeowner's wife died, the homeowner defaulted on the loan. The homeowner alleged that the mortgage servicer refused to communicate with him about the loan because he was not the named borrower.

 

The servicer subsequently initiated foreclosure proceedings by causing a notice of default to be recorded. The homeowner filed suit under the California Homeowner Bill of Rights (HBOR), Civil Code section 2923.4 et seq., seeking to enjoin the foreclosure proceedings. He claimed the servicer violated the HBOR by failing to assign him a "single point of contact" (§ 2923.7), failing to communicate with him regarding foreclosure alternatives before recording a notice of default (§ 2923.55), and recording a false declaration of compliance (§ 2924.17).

 

After the servicer agreed to postpone the foreclosure sale and the homeowner failed to make his payment, the foreclosure sale proceeded as planned and the property was purchased by a third party. The homeowner then filed an amended complaint against the respondent, adding an allegation that the servicer violated the HBOR by conducting the foreclosure sale while his loan-modification application was still pending (§ 2923.6).

 

The servicer moved for summary judgment, which the trial court granted. The trial court concluded that the homeowner's claims under sections 2923.55 and 2923.6 failed because those provisions had been repealed after the homeowner filed his action. Alternatively, it concluded that the servicer had remedied any material HBOR violation before the foreclosure sale, and that the sale resulted from the homeowner's failure to accept the offered trial-period modification plan.

 

After learning that the California Legislature had reenacted sections 2923.55 and 2923.6, the homeowner moved for reconsideration, but the trial court denied this motion.

 

On appeal, the homeowner contended: (1) the servicer failed to cure its pre-sale violations because it did not record a new notice of default after communicating with him; (2) the servicer violated section 2923.6 by conducting the foreclosure sale while the parties were still in negotiations regarding a loan modification; and (3) given the Legislature's restoration of sections 2923.55 and 2923.6, the trial court erred in denying reconsideration.

 

First, the Second District observed that the HBOR creates liability only for material violations that have not been remedied before the foreclosure sale is recorded. A material violation is one that affected the borrower's loan obligations, disrupted the borrower's loan-modification process, or otherwise harmed the borrower. See, e.g., Cardenas v. Caliber Home Loans, Inc. (N.D.Cal. 2017) 281 F.Supp.3d 862, 870.

 

However, the Second District pointed out that section 2924.12(c) encourages mortgage servicers to cure any material violation by providing a safe harbor to the servicers: "[a] mortgage servicer . . . shall not be liable for any violation that it has corrected and remedied prior to the recordation of the [foreclosure sale] . . . ."

 

Based on these principles, the Second District held that where a mortgage servicer's violations stem from its failure to communicate with the borrower before recording a notice of default, the servicer may cure these violations by doing what the respondent did here: postponing the foreclosure sale, communicating with the borrower about potential foreclosure alternatives, and fully considering any application by the borrower for a loan modification.

 

The Court further concluded that, following these corrective measures, any remaining violation relating to the recording of the notice of default was immaterial, and a new notice of default was not required to avoid liability.

 

The Second District was careful not to endorse the servicer's conduct in allegedly failing to communicate with the homeowner before initiating foreclosure proceedings and allegedly failing to comply with other statutory requirements. The Court only concluded that the homeowner had provided no basis for liability under the HBOR.

 

Regarding the homeowner's second argument, the Second District noted that section 2923.6(c) prohibits mortgage servicers from proceeding with the foreclosure process while a borrower's application for a loan modification is pending. However, a servicer may conduct a foreclosure sale when "the borrower does not accept an offered . . . loan modification within 14 days of the offer" (§ 2923.6(c)(2)) or "14 days after a . . . loan modification is offered after appeal but declined by the borrower" (§ 2923.6(e)(2)).

 

Therefore, the Second District concluded that the servicer complied with section 2923.6 as a matter of law by conducting the foreclosure sale more than 14 days after the homeowner failed to accept an offered trial-period modification plan. Neither the continued communications between the parties following the expiration of the offer, nor the homeowner's last-minute offer on the eve of the sale, persuaded the Court that the expired offer was revived or that the homeowner's application became "pending" for the purposes of the statute.

 

Finally, given the Second District's conclusions and the trial court's consideration of the merits of the homeowner's claims, the Court held that the reinstatement of sections 2923.55 and 2923.6 did not warrant reconsideration.

 

Accordingly, the Second District affirmed the trial court's grant of summary judgment in favor of the servicer.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Wisc Sup Ct Rejects Punitive Damages Award in Construction Loan Case

In an action by a general contractor against a bank arising out of a construction loan, the Wisconsin Supreme Court recently held that:

 

(1) the trial court properly exercised its discretion when it imposed a default judgment against the defendant bank as a sanction for discovery violations;

 

(2) the damages award for unjust enrichment was in error because Wisconsin law does not permit recovery of damages for both breach of contract and unjust enrichment arising from the same conduct; and

 

(3) the punitive damages award must be set aside because it was based upon an award of damages for the contract claims and punitive damages are recoverable only in tort. T

 

A copy of the opinion is available at:  Link to Opinion

 

In February 2016, the plaintiff general contractor, filed a complaint against the defendant bank, alleging three causes of action: (1) the defendant breached its contract to pay the plaintiff for its work on a condominium construction project; (2) the defendant was unjustly enriched by the construction work the plaintiff provided on the condominium project, which increased the value of the loan sold by the defendant; and (3) the defendant misrepresented to the plaintiff that funds were available to pay it for the work it performed on the project, which the defendant would pay the plaintiff if it continued constructing the condominiums. The complaint alleged that if the plaintiff proved the misrepresentation "was intentional and/or in reckless disregard of [the plaintiff's] rights," the plaintiff should receive punitive damages.

 

In its August 29, 2017 written order, the trial court: 

 

* Reaffirmed its earlier ruling denying the defendant's summary judgment motion; 

* Granted the plaintiff's requests for discovery sanctions; 

* Granted judgment to the plaintiff as to the liability of the defendant, including the defendant's liability for intentional misrepresentation; 

* Because of the defendant's conduct regarding discovery and its disregard for the trial court's orders, granted judgment to the plaintiff for its attorneys' fees in an amount to be determined by the court; 

* Kept the case scheduled for trial, but stated that the issues to be tried will be the damages and punitive damages to be assessed against the defendant.

 

The case proceeded to trial in October 2017 as scheduled. The jury awarded the plaintiff general contractor $106,581 for the defendant bank's breach of contract, $132,668 for the defendant bank's unjust enrichment, and $1,000,000 for punitive damages. The trial court eventually lowered the punitive damages to $458,484.

 

The defendant bank appealed the trial court's order to the court of appeals. The court of appeals affirmed, ruling that the trial court properly exercised its discretion in imposing judgment on liability against the defendant as a discovery sanction based on the defendant's egregious conduct. However, the court of appeals did not address the merits of the defendant bank's arguments on contract and unjust enrichment claims being mutually exclusive or the punitive damages award resting entirely on contract. In its view, the defendant bank failed to adequately raise or brief these issues.

 

The defendant bank timely appealed to the Wisconsin Supreme Court.

 

The defendant bank argued that the court of appeals erred in affirming the trial court on three grounds: (1) the trial court erroneously exercised its discretion in imposing default judgment as a discovery sanction because this sanction is too severe and because the trial court did not find that the plaintiff was prejudiced by the defendant's violations; (2) Wisconsin law does not permit a plaintiff to recover damages for both breach of contract and unjust enrichment; and (3) the punitive damages award was based on contract rather than tort.

 

The Wisconsin Supreme Court reviews discovery sanctions under the erroneous exercise of discretion standard. See Industrial Roofing Serv. v. Marquardt, 2007 WI 19, ¶41, 299 Wis. 2d 81, 726 N.W.2d 898. If the trial court "examined the relevant facts, applied a proper standard of law, and, using a demonstrated rational process, reached a conclusion that a reasonable judge could reach," the Court upholds the decision. Id. The Court's review of whether a party may recover damages for both breach of contract and unjust enrichment and whether the punitive damages award was permitted here presented questions of law the Court reviewed de novo. Miller v. Wal-Mart Stores, Inc., 219 Wis. 2d 250, 259, 580 N.W.2d 233 (1998).

 

First, the Supreme Court noted that it has specifically declined to require prejudice to the offended party when default judgment is imposed as a discovery sanction. See Industrial Roofing Serv., 299 Wis. 2d 81, ¶43; Johnson v. Allis Chalmers Corp., 162 Wis. 2d 261, 282, 470 N.W.2d 859 (1991). The Court remarked that, as a result of their behavior, parties acting egregiously or in bad faith "significant[ly] prejudice… the [trial] court's ability to efficiently and effectively administer judicial business." Johnson, 162 Wis. 2d at 282. "[I]n some cases the need to punish and deter the flagrant disobedience of court orders requires the [trial] court to impose greater sanctions than monetary ones." Id. at 286.

 

The trial court found the defendant bank's discovery conduct to be egregious, disingenuous, designed to bury documents and hide a "smoking gun" email, and in violation of its discovery order. The Supreme Court determined that those findings were not clearly erroneous, as the record contained evidence supporting them. "[F]ailure to comply with [trial] court scheduling and discovery orders without clear and justifiable excuse is egregious conduct." Industrial Roofing Serv., 299 Wis. 2d 81, ¶43

 

Based on the trial court's warnings to the defendant bank, the defendant bank's refusal to obey the court's discovery order, the court's findings of egregiousness, and the availability of a default judgment sanction under Wis. Stat. § 804.12(2), the Supreme Court held that the trial court's decision to impose the sanction was a reasoned determination. Accordingly, the Court concluded that the trial court did not erroneously exercise its discretion and affirmed the court of appeals' decision regarding the discovery sanctions.

 

However, the Supreme Court also held that the court of appeals erred in upholding the jury's verdict awarding damages to the plaintiff general contractor for both breach of contract and unjust enrichment.

 

The Supreme Court stated that, under Wisconsin law, a plaintiff may not recover damages for both breach of contract and unjust enrichment based on the same conduct. See Meyer v. The Laser Vision Inst., LLC, 2006 WI App 70, ¶26, 290 Wis. 2d 764, 714 N.W.2d 223. The Court reasoned that unjust enrichment is an equitable claim that cannot coexist with a breach of contract claim. Id., ¶28. The Court also pointed out that if the parties entered into a valid, enforceable contract, then unjust enrichment does not apply. Continental Cas. Co. v. Wisconsin Patients Comp. Fund, 164 Wis.2d 110, 118, 473 N.W.2d 584 (Ct. App. 1991).

 

Because the trial court found a contract did exist here, and because the jury awarded damages for the defendant bank's breach of the contract, the Supreme Court concluded that the award for damages based on unjust enrichment must be set aside. The Court clarified that a party may plead claims for relief in the alternative, as the plaintiff did in this case, Wis. Stat. § 802.02(5)(b), but that the party may recover under only one of the claims.

 

Finally, the Supreme Court observed that punitive damages are not available as a remedy in a breach of contract action in Wisconsin. Entzminger v. Ford Motor Co., 47 Wis. 2d 751, 757, 177 N.W.2d 899 (1970). Instead, the Court made clear that a jury's award of punitive damages must be based upon a finding of tort liability. Hansen v. Texas Roadhouse, Inc., 2013 WI App 2, ¶29, 345 Wis. 2d 669, 827 N.W.2d 99.

 

The punitive damages questions before the jury in this case did not reference tort liability. Instead, the punitive damages awarded by the jury were based on the amounts they awarded for the defendant bank's breach of contract and unjust enrichment claims. Therefore, the Supreme Court held that the punitive damages award must be set aside.

 

Accordingly, the Wisconsin Supreme Court held that the trial court did not erroneously exercise its discretion when it granted default judgment against the defendant as a discovery sanction.

 

However, the Court also concluded that Wisconsin law does not permit a plaintiff to recover simultaneously for breach of contract and unjust enrichment based on the same conduct or subject matter and that the jury's award for unjust enrichment must be set aside here. Additionally, the Court determined that Wisconsin law only permits a punitive damages award to be based upon a tort, not a contract, and so the punitive damages award here must also be set aside.

 

Thus, the Court affirmed in part and reversed in part the decision of the court of appeals and remanded the case to the trial court for further proceedings consistent with this opinion.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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