Archive | July, 2012

Important new bankruptcy case you need to read

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Tuesday, May 01, 2012 3:45 PM
To: Charles Cox
Subject: Important new bankruptcy case you need to read

Charles W. Trainor

Attorney at Law

Trainor Fairbrook

916-929-7000

Begin forwarded message:

Subject: Important new case you need to read

The summary below highlights an important (and disturbing, from a lender’s viewpoint) new court ruling out of the 9th Circuit BAP (which is composed of bankruptcy judges and not the regular, notoriously liberal 9th Circuit judges). I commend it to your reading and encourage you to ask me questions if you don’t understand it. It’s a major game-changer for under-water, single asset real estate cases where the borrower is a single-asset LLC and there’s a separate guarantor. Everyone, whether you’re a transactional attorney or a litigator, needs to understand the implications of this case.

With the issuance of this decision, instead of borrowers just letting the property get foreclosed on and facing the need to defend the inevitable lawsuit on the guaranty, many owners are going to choose to file a chapter 11 and try to keep the property, successfully confirming a plan that bifurcates the lender’s claim into a secured and unsecured portion (the latter of which is now classified separately from the other general unsecured creditors), and then cramming down the plan over the lender’s objections, paying only pennies on the dollar on that unsecured portion. Previously, separate classification was not permitted, and because the deficiency claim of a lender was usually so high that it could control the voting of the unsecured class, it would also veto any plan that didn’t pay out 100 cents on the dollar to the unsecured class, invoking the absolute priority rule. Now, with separate classification permitted, the lender’s leverage is eliminated and it will no longer be able to preclude plan confirmation. Of course, the lender still retains its rights against the guarantor and can immediately demand payment of the unrealized portion of the unsecured claim from the guarantor, and sue if payment thereof isn’t received. But the leverage that the borrower/owner has by threatening a cram-down through a bankruptcy will be a major negotiating point on the enforcement of those guarantees.

And yes, Chuck, I’ll be writing a client bulletin about it right away.

From: Gall, Travis
To: Sections: Bus Law Insolvency Constituency List
Subject: Update from the State Bar Business Law Section’s INSOLVENCY LAW COMMITTEE

Insolvency Law Committee – Business Law Section of the State Bar of California
Bankruptcy e-Bulletin
Robert G. Harris
Co-Chair
Binder & Malter LLP
2775 Park Avenue
Santa Clara, CA 95050
408-295-1700
rob

Elissa D. Miller
Co-Chair
Sulmeyer Kupetz
333 S. Hope Street, 35th Fl.
Los Angeles, CA 90071
213-626-2311
emiller

Thomas R. Phinney
Co-Vice Chair
Parkinson Phinney
400 Capitol Mall, Suite 2560
Sacramento, CA 95814
916-449-1444
tom

James P. Hill
Co-Vice Chair
Sullivan Hill Lewin Rez & Engel
550 West C Street, 15th Floor
San Diego, CA 92101
619-233-4100
hill

March 6, 2012

Dear constituency list members of the Insolvency Law Committee, the following is a recent case update:

The United States Bankruptcy Appellate Panel of the Ninth Circuit recently affirmed the separate classification of a lender’s deficiency claim based on the existence of a third-party source of payment for the subject deficiency claim. Wells Fargo Bank, N.A. v. Loop 76, LLC (In re Loop 76, LLC), ___ B.R. ___ (9th Cir. BAP February 23, 2012). To read the decision, click: HERE.

FACTS:

The facts are straightforward. In 2005, Wells Fargo Bank provided a construction loan in the approximate amount of $23 million to Loop 76, LLC, repayment of which was secured by an office/retail complex in Scottsdale, Arizona. Loop 76 was unable to secure replacement financing before the construction loan’s maturity date, and, Wells Fargo ultimately sued Loop 76 in state court seeking appointment of a receiver. Loop 76 responded by filing its single asset Chapter 11 case. Wells Fargo countered by filing a separate lawsuit in state court against the non-debtor guarantors of the construction loan.

As the loan exceeded the stipulated value of Wells Fargo’s real estate collateral, Loop 76’s plan bifurcated Wells Fargo’s $23 million claim into two separate claims: (i) a secured claim for $17 million; and (ii) an unsecured deficiency claim for the $6 million balance. The plan also classified Wells Fargo’s deficiency claim separate from Loop 76’s other general unsecured claims. This separate classification is significant because Wells Fargo’s deficiency claim was substantially greater in amount than the approximate $181,000 of other general unsecured claims; as such, if the deficiency claim had been classified together with the other unsecured claims, Wells Fargo would have been able control the vote of the general unsecured claims, thereby jeopardizing confirmation of the plan overall.

Wells Fargo objected to the plan and argued, among other things, that Loop 76’s separate classification of its deficiency claim violated Bankruptcy Code section 1122(a), because the debtor classified Wells Fargo’s unsecured deficiency claim “solely to gerrymander an affirmative vote on the plan.” Rejecting Wells Fargo’s contention, the bankruptcy court ultimately held that the existence of a third-party source of payment – the guarantors for the construction loan – rendered Wells Fargo’s deficiency claim dissimilar to the unsecured trade claims. As a result, the bankruptcy court determined that 11 U.S.C. § 1122(a) mandated that Wells Fargo’s deficiency claim be separately classified.

HOLDING:

On appeal, the BAP affirmed the ruling of the bankruptcy court on the claims classification issue, and concluded that a third party source for recovery on a creditor’s unsecured claim is a factor which the bankruptcy court may consider when determining whether claims are substantially similar under section 1122(a).

Significantly, Wells Fargo alleged that the law in the Ninth Circuit requires classification “to be based on the nature of the claim as it relates to the assets of the debtor” as stated in pre-Code case law, including the case of In re Los Angeles Land & Invs., Ltd., 282 F.Supp. 448 (D. Haw. 1968), aff’d, 447 F.2d 1366 ( 9th Cir. 1971) (“Los Angeles Land”).

The BAP disagreed with Wells Fargo’s contention in that regard. According to the BAP, the Ninth Circuit’s more flexible approach to claim classification is demonstrated in the more recently published opinion of Steelcase Inc. v. Johnston (In re Johnston), 21 F.3d 323 (9th Cir. 1994), which allowed separate classification of an unsecured claim based on factors not related to the debtor’s assets, including that: (i) the claim was partially secured; (ii) the debtor and the creditor were embroiled in litigation and the debtor’s claim against the creditor might offset or exceed the creditor’s claim against the debtor; and (iii) if the creditor was successful in its litigation, it could be paid in full before other unsecured creditors. As a result, the BAP determined , Johnston (which looked beyond the assets of the debtor and considered third party sources of recovery for the creditor’s unsecured claim as a basis for dissimilarity) did not expressly overrule Los Angeles Land, but did reject Los Angeles Land’s narrow consideration of the “nature” of a creditor’s claim in any section 1122(a) analysis.

Alternatively, Wells Fargo argued that the bankruptcy court’s holding was inconsistent with Ninth Circuit precedent as stated in Johnston and Barakat v. Life Ins. Co. of Va. (In re Barakat), 99 F.3d 1520, 1526 ( 9th Cir. 1996) because neither of those cases expressly held that a third-party source of payment made the claim at issue dissimilar to the other unsecured claims. Distinguishing Johnson and Barakat, the BAP made short shrift of this argument, by pointing out that the third-party source of recovery in Johnston was collateral, not cash, while there was no third party source of recovery in Barakat.

Finally, Wells Fargo argued that the bankruptcy court’s ruling was inconsistent with Barakat’s express holding, in that deficiency claims are so “substantially similar” to other unsecured claims that they cannot be classified separately from other unsecured claims absent a business or economic justification. Rejecting this argument, the BAP pointed out that in the Loop 76 case, Wells Fargo did in fact have a “special circumstance” which did not apply to any other unsecured creditors:– Wells Fargo had a third party source of recovery for its deficiency claim in the form of the nondebtor guarantors. Therefore, the BAP opined, even if the debtor were able to pay its proposed pro rata distribution to Wells Fargo under the plan, Wells Fargo still had the right to collect its entire debt from the guarantors, unlike any other of the debtor’s unsecured creditors. Discussing Johnson in detail, the BAP also clarified that the same analysis applies if the third party source of recovery is collateral rather than cash.

Accordingly, the BAP affirmed the bankruptcy court and held that, “at minimum, a bankruptcy court may consider sources outside of the debtor’s assets, such as the potential for recovery from a non-debtor or nonestate source” when determining whether unsecured claims are substantially similar under section 1122(a).

AUTHORS’ NOTE:

This case is significant in that it enables a Chapter 11 debtor to reduce and/or eliminate a significant point of leverage for most commercial lenders, especially in single asset Chapter 11 cases – the ability to use an unsecured deficiency claim to control the vote of the class of unsecured non-priority claims. Indeed, a commercial lender in single asset Chapter 11 cases often has its loan bifurcated into two separate claims: (i) a secured claim to the extent of the value of the real property collateral; and (ii) an unsecured deficiency claim for the balance of the loan amount. If the unsecured deficiency claim is classified together with other general unsecured claims, the unsecured deficiency claim will usually be greater than one-third of the total unsecured non-priority claims, thereby giving the lender veto power over the treatment of unsecured non-priority claims. See 11 U.S.C. § 1126(c), which provides that a class of claims has accepted a plan if at least two-thirds in amount and more than one-half in number of the allowed claims in such class have voted to accept the plan.

This veto power can be devastating to a Chapter 11 debtor in a single asset case with only one class of impaired unsecured claims. While the debtor may be in a position to “cram down” the lender’s secured claim over the lender’s objection, the debtor will be unable to confirm a plan making less than 100% distributions on unsecured claims if because the lender votes its deficiency claim to block the plan and therefore causes the sole impaired class of unsecured claims to reject the plan.

The Loop 76 case reduces the partially secured creditor’s power to veto a Chapter 11 plan. This is because a commercial lender with an undersecured claim in a single asset real estate Chapter 11 case usually finds itself in the unique position of having recourse to third parties via personal guaranties – a characteristic that other unsecured non-priority claims do not typically share. The Loop 76 case confirms that the Chapter 11 debtor may use that unique characteristic to separately classify the lender’s unsecured deficiency claim without violating section 1122(a), thereby providing the debtor with a stronger opportunity to “cram down” its plan over the secured creditor’s objection.

These materials were prepared by Martin A. Eliopulos of Higgs Fletcher & Mack, LLP, San Diego, California, with editorial contributions from Monique Jewett-Brewster, of MacConaghy & Barnier, PLC, Sonoma, California. Mr. Eliopulos is a member of the Insolvency Law Committee.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee

The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice. For more information about the Business Law Standing Committees, please see the standing committees web page.

These periodic e-mails are being sent to you because you expressed interest in receiving updates from the Insolvency Law Committee of the State Bar of California’s Business Law Section. As a Section member, if you would also like to sign up to receive e-bulletins from other standing committees, simply click HERE and follow the instructions for updating your e-bulletin subscriptions in My State Bar Profile. If you have any difficulty or need assistance, please feel free to contact Travis Gall. If you are not a member, or know of friends or colleagues who might wish to join the Section to receive e-bulletins such as this, please click HERE to join online.

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Eighth Circuit affirms dismissal of RICO suit over alleged inflated appraisals

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Monday, April 23, 2012 6:22 AM
To: Charles Cox
Subject: Eighth Circuit affirms dismissal of RICO suit over alleged inflated appraisals

Eighth Circuit affirms dismissal of RICO suit over alleged inflated appraisals

· Goodwin Procter LLP

· USA

·

· April 17 2012

The Eighth Circuit affirmed a lower court’s dismissal of plaintiffs’ lawsuit over an alleged “inflated appraisal fee scheme.” Plaintiffs filed a putative class action alleging violations of the Racketeer Influenced and Corrupt Organizations Act, the Real Estate Settlement Procedures Act, and several state laws. Plaintiffs alleged the defendants “skimmed the difference” between the actual cost of the appraisal and that which was disclosed and charged in the HUD-1 settlement statement. Plaintiffs maintained that defendants required appraisers into performing appraisals at below market rate, but did not pass along the reduced appraisal fees to plaintiffs. The lower court held that plaintiffs lacked standing under RICO and the state anti-racketeering statute because the alleged RICO violations did not cause plaintiffs to suffer any “concrete financial loss.” More specifically, the lower court held that the plaintiffs would have been in the same financial position in the absence of the alleged RICO violations. The Eighth Circuit agreed.

Notably, the Eighth Circuit affirmed the lower court’s dismissal of plaintiffs’ Section 8(a) RESPA claim, noting that the company which arranged real-property appraisals did not appraise properties, but simply hired an appraiser on an approved list and “merely forwarded the appraisal” to the lender. The Eighth Circuit held further that plaintiffs would have to allege “more than the mere fact of a referral and the possibility of improper control to sustain a claim under Section 8(a).” The Eighth Circuit also agreed with the lower court’s dismissal of plaintiffs’ Section 8(b) RESPA claim, pointing to its ruling in Haug v. Bank of America, N.A., 317 F.3d 832 (8th Cir. 2003), in which it held that Section 8(b) is an anti-kickback provision which “unambiguously requires at least two parties to share a settlement fee in order to violate the statute.” Like the allegations in Haug, plaintiffs’ allegations were about marking up the appraisal fee, and “an overcharge, standing alone, does not violate Section 8(b) of RESPA.”


MN-RICO Suit Dismissed.pdf

MERS, Sued by Louisiana Counties – PRESENTING KENTUCY v. MERS!

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Sunday, April 29, 2012 2:11 PM
To: Charles Cox
Subject: MERS, Sued by Louisiana Counties – PRESENTING KENTUCY v. MERS!

MERS, Sued by Louisiana Counties, and NOW PRESENTING KENTUCY v. MERS!

April 28th, 2012 | Author: Matthew D. Weidner, Esq.

The list of lawsuits against MERS just keeps on growing and growing and growing. Attached below is the latest attempt by 14 counties in Texas to recover monies they claim are due from MERS.

For all of you new to the whole MERS as the villain game, I encourage you to Google MERS v. Azize and read what a good judge from right here in Pinellas County had to say about the whole MERS thing. I encourage everyone in this country, especially all those elected officials that remain content to continue accepting the lies and the catastrophe presented to us by the banking sector and their attorneys to ask yourselves,

What if the world had listened to Judge Walt Logan in his 2004 opinion, MERS v. Azize?

And now from the complaint itself:

For hundreds of years, the combination of recorded deeds, recorded mortgages and recorded mortgage assignments have provided the public in Kentucky with the tools necessary to effectuate real estate transactions with the knowledge that all potential interests in the property have been addressed with legal finality. The county recording system in Kentucky has been in place since the Commonwealth joined the United States.

Defendants have failed to record mortgage assignments in contravention of Kentucky law depriving Kentucky counties of millions of dollars in unpaid fees for mortgage assignments. The Defendants have taken advantage of the protections afforded by Kentucky’s laws by recording mortgages in land records maintained by Kentucky’s counties while at the same time they have failed to comply with Kentucky’s laws requiring accurate information.

Kentucky counties are charged with maintaining a property records system that provides Kentucky citizens with accurate notice of property interests in land. Kentucky specifically requires that all mortgages be recorded in the county clerk’s office: “All deeds, mortgages and other instruments required by law to be recorded to be effectual against purchasers without notice, or creditors, shall be recorded in the county clerk’s office…” KRS382.110(1). After the initial recording of a mortgage, Kentucky law requires that all assignments of a mortgage be recorded in the county clerk’s office, KRS 382.360(3), and that a fee be paid for each assignment by the assignee. KRS 64.012(1)(a)

KY-USDC-Complaint-KY-v-MERS.pdf

New post How To Tell The Judge “NO” and MAYBE Not Have Him /Her Get Pissed Off

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Thursday, June 21, 2012 9:11 PM
To: Charles Cox
Subject: [New post] How To Tell The Judge “NO” and MAYBE Not Have Him/Her Get Pissed Off

New post on Livinglies’s Weblog

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This article was prompted by a very reasoned argument presented by CA Attorney Dan Hanacek:

Even In the Event the Court Finds the "Assignment" Valid, the Assigning of the Note to a Co-Obligor Makes it Functus Officio

"It has long been established in California that the assignment of a joint and several debt to one of the co-obligors extinguishes that debt." (Gordon v. Wansey (1862) 21 Cal. 77, 79.) "The assignment amounts to payment and consequently the evidence of that debt, i.e., the note or judgment, becomes functus officio (of no further effect)"-and precludes any further action on the note itself. Any action would not be on the note itself, but rather one for contribution. (Id.; Quality Wash Group V, Ltd. V. Hallak (1996) 50 Cal.App.4th 1687, 1700; Civ. Code §1432.) In the instant case, even if the alleged assignment is seen to be valid, then a co-obligor was assigned the note and the debt has been extinguished.

Note: the trustee of the securitized trust is a co-obligor.

Note: Fannie Mae, Freddie Mac and Ginnie Mae are co-obligors.

Note: the servicer is almost always a co-obligor.

Questions for Neil:

Have they extinguished this debt by endorsing it and/or assigning it to the transaction parties?

Does this only apply in CA? I cannot believe that this would be the case.

CA – Single Lender Making Two Nonpurchase Money Loans Assigns Junior Loan; Junior Loan Can Pursue Money Judgment.

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Thursday, June 21, 2012 9:15 AM
To: Charles Cox
Subject: CA – Single Lender Making Two Nonpurchase Money Loans Assigns Junior Loan; Junior Loan Can Pursue Money Judgment.

When a single lender contemporaneously makes two nonpurchase money loans secured by two deeds of trust referencing a single real property and soon thereafter assigns the junior loan to a different entity, the assignee of the junior loan, who is subsequently "sold out" by the senior lienholder’s nonjudicial foreclosure sale, can pursue the borrower for a money judgment in the amount of the debt owed. Trial court’s grant of summary judgment to defendant is reversed.

Cadlerock Joint Venture v Lobel.docx

Yet more disgusting layers of BS to wade through – “Who’s on First?” and “We’re From the Government and We’re Here to Help.” Yeah, right…

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Thursday, June 21, 2012 6:53 AM
To: Charles Cox
Subject: Yet more disgusting layers of BS to wade through – "Who’s on First?" and "We’re From the Government and We’re Here to Help." Yeah, right…

HUD No. 12-096
Tiffany Thomas Smith
(202) 708-0980
FOR RELEASE
Friday
June 8, 2012

HUD TO EXPAND SALE OF TROUBLED MORTGAGES THROUGH PROGRAM DESIGNED TO HELP BORROWERS AVOID COSTLY, LENGTHY FORECLOSURES
Enhanced FHA note sale program part of Obama Administration effort to address shadow inventory, target relief to hardest hit communities

CHICAGO – Thousands of borrowers severely delinquent on loans insured by the Federal Housing Administration (FHA) will have help from a new servicer to explore affordable mortgage solutions or achieve a favorable resolution under an enhanced government note sale program announced today. In a press conference held at the 2012 Clinton Global Initiative America Meeting, U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan and Acting FHA Commissioner Carol Galante launched the Distressed Asset Stabilization Program, an expansion of an FHA pilot program that allows private investors to purchase pools of mortgages headed for foreclosure and charges them with helping to bring the loan out of default.

“While our housing market has momentum we haven’t seen since before the crisis, there are still thousands of FHA borrowers who are severely delinquent today – who have exhausted their options and could lose their homes in a matter of months,” said HUD Secretary Shaun Donovan. “With this program, we will increase by as much as ten times the number of loans available for purchase while making it easier for borrowers to avoid foreclosure. Finding ways to bring these loans out of default not only helps the borrower, but helps the entire neighborhood avoid the disinvestment and decline in value that accompanies a distressed property.”

The FHA note sales program began as a pilot in 2010 and has resulted in the purchase of more than 2,100 single family loans to date. A servicer can place a loan into the loan pool if the following criteria are met:

  • The borrower is at least six months delinquent on their mortgage;
  • The servicer has exhausted all steps in the FHA loss mitigation process;
  • The servicer has initiated foreclosure proceedings; and
  • The borrower is not in bankruptcy.

Under the program, FHA-insured notes are sold competitively at a market-determined price generally below the outstanding principal balance. Once the note is purchased, foreclosure is delayed for a minimum of six additional months as the borrower gets direct help from their servicer to help to find an affordable solution to avoid foreclosure. The investor purchases the loan at a discount and then takes additional steps to help the borrower avoid default, whether through modifying their loan terms or helping them through a short sale, in order to maximize the return on the sale.

“The Distressed Asset Stabilization Program offers a better shot for the struggling homeowner and lower losses to the FHA,” said Acting FHA Commissioner Carol Galante. “By addressing the growing back log of distressed mortgages, FHA is helping to mitigate the negative effects of the foreclosure process as part of the Administration’s broader commitment to community stabilization.”

Beginning with the September 2012 scheduled sale, FHA will increase the number of loans available for purchase from approximately 1,800 each year to a quarterly rate of up to 5,000, and add a new neighborhood stabilization pool to encourage investment in communities hardest hit by the foreclosure crisis.

In an additional safeguard against blight, HUD will require that no more than 50 percent of the loans within a purchased pool become real-estate owned (REO) properties and – if the servicer and borrower are unable to bring the loan out of default – that the servicer hold the loan for at least three years.

“Currently, FHA’s inventory of REO properties available for sale is at its lowest level since FY 2009,” added Galante. “At the same time, the inventory of seriously delinquent loans is near an all time high. With many neighborhoods still fighting to recover from the housing crisis, going upstream will allow us to help more borrowers before they go through foreclosure and their homes ever come into the REO portfolio.”

“As the court explained in (Wigod v. Wells Fargo Bank),while the TPP did not set forth the specific terms of repayment, Wells Fargo was required to offer a modification that was consistent with HAMP . . .

28 Jul

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Friday, May 11, 2012 9:12 AM
To: Charles Cox
Subject: "As the court explained in (Wigod v. Wells Fargo Bank),while the TPP did not set forth the specific terms of repayment, Wells Fargo was required to offer a modification that was consistent with HAMP . . .

Inline image 6Inline image 1

Wells Fargo Loses Bid to Dismiss Homeowner Suit

By CHRIS MARSHALL

SAN FRANCISCO (CN) – A federal judge dismissed part of a class action accusing Wells Fargo of offering temporary loan modifications without the intention of ever making the modifications permanent.

U.S. Magistrate Joseph Spero found the class failed to state a claim for breach of contract or debt collection violations while allowing unfair competition claims to remain. Spero also gave the class leave to amend the complaint to allege damages from the bank’s alleged contract breach.

Lead plaintiffs Vicki and Richard Sutcliffe claim Wells Fargo offered them a temporary home loan modification after they fell behind on their mortgage payments. The Sutcliffes made the required reduced payments but did not receive paperwork for a loan modification at the end of the trial period. Instead Wells Fargo sent paperwork indicating the loan was in default and another letter stating it was not going to permanently modify their loan. Over a month later Wells Fargo sent another letter offering them a "Special Forbearance Plan," under which they would make more reduced payments. Plaintiffs made the payments, only to be sent another letter again stating the loan was in default. The bank returned one payment and told the Sutcliffes not to make any more. Soon after they received a letter from a law firm indicating they had been retained by Wells Fargo to initiate foreclosure proceedings. Plaintiffs asked Wells Fargo again to reconsider the loan modification. The bank responded by putting them on another forbearance plan. Plaintiffs accepted the offer and began making payments. They soon received another letter saying the property would be sold at a trustee’s sale.

Plaintiffs filed suit on behalf of "all homeowners nationwide who received a trial loan modification proposal substantially similar to the TPP (Home Affordable Modification Program Trial Period) from any of the Defendants; made the payments set forth in the proposal; provided true information with respect to all representations required by the proposal; and were either (a) denied a permanent loan modification; (b) offered an illusory ‘modification’ on terms substantially similar to their unmodified loan; and/or (c) who received, entered into, and complied with the above described Forbearance Plans from Wells Fargo, consisting of the Offer Letter and Agreement, in substantially the same form(s) presented to Plaintiffs."

Plaintiffs accuse Wells Fargo of unfair competition, breach of contract and bad faith. Claims for rescission and restitution were rendered moot when the Sutcliffes recently accepted a permanent loan modification from Wells Fargo, according to the ruling.

The court rejected Wells Fargo’s argument that the other claims were not ripe, finding their claims "turn on conduct that had already occurred at the time the action was filed, namely, Wells Fargo’s failure to offer them a permanent modification after Plaintiffs allegedly complied with all requirements of the TPP."

The court also noted that "the allegations were sufficient to show that denying judicial consideration would have imposed significant hardship on Plaintiffs because they had received notices that they were in default on their loan and that their file had been passed on to Wells Fargo’s counsel to initiate foreclosure proceedings."

Spero similarly refuted Wells Fargo’s argument that by offering a permanent modification, all plaintiffs’ claims are moot. According to the ruling, "claims that are related to a foreclosure but which are based on alleged wrongful conduct that goes beyond the wrongful foreclosure are not necessarily rendered moot where the foreclosure is vacated… The Court finds that is the case here because Plaintiffs’ claims are based on Wells Fargo’s alleged unfair and deceptive conduct in connection with the two forbearance offers and the TPP and not on wrongful conduct committed in foreclosure proceedings."

The court found Wells Fargo’s assertion that the relevant conduct in the case did not occur in California to be a factual question that may be suitable at summary judgment but does not support dismissal. Wells Fargo had tried to have plaintiffs’ allegations under California’s unfair competition law tossed on the grounds that the conduct did not occur in California.

Concluding that the public would likely be deceived by communications from Wells Fargo that claim the borrower would be offered a modification if the borrower complied with the terms of the TPP and forbearance the court found the allegations sufficient to hold up at this stage of the litigation.

While noting disagreements among courts about whether an enforceable contract was created when the TPP was sent to plaintiffs Spero ultimately found it was, at least for the purposes of surviving a motion to dismiss, rejecting multiple arguments by Wells Fargo, including that the TPP could not create an enforceable contract because it did not set forth the terms of repayment that would apply to the modified loan.

According to the ruling, "As the court explained in (Wigod v. Wells Fargo Bank),while the TPP did not set forth the specific terms of repayment, Wells Fargo was required to offer a modification that was consistent with HAMP (Home Affordable Modification Program) guidelines and therefore, the agreement did not give Wells Fargo unlimited discretion as to the repayment terms… Because Wells Fargo was required to comply with HAMP guidelines in determining the terms of repayment under a modification agreement, the Court concludes, at least at the pleading stage, that the terms of the TPP are sufficiently definite to support the existence of a contract."

And since plaintiffs were required to submit financial documents not required under the original loan and agreed to go to credit counseling they adequately alleged consideration to survive a motion to dismiss.

Spero did end up dismissing the claim for breach of contract, however, agreeing with the bank that the only alleged damages are the reduced payments made under the TPP and these payments do not constitute damages because plaintiffs had a pre-existing duty to make payments on their loan.

The court gave leave to amend that part of the complaint, however, noting that plaintiffs represented at oral argument that they could allege other types of damages, including adverse credit consequences in an increase in the principal amount owed on the loan.

CA-USDC-Northern-Order-Sutcliffe-v-WellsFargo.pdf

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