[BROKERDIRT] order USDC VA - Bagley v. Wells Fargo - mtd denied in fha f/c - no face to face meeting; fha regs incorporated into mtg and enforceable

[April Charney]

EDWARD M. BAGLEY, et al, Plaintiffs, v. WELLS FARGO BANK, N.A., et al, Defendants.

Civil Action No. 3:12-CV-617

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA, RICHMOND DIVISION

2013 U.S. Dist. LEXIS 11880

January 29, 2013, Decided
January 29, 2013, Filed

CORE TERMS: deed, foreclosure, face-to-face, foreclosure sale, good faith, fair dealing, mortgage, declaratory judgment, mitigation, default, mortgagee, deed of trust, quiet, breach of contract, failure to comply, implied covenant, arrange, breached, void, unlawful detainer, failed to comply, cause of action, conditions precedent, declaratory, foreclosing, quieting, unpaid, monthly installments, communicate, interview

COUNSEL: [*1] For Edward M. Bagley, Laura L. Bagley, Plaintiffs: Henry W. McLaughlin, III, LEAD ATTORNEY, The Law Office of Henry McLaughlin, P. C., Richmond, VA.

For Wells Fargo Bank, N.A., Equity Trustees, L.L.C., Defendants: Hunter Wilmer Sims, Jr., LEAD ATTORNEY, Kaufman & Canoles PC, Norfolk, VA; Matthew B. Chmiel, LEAD ATTORNEY, Terry Catherine Frank, Kaufman & Canoles PC (Richmond), Richmond, VA.

JUDGES: James R. Spencer , United States District Judge.

OPINION BY: James R. Spencer

OPINION

MEMORANDUM OPINION

THIS MATTER is before the Court on a Motion to Dismiss Plaintiffs' Amended Complaint filed by Defendants Wells Fargo Bank, N.A. ("Wells Fargo ") and Equity Trustees, L.L.C. ("Equity Trustees")(collectively the "Defendants") pursuant to Federal Rule of Civil Procedure 12(b)(6)(ECF No. 10). Plaintiffs seek compensatory damages against Defendants and an order quieting title following the foreclosure of their home, as well as a declaratory judgment stating that Plaintiffs are not liable for the foreclosure-related costs. The Court dispenses with oral argument because the facts and legal contentions are adequately presented in the materials presently before the Court, and argument would not aid in the decisional process. E.D. [*2] Va. Loc. Civ. R. 7(J). For the reasons discussed below, the Court GRANTS IN PART and DENIES IN PART Defendants' Motion.

I. BACKGROUND

On October 15, 2008, Plaintiffs Edward and Laura Bagley entered into a home mortgage loan for a residence in Richmond, Virginia. Guaranteed Home Mortgage Company, Inc. ("Guaranteed Home") was the lender and the loan was evidenced by a Note and secured by a Deed of Trust. Guaranteed Home assigned the Note to Defendant Wells Fargo, and Wells Fargo became the Note holder. The Deed of Trust appointed Samuel I. White, P.C. ("White") as trustee.

Plaintiffs assert that the loan was governed by Fair Housing Act ("FHA") regulations promulgated by the Department of Housing and Urban Development ("HUD"), and that the Note and Deed of Trust permitted Defendants to accelerate the Note or proceed with foreclosure only if allowed by FHA regulations. Specifically, Plaintiffs allege that Defendants were subject to regulation 24 C.F.R. § 203.604, which requires the mortgagee to have a face-to-face interview with the mortgagor, or to make a reasonable effort to arrange such a meeting, before three full monthly payments on the loan are unpaid. Plaintiffs further allege that [*3] Defendants were subject to 24 C.F.R. § 203.501, which states that mortgagees "must consider the comparative effects of their elective servicing actions, and must take those appropriate actions which can reasonably be expected to generate the smallest financial loss to the Department [of Housing and Urban Development]." § 203.501. § 203.501 then lists examples of loss mitigation actions which the mortgagee might take. Lastly, Plaintiffs assert that Defendants were subject to 24 C.F.R. § 203.605, ¹ which requires that "[b]efore four full monthly installments due on the mortgage have become unpaid, the mortgagee shall evaluate on a monthly basis all of the loss mitigation techniques provided at § 203.501 to determine which is appropriate. Based upon such evaluations, the mortgagee shall take the appropriate loss mitigation action." § 203.605.

FOOTNOTES

1 The Amended Complaint mistakenly cites this regulation as § 203.501.


Plaintiffs fell more than three months behind on their mortgage payments. Plaintiffs claim that Edward Bagley tried to communicate with Wells Fargo in order to resolve the debt, but "was rebuffed by Wells Fargo. " (Am. Compl. ¶ 16.) Plaintiffs also assert that Wells Fargo "refused [*4] to accept any payment for less than an amount sufficient to bring the loan current." (Am. Compl. ¶ 15.) Plaintiffs claim that no creditor, including Wells Fargo, ever held or attempted to arrange a face-to-face meeting with Plaintiffs or "ever considered a deed in lieu of foreclosure as an alternative to foreclosure on the home or fairly considered any forbearance or recasting of the mortgage." (Am. Compl. ¶ 14.)

On March 16, 2011, Plaintiffs allege that Wells Fargo removed White as trustee on the Deed of Trust and appointed Defendant Equity Trustees as substitute trustee. Plaintiffs assert that, on Wells Fargo's instructions, Equity Trustees advertised the home for foreclosure and conducted a foreclosure sale on June 24, 2012, where Wells Fargo made the high bid. Plaintiffs contend that, at the time of the foreclosure sale, Plaintiffs "had approximately $15,000.00 that they were prepared to apply to arrearage on the loan." (Am. Compl. ¶ 23.) On August 11, 2011, Wells Fargo filed an unlawful detainer against Plaintiffs in the General District Court of Henrico County, Virginia and was awarded possession of the home on December 2, 2011. Plaintiffs appealed, and as of the filing of Plaintiffs' [*5] suit, the unlawful detainer matter was pending in the Circuit Court of Henrico County, Virginia.

In Count One, Plaintiffs allege that Defendants breached the terms of the Note and Deed of Trust by failing to comply with FHA regulations. Specifically, Plaintiffs claim that Defendants failed to arrange or attempt to arrange a face-to-face meeting under § 203.604 or to consider loss mitigation actions under § 203.501. Plaintiffs contend that this purported failure to comply with FHA regulations renders Wells Fargo's filing of an unlawful detainer action a further breach of the Note and Deed of Trust. For these reasons, Plaintiffs maintain that the foreclosure sale and trustee's deed are void, or alternatively, voidable. In Count Two, Plaintiffs allege that, as a result of the conduct alleged in Count One, Defendants breached an implied covenant of good faith and fair dealing in the Note and Deed of Trust. In Count Three, Plaintiffs seek a declaratory judgment that they are not responsible for Wells Fargo's foreclosure-related expenses. Plaintiffs claim that they suffered: the loss of title to and quiet enjoyment of their home; legal expenses; damage to their credit history; and substantial [*6] inconvenience. Accordingly, Plaintiffs assert that they have superior title and ask for an order quieting title and compensatory damages in the amount of $60,000.00.

Defendants filed a Motion to Dismiss on August 30, 2012, and Plaintiffs amended their Complaint on September 20, 2012. ² Defendants filed a Motion to Dismiss the Amended Complaint on October 4, 2012. Defendants argue that the Amended Complaint should be dismissed pursuant to Rule 12(b)(6) on the following grounds: (1) Plaintiffs have failed to state a breach of contract claim for a violation of FHA regulations; (2) Virginia does not recognize an independent cause of action for breach of implied duty of good faith and fair dealing, and even so, the Uniform Commercial Code ("U.C.C.") which does allow for this implied covenant does not apply to home mortgage loans; (3) Plaintiffs are not entitled to a declaratory judgment because the claim is based on speculative action by Wells Fargo; and (4) Plaintiffs have not sufficiently alleged that they have superior title to the home, and are not entitled to a rescission of the foreclosure sale. This motion has been fully briefed and this matter is now ripe for review.

FOOTNOTES

2 In light of [*7] the Motion to dismiss the Amended Complaint, the Court thus DENIES AS MOOT Defendants' Motion to Dismiss Plaintiff's original Complaint (ECF No. 4.)


II. LEGAL STANDARD

A motion to dismiss for failure to state a claim upon which relief can be granted challenges the legal sufficiency of a claim, rather than the facts supporting it. Fed. R. Civ. P. 12(b)(6); Goodman v. Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007); Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992). A court ruling on a Rule 12(b)(6) motion must therefore accept all of the factual allegations in the complaint as true, see Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999); Warner v. Buck Creek Nursery, Inc., 149 F. Supp. 2d 246, 254-55 (W.D. Va. 2001), in addition to any provable facts consistent with those allegations, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 81 L. Ed. 2d 59 (1984), and must view these facts in the light most favorable to the plaintiff. Christopher v. Harbury, 536 U.S. 403, 406, 122 S. Ct. 2179, 153 L. Ed. 2d 413 (2002). The Court may consider the complaint, its attachments, and documents "attached to the motion to dismiss, so long as they are integral to the complaint and authentic." Sec'y of State for Defence v. Trimble Navigation Ltd., 484 F.3d 700, 705 (4th Cir. 2007).

To [*8] survive a motion to dismiss, a complaint must contain factual allegations sufficient to provide the defendant with "notice of what the . . . claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)). Rule 8(a)(2) requires the complaint to allege facts showing that the plaintiff's claim is plausible, and these "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 540 U.S. at 545; see id. at 555 n.3. The Court need not accept legal conclusions that are presented as factual allegations, id. at 555, or "unwarranted inferences, unreasonable conclusions, or arguments," E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir. 2000).

III. DISCUSSION

Defendants argue that Count One should be dismissed because Plaintiffs have not sufficiently stated a claim that Defendants failed to comply with FHA regulations, and even so, Plaintiffs have not alleged that they were harmed as a result of the alleged failure to comply with the regulations. Further, Defendants argue that a failure to comply with FHA regulations is an affirmative defense [*9] to foreclosure, but does not create a private cause of action. Defendants argue that Count Two should be dismissed because there is no independent cause of action for breach of an implied duty of good faith and fair dealing in Virginia, and even if Plaintiffs had pled this claim within the context of a breach of contract claim, the U.C.C. does not apply to a creation or transfer of an interest in or lien on real property. In addition, Defendants assert that they were merely exercising their rights under the Deed of Trust by foreclosing on the home, and thus, Plaintiffs cannot establish that Defendants breached an implied covenant of good faith and fair dealing. Defendants argue that Count Three should be dismissed because Plaintiffs' claim for declaratory judgment is based on hypothetical future action by Wells Fargo. Lastly, Defendants challenge Plaintiffs' action to quiet title because Plaintiffs do not claim that they have satisfied their debts under the Note and Deed of Trust. The Court discusses below the sufficiency of each of Plaintiffs' claims.

A. Count One: Breach of Note and Deed of Trust

Under Virginia law, a party alleging breach of contract must establish that the defendant [*10] owed the plaintiff a legally enforceable obligation, the defendant violated that obligation, and the plaintiff suffered injury or damage as a result of the defendant's breach. See Filak v. George, 267 Va. 612, 619, 594 S.E.2d 610 (Va. 2004). Further, "[a] material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract." Countryside Orthopaedics, P.C. v. Peyton, 261 Va. 142, 154, 541 S.E.2d 279 (2001). "The essential purposes of a deed of trust are two-fold: to secure the lender-beneficiary's interest in the parcel it conveys and to protect the borrower from acceleration of the debt and foreclosure on the securing property prior to the fulfillment of the conditions precedent it imposes." Mathews v. PHH Mortgage, 283 Va. 723, 732, 724 S.E.2d 196 (Va. 2012).

Plaintiffs allege that Defendants breached the Deed of Trust by foreclosing on the house without complying with specific FHA regulations. Paragraph 9(d) of the Deed of Trust provides that "[i]n many circumstances regulations issued by the Secretary [of HUD] will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclose [*11] if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary." (Am. Compl. Ex. A. 7.)

Firstly, Plaintiffs argue that Wells Fargo failed to comply with § 203.604, which provides:

The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to-face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 30 days before foreclosure is commenced, or at least 30 days before assignment is requested if the mortgage is insured on Hawaiian home land pursuant to section 247 or Indian land pursuant to section 248 or if assignment is requested under § 203.350(d) for mortgages authorized by section 203(q) of the National Housing Act.

§ 203.604(b). Plaintiffs assert that they "fell more than three months behind on the note while living in the home," (Am. Compl. ¶ 13), and that "no creditor entity had a face-to-face [*12] meeting with the Bagleys or with either of them, or made any attempt to arrange for such face-to-face meeting." (Am. Compl. ¶ 14.) Accordingly, Plaintiffs assert that the foreclosure sale was void, or alternatively, voidable.

Defendants argue that Plaintiffs have not sufficiently stated a claim because Plaintiffs conflate the two situations in which § 203.604 requires a face-to-face meeting: (1) before three full monthly installments are unpaid; or (2) at least 30 days before commencement of foreclosure if default occurs in a repayment plan arranged other than during a personal interview. See Mathews, 283 Va. at 742-43(Kinser, J., concurring). Further, Defendants argue that Plaintiffs do not claim that they were ready, willing, and able to cure the default if they had had the meeting, and thus, Plaintiffs cannot establish that they were damaged by a failure to comply with § 203.604.

Plaintiffs have sufficiently alleged that Defendants violated the Deed of Trust by foreclosing on the home without complying with § 203.604. In Virginia, "a lender must comply with all conditions precedent to foreclosure in a deed of trust even if the borrowers are in arrears." Mathews, 283 Va. at 730; see [*13] also Bayview Loan Servicing, LLC v. Simmons, 275 Va. 114, 654 S.E.2d 898 (2008). Further, the Supreme Court of Virginia held in Mathews v. PHH Mortgage, a case in which the deed of trust also required compliance with FHA regulations, that "the face-to-face meeting requirement [of § 203.604(b)] is a condition precedent to the accrual of the rights of acceleration and foreclosure incorporated into the Deed of Trust." 283 Va. at 736-37. In this case, Plaintiffs clearly allege that they failed to pay their mortgage installments for more than three months, and that the Defendants violated § 203.604 because they never arranged a face-to-face meeting or attempted to do so. (See Am. Compl. ¶¶ 13-14.) Accordingly, by asserting that Defendants failed to comply with § 203.604, Plaintiffs have sufficiently alleged that Defendants failed to satisfy a condition precedent to foreclosing on the home, and thus, have breached the Deed of Trust. ³

FOOTNOTES

3 Defendants also seek to dismiss Count One on the ground that a failure to comply with FHA regulations is an affirmative defense to foreclosure, but does not create a private cause of action. However, while the plaintiffs in Mathews sought a declaratory judgment that their [*14] foreclosure was void rather than compensatory damages, Mathews expressly held that "[b]orrowers may sue to enforce conditions precedent to foreclosure." 283 Va. at 733.


Further, Plaintiffs have sufficiently pled that they were harmed by Defendants' alleged failure to comply with § 203.604, Although Plaintiffs have not alleged that they were ready, willing, and able to fully satisfy the debt if Defendants had arranged the face-to-face meeting required by § 203.604, Plaintiffs would have been able to communicate in person with Wells Fargo representatives about other ways that they could resolve their debt. Instead, Plaintiffs assert that they were unable to meet face-to-face with Wells Fargo representatives about their default and that Edward Bagley was rebuffed when he attempted to communicate with Wells Fargo about the debt. 12 U.S.C. § 1715, which authorizes HUD to implement § 203.604, requires lenders to engage "in loss mitigation actions for the purpose of providing an alternative to foreclosure" when a borrower is in default or facing imminent default. 12 U.S.C. § 1715 (emphasis added); see Mathews, 283 Va. 741 n.6. The face-to-face meeting creates an opportunity for homeowners [*15] in default to avoid foreclosure, ⁴ thus surely a plaintiff may be harmed if they are denied this opportunity, even if they are not able to pay the full debt at the time of the meeting. Therefore, Plaintiffs have sufficiently stated a claim that Defendants breached the Deed of Trust by failing to comply with § 203.604. The Motion to dismiss this claim is thus DENIED.

FOOTNOTES

4 Seemingly, there would be no reason to hold a face-to-face meeting to discuss the default if the borrowers were prepared to fully cure the debt at that point anyways. For this reason, HUD requires that the face-to-face meetings are conducted by "staff that is adequately trained to discuss the delinquency and the appropriate loss mitigation options." Mathews, 283 Va. at 740.


Secondly, Plaintiffs allege that Defendants violated § 203.501, which provides that:

Mortgagees must consider the comparative effects of their elective servicing actions, and must take those appropriate actions which can reasonably be expected to generate the smallest financial loss to the Department. Such actions include, but are not limited to, deeds in lieu of foreclosure under § 203.357, pre-foreclosure sales under § 203.370, partial claims under § 203.414, [*16] assumptions under § 203.512, special forbearance under §§ 203.471 and 203.614, and recasting of mortgages under § 203.616. HUD may prescribe conditions and requirements for the appropriate use of these loss mitigation actions, concerning such matters as owner-occupancy, extent of previous defaults, prior use of loss mitigation, and evaluation of the mortgagor's income, credit and property.

§ 203.501. Plaintiffs claim that Defendants never considered a deed in lieu of foreclosure or "fairly considered any forbearance or recasting of the mortgage." (Am. Compl. ¶ 14.) Plaintiffs further assert that Edward Bagley was rebuffed by Wells Fargo when he tried to resolve the debt on the loan and that Wells Fargo refused to accept any payment less than the full amount needed to bring the loan current. At the time of the foreclosure sale, Plaintiffs allegedly had $15,000.00 that they were prepared to apply to the arrearage.

Plaintiffs have not sufficiently stated a claim for breach of the Deed of Trust by alleging that Defendants violated § 203.501. § 203.501 requires Defendants to consider the comparative effects of their elective servicing actions, and Plaintiffs have alleged no facts indicating [*17] that Defendants failed to do so. In addition, § 203.501 provides a non-exhaustive list of loss mitigation actions that the mortgagee may consider taking, and Defendants were not required to take any specific action on the list as long as they took any appropriate actions which could reasonably have been expected to most significantly reduce HUD's financial loss. The allegations that Wells Fargo "rebuffed" Edward Bagley or refused to accept payment for less than the amount needed to bring the loan current do not, without more, sufficiently state a claim that Defendants failed to comply with these provisions of § 203.501. Accordingly, Plaintiffs have failed to state a breach of contract claim for failure to comply with § 203.501, and the Court GRANTS the motion with respect to this claim. ⁵

 

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