SharpThinking

No. 61    Perspectives on Developments in the Law from The Sharp Law Firm, P.C.     April 2012

Affordable Mortgage Program Is Enforceable Through State Causes of Action, Court Rules

By John T. Hundley, 618-242-0246, Jhundley@lotsharp.com

The Obama Administration’s Home Affordable Mortgage Program (“HAMP”) does not contain a federal private right to sue for violation of its terms, but it also does not preempt otherwise viable state-law claims which incorporate terms and standards of the federal program, a federal appeals court in Chicago ruled last month.

Rejecting most of the arguments of a mortgage servicer which accepted the plaintiff for a trial program but failed to offer her a permanent mortgage modification, the court relied heavily on HAMP program terms and documents in finding that the plaintiff stated causes of action for breach of contract, promissory estoppel, fraudulent misrepresentation and violation of the Illinois Consumer Fraud & Deceptive Business Practices Act, 815 ILCS 505 (“ICFDBPA”).  Wigod v. Wells Fargo Bank, N.A., No. 11-1423, __ F.3d __, 2012 WL 727646 (7th Cir. March 7, 2012).

Program Outlined.  In response to the financial crises of 2008, Congress enacted the Emergency Economic Stabilization Act, P.L. 110-343, 122 Stat. 3765, which, as part of its “Troubled Asset Relief Program”, required the Treasury Secretary to implement programs to assist homeowners and minimize foreclosures.  As a result, Treasury set aside $50 billion as incentives for lenders to refinance troubled mortgages to allow homeowners to avoid foreclosure.  HAMP was the resulting program, and it set standards for refinancing under a two-step plan.  The borrower was first given a trial period plan, upon successful completion of which a permanent modification was to be offered.                                                                                                                                                                           

Contract Claim Sustained.  Defendant attacked plaintiff’s contract claims, arguing it had not made a legally enforceable offer, that the alleged contract lacked certainty, and that it was not supported by consideration.  The “offer” attack was based on alleged discretion defendant had as to whether to accept a successful trial participant for a permanent modification.  The court rejected that argument, finding that under the temporary program Wells Fargo’s opportunity to determine whether the debtor was qualified was when it accepted her into the temporary program.  That the program had conditions which she had to fulfill to get a permanent modification did not prevent it from constituting a valid offer, the court said; “[o]nce Wells Fargo signed the [temporary program] Agreement and returned it to Wigod, an objectively reasonable person would construe it as an offer to provide a permanent modification agreement if she fulfilled its conditions.”

Similarly, the court rejected defendant’s argument that the “contract” was too indefinite to be enforceable, incorporating the criteria and terms of the HAMP program and finding that any variation from “estimates” included in the temporary program had to be made in conformance with those terms.  The court also rejected the argument that debtor gave no consideration because she paid less under the temporary program than she was required under the original mortgage and note.  Consideration was found in Wigod’s agreeing to open new escrow accounts, to undergo credit counseling, and to provide and vouch for financial information. 

Promissory Estoppel Claim Sustained.  In the alternative, the court said plaintiff could rely upon a promissory estoppel theory.  “Promissory estoppel makes a promise binding where ‘all the other elements of a contract exist, but consideration is lacking,’” it said, citing Dumas v. Infinity Broadcasting Co., 416 F.3d 671 (7th Cir. 2005).  In place of consideration, promissory estoppel requires detrimental reliance, but that was found in plaintiff’s foregoing the opportunity to use other remedies to save her home and in her devoting her resources to making the payments under the temporary program rather than attempting to sell her home or defaulting.

Negligence, Negligent Misrepresentation Claims Rejected.  Next plaintiff argued that defendant had negligently hired and supervised its HAMP employees in an effort to sabotage the program.  The court found this claim barred under the “economic loss” doctrine of Illinois tort law.  In a potentially significant passage, the court recognized that Illinois has exceptions to the economic loss doctrine, but it ruled that such exceptions must stem from “an extra-contractual duty between the parties” – of which the court found none in the HAMP context.  A claim that defendant had made negligent misrepresentations was rejected for the same reason.

Fraud Claims Sustained.  Plaintiff also argued defendant committed fraud, a recognized exception to the economic loss doctrine.  Noting Wigod claimed that Wells Fargo “made and broke promises of permanent modifications to her and to thousands of other potential class members as well,” the court said such a widespread pattern of deception could reasonably be considered a scheme actionable under Illinois law on promissory fraud (discussed in Sharp Thinking No. 59 (March 2012)).

The court also sustained plaintiff’s claim under the ICFDBPA.  Noting that intent to deceive is not a requirement under this act (see Sharp Thinking No. 19 (April 2009)), the court said Wigod alleged practices which were both deceptive and unfair under that act.  It rejected an argument plaintiff suffered no “actual pecuniary loss” because her plan payments were less than the original mortgage required.

Preemption Arguments Rejected.  Finally, defendant argued that plaintiff’s state-law causes of action were preempted by federal law.  Citing In re Ocwen Loan Servicing, LLC Mortg. Servicing Litigation, 491 F.3d 638 (7th Cir. 2007), the court first rejected an argument that the federal government had intended to preemptively occupy the entire field of mortgage lending regulation. Next defendant argued that preemption had to be found because federal regulation “conflicts” with the state causes of action.  This theory too was rejected by the court.  Noting that Wigod’s claims were derived from the federal program, the court ruled that allowing them to proceed “would not create state-law duties for servicing home mortgages, let alone ones that ‘actually conflict’” with federal law.  Rebuffing defendant’s claim that it might be subject to inconsistent duties, the court said that “the state-law duty allegedly breached is imported from and delimited by federal standards established in HAMP’s program guidelines. . . . So long as state laws do not impose substantive duties that go beyond HAMP’s requirements, loan servicers need only comply with the federal program to avoid incurring state-law liability.” 

 

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