Saturday, August 17, 2013

Mortgage Wars Part 1--Debtor Wins Rare (But Limited) Victory Under TDCA

The life of an appellate court judge is largely occupied by consideration of criminal appeals and prisoner petitions.    In FY2012, these cases made up 64% of the Fifth Circuit's docket.   (By contrast, bankruptcy appeals made up only 1.7% of cases docketed).    While they are statistically insignificant, the Fifth Circuit is having to devote an increasing amount of its time to cases involving persons unhappy about the foreclosure of their residence.   By my count, the Fifth Circuit has issued three published opinions and eighteen unpublished opinions so far during 2013.   These cases involve an increasing trend of litigants going to district court (usually a filing in state district court which is removed to U.S. District Court) to protest their foreclosures rather than going to bankruptcy court to prevent them.  
Many of these cases fall into one of two categories:   either the homeowner argues that the lender lied about the effect of a request for a HAMP modification or that the foreclosing party lacked authority.    This post will examine two published cases dealing with allegations of misbehaving HAMPsters, Part 2 will examine the robo-signing phenomenon and Part 3 will examine the technical requirements for a Texas foreclosure.   (A HAMPster is a cross between a hamster and a gangster.    While overworked, underpaid mortgage servicing employees often scurry about like hamsters trying to cope with overwhelming amounts of paperwork that they never manage to fully process, they often appear like gangsters to beleaguered  homeowners who are promised relief only to find that the HAMP process diverted their attention from the inevitably advancing foreclosure).    

James and Allene Miller and Ashley Martins were two sets of homeowners who found themselves dealing with BAC Home Loans Servicing, LP.    In an opinion authored by Chief Judge Carl Stewart, the Millers emerged with part of their lawsuit intact.   Miller v. BAC Home Loans Servicing, LP, No. 12-41273 (5th Cir. 8/13/13), which can be found here.   Mr. Martins was not so fortunate.   Martins v. BAC Home Loan Servicing, LP, No. 12-20559 (5th Cir. 6/26/13), which can be found here.   The Martins case will be discussed further in Parts 2 and 3.

What Happened

The Miller court succinctly summarized a story being heard often by attorneys:
The Millers allege that between March 10, 2010 and May 3, 2010, they called BAC at least three times, and that each call resulted in an unfulfilled promise from a BAC call center representative to send them a loan modification application. Further, the Millers allege that at least one of the call center representatives assured them that there would be no need to make a premodification payment to cure the default.

On May 3, 2010, the Millers received a letter from BAC’s foreclosure law firm stating that a foreclosure sale of the property would occur on June 1, 2010. The Millers allege that sometime between May 3, 2010, and May 18, 2010, a BAC foreclosure specialist named Victoria Masters informed them that she would make sure a loan modification application arrived, and that the foreclosure sale would be postponed while they attempted to modify their loan. The loan modification application arrived on May 18, 2010. The Millers returned their completed application by mail on May 28, 2010. 

That same day, they were contacted by an agent of BAC who informed them that the foreclosure auction would proceed on June 1, 2010. On May 31, 2010, the Millers again spoke with Ms. Masters, the BAC foreclosure specialist. She informed them that no postponement had yet been approved, but that she would attempt to obtain such approval from Fannie Mae. Later that day, the Millers allege Ms. Masters represented to them that she had obtained approval from Fannie Mae for foreclosure postponement pending disposition of their loan modification application.

Notwithstanding this alleged representation of postponement, the foreclosure sale proceeded as scheduled on June 1, 2010.
Miller, pp. 2-3.    The Martins case also involved an allegation that a representative of BAC "orally promised that his house would not be foreclosed if he submitted an application through the Home Affordable Modification Program (known as HAMP), which he did."    Martins, p. 9.

In both instances, the home was lost to foreclosure and the homeowner brought suit.   In both cases, the state court suit was removed to U.S. District Court which granted a motion to dismiss for failure to state a cause of action in the former case and a motion for summary judgment in the latter.
The Homeowners' Legal Theories
 The homeowners attacked the foreclosing parties under a number of state and federal theories, including the Fair Debt Collection Practices Act (FDCPA) , the Texas Debt Collection Act (TDCA), the Texas Deceptive Trade Practices Act (DTPA) and the Texas common law theories of promissory estoppel and wrongful foreclosure.    In these particular cases, the TDCA was the only theory to survive initial scrutiny.

The FDCPA vs. the TDCA 
This case illustrates an important distinction between the state and federal debt collection statutes.   Both the FDCPA and the TDCA require that a person be a "debt collector" in order to be subject to its requirements.   A creditor is not a debt collector under FDCPA unless it acquired the debt after it was in default.   On the other hand, a creditor is a "debt collector" but is not a "third party debt collector" under the Texas statute.   The U.S. Magistrate recommended that both claims be dismissed on the basis that BAC did not fall within the definition of a debt collector.   While there was a question about whether the loan was in default when BAC took over the servicing, the debtor did not appeal the dismissal of its FDCPA claims.   On the other hand, the Fifth Circuit found that the TDCA did apply and that this claim was wrongly dismissed.   The Court stated:
We reject this conclusion, which erroneously affords the lone third-party debt collectors reference talismanic significance despite the fact that the FDCPA is a “distinguishable, federal statute.” (citation omitted). The TDCA’s definition of debt collector is broader than the FDCPA’s definition. (citation omitted). Unlike the TDCA, the FDCPA expressly excludes from its definition of debt collector: “any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.” 15 U.S.C. § 1692a(6)(F)(iii).

As noted above, we held in Perry that this FDCPA exclusion encompasses mortgage servicing companies and debt assignees “as long as the [mortgage] was not in default at the time it was assigned” by the originator. (citation omitted). However, we also held in Perry that servicers and assignees are debt collectors, and therefore are covered, under the TDCA. See id. (citation omitted). In light of Perry, we conclude that BAC qualifies as a debt collector under the broader TDCA, irrespective of whether the Millers’ mortgage was already in default at the time of its assignment.
 Miller, p. 7.
 The Miller sued under four provisions of the TDCA:   misrepresenting the character, extent or amount of a consumer debt or its status in a judicial or governmental proceeding; falsely representing the status or nature of the services provided by the debt collector; misrepresenting that the debt was being collected by an independent, bona fide third party; and "using any other false representation or deceptive means to collect a debt."    

The Court found that the debtors' allegation that the loan servicer promised to send the Millers a loan modification application and to delay foreclosure stated a cause of action under the TDCA provision relating to misrepresenting the services provided by a debt collector.    However, it found that the debtors' allegations did not state a claim under the other subsections.     
The Court found that BAC had not misrepresented the character, extent or amount of the debt because the Millers knew that they owed the debt, knew what they owed and knew that they had defaulted and that BAC said nothing to lead them to think differently.   The Court found that because the debtors had not "alleged any facts stating that BAC was a subterfuge organization for Bank of America" that they had not misrepresented that the debt was being collected by a bona fide third party.    Finally, the Court found that the debtors had not alleged any specific deceptive acts or practices.   From where I sit, BAC engaged in a false and deceptive practice when it told the borrowers that it would not foreclose while it was considering their HAMP application.    However, the Court did not see it this way.
The Court affirmed dismissal of the Millers' DTPA cause of action on the basis that the DTPA applies to a consumer.   A consumer is a person who acquires or seeks to acquire goods or services.   A straight loan of money without more is neither a good nor a service.   A loan to acquire goods or services can make someone a consumer but only if the claim arises from the purchase of the goods or services.   Because the Millers' claim arose from the attempted modification of the loan rather than the purchase of the home, the court found that they did not meet the definition of a consumer and did not state a cause of action under the DTPA.
Promissory Estoppel
 Both sets of plaintiffs alleged that the doctrine of promissory estoppel precluded BAC from honoring its alleged promise not to foreclose while it was considering the HAMP modification.    However, the specifics of the Texas doctrine prevented them from gaining traction here.   In Moore Burger, Inc. v. Phillips Petroleum Co., 492 S.W.2d 934 (Tex. 1972), the Texas Supreme Court held that a promise to sign a document that would comply with the statute of frauds would preclude the promising party from raising the statute of frauds.    Under Texas law, an agreement to make a loan for more than $50,000 as well as an agreement relating to sale of real estate must be in writing to be enforceable. As a result, the Court found that BAC's promise not to foreclose was unenforceable unless it was contained in a signed writing.  The Plaintiffs alleged that BAC agreed not to foreclose while it was considering the HAMP modification request.   However, the Plaintiffs did not allege that BAC said that it would sign a document in writing confirming this.   As a result, the doctrine of promissory estoppel did not apply.
Wrongful Foreclosure
Both sets of plaintiffs also unsuccessfully alleged wrongful foreclosure.   Under Texas law, there are three requirements for wrongful foreclosure:   (1) a defect in the foreclosure sale proceedings; (2) a grossly inadequate sales price; and (3) a causal connection between the two.   Mr. Martins alleged that failure to receive notice of the sale was a defect in the sales process.   However, the Court found that the notice need merely be sent, not received.   Additionally, it found that foreclosure for 92% of appraised value was not "grossly inadequate."   While the lower court accepted that the Millers' HAMP misrepresentation claims constituted a defect in the foreclosure sale process, it found that they had not attempted to satisfy the second and third elements of the test.   Instead, the Millers argued that they did not have to meet the second and third requirements where they sought damages but did not seek to set the foreclosure aside.   The Court disagreed.  
 What Does This Mean For Homeowners Chewed Up by HAMPsters?

In a perfect world (or even a pretty good one), lenders would realize that these cases are not an aberration and take steps to make the program work better.   After all, people who default upon their mortgages are not mere deadbeats disconnected from the rest of society.   They have friends and relatives who might be future customers and might be turned off by stories of homes lost due to duplicity concerning the benefits of the HAMP program.   These same people might also have long memories the next time that Wall Street turns to Washington for a bailout.  
Nevertheless, until the home mortgage crisis resolves itself, the Miller and Martins cases (and the eighteen unreported cases that I did not discuss) demonstrate that suing a mortgagor/servicer, even one that makes misrepresentations, is a daunting task.    If a loan servicer promises to forebear on a pending foreclosure based on a HAMP request, it is a good idea to have a bankruptcy lawyer waiting in the wings.  However, if that strategy doesn't work or isn't available, the cases discussed here provide a few litigation ideas.   First, if you have the luxury of talking to your client at the time that the loan servicer is promising that HAMP will make everything better, tell your client to ask for the agreement in writing.   They won't put it in writing, but they might say they would.   Offering to put the agreement not to foreclose in a signed letter would be enough to bring the case within promissory estoppel.  Second, be sure to remember the TDCA when pleading causes of action.   While it is not as sexy as the FDCPA, it was the only theory that worked in these cases.   Third, remember that there are three elements to wrongful foreclosure and make sure that you allege each of them (or perhaps omit the claim in favor of a stronger one).   Finally, call your Congressman and tell him that HAMP doesn't work and is being abused.     

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