Wigod v Wells Fargo Bank, N.A. (Fed)

Summary: Federal regulations concerning HAMP do not preempt state causes of action.

Wigod v Wells Fargo Bank, N.A., 673 F3d 547 (7th Cir., 2012).

Facts: Congress enacted the Emergency Economic Stabilization Act in response to financial conditions in 2008. Under the act, the Trouble Asset Relief Program (TARP) gave power to the Secretary of the Treasury to implement a plan to minimize foreclosures.  Based upon this authority, the Secretary set aside $50 billion of TARP’s funds to induce lenders to refinance mortgages with more favorable rates in order to avoid foreclosures. The Secretary negotiated Servicer Participation Agreements (SPAs) with loan servicers, including Wells Fargo. Under the SPAs, servicers would identify homeowners who were or would soon be in default and modify eligible loans. The SPAs required servicers to perform the loan modifications pursuant to the procedures issued by the Treasury. 

The Treasury directed servicers to determine eligibility based upon a three-step process. The first step required that the borrower met certain criteria. The criteria required that the loan had originated on or before January 1, 2009, that it was secured by the borrower’s primary residence, that the mortgage payments were more than 31% of the borrower’s monthly income, and that for a one-unit home, the unpaid principal balance was less than $729,750. The second step required the servicer to calculate the modification using a “waterfall” method. The “waterfall” method would apply enumerated changes in a specified order until the borrower’s monthly mortgage payment dropped close to 31%. Finally, the servicer applied a Net Present Value (NPV) test to assess whether the modified mortgage value would be greater than the return on the mortgage if unmodified (foreclosed). If foreclosure was worth more (NPV result was negative), then there was no obligation to modify. However, if the modification was positive, then the servicer must offer the modification.

After determining eligibility, a Trial Period Plan (TPP) began and applied the terms found in the “waterfall.”  The TPP lasted three or four months, during which the loan was treated as if it were in forbearance. If the borrower complied with the TPP, the servicer must offer a modified loan. At the time Lori Wigod (Wigod) applied for a loan modification under HAMP, the servicer could initiate a TPP based upon undocumented representations made about the debtor’s finances. 

In September of 2007, Wigod obtained a home mortgage loan for $728,500 from Wachovia (later merged with Wells Fargo Bank, N.A.(Wells Fargo)).  In April of 2009, Wigod submitted a written request for loan modification. Wells Fargo required Wigod to submit verified documentation of proof of finances before the TPP. After Wells Fargo received documentation, it sent her a TPP. The TPP stated “I understand that after I sign and return two copies of this Plan to the Lender, the Lender will send me a signed copy of this Plan if I qualify for the [permanent modification] Offer or will send me written notice that I do not qualify.”  On May 28, 2009, Wigod signed two copies of the TPP agreement and returned it to the bank along with additional documents and her first payment under the TPP.  The TPP period ran from July 1, 2009, until November 1, 2009. The TPP stated that “[i]f I am in compliance with this loan trial period and my representations in section one continue to be true in all material respects, then the Lender will provide me with a [permanent] Loan Modification Agreement.” 

Wigod made all of the payments, and for purposes of the appeal, the court assumed she complied with all other requirements.  Despite Wigod’s compliance, Wells Fargo declined to offer a modified loan. After the TPP expired, Wells Fargo informed Wigod she owed an outstanding balance plus late fees, and in a subsequent letter, that she was in default.  Wigod protested to Wells Fargo with no avail, and continued to make payments in the TPP amounts. 

Wigod alleged that Wells Fargo improperly re-evaluated her for HAMP after a determination of eligibility and erroneously determined ineligibility based upon miscalculating her property taxes. Wells Fargo responded stating the guidelines that were then in force allowed Wells Fargo to verify if a borrower satisfied government and investor criteria after the TPP started. Wells Fargo cited an inability to craft a permanent modification loan as its reasoning for denying loan modification, although for the purposes of the appeal, the court disregarded Wells Fargo’s argument.

Wigod filed a class action complaint alleging the following: (I) breach of contract and breach of implied covenants for violating the TPP;(II) promissory estoppel based upon the TPP; (III) breach of the SPA; (IV) negligent hiring and supervision; (V) fraudulent misrepresentation or concealment;  (VI) negligent misrepresentation or concealment; and (VII) violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA).  The district court dismissed counts (I), (II), (IV), and (VI) because Wells Fargo’s obligations originated under HAMP, which does not confer a private right of action. Count (III) was dismissed because Wigod did not have standing under the SPA as a third-party beneficiary. Count (VI) was dismissed because the district court found that Wigod could not have reasonably relied on Wells Fargo’s representation that she would receive a permanent modification so long as she made all of the trial payments and her financial information was correct because the TPP also stated that Wigod must meet HAMP’s requirements. The district court dismissed count (VII) because it found that Wigod had not plausibly alleged that Wells Fargo acted with the intent to deceive her. Wigod appealed all counts except count (III).

Holding: Reversed as to counts (I), (II), (VII), and the fraudulent misrepresentation claim in (V), and affirmed as to counts (IV), (VI), and the fraudulent concealment claim in (V). 

Count I, Breach of Contract

The court of appeals held that Wigod sufficiently pled her breach of contract claim. Under Illinois common law, breach of contract requires: “(1) offer and acceptance; (2) consideration; (3) definite and certain terms; (4) performance by plaintiff of all required conditions; (5) breach; and (6) damages.”  The TPP promised to offer a permanent modification if (1) Wigod complied with the terms of the TPP by making timely payments and disclosures; and (2) the representations she made were true. To determine if there was a valid offer the court looked at whether the promise induced a reasonable belief in the recipient that they can, by acceptance, bind the seller. Generally, a promise is not enforceable if it is contingent upon a further act of the offeror. However when the promise is conditioned upon a third party’s action and not the action of the offeror, it can be a valid offer. The court of appeals rejected the contention that there was no offer because acceptance was contingent on approval under the HAMP conditions. This theory goes against the plain terms of the TPP, which stated that Wigod would receive a signed copy of the TPP if she qualified for the offer. When Wells Fargo countersigned the TPP, it communicated to Wigod that she had qualified for HAMP and would receive a permanent loan modification after the trial period. The TPP noted that there is not a modification until all the conditions are met, receipt of a fully executed Modification Agreement, and passing of the modification date is that no modification existed until those times. The natural reading of that provision along with the other terms of the TPP would indicate that Wells Fargo still had an obligation to offer the modification.

Under Illinois law, consideration requires some detriment to the offeror, some benefit to the offeree, or some bargained-for exchange between them. If a debtor does something more or different from what was legally required, then that will constitute consideration. The TPP required Wigod to open a new escrow account, undergo credit counseling if asked, and provide and vouch for the truth of financial information. These requirements were ample consideration because Wigod incurred a legal detriment by taking multiple obligations beyond what was required in connection with her mortgage.

A contract is enforceable even if some of the terms are missing if the parties’ obligations are ascertainable from the plain language of the contract. A contract with open terms can be enforced if the terms to be agreed upon can be determined, either by virtue of the agreement itself, or by commercial practice or other usage or custom. While the trial period terms were only an estimation of what the actual terms would be, the indefinite terms were determined by HAMP guidelines, namely the waterfall method and the NPV. Per the terms of the TPP, Well Fargo was required to make a good-faith permanent modification offer consistent with HAMP guidelines. For the above reasons, the court of appeals held that Wigod had successfully pled all of the elements of a breach of contract claim.

Count II, Promissory Estoppel

The elements of promissory estoppel are as follows: (1) the defendant made an unambiguous promise to the plaintiff; (2) the plaintiff relied on such promise; (3) the plaintiff’s reliance was foreseeable; and (4) the plaintiff relied on the promise to its detriment. Wigod alleged that Wells Fargo made an unambiguous promise that if she followed the terms of the TPP, she would receive an offer for a permanent loan modification consistent with HAMP methodology. Wigod further asserted that she forwent other opportunities to save her home such as bankruptcy or attempting to sell the house, in relienace on Wells Fargo’s promise. A lost opportunity can be sufficient detriment under promissory estoppel. Wigod also alleged that Wells Fargo should have anticipated her compliance with the terms of the promise. For these reasons, Wigod presented a plausible claim of promissory estoppel.

Count IV, Negligent Hiring and Supervision

Wigod alleged that Wells Fargo deliberately hired unqualified customer service employees, refused to train them adequately, and had policies intending to frustrate the borrower therefore giving a basis for a negligent hiring and supervision claim. The court of appeals held that this claim was foreclosed by the economic loss doctrine.  The economic loss doctrine bars recovery in tort for purely economic losses arising out of a failure to perform a contract. The exceptions to the economic loss doctrine follow a general rule in which recovery is not barred if there is a breach of a duty that arises outside the contract. The duty that Wells Fargo owed to Wigod was based solely on its contractual obligation and therefore the claim was barred by the economic loss doctrine. The court held that it was inconsequential that the relief sought was equitable because there is no necessary connection between the type of relief and the loss alleged.

Counts V and VI, Fraudulent and Negligent Misrepresentation or Concealment

Illinois recognizes an exception to the economic loss doctrine in instances of fraud. Therefore the economic loss doctrine did not bar Wigod’s fraudulent misrepresentation and fraudulent concealment claims. A viable fraudulent misrepresentation claim in Illinois requires the following: (1) a false statement of material fact; (2) known or believed to be false by the party making it; (3) made with the intent to induce the other party to act; (4) together with an action by the other party in reliance on the truth of the statement; and (5) damage to the other party resulting from the reliance. Wigod alleged that Wells Fargo intended for her to rely on its promise and knowingly misrepresented that it would make a permanent offer if she followed the terms of the TPP and that she acted on that promise to her detriment. 

The reliance on the defendant’s false statements must be reasonable. The court found that the promise under the TPP was enough to satisfy this requirement. Wigod’s claim was harder to establish than many instances of fraud, because she claimed promissory fraud. Promissory fraud is a “false statement of intent regarding future conduct,” in contrast to a false statement made about an existing or past fact. Promissory fraud is generally not actionable in Illinois unless the act was a part of a scheme to defraud. To fall under the scheme exception, Wigod had to prove that Wells Fargo did not intend to fulfill the promise at the time it was made. Wigod alleged that Wells Fargo implemented a system designed to hamper eligible HAMP borrowers from an opportunity to modify their mortgages, and thousands of HAMP eligible homeowners were victims of this system. This was enough to constitute a scheme and show that Wells Fargo did not intend to fulfill the promise. Therefore, Wigod successfully alleged fraudulent misrepresentation. 

To successfully plead fraudulent concealment, Wigod had to meet the elements of fraudulent misrepresentation and allege that the defendant intentionally omitted or concealed a material fact that it had a duty to disclose. A duty arises when the parties “are in a fiduciary or confidential relationship” or in a “situation where plaintiff places trust and confidence in defendant, thereby placing defendant in a position of influence and superiority over plaintiff.” The court of appeals held that Wells Fargo’s role as HAMP supervisor was not enough to create the special relationship in which a duty would arise, and therefore Wigod failed to successfully plead fraudulent concealment.

Wigod’s negligent misrepresentation or concealment claims were barred by the economic loss doctrine.

Count (VII) Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA)

A claim under the ICFA requires that the defendant be the proximate cause of the following: (1) a deceptive or unfair act or practice by the defendant; (2) the defendant’s intent that the plaintiff rely on the deceptive or unfair practice; and (3) the unfair or deceptive practice occurred during a course of conduct involving trade or commerce. Wigod alleged that Wells Fargo misrepresented and concealed material facts which constituted deceptive business practices and that Wells Fargo dishonestly and ineffectually implemented HAMP, which was an unfair business practice. The court of appeals held that there is no intent to deceive requirement under the ICFA, and that Wigod suffered actual pecuniary loss because she incurred costs and fees, forwent other opportunities to save her home, suffered a negative impact to her credit, never received a modification agreement, and lost her ability to receive incentive payments during the first five years of the modification. For these reasons Wigod successfully pled an ICFA violation and the holding of the district court was overturned.

Field preemption is an instance in which “federal law so thoroughly occupies a legislative field ‘as to make reasonable the inference that Congress left no room for the States to supplement it.’” Field preemption is inapplicable because of a savings clause in an OTS regulation that specified that state tort, contract, and commercial laws are “not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section.” 12 C.F.R. § 560.2(c).  Put another way, laws of general applicability survive preemption so long as they do not impose standards that conflict with federal ones. Cf. Watters v Wachovia Bank, N.A., 550 U.S. 1, 11, 127 S.Ct. 1559, 167 L.Ed.2d 389, (2007).  The court of appeals declined to rule in opposition to this holding, effectively barring Wells Fargo’s field preemption claim.

The U.S. Supreme Court has found field preemption when state law poses an obstacle to the purposes and objectives of Congress. The court of appeals found that conflict preemption does not bar ICFA claims.  If Wells Fargo would have followed the terms of the TPP and HAMP, then it wouldn’t have violated state law. 

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By: ATG Underwriting Department | Posted on: Fri, 07/13/2012 - 4:28pm