In Gustavo Reyes, et al. v. Wells Fargo Bank, N.A., Case No. C-10-101667 JCS (N.D. Cal. 2011), the plaintiff homeowners filed a class action lawsuit against Wells Fargo Bank, N.A. (“Wells Fargo”) arising from Wells Fargo’s alleged mortgage practices relating to distressed residential mortgages. The plaintiffs alleged that Wells Fargo duped them into making six months of monthly payments with promises of a loan modification thereafter. In finding that, in making those payments, the plaintiffs were simply doing what they were otherwise contractually obligated to do under the pre-existing loan agreement, the court dismissed many of plaintiff’s claims, while leaving intact several statutory and other claims under California law.  

Background  

Plaintiffs Gustavo Reyes and Maria Teresa Guerro purchased a California home in 2003 with a loan from Wells Fargo and, in 2005, Wells Fargo refinanced that loan. By 2009, the value of the home had fallen to less than half of the loan amount and Reyes and Guerro allegedly were no longer able to make mortgage payments. They requested a loan modification, which Wells Fargo denied. In September 2009, Wells Fargo recorded and served a Notice of Default and Election to Sell, choosing to proceed with the foreclosure of the property. Under California Civil Code Section 2924, the recordation and serving of the Notice of Default triggered a three-month cure period.  

On December 1, 2009, Wells Fargo sent Reyes and Guerro an “Offer Letter” enclosing a Special Forbearance Agreement by which Wells Fargo offered that, if the borrowers remained current on the next six installment payments at the reduced amount set forth therein, “[a]ny outstanding payments and fees will be reviewed for a loan modification.” The Offer Letter stated:  

We have good news about the above referenced loan. Our goal is simple. We want to ensure you have every opportunity to retain your home . . . . [W]e would like to offer you a Special Forbearance Agreement (“Agreement”). Currently, your loan is due for 6 installments . . . . As agreed, you have promised to pay the amounts stated within the Agreement . . . . This is not a waiver of the accrued future payments that become due, but a trial period showing you can make regular monthly payments. Please note that investor approval is still pending.  

Upon successful completion of the Agreement, your loan will not be contractually current. Since the installments may be less than the total amount due, you may still have outstanding payments and fees. Any outstanding payments and fees will be reviewed for a loan modification. If approved for a loan modification, based on investor guidelines, this will satisfy the remaining past due payments on your loan and we will send you a loan modification agreement. An additional contribution may be required . . . .  

If your loan is in foreclosure, we will instruct our foreclosure counsel to suspend foreclosure proceedings once the initial installment has been received, and to continue to suspend the action as long as you keep to the terms of the Agreement. Upon full reinstatement, we will instruct our foreclosure counsel to dismiss foreclosure proceedings . . . .

The Special Forbearance Agreement enclosed with that Offer Letter included, in the Terms and Conditions section, the following disclaimer:

The lender is under no obligation to enter into any further agreement, and this Agreement shall not constitute a waiver of the lender’s right to insist upon strict performance in the future.  

. . . The lender, in its sole discretion and without further notice to you, may terminate this Agreement.  

Plaintiffs Reyes and Guerro signed and returned the Agreement and, starting in December 2009 through March 2010, they made their monthly payments as modified in the Special Forbearance Agreement. After Reyes and Guerro made their fourth such payment in March 2010, they learned that their house had been sold in foreclosure in February 2010.

The Claims

The plaintiffs’ complaint alleged that their lawsuit “seeks to redress and remedy Wells Fargo’s recent practice of extracting payments from defaulted residential mortgage customers by falsely promising them the opportunity to retain their homes through an illusory forbearance-to-modification program.” Plaintiffs asserted that Wells Fargo offered such mortgage modification programs to borrowers despite that fact that it was not prepared to modify their mortgages to a payment level the borrowers could reasonably afford. Further, plaintiffs asserted that the Wells Fargo “forbearance-to-modification program was essentially a sham . . . designed to generate revenue from non-performing mortgage loans without providing customers with the promised consideration of an opportunity to retain their homes.”

Plaintiffs class action suit asserted the following causes of action against Wells Fargo: (1) breach of contract and/or the implied covenant of good faith and fair dealing; (2) rescission and restitution under Cal. Civ. Code Sections 1688 & 1689, the California Rosenthal Fair Debt Collection Practices Act (“Rosenthal Act”), Cal. Civ. Code Section 1788, et seq; and (3) unfair competition under Cal. Bus. & Prof. Code Sections 17200, et seq.

Plaintiffs’ breach of contract claim was based on the allegation that the parties entered into the Agreement whereby, in exchange for six monthly payments (at the modified amount), Wells Fargo agreed to put plaintiffs into a forbearance-to-modification program to give them the opportunity to retain their home, which Wells Fargo subsequently breached. The claims for rescission and restitution were based on the allegation that the plaintiffs’ consent to the Agreement, and thereafter the making of monthly payments, was given by mistake or obtained through fraud. Further, Wells Fargo represented that it had reviewed plaintiffs’ financial situation before offering them the opportunity to sign the Agreement, and that this induced the plaintiffs to enter into the Agreement and make the monthly payments when Wells Fargo should have known that the reduced payment it offered to plaintiffs in the Special Forbearance Agreement was not a payment it was be willing to accept on a long-term basis. Plaintiffs’ claim under the Rosenthal Act relied on the allegation that Wells Fargo was acting as a debt collector and violated the Rosenthal Act by “using false, deceptive, and misleading statements in connection with the collection of Plaintiffs’ mortgage debt.” Plaintiffs’ claims under California’s unfair competition law focused on the allegation that defendants forbearance-to-modification offer was intended to and likely did mislead the public. Additionally, plaintiffs contended that Wells Fargo violated laws underlying legislative policies designed to prevent foreclosures.  

The complaint requested relief in the form of an order rescinding and/or terminating the Special Forbearance Agreements executed by all class members, awarding restitution of all of the consideration paid under those agreements by the entire class, awarding statutory damages, and awarding attorneys’ fees.

Wells Fargo’s Motion to Dismiss  

Wells Fargo moved to dismiss the complaint on the grounds that it failed to state a claim. Wells Fargo asserted that the complaint failed to point to any provision of the Agreement that Wells Fargo had breached. Additionally, Wells Fargo asserted that all of the claims based on fraudulent practices failed to allege the circumstances surrounding the fraud with the required particularity. Further, Wells Fargo argued that both rescission and restitution are not stand-alone claims but, rather, are remedies for other claims. Wells Fargo also contended that it is not a “debt collector” under the Rosenthal Act and, therefore, no claim was stated thereunder. Finally, Wells Fargo argued that any claim concerning unfair business practices should be dismissed as the plaintiffs had not suffered any injury in fact and any had not adequately alleged a fraud claim due to the failure to plead with particularity.  

The Court’s Analysis  

The Breach of Contract Claim  

The court agreed with Wells Fargo’s assertion that no breach of contract claim can exist where the plaintiffs do not and cannot allege damages. The court found that doing or promising to do what one otherwise is legally bound to do is not consideration for a promise and, because the plaintiffs were already legally bound under their original loan agreement to make monthly payment on their mortgage loan, the payments made pursuant to the Special Forbearance Agreement did not constitute legally cognizable damages. Additionally, the court found that plaintiffs could not point to any provision of the Agreement that promised the plaintiffs with any degree of certainty a meaningful opportunity to retain their home.  

The court addressed whether Wells Fargo breached its implied duty of good faith and fair dealing by foreclosing on the home when the Agreement was arguably still in effect, without at least refunding a portion of the February payment. The court observed, however, that “where the money paid under an agreement was already owed under a prior agreement, it is not consideration and cannot support a claim for damages.” Further, plaintiffs did not dispute that they were able to remain in their home even after the foreclosure sale and, therefore, could not assert damages in that manner. The court consequently found that plaintiffs failed to state a claim for breach of contract or breach of the implied covenant of good faith and fair dealing.

Rescission/Restitution Claim

The court held that plaintiffs’ claim for rescission and restitution failed for all payments they made under the Agreement prior to March 2010. The court agreed with Wells Fargo that rescission is not a standalone claim, but the court did find restitution to be a recognized cause of action under California law. To state a claim for restitution, a plaintiff needs to plead the receipt and unjust retention of a benefit of another. Plaintiffs need not establish bad faith, only that the recipient of funds is not entitled to retain such. As to the payments made by plaintiffs to Wells Fargo before the foreclosure, the court found that plaintiffs were not entitled to restitution as Wells Fargo was owed this money under the original loan agreement. The court found, however, that the restitution claim as to the March payment, that was made post-foreclosure, survived Wells Fargo’s motion to dismiss, the court recognizing that plaintiffs may be able to prove that (1) the March payment was not required under the Agreement, and (2) because it was made after Wells Fargo foreclosed on the property in February, Wells Fargo was not entitled to it under Cal. Civ. Code § 580d.  

Rosenthal Act Claim

The court rejected Wells Fargo’s argument that it is not a debt collector as defined in California’s Rosenthal Act. The Rosenthal Act “is intended to prohibit debt collectors from engaging in unfair or deceptive acts or practices in the collection of consumer debts and to require debtors to act fairly in entering into and honoring such debts.” The Rosenthal Act additionally prohibits “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” A debt collector is defined as a person who in the usual course of business “regularly, on behalf of himself or others, engages in debt collection.” The court found that a mortgage servicer may be a debt collector under California’s Rosenthal Act, unlike under the federal Fair Debt Collection Practices Act which excludes creditors collecting on their own debts.

Other California courts have found that “where the claim arises out of debt collection activities ‘beyond the scope of the ordinary foreclosure process,’ a remedy may be available under the Rosenthal Act.” In evaluating such a claim, the objective of the Rosenthal Act is to protect the least sophisticated debtor. The court here found, based on the language in the Offer Letter relating to the Special Forbearance Agreement, that it was beyond the scope of the ordinary foreclosure process. The court could not conclude on a motion to dismiss that the letter was not misleading based on: (1) the words “good news” in the Offer Letter, (2) the language indicating that the Agreement was being offered based on a review of the recipient’s financial information, (3) the instruction that counsel would be directed to delay foreclosure proceedings as long as timely payments were made under the Agreement, and (4) the use of the words “trial period” to describe the Agreement. Based on the above, the court found that the complaint stated a claim under the Rosenthal Act.

Unfair Competition Claims

The court found that plaintiffs had standing to bring claims under the California Unfair Competition Law and that they had stated a claim thereunder based on their allegations of unfair, unlawful and fraudulent business practices. To state a claim under that law, plaintiffs must allege an injury in fact, in the form of lost money or property, as a result of unfair competition. Only money or property that is subject to restitution satisfies this requirement. Because the plaintiffs here allegedly made payments to Wells Fargo as a result of Wells Fargo’s business practices, the plaintiffs had standing to bring this claim. To establish this claim, a plaintiff must further show a violation of an underlying law. Here, plaintiffs had stated a claim under the Rosenthal Act, which is sufficient to support a claim for unlawful business practices. Additionally, the court stated that a fraudulent business practice is one in which the public is likely to be deceived. At the motion to dismiss stage, the court could not conclude that the Offer Letter and Special Forbearance Agreement from Wells Fargo would be insufficient to show deceptive practices and to prevail on this claim.  

Conclusion and Implications

One of the most interesting aspects of this decision is the ruling that plaintiffs suffered no damages by making monthly payments pursuant to the Special Forbearance Agreement as they were already contractually obligated under the original loan documentation to make those payments, albeit at a higher level. Lenders should be careful, of course, to ensure that modified mortgage payments are not procured through misleading statements. Though lenders are clearly entitled to payments due under loan agreements, entering into special mortgage forbearance agreements may expose lenders to liability that they might not otherwise have.