The U.S. Court of Appeals for the Ninth Circuit recently affirmed a district court’s dismissal of a borrower’s claims for breach of contract and breach of fiduciary duty relating to alleged failures to properly disburse escrow amounts against a non-servicer assignee of a mortgage loan.
In so ruling, the Court confirmed that Washington does not bar splitting the loan servicing duties from the right to receive payment under the note.
A copy of the opinion is available at: Link to Opinion.
The deed of trust between the borrower and the loan originator required the borrower to pay the hazard insurance premium in an escrow account, and the loan originator to make insurance payments when due.
The deed of trust specifically provided, however, that the loan servicing obligations did not necessarily transfer to a subsequent purchaser of the loan. The obligations could instead remain with the loan originator or be transferred to a new loan servicer unless otherwise provided by the subsequent purchaser.
The loan originator continued to service a loan after selling it to the subsequent purchaser. The loan originator then issued a batch of escrow disbursement checks for hazard insurance premiums to the hazard insurer, which bounced, the insurance was cancelled, and the loan originator filed for bankruptcy.
The borrower’s property later was destroyed by a fire, and the borrower was eventually paid insurance proceeds of $186,000 from the loan originator’s lender placed insurer, who charged higher insurance premiums than the original insurer selected by the borrower.
As a result of the lender-placed insurance, the borrower’s monthly mortgage payments increased from $1,500 to $2,300 due to the increased insurance premiums, his living expenses increased because his property was destroyed, and he failed to make his monthly payments on the loan. The insurance proceeds were therefore given to the new loan servicer as a final satisfaction of the loan debt.
Thereafter, the borrower filed suit against the assignee and purchaser of the loan, alleging breach of contract and breach of fiduciary duty and other related claims. The case was removed to federal district court and dismissed, and the borrower appealed.
On appeal, the Ninth Circuit first held the borrower’s breach of contract allegations were contradicted by the deed of trust, which provided that the subsequent purchaser did not necessarily assume the loan servicing obligations. Accordingly, under the terms of the deed of trust, the loan servicing obligations could remain — and in this case, did remain — with the loan originator.
The Appellate Court distinguished the borrower’s reliance on Paullus v. Fowler, 367 P.2d 130, 135 (Wash. 1961), and the general rule that an assignee of a contract stands in the shoes of his assignor. Rather, “an assignee in an executory contract is not liable on the underlying obligations absent an express assumption of those obligations” under Washington law. Lewis v. Boehm, 947 P. 2d 1265, 1270 (Wash. Ct. App. 1997).
In addition, the borrower relied on Bain v. Metropolitan Mortgage Group, Inc., 285 P. 3d 34, 41-42 (Wash. 2012), for the proposition that Washington bars splitting the loan servicing duties from the right to receive the payments on the note.
The Ninth Circuit disagreed, holding that Bain did not bar splitting the loan servicing duties from the right to receive payment under the note. On the contrary, the Appellate Court noted, Washington law did not prohibit an arrangement whereby the loan obligations would remain with the loan originator, and this arrangement was typical of such home loans obtained by the subsequent purchaser, as discussed in Am. Bankers Mortg. Corp. v. Fed. Home Loan Mortg. Corp., 75 F. 3d 1401, 1404 (9th Cir. 1996).
The Ninth Circuit further held that the fiduciary duty of an escrowee to pay the insurance premiums held in escrow likewise remained with the loan originator.
Accordingly, the Appellate Court affirmed dismissal of the borrower’s claims for breach of contract and breach of fiduciary duty.