Case against junk foreclosure fees survives for now

Bias v. Wells Fargo & Co., 2013 WL 1787158 (N.D. Cal.)

Wells Fargo charged a lot of people a lot of junk foreclosure-related fees, and would prefer not to fix its practices.  Though the US government identified at least a tiny fraction of the people who were harmed by such practices, it isn’t going to tell them.  That leaves the judicial system; these cases aren’t perhaps as sexy or groundbreaking as food lawsuits, the other wave of consumer protection suits that has built over the past year.  But they are out there.

Plaintiffs, on behalf of a putative nationwide class, alleged that Wells Fargo assessed fraudulent fees upon a homeowner’s default, using subsidiaries and affiliated companies to mark up fees beyond the third-party vendors’ actual costs.  Plaintiffs alleged that their Louisiana mortgage contracts disclosed that Wells Fargo would pay for default-related services when necessary, but never disclosed that the servicer could mark up the actual costs of those services to make a profit.  Wells Fargo identified the fees as “Other Charges” or “Other Fees” on mortgage statements, and allegedly concealed and misled borrowers about the charges when asked, claiming that the mortgages provided for the fees.

These fees included Broker's Price Opinion fees and appraisal fees.  BPOs were charged by an inter-company division, Premiere Asset Services, which advertised as if it were independent but acted as a phony third party vendor.  Premiere subcontracted BPOs to local real estate brokers; Wells Fargo allegedly never actually paid Premiere’s invoiced amounts, but rather paid lower amounts directly to the local prokers.

In addition, plaintiffs alleged that defendants used a sophisticated home loan management program that “automatically implement[ed] decisions about how to manage borrowers' accounts based on internal software logic” and imposed default-related fees when a loan was past due. The parameters and guidelines for the Program were “designed by the executives” at Wells Fargo.

Plaintiffs alleged that they had paid unlawful fees, and that they suffered additional harm based on being driven further into default or kept in default; damage to credit scores; inability to get better interest rates on future loans; and, in some cases, foreclosure. They sued for violations of the UCL, RICO and RICO conspiracy, unjust enrichment, and common-law fraud.  The court declined to dismiss the complaint.

Wells Fargo first argued that the UCL shouldn’t apply because the mortgages’ choice of law provisions required the application of Louisiana law.  The relevant test looks at whether the chosen state has a substantial relationship to the parties or their transaction, or whether there’s a reasonable basis for the choice of law.  If so, the court must determine whether there’s a fundamental conflict with California law and then whether California has a materially greater interest.

Wells Fargo argued that there was a substantial relationship to Louisiana because plaintiffs were residents of the state, owned property there, and executed the contracts there.  Plus, even if the court declined to enforce the choice of law provision, it shouldn’t apply California’s laws to out-of-state transactions not involving California residents, just because Wells Fargo is headquartered in California.  And Louisiana had an interest in having its ban on consumer protection class actions and one-year statute of limitations applied.

Plaintiffs rejoined that choice of law would be better addressed at the class certification stage. In any event, this wasn’t a contract case but a fraud case, and California had a substantial interest in regulating fraudulent practices in California, where the fraudulent conduct, concealment, and executive decisions allegedly occurred. 

The court found the contract relevant, since the fees were purportedly charged under the mortgage contract.  Still, the record with respect to balancing the states’ interests wasn’t sufficiently developed.  Louisiana did have a substantial relationship to the claims, but figuring out whether there was a fundamental conflict between the states’ laws and which state had a materially greater interest was premature.  Ultimately, plaintiffs would bear the burden of “establishing whether issues relating to choice of law can survive the test for class certification.”  But a full determination of where defendants’ conduct occurred wasn’t yet possible.  At this stage, the court accepted the allegations that the scheme was designed by executives in California.  Mazza v. American Honda Motor Co. was not dispositive because the court there expressed no view on whether it would be correct to certify a smaller class of California purchasers or different subclasses.

As for UCL standing: yes, plaintiffs had that.  Wells Fargo argued that, because the rates charged for BPOs were within the market rate of $30–$100, economic injury couldn’t exist, and anyway that plaintiffs didn’t plead actual reliance on the allegedly misleading documents.  Plaintiffs responded that the issue was whether Wells Fargo was entitled to recover far more than actual fees and conceal the nature of those fees.  Plaintiffs also alleged that, had the concealed information been disclosed, they would have behaved differently, which was enough for reliance. 

The court agreed with plaintiffs: if they would have paid less had they known the truth, they alleged injury in fact.  “The Court declines to hold as a matter of law that a consumer lacks UCL standing as long as he or she is only being overcharged within the market range.”  Further, plaintiffs alleged actual reliance: they alleged that the mortgage agreements gave Wells Fargo the right to be paid back for its costs/expenses but were silent on the right to mark up the costs for profit, and that they received mortgage statements that failed to truly itemize the fees, identifying them as “Other Charges” or “Other Fees” that they believed they were obligated to pay. “Put simply, Plaintiffs allege that they received their mortgage statements, believed based on the statements that they were obligated to pay these amounts to Wells Fargo, and paid them.” That was enough to plead causation.  Also, a presumption, or at least an inference, of reliance arises when a misrepresentation is material, and it was plausible that a reasonable person would have considered this information material.

The parties agreed that Rule 9(b) applied, and the court found the UCL claim pled with particularity.

Turning to UCL “unfairness,” there’s no definitive test for what’s unfair in consumer cases.  Here, the relevant tests looked at “whether the alleged business practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers and requires the court to weigh the utility of the defendant's conduct against the gravity of the harm to the alleged victim” or whether “(1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided.”

Wells Fargo advocated for the latter test, and argued that plaintiffs could have avoided being overcharged by staying current on their payments, and that there were countervailing benefits to conducting property inspections.  Plaintiffs responded that the undisclosed markups made it impossible for borrowers to become current, and that the lack of disclosure made it impossible to avoid the fees.  The court found that, applying the first relevant test the allegations plausibly pled that Wells Fargo’s conduct was immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers. Applying the second test, the Court couldn’t find as a matter of law that the supposed benefits outweighed plaintiffs' injuries.

Similarly, the “fraudulent” UCL claim survived.  Such a claim only requires that members of the public are likely to be deceived; actual deception, reasonable reliance, and damage are unnecessary.  Wells Fargo argued that the allegations that it told borrowers that the fees were in accordance with their mortgage terms were merely opinions about the law and thus not actionable as fraud.  Though the fraud was in part based on omissions, it still needed to be pled with particularity.  Still, plaintiffs provided enough allegations to give Wells Fargo notice of the particular misconduct at issue.  They described the content of the omission  and where it should or could have been revealed—in the mortgage agreements themselves, the mortgage statements, or communications with Wells Fargo about the fees.  Plaintiffs alleged specific dates they were charged the fees at issue, alleged they paid without knowing the truth, and (as allowed) generally alleged Wells Fargo’s knowledge and intent. The court disagreed that the statements were at most “misrepresentations of the law.”  Statements that are true may still be deceptive or misleading, and it was premature to characterize these misrepresentations as solely law-related.

Surprisingly to me, the RICO and RICO conspiracy claims also survived.  So did the unjust enrichment claim, though unjust enrichment is unavailable when a valid express contract covering the same subject matter exists.  It was premature for the court to decide whether the claims here covered the same subject matter as the mortgage agreements, and whether Wells Fargo’s conduct was “unjust” was also a factual issue.

Fraud too survived, for reasons noted above; the court didn’t need to resolve choice of law issues.  Even absent a special duty to disclose, “the omissions and misrepresentations are inextricably tied together such that the demands for reimbursement of fees in Wells Fargo's monthly mortgage statements are akin to misrepresentations:”

Wells Fargo sought reimbursement from Plaintiffs based on fictitious invoices prepared by Premiere at Wells Fargo's direction. However, Wells Fargo did not actually pay those invoices, and instead directly paid third parties for a lesser amount—all of which occurred by a plan of Defendants' design.

Plaintiffs explained why that was false and misleading, providing sufficient notice under Rule 9(b).