810 F.3d 273
4th Cir.2016Background
- In 2006 McFarland refinanced his West Virginia home after a mortgage broker told him the value rose to $202,000; he obtained a Wells Fargo mortgage for $181,800 (adjustable rate up to 13.75%).
- McFarland used loan proceeds to consolidate about $40,000 of student and auto debt; he fell behind in 2007 and Wells Fargo began foreclosure in 2012 after unsuccessful modifications.
- A 2012 retroactive appraisal suggested the home was worth only $120,000 in 2006; McFarland sued Wells Fargo, Greentree, and U.S. Bank trustee alleging the Wells Fargo loan was an "unconscionable contract" under the WVCCPA.
- He asserted two theories: (1) traditional substantive/procedural unconscionability (loan terms themselves were unfair because loan exceeded value and provided no "net tangible benefit"); and (2) unconscionable inducement — the agreement was induced by misrepresentations (inflated appraisal) and thus voidable under W. Va. Code § 46A-2-121.
- The district court granted summary judgment for the Banks, holding that a loan exceeding property value, standing alone, is not substantive unconscionability under West Virginia law and that substantive unconscionability is a required predicate for relief; it therefore did not reach inducement claims.
- The Fourth Circuit affirmed in part but vacated and remanded in part: it agreed loan size alone is not substantive unconscionability and rejected reliance on a "net tangible benefit" test for unconscionability, but held WVCCPA permits a stand-alone unconscionable-inducement claim and remanded for the district court to consider inducement evidence.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a mortgage that exceeds property value is evidence of substantive unconscionability | McFarland: loan far exceeded home value and trapped borrower; that imbalance shows substantive unconscionability | Banks: excess financing does not make contract "one-sided" or "overly harsh"; lender, not borrower, is disadvantaged by under-collateralization | Court: Loan size alone is not substantive unconscionability under WV law; affirmed dismissal on that theory |
| Whether absence of a "net tangible benefit" makes a contract substantively unconscionable | McFarland: loan gave no net tangible benefit and thus is unconscionable | Banks: "net tangible benefit" test derives from separate anti-predatory statute and is inapplicable to §46A-2-121 unconscionability | Court: Rejected the net-tangible-benefit standard for substantive unconscionability; affirmed dismissal on that ground |
| Whether WVCCPA allows an independent claim for unconscionable inducement (process-based) without proving substantive unconscionability | McFarland: §46A-2-121 authorizes relief when agreement was "induced by unconscionable conduct" — no substantive unfairness required | Banks: argued substantive unconscionability is a necessary predicate for any unconscionability relief | Court: Vacated dismissal and held WVCCPA permits a stand-alone unconscionable-inducement claim; remanded for district court to assess inducement evidence |
Key Cases Cited
- Brown v. Genesis Healthcare Corp., 729 S.E.2d 217 (W. Va. 2012) (articulates WV standard requiring substantive and procedural unconscionability for traditional unconscionability claims)
- Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d 550 (W. Va. 2012) (explains substantive unconscionability requires terms that are one-sided and overly harsh)
- Quicken Loans, Inc. v. Brown, 737 S.E.2d 640 (W. Va. 2012) (addresses unconscionability in inducement and procedural issues; court found inducement factors relevant)
- Herrod v. First Republic Mortgage Corp., 625 S.E.2d 373 (W. Va. 2005) (reverses summary judgment where evidence suggested appraisal-based fraud affecting inducement)
- U.S. Life Credit Corp. v. Wilson, 301 S.E.2d 169 (W. Va. 1983) (invalidated a one-sided loan provision and discussed statutory construction of §46A-2-121)