Dеrek DAVIS, Plaintiff, v. WORLD SAVINGS BANK, FSB, n/k/a Wachovia Mortgage, FSB, et al., Defendants.
Civil Action No. 10-1761 (RMC).
United States District Court, District of Columbia.
Aug. 29, 2011.
808 F. Supp. 2d 159
ROSEMARY M. COLLYER, District Judge.
Ryan S. Spiegel, Winston & Strawn, LLP, Washington, DC, Stacie C. Knight, Winston & Strawn, LLP, Charlotte, NC, for Defendants.
MEMORANDUM OPINION
ROSEMARY M. COLLYER, District Judge.
Derrick Davis purchased a home with a mortgage loan from World Savings Bank FSB; the loan is allegedly now held by Wachovia Corporation and Wells Fargo Bank, N.A., (collectively the “Defendants“).1 Mr. Davis defaulted on payment of the mortgage, and then brought suit against Defendants asserting claims under District of Columbia common law: breach of contract/breach of the implied covenant of good faith and fair dealing, promissory estoppel, fraud, and negligent misrepresentation. Defendants move to dismiss on various grounds, including preemption under the Homeowners’ Loan Act (“HOLA“),
I. FACTS
Mr. Davis borrowed $280,000 from World Savings Bank FSB (“World Savings Bank“) in December 2007 pursuant to a fixed-rate mortgage note and a “Pick-a-Payment” mortgage loan. Notice of Removal [Dkt. # 1], Ex. 1 (“Compl.“), Ex. A (“Note“). The Pick-a-Payment loan provided for various payment options, including a minimum payment, an interest-only payment, a payment based on a 30-year amortization, or a payment based on a 15-year amortization. Compl. at 1 (Preliminary Statement). Mr. Davis chose the minimum payment option, which was fixed at the amount of $1,273.01 per month for an initial term of one year, after which the monthly payment was subject to change. The Note provided:
1. Borrower‘s Promise to Pay
In return for a loan that I have received, I promise to pay U.S. $280,000.00, called “Principal,” plus interest, and any other charges incurred during the course of
the loan, to the order of the Lender. The Lender is World Savings Bank, FSB, a Federal Savings Bank, its successors and/or assignees, or anyone to whom this Note is transferred. . . .
3. Payments
(A) Time and Place of Payments
I will pay Principal and interest by making payments every month.
I will make my monthly payments on the 1st day of each month beginning on February 1, 2008. I will make these payments every month until I have paid (i) all the Principal and interest; and (ii) any other charges described below that I may owe under this Note; and (iii) any charges that may be due under the Security Instrument. If, on January 1, 2038, I still owe amounts under this Note, I will pay those amounts in full on that date, which is called the “Maturity Date.” . . .
(B) Amount of My Initial Monthly Payments
Each of my initial monthly payments will be in the amount of U.S. $1,273.01. This amount will change as described in Sections 3(C) and 3(D) below. My initial monthly payment amount was selected by me from a range of initial payment amounts approved by the Lender and may not be sufficient to pay the entire amount of interest accruing on the unpaid Principal Balance.
(C) Payment Change Dates
My monthly payment will change as required by Section 3(D) below beginning on the 1st day of February, 2009 and on that day every 12th month thereafter until the 121st month, which will be the final payment change. Each of these dates is called a “Payment Change Date.” My monthly payment will also change at any time Section 3(F) or 3(G) below requires me to pay a different amount. I will pay the amount of my new monthly payment each month beginning on each Payment Change Date and as provided in Section 3(F) or 3(G) below.
(D) Calculation of Payment Changes
Subject to Sections 3(F) and 3(G), on the Payment Change Date my monthly payment may be changed to an amount sufficient to pay the unpaid principal balаnce together with interest, including any deferred interest as described in Section 3(E) below, by the Maturity Date. However, the amount by which my payment can be increased will not be more than 7 1/2 % of the then existing Principal and interest payment. This 7 1/2 % limitation is called the “Payment Cap.” The Lender will perform this Payment Change calculation at least 60 but not more than 90 days before the Payment Change Date.
(E) Deferred Interest; Additions to My Unpaid Principal
From time to time, my monthly payments may be insufficient to pay the total amount of monthly interest that is due. If this occurs, the amount of interest that is not paid each month, called “Deferred Interest,” will be added to my Principal and will accrue interest at the same rate as the Principal.
(F) Limit on My Unpaid Principal; Increased Monthly Payment
My unpaid principal balance can never exceed 125% of the Principal I originally borrowed, called “Principal Balance Cap.” If, as a result of the addition of deferred interest to my unpaid principal balance, the Principal Balance Cap limitation would be exceeded on the date that my monthly payment is due, I will instead pay a new monthly payment. Notwithstanding Sections 3(C) and 3(D) above, I will pay a new monthly pay-
ment which is equal to an amount that will be sufficient to repay my then unpaid principal balance in full on the Maturity Date together with interest, in substantially equal payments. (G) Final Payment Change
On the 10th Payment Change Date my monthly payment will be calculated as described in Section 3(D) above except that the Payment Cap limitation will not apply.
Note §§ 1, 3(A)-(G). In sum, when the minimum payment was sufficient to pay only a portion оf the interest due on the loan, the Note provided that the unpaid portion of the interest, called “Deferred Interest,” would be added to the principal balance and would, in turn, accrue interest. Id. § 3(E). So that the Note would still be paid in full by its maturity date, the minimum payment was subject to periodic increases. Id. § 3(D), (F), (G).
Mr. Davis alleges that although his loan carried a fixed interest rate of 8.8%, see id. § 2, by opting for the minimum payment Mr. Davis was effectively charged a much higher interest rate. Compl. ¶ 15. “Plaintiff was promised . . . a fixed rate note. In fact[,] Plaintiff‘s note states on its face that the note in which Plaintiff received was a fixed rate note. However, Plaintiff never received a fixed rate note [because the note] is really an adjustable rate note with a nеgative amortization component hidden within.” Id. ¶ 23. Mr. Davis also claims that, at least during the initial minimum payment period, the Note was negatively amortized. Id. ¶ 13. Despite the plain language of the Note, Mr. Davis contends that Defendants failed to provide sufficient disclosures to him regarding the nature of the loan, the risk of negative amortization, and the fact that the minimum payment did not cover the full amount of interest due or the full cost of the loan. See, e.g., Compl. ¶¶ 13-14, 16-17. Also, he complains that Defendants failed to inform him that if his balance increased to a certain level, he could no longer select the minimum payment option. Id. ¶ 18. As a result, Mr. Davis brought suit, alleging breach of contract/breach of the implied covenant of good faith and fair dealing, рromissory estoppel, fraud, and negligent misrepresentation. See Compl. ¶¶ 25-60 (Counts I-IV). Defendants move to dismiss.3
II. LEGAL STANDARDS
A. Jurisdiction
Although Mr. Davis initially filed this case in D.C. Superior Court, Defendants removed the case to this Court on the basis of diversity jurisdiction. Federal courts have diversity jurisdiction where the suit is between citizens of different states and the amount in controversy exceeds $75,000.
B. Motion to Dismiss
A motion to dismiss for failure to state a claim pursuant to
A court must treat the complaint‘s factual allegations as true, “even if doubtful in fact.” Id. at 555. But a court need not accept as true legal conclusions set forth in a complaint. Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868 (2009). In deciding a motion under Rule 12(b)(6), a court considers the facts alleged in the complaint, documents attached to the complaint as exhibits or incorporated by reference, and matters about which the court may take judicial notice. Abhe & Svoboda, Inc. v. Chao, 508 F.3d 1052, 1059 (D.C. Cir. 2007). Further, “[a] copy of a written instrument that is an exhibit to a pleading is a part of the pleading for all purposes.”
III. ANALYSIS
A. Preemption Under the Homeowners’ Loan Act
Defendants assert that all of the claims set forth in the Complaint are preempted by HOLA. There are three ways that federal law can preempt state law. First, Congress may preempt state law by expressly stating that preemption applies. Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977); Bank of Am. v. City and County S.F., 309 F.3d 551, 558 (9th Cir. 2002). Second, “field preemption” applies when federal regulation is so pervasive that it is reasonable to infer that Congress left no room for the states to supplement an area of law. Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947); Bank of Am., 309 F.3d at 558. Third, preemption may apply when state law cоnflicts with federal law such that compliance with both laws is impossible, Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963), or when application of state law would impede Congress‘s purposes and objectives, Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Bank of Am., 309 F.3d at 558.
HOLA empowered the Office of Thrift Supervision (“OTS“) to supervise and regulate federal savings associations
(a) Occupation of field.
Pursuant to 4(a) and 5(a) of the HOLA,
12 U.S.C. § 1463(a) ,1464(a) , OTS is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate to facilitate the safe and sound operation of federal savings associations, to enable federal savings associations to conduct their operations in accordance with the best practices of thrift institutions in the United States, or to further other purposes of the HOLA. To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplications and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordаnce with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provided in paragraph (c) of this section or560.110 of this part.4 For purposes of this section, “state law” includes any state statute, regulation, ruling, order or judicial decision.
Id. (emphasis added).5 While ordinarily there is a presumption against preemption over state police powers, this presumption does not apply when there has been a
Section 560.2(b) provided thirteen examples of the types of state laws that were preempted, including the following:
(b) Illustrative examples.
[T]he types of state laws preempted by paragraph (a) of this section include, without limitation, state laws purporting to impose requirements regarding:
. . .
(4) The terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate, balance, payments due, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to thе loan;
(5) Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and overlimit fees;
. . .
(9) Disclosure and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents and laws requiring creditors to supply copies of credit reports to borrowers or applicants;
(10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages;
(11) Disbursements and repayments ....
Section 560.2 also provided examples of state laws that are not preempted:
(c) State laws that are not preempted. State lаws of the following types 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:
(1) Contract and commercial law;
. . .
(4) Tort law;
. . .
(6) Any other law that OTS, upon review, finds:
(i) Furthers a vital state interest; and
(ii) Either has only an incidental effect on lending operations or is not otherwise contrary to the purposes expressed in paragraph (a) of this section.
Id. § 560.2(c).
OTS outlined the steps it would take to analyze whether a state law is preempted:
When analyzing the status of state laws under § 560.2, the first step will be to determine whether the type of law in question is listed in paragraph (b). If so, the analysis will end there; the law is preempted. If the law is not covered by paragraph (b), the next question is whether thе law affects lending. If it does, then, in accordance with paragraph (a), the presumption arises that the law is preempted. This presumption can be reversed only if the law can clearly be shown to fit within the confines of paragraph (c). For these purposes, paragraph (c) is intended to be
interpreted narrowly. Any doubt should be resolved in favor of preemption.
61 Fed. Reg. 50951-01 (Sept. 30, 1996).
While the D.C. Circuit has not addressed the issue of preemption under HOLA, three other circuits have. The Eighth and Ninth Circuits have applied § 560.2 to find broad preemption; in contrast, the Seventh Circuit has read § 560.2 quite narrowly. Compare Casey v. FDIC, 583 F.3d 586 (8th Cir. 2009) (finding claims under Missouri Merchandising Practices Act preempted by HOLA) and Silvas v. E*Trade Mort. Corp., 514 F.3d 1001 (9th Cir. 2008) (finding claims under California Unfair Competition Law preempted by HOLA) with In re Ocwen Loan Servicing, LLC, Mort. Servicing Litig., 491 F.3d 638 (7th Cir. 2007) (finding common lаw claims generally are not preempted). In arguing for preemption, Defendants rely on Silvas. In arguing against it, Mr. Davis relies on Ocwen.
In Silvas, the Ninth Circuit determined that claims under the California Unfair Competition Law (“UCL“) were preempted by HOLA. There, mortgage applicants brought suit alleging that E*Trade Mortgage Corporation violated the UCL‘s unfair advertising and unfair competition rules (1) by including false information in its website and in its advertising and (2) by misrepresenting consumer legal rights in its advertising and other documents. Silvas, 514 F.3d at 1003. The Ninth Circuit held that the claims were preempted under § 560.2(b)(9), which preempts state laws claims regarding disclosure and advertising. Id. at 1006. The mortgage applicants also claimed that E*Trade violated the UCL‘s unfair competition provision by charging an interest rate lock-in fee that was not refunded when loan aрplicants cancelled their loan transactions. The Ninth Circuit found that under § 560.2(b)(5), state laws that purport to impose requirements on loan fees are preempted. Id. Because the UCL was the type of state law that was contemplated under § 560.2(a) and (b), the court ended its analysis, explaining that there was no need to address whether the UCL was a state law with only an incidental effect on lending under § 560.2(c). Id. at 1006.6 The Ninth Circuit affirmed the district court‘s dismissal on preemption grounds. Id. at 1008.
In Casey, the Eighth Circuit found claims that lenders violated the Missouri Merchandising Practices Act by charging fees for preparation of documents by non-lawyers were preempted by HOLA under § 560.2(b)(5). Section 560.2 provides that laws that are preempted include “state laws purporting to impose requirements” regarding “[l]oan-related fees.”
In contrast, the lenders viewed the phrase “state laws purporting to impose requirements” to mean state laws that as
In a case strikingly similar to this one, a federal court in this district followed Silvas and found contract and tort claims against thе same lenders on the same type of loan to be preempted. In Bopp v. Wells Fargo Bank, N.A., 740 F. Supp. 2d 12 (D.D.C. 2010), the plaintiff brought suit against World Savings Bank and its successors in interest, Wachovia Mortgage, and Wells Fargo Bank, on a Pick-a-Payment mortgage. In addition to claims under the Truth in Lending Act (“TILA“),
First, negative amortization was not certain to occur. It resulted because of the payment option that Bopp himself chose. Second, the [deferred interest disclosure] clearly and conspicuously disclose[d] that negative amortization would in fact occur if Bopp chose to make a payment less than the interest owed on the loan. 740 F. Supp. 2d at 16. The court noted that “[i]t is clear that the gravamen of Bopp‘s state law claims is the same as what underlies his TILA claim. A thorough reading of plaintiff‘s Complaint reveals that he is challenging the terms of his credit, the manner in which his loan was amortized, the quality and quantity of information disclosed to him, and the manner in which his mortgage application loan and origination was processed. All of these complaints are expressly enumerated in HOLA as illustrative examples of preempted state law.” Id. at 16-17 (citing
In contrast, in Ocwen the Seventh Circuit held that as a general proposition HOLA does not preempt state common law claims. In that case, the lower court had denied the lenders’ motion to dismiss numerous state law claims on HOLA preemption grоunds, including claims for fraud and breach of contract. The lenders
[S]uppose an S & L signs a mortgage agreement with a homeowner that specifies an annual interest rate of 6 percent and a year later bills the homeowner аt a rate of 10 percent and when the homeowner refuses to pay institutes foreclosure proceedings. It would be surprising for a federal regulation to forbid the homeowner‘s state to give the homeowner a defense based on the mortgagee‘s breach of contract. Or if the mortgagee (or a servicer like Ocwen) fraudulently represents to the mortgagor that it will forgive a default, and then forecloses, it would be surprising for a federal regulation to bar a suit for fraud.
Even so, the Seventh Circuit recognized that preemption depends on the nature of the claims alleged and examined each of the twenty-two causes of action at issue. The court described the complaint as a “hideous sprawling mess,” and found it “difficult and in many instances impossible to ascertain the nature of the charges.” Id. at 641.8 The court noted, for example, that the fraud allegation “does not appear to be preempted, though this could depend on the nature of the fraud, which is unexplained.” Id. at 648. The court concluded that the case was “largely unripe for a determination of preemption,” affirmed the lower court‘s denial of the motion to dismiss and remanded. The Seventh Circuit directed that “[o]n remand, the judge must focus on the acts alleged in the complaint, seeking clarification from the plaintiffs where necessary and deciding in accordance with this opinion which [claims] are preempted and which are not.” Id. at 648.
District courts have reached conflicting cоnclusions in this area of law. Some follow Silvas/Casey and find broad preemption, while others follow Ocwen and find no preemption. See, e.g., Dixon v. Wells Fargo Bank, N.A., Civ. No. 11-10368-WGY, 798 F. Supp. 2d 336, 358-60 & nn. 9-10, 2011 WL 2945795, *16 & nn. 9-10 (D. Mass. July 22, 2011) (collecting cases). In some cases, district courts have attempted to dissect the claims. See, e.g., Thomas v. OneWest Bank, FSB, No. 10-6234-AA, 2011 WL 867880 (D. Or. Mar. 10, 2011) (fraud claim was preempted and breach of contract claim was not); but see Down v. Flagstar Bank, FSB, Civ. No. 3:10-847, 2011 WL 1326961, *4-6 (E.D. Va. Apr. 4, 2011) (HOLA preempted fraud claim; the alleged fraudulent representations and the loan transaction were “inextricably linked to one another” and could not be dissected by the court).9
An analysis of preemption in this case must start with the proposition that there is a presumption of preemption here. See 61 Fed. Reg. 50951-01 (any doubt should be resolved in favor of preemption); Aguayo, 653 F.3d at 920-21 (because field preemption applies, there is a presumption of preemption). Further, a close reading of the Complaint and the Note reveals that all of the common law claims raised are inextricably linked to the loan transaction and the documents related to the loan.10
The claims of promissory estoppel, fraud, and negligent misrepresentation are based on the allegation that Defendants fraudulently represented that the loan was fixed-rate when it was really an adjustable rate loan with a negative amortization component “hidden within.” Compl. ¶ 23; see also id. ¶¶ 38-43, 44-51, 52-60. The claim of breach of contract/breach of good faith claim is based solely on one sentence of § 3(A) of the Note, which provides “I will pay Principal and Interest by making payments every month.” See id. ¶ 28. Mr. Davis alleges that Defendants breached the loan by “agreeing” that initial monthly payments would be sufficient to pay both the principal and interest owed on the Note and by failing to apply any of the initial monthly payments to principal. See id. ¶ 31. All of these claims are based on the loan transaction and are grounded in the loan documents. Because the common law claims cannot be removed from the loan transaction, they are preempted by the federal regulations that govern the loan transaction. See Down, 2011 WL 1326961 at *4-6 (HOLA preempted fraud claim that was inextricably linked to the loan transaction).
Moreover, this case is almost identical to Bopp, where the court found that HOLA preempted fraud and breach of contract claims. Like Mr. Bopp, Mr. Davis complains that Defendants did not provide sufficient notice that negative amortization could occur. The Note, however, clearly аnd conspicuously disclosed that negative amortization could occur if Mr. Davis chose to make a payment amounting to
In sum, Mr. Davis is challenging the terms of his credit, the manner in which his loan was amortized, and the quality and quantity of information disclosed to him—all claims that were expressly enumerated in § 560.2(b) as illustrative examples of preempted state law. See
B. Failure to State a Claim
Even if the claims were not preempted, they would still be dismissed for failure to state a claim.
1. Breach of Contract
Mr. Davis‘s breach of contract/breach of good faith11 allegation rests solely on one sentence of § 3(A) of the Note, which provides “I will pay Principal and Interest by making payments every month.” See Compl. ¶ 28. Mr. Davis alleges that Defendants “agreed” that initial monthly payments would be sufficient to pay both the principal and interest owed on the Notе and by failing to apply any of the initial monthly payments to principal. See Compl. ¶ 31. Mr. Davis‘s breach of contract allegation, based on a single sentence of the Note taken out of context, is unreasonable because it is flatly contradicted by the express terms of the Note.
“[O]ne who signs a contract has a duty to read it and is obligated according to its terms.” Paterson v. Reeves, 304 F.2d 950, 951 (D.C. Cir. 1962); Watson v. Gold N Diamonds, Inc., 736 F. Supp. 2d 266, 269 (D.D.C. 2010). Further, “when the bare allegations of the complaint conflict with any exhibits or documents, whether attached or adopted by reference, the exhibits or documents prevail.” Miller v. Pacific Shore Funding, 224 F. Supp. 2d 977, 984 n. 1 (D. Md. 2002) (citing Fayetteville Investors v. Commercial Builders, Inc., 936 F.2d 1462, 1465 (4th Cir. 1991)); see also Thompson v. Ill. Dep‘t of Professional Regulation, 300 F.3d 750, 754 (7th Cir. 2002).
2. Promissory Estoppel
Count II, the claim for promissory estoppel, must also be dismissed. Promissory estoppel provides a remedy for the enforcement of a promise where the formal requirements of a contract have not been satisfied. Vila v. Inter-Am. Inv. Corp., 570 F.3d 274, 280 (D.C. App. 2009). District of Columbia courts generally prohibit litigants from asserting a claim for promissory estoppel when an express contract governs the parties’ conduct. Plesha v. Ferguson, 725 F. Supp. 2d 106, 112 (D.D.C. 2009). Here, the Note and other written mortgage documents govern. Count II will be dismissed.
3. Fraud and Negligent Misrepresentation
In order to state a claim for fraud under District of Columbia law, a plaintiff must allege that the defendant made a material misrepresentation, with knowledge of its falsity and with intent to deceivе, and that the plaintiff reasonably relied on such misrepresentation resulting in provable damages. Essroc Cement Corp. v. CTI/D.C., Inc., 740 F. Supp. 2d 131, 145 (D.D.C. 2010). The elements of a negligent misrepresentation claim are similar except that they do not include the scienter requirements of a fraud claim. Parr v. Ebrahimian, 774 F. Supp. 2d 234, 240 (D.D.C. 2011). While reasonable reliance can be a jury issue, dismissal for failure to state a claim is proper when no reasonable person would have relied on the representation. Burman v. Phoenix Worldwide Indus., Inc., 384 F. Supp. 2d 316, 329 (D.D.C. 2005) (citing Alicke v. MCI Comm. Corp., 111 F.3d 909, 912 (D.C. Cir. 1997)).
Contrary to Mr. Davis‘s allegations, the Note does not “hide” anything. On its face it expressly and clearly provided that while the interest rate is fixed, the minimum payment might not be sufficient to pay the entire amount of interest accruing, Note § 3(B); that when monthly payments were not large enough to cover interest, Deferred Interest would be added to the principal and would accrue interest, id. § 3(E); and that monthly payments would be increased annually to an amount sufficient to pay the principal and interest, including the Deferred Interest. Id. § 3(C), (D), (F). In light of the terms of the Note, Mr. Davis fails to allege a fraudulent or negligent misrеpresentation and fails to allege reasonable reliance. Because the claims for fraud and negligent misrepresentation are flatly contradicted by the express terms of the Note, they fail to state a claim. Counts III and IV of the Complaint will be dismissed.
IV. CONCLUSION
For the foregoing reasons, the motion to dismiss filed by World Savings Bank, FSB [Dkt. # 6] and the motion to dismiss filed by Wachovia Mortgage Corporation and Wells Fargo Bank N.A. [Dkt. # 7] will be granted. The Complaint will be dismissed. A memorializing Order accompanies this Memorandum Opinion.
ROSEMARY M. COLLYER
United States District Judge