Ready, Aim, File! 

The same attorney for the plaintiffs in our last blog entry (and that in the Matthews and Spaulding cases cited therein) has filed another loan modification complaint in the U.S. District Court for the District of Maryland, this time before the Honorable James K. Bredar.  On February 1, 2013, Judge Bredar issued an opinion addressing Plaintiffs Marquis Neal et al.’s (the “Neals” or “Plaintiffs”) five causes of action—violations of the Maryland Consumer Protection Act ("MCPA"), common law fraud, promissory estoppel, negligence, and negligent misrepresentation, and Defendant Residential Credit Solutions, Inc.’s (“RCS” or “Defendant”) breach of contract counterclaim.  Neal et al. v. Residential Credit Solutions, Inc. (“Op.”), No. JKB-11-3707, 2013 WL 428675 (D. Md. Feb. 1, 2013).

First, given our prior blog entry, we note that Judge Bredar referred to as “an interesting theory” RCS’s claim that Plaintiffs’ state law claims were “foreclosed by the fairly universal acceptance by courts that no private right of action lies for a denial of a loan modification under the Home Affordable Modification Program (“HAMP”),[ but stated that Defendant had] cited no authority for this theory of implicit preemption.”  (Op. at 11.)  Consequently, the Court did not adopt the Defendant’s theory and instead adopted the conclusion from opinions by the Court finding that state law claims were not “foreclosed by the fact that they arose in the context of HAMP.”  (Id.);  see, e.g., Legore v. OneWest Bank, Civ. No. BEL-11-589, 2012 WL 4903087, *4 (D. Md. Oct. 15, 2012) and cases cited therein.

(See the “Closing the HAMPer?”  blog entry for more discussion of HAMP preemption in Maryland.)

Defendant’s Win MSJ On Breach of Contract Counterclaim

RCS alleged that on September 11, 2007, the Neals borrowed $231,300 from BankUnited FSB, as evidenced by a promissory note (the “Note”) executed on the same date.  (Def. RCS’s Answer to Complaint and Counterclaim at 8.)  RCS is the current loan servicer of the Note.  (Id.)

Plaintiffs argued that RCS, as a mere loan servicer, was not entitled to sue on the note.  (Op. at 2.)  RCS countered by submitting guidelines from Fannie Mae, which govern the relationship between Fannie Mae and loan servicers.  (Id. at 3.)  The guidelines conclusively establish that Fannie Mae allows a loan servicer to have temporary possession of the mortgage note, “whenever the servicer, acting in its own name, represents the interests of Fannie Mae in foreclosure actions, bankruptcy cases, probate proceedings, or other legal proceedings.  (Id.)  In sum, the servicer becomes the holder of the note.  (Id.)  The Court concluded therefore that RCS had standing to sue on the note as its holder and dismissed the Plaintiffs’ motion to dismiss the counterclaim.  (Id.)

Moreover, the Court granted RCS’ motion for summary judgment of this counterclaim because Plaintiffs “have never denied that they executed the note or that they are in default with respect to it.”  (Id. at 4.)  Mr. Neal testified in his depositions that they had not made any payments on the note in 2010 and leading up to their depositions in October 2011.  (Id.)  Mrs. Neal testified similarly at a hearing in the course of the foreclosure proceeding.  (Id.)  Plaintiffs’ only argument against RCS’s entitlement to judgment on its counterclaim relied on their argument to dismiss the counterclaim, which was denied as unmeritorious.  (Id.)  In sum, RCS “clearly established it [was] entitled to judgment.”  (Id.)  Thus, the Court granted RCS’s motion for summary judgment on the counterclaim.  (Id.)

Plaintiffs’ Claims Are Not Foreclosed by HAMP And Defendant Is Denied MSJ On Three Counts.

Plaintiffs’ claims arose out of their attempt to obtain a loan modification in December 2009 from their mortgage servicer, RCS. (Id.at 5.) Evidence in the record supported the Neals’ allegation that they called RCS in early January 2010 to inquire about the status of their loan modification application. (Id.) Apparently an “RCS representative told [the Neals] that they did not qualify because they were current in their mortgage payments, and . . . recommended [that Plaintiffs] not make their January mortgage payment.” (Id.) The Neals followed this advice and did not make a payment in January. (Id.) According to the Neals, a similar conversation took place regarding their February payment, and again, they did not make the February payment based on the advice not to do so from the RCS representative. (Id.)

During February 2010, an RCS representative called the Neals and told them they were approved for a loan modification and their new monthly payment amount-- $1634, instead of $1840. (Id. at 5-6.) During a subsequent conversation, the Neals accepted the new amount, and RCS told them they would send additional paperwork to sign. (Id. at 6.)

After this conversation, RCS confirmed three times, throughout March and April 2010, that it would be sending the Neals the required paperwork. (Id.) However, in early March, the Neals received a notice of intent to foreclose from RCS. (Id.) A RCS representative told Plaintiffs this was automatic and not to worry about it. (Id.)

According to their loan modification plan, the payments the Neals skipped were to be added to the end of the loan. (Id.) Consequently, the Neals used this money to pay other debt. (Id.) In March, Mrs. Neal tried to make the monthly payment online. (Id.) She tried paying both the modified amount and the original amount, but the payment processing system did not accept her payment. (Id.) She called RCS and was informed that the Neals’ application for a loan modification was denied. (Id.) In addition, the RCS representative told her that she and her husband would have to pay $5,000, and their new monthly payment would be $2,200. (Id.) In late June 2010, RCS provided Plaintiffs with a total amount to pay to cure the default. (Id.) However, that occurred after RCS filed a foreclosure action. (Id.)

In sum, the Plaintiffs’ claims are based on their assertion that they were given false information, they relied on this false information, and they suffered injury as a result. (Id.)

The Court found that Plaintiffs had presented evidence that, if credible, was sufficient for a fact-finder to render judgment in their favor on three counts. (Id. at 7-8.) Thus, the Court denied RCS’s motion for summary judgment for Counts One (Violations of the MCPA), Three (Promissory Estoppel/Detrimental Reliance), and Five (Negligent Misrepresentation). (Id.) 

The Court granted the Defendant’s motion for summary judgment for Counts Two (Common Law Fraud) and Four (Negligence). (Id. at 9-10.) Plaintiffs’ claim of fraud failed as there was no evidence that any misrepresentation was done for the purpose of defrauding the Neals. (Id. at 9.)

Plaintiffs’ claim of negligence also failed. (Id. at 10.) “In the context of loan applications, Maryland’s highest court has found a tort duty by a creditor to its customer to use reasonable care in the processing and determination of an application for credit.” (Id.), citing Jacques v. First Nat’l Bank of Md., 515 A.2d 756, 761-63 (Md. 1986). However, this tort duty does not exist in all cases. The duty existed in Jacques only because of special circumstances—the “Jacqueses’ vulnerability to risk and dependence upon accurate loan processing, with the bank being aware of that circumstance, and the public interest in banking.” Jacques, 515 A.2d at 762-63. The Jacques court noted that the probable harm from negligent processing of a loan application is limited to economic loss. Id. at 760.

The Jacques Court concluded therefore that:  

Where the failure to exercise due care creates a risk of economic loss only, courts have generally required an intimate nexus between the parties as a condition to the imposition of tort liability. This intimate nexus is satisfied by contractual privity or its equivalent. By contrast, where the risk created is one of personal injury, no such direct relationship need be shown, and the principal determinant of duty becomes foreseeability. 

Id. at 759-60.

Here, the Neals’ original mortgage with RCS provided the parties with contractual privity; however, this privity did not govern whether RCS owed the Neals a duty of care in the processing of their loan modification application. (Op. at 10.) They are separate inquiries. (Id.) 

The Neals’ negligence count was based on RCS’s alleged failure to use due care in connection with the Neals’ loan modification application.” ((Id.) The Court relied on Jacques to find that “[s]imply submitting an application for a loan modification is insufficient to establish the ‘intimate nexus’ that Jacques requires.” (Id.) The Court found that this case lacked the special circumstances or the contractual basis necessary to establish a tort duty of care on RCS as to the loan modification application. (Id. at 11.); see also Spaulding v. Wells Fargo Bank, Civ. No. GLR-11-2733, 2012 WL 3025116, at *6 (D. Md. Jul. 23, 2012) (holding that plaintiffs and bank did not enter into implied or express contract for processing of loan modification application).

Moreover, the Court explained that the undisputed evidence in the record demonstrated that the Neals’ “extensive credit card debt” prevented them from qualifying for the loan modification. (Id. at 11.) In sum, even if a duty existed, RCS could not breach such a duty because the Neals were not entitled to a loan modification. (Id.)

Consequently, the Court granted RCS’s motion for summary judgment on Counts Two and Four. (Id. at 9,11.)

Finally, the Court denied Plaintiffs’ Motion for Partial Summary Judgment, on Count One, alleging violations of the MCPA, on the grounds that a state court foreclosure action dismissed without prejudice was not a final judgment and therefore did not collaterally estop RCS from denying liability under the MCPA. (Id. at 12.)