Campidoglio LLC v. Wells Fargo & Co.

• Decision Date: 12 September 2017
• Docket Number: Nos. 14-35898,14-36091,s. 14-35898
• Citation: 870 F.3d 963
• Parties: CAMPIDOGLIO LLC ; Carmen LLC ; San Marco LLC, Plaintiffs-Appellants/Cross-Appellees, v. WELLS FARGO & COMPANY, Defendant, and Wells Fargo Bank, NA, Defendant-Appellee/Cross-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

870 F.3d 963

CAMPIDOGLIO LLC ; Carmen LLC ; San Marco LLC, Plaintiffs-Appellants/Cross-Appellees,

v. WELLS FARGO & COMPANY, Defendant,andWells Fargo Bank, NA, Defendant-Appellee/Cross-Appellant.

Nos. 14-35898

14-36091

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 8, 2017 Seattle, Washington

Filed September 12, 2017

Benjamin Gould (argued), Ryan McDevitt, Raymond J. Farrow, and Mark A. Griffin, Keller Rohrback L.L.P., Seattle, Washington, for Plaintiffs-Appellants/Cross-Appellees.

Robert Collings Little (argued), Robin C. Campbell, Mark T. Flewelling, and Leigh O. Curran, Anglin Flewelling Rasmussen Campbell & Trytten LLP, Pasadena, California; Robert T. Mowrey and W. Scott Hastings, Locke Lord LLP, Dallas, Texas; Regina J. McClendon, Locke Lord LLP, San Francisco, California; Robert J. Bocko, Holmes Weddle & Barcott, Seattle, Washington, for Defendant-Appellee/Cross-Appellant.

Before: M. Margaret McKeown, Consuelo M. Callahan, and Sandra S. Ikuta, Circuit Judges.

OPINION

CALLAHAN, Circuit Judge:

Campidoglio LLC, Carmen LLC, and San Marco LLC (the Borrowers) sued Wells Fargo Bank, N.A. (Wells Fargo) based on Wells Fargo and its predecessors' (together, the Lenders) alleged miscalculation of interest on the Borrowers' loans. This case presents four issues for our review. First, we are called upon to determine whether the Home Owners' Loan Act ("HOLA") preempts the Borrowers' "Interest Rate Calculation" breach of contract claim, which arises under Washington law. Because we find that a common law breach of contract claim is not the type of law listed in paragraph (b) of 12 C.F.R. § 560.2, but comes within paragraph (c) of that regulation and is a law that only incidentally affects the lending operations of federal savings associations, we conclude that this claim is not preempted by HOLA. Second, we address whether the district court erred in granting summary judgment in Wells Fargo's favor on the Borrowers' "Use of Unapproved Indexes" breach of contract claim, and the other claims related to this alleged conduct by the Lenders. We affirm the grant of summary judgment because the Lenders gave notice to their primary regulators of their intent to substitute the Indexes used to calculate interest on the Borrowers' loans and the regulators did not object. Third, we affirm the district court's denial of the Borrowers' motion for discovery sanctions pursuant to Federal Rule of Civil Procedure 37 because the Borrowers fail to show prejudice resulting from this ruling. Finally, in light of our determination that HOLA does not preempt the Borrowers' "Interest Rate Calculation" claim, we vacate the district court's denial of attorneys' fees without prejudice.

I

A

Each Borrower executed an adjustable-rate mortgage promissory note in favor of World Savings Bank (the Notes). The interest rate for all three Notes is calculated by adding the "stated margin," which is a constant value, and the "current index" (the Index), which has a fluctuating value. When the Borrowers executed the Notes, the Notes defined "Index" to mean the "weighted average of the interest rates in effect as of the last day of each calendar month on the deposit accounts of the federally insured depository institution subsidiaries ... of Golden West Financial Corporation" (Golden West). It also provided that "[i]f an index is substituted as described in this Section ... the alternative index will become the Index." At that time, World Savings Bank was Golden West's subsidiary, and the Index was the Golden West "cost of savings" index, or the "Golden West COSI." The Notes also provide:

The Lender may choose an alternative to be the Index if the Index is no longer available.... The selection of the alternative index shall be at the Lender's sole discretion. The alternative index may be a national or regional index or another type of index approved by the Lender's primary regulator . The Lender will give notice to the Borrower of the alternative index.

Wachovia Corporation (Wachovia) later acquired Golden West and World Savings Bank, and World Savings Bank changed its name to Wachovia Mortgage, FSB. On December 15, 2006, Wachovia submitted a letter to its primary regulator, the Office of Thrift Supervision (OTS), stating that Wachovia intended to change the Index from the Golden West COSI to the Wachovia COSI.¹ The letter discusses both new and existing loans. In January 2007, the OTS responded to Wachovia. The response describes Wachovia's December 2006 letter as seeking "to establish an alternative adjustable-rate loan index for new mortgage loans," and states that:

[B]ased upon the regulatory criteria and the representations made in the Notice, the OTS takes no objection to World [Savings Bank's] use of the proposed alternative adjustable-rate loan index.

The OTS's January 2007 letter does not, however, specifically mention existing loans. The OTS and Wachovia later communicated about Wachovia's plan for substituting the Index for existing loans. In July 2007, the Borrowers were notified that because the Golden West COSI would no longer be available, the Wachovia COSI would be used as the Index going forward.

Then, in 2008, Wells Fargo acquired Wachovia, including Wachovia Mortgage. Because the Wachovia COSI would no longer be available for use as the Index, Wells Fargo sent letters to Wachovia's primary regulator, the OTS, and its own primary regulator, the Office of the Comptroller of the Currency (OCC), seeking approval to use a new Index value: the Wells Fargo COSI.² The OCC responded, indicating that, based on the information provided by Wells Fargo, it had no objection to Wells Fargo using the Wells Fargo COSI as the Index. In a footnote, the OCC's letter recites that the "Wachovia COSI was approved by the OTS for use by World Savings [Bank] in May 2007. Wachovia COSI replaced a similar World Savings [Bank] index the OTS had approved in 1997." The OTS similarly informed Wells Fargo that it had no objection. Wells Fargo then switched to using the Wells Fargo COSI as the Index for calculating the interest rate on various adjustable-rate mortgage loans, including the Borrowers' loans.

B

The Borrowers filed a putative class action in Washington state court in May 2012, alleging four separate claims for breach of contract, a claim for breach of the implied covenant of good faith and fair dealing, violations of the Washington Consumer Protection Act (WCPA), and unjust enrichment. The breach of contract claims are based on the Lenders' allegedly improper "Interest Rate Calculation," "Substitution of Indexes," "Transparency of Calculation," and "Use of Unapproved Indexes." Wells Fargo removed the case to the United States District Court for the Western District of Washington, and moved to dismiss the complaint for failure to state a claim upon which relief could be granted. Wells Fargo argued that HOLA preempted the Borrowers' claims. The district court granted the motion in part, finding that HOLA preempted three of the Borrowers' four claims for breach of contract, including the "Interest Rate Calculation" breach of contract claim. The surviving breach of contract claim, entitled "Use of Unapproved Indexes," alleged that the Lenders breached their contractual duty "to substitute only indexes qualifying as ‘national or regional indexes' and/or approved by their primary regulator" by using the Wachovia COSI and the Wells Fargo COSI. The Borrowers' claims for violations of the WCPA, unjust enrichment, and breach of the covenant of good faith and fair dealing survived to the extent they were premised on this alleged misconduct.

Wells Fargo later moved for summary judgment on the Borrowers' remaining claims. Due to ongoing discovery disputes, the district court continued the hearing on this motion several times. The parties' discovery skirmishes culminated in the Borrowers filing a motion for sanctions pursuant to Federal Rule of Civil Procedure 37. The Borrowers asserted that although Wells Fargo had identified approximately 6,000 documents responsive to the Borrowers' requests for production, Wells Fargo withheld production of, or redacted, 4,636 documents based on overly broad assertions of attorney-client privilege. The Borrowers argued that Wells Fargo's failure to produce these documents violated a prior court order, and sought to compel their production.

The court for the most part deferred ruling on the motion, indicating that it lacked sufficient information to determine whether Wells Fargo had properly invoked the attorney-client privilege.³ The court ordered the Borrowers to designate up to twenty of Wells Fargo's privilege log entries that, in the Borrowers' view, identified communications not actually protected by the attorney-client privilege. Wells Fargo would then submit these communications, and the corresponding privilege log entries, to the court for in camera review. The court indicated that if Wells Fargo had properly invoked the attorney-client privilege for the designated communications, then the court would deny this portion of the Borrowers' Rule 37 motion. But, if "Wells Fargo ha[d] improperly asserted the attorney-client privilege as to a significant portion of the communications," then the court would "grant appropriate relief to [the Borrowers], potentially including in camera review of additional materials and/or directing Wells Fargo to produce all documents identified in the privilege log."

Wells Fargo subsequently withdrew its assertion of the attorney-client privilege for some documents, but maintained that those documents were nonetheless protected by the "bank examination privilege." See infra note 5. Wells Fargo asserted that although it had correctly withheld documents based on privilege, on some privilege log entries it might have misstated the applicable privilege.

The district court issued two orders on the Rule 37 motion. It first found that Wells Fargo had appropriately invoked the bank examination privilege as...