Cannon v. Wells Fargo Bank N.A.

Decision Date09 January 2013
Docket NumberNo. C–12–1376 EMC.,C–12–1376 EMC.
PartiesStanley D. CANNON, et al., Plaintiffs, v. WELLS FARGO BANK N.A., et al., Defendants.
CourtU.S. District Court — Eastern District of California


Sheri L. Kelly, Law Office of Sheri L. Kelly, San Jose, CA, for Plaintiffs.


(Docket Nos. 57, 59–61)

EDWARD M. CHEN, District Judge.

Plaintiffs Stanley D. Cannon and Patricia R. Cannon have filed suit against Wells Fargo Bank, N.A.; Assurant, Inc.; and the Federal National Mortgage Association (“Fannie Mae”). In essence, Plaintiffs challenge certain practices related to Wells Fargo's forced purchase of flood insurance for borrowers whose loans are owned by Fannie Mae and serviced by Wells Fargo. The insurance is purchased from Assurant's subsidiaries, American Security Insurance Company and Standard Guaranty Insurance Company (collectively, “ASIC”). Currently pending before the Court are various 12(b)(6) motions filed by each of the defendants.


The instant case concerns what Plaintiffs call “force-placed flood insurance” and what Defendants call “lender-placed flood insurance.” Flood insurance is a kind of property insurance. A person who borrows money to finance the purchase of residential property may be required by the lender to obtain acceptable flood insurance on the real property securing the loan. When a borrower does not maintain the insurance, then the lender steps in to purchase the insurance for the borrower. The lender typically has the right to do this under the mortgage contract. In the instant case, Plaintiffs challenge certain force-placed flood insurance practices engaged in by Wells Fargo, acting as a servicer on behalf of the loan owner Fannie Mae.

Plaintiffs allege as follows in their first amended complaint (“FAC”).

Plaintiffs are residents of Florida. See FAC ¶ 15. In September 2005, Plaintiffs obtained a mortgage in the amount of $128,000 from Amerisave Mortgage Corporation. See FAC ¶ 27. Their mortgage was subsequently purchased by Fannie Mae. See FAC ¶¶ 25, 27. Fannie Mae is a federally chartered company. See FAC ¶ 18. It “buys and owns mortgages originated by other lenders.” FAC ¶ 25. “To service its vast portfolio of loans, Fannie Mae hires servicing agents to service its loans pursuant to the contract terms contained with the loans.” FAC ¶ 25. For Plaintiffs' loan, Fannie Mae hired Wells Fargo as the servicing agent. See FAC ¶ 26.

Plaintiffs' mortgage was a Fannie Mae form mortgage. See FAC ¶ 29. One of the terms of the mortgage concerns property insurance. It provides in relevant part as follows:

5. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire ... and any other hazards, including, but not limited to, earthquakes and floods, for which Lender requires insurance. The insurance shall be maintained in the amounts ... and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan....

If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender's option and Borrower's expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower's equity in the Property, or the contents of the Property, against any risk, hazard or liability and might provide greater or lesser coverage than was previously in effect. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained. Any amounts disbursed by Lender under this Section 5 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.

FAC, Ex. A (Mortgage § 5).

Because Plaintiffs' home was located in a Special Flood Hazard Area, as defined by federal regulations, they were required to obtain flood insurance. See FAC ¶ 31. At the time they entered into the mortgage, Plaintiffs signed a notice regarding a special flood hazard area (“NSFH”). See FAC ¶ 31. The notice specified that,

The community in which the property securing the loan is located participates in the National Flood Insurance Program (NFIP). Federal law will not allow us to make you the loan that you have applied for if you do not purchase flood insurance. The flood insurance must be maintained for the life of the loan. If you fail to purchase or renew flood insurance on the property, Federal law authorizes and requires us to purchase the flood insurance for you at your expense.


At a minimum, flood insurance purchased must cover the lesser of:

1. the outstanding principal balance of the loan; or

2. the maximum amount of coverage allowed for the type of property under the NFIP.

Docket No. 58 (Wells Fargo's RJN, Ex. I) (notice); see also FAC ¶ 31; Docket No. 70 (Opp'n at 7) (stating no objection to request for judicial notice of the NSFH).

Plaintiffs obtained sufficient flood insurance coverage to close their mortgage in 2005. See FAC ¶ 32. However, in April 2006—two months after Wells Fargo became the servicer for Plaintiffs' mortgage—Wells Fargo increased the amount of flood insurance that Plaintiffs were required to maintain. See FAC ¶ 34. In May 2006, Wells Fargo notified Plaintiffs that it had force-purchased additional flood insurance on behalf of Plaintiffs because there was deficient coverage. Wells Fargo purchased the insurance from ASIC, i.e., one of Assurant's subsidiaries. See FAC ¶ 38. Subsequently, Plaintiffs purchased additional flood insurance from a different insurance company to avoid paying the high premiums charged by ASIC. See FAC ¶ 39.

In April/May 2008, Plaintiffs were again subjected to force-placed flood insurance by Wells Fargo. The insurance policy was once again with ASIC. See FAC ¶¶ 39–40. At this time, Plaintiffs' private flood insurance policy combined with the force-placed insurance policy provided a total of at least $238,100 in flood insurance coverage. See FAC ¶ 41. The amount Plaintiffs owed Fannie Mae was significantly lower—more than $100,000 lower. See FAC ¶ 41.

According to Plaintiffs, the force-placed insurance to which they were subjected is improper for at least three reasons.

First, Wells Fargo or an affiliated entity receives a kickback from ASIC for the force-placed insurance ( i.e., a percentage of the premiums). Although Wells Fargo claims these are commissions earned for finding and placing the insurance, Wells Fargo does not in fact provide any such service because it has a set agreement with Assurant and/or ASIC in which it agrees to buy every force-placed insurance policy from ASIC. See FAC ¶¶ 3–5.

Second, Wells Fargo requires all borrowers to maintain flood insurance equal to the “replacement cost value” of the borrower's property, even if that value exceeds the principal balance on the loan. But the purpose of force-placed insurance is only to protect the lender's interest in the property, and therefore a borrower should not be force-placed into insurance exceeding the outstanding principal balance. See FAC ¶ 7.

Finally, “Wells [Fargo] force-places retroactive insurance policies covering periods of time in the past where coverage had lapsed. This is done despite the fact that there are no claims during the lapsed period and the homeowner has since secured standard insurance.” FAC ¶ 59. In short, Plaintiffs claim that Wells Fargo engages in improper backdating.

Based on, inter alia, the above allegations, Plaintiffs assert the following claims, both on their own behalf and on behalf of a nationwide class and a California-wide subclass:

(1) breach of contract, including the implied covenant of good faith and fair dealing (against Fannie Mae and Wells Fargo only);

(2) unjust enrichment (against Wells Fargo and Assurant only);

(3) conversion (against Wells Fargo only);

(4) breach of fiduciary duty (against Fannie Mae and Wells Fargo only);

(5) violation of the Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq. (against Fannie Mae and Wells Fargo only);

(6) violation of California Business & Professions Code § 17200 (against all Defendants);

(7) violation of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 (against all Defendants); and

(8) equitable relief (against all Defendants).

The eighth claim, however, may be disregarded because, as Plaintiffs concede in their papers, equitable relief is not a claim for relief but rather only a remedy. See, e.g., Docket No. 70 (Opp'n at 22) (stating that Plaintiffs “mistakenly listed ‘Equitable Relief’ as a cause of action”; agreeing with Defendants that “equitable relief is not a separate cause of action, but is, instead, a remedy”).

A. Legal Standard

Under Federal Rule of Civil Procedure 12(b)(6), a party may move to dismiss based on the failure to state a claim upon which relief may be granted. SeeFed.R.Civ.P. 12(b)(6). A motion to dismiss based on Rule 12(b)(6) challenges the legal sufficiency of the claims alleged. See Parks Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). In considering such a motion, a court must take all allegations of material fact as true and construe them in the light most favorable to the nonmoving party, although “conclusory allegations of law and unwarranted inferences are insufficient to avoid a Rule 12(b)(6) dismissal.” Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir.2009). While “a complaint need not contain detailed factual allegations ... it must plead ‘enough facts to state a claim to relief that is plausible on its face.’ Id. “A claim has facial plausibility when the plaintiff pleads...

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