Chandler v. Wells Fargo Bank, N.A.
| Decision Date | 03 January 2014 |
| Docket Number | Case No. 11-03831 SC |
| Court | U.S. District Court — Northern District of California |
| Parties | ROBERT CHANDLER, AS REPRESENTATIVE OF THE ESTATE OF ROSEMARY S. CHANDLER, individually and on behalf of all others similarly situated, Plaintiff, v. WELLS FARGO BANK, N.A., and FEDERAL NATIONAL MORTGAGE ASSOCIATION a/k/a FANNIE MAE, Defendants. |
Plaintiff Robert Chandler ("Plaintiff") brings this putative class action in connection with Defendants Wells Fargo, N.A. ("Wells") and Federal National Mortgage Association's ("Fannie Mae") (collectively, "Defendants") alleged breach of his mother's reverse mortgage, also known as a home equity conversion mortgage ("HECM"). ECF No. 64 (First Amended Complaint ("FAC")). Defendants now move to dismiss. ECF No. 67 ("MTD"). The motion is fully briefed, ECF Nos. 69 ("Opp'n"), 70 ("Reply"), and appropriatefor resolution without oral argument per Civil Local Rule 7-1(b). For the reasons set forth below, the Motion is GRANTED.
Plaintiff resides at 10095 Sheldon Road, Elk Grove, California (the "Property"). In 2006, Plaintiff's mother, Rosemary S. Chandler, took out a $544,185 reverse mortgage loan that was secured by the Property. Ms. Chandler signed the Home Equity Conversion Deed of Trust (the "HECM Deed") as trustee for Rosemary S. Chandler, 1993 Trust. ECF No. 68 ("RJN") Ex. A ("HECM Deed"). Wells originated the reverse mortgage but later sold it to Fannie Mae. Wells continued to service the loan.
Ms. Chandler died in January 2010. FAC 1 46. At the time of her death, the HECM balance was approximately $338,000 and the value of the home was approximately $252,698. Id. Plaintiff contacted Wells about purchasing the home for its appraised value, but Wells insisted that Plaintiff would have to pay off the full loan balance. Id. 1 47. Plaintiff subsequently received a notice from a substitute trustee that the mortgage was in default due to failure to pay the entire principal balance. Id. 1 48. Plaintiff alleges that, pursuant to the HECM Deed and HUD regulations, Defendants should have provided him with notice and an opportunity to purchase the Property at 95 percent of its appraised value.
Unlike a typical mortgage, where a borrower receives loan proceeds as a lump sum, uses the proceeds to buy a home, and then pays back the loan gradually, a "reverse" mortgage borrower alreadyowns a home and takes out a loan against its equity. In the reverse of a typical mortgage, an HECM borrower generally receives the loan proceeds in gradual payments and pays back the loan in a lump sum.
Repayment is triggered by certain qualifying events. Those qualifying events are set forth in Paragraph 9 of the HECM Deed. Specifically, Paragraph 9(a) provides that the lender may require immediate repayment in full of all sums secured if (i) the borrower dies, or (ii) all of the borrower's title in the Property is sold or otherwise transferred. Paragraph 9(b) sets forth other conditions under which the loan may become due and payable that are not relevant here. Paragraph 9(d) provides that the lender shall notify the Secretary of Housing and Urban Development ("HUD") and the borrower "whenever the loan becomes due and payable under paragraph 9(a)(ii)," that is, whenever the loan becomes due and payable because the borrower transfers her interest in the property, or under paragraph 9(b). Paragraph 9(d) omits any reference to the death of the borrower as a triggering event for notice.
Paragraph 9(d) further provides that lender shall not have the right to commence foreclosure until the borrower has had thirty days after the notice to either:
Subparagraph (iii) sets forth the so-called "95 percent rule" that Plaintiff now seeks to enforce.
The terms of the HECM Deed also protect Ms. Chandler and her heirs from deficiency judgments. Specifically, paragraph 10 of the HECM Deed provides that lender may only enforce the debt through sale of the property and that the lender shall not be permitted to obtain a deficiency judgment against the borrower.
B. HUD Regulations and Guidelines
Plaintiff alleges that Ms. Chandler's reverse mortgage was insured by HUD. HUD regulations parallel the provisions of the HECM Deed in many respects. For example, 24 C.F.R. § 206.27(c)(1)(i) and (ii) mirror the provisions of paragraph 9(a) and 9(b) of the HECM Deed, stating that the reverse mortgage becomes due and payable when, among other things, the borrower dies or the borrower conveys title to the property to another.
Like paragraph 9(d) of the HECM Deed, HUD regulations provide that the lender shall notify the borrower that the mortgage is due and payable, "unless the mortgage is due and payable by reason of the mortgagor's death." Id. § 206.125(a)(2). The regulations continue:
HUD regulations also allow the borrower to sell the property at any time and limit liability to no more than the appraised value of the property:
Whether or not the mortgage is due and payable, the mortgagor may sell the property for at least the lesser of the mortgage balance or the appraised value (determined under § 206.125(b)). If the mortgage is due and payable at the time the contract for sale is executed, the mortgagor may sell the property for at least the lesser of the mortgage balance or five percent under the appraised value.
In December 2008, HUD issued guidance regarding these regulations. RJN Ex. E. That guidance states that a borrower or the borrower's estate cannot "pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home." Id. The guidance further states that if the HECM is due and payable and the borrower or the borrower's estate wants to retain ownership of the subject property, the HECM must be repaid in full. HUD explained that HECMs were non-recourse loans and "[n]on-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee's remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure." Id.
HUD rescinded this guidance in April 2011. RJN Ex. G. A few months later, in July 2011, HUD issued new guidance explaining thatwhen an HECM loan becomes due and payable as a result of the borrower's death, the borrower's heirs may satisfy the HECM debt by paying the lesser of the mortgage balance or 95 percent of the current appraised value of the property. FAC Ex. A. at 1. The new guidance further provides that lender should grant heirs 90 to 180 days to make the required payments.
Based on the allegations set forth above, the HECM Deed, and the HUD regulations, Plaintiff asserts claims for (1) declaratory relief, (2) breach of contract, and (3) violation of the California Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, et seq.
With respect to the first cause of action, Plaintiff seeks a declaration that (a) Defendants are required to provide notice to borrowers that they can sell or transfer their properties for 95 percent of the appraised value before Defendants may initiate foreclosure proceedings, (b) Defendants cannot initiate foreclosure proceedings if a borrower endeavors to sell or transfer the property for 95 percent of the appraised value, (c) Defendant's failure to provide notice and an opportunity to sell violates 12 U.S.C. § 1715z-20, as well as HUD regulations, (d) any foreclosure that occurs prior to the required notice or after a denial of an opportunity to sell is illegal and a breach of contract.
Plaintiff's other claims for breach of contract and UCL violations are likewise premised on Defendants' alleged obligation to provide Plaintiff with notice and opportunity to take advantage of the 95 percent rule.
This is a putative class action brought under Federal Rule of Civil Procedure 23(b)(2). The proposed class is defined as "estates and personal representatives of HECM borrowers, whose loans are or were owned and/or serviced by Defendants, and who are entitled to notice and the opportunity to purchase properties for 95% of appraised value." FAC ¶ 54.
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "tests the legal sufficiency of a claim." Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). "Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory." Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988). "When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). However, ...
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