Davis v. Wells Fargo Bank, N.A.

• Decision Date: 30 September 2013
• Docket Number: Civil Action No. 6–11–CV–47.
• Citation: 976 F.Supp.2d 870
• Parties: Mack DAVIS, et al, Plaintiffs, v. WELLS FARGO BANK, N.A., et al, Defendants.
• Court: U.S. District Court — Southern District of Texas

976 F.Supp.2d 870

Mack DAVIS, et al, Plaintiffs,

v.WELLS FARGO BANK, N.A., et al, Defendants.

Civil Action No. 6–11–CV–47.

United States District Court,

S.D. Texas,

Victoria Division.

Sept. 30, 2013.

Craig M. Sico, Sico White et al., John Timblin Flood, Flood & Flood, Corpus Christi, TX, for Plaintiffs.

Robert T. Mowrey, Johnathan E. Collins, Marc Daniel Cabrera, Matthew Hogan Davis, Thomas George Yoxall, Locke Lord Bissell and Liddell, Dallas, TX, Ralph F. Meyer, Ronald Walter Dennis, Royston Rayzor et al., Corpus Christi, TX, for Defendants.

MEMORANDUM AND ORDER

GREGG COSTA, District Judge.

The real estate at issue in this proposed class action is part of an 800–acre development along the mid-Gulf Coast of Texas. But the allegations of fraud reach back to decisions made in Washington and Wall Street during the height of the financial crisis in the fall of 2008. In the spasm of bank merger activity that occurred during that period, when troubled banks bought their even more troubled brethren, Wells Fargo purchased Wachovia. As a result, Wells Fargo took on the mortgage loans that Wachovia had made to Plaintiffs to fund their real estate purchases at the development in Port O'Connor, Texas.

Plaintiffs contend that a special and short-lived IRS rule aimed at encouraging the bank merger activity caused Wells Fargo to have “unusual loss incentives” resulting in its “victimization” of Plaintiffs when their loans came due. Pls.' First Amended Complaint, Docket Entry No. 23 ¶ 40. The temporary tax change removed the limit on the amount of loan losses from an acquired bank's balance sheet that an acquiring bank could deduct. Plaintiffs contend that as a result of this increased ability to deduct losses on Wachovia loans, Wells Fargo sold the homes at below market prices, instead of offering reasonable refinancing terms, when balloon payments came due on Plaintiffs' interest-only loans around 2009. A principal allegation of fraudulent activity supporting this “market value/tax manipulation scheme” is that Wells Fargo instructed appraisers to use only foreclosure sales as comparable because, as it supposedly told one appraiser, it “wanted the appraisals lower.” Id. ¶ 44–45.

This overall scheme serves as the basis for fourteen different state and federal claims Plaintiffs assert against the Defendants: Wells Fargo Bank N.A., Wachovia Bank, N.A.; Greenlink LLC; Wells Fargo Home Mortgage, Inc.; America's Servicing Company; and several unnamed real estate appraisers. ¹ Wells Fargo filed a motion to dismiss contending that Plaintiffs' alleged scheme is implausible on its face, that federal law preempts some of the state law claims, that the economic loss rule precludes the tort claims, and that the individual causes of action fail to state a claim. For the reasons that follow, the Court rejects Defendants' general plausibility, preemption, and “economic loss rule” challenges, but finds that a number of the claims are legally insufficient under the facts alleged. Accordingly, Defendants' motion is GRANTED IN PART and DENIED IN PART as discussed below.

I. BackgroundA. The Sanctuary²

The Sanctuary at Costa Grande is an 800–acre development with 767 single lots located along 1.5 miles of the Intercoastal Waterway in Port O'Connor. Development of The Sanctuary—which involved the construction of roads, a marina, clubhouse, plumbing, and electricity service—cost more than $60 million. Beginning in 2006, developers began selling the lots. The seventeen individual Plaintiffs—most of whom reside outside of Texas—purchased their lots between 2006 and 2008 under three- to five-year interest—only loans from Wachovia Bank, N.A. The loans required 10% down and a large balloon payment at the end of the loan term, but—according to Plaintiffs—came “with the assurance that the borrower could always refinance the loan, if necessary,” at the end of the three- or five-year term. Docket Entry No. 23 ¶ 34. The loan agreements did not, however, guarantee any particular refinancing terms.

B. Wells Fargo Acquires The Sanctuary Loans During The 2008 Financial Crisis

Wells Fargo acquired these loans when it merged with Wachovia during the financial crisis of 2008. The circumstances surrounding that merger form a core part of the allegations in this case.

During the 2008 financial crisis, Wachovia posted a second-quarter loss of $8.9 billion and suffered a one-day loss of $5 billion in deposits. That balance sheet made it one of the “too big to fail” institutions that were the subject of frenzied merger talks, often at government prodding. Wells Fargo made an offer for Wachovia that was rejected. Then an announcement was made that Citigroup would buy Wachovia for $2 billion under a deal that would allow Citigroup to bypass certain Federal Deposit Insurance Corporation procedures.

But another government incentive prompted Wells Fargo to up its earlier bid for Wachovia. On September 30, 2008, the Internal Revenue Service issued Notice 2008–83. That notice provided that: “For purposes of section 382(h), any deduction properly allowed after an ownership change ... with respect to losses on loans or bad debts ... shall not be treated as a built-in loss or a deduction that is attributable to periods before the change date.” Section 382 had previously limited the amount of an acquired company's losses that an acquiring company could deduct to a small percentage of the acquired company's stock value. This prevented mergers aimed at acquiring a company for its potential to generate tax losses. Given the plummeting value of Wachovia's stock, Plaintiffs contend that the historical Section 382 would have limited a buyer's allowable annual deduction for Wachovia's bad loans to a figure “as low as $93 million.” Docket Entry No. 23 ¶ 38. But—with Notice 2008–83 substantially accelerating the allowable deductions for the acquired company's loan losses—the company acquiring Wachovia would be able to claim billions in tax deductions in the years following a merger.

Three days after the announcement of this change in tax law, instead of consummating the expected sale to Citigroup, Wachovia announced an all-stock merger with Wells Fargo that required no FDIC involvement. FDIC chairwoman Sheila Bair later testified that Wells Fargo's chairman had informed her that IRS Notice 2008–83 “had been a factor leading to Wells's revised bid.” Id. ¶ 39; Sheila Bair, Interview by Fin. Crisis Inquiry Comm'n, Aug. 18, 2010. The Wells Fargo Wachovia merger closed on December 31, 2008.

The IRS notice sparked congressional criticism, in particular because of the large tax benefit it provided Wells Fargo for the Wachovia purchase. As a result, the American Recovery and Reinvestment Act, signed on February 17, 2009, repealed IRS Notice 2008–83. But the Act retained the effect of Notice 2008–83 on any ownership change that occurred before January 16, 2009. As a result, Wells Fargo would continue to receive accelerated tax deductions for any loss on a loan that it acquired as a result of its merger with Wachovia. It is this unique tax treatment that Plaintiffs contend created an incentive for the fraud scheme that Wells Fargo allegedly commenced in 2009 when the Sanctuary mortgage loans started to come due.

C. The Sanctuary Loans Come Due

Plaintiffs contend that when their short-term (3 or 5 year) interest-only loans started to come due which required the balloon payment, they had “better than average credit scores” and were in a “position to refinance.” Docket Entry No. 23 ¶ 40. But Wells Fargo offered “oppressive and unreasonable refinancing terms” and refused to allow “short sales, deeds in lieu of foreclosure, or debt forgiveness.” Id. The IRS Notice put Wells Fargo in what Plaintiffs call “a perfect position—it would receive very favorable, secured loan terms from credit-worthy individuals, or foreclose and realize the losses it had uniquely secured from Wachovia.” Id.

Plaintiffs contend that this “no-lose situation” led Wells Fargo to embark on its market manipulation scheme. It began during the fall of 2009 when Wells Fargo allegedly dumped two foreclosure properties at “prices far below market value.” Id. ¶ 41. One of those was waterfront Lot 117. Lot 117 was listed for $95,000 on December 2, 2009 even though two “identical” properties had sold for $145,000 and $130,000 the previous month, and eventually sold for a mere $38,000. Id.

These initial foreclosure sales then became the basis for subsequent appraisals of foreclosed Sanctuary homes—appraisals that Plaintiff contends were themselves illegal. According to a local appraiser the First Amended Complaint identifies as “Appraiser A”, Wells Fargo and the mortgage servicing companies would not accept his appraisals because he used sales by the developer and other non-foreclosure sales as comparables. Id. ¶ 43. Appraiser A refused to follow Wells Fargo's desire for foreclosure—only comps because he believed the Uniform Standards of Professional Appraisal Practice (USPAP) prohibits that practice. After Appraiser A refused to comply with Defendants' directions, Wells Fargo and the servicing companies started to use two other appraisers, designated Appraisers B and C. Plaintiffs allege that Appraisers B and C were instructed to use only foreclosure sales as comparables and that Wells Fargo “wanted the appraisals lower” than actual market value. Id. ¶ 44. Plaintiffs further allege that Wells Fargo rejected appraisals performed by others because they were “too high” and requested “30–day appraisals” which consider only the price that a home would sell for if on the market for one day, as it takes at least 30 days to close. Id.

Plaintiffs then allege that these appraisals—which they contend “violate federal and state laws and regulations,” id. ¶ 47—set the market for the foreclosure sales. The resulting artificially low foreclosure sales allowed Wells Fargo both to claim a large tax deduction on the loan (because of IRS...