Leghorn v. Wells Fargo Bank, N.A.

Decision Date19 June 2013
Docket NumberCase No.: C-13-00708 JCS
PartiesARLEY LEGHORN, et al., Plaintiffs, v. WELLS FARGO BANK, N.A., et al., Defendants.
CourtU.S. District Court — Northern District of California

This is a putative class action brought by Plaintiffs Arley and Valerie Leghorn ("Plaintiffs") against Wells Fargo Bank, N.A. ("WFB"), Wells Fargo Insurance, Inc. ("WFI") (WFB and WFI are referred to collectively as "Wells Fargo"), QBE Insurance Corporation ("QBEC"), and QBE First Insurance Agency, Inc. ("QBEF") (QBEC and QBEF are referred to collectively as "QBE") (collectively, "Defendants") for breach of contract, breach of the covenant of good faith and fair dealing, violation of California's Unfair Competition Law ("UCL"), and unjust enrichment/restitution Two Motions are presently before the Court: (1) Wells Fargo's Motion to Dismiss Class Action Complaint and to Strike ("Wells Fargo Motion"); and (2) QBE's Motion to Dismiss the Complaint ("QBE Motion"). A hearing on the Motions was held on June 14, 2013 at 9:30 a.m. For the reasons stated below, the Court DENIES Defendants' Motions.1

A. The Complaint

In their Complaint, Plaintiffs allege as follows. Mortgage lenders and servicers generally have the right to force-place flood insurance where the property securing the loan falls in a Special Flood Hazard Area ("SFHA"). Complaint, ¶ 2. WFB systematically abused their rights by (1) purchasing backdated policies; (2) charging borrowers for expired or partially expired coverage; and (3) arranging for kickbacks or "commissions" for itself and/or its affiliates in connection with force-placed flood insurance. Id. WFI actively participated in this scheme by (1) procuring backdated force-placed flood insurance for WFB; and (2) accepting kickbacks or commissions from QBE and other entities for such backdated coverage. Id. at ¶ 3. QBEC also participated in the scheme by issuing backdated force-placed flood insurance for WFB. Id. at ¶ 4. QBEC shared a portion of the premiums with QBEF, which attracted Wells Fargo's business by offering kickbacks or commissions to Wells Fargo. Id.

In December, 2008, Plaintiffs obtained a mortgage loan from Wachovia Mortgage, FSB ("Wachovia") in the amount of $417,000 secured by a deed of trust on their homestead in San Mateo, California. Id. at ¶ 17 and Ex. 1. WFB acquired Wachovia later that month and is the current lender-in-interest to Plaintiffs' mortgage. Id. at ¶ 18. Plaintiffs' mortgage loan is serviced through Wells Fargo Home Mortgage, a division of WFB. Id.

Under the National Flood Insurance Act ("NFIA") lenders are required to ensure that any improved property in a SFHA that secures a loan or line of credit is covered by flood insurance in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available under the NFIA ($250,000), whichever is less. Id. at ¶ 19 (citing 42 U.S.C. § 4012a(b)(1)). If the required amount of insurance is not maintained, the NFIA authorizes mortgage lenders and servicers to purchase flood insurance for the borrower in the required amount. Id. at ¶ 20 (citing 42 U.S.C. § 4012a(e)(1)-(2)). The NFIA does not authorize lenders and servicers to purchase backdated insurance coverage or to enrich themselves by accepting kickbacks and commissions in connection with force-placed insurance policies. Id.

Plaintiffs' deed of trust also allows the lender to force-place flood insurance if Plaintiffs fail to maintain the amount of coverage required by the lender. Id. at ¶ 21 and Ex. 1 at ¶ 5. The deed of trust does not provide authority to purchase backdated insurance coverage or allow the lender to arrange for kickbacks, commissions, or other compensation for itself or its affiliates in connection with the force-placement of insurance coverage. Id. (citing Ex. 1 ¶¶ 9, 14, 16).

Plaintiffs' property was located in a SFHA from the date they originated their loan until October 16, 2012, when the Federal Emergency Management Agency implemented a map revision for the San Mateo area. Id. at ¶ 22. Plaintiffs continuously maintained $250,000 worth of flood insurance coverage on their property from the origination of their mortgage loan through October 16, 2012. Id. at ¶ 23. This met the requirements of NFIA and WFB. Id. WFB had notice of Plaintiffs' flood insurance coverage. Id. at ¶ 24. Even so, on January 30, 2012, WFB sent Plaintiffs a form letter claiming that they did not have proper insurance in the period beginning on December 12, 2009 and advising Plaintiffs' that it had procured a flood insurance binder from QBEC covering a 90-day period beginning on that date. Id. at ¶ 24 and Ex. 2. On March 6, 2012, WFB sent Plaintiffs a letter indicating that it had purchased a one-year flood insurance policy from QBEC for the period from December 12, 2009 to December 12, 2010. Id. at ¶ 25 and Ex. 3. The premium for the policy was $2,250. Id. at ¶ 26. The insurance was obtained with the assistance of WFI, an affiliate of WFB, which received a commission. Id. at ¶ 26 and Ex. 3. Both policies were worthless because Plaintiffs suffered no flood losses and had no flood-related claims during that time period. Id. at ¶¶ 24-25.

On March 7, 2012, WFB sent Plaintiffs a letter informing them that their flood insurance coverage had expired on December 12, 2010. Id. at ¶ 27 and Ex. 4. WFB indicated that it intended to force-place another flood insurance policy. Id. On April 6, 2012, WFB sent Plaintiffs a letter indicating that it had purchased another flood insurance policy from QBEC, this time covering the period from December 12, 2010 to December 12, 2011. Id. at ¶ 28, Ex. 5. The premium was $2,375. Id. at ¶ 29. The policy was worthless because Plaintiffs suffered no flood losses and had no flood-related claims during the time period. Id. at ¶ 28. In addition, Plaintiffs had in fact been able to obtain the same amount of coverage during that time period for $1,634. Id. at ¶ 48 and Ex. 8.

Plaintiffs disputed the placement of flood insurance with WFB. WFB's computer records indicated that Plaintiffs' had flood insurance coverage during the relevant time period, but WFB misplaced the physical policy documents and could not locate them. Id. at ¶ 33. Plaintiffs were able to provide physical documentation of their flood insurance coverage between December 12, 2009 and December 12, 2010. Id. As a result, WFB refunded the premium on the policy procured to cover that time period, $2,250. Id. at ¶ 34. The charges for the second policy were never refunded, and Plaintiffs were ultimately forced to pay for that policy to avoid adverse credit consequences or foreclosure. Id. at ¶¶ 34-36.

According to the National Association of Insurance Commissioners ("NAIC"), policies should not be back-dated to collect premiums for a time period that has already passed because insurance is prospective in nature. Id. at ¶ 40 (citing Ex. 13 at 2). Moreover, the Office of the Comptroller of Currency ("OCC") has stated that "The ability to impose the costs of force placed flood insurance on a borrower commences 45 days after notification to the borrower of a lack of insurance or of inadequate insurance coverage. Therefore, lenders may not charge borrowers for coverage during the 45-day notice period." Id. at ¶ 41 (quoting Flood Insurance Questions & Answers, 74 Fed. Reg. at 35,934). In addition, several courts have upheld claims that backdating force-placed insurance policies is unlawful. Id. at ¶ 42 (citing cases).

In addition, the commissions paid to WFI, and funneled to WFB, were not legitimately earned. Id. at ¶¶ 43-44. Rather, the commission was a kickback that induced Wells Fargo to purchase force-placed flood insurance from QBE. Id. at ¶ 44. Specifically, QBEC paid approximately 40% of the net written premiums to QBEF on each policy. Id. at ¶ 45 (citing Ex. 14). QBEF then paid 11% of the net written premiums to WFI. Id. (citing Ex. 14). WFI passed back a substantial portion of the commissions it received to WFB in connection with Wells Fargo's "soft dollars" program. Id. at ¶ 46.

Numerous courts have found similar kickback schemes give rise to legal claims. Id. at ¶ 50 (citing cases). In addition, a lender or servicer's practice of accepting commissions in connection with force-placed flood insurance is inconsistent with the NFIA, which only allows lenders and servicers to charge the borrower for the costs of premiums and fees incurred by the lender or servicer. Id. at ¶ 51 (citing 42 U.S.C. § 4012(e)(2); 12 C.F.R. § 22.3). Moreover, Fannie Mae issued aServicing Guide Announcement ("SGA") pertaining to lender-placed insurance on March 14, 2012. Id. at ¶ 52 (citing Ex. 15). In the SGA, Fannie Mae stated that "reimbursement of lender-placed insurance premiums must exclude any lender-placed insurance commission earned on that policy by the servicer or any related entity[.]" Id. (quoting Ex. 15 at 4) (emphasis removed). A week earlier, on March 6, 2012, Fannie Mae issued a Request for Proposal ("RFP") seeking to align servicer incentives with the best interest of Fannie Mae and homeowners. Id. at ¶ 53 (citing Ex. 16). In California, the Department of Insurance ("DOI") announced on March 14, 2012 that it had contacted the ten largest lender-placed insurers in California and asked them to reduce their rates due to questionable financial integration between lenders and insurers and the lack of arm's length transactions. Id. at ¶ 54 (citing Exs. 17-18). Similar concerns have been expressed by the New York Department of Financial Services, which held a three-day public hearing regarding force-placed insurance practices in May 2012. Id. at ¶ 55 (citing Ex. 19).

Based on the foregoing, Plaintiffs allege six causes of action on behalf of themselves and various putative classes and subclasses. Id. at ¶¶ 73-131; see also ¶¶ 57-72 (class allegations).

(1) Breach of Contract Against WFB: ...

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