McKenzie v. Wells Fargo Bank, N.A., Case No. C–11–04965 JCS.

• Decision Date: 14 March 2013
• Docket Number: Case No. C–11–04965 JCS.
• Parties: Clifford McKENZIE, et al., Plaintiffs, v. WELLS FARGO BANK, N.A., et al., Defendants.
• Court: U.S. District Court — Eastern District of California

931 F.Supp.2d 1028

Clifford McKENZIE, et al., Plaintiffs,

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

Case No. C–11–04965 JCS.

United States District Court,

N.D. California.

March 14, 2013.

Austin P. Tighe, Jr., Feazell & Tighe, L.L.P., Austin, TX, Brian Stephen Kabateck, Evan Michael Zucker, Richard Kellner, Richard L. Kellner, Kabateck Kellner LLP, Los Angeles, CA, Patrick Fanning Madden, Shanon Jude Carson, Berger Montague, P.C., Philadelphia, PA, for Plaintiffs.

Michael Jan Steiner, Philip Barilovits, Severson & Werson, A Professional Corporation, San Francisco, CA, for Defendants.

ORDER GRANTING MOTION TO DISMISS EXCESSIVE INSURANCE CLAIMS

JOSEPH C. SPERO, United States Magistrate Judge.

I. INTRODUCTION

This is a putative class action brought by Plaintiffs Clifford McKenzie, Daniel and Robin Biddix (“the Biddixes”), David Kibiloski (“Kibiloski”), and Virginia Ryan (“Ryan”) (“Plaintiffs”) against Wells Fargo Bank, N.A. (“WFBNA”), which at times does business as Wells Fargo Home Mortgage (“WFHM”), Wells Fargo Insurance, Inc. (“WFI”) (WFBNA, WFHM, and WFI are referred to collectively as “Wells Fargo”), Assurant, Inc. (“Assurant”), American Security Insurance Company (“ASIC”), and QBE FIRST Insurance Agency Inc. (“QBE”) (Assurant, ASIC, and QBE are referred to collectively as “Insurance Defendants”) (collectively, “Defendants”) for breach of contract, unjust enrichment, conversion, tortious interference with a business relationship, and violation of the New Mexico Unfair Trade Practices Act (“UPA”). Presently before the Court is Wells Fargo's Motion to Dismiss or Strike the Third Amended Complaint's Excessive Insurance Claims (“Motion”). A hearing on the Motion was held on March 8, 2013 at 9:30 a.m. For the reasons stated below the Court construes Wells Fargo's Motion as a Motion to Dismiss and GRANTS Wells Fargo's Motion.¹

II. BACKGROUNDA. Third Amended Complaint

Plaintiffs allege that Defendants force-placed borrowers with flood insurance policies. Third Amended Complaint (“TAC”), ¶ 2. Plaintiffs further allege that Wells Fargo forces buyers to pay for these policies by diverting monthly mortgage payments and/or debiting borrowers' escrow accounts after retaining a commission for itself. Id. at ¶ 3. The TAC raises two theories for recovery, each of which encapsulates several overlapping claims. First, “Plaintiffs challenge Wells Fargo's practice of purchasing force-placed flood insurance from the Insurance Defendants pursuant to agreements with Insurance Defendants that return financial benefits to Wells Fargo that are unrelated to any bona fide interest in protecting the Lender's interest in the loan,” resulting in unfairly inflated costs to borrowers for force-placed insurance in violation of law. Id. at ¶ 10. This theory, the “kickback theory,” is not challenged in the present Motion.

Second, “Plaintiffs Daniel and Robin Biddix, David Kibiloski, and Virginia Ryan (the “GSE Plaintiffs”) bring this action on behalf of all persons who have or had residential mortgage loans originated and/or serviced by WFBNA/WFHM but owned by Fannie Mae or Freddie Mac (the “Government Sponsored Entities” or “GSEs”) and, in connection therewith, were required to purchase flood insurance coverage by WFBNA in excess of what is required by the owner of the mortgage note.” Id. at ¶¶ 11–12. In addition, Plaintiffs allege that the increased coverage requirements had a deleterious effect on the borrower's ability to make their monthly mortgage payments. Id. at ¶ 13. Thus, Plaintiffs allege that the increased coverage was not in the interest of the GSEs or the borrowers. Id. This theory, the “excessive insurance theory,” is at issue here.

Plaintiffs allege that the Biddixes own property in Texas subject to a mortgage that was originated by WFBNA and is now serviced by WFBNA, but at all relevant times was owned by Freddie Mac. Id. at ¶ 23. Plaintiffs allege that Kibiloski and Ryan own property in New Mexico subject to a mortgage that was originated by WFBNA and is now serviced by WFBNA, but at all relevant times was owned by Freddie Mac. Id. at ¶ 24.

Plaintiffs allege that residential mortgage loans are broken into two parts, the note and the security instrument. Id. at ¶ 33. Plaintiffs allege that the property insurance provisions are contained in the security instrument. Id. Plaintiffs allege that the “Standard Fannie Mae/Freddie Mac” security instrument (“Fannie/Freddie Form”) refers only to the Lender, and not the Loan Servicer, in the property insurance provisions. Id. at ¶ 34 (citing Fannie/Freddie Form, ¶ 5). Plaintiffs allege that Lender is defined in the Fannie/Freddie Form as the owner of the note. Id. at ¶ 35 (citing Fannie/Freddie Form, “Definitions” ¶ (D)). Plaintiffs allege that a subsequent purchaser of the note and security instrument becomes the Lender pursuant to the Fannie/Freddie Form. Id. at 37. Plaintiffs allege that the Fannie/Freddie Form states the possibility that the Lender will change and recognizes the distinction between the Loan Servicer and the Lender. Id. at ¶ 36 (citing Fannie/Freddie Form, ¶ 20). That is, Plaintiffs allege, that the Lender funds the loan and is entitled to repayment of principal and interest whereas the Loan Servicer collections periodic payments due under the note and security instrument and performs other mortgage loan servicing obligations. Id. at ¶ 38 (citing Fannie/Freddie Form, ¶ 20). Plaintiffs allege that the Fannie/Freddie form does not define the term “other mortgage loan servicing obligations.” Id. at ¶ 39. Plaintiffs allege that the term is defined by the Fannie Mae or Freddie Mac servicer guidelines (“GSE servicer guidelines”). Id. Plaintiffs allege that the neither the GSE servicer guidelines nor any other express or implied agreements permits Defendants to set or change flood insurance requirements. Id. at ¶ 40. Moreover, Plaintiffs allege that the Loan Servicer's interest in the mortgage is limited to its right to receive servicer fees. Id. at ¶ 45.

Plaintiffs allege that the National Flood Insurance Act (“NFIA”) requires lenders to ensure that flood insurance coverage is maintained on any property securing a loan or line of credit that falls in a Special Flood Hazard Area. Id. at ¶ 53. Plaintiffs allege that the NFIA requires coverage in amount that must be equal to the lesser of: (1) the maximum insurance coverage available through the NFIP, which is $250,000 per unit; (2) the outstanding balance of the loan; or (3) the replacement cost of the property. Id. Plaintiffs allege that this establishes a coverage floor. Id. Plaintiffs allege that Fannie Mae and Freddie Mac each have specific flood insurance requirements that are identical to and coextensive with the NFIA floor. Id. at ¶ 54. Plaintiffs allege that the Loan Servicer has improperly conflated the requirements for placing hazard insurance with those for placing flood insurance. Id. at ¶ 55.

Turning to the Freddie Mac servicing guidelines, Plaintiffs allege that Freddie Mac requires loan servicers that service its loan portfolio to obtain hazard insurance and flood insurance in two distinct sections. Id. at ¶¶ 56–59. Plaintiffs allege that, pursuant to the guidelines, the Borrower's flood insurance coverage must be at least equal to (1) the unpaid principal balance of the mortgage; (2) the maximum amount of coverage currently sold under the NFIP; or (3) the replacement cost of the insurable improvement. Id. at ¶ 58 (citing Ex. 2). Plaintiffs allege that the Freddie Mac servicer guidelines provide that, as to flood insurance, if “[t]he Borrower does not maintain any of the insurance coverages required of the Borrower in [the above described sections of the servicer guidelines], [t]he [Loan] Servicer must follow up to verify that adequate coverage has been obtained and remains in force. If the Borrower does not or cannot obtain such coverage, the [Loan] Servicer must do so.” Id. at ¶ 60 (quoting Freddie Mac Servicer Guide, Vol. 2, Chapter 58.9). Plaintiffs allege that this only allows the servicer to force-place insurance if the floor set out in the servicing guidelines is not met. Id. at ¶ 61.

Next, the TAC addresses the Fannie Mae servicing guidelines. Plaintiffs allege that the Fannie Mae servicing guidelines also distinguish between hazard insurance and flood insurance. Id. at ¶¶ 62–65. Plaintiffs allege that the Fannie Mae servicing guidelines require a minimum amount of flood insurance “for most first-lien mortgage loans [that] is the lower of: [ (1) ] 100% of the replacement cost of the insurable value of the improvements; [ (2) ] the maximum insurance available from the NFIP, which is currently, $250,000 per dwelling; or [ (3) ] the UPB of the mortgage loan.” Id. at ¶ 65 (quoting Ex. 5). Plaintiffs allege that the Fannie Mae servicing guidelines provide that part of a Loan Servicer's “responsibility for protecting Fannie Mae's interest in the security property is to ensure that hazard insurance (including flood insurance), under the terms specified in Fannie Mae's [Servicer Guide], is in place at all times.” Id. at ¶ 66 (quoting Ex. 5).

Plaintiffs allege that, on September 16, 2011, Defendants sent the Biddixes a flood insurance notification stating that Wells Fargo was “require[d]” by statute to impose replacement cost flood insurance. Id. at ¶ 86 (citing Ex. 14). Plaintiffs allege that the Flood Insurance Notice was inconsistent with statutory requirements under the NFIA and the requirements of the Lender, Freddie Mac. Id. at ¶¶ 89–91. Plaintiffs further allege that the Biddixes received a second letter on November 16, 2011 informing them that a temporary replacement cost value insurance policy had been placed on their home, and that a policy would subsequently be placed with the assistance of WFI, an affiliate of WFBNA. Id. at ¶¶ 92–93 (citing Exs. 15–16). Plaintiffs allege that Defendants subsequently placed flood insurance that was excessive both in coverage and in unit cost,...