Rutledge v. Wells Fargo Bank, N.A. (In re Rutledge)

• Decision Date: 16 May 2014
• Docket Number: Bankruptcy No. 12–51625.,Adversary No. 13–06037.
• Citation: 510 B.R. 491
• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: In re Pamela C. RUTLEDGE, Debtor. Pamela C. Rutledge, Plaintiff, v. Wells Fargo Bank, N.A., Defendant.

510 B.R. 491

In re Pamela C. RUTLEDGE, Debtor.Pamela C. Rutledge, Plaintiff,

v.Wells Fargo Bank, N.A., Defendant.

Bankruptcy No. 12–51625.

Adversary No. 13–06037.

United States Bankruptcy Court,

M.D. North Carolina,

Winston–Salem Division.

Signed May 16, 2014.

Keith Turner Clayton, Diana Santos Johnson, John Robert Lawson, Legal Aid of North Carolina, Winston–Salem, NC, for Plaintiff.

Julie B. Pape, Winston–Salem, NC, Thomas W. Waldrep, Jr., Jennifer Barker Lyday, Womble, Carlyle, Sandridge, & Rice, PLLC, Winston–Salem, NC, for Defendant.

MEMORANDUM OPINION

LENA MANSORI JAMES, Bankruptcy Judge.

THIS MATTER came before the Court for hearing on March 20, 2014, after due and proper notice, upon the Motion to Dismiss (the “Motion to Dismiss”) filed by Defendant Wells Fargo Bank, N.A. (“Wells Fargo”) to dismiss this adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7012 and Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted. Appearing before the Court were John Lawson and Keith Clayton, counsel for Pamela C. Rutledge (the “Debtor”), and Christopher Jones and Julie Pape, counsel for Wells Fargo. Following the hearing, and upon consideration of the Motion to Dismiss, the memoranda of law in support thereof and in response thereto, and the arguments of counsel, and for the reasons that follow, the Court will grant the Motion to Dismiss in part and deny the Motion to Dismiss in part.

I. FACTS

The Debtor initiated an adversary proceeding by filing a Complaint Seeking Damages in Core Adversary Proceeding, Objecting to Proof of Claim, and to Determine the Secured Status and Validity or Amount of Secured Claim (the “Complaint”) on May 22, 2013. The following facts are as alleged in the Complaint and taken as true for the purposes of this motion:

The Debtor purchased residential property located at 5761 Davis Road, Walkertown, North Carolina, in January 2002. In April 2004, the Debtor refinanced her property, executing a promissory note (the “Note”) in the amount of $91,164.00 in favor of Greater Atlantic Mortgage Corporation. The Note provided for interest at the rate of 6.0% per annum, with principal and interest payments of $546.57 per month. The deed of trust securing the indebtedness (the “Deed of Trust”) is recorded in Book 2470, Page 3611 in the Office of the Register of Deeds of Forsyth County. The loan evidenced by the Note and Deed of Trust is insured by the Federal Housing Administration (“FHA”).

Wells Fargo was the servicer and/or holder of the loan for the relevant time periods set forth in the Complaint. After health issues, the Debtor fell behind on her mortgage payments. She paid Wells Fargo $4,108.92 in June 2009 in reliance on the representation by Wells Fargo that her loan would then be current. Despite this payment, the Debtor's next billing statement showed an amount due of $2,054.46. Following the tender of this payment, the Debtor had two emergency cardiac surgeries, one in July 2009 and one in September 2009. In March 2010, the Debtor entered into a loan modification agreement with Wells Fargo that reduced her monthly principal and interest payment, lowered her interest rate, and extended the maturity date of the loan to April 1, 2040. The modification agreement provided that the unpaid principal balance owed to Wells Fargo was $84,167.06. The modification stated that except as specifically provided, all other terms of the original Note and Deed of Trust remained unchanged.¹

In November 2010, in response to a request by the Debtor for assistance with her mortgage, Wells Fargo verbally offered the Debtor a special forbearance agreement (the “Special Forbearance Agreement”) to make six reduced payments of $372.00 from December 1, 2010 to May 1, 2011. The Debtor did not receive a copy of the Special Forbearance Agreement until her counsel requested a copy from Wells Fargo.² At the time the forbearance agreement was offered, the Debtor was four months in arrears and $2,023.81 past due on her mortgage. According to paragraph 2 of the Special Forbearance Agreement, the Debtor owed an estimated amount of $3,356.77 at the end of its term; however, the Debtor assumed any remaining delinquent balance would be added to the end of the term of her loan as a balloon payment. She asserts that if she had realized her loan would not be current at the end of the six months of the Special Forbearance Agreement, she would not have entered into the agreement.

In May 2011, a Wells Fargo Home Preservation Specialist, Scott Horton, led the Debtor to believe that she would be offered another loan modification. In reliance on Horton's statements, the Debtor made two payments of $594.15 for principal, interest, escrow of taxes, and insurance premiums, and then two payments of $594.00 from June 2011 through September 2011. During this four-month period, the Debtor was awaiting anticipated information on loss mitigation options to lower her monthly payment and allow her to remain in her home.

In October 2011, the Debtor's home sustained soot damage, and she subsequently received a check from Farm Bureau, her insurance carrier, in the amount of $3,578.16. Prior to receiving the check, the Debtor paid for and made all the repairs herself. Because the check from Farm Bureau was made payable to both the Debtor and Wells Fargo, the Debtor endorsed the check and sent it to Wells Fargo. Wells Fargo deposited the check in a special escrow account. Wells Fargo confirmed in a letter dated October 3, 2012, that Wells Fargo's representative completed the inspection of the home on January 16, 2012, and all repairs were made at that time. Yet, in a letter dated March 22, 2012, Wells Fargo asked the Debtor for an update on the repairs. The Debtor stated in the Complaint that she asked Wells Fargo numerous times to apply the insurance proceeds to her delinquency. The applicable section of the Deed of Trust, Uniform Covenant 4, provides:

All or any part of the insurance proceeds may be applied by Lender, at its option, either (a) to the reduction of the indebtedness under the Note and this Security Instrument, first to any delinquent amounts applied in the order in paragraph 3, and then to the prepayment of principal, or (b) to the restoration or repair of the damaged Property.

A letter from Anita Goff, Written Customer Contact for Wells Fargo, dated September 27, 2012, informed the Debtor's counsel that proceeds from a property loss check “cannot be used to bring an account current.” [Pl.'s Compl. Ex. 11.] Wells Fargo personnel repeatedly told both the Debtor and her counsel that the proceeds from the property loss check could not be used to bring the Debtor's account current. However, on October 3, 2012, Debtor's counsel received a letter from Sara Esser, Executive Mortgage Specialist, Office of Executive Complaints for Wells Fargo, stating that the proceeds could in fact be applied to her account. According to Ms. Esser:

Since Wells Fargo Home Mortgage confirmed the repairs on the property were complete[sic] Ms. Rutledge may request that the insurance proceeds are applied toward bringing her loan current. Please be advised that she would need to provide any additional funds needed to bring the loan current. Wells Fargo Home Mortgage is also willing to release the funds to Ms. Rutledge once she signs and returns the enclosed Hold Harmless Agreement.

Pl.'s Compl. Ex. 15.

The Debtor spoke with someone at Wells Fargo in May 2011 regarding a request for additional payment assistance. The letter from Sara Esser stated that on May 25, 2011, Wells Fargo received portions of the necessary financial documentation. Ms. Esser's letter also stated that Wells Fargo “had not received a complete financial package” from the Debtor despite numerous requests, and therefore, on January 25, 2012, “the loan was removed from review and the enclosed letter confirming this decision was sent to Ms. Rutledge.”

In the January 25, 2012 letter, Wells Fargo informed the Debtor that after review and exploration of a number of mortgage assistance options, she did not qualify for “the program” because the bank had been unable to reach her to discuss the situation, and could therefore not review her application for mortgage assistance. The Debtor alleges in her Complaint that she had been providing Wells Fargo with information related to her finances as early as May 16, 2011.

The last payment from the Debtor to Wells Fargo was $594.00 in September 2011. By December 2011, the Debtor was approximately nine months past due on her mortgage payments according to Wells Fargo's loan activity statement. Wells Fargo began the foreclosure process on the Debtor's home in late May 2012. The Notice of Hearing on Foreclosure Deed of Trust was filed on June 4, 2012, and the Debtor retained counsel shortly thereafter to “defend the foreclosure action and obtain a home retention solution” from Wells Fargo. The Notice of Hearing on Foreclosure Deed of Trust stated the holder of the note secured by the deed of trust as “Wells Fargo Bank, N.A.”

Paragraph 9(d) of the Deed of Trust is relevant to the foreclosure process for an FHA-insured mortgage. It provides:

(d) Regulations of HUD Secretary. In many circumstances regulations issued by the Secretary will limit Lender's rights, in the case of payment defaults, to require immediate payment in full and foreclose if not paid. This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary.

Debtor's counsel contacted Wells Fargo in August 2012 to consider the Debtor for a loss mitigation option under HUD Mortgagee Letter 2009–23, applicable to FHA insured mortgages, commonly known as the “FHA–Home Affordable Modification Program” or “FHA–HAMP.” Wells Fargo denied the request with regard to a FHA–HAMP modification because the Debtor was more than twelve months past due on her mortgage. If insurance proceeds...