Is The 9th Circuit’s Decision on Trial Payment Plan Promises the Prelude to a Cautionary Tale?
The U.S. Department of Treasury, acting under the direction of Congress, launched the Home Affordable Modification Program (“HAMP”) in 2009 to help distressed homeowners with delinquent mortgages. However, the program “seems to have created more litigation than it has happy homeowners.”
These were the first words in Corvello v. Wells Fargo,issued yesterday by 9th Circuit. It is the latest consequential federal court decision related to HAMP and, more broadly, to the potential liability that banks continue to face arising out of the mortgage meltdown and the resulting flood of home mortgage defaults.
The Corvello holding itself, which is based in part on a 20127th Circuit decision in Wigod v. Wells Fargo, is not monumental. However, to the extent dicta and observations made by the 9th Circuit in Corvell are part of the leading edge of an analytical construct to be applied in both individual and class action contexts, it is consequential.
Corvell involves allegations that Wells Fargo breached a contractual obligation to offer mortgage modifications to defaulted mortgagors. The mortgagors alleged that they had complied with all obligations associated with a Trial Payment Plan (“TPP”) and Wells Fargo was therefore obligated to offer them a modification. The case was appealed to the Circuit Court from a District Court dismissal pursuant to Rule 12(b)(6), so the 9th Circuit analysis did not extend to the facts, but rather only to whether the borrowers pled the elements of a viable claim. The 9th Circuit ruled that they had. Specifically, Corvello stands for the proposition that if a distressed homeowner is offered a TPP, accepts it, and performs all required obligations, then the lender could be obligated to offer a modification … “could” being the operative word.
While Corvello has received heavy media attention, the decision itself only means that the Plaintiffs have survived an initial attack. The war is far from over, because going forward the Plaintiffs will have to support their allegations with evidence, and Wells Fargo will have an opportunity to attack the veracity and accuracy of those allegations, which is the moment when many such claims disintegrate.
However, the Corvello decision includes dicta and reasoning that could foreshadow a significant shift in home mortgage modification lawsuits. Specifically, the Court expressed discomfort with some language in Wells Fargo’s TPPs, and the Court observed that perhaps the only appropriate moment to evaluate and inform a borrower that s/he does not qualify for a HAMP modification is upon receipt of the TPP from the borrower, not some months later after the borrower has made TPP payments and complied with the TPP. Though the Court does not use the terms “waiver” or “estoppel,” the opinion certainly reads as though those principles are in play. Considering that banks around the country may not have followed that precise timeline in the months and years immediately following the enactment of HAMP and subsequent HUD guidance, this idea, if widely adopted, could be significant.
Corvell is just getting off the ground and the road ahead is long. However, the 9th Circuit’s dicta, which will undoubtedly be cited by Plaintiffs and future courts alike, only fuels the litigation fire that theCorvell court laments in its opening sentences. We will be watching this case to determine whether it is a mere ripple in the ocean of mortgage litigation, or a harbinger of significant changes to come.