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Jackson v. Wells Fargo Bank, N.A.

United States District Court, Third Circuit

November 6, 2013

THOMAS M. JACKSON and PATRICIA G. JACKSON, as individuals and as representatives of the classes, Plaintiffs,



Thomas and Patricia Jackson ("plaintiffs") commenced this action on behalf of themselves and as members of three putative classes seeking redress for alleged improper settlement charges and damages caused by defendant Wells Fargo Bank, N.A.'s ("W. F. Bank") demand that unnecessary flood insurance be acquired for improved real estate plaintiffs purchased with a mortgage from W. F. Bank. Presently before the court are W. F. Bank and Wells Fargo Insurance, Inc.'s ("W. F. Insurance") motions to dismiss plaintiff's first amended class action complaint. For the reasons set forth below, the motions will be granted in part and denied in part.

It is well-settled that in reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "the court [is required] to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and view them in the light most favorable to the non-moving party." Rocks v. City of Philadelphia , 868 F.2d 644, 645 (3d Cir.1989). Under Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 561 (2007), dismissal of a complaint pursuant to Rule 12(b)(6) is proper only where the averments of the complaint fail to raise plausibly, directly or inferentially, the material elements necessary to obtain relief under a viable legal theory of recovery. Id. at 544. In other words, the allegations of the complaint must be grounded in enough of a factual basis to move the claim from the realm of mere possibility to one that shows entitlement by presenting "a claim to relief that is plausible on its face." Id. at 570.

"A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009). In contrast, pleading facts that are merely consistent with a defendant's liability is insufficient. Id . Similarly, tendering only "naked assertions" that are devoid of "further factual enhancement" falls short of presenting sufficient factual content to permit an inference that what has been presented is more than a mere possibility of misconduct. Id. at 1949-50. See also Twombly , 550 U.S. at 563 n. 8 (factual averments must sufficiently raise a "reasonably founded hope that the [discovery] process will reveal relevant evidence' to support the claim.") (quoting Dura Pharmaceuticals, Inc. v. Broudo , 544 U.S. 336, 347 (2005) & Blue Chip Stamps v. Manor Drug Stores , 421 U.S. 723, 741 (1975)).

This is not to be understood as imposing a probability standard at the pleading stage. Iqbal , 556 U.S. at 678 ("The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully."); Phillips v. County of Allegheny , 515 F.3d 224, 235 (3d Cir.2008) (same). Instead, "[t]he Supreme Court's Twombly formulation of the pleading standard can be summed up thus: stating... a claim requires a complaint with enough factual matter (taken as true) to suggest the required element... [and that provides] enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element.'" Phillips , 515 F.3d at 235; see also Wilkerson v. New Media Technology Charter School Inc. , 522 F.3d 315, 321 (3d Cir.2008).

The facts read in the light most favorable to the non-moving party are as follows. On August 31, 2011, plaintiffs obtained a mortgage loan from W. F. Bank for $107, 500.00. Amended Complaint at ¶ 7. W. F. Bank charged plaintiffs $19.00 for a flood zone determination that was performed by W. F. Insurance prior to closing. Id. at ¶ 19. The charge was reflected on plaintiffs' HUD-1 settlement statement. Id.

In conjunction with the mortgage plaintiffs received a Truth-in-Lending Act ("TILA") Disclosure ("TILA Disclosure"). Id. at ¶ 8. The initial version of the TILA Disclosure erroneously stated that flood insurance was required for plaintiffs' property. However, this error was later corrected with both parties' consent. With approval and consent of W. F. Bank, the TILA Disclosure used at closing provided that flood insurance was not required for plaintiffs' property. Id.

Before closing plaintiffs obtained their own independent flood zone determination from CoreLogic Flood Services ("CoreLogic"). Id. at ¶ 17. CoreLogic determined that flood insurance was not required on plaintiff's property. Id .; Standard Flood Hazard Determination of August 26, 2011, Completed by CoreLogic (Doc. No. 18-9). This independent flood determination cost plaintiffs $6.00, which is the standard amount CoreLogic charges for this service. Id. at ¶¶ 17, 21.

At closing plaintiffs signed a Standard Flood Hazard Determination ("SFHD") which had been prepared by W. F. Insurance for W. F. Bank. Id. at ¶ 9. The parties at closing treated the SFHD as indicating that flood insurance was not required for any portion of plaintiffs' property. Id.

On November 7, 2011, W. F. Bank sent plaintiffs a form letter stating that flood insurance "is a requirement of your loan." Id. at ¶ 10; Letter of November 7, 2011 (Doc. No. 18-4). The letter indicated that if plaintiffs did not provide proof of flood insurance W. F. Bank would purchase it at plaintiffs' expense. Id . Plaintiffs repeatedly objected to this demand by calling the customer service number provided in the letter, but their calls were directed to voicemail and their messages were never returned. Id. at 11.

Plaintiffs wrote a letter to W. F. Bank on December 9, 2011, in which they informed it in clear and unequivocal terms that flood insurance was not required for their loan. As proof they enclosed a copy of the SFHD that they and W. F. Bank had signed at closing. Id .; Thomas Jackson's Letter of December 9, 2011(Doc. No. 18-5). W. F. Bank did not immediately respond to plaintiffs' letter. Feeling as if they had no choice, plaintiffs purchased a policy providing $250, 000.00 in coverage from the National Flood Insurance Program ("NFIP") in order to comply with W. F. Bank's November 7, 2011, demand. Id. at ¶ 12.

After purchasing the insurance plaintiffs sent a second letter to W. F. Bank on December 19, 2011, informing it that they had acquired the demanded insurance and providing proof of the same. Id .; Thomas Jackson's Letter of December 19, 2011(Doc. No. 18-6). The letter further explained that plaintiffs' property was not in a Special Flood Hazard Area ("SFHA"); the loan would not have been taken out if it had been known that flood insurance was required; and at closing W. F. Bank had assured that plaintiffs were not required to obtain such insurance prior to signing the settlement documents. Id.

W. F. Bank responded to plaintiffs in a letter dated January 5, 2012. Id. at ¶ 13. Therein W. F. Bank acknowledged plaintiffs' concerns about the flood insurance requirement and contended that the SFHD used at closing was for plaintiffs' garage only, and included with the letter a separate SFHD for plaintiffs' home. Id .; Letter of January 5, 2012, by Christopher Cory (Doc. No. 18-7). Plaintiffs had not received this separate determination for their residence at closing. Id . Further, the comment section of the SFHD form indicated that W. F. Insurance had made the determination regarding the status of plaintiffs' residence on August 23, 2011; however, the date of determination listed on the form is August 17, 2011. Id .; Standard Flood Hazard Determination of August 23, 2011, Section E, Comments (Doc. No. 18-3).

Upon receiving this letter plaintiffs spoke to an executive mortgage specialist at W. F. Bank. Id. at ¶ 14. During the telephone conversation plaintiffs expressed their dismay that W. F. Bank had not disclosed its flood insurance requirement at closing. Id . Thereafter, W. F. Bank sent a letter to plaintiffs stating that "flood insurance was not required on your loan at the time of closing" and that this was reflected in both the SFHD and the TILA Disclosure provided at closing. Id .; Letter of February 17, 2012 (Doc. No. 18-8).

By the time plaintiffs received this letter they had already refinanced with another bank and paid off their mortgage with W. F. Bank in order to free themselves from W. F. Bank's flood insurance demand. Id. at ¶ 15. Plaintiffs' new lender did not require flood insurance for any part of plaintiffs' property, and specifically has determined that their home does not fall in a SFHA. Id.

Plaintiffs incurred substantial costs in refinancing their residence and paying off their loan with W. F. Bank. Id. at ¶ 16. W. F. Bank did not offer to reimburse plaintiffs for such costs, or for the flood insurance premiums that they incurred for the coverage purchased in response to W. F. Bank's November 7, 2011, form letter. Id.

Although W. F. Bank charged $19.00 for the SFHD, its actual cost to obtain the determination was closer to $5.00. Id. at ¶ 23. W. F. Insurance received this fee and kicked-back or split the charge with W. F. Bank or W. F. Bank received the fee and did not pay the full amount to W. F. Insurance. Id. at ¶¶ 24, 26. This practice repeatedly has been utilized by defendants. Id. at ¶¶ 25, 27. W. F. Insurance typically kicks back a portion of the charge it earns from referral business from W. F. Bank through its "soft dollars" program and the pass-back of these amounts is reflected on the general ledger and is reported on a "Profitability Passback Report." Id. at ¶ 25. This charge did not reflect a reasonable fee in compliance with those authorized under the National Flood Insurance Act ("NFIA") and the practice of kick-backs or fee-splitting constituted an illegal arrangement under the Real Estate Settlement Procedures Act ("RESPA"). Id. at ¶¶ 22, 26.

Plaintiffs advance causes of action for (1) violation of TILA; (2) violation of RESPA; and (3) breach of contract/breach of the covenant of good faith and fair dealing against W. F. Bank. Plaintiffs advance causes of action for violation of RESPA and unjust enrichment against W. F. Insurance.

Defendants moves to dismiss on several bases. Generally, W. F. Bank contends that plaintiffs' breach of contract claims are predicated on what at best can be described as a mistaken determination of whether plaintiffs' property is within a SFHA and any claim based on such a determination essentially asserts a violation of the Federal Disaster Protection Act ("FDPA") and state law claims predicated on such violations are preempted under the NFIA. Plaintiffs' TILA claim purportedly fails because disclosure of flood insurance is not a required TILA disclosure, and therefore any inaccuracy about whether flood insurance was required did not violate TILA. Plaintiffs' RESPA claim assertedly is pled inadequately because the allegations of the first amended complaint contain little more than a formulaic recitation of the elements.

Plaintiffs assert that viable claims have been set forth at every count. They posit that because the TILA disclosures signed at closing indicated that flood insurance was not required, W. F. Bank's subsequent insistence that plaintiffs purchase flood insurance meaningfully changed the legal obligations between the parties in violation of 12 C.F.R. § 226.17(c)(1), which clearly violated TILA.

Similarly, plaintiffs maintain that a claim under RESPA sufficiently has been pled. They aver W. F. Bank either accepted kickbacks from W.F. Insurance or split fees with it in connection with the charge for a SFHD. Part of this asserted misconduct was the marking-up of the SFHD fee, which is averred to have significantly exceeded its actual cost. In addition, the program under which such fees were kicked back or split, the method of accounting for such transfers and the manner in which these illegal transfers were tracked and reported all have been identified. Plaintiffs thus assert that the level of factual specificity required for notice pleading has been satisfied.

Plaintiffs further maintain that their breach of contract claim(s) is not preempted because it is not based on a SFHD but instead is based on a provision of the mortgage which gives plaintiffs a contractual remedy for a violation of federal law, which therefore permits a contractual recovery for charging an unreasonable fee in violation of NFIA and RESPA. In addition, defendants' use of inflated charges and misleading information as to the flood zone status of the property purportedly implicates a breach of the covenant of good faith and fair dealing that is independent of any separate NFIA or RESPA violation.

W. F. Insurance generally maintains that plaintiffs' unjust enrichment claim fails because it is premised on conduct authorized by the FDPA, there is no private cause of action under that act and state law claims predicated on a SFHD are preempted under the NFIA. Furthermore, plaintiffs cannot prove there was anything "unjust" about the transaction: the amount for the SFHD expressly was disclosed to plaintiffs and they received the actual benefit for which they bargained. There was no communications between plaintiffs and W. F. Insurance about the service or fee, plaintiffs do not identify any actions by it that can be found to be misleading, and each of the bases advanced to show the fee was inequitable is legally insufficient or sufficiently undermined by the record. Finally, W. F. Insurance alleges that plaintiffs' RESPA claim fails because it is predicated on conclusions that merely restate the statute's prohibitions.

Plaintiffs contend their RESPA claim against W. F. Insurance is adequate factually and consistent with the statute and controlling case law. Their unjust enrichment claim survives because defendants received the SFHD fee in connection with a scheme in violation of federal law, the amount charged was in violation of NFIA and plaintiffs received at best an incomplete and misleading SFHD, which was far below what was needed to supply the benefit of the bargain. Thus, what plaintiffs received was an unreliable and incomplete SFHD that was used to extract unlawful fees to plaintiffs' detriment, which supplies more than an adequate basis for an unjust enrichment claim.


W. F. Bank specifically contends that because flood insurance "is not a required TILA disclosure, any alleged mis-disclosure of whether flood insurance was required does not violate TILA." Plaintiffs purportedly cannot identify any specific TILA or Regulation Z provision that requires a disclosure of whether flood insurance is or is not required on a home mortgage. Furthermore, W. F. Bank complied with the property insurance disclosure that is required under TILA to exclude any premium from the finance charge when it accurately disclosed a form containing the following at closing:

if required, flood insurance may be obtained through any person of your choice. If you choose to obtain flood insurance through the creditor, the terms of the policy will be N/A and the premium for that term will be N/A.

Thus, W. F. Bank argues that the only flood insurance information required under TILA was disclosed and plaintiffs' TILA claim cannot proceed.

Plaintiffs respond that W. F. Bank violated the TILA by requiring plaintiffs to purchase flood insurance on their property after the parties signed a TILA disclosure indicating that such insurance was not required. In doing so W. F. bank adversely changed the terms of the mortgage agreement after the fact without (1) any change of the SFHA designation, (2) proper disclosures or (3) consent. Such an alleged deviation from the disclosed TILA transaction violates TILA's requirement that the disclosures made by the lender in a closed-end credit transaction accurately reflect the legal obligations between the parties.

Plaintiffs have adequately pled a TILA claim. In enacting TILA "Congress sought to remedy the divergent and often fraudulent practices by which credit customers were apprised of the terms of the credit extended to them.'" Smith v. Fidelity , 898 F.2d 896, 897 (3d Cir. 1989) (quoting Johnson v. McCrackin-Sturman Ford, Inc. , 527 F.2d 257, 262 (3d Cir. 1975)). TILA's purpose is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him." 15 U.S.C. § 1601(a). As a remedial statute designed to "balance the scales thought to be weighed in favor of lenders, '" TILA "is to be liberally construed in favor of borrowers." Smith , 898 F.2d at 897 (quoting Bizier v. Globe Financial Services , 654 F.2d 1, 3 (1st Cir. 1981)).

TILA "requires a creditor to disclose information relating to such things as finance charges, annual percentage rates of interest, and borrowers' rights... and it prescribes civil liability for any creditor who fails to do so[.]" Koons Buick Pontiac GMC, Inc. v. Nigh , 543 U.S. 50, 54 (2004). The statute charges "the Federal Reserve Board with implementation of the Act, and the agency has imposed even more precise disclosure requirements via Regulation Z, " which is codified at 12 C.F.R. §§ 226.1 et seq. Arnett v. Bank of America, N.A. , 874 F.Supp.2d 1021, 1037 (D. Ore. 2012) (quoting Hauk v. JP Morgan Chase Bank USA , 552 F.3d 1114, 1118 (9th Cir. 2009) and citing 15 U.S.C. § 1607). "In particular, 15 U.S.C. § 1638 and 12 C.F.R. § 226.18, which govern closed-end transactions such as residential home loans, require that the creditor must disclose the credit's finance charge' before the credit is extended.'" Id . (citing 15 U.S.C. §§ 1638(a)(3), 1638(b)(1); 12 C.F.R. §§ 226.17(b), 226.18(d)) (foot notes omitted).

Regulation Z provides that "[t]he disclosures shall reflect the terms of the legal obligations between the parties." 12 C.F.R. § 1026.17(c)(1). This requirement is applicable to closed-end transactions. Id. at § 1026.17. To accomplish this the creditor must among other things disclose "insurance or debt cancellation under § 1026.18(n)." Id. at § 1026(a)(1). The creditor must provide the items required by § 1026.4(d) in order to exclude property insurance premiums from the finance charge. Id. at § 1026.18(n). Property insurance premiums may be excluded from the finance charge if it is disclosed that the insurance coverage may be obtained from another person; otherwise, if obtained through the creditor, "the premium for the initial term of insurance shall be disclosed." Id. at §§ 1026.4(d)(2)(i) & (ii) (emphasis added).

W. F. Bank concedes for the sake of argument that its disclosure seeking to exclude any required insurance was inaccurate because from its perspective flood insurance was required as a condition of the mortgage. There simply was a "mis-direction" as to this disclosure and having advised plaintiffs that they could obtain flood insurance from a third person, what was required to be disclosed was disclosed and no TILA violation can be established.

The difficulty with this position is that "TILA prohibits not only failures to disclose, but also false or misleading disclosures." Rossman v. Fleet Bank, N.A. , 280 F.3d 384, 393 (3d Cir. 2002). The disclosures at closing indicated that flood insurance was not required for the extension of credit. The November 7, 2011, letter advised that flood insurance was required and demanded that proof of insurance be provided in 45 days. If proof was not provided, W. F. Bank indicated it was required to secure the insurance at plaintiffs' expense and the premium would be charged to the existing escrow account or, if ...

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