Philip McFarland v. Wells Fargo Bank, N.A.
Filing
PUBLISHED AUTHORED OPINION filed. Originating case number: 2:12-cv-07997. [999736414]. [14-2126]
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2126
PHILIP MCFARLAND,
Plaintiff – Appellant,
v.
WELLS FARGO BANK, N.A.; U.S. BANK NATIONAL ASSOCIATION,
Defendants – Appellees,
and
CHASE TITLE INC.,
Defendant.
------------------------AARP; CENTER FOR RESPONSIBLE LENDING; NATIONAL ASSOCIATION
OF CONSUMER ADVOCATES; NATIONAL CONSUMER LAW CENTER,
Amici Supporting Appellant,
THE COMMUNITY BANKERS OF WEST VIRGINIA, INCORPORATED; THE
WEST VIRGINIA BANKERS ASSOCIATION,
Amici Supporting Appellees.
Appeal from the United States District Court for the Southern
District of West Virginia, at Charleston.
Joseph R. Goodwin,
District Judge. (2:12-cv-07997)
Argued:
October 28, 2015
Decided:
January 15, 2016
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Before SHEDD, DIAZ, and HARRIS, Circuit Judges.
Affirmed in part, vacated in part, and remanded by published
opinion.
Judge Harris wrote the opinion, in which Judge Shedd
and Judge Diaz joined.
ARGUED:
Jennifer S. Wagner, MOUNTAIN STATE JUSTICE, INC.,
Clarksburg, West Virginia, for Appellant.
John Curtis Lynch,
TROUTMAN SANDERS LLP, Virginia Beach, Virginia, for Appellees.
ON BRIEF:
Bren J. Pomponio, MOUNTAIN STATE JUSTICE, INC.,
Charleston, West Virginia, for Appellant.
Jason Manning, Megan
Burns, TROUTMAN SANDERS LLP, Virginia Beach, Virginia, for
Appellees.
Jason E. Causey, BORDAS & BORDAS, PLLC, St.
Clairsville, Ohio; Jonathan Marshall, Patricia M. Kipnis, BAILEY
& GLASSER, LLP, Charleston, West Virginia, for Amici The
National Consumer Law Center, AARP, The National Association of
Consumer Advocates, and The Center for Responsible Lending.
Floyd E. Boone, Jr., Stuart A. McMillan, Sandra M. Murphy, James
E. Scott, BOWLES RICE LLP, Charleston, West Virginia, for Amici
Community Bankers of West Virginia, Inc. and The West Virginia
Bankers Association, Inc.
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PAMELA HARRIS, Circuit Judge:
In
2006,
McFarland was
at
the
height
informed
by
of
a
the
housing
mortgage
broker
value had nearly doubled in two years.
market,
that
his
Philip
home’s
Acting on that advice,
McFarland refinanced his home so that he could pay down other
debt.
But it soon became apparent that McFarland could not
manage the increased interest payments on his new loan, and when
housing prices fell, McFarland was faced with an unaffordable
mortgage and a looming foreclosure.
McFarland
sued,
alleging
that
his
mortgage
agreement,
providing him with a loan far in excess of his home’s actual
value, was an “unconscionable contract” under the West Virginia
Consumer Credit and Protection Act, W. Va. Code § 46A–1–101, et
seq. (the “Act” or the “WVCCPA”).
The district court rejected
that claim, holding that a loan exceeding the worth of a home,
without more, is not evidence of “substantive unconscionability”
under
West
understood
substantive
Virginia
a
law.
WVCCPA
claim
And
because
always
to
unconscionability,
it
the
district
require
stopped
its
a
court
showing
analysis
of
there,
without considering the fairness of the process by which the
agreement was reached.
We
mortgage
agree
with
loan,
the
by
district
itself,
court
that
cannot
the
show
amount
of
a
substantive
unconscionability under West Virginia law, and that McFarland
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has not otherwise made that showing.
proper
interpretation
of
the
But we disagree as to the
WVCCPA,
and
find
that
the
Act
allows for claims of “unconscionable inducement” even when the
substantive
terms
of
a
contract
are
not
themselves
unfair.
Accordingly, we remand so that the district court may consider
in the first instance whether McFarland’s mortgage agreement was
induced by unconscionable conduct.
I.
A.
In 2004, McFarland purchased his Hedgesville, West Virginia
home for roughly $110,000.
Just two years later, in June 2006,
he availed himself of then-favorable debt markets to engage in
the refinancing that is the subject of this appeal.
Interested
in consolidating his approximately $40,000 in combined student
and
vehicle
debt
with
his
mortgage,
McFarland
entered
into
discussions with Greentree Mortgage Corporation (“Greentree”), a
third-party
mortgage
lender.
Greentree
arranged
for
an
appraisal of McFarland’s property, and McFarland was informed
that the market value of his home had jumped to $202,000 since
its acquisition two years earlier.
McFarland then entered into two secured loan agreements.
The first, which is the subject of this dispute, was a mortgage
agreement with Wells Fargo Bank, N.A. (“Wells Fargo”), with a
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principal amount of $181,800 and an adjustable interest rate
that started at 7.75 percent and could increase to 13.75 percent
(the “Wells Fargo Loan”).
The second, not directly at issue
here, was with Greentree, for an interest-only home equity line
of credit of $20,000.
As planned, McFarland used the proceeds
of those two loans to consolidate all of his debts.
McFarland paid the Wells Fargo Loan without incident for
roughly a year.
In late 2007, however, he began to fall behind
on his mortgage payments, and contacted Wells Fargo to ask for
assistance.
After
several
failed
attempts
to
restructure
McFarland’s mortgage, Wells Fargo and McFarland entered into a
loan modification in May 2010.
The revised agreement reduced
McFarland’s interest rate and extended the term of the loan in
exchange for an increase in the principal amount outstanding.
But even under the new arrangement, McFarland remained unable to
make his payments.
In 2012, Wells Fargo initiated foreclosure
on McFarland’s home.
B.
To
stop
the
pending
foreclosure,
McFarland
brought
this
action against Greentree and Wells Fargo, as well as U.S. Bank
National Association (“U.S. Bank”), the trustee of a securitized
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loan trust that now includes the Wells Fargo Loan. 1
Relevant to
this appeal, McFarland alleged in his complaint that the Wells
Fargo Loan was an “unconscionable contract” under the WVCCPA.
See W. Va. Code § 46A-2-121(1)(a).
McFarland
raised
two
distinct
“unconscionable
contract”
arguments in his complaint and before the district court, either
of
which,
finding
he
contended,
under
the
unconscionability
could
WVCCPA.
claim
with
support
The
its
an
first
genesis
unconscionability
was
in
a
the
traditional
common
law,
focusing on the terms of the Wells Fargo Loan itself and, in
particular, the size of the mortgage it provided.
Put simply,
McFarland argued that Wells Fargo loaned him too much money.
Citing a 2012 retroactive appraisal finding that his home was
worth only $120,000 in June 2006 — considerably less than the
$202,000
valuation
that
preceded
the
Wells
Fargo
Loan
—
McFarland claimed that Wells Fargo’s excess loan tied him to an
unaffordable
mortgage
that
increased
his
housing
burden
by
several hundred dollars a month and put his home at risk.
That
general
this
species
of
unconscionability
claim
(if
not
particular variant), alleging the unfairness of the terms of an
1
After originating McFarland’s mortgage loan, Wells Fargo
sold the mortgage on the secondary market as part of a
securitized loan trust. U.S. Bank is the trustee of that trust,
which is owned by investors.
Wells Fargo continues to service
the loans in the trust.
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agreement, is well established in West Virginia:
In the context
of consumer agreements, it is now codified under the WVCCPA, see
W. Va. Code § 46A-2-121(1)(a) (court may refuse to enforce a
consumer agreement that is “unconscionable at the time it was
made”), and it has long roots in West Virginia’s common law, see
Brown v. Genesis Healthcare Corp., 729 S.E.2d 217, 226–27 (W.
Va. 2012).
McFarland’s
second
theory
of
unconscionability
was
more
novel.
West Virginia’s traditional unconscionability doctrine,
as
customary,
is
requires
unconscionability,
procedural
or
a
showing
unfairness
unconscionability,
process.
Genesis
McFarland’s
alternative
or
Healthcare,
argument
in
the
of
both
contract
unfairness
729
was
substantive
in
S.E.2d
that
itself,
the
at
even
and
bargaining
221.
if
But
the
Wells
Fargo Loan was not unconscionable when made, the district court
could
invalidate
“unconscionably
it
on
induced”
the
—
independent
in
other
ground
words,
that
based
it
was
solely
on
factors predating acceptance of the contract and relating to the
bargaining
process.
Specifically,
McFarland
argued
that
the
Wells Fargo Loan was “induced by misrepresentations,” focusing
on what he alleged to be the vastly inflated appraisal of his
home
in
2006.
unconscionable
grounds
for
And
according
inducement
relief
by
is,
to
under
itself,
7
McFarland,
the
without
text
that
of
regard
kind
the
to
of
WVCCPA,
the
loan
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substantive
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terms.
See
W.
Va.
Code
§ 46A-2-
121(1)(a) (court may refuse to enforce a consumer agreement that
is “unconscionable at the time it was made, or . . . induced by
unconscionable conduct”).
After McFarland filed his complaint, he and the defendants
engaged in several months of extensive discovery.
McFarland
eventually reached a settlement with Greentree, but his case
against Wells Fargo and U.S. Bank (“the Banks”) proceeded.
In
the decision that is the subject of this appeal, the district
court
granted
the
Banks’
motion
for
summary
judgment
dismissed McFarland’s unconscionable contract claim.
and
McFarland
v. Wells Fargo Bank, N.A., 19 F. Supp. 3d 663, 668–73 (S.D.W.
Va. 2014).
As
to
explained
substantive
that
unconscionable
unconscionability,
McFarland
features
of
had
the
the
identified
Wells
Fargo
district
two
Loan
in
court
allegedly
both
his
complaint and his opposition to the Banks’ motion for summary
judgment: that the loan far exceeded the value of the property,
and
that
McFarland.
the
loan
provided
no
“net
tangible
benefit”
to
But neither, the district court held, provided a
basis for a finding of substantive unconscionability.
That a refinanced loan exceeds the value of a home, the
court ruled, is not evidence of substantive unconscionability
under West Virginia law.
“It is not ‘overly harsh’ or ‘one8
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sided’ against the plaintiff that he received more financing
than he was allegedly entitled to receive.”
Supp. 3d at 670 (emphasis in original).
reasoned,
an
under-secured
not the borrower.
mortgage
McFarland, 19 F.
If anything, the court
disadvantages
the
lender,
Absent unfairness in specific loan terms like
the rate of interest charged or the timing of payments, the
court concluded, there is nothing substantively unconscionable
about a loan simply because of its size.
Nor does West Virginia law require that a contract provide
a “net tangible benefit” to either party, the court held.
Under
West Virginia law, a contract is substantively unconscionable
only if it is “one-sided,” with an “overly harsh effect on the
disadvantaged party.”
729 S.E.2d at 221).
Id. at 673 (quoting Genesis Healthcare,
That is a different standard, the court
reasoned, and whether the Wells Fargo Loan was of net benefit to
McFarland
is
simply
not
relevant
to
the
substantive
unconscionability inquiry.
Finally,
the
district
court
held
that
in
light
of
its
holding as to substantive unconscionability, there was no need
even to consider McFarland’s allegations regarding the process
that
led
court,
to
West
contract
Virginia
unconscionable
formation.
law
contract
unconscionability.
does
without
According
not
some
allow
to
for
showing
the
a
of
district
finding
of
substantive
As a result, the court dismissed McFarland’s
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claim — including his allegation of “unconscionable inducement”
under
the
WVCCPA
—
without
further
addressing
the
purported
misrepresentations that led to the Wells Fargo Loan.
McFarland
timely
appealed
the
dismissal
of
his
unconscionable contract claim.
II.
We review a district court’s award of summary judgment de
novo, and view the facts and the reasonable inferences that may
be drawn from them in the light most favorable to the nonmoving
party — here, McFarland.
See Woollard v. Gallagher, 712 F.3d
865, 873 (4th Cir. 2013).
Summary judgment is appropriate only
“if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter
of law.”
Fed. R. Civ. P. 56(a).
As a federal court sitting in
diversity, our role is to apply governing West Virginia contract
law, “or, if necessary, predict how the state’s highest court
would rule on an unsettled issue.”
Horace Mann Ins. Co. v. Gen.
Star Nat’l Ins. Co., 514 F.3d 327, 329 (4th Cir. 2008).
A.
We
begin
with
McFarland’s
contention
that
the
district
court erred as a matter of West Virginia law when it rejected
McFarland’s theories of substantive unconscionability.
As the
district
in
court
explained,
McFarland
10
identified,
first
his
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complaint and again in response to the Banks’ motion for summary
judgment, two and only two aspects of the Wells Fargo Loan that
he claimed made it substantively unconscionable: “(1) that the
loan far exceeded the value of the property and (2) that the
loan did not provide a net tangible benefit.”
J.A. 266.
Like
the district court, we will limit our analysis to those two
contentions.
McFarland directed the district court to consider
two specific terms of the Wells Fargo Loan, and to the extent
that
he
now
contends
on
appeal
that
other
terms
also
substantively unconscionable, those arguments are waived.
are
See
Malbon v. Pa. Millers Mut. Ins. Co., 636 F.2d 936, 941 (4th Cir.
1980).
1.
McFarland’s
primary
argument
is
that
the
district
court
erred when it ruled that a refinanced loan exceeding the value
of a home is not evidence of substantive unconscionability under
West Virginia law.
decided
this
Because the West Virginia courts have not
question, 2
our
task
2
is
to
apply
the
relevant
McFarland relies on two decisions of the West Virginia
Supreme Court of Appeals, but in neither of those cases did the
court hold that a loan exceeding the value of a home is evidence
of substantive unconscionability.
In Quicken Loans, Inc. v.
Brown, 737 S.E.2d 640, 656–59 (W. Va. 2012) (“Quicken Loans I”),
the court was presented with evidence that a loan was based on
an inflated appraisal. But the loan also contained significant
fees, a particularly high interest rate, and an undisclosed
balloon payment. See id. So when the court found the loan to
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principles of state contract law as we believe they would be
applied by the West Virginia Supreme Court of Appeals in this
context.
See Horace Mann, 514 F.3d at 329.
Fortunately, the West Virginia courts have made very clear
the standard for substantive unconscionability under state law:
A contract term is substantively unconscionable only if it is
both
“one-sided”
party.
and
“overly
harsh”
as
to
the
disadvantaged
See, e.g., Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d
550, 558 (W. Va. 2012); Genesis Healthcare, 729 S.E.2d at 221.
The point is not to disturb the “reasonable allocation of risks
or reasonable advantage because of superior bargaining power.”
Arnold v. United Cos. Lending Corp., 511 S.E.2d 854, 860 (W. Va.
1998) (quoting Unif. Consumer Credit Code 1974 § 5.108 cmt. 3),
overruled on other grounds by Dan Ryan Builders, 737 S.E.2d 550.
Rather, substantive unconscionability screens for cases in which
a
“gross
imbalance,
one-sidedness
or
lop-sidedness
in
a
be unconscionable because its “total cost . . . was exorbitant,”
its holding turned on much more than the principal amount of the
loan. See id. at 659. And in Herrod v. First Republic Mortgage
Corp., 625 S.E.2d 373, 379–81 (W. Va. 2005), although the court
reversed summary judgment where it found evidence that the
“house was worth at least $20,000 less than the amount for which
it was mortgaged,” its analysis concentrated singularly upon
issues of fact relating to procedural unconscionability —
namely, whether the loan was based on a fraudulent appraisal —
and the decision never mentions substantive unconscionability.
See id.
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contract”
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will
justify
agreement as written.
a
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court’s
refusal
to
enforce
the
Genesis Healthcare, 729 S.E.2d at 220.
We agree with the district court that under this standard,
a
mortgage
agreement
would
not
be
deemed
substantively
unconscionable solely because it provides a borrower with more
money than his home is worth.
Whatever the pitfalls, receiving
too much money from a bank is not what is generally meant by
“overly harsh” treatment, and we have no reason to think that
the
West
Virginia
Supreme
Court
of
Appeals
would
standard in such a counterintuitive manner.
apply
its
As the district
court noted, it is not the borrower but the bank that typically
is disadvantaged by an under-collateralized loan.
That is why
borrowers may pay a premium for under- or non-collateralized
loans,
Lenders
see
Benjamin
and
International
E.
Hermalin
Borrowers
in
Capital
Flows
&
Andrew
International
363,
369
K.
Rose,
Capital
(Martin
Risks
to
Markets,
in
Feldstein
ed.,
1999); why it is common practice for banks, as many borrowers
can
attest,
to
ensure
that
their
real
estate
loans
are
for
significantly less than property value, see Michael T. Madison
et al., 1 Law of Real Estate Financing § 5:14 (2015); and why a
generous mortgage loan is usually cause for celebration and not
a lawsuit.
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McFarland, with the support of multiple amici, 3 rejects that
common-sense
application
of
West
Virginia’s
substantive
unconscionability law, arguing that it fails to take account of
the
broader
McFarland,
social
the
and
Wells
economic
Fargo
Loan
context.
is
but
According
one
example
of
to
a
widespread practice of overvaluing homes and lending too much
money
that
crisis:
has
contributed
to
a
national
home
foreclosure
When a borrower is bound to a mortgage that exceeds the
value of his home, he is trapped, unable to refinance to obtain
better terms or sell his home to relocate, and foreclosure is
the result.
It is that harm to borrowers and to public policy,
McFarland argues, that renders mortgage loans in excess of home
value substantively unconscionable under West Virginia law.
We certainly agree that consumers may be harmed, sometimes
grievously,
when
homes are worth.
they
take
on
more
mortgage
debt
than
their
Cf. McCauley v. Home Loan Inv. Bank, F.S.B.,
710 F.3d 551, 559 n.5 (4th Cir. 2013) (finding in the context of
a fraud claim that a borrower could be injured by an undercollateralized loan).
And we have no reason to doubt that West
Virginia’s courts would acknowledge that disproportionate debt
may
be
dangerous
both
for
homeowners
3
and
for
the
broader
McFarland is joined in this argument by amici curiae The
National Consumer Law Center, AARP, The National Association of
Consumer Advocates, and The Center for Responsible Lending.
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economy.
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See, e.g., IMF, Dealing with Household Debt, in Growth
Resuming, Dangers Remain, World Economic Outlook 89, 96 (Apr.
2012)
(economic
downturns
“are
more
severe
when
preceded by larger increases in household debt”).
note
that
statute
West
Virginia
precisely
the
already
lending
complains,
with
a
law
aimed
lending.
See
W.
Va.
Code
has
decided
practices
squarely
to
of
at
they
Indeed, we
regulate
which
by
McFarland
predatory
§ 31-17-8(m)(8)
are
mortgage
(prohibiting
“a
primary or subordinate mortgage loan in a principal amount that
. . . exceeds the fair market value of the property”).
But here is where we disagree with McFarland:
that
a
practice
substantively
contract
is
harmful
unconscionable
law.
Rather,
does
as
as
a
not
by
matter
noted
The fact
itself
of
above,
West
make
it
Virginia
substantive
unconscionability is an equitable doctrine reserved for those
cases in which a contract is “so one-sided that it has an overly
harsh effect on the disadvantaged party.”
737 S.E.2d at 558.
Dan Ryan Builders,
And an under-collateralized loan, though it
ultimately may cause harm, cannot meet this standard, because it
will benefit the borrower in at least some respects and operate
to the detriment of the lender in others.
Here, for example,
the Wells Fargo Loan provided McFarland with the money he needed
to pay off approximately $40,000 of student and automobile debt,
as he had hoped.
And while it undoubtedly exposed McFarland to
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certain risks, it posed risks for the bank, as well:
When a
bank writes a mortgage for more money than a borrower’s home is
worth, it takes the chance that it will forfeit at least some of
its capital in the event of a default. 4
So a loan in excess of
home value does not accrue entirely to the lender’s benefit, and
thus lacks the kind of “gross imbalance, one-sidedness or lopsidedness,”
courts
id.,
have
evident
identified
substantively
(striking
and
down
in
impropriety
setting
unconscionable.
unilateral
aside
See,
arbitration
that
West
contract
Virginia
terms
e.g.,
id.
at
clause
because
as
559–60
it
was
wholly one-sided and unfair); U.S. Life Credit Corp. v. Wilson,
301 S.E.2d 169, 171–72 (W. Va. 1982) (invalidating provision in
4
McFarland contends that today this risk is more illusory
than real, given that mortgage lenders can sell their loans on
the secondary market and remove them from their balance sheets.
But as the Banks explain, they remain accountable to the
purchasers of their loans, and in some circumstances even may
have to repurchase loans that prove “defective.”
And indeed,
many banks experienced a solvency crisis during the recent
economic downturn because of the number of “bad loans” they had
issued.
See Eamonn K. Moran, Wall Street Meets Main Street:
Understanding the Financial Crisis, 13 N.C. Banking Inst. 5, 55
(2009).
We acknowledge that the growth of loan securitization
in the years leading up to the financial crisis significantly
affected
the
allocation
of
risk
associated
with
undercollateralized loans.
But that does not mean that banks are
fully insulated from the consequences of bad loans, and it is
enough here that loans in excess of home value continue to carry
risk for all parties involved.
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consumer loan agreement that waives debtor’s statutory right to
be free from publication of his indebtedness).
Our belief that the West Virginia Supreme Court of Appeals
would
not
recognize
loan
size,
by
itself,
as
evidence
of
substantive unconscionability is confirmed when we consider the
problems
that
would
circumstances.
arise
in
fashioning
a
remedy
in
such
In the typical case, when what is challenged is
a particular contract term — say, a rate of interest, or a
prepayment penalty — courts may sever the unconscionable term or
reform it to avoid an “unconscionable result.”
§ 46A-2-121(1)(b).
But
here,
the
only
See W. Va. Code
way
to
avoid
what
McFarland alleges is the unconscionable feature of having been
loaned too much money would be to cancel the loan agreement
altogether — which would spare McFarland a foreclosure but also
require that he return the loan principal to Wells Fargo, which
is of course the very outcome he seeks to avoid.
Loans,
Inc.
v.
Brown,
777
S.E.2d
581,
592
(W.
See Quicken
Va.
2014)
(“Quicken Loans II”) (requiring return of loan principal as part
of remedy for unconscionable loan agreement).
The West Virginia
Supreme Court of Appeals has been clear that “cancellation of
the debt” — relieving McFarland of the obligation to repay his
Wells Fargo Loan altogether — “is not a permissible remedy” in
circumstances like these.
See Quicken Loans II, 777 S.E.2d at
591.
the
And
with
that
off
table
17
and
no
good
alternative
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proposed, we think it unlikely that the West Virginia Supreme
Court of Appeals would reach out to create a new variant of
substantive unconscionability for which there appears to be no
sensible remedy.
Cf. Mallet v. Pickens, 522 S.E.2d 436, 441 n.6
(W. Va. 1999) (interpreting West Virginia common law to avoid an
“illogical, counterintuitive outcome”). 5
2.
McFarland also continues to press his alternative theory of
substantive
unconscionability:
that
his
contract
with
Wells
Fargo is substantively unconscionable under West Virginia law
because the Wells Fargo Loan did not provide him a “net tangible
benefit.”
Like the district court, we think it is clear that
the “net tangible benefit” inquiry to which McFarland alludes is
5
Like the district court, we acknowledge that some federal
courts in West Virginia appear to have reached a different
conclusion, holding or assuming, without significant analysis,
that
a mortgage’s
size
may
be
evidence
of
substantive
unconscionability.
See, e.g., Petty v. Countrywide Home Loans,
Inc., No. 3:12-cv-6677, 2013 WL 1837932, at *5 (S.D.W. Va. May
1, 2013).
The district court distinguished those cases on the
ground that they arose prior to discovery, and that early
dismissal of the cases would have been inconsistent with the
WVCCPA’s policy of allowing unconscionability claims to proceed
through discovery.
See McFarland, 19 F. Supp. 3d at 672–73
(citing W. Va. Code § 46A-2-121(2) (“[T]he parties shall be
afforded a reasonable opportunity to present evidence . . . to
aid
the
court
in
making
the
[unconscionability]
determination.”)).
And regardless, we agree with the district
court that the cases are unpersuasive on the merits, see id. at
672, decided without sustained examination of the issue and
providing no reason to think that West Virginia would apply its
law in this manner.
18
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irrelevant to substantive unconscionability under West Virginia
law.
McFarland
appears
to
have
borrowed
the
“net
tangible
benefit” test he proposes from West Virginia’s anti-predatory
lending statute, which prohibits mortgage brokers from charging
certain fees “unless the new loan has a reasonable, tangible net
benefit to the borrower considering all of the circumstances.”
See W. Va. Code § 31-17-8(d).
But McFarland has not alleged
that the Wells Fargo Loan violated this provision, nor pointed
to
any
applying
West
it
Virginia
in
the
case
very
law
borrowing
different
“unconscionable contract” claim.
context
its
of
language
a
§
and
46A-2-121
Nor can we see any reason why
the “tangible net benefit” standard would be transposed to the
unconscionability context.
Again, unconscionability under West
Virginia law is concerned with whether a loan agreement is so
“one-sided” and “overly harsh” that it should not be enforced as
written.
Genesis Healthcare, 729 S.E.2d at 221.
Whether a
contract provides either or both parties with a “tangible net
benefit” is an entirely separate question; contracts are made
all the time that include terms that might not provide either
party with a “net tangible benefit” yet remain fair and evenhanded — or at least fair and even-handed enough not to be
considered
substantively
unconscionable
standard.
Cf. Pingley v. Perfection Plus Turbo-Dry, LLC, 746
19
under
West
Virginia’s
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S.E.2d 544, 551–52 (W. Va. 2013) (contract between homeowner and
sewage
removal
though
it
company
disclaimed
not
substantively
liability
for
unconscionable
damages
caused
by
even
mold);
State ex rel. AT & T Mobility, LLC v. Wilson, 703 S.E.2d 543,
550–51
(W.
Va.
2010)
(arbitration
agreement’s
ban
on
class
actions does not render it substantively unconscionable). 6
III.
We turn now to McFarland’s contention that the district
court
erred
solely
on
by
the
dismissing
ground
unconscionability.
his
that
unconscionable
he
According
could
to
not
McFarland,
contract
show
claim
substantive
neither
of
his
unconscionable contract claims — that the loan agreement itself
was
unconscionable
when
made,
or
that
it
was
induced
by
unconscionable means — could be dismissed under West Virginia
law
without
some
assessment
of
the
fairness
of
the
process
leading up to contract formation.
We agree, but only in part.
think
West
Virginia
law
Like the district court, we
clearly
6
requires
a
showing
of
The Banks argue in the alternative that even if the
“tangible net benefit” standard were applicable here, it would
be satisfied, given that the Wells Fargo Loan allowed McFarland
to pay off his student and vehicle debt and thus reduce his
total monthly loan payments. Because we find that West Virginia
law does not call for an inquiry into “tangible net benefit” in
this context, we need not address that contention.
20
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substantive unconscionability to make out a traditional claim
that a contract is itself unconscionable.
equally
plain
unconscionable
that
the
inducement
WVCCPA
claim
But we think it is
authorizes
which,
a
unlike
stand-alone
its
common-law
antecedents, may be based entirely on evidence going to process
and requires no showing of substantive unfairness.
A.
Having
found
that
McFarland
could
not
show
substantive
unconscionability, the district court granted the Banks summary
judgment
on
McFarland’s
unconscionable
contract
claim.
No
further analysis was required, the district court held, because
under
West
Virginia
unconscionability
law,
in
a
claimant
order
to
must
prevail
prove
on
a
substantive
claim
of
unconscionable contract.
As
to
McFarland’s
first
unconscionable
contract
claim
—
that the loan agreement itself was unconscionable when made, see
W.
Va.
Code
§
46A-2-121(1)(a)
(courts
may
refuse
to
enforce
agreement that is “unconscionable at the time it was made”) — we
agree.
West
Virginia
law
clearly
requires
evidence
of
both
substantive and procedural unconscionability to make out this
traditional
unconscionability
claim,
Virginia Code § 46A-2-121(1)(a).
now
codified
under
West
See, e.g., Genesis Healthcare,
729 S.E.2d at 221; Arnold, 511 S.E.2d at 861 n.6.
Given its
holding that McFarland could not show the requisite substantive
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unconscionability — with which we agree — the district court
properly awarded summary judgment to the Banks on McFarland’s
claim that his contract with Wells Fargo was unconscionable at
the time it was made.
McFarland’s contrary argument rests on cases in which the
West
Virginia
courts
there
against
are
Supreme
dismissing
outstanding
unconscionability.
(existence
of
bargaining
power
That
policy
Court
issues
questions
Appeals
has
unconscionable
See,
of
e.g.,
of
precludes
is
of
driven
fact
relating
625
regarding
resolution
by
contract
Herrod,
fact
instructed
a
by
claims
to
at
grossly
practical
when
procedural
S.E.2d
summary
state
379
unequal
judgment).
concern
that
unconscionability claims are context-specific, so that evidence
of procedural unconscionability may in some cases also inform
the substantive unconscionability analysis.
See Quicken Loans
I, 737 S.E.2d at 657; Arnold, 511 S.E.2d at 860–61.
Whatever
its merits, that guidance is a matter of state civil procedure,
not substantive law, and does not bind a federal court sitting
in diversity.
Federal courts apply federal rules of procedure.
See Rowland v. Patterson, 852 F.2d 108, 110 (4th Cir. 1988).
And
under
Federal
Rule
of
Civil
Procedure
56,
the
only
requirement for summary judgment is that the movant be entitled
to judgment as a matter of law.
Because McFarland could not
succeed on his claim that his contract with Wells Fargo was
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unconscionable when entered even accepting as true all of his
allegations regarding the bargaining process, the district court
properly awarded summary judgment to the Banks.
B.
We reach a different conclusion with respect to McFarland’s
claim of unconscionable inducement.
Though the question is not
fully
law,
settled
under
West
Virginia
we
believe
the
West
Virginia Supreme Court of Appeals would rule that the WVCCPA
authorizes
a
stand-alone
claim
for
unconscionable
inducement,
predicated on the process leading up to contract formation and
independent of any showing of substantive unconscionability.
The terms of the WVCCPA are plain enough:
Section 46A-2-
121 authorizes a court to refuse enforcement of an agreement on
one
of
two
distinct
“unconscionable
induced
by
at
the
findings:
time
unconscionable
it
that
was
the
made,
conduct.”
W.
agreement
or
Va.
[that
Code
it
§
was
was]
46A-2-
121(1)(a) (emphasis added).
What makes the question interesting
is
West
the
common
interplay
law
provision
in
substantive
and
the
between
the
codification
WVCCPA.
At
unconscionability
unconscionability claim.
Virginia’s
of
common
is
a
an
law,
unconscionability
unconscionability
some
showing
prerequisite
to
of
an
And it is settled as a matter of West
Virginia law that the same requirement applies to claims under
the first part of § 46A-2-121(1)(a), alleging that a contract
23
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was
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“unconscionable
at
the
Pg: 24 of 29
time
it
was
made.”
See
Credit
Acceptance Corp. v. Front, 745 S.E.2d 556, 559, 564 (W. Va.
2013).
So the question is whether the second part of § 46A-2-
121(1)(a),
conduct,”
covering
is
understanding
inducement
to
be
and
that
that
read
as
“induced
diverging
authorizing
does
unconscionability.
(noting
contracts
not
a
from
claim
require
a
by
unconscionable
this
for
showing
traditional
unconscionable
of
substantive
See id. at 571 (Ketchum, J., concurring)
legislature
has
suggested
that
substantive
unconscionability is not required and urging court to clarify
the matter).
For several reasons, we think the West Virginia Supreme
Court of Appeals would answer this question in the affirmative.
First, it has come very close to doing so already.
In its 2012
decision in Quicken Loans I, the court sustained findings of
“unconscionability in the inducement” based entirely on conduct
predating acceptance of the contract and allegations going to
the
fairness
of
the
process,
without
regard
to
substantive
unconscionability: a “false promise” of refinancing, the sudden
introduction
conducted
S.E.2d
of
a
balloon
appraisal
at
657–58.
review,
payment
and
Because
at
closing,
other
similar
the
court’s
a
negligently
factors.
analysis
737
of
unconscionable inducement was only one portion of its overall
unconscionability analysis — which also reflected that the loan
24
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agreement included several substantively unconscionable terms,
id. at 658 — we will err on the side of caution and treat it as
something less than a clear holding on the question.
minimum,
it
is
a
strong
indication
that
the
But at a
West
Virginia
Supreme Court of Appeals understands the WVCCPA to allow for
unconscionable
inducement
claims
separate
and
apart
from
substantive unconscionability.
Second, the West Virginia Supreme Court of Appeals takes a
plain meaning approach to statutory construction:
“Where the
language of a statutory provision is plain, its terms should be
applied as written.”
Va. 1999).
DeVane v. Kennedy, 519 S.E.2d 622, 632 (W.
And the language of the WVCCPA fits the bill.
It
expressly authorizes courts to refuse to enforce an agreement
that they find “to have been unconscionable at the time it was
made, or to have been induced by unconscionable conduct.”
Va.
Code
§
46A-2-121(1)(a)
(emphasis
added).
The
word
W.
“or”
unmistakably signals two distinct causes of action when it comes
to consumer loans: one for unconscionability in the loan terms
themselves, and one for unconscionable conduct that causes a
party to enter into a loan.
If the legislature had intended to
require both substantive and process-related unconscionability,
subjecting creditors to liability only where an agreement itself
is unconscionable, then all it had to do was replace the “or”
with an “and.”
Cf. U.S. Life, 301 S.E.2d at 173 (engaging in
25
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same plain meaning analysis of § 46A-2-121(1)(a) and rejecting
defendant’s
argument
unconscionable
that
inducement
it
and
allows
not
claims
also
for
only
for
substantively
unconscionable contract terms).
Finally, the West Virginia courts have advised that the
comments
to
the
Uniform
“highly
instructive”
because
its
when
Consumer
it
comes
unconscionability
those of the statute.
Credit
to
Code
(“UCCC”)
construing
provisions
are
are
§ 46A-2-121
“identical”
to
Quicken Loans I, 737 S.E.2d at 656–57.
And the comments to the UCCC not only indicate that a standalone unconscionable inducement claim exists, but also explain
its purpose:
Subsection (1), as does UCC Section 2-302, provides
that a court can refuse to enforce or can adjust an
agreement
or
part
of
an
agreement
that
was
unconscionable on its face at the time it was made.
However, many agreements are not in and of themselves
unconscionable according to their terms, but they
would never have been entered into by a consumer if
unconscionable means had not been employed to induce
the consumer to agree to the contract. It would be a
frustration of the policy against unconscionable
contracts for a creditor to be able to utilize
unconscionable
acts
or
practices
to
obtain
an
agreement.
Consequently subsection (1) also gives to
the court the power to refuse to enforce an agreement
if it finds as a matter of law that it was induced by
unconscionable conduct.
Unif.
Consumer
Credit
Code
1974
§
5.108
cmt.
1.
That
is
McFarland’s argument in a nutshell: that regardless of whether
his
loan
agreement
with
Wells
Fargo
26
is
“in
and
of
[itself]
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unconscionable
according
substantively
unconscionable
finding
of
Pg: 27 of 29
to
[its]
—
unconscionability
terms”
—
§ 46A-2-121(1)(a)
if
that
allows
for
means
[were]
“unconscionable
employed to induce [him] to agree to the contract.”
appears
that
the
West
Virginia
legislature
is,
adopted
Id.
a
It
precisely
this approach, and we think that the West Virginia Supreme Court
of Appeals would so hold.
Reading
§ 46A-2-121(1)(a)
to
allow
for
a
stand-alone
unconscionable inducement claim, we should note, is in no way
inconsistent
with
West
Virginia
precedent
holding
that
procedural unconscionability alone cannot show that a contract
was itself unconscionable when made.
The kind of procedural
unconscionability
(in
that
is
required
combination
with
substantive unconscionability) to render a contract or contract
term unconscionable in and of itself may turn on such “status”
factors as the “relative positions of the parties, the adequacy
of the bargaining position, [and] the meaningful alternatives
available to the plaintiff.”
657.
We
of
course
leave
to
Quicken Loans I, 737 S.E.2d at
West
Virginia
law
the
precise
contours of an unconscionable inducement claim, but it appears
that it will turn not on status considerations that are outside
the
control
of
the
defendant,
but
misrepresentations or active deceit.
instead
on
affirmative
See id. at 653–55, 657
(unconscionable inducement findings include lender’s concealment
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of balloon payment and false promise to allow refinancing).
McFarland
concedes,
in
other
words,
the
standard
As
for
unconscionable inducement is different and higher than that for
procedural unconscionability.
Accordingly,
we
hold
that
the
district
court
erred
in
dismissing McFarland’s claim of unconscionable inducement on the
ground
that
substantive
unconscionability
is
a
necessary
predicate of a finding of unconscionability under the WVCCPA.
We
take
no
view
unconscionable
as
to
inducement
the
underlying
claim,
and
merits
remand
to
of
McFarland’s
the
district
court to consider McFarland’s evidence that his loan agreement
was
“induced
by
misrepresentations”
and
determine
whether
it
allows him to proceed against the Banks. 7
7
In a separate count of his complaint, McFarland sought to
hold the Banks liable for unconscionable contract under agency
and joint venture theories.
The district court dismissed that
count of the complaint on the ground that McFarland had failed
to make the necessary showing of unconscionability.
McFarland,
19 F. Supp. 3d at 674 (“Here, joint venture and agency may not
be used to impose liability for unconscionable contract [], as
that claim is dismissed.”). Accordingly, we vacate that portion
of the district court’s judgment, as well, and remand for
reconsideration of McFarland’s joint venture and agency claims
in light of this opinion.
28
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IV.
For the foregoing reasons, we affirm the judgment of the
district court in part and vacate and remand in part.
AFFIRMED IN PART,
VACATED IN PART,
AND REMANDED
29
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