Lara et al v. Wells Fargo Bank N. A.

Filing 14

MEMORANDUM OPINION AND ORDER granting 4 Motion to Dismiss for Failure to State a Claim. (Ordered by Judge Jane J Boyle on 12/2/2013) (Judge Jane J Boyle)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
ERNESTO LARA and LORENA
LARA,
Plaintiffs,
v.
WELLS FARGO BANK, N.A.
Defendant.

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CIVIL ACTION NO. 3:13-CV-1686-B

MEMORANDUM OPINION AND ORDER
Before the Court is Defendant Wells Fargo Bank, N.A.’s Motion to Dismiss (doc. 4), filed
pursuant to Rule 12(b)(6) on June 7, 2013. For the reasons that follow, Defendant’s Motion to
Dismiss is GRANTED.
I.
BACKGROUND1
This case arises out of an attempted foreclosure of Plaintiffs’ home by Defendant. Plaintiffs
fell behind on their mortgage payments and consequently requested a loan extension from
Defendant. Plaintiffs allege that they were granted the extension but received contradictory and
confusing messages from Defendant regarding their request. Plaintiffs further claim that, after their
residence flooded in June 2010, Defendant failed to disburse funds from an insurance settlement in
a timely manner. Finally, they allege that Defendant engaged in active misrepresentation of the facts

1

The Court draws its factual account from the allegations contained in Plaintiffs’ Original Complaint
(doc. 1), as well as the attachments and documents incorporated therein by reference. See Wolcott v. Sebelius,
635 F.3d 757, 763 (5th Cir. 2011).

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reported in an affidavit used to obtain a court order for foreclosure of Plaintiffs’ home. Consequently,
Plaintiffs are suing Defendant for breach of contract and fraud.
A.

Factual Background
1.

Home Equity Loan

On or about September 24, 2007, Plaintiffs Ernesto Lara and Lorena Lara (hereinafter
“Plaintiffs”) obtained a home equity loan from Defendant against their residence, 19380 State
Highway 274, Kemp, Texas 75143 (the “Property”). Compl. Ex. 1. Mr. Lara executed a Texas Home
Equity Note (the “Note”) in the original principal amount of $59,000.00. Compl. II, ¶ 1. Plaintiffs
then granted Defendant a security interest in the Property by executing the Texas Home Equity
Security Instrument (the “Security Instrument”). Id. The Note requires Plaintiffs make “monthly
payment(s) in the amount of U.S. $513.95.” Compl. Ex. 1, ¶ 3. The Security Instrument requires
Plaintiffs keep the Property insured against damage arising from various events, including floods.
Compl. Ex. 2, ¶ 5. If the Property is damaged and insurance proceeds are received, the Security
Instrument also requires the proceeds go towards repairing the Property. Id.
In May 2009 Plaintiffs fell behind on their Note payments. Compl. II, ¶ 2. On or about
September 24, 2009, Plaintiffs made their first request for loan assistance. Id. at ¶ 5. According to
Plaintiffs, this request was accepted by Defendant and an extension of the loan was effectuated for
November 2009, December 2009, and January 2010. Id. Plaintiffs made their payments under the
extended loan on time. Id. On or about January 12, 2010, Plaintiffs were notified by Defendant that
the extension plan had been canceled. Id. However, Plaintiffs later spoke with a representative of
Defendant, who advised them to disregard the prior communication that the extension had been
canceled. Id. Consequently, Plaintiffs continued to make payments under the extension from
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February through May 2010. Id.
On June 1, 2010, Plaintiffs were notified by Defendant that it was “withdrawing the extension
of credit or modification with its remedies under the home equity security agreement which included
a short sale and foreclosure sale as permitted by court order.” Id. at ¶ 6. However, Plaintiffs claim
they continued to receive correspondence from Defendant requesting tax and financial information
regarding their extension request. Id. at ¶ 8. Plaintiffs also claim that they reviewed a letter stating
that the pre-foreclosure sale had been canceled and their file had been closed. Id. Nevertheless, on
July 22, 2010, Defendant filed a verified application in county court in Kaufman County, Texas for
a home equity foreclosure. Id. at ¶ 9. In support thereof, Defendant offered an affidavit of Herman
John Kennerty, “purportedly a custodian of records of Wells Fargo Bank, N.A.” Id. On December
3, 2010, Defendant’s application for home equity foreclosure was dismissed. Id. at ¶ 10.
On November 7, 2012, Defendant filed another verified application in county court in
Kaufman County, Texas for a home equity foreclosure order. Id. at ¶ 12. It is not clear from the
parties’ filings whether this order was granted or dismissed.
2.

The Flood

On or about June 1, 2010, Plaintiffs’ Property was flooded, resulting in $63,000.00 of damage.
Id. at 7. Plaintiffs received $59,500.00 from their insurance company. Id. According to Plaintiffs,
Defendant demanded they endorse the insurance check over to it. Id. Plaintiffs complied. Id. Months
later, on February 8, 2011, Plaintiffs received from Defendant $19,266.00 from the insurance
proceeds. Id. at ¶ 11. Plaintiffs used this money to repair some of the damage to the Property;
however it was not enough to cover repairs for all of the damage. Id.
B.

Procedural History
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Plaintiffs’ Original Complaint (doc. 1) was filed with this Court on May 2, 2013. On June 7,
2013, Defendant moved to dismiss (doc. 4) all claims against it. Plaintiffs responded (doc. 11) on July
23, 2013. On August 6, 2013, Defendant replied (doc. 12).2 The Motion is now ripe for the Court’s
review.
II.
LEGAL STANDARD
Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must contain “a
short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.
8(a)(2). Rule 12(b)(6) authorizes the court to dismiss a plaintiff’s complaint for “failure to state a
claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). In considering a Rule 12(b)(6)
motion to dismiss, “[t]he court accepts all well-pleaded facts as true, viewing them in the light most
favorable to the plaintiff.” In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.
2007)(quoting Martin K. Eby Contr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir.
2004)). To survive such a motion, a plaintiff must plead “enough facts to state a claim to relief that
is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “Threadbare recitals
of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “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
2

On August 30, 2013, Defendant filed its Original Counterclaim (doc. 13), requesting the Court
deny Plaintiffs any relief in the present litigation. In addition, Defendant requested (1) an order foreclosing
the lien and ordering sale of the Property; (2) interest accrued and accruing through the date of judgment
as provided under the Note and Security Instrument; (3) post-judgment interest at the maximum rate allowed
by law on all amounts permitted by law from the date of judgment until the date paid; and (4) any other legal
or equitable relief to which Defendant may be entitled. Orig. Count. 5. The Court will consider Defendant’s
Counterclaim in a separate order.

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for the misconduct alleged.” Id. “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.” Id. When wellpleaded facts fail to achieve this plausibility standard, “the complaint has alleged–but it has not
shown–that the pleader is entitled to relief.” Id. at 679 (internal quotation marks and alterations
omitted).
III.
ANALYSIS
Defendant moves to dismiss each of Plaintiffs’ claims against it. The Court thus reviews each
in turn below.
A.

Breach of Contract
Plaintiffs allege Defendant breached its contractual obligations to them in three ways: (1) by

failing to provide insurance funds to repair the Property in a timely manner on June 1, 2010; (2) by
failing to provide insurance funds to complete repair of the Property after February 2011; and (3) by
failing to extend credit to Plaintiffs and sending contradictory and confusing messages regarding the
loan extension. Compl. III, ¶ 1. Defendant argues that Plaintiffs’ claims cannot stand because
Plaintiffs fail to plead the elements of a breach of contract cause of action. Def.’s Mot. 7-12. In
addition, Defendant contends that Plaintiffs’ claims are barred by the statue of frauds. Id. at 12.
Under Texas law, “[t]he elements of a breach of contract claim are: (1) the existence of a
valid contract; (2) performance tendered by the plaintiff; (3) breach of the contract by the
defendant; and (4) damages to the plaintiff resulting from that breach.” Wright v. Christian & Smith,
950 S.W.2d 411, 412 (Tex. App. 1997). Further, “a plaintiff suing for breach of contract must point
to a specific provision in the contract that was breached by the defendant.” King v. Wells Fargo Bank,
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N.A., No. 3:11-CV-0945-M-BD, 2012 WL 1205163, at *2 (N.D. Tex. Mar. 20, 2012)(collecting
cases).
Plaintiffs’ Original Complaint acknowledges two contracts between the parties, the Note and
the Security Instrument. However Plaintiffs fail to identify which contract–or provision–supports
their claims. Thus, the Court is left to assume that, with respect to the insurance proceeds, the
Plaintiffs rely on the Security Instrument, in particular on Section 5 entitled “Property Insurance.”
Compl. Ex. 2, ¶ 5. This section outlines, inter alia, Borrower’s obligations to insure the Property
against certain hazards, including flooding. Id. It further provides that, in the event of loss and absent
a separate agreement in writing between Lender and Borrower, any insurance proceeds shall be
applied to restoration or repair of the Property. Id. When such repair or restoration is undertaken,
Lender shall have the right to hold such insurance proceeds until
Lender has had an opportunity to inspect such Property to ensure the
work has been completed to Lender’s satisfaction, provided that such
inspection shall be undertaken promptly. Lender may disburse
proceeds for the repairs and restoration in a single payment or in a
series of progress payments as the work is completed.
Id.
By the language of this provision Defendant was entitled to hold the proceeds Plaintiffs
obtained from their insurance company. What’s more, Defendant was also entitled to retain such
money until it had inspected the Property and determined that repairs had been completed to its
satisfaction. Nowhere does this provision require Defendant to release all the funds to Plaintiffs
either on the date of damage or upon completion of certain repairs. Though the Court recognizes the
provision requires Defendant inspect the Property promptly, this does not, in turn, require it to
disburse the money promptly. Section 5 is explicit that Defendant is allowed to disburse the funds

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over a period of time as it is satisfied the Property has been sufficiently repaired. From the scant facts
that Plaintiffs have provided it seems this is in fact what occurred; Defendant held the insurance
funds and then released a portion to cover some repairs. That the amount released was not enough
to cover all repairs is not itself a breach. After all, nowhere do Plaintiffs claim that the Property had
been completely restored or that Defendant inspected and approved the repairs but nevertheless
withheld the funds necessary to pay for the completed work. Instead, they argue simply that
Defendant failed to pay them in a timely manner on or about the date of the flood, and also that
Defendant released only a portion of the proceeds in February 2011. These factual allegations do not
support the elements required to prove breach of contract. Accordingly the Court DISMISSES
Plaintiffs’ claims regarding the insurance proceeds.
The Court now considers Plaintiffs’ remaining breach of contract claim regarding the loan
extension. Plaintiffs state in their opposition brief that “[t]he gist of Plaintiffs’ contract claim is that
Defendant promised Plaintiffs that Defendant would modify the contract granting Plaintiffs’ loan
extension.” Pls.’ Opp. 8. They later identify the relevant contract as “a contract to extend a
modification of credit . . . .” Id. at 9. Finally they argue “Defendant breached by failing to extend the
loan modification after June, [sic] 2010.” Id. Defendant argues that Plaintiffs’ claim must fail because
Plaintiffs admit they defaulted under the Note. Def.’s Mot. 8. Further, Defendant contends that it
never breached because Plaintiffs were never entitled to a loan modification. Id. at 9. Finally,
Defendant insists that Plaintiffs’ claim is barred by the statute of frauds. Id. at 12.
“Under Texas law, if one party to a contract breaches, there is no obligation for the nonbreaching party to continue performance.” United States ex rel. Wallace v. Flintco Inc., 143 F.3d 955,
968 (5th Cir. 1998)(citations omitted). There is no dispute that the Note was a valid contract that
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required Plaintiffs to pay Defendant a monthly payment of $513.95. Compl. Ex. 1, ¶ 3. There is also
no dispute that, by the terms of the Note, failing to pay the full amount each month would result in
default. Id. By Plaintiffs’ own admission, they fell behind on their payments in May 2009. Compl. II,
2. Therefore, Plaintiffs defaulted long before Defendant’s alleged breach. Accordingly, they cannot
maintain a suit for breach of contract under the Note. See Wallace, 143 F.3d at 968; see also May v.
Wells Fargo Bank, N.A., No. 4:11-3516, 2013 WL 4647673, at *3 (S.D. Tex. Aug. 29,
2013)(“Because Plaintiffs were in default of the contract’s terms, they cannot maintain a suit for
breach of contract.”); Browning v. PHH Mortg. Corp., No. H-12-0886, 2013 WL 3244094, at *4
(S.D. Tex. June 26, 2013)(“Because Plaintiff failed to perform his payment obligations under the
security instrument, any alleged subsequent breach of [Defendant’s] obligations under the agreement
is excused.”); Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692 (Tex. 1994)(“A fundamental
principle of contract law is that when one party to a contract commits a material breach of that
contract, the other party is discharged or excused from any obligation to perform.”).
To the extent Plaintiffs are not suing under the Note, but rather under a promise to modify
the Note, their claim nevertheless fails. “Under Texas law, a ‘loan agreement in which the amount
involved in the loan agreement exceeds $50,000 in value is not enforceable unless the agreement is
in writing and signed by the party to be bound or by that party’s authorized representative.’” Gordon
v. JPMorgan Chase Bank, N.A., 505 F. App’x 361, 364 (5th Cir. 2013)(unpublished)(quoting Tex.
Bus. Com. Code § 26.02(b)). “The term ‘loan agreement’ includes any agreement or promise where
a financial institution ‘loans or delays repayment of or agrees to loan or delay repayment of money,
goods, or another thing of value or to otherwise extend credit or make a financial accommodation.’”
Gordon, 505 F. App’x at 364 (quoting Tex. Bus. Com. Code § 26.02(a)(2)). Finally, “[w]hen a
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written agreement is governed by the statute of frauds, it cannot be materially modified by a
subsequent oral agreement.” Gordon, 505 F. App’x at 364; see also Dracopoulas v. Rachal, 411 S.W.2d
719, 721 (Tex. 1967).
Here, the Note is a “loan agreement” within the meaning of the Texas Business Code and
is thus governed by the statute of frauds. The parties’ alleged agreement to modify the Note by
granting an extension of credit is therefore also subject to the Texas statute of frauds and must be
in writing to be enforceable. See Gordon, 505 F. App’x at 364; see also Chavez v. Wells Fargo Bank,
N.A., No. 4:11-CV-846-Y, 2013 WL 3762894, at *5 (N.D. Tex. July 9, 2013). Accordingly, it is
Plaintiffs’ burden to demonstrate that the statue of frauds is satisfied. See Hugh Symons Group, plc v.
Motorola, Inc., 292 F.3d 466, 469 (5th Cir. 2002). In their filings Plaintiffs have failed to allege–let
alone prove–that this “contract to extend a modification” was ever reduced to writing. Instead they
have insisted, incorrectly, that the statute of frauds simply does not apply. Pls.’ Opp. 9. Consequently,
their claim of breach of contract with respect to the agreement to offer a loan extension fails as a
matter of law.3
Because the Court DISMISSES all of Plaintiffs’ claims of breach of contract, it similarly
DISMISSES Plaintiffs’ claims for attorney’s fees with respect thereto.
3

Though Plaintiffs do not plead promissory estoppel, the Court has nevertheless considered this
possibility in light of Plaintiffs’ allegation (albeit with respect to their fraud claim) that “Plaintiffs relied on
the promise of Defendant to make a modification of the agreement . . . .” Pls.’ Opp. 10. Though “promissory
estoppel is primarily a defensive theory, it is also available as a cause of action for a ‘promisee who has acted
to his detriment in reasonable reliance on an otherwise unenforceable promise.’” Gordon, 505 F. App’x at 365
(quoting Ford v. City State Bank of Palacios, 44 S.W.3d 121, 140 (Tex. App.–Corpus Christi 2001, no pet.)).
Even under this theory, though, Plaintiffs’ claim still fails. Because Plaintiffs are relying on an oral promise
that is otherwise barred by the statue of frauds, they must show that Defendant “promised to sign a written
document that would satisfy the statute of frauds.” Ford, 44 S.W.3d at 140. As Plaintiffs make no such
allegation, they cannot support a promissory estoppel cause of action for breach of contract with respect to
the loan modification.

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B.

Fraud
The Court next considers Plaintiffs’ claim of fraud. Plaintiffs allege: (1) that Defendant

“engaged in active misrepresentation of the facts reported in the affidavit to obtain a court order for
foreclosure”; and (2) that “Plaintiffs relied upon the representation of Defendant as expressed in the
numerous contradictory and encouraging communications for the extension and/or modification of
the loan.” Compl. III, ¶¶ 2, 4. They further claim that, as a result of Defendant’s promises and their
reliance thereon, they suffered considerable damage. Pls.’ Opp. 11. Defendants argue that Plaintiffs’
claim cannot stand because they fail to meet Rule 9(b)’s heightened pleading standard, and Plaintiffs
fail to establish the necessary elements of a fraud claim. Def.’s Mot. 14-20. Finally, Defendant argues
that Plaintiffs’ claim is barred by the statute of frauds and the economic loss rule. Id. at 20-22.
The elements of fraud are:
(1) that a material representation was made; (2) the representation
was false; (3) when the representation was made, the speaker knew
it was false or made it recklessly without any knowledge of the truth
and as a positive assertion; (4) the speaker made the representation
with the intent that the other party should act upon it; (5) the party
acted in reliance on the representation; and (6) the party thereby
suffered injury.
Indian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 337 (Tex. 2011).“A
promise of future performance constitutes an actionable misrepresentation if the promise was made
with no intention of performing at the time it was made.” Aquaplex, Inc. v. Rancho La Valencia, Inc.,
297 S.W.3d 768, 774 (Tex. 2009)(per curiam)(quoting Formosa Plastics Corp. USA v. Presidio Eng’rs
& Contractors, Inc., 960 S.W.2d 41, 48 (Tex. 1998)).
Fraud claims are subject to a heightened pleading standard under Rule 9(b). Fed. R. Civ. P.
9(b). In addition, the Fifth Circuit “interprets Rule 9(b)strictly, requiring a plaintiff pleading fraud
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to specify the statements contended to be fraudulent, identify the speaker, state when and where the
statements were made, and explain why the statements were fraudulent.” Herrmann Holdings Ltd.
v. Lucent Techs., Inc., 302 F.3d 552, 564-65 (5th Cir. 2002)(citations and internal quotations
omitted). In other words, “Rule 9(b) requires ‘the who, what, when, where, and how’ to be laid out.”
Shandong Yinguang Chem. Indus. Joint Stock Co., Ltd. v. Potter, 607 F.3d 1029, 1032 (5th Cir.
2010)(quoting Benchmark Elecs., Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir. 2003)).
Considering Plaintiffs’ filings and the relevant law, it is clear that Plaintiffs’ allegation of fraud
with respect to Herman John Kennerty’s affidavit falls short of stating a cause of action. Though
Plaintiffs make clear that Mr. Kennerty “was not a custodian of the records; had no personal
knowledge of the facts stated in the affidavit; and, was simply acting as a document examiner in a
foreclosure mill maintained by Defendant,” they fail to state how any of his statements were
knowingly false or, more critically, how Plaintiffs relied on them. Compl. III, ¶ 2. If anything,
Plaintiffs seem to suggest that Defendant, through Mr. Kennerty, was attempting to mislead the
county court by providing a false affidavit in order to obtain a foreclosure order. However improper
that conduct–if true–may have been, it is not fraud with respect to Plaintiffs. Thus, their claim
cannot stand.
Regarding their second allegation that Defendant gave them “numerous contradictory and
encouraging communications for the extension and/or modification on the loan,” the Court finds this
claim also cannot stand. Under Texas law, a tort claim such as fraud must include injury to plaintiff
apart from an alleged breach of contract. See Horne v. Bank of America, N.A., No. 4:12-CV-622-A,
2013 WL 765312, at *5 (N.D. Tex. Feb. 28. 2013)(citing D.S.A., Inc. v. Hillsboro Indep. Sch. Dist.,
973 S.W.2d 662, 663-64 (Tex. 1998)(per curiam)). “When an injury is only the economic loss to
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the subject of a contract itself, the action sounds in contract alone.” D.S.A., Inc., 973 S.W.2d at 66364. Here, Plaintiffs’ fraud claim flows directly from the Note and Security Instrument because, absent
the original agreements, any discussion of modification would not have existed. See Horne, 2013 WL
165312, at *5. Further, the injuries Plaintiffs allege–loss of equity in the home and loss of insurance
proceeds–also flow from the contracts. See id. Thus, the Court agrees with Defendant that Plaintiffs’
claim is barred as a matter of law by the economic loss doctrine.4
Accordingly, the Court DISMISSES Plaintiffs’ fraud claims as well as their request for
exemplary damages.
IV.
CONCLUSION
For the foregoing reasons, Defendant’s Motion to Dismiss (doc. 4) is GRANTED. Plaintiffs’
claims and this case are DISMISSED with prejudice.
SO ORDERED.
SIGNED: December 2, 2013.

_________________________________
JANE J. BOYLE
UNITED STATES DISTRICT JUDGE

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Because the Court finds that Plaintiffs’ fraud claim is so barred, it does not reach Defendant’s
arguments regarding Plaintiffs’ other pleading deficiencies or the statute of frauds.

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