Pennington et al v. HSBC Bank USA, N.A. et al

Filing 63

REPORT AND RECOMMENDATIONS re 47 Motion to Dismiss filed by Wells Fargo Bank N.A., HSBC Bank USA, N.A.. The Magistrate Judge RECOMMENDS that the District Court GRANT the Motion to Dismiss. Signed by Judge Andrew W. Austin. (dm, )

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
ELLERY G. PENNINGTON AND
§
LAURA M. PENNINGTON, on behalf of
§
themselves and all others similarly situated §
§
v.
§
§
HSBC BANK USA, NATIONAL
§
ASSOCIATION and WELLS FARGO
§
BANK, N.A.
§

A-10-CA-785 LY

REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
TO:

THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are: Defendants HSBC Bank USA, N.A.’s and Wells Fargo Bank, N.A.’s

Motion to Dismiss (Clerk’s Doc. No. 47); Plaintiffs’ Response to Defendants’ Motion to Dismiss
(Clerk’s Doc. No. 51); and Defendants’ Reply in Support of Their Motion to Dismiss (Clerk’s Doc.
No. 53). The District Court referred these Motions to the undersigned Magistrate Judge for report
and recommendation.
Plaintiffs are home owners who took out home equity loans and then defaulted on those
loans. After the default, the borrowers and their lenders entered into arrangements called Trial
Period Plans (“TPPs”) through which the borrowers would pay reduced payments, the lenders agreed
they would not foreclose, and the lenders agreed they would consider loan modifications for these
borrowers. Ultimately the borrowers were denied the loan modifications. They now sue their
lenders and loan servicers complaining that the TPPs violated the Texas Constitution, that the
lenders breached both express and implied contracts with them, violated the DTPA, made negligent
misrepresentations, and are estopped by promissory estoppel from foreclosing.

I. FACTUAL BACKGROUND1
Plaintiffs purport to bring this case as a class action, although at this early stage of the case
it has not been certified as such. The suit is filed against Wells Fargo Bank, N.A., its division Wells
Fargo Home Mortgage, and HSBC Bank USA (collectively “Defendants”) on behalf of Texas
resident home equity loan borrowers who were offered loan modifications by Defendants after
March 3, 2007.

The Plaintiffs are Ellery and Laura Pennington and Traci Smith (collectively

“Plaintiffs”). Ellery and Laura Pennington defaulted on their home equity loan for lack of payment
and failed to cure the default. Traci Smith alleges she was not in default at the time she sought a
loan modification to reduce the payment on her home equity loan. All Plaintiffs attempted to renegotiate their loans.
In late 2008, Wells Fargo signed a contract with the United States Treasury agreeing to
participate in the federal Home Affordable Modification Program (“HAMP”), a program enacted
pursuant to the Troubled Asset Relief Program (“TARP”), 12 U.S.C. § 5211, in return for receipt
of certain governmental bailout funds. This agreement required Defendants to comply with HAMP
program requirements and to perform loan modification and other foreclosure prevention services
described in the program guidelines. These requirements included: identifying loans subject to
modification under HAMP; collecting information from homeowners to determine eligibility under
HAMP; instituting a modified loan with a reduced payment amount that is effective for a threemonth trial period; and providing a permanently modified loan for homeowners who comply with
the trial period requirements. Complaint at ¶ 19.

1

The facts set out here are taken from Plaintiffs’ Fourth Amended Class Action Complaint
and Application for Injunctive Relief, and the Court takes these allegations as true in reviewing the
motion to dismiss.
2

As HAMP participants, Defendants entered into Trial Period Plans with Plaintiffs. These
TPPs allowed Plaintiffs to make payments that were less than those required by the original loans
and required Plaintiffs to provide Defendants with certain information. In return Defendants agreed
not to foreclose on Plaintiffs’ homes during the TPP and to consider Plaintiffs for permanent loan
modifications. Specifically, Plaintiffs were required to send the following documents to Defendants:
a signed Trial Period Plan, a signed Hardship Affidavit, a signed and dated IRS Form 4506-T,
documentation to verify the income of each borrower, and pre-determined trial period payments for
a three-month period. Complaint, Exhibits 2 and 5. It is uncontested that Plaintiffs met all the
requirements set forth above. Plaintiffs assert that they made payments and took all other actions
required of them by the TPPs, but their requests for loan modifications were ultimately denied.
Plaintiffs Ellery G. and Laura M. Pennington spent over 18 months in the loan modification
process with Defendants until their requested loan modification was ultimately denied and
Defendants gave notice of their intent to foreclose on the Pennington’s home. Smith quit making
payments on her home equity loan in mid-2009, received a letter in February 2011 enclosing “Step
Two” of the Home Affordable Modification Agreement and setting out loan terms. In May 2011,
she received a call from Wells Fargo stating she would not be given a permanent loan modification,
and was threatened with foreclosure on her home.
Plaintiffs allege that Defendants required borrowers to get behind on their payments before
the would even consider a borrower for a TPP. Plaintiffs allege that Defendants offered home equity
loan borrowers loan modifications under HAMP that Defendants knew or should have known2

2

Plaintiffs allege that the Texas Joint Regulatory Agencies issued an explicit advisory to this
effect in April of 2009.
3

violated Article XVI Section 50(a)(6)(L) of the Texas Constitution.3 Plaintiffs contend that this
provision of the Texas Constitution mandates that interest arrearages cannot be rolled up into a home
equity loan modification’s payments because a modification to a home equity loan in Texas cannot
increase the principal. Thus, a home equity loan with interest arrears would not be a proper subject
for modification unless: 1) the borrower caught up on past due payments; or 2) the lender waived
accrued interest as of the date of the modification. Plaintiffs allege that Defendants induced or
required borrowers to incur interest arrearages in order to qualify them for loan modifications under
HAMP, but without disclosing how this would make a permanent loan modification all but
impossible. Additionally, Plaintiffs allege that when Defendants failed to grant a permanent loan
modification after the three-month trial period, Defendants required or advised Plaintiffs to continue
making trial period payments. Complaint at ¶ 29.
Plaintiffs bring this class action on behalf of themselves and all others similarly situated,
asserting violations of the Texas Constitution Article XVI Section 50(a)(6)(L), the Texas Deceptive
Trade Practices Act, TEX . BUS. & COM . CODE § 17.41-17.63 (“DTPA”), as well as common-law
claims of negligent misrepresentation, promissory estoppel, and breach of contract. Plaintiffs seek
damages and equitable relief. Plaintiffs request a payment by Defendants of $1,000.00 per loan to

3

This provision states:

The homestead of a family, or of a single adult person, shall be, and is hereby
protected from forced sale, for the payment of all debts except for . . . an extension
of credit that . . . is scheduled to be repaid: (i) in substantially equal successive
periodic installments, not more often than every 14 days and not less often than
monthly, beginning no later than two months from the date the extension of credit is
made, each of which equals or exceeds the amount of accrued interest as of the date
of the scheduled installment; or (ii) if the extension of credit is a home equity line of
credit, in periodic payments described under Subsection (t)(8) of this section. . . .
4

all class members, and request refinancing of their loans or another remedy that otherwise complies
with the Texas Constitution. Plaintiffs request monetary damages in the form of the return of
payments made by borrowers under HAMP trial period modifications, and interest and charges
incurred by or assessed against class members during the pendency or processing of a HAMP or
other loan modification. Plaintiffs also request that the Court temporarily and permanently enjoin
foreclosures on class members’ homes securing the subject home equity loans, and costs and
expenses.
II. MOTION TO DISMISS
Defendants move to dismiss based upon Federal Rule of Civil Procedure 12(b)(6) for failure
to state a claim for relief. Rule 12(b)(6) allows for dismissal of an action “for failure to state a claim
upon which relief can be granted.” While a complaint attacked by a Rule 12(b)(6) motion does not
need detailed factual allegations, in order to avoid dismissal, the plaintiff's factual allegations “must
be enough to raise a right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 555 (2007); see also, Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007). A plaintiff’s
obligation “requires more than labels and conclusions, and a formulaic recitation of the elements of
a cause of action will not do.” Id. The Supreme Court expounded on the Twombly standard,
explaining that a complaint must contain sufficient factual matter to state a claim to relief that is
plausible on its face. Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949 (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 for the misconduct alleged.” Id. In evaluating a
motion to dismiss, the Court must construe the complaint liberally and accept all of the plaintiff's
factual allegations in the complaint as true. See In re Katrina Canal Breaches Litigation, 495 F.3d
191, 205 (5th Cir. 2009).
5

A.

Texas Constitution Article XVI Section 50(a)(6)(L)

Plaintiffs allege that “modifications to home equity loans by Wells Fargo to borrowers in
Texas that included accrued interest (arrearages), whether ‘temporary’ or ‘permanent,’ violated the
Texas Constitution insofar as they included interest arrearages or other non-principal charges or
fees.” Complaint at ¶ 62. Plaintiffs allege that any modification of a home equity loan that includes
interest that has not been paid by the borrower violates Section 50(a)(6)(L) of the Texas Constitution,
which requires that an extension of credit be “scheduled to be repaid: (i) in substantially equal
successive periodic installments . . . . each of which equals or exceeds the amount of accrued interest
as of the date of the scheduled installment.” TEX . CONST ., ART . XVI, § 50(a)(6)(L)(i).
Defendants argue that the TPPs did not violate the Texas Constitution because the TPPs
were not, by their express terms, modifications of Plaintiffs’ home equity loans; rather they were
forbearance arrangements. And, Defendants argue, section 50(a)(6)(L) of the Texas Constitution
prohibits foreclosure of loans where the payment structure violates that provision, but says nothing
about a loan servicer accepting partial payments.
The Texas constitutional provision at issue prohibits the “forced sale” of a “homestead” for
the “payment of a debt,” unless the debt is one of those listed in that provision. TEX . CONST . ART .
XVI, § 50(a). Plaintiffs do not claim that their original loans violated this provision; rather, they
assert that a modification of the type contemplated by the TPP would have violated this provision,
because it would have been an extension of credit that was scheduled to be paid in installments
which would not have exceeded the amount of accrued interest as of the date of the payment. But
whether such a modification would have violated this provision is irrelevant if no modification ever
took place. In other words, for Plaintiffs’ claim under the Texas Constitution to prevail, they must
show that their loans were in fact modified.
6

Plaintiffs’ own pleading, however demonstrates that their loans were never modified. As
Defendants point out, Plaintiffs’ Fourth Amended Complaint states that “Wells Fargo did not grant
permanent modifications to borrowers following the three-payment trial period.” Complaint at ¶ 35.
Plaintiffs respond by claiming that the TPP Agreement itself constituted a loan modification.
Plaintiffs attach copies of the TPP agreements to their complaint. See Complaint Exhibits 2 and 5.
Plaintiffs rely upon language contained in the third paragraph, stating:
I understand that once Lender is able to determine the final amounts of unpaid
interest and any other delinquent amounts (except late charges) to be added to my
loan balance and after deducting from my loan balance any remaining money held
at the end of the Trial Period under Section 2.D above, the lender will determine the
new payment amount. If I comply with the requirements in Section 2 and my
representations in Section 1 continue to be true in all material respects, the Lender
will send me a Modification Agreement for my signature which will modify my loan
documents as necessary to reflect this new payment amount and waive any unpaid
late charges accrued to date. The Modification will provide that, as of the
Modification Effective Date, a buyer or transferee of the Property will not be
permitted, under any circumstance, to assume the loan. Upon execution of a
Modification Agreement by the Lender and me, this Plan shall terminate and the
Loan Documents, as modified by the Modification Agreement, shall govern the terms
between the Lender and me for the remaining term of the loan.
Complaint, Exhibit 2 at ¶ 3.
Defendants argue that the plain language of the TPP and Step Two document expressly
indicate that they are not modifications of Plaintiffs’ home equity loans, but rather are forebearance
arrangements. Defendants point to ¶ 2.G of the TPP, which states:
I understand that the Plan is not a modification of the Loan Documents and that the
loan documents will not be modified unless and until (i) I meet all of the conditions
required for modification, (ii) I receive a fully executed copy of a Modification
Agreement and (iii) the Modification Effective Date has passed. . . .
Id. Similarly, the Step Two document states that “the Loan Documents will not be modified unless
and until (i) the Lender accepts this Agreement by signing and returning a copy of it to me, and (ii)

7

the Modification Effective Date . . . has occurred.” Complaint, Exhibit 5 at § 2(B). It is undisputed
that neither the Pennington TPP nor the Smith Step Two document were signed by the Lender. Thus,
the Plaintiffs’ own pleadings demonstrate that the parties did not enter into any modification of their
loan agreements.
Plaintiffs assert that the language of the TPP is self-contradictory on this point. However,
both sections of the TPP cited above contemplate receipt by a borrower of a loan modification
agreement fully executed by the Lender before any loan modification could occur. Thus, even when
a borrower otherwise fulfilled the requirements of the forbearance agreement, there remained the
possibility that the Lender might choose not to sign the loan modification agreement. As already
noted, the TPPs, by their plain language, were not contracts guaranteeing that Plaintiffs’ loans would
be modified. Further, the TPPs make it clear that the original loan documents remained in effect
during the period of the TPPs. Complaint, Exhibit 5 at ¶ 2.E (“When the lender accepts and posts
a payment during the Trial Period it will be without prejudice to, and will not be deemed a waiver
of, the acceleration of the loan or foreclosure action and related activities and shall not constitute a
cure of my default under the Loan Documents . . .”). Because the complaint demonstrates that no
loan modification occurred, as a matter of law the complaint fails to state claim for a violation of §
50 of Article XVI the Texas Constitution.
Nor does the fact that the Defendants accepted partial payments during the TPP trial mean
that they violated the Texas Constitution . Although the partial payments constituted less than the
accrued interest and paid off no principal, these were plainly temporary payments to stave off
foreclosure, and were not themselves an extension of credit contemplated by Section 50(a)(6)(L).
Section 50(a)(6)(L) addresses a loan payment schedule at the inception of a loan. The scheduled
loan payments were not changed by the TPP, which provides that Wells Fargo will “hold the
8

payments received during the Trial Period in a non-interest bearing account until they total an
amount that is enough to pay my oldest delinquent monthly payment on my loan in full.” Complaint,
Exhibit 2 at ¶ 2.D.
For all of these reasons, the undersigned recommends that the Court grant the motion to
dismiss the Plaintiffs’ claim under the Texas Constitution.
B.

Breach of Express Contract

In this claim, Plaintiffs contend that in the TPP the Defendants contracted to provide a loan
modification, and Defendants breached that contract. Plaintiffs allege that “Defendants were
obligated [under the TPP] to give permanent loan modifications to borrowers who satisfied the
various contractual conditions precedent.” Complaint at ¶ 85. Plaintiffs claim that they complied
with their obligations under the TPP “by submitting all required documentation, answering all
questions truthfully, and by making their payments . . . .” Id. at ¶ 21. Defendants respond that they
had no obligation to modify the Plaintiffs’ loans unless and until they determined that the Plaintiffs
had met the TPP requirements and sent the borrower a permanent Loan Modification Agreement
executed by the borrower and the lender.
Judge Xavier Rodriguez of the San Antonio division of this Court recently faced this very
issue. As he noted,
[t]here is no Fifth Circuit precedent, and sparse precedent nationwide, on
diversity-based breach of contract claims based upon HAMP TPPs. Of that
precedent which exists, almost every district court has affirmed 12(b)(6) dismissal
of such breach claims on the basis that the borrower’s failure to receive an executed
Home Affordable Modification Agreement prevented the borrower’s compliance
with all TPP obligations.

9

Rackley v. JPMorgan Chase Bank, Nat. Ass'n, 2011 WL 2971357 (W.D. Tex. 2011). Numerous
other courts have reached the same conclusion.4 Moreover, the few precedents cited by Plaintiffs
in support of this argument do not hold that the TPP included a promise to modify a loan. Rather,
they hold that the TPP obligated the lender to consider modifying the loan and to provide a decision
to the borrower after that consideration. See Bosque v. Wells Fargo Bank, N.A., 2011 U.S. Dist.
LEXIS 124603, at *2–3 (D .Mass. Jan. 26, 2011); Durmic v. JPMorgan Chase Bank, N.A., No.
10–CV–10380–RGS, 2010 WL 4825632 (D. Mass. Nov. 24, 2011).
The plain language of the TPP defeats the Plaintiffs’ breach of contract claim. Paragraph 2.F
of the TPP states that:
If prior to the Modification Effective Date, (i) the lender does not provide me with
a fully executed copy of this Plan and the Modification Agreement, (ii) I have not
made the Trial Period payments required under Section 2 of this Plan, or (iii) the
Lender determines that my representations in Section 1 are no longer true and correct,
the Loan Documents will not be modified and the Plan will terminate.
Complaint, Exhibit 2 at ¶ 2.F. Under this language, even if the Plaintiffs fulfilled all of their
obligations in of the TPP, the TPP and Step Two documents did not guarantee the permanent
modification of Plaintiffs’ loans, nor did it obligate the lender to modify the loan. Both documents
require that certain events occur prior to the modification, making the modification dependent upon

4

See, e.g. Wigod v. Wells Fargo Bank, N.A., No. 10–CV–2348, 2011 U.S. Dist. LEXIS 7314,
at *20 (N.D. Ill. Jan.24, 2011); Vida v. OneWest Bank, F.S.B., No. 10–987–AC, 2010 U.S. Dist.
LEXIS 132000, at *15 (D. Or. Dec.13, 2010); Torres v. Litton Loan Servicing L.P., No.
10–cv–01709–OWW–SKO, 2011 U.S. Dist. LEXIS 4616, at *6 (E.D. Cal. Jan 18, 2011); Grill v.
BAC Home Loans Servicing L.P., No. 10–CV–03057–FCD/GGH, 2011 U.S. Dist. LEXIS 3771, at
*21 (E.D. Cal. Jan 14, 2011); Prasad v. BAC Home Loans Servicing L.P., No.
2:10–CV–2343–FCD/KJN, 2010 U.S. Dist. LEXIS 133938, at *12–13 (E.D. Cal. Dec.7, 2010);
Brown v. Bank of N.Y. Mellon, No. 1:10–CV–550, 2011 U.S. Dist. LEXIS 6006, at *8 (W.D. Mich.
Jan. 21, 2011); Lonberg v. Freddie Mac, No. 10–6033–AA, 2011 U.S. Dist. LEXIS 23137, at
*16–17 (D. Or. March 3, 2011); Bourdelais v. JPMorgan Chase Bank, N.A., No.
3:10–CV–670–HEH, 2011 U.S. Dist. LEXIS 35507, at *14 (E.D. Va. Apr.1, 2011).
10

the discretion of the Defendants. As a matter of law, Defendants did not breach any obligation in
the TPP or Step Two document when they did not modify the Plaintiffs’ loans. This claim should
be dismissed.
C.

DTPA Claim

Defendants next claim that Plaintiffs DTPA claim should be dismissed because Plaintiffs do
not qualify as “consumers” under the DTPA. In order to establish a claim under the DTPA, a
plaintiff must establish, among other things, that he or she is a “consumer.” Amstadt v. U.S. Brass
Corp., 919 S.W.2d 644, 649 (Tex. 1996). A person qualifies as a consumer under the DTPA by
meeting two requirements. First, the person must seek or acquire goods or services by lease or
purchase. TEX . BUS. & COM .CODE ANN . § 17.45(4). Second, the goods or services sought or
acquired must form the basis of the party’s complaint. Melody Home Mfg. Co. v. Barnes, 741
S.W.2d 349, 351–52 (Tex. 1987). Whether a person meets these requirements is a question of law.
Johnson v. Walker, 824 S.W.2d 184, 187 (Tex. App. – Fort Worth 1991, writ denied); see also Ortiz
v. Collins, 203 S.W.3d 414, 424 (Tex. App. – Houston [14th Dist.] 2006, no pet.). In determining
whether a plaintiff is a consumer, the focus is on the plaintiff’s relationship to the transaction.
Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 815 (Tex. 1997).
Generally, a person cannot qualify as a consumer if the underlying transaction is a loan
because money is considered neither a good nor a service. Riverside Nat’l Bank v. Lewis, 603
S.W.2d 169, 173–74 (Tex. 1980) (holding that the refinance of a car loan did not confer consumer
status on the debtor). Additionally, obtaining an extension of credit does not qualify one as a
“consumer.” See La Sara Grain Co. v. First Nat'l Bank of Mercedes, 673 S.W.2d 558, 567 (Tex.
1984); Maginn v. Norwest Mortgage Inc., 919 S.W.2d 164, 166 (Tex. App. – Austin 1996, no writ).
Other courts have applied the Riverside holding to modifications of existing loans, holding that loan
11

modifications are neither goods nor services and cannot form the basis of a claim under the DTPA.
See Fix v. Flagstar Bank, FSB, 242 S.W.3d 147, 160 (Tex. App. – Fort Worth 2007, pet. denied);
see also Broyles v. Chase Home Finance, No. 3:10BCV2256BG, 2011 WL 1428904, at *4 (N.D.
Tex. Apr. 13, 2011) (“subsequent actions related to mortgage accounts—for example, extensions of
further credit or modifications of the original loan—do not satisfy the ‘good or services’ element of
the DTPA”); Cavil v. Trendmaker Homes, Inc., No. GB10B304, 2010 WL 5464238, at *4 (S.D. Tex.
Dec. 29, 2010) (“a mortgage or modification of a mortgage is not a good or service under the
DTPA”; Ayres v. Aurora Loan Services, LLC, No. 6:10-CV-593, 2011 WL 2120000, at *3 (E.D.
Tex. May 27, 2011) (“refinancing is simply an extension of credit that does not qualify Plaintiff as
a consumer”). The Fifth Circuit has also held that pure loan transactions are not covered by the
DTPA. Walker v. FDIC, 970 F.2d 114, 123-24 (5th Cir. 1992).
In this case, Plaintiffs argue that the TPPs were not mere loan transactions, but instead
included financial “services.” See Response at p. 9-10. The service, Plaintiffs contend, was
Defendants’ offer of their efforts to determine whether Plaintiffs’ loans could be re-configured or
worked out as required by the federal government pursuant to the HAMP program. Plaintiffs rely
upon Herndon v. First Nat. Bank of Tulia, 802 S.W.2d 396, 399 (Tex. App. – Amarillo 1991). In
Herndon, the borrower claimed that he sought to acquire from the lender a variety of financial
services. These services included financial advice on when and where to obtain financing, whether
to abstain from borrowing, and how to structure various financial agreements of his business
operations. The court held that the bank’s financial advice constituted services for purposes of the
DTPA.
The purchase of services, in the context of the DTPA, has been defined as the actual
transmission of services from one person to another by voluntary act or agreement, founded on
12

valuable consideration. Hall v. Bean, 582 S.W.2d 263, 265 (Tex .Civ. App. — Beaumont 1979, no
writ); see also TEX . BUS. & COM .CODE ANN . § 17.45(2) (West 2002) (“ ‘Services’ means work,
labor, or service purchased or leased for use, including services furnished in connection with the sale
or repair of goods.”). The Third Court of Appeals noted in First State Bank v. Keilman, 851 S.W.2d
914, 929 (Tex. App. — Austin 1993, writ denied), that “the key principle in determining consumer
status is that the goods or services purchased must be an objective of the transaction, not merely
incidental to it.” (quoting FDIC v. Munn, 804 F.2d 860, 863–64 (5th Cir. 1986)).
Herndon is distinguishable from the instant case. Financial advice on when to borrow,
whether to borrow, and how to structure financial arrangements of business operations is not
typically incidental to the loan itself. The type of financial advice found to be a “service” in
Herndon is far beyond what is alleged to have taken place here. In this case, the end and aim of
Plaintiffs’ dealings with Defendants was to obtain a loan modification of an already existing loan.
Defendants’ offer of the TPPs were ancillary services that served no purpose apart from facilitating
a loan modification of an existing loan. Therefore, as a matter of law, any services provided by
Defendants were incidental to the contemplated loan modification; they were not an objective of the
transaction. As such, Plaintiffs do not qualify as “consumers” under section 17.45(4) of the Texas
Business and Commerce Code and do not have standing under the DTPA.
D.

Negligent Misrepresentation Claim

Plaintiffs assert that “Defendants represented to borrowers in the course of Defendants’ loan
servicing and lending business that if borrowers complied with the terms of the TPP Agreements,
they would be given permanent loan modifications.” Complaint at ¶ 70. Plaintiffs also complain
that Defendants failed to communicate “the effect of TPP Agreement payments, which was to further
increase interest arrearages.” Id. at ¶ 73. Defendants argue that Plaintiffs fail to state a negligent
13

misrepresentation claim because Defendants did not owe Plaintiffs a duty outside of their contractual
relationship contained in their notes and deeds of trust and the alleged misrepresentations did not
concern any existing facts. See Motion to Dismiss at p. 9.
Plaintiffs respond that: the pleadings do not identify who owned the notes and deeds of trust
in issue here; an existence of a contract between the parties does not preclude a claim of negligent
misrepresentation if Plaintiffs plead an injury distinct from the benefit of the bargain of the contract
between the parties; that Defendants and Defendants’ representative made various misrepresentations
of existing fact; and that Defendants guided Plaintiffs into a loan modification process that could
never result in a modified loan. Additionally, Plaintiffs point out, the TPP is the “agreement” in
issue, which Defendants allege is not a contract, and as such it cannot negate a negligent
misrepresentation claim.
Under Texas law, a claimant alleging negligent misrepresentation must show the following:
(1) the representation is made by a defendant in the course of his business, or in a transaction in
which the defendant has a pecuniary interest; (2) the defendant supplies “false information” for the
guidance of others in their business; (3) the defendant did not exercise reasonable care or
competence in obtaining or communicating the information; and (4) the plaintiff suffers a pecuniary
loss by justifiably relying on the representation. Biggers v. BAC Home Loans Servicing, LP, 767
F.Supp.2d 725, 734 (N.D. Tex. Feb. 10, 2011). “The misrepresentation at issue must be one of
existing fact” rather than a promise of future conduct.

Fankhauser v. Fannie Mae, No.

4:10–CV–274, 2011 WL 1630193, at *7 (E.D. Tex. Mar. 20, 2011).
There is no question that that Plaintiffs and Defendants had an existing contractual
relationship prior to the TPPs. Plaintiffs’ Fourth Amended Complaint explicitly states that in 2002
the Penningtons purchased their home with a loan from Well Fargo, and that in 2004, they received
14

a home equity loan from Wells Fargo that paid off their prior note. Complaint at ¶ 37. Smith also
received a loan from Wells Fargo. Id. at ¶ 48. Texas courts consistently have prohibited tort claims
if the parties’ relationship and attendant duties arise from a contract. See, e.g ., Quintanilla v. K–Bin,
Inc., 993 F.Supp. 560, 563 (S.D. Tex. 1998); Sw. Bell Tel. Co. v. Deanne, 809 S.W.2d 493, 493–95
(Tex. 1991); Ortega v. City Nat'l Bank, 97 S.W.3d 765, 777 (Tex. App. – Corpus Christi 2003, no
pet.).
In Texas, the tort of negligent misrepresentation requires an injury independent of a breach
of contract. D.S.A., Inc. v. Hillsboro Indep. Sch. Dist., 973 S.W.2d 662, 663–64 (Tex. 1998) (per
curiam). To determine whether a cause of action sounds in contract or tort, courts look to the source
of the duty allegedly breached, and to the nature of the remedy sought. Formosa Plastics Corp. USA
v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 45 (Tex. 1998). “When the injury is only
the economic loss to the subject of a contract itself, the action sounds in contract alone.” Id. (internal
quotations omitted). Plaintiffs argue that they may bring a negligent misrepresentation claim because
the injury they are alleging is distinct from any injury they would claim for breach of the Note, and
that injury has distinct and separate economic losses from a breach of contract claim. Plaintiffs point
out that they breached the Note by failing to make payments, and thus the injury under the Note is
not to them. Instead, they claim separate injuries pursuant to the TPP—the failure to receive a
promised permanent loan modification, being induced into incurring interest arrearages and being
threatened with foreclosure.
The Court finds that Plaintiffs cannot bring a negligent misrepresentation claim for the loss
of their house because that transaction is dictated by the terms Note, for which the house was the
security. Foreclosure under the Note cannot qualify as an independent injury. That claim sounds
in the existing contract. Similarly, with regard to Plaintiffs’ claim that due to Defendants’ negligent
15

misrepresentations they failed to receive a permanent loan modification, this claim is also about the
modification of an existing contract and sounds in contract. Additionally, Plaintiffs cannot recover
benefit of the bargain damages for a negligent misrepresentation claim. D.S.A., Inc. v. Hillsboro
Independent School Dist., 973 S.W.2d 662, 663-664 (Tex. 1998). Thus Plaintiffs cannot attain their
requested remedy of a permanent loan modification through a negligent misrepresentation claim.
However, Plaintiffs’ allegations that they have been damaged because they were led on by
Defendants through the TPP process and thus incurred interest arrearages is less clear.5 Defendants
assert that Plaintiffs have failed to allege misrepresentations of existing fact sufficient to survive a
motion to dismiss. Plaintiffs base their claim on allegations that Defendants repeatedly misled
Plaintiffs regarding the status of their loan modification process, the possibility of qualifying for a
loan modification, and statements that they qualified for the HAMP program.
These allegations all constitute promises of future conduct rather than misstatements of
existing facts, and as such they are not actionable. Miller v. Raytheon Aircraft Co., 229 S.W.3d 358,
379 (Tex. App. – Houston [1st Dist.] 2007, no pet.) (“To establish a negligent misrepresentation
claim, the plaintiff must also prove that the defendant misrepresented an existing fact rather than a
promise of future conduct.”). See also Reynolds v. Murphy, 188 S.W.3d 252, 270 (Tex. App. – Fort

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Defendants assert that this argument is an impermissible attempt to circumvent the statute
of frauds with a tort claim. The Statute of Frauds requires that contracts which cannot be completed
within one year be in writing. TEX . BUS. & COM . CODE ANN . § 26.01(b)(6) (Vernon 2002). Where
the parties do not fix the time of performance and the agreement itself does not indicate that it cannot
be performed within one year, the contract does not violate the Statute of Frauds. Niday v. Niday,
643 S.W.2d 919, 920 (Tex. 1982) (per curiam). The Statute of Frauds does not bar a claim for fraud
or negligent misrepresentation to the extent a party seeks to recover reliance or out-of-pocket
damages because such damages are not part of the benefit of the alleged bargain between the parties.
Bank of Tex., N.A. v. Gaubert, 286 S.W.3d 546, 557 (Tex. App. –- Dallas 2009, pet. dism’d w.o.j.).
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Worth 2006, pet. denied); Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 435 (Tex. 1986).
Accordingly, Plaintiffs’ negligent misrepresentation claims must be dismissed.
D.

Promissory Estoppel

Plaintiffs’ promissory estoppel claim is based upon the assertion that Defendants “promised
to offer loan modifications to borrowers who satisfied all TPP Agreement requirements” and that
these actions “induced borrowers to remain in the illusory loan modification process rather than take
steps to limit or eliminate interest arrearages.” Complaint at ¶¶ 78, 81. The elements of a
promissory-estoppel claim are (1) a promise; (2) foreseeability of reliance by the promisor;
(3) actual, substantial, and reasonable reliance by the promisee to its detriment; (4) injustice that can
be avoided only by enforcement of the promise. In re Weekley Homes, L.P., 180 S.W.3d 127, 133
(Tex. 2005).
Defendants argue that any promise alleged by Plaintiffs must be contained in the TPPs
because Plaintiffs fail to identify in their pleadings any promise outside the TPPs. Assuming the
promises on which Plaintiffs rely are contained in the TPP, Defendants continue, then Plaintiffs have
failed to adequately plead a cause of action for promissory estoppel because the TPPs do not make
a promise of a loan modification. Plaintiffs respond that they are pleading that Defendants promised
not that they would modify Plaintiffs’ loans, but that they could. Plaintiffs plead that in reliance on
this promise, they incurred interest arrearages that they otherwise would have mitigated. Plaintiffs
do not point to any promise outside the TPPs.
Texas courts have recognized promissory estoppel as an affirmative claim in certain limited
circumstances:
Where the promisee has failed to bind the promisor to a legally sufficient contract,
but where the promisee has acted in reliance upon a promise to his detriment, the

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promisee is to be allowed to recover no more than reliance damages measured by the
detriment sustained.
Wheeler v. White, 398 S.W.2d 93, 96 (Tex. 1985). Promissory estoppel, however, may not be used
to create a contract that does not otherwise exist. Id. at 96; see also Rice v. Metro. Life Ins. Co., --S.W.3d ----, No. 02-09-0248-CV, 2010 WL 3433058, at * 10 (Tex. App. – Fort Worth August 31,
2010, no pet. h.) (mem. op.) (noting that breach of contract and promissory estoppel are mutually
exclusive claims).
As the Court has found above, the TPP in no way sets forth a promise that a future loan
modification would take place. Because there is no guarantee of a loan modification in the TPP,
Plaintiffs cannot claim they relied to their detriment on such a promise. This is also true for any
promise to Plaintiffs that they could qualify for a loan modification—a loan modification, by the
plain terms of the TPP, was never a certainty and Plaintiffs relied upon a promise of what might
happen at their own peril. Plaintiffs have failed to plead a promise and have failed to plead
reasonable reliance on any promises set forth by the TPP or any promise outside the TPP. Plaintiffs’
promissory estoppel claim should be dismissed.
F.

Quasi-contract Claims

Plaintiffs assert they may bring a claim for breach of implied contract and are entitled to
damages pursuant to the theories of quantum meruit and/or unjust enrichment. In their Complaint,
Plaintiffs state:
90.

Plaintiffs and class members continued to make payments under the TPP
Agreements after Defendants failed to grant permanent loan modifications
following Plaintiffs’ and class members’ performance of all conditions
precedent.

91.

Defendants accepted Plaintiffs’ payments but still denied a permanent loan
modification.
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Complaint at ¶¶ 90-91. Plaintiffs’ argue that an implied contract arose when Plaintiffs continued to
make payments after the trial period under the TPPs ended, and that Defendants implicitly agreed,
irrespective of the written agreements, to give Plaintiffs permanent loan modifications if they
continued to make trial payments pursuant to the TPPs. Complaint at ¶ 90. Defendants argue that
Plaintiffs’ claim fails as a matter of law because Plaintiffs cannot recover damages under a theory
of quantum meruit or unjust enrichment because Plaintiffs had a pre-existing duty to make loan
payments under their original loan documents.
Fundamentally, this claim is based on Plaintiffs’ argument that they overpaid Defendants
when they kept paying monthly payments after the three-month period of the TPP agreement lapsed.
The remedy they seek in this claim is damages in the form of these “overpayments.” Defendants
assert that Plaintiffs were required to make even larger monthly payments under the terms of their
original notes and that Defendants could not possibly be “inequitably” or “unjustly” enriched by
money that was owed to them under a contract.
Quantum meruit “is based upon the promise implied by law to pay for beneficial services
rendered and knowingly accepted.” Campbell v. Nw. Nat'l Life Ins. Co., 573 S.W.2d 496, 498 (Tex.
1978). Plaintiffs cannot make out a quantum meruit claim for damages because they have failed to
plead that they provided any benefit or services to Defendants. Similarly, Plaintiffs cannot make out
a claim for damages under an unjust enrichment theory. A plaintiff may recover for unjust
enrichment by showing that the defendant obtained a benefit from the plaintiff “by fraud, duress, or
the taking of an undue advantage.” Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39,
41 (Tex. 1992). Generally, a party may recover under quantum meruit or unjust enrichment only if
no express contract covering the services or materials furnished exists. Truly v. Austin, 744 S.W.2d
934, 936 (Tex. 1988). As noted multiple times herein, there were existing contracts governing the
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parties’ relationship. Moreover, Plaintiffs fail to plead that they provided a benefit to Defendants
they were not already entitled to—specifically, payments under the mortgage. As just noted, the
original notes called for payments higher than those made under the TPPs, and thus no unjust
enrichment could have occurred here. These quasi-contract claims should therefore be dismissed.
G.

Injunctive Relief

Lastly, Plaintiffs request a preliminary injunction for various forms of injunctive relief
including an injunction against Defendants from foreclosing on Plaintiffs’ and putative class
members’ homes. Defendants request that Plaintiffs’ claims for injunctive relief be dismissed
because Plaintiffs cannot show a substantial likelihood that they will prevail on the merits. In light
of this Court’s determination that Plaintiffs’ claims should be dismissed, the Court finds that
Plaintiffs’ request for injunctive relief should also be dismissed.
III. RECOMMENDATION
The undersigned Magistrate Judge RECOMMENDS that the District Court GRANT
Defendants HSBC Bank USA, N.A.’s and Wells Fargo Bank, N.A.’s Motion to Dismiss (Clerk’s
Doc. No. 47) and DISMISS WITH PREJUDICE all of Plaintiffs’ claims.
IV. WARNINGS
The parties may file objections to this Report and Recommendation. A party filing
objections must specifically identify those findings or recommendations to which objections are
being made. The District Court need not consider frivolous, conclusive, or general objections. See
Battle v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen (14) days after the party is served with a copy of the Report
shall bar that party from de novo review by the District Court of the proposed findings and
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recommendations in the Report and, except upon grounds of plain error, shall bar the party from
appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the
District Court. See 28 U.S.C. § 636(b)(1)(c); Thomas v. Arn, 474 U.S. 140, 150-53 (1985);
Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).
To the extent that a party has not been served by the Clerk with this Report &
Recommendation electronically pursuant to the CM/ECF procedures of this District, the Clerk is
directed to mail such party a copy of this Report and Recommendation by certified mail, return
receipt requested.
SIGNED this 22nd day of December, 2011.

_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE

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