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From Banking and Finance Law Daily, July 29, 2014

Appellate court saves consumer’s suit over failure to modify mortgage

By Richard A. Roth, J.D.

Pointing out that the facts alleged in a complaint are what matter, not the legal theories that are advanced, the U.S. Court of Appeals for the Eighth Circuit has kept alive a homeowner’s suit against a mortgage servicer for failing to come through with a permanent mortgage loan modification. Even though the consumer never said specifically that he was suing JPMorgan Chase Bank for breach of contract, his factual assertions were enough to give the bank notice of the basis of his claim, the court said. However, the trial court’s dismissal of the homeowner’s claims for fraudulent misrepresentation, negligent misrepresentation, and unjust enrichment was affirmed (Topchian v. JPMorgan Chase Bank, N.A., July 28, 2014, Wollman, Circuit Judge).

The homeowner’s complaint, which he drafted and filed himself, neglected to describe how his relationship with Chase began, so the court inferred that he had borrowed from the bank and later became unable to make his payments. As a result, the homeowner and the bank began discussing a mortgage loan modification under the Home Affordable Modification program.

HAMP process. There is a two-step process in a HAMP modification, the court outlined. In the first step, the servicer offers a homeowner a Trial Period Plan agreement that lets the homeowner make reduced monthly payments for a specified period and imposes other conditions. If the homeowner satisfies all of the first-step conditions, the servicer then offers a permanent modification.

Homeowner’s claims. According to the homeowner’s complaint, he made the trial period payments and did everything else required. At the end of the trial period, Chase sent him a permanent modification agreement, which was to take effect on March 1 under two conditions: first, that Chase signed and returned the agreement and, second, that the homeowner had made all of the TPP payments (which he already had done). The homeowner signed the agreement, returned it, and soon was assured by Chase that the agreement was “in its processing center.”

However, Chase rejected the March payment, according to the homeowner. He called the bank and spoke to an executive director who denied the bank ever had received the signed agreement. The homeowner signed another copy of the agreement and sent it to the bank, along with his payments for March and April. He then spoke again with the executive director, who acknowledged that the bank had received the agreement and payments, told the homeowner that the modification had been accepted, but refused to send any proof of that acceptance.

The homeowner said that he made eight additional monthly payments, through the end of the year, all of which were accepted by Chase.

The executive director then contacted the homeowner to tell him that he needed to update the documents in his file, which he did. Chase also told him to stop making payments while this updating was taking place, and he did that as well. Seven months later, Chase sent the homeowner a notice that his modification request had been denied. Two foreclosure attempts followed.

Trial court proceedings. The homeowner filed suit in state court, and the suit was removed to the federal court by Chase. The federal district court judge ordered the homeowner to file an amended complaint but, according to the appellate court, the amended complaint added factual allegations without describing any legal theories of recovery.

In a motion to dismiss the amended complaint, Chase considerately offered its opinion on what legal theories might be available to the homeowner and then told the trial court judge why each theory failed. The trial court judge agreed with the bank’s arguments and dismissed the suit. Notably, the bank did not include breach of contract among its suggested theories.

Construing a pro se complaint. Complaints drafted by persons representing themselves are to be “liberally construed,” the appellate court first noted. Moreover, whether a complaint adequately states a claim depends on the complaint’s well-pleaded facts, not on any legal theories that it advances, the court added. A court has a duty to examine a complaint to decide if the facts alleged would provide a basis for relief on any plausible theory.

For that reason, the appellate court rejected the bank’s position that the homeowner had waived any of his possible claims by not raising them in the trial court. If the facts asserted in the amended complaint were enough to state a claim, regardless of what legal theories might have been advanced or omitted, the complaint should not have been dismissed.

Breach of contract. Chase raised several arguments as to why there was no contract to modify the loan. Based on the complaint’s allegations, the appellate court rejected them all.

First, Chase asserted, the modification agreement specified that it only was accepted by the bank if the bank signed it and sent it back to the homeowner. Since the bank had not done so, there was no contract, Chase argued.

According to the court, the requirement that the bank sign and return the agreement was a condition precedent to the formation of a contract, and a condition precedent can be waived. The homeowner’s complaint described facts that established such a waiver. In fact, a waiver of the signature requirement could be shown in two different ways, the court said—first, when the executive director orally acknowledged that the agreement had been accepted but refused to send proof, and, second, when Chase accepted payments for 10 months. The bank does not accept payments that are less than what are required by contract, the court observed.

Even if the sign-and-return clause was a limit on how a contract could be accepted rather than a condition precedent, the complaint included enough to show a breach of contract, the court also said. A written offer of a contract could be accepted orally, and the executive director’s statements combined with the homeowner’s payments described such an acceptance.

The court added that the homeowner claimed he had made all of the required payments, and that those payments constituted partial performance of the contract that made the statute of frauds ban on oral agreements to modify mortgages inapplicable.

Legal theories rejected. The appellate court also considered whether the facts in the complaint could support claims for fraudulent misrepresentation, negligent misrepresentation, or unjust enrichment. These theories of recovery all were rejected.

The complaint’s facts did not give a good reason to conclude the executive director knew his statements were false or that he was reckless about whether they were false, the court said, so there was no fraudulent misrepresentation. Similarly, the complaint did not describe what he did, or did not do, to determine whether his statement that the agreement had been accepted was accurate. This meant that negligent misrepresentation was not described.

The claim for unjust enrichment due to Chase’s retention of the homeowner’s payments after he was told the permanent modification agreement had been accepted also failed. If there was no permanent modification agreement, the homeowner was obligated to make payments under the original mortgage, the court pointed out. The complaint did not describe any payments made to Chase that were not owed or that would be unjust for the bank to keep, the court said.

The case is No. 13-2128.

Attorneys: Alicia Anne Campbell (Campbell Law, LLC) for Samvel G. Topchian. Jennifer A. Donnelli (Bryan & Cave) for JPMorgan Chase Bank, NA.

Companies: JPMorgan Chase Bank, N.A.

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