Even though the terms of a mortgage loan agreement were not unconscionable under the West Virginia Consumer Credit and Protection Act (WVCCPA), the state law allows claims for “unconscionable inducement” even when the substantive terms of a contract are not themselves unfair, the U.S. Court of Appeals for the Fourth Circuit has ruled (McFarland v. Wells Fargo Bank, N.A., Jan. 15, 2016, Harris, P.).
Notably, the West Virginia Bankers Association and the Community Bankers of West Virginia filed an amicus brief in the case on behalf of Wells Fargo Bank, N.A., the mortgage lender and eventual servicer, and U.S. Bank, N.A., the trustee of a securitized loan trust that included the Wells Fargo loan. Similarly, several consumer advocacy groups filed an amicus brief on behalf of the borrower.
Underlying transaction. In seeking to consolidate his outstanding debt and leverage the apparent increase in the market value of his home, the borrower entered into two secured loan agreements—one with Wells Fargo and the other with another lender. Despite a later loan modification, the borrower continued to fall behind on his mortgage payments, and Wells Fargo initiated foreclosure proceedings against the borrower’s home.
Borrower’s complaint. Seeking to halt the foreclosure, the borrower brought an action against Wells Fargo and U.S. Bank, among others, alleging that the Wells Fargo loan constituted “an unconscionable contract” under the WVCCPA (W. Va. Code §46A-2-121(1)(a)). In support of his claim, the borrower advanced two theories of unconscionability.
Substantive unconscionability. Under his first and conventional theory of unconscionability, the borrower focused on the terms of the Wells Fargo loan in general and on the amount of the refinanced mortgage in particular. He contended that the loan was substantively unconscionable because the loan amount far exceeded the value of the property and did not provide a net tangible benefit. In other words, the Fourth Circuit related, the borrower maintained that “Wells Fargo loaned him too much money” and burdened him with an unaffordable mortgage.
Noting that the West Virginia Supreme Court of Appeals had not directly addressed the issue, the Fourth Circuit ultimately determined that, assuming the Wells Fargo loan exceeded the value of the borrower’s home, the amount of the loan amount, by itself, was not evidence of substantive unconscionability under the WVCCPA because: (i) it did not rise to the level of a “one-sided and overly harsh” contract term; (ii) the lender, not the borrower, is typically disadvantaged by an under-collateralized loan; (iii) while a borrower may be “harmed” by the consequences of a loan risk, that does not make the contract “unconscionable”; (iv) cancellation of the borrower’s obligation to repay the Wells Fargo loan altogether was not a permissible remedy under West Virginia law; and (v) the borrower’s contention that the Wells Fargo loan did not provide him with a “net tangible benefit” was not relevant to an analysis of substantive unconscionability under the WVCCPA.
Unconscionable inducement. Under his second and novel theory of unconscionability, the borrower maintained that even if the Wells Fargo Loan was not unconscionable when it was made, it could be invalidated on the independent ground that it was “unconscionably induced.” Under this theory, differing from a conventional claim of procedural unconscionability under the WVCCPA, the borrower alleged that the Wells Fargo loan was induced by misrepresentations pertaining to the “vastly inflated appraisal” of his home—apart from the loan agreement’s substantive terms. The borrower contended that his home was worth approximately $82,000 less than the pertinent appraisal.
The Fourth Circuit disagreed with the federal trial court’s determination that the borrower’s unconscionable inducement claim under the WVCCPA was required to be linked to substantive unconscionability. In contrast, the Fourth Circuit concluded that “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.”
In support of its conclusion, the Fourth Circuit emphasized that: (i) West Virginia’s high court “has come very close” to this determination in its other decisions; (ii) the high court has taken a “plain meaning approach to statutory construction” of the WVCCPA and other state laws; and (iii) comments to the Uniform Consumer Credit Code are “highly instructive” and illuminating on the unconscionable inducement issue.
Final disposition. As a result, the Fourth Circuit affirmed the judgment of the trial court on the issue of substantive unconscionability, vacated the judgment of the trial court on the issue of unconscionable inducement, and remanded the matter for consideration of whether the borrower’s execution of the Wells Fargo mortgage agreement was induced by unconscionable conduct.
The case is No. 14-2126.
Attorneys: Sarah K. Brown, Jennifer S. Wagner, and Bren J. Pomponio (Mountain State Justice, Inc.) for Philip McFarland. Megan Burns, Jason Manning, and John C. Lynch (Troutman Sanders, LLP) for Wells Fargo Bank, N.A. and U.S. Bank N.A. Jason E. Causey (Bordas & Bordas, PLLC) and Jonathan Marshall and Patricia M. Kipnis (Bailey & Glasser, LLP) for amici National Consumer Law Center, AARP, National Association of Consumer Advocates, and Center for Responsible Lending. Floyd E. Boone, Jr., Stuart A. McMillan, Sandra M. Murphy, and James E. Scott (Bowles Rice LLP) for amici Community Bankers of West Virginia, Inc. and West Virginia Bankers Association, Inc.
Companies: Community Bankers of West Virginia, Inc.; U.S. Bank, N.A.; Wells Fargo Bank, N.A.; West Virginia Bankers Association, Inc.
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