The Home Affordable Modification Program (HAMP) has been the subject of many of my blog posts. This is because, love it or hate it, HAMP is the program with which we're stuck. I've seen many homeowners in foreclosure who fell into a "perpetual trial modification" under HAMP. This is not entirely the failure of the HAMP program. The servicers and lenders that participate in HAMP have done an awful job of implementing it.
HAMP itself does not create a private cause of action. This means that, under federal law, homeowners cannot sue a lender for failing to follow HAMP's guidelines. But what about claims based on state law? In the past, I have seen plaintiff's firms arguing that even the state law claims are invalid because there is no private cause of action under HAMP. In some situations, those plaintiff's firms won on the issue.
As of March 7, 2012, that argument has been largely defeated, at least as far as Illinois is concerned. The U.S. Court of Appeals, Seventh Circuit weighed in on this issue in the favor of the homeowner in Wigod v. Wells Fargo Bank, N.A. There is currently no official citation for the opinion, but those of you with Westlaw access can find it at 2012 WL 727646. You can also find it on the court's website here.
In Wigod, Lori Wigod brought a federal lawsuit against Wells Fargo based on several legal theories. The U.S. District Court for the Northern District of Illinois dismissed her case on all counts based on theories of preemption and the lack of a private cause of action under HAMP. The Seventh Circuit reversed, holding that state law claims based on HAMP were valid. It further held that, even though Wells Fargo's trial modification paperwork disclaimed any obligation to issue a permanent loan modification, Ms. Wigod could still successfully bring a claim for breach of contract or promissory estoppel.
This case is good news for many homeowners, in particular those who have been caught in the perpetual trial modification trap. Most trial loan modifications tell homeowners two conflicting stories: 1) complete your trial payments and you will receive a permanent modification if your financial information has remained the same; and 2) this trial modification is no guarantee of a permanent modification, does not modify your loan, and has significant downsides to being denied a permanent modification.
Perhaps the most useful analysis in the opinion is the court's discussion of Ms. Wigod's breach of contract and promissory estoppel claims. The analysis begins on page *5 of the not-yet-published opinion, and begins to really get cooking by page *6. The court examines whether the trial modification is a valid offer to enter into a contract and determines that the terms of the agreement contain a unilateral offer to modify the loan. This offer is conditioned on Wigod's performance -- e.g. that she make the trial payments and that her financial representations continued to be true.
The court also notes that the contract is not lacking in consideration. In Illinois, consideration is a bargained-for-exchange, or a transaction in which one party experiences a detriment in exchange for a benefit. The court found that since Ms. Wigod made additional promises that went above and beyond her obligation under the mortgage and note, there was adequate consideration to support a contract.
The court also found that, although no precise terms regarding a permanent modification had been disclosed, HAMP's guidelines were sufficient to allow a party to independently determine what those terms might be. This is a key finding because, in order for a contract to exist, it must have clear and definite terms.
In its discussion of Ms. Wigod's promissory estoppel claim, the court noted that seeking a loan modification, and foregoing the opportunity to use other remedies to avoid foreclosure, was sufficiently detrimental to Ms. Wigod to support the claim. In order to properly plead a promissory estoppel claim, a plaintiff must demonstrate that 1) the defendant made an unabmiguous promise to the plaintiff; 2) that the plaintiff relied on the promise; 3) that the defendant would reasonably expect plaintiff to rely on its promise; and 4) that this reliance was detrimental to the plaintiff. By foregoing her other remedies to avoid foreclosure, Ms. Wigod was harmed by her reliance on Wells Fargo's statements. This is exactly the same predicament that many homeowners have found themselves in.
The court also vitiated the effect of Wells Fargo's "this trial modification is no guarantee of a permanent loan modification" disclaimer. Wells Fargo argued that so long as it never sent the fully executed Modification Agreement to the borrower, it would not be obligated to perform under the contract. The court declined to support this analysis, declaring that to accept Well Fargo's argument would render the rest of the agreement illusory and meaningless. Instead, it construed the disclaimer to mean that the loan documents would not be modified until all signed documents were sent to the homeowner. However, the disclaimer does not excuse Wells Fargo from fulfilling its obligations under the contract. So long as Ms. Wigod met her obligations under the trial modification, Wells Fargo was obligated to offer her a permanent modification.
This distinction is key for Illinois homeowners and practitioners. For homeowners stuck in a perpetual trial modification, the breach of contract is not the failure to issue the permanent modification, the breach of contract is the failure to offer the permanent modification. What makes this analysis even more useful for Illinois homeowners and practitioners is that it is all based on Illinois common law. It should be highly persuasive for state judges, so long as the same or similar contract language is used.
Another important element of the Wigod opinion is that the Seventh Circuit resoundlingly denied Wells Fargo's argument that using state law claims to address violations of the HAMP guidelines is an end-around the fact that HAMP provides no private cause of action at the federal level. The court stated on page *24 of the opinion, "The issue here, however, is not whether federal law itself provides private remedies, but whether it dispalces remedies otherwise available under state law. The absence of a private right of action from a federal statute provides no reason to dismiss a claim under state law just because it refers to or incorporates some element of the federal law."
The court noted that when a federal lawsuit is based on diversity jurisdiction, the lack of a private cause of action weighs against preemption. Diversity jurisdiction exists when the parties to the lawsuit are from different states or countries, and when the matter in controversy exceeds a value of $75,000. Quite simply, when a federal law does not provide a private cause of action, one of the only ways to bring a state law claim in federal court is to assert diversity jurisdiction. To preempt such claims would severely restrict the reach of diversity jurisdiction.
The court's reasoning on this point should also help defeat an argument that lender and servicer attorneys love to make: "The homeowner cannot enforce the HAMP guidelines because the homeowner is not an intended beneficiary of the contract between the government and the lender." Ultimately, these kinds of claims are not invalid simply because a federal law is mentioned or invoked in the context of an otherwise valid common law or state law claim.
The Wigod opinon may very well be one of the best opinions for homeowners trapped in a perpetual trial modification. While it speaks directly to HAMP and loan modifications issued under HAMP, its analysis of the contract language in Wells Fargo's trial modification package can be applied to in-house and HAMP-based modifications alike.