Encore Bank, N.A. v. Bank of Am., N.A.

918 F.Supp.2d 633

ENCORE BANK, N.A., Plaintiff,

v.BANK OF AMERICA, N.A., BAC Home Loan Servicing, L.P., and Countrywide Home Loans, Inc., Defendants.

Civil Action No. H–11–3552.

United States District Court,

S.D. Texas,

Houston Division.

Jan. 23, 2013.

Mark S. Finkelstein, George A. Shannon, Jr., Jeffery Robin Koch, Shannon Martin Finkelstein & Alvarado PC, Houston, TX, for Plaintiff.

Raymond A. Chenault, McGlinchey Stafford, Houston, TX, Bahareh Mostajelean, Robert J. Esposito, Robert Padway, Bryan Cave LLP, San Francisco, CA, Keitha M. Wright, Walter A. Herring, Bryan Cave LLP, Dallas, TX, for Defendants.

OPINION AND ORDER GRANTING PARTIAL DISMISSAL AND LEAVE TO AMEND

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause, alleging Defendants' failure to perform, under the parties' Mortgage Loan Purchase and Servicing Agreement, proper mortgage servicing on multiple pools of mortgage loans sold by Defendants to Plaintiff Encore Bank, N.A. (“Encore”), is a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) and a motion to strike certain portions of Encore's First Amended Complaint under Federal Rule of Civil Procedure 12(f)(2) (instrument # 37), filed by Defendants Bank of America, N.A. (“BofA”), for itself and as successor by merger to BAC Home Loans Servicing, LP (“BAC”),¹ and by Countrywide Home Loans, Inc. (“Countrywide”) (collectively “BofA ²”).

Allegations in Encore's First Amended Complaint

The First Amended Complaint (# 35) asserts the following causes of action in seven counts: (1) equitable relief—partial rescission; (2) termination rights and specific performance; (3) breach of contract—monetary damages; (4) breach of duty of good faith and fair dealing; (5) breach of fiduciary duty and punitive damages; (6) indemnification and attorneys' fees; and (7) alter ego/successor liability.

In 1998 Countrywide, arguably the most successful mortgage lender in the United States, served as the servicer of mortgage loans and often as the seller of packages of mortgage loans to investors. Encore, then known as Guardian Savings and Loan Association (“Guardian”), a regional savings and loan association located in Houston, Texas, purchased packages of mortgage loans from Countrywide, over which Countrywide retained loan servicing rights and responsibilities in return for compensation in the form of mortgage loan servicing fees, which over time mounted to more than $4.7 million.

On November 6, 1998 Countrywide and Guardian executed a Mortgage Loan Purchase and Servicing Agreement (as amended on March 31, 1999 and February 8, 2001) (“the “Agreement,” filed under seal as # 2 and # 32, and governed by California law under § 8.09 of the Agreement”). Under the Agreement, Countrywide was to provide a variety of services for all the mortgage loans contained in the Agreement: as to performing loans, the collection of mortgage payments, property taxes and insurance payments, proper accounting for such amounts, and proper remittance of principal and interest to Guardian (now Encore) as owner of the loans; as to default loans, Countrywide was to enforce the loan obligations, including collection efforts, foreclosure, re-sale of the mortgaged properties, and the proper accounting for and remittance of collected funds to Guardian/Encore. Under the Agreement Countrywide promised to “employ procedures in accordance with the customary and usual standards of practice of prudent mortgage servicers.” Countrywide's specific obligations under the Agreement are defined in the First Amended Complaint, ¶ 12, pp. 4–6.

In 2007–08, when the financial crisis severely impacted the residential mortgage industry, Countrywide's parent, Countrywide Financial, was purchased and merged into the parent company of BofA. BofA assumed Countrywide's servicing obligations and first combined them with other service obligations under the operations of BAC. In July 2011 BAC was merged into BofA. The three Defendants after the 2008 transaction operated jointly and regularly contacted Encore regarding the mortgage loans at issue in this suit and the loan servicing obligations of the three have been integrated, merged, and/or assumed so that each entity is liable for the obligations of the others by merger or successor liability or assumption of liability or alter ego or other veil-piercing theory of liability. Thus they are jointly and severally liable for the obligations of Countrywide under the Agreement. For the sake of simplifying, the Court henceforth will refer to the parties by the names of their successors (BofA and Encore) and all defendants will be referred to collectively as BofA unless specified otherwise.

In 2009 Encore noted and informed BofA that its default portfolio had not been and was not being serviced in accordance with the terms of the Agreement and that the standards of practice applicable to prudent mortgage loan servicers, including (1) collateral documentation deficiencies were not being cured, (2) standard and customary collection processes were not followed, and (3) the timing of loss mitigation and foreclosure proceedings was improperly delayed. Despite being notified, BofA did not cure these problems. Highly concerned, Encore insisted on an audit of the mortgage loan portfolio, as allowed under the Agreement. The audit, which focused on the default and liquidated loans, revealed systematic failures by BofA to meet its obligations under the Agreement, including the following: (1) frequent failure to record Encore's ownership upon purchase of the mortgage loans and to inform HUD of the transfer of title as to HUD-related mortgages; (2) failure to initiate loss mitigation and work-out procedures, such as loan modifications, short sales, and deeds-in-lieu; (3) when such loss mitigation procedures were discussed with the mortgagor, failure to decide upon adoption of a loss mitigation approach in an adequate and timely matter; (4) failure to modify loans in a manner to protect the collateral owned by Encore or in a manner that allowed mortgagors to know how to deal with BofA in a mutually effective way, in violation of standards of practice applicable to prudent mortgage servicers; (5) occasional failure to obtain approval from Encore for loan modifications; (6) numerous failures to initiate timely foreclosure proceedings relating to mortgages owned by Encore; (7) improper placement of a hold on foreclosures, purportedly due to a Consent Order with the Office of the Comptroller of Currency (“OCC”), which Encore argues did not justify or excuse BofA's failure to perform or prohibit BofA from taking action on numerous default loans; (8) occasional failure to maintain or provide its counsel with documentation that was necessary to foreclose timely; (9) failure to properly manage third-party attorneys responsible for foreclosure proceedings, resulting in delays and errors, after which BofA transferred the foreclosure proceedings to new attorneys, causing additional delays; (10) stoppage of some pending foreclosures just before sale date due to unapproved loss mitigation reviews and allowing defaulting mortgagors to remain in properties for several years due to lack of timely and coherent foreclosure processing by BofA; (11) on some loans, failure to obtain and remit private mortgage insurance proceeds to Encore following liquidation of loans that should have qualified for insurance and failure to inform Encore of the eventual denial of insurance by the private mortgage insurance providers; (12) failure to perform required servicing to comply with the FHA program for government guaranteed loans, resulting in the placement of “FHA holds” by BofA on Encore's delinquent government guaranteed loans; and (13) failure to oversee subservicers during the loss mitigation, modification, foreclosure, and liquidation processes.

After the audit confirmed Encore's suspicions, it hired counsel, who provided a notice of default and demand under the Agreement by letter dated January 7, 2011. The letter described BofA's defaults and demanded that the mortgage loans be repurchased, reserving all rights under the Agreement.

BofA, claiming that a prior release provided to it by Encore in connection with the sale of a small number of loans to a third party released BofA from all past and future servicing defaults on the mortgage loans retained by Encore, responded by ceasing to provide Encore with information on the status of the mortgage loans that it had previously provided, including the following: (1) monthly delinquent loan status reports; (2) current real estate owned reports; (3) monthly conference calls regarding delinquent accounts; and (4) contact with the usual investor representatives. These actions deprived Encore of the ability and information required to monitor and manage the mortgage loan assets that it had invested in and for which it bore financial risk. BofA made misrepresentations about whether nonperforming loans were being serviced by proper foreclosure or otherwise, and it sometimes said the loans were subject to a hold in the foreclosure proceedings, but later stated that no hold applied. Because of these loan servicing failures, lack of communication, stonewalling, and the results of the audit, Encore had to file this action on October 23, 2011.

On March 8, 2012 Encore sent BofA a letter (Exhibit B) containing a 44–page memorandum (Exhibit A) detailing multiple loan servicing deficiencies by BofA. The letter invoked a provision of the Agreement allowing for termination of BofA's servicing rights if events of default were not cured within thirty days. Encore received no response to the March 8, 2012 letter within the thirty-day cure period. On April 10, 2012 Encore sent a follow-up letter (Exhibit C), stating that in light of BofA's failure to timely remedy its defaults,Encore was invoking its right to terminate BofA' s servicing rights under the Agreement.

According to the...