HP Debt Exch. LLC v. Wells Fargo Bank N.A.

HP DEBT EXCHANGE LLC, Plaintiff, v. WELLS FARGO BANK N.A., Defendant.

No. C -13-04717 EDL

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

Dated: February 11, 2014

ORDER GRANTING DEFENDANT'S

MOTION TO DISMISS

Defendant Wells Fargo has moved to dismiss this tort action against it on the grounds that Plaintiff HP Debt Exchange's claims rely upon contracts that Defendant has with other entities and to which Plaintiff is not a party or a beneficiary. Plaintiff has opposed the motion and Defendant filed a reply. For the reasons stated at the January 28, 2014 hearing and in this Order, Defendant's motion to dismiss is granted with leave to amend.

Allegations from the complaint

Plaintiff is an active participant in the secondary mortgage market, primarily buying unpaid mortgage notes. Compl. ¶ 6. Non-party Absolute Resolutions Corporation (ARC) is a buyer and seller of uncollected debt and an approved vendor of Defendant Wells Fargo Bank. Compl. ¶ 7. Non-party Brunswick Mutual is a buyer and seller of uncollected debt. Compl. ¶ 8. Plaintiff has a debt-buying relationship with Brunswick. Compl. ¶ 10. Brunswick has a debt-buying relationship with ARC. Compl. ¶ 11. ARC has a debt-buying relationship with Defendant. Compl. ¶ 12.

In 2010, Plaintiff learned that Defendant wanted to sell certain defaulted mortgage loans it acquired as a result of its acquisition of Wachovia Bank. Compl. ¶ 13. ARC reached out to Plaintiff to ascertain if Plaintiff was interested in buying the subject loans. Compl. ¶ 14. ARC and Brunswick facilitated the purchase of the subject loans from Defendant to Plaintiff. Compl. ¶ 15.

In particular, ARC purchased the subject loans from Defendant in or around November 26, 2010. Compl. ¶ 16. Defendant sold three portfolios to ARC, one composed of "secured" loans and two composed of "unsecured" loans. Compl. ¶ 17. Plaintiff alleges that Defendant knew that ARC was purchasing the subject loans in order to resell them on the secondary market. Compl. ¶ 18. Plaintiff alleges that Defendant knew that the purchaser of the subject loans was buying them in order to collect on their unpaid balances as well as to resell them on the secondary mortgage market. Compl. ¶ 19.

On or around November 26, 2010, ARC sold 1,627 unsecured junior loans and 889 secured mortgage loans to Brunswick. Compl. ¶ 20. Brunswick paid ARC $857,325.37 for the mortgage loans that ARC purchased from Defendant. Compl. ¶ 21.

On or around December 16, 2010, Brunswick sold the subject loans to Plaintiff for $907,325.37. Compl. ¶ 22. All of the purchase agreements arranged for the sale, transfer, and conveyance of mortgage loan documents, including, but not limited to, mortgage notes, allonges evidencing transfer of ownership of the notes, assignments of mortgage and loan origination documents. Compl. ¶ 23. When Plaintiff purchased the subject loans from Brunswick, it became the sole and rightful owner of the subject loans and all associated documents. Compl. ¶ 24. On December 20, 2010, Plaintiff sold approximately 100 of the loans to non-party Summit Real Estate Partners LP Series 2010-2. Compl. ¶ 25.

In January 2011, Plaintiff began communicating with Defendant about missing loan documents. Compl. ¶ 26. In February 2011, Plaintiff had not received the necessary loan documents and files associated with ownership of the subject loans. Compl. ¶ 27. On March 2, 2011, ARC informed Brunswick that the files were being gathered to be shipped by Defendant. Compl. ¶ 28. On March 7, 2011, ARC invoked their confidentiality agreement with Brunswick and directed Brunswick and its buyers not to contact Defendant about any post-sale matters. Compl. ¶ 30. On March 8, 2011, ARC demanded in writing that Brunswick and Plaintiff stop communicating with Defendant regarding files and other issues. Compl. ¶ 29.

In May 2011, Plaintiff received approximately fourteen boxes containing some of the subject loan documents, leaving a majority of the subject loans without loan files, allonges orassignments. Compl. ¶ 31. In July 2011, Summit sued Plaintiff for failing to provide all of the loan documents associated with the subject loans it sold, thereby breaching Plaintiff's contract with Summit. Compl. ¶ 32.

In September 2011, Defendant's employee, Jason Beck, told two of Plaintiff's employees that Defendant does not provide all of the loan documents for these "low-level, low-priced" sales. Compl. ¶ 33. In December 2011, one of Plaintiff's employees asked Mr. Beck about 1,900 credit files and was told that Defendant does not usually provide those in a sale such as the one at issue. Compl. ¶ 34. Plaintiff believes that the documents are stored by Iron Mountain in Boston and that Defendant has electronic copies of all loan documents, notes and mortgages. Compl. ¶ 35.

In February 2012, a Texas court found that Plaintiff was liable to Summit in the amount of $251,239.77 for failing to provide the loan documents. Compl. ¶ 36. In March 2012, Mr. Beck confirmed that the loan files transferred by Defendant were 25-30 pages each on the secured pool and even less on the unsecured pool. Compl. ¶ 37. According to Plaintiff, a complete mortgage file is usually 250 to 350 pages long. Compl. ¶ 38. Mr. Beck also stated that when Defendant sells notes individually or in bulk, it only delivers the note, the deed and allonge and maybe a payment history. Compl. ¶ 39. The sales contracts, however, provided for the sale, transfer, and conveyance of the "Servicing File and the Loan File" for unsecured loans and the "Servicing File" and "Mortgage Loan File" for the secured portfolios. Compl. ¶ 40. In the contract, the Loan File is defined as "the Note and the other Loan Documents and all other documentation, correspondence and records in the possession of or available to Seller." Compl. ¶ 41. The "Servicing File" is defined in the contracts as "the file maintained by the seller in connection with the servicing of the loan." Compl. ¶ 42. "Loan Documents" are defined as "the Note and any other documents in the Seller's possession or control creating or relating to the credit support for the Note, including . . . other documents, agreements or instruments under which legal sights or obligations are created or exist." Compl. ¶ 43.

In August 2012, Brunswick and Plaintiff initiated arbitration against ARC and Defendant under the contracts. Compl. ¶ 45. In the arbitration action, Defendant did not dispute or deny that approximately 2,500 loans were sold from Defendant to ARC to Brunswick to Plaintiff. Compl. ¶46. However, Defendant prevailed on a motion to dismiss arbitration because Plaintiff was a non-signatory to the contract containing the arbitration clause. Compl. ¶ 46. The arbitration panel specifically held that Plaintiff could pursue other remedies by suing Defendant in court. Compl. ¶ 47.

Plaintiff alleges that at least 500 of the loans sold in the unsecured portfolios were in fact still secured by real property. Compl. ¶ 48. None of the contracts for the sale of the unsecured portfolios contained a definition or description of the term "unsecured." Compl. ¶ 49. Plaintiff believes that loans secured by property that were underwater at the time of the sale were deemed unsecured by Defendant. Compl. ¶ 50. Plaintiff alleges that Defendant has taken the position that Plaintiff is not entitled to any mortgage assignments for the loans that were sold in the unsecured portfolios. Compl. ¶ 51. Plaintiff also alleges that according to ARC, Defendant did not sell the mortgages associated with the unpaid promissory notes in the unsecured portfolios to ARC. Compl. ¶ 52. Therefore, ARC did not own any of the mortgages and could not have sold, transferred, or conveyed those to Brunswick, and Brunswick could not have conveyed them to Plaintiff. Compl. ¶ 52.

Plaintiff alleges that at the time of the complaint, at least 512 subject loans continued to lack assignments for the mortgages and nearly all of the loans lacked proper allonges. Compl. ¶ 54. Almost every loan was missing the loan and servicing files sold by Defendant and purchased by Plaintiff. Compl. ¶ 54. The allonges, assignments, and loan documentation are necessary for Plaintiff to enforce its ownership rights in the subject loans. Compl. ¶ 55. Plaintiff monetizes non-performing debt through litigation, rendering the provision of loan documents with the actual loans an essential part of its purchase of loans on the secondary market. Compl. ¶ 56. Without proper documentation, Plaintiff alleges that it cannot validate that it properly owns the debts, litigate any of the loans or protect its security interest based upon its ownership of any associated promissory notes. Compl. ¶ 57. Purchasers of non-performing unsecured uncollected debt generally recover eight to ten percent of the unpaid balance annually, with secured debt earning even more. Compl. ¶ 58. The unpaid principal balance of the subject loans, secured and unsecured, purchased by Plaintiff totals more than 127 million dollars. Compl. ¶ 59.

Plaintiff alleges that Defendant has actively collected on and settled debts that were sold to Plaintiff, and has taken actions that eliminate the security interest associated with notes sold to Plaintiff. Compl. ¶ 61. In December 2012, Defendant settled a debt that had been sold to Plaintiff through ARC and Brunswick with borrower Victor Milbourne. Compl. ¶ 62. In August 2013, Defendant was using a collection agency to collect on another unpaid loan that had been sold to Plaintiff through ARC and Brunswick from borrower Robert Knapper. Compl. ¶ 63.

In another case, a note owned by Plaintiff was still secured by property located at 4 Ellsmere Drive, Greenville, SC 29615. Compl. ¶ 64. Defendant owned the first mortgage on the property, but sold the second mortgage to Plaintiff through ARC and Brunswick as part of the unsecured portfolio. Compl. ¶ 64. Defendant did not provide an assignment of mortgage for Plaintiff to file with the...