McFarland v. Wells Fargo Bank, N.A.

810 F.3d 273

Philip McFARLAND, Plaintiff–Appellant,

v.WELLS FARGO BANK, N.A.; U.S. Bank National Association, Defendants–Appellees,andChase Title Inc., Defendant.

AARP; Center for Responsible Lending; National Association of Consumer Advocates; National Consumer Law Center, Amici Supporting Appellant,

The Community Bankers of West Virginia, Incorporated; The West Virginia Bankers Association, Amici Supporting Appellees.

No. 14–2126.

United States Court of Appeals, Fourth Circuit.

Argued: Oct. 28, 2015.

Decided: Jan. 15, 2016.

ARGUED:Jennifer S. Wagner, Mountain State Justice, Inc., Clarksburg, West Virginia, for Appellant. John Curtis Lynch, Troutman Sanders LLP, Virginia Beach, Virginia, for Appellees. ON BRIEF:Bren J. Pomponio, Mountain State Justice, Inc., Charleston, West Virginia, for Appellant. Jason Manning, Megan Burns, Troutman Sanders LLP, Virginia Beach, Virginia, for Appellees. Jason E. Causey, Bordas & Bordas, PLLC, St. Clairsville, Ohio; Jonathan Marshall, Patricia M. Kipnis, Bailey & Glasser, LLP, Charleston, West Virginia, for Amici The National Consumer Law Center, AARP, The National Association of Consumer Advocates, and The Center for Responsible Lending. Floyd E. Boone, Jr., Stuart A. McMillan, Sandra M. Murphy, James E. Scott, Bowles Rice LLP, Charleston, West Virginia, for Amici Community Bankers of West Virginia, Inc. and The West Virginia Bankers Association, Inc.

Before SHEDD, DIAZ, and HARRIS, Circuit Judges.

Affirmed in part, vacated in part, and remanded by published opinion. Judge HARRIS wrote the opinion, in which Judge SHEDD and Judge DIAZ joined.

PAMELA HARRIS, Circuit Judge:

In 2006, at the height of the housing market, Philip McFarland was informed by a mortgage broker that his home's value had nearly doubled in two years. Acting on that advice, McFarland refinanced his home so that he could pay down other debt. But it soon became apparent that McFarland could not manage the increased interest payments on his new loan, and when housing prices fell, McFarland was faced with an unaffordable mortgage and a looming foreclosure.

McFarland sued, alleging that his mortgage agreement, providing him with a loan far in excess of his home's actual value, was an "unconscionable contract" under the West Virginia Consumer Credit and Protection Act, W. Va.Code § 46A–1–101, et seq. (the "Act" or the "WVCCPA"). The district court rejected that claim, holding that a loan exceeding the worth of a home, without more, is not evidence of "substantive unconscionability" under West Virginia law. And because the district court understood a WVCCPA claim always to require a showing of substantive unconscionability, it stopped its analysis there, without considering the fairness of the process by which the agreement was reached.

We agree with the district court that the amount of a mortgage loan, by itself, cannot show substantive unconscionability under West Virginia law, and that McFarland has not otherwise made that showing. But we disagree as to the proper interpretation of the WVCCPA, and find that the Act allows for claims of "unconscionable inducement" even when the substantive terms of a contract are not themselves unfair. Accordingly, we remand so that the district court may consider in the first instance whether McFarland's mortgage agreement was induced by unconscionable conduct.

I.

A.

In 2004, McFarland purchased his Hedgesville, West Virginia home for roughly $110,000. Just two years later, in June 2006, he availed himself of then-favorable debt markets to engage in the refinancing that is the subject of this appeal. Interested in consolidating his approximately $40,000 in combined student and vehicle debt with his mortgage, McFarland entered into discussions with Greentree Mortgage Corporation ("Greentree"), a third-party mortgage lender. Greentree arranged for an appraisal of McFarland's property, and McFarland was informed that the market value of his home had jumped to $202,000 since its acquisition two years earlier.

McFarland then entered into two secured loan agreements. The first, which is the subject of this dispute, was a mortgage agreement with Wells Fargo Bank, N.A. ("Wells Fargo"), with a principal amount of $181,800 and an adjustable interest rate that started at 7.75 percent and could increase to 13.75 percent (the "Wells Fargo Loan"). The second, not directly at issue here, was with Greentree, for an interest-only home equity line of credit of $20,000. As planned, McFarland used the proceeds of those two loans to consolidate all of his debts.

McFarland paid the Wells Fargo Loan without incident for roughly a year. In late 2007, however, he began to fall behind on his mortgage payments, and contacted Wells Fargo to ask for assistance. After several failed attempts to restructure McFarland's mortgage, Wells Fargo and McFarland entered into a loan modification in May 2010. The revised agreement reduced McFarland's interest rate and extended the term of the loan in exchange for an increase in the principal amount outstanding. But even under the new arrangement, McFarland remained unable to make his payments. In 2012, Wells Fargo initiated foreclosure on McFarland's home.

B.

To stop the pending foreclosure, McFarland brought this action against Greentree and Wells Fargo, as well as U.S. Bank National Association ("U.S. Bank"), the trustee of a securitized loan trust that now includes the Wells Fargo Loan.¹ Relevant to this appeal, McFarland alleged in his complaint that the Wells Fargo Loan was an "unconscionable contract" under the WVCCPA. See W. Va.Code § 46A–2–121(1)(a).

McFarland raised two distinct "unconscionable contract" arguments in his complaint and before the district court, either of which, he contended, could support an unconscionability finding under the WVCCPA. The first was a traditional unconscionability claim with its genesis in the common law, focusing on the terms of the Wells Fargo Loan itself and, in particular, the size of the mortgage it provided. Put simply, McFarland argued that Wells Fargo loaned him too much money. Citing a 2012 retroactive appraisal finding that his home was worth only $120,000 in June 2006—considerably less than the $202,000 valuation that preceded the Wells Fargo Loan—McFarland claimed that Wells Fargo's excess loan tied him to an unaffordable mortgage that increased his housing burden by several hundred dollars a month and put his home at risk. That general species of unconscionability claim (if not this particular variant), alleging the unfairness of the terms of an agreement, is well established in West Virginia: In the context of consumer agreements, it is now codified under the WVCCPA, see W. Va.Code § 46A–2–121(1)(a) (court may refuse to enforce a consumer agreement that is "unconscionable at the time it was made"), and it has long roots in West Virginia's common law, see Brown v. Genesis Healthcare Corp., 229 W.Va. 382, 729 S.E.2d 217, 226–27 (2012).

McFarland's second theory of unconscionability was more novel. West Virginia's traditional unconscionability doctrine, as is customary, requires a showing of both substantive unconscionability, or unfairness in the contract itself, and procedural unconscionability, or unfairness in the bargaining process. Genesis Healthcare, 729 S.E.2d at 221. But McFarland's alternative argument was that even if the Wells Fargo Loan was not unconscionable when made, the district court could invalidate it on the independent ground that it was "unconscionably induced"—in other words, based solely on factors predating acceptance of the contract and relating to the bargaining process. Specifically, McFarland argued that the Wells Fargo Loan was "induced by misrepresentations," focusing on what he alleged to be the vastly inflated appraisal of his home in 2006. And according to McFarland, that kind of unconscionable inducement is, under the text of the WVCCPA, grounds for relief by itself, without regard to the loan agreement's substantive terms. See W. Va. Code § 46A–2–121(1)(a) (court may refuse to enforce a consumer agreement that is "unconscionable at the time it was made, or ... induced by unconscionable conduct").

After McFarland filed his complaint, he and the defendants engaged in several months of extensive discovery. McFarland eventually reached a settlement with Greentree, but his case against Wells Fargo and U.S. Bank ("the Banks") proceeded. In the decision that is the subject of this appeal, the district court granted the Banks' motion for summary judgment and dismissed McFarland's unconscionable contract claim. McFarland v. Wells Fargo Bank, N.A., 19 F.Supp.3d 663, 668–73 (S.D.W.Va.2014).

As to substantive unconscionability, the district court explained that McFarland had identified two allegedly unconscionable features of the Wells Fargo Loan in both his complaint and his opposition to the Banks' motion for summary judgment: that the loan far exceeded the value of the property, and that the loan provided no "net tangible benefit" to McFarland. But neither, the district court held, provided a basis for a finding of substantive unconscionability.

That a refinanced loan exceeds the value of a home, the court ruled, is not evidence of substantive unconscionability under West Virginia law. "It is not ‘overly harsh’ or ‘one-sided’ against the plaintiff that he received more financing than he was allegedly entitled to receive." McFarland, 19 F.Supp.3d at 670 (emphasis in original). If anything, the court reasoned, an under-secured mortgage disadvantages the lender, not the borrower. Absent unfairness in specific loan terms like the rate of interest charged or the timing of payments, the court concluded, there is nothing substantively unconscionable about a loan simply because of its size.

Nor does West Virginia law require that a contract provide a "net tangible benefit" to either party, the court held. Under West Virginia law, a contract is substantively unconscionable only if it is "one-sided," with an "overly...