Judge Berger

12-06016 Nelson et al v. Wells Fargo Home Mortgage et al (Doc. # 23)

Nelson et al v. Wells Fargo Home Mortgage et al, 12-06016 (Bankr. D. Kan. Jul. 20,2012) Doc. # 23

PDFClick here for the pdf document.

The relief described hereinbelow is SO ORDERED.
SIGNED this 19th day of July, 2012.


In re:

PAUL NELSON and Case No. 11-20848

PAUL NELSON, et al.,

v. Adv. No. 12-6016


Defendants Wells Fargo Home Mortgage and Federal Home Loan Bank of Chicago
(FHLB) move to dismiss Debtors’ complaint which alleges the mortgagee and servicer engaged
in fraudulent or negligent conduct in its negotiations with Debtors regarding their defaulted
home loan. Defendants’ motion is granted because Debtors fail to state a claim for relief.

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Factual Allegations Accepted as True

Debtors borrowed $169,100.00 in 2003 to finance their home. FHLB has an interest in
the note, and Wells Fargo services the note and mortgage. In 2006, Debtors defaulted on the
note. In 2008, FHLB obtained a foreclosure judgment.1 Thereafter, Debtors contacted Wells
Fargo about what they could do to keep their home. On March 17, 2009, Wells Fargo sent
Debtors a letter describing some of the options available under Wells Fargo’s Borrower
Counseling Program. The letter listed loan modification as one of several options. Wells Fargo
described its loan modification as a program which adds the delinquency to the unpaid principal
balance to bring the loan current, extending the repayment of the arrearage over the remaining
term of the loan.2 The letter does not offer Debtors the option to reduce their interest rate or
lengthen the term of their loan or reduce the principal, and Debtors do not so allege. The
March 17 letter also states: “We recognize that you have been discharged from personal liability
for this mortgage loan; however, Wells Fargo Bank, NA retains a valid and enforceable lien
against the property and we will enforce these rights while the loan is in default.”3

Debtors decided to apply for the Borrower Counseling Program. Over the next several
months, Debtors compiled and submitted requested paperwork. By December 2009, Debtors
were discouraged and their home was scheduled for a sheriff’s sale. On December 31, 2009,
Wells Fargo emailed Debtors’ agent,

Unfortunately, we will not be able to post-pone the foreclosure sale. This

investor does not participate in modifications, which the borrower should know

already because he previously had a modification denied by the investor for this

1 Defendants state the state court judgment needs to be transferred to Wells Fargo because it services the

note and mortgage, and FHLB holds an investor’s interest in the note.

2 Doc. No. 1, Exhibit 1.

3 Id. Debtors discharged their personal liability on the note after a 2005 bankruptcy.


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reason on 06/30. HAMP was also denied on 08/03.
Also, the foreclosure sale has already been post-poned 3 times. The dates are
01/13/09, 04/14/09 and 05/12/09. The borrower had also been put on two plans,

but broke both. Those plans were on 08/28/09 and 10/14/09. I’m sorry.4
However, the fourth foreclosure sale was postponed, and Wells Fargo sent an email to Debtors’
agent days later stating:

This loan is now being worked here by the Office of the President because it has
been escalated. That department has called the borrower to ask for an updated
workout packet. This investor is a bit strict, and so there is some extra
information needed when it comes to employment in order for us to do a

The information requested was primarily proof of income and expenses.
During 2010, Debtors continued to submit information to Wells Fargo. A March 23,
2011, Wells Fargo letter to Debtors states,
We’re responding to your request for mortgage payment assistance and the
options that may be available to help you. . . . We carefully reviewed the

information you sent us and explored a number of mortgage assistance options.
At this time, you are not eligible because:
You have not been approved for a mortgage loan modification because we were

unable to get you to a modified payment amount that you could afford . . . .
The letter continues with other options available to the Debtors.6 A foreclosure sale was
scheduled for April 5, 2011, but Debtors filed for bankruptcy on March 31, 2011.

Post-petition, Debtors again sought a loan modification from Wells Fargo, but Wells
Fargo denied the request because “PER INVESTOR GUIDELINES NO RETENTION

4 Doc. No. 1, Exhibit 3. HAMP is the Home Affordable Modification Program, the government’s response

to the foreclosure crisis. HAMP is a voluntary program. Investors and servicers are not required to participate.
5 Doc. No. 1, Exhibit 4.
6 Doc. No. 1, Exhibit 5.


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OPTION AVAILABLE AT THIS TIME.”7 Debtors renewed their request and on January 12,
2012, Wells Fargo wrote back,


Debtors allege this last denial gives rise to fraudulent or negligent misrepresentation claims
because if FHLB did not allow rate changes or permanent loan modifications in 2012, then all
the options offered and requests for information made by Wells Fargo between 2009 and 2012
were based on false information about Debtors’ ability to modify their note. Debtors assert
Defendants strung them along for three years to increase the amount of Debtors’ debt against
their home.


A. Pleading Standards
In considering a motion to dismiss, the court accepts all well-pleaded factual allegations,
as opposed to conclusory legal allegations, as true and construes them in the light most favorable
to the plaintiff.9 A complaint must contain sufficient factual allegations to state a plausible claim
to relief.10 A claim is plausible when plaintiff pleads sufficient facts to allow the court to
reasonably infer the defendant is liable for the alleged misconduct. Mere recitation of the

7 Doc. No. 1, Exhibit 6. Bold in original.

8 Doc. No. 1, Exhibit 7. Bold in original.

9 Lawrence Nat’l Bank v. Edmonds (In re Edmonds), 924 F.2d 176, 180 (10th Cir. 1991).

10 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570


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elements of a cause of action is insufficient. The conclusory “the defendant unlawfully harmed
me” accusation is insufficient. Still, the complaint need not contain detailed factual allegations;
the allegations must be enough to raise a right to relief above the speculative level. The issue is
not whether the plaintiff will ultimately prevail, but whether the claimant is entitled to offer
evidence to support the claims.11 In determining whether facts are sufficiently pled, the court
may consider exhibits attached to the complaint.12 “[A]n exhibit to a pleading is a part of the
pleading for all purposes.”13

Complaints for fraud have heightened pleading requirements under Fed R. Bankr. P.
7009. Alleging fraud with Rule 9’s required particularity means (1) identifying who made the
misrepresentation; (2) stating the time, place and content of the misrepresentation; and

(3) describing how the misrepresentation was communicated and its consequences.14 Rule 7009
requires simple, concise, and direct averments which are construed so as to do substantial
justice.15 The result should allow the defendant fair and reasonable notice of plaintiff’s claims
and the factual grounds upon which the claims are based.16
B. First Cause of Action for Fraudulent Misrepresentation
In order to state a claim for fraudulent misrepresentation, the plaintiff must allege the
time, place, and content of the false representation; the identity of the person making the
representation; and the harm caused by the plaintiff’s reliance on the false representation.17


12 Oxendine v. Kaplan, 241 F.3d 1272, 1275 (10th Cir. 2001).


FED. R. BANKR. P. 7010.
14 Koch v. Koch Indus., Inc., 203 F.3d 1202, 1236 (10th Cir. 2000).
15 In re Panem, 352 B.R. 269, 281 (Bankr. D. Colo. 2006).


17 Universal Premium Acceptance Corp. v. Oxford Bank & Trust, 277 F. Supp. 2d 1120, 1131 (D. Kan.


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Debtors fail to state a plausible claim for relief or plead fraud with particularity. Debtors
allege Defendants misrepresented a permanent loan modification was an option to Debtors’
detrimental reliance. However, the complaint fails to allege either Defendant made an
unqualified offer for a permanent loan modification or a rate change between 2009 and 2012.
Debtors vaguely allege the Defendants offered a loan modification, but the only definition of
loan modification alleged in the complaint is Wells Fargo’s program which adds the delinquency
to the unpaid principal balance to bring the loan current, extending the repayment of the
arrearage over the remaining term of the loan. Thus, Debtors allege Wells Fargo offered them a
different repayment plan, not a rate change. The only place in the complaint a permanent loan
modification is mentioned by Wells Fargo is in an October 9, 2009, email in which Wells Fargo
requests proof of income and a budget “so [it] can see about permanent modifications options.”18
But by December 31, 2009, Wells Fargo advises Debtors’ agent, “This investor does not
participate in modifications, which the borrower should know already because he previously had
a modification denied by the investor for this reason on 06/30. HAMP was also denied on
08/03.”19 Debtors do not place much emphasis on this information, nor do they allege additional
facts about the denied modification requests to explain their continued reliance on Wells Fargo
and why they expected something other than another repayment plan.

Debtors’ allegations are not substantively set out in the complaint, but are primarily
attached as exhibits in the form of incomplete copies of correspondence and snippets of email
strings. As cherry-picked as the correspondence is, Debtors’ exhibits nonetheless show Wells
Fargo offered Debtors a repayment plan option, which, also according to Debtors’ own exhibits,

18 Doc. No. 1, Exhibit 2.
19 Doc. No. 1, Exhibit 3.


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Debtors either broke or for which Debtors did not later qualify. Debtors do not allege Wells
Fargo or FHLB represented they would refrain from enforcing their lien rights while Debtors’
loan remained in default. Debtors do not allege they relied on Wells Fargo’s application process
as debt forgiveness or forbearance. Debtors do not allege Defendants advised Debtors to take a
particular course of action. Debtors do not allege FHLB communicated with them at all. Wells
Fargo is the only party which communicated with Debtors. In whole, Debtors’ complaint is they
feel vaguely harmed by their inability to get a rate change from a lender who never offered it.
These allegations do not state a claim for relief.

C. Second Cause of Action for Negligent Misrepresentation
To state a claim for negligent misrepresentation, a plaintiff must allege (1) the defendant
made a false statement regarding a transaction in which it had a pecuniary interest; (2) the
defendant failed to exercise reasonable care to ascertain or communicate the accuracy of the
statement; (3) the plaintiff justifiably relied on the defendant’s statement; and (4) the plaintiff
suffered a loss as a result.20 Under Kansas law, a person cannot negligently misrepresent a
present intent to perform in the future.21

According to Debtors’ complaint, the false information Defendants provided is the
possibility of a rate change or other permanent loan modification, but Debtors fail to allege either
Wells Fargo or FHLB offered a rate change or a permanent loan modification as an option. The
only loan modification offered to Debtors, according to their complaint, is a repayment plan
which would add their delinquency to the principal of the loan. Unlike Bryant Manor, Debtors

20 In re Bryant Manor, LLC, 434 B.R. 629, 636 (Bankr. D. Kan. 2010) (citing Evolution, Inc. v. SunTrust
Bank, 342 F. Supp. 2d 964, 971 (D. Kan.2004)).

21 Bittel v. Farm Credit Servs. of Cent. Kansas, 265 Kan. 651, 665 (1998); Near v. Crivello, 673 F. Supp.
2d 1265, 1279-80 ( D. Kan. 2009).


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do not allege Wells Fargo counseled Debtors to take a particular course of action such as
defaulting on their loan in order to transfer their account to the workout department. Debtors’
allegations state Wells Fargo offered to explore their options but also state Wells Fargo would
continue to enforce its rights while the note remained in default. Debtors allege Wells Fargo
communicated to Debtors in terms of their future options, which can not support a negligent
misrepresentation cause of action. All the communications attached to Debtors’ complaint are
couched in terms of future possibilities, but a rate change is not mentioned by Wells Fargo as an
option for Debtors. The complaint does not contain an allegation about false information
provided to Debtors.

D. Third Cause of Action for Breach of Duty of Good Faith and Fair Dealing
The duty of good faith and fair dealing implied in all contracts prohibits parties from
intentionally and purposely preventing the other party from carrying out his part of the
agreement or otherwise destroying the right of the other party to receive the benefits of the
contract.22 Plaintiffs must (1) plead a cause of action for breach of contract, not a separate cause
of action for breach of duty of good faith, and (2) point to a term of the contract which the
defendant allegedly violated by failure to abide by the good faith spirit of that term.23 The duty
of good faith is based on a preexisting contract right; it does not create a new one.24

Debtors came to Wells Fargo having already defaulted under the note and mortgage.

22 Kansas Penn Gaming, LLC v. HV Prop. of Kan., LLC, 727 F. Supp. 2d 1100, 1111 (D. Kan. 2010)
(citing Daniels v. Army Nat’l Bank, 249 Kan. 654 (1991)).

23 Terra Venture, Inc. v. JDN Real Estate-Overland Park, L.P, 340 F. Supp. 2d 1189, 1201 (D. Kan. 2004).

24 Id.; see, e.g., Venture Commercial Mortg., LLC. v. F.D.I.C., not reported in F. Supp. 2d, 2010 WL
820711, at *10 (D. Kan. 2010) (dismissing a claim for a creditor’s alleged breached duty of good faith and fair
dealing and noting the absence of cases where a party in default successfully alleged such a cause of action against a
creditor exercising its contractual remedies).


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Debtors do not allege Defendants caused Debtors to default, nor do Debtors allege Defendants
breached the agreements while the parties discussed workout options.

E. Fourth Cause of Action for Violation of the Kansas Consumer Protection Act
The Kansas Consumer Protection Act prohibits lenders from engaging in any deceptive
act or practice in connection with a consumer loan.25

Debtors have failed to allege a deceptive act or practice. Debtors’ allegations incorporate
the same allegations which fail to give rise to either a fraudulent or negligent misrepresentation

F. Fifth Cause of Action for Sanctions and Attorney Fees
Debtors remaining cause of action similarly fails because it is predicated, in part, upon
succeeding on at least one of the first through fourth causes of action. Debtors also raise the
issue FHLB and not Wells Fargo obtained the state court foreclosure judgment. The issue of
which Defendant is the real party in interest in the state court proceeding is not sanctionable at
this time. Wells Fargo may yet ratify, join, or be substituted into the action, at which point the
action proceeds as if it had been originally commenced by the real party in interest.26 Debtors do
not allege they filed an objection in the state court proceeding or incurred any damages as a
result of the named plaintiff in state court.


IT IS ORDERED Defendants’ Motion to Dismiss is GRANTED without prejudice.
Debtors have 14 days from the date of this order to file an amended complaint if they can plead
fraud with the requisite particularity. Otherwise, this order becomes final and this adversary

25 K.S.A. §50-626.
26 K.S.A. §60-217(a)(3).


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shall be dismissed.



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