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Smyth v. America's Servicing Co.

United States District Court, D. Massachusetts

March 1, 2017

AMERICA'S SERVICING COMPANY, a division of WELLS FARGO BANK, N.A., et al. Defendants.


          Judith Gail Dein, United States Magistrate Judge

         On July 22, 2014, Edward and Gail Smyth filed this action in the Plymouth Superior Court for the Commonwealth of Massachusetts alleging that defendants engaged in unfair and deceptive conduct in connection with the Smyth's attempts to modify their mortgage loan pursuant to the Home Affordable Modification Program ("HAMP"). In particular, the Smyths allege that in 2010, defendants misrepresented their eligibility for a HAMP modification and deceived them into accepting an unaffordable "in-house" modification instead. The Smyths also allege that between 2011 and 2013, after they defaulted on their 2010 loan, defendants deceived them into spending a year and a half applying for a second modification to avoid foreclosure, even though defendants knew that investor restrictions on the loan prohibited a second modification and that the application was futile.

         The Smyths claimed violations of Mass. Gen. Laws Chapter 93A (Count I), lack of standing to foreclose (Count II), breach of fiduciary duty (Count III), breach of the implied covenant of good faith and fair dealing (Count IV), and misrepresentation (Counts V and VI). Defendants subsequently removed the case to this court. The case was referred to Magistrate Judge Judith Dein for full pretrial purposes, including a report and recommendation on any dispositive motions. See Docket No. 26. On July 1, 2016, defendants moved for summary judgment. See Docket No. 38.

         The Magistrate Judge issued her Report and Recommendation on March 1, 2017. See Docket No. 60. In it, she concludes that defendants are entitled to judgment as a matter of law on counts II, III, and IV because defendants have standing to foreclose, and did not breach any fiduciary duty or implied covenant. In addition, she concludes that plaintiffs' claims in counts I, V, and VI are time-barred to the extent that they arise from the 2010 mortgage loan. However, she also concludes that a reasonable jury could find that defendants' actions concerning the second loan modification constituted common-law misrepresentation and violated Chapter 93A. Accordingly, she recommends that the defendants' motion be allowed as to counts II, III, and IV and denied as to counts I, V, and VI to the extent that she did not recommend that they be found to be time-barred.

         The time period for objections to the Report and Recommendation has expired. No objections have been filed. In any event, the court has reviewed the Magistrate Judge's reasoning and finds it to be thorough, thoughtful, and persuasive. Therefore, the Report and Recommendation is being adopted.

         In view of the foregoing, it is hereby ORDERED that:

         1. The Magistrate Judge's Report and Recommendation (Docket No. 60) is ADOPTED and INCORPORATED pursuant to 28 U.S.C. §636.

         2. For the reasons stated in the Report and Recommendation, the defendants' Motion to for Summary Judgment (Docket No. 38) is ALLOWED with respect to Counts II, III, and IV, alleging lack of standing to foreclose, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing. The motion is DENIED with respect to Counts I, V, and VI, alleging violations of Mass. Gen. Laws Chapter 93A and common-law misrepresentation, to the extent that the Magistrate Judge did not recommend that they be found to be time-barred.

         3. The parties shall, by April 12, 2017, report whether they consent to trial before the Magistrate Judge.


          DEIN, U.S.M.J.


         The plaintiffs, Edward and Gail Smyth (the "Smyths"), are the owners of a home located in Middleboro, Massachusetts. They have brought this action against America's Servicing Company, a division of Wells Fargo Bank, N.A.; Wells Fargo Home Mortgage, Inc. (referred to collectively with America's Servicing Company as "Wells Fargo"); and U.S. Bank, N.A., as Trustee for Residential Asset-Backed Pass-Through Certificates Series 2006-EMX1 ("U.S. Bank"), [1] claiming that the defendants engaged in unfair, deceptive and otherwise unlawful conduct in connection with the Smyths' efforts to modify their mortgage loan pursuant to the Home Affordable Modification Program ("HAMP") and avoid a foreclosure on their property. In particular, the Smyths allege that the defendants acted unlawfully by misrepresenting their eligibility for a favorable HAMP modification in early 2010, and deceiving them into accepting an unaffordable, "proprietary" modification instead. They further allege that after it became clear that they were unable to meet their payment obligations under the terms of the proprietary modification, the defendants again acted improperly by inducing the Smyths to apply for a second modification and then, after a year and a half application process, denying their application on the grounds that the first modification rendered them ineligible for relief under HAMP. By their Complaint, the plaintiffs have asserted claims against the defendants for violations of the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A ("Chapter 93A") (Count I), lack of standing to foreclose (Count II), breach of fiduciary duty (Count III), breach of the implied covenant of good faith and fair dealing (Count IV), intentional misrepresentation (Count V) and negligent misrepresentation (Count VI).

         The matter is before the court on the "Defendants' Motion for Summary Judgment" (Docket No. 38), by which the defendants are seeking summary judgment, pursuant to Fed.R.Civ.P. 56, on all of the plaintiffs' claims. As detailed below, this court finds that the defendants are entitled to judgment as a matter of law on the Smyths' claims for lack of standing to foreclose, breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing, but that disputed issues of material fact preclude summary judgment on the claims for misrepresentation and violations of Chapter 93A. Therefore, and for all the reasons set forth herein, this court recommends to the District Judge to whom this case is assigned that the defendants' motion for summary judgment be ALLOWED IN PART and DENIED IN PART.


         The following facts, which are relevant to the defendants' motion for summary judgment, are undisputed unless otherwise indicated.[3]

         The Parties

         The plaintiff, Edward Smyth, is a real estate appraiser. (DF ¶ 17). During the time period relevant to this litigation, he operated his own real estate business. (DF ¶ 18). Mr. Smyth's wife, plaintiff Gail Smyth, is a jewelry artist. (DF ¶ 21). Although Mrs. Smyth has a history of employment as a medical technician, she has not worked outside the home since about 1991, when she was physically assaulted at work and developed serious anxiety. (DF ¶¶ 22-24; Def. Ex. C at 12-15). The plaintiffs are owners of a home located in Middleboro, Massachusetts. (See Def. Ex. E). This case concerns the Smyths' efforts to obtain a mortgage loan modification under HAMP, and to save their home from foreclosure.

         Defendant Wells Fargo is authorized, pursuant to a power of attorney, to conduct business with respect to loans held by U.S. Bank. (DF ¶ 16). At all times relevant to this litigation, Wells Fargo has been the servicer of the plaintiffs' mortgage loan. (DF ¶ 15). It also has served as the document custodian for defendant U.S. Bank. (Id.).

         The Smyths' Mortgage Loan

         On November 4, 2005, the plaintiffs entered into an adjustable rate mortgage loan transaction with Mortgage Lender's Network U.S.A., Inc. ("MLN") by executing a promissory note ("Note") in the amount of $260, 000. (DF ¶ 1; Def. Ex. A). MLN indorsed the Note to EMAX Financial Group, LLC ("EMAX"), which specially indorsed the Note to Residential Funding Corporation. (DF ¶¶ 2-3; PF ¶¶ 26, 28; DR ¶ 28). Residential Funding then indorsed the Note to "U.S. Bank National Association as Trustee WITHOUT RECOURSE." (DF ¶ 4; Def. Ex. A at Page 7 of 7). Wells Fargo, as custodian for U.S. Bank, acquired the Note on December 29, 2005. (DF ¶ 7; Def. Ex. D at 2).

         The Note was secured by a Mortgage on the Smyths' home in Middleboro. (See Def. Ex. E). Mortgage Electronic Registration Systems, Inc. ("MERS"), [4] acting as a nominee for the lender and the lender's successors and assigns, was named as the mortgagee of record, (Id. at 1; DF ¶ 9). Pursuant to the Mortgage, MERS had the right to invoke the statutory power of sale. (DF ¶ 10). However, nothing in the Mortgage required the mortgagee to modify or to consider modifying the mortgage loan. (DF 11).

         The 2010 Mortgage Loan Modification

         Wells Fargo began servicing the plaintiffs' Mortgage in about March 2007. (Def. Ex. D at 3). That same year, the Smyths defaulted on their loan. (DF ¶ 25). In an effort to be proactive and save their home from foreclosure, the Smyths applied to Wells Fargo for loss mitigation when they were still less than three months in arrears. (PI. Ex. C ¶ 2). Upon receipt of the completed application, Wells Fargo evaluated the plaintiffs for a loan modification. (See PF ¶ 1; PI. Ex. A at 5). As part of its evaluation, the defendant ran the Smyths' information through the so-called "waterfall" test, which requires a loan servicer to apply a series of steps aimed at reducing monthly mortgage payments to 31 percent of the homeowners' gross monthly income.[5] (See id.). In January 2010, Wells Fargo approved the plaintiffs for a permanent loan modification, which met the criteria of the waterfall test. (PF ¶ 1).

         At the time the Smyths applied for the loan modification, Wells Fargo was a participating servicer under the HAMP program. (PF ¶ 2). However, it is unclear whether the parties discussed that program at the time the Smyths submitted their application. According to Wells Fargo, none of its records indicate that the parties discussed HAMP or that the plaintiffs' were seeking a HAMP modification. (See PI. Ex. A at 2-3). On the other hand, Mr. Smyth claims that at or around the time he was submitting his application for a modification, he spoke to a Wells Fargo employee who told him that all of the available modifications were HAMP modifications. (Def. Ex. B at 46-47). In any event, there is no dispute that the modification Wells Fargo offered the Smyths was an in-house, proprietary modification rather than a HAMP loan. (See PF ¶ 37; DR¶37).

         The Smyths accepted the defendant's offer, and on January 12, 2010, the parties entered into a written Loan Modification Agreement. (DF ¶ 30; Def. Ex. K). It is undisputed that the Smyths reviewed the terms of the Loan Modification Agreement prior to signing it, and understood that it altered the terms of their mortgage loan. (DF ¶¶ 28-29). As detailed in the Agreement, the modification converted the plaintiffs' loan from an adjustable rate loan to a fixed rate loan, and capitalized the outstanding arrearages. (See Def. Ex. K). However, the Loan Modification Agreement contained no mention of HAMP, and did not purport to modify the loan pursuant to the federal HAMP program. (See Id.).

         Despite the lack of any reference to HAMP in the Loan Modification Agreement, the Smyths claim that they did not realize that the 2010 modification was not a HAMP modification until they consulted with counsel in 2013. (PF ¶ 37; PI. Ex. C ¶ 5). They also claim that they were eligible for a HAMP modification in 2010, and that a HAMP loan would have been more favorable than the in-house modification they received from Wells Fargo. (See PF ¶¶ 18-21, 43-44). As described below, this court finds that the Smyths' claims relating to the 2010 loan modification are time-barred.[6] In any event, there is no dispute that the Smyths voluntarily entered into the Loan Modification Agreement with Wells Fargo, and accepted the terms contained therein. (See DF ¶¶ 28-30).

         On August 3, 2011, MERS, "as Nominee for Mortgage Lenders Network USA, Inc., its Successors and Assigns, " assigned the plaintiffs' Mortgage to defendant "U.S. Bank, National Association, as Trustee for RASC 2006-EMX1." (DF ¶ 12; PF ¶ 25; DR ¶ 25). Thus, according to the record on summary judgment, the defendants held both the Mortgage on the plaintiffs' home and the underlying promissory Note as of August 2011. (See DF ¶¶ 7, 12). As described below, the plaintiffs are attempting to dispute U.S. Bank's status as the holder of the Note and the Mortgage, but this court finds that they have failed to create a genuine question of fact on this issue.

         Plaintiffs' Application for a Second Loan Modification

After receiving the 2010 modification, the Smyths continued to struggle to pay their mortgage loan. (DF ¶ 31). On September 29, 2010, they filed for Chapter 7 bankruptcy protection. (DF ¶ 32; Def. Ex. L). In their bankruptcy petition, the plaintiffs listed the current value of their real property as $239, 000, and the amount of their mortgage debt as $263, 526.52. (DF ¶ 33; Def. Ex. M at Page 13 of 41). On December 29, 2010, the Smyths received a discharge from the Bankruptcy Court. (DF ¶ 35). While this relieved the Smyths from any personal liability on the discharged debt, it did not alter the mortgagee's rights in the property, including the right to pursue foreclosure. See Best v. Nationstar Mortg., LLC, 540 B.R. 1, 9 (1st Cir. BAP 2015) ("Fundamentally, a discharge merely releases a debtor from personal liability on the discharged debt; when a creditor holds a mortgage lien or other interest to secure the debt, the creditor's rights in collateral, such as foreclosure rights, survive or pass through the bankruptcy." (quotations and citation omitted)).

         The Smyths remained unable to make their mortgage payments, and by the spring of 2011, they had defaulted on their modified mortgage loan. (See DF ¶ 36; PI. Ex. C ¶ 14). Following the default, Wells Fargo sent them correspondence encouraging them to apply for another loan modification, and promising to review them for a modification based on the information they submitted. (PF ¶ 6; DR ¶ 6; PI. Ex. C ¶ 14). In 2011, the Smyths submitted an application for a second loan modification from Wells Fargo. (DF ¶ 37). They also engaged Neighborhood Assistance Corporation of America ("NACA") to work with the defendant on their behalf. (DF ¶ 38; Def. Ex. B at 22). The record establishes that the Smyths engaged in a lengthy process to obtain a new loan modification from Wells Fargo. It also establishes that their efforts were futile from the outset because investor restrictions on the loan did not allow for a second modification.

         Between 2011 and 2013, the Smyths, either individually or through NACA, remained in frequent contact with Wells Fargo in an effort to obtain another loan modification. (PF ¶ 5; DR ¶ 5). According to Mr. Smyth, the process involved significant time and effort on his part because it required him to respond to repeated requests for paperwork, send numerous facsimiles and handle a substantial volume of email correspondence. (See PF ¶ 7; DR ¶ 7). He also contends that throughout the process, Wells Fargo continued to assure him that he and his wife would be reviewed for a loan modification based upon the information he submitted, and that they would receive a modification if they qualified. (PF ¶¶ 6, 33 PI. Ex. C ¶ 22).

         As part of the discovery in this litigation, Wells Fargo produced internal records reflecting its handling of the Smyths' application for a second loan modification. Those records contain notes from June 24, 2011, which read in relevant part as follows:


(PI. Ex. R). Based on this evidence, the plaintiffs contend that the defendants knew, as of June 2011, that investor restrictions on their mortgage loan would preclude Wells Fargo from offering them a second modification, and that it was unfair and deceptive to encourage the Smyths to continue to pursue a modification under those circumstances. (PI. Opp. Mem. (Docket No. 46) at 15). The defendants dispute this interpretation, and insist that the note refers to restrictions on Wells Fargo's ability to offer the plaintiffs a repayment plan, "which allows the borrower to catch up on delinquent payments under the existing loan, " but has nothing to do with a modification, "which results in entirely new loan terms." (DR ¶ 46 (quoting Dovle v. CitiMorteage. Inc., 32 Mass. L. Rptr. 312, 2014 WL 4373558, at *7 (Mass. Super. Ct. Aug. 11, 2014)). Accordingly, the defendants argue that the note "does not indicate that the loan was [not] eligible for a loan modification due to investor restrictions." (DR ¶ 46). For the reasons described below, this court finds that this evidence raises a disputed issue of fact that should be resolved at trial.

         Wells Fargo performed a review of the Smyths' completed application on January 18, 2013. (PF ¶ 9). The review included assessments for eligibility under HAMP, and indicated that the Smyths passed the HAMP "Tier 2 - NPVTest." (PF ¶¶ 10, 15; PI. Ex. E at Bates No. 312).[7]An NPV, or "Net Present Value" test is performed after the servicer determines that the borrower's mortgage meets certain criteria for eligibility under HAMP, and it "determines whether or not the loan modification would be an economically efficient and desirable transaction." Regal v. Wells Fareo Bank, N.A., - F.Supp.3d ---, 2016 WL 4699679, at *4 (D. Mass. Sept. 7, 2016). In this case, Wells Fargo's evaluation indicated that the Smyths could qualify for an NPV positive HAMP modification with a term of 276 months, an interest rate of 4.00%, and a monthly principal and interest payment of $1, 177.59. (PF ¶ 16; PI. Ex. E at Bates No. 315). Nevertheless, on February 6, 2013, Wells Fargo notified the plaintiffs that they did "not meet the investor requirements" of the available mortgage assistance program because they had "exceeded the number of modifications allowed by the investor." (PI. Ex. D). Thus, after a year and a half of work by the parties to avoid a foreclosure on the Smyths' property, the defendants informed the plaintiffs that their 2010 loan modification disqualified them from obtaining any additional relief.

         On or about March 5, 2013, the Smyths received a letter from Wells Fargo's outside counsel. (PI. Ex. L). The letter informed the plaintiffs that their mortgage loan was in default, that Wells Fargo had accelerated the loan and that Wells Fargo had instructed counsel to initiate foreclosure proceedings, (id.). In connection with their present action, the Smyths are seeking to establish that the defendants lack standing to foreclose on their property because they are not the rightful holders of the Mortgage or the underlying promissory Note. For the reasons detailed below, this court finds that the defendants are entitled to judgment as a matter of law on that issue.

         On July 9, 2013, Wells Fargo responded to an inquiry regarding the Smyths' mortgage loan. (PI. Ex. B). In its letter, the defendant provided a more detailed explanation for the decision to deny the Smyths' application for a second loan modification. Specifically, as Wells Fargo explained:

[Wells Fargo] services its mortgage loans on behalf of secondary market investors. All workout arrangements are based on a review of the homeowner's financial information and the investor's guidelines. [Wells Fargo] must comply with the home preservation standards of the ...

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