Wednesday, May 4, 2011

Court Slams Wells Fargo Bank Tactics Against Homeowner

Considering the current recession brought on by the mortgage-lending practices of several large banks, it is good to see one court was not going to let the perpetrators of financial ruin add insult to injury.

A few weeks ago, federal judge A. Howard Matz, United States District Court Judge for the Central District of California, denied Wells Fargo Bank's motion to order homeowners Abundio and Luz Cruz to pay $18,552.50 in attorney's fees the Bank incurred in defending against their lawsuit to stop a foreclosure on their home. The Cruz's claimed they were deceived by Wells Fargo Bank into agreeing to a payment-option, adjustable rate mortgage.

Wells Fargo successfully moved to dismiss the case on technical grounds, showing that the Cruz's complaint was, among other things: (1) preempted by federal law and (2) had to be dismissed because the Mortgage Reform and Anti-Predatory Act of 2010 was enacted too late to apply to the Cruz's case.

Wells Fargo then filed a motion asking the Court to order the Cruz's to pay the attorney's fees the bank incurred in successfully defending the lawsuit. Wells Fargo argued that under California law (Code of Civil Procedure, Section 1032), it was entitled to payment of attorney's fees because the Cruz's promised to pay such fees when they contractually agreed to the loan.

The Court, however, pointed out there was a higher principle of law, namely, that federal courts have the discretion to deny contractually-authorized attorney's fees if an award of fees would be inequitable and unreasonable. (Cruz v. Wachovia Mortgage, Well Fargo, et al., (2011) 2011 U.S. Dist. LEXIS 24784). In fact, the court noted it would be an abuse of its discretion for a court to award contractually-authorized attorney's fees under circumstances making the award inequitable or unreasonable. (Id.)

Under the circumstances of this case, the Court concluded that to permit Wells Fargo to recover its attorney's fees would be both inequitable and unreasonable.

The Court's conclusion is well-reasoned. First of all, Wells Fargo had never disproved the Cruz's allegations; rather, Wells Fargo prevailed on technical defenses that did not address the merits of the Cruz's allegation that the lenders disregarded their underwriting requirements to get the Cruz's to obtain a loan they would not be able to repay. The Court believed the allegation was plausible. In the words of the Court, "as the revelations of mortgage and banking abuses over the past two years have demonstrated, this allegation is by no means implausible." (p.3). Moreover, Wells Fargo did not claim the Cruz's suit was frivolous.

Second, the contractual attorney's fees provision was in fine print, buried in six pages of legalese. As the Court put it, 'the size of the print is so tiny that most readers blessed with 20-20 vision would experience the trevails of Mr. Magoo in trying to decipher it." (p.4).

Lastly, the Court found Wells Fargo's motivation to be offensive. "Now, Wells Fargo Bank seeks to punish Plaintiffs for daring to sue it." (p.3). "Plaintiffs are already facing the loss of their home. To saddle them with nearly $20,000.00 in attorney's fees sought by a giant financial institution because they had the temerity to file a lawsuit would be worse than inequitable and unreasonable ; it would be a travesty." (p.7).

This opinion should give hope to homeowners contemplating a lawsuit to save their home. Anyone considering a lawsuit for breach of contract or a loan agreement that contains an attorney's fees provision should seriously consider their liklihood of prevailing before filing suit. But as this case shows, an attorney's fees provision in an agreement with a mortgage lender or bank should be construed in the context of the abuses perpetrated by the lenders.

It remains to be seem whether other courts will agree; nevertheless, it is undeniable the lenders played a major role in creating the current crisis. Moreover, the banks received hundreds of billions of dollars to bail them out of the crisis they created; for them to to get attorney's fees from insolvent homeowners, just to punish and deter hoeowners' legal attempts to save their homes would just add insult to injury.

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