Fifth Circuit Holds that Representations During Loan Modification Process are "Future Promises" that Cannot Support Negligent Misrepresentation Claim
In Pennell v. Wells Fargo Bank, N.A., No. 12-60595 (5th Cir. 2013), the Fifth Circuit Court of Appeals had the occasion to address what constitutes a negligent misrepresentation under Mississippi law when a borrower and bank are negotiating a loan modification in an attempt to avoid foreclosure. The plaintiffs filed a lawsuit against the defendant mortgage servicing company after their home had been sold at a non-judicial foreclosure sale. The plaintiffs asserted a variety of claims, including, inter alia, wrongful foreclosure, slander of title, intentional and negligent misrepresentation, and a violation of the Fair Debt Collection Practices Act ("FDCPA"). The FDCPA claim was thrown out in response to the defendant's motion to dismiss, and the defendant then prevailed on the remaining claims at the summary judgment stage. The plaintiffs filed an appeal to the Fifth Circuit Court of Appeals with only with respect to their claim for negligent misrepresentation. The plaintiffs alleged that the defendant negligently misrepresented the loan modification process through their letters concerning a Trial Period Plan under the Home Affordable Modification Program ("HAMP"). The plaintiffs argued that the Trial Period Plan include misrepresentations of existing fact, by claiming to be a possible solution to foreclosure. The plan stated that the plaintiffs "may qualify" and that the chance to avoid foreclosure was conditioned on approval of their application. The plaintiffs also argued that a letter they received from Wells Fargo -- several days before the foreclosure -- which stated the defendant must receive their tax returns before the process could move forward, misrepresented the loan modification process and gave the plaintiffs the impression that they had additional time before foreclosure would occur. Additionally, the plaintiffs argued that a letter they received after foreclosure, which stated that the loan could be reinstated upon receipt by the defendant of $30,242.15, was another negligent misrepresentation because they took some steps to attempt to pay the money. The Fifth Circuit agreed with the district court and found that the plaintiffs had not submitted sufficient evidence to state a claim for negligent misrepresentation. Specifically, the Fifth Circuit concluded that all of the aforementioned allegations concerned promises of future conduct, which could not support a claim for negligent misrepresentation. The court held that to state a claim for negligent misrepresentation it was necessary that the defendant misrepresented an existing fact, not just a promise of future conduct. The Fifth Circuit concluded that all of the defendants' statements could only be construed as promises to act in the future, which are not actionable. In doing so, the court called into question two prior decisions -- Crowley v. Adams & Edens, P.A., 731 F. Supp. 2d 628, 637 (S.D. Miss. 2010) and Poppelreiter v. GMAC Morg. LLC, No. 1:11CV008-A-S, 2011 WL 2690165, at 6 (N.D. Miss. July 11, 2011) -- which had both held that a creditor had misrepresented existing facts during the loan modification process. In Crowley, the district court had highlighted the plaintiff's summary judgment evidence that the defendant had stated a loan modification would be forthcoming. The Pennell court stated that Crowley and Poppelreiter were both federal district court opinions, not Mississippi state court opinions, and, thus, were not authoritative statements of the law. The Pennell decision is helpful for mortgage servicing companies litigating misrepresentation claims in the Fifth Circuit, and elsewhere. In most states a negligent misrepresentation claim cannot be based on a future promise. In those states, if a borrower alleges that a mortgage servicing company promised a loan modification was forthcoming, or made statements leading a plaintiff to believe that a loan would be modified, a borrower cannot assert a claim for negligent misrepresentation. Rather, a borrower must submit evidence that the speaker had a present intent to deceive and bring a claim for intentional misrepresentation. This is a much more difficult set of facts to prove. Thus, while the Pennell case may be an analysis under state law, it could have more far reaching ramifications. For more information on consumer finance litigation topics, please contact one of the Burr & Forman team members for assistance. We are happy to answer any questions or concerns you may have.
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