The Alvarezes purchased their home in 2007 and refinanced in 2009 with PNC Mortgage servicing the loan for Fannie Mae. At that time the mortgage documents provided that the Alvarezes would maintain homeowner’s insurance and property taxes directly, without an escrow account. The Alvarezes began to have financial difficulties in 2012, but were denied mortgage assistance by PNC. Starting in August 2012, the Alvarezes alleged that PNC began misapplying their payments, holding funds in a suspense account and paying taxes and insurance from that account, violating numerous protections under the deed of trust, 12 C.F.R. § 1024.17 and N.C.G.S. § 45-93. Following correspondence from the Alvarezes’ attorney, in July and August of 2014, PNC took corrective action to remove the account from foreclosure and waive various fees and charges. The Alvarezes, however, maintained that such was insufficient and remained inaccurate. Further, PNC sent a loan modification to the Alvarezes, but it was left by FedEx, without signature, at a unused side entrance and not discovered until the loan modification offer had expired. The Alvarezes brought suit in Brunswick Superior Court, alleging numerous mortgage violations. This suit was removed to the U.S. District Court, which, after the Alvarezes filed Ch. 13 to prevent the on-going foreclosure, referred the matter to the bankruptcy court. PNC moved to dismiss for failure to state a claim.
Breach of Contract: The Alvarezes alleged that PNC committed a breach of contract by applying funds to insurance and taxes without notice in violation of the escrow waiver signed with the mortgage note, resulting in improper fees and misapplication of payments. PNC contended that the escrow account was authorized when the Alvarezes sought mortgage assistance and signed a Uniform Borrower Assistance Form. The Alvarezes countered that this only allowed an escrow account if they entered into a loan modification, which did not occur. Accordingly, the court allowed this cause of action to go forward.
Negligence: The Alvarezes asserted that PNC owed a duty of care in servicing their mortgage and failed in that regard in not imposing a proper accounting system that resulted in repeated errors. The bankruptcy court held that as a “general rule, referred to as the economic loss rule, is that a breach of contract does not give rise to a cause of action in tort.” For most of the alleged violations of the note, the contract would supply remedies and “[a]n action in tort is therefore improper.” As to the alleged failure to maintain proper accounting systems, this alleged “duty and breach stems not from the defendants’ contractual promises, but from their duty to use reasonable care in affirmatively performing those promises.”
Violation of N.C.G.S. § 45-90 et seq.: The Alverezes next contended that PNC violated N.C.G.S. § 45-91(2) by failing to accept and credit each full payment within one business day of receipt and were entitled to compensation for actual damages under N.C.G.S. § 45-94, which provides a 30-day “safe harbor” following notice of alleged errors. PNC argued that it corrected the alleged errors and there was no subsequent notice from the Alvarezes. The bankruptcy court found such argument to be nonsense as ” [l]iability is not extinguished for servicers that fail to correct or only partially correct or compensate the injured borrower….”
Breach of Duty of Good Faith and Fair Dealing: The Alvarezes contended that PNC breached both its common law duty of good faith and fair dealing and also its statutory obligations under the Secure and Fair Enforcement Mortgage Licensing Act (“SAFE Act”) and N.C.G.S. §§ 25-1-304, 53-244.110 and 53-244.111. PNC argued that this cause of action was indistinguishable from a breach of contract. While there may be conflicting opinions on whether a private right of action can be derived from the SAFE Act, the bankruptcy court held that there is an implied covenant in every contract under the common law of a duty of good faith and fair dealing.
Violations of N.C.G.S. § 75-50 et seq.: An a unfair and deceptive trade practices claim based on a breach of contract must allege aggravating circumstances. Rutledge v. Wells Fargo Bank, N.A. (In re Rutledge), 510 B.R. 491, 500 (Bankr. M.D.N.C. 2014). Here the allegations of unilateral abuses over a period of years was sufficient to state a claim.
Conversion: Conversion of funds is “an unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another, to the alteration of their condition or the exclusion of an owner’s rights.” Norman v. Nash Johnson & Sons’ Farms, Inc., 140 N.C. App. 390, 414, 537 S.E.2d 248, 264 (2000) (quoting Spinks v. Taylor, 303 N.C. 256, 264, 278 S.E.2d 501, 506 (1981)) and has two essential elements:
(1) ownership in the subject chattel by the plaintiff, and
(2) wrongful possession or conversion.
Relying on a series of cases from Ohio, See e.g., Moore v. Caliber Home Loans, Inc., 2015 WL 516482 (S.D. Ohio Sept. 3, 2015), the bankruptcy court found that the Alvarezes satisfied the first element as even though they had “tendered monthly payments to the loan servicer, and that ownership was not relinquished until the payments were turned over to the holder of the loan.” The alleged alleged failure by PNC to correctly apply funds to an account “amounts to an act of dominion . . . that is wrongfully asserted, even though [it] came into lawful possession” of the funds. Johnson v. Citimortgage, Inc., 351 F. Supp. 2d 1368, 1372 (N.D. Ga. 2004).
It is very apt that the loan servicing arrangement, which seems designed to insulate the holder of a note and the servicer from responsibility, was reversed and used to show that improper conversion might arise due to that relationship.
Taken together with the recognition by the North Carolina Business Court opinion in RREF BB Acquisitions, LLC v. MAS Properties, LLC, 2015 NCBC 58, of a duty to negotiate in good faith, this case with its finding of a potential obligation to maintain proper mortgage accounting systems, greatly increases the obligation of a mortgage servicer to both properly and fairly address loan modification requests and account for payments. This is in addition to the requirements in bankruptcy, including under 11 U.S.C. § 524(i) , Rule 3002.1, the confirmation order, etc.
For a copy of the opinion, please see:
Alvarez- Mortgage Servicing Claims