Wells Fargo and False Loan Forbearance Class Action

Posted by NCBRC - December 20, 2022

The court denied a motion to dismiss the debtors’ class action adversary complaint against Wells Fargo based on Wells Fargo’s inaccurate notices to various bankruptcy courts that the debtors’ loans had been placed in COVID forbearance at the debtors’ request. Harlow v. Wells Fargo & Co., No. 17-71487, Adv. Proc. No. 20-7028 (Bankr. W.D. Dec. 12, 2022).

The named plaintiffs in this action had mortgage loans with Wells Fargo Bank which were placed into forbearance by Wells Fargo without the plaintiffs’ knowledge or consent. Wells Fargo then noticed the court of the forbearance action either by filing Official Form 401S1, titled “Notice of Mortgage Payment Change,” or by noticing the forbearance on the court’s docket. Both notification methods falsely stated that the forbearance action was taken at the debtors’ request.

After certain counts of the complaint were dismissed by the district court, the case was again before the bankruptcy court on three remaining counts against Wells Fargo, and Wells Fargo’s holding company, Wells Fargo & Co. (WFC): 1) violation of Rule 3002.1; 2) violation of the automatic stay; and 3) abuse of process, contempt and fraud, under section 105(a). Wells Fargo and WFC moved to dismiss.

The bankruptcy court began with Wells Fargo’s argument that the plaintiffs’ claim of Rule 3002.1 violation should be dismissed as failing to state a claim. Wells Fargo argued that it was not liable for violation of Rule 3002.1 because placing the loans in forbearance did not constitute a change to mortgage payments requiring compliance with the Rule. Wells Fargo further argued that the Rule “does not give rise to a cause of action, the notices at issue explicitly disclaimed compliance with that Rule, and that this Court lacks jurisdiction over the claims for debtors in other courts.”

Rule 3002.1 provides: “The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice of any change in the payment amount, including any change that results from an interest rate or escrow account adjustment, no later than 21 days before a payment in the new amount is due.” The court agreed with other courts that have held that filing a notice with incorrect information also violates the Rule.

Paragraph 3002.1(i) of the rule further provides that as a consequence of failing to file a required notice, a creditor may be precluded from using the omitted information as evidence in any contested matter in the bankruptcy case, or may be required to pay the debtor’s expenses and attorney’s fees incurred by reason of the omission.

The court held that even if the mere act of placing an account in forbearance did not trigger Rule 3002.1’s notice requirement, once Wells Fargo provided notice using Official Form 401S-1, it could be held liable under the Rule for including false information in that notice.

Turning to Wells Fargo’s “trickier” argument that Rule 3002.1 does not create a private right of action, the court found that in order for the rule to be effective it must have teeth. For that reason, it found that while violation of the rule may not give rise to a cause of action for compensatory damages, it may create a basis for an award of punitive or other non-compensatory damages.

Likewise, with respect to the debtors who received notice of the forbearance through docket entries, the court found the lack of reference to Rule 3002.1 did not remove the notices from the protections covered by the rule.

Finally, in a footnote, the court noted that section 105(a) is expansive enough to permit a court to “issue any order necessary . . . to carry out the provisions of the bankruptcy code,” including orders against outside parties in class action cases.

The claim for violation of Rule 3002.1 thus survived the motion to dismiss.

The court next addressed the claim that by unilaterally placing the loans in forbearance Wells Fargo exercised control over property of the estate in violation of the automatic stay.

The court found “by the thinnest of margins,” that Wells Fargo was not entitled to dismissal of the claim for violation of section 362(a)(3). It agreed with courts such as Mattox v. Wells Fargo, NA (In re Mattox), No. 07-51925, 2011 WL 3626762 (Bankr. E.D. Ky. Aug. 17, 2011), that a debtor’s post-petition mortgage payments are part of the bankruptcy estate under section 1306. For that reason, Wells Fargo’s efforts to establish payments in contravention of the debtors’ confirmed plans impacted the automatic stay.

With respect to the allegation that Wells Fargo’s conduct violated section 362(a)(6), prohibiting attempts to collect on a debt subject to the stay, the court granted the motion to dismiss. It found that mere notification of forbearance did not constitute an effort to collect on the debt.

The court turned next to the remaining counts of the complaint that relied on the court’s power under section 105(a) to administer its cases. Those claims were threefold: abuse of process, contempt, and fraud.

The court noted that section 105(a) generally permits a bankruptcy court to exercise its civil contempt powers to address a party’s attempt to use the bankruptcy process for an illicit purpose. The court found the complaint sufficiently stated a basis for that claim in the plausible allegation that Wells Fargo “engaged in a maneuver or scheme sufficient to undermine the integrity of the bankruptcy system” when it filed false forbearance notifications.

It also found the debtors’ claim for violation of the automatic stay, which survived dismissal, is enforceable under a court’s contempt powers.

As to the remaining claims under section 105(a), the debtors alleged that Wells Fargo acted in bad faith in an attempt to benefit from the financial incentives in the CARES Act and the court found sufficient evidence to support that claim.

The same could not be said of the debtors’ section 105(a) claim of fraud upon the court. The debtors alleged that Wells Fargo’s false claims were made to either delay confirmation of unconfirmed plans, or modify without court approval confirmed plans, in order to reap the benefits of the CARES Act. The court noted that existing caselaw indicates that a finding of fraud on the court is “rare and extreme” and is typically based on conduct by an officer of the court which undermines the integrity of the court. The court found as a matter of law that Wells Fargo’s conduct here did not meet the high standard for supporting a claim of fraud on the court.

Finally, the court turned to WFC’s argument that it should be dismissed from the lawsuit because none of the allegations in the complaint justified piercing the corporate veil. In addressing this argument, the court noted that the state of incorporation, Delaware, considers “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a facade for the dominant shareholder.”

The court found the debtors failed to allege facts sufficient to support piercing the corporate veil. The debtors’ implications of collaboration and benefits from the corporate/subsidiary relationship was insufficient to state a claim. It granted WFC’s motion to dismiss.

The court thus granted the motion to dismiss in part and denied it in part.

Harlow Bankr WD Va Dec 2022


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