Federal Court: Borrower is INTENDED 3rd Party Beneficiary of HAMP – Homeowner Sues for Breach

This is getting interesting.  A judge in U.S. District Court, Southern District of California, has issued an order that may just answer a few prayers of many homeowners.  Here’s what happened…

A San Diego homeowner, by the name of Ademar Marques, was applying for a loan modification, and, although it might be hard for many readers to believe, his servicer, Wells Fargo, dba, America’s Servicing Company, wasn’t being very nice about it, or even cooperating at all.  It seems that Wells Fargo wanted to just skip all of those messy and time-consuming formalities required when considering someone for a loan modification, and just jump straight into foreclosure.

Mr. Marques filed a lawsuit against Wells Fargo’s America’s Servicing Company because he read about the Home Affordable Modification Program (“HAMP”) and the program’s guidelines said that his servicer was “REQUIRED” to screen him for a hardship, and consider him for a loan modification.  He also alleged that he qualified for the loan modification program based on all of the published guidelines, and that his servicer, a participating servicer in HAMP never said that his loan could not be modified, they just refused to modify it, and instituted foreclosure proceedings.

Well, I never!  The gall of some servicers.  Have you ever heard of such a thing?  Actually, I have.  But not more than 30-40 times a day for the last two years.

According to the court order

“On or about April 13, 2009 Defendant entered into the Commitment to Purchase Financial Instrument and Servicer Participation Agreement for the Home Affordable Modification Program under the Emergency Economic Stabilization Act of 2008 with Federal National Mortgage Association (“Fannie Mae”) and agreed to perform certain loan modification and foreclosure prevention services for eligible loans.”

“Plaintiff filed a complaint in San Diego County Superior Court alleging breach of the Agreement on the theory that he is a third-party beneficiary under California Civil Code Section 1559, that his loan was eligible for modification, Defendant refused to offer to modify it under the Agreement, but instead commenced foreclosure proceedings.”

Based on breach of contract, Mr. Marques also alleged that Wells Fargo’s Servicer violated the Unfair Competition Law (Cal. Bus. & Prof Code § 17200 et seq. (“UCL”) and he sought damages and declaratory judgment that Wells does not have the right to foreclose on the Property.

So, the first thing Wells Fargo did was to argue that the venue was improper.  Wells Fargo said that the complaint should either be dismissed, or transferred to the District of Colombia… and I’m pretty sure that’s the D.C. in Washington D.C.  Now, I don’t know about you, but I found that nothing short of hysterical.  Mr. Marques should travel back and forth to Washington D.C. in order to sue Wells Fargo?  Where’s that damn stagecoach from anyway… D.C.?

It’s called a “forum selection clause,” and the judge wasn’t buying any of it, explaining in his order:

“Plaintiff argues that enforcing the clause would be unreasonable because it would effectively deprive him of his day in court. The court agrees. That Plaintiff is financially distressed is obvious from the nature of this action and Defendant does not dispute it. Where a party’s financial circumstance would effectively preclude him from a day in court, enforcing the forum selection clause would be unreasonable.  Defendant’s motion to dismiss or transfer for improper venue is therefore DENIED.”

So… a swing and a miss!  Nice try Wells Fargo, but at the bottom of the first inning, it’s one up and one down.

Next Wells Fargo tried to argue that the complaint should be dismissed pursuant to something called Rule 12(b)(6), because:

“… it failed to state a claim pursuant to motion tests the sufficiency of the complaint.  Dismissal is warranted under where the complaint lacks a cognizable legal theory.”

Apparently, Rule 12(b)(6) authorizes a court to “dismiss a claim on the basis of a dispositive issue of law”.  Or, the same rule also states that the court may dismiss a complaint if it presents a cognizable legal theory but fails to “plead essential facts under that theory”.

(It’s strike two, no runners on base as we head into the third inning, even though, as you’ll see at the end of this article, Mr. Marques, who was not represented by counsel, must amend his complaint in order to return to his day in court.)

Here’s where it gets really good…

Marques claimed that he could sue Wells Fargo for breach of contract, referring to the contract between the federal government and the HAMP participating servicers, because he argued that he… and in fact all eligible homeowners in this country, are “intended third party beneficiaries” to that contract.

Wells Fargo’s lawyers said a bunch of stuff, but to paraphrase they basically said, “Noooooooooooooooo!”

The judge, M. James Lorenz, had quite a bit to say, starting with establishing that Federal law controls the interpretation of a contract entered into pursuant to federal law and to which the United States is a party, which took me by surprise as it makes total sense.

“The Agreement was entered into between Defendant and Fannie Mae in its capacity as a financial agent of the United States.  Furthermore, the Agreement provides that it “shall be governed by and construed under Federal law and not the law of any state or locality, without reference to or application of the conflicts of law principles. Whether Plaintiff is a third-party beneficiary is therefore determined by federal law.”

And then he added the following key sentence:

“Under federal common law only an intended beneficiary may enforce a contract as a third-party beneficiary:”

Are you digging this?  Best I can make out, if you’re the intended third party beneficiary to a federal contract you can sue for breach of contract.  So, if it says in the contract that the servicer “MUST” do something, and that servicer doesn’t do it… you the borrower may be able to sue the servicer for breaching that contract.

Last year, as you may recall, there were several attempts to enforce the HAMP guidelines and none were particularly successful.  I wrote one article about an LA Superior Court judge who ruled that “HAMP Has No Teeth,” which was the headline of my story.  In Minnesota someone tried to say that HAMP was a “right” and had some sort of “due process” argument involved.  It didn’t fly at all.

I think I’m right when I say that up until this order, it was pretty difficult for a homeowner to sue their servicer for doing almost nothing according to the HAMP guidelines.  So, in my mind… this is a pretty big deal.

“To qualify as an intended beneficiary, the third party must show that the contract reflects the express or implied intention of the parties to the contract to benefit the third party. Although intended beneficiaries need not be specifically or individually identified in the contract, they still must fall within a class clearly intended by the parties to benefit from the contract.”

Well, it seems pretty straightforward to me, but the Judge Lorenz did point out that it is difficult to be deemed an intended third party beneficiary to a government contract.

“It is particularly difficult for parties to government contracts to demonstrate third-party beneficiary status. Id. “Parties that benefit from a government contract are generally assumed to be incidental beneficiaries rather than intended ones, and so may not enforce the contract absent a clear intent to the contrary.”

So, it seems that what we have here is the old “clear intent” hurdle trick… Some judges might have fallen apart at this point, but not Judge Lorenz.  He cut through it like a hot knife through butter.

To determine whether a party is an intended beneficiary of a government contract, the court must examine “the precise language of the contract for a clear intent to rebut the presumption that the third parties are merely incidental beneficiaries.”  Specifically, the court examines the contract as a whole and “weighs the circumstances of the transaction.” When a contract is mandated by a federal statute, this includes the governing statute and its purpose.

Judge Lorenz then went through every single page of the HAMP contract and Program guidelines.  This judge is not afraid of doing the work.  He pulled out key paragraphs from HAMP guidelines such as this popular stanza that I’ve seen quoted on dozens of occasions over this past year:

Servicer shall perform the Services for all mortgage loans it services, whether it services such mortgage loans for its own account or for the account of another party, including any holders of mortgage-backed securities (each such other party, an “Investor”). Servicer shall use reasonable efforts to remove all prohibitions or impediments to its authority, and use reasonable efforts to obtain all third party consensus and waivers that are required, by contract or law, in order to effectuate any modification of a mortgage loan under the Program.

Judge Lorenz brings it all together like a gospel choir in the last few pages of the order, and this guy’s voice is flawless:

“… the Agreement unambiguously directs Defendant to modify loans, identifies criteria to determine which loans are eligible for modification, and specifies how to modify them.”

Go your Honor, go!  Bring it on home for the brothers and the sisters.  Everybody on your feet… don’t you feel like singing?

“Upon a fair reading of the Agreement in its entirety and in the context of its enabling legislation, it is difficult to discern any substantial purpose other than to provide loan modification services to eligible borrowers.”

It’s difficult to discern, Amen.  Difficult to discern, yes Lord.  It’s difficult to discern any purpose other than to modify my loan.  Sing it with me, Yes Lord…  My Lord can discern, My Lord can discern… yes he can… and he has a substantial purpose…

“The Agreement on its face expresses a clear intent to directly benefit the eligible borrowers.”

Ohhhh Lord… Shine a light on his face… Sing it my brothers… I want to express clear intent…  to my sisters… one day we’ll all be eligible… shine that light on the eligible…

Based on the foregoing, Plaintiff may be able to state a claim against Defendant as an intended beneficiary of the Agreement.  Under the unambiguous terms of the Agreement,  Plaintiff at the very least had a right to have his loan considered for modification.

At the very least he had a right… Lord… at the very least, to state a claim… Oh Lord… at the very least he had the right to be considered, yes he did Lord.  Sing… Halleluiah! for that right.  A little louder, Halleluiah!  Sing Halleluiah, for the right to sue his bank, yes Lord.

Where is Gladys Knight when you need her?  I’m getting up on Sunday morning and going straight over to the House of Blues for Gospel Brunch, and if you can attend a Gospel church this Sunday, I’d highly recommend giving thanks for Judge Lorenzo, and I don’t know about you, but I like to sing my thanks.  I think He hears it just a little bit better.

And Judge Lorenzo looked at Wells Fargo’s lawyers and said: “Let my people modify.”  And the bank’s lawyers looked back and said, “But we lost all the paperwork”.  And Judge Lorenzo banged his gavel three times and all the paperwork that Wells Fargo has claimed to have lost over the last two years started falling from the sky burying the bank’s lawyers, while the Plaintiff, Mr. Marques was raised up to the top and walked out of that courtroom on air.  And it was good.

Of course, Wells Fargo tried to argue several times that homeowners were not the intended third party beneficiaries of the contract between the federal government and the servicers, but everything sounded well… hmmm… I think “stupid” would be the technical term.

First they tried to say that Freddie and Fannie had something to do with it, and I didn’t really understand what they were trying to say, but in any case, Judge Lorenz pointed out that Fannie’s and Freddie’s roles only come into play on loans that are modified, and not on loans that aren’t, so sit back down Wells… Judge Lorenz is in the house.

And lastly, Wells Fargo’s lawyers tried the old “but your Honor… a homeowner can’t be the intended beneficiary of anything because then they’d all sue and it would be “unwieldy.”   To which the judge just laughed… or at least I’d like to think so.  Judge Lorenz said that it wasn’t unwieldy because Wells would only have to worry about the customers they didn’t modify, which is a well-defined group, not the public at large.

A swing and a miss… and that’s ball four, take a hike, you are done and the showers are on, Wells…

I should mention that this order is just that… an order that says homeowners are the intended third party beneficiary to the HAMP servicer contract.  According to the judge, Mr. Marques, representing himself, didn’t present enough evidence to win his case, so the judge did something called “Leave to Amend,” which means that Marques has a month to amend his complaint and come back into court.


And, if you do plan to sue your servicer, you’re going to NEED a REST Report that shows that you do, in fact, pass the most up-to-date NPV analytics and otherwise qualify for HAMP. Alleging that you qualify isn’t enough.  You need to show the judge absolute, irrefutable proof.  You need a document that can withstand ANY amount of scrutiny.  The REST platform is not a toy.  It absolutely can stand up in court.  (Email me at mandelman@mac.com if you’re interested in pursuing this strategy.)


The facts of Marques’ case, for our purposes today however, are beside the point.  Homeowners start your engines.  Want a copy of the Court Order in this case?  Email me and I’ll send you a PDF file.  If you have a lawyer, send him or her a link to this article.  If you don’t have a lawyer, contact me, and I’ll tell you who I’d use… I know hundreds of dedicated attorneys across the country, and you won’t have to worry about being ripped off.  I only hang with the good guys… that’s how I roll.

You can always email me at: mandelman@mac.com

I also spent some time debating with several attorneys over the question, “Will Wells Fargo appeal to the 9th Circuit Appellate Court?  I don’t think they will, but other lawyers think I’m wrong.

I don’t think they will because if this order were to be upheld by the higher court, Wells and every other bankster would be in deep kimchi.  Another lawyer, who disagrees with me, points out that if they appealed it could mean waiting two years.  But that lawyer also admitted that while the lower courts waited for the high courts decision, the court might very well issue TROs and stop foreclosures until the Appellate Court’s decision has been reached.

So, either way… this is going to be more fun than watching a barrel of monkeys climb all over each other to turn around a decision that is pure common sense and threatens to make servicers responsible to the homeowners.  Heaven forfend.

Oh yeah… Shalom.

Mandelman out.

Marques v. Wells Fargo

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