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February 14, 2016
  McFarland v. Wells Fargo Bank -- Fourth Circuit
Homeowners Take Note: Mortgage Loan Contracts May Be Unenforceable Under West Virginia Statute, If Unconscionably Induced

Areas of Law: Business Law, Contracts Law

Issue Presented: Whether under the West Virginia Consumer Credit and Protection Act ("WVCCPA"), a loan can be found to be substantively unconscionable, unconscionably induced, or both, solely on the ground that the loan amount exceeds the property value.

Brief Summary: In a published opinion, the United States Court of Appeals for the Fourth Circuit upheld the United States District Court for the Southern District of West Virginia's holding that a mortgage loan exceeding the home's value cannot be deemed substantively unconscionable on that ground alone. However, the Fourth Circuit also found that the district court erred when it dismissed the loan recipient's separate unconscionable inducement claim on the ground that the recipient had not made a proper showing of substantive unconscionability.

Extended Summary: In 2004, Philip McFarland purchased his home in Hedgesville, West Virginia, for approximately $110,000. In 2006, seeking to combine his $40,000 student and vehicle debt with his mortgage, McFarland entered into two secured loan agreements. The first, the subject of this dispute, was a mortgage agreement with Wells Fargo Bank ("Wells Fargo"), with a principal amount of $181,800 and an adjustable interest rate between 7.75% and 13.75%. The second loan, which is not directly at issue here as the parties reached a settlement, was with Greentree Mortgage Corporation ("Greentree"), a third party mortgage lender, for an interest-only home equity line of credit of $20,000. Prior to the agreements, Greentree appraised McFarland's property at $202,000. However, a 2012 retroactive appraisal showed that McFarland's home was worth just $120,000 in 2006.

In 2012, after several failed mortgage restructure attempts, a 2010 loan modification and years of McFarland falling behind on his payments, Wells Fargo initiated foreclosure proceedings on his home. In order to stop the proceedings, McFarland filed suit against Greentree, Wells Fargo, and U.S. Bank National Association ("U.S. Bank"), a loan trustee, alleging that the Wells Fargo loan was unconscionable under the WVCCPA. McFarland asserted a traditional substantive unconscionability argument - arguing that because the Wells Fargo loan exceeded the property value and did not provide him with a "net tangible benefit," the loan was substantively unconscionable. McFarland also raised a novel unconscionable inducement argument asserting that the loan was induced by misrepresentation as evidenced by the inflated 2006 home appraisal.

The district court granted the lenders' motion for summary judgment and dismissed McFarland's unconscionability claims on the ground that a loan's size alone without unfairness in the specific loan terms does not amount to substantive unconscionability. Moreover, the district court concluded that since McFarland was not able to make a showing of substantive unconscionability, which is required under West Virginia's unconscionability doctrine, there was no need to even consider his unconscionable inducement argument regarding the process that led to the loan contract's formation. McFarland appealed.

The Fourth Circuit affirmed the district court's decision on McFarland's substantive unconscionability claim finding that the loan was not one-sided because it benefited McFarland by providing him with the money that he requested, and the loan exposed all parties to risk (not just McFarland). The court also affirmed the lower court's conclusion that cancelling the debt altogether, thereby relieving McFarland of his debt, was not a permissible remedy under West Virginia law and the "net tangible benefit" test was not relevant as that test would have applied to fees that McFarland had not challenged.

However, the Fourth Circuit remanded the district court's ruling on McFarland's unconscionable inducement claim, ordering the lower court to consider McFarland's unconscionable inducement evidence and to determine if it allowed him to proceed against the lenders. The Fourth Circuit found that although the matter had not yet been fully settled under West Virginia law, the West Virginia Supreme Court of Appeals might rule that the WVCCPA authorized a stand-alone unconscionable inducement claim that did not require a showing of substantive unconscionability.

The Fourth Circuit based its finding on a prior West Virginia Supreme Court of Appeals case that strongly indicated the WVCCPA allows for unconscionable inducement claims separate and apart from substantive unconscionability. The Fourth Circuit also concluded that the comments to the Uniform Consumer Credit Code (UCCC), which are highly relevant to construction of the WVCCPA, indicate that a stand-alone unconscionable inducement claim does exist.

The Fourth Circuit also vacated and remanded the district court's order on a separate count of McFarland's complaint that sought to hold the lenders' liable for unconscionable contracting under agency and joint venture theories.

To read the full text of this opinion, please click here.

Panel: Judges Shedd, Diaz, and Harris

Argument Date: 10/28/15

Date of Issued Opinion: 01/15/16

Docket Number: Case No. 14-2126

Decided: Affirmed in part, vacated in part, and remanded by published opinion.

Case Alert Author: Simone Chukwuezi, Univ. of Maryland Carey School of Law

Counsel: ARGUED: Jennifer S. Wagner, MOUNTAIN STATE JUSTICE, INC., Clarksburg, West Virginia, for Appellant. John Curtis Lynch, TROUTMAN SANDERS LLP, Virginia Beach, Virginia, for Appellees. ON BRIEF: Bren J. Pomponio, MOUNTAIN STATE JUSTICE, INC., Charleston, West Virginia, for Appellant. Jason Manning, Megan Burns, TROUTMAN SANDERS LLP, Virginia Beach, Virginia, for Appellees. Jason E. Causey, BORDAS & BORDAS, PLLC, St. Clairsville, Ohio; Jonathan Marshall, Patricia M. Kipnis, BAILEY & GLASSER, LLP, Charleston, West Virginia, for Amici The National Consumer Law Center, AARP, The National Association of Consumer Advocates, and The Center for Responsible Lending. Floyd E. Boone, Jr., Stuart A. McMillan, Sandra M. Murphy, James E. Scott, BOWLES RICE LLP, Charleston, West Virginia, for Amici Community Bankers of West Virginia, Inc. and The West Virginia Bankers Association, Inc.

Author of Opinion: Judge Harris

Case Alert Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 02/14/2016 02:52 PM     1st Circuit  

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