Klein v. Alabama Housing Finance Authority

• Court: District Court, W.D. Washington
• Decided: September 12, 2019
• Docket: 2:19-cv-00020
• Status: Unknown

Opinion

1 HONORABLE RICHARD A. JONES 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 WESTERN DISTRICT OF WASHINGTON AT SEATTLE 9 10 11 MICHAEL KLEIN, as Trustee for the Case No. C19-00020-RAJ estate of Christine Tavares, DENNIS 12 LEE BURMAN, as Trustee for the ORDER DENYING estate of Edward Anzaldua, APPELLANTS’ 13 BANKRUPTCY APPEAL Appellants/Plaintiffs, 14 15 v. 16 17 ALABAMA HOUSING FINANCE 18 AUTHORITY, doing business in Washington as SERVISOLUTIONS, 19 20 Appellee/Defendant. 21 22 This matter comes before the Court on Appellants’ appeal from the bankruptcy 23 court’s dismissal of Plaintiff Christine Tavares’ Second Amended Complaint. Dkt. # 6. 24 For the reasons that follow, the Court DENIES Appellants’ appeal and AFFIRMS the 25 bankruptcy court’s decision. 26 27 1 I. BACKGROUND 2 In March 2014, Plaintiff Christine Tavares (“Tavares” or “Ms. Tavares”) 3 purchased a home with her former domestic partner, Edward Anzaldua (“Anzaldua”). 4 DR # 13 at ¶ 11. The purchase was financed with a Federal Housing Administration 5 (“FHA”) insured loan. DR # 13 at ¶ 13. Tavares and Anzaldua also executed a Deed of 6 Trust against the property. DR # 13 at ¶ 12. In November 2015, Anzaldua and Tavares 7 separated after allegations emerged that Anzaldua was sexually assaulting Tavares’ 8 daughter. DR # 13 at ¶17. Tavares and Anzaldua continued to make payments on the 9 loan until April 2016, when Anzaldua stopped making payments in lieu of child support. 10 DR # 13 at ¶ 19. 11 After Anzaldua stopped making payments on the loan, Tavares approached 12 Defendant/Appellee Alabama Housing Finance Authority (“Appellee” or “AHFA”) about 13 a possible loan modification. DR # 13 at ¶ 22. AHFA told Tavares that in order to obtain 14 a loan modification, she would need to default on the mortgage. DR # 13 at ¶ 21. After 15 defaulting, Tavares again approached AHFA and was told that in order to apply for a loan 16 modification both borrowers (Tavares and Anzaldua) would need to apply or Tavares 17 would need Anzaldua to execute a quitclaim deed. DR # 13 at ¶ 22. 18 On September 26, 2016, Tavares filed a voluntary petition for Chapter 7 19 bankruptcy. DR # 13 at ¶ 23. Tavares also engaged a housing counselor to help her 20 apply for the loan modification. DR # 13 at ¶ 25. According to Tavares, AHFA tried to 21 talk her out of hiring the housing counselor and told her that the quitclaim deed would no 22 longer be helpful for the loan modification process. DR # 13 at ¶¶ 25-26. Tavares opted 23 to continue using the housing counselor and submitted an application to AHFA for a 24 HAMP loan modification with a partial claim in June 2017. DR # 13 at ¶ 27. According 25 to Tavares, AHFA did not respond to her first application other than to deny the use of 26 child support in her income calculation. DR # 13 at ¶ 27. Tavares submitted a second 27 application in September 2017. DR # 13 at ¶ 30. AHFA denied Tavares’ second loan 1 modification application. DR # 13 at ¶ 31. In the denial letter, AHFA detailed the bases 2 for its denial including, among other things, Tavares’ failure to include detailed income 3 information from both borrowers (Tavares and Anzaldua). DR # 22, Ex. 8. 4 In November 2016, the bankruptcy court granted AHFA relief from the automatic 5 stay and AHFA began nonjudicial foreclosure proceedings. DR # 26 at 8. In October 6 2017, Ms. Tavares brought this action in federal court, seeking an injunction to prohibit 7 the sale of the property and damages (Tavares v. AHFA, No. 2:17-cv-01599-MJP (W.D. 8 Wash.)). Dkt. # 6 at 13. AHFA filed a motion to dismiss and the Court granted Ms. 9 Tavares’ motion to amend the complaint. DR # 26 at 8. The Honorable Marsha J. 10 Pechman also referred the action to bankruptcy court for pre-trial proceedings. Id. In 11 February 2018, Ms. Tavares filed her first amended complaint. DR # 1. AHFA again 12 filed a motion to dismiss and on June 7, 2018 the bankruptcy court granted the motion, 13 with leave to amend. DR # 26 at 8. One month later, Ms. Tavares filed a second 14 amended complaint, asserting a single claim under the Washington Consumer Protection 15 Act. DR # 13. AHFA moved to dismiss for the third time (DR # 22) and the bankruptcy 16 court granted the motion to dismiss, this time with prejudice. DR # 26. Appellants 17 promptly appealed. 1 DR # 31. 18 II. LEGAL STANDARD 19 District courts have jurisdiction to hear appeals from a final judgment and order in 20 a bankruptcy proceeding. See 28 U.S.C. § 158(a)(1). A district court reviews the 21

22 1 Fed. R. Civ. P. 17(a)(1) provides that “an action must be prosecuted in the name of the 23 real party in interest.” After filing a chapter 7 bankruptcy petition, the debtor may no 24 longer prosecute a cause of action belonging to the estate. Such action must be brought by the bankruptcy trustee. In its Order, the bankruptcy court noted that the underlying 25 action was improperly brought by the debtor, Plaintiff Christine Tavares. DR # 26 at 6. 26 However, the bankruptcy court declined to allow for the substitution of the real party in interest because the action was dismissed on the merits, with prejudice. Id. Appellants 27 (Trustees for Tavares and Anzaldua), as the real parties in interest, now appeal. 1 bankruptcy court’s conclusions of law de novo and reviews determinations of fact for 2 clear error. See In re Crow Winthrop Operating P’ship, 241 F.3d 1121, 1123 (9th Cir. 3 2001); In re Olshan, 356 F.3d 1078, 1083 (9th Cir. 2004). A motion to dismiss for 4 failure to state a claim will be denied unless it appears that the plaintiff can prove no set 5 of facts which would entitle him to relief. Fidelity Fin. Corp. v. Federal Home Loan 6 Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986). All material allegations in 7 the complaint will be taken as true and construed in the light most favorable to the 8 plaintiff. NL Indust., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). 9 III. DISCUSSION 10 At issue is whether the second amended complaint (the “Complaint”) pled 11 sufficient facts to state a claim under Washington’s Consumer Protection Act (“CPA”). 12 To prevail in a CPA action, the plaintiff must satisfy the following five elements: (1) an 13 unfair or deceptive act or practice, (2) occurring in trade or commerce, (3) impacting the 14 public interest, (4) causing injury to plaintiff’s business or property, and (5) causation. 15 Hangman Ridge Training Stables, Inc. v. Safeco Title Ins. Co., 719 P.2d 531, 532 (Wash. 16 1986 17 Tavares’ Complaint alleges five “unfair or deceptive acts” underlying her CPA 18 claim: (1) AHFA failed to make a partial claim against FHA’s Mutual Mortgage 19 Insurance Fund” and failed to apply the proceeds to cure the default, (2) AHFA evaded a 20 “real review” of Tavares’ second loan modification application by “only mentioning the 21 parameters of HAMP standalone modifications” and not applying the parameters to 22 Tavares’ income, (3) AHFA misled Tavares with conflicting directives regarding the 23 necessity for a quitclaim deed, (4) AHFA discouraged the use of a housing counselor, and 24 (5) AHFA misled Tavares regarding the exclusion of child support payments from her 25 income calculation. DR # 13. 26 The bankruptcy court dismissed the Complaint, holding that Tavares failed to 27 plead sufficient facts to show: (1) AHFA’s failure to apply for a partial claim constituted 1 an unfair or deceptive act, (2) Plaintiff suffered an injury resulting from AHFA’s 2 conflicting directives regarding the quitclaim deed, (3) Plaintiff suffered an injury 3 resulting from AHFA discouraging the use of a housing counselor, and (4) AHFA’s 4 denial of the loan modification constituted an unfair or deceptive act. 2 DR # 26. 5 Appellants now seek review of the bankruptcy court’s ruling that the Complaint failed to 6 state a claim under the CPA and that further amendment would be futile. Dkt. # 6. 7 A. Failure to Apply Partial Claim 8 Appellants first argue that the bankruptcy court incorrectly held that Tavares failed 9 to plead sufficient facts to show that AHFA’s failure to apply a partial claim constituted 10 an unfair or deceptive act. Dkt. # 6 at 18. In the Complaint, Tavares alleged that AHFA 11 failed to use its partial claim against FHA’s mutual mortgage insurance and failed to cure 12 Tavares’ default by not applying the insurance proceeds. DR # 13 at ¶ 43. The 13 bankruptcy court held that this was insufficient to state a claim under the CPA, noting 14 that under FHA guidelines, applicants must provide documentation for all borrowers’ 15 income to qualify for a HAMP loan modification with a partial claim. DR # 26 at 12-13. 16 Because Tavares did not provide financial information for Anzaldua, the court 17 determined that AHFA’s failure to apply for a partial claim was not an unfair or 18 deceptive act. The bankruptcy court also held that Tavares failed to plead an injury 19 resulting from AHFA’s failure to apply a partial claim because it appeared that Tavares 20 would not have qualified for a HAMP loan modification with a partial claim given the 21 FHA’s requirement that applications provide documentation for each borrower’s income. 22 DR. # 26 at 12. 23 When an FHA-insured mortgage loan goes into default, mortgagees must “engage 24 in loss mitigation actions for the purpose of providing an alternative to foreclosure[.]” 12 25

26 2 The bankruptcy court consolidated the second and fifth allegations for the purposes of 27 its analysis. DR # 26 at 14. 1 U.S.C. § 1715u(a). Loss mitigation may include, but is not limited to, special 2 forbearance, loan modification, preforeclosure sale, support for borrower housing 3 counseling, subordinate lien resolution, borrower incentives, and deeds in lieu of 4 foreclosure. 12 U.S.C. § 1715u(a). FHA mortgagees are required to comply with the 5 requirements in the FHA Single Family Housing Policy Handbook (“FHA Handbook”). 6 See Federal Housing Administration, Single Family Housing Policy Handbook 4000.1, at 7 609 (Effective Date: July 10, 2019).3 The FHA Handbook requires the submission of 8 detailed financial information from all borrowers for the purposes of a loss mitigation 9 analysis. Id. at 658. The parties do not dispute that Ms. Tavares did not provide 10 Anzaldua’s financial information. Dkt. ## 6, 7. Instead, the Complaint alleges that 11 AHFA’s failure to use its partial claim against the FHA’s Mutual Mortgage Insurance 12 Fund to cure Tavares’ default is an unfair or deceptive act. DR # 13 at ¶ 43. This is 13 insufficient to state a claim for relief. 14 Under the CPA, an act or practice is unfair or deceptive where it “has a capacity to 15 deceive a substantial portion of the public,” or “constitutes a per se unfair trade practice.” 16 Hangman, at 535. “A per se unfair trade practice exists when a statute which has been 17 declared by the Legislature to constitute an unfair or deceptive act in trade or commerce 18 has been violated.” Hangman, at 536. Here, Ms. Tavares did not allege that AHFA 19 violated any statute that “has been declared by the Legislature to constitute an unfair or 20

21 3 As an initial matter, the Court notes the parties include and reference several documents 22 other than the complaint in their briefs. At the motion to dismiss phase, a court typically cannot consider evidence beyond the four corners of the complaint, without converting 23 the motion to a motion for summary judgment. Lee v. City of Los Angeles, 250 F.3d 668, 24 688 (9th Cir. 2001). There are two exceptions to this rule: (1) the court may consider a document to which the complaint refers if the document is central to the party’s claims 25 and its authenticity is not in question, and (2) the court may consider evidence subject to 26 judicial notice. Id. at 688. As the bankruptcy court noted, the FHA Handbook and AHFA’s denial letter (DR # 22, Ex. 8) were both referenced in the Complaint. 27 Accordingly, the Court will also consider both documents for the purposes of this appeal. 1 deceptive act in trade or commerce…” Id.; see also Smart v. Emerald City Recovery, 2 LLC, No. C18-0448-JCC, 2018 WL 3569873, at *4 (W.D. Wash. July 25, 2018) (holding 3 the plaintiff failed to allege a per se violation of the CPA where the underlying statutory 4 violation did not constitute an unfair or deceptive act). 5 Similarly, the Complaint fails to plead facts suggesting that AHFA’s acts have the 6 “capacity to deceive a substantial portion of the public.” Hangman, at 535. As the 7 bankruptcy court noted, the Complaint does not allege any facts suggesting that AHFA 8 ever applied for a partial claim or that it had an obligation to do so when Tavares did not 9 meet the FHA requirements. DR # 26 at 12; see also DR # 13 at ¶ 43. The Complaint 10 also does not allege facts suggesting that AHFA ever received any “proceeds” from a 11 partial claim such that it would be obligated to apply those proceeds to cure the default. 12 While it is possible that AHFA could have requested a partial claim from HUD, its failure 13 to do so is not an an act capable of deceiving a substantial portion of the public. 14 Hangman, at 535. 15 Appellants argue that Tavares could not provide Anzaldua’s information because 16 of the no-contact order and his refusal to cooperate. Dkt. # 8 at 17. The Court 17 sympathizes but that is not sufficient to state a claim for relief under the CPA. It was not 18 “unfair or deceptive” for AHFA to decline to request a partial claim from HUD given 19 Tavares’ failure to satisfy the FHA guidelines. The Court finds that Ms. Tavares failed to 20 plead sufficient facts to establish that AHFA’s failure to apply a partial claim was an 21 “unfair or deceptive” practice under the CPA. 22 B. Injury from Conflicting Directives Regarding Quitclaim Deed 23 Next, Appellants argue that the bankruptcy court erred in holding that the 24 Complaint did not allege sufficient facts to establish an “injury” resulting from AHFA’s 25 conflicting directives regarding the necessity of a quitclaim deed. Dkt. # 6 at 20; DR # 26 26 at 13. In its Order, the bankruptcy court held that Tavares failed to plead an injury 27 1 resulting from AHFA’s misleading statements because Tavares’ loan modification 2 application was denied for other reasons. DR # 26 at 13. 3 This is a closer call. Appellants allege that the use of a quitclaim deed would have 4 eliminated the need for Tavares to provide Anzaldua’s income information in her 5 application – one of the reasons that Anzaldua’s application was denied. Dkt. # 6 at 20. 6 Assuming for the purposes of this motion to dismiss that Tavares is correct, there is still 7 the issue of the other FHA requirements. Even if HUD would have accepted the 8 application without Anzaldua’s income information, the Complaint does not allege that 9 securing a quitclaim deed would have also freed Tavares from satisfying the other FHA 10 requirements, including the income requirements and possession of a clear title. Dkt. # 7 11 at 22. 12 Under the CPA, a plaintiff must establish an injury to his or her “business or 13 property” resulting from the defendant’s unfair or deceptive act. Indoor 14 Billboard/Washington, Inc. v. Integra Telecom of Washington, Inc., 162 Wash. 2d 59, 83 15 (2007) (finding that to state a claim under the CPA a plaintiff must allege an injury and 16 “a causal link between the unfair or deceptive act and the injury suffered”). Here, 17 Appellants argue that Tavares would not have been required to submit Anzaldua’s 18 income information if she had obtained the quitclaim deed. Dkt. # 6 at 20. But it appears 19 that Tavares’ application was also denied for other reasons, in addition to her failure to 20 provide Anzaldua’s income information. DR # 22, Ex. 8. Moreover, Tavares did not 21 allege that Anzaldua would have agreed to quitclaim his interest. To the contrary, 22 Appellants contend that the reason Tavares was unable to provide Anzaldua’s income 23 information to satisfy the FHA requirements was because of the no-contact order and his 24 refusal to cooperate. Dkt. # 8 at 17. Without more, the Court finds that the Complaint 25 does not allege sufficient facts to establish that Ms. Tavares suffered an injury resulting 26 from AHFA’s conflicting directives regarding the quitclaim deed. 27 1 C. Injury from Discouraging Use of Housing Counselor 2 Appellants also challenge the bankruptcy court’s determination that the Complaint 3 failed to plead sufficient facts to establish an “injury” resulting from AHFA’s 4 discouragement of the use of a housing counselor. DR # 26 at 13-14. In its Order, the 5 bankruptcy court held that Ms. Tavares failed to satisfy the “injury” element because she 6 still decided to use a housing counselor, despite AHFA’s alleged discouragement. Id. at 7 14. Appellants argue that AHFA’s practice of discouraging the use of housing counselors 8 is an “unfair and deceptive” act, negatively impacting the public. Dkt. # 6 at 21-23. 9 Even if that were the case, to prove a violation of the CPA a plaintiff must demonstrate 10 all five elements of the claim – the failure to meet any of the elements is fatal. Hangman, 11 at 535. While AHFA’s alleged practice of discouraging the use of housing counselors 12 may very well be an unfair or deceptive practice, Ms. Tavares alleged no facts showing 13 that this practice injured her directly. Instead, it appears that this counselor actively 14 assisted her in submitting two separate loan modification applications. DR # 13 at ¶¶ 27, 15 30. Accordingly, the Court finds that Ms. Tavares failed to sufficiently plead an injury 16 resulting from AHFA discouraging the use of a housing counselor. 17 D. Unfair/Deceptive Denial of Loan Modification 18 Finally, Appellants argue that the bankruptcy court erred in finding that the 19 Complaint failed to plead sufficient facts to show that AHFA’s denial of Tavares’ loan 20 modification application constituted an unfair and deceptive act. Dkt. # 6 at 24-25. 21 Appellants acknowledge that Tavares’ loan modification application was denied for, 22 among other reasons, a failure to provide the income information for both borrowers. 23 Dkt. # 6 at 24. Appellants argue, however, that this was “unfair or deceptive” because 24 Ms. Tavares’ housing counselor indicated that she could afford a modification, without 25 Anzaldua’s income. Dkt. # 6 at 24. Appellants further contend that AHFA used the no- 26 contact order to deny any loan modification application that failed to comply with FHA 27 guidelines regarding the inclusion of all borrower income information. Id. But this is 1 insufficient to establish an unfair or deceptive act under the CPA. Hangman Ridge 2 Training Stables, Inc. v. Safeco Title Ins. Co., 719 P.2d 531, 535 (Wash. 1986). 3 FHA promulgated guidelines for loan modifications and partial claims. Ms. 4 Tavares did not satisfy all of the guidelines and, as a result, AHFA rejected her 5 application for a loan modification with a partial claim. Whether AHFA could have 6 approved the application or given Tavares more time to satisfy the FHA guidelines is 7 irrelevant. A mortgagee’s denial of an application for a loan modification that did not 8 meet FHA guidelines is insufficient to state a claim for relief under the CPA. 9 The Court is sensitive to Ms. Tavares’ situation. Unfortunately, the facts alleged 10 in the Complaint are insufficient to state a claim for relief CPA. Accordingly, the Court 11 AFFIRMS the bankruptcy court’s determination that the Complaint failed to state a claim 12 for relief under the CPA. 13 E. Leave to Amend 14 The bankruptcy court did not err when it denied Tavares leave to amend. Ms. 15 Tavares has now been given three separate opportunities to amend her complaint to 16 address deficiencies and has failed to do so. The Court is unconvinced that further 17 amendment would be productive. Saul v. United States, 928 F.2d 829, 843 (9th Cir. 18 1991) (holding that a court does not abuse its discretion in denying leave to amend where 19 amendment would be futile). 20 IV. CONCLUSION 21 For the foregoing reasons, the Court DENIES Appellants’ appeal and AFFIRMS 22 the bankruptcy court’s decision. DR # 26.

23 Dated this 12th day of September, 2019. 24 A

25 26 The Honorable Richard A. Jones United States District Judge 27