Salom v. Nationstar Mortgage LLC

Opinion

1 The Honorable Barbara J. Rothstein

WESTERN DISTRICT OF WASHINGTON

7 NO. 24-cv-444-BJR RICARDO SALOM, et al., on their own 8 behalf and on behalf of other similarly ORDER GRANTING MOTION TO situated persons, DISMISS 9 Plaintiffs, 10 v. 11 NATIONSTAR MORTGAGE LLC, et al., 12 Defendants. 13

15 Plaintiffs have filed a putative class action accusing Defendants, Nationstar Mortgage LLC 16 and Federal Home Loan Mortgage Association (“Freddie Mac”), of illegally charging fees 17 whenever homeowners request payoff statements for their loans. In addition to their claims asserted 18 under the Federal Debt Collection Practices Act (“FDCPA”), 15 U.S.C. §§ 1692, et seq., Plaintiffs 19 also assert claims under Washington and Maryland state law, alleging violations of the Maryland 20 Consumer Debt Collection Act (“MCDCA”), Md. Code, Com. L. § 14-202, et seq., the Washington 21 State Consumer Agency Act (“WCPA”), R.C.W. §§ 19.86, et seq., and the Washington State 22 Collection Agency Act (“WCAA”), R.C.W. § 19.16.250 et seq. Currently pending before the Court 23

1 is Freddie Mac’s motion to dismiss, ECF No. 74. Having reviewed the materials1 and the relevant 2 legal authorities, the Court will grant Freddie Mac’s motion. The reasoning for the Court’s decision 3 follows. 5 Plaintiffs, Ricardo Salom, Catherine Palazzo as assignee for Ruben Palazzo, and Peter 6 Hackinen, on their own and on behalf of similar borrowers, bring this action against Nationstar 7 (also known under the trade name Champion Mortgage), which acts as a collector on behalf of the 8 owners of thousands of mortgage loans throughout the country, including mortgage loans owned 9 by Freddie Mac. Am. Compl. ¶ 1, ECF No. 24. Freddie Mac and its sister corporation, Fannie Mae 10 (Federal National Mortgage Association), are government-sponsored enterprises chartered by 11 Congress to facilitate the nationwide secondary residential mortgage market. See 12 U.S.C. § 1451,

12 1716. Both entities buy mortgages from lenders rather than lending directly to borrowers, they 13 bundle the mortgage loans into securities and sell those securities to investors, which helps ensure 14 a steady supply of funds for home loans, promoting affordable housing and maintaining liquidity 15 in the mortgage market. See https://www.freddiemac.com/about/business (last visited Dec. 2, 16 2024); https://www.fhfa.gov/about-fannie-mae-freddie-mac (last visited Dec. 2, 2024). Plaintiffs 17 allege that Freddie Mac became the owner of the Palazzo mortgage loan, and Nationstar, acting as 18 Freddie Mac’s servicer, charged a fee for a payoff statement that is not authorized by law. Am. 19 Compl. ¶¶ 2-5. 20 Plaintiffs propose that Freddie Mac be appointed as the Named Defendant on behalf of a 21 Defendant Class that includes the owners of mortgage loans where Nationstar had no ownership

22 1 Including the motion, ECF No. 74; Plaintiffs’ response in opposition, ECF No. 76; and Freddie Mac’s reply, ECF 23 No. 78; together with attached exhibits.

1 interest but acted as the mortgage servicer and collected payments from the borrower. Id. ¶ 143. 2 Plaintiffs claim that the $25 fees charged by Nationstar for written payoff quotes are illegal pay-to- 3 pay “junk fees.” Id. ¶¶ 5-9. Specifically, Plaintiffs assert four causes of action: (1) Unjust 4 Enrichment against Nationstar; (2) Breach of Contract against Freddie Mac and the Defendant 5 Class, brought as an alternative claim to the unjust enrichment claim against Nationstar; (3) 6 Violations of the FDCPA brought by Plaintiff Hackinen against Nationstar; and (4) Violations of 7 State Debt Collection and Mortgage Servicing Laws against Nationstar. Id. ¶¶ 160-220. 8 The breach of contract claim against Freddie Mac was asserted on behalf of Ms. Palazzo 9 based on the Palazzo mortgage loan being sold to Freddie Mac, which remains the current owner. 10 Mot. 2 n.1; Opp’n 1; Am. Compl. ¶¶ 2, 93-94. Nationstar acted as a servicer of the loan. Am. Compl. 11 ¶¶ 1, 11, 61, 142. Plaintiffs assert that Freddie Mac had the “means and ability to audit and supervise

12 Nationstar’s conduct” to ensure that the fees collected were allowable, and Freddie Mac ratified 13 Nationstar’s illegal fees “by turning a blind eye” to the payoff fees. Id. ¶ 180; see also ¶¶ 181-83 14 (describing Freddie Mac’s inaction and ratification of Nationstar’s fee collection). By its motion, 15 Freddie Mac seeks dismissal with prejudice of the breach of contract claim asserted against it. 17 A motion to dismiss for failure to state a claim under Rule 12(b)(6) is properly granted if 18 the complaint does not “contain sufficient factual matter, accepted as true, to ‘state a claim to relief 19 that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. 20 v. Twombly, 550 U.S. 544, 570 (2007)). The plaintiff must plead “factual content that allows the 21 court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

22 “A complaint may fail to show a right to relief either by lacking a cognizable legal theory or by 23 lacking sufficient facts alleged under a cognizable legal theory.” Woods v. U.S. Bank N.A., 831

1 F.3d 1159, 1162 (9th Cir. 2016). When considering a motion to dismiss under Rule 12(b)(6), courts 2 must accept the factual allegations in the complaint as true and construe such allegations in the 3 light most favorable to the plaintiff. Interpipe Contracting, Inc. v. Becerra, 898 F.3d 879, 886-87 4 (9th Cir. 2018). 6 Freddie Mac disputes that Nationstar charged an illegal fee but argues that even if Nationstar 7 did charge an illegal fee, Freddie Mac did not authorize Nationstar to do so and, indeed, expressly 8 requires servicers to comply with all applicable laws and charge only lawful fees. Mot. 1-2. Freddie 9 Mac contends that, because it is a government entity, it is protected by the Merrill2 doctrine, and 10 cannot be held vicariously liable for its servicer’s unauthorized acts. Id. Additionally, Freddie Mac 11 argues that Plaintiffs fail to plausibly allege a breach of any contractual provision. Id. at 2.

12 Plaintiffs assert that Freddie Mac has raised the Merrill doctrine defense prematurely since 13 the cause of action was pleaded only “in the alternative,” and Plaintiffs suggest that the Court simply 14 stay the claim against Freddie Mac until there is a determination that the unjust enrichment claim 15 against Nationstar (Count I) cannot proceed. Opp’n 1-2 (citing Am. Compl. ¶¶ 136(o), 142, 146, 16 150, 175-188). Certainly, the Court has the power and discretion to stay the claim, but the party 17 seeking a stay bears the burden of establishing its need. Clinton v. Jones, 520 U.S. 681, 706-07 18 (1997) (citing Landis v. North American Co., 299 U.S. 248, 254 (1936)). Plaintiffs have not done 19 so, and staying a claim because it was raised in the alternative is not consistent with either the 20 language of Rule 8 or “the general purpose of the Federal Rules,” which is “to minimize technical 21

22 2 Referring to Federal Crop Insurance Co. v. Merrill, 332 U.S. 380 (1947), in which the Supreme Court held that a federal instrumentality can only be vicariously liable for the acts of its agents if those acts were actually authorized 23 by the instrumentality.

1 obstacles to a determination of the controversy on its merits.” United States ex rel. Atkins v. Reiten, 2 313 F.2d 673, 675 (9th Cir. 1963). The Court finds no compelling reason to wait to resolve the 3 pending motion. 4 Plaintiffs also argue that the Merrill doctrine is not applicable to this case. Opp’n 2. In 5 contending that the Merrill doctrine does not preclude Freddie Mac’s liability, Plaintiffs argue that 6 the Merrill doctrine is limited—limited to equitable estoppel claims; limited due to the Palazzo’s 7 not voluntarily choosing to enter into the contract with Freddie Mac; and limited because the public 8 treasury is not at risk. And Plaintiffs assert that Freddie Mac ratified Nationstar’s illegal fees. The 9 Court shall address these arguments in turn. 10 A. The Merrill doctrine is not limited to estoppel claims 11 Under the Merrill doctrine, a government agency is not bound by, or liable for, the

12 unauthorized or illegal conduct of its agents. Faiella v. Fed. Nat’l Mortg. Ass’n, 928 F.3d 141, 143 13 (1st Cir. 2019) (citing Merrill, 332 U.S. at 384); see also Johnson v. Fed. Home Loan Mortg. Corp., 14 No. C12–1712TSZ, 2013 WL 308957, at *5–7 (W.D. Wash. Jan.25, 2013) (holding that Freddie 15 Mac was not liable for alleged breaches of contract and fiduciary duty by mortgage servicers). 16 “Federal courts consistently have recognized that Freddie Mac was created by Congress with an 17 intent to further an important governmental objective and thus qualifies as governmental for Merrill 18 purposes.” Paslowski v. Standard Mortg. Corp., 129 F. Supp. 2d 793, 800 (W.D. Pa. 2000) (citing 19 cases); see also Johnson, 2013 WL 308957, at *5 (concluding that Freddie Mac is a federal agency 20 for purposes of the Merrill doctrine). 21 Multiple courts have rejected the argument that the Merrill doctrine is limited to estoppel

22 claims. See, e.g., Faiella, 928 F.3d at 149-50 (collecting cases applying the Merrill doctrine to bar 23 both contract and tort-based claims); Nelson v Nationstar Mortg., LLC, 504 F. Supp. 3d 1307, 1326

1 (S.D. Ala. 2020) (“[C]ertainly, the Eleventh Circuit neither held nor intimated in those decisions 2 that the Merrill doctrine is confined to the estoppel context.”); Gray v. Seterus, Inc., 233 F. Supp. 3 3d 865, 869 (D. Or. 2017) (“This finding that Fannie Mae is a federal instrumentality for the 4 purposes of the Merrill doctrine has been echoed in other cases, which have found that the Merrill 5 doctrine applies in both contract and statutory tort based claims.”); Cannon v. Wells Fargo Bank 6 N.A., 917 F. Supp. 2d 1025, 1034 (N.D. Cal. 2013) (“Notably, the Merrill doctrine has been applied 7 to both contract and tort-based claims.”); Paslowski, 129 F. Supp. 2d at 804–05 (applying Merrill 8 doctrine to claims for breach of contract and violation of state consumer protection law). 9 B. The Merrill doctrine applies to an involuntary contract 10 Plaintiffs try to distinguish this case from Merrill by arguing that the Palazzos “did not 11 voluntarily choose, like the farmer in Merrill chose to do, to enter into any mortgage contract they

12 have with Freddie [Mac] but instead entered into contracts with non-government entities which 13 were later assigned” to Freddie Mac. Opp’n 2. However, courts have not made this distinction when 14 applying the Merrill doctrine in similar cases involving mortgage loans purchased by Freddie Mac 15 or its sister agency, Fannie Mae. See e.g., Faiella, 928 F.3d at 150 (applying the Merrill doctrine 16 to bar holding Fannie Mae vicariously liable for its loan servicer’s conduct); Johnson, 2013 WL 17 308957, at *6 (holding that Freddie Mac was not liable for alleged breaches of contract and 18 fiduciary duty by mortgage servicers); Paslowski, 129 F. Supp. 2d at 803 (applying the Merrill 19 doctrine to preclude plaintiffs from pursuing a breach of contract action against Freddie Mac based 20 on a theory of vicarious liability for the actions of its servicers). Plaintiffs cited no cases to support 21 their distinction.

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1 C. The Merrill doctrine is not limited to protection of the public fisc 2 Plaintiffs also seek to distinguish this case from Merrill on the basis that “there is no risk to 3 the ‘public treasury’ by Plaintiffs’ claims . . . because Nationstar has indemnified” Freddie Mac. 4 Opp’n 4. Of course, “the Merrill doctrine is designed, in part, to ensure appropriate protection of 5 the public fisc.” Faiella, 928 F.3d at 147 (emphasis added). However, “the Merrill doctrine 6 implicates policy considerations beyond protection of the public treasury.” Paslowski, 129 F. Supp. 7 2d at 803; see also Faiella, 928 F.3d at 147 (explaining that it stated “‘in part’ because the doctrine 8 also rests solidly ‘upon considerations of sovereign immunity and constitutional grounds.’”). “[T]he 9 Merrill doctrine involves the distinct concept of whether a federal instrumentality should be bound 10 by the unauthorized acts of its agents and is based on broader considerations involving separation 11 of powers and public policy.” Paslowski, 129 F. Supp. 2d at 801. The test is whether Freddie Mac

12 is engaged in a governmental objective, and it clearly is. Id. 13 D. The Merrill doctrine requires a showing of actual authority 14 Finally, Plaintiffs argue that Freddie Mac is vicariously liable because it ratified 15 Nationstar’s conduct by having the “means and ability” to supervise. Opp’n 9. Plaintiffs assert that 16 Freddie Mac was notified about Nationstar’s conduct and did not respond, which exemplifies its 17 ratification of the conduct at issue. Id. Plaintiffs also argue that Freddie Mac ratified Nationstar’s 18 actions by allowing the charges to appear in the payoff statements sent to borrowers. Id. at 12. 19 The court in Faiella made clear that “[t]he Merrill doctrine requires a showing of actual 20 authority as a basis for holding a federal instrumentality vicariously liable for the acts of its agents,” 21 adding “even if a private principal could be held liable in the same or similar circumstances under

22 a theory of apparent authority.” 928 F.3d at 143 (emphasis added) (citing Merrill, 332 U.S. at 384). 23 Plaintiffs fail to allege any affirmative act committed by Freddie Mac nor that Freddie Mac provided

1 any express authorization for the charged fee. Plaintiffs allege that Freddie Mac did not take any 2 actions to prevent the fees being charged by Nationstar, but Plaintiffs fail to provide any authority 3 to support a theory that Freddie Mac can be held vicariously liable under a theory of ratification by 4 inaction. Even if the fees charged by Nationstar are illegal, the Merrill doctrine precludes Freddie 5 Mac from being held vicariously liable for conduct it did not authorize. See Paslowski, 129 F. Supp. 6 2d at 803 (finding that the alleged actions occurred outside the scope of their express authority). As 7 such, Plaintiffs’ claim against Freddie Mac is barred by the Merrill doctrine. 8 Accordingly, the Court dismisses Plaintiffs’ claims against Freddie Mac based on the 9 Merrill doctrine. At this juncture, the dismissal shall be without prejudice. Plaintiffs have requested 10 leave to amend, which is granted, but only if they can, in good faith, allege facts that plausibly 11 establish that Freddie Mac authorized Nationstar’s conduct.

13 For the foregoing reasons, 14 1. Defendant Federal Home Loan Mortgage Corporation’s Motion to Dismiss Plaintiffs’ Amended Complaint, ECF No. 74, is GRANTED; 15 2. Plaintiffs’ claim for breach of contract asserted against Federal Home Loan 16 Mortgage Corporation is DISMISSED WITHOUT PREJUDICE; 17 3. Plaintiffs have leave to amend, as authorized herein, to be filed within 15 days if they choose to do so; and 18 4. The parties are ordered to confer and file an Amended Joint Status Report within 15 days. 19 DATED this 5th day of December 2024. 20 A 21 22 B arbara Jacobs Rothstein U.S. District Court Judge 23