Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 1 of 28 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

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1 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 1 of 28 WILFREDO and ODALID BOSQUE and GERMANO DEPINA, on behalf of themselves and all others similarly situated IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS Plaintiffs, v. C.A. NO WELLS FARGO BANK, N.A. d/b/a WELLS FARGO HOME MORTGAGE d/b/a AMERICA S SERVICING COMPANY, Defendant. MEMORANDUM OF WELLS FARGO BANK, N.A. IN SUPPORT OF MOTION TO DISMISS THE COMPLAINT Irene C. Freidel BBO No David D. Christensen BBO No Kristin A. Davis BBO No K&L GATES LLP State Street Financial Center One Lincoln Street Boston, MA June 2, 2010 Counsel for Wells Fargo Bank, N.A.

2 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 2 of 28 TABLE OF CONTENTS Page I. INTRODUCTION AND SUMMARY OF ARGUMENT... 1 II. BACKGROUND... 2 A. Summary of the Complaint The Bosque loan The DePina loan... 3 B. The U.S. Treasury s Home Affordable Modification Program... 6 III. ARGUMENT... 9 A. HAMP Does Not Provide Plaintiffs With A Private Right Of Action To Enforce Its Requirements; Plaintiffs Cannot Enforce HAMP Under The Guise Of Massachuesetts Common Law B. Plaintiffs Have Failed To State A Claim For Breach Of Contract (a) The TPP is not an enforceable offer (b) Plaintiffs have not alleged facts showing consideration (c) The TPP does not contain definite and essential terms (d) Plaintiffs have not alleged an entitlement to damages C. Plaintiffs Have Failed To State A Claim For Breach Of The Implied Covenant Of Good Faith And Fair Dealing Plaintiffs have failed to allege facts to support a breach of the implied covenant claim against Wells Fargo Plaintiffs have not alleged an entitlement to damages for breach of the implied covenant D. Plaintiffs Have Failed To State A Claim For Promissory Estoppel IV. CONCLUSION i

3 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 3 of 28 Defendant Wells Fargo Bank, N.A. ( Wells Fargo ), by and through undersigned counsel and pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, respectfully submits this memorandum in support of its Motion to Dismiss the Complaint filed by plaintiffs Wilfredo and Odalid Bosque (the Bosques ) and Germano DePina ( Depina ) (collectively, plaintiffs ). I. INTRODUCTION AND SUMMARY OF ARGUMENT This case is about whether Wells Fargo as plaintiffs mortgage loan servicer violated guidelines issued by the U.S. Treasury in connection with the government s Home Affordable Modification Program ( HAMP ) program by not providing plaintiffs with permanent mortgage loan modifications immediately upon the completion of three payments by plaintiffs under their trial modification plans. Because HAMP provides plaintiffs with no private right of action, plaintiffs bring their claims under the guise of Massachusetts common law. In Count I of the Complaint, plaintiffs claim that Wells Fargo breached an alleged contract with them to permanently modify their mortgage loans under HAMP. In Count II, plaintiffs claim that Wells Fargo breached the implied covenant of good faith and fair dealing because it allegedly engaged in conduct designed to discourage borrowers from successfully completing the loan modification requirements and to minimize the number of permanent loan modifications extended. In Count III, plaintiffs bring a promissory estoppel claim alleging that Wells Fargo misrepresented that it would offer a permanent modification to them if they executed a HAMP trial modification or trial period plan ( TPP or trial plan ), supplied supporting documentation, and made their payments. The Complaint should be dismissed. It is nothing more than an attempted end-run around the enforcement mechanisms set forth in HAMP, which do not permit private enforcement actions by private litigations against loan servicers who are voluntary participants in the HAMP program. Moreover, plaintiffs have no legally enforceable property interest or BOS v24

4 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 4 of 28 mandatory entitlement to a permanent loan modification. Even if plaintiffs had a right of action under HAMP, as a matter of law, they have failed to plead and they cannot establish each element of their breach of contract and related claims. As discussed more fully below, plaintiffs have not adequately alleged that their trial modifications were contracts to enter into permanent modifications; the trial modifications did not contain any of the terms or details of a permanent modification, the trial modifications were not, and were never intended to be, guarantees that the borrowers would receive permanent modifications if not otherwise eligible for such modifications under HAMP guidelines, and, in light of their pre-existing indebtedness under their loan notes, plaintiffs reduced monthly payments under their trial modifications could not have constituted consideration necessary to form an enforceable contract. Because plaintiffs claims fail to satisfy the plausibility test set forth in Twombly and Iqbal, the Complaint should be dismissed. 1 II. BACKGROUND A. Summary of the Complaint. 1. The Bosque loan Odalid and Wilfredo Bosque obtained a first lien residential mortgage loan in the amount of $324,000 from Accredited Home Lenders, Inc. ( Accredited ) on January 9, A true and correct copy of the Bosques mortgage loan is attached as Exhibit A to the Declaration of Irene C. Freidel ( Freidel Decl. ). 2 The adjustable rate loan was secured by the Bosques residence at 1 Moreover, plaintiffs claims are moot. Wells Fargo provided plaintiffs with permanent modifications on April 1, 2010, with an effective date of May 1, Despite their claims in this case, however, neither the Bosques nor Mr. DePina accepted the modifications provided to them. However, on June 1, 2010, Mr. DePina executed and thereby accepted the permanent modification. To the extent that this case is premised on Wells Fargo s failure to provide named plaintiffs with permanent modifications, Wells Fargo has done so, and the case has no basis to proceed. 2 Documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim. Beddall v. State St. Bank & Trust Co., 137 F.3d 2

5 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 5 of 28 3 Elizabeth Circle, Leominster, MA. The Bosques defaulted on their loan more than two years ago. Compl. 44. On August 28, 2009, Wells Fargo notified the Bosques that they were eligible for the Home Affordable Modification Program ( HAMP ). Compl. 48. On October 1, 2009, the Bosques Trial Period Plan ( TPP ) became effective through HAMP. Ex. 8 to Compl. To meet HAMP requirements, the TPP included principal forbearance and was based on a fixed interest rate of 2% for the first five years graduating to a fixed interest rate of 5% beginning in year 8. Ex. 8 to Compl. As part of the TPP, the Bosques certified that: The TPP required that the Bosques make three payments of $1, beginning on October 1, Ex. 8 to Compl. At no point did Wells Fargo determine or notify the Bosques that they were ineligible for a permanent modification under HAMP or otherwise. Compl. 50. Wells Fargo provided the Bosques with a revised, permanent HAMP modification, with an effective date of May 1, 2010, on April 1, Freidel Decl. 3. However, the Bosques have not accepted the permanent modification. Id. 2. The DePina loan 12, 17 (1st Cir. 1998) (quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993); Christensen v. Kingston Sch. Comm., 360 F. Supp. 2d 212, 215 (D. Mass. 2005) (allowing undisputedly authentic document to be attached as an exhibit to a motion to dismiss because plaintiff s claims were based on that document). Plaintiffs mortgages are submitted for the Court s consideration because they are referenced in the Complaint and are central to plaintiffs claims that Wells Fargo was required to permanently modify the terms of their loans. Further, plaintiffs mortgages are self-authenticating pursuant to Fed. R. Evid. 902(9). See also In re DiMare, No , 2008 WL , *7 (Bankr. D. Mass. Dec. 22, 2009) (finding documents provided to consumers in mortgage lending transaction satisfy the requirements of Rule 902(9) as self-authenticating and related to commercial paper); 31 Wright & Gold, Federal Practice and Procedure:Evidence, 7143 (2000). In addition, plaintiffs mortgages are available on-line through their counties registry of deeds websites. See Worcester Northern District Registry of Deeds web-site for the Bosques mortgage ( and Suffolk County Registry of Deeds web-site ( for the DePina mortgage. 3

6 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 6 of 28 On April 20, 2006, Germano DePina obtained a first-lien residential mortgage loan from Equifirst Corporation ( Equifirst ). A true and correct copy of the DePina mortgage loan is attached as Exhibit B to the Freidel Decl. The adjustable rate loan was in the amount of $336,000. The DePina loan thereafter went into default. Wells Fargo determined that Mr. DePina was eligible for HAMP, and sent Mr. DePina a TPP from Wells Fargo on August 11, Ex. 11 to Compl. However, the original TPP was thereafter modified based on additional financial information provided by Mr. DePina. On October 9, 2009, Wells Fargo sent Mr. DePina a second TPP, which Mr. DePina executed and returned to Wells Fargo. Ex. 12 to Compl. The TPP required Mr. DePina to make three payments, beginning on October 1, 2009, in the amount of $1, Id. On January 20, 2010, Wells Fargo sent Mr. DePina a letter notifying him that he was still under the TPP, and that Wells Fargo required additional information by February 19, 2010 to complete the permanent modification: Ex. 14 to Compl. The Form 4506T that Mr. DePina had submitted to Wells Fargo was incomplete and rejected by the IRS; information in boxes 1A through 3 was missing. Ex. 14 to Compl. At no point did Wells Fargo determine or notify Mr. DePina that he was ineligible for a permanent modification under the HAMP program. Compl. 71. Wells Fargo provided Mr. DePina with a permanent HAMP modification agreement for the DePina loan on April 1, with an effective date of May 1, Freidel Decl. 5. On May 4

7 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 7 of 28 28, 2010, Mr. DePina indicated, through his counsel, that he intended to accept the modification. Id. 3 B. The Complaint On February 23, 2010, plaintiffs filed this putative class action lawsuit. They seek certification pursuant to Fed. R. Civ. P. 23(b)(2) and 23(b)(3) of a class of Massachusetts homeowners whose loans have been serviced by Defendant and who, since April 13, 2009, have complied with all of their obligations under a written TPP, but have not received a permanent modification HAMP. Compl. 78. For relief, plaintiffs seek: (1) class certification and appointment as class representatives and their counsel as class counsel; (2) a declaration that the acts and practices of Defendant complained of herein [] constitute a breach of contract and a breach of the covenant of good faith and fair dealing, as well a declaration that they are required by the doctrine of promissory estoppel to offer permanent modification to class members; (3) a permanent injunction enjoining Wells Fargo from continuing to harm Plaintiffs and the putative class; (4) an order requiring Wells Fargo to adopt and enforce a policy that requires appropriate training of [its] employees and agents regarding [its] duties under HAMP; (5) specific performance of Defendant s contractual obligations together with other relief required by contract and law; and (5) an award of actual and punitive damages, and the costs of the action, including attorneys fees. Id. at 20 (prayer for relief). 3 Mr. DePina has filed a separate lawsuit in connection with the servicing of the same loan that is the subject of the Bosque lawsuit. See Manson v. GMAC Mortgage, LLC, Case 1:08-cv RGS (D. Mass.) In that case, Mr. DePina seeks injunctive relief to stop further foreclosure activities on his loan, as well as unspecified damages. 5

8 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 8 of 28 B. The U.S. Treasury s Home Affordable Modification Program In an effort to help millions of families restructure or refinance their mortgages to avoid foreclosure, the U.S. Treasury announced a national modification program intended to help 3 to 4 million at-risk homeowners avoid defaulting on their mortgage loans by reducing monthly payment amounts to sustainable levels. U.S. Treasury s HAMP Supplemental Directive ( SD ) at 1, Ex. 2 to Compl. On March 4, 2009, the Obama Administration published detailed program guidelines for HAMP. Id. HAMP creates a defined loan modification process through which borrowers who are in default, at risk of imminent default, or in foreclosure can have their loans modified to a more affordable monthly payment that is intended to be not more than 31% of their gross monthly income. See As of April 30, 2010, in addition to completing 36,094 permanent HAMP modifications, Wells Fargo had 75,322 active trial modifications under HAMP and continues modifications under its own programs. See permanent-hamp-modifications From the beginning of 2009 through April 2010, Wells Fargo s completed modifications totaled more than 390,000, bringing its total HAMP and non-hamp active trial and completed modifications to 505,059. See id. Notably, in February 2010, Wells Fargo moved more borrowers into permanent HAMP modifications than any other servicer participating in the HAMP program. See All servicers of loans that are owned or guaranteed by Fannie Mae or Freddie Mac ( GSE loans ) must participate in the HAMP program as to those loans. Participation in HAMP is voluntary for servicers as to non-gse loans, that is, loans like plaintiffs that are not held by government-sponsored entities such as Fannie Mae and Freddie Mac, are held by servicers in their own portfolios, or are serviced by servicers for other portfolios, securitization trusts, or 6

9 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 9 of 28 investors. A servicer that chooses to voluntarily participate in HAMP must execute a Servicer Participation Agreement ( SPA ) with Fannie Mae in its capacity as Financial Agent for the United States. Wells Fargo executed an SPA on April 13, 2009 and an Amended SPA on March 16, Not all mortgage loans are eligible for HAMP, and a participating servicer is not required to modify every HAMP-eligible loan. If borrower eligibility is satisfied, the servicer is obligated to consider the borrower for a HAMP modification. However, the servicer retains certain discretion when determining eligibility for a permanent modification. See, e.g., SD at 5, 17. Contrary to the underlying premise of this case (see, e.g., Compl. 40, 78 (class definition)), a borrower is not guaranteed a permanent loan modification simply by obtaining a trial plan, making three payments, and providing all requested documentation to the loan servicer. The servicer must still evaluate the borrower s documentation to determine eligibility. Accordingly, using the borrower s income information, a participating servicer will follow a series of steps (known as the waterfall ) in an effort to obtain an affordable monthly payment for the borrower. The waterfall is designed to achieve a monthly mortgage payment that is not more than 31% of a borrower s total pre-tax monthly income. Id. at First, the servicer will reduce the interest rate to as low as 2%. Next, if necessary, the servicer will extend the loan term to 40 years. Id. Finally, if necessary, the servicer will forebear repayment of a portion of the principal until the loan is paid off and will waive interest on the deferred amount. Id. 4 Wells Fargo s SPA and Amended SPA are available publicly at the following government web-site: The Amended SPA is also attached as Ex. 1 to the Compl. 7

10 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 10 of 28 If application of the waterfall does not produce an affordable payment, the loan does not qualify for a permanent HAMP modification. If application of the waterfall does produce an affordable payment, the servicer also subjects the loan to a Net Present Value ( NPV ) test. If the NPV test produces a negative result (losses from foreclosure are less than losses from modification), the servicer is not obligated to modify the loan. The servicer retains discretion as to the manner in which the NPV test is calculated. See SD at 5; see also Williams v. Geithner, Civil No ADM/JJG, 2009 WL , *6 (D. Minn. Nov. 9, 2009). Under original HAMP guidelines, the modification of a loan was a two-step process. SD at 14-15; Compl. 38. To provide immediate payment relief for borrowers, a participating servicer could place a borrower on a three-month trial period plan before the servicer had obtained the information from the borrower necessary to make a final determination as to whether the borrower was eligible for a permanent modification. SD at 5, 17 ( [s]ervicers are not required to verify financial information prior to the effective date of the trial period ). The servicer would thereafter permanently modify the borrower s loan if required conditions are met. See SD at The two-step process has led to certain borrowers being placed trial plans but not transferring into a permanent modification for various reasons including, but not limited to, because they did not qualify for a permanent modification based on the documentation provided to the servicer. Some borrowers, like plaintiffs here, simply did not obtain a permanent modification as quickly as the HAMP program originally anticipated and were required to stay on the trial plan for more than three months. All of these borrowers, whose reasons for not obtaining a permanent modification vary, underpin this lawsuit and other litigation filed against servicers in courts around the country. 8

11 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 11 of 28 To respond to the circumstances of borrowers who were placed on trial modifications but not moved to permanent modifications, for varying reasons, the U.S. Treasury, on January 28, 2010, issued Supplemental Directive ( SD ), effective June 1, SD (attached as Ex. C to Freidel Decl.) provides a significant program change by requiring that servicers verify borrower eligibility for a permanent modification prior to offering a HAMP loan modification. III. ARGUMENT 5 A. HAMP Does Not Provide Plaintiffs With A Private Right Of Action To Enforce Its Requirements; Plaintiffs Cannot Enforce HAMP Under The Guise Of Massachusetts Common Law. While ostensibly pled as unadorned common law claims, the counts of the Complaint are all premised on (1) Wells Fargo s allegedly unlawful delay in providing plaintiffs with permanent HAMP modifications upon completion of three payments under their trial plans, and (2) the claim that all borrowers placed on a trial plan who provide requested documentation and make three payments are guaranteed a permanent modification regardless of eligibility. HAMP, however, provides borrowers with no private right of action to enforce its requirements, which servicers participate in voluntarily and that are already enforced by the U.S. Treasury (through its agents). Moreover, contrary to the premise of this lawsuit, not all borrowers are eligible for a 5 While it is axiomatic that the Court accepts as true all well-pled facts alleged in the complaint, plaintiff must offer more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Damon v. Moore, 520 F.3d 98, 103 (1st Cir. 2008) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). When reviewing a motion to dismiss, the Court must ask whether the plaintiff has provided allegations that raise a right to relief above the speculative level and state a claim to relief that is plausible on its face. Curran v. FedEx Ground Package Sys., Inc., 593 F. Supp. 2d 341, 344 (D. Mass. 2009) (quoting Twombly, 550 U.S. at 555 and 570). As the Supreme Court recently stated in Ashcroft v. Iqbal, Rule 8 does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions. [O]nly a complaint that states a plausible claim for relief survives a motion to dismiss. [Twombly at 556]. Determining whether a complaint states a plausible claim for relief will be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not show[n]-that the pleader is entitled to relief. Fed. Rule Civ. Proc. 8(a)(2). 129 S. Ct. 1937, 1950 (2009) (internal citations and quotations omitted). 9

12 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 12 of 28 permanent HAMP modification, and HAMP does not require or mandate that every borrower whose loan is modified on a trial basis receive a permanent modification. While HAMP was designed to help homeowners stay in their homes, it also recognizes that not every borrower can be helped. As one district court has already held, neither the Emergency Economic Stabilization Act, 12 U.S.C (2008) ( EESA ), which created HAMP, nor HAMP s guidelines intended to create a property interest in loan modifications for mortgages in default. Williams, 2009 WL , at *6. The statute does not contain language mandating loan modifications, but instead states that loans may be modified where appropriate a phrase that evinces a Congressional intent to afford discretion in the decision whether to modify loans in certain circumstances. Id. In this case, plaintiffs claims flow from Wells Fargo s perceived failure to meet its obligations under HAMP including under its SPA which incorporates HAMP guidelines by not providing plaintiffs with a permanent loan modification immediately after they made three or more payments under their trial modifications. Plaintiffs, however, do not have standing to enforce Wells Fargo s obligations under HAMP (or the SPA), and thus courts have held that borrowers, like plaintiffs, are not intended third-party beneficiaries of the SPA. See Escobedo v. Countrywide Home Loans, Inc., No. 09cv1557 BTM(BLM), 2009 WL , *3 (S.D. Cal. Dec. 15, 2009) ( [q]ualified borrowers are incidental beneficiaries of the Agreement and do not have enforceable rights under the contract ); Villa v. Wells Fargo Bank, N.A., No. 10CV81 DMS (WVG), 2010 WL , *3 (S.D. Cal. March 15, 2010) (same). Moreover, it is now well-established that neither HAMP nor the SPA provides plaintiffs with the right to privately enforce its terms to obtain a permanent HAMP modification whether directly or under the guise of state law. Indeed, nowhere does the SPA or HAMP contemplate 10

13 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 13 of 28 private party enforcement actions under either HAMP or state law. The only limited private right of action created under EESA, is through the Administrative Procedures Act. See 12 U.S.C But that provision only provides for challenges to actions taken by the Secretary of the Treasury. The statute does not create a private right of action against servicers participating in the HAMP program. See Gaitan v. Mortgage Elec. Registration Sys., No. EDCV VAP (MANx), 2009 WL , *7 (C.D. Cal. Oct. 5, 2009) (HAMP does not provide a private cause of action). For this reason, numerous courts have already held that there is no private right of action under HAMP for claims by borrowers against participating servicers, and state laws cannot be used to create private rights of action where none exist under federal law. See Aleem v. Bank of Am., N.A., No. EDCV VAP (RZx), 2010 WL , *3-4 (C.D. Cal. Feb. 9, 2010) ( [t]he UCL cannot create a private right of action where none exists under the federal statute ); Pantoja v. Countrywide Home Loans, Inc., 640 F. Supp. 2d 1177, 1187 (N.D. Cal. 2009); Ung v. GMAC Mortgage, No. EDCV VAP (OPx), 2009 WL , *9-11 (C.D. Cal. Sept. 4, 2009) (dismissing TARP-based claims pled as the basis for state law claims); Gonzales v. First Franklin Loan Servs., No. 1:09-CV AWI-GSA, 2010 WL , *18 (E.D. Cal. Jan. 11, 2010) (no private right of action under TARP or EESA). Moreover, that HAMP does not provide for a private right of action is consistent with HAMP s enforcement mechanisms. Enforcement of HAMP requirements is performed by Freddie Mac, which the U.S. Treasury designated as its compliance agent under HAMP. SD at 25. To ensure that loan servicers comply with HAMP requirements, the SPA provides Freddie Mac with extensive oversight and remedial powers. Freddie Mac, in turn, conducts both on-site and remote assessments to determine a servicer s compliance with various HAMP 11

14 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 14 of 28 requirements from reviewing borrower eligibility to execution of the NPV/waterfall processes. See id. HAMP expressly requires that for each loan the servicer must report loan level data including reasons why loans evaluated for modifications were not modified. HAMP Supplemental Directive ( SD ), Ex. D to the Freidel Decl. Further, pursuant to SD 09-06, any loan that does not result in a permanent HAMP modification after completion of a trial period triggers additional reporting requirements by the servicer. Id. at 4. Further, the SPA also states that disputes between the parties, here Wells Fargo and the U.S. Treasury, regarding HAMP requirements will be resolved in accordance with federal law and through alternative dispute mechanisms. The SPA states that the parties agree to take all reasonable steps to resolve disputes internally before commencing legal proceedings. See Ex. 1 to Compl. at 9. Consistent with this theme, SD also provides for an issue/resolution appeal process for servicer assessments. SD at Finally, a servicer s voluntary participation in HAMP which is strongly encouraged by the U.S. Treasury would be severely discouraged if the servicer were exposed to multiple private causes of action and damages for failing to comply with HAMP requirements. See, e.g., Brown v. First Tenn. Nat l Ass n, C.A. No. 1:09-CV-0679-BBM (N.D. Ga. Nov. 20, 2009) (slip op. at 13-14, 28-29, attached to Freidel Decl. as Ex. E) (finding no private right of action to enforce VA guidelines where Congress provided administrative remedies to the government to enforce program requirements and program was intended to encourage lender participation). For these and other reasons, plaintiffs cannot enforce HAMP, and they may not use state law as an indirect means to enforce HAMP when the program was not designed to include 6 To assist borrowers in connection with the denial of loan modification requests, the U.S. Government set up the Homeowners Hope Hotline. See 12

15 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 15 of 28 private enforcement or penalties against servicers who are participating in the program voluntarily. B. Plaintiffs Have Failed To State A Claim For Breach Of Contract. Assuming for the sake of argument that plaintiffs could enforce HAMP under the guise of Massachusetts common law (contrary to the foregoing), plaintiffs breach of contract claim should nonetheless be dismissed as a matter of law. It is well established in Massachusetts that the essential elements of a contract are an offer, acceptance, and an exchange of consideration or meeting of the minds. Vadnais v. NSK Steering Sys. Am., Inc., 675 F.Supp.2d 205, 207 (D. Mass. 2009). Plaintiffs allegations that Wells Fargo became contractually obligated to permanently modify their mortgage loans after it provided plaintiffs with a TPP pursuant to which plaintiffs made three or more payments are not sufficient to establish the existence of a valid contract. Absent more, Twombly and Iqbal mandate dismissal of plaintiffs claims. See, e.g., Iqbal, 129 S. Ct. at 1950 (a plaintiff is not entitled to engage in discovery when plausible claim has not been alleged). (a) The TPP is not an enforceable offer Plaintiffs erroneously assert that the TPPs that they executed with Wells Fargo were valid contracts that required Wells Fargo to immediately provide plaintiffs with permanent modifications upon completion of their trial plan payments. Compl Plaintiffs allege that they accepted the offers by making their trial plan payments and providing requested documentation, which then guaranteed that they would receive permanent modifications. Id. 40, 78. The test for an offer is a manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. Bourque v. FDIC, 42 F.3d 704, 709 (1st Cir. 1994) (quoting Restatement (Second) of Contracts 24 at 71 (1981). A party s suggestion is not an offer if it is reasonably apparent 13

16 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 16 of 28 that some further step is necessary to create contractual relations. Id. (concluding that no contract was formed because reasonable interpretation of agreement was that buyer s acceptance of seller s offer was subject to further approval); Restatement (Second) of Contracts 26. Here, plaintiffs TPPs cannot reasonably be viewed as offers the acceptance of which could bind Wells Fargo to permanently modify plaintiffs mortgage loans. Contrary to plaintiffs suggestion, nowhere do applicable HAMP guidelines mandate that any borrower who obtains a TPP is guaranteed a permanent modification. Indeed, the guidelines implicitly reject that conclusion and would be eviscerated if plaintiffs claims were true. At the time plaintiffs received their TPPs, HAMP guidelines expressly permitted a servicer to place a borrower on a trial plan before the servicer obtained all of the borrower s documentation and was able to determine eligibility for a permanent modification. SD at 5, 17 ( [s]ervicers are not required to verify financial information prior to the effective date of the trial period ). HAMP guidelines also contemplate that the servicer would evaluate (or reevaluate) the borrower s NPV during the trial plan to determine if the NPV is positive (and thus eligible for modification) or negative (and thus not appropriate for modification). SD at 10; see also HAMP FAQs (April 2, 2010), Q2314 at 27-28, Ex. F to Freidel Decl. HAMP guidelines further state that if the borrower successfully completed the trial plan and should have been converted to a permanent modification, the servicer must promptly make a determination as to whether the borrower is eligible for a permanent HAMP modification See HAMP FAQs, Conversion Campaign, Q at 3, Ex. G to Freidel Decl. (emphasis added). The guidelines provide the servicer with a 60-day grace period to provide a permanent modification if the servicer discovers that an error was made and the borrower should have been placed in a permanent modification. Id. at 2-3. Clearly, the guidelines do not 14

17 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 17 of 28 presume that every trial modification would necessarily result in a permanent loan modification, nor do they expect that every permanent modification will be provided immediately upon completion of the trial plan. The language of the TPP confirms that permanent modification of plaintiffs loans were was conditioned on the receipt and review by Wells Fargo of additional documentation and the satisfaction of all necessary conditions to render plaintiffs eligible for a permanent modification. When signing the TPP, plaintiffs acknowledged: I am providing or already have provided documentation for all income that I receive. Compl., Exs. 8 and 11 at 1(D). Further, when signing their TPPs, plaintiffs agreed that: all terms and provisions of the [original] Loan Documents remain in full force and effect; nothing in this Plan shall be understood or construed to be a satisfaction or release in whole or in part of the obligations contained in the Loan Documents. The Lender and I will be bound by, and will comply with, all of the terms and provisions of the Loan Documents. Id. at 4(D). Finally, Wells Fargo used TPP documents in the form and substance provided and required by the Treasury under the HAMP program. See, e.g., SD Because the HAMP program does not contemplate private enforcement of its requirements (supra), and the program would be nullified if servicers were subject to thousands of individual lawsuits on any basis, let alone on the forms provided by the Treasury, boilerplate language in the Treasury s form TPP should not be read as plaintiffs advocate to (1) bind Wells Fargo to permanently modify the loan of every borrower on a TPP, (2) bind Wells Fargo to permanently modify the loan of every borrower on a TPP immediately upon completion of three TPP payments, and (3) subject Wells Fargo to private causes of action for failing to do so even if it determines that a borrower is not 15

18 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 18 of 28 eligible for a permanent modification. For all of these reasons, and as a matter of law, plaintiffs TPPs cannot be considered either valid contracts or offers for permanent loan modifications. (b) Plaintiffs have not alleged facts showing consideration. Consideration is the primary basis for finding that a promise is legally enforceable. A contract must have consideration to be enforceable and in order for a contract to have valid consideration, the contract must be a bargained-for exchange in which there is a legal detriment of the promisee or a corresponding benefit to the promisor. Neuhoff v. Marvin Lumber and Cedar Co., 370 F.3d 197, 201 (1st Cir. 2004) (affirming dismissal of breach of contract claim because Defendant s alleged promise to repair lacked consideration) (internal quotations omitted) (citing Hinchey v. NYNEX Corp., 144 F.3d 134, 142 (1 st Cir. 1998); see also Hutchins, 430 F.Supp.2d at 34 (dismissing breach of contract claim for lack of consideration). The well-settled rule in the field of contracts has long been that performance of a preexisting legal duty that is neither doubtful nor subject to honest and reasonable dispute is not valid consideration where the duty is owed to the promisor, or to the public at large. In re Lloyd, Carr and Co., 617 F.2d 882, 890 (1 st Cir. 1980). Under the pre-existing duty rule, the partial payment by a debtor of an amount undisputedly due such as plaintiffs modified loan payments here is not consideration for the creditor s promise to discharge the entire debt. First Nat l Bank of Boston v. Cartoni, 3 N.E.2d 177, 178 (Mass. 1936) ( [i]t is settled in this commonwealth that the payment of a lesser sum in satisfaction of a larger overdue liquidated sum does not discharge the whole debt, nor bar an action to recover the rest ). Here, plaintiffs allege that they provided valid consideration when they made their trial plan payments. See, e.g., Compl. 93. But making payments pursuant to the terms of a preexisting note does not constitute a bargained-for exchange of promises; plaintiffs were already obligated to make monthly principal and interest payments under the terms of their original 16

19 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 19 of 28 notes, which are secured by their properties. See Exs. A and B to Freidel Decl. Under plaintiffs trial modifications, Wells Fargo agreed to accept reduced monthly principal and interest payments based on plaintiffs representations to Wells Fargo of financial hardship. Compl. 52 and 72. The monthly payment amounts under plaintiffs trial plans were substantially less than the monthly amounts owed under plaintiffs original secured obligations to Wells Fargo. See Exs. A and B to Freidel Decl. The partial payments by plaintiffs to Wells Fargo of amounts undisputedly due and secured by plaintiffs property cannot as a matter of law be considered bargained-for consideration or the result of a reciprocal agreement. In re Lloyd, Carr & Co., 617 F.2d at 890 ( performance of a pre-existing legal duty... is not valid consideration where the duty is owed to the promisor ); Boston Prof l Hockey Assoc. v. Comm r of Revenue, 443 Mass. 276, 287 (2005) ( [w]e have long held that performance of an existing legal duty or contractual obligation is not sufficient consideration for a new promise by the obligee ). See also Restatement (Second) of Contracts 73 and Comment A. Accordingly, because plaintiffs have provided no additional consideration to Wells Fargo (or more importantly, to their noteholders), no new, enforceable contracts governing repayment of their mortgage loans have been formed. (c) The TPP does not contain definite and essential terms. Under Massachusetts law, [a] purported contract which is no more than an agreement to agree in the future on essential terms, or one which does not adequately specify essential terms, ordinarily will be unenforceable. Giuliano v. Nations Title, No , 1998 WL 45459, *4 (1st Cir. Jan. 23, 1998) (quoting Air Tech. Corp.v. Gen. Elec. Co., 199 N.E.2d 538, 548 (Mass. 1964)). In determining whether an agreement is an enforceable contract, the key issue for the court is whether the parties intended to be bound when they signed the contract and, if so, whether the initial agreement included all of the essential terms. Id. (quoting Rand-Whitney 17

20 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 20 of 28 Packaging Corp. v. Robertson Group, Inc., 651 F. Supp. 520, 535 (D. Mass. 1986)). The essential terms must be set forth with sufficient definiteness and clarity. Id.; see also Hutchins, 430 F. Supp. 2d at 34 ( the law is well-settled that the essential terms of a contract must be definite enough to ascertain the nature and extent of the parties obligations ). Among the essential terms in a contract to lend money are the applicable rate of interest, duration of the loan, and mode of repayment. See Jordan-Milton Mach. Inc. v. F/V Teresa Marie II, 978 F.2d 32, 35 (1st Cir. 1992). Indeed, in Jordan-Milton, the court stated that the absence of an agreement regarding when repayment was to begin and end, the amount to be repaid or the rate of interest to be charged by the lender, requires the conclusion that these omitted terms are material to a determination that there was no valid enforceable agreement. Id.; see also Restatement (Second) of Contracts 33 (1981) (contract terms must be reasonably certain so as to enable a court to establish the existence of a breach and fashion a remedy therefrom). The Court should reach the same conclusion here. Plaintiffs trial plans do not contain any of the definite and essential terms that reflect an agreement by the parties for permanent loan modifications and which agreement could be enforced by the Court. The TPPs do not state the principal amounts of the modified loans, the terms of the modified loans, the monthly payment amounts, the applicable interest rates, or the amounts of escrow payments owed, if any. See Exs. 8, 11 and 12 to Compl [TPPs]. All of these terms may be modified under HAMP, see SD 09-01, yet they are all left out of the TPPs. This is so because plaintiffs TPPs are not permanent modifications nor are they offers for permanent modifications that could be accepted by plaintiffs as confirmed by the statement in Paragraph 4(D) of the TPPs that all the terms and provisions of the Loan Documents remain in full force 18

21 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 21 of 28 and effect. The TPPs are silent with respect to what the parties agreed to as to any permanent modification and, as such, it cannot be enforced by this Court. (d) Plaintiffs have not alleged an entitlement to damages. Even if plaintiffs TPPs were contracts, plaintiffs have not alleged that they were injured as the result of Wells Fargo s purported failure to provide them with permanent modifications immediately upon completion of three or more payments under their TPPS, and they have not alleged a basis for the Court to award actual damages. The long-established general rule for breach of contract recovery in Massachusetts is that the wronged party should receive the benefit of his bargain, i.e., be placed in the same position as if the contract had been performed. Verderber v. Perry, 1999 WL , *2 n.4 (1 st Cir. 1999) (quoting VMark Software, Inc. v. EMC Corp., 642 N.E.2d 587 (Mass. App. Ct. 1994)). This award compensates the injured party for the loss of the bargain, as measured by the loss in value to him of the other party s promised performance, plus any incidental or consequential losses caused by the breach, less any cost that he has avoided by not having to perform. See Restatement (Second) of Contracts 347(a)-(c). The purpose of contract damages is to put the party suffering from the breach in as good a position it would be in had there been no breach. Restatement (Second) of Contracts 347 Comment A (1981). Plaintiffs have alleged no harm caused to them by Wells Fargo nor any valid measure or amount of damages to which they assert they are entitled. First, plaintiffs have identified no monetary harm or financial loss that they have suffered by virtue of not having received permanent modifications immediately upon completion of their TPPs because there was none. Plaintiffs were obligated to repay the principal balances on their loans, and they were in default. Since the beginning of their HAMP trial plans, Wells Fargo has been accepting reduced, modified loan payments from plaintiffs. In light of plaintiffs existing indebtedness under their loan notes, plaintiffs claims for damages are untenable. 19

22 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 22 of 28 Second, HAMP guidance suggests a 60-day grace period for servicers to provide a modification if they determine that a modification was denied in error. See HAMP FAQs, Conversion Campaign, Q at 3. Here, Wells Fargo did not deny plaintiffs permanent modifications in error, or otherwise, and in fact offered plaintiffs permanent modifications on April 1, Even if there was a finding that Wells Fargo denied plaintiffs a permanent modification in error, which Wells Fargo disputes, Wells Fargo s provision of permanent modifications to plaintiffs on April 1, 2010 should fall within the HAMP grace period. Third, plaintiffs claim they were harmed by Wells Fargo because they forewent pursuing other remedies that might be pursued to save their home, such as restructuring their debt under the bankruptcy code, or pursuing other strategies to deal with their default, such as selling their home. Compl. 98. There is no support, however, for the Court to find that plaintiffs alleged lost opportunities for mitigating their financial burdens are a cognizable basis for a claim of damages. See, e.g., Redgrave v. Boston Symphony Orchestra, Inc., 855 F.2d 888, 899 (1 st Cir. 1988) (conclusory statement that business opportunities were lost because of breach of contract was not sufficient to support award of damages); Kiely v. Raytheon, 105 F.3d 734, 739 (1 st Cir. 1997) (rejecting speculative claims of damages). Moreover, even if damages for these alleged speculative injuries were recoverable (and could be assessed a present value), plaintiffs have not alleged causation, that is, they have identified no damages that they have suffered due to any conduct of Wells Fargo, as their loan servicer. Kiely, 105 F.3d at 739. Indeed, they do not allege that Wells Fargo prevented plaintiffs from seeking bankruptcy relief, from selling their homes, or from pursuing any alternative and more preferable solutions to address their debt obligations. For all these reasons, Count I should be dismissed. 20

23 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 23 of 28 C. Plaintiffs Have Failed To State A Claim For Breach Of The Implied Covenant Of Good Faith And Fair Dealing. In Count II, plaintiffs allege that Wells Fargo breached the implied covenant of good faith and fair dealing. Compl Plaintiffs claims should be dismissed because they have failed to allege the existence of a contract, any bad faith on the part of Wells Fargo, or any economic loss as the result of a purported breach. 1. Plaintiffs have failed to allege facts to support a breach of the implied covenant claim against Wells Fargo. [T]o demonstrate a claim for the breach of the covenant of good faith and fair dealing, the plaintiff must show that an enforceable contract existed between the two parties. Christensen v. Kingston School Committee, 360 F. Supp. 2d 212, 226 (D. Mass. 2005) (no breach of implied duty because no evidence that employer fired employee in bad faith or with improper motive) (internal quotations omitted). The purpose of the implied covenant is to ensure that neither party interferes with the ability of the other to enjoy the fruits of the contract, and that, when performing the obligations of the contract, the parties remain faithful to the intended and agreed expectations of the contract. Chokel v. Genzyme Corp., 867 N.E.2d 325, 329 (Mass. 2007) (internal citations and quotations omitted). Because the Complaint does not contain allegations showing that a contract was formed to permanently modify plaintiffs loans, there are no allegations sufficient to show how Wells Fargo breached any implied covenant of good faith and fair dealing. The only valid contract at issue here is the original loan agreement between plaintiffs and their investor (a non-party); there are no allegations in this case that Wells Fargo, as servicer, did anything to violate plaintiffs reasonable expectations as to that contract. Moreover, not every breach of contract is a breach of the implied covenant of good faith and fair dealing. Christensen, 360 F. Supp.2d at 227 (dismissing breach of the implied covenant claim and stating claims for breach of the implied covenant of good faith and fair dealing are 21

24 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 24 of 28 distinct from simple breach of contract claims and require additional factual allegations of unfairly leveraging the contract terms for undue economic advantage ). As the district court has stated, breach of the implied covenant requires the plaintiff to allege conduct taken in bad faith either to deprive a party of the fruits of labor already substantially earned or unfair leveraging of the contract terms to secure undue economic advantage. Id. See also Sonoran Scanners, Inc. v. Perkinelmer, Inc., 585 F.3d 535, 541 (1st Cir. 2009) (finding no breach of implied covenant); see also Schultz v. R.I. Hosp. Trust Nat l Bank, N.A., 94 F.3d 721, 730 (1 st Cir. 1996) (no support in record for finding that defendant acted with the sort of dishonest purpose or conscious wrongdoing necessary for a finding of bad faith or unfair dealing ); Equip. & Sys. for Indus. v. Northmeadows Constr. Co., 798 N.E.2d 571, 575 (Mass. App. Ct. 2003) (affirming dismissal of claim for breach of implied duty and stating there is nothing in the complaint from which one might draw the reasonable inference that the [buyer s] refusal to sign [agreement] was done in bad faith ); Birbiglia v. St. Vincent Hosp., Inc., 692 N.E.2d 9, 14 n. 5 (Mass. 1998) (specific intent required to establish a violation of any duty of good faith and fair dealing). Here, plaintiffs breach of implied covenant claim adds nothing to their breach of contract claim. Plaintiffs have not alleged as they must -- that Wells Fargo acted in bad faith when it did not provide plaintiffs with their permanent modifications immediately upon completion of three or more trial plan payments. See Compl. 103 (alleging that Wells Fargo failed to perform loan servicing functions, properly supervise its agents and employees, follow through on written and implied promises, and follow through on contractual obligations ). In the lender-borrower context, the implied covenant requires that the bank not purposefully injure [plaintiffs ] right to obtain the benefit of the contract. Famm Steel, Inc. v. Sovereign Bank, 571 F.3d 93, 100 (1st Cir. 2009) (quoting Shawmut Bank, N.A. v. Wayman, 606 N.E.2d 22

25 Case 4:10-cv FDS Document 6 Filed 06/02/10 Page 25 of , 928 (Mass. App. Ct. 1993)); accord In re Greenberg, 212 B.R. 422, 429 (Bankr. D. Mass. 1997) (bank did not breach implied duty of good faith and fair dealing in transactions with mortgage borrower by failing to disclose how prepayment on mortgage loan could best be applied); Ferris v. Fed. Home Loan Mortgage Corp., 905 F. Supp. 23, 28 (D. Mass. 1995) (bank s failure to provide information to mortgagor did not rise to level of breach of implied covenant of good faith and fair dealing). Plaintiffs have alleged no bad faith by Wells Fargo, as loan servicer, or conduct intended to purposefully injure [plaintiffs ] right to obtain the benefit of the contract in connection with the modification of their mortgage loans. On this basis alone, plaintiffs breach of implied covenant claim should be dismissed. 2. Plaintiffs have not alleged an entitlement to damages for breach of the implied covenant An action for breach of the covenant of good faith and fair dealing is an action on the contract. As such, damages available for a breach of implied covenant claim are damages arising out of contract, and they are not intended to be financial windfalls in the form of damages not otherwise recoverable. Ayash v. Dana-Farber Cancer Inst., 822 N.E.2d 667, (Mass. 2005) (plaintiff only entitled to damages for economic loss; in awarding damages for breach of the implied covenant of good faith and fair dealing, the goal is to compensate an employee for past services and to deny the employer any readily definable, financial windfall resulting from the breach); McCone v. New England Tel. and Tel. Co., 471 N.E.2d 47, 50 (Mass. 1984) (holding that damages to professional reputations, disruption of personal lives, and great pain of body and mind are not compensable losses because suit for breach of implied covenant of good faith and fair dealing is suit on the contract, and these damages are not contract damages). Plaintiffs have not alleged how any purported delay by Wells Fargo in providing them with permanent modifications caused plaintiffs any economic loss, or provided Wells Fargo (or, 23