Antitrust Law Daily Wrap Up, RICO—NDCal: RICO and California Unfair Competition Claims Proceed Against Wells Fargo over Mortgage Default Fees, (May 2, 2013)

By Tobias J. Gillett, J.D., LL.M.

Mortgage loan borrowers have stated federal RICO and California Unfair Competition Law (UCL) claims against Wells Fargo & Company and Wells Fargo Bank, N.A. over Wells Fargo’s alleged overcharging of fees related to defaults on their mortgages, and Wells Fargo’s alleged concealment of the marked-up fees, the federal district court in Oakland, California has ruled (Bias v. Wells Fargo & Co., April 25, 2013, Rogers, Y.).

The borrowers had mortgage loans through Wells Fargo, on which they defaulted. Although their mortgages disclosed that they would be required to pay for certain services on default, the borrowers alleged that Wells Fargo "assess[ed] borrowers a fee that was significantly marked-up from the third-party vendors’ actual fees for the services." The borrowers alleged that these fees included broker’s price opinion fees (BPOs) paid to Premiere Assets Services ("Premiere"). Wells Fargo allegedly created Premiere and Premiere then invoiced Wells Fargo as if it was a separate company, but Wells Fargo never paid the invoices. Instead, Wells Fargo "paid a lesser amount directly to the local real estate brokers and assessed borrowers’ accounts for a marked-up amount on the manufactured ‘invoices.’"

The borrowers filed suit against Wells Fargo, asserting claims for violations of the RICO Act and the UCL, and for conspiracy to violate the RICO Act, among other claims. Wells Fargo filed a motion to dismiss.

Unfair Competition Law

Choice of law. The court first found that it should withhold a decision on the appropriate state law to employ until the class certification stage, applying the test in Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459 (1992). Under that test, the court would have to decide "whether the chosen state has (1) a ‘substantial relationship to the parties or their transaction’ or (2) whether there is ‘any other reasonable basis for the parties’ choice of law.’" Louisiana did have a substantial relationship to the claims because the properties and default-related services occurred there.

However, the court observed that it would still have to determine "whether the chosen state’s law is contrary to a fundamental policy of California," and, if so, "which state has a ‘materially greater interest’ in determining the particular issue." Here, the borrowers made plausible allegations that Wells Fargo executives in California had initiated and perpetrated the scheme. The court concluded that "whether [the borrowers’] UCL claim is ultimately tied to California solely by a California headquarters cannot be discerned without the benefit of discovery," and therefore the decision was better left to the class certification stage.

Standing. The court next rejected Wells Fargo’s contention that the borrowers lacked standing to bring their claims. The borrowers had alleged that they had paid some or all of the fees assessed by Wells Fargo, and that the fees were more than they would have paid if Wells Fargo had simply passed on actual costs, which qualified as an injury-in-fact even if the amounts charged were within the market rates, as Wells Fargo asserted. They also sufficiently alleged actual reliance, in that they alleged "that they received their mortgage statements, believed based on the statements that they were obligated to pay these amounts to Wells Fargo, and paid them."

Particularity of claims. The court also found that the borrowers had succeeded in stating their UCL claims with particularity. The court explained that the UCL prohibits "unlawful, unfair or fraudulent" business practices, and that Federal Rule of Civil Procedure 9(b) applied to claims grounded in fraud. The borrowers contended that their claims satisfied two tests for unfairness. One test "determine[s] whether the alleged business practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers and requires the court to weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim." The other test "requires that: (1) the consumer injury must be substantial; (2) the injury must not be outweighed by any countervailing benefits to consumers or competition; and (3) it must be an injury that consumers themselves could not reasonably have avoided."

The court determined that the borrowers had adequately alleged conduct that was "plausibly immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers" to satisfy the first test. Moreover, the borrowers satisfied the second test because the court could not "find as a matter of law that the supposed benefits outweigh [the borrowers’] injuries." Therefore, the court declined to dismiss the UCL claim based on the "unfair" prong.

The court also found that, although plaintiffs alleging a fraud based in part on omissions still had to satisfy Rule 9(b)’s particularity requirement, the borrowers had met that standard. The borrowers alleged "numerous instances where the omitted information could have been revealed, provided specific dates when they alleged that were charged marked-up fees, and alleged that "they paid the fees without knowing their true nature." The borrowers alleged knowledge and intent by alleging "that Wells Fargo executives designed the scheme, agreed to participate in the scheme, and concealed the scheme." Therefore, the court declined to dismiss the UCL claim based on the "fraudulent" prong."

RICO

Standing. The court rejected Wells Fargo’s argument that the borrowers did not have standing for their RICO claims because the fees it charged were within the market rate. The court observed that "[a] consumer who has been overcharged can claim injury to property under RICO based on a wrongful deprivation of money, which is a form of property," and therefore the borrowers had alleged an injury in fact.

The court explained that, to state a claim under Section 1962(c) of the RICO Act, a plaintiff must allege "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity."

Predicate acts of racketeering activity. The court determined that the borrowers had sufficiently alleged predicate acts of racketeering activity. The court distinguished the Ninth Circuit’s 1987 decision in California Architectural Bldg. Products, Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, in which the court of appeals determined that the defendant "did not have an independent duty to disclose to customers its contingency plan to close its business" when it "was making significant, honest efforts to remain open."

Here, Wells Fargo’s alleged failure to disclose was "interwoven with misrepresentations." Wells Fargo had charged its fees as "reimbursement" and claimed they were charged pursuant to the mortgage agreements. Instead, the fees were allegedly more than the amounts actually owed under the agreements. Moreover, Wells Fargo allegedly had Premiere create fictitious invoices in order to appear to be "merely seeking reimbursement for payments made to independent entities." Therefore, the borrowers had sufficiently alleged a fraudulent scheme

Enterprise. The borrowers also adequately alleged the existence of a RICO enterprise, in the court’s view. The court explained that plaintiffs "must allege two distinct entities: a ‘person’ and an ‘enterprise’ that is not simply the same ‘person’ referred to by a different name." Moreover, Ninth Circuit precedent requires plaintiffs to allege "(i) a common purpose of engaging in a course of conduct; (ii) evidence of an "ongoing organization, formal or informal"; and (iii) evidence that the various associates function as a continuing unit."

The court concluded that the borrowers satisfied both the distinctiveness and the common purpose requirements. The borrowers alleged an enterprise consisting of Wells Fargo & Co., Wells Fargo Bank, Premiere, their employees, their property preservation vendors, and the real estate brokers that provided BPOs for Wells Fargo. The individuals and entities allegedly came "together for the common purpose of limiting costs and maximizing profits by fraudulently concealing assessments for unlawfully marked-up fees for default-related services on borrowers’ accounts."

The court observed that the borrowers had at least alleged that Wells Fargo and Premiere had associated for the common purpose of maximizing profits, and that they played distinct roles in the scheme. Premiere’s existence, "its creation of fictitious invoices to substantiate fees, Well Fargo’s reliance on those invoices to justify the marked-up fees, and Wells Fargo’s payment of lesser amounts—independent of the invoices—directly to third-party vendors and brokers satisf[ied] the distinctiveness requirement." Therefore, the court declined to dismiss the RICO claim.

RICO conspiracy. The court also declined to dismiss the borrowers’ RICO conspiracy claim. The court observed that the borrowers had sufficiently alleged a substantive RICO claim, and that Wells Fargo agreed to participate in it. Since the borrowers alleged that Wells Fargo has designed and developed the scheme, the borrowers adequately pled intent to further the RICO violation and awareness of the scope of the enterprise.

The court also declined to dismiss the borrowers claims for unjust enrichment and fraud.

The case is No. 12-cv-00664-YGR.

Attorneys: Daniel Alberstone (Baron Budd, P.C.) for Latara Bias. Mark Douglas Lonergan (Severson & Werson) for Wells Fargo & Co.

Companies: Wells Fargo & Co.; Wells Fargo Bank, N.A.

Cases: RICO StateUnfairTradePractices CaliforniaNews