Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—NDCal: Choice of Law Rules Bar Florida Homeowners’ California Unfair Competition Law Claim Against Wells Fargo Over Flood Insurance Practices, (Jan 14, 2013)

By Tobias J. Gillett, J.D., LLM.

Florida homeowners cannot bring a claim for violation of California’s Unfair Competition Law (UCL) against Wells Fargo Bank, N.A. over alleged improper flood insurance practices because under Florida and California choice-of-law rules Florida substantive law applied, and because the case did not have sufficient connection to California to warrant extraterritorial application of the California statute even if California law applied, the federal district court in San Francisco has ruled (Cannon v. Wells Fargo Bank, N.A., January 9, 2013, Chen, E.). The court also dismissed claims based on an “excessive coverage” theory, although the court declined to dismiss claims pursuant to the filed-rate doctrine or the primary jurisdiction doctrine.

The homeowners had a mortgage through the Federal National Mortgage Corporation (“Fannie Mae”), which was serviced by Wells Fargo. Since the homeowners resided in a portion of Florida located in a federal Special Flood Hazard Area, they had to obtain flood insurance as a condition of their mortgage. According to the homeowners’ complaint, although the homeowners had adequate insurance to close their mortgage, after becoming the servicer on the mortgage Wells Fargo later twice increased the amount of insurance they were required to obtain.

Wells Fargo allegedly purchased the insurance for the homeowners though American Security Insurance Company (ASIC). The amount of coverage Wells Fargo required the homeowners to maintain greatly exceeded the amount they owed Fannie Mae.

The homeowners filed suit, alleging that Wells Fargo’s flood insurance practices were improper because Wells Fargo received a kickback from ASIC of a percentage of the premiums on the polices (“kickback” theory); because the purpose of the insurance is only to protect the lender’s interest in the property, and therefore the amount of coverage required should not exceed the outstanding principal balance (“excessive coverage” theory); and because Wells Fargo inappropriately imposed “retroactive insurance policies covering periods of time in the past where coverage had lapsed” (“backdating” theory). The homeowners asserted a wide range of claims, including a claim for violation of California’s UCL.

Applicability of California’s Unfair Competition Law

The court rejected the homeowners’ UCL claim, concluding that the interaction of California and Florida choice-of-law rules required use of Florida substantive law. The mortgage contract had provided that it would be “governed by federal law and the law of the jurisdiction in which the property is located.” Although the parties agreed that a breach of contract claim was governed by Florida law, the parties had disputed whether Florida law or California law applied to tort law claims.

The court observed that “in a federal question action that involves supplemental jurisdiction over state law claims, a court applies the choice of law rules of the forum state,” in this case California. California’s choice of law rules provided that an ambiguous choice-of-law provision was “a question of contract interpretation that should be determined pursuant to the law specified in the contractual choice-of-law provision,” in this case Florida.

The court noted that the Eleventh Circuit appeared “to view contractual choice-of-law provisions as inapplicable to tort claims,” but agreed with Wells Fargo that the cases did “not clearly apply Florida state law.” The court could find no authority that stated what Florida state law would conclude about the contractual provision at issue, and therefore defaulted to California law to decide the dispute.

California law provided that a “valid choice-of-law clause, which provides that a specified body of law ‘governs’ the ‘agreement’ between the parties encompasses all causes of action arising from or related to that agreement.” Therefore, the court held that Florida substantive law should apply.

Having concluded that Florida law applied, the court found that the UCL claim should be dismissed on that basis. Moreover, the court held that the case did not have sufficient connection to California to warrant extraterritorial application of the UCL, even if California law did apply. Although Wells Fargo had its principal place of business in California, no facts suggested that Wells Fargo had made the decisions concerning the flood insurance at issue in California. Therefore, the court dismissed the homeowners’ UCL claim.

National Bank Act Preemption

Wells Fargo also argued with respect to all of the state law claims that the National Bank Act (NBA) preempted them. Under the NBA, “national banks are subject to state laws of general application in their daily business but only to the extent such laws do not conflict with the letter or the general purposes of the NBA.” Wells Fargo argued that two implementing regulations preempted the state law claims, one providing that “[a] national bank may make real estate loans . . . without regard to” various state law limitations, and the other providing that “[a] national bank may charge its customers non-interest charges and fees.”

The court concluded that neither provision preempted the claims. The first provision dealt with “mak[ing] real estate loans,” but Wells Fargo merely serviced a loan owned by Fannie Mae. The second provision did not apply either, because, although an insurance premium might be considered a “charge” or “fee” under the circumstances, the state law would not “prevent[] or significantly restrict[] the national bank’s powers.” The lawsuit only challenged Wells Fargo’s “manipulation of the forced-placed insurance process,” not its authority to impose flood insurance. Therefore, the court rejected Wells Fargo’s preemption argument.

Filed-Rate Doctrine

Wells Fargo contended that the filed-rate doctrine, which provides that a filed rate “is per se reasonable and unassailable in judicial proceedings brought by ratepayers,” barred claims based on the theory that Wells Fargo had received “kickbacks” from ASIC. Wells Fargo argued that the homeowners were trying to claim that the cost of the flood insurance was excessive because it included a kickback.

The court noted that some case law concerning insurance companies supported Wells Fargo’s position. Nonetheless, the court held that the doctrine did not apply, citing two Southern District of Florida decisions that had rejected application of the doctrine to banks. The court found the reasoning that “where a plaintiff is not challenging a rate as excessive, but rather the manipulation of the rate, the filed-rate doctrine does not apply” to be “persuasive.” Even if the rate was protected by the doctrine, a claim of manipulation could still be brought.

Primary Jurisdiction Doctrine

Wells Fargo also argued that the case should be stayed or dismissed so that the homeowners could first present their claims to Florida’s Office of Insurance Regulation (OIR), pursuant to the primary jurisdiction doctrine. That doctrine “allows courts to stay proceedings or to dismiss a complaint without prejudice pending the resolution of an issue within the special competence of an administrative agency.

The court declined to stay or dismiss the claims under the primary jurisdiction doctrine, noting that under federal law “primary jurisdiction usually involves referral to a federal agency,” although some exceptions applied, including “where the state agency is exercising in effect delegated federal power.” Here, the OIR did not appear to possess any delegated federal power. Moreover, the Florida statutes did not provide an administrative remedy, and the homeowners were challenging the manipulation of the insurance rate, not that it was excessive.

Excessive Coverage Claims

Wells Fargo contended with respect to claims based on a theory that Wells Fargo required the homeowners to obtain excessive insurance that “the mortgage [gave] it discretion as to the amount of flood insurance required,” and therefore the theory “cannot be maintained.”

The homeowners pointed out that the mortgage provided that the coverage “shall cover lender,” and argued that this provision meant that the coverage was only meant to cover the lender’s interest. The court cited Northern District of California and First Circuit precedent that had found that lenders have interests beyond the principal balance, including potential loss of interest on the loan and “loan origination costs arising from the premature payment of the loan.”

The court also rejected an argument that the mortgage was ambiguous regarding whether Wells Fargo could set the coverage in excess of the principal balance when the mortgage was considered in combination with the special flood hazard area notice (NSFH). A District of Oregon court had found that under an alternative interpretation of the mortgage a bank would not have that authority “because the NSFH ‘fills in’ the trust deed’s open-ended discretionary terms,” setting an amount of flood insurance that was “not subject to change, except as expressly provided for in the NSFH.” That court had explained away a phrase stating that the insurance must “[a]t a minimum” cover the balance of the loan, or the maximum amount allowed for the type of property, as fixing the amount of coverage a lender could require but not prohibiting borrowers from obtaining more.

The court disagreed with this reasoning, finding that the phrase “at a minimum” merely set a mandatory minimum for coverage, and did not prohibit lenders from requiring more. Therefore, the court found that all claims based on an “excessive coverage” theory were barred, although not claims based on the “kickback and “backdating” theories.

The court also dismissed without prejudice all claims against Fannie Mae and ASIC. In addition, the court dismissed claims under the Real Estate Settlement Procedures Act and for breach of contract under all theories. However, the court declined to dismiss kickback and backdating theory claims for unjust enrichment, conversion, breach of fiduciary duty, and violation of the Truth in Lending Act.

The case is No. C-12-1376 EMC.

Jack Wagoner, III (Wagoner Law Firm, P.A.) for Stanley D. Cannon. Michael Jan Steiner (Severson & Werson) for Wells Fargo Bank, N.A.

Cases: StateUnfairTradePractices CaliforniaNews