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Wieck v. CIT Group, Inc.

United States District Court, D. Hawaii

March 30, 2018

JULIA WIECK, on behalf of herself and all others similarly situated, Plaintiff,
v.
CIT GROUP, INC.; CIT BANK, N.A.; FINANCIAL FREEDOM; SEATTLE SPECIALTY INSURANCE SERVICES, INC.; CERTAIN UNDERWRITERS OF LLOYD'S, LONDON; and, GREAT LAKES REINSURANCE UK, PLC, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS, ECF NOS. 55, 56 & 59, AND GRANTING PLAINTIFF'S MOTION REQUESTING JUDICIAL NOTICE OF OFFICIAL GOVERNMENT REPORTS, ECF NO. 67

          J. MICHAEL SEABRIGHT CHIEF UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         In this putative class action, Plaintiff Julia Wieck (“Plaintiff” or “Wieck”) seeks damages and injunctive relief on behalf of herself and others similarly situated, alleging several causes of action based on lender-placed insurance (“LPI”) or “force-placed” insurance on her reverse mortgage - specifically, hurricane coverage. (Throughout this Order, the court refers to LPI and force-placed insurance interchangeably.) Wieck claims Defendants overcharged her and improperly benefitted from the placement in violation of state and federal laws. Three sets of Defendants have filed Motions to Dismiss the First Amended Complaint (“FAC”). ECF Nos. 55, 56, 59. Based on the following, the Motions are GRANTED in PART and DENIED in PART.

         II. BACKGROUND

         A. Factual Background

         The 73-page FAC, ECF No. 15, makes both individual and class allegations. It bases federal jurisdiction on the Class Action Fairness Act of 2005, Pub. L. No. 109-2, 119 Stat. 4 - it alleges minimal diversity of citizenship under 28 U.S.C. § 1332(d)(2)(A); an aggregated amount-in-controversy of over $5, 000, 000 under 28 U.S.C. § 1332(d)(6); and a class of over 100 members under 28 U.S.C. § 1332(d)(5)(B). Given the FAC's length and that it is very premature to address class matters, the court does not reiterate all the pertinent allegations of the FAC. Rather, the court focuses on factual allegations as to Wieck to examine whether she has alleged sufficient facts to withstand the Motions to Dismiss. And in so doing, the court sets forth only the essential allegations as necessary to understand the nature of Wieck's claims. Further details are also provided in the appropriate discussion sections that follow.

         For purposes of these Motions, the court assumes the following factual allegations are true. See, e.g., Turner v. City & Cty. of S.F., 788 F.3d 1206, 1210 (9th Cir. 2015) (“In assessing whether a party has stated a claim upon which relief can be granted, a court must take all allegations of material fact as true and construe them in the light most favorable to the nonmoving party[.]”).

         1. Wieck Obtains a Reverse Mortgage From and Serviced by CIT

         Wieck is an 86-year old resident of Lahaina, Maui. FAC ¶ 4. She has lived at her residence (“the Property”) for over thirty-eight years, and obtained a reverse mortgage on the Property from Defendant Financial Freedom Senior Funding Corporation (“Financial Freedom”) in 2006. Id.; FAC Ex. A, ECF No. 15-1 (“Home Equity Conversion Mortgage”).

Reverse mortgages are government backed loans that allow Americans over the age of sixty-two (62) to borrow against the value of their homes. Borrowers do not have to pay interest on their reverse mortgage loan and can live in their homes for life. A sale of the property can be used to repay the debt. The reverse mortgage loans are backed by insurance from the Federal Housing Administration (“FHA”). When a loan comes due, the loan servicer can earn interest on the loan from the FHA by meeting deadlines for certain tasks such as getting an appraisal and starting the foreclosure process. If the loan servicer misses the FHA deadlines, the service is not entitled to earn interest from the FHA while waiting for the agency to pay its claim.

FAC ¶ 17.

Traditionally, a reverse mortgage is meant to come due and payable when the resident dies. However, there are other events which may cause the reverse mortgage to become due and payable, such as the borrower's failure to pay property taxes or insurance, or the property is deemed vacant, thus enabling the loan servicer to commence foreclosure proceedings.

Id. ¶ 18.

         Financial Freedom is a division of Defendant CIT Bank, N.A. (“CIT Bank”). FAC ¶ 5. CIT Bank is a wholly owned subsidiary of Defendant CIT Group, Inc. (“CIT Group”), which is a financial holding company. Id. ¶ 7. Where appropriate, the court refers to Financial Freedom, CIT Bank, and CIT Group collectively as “CIT, ” and sometimes refers to actions taken by Financial Freedom as taken by CIT.

         “Until 2011, Financial Freedom originated and serviced reverse mortgages. Financial Freedom aggressively marketed reverse mortgages to elderly consumers . . . . In 2011, Financial Freedom stopped making new loans and operated exclusively as a reverse mortgage loan servicer.” Id. ¶ 19. Financial Freedom was a subsidiary of IndyMac Bank, FSB, when Wieck's loan was originated. Id.¶¶ 5, 19, 65 & Ex. A. IndyMac Bank was a predecessor of OneWest Bank FSB, which changed its charter from a federal savings bank to a national association on February 28, 2014, and eventually became CIT Bank, N.A. See Balettie Decl. ¶ 5, ECF No. 55-2.

         Among others, Wieck's reverse mortgage with CIT contains the following potentially relevant provisions:

2. Payment of Property Charges. Borrower shall pay all property charges consisting of taxes, ground rents, flood and hazard insurance premiums, and special assessments in a timely manner, and shall provide evidence of payment to Lender, unless Lender pays property charges by withholding funds from monthly payments due to the Borrower or by charging such payments to a line of credit as provided for in the Loan Agreement.
3. Fire, Flood and Other Hazard Insurance. Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire. This insurance shall be maintained in the amounts, to the extent and for the periods required by the Lender or the Secretary of Housing and Urban Development (“Secretary”). Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary. . . .
. . . .
5. Charges to Borrower and Protection of Lender's Rights in the Property.
. . . .
If Borrower fails to make these payments or the property charges required by Paragraph 2, or fails to perform any other covenants and agreements contained in this Security Instrument, . . . then Lender may do and pay whatever is necessary to protect the value of the Property and Lender's rights in the Property, including payment of taxes, hazard insurance and other items mentioned in Paragraph 2.
To protect Lender's security in the Property, Lender shall advance and charge to Borrower all amounts due to the Secretary for the Mortgage Insurance Premium as defined in the Loan Agreement as well as all sums due to the loan servicer for servicing activities as defined in the Loan Agreement. Any amounts disbursed by Lender under this Paragraph shall become an additional debt of Borrower as provided for in the Loan Agreement and shall be secured by this Security Instrument.
6. Inspection. Lender or its agent may enter on, inspect or make appraisals of the Property in a reasonable manner and at reasonable times provided that Lender shall give the Borrower notice prior to any inspection or appraisal specifying a purpose for the inspection or appraisal which must be related to Lender's interest in the Property. If the Property is vacant or abandoned or the loan is in default, Lender may take reasonable action to protect and preserve such vacant or abandoned Property without notice to the Borrower.
. . . .
9. Grounds for Acceleration of Debt.
. . . .
(b) Due and Payable with Secretary Approval. Lender may require immediate payment in full of all sums secured by this Security Instrument, upon approval of the Secretary, if:
. . . .
(iii) An obligation of the Borrower under this Security Instrument is not performed.

FAC ¶ 66 (language modified as in Mortgage, Ex. A).

         2. “Windstorm (including hail/hurricane)” Coverage is Force Placed on Wieck's Mortgage

         The FAC makes various allegations about whether Wieck had “windstorm” coverage, whether she initially understood that separate hurricane coverage was required, and whether CIT accepted or approved the mortgage in 2006 without requiring hurricane coverage (which is often excluded from general hazard property insurance, and requires a separate rider). FAC ¶¶ 67-69. But the parties essentially agree (at least for purposes of these Motions) that some kind of coverage against damage from hurricanes is required under the mortgage - and the fundamental dispute alleged in the FAC stems from this requirement.[1] Wieck also does not dispute that CIT is allowed to force-place coverage if necessary. Rather, the dispute centers on the manner and terms upon which such coverage is placed.

         “[O]n or around August 24, 2010, Financial Freedom notified Plaintiff that she did not have windstorm coverage, which was incorrect, and that it would force place a windstorm insurance policy (backdated to February 15, 2010), and would charge Plaintiff $10, 000 plus for the policy.” Id. ¶ 70. “A second notice from Financial Freedom requiring Plaintiff to provide proof of windstorm coverage was mailed on or about September 21, 2010.” Id. The actual August 24, 2010 letter from Financial Freedom states in pertinent part: “Financial Freedom Acquisition LLC has been notified by your insurance provider that your current property insurance policy does not include windstorm coverage . . . . If your property were to incur hurricane or other wind damage it would not be covered.” ECF No. 55-4.[2]

         After reviewing Wieck's response, FAC ¶ 71, on or about November 15, 2010, CIT notified her that it was placing proper windstorm coverage on her property. Id. ¶ 72. It wrote “our records indicate that you have not provided us with acceptable evidence of windstorm insurance; therefore, in order to protect our collateral interest in the property, we have purchased windstorm coverage in accordance with the terms of your Deed of Trust/Mortgage. You are responsible for the cost of this insurance.” Id. CIT told her:

The amount of coverage may be less than the value of your home or real and personal property, and as a result, you may be underinsured. The cost of this insurance may be significantly more than the cost of insurance you can obtain on your own. We and/or our affiliates may have received compensation in connection with the placement of the insurance described in this letter.

Id. It also specifically told her that “The cost of this insurance will be charged to the outstanding balance of your loan, and if there are insufficient funds in your line of credit, arrangement must be made for repayment.” Id. “The November 15, 2010 notice stated that the annual premium for the force placed windstorm policy was $10, 086.96 - more than twenty times more expensive than Plaintiff's hazard policy with First Fire and Casualty Company which provided windstorm and hail coverage.” Id. (emphasis omitted). “The accompanying ‘Evidence of Wind Insurance' for the force placed windstorm policy was obtained from Defendants [Certain Underwriters of Lloyd's, London; and Great Lakes Reinsurance (UK), PLC], both surplus lines insurance providers which are not required to file their rates with the state insurance departments.” Id. (This Order refers to Certain Underwriters of Lloyd's, London as “Lloyd's”; to Great Lakes Reinsurance (UK), PLC as “Great Lakes;” and sometimes refers to them collectively as “the Insurer Defendants.”).

In the November 15, 2010 notice, Financial Freedom represented that the Effective Date for the force placed windstorm policy placed on Plaintiff's property was February 15, 2010 through February 15, 2011. Financial Freedom thus had backdated the force placed windstorm policy by nine months to cover a period of time which had already passed during which there was no damage to Plaintiff's Property and no claims had been made. Moreover, on October 19, 2010, Plaintiff had provided Financial Freedom with evidence of her hazard insurance policy which included windstorm coverage.

Id. ¶ 73.

On December 2, 2010, Financial Freedom partially cancelled the force placed windstorm policy for coverage on Plaintiff's property from February 15, 2010 through February 15, 2011. On December 7, 2010, Financial Freedom cancelled this force placed windstorm policy in full and restored Plaintiff's account balance to zero.

Id. ¶ 74.

         Similar interactions occurred between Wieck and CIT in 2013 and 2015, where hurricane coverage was placed on Wieck's property (with similarly-worded notices) and where allegedly excessively high and unnecessary premiums charged to her were eventually “refunded.” Id. ¶¶ 75-87. These interactions all also involved the Insurer Defendants and Defendant Seattle Specialty Insurance Services, Inc. (“Seattle Specialty”), which is “an intermediate insurance broker.” Id. ¶ 27. “Seattle Specialty provides force placed insurance and insurance tracking services to mortgage servicers.” Id. ¶ 8.

Since April 2013, Plaintiff has actively attempted to resolve with Financial Freedom the wrongful charges to her reverse mortgage from the backdated, excessively priced and unnecessary force placed wind policy which Financial Freedom placed on her property in March 2013, but which was backdated to cover the period December 10, 2011 through December 10, 2012. Towards this end, Plaintiff has engaged the services of Sandy Jolley, a reverse mortgage suitability and abuse consultant who has provided testimony to the Federal Reserve Board in Los Angeles concerning the wrongful acts of Financial Freedom, its prior parent company, OneWest, and its current parent company, CIT Bank, N.A.

Id. ¶ 88. And,

Since April 2013, Plaintiff has maintained [an] additional Standalone Hurricane policy with Zephyr, even though this additional insurance coverage was not required by her reverse mortgage. The annual premium on the Zephyr policy is approximately $600 - a fraction of the $10, 362 in annual premiums which Financial Freedom charged to Plaintiff's reverse mortgage for the force placed windstorm policy. Even though Plaintiff has, at all relevant times, maintained her hazard insurance policy with First Fire & Casualty Company which provides the same type of windstorm and hail coverage as the force placed windstorm policy, Plaintiff has renewed the additional and unnecessary standalone hurricane insurance from Zephyr each year solely in an attempt to avoid foreclosure proceedings from Financial Freedom.

Id. ¶ 87.

         3. The Alleged Wrongdoing

         The FAC alleges that Defendants committed unlawful practices in servicing Wieck's mortgage. See, e.g., id. ¶¶ 2-3. In particular, Wieck contends that the premiums for LPI are unconscionably high not because of their actual cost, but because Financial Freedom has an exclusive relationship with Seattle Specialty to place insurance with Lloyd's and Great Lakes in exchange for unearned “commissions” and low cost or no cost loan tracking and monitoring services from Seattle Specialty. Id. ¶ 3. “Seattle Specialty receives a commission from Lloyd's and Great Lakes as a percentage of the total net written premium of force placed policies on the Financial Freedom loan portfolio, a portion of which Seattle Specialty then kickbacks to Financial Freedom[.]” Id. “These kickbacks are directly tied to the price of the force-placed insurance policies and are usually a percentage of the total net written premium of a policy.” Id. ¶ 27. “This arrangement provides the mortgage servicer with an incentive to purchase the highest priced force-placed insurance policy that it can because the higher the cost of the insurance policy, the higher the commission or kickback to the mortgage servicer.” Id. ¶ 28. CIT also improperly places “retroactive or backdated force placed insurance policies on Plaintiff and other borrowers' properties to cover periods of time which have passed and during which the property was not damaged and no claims were made[.]” Id.¶ 3.

         The FAC alleges that CIT, in concert with the other Defendants, failed to properly disclose costs and made material misrepresentations to Wieck about these costs when notifying her of the placing of insurance. “When a mortgage servicer notifies a borrower that a force-placed insurance policy has been secured and retroactively placed on the borrower's property, the mortgage servicer routinely fails to disclose the profits or financial windfalls it has derived as a result, and at the borrower's expense. Rather, the mortgage servicer falsely informs the borrower that they are only being charged for the actual ‘cost' of the insurance.” Id. ¶ 31. “Defendants have chosen insurance policies with excessively priced insurance premiums because of the benefits inuring to Defendants.” Id. ¶ 34. “These policies violate the mortgage contract because they exceed the cost of the services and are not reasonable or appropriate to protect the note holder's interest in the property and rights under the security instrument.” Id.

         More specifically, the FAC alleges that:

Upon information and belief, Financial Freedom has negotiated deals with Seattle Specialty and the surplus line force placed insurance providers, [Lloyd's & Great Lakes], whereby they receive a percentage of the cost of the total net written premium of the force-placed insurance policies purchased for the borrowers. This unearned commission or kickback structure encourages the Defendants to select the most expensive insurance policy, despite not having an interest in the insured collateral.

Id. ¶ 42.

         And it alleges, on information and belief, that “Seattle Specialty [provides] improper incentives, including low cost or below market loan tracking and portfolio monitoring services to Financial Freedom as an additional incentive to obtain the surplus lines force placed insurance policies through Seattle Specialty.” Id. ¶ 43. “Third party vendors like Seattle Specialty are not authorized to service reverse mortgages, ” id., and “[b]y outsourcing loan servicing and insurance tracking to Seattle Specialty, Financial Freedom has skirted its duty to adhere to federal regulations and compliance standards for reverse mortgage servicing.” Id. “Financial Freedom charges Plaintiff . . . the full amount of the over-priced force placed insurance policy, despite being paid unearned commissions, receiving below cost or discounted loan tracking services, and other kickbacks from Seattle Specialty.” Id. ¶ 44.

         4. CIT Forecloses on Wieck's Property

         In August of 2016, CIT filed a foreclosure complaint against Wieck. Id. ¶ 104. The foreclosure stemmed from accumulated, unpaid charges for forced place insurance. The FAC alleges:

On or around July 1, 2015, Financial Freedom sent Plaintiff a “Property Charge Delinquency Letter” in which it demanded payment for the backdated force placed wind insurance policies in the amount of $13, 497.99 for 16 months of “Hurricane Insurance” coverage from the period November 1, 2011 to March 31, 2013. This letter was materially misleading and false because the EOI [(“Evidence of Insurance”)] indicated that the force placed policy was for windstorm and hail coverage, not “hurricane' insurance.”

Id. ¶ 92. Wieck responded (though Jolley) and received certain responses back from Financial Freedom in 2015. Id. ¶¶ 100-03. Nevertheless, “[o]n or around May 24, 2016, Plaintiff received a notice that her loan had been referred to foreclosure, ” id. ¶ 98, and “a foreclosure complaint was filed by CIT Bank, N.A. against Plaintiff in the Second Circuit Court of the State of Hawaii, in and for the County of Maui. The only reason Plaintiff's loan [was] in ‘default' is because of the wrongfully placed, excessively priced, duplicative, backdated and unlawful force placed wind insurance.” Id. ¶ 104.

         Thereafter, the coverage dispute that led to the foreclosure was resolved, and the foreclosure proceeding was closed:

On October 28, 2016, Zephyr issued Plaintiff a Standalone Hurricane policy for the period November 30, 2011 through November 30, 2012. Financial Freedom was provided with a copy of the policy. On November 2, 2016, Financial Freedom verbally represented that it would reverse the $13, 497.99 in force placed insurance charges on Plaintiff's loan and dismiss the foreclosure proceedings against Plaintiff. A notice of dismissal without prejudice was filed on November 30, 2016 in the foreclosure proceeding against Ms. Wieck. To Plaintiff's knowledge, the charges to her mortgage account resulting from the force placed insurance have yet to be reversed in full.

Id. ¶ 105. Meanwhile, on November 4, 2016, Wieck filed the initial Complaint in this action. ECF No. 1.

         The foreclosure proceedings, however, led to an allegedly unnecessary property inspection of Wieck's residence right before she had filed suit. Specifically,

Several days prior to obtaining the Zephyr policy, on October 24, 2016, at 11:15 a.m. Plaintiff was startled at her residence by a tall, thin, white man who had surmounted the six foot fence with a locked gate which surrounds Plaintiff's property, as well as the locked grillwork gate at the foot of the stairs leading to Plaintiff's front door and lanai. This strange man was on Plaintiff's lanai, peering into Plaintiff's home. Plaintiff yelled at the man, stating “Stop right there. How dare you enter my property.” The man took a picture of Plaintiff's home and leapt over the fence.

Id. ¶ 106. On November 28, 2016, CIT “informed Plaintiff that because a third party vendor of Financial Freedom had reported her property to be vacant on October 20, 2016, Financial Freedom submitted a request to HUD to call her reverse mortgage loan immediately ‘due and payable.'” Id. ¶ 107. According to Wieck,

There is absolutely no reason for Financial Freedom to have ordered an inspection of Ms. Wieck's property, or for its third party vendor to report that the property was vacant. Ms. Wieck has been in constant verbal and written communication with Financial Freedom since her loan was originally charged for force placed insurance. Moreover, Ms. Wieck has certified numerous times to Financial Freedom, both verbally and in writing, that she has continuously occupied the property as her primary residence.

Id. ¶ 108. And “Financial Freedom charged Plaintiff a $30 inspection fee for the unwarranted October 2016 inspection.” Id. ¶ 109.

         B. Procedural Background

         After the initial Complaint on November 4, 2016, Wieck filed the FAC on January 11, 2017. ECF No. 15. The FAC alleges the following Counts:

• Count One (Breach of Contract) against CIT.
• Count Two (Breach of Implied Covenant of Good Faith and Fair Dealing) against CIT.
• Count Three (Violations of Hawaii Revised Statute (“HRS”) § 480-2) against CIT.
• Count Four (Violations of HRS § 480-2) against Seattle Specialty and the Insurer Defendants.
• Count Five (Tortious Interference with Business Relationship) against Seattle Specialty and the ...

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