The U.S. Court of Appeals for the Fourth Circuit recently affirmed in part and vacated and remanded in part a trial court’s grant of summary judgment in favor of plaintiffs who brought a class action suit alleging that the pressure tactics used by the defendants on home appraisers to raise the appraisal values on the plaintiffs’ homes constituted conspiracy, breach of contract and unconscionable inducement under the West Virginia Consumer Credit and Protection Act.
The Fourth Circuit concluded that class certification was appropriate, and that the plaintiffs were entitled to summary judgment on their claims for conspiracy and unconscionable inducement.
However, the Court concluded that a contract was formed in the loan documents that the trial court failed to observe, and the question of whether that contract was breached and whether there were resulting damages needed to be decided by the trial court on remand. Additionally, the Fourth Circuit agreed with the plaintiffs that the implied covenant of good faith and fair dealing applied to the parties’ contract, but held that it cannot by itself sustain the trial court’s decision.
A copy of the opinion in Alig v. Quicken Loans Inc. is available at: Link to Opinion.
The plaintiffs were a putative class of “[a]ll West Virginia citizens who refinanced” a total of 2,769 mortgages with the defendant lender from 2004 to 2009 for whom the lender obtained appraisals from the defendant appraisal manager.
The lender collected information from the plaintiffs, including an estimated value of their homes. The lender relayed the plaintiffs’ estimates of value to the appraisal manager, which passed those estimates on to contracted appraisers via appraisal engagement letters. If an appraisal came back lower than the estimated value, appraisers received phone calls from the appraisal manager drawing their attention to the estimated value and asking them to take another look.
This practice was allegedly common at the beginning of the class period, but after Fannie Mae and Freddie Mac implemented the Home Valuation Code of Conduct on May 1, 2009, it ceased.
The plaintiffs brought putative class action actions against the lender, the appraisal manager, and three other defendants in West Virginia state court in 2011, which were removed to federal court in 2012. After a narrowing of the claims and the defendants, three claims remained: (1) a civil conspiracy claim against both the lender and the appraisal manager; (2) a claim of unconscionable inducement to contract under the West Virginia Consumer Credit and Protection Act against the lender; and (3) a breach of contract claim against the lender.
The trial court conditionally certified the plaintiffs’ class and granted in part and denied in part each of the parties’ motions for summary judgment. The court then held an evidentiary hearing on damages, after which it imposed a statutory penalty of $3,500 as to unconscionability for each of the 2,769 violations, for a total of $9,691,500. The court also awarded the plaintiffs the appraisal fees they had paid as damages for breach of contract, for a total of $968,702.95. The court did not award separate damages for conspiracy.
On appeal, the defendants first challenged the trial court’s decision to certify the class under Rule 23 on the issue of predominance. They argued that questions of standing, their statute-of-limitations defense, the unconscionable inducement analysis, various breach of contract issues, and the calculation of damages all required individual determinations that should have defeated class certification.
The Fourth Circuit reviews a class-certification decision for abuse of discretion. See Sharp Farms v. Speaks, 917 F.3d 276, 290 (4th Cir. 2019). “A district court abuses its discretion when it materially misapplies the requirements of [Federal] Rule [of Civil Procedure] 23,” EQT Prod. Co. v. Adair, 764 F.3d 347, 357 (4th Cir. 2014), or “makes an error of law or clearly errs in its factual findings.” Thorn v. Jefferson-Pilot Life Ins. Co., 445 F.3d 311, 317 (4th Cir. 2006).
The defendants first argued that there were class members who did not suffer any injuries because they benefited from obtaining the loans. Accordingly, in the defendants’ view, the trial court lacked Article III power to award damages to those class members.
However, the Fourth Circuit held that, even if some plaintiffs were not injured, “[o]nce injury is shown, no attempt is made to ask whether the injury is outweighed by benefits the plaintiff has enjoyed from the relationship with the defendant. Standing is recognized to complain that some particular aspect of the relationship is unlawful and has caused injury.” 13A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3531.4 (3d ed. 2008 & Supp. 2020).
Next, the appellate court determined that the statute-of-limitations question is straightforward and susceptible to classwide determination because the trial court pointed to several ways in which the defendants could perform the “ministerial exercise” of determining which loans fell outside the applicable limitations period.
Furthermore, the Fourth Circuit held that the plaintiffs did not need to prove that they were induced into a loan by the challenged practice. Instead, the plaintiffs needed only to show misconduct on the part of the defendants, and concealment thereof, relating to a key aspect of the loan-formation process which necessarily contributed to the class members’ decisions to enter the loan agreements.
The Court concluded that this is a determination that can be made across the class, since (1) for every member of the class, the defendants engaged in the same allegedly unconscionable practice, sharing borrowers’ estimates of value with appraisers while failing to disclose that practice to the plaintiffs, and (2) unconscionable behavior affecting the appraised value of a property inherently impacts the borrower’s decision to obtain a loan based on that number.
The defendants also argued on appeal that the breach of contract claim should be litigated on an individual basis because some homeowners (not specifically any member of the class) sometimes sought to persuade appraisers to increase their appraisal values themselves and because there would be no damages, and thus no breach of contract, if the appraiser would have reached the same result with or without the borrower’s estimate of value.
However, the Fourth Circuit concluded that this evidence can be evaluated through the “ministerial exercise” of comparing actual home values to estimates of value.
Finally, the defendants contended that the trial court could not order statutory penalties classwide, arguing that the court was required to consider the level of harm suffered by each class member individually.
But the appellate court pointed out that the West Virginia Supreme Court of Appeals has clarified that “an award of civil penalties pursuant to” section 46A-5-101(1) is “conditioned only on a violation of a statute” and is permissible even for “those who have suffered no quantifiable harm” as long as they have been “subject to undesirable treatment described in [section 46A-2-121 or related provisions] of the [West Virginia Consumer Credit and Protection] Act.” Vanderbilt Mortg. & Fin., Inc. v. Cole, 740 S.E.2d 562, 566, 568–69 (W. Va. 2013).
Therefore, the Fourth Circuit affirmed the trial court’s certification of the plaintiffs’ class.
The Fourth Circuit then turned to the question of whether the defendants breached their contracts with each of the class members. The Court reviews de novo a trial court’s interpretation of state law, contract, and grant of summary judgment. See Schwartz v. J.J.F. Mgmt. Servs., Inc., 922 F.3d 558, 563 (4th Cir. 2019).
The appellate court noted that, under West Virginia law, “[a] claim for breach of contract requires proof of the formation of a contract, a breach of the terms of that contract, and resulting damages.” Sneberger v. Morrison, 776 S.E.2d 156, 171 (W. Va. 2015). Additionally, formation of a contract under West Virginia law requires “an offer and an acceptance supported by consideration.” Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d 550, 556 (W. Va. 2012).
The Fourth Circuit concluded that the deposit agreement section in the plaintiffs’ loans created a contract. The Court observed that the section was labeled “agreement” and included an offer, acceptance, and consideration: the plaintiffs paid a deposit in exchange for the lender beginning the loan application process, which could include an appraisal or credit report.
However, the Fourth Circuit noted that the trial court failed to recognize this contract in their initial review of the case. Therefore, the Court concluded that whether the contract was breached, and whether there were resulting damages, were questions that the trial court needed to review in the first instance. See Fusaro v. Cogan, 930 F.3d 241, 263 (4th Cir. 2019).
Next, the appellate court observed that, in West Virginia, there is an implied “covenant of good faith and fair dealing in every contract for purposes of evaluating a party’s performance of that contract.” Evans v. United Bank, Inc., 775 S.E.2d 500, 509 (W. Va. 2015). The Court included lender/borrower cases in the ambit of that covenant.
West Virginia law does not allow an independent claim for breach of the implied covenant unrelated to any alleged breach of contract. Evans, 775 S.E.2d at 509. Here, however, the Fourth Circuit held that the plaintiffs’ complaint clearly alleged a claim for breach of contract and cited the implied covenant as relevant to that claim.
However, the Fourth Circuit held that the implied covenant of good faith and fair dealing is only relevant to determining whether there was a breach. There must have also been resulting damages for the plaintiffs’ breach-of-contract claim to succeed. See Sneberger v. Morrison, 776 S.E.2d 156, 171 (W. Va. 2015).
Accordingly, the Court concluded that the trial court may only grant summary judgment to the plaintiffs on the breach of contract claim on remand if it concludes that (1) the lender breached its contracts with the class members, an analysis which may take into consideration how the covenant of good faith and fair dealing impacted the evaluation of the lender’s performance under the contracts; and (2) the class members suffered damages as a result.
Then the Fourth Circuit turned to the plaintiffs’ unconscionable inducement claim. The West Virginia Consumer Credit and Protection Act (WVCCPA) authorizes a court to act when a loan agreement was “unconscionable at the time it was made” or “induced by unconscionable conduct.” W. Va. Code § 46A-2-121(a)(1).
Thus, according to the appellate court, unconscionable inducement is simply “unconscionable conduct that causes a party to enter into a loan.” McFarland v. Wells Fargo Bank, N.A., 810 F.3d 273, 285 (4th Cir. 2016). Courts are to analyze such claims “based solely on factors predating acceptance of the contract and relating to the bargaining process,” that is, “the process that led to contract formation.” Id. at 277–78. A plaintiff must show more than procedural unconscionability: he or she must demonstrate unconscionable behavior on the part of the defendant, such as an affirmative misrepresentation or active deceit.
To assess a claim of unconscionable inducement under the WVCCPA, the Fourth Circuit stated that courts should look to the defendant’s conduct, not to the bargaining strength of the parties or the substantive terms of the agreement. For claims based on affirmative misrepresentations, the plaintiffs must demonstrate that they subjectively relied on that conduct. For claims based on concealment, however, a plaintiff need only show that the defendant’s conduct was unconscionable and that this unconscionable conduct contributed to the formation of the plaintiff’s decision to enter the loan.
In this case, the Fourth Circuit agreed with the trial court’s view that the defendants sought to pressure appraisers to match targeted appraisal values and concealed this practice from the plaintiffs, a process that, in combination, contributed to the plaintiffs’ decisions to enter the loan agreements. Under the standard outlined above, the Court held that this conduct rose to the level of unconscionable inducement under the WVCCPA.
The plaintiffs’ final claim against the defendants was for conspiracy. The defendants’ only argument on appeal was that the trial court’s summary judgment decision on the plaintiffs’ conspiracy claim was derivative of its ruling on the unconscionable inducement claim. Because the Fourth Circuit already affirmed the trial court’s decision to grant summary judgment to the plaintiffs on their inducement claim, this argument failed.
Accordingly, the Fourth Circuit affirmed the trial court’s decisions to grant class certification, grant summary judgment to the plaintiffs on their conspiracy and unconscionable inducement claims, and award statutory damages. However, the appellate court also vacated the trial court’s grant of summary judgment to the plaintiffs on their breach of contract claim and the related damages award and remanded that claim for further proceedings consistent with this decision.
