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Harte v. Ocwen Financial Corp.

United States District Court, E.D. New York

September 19, 2014

DEBORAH C. HARTE on behalf of herself and others similarly situated, Plaintiff,


MARGO K. BRODIE, District Judge.

Plaintiff Deborah C. Harte commenced this action in New York Supreme Court, Kings County, on behalf of herself and a class of similarly situated homeowners nationwide, alleging that Defendants Ocwen Financial Corporation ("OFC") and Ocwen Loan Servicing, LLC ("OLS") (collectively "Defendants"), made misrepresentations to mortgage borrowers in violation of New York statutory and common law. On September 30, 2013, Defendants removed this action to the Eastern District of New York.[1] On February 7, 2014, Defendants moved to dismiss the Complaint for failure to state a claim. For the reasons set forth below, the Court grants in part and denies in part Defendants' motions.

I. Background

a. Parties

Plaintiff is a resident of Brooklyn, New York.>[2] (Compl. ¶ 6, annexed to Notice of Removal as Ex. A.) OFC is organized under the laws of the state of Florida with a principal place of business in Atlanta, Georgia. ( Id. ¶ 7.) OFC "is a financial services holding company which, through its subsidiaries, engages in the servicing and origination of mortgage loans." ( Id. ) OLS is a Delaware corporation and a wholly owned subsidiary of OFC. ( Id. ¶ 8.) OLS is licensed to service mortgages in all 50 states, as well as the District of Columbia and two United States territories. ( Id. )

b. Defendants' general loan modification scheme

OLS[3] solicits modifications of home mortgage loans from borrowers through mailings and customer service calls. ( Id. ¶ 3.) Through the solicitation of loan modifications, OLS sought to increase its own fees through a "dual tracking" scheme which involves the following steps: (1) OLS solicits homeowners to apply for loan modifications, which requires homeowners to submit documentation to OLS, and falsely denies receiving homeowner documents, (2) OLS then tells borrowers to withhold monthly mortgage payments while modification applications are pending knowing that such withholding would result in fees, default and/or foreclosure, and (3) without sufficient notice, OLS commences foreclosure proceedings against borrowers with pending modification applications despite statements indicating that it would not do so. ( Id. ¶¶ 4, 14.) OLS fails to make timely decisions on loan modifications, resulting in a borrower "limbo" where OLS is able to accumulate revenue through penalty fees, back interest and other foreclosure-related fees. ( Id. ¶¶ 14-16.) After this "self-extended delay, " OLS declares the borrower in default, commences foreclosure and refuses to accept any payment other than the entire amount overdue. ( Id. ¶ 16.)

c. Plaintiff's loan modification

On or about September 15, 2005, Plaintiff obtained a mortgage loan (the "Mortgage") from Federal Mortgage & Investment Corporation in the amount of $420, 000. ( Id. ¶ 18.) On March 13, 2008, Plaintiff's loan was modified, resulting in an increased principal balance of $463, 810.37. ( Id. ) At some point between 2005 and 2010, OLS became the servicer of Plaintiff's mortgage. ( Id. ¶ 19.) In October 2011, Plaintiff received "literature" from OLS regarding loan modification options. ( Id. ¶ 20.) On October 21, 2011, OLS sent a letter to Plaintiff discussing "alternatives to foreclosure." ( Id. ¶ 21.) By letter dated December 16, 2011, OLS sent Plaintiff a packet describing the documentation required in order to effectuate a modification of her loan. ( Id. ¶ 22.) The packet, ("Modification Application"), included a "Borrower/Co-Borrower Acknowledgement and Agreement, " which required the borrower's signature and set forth the terms governing the relationship between OLS and the borrower. ( Id. ; Modification Application dated Dec.16, 2011, annexed to the Decl. of Brian M. Forbes as Ex. C.) Plaintiff also received a document titled "Important Information Regarding Your Modification Application" ("Important Information Document"), which stated that "[w]hile we consider your request [for a modification], we will not initiate a new foreclosure action."[4] (Compl. ¶ 84.) On December 28, 2011, Plaintiff returned this agreement form to OLS, along with an eleven-page modification form, an economic hardship letter, tax documents, pay stubs, certifications of rent payments and proof of receipt of monthly child support payments. ( Id. ¶ 23.)

By letter dated December 30, 2011, OLS notified Plaintiff that they had received her documentation and that she had been assigned a "relationship manager" named Pradnya G. Naik. ( Id. ¶ 24.) Plaintiff later spoke to Naik, who directed Plaintiff to stop submitting mortgage payments until Plaintiff's modification had been processed. ( Id. ¶ 25.) By letter dated January 2, 2012, OLS requested additional information from Plaintiff. ( Id. ¶ 26.) On January 5, 2012, Plaintiff faxed the additional information, which included a recent bank statement, photocopies of rent checks from Plaintiff's tenant, a signed statement from Plaintiff's tenant and a signed statement by Plaintiff and her child support provider concerning child support payments. ( Id. ) On January 10, 2012, OLS requested proof of receipt of child support, the lease agreement between Plaintiff and her tenant, and recent bank statements demonstrating rental income. ( Id. ¶ 27.) On January 11, 2012, Plaintiff faxed the requested information to OLS although the documentation had already been provided. ( Id. ¶ 28.) By letter dated January 16, 2012, OLS again requested information concerning child support payments, rental income and bank statements. ( Id. ¶ 29.)

On at least one occasion between February 2012 and April 2012, Plaintiff contacted OLS expressing concern that her application had been pending for a long time during which mortgage payments were not being made. ( Id. ¶ 30.) An OLS representative assured Plaintiff that OLS was still processing her modification and that during this period the monthly amount due under the mortgage was unknown. ( Id. ) By letter dated March 12, 2012, OLS notified Plaintiff that she had been assigned a new "relationship manager" named Angie Garcia. ( Id. ¶ 31.) By letter dated April 3, 2012, OLS acknowledged that Plaintiff requested a modification to her mortgage and stated "[w]hile we consider your request, we will not initiate a new foreclosure action and we will not move ahead with foreclosure sale on an active foreclosure as long as we have received all required documents and you have met the eligibility requirements." ( Id. ¶ 33.)

By letter dated April 10, 2012, OLS requested Plaintiff's lease agreement with her tenant, two bank statements and a form concerning "non-borrower income." ( Id. ¶ 34.) Of the requested items, only the last had not been previously submitted. ( Id. ) By separate letter also dated April 10, 2012, OLS thanked Plaintiff for submitting her application and stated: "Based on our review of the information you provided, the Non-Borrower Verification form is required to complete the application process." ( Id. ¶ 35.) Plaintiff faxed to OLS a letter regarding the amount of rent charged to her tenant, a signed statement from Plaintiff's tenant attesting to the amount of rent, the lease agreement and Plaintiff's 2011 schedule E taxes. ( Id. ¶ 36.) By letter dated April 19, 2012, the Company again claimed that Plaintiff's application was incomplete and requested documents, all of which Plaintiff had previously submitted. ( Id. ¶ 37.) A separate letter, also dated April 19, 2012, requested the same information of the other letter and, for the first time, a copy of Plaintiff's divorce decree and a separation agreement or other legal document specifying the amount, duration and frequency of child support payments. ( Id. ¶ 38.) Plaintiff had already discussed with one or both of her "relationship managers" that her child support payments were not governed by any legal document. ( Id. )

By letter dated April 24, 2012, OLS informed Plaintiff that, based on the information Plaintiff had provided, she was not eligible for a HAMP modification.[5] ( Id. ¶ 39.) The letter also stated that documents were still missing from Plaintiffs application. ( Id. ) Specifically, OLS needed proof that Plaintiff had been receiving regular child support and/or alimony payments, a copy of the lease agreement between Plaintiff and her tenant and two recent bank statements. ( Id. ) Plaintiff had previously provided all of this documentation. ( Id. ) A separate letter, also dated April 24, 2012, stated that Plaintiff was not eligible for a loan modification, that there were missing documents, that notification had been sent regarding these documents and that OLS had received no response from Plaintiff. ( Id. ¶ 40.) By letter dated April 27, 2012, OLS again notified Plaintiff that she was not eligible for a modification but claimed that this was due to Plaintiff's failure to provide income documents. ( Id. ¶ 41.) On May 7, 2012, Plaintiff faxed OLS a recent bank statement and a letter by the child support provider attesting to his monthly child support payments. ( Id. ¶ 42.)

On May 16, 2012, OLS filed a foreclosure action against Plaintiff in New York Supreme Court, Kings County. ( Id. ¶ 43.) As of that date, Plaintiff had not received a notice of default. ( Id. ) On May 20, 2012, Plaintiff spoke with Garcia but Garcia never mentioned to Plaintiff that foreclosure proceedings had been initiated. ( Id. ¶ 44.) On May 21, 2012, Plaintiff faxed OLS additional copies of paystubs. ( Id. )

By letter dated May 24, 2012, OLS again thanked Plaintiff for submitting her application and claimed that additional documents were required in order to process the application. ( Id. ¶ 45.) By letter dated June 1, 2012, OLS thanked Plaintiff for her application and enclosed a list of frequently asked questions. ( Id. ¶ 46.)

In approximately the beginning of June 2012, Plaintiff began to receive correspondence and telephone messages from third parties claiming to help homeowners facing foreclosure. ( Id. ¶ 47.) As a result of this correspondence, Plaintiff became aware of her foreclosure. ( Id. )

By letter dated July 8, 2012, OLS notified Plaintiff that if it did not receive the outstanding documentation, Plaintiff's modification application would be denied. ( Id. ¶ 48.) By letter dated July 9, 2012, OLS stated that it had sent Plaintiff a notice of default and that OLS wanted to assist Plaintiff in bringing her loan current. ( Id. ¶ 49.) The letter suggested that Plaintiff attempt to modify her loan. ( Id. ) Plaintiff subsequently received a notice of default, dated July 11, 2012. ( Id. ¶ 50.) Plaintiff also continued to receive letters concerning her modification application and outstanding documents. ( Id. ¶¶ 51-52.)

On December 18, 2012, Plaintiff filed a Chapter 13 Petition for Bankruptcy Protection in the United States Bankruptcy Court for the Eastern District of New York. ( Id. ¶ 54.)

d. OLS' similar conduct with other homeowners

In 2010, OLS settled a multidistrict litigation consolidated in the Northern District of Illinois, which entailed allegations of unlawful and predatory behavior against borrowers. ( Id. ¶ 55.) In 2005, a Texas jury found OLS liable to a pair of borrowers with damages amounting to $3, 000, 000. ( Id. ¶ 56.) The Complaint lists five other court actions involving similar allegations against OLS, in addition to a number of consumer criticisms against OLS posted on interne messaging boards. ( Id. ¶¶ 58-67.) The Complaint also discusses various state and federal agency investigations into OLS's loan servicing practices. ( Id. ¶ 68.)

II. Discussion

a. Standard of Review

In reviewing a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court "must take all of the factual allegations in the complaint as true." Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Centers Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc., 712 F.3d 705, 717 (2d Cir. 2013) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)); see also Lundy v. Catholic Health Sys. ofLong Island Inc., 711 F.3d 106, 113 (2d Cir. 2013) (quoting Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009)); Matson v. Bd. of Educ., 631 F.3d 57, 63 (2d Cir. 2011) (quoting Connecticut v. Am. Elec. Power Co., 582 F.3d 309, 320 (2d Cir. 2009)). A complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Matson, 631 F.3d at 63 (quoting Iqbal, 556 U.S. at 678); see also Pension Ben. Guar. Corp., 712 F.3d at 717-18. "[W]here the wellpleaded 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.'" Pension Ben. Guar. Corp., 712 F.3d at 718 (alteration in original) (quoting Iqbal, 556 U.S. at 679). Although all allegations contained in the complaint are assumed true, this principle is "inapplicable to legal conclusions."[6] Iqbal, 556 U.S. at 678.

b. Breach of contract

To establish a claim of breach of contract under New York law, a plaintiff must demonstrate "(i) the formation of a contract between the parties; (ii) performance by the plaintiff; (iii) failure of defendant to perform; and (iv) damages." Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131, 142 (2d Cir. 2011) (citing Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N. Y, 375 F.3d 168, 177 (2d Cir. 2004)); see also Hudson & Broad, Inc. v. IC. Penney Corp., Inc., 553 F.Appx. 37, 38 (2d Cir. 2014) (quoting Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996)).

i. Breach of the Mortgage[7]

Plaintiff's breach of contract claim is based on a violation of her underlying Mortgage. OLS argues that Plaintiff's claim fails as a matter of law because OLS is not a party to the Mortgage. (OLS Mem. 8.) Plaintiff acknowledges that OLS was not a party to the Mortgage but argues that Plaintiff and OLS were in the "functional equivalent of pnvity."[8] (Pl. OLS Opp'n Mem. 9.)[9] For the reasons discussed below, the Court agrees with Plaintiff but grants OLS' motion to dismiss based on Plaintiff's failure to plead such a theory of liability in the Complaint.

"It is hornbook law that a nonsignatory to a contract cannot be named as a defendant in a breach of contract action unless it has thereafter assumed or been assigned the contract." In re Cavalry Const., Inc., 428 B.R. 25, 30 (S.D.N.Y. 2010) (quoting Crabtree v. Tristar Auto. Group, Inc., 776 F.Supp. 155, 166 (S.D.N.Y. 1991)), aff'd sub nom. In re Cavalry Const., 425 F.Appx. 70 (2d Cir. 2011); CDJ Builders Corp. v. Hudson Grp. Const. Corp., 889 N.Y.S.2d 64, 65 (App. Div. 2009) ("Liability for breach of contract does not lie absent proof of a contractual relationship or privity between the parties." (quoting Hamlet at Willow Creek Dev. Co., LLC v. Ne. Land Dev. Corp., 878 N.Y.S.2d 97, 112 (App. Div. 2009))). Courts in this Circuit, interpreting New York caselaw, have come to recognize an exception to this general precept for non-signatories who are in the "functional equivalent of privity." In re Cavalry Constr., Inc., No. 07-22707, 2013 WL 5682741, at *3-4 (Bankr. S.D.N.Y. Oct. 18, 2013) (noting that the exception is "well established" in tort but recognizing that "several cases have applied the doctrine to breach of contract claims"); Aktas v. JMC Dev. Co., Inc., 877 F.Supp.2d 1, 27 (N.D.N.Y. 2012) ("Courts in New York have routinely, refused to dismiss breach of contract causes of action asserted by property owners against subcontractors who performed construction services on their property'." (quoting Logan-Baldwin v. L.S.M. Gen. Contractors, Inc., 942 N.Y.S.2d 718, 721 (App. Div. 2012))), aff'd, 563 F.Appx. 79 (2d Cir. 2014); Keywell L.L.C. v. Pavilion Bldg. Installation Sys., Ltd., 861 F.Supp.2d 120, 129 (W.D.N.Y. 2012) ("New York law does recognize that, even in the absence of a formal signed contract, the functional equivalent of privity' may exist in construction situations under certain circumstances when a project's owner and a subcontractor engaged in direct dealings."); see also Town ...

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