Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_11-cv-03831/USCOURTS-cand-3_11-cv-03831-9/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

I. INTRODUCTION

Plaintiff Robert Chandler ("Plaintiff") brings this putative 

class action in connection with Defendants Wells Fargo, N.A.

("Wells") and Federal National Mortgage Association's ("Fannie 

Mae") (collectively, "Defendants") alleged breach of his mother's 

reverse mortgage, also known as a home equity conversion mortgage 

("HECM"). ECF No. 64 (First Amended Complaint ("FAC")). 

Defendants now move to dismiss. ECF No. 67 ("MTD"). The motion is 

fully briefed, ECF Nos. 69 ("Opp'n"), 70 ("Reply"), and appropriate 

ROBERT CHANDLER, AS 

REPRESENTATIVE OF THE ESTATE OF 

ROSEMARY S. CHANDLER, 

individually and on behalf of 

all others similarly situated,

Plaintiff, 

 v.

WELLS FARGO BANK, N.A., and 

FEDERAL NATIONAL MORTGAGE 

ASSOCIATION a/k/a FANNIE MAE,

Defendants.

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Case No. 11-03831 SC

ORDER GRANTING MOTION TO

DISMISS

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for resolution without oral argument per Civil Local Rule 7-1(b). 

For the reasons set forth below, the Motion is GRANTED.

II. BACKGROUND

A. The Parties and Plaintiff's Allegations

Plaintiff resides at 10095 Sheldon Road, Elk Grove, California 

(the "Property"). In 2006, Plaintiff's mother, Rosemary S. 

Chandler, took out a $544,185 reverse mortgage loan that was 

secured by the Property. Ms. Chandler signed the Home Equity 

Conversion Deed of Trust (the "HECM Deed") as trustee for Rosemary 

S. Chandler, 1993 Trust. ECF No. 68 ("RJN") Ex. A ("HECM Deed"). 

Wells originated the reverse mortgage but later sold it to Fannie 

Mae. Wells continued to service the loan. 

Ms. Chandler died in January 2010. FAC ¶ 46. At the time of 

her death, the HECM balance was approximately $338,000 and the 

value of the home was approximately $252,698. Id. Plaintiff 

contacted Wells about purchasing the home for its appraised value, 

but Wells insisted that Plaintiff would have to pay off the full 

loan balance. Id. ¶ 47. Plaintiff subsequently received a notice 

from a substitute trustee that the mortgage was in default due to 

failure to pay the entire principal balance. Id. ¶ 48. Plaintiff 

alleges that, pursuant to the HECM Deed and HUD regulations, 

Defendants should have provided him with notice and an opportunity 

to purchase the Property at 95 percent of its appraised value.

B. The HECM at Issue

Unlike a typical mortgage, where a borrower receives loan 

proceeds as a lump sum, uses the proceeds to buy a home, and then 

pays back the loan gradually, a "reverse" mortgage borrower already 

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owns a home and takes out a loan against its equity. In the 

reverse of a typical mortgage, an HECM borrower generally receives 

the loan proceeds in gradual payments and pays back the loan in a 

lump sum. 

Repayment is triggered by certain qualifying events. Those 

qualifying events are set forth in Paragraph 9 of the HECM Deed. 

Specifically, Paragraph 9(a) provides that the lender may require 

immediate repayment in full of all sums secured if (i) the borrower 

dies, or (ii) all of the borrower's title in the Property is sold 

or otherwise transferred. Paragraph 9(b) sets forth other 

conditions under which the loan may become due and payable that are 

not relevant here. Paragraph 9(d) provides that the lender shall 

notify the Secretary of Housing and Urban Development ("HUD") and 

the borrower "whenever the loan becomes due and payable under 

paragraph 9(a)(ii)," that is, whenever the loan becomes due and

payable because the borrower transfers her interest in the 

property, or under paragraph 9(b). Paragraph 9(d) omits any 

reference to the death of the borrower as a triggering event for 

notice.

Paragraph 9(d) further provides that lender shall not have the 

right to commence foreclosure until the borrower has had thirty 

days after the notice to either:

(i) Correct the matter which resulted in the Security 

Instrument coming due and payable; or

(ii) Pay the balance in full; or 

(iii) Sell the Property for the lesser of the balance 

or 95% of the appraised value and apply the net 

proceeds of the sale toward the balance; or

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(iv) Provide the Lender with a deed in lieu of 

foreclosure.

Subparagraph (iii) sets forth the so-called "95 percent rule" that 

Plaintiff now seeks to enforce. 

The terms of the HECM Deed also protect Ms. Chandler and her 

heirs from deficiency judgments. Specifically, paragraph 10 of the 

HECM Deed provides that lender may only enforce the debt through 

sale of the property and that the lender shall not be permitted to 

obtain a deficiency judgment against the borrower. 

B. HUD Regulations and Guidelines

Plaintiff alleges that Ms. Chandler's reverse mortgage was 

insured by HUD. HUD regulations parallel the provisions of the 

HECM Deed in many respects. For example, 24 C.F.R. § 

206.27(c)(1)(i) and (ii) mirror the provisions of paragraph 9(a) 

and 9(b) of the HECM Deed, stating that the reverse mortgage 

becomes due and payable when, among other things, the borrower dies 

or the borrower conveys title to the property to another.

Like paragraph 9(d) of the HECM Deed, HUD regulations provide 

that the lender shall notify the borrower that the mortgage is due 

and payable, "unless the mortgage is due and payable by reason of 

the mortgagor's death." Id. § 206.125(a)(2). The regulations 

continue:

The mortgagee shall require the mortgagor to (i) pay 

the mortgage balance, including any accrued interest 

and MIP, in full; (ii) sell the property for at least 

95% of the appraised value as determined under § 

206.125(b), with the net proceeds of the sale to be 

applied towards the mortgage balance; or (iii) provide 

the mortgagee with a deed in lieu of foreclosure. The 

mortgagor shall have 30 days in which to comply with 

the preceding sentence, or correct the matter which 

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resulted in the mortgage coming due and payable, 

before a foreclosure proceeding is begun.

Id. 

HUD regulations also allow the borrower to sell the property 

at any time and limit liability to no more than the appraised value 

of the property:

Whether or not the mortgage is due and payable, the 

mortgagor may sell the property for at least the 

lesser of the mortgage balance or the appraised value 

(determined under § 206.125(b)). If the mortgage is 

due and payable at the time the contract for sale is 

executed, the mortgagor may sell the property for at 

least the lesser of the mortgage balance or five 

percent under the appraised value. 

Id. § 206.125(c). 

In December 2008, HUD issued guidance regarding these 

regulations. RJN Ex. E. That guidance states that a borrower or 

the borrower's estate cannot "pay off the loan balance of a HECM 

for the lesser of the mortgage balance or the appraised value of 

the property while retaining ownership of the home." Id. The 

guidance further states that if the HECM is due and payable and the 

borrower or the borrower's estate wants to retain ownership of the 

subject property, the HECM must be repaid in full. HUD explained 

that HECMs were non-recourse loans and "[n]on-recourse means simply 

that if the borrower (or estate) does not pay the balance when due, 

the mortgagee's remedy is limited to foreclosure and the borrower 

will not be personally liable for any deficiency resulting from the 

foreclosure." Id.

HUD rescinded this guidance in April 2011. RJN Ex. G. A few 

months later, in July 2011, HUD issued new guidance explaining that 

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when an HECM loan becomes due and payable as a result of the 

borrower's death, the borrower's heirs may satisfy the HECM debt by 

paying the lesser of the mortgage balance or 95 percent of the 

current appraised value of the property. FAC Ex. A. at 1. The new 

guidance further provides that lender should grant heirs 90 to 180

days to make the required payments.

C. Procedural History

Based on the allegations set forth above, the HECM Deed, and 

the HUD regulations, Plaintiff asserts claims for (1) declaratory 

relief, (2) breach of contract, and (3) violation of the California 

Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, et 

seq. 

With respect to the first cause of action, Plaintiff seeks a 

declaration that (a) Defendants are required to provide notice to 

borrowers that they can sell or transfer their properties for 95 

percent of the appraised value before Defendants may initiate 

foreclosure proceedings, (b) Defendants cannot initiate foreclosure 

proceedings if a borrower endeavors to sell or transfer the 

property for 95 percent of the appraised value, (c) Defendant's 

failure to provide notice and an opportunity to sell violates 12 

U.S.C. § 1715z-20, as well as HUD regulations, (d) any foreclosure 

that occurs prior to the required notice or after a denial of an 

opportunity to sell is illegal and a breach of contract. 

Plaintiff's other claims for breach of contract and UCL 

violations are likewise premised on Defendants' alleged obligation 

to provide Plaintiff with notice and opportunity to take advantage 

of the 95 percent rule.

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This is a putative class action brought under Federal Rule of 

Civil Procedure 23(b)(2). The proposed class is defined as 

"estates and personal representatives of HECM borrowers, whose 

loans are or were owned and/or serviced by Defendants, and who are 

entitled to notice and the opportunity to purchase properties for 

95% of appraised value." FAC ¶ 54.

III. LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 

12(b)(6) "tests the legal sufficiency of a claim." Navarro v. 

Block, 250 F.3d 729, 732 (9th Cir. 2001). "Dismissal can be based 

on the lack of a cognizable legal theory or the absence of 

sufficient facts alleged under a cognizable legal theory." 

Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 

1988). "When there are well-pleaded factual allegations, a court 

should assume their veracity and then determine whether they 

plausibly give rise to an entitlement to relief." Ashcroft v. 

Iqbal, 556 U.S. 662, 679 (2009). However, "the tenet that a court 

must accept as true all of the allegations contained in a complaint 

is inapplicable to legal conclusions. Threadbare recitals of the 

elements of a cause of action, supported by mere conclusory 

statements, do not suffice." Id. (citing Bell Atl. Corp. v. 

Twombly, 550 U.S. 544, 555 (2007)). 

IV. DISCUSSION

Defendants now move to dismiss Plaintiff's claims on the 

ground that the HECM Deed does not give Plaintiff the right to 

notice or opportunity to purchase the Property at 95 percent of the 

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appraised value. Defendants further argue that the Plaintiff 

cannot premise his claims on HUD regulations or guidance because 

they do not provide for a private right of action. Finally, 

Defendants argue that even if Plaintiff could sue under HUD 

regulations, those regulations do not support his claim that he a 

right to notice and opportunity to purchase the Property at 95 

percent of its appraised value.

A. The HECM Deed

The Court agrees with Defendants that the HECM Deed, read 

alone, does not provide Plaintiff with a right to notice and an 

opportunity to purchase the Property at 95 percent of its appraised 

value. Both parties appear to agree that the HECM became due and 

payable upon the death of borrower, Ms. Chandler. The plain 

language of the HECM Deed provides that where the borrower dies, 

"the Lender may require immediate payment in full of all sums 

secured by the [Deed]," which is essentially what Defendants 

demanded after the death of Ms. Chandler. HECM Deed ¶ 9(a).

Plaintiff urges the Court to look to paragraph 9(d) of the 

HECM Deed, which provides that that the lender shall notify the 

borrower whenever the loan becomes due and payable pursuant to 

Paragraphs 9(a)(ii) and 9(b), neither of which pertains to the 

death of the borrower. Paragraph 9(d) further provides that the 

lender shall not commence foreclosure proceedings until the 

borrower has had thirty days after notice to, among other things, 

sell the property for the lesser of the outstanding HECM balance or 

95 percent of the Property's appraised value.

There are a few problems with Plaintiff's contention that 

paragraph 9(d) entitles him to notice and an opportunity to take 

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advantage of the 95 percent rule. First and foremost, paragraph 

9(d) specifically omits any reference to paragraph 9(a)(i), which 

pertains to the death of a borrower, as a triggering event for 

notice. Second, paragraph 9(d) refers to the rights of the 

borrower, not the borrower's heirs. Third, because paragraph 9(d) 

provides that notice is only required where the HECM becomes due 

and payable pursuant to paragraphs 9(a)(ii) and 9(b), neither of 

which pertain to the death of the borrower, and because paragraph 

9(d) only allows for options such as the purchase of the property 

for 95 percent of the appraised value "after notice," it follows 

that the HECM Deed does not expressly provide the borrower's heirs 

with the right to take advantage of the 95 percent rule after the 

death of the borrower.

Plaintiff contends that "while the options might more artfully 

have been placed in a separate section of the mortgage," his right 

to notice and opportunity to purchase the property for 95 percent 

of its appraised value prior to foreclosure is "indisputable." 

Opp'n at 5. Plaintiff reasons that any other reading would 

eviscerate paragraph 10 of the HECM Deed. Id. The Court 

disagrees. Paragraph 10 merely provides that the lender shall not 

be permitted to obtain a deficiency judgment against the borrower 

if HECM deed is foreclosed. Nothing in this provision is 

inconsistent with refusing to allow a borrower's heirs to purchase 

a borrower's property for 95 percent of its appraised value.

Plaintiff also argues that Defendants' interpretation of 

their notice obligations is somehow inconsistent with paragraph 20 

of the HECM Deed, which pertains to foreclosure procedures. Id. at 

8-9. This argument also lacks merit. Paragraph 20 merely requires 

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that, in the event the lender requires satisfaction of the 

outstanding HECM balance, the lender must provide a notice of 

default and other notice required by applicable law. There is no 

dispute that Defendants provided such notice in this case. In any 

event, Paragraph 20 does not require notice of the 95 percent rule 

that Plaintiff now demands.

Next, Plaintiff contends that paragraph 9(a)(ii) of the HECM 

Deed independently requires notice. Id. at 11. That provision 

states that the lender may require immediate payment of the 

outstanding HECM balance where all of a borrower's title in the 

Property is sold or otherwise transferred. Paragraph 9(d) requires 

that the lender provide notice of the 95 percent rule whenever the 

loan becomes due and payable under paragraph 9(a)(ii). Plaintiff 

reasons that "HUD has made clear that it 'interprets the word sale 

to include any post-death conveyance of the mortgage property (even 

by operation of law) to the borrower's estate or heirs.'"1

 Opp'n 

at 11. The Court remains unconvinced. Paragraph 9(a) refers to 

two types of events that could cause the HECM to become due and 

payable: (i) the death of the borrower, (ii) the sale or transfer 

of the Property. Plaintiff's interpretation renders subsection 

(ii) nugatory, strains common sense, and would essentially require 

the Court to read the contract in a manner inconsistent with its 

plain meaning.

Accordingly, the Court finds that the plain language of the 

HECM Deed does not support Plaintiff's position that he was 

entitled to notice and an opportunity to purchase the Property for 

 1 Plaintiff does not identify the HUD guidance from which he 

quotes.

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95 percent of its appraised value.

B. HUD Regulations and Guidance

Plaintiff contends that the HUD regulations require notice and 

opportunity to purchase the Property for 95 percent of its 

appraised value, and that the HECM Deed manifests the parties' 

intent to be bound by those regulations. Opp'n at 13. However, 

Plaintiff cannot point to a particular provision of the HECM Deed 

incorporating HUD regulations. 

Plaintiff cites Norfolk and Western Railway Company v. 

American Train Dispatchers' Association, 499 U.S. 117, 130 (1991),

for the general proposition that "[l]aws which subsist at the time 

and place of the making of a contract, and where it is to be 

performed, enter into and form a part of it, as fully as if they 

had been expressly referred to or incorporated in its terms." 

Opp'n at 14 n.46. However, this broad canon of construction does 

not trump the standard inquiry used to determine whether a federal 

statute creates an implied cause of action. Umland v. PLANCO Fin. 

Servs., Inc., 542 F.3d 59, 66 (3d Cir. 2008). Moreover, courts 

have been reluctant to incorporate statutory or HUD regulatory 

provisions into a contract unless the contract explicitly provides 

for their incorporation. See St. Christopher Assocs., L.P. v. 

United States, 511 F.3d 1376, 1384 (Fed. Cir. 2008).

Even if Plaintiff could rely on the HUD regulations, they do 

not support his position that he was entitled to notice and 

opportunity to purchase the property for 95 percent of its 

appraised value. With respect to notice, the regulations provide 

that a borrower is entitled to notice "unless the mortgage is due 

and payable by reason of the mortgagor's death by reason of the 

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borrower's death." 24 C.F.R. § 206.125(a)(2). Thus, Plaintiff

cannot credibly contend that the regulations entitled him to notice 

when the HECM became due and payable by virtue of the death of his 

mother.

The regulatory provisions pertaining to the right to purchase 

a subject property for 95 percent of its appraised value presents a 

closer question. Section 206.125(a)(2) is substantially similar to 

paragraph 9(d) of the HECM Deed, which as discussed above, 

indicates that the 95 percent rule does not apply upon the death of 

the borrower. However, 24 C.F.R. § 206.125(c), which is unlike any 

provision in the HECM Deed, provides that if the mortgage is due 

and payable for any reason, the "mortgagor" may sell the property 

for 95 percent of its appraised value. Section 206.123 suggests 

that, in certain contexts, the term "mortgagor" encompasses the 

mortgagor's estate or personal representative. Read together,

sections 206.123 and 206.125(c) suggest that a borrower's estate 

may have the right to sell a subject property for 95 percent of its 

appraised value. However, the regulations are far from clear on 

this point.2

Even if sections 206.123 and 206.125(c) can be read to allow 

an heir or estate to take advantage of the 95 percent rule, HUD 

adopted a contrary view at the time of Ms. Chandler's death in 

 2 Section 206.123(a) provides that mortgagees may submit claims for 

payment of the mortgage insurance benefits if, among other things, 

"[t]he mortgagor sells the property for less than the mortgage 

balance and the mortgagee releases the mortgage of record to 

facilitate the sale, as provided in § 206.125(c)." Section 

206.123(b) provides that "[t]he term mortgagor as used in this 

subpart . . . shall also mean the mortgagor's estate or personal 

representative." It is unclear whether this means that the 

expanded definition of mortgagor also applies to the 95 percent 

rule as set forth in § 206.125(c).

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2010. In guidance issued in December 2008, HUD stated "[i]f the 

mortgage is due and payable and the borrower (or estate) desires to 

retain ownership of the property, the mortgage debt must be repaid 

in full." RJN Ex. E at 2. HUD later retracted the December 2008

guidance, but not until after Plaintiff sought to purchase the 

Property. Accordingly, at the time Defendants rejected Plaintiff's 

offer to purchase the property, they were acting in accordance with 

express directives from HUD. An agency's interpretation of its 

regulations is entitled to deference. Pub. Lands for the People, 

Inc., v. U.S. Dept. of Agric., 697 F.3d 1192, 1199 (9th Cir. 2012). 

In sum, the Court finds that the HUD regulations were not 

incorporated into the HECM Deed and, even if they were, those 

regulations do not support Plaintiffs' claims.

V. CONCLUSION

For the foregoing reasons, the Court GRANTS Defendants' motion 

to dismiss and DISMISSES Plaintiff Robert Chandler's First Amended 

Complaint. Since the Court finds that amendment would be futile, 

dismissal is WITH PREJUDICE.

 

IT IS SO ORDERED.

Dated: January 3, 2014

UNITED STATES DISTRICT JUDGE

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