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District Court Uses Same Doctrine to Benefit Both Parties in Litigation Over Failed HAMP Workou

Izumi Saika v. Ocwen Loan Servicing, LLC, 2018 U.S. Dist. LEXIS 206795  (D. N. Ill. 2018) ILLINOIS
By ALFN Member: Mike Timothy, Associate General Counsel, LOGS Network

In a unique and somewhat ironic ruling, the U.S. District Court for the Northern District of Illinois shut down a breach of contract claim while permitting a count for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”) to proceed against a mortgage servicer.  The district court used a common law pleading rule known as the “mend the hold” doctrine to prevent plaintiff from maintaining a count for breach of contract while preventing the defendant mortgage-servicer from using the same doctrine as a defense to liability under the ICFA.
 
The claims arose out of a failed HAMP workout.  Borrower applied for HAMP with Ocwen, the loan servicer in 2014.  Ocwen had been processing mortgagor automatic debit payments up to that time.  Ocwen offered a trial plan payment schedule at less than the normal monthly payment, but did not reduce the automatic debit amount to reflect the reduced TPP amounts.  As a result, the original monthly payments were debited during the entire TPP period.  An escrow adjustment was additionally processed by Ocwen, resulting in yet a different payment amount while a permanent modification was transmitted to the borrower, facially in compliance with HAMP regulations.  Both title holders were required to sign and return the agreement. Only the borrower signed and Ocwen refused to recognize the agreement.  Servicing was subsequently transferred, another foreclosure initiated and the borrower eventually received a HAMP workout with the successor servicer.  The borrower then brought suit against Ocwen in state court.
 
Ocwen removed the case to federal court.  The 2-count complaint alleged a breach of contract for Ocwen's failure to offer a permanent modification and violation of the ICFA claiming unfair practices in processing the application.   The district court disposed of the breach of contract count, emphasizing the plaintiff could not plead that it complied with the terms of the TPP because of plaintiff's refusal or inability to have all titleholders sign the agreement, as required.  Plaintiff argued that the “mend the hold” doctrine prevented Ocwen from maintaining a non-enforceable agreement at trial because Ocwen had not made that argument pre-suit.  The district court, reviewing Illinois case law, found that the mend-the-hold doctrine “(D)oes not prohibit the addition of a defense after suit is filed”.  See On-Site Screening, Inc. v. U.S., 687 F 3d 896 (7th Cir. 2012), Estate of Burford v. Accounting Practice Sales, Inc. 851 F. 3d 641 (7th Cir. 2017).
 
In an ironic twist, this same court rejects Ocwen's attempt to utilize the same pleading doctrine to defeat the ICFA claim.  As an initial matter, the district court held that a successful plaintiff must plead five elements to maintain a successful count under ICFA: (1) a deceptive or unfair act or practice by defendant, (2) the defendant's intention that plaintiff rely on the deceptive or unfair practice, (3)  the allegedly deceptive act occurred during a course of conduct involving trade or commence, (4) actual damages (5) proximately caused by defendants action.   Ocwen defended by arguing plaintiffs did not properly allege the unfair and causation elements of the ICFA claim.  The court analyzed the manner in which unfairness and causation can be shown, and found Ocwen's alleged conduct sufficient to meet that pleading standard.  The opinion is highly critical of Ocwen's actions in attempting to draft and administer the TPP and permanent modification.  In its reply, Ocwen argued that plaintiff's allegations of oppressive conduct came too late, because plaintiff did not raise these issues pre-litigation, in violation of the “mend-the-hold” doctrine. The district court took a different approach in using this argument against Ocwen, finding that by raising it for the first time in their reply brief, they waited too long once in the litigation and waived the argument as a matter of law.
 
 
INDUSTRY IMPACT: WHAT IT MEANS FOR SERVICING

The takeaway from this case is litigants should not be afraid to raise new arguments in litigation that may not have been discussed in prior communications with an opponent, but they must be diligent in raising these arguments at the earliest possible moment within the litigation and are bound by those positions throughout the life of the suit.