The opinion of the court was delivered by: Katharine S. Hayden, U.S.D.J.
The named plaintiffs, Gerald and Tanya Beals and Jose Grullon, are currently in state court foreclosure proceedings brought by defendants Bank of America, N.A. and BAC Home Loans Servicing, L.P. In their proposed class action lawsuit, plaintiffs assert that defendants engaged in numerous bad practices resulting in unreliable and unfair foreclosure proceedings. Defendants filed a motion to dismiss, arguing that this Court should abstain from considering plaintiffs' claim because of potential conflict with the state court proceedings and, in the alternative, that plaintiffs' complaint should be dismissed for failure to state a claim on which relief can be granted.
II. Facts and Procedural History
This case involves Bank of America's mortgage foreclosure practices in the wake of the financial crisis. Although the class action focuses broadly on all foreclosure practices, plaintiffs' claims focus on defects in Bank of America's loan modification procedures. Because the plaintiffs have unique factual predicates for their claims, each is discussed separately. The facts are derived from the complaint.
1. Tanya Beals and Gerald Beals, Jr.
Tanya and Gerald Beals ("the Beals plaintiffs") received a loan secured by a mortgage on their home from Countrywide Financial ("Countrywide"), which Bank of America later acquired. (Second Am. Compl. ¶ 142.) Under this loan, the Beals plaintiffs were obligated to submit monthly payments of $1,337.08. (Id.) They were unable to make payments, and around January 2010, they contacted Bank of America to seek a loss mitigation plan. (Id. ¶ 143.)
The parties reached an agreement whereby the Beals plaintiffs would pay $2,000.87 per month for 12 months. (Id. ¶ 144.) They received a letter dated March 18, 2010 from Jennifer M. Morrison, a legal assistant at the law firm representing defendant BAC Home Loan Servicing, L.P. ("BAC"), a wholly owned subsidiary of Bank of America that operates as its mortgage servicer. (Second Am. Compl., Ex. A; Second Am. Compl.¶ 5.) The letter directed the Beals plaintiffs to return an attached proposed Stipulation Agreement with a $4,289.13 payment made payable to BAC Home Loan Servicing, L.P. (BAC). (Second Am. Compl., Ex. A.) The proposed agreement included blank signature spaces for the Beals plaintiffs and for the "Representative for Mortgagee." (Id.) The complaint alleges that before the Beals plaintiffs received the letter, Morrison represented to them in a conversation that "if [they] executed the proposed stipulation and made timely payments pursuant to that stipulation, . . . BAC would not move forward with any foreclosure proceedings." (Second Am. Compl. ¶ 147.)
The Beals plaintiffs, under the impression "that the modification would become permanent if they fulfilled their modified payment obligations," returned the signed and notarized agreement along with a check for $4,289.13. (Id. ¶ 148--49.) BAC cashed the check. (Id.) The Beals plaintiffs sent their first monthly payment to BAC, but BAC returned the check "for failure to provide the full amount to cure." (Id. ¶¶ 149--51.) In a letter dated May 25, 2010, defendants sent a new proposed agreement that would have mandated $5,734.75 as a down payment and monthly payments of $2,224.60 for the next twelve months. (Id. ¶ 152.) The Beals plaintiffs declined to sign this proposal because its terms were less favorable than the earlier agreement. (Id.)
On March 9, 2010, defendants initiated foreclosure proceedings. (Id. ¶ 153.) That foreclosure action is still pending, and it includes the Beals plaintiffs' counterclaim against BAC for breach of contract, breach of the covenant of good faith and fair dealing, and fraud. (Id. ¶ 155; Defs.' Mot. Dismiss, Ex. B at 25--28.) In this action, the Beals plaintiffs allege damages including the costs of defending against the foreclosure proceeding and the costs emanating from the harm to their credit score. (Second Am. Compl. ¶ 156.)
In July 2005, Grullon obtained a loan from defendants, secured by a mortgage on his home. (Id. ¶ 157.) Under this loan, Grullon made monthly payments of $1,995.83. (Id.) On April 16, 2009, Mortgage Electronic Registration Systems assigned Grullon's mortgage to Countrywide. (Id. ¶ 158.) The assignment of Grullon's mortgage was signed by Renee Hertzler as "Vice President/Compliance Administration Manager for" BAC; in other litigation, Hertzler testified that she signed thousands of foreclosure documents per month without reading them and without personal knowledge of their truthfulness. (Id. ¶¶ 158--60.)
On July 20, 2009, defendants served Grullon with a foreclosure complaint. (Id. ¶ 161.) Shortly after, he submitted paperwork seeking a loan modification under the Treasury Department's Home Affordable Modification Program ("HAMP").*fn1 (Id. ¶ 161.) Defendants rejected Grullon's application. (Id. ¶ 162.)
Grullon and defendants attended a mediation in the foreclosure matter on January 8, 2010, in which they developed and executed a settlement agreement that would have modified Grullon's loan so that he might be able to avoid foreclosure. (Id. ¶ 164.) The Agreement required Grullon to submit various documents to BAC, at which point BAC would "review and determine" whether a modified payment plan could ensue. (Second Am. Compl., Ex. C.) Grullon sent the requested documents, but defendants never conducted the follow-up and never sent a written memorialization of the agreement as promised. (Second Am. Compl. ¶¶ 166--67.) Grullon inquired with BAC several times and was told that his application was being reviewed and that a response would be forthcoming. (Id. ¶ 168.) In spring 2010, he contacted BAC again and was told that he did not qualify for a modification because he failed to send payments. (Id. ¶ 169.) A BAC representative also informed Grullon that "he was unaware of any such agreement and that there was nothing in Mr. Grullon's file indicating the full and complete terms of the January 8, 2010 agreement." (Id. ¶ 170.)
The foreclosure action against Grullon remains pending and includes Grullon's counterclaims against BAC for breach of contract, breach of the covenant of good faith and fair dealing, and fraud. (Id. ¶ 172; Defs.' Mot. Summ. J., Ex. A at 9--12.) In this action, he alleges damages including harm to his credit score and the costs of defending against the foreclosure proceeding. (Id. ¶ 173.)
3. General Allegations Based on Bank of America's Practices
In addition to plaintiffs' individualized complaints regarding their interactions with Bank of America, they also allege broader systemic flaws in the mortgage foreclosure industry. These allegations are more relevant to the broader class action, but they are briefly recounted here because they constitute nearly two-thirds of plaintiffs' complaint.
Plaintiffs allege that in the wake of the financial crisis, Bank of America had to handle an unmanageable quantity of foreclosures, and that to move the process along, the Bank's agents took shortcuts by having so-called robo-signers complete affidavits and other essential foreclosure documents without personal knowledge of the documents' veracity and without verification of the documents' contents. (Id. ¶¶ 12--19.) This was not a mere aberration, but rather a standard business practice resulting in thousands of wrongful disclosures across New Jersey and the country. (Id. ¶¶ 24--26.) After problems emanating from these practices got out of hand, Bank of America froze foreclosure proceedings in judicial foreclosure states and, later, in all states. (Id. ¶ 29.)
Plaintiffs also allege that Bank of America has engaged in wrongful conduct with regard to its handling of loan modification applications. (See id. ¶ 37.) Specifically, Bank of America will frequently solicit mortgagors to participate in a loan modification program and then initiate foreclosure proceedings against them, delay on making final decision on the modification applications, and "fail to use reasonable efforts to secure investor approval of potential modifications where such approval is necessary." (Id. ¶ 42.) Moreover, mortgagors seeking to check on the status of their modification requests are forced to wait much longer than promised for final decisions. (Id. ¶ 44.)
The plaintiffs allege that they and the putative class members have reasonably relied upon Bank of America's communications in the loan modification process, and that they have been harmed by Bank of America's actions, especially when they are placed in trial programs with the erroneous understanding that the modifications will be made permanent. (Id. ¶¶ 51--56.) Plaintiffs assert that if they had received accurate information regarding the status of borrower loans, purported defaults, and what measures could be taken to cure the defaults or modify the loans, [they] would have pursued other measures to cure a potential default, would not have defaulted, and/or would not have been led to believe that [Bank of America] would assist [them] in order to avoid default.
Plaintiffs support their more generalized allegations through reference to testimony at congressional hearings from numerous professors and industry experts who have studied problems in the mortgage servicing industry. (See id. ¶¶ 73--132.) Additionally, plaintiffs recount the details of a Legal Services of New Jersey report to the New Jersey Supreme Court; this report, which recounted details of systemic flaws in the country's mortgage foreclosure practice, led to a statewide order to show cause directing six lenders, including Bank of America, to show why their ability to conduct foreclosures should not be suspended in light of these numerous irregularities. (Id. ¶¶ 133--41.)*fn2
The complaint recites seven counts as the basis of the claim for relief: (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; (3) fraud and intentional misrepresentation; (4) constructive fraud and negligent misrepresentation; (5) negligent processing of loan modifications and foreclosures; (6) violation of the New Jersey Consumer Fraud Act ("CFA"), N.J.S.A. 56:8-1 et seq.; and (7) violation of the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1962 et seq. (Id. ¶¶ 181--238.) Plaintiffs demand, on behalf of themselves and all class members: economic and compensatory damages, actual damages, emotional distress damages, treble damages, punitive damages, declaratory relief "declaring that Defendants' actions are unlawful," injunctive relief "compelling Defendants to cease their unlawful actions," attorneys' fees, and any other relief this Court deems appropriate. (Id. at 58--59.)
On October 19, 2010, plaintiffs filed their first class-action complaint, which they later amended. On December 17, 2010, defendants filed a motion to dismiss. In response, plaintiffs filed a second amended complaint that removed four named plaintiffs from the action, leaving only the three present named plaintiffs: Tanya Beals, Gerald Beals, Jr., and Jose Grullon.
Defendants filed a motion to dismiss the second amended complaint. On October 17, 2011, this Court held oral arguments.
Federal Rule of Civil Procedure 8(a)(2) provides that a claim for relief must include "a short and plain statement of the claim showing that the pleader is entitled to relief." The Rule "does not require ‗detailed factual allegations,' but it demands more than an unadorned, the- defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Consequently, mere "‗labels and conclusions' or ‗a formulaic recitation of the elements of a cause of action will not do'" unless the complaint contains "sufficient factual matter, accepted as true, to ‗state a claim to relief that is plausible on its face.'" Id. (quoting Twombly, 550 U.S. at 556--57, 570). In other words, the plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.; see also Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008).
When deciding whether plaintiff has stated a claim on which relief can be granted, the Court "must accept as true all of the allegations contained in a complaint," provided that they are genuine factual allegations and not masked legal conclusions. Iqbal, 129 S. Ct. at 1949--50.
Under Federal Rule of Civil Procedure 9(b), a heightened standard applies to an allegation of fraud; in fraud cases, the plaintiff "must state with particularity the circumstances constituting fraud," though "[m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." More specifically, "Rule 9(b) requires a plaintiff to plead (1) a specific false representation of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his [or her] damage." In re Supreme Specialties, Inc. Securities Litig., 438 F.3d 256, 270 (3d Cir. 2006) (quoting Shapiro v. UJB Fin. Corp., 964 F.2d 272, 284 (3d Cir. 1992)). A properly-pleaded fraud claim should "ensure that defendants are placed on notice of the ‗precise misconduct with which they are charged'" and should "safeguard defendants against spurious charges." Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989) (quoting Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir. 1984)).
IV. Abstention Discussion and Analysis
Defendants argue that this Court should abstain from rendering a decision in this case under four different theories: Colorado River, the Anti-Injunction Act, Younger, and Brillhart/Wilton.
A. Colorado River Abstention
Defendants first argue that this Court should abstain from hearing this case under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976) because parallel litigation is pending in state court regarding the plaintiffs' foreclosures.
The facts underlying Colorado River are helpful in understanding the scope of this abstention doctrine. The state of Colorado established a system in which water rights were adjudicated through a system consisting of "water judges" sitting in seven water divisions. Colorado River, 424 U.S. at 804. The United States filed a case in federal court asserting certain water rights. Id. at 805--06. "Shortly after the federal suit was commenced, one of the defendants in that suit filed an application in the state court for District 7," seeking to make the United States a defendant in state proceedings for adjudication of the same water rights at issue in the federal litigation. Id. at 806. The Supreme Court, looking to "considerations of ‗(w)ise judicial administration, giving regard to conservation of judicial resources and comprehensive disposition of litigation,'" developed an abstention doctrine to "avoid duplicative litigation." Id. at 814 (quoting Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)). Examining factors relating to the procedural background of each case, the parties' participation, and the convenience of the forum, the Court decided that the federal court should abstain from adjudicating the matter and allow the Colorado state tribunal to assess the water rights at issue. Id. at 820.
In the years since Colorado River, the doctrine has been refined and the framework generalized for universal application. First, there must be a "parallel state proceeding" raising "substantially identical claims [and] nearly identical allegations and issues." Nationwide Mut. Fire Ins. Co. v. George V. Hamilton, Inc., 571 F.3d 299, 307 (3d Cir. 2009) (quoting Yang v. Tsui, 416 F.3d 199, 204 n.5 (2005)). If a parallel state proceeding is pending, then six factors must be considered to determine whether abstention is appropriate: "(1) [in an in rem case,] which court first assumed jurisdiction over the property; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained; (5) whether federal or state law controls; and (6) whether the state court will adequately protect the interests of the parties." Id. at 308 (quoting Spring City Corp. v. Am. Bldgs. Co., 193 F.3d 165, 171 (3d Cir. 1999)). Underlying the analysis is that abstention doctrines are "narrowly applied in light of the general principle that ‗federal courts have a strict duty to exercise the jurisdiction that is conferred upon them by Congress.'" Id. at 307 (quoting Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 716 (1996)).
The two sets of proceedings here are similar, with many facts common between them, but they are not parallel. "Parallel cases involve the same parties and ‗substantially identical' claims, raising ‗nearly identical allegations and issues.'" Yang, 416 F.3d at 204 n.5 (quoting Timoney v. Upper Merion Twp., 66 F. App'x 403, 405 (3d Cir. 2003)). These cases are not identical. Most notably, this is a class action and the state foreclosure actions involve only the named plaintiffs.
Although the plaintiffs in this case have included counterclaims in state court for breach of contract and fraud, this case includes three claims not present in the state litigation: a claim for negligent processing of loan modifications, and statutory claims under the New Jersey Consumer Fraud Act and the Fair Debt Collection Practices Act. See Dehart v. US Bank, N.A., No. 10-5869, 2011 WL 3651270 (D.N.J. Aug. 18, 2011) (Simandle, J.) (declining to exercise Colorado River abstention in FDCPA case where FDCPA was not asserted as affirmative defense in state foreclosure proceeding). But see St. Clair v. Wertzberger, 637 F. Supp. 2d 251, 255 (D.N.J. 2009) (Hillman, J.) (abstaining because "[i]f the Court were to find that defendants ...