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Home Refurbisher Claims Wells Fargo Ruined His Business by Misstating His Credit - Johnson v. Wells Fargo Mortgage

November 7, 2011

Our Moreno Valley foreclosure defense lawyers have written many, many posts recently about the negative consequences of the poor communications and sloppy work at major lenders. Occasionally, these mistakes come back to haunt the banks, as in one case that resulted in court sanctions -- but usually, they hurt the borrower the most. That was the case in Johnson v. Wells Fargo Home Mortgage, a Ninth U.S. Circuit Court of Appeals decision in which Wes Johnson claims Wells Fargo's mistake ruined his business of buying, upgrading and re-selling homes. Johnson's on-time payment was misapplied, and the bank failed to correct the problem before his credit was destroyed and left Johnson unable to get more home loans. As a result, Johnson sued and the case eventually went to arbitration, and a dispute arose over the disposition of that award.

Johnson had purchased 200 to 300 homes across the United States since the 1970s, and was in the business of refurbishing, renting and selling them. The homes were purchased with risky subprime mortgages, which means the quality of his credit mattered. In 2004, Johnson's wife sent payments on two mortgages, both for homes located in Oregon, but made a mistake that led Wells Fargo to apply both payments to the same mortgage. This led it to report a delinquency on the other mortgage, and this kicked off a long series of phone calls and letters from Johnson attempting to straighten the problem out. The arbitrator noted that Wells Fargo has multiple teams to deal with these issues, none of whom communicate well with one another. In the end, Wells Fargo admitted its mistake, but only after reporting the late payment and starting foreclosure proceedings on both homes. Johnson sold both homes ahead of the foreclosure, but was unable to get any new loans as a result of the negative reports. This, he said, effectively put him out of business.

Johnson sued for negligence and violations of the Fair Credit Reporting Act, the Fair Debt Collection Practices Act and the Real Estate Settlement Procedures Act. The district court eventually dismissed all claims by the FCRA claims and sent the case to arbitration, in an order giving the parties "appeal rights." The arbitrator found for Johnson on about half of his FCRA claims. Wells Fargo tried twice to move to vacate, modify or amend the award, but the district court rebuked it, explaining that the appeal rights meant Wells Fargo had the right to appeal to the Ninth Circuit. Wells Fargo appealed the procedure behind this ruling; Johnson appealed the dismissal of his negligence and RESPA claims.

On appeal, the Ninth Circuit found that the issue was not properly before it. The appeals courts have the power to review only adoption or vacation of arbitration awards, it said -- there's no jurisdiction over the underlying arbitration awards. The parties' agreement to arbitrate defaults to the Federal Arbitration Act, which gives only federal district courts the authority to review awards. The bank's arguments to the contrary were dismissed as "inventive." For similar reasons, the Ninth did not take up Wells Fargo's argument that the standard of review should go beyond the FAA; nothing in the record suggests this, it said. However, the court was no kinder to Johnson in his cross-appeals of the dismissal of his RESPA and negligence claims. RESPA does not apply to loans taken out for business purposes, it noted; Johnson's arguments to the contrary were not persuasive. Finally, it affirmed the district court's ruling that Oregon tort law bars some of Johnson's negligence claim -- but reversed the district court's decision that the FCRA barred another part, finding that the court misread FDCPA claims as FCRA claims.

This case is long, but it could have important effects on our work as Newport Beach foreclosure defense attorneys. The Ninth Circuit has made it clear in this ruling that it won't directly review arbitration awards, which should clarify things for lower courts that either order arbitration or are asked to affirm privately ordered arbitration. Unfortunately, Johnson was not able to collect on all of his claims, although the opinion does note that he collected on the FCRA claims, which pertain to the egregious credit reporting violations. However, it's pleasing to our Whittier foreclosure defense lawyers that some of Johnson's claims were only unavailable because he was a real estate investor. An ordinary homeowner in the same position would likely be able to prevail on RESPA and FDCPA claims. Given the poor records of major lenders, this right may be needed.

If you're struggling just to get your loan servicer or lender to listen to your story, and foreclosure is getting far too close, call Howard Law, P.C.. To discuss how we can help, send us an email or call toll-free at 1-800-872-5925.

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