August 19, 2014
Link to the Supreme Court of Missouri Opinion
Davis Conway and Sheri Conway (collectively,
Homeowners) challenged the Circuit County of St. Charles County’s dismissal of
their homeowner’s suit under the Missouri Merchandising Practice Act (MMPA). The
Homeowners, on appeal, argued that although Fannie Mae and CitiMortgage were
not parties to the original loan transaction, they were still liable for
misconduct that occurred in connection with the loan transaction. The Supreme
Court of Missouri agreed with the homeowners and reversed the Circuit Court’s
dismissal. In so holding, the Court
emphasized that the MMPA prohibits the use of certain deceptive practices if
there is a relationship between the sale and the alleged unlawful action. It further stated that the unlawful action
may occur by any person at any time before, during or after the sale.
I. Facts & Holding
In 2007, Davis Conway and Sheri Conway
(collectively, Homeowners) purchased a home in Wentzville (“the Wentzville property”).[1] The purchase was financed by a mortgage loan
from Pulaski Bank.[2] Pulaski assigned the loan to Fannie Mae and
CitiMortgage serviced the loan.[3] After purchasing the Wentzville property,
the Homeowners decided to do renovations on the property and thus continued to
reside in their St. Peter’s home (“the St. Peter’s home”) during renovations.[4]
During renovations, the Wentzville
property was damaged in a fire and had to be completely demolished.[5] The Homeowners settled a claim with their insurance
company for $150,000 and thereafter informed CitiMortgage.[6] While the Wentzville property was being
rebuilt, the insurance company made their checks payable to both the Homeowners
and CitiMortgage.[7] After the Homeowners endorsed the checks, CitiMortgage
held them in escrow.[8] As the Homeowners submitted bills,
CitiMortgage sent payments to the St. Peters home address.[9] During the course of rebuilding, the
Homeowners realized that the insurance proceeds would not cover the entire cost
of reconstruction.[10] After the Homeowners communicated this to
CitiMortgage, CitiMortgage informed the Homeowners that the last $15,000 in insurance
proceeds would not be released until the construction was complete.[11]
The Homeowners thereafter fell
behind on their mortgage payments by approximately $9,000.[12] CitiMortgage, however, refused to apply the
$15,000 it held in escrow to the balance owed on the loan.[13]
Instead, CitiMortgage sent a notice of foreclosure to the Homeowners.[14] After
CitiMortgage foreclosed on the Wentzville property, Fannie Mae acquired title
to the property.[15]
The Homeowners filed an action
against Fannie Mae and CitiMortgage (the “Defendants”) under the Missouri Merchandising
Practice Act (MMPA).[16] They claimed the
defendants’ wrongful foreclosure was “in connection with” the 2007 loan and thus, in violation of the MMPA.[17] The trial court granted the Defendant’s
motion to dismiss.[18] It held that the MMPA did not apply because the
Defendants were not parties to the original loan transaction.[19] It further stated that the MMPA “does not apply to post-sale . . . activity
wholly unrelated to claims or representations made before or at the time of the
transaction.”[20] The Homeowners appealed and the Missouri
Supreme Court granted transfer. [21]
The Missouri Supreme Court ultimately
reversed the trial court’s holding.[22] It emphasized that the MMPA covers any unlawful act committed “in connection
with” the sale.[23] The Court stated that the phrase “in
connection with” should be understood as meaning “to have a relationship with.”[24] Consequently the MMPA should be read as
prohibiting deceptive practices “if there is a relationship between the sale .
. . and the alleged unlawful action.”[25] It further stated “the unlawful action may
occur at any time before, during or after the sale and by any person.”[26] After stating these principles, the Missouri Supreme
Court held that the Homeowners claims had sufficiently alleged a relationship
between the foreclosure actions and the 2007 to survive a motion to dismiss.[27] It thus reversed the trial courts decisions
and remanded the action.[28]
II. Legal Background
The MMPA was first adopted by
the Missouri legislature in 1967. It was
created to “supplement the common law action for fraud, create a distinct
statutory fraud action, and provide consumers with a means to seek relief for
deceptive and unfair practices.”[29] The Act prohibits
“the act, use or employment by any person of any deception, fraud, false
pretense, false promise, misrepresentation, unfair practice or the concealment,
suppression, or omission of any material fact in connection with the sale or
advertisement of any merchandise in trade or commerce . . .”[30]
For the purposes of the MMPA, courts consider a
loan to be “an agreed upon bundle of services [that is] ‘sold’ by the lender to
the borrower.”[31] The “sale” of the
loan, further, “lasts until the last service is performed or the loan is
repaid.”[32]
In 2007, the
Missouri Supreme Court, en banc, considered whether privity with the consumer
is necessary for the MMPA to apply.[33] In that case, Plaintiff purchased a car from
a dealership that had, in turn, purchased the car from a wholesaler.[34] Plaintiff sued both the dealership and the wholesaler under the MMPA, alleging that both
parties had violated the Act by failing to disclose that the car had previously
been involved in an accident.[35] The wholesaler
filed a motion to dismiss for lack of privity, and the trial court promptly granted
it.[36] The Missouri Supreme Court, on appeal,
reversed the dismissal stating, “[t]he statute’s plain language does not
contemplate a direct contractual relationship between plaintiff and defendant,
and Missouri courts have not imposed such a requirement through statutory
construction.”[37]
Two cases
considering the MMPA in connection with loan servicing are State ex rel.
Koster v. Professional Debt Management, LLC[38]
and State ex rel. Koster v. Portfolio Recovery Associates, LLC.[39] These cases, both decided on April 5,
2011, considered whether a third-party
debt collector could be in violation of the MMPA violations for allegedly
deceptive and unfair debt collection practices.
In both cases, the defendants filed motions to dismiss, arguing that
because they were not parties to the original transactions, their actions could
not have been “in connection with” the original sales transactions.[40] The Missouri Court of Appeals agreed stating,
“actions occurring after the initial sales transaction, which do not relate to
any claims or representations made before or at the time of the initial sales
transaction, and which are taken by a person who is not a party to the initial
sales transactions, are not made ‘in connection with’ the sale.”[41]
III.
Instant Decision
In Conway v. CitiMortgage,
Inc., the Missouri Supreme
Court considered whether a plaintiff could state a claim under the MMPA against
a loan servicer who was not a party to the original loan transaction for
alleged wrongful foreclosure on a deed of trust.[42] The
court, in reaching its decision, acknowledged that two separate issues needed
to be addressed. First, the court
considered whether the enforcement of a loan’s terms is “in connection with”
the sale of the loan.[43] The court noted that a loan creates a “long-term
relationship in which the borrower and the lender continue to perform various
duties . . . over an extended period of time.”[44] As
a result, the “sale” is not complete when the lender extends the credit, but,
rather, continues for the life of the loan.[45] Because the sale continues for the life of the
loan, the court held that enforcement of the loan’s terms is “in connection with” the sale of the loan. [46]
The Missouri Supreme Court next
considered whether a loan servicer who was not a party to the original
transaction could be in violation of MMPA.[47] The court acknowledged that the issue had previously
been addressed by the Missouri Court of Appeals in State ex rel. Koster v.
Professional Debt Management, LLC and State ex rel. Koster v. Portfolio
Recovery Associates, LLC.[48]
In those cases, the court held that because a third party loan servicer
is not a party to the original transactions, its actions cannot
be “in connection with” the original sales transactions.[49] The
instant court, however, found those holdings
to be contrary to the purpose of the MMPA.[50] “Given that the MMPA was enacted to
supplement the common law definition of fraud, there is no compelling reason to
interpret ‘in connection with’ to apply only when the entity engaged in the
misconduct was a party to the transaction at the time the transaction was
initiated.” [51] It reiterated that enforcing the terms of the
loan is in connection with the ongoing sale of the loan and that whom does the
enforcing should be of no matter. [52] The court, thus, reversed the trial courts holding,
stating “allegations of fraud and deception in the course of [loan] services
are ‘in connection with’ the ‘sale,’ . . . even where, as here, the party
committing the alleged fraud or deception is not the seller.”[53]
IV. Comment
The Supreme Court of Missouri, in
handing down this decision, sent a message to entities engaged in the loan
servicing: a person not actually a
part of the original loan transaction can nevertheless be subject to the
Missouri Merchandising Practice Act. Consequently,
a party engaged in loan servicing that never partakes in the origination of the
loan must still treat consumers with “fundamental honesty, fair play and right dealings in
public transaction.”[54] This holding will prove beneficial to
Missouri. The business world continues
to become more specialized; however consumer needs remain the same. Consumers still require honesty and
accountability in their transactions. This
holding ensures that a person who interacts with a loan servicer will not be
less protected because that loan servicer was not a party to the original loan
transaction. Who signs the original loan
documents will no longer determine who is subject to the MMPA; now the relevant
inquiry will be whether the entity has engaged in an unlawful action in
connection with the ongoing sale of the loan.
- Kelly Gorman
[1] Conway
v. CitiMortgage, Inc., 438 S.W.3d 410, 413 (Mo. 2014) (en banc).
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id. The
MMPA prohibits “the act, use or employment by any person of any deception,
fraud, false pretense, false promise, misrepresentation, unfair practice or the
concealment, suppression, or omission of any material fact in connection with
the sale or advertisement of any merchandise in trade or commerce . . .” Mo.
Rev. Stat. § 407.020 (Supp.2013). “For the purposes
of the MMPA, a loan is an agreed upon bundle of services being ‘sold’ by the
lender to the borrower, and the ‘sale’ of a loan lasts until the last service
is performed or the loan is repaid.” Conway, 438 S.W.3d at 412.
[17] Id. at
412-413.
[18] Id.
[19] Id.
[20] Id at
413.
[21] Id.
[22] Id.
[23] Id.
[24] Id. at
414.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29]
Douglass F. Noland & Jennifer N. Wettstein, The Missouri Merchandising Practices
Act: Remedies for Consumers, 69 J. Mo. B. 210 (2013) (citing State ex rel. Danforth v. Independence, Inc.,
494 S.W.2d 362, 368 (Mo. App. W.D. 1973)).
[30] Mo.
Rev. Stat. § 407.020 (Supp.2013).
[31] Conway,
438 S.W.3d at 412.
[32] Id.
[33] Gibbons
v. J. Nuckolls, Inc., 216 S.W.3d 667, 668 (Mo. 2007).
[34] Id.
[35] Id.
[36] Id.
[37] Id. at
669.
[38] 351
S.W.3d 668 (Mo.App.2011).
[39]
351 S.W.3d 661 (Mo.App.2011).
[40] Professional Debt, 351 S.W.3d at 670;
Portfolio Recovery Associates, 351 S.W.3d at 663.
[42] Conway,
438 S.W.3d at 412.
[43] Id. at
415.
[44] Id.
[45] Id.
[46] Id.
[47] Id. at
415-416.
[48] Id. at
416.
[49] Id.
[50] Id.
[51] Id.
[52]
Id. at 415-416.
[53] Id. at
412.
[54] State ex rel. Danforth v. Independence, Inc.,
494 S.W.2d 362, 368 (Mo. App. W.D. 1973).
