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Moreno v. Wells Fargo Bank, N.A.

United States District Court, D. Minnesota

April 1, 2019

WELLS FARGO BANK, N.A., Defendant.

          Brian J. Wisdorf; Robert B. Bauer and William M. Topka, DOUGHERTY, MOLENDA, SOLFEST, HILLS & BAUER P.A., for plaintiffs.

          Charles F. Webber and Jessica Z. Savran, FAEGRE BAKER DANIELS LLP, for defendant.


          Patrick J. Schiltz United States District Judge

         Plaintiffs Nancy and Monti Moreno (“the Morenos”) borrowed money to purchase real property. The loan was secured with a mortgage on the property. The Morenos failed to repay the loan, and defendant Wells Fargo initiated foreclosure proceedings. Before the foreclosure sale took place, however, the property was damaged by a hail storm and a fire. The homeowners insurer paid $190, 515.90 for the damage, and Wells Fargo placed those funds in an escrow account until the repairs were completed. The repairs were never completed.

         Wells Fargo purchased the property at the foreclosure sale. The purchase price fell well short of the amount of money owed by the Morenos, as the value of the property had been significantly reduced by the (unrepaired) hail and fire damage. The Morenos redeemed the property from Wells Fargo. A dispute then arose over whether the Morenos or Wells Fargo was entitled to the $190, 515.90 in escrowed insurance proceeds. The Morenos brought this action to settle that dispute.

         The relationship between the Morenos and Wells Fargo is contractual, and thus their dispute must be resolved by interpreting their contract. Instead of filing a straightforward breach-of-contract action, however, the Morenos have gone the kitchen- sink route, bringing not only a breach-of-contract claim, but also add-on claims for violation of the Minnesota Consumer Fraud Act, conversion, civil theft, and unjust enrichment.

         Wells Fargo now moves to dismiss these add-on claims under Fed.R.Civ.P. 12(b)(6). For the reasons that follow, the Court grants Wells Fargo's motion.

         I. BACKGROUND

         In 2004, the Morenos borrowed $333, 700 from Central Bank to purchase a lot with a house and a barn in Marine on St. Croix, Minnesota. ECF No. 12-1 at 1; ECF No. 1-1 at ¶ 5. The Morenos secured the loan with a mortgage on the property. ECF No. 1-1 at ¶ 6. Central Bank subsequently assigned the mortgage to Wells Fargo. Id.

         Section 5 of the mortgage required the Morenos to maintain insurance on the property to protect “against loss by fire . . . and any other hazards, including, but not limited to, earthquakes and floods . . . .” ECF No. 12-1 at p. 5, § 5, ¶ 1. Section 5 also provided that if the property was damaged, Wells Fargo had the right to hold onto any insurance proceeds until Wells Fargo could inspect the property and ensure that the damage had been satisfactorily repaired. Id. at p. 5, § 5, ¶ 4. Section 5 further provided that Wells Fargo could keep the insurance proceeds if it “acquire[d] the Property under Section 22 [of the mortgage] or otherwise.” Id. at p. 6, § 5, ¶ 5.

         Section 22 essentially gave Wells Fargo the right to foreclose on the property if the Morenos defaulted under the promissory note and failed to cure. Id. at p. 11, § 22. If Wells Fargo received the right to keep the insurance proceeds by virtue of having acquired the property under Section 22, then, under Section 5, Wells Fargo could “use the insurance proceeds either to repair or restore the Property or to pay amounts unpaid under the Note or this Security Instrument, whether or not then due.” Id. at p. 6, § 5, ¶ 5.

         Two unrelated events caused damage to the Morenos' property and triggered payments from the Morenos' homeowners insurer. First, on May 25, 2008, hail damaged the roof of the house. ECF No. 1-1 at ¶ 16. On July 8, 2008, the Morenos' insurer paid out $14, 515.90, which Wells Fargo held in escrow until the Morenos repaired the roof. Id. at ¶¶ 18-19. Years passed, but the Morenos did not repair the roof, so the insurance proceeds sat in the escrow account. Then, on January 28, 2015, a fire destroyed the barn. Id. at ¶ 20. On April 8, 2016, the Morenos' insurer paid out $176, 000, which Wells Fargo also held in escrow. Id. at ¶¶ 22-23.

         In 2007-prior to either the 2008 hail storm or the 2015 fire-Wells Fargo commenced foreclosure proceedings on the Morenos' property after the Morenos failed to make the promised repayments on their loan. ECF No. 1-1 at ¶ 10. For some reason, Wells Fargo did not obtain a judgment of foreclosure until August 2015. ECF No. 12-1 at 20. It appears that at least part of the long delay may have been caused by the fact that the Morenos retained attorney William B. Butler to represent them. ECF No. 12-1 at 13. Until he was indefinitely suspended from practicing law, see In re Disciplinary Action Against Butler, 868 N.W.2d 243 (Minn. 2015), Butler made “a cottage industry” out of filing frivolous lawsuits on behalf of homeowners who had defaulted on their loans, Welk v. GMAC Mortg., LLC, 850 F.Supp.2d 976, 981 (D. Minn. 2012). Clients would pay Butler “not for bringing legitimate claims, but simply for each month that he delay[ed] foreclosure by tying up mortgagees in frivolous court proceedings.” Id. at 1004.

         The Minnesota court that entered the judgment of foreclosure against the Morenos found that, as of July 10, 2015, the Morenos owed Wells Fargo $521, 842.75 in unpaid principal, interest, costs, and fees. ECF No. 12-1 at p. 14, ¶ 7. On November 10, 2015, Wells Fargo purchased the property at the sheriff's sale for $187, 910. ECF No. 1-1 at ¶¶ 11-12. The amount that Wells Fargo paid for the property at the sheriff's sale was significantly less than the amount that the Morenos had paid for the property when they purchased it in 2004, no doubt reflecting the fact that the barn had been destroyed by fire and the roof of the house had been damaged by hail. In December 2016, the Morenos came up with $208, 263.62 to redeem the property from Wells Fargo. ECF No. 1-1 at ¶ 14.

         At this point, the Morenos had suffered no financial loss as a result of their breach of the promissory note, the protracted legal proceedings, the hail storm, and the fire. They owned a piece of property worth roughly $200, 000 for which they had paid roughly $200, 000, their considerable remaining debt to Wells Fargo was erased by the fact that Wells Fargo did not seek a deficiency judgment against them, and they had (presumably) enjoyed years of rent-free living in their house. At the same time, Wells Fargo had taken a financial bath, as the amount that Wells Fargo recovered from the Morenos was over $300, 000 less than the Morenos owed.

         Not satisfied with their good fortune, the Morenos then insisted that Wells Fargo also pay them the $190, 515.90 in insurance proceeds that had been escrowed, even though it had been Wells Fargo, and not the Morenos, that ultimately suffered financial loss on account of the hail storm and fire. ECF No. 1-1 at ¶¶ 18, 22, 25. Wells Fargo refused, contending that Section 5 of the mortgage gave it the right to retain the insurance proceeds because it had “acquire[d] the Property” under Section 22 of the mortgage. ECF No. 11 at 6-7, 9-12. The Morenos disagreed, contending that, because they redeemed the property after the sheriff's sale, Wells Fargo never “acquired” the property, and thus Wells Fargo had no right to the insurance proceeds. ECF No. 17 at 6- 8.

         The Morenos filed this lawsuit to recover the insurance proceeds, arguing that Wells Fargo's failure to release the insurance proceeds to them was not only a breach of the mortgage contract, but also (1) a violation of the Minnesota Consumer Fraud Act, (2) conversion, (3) civil theft, and (4) unjust enrichment. ECF No. 1-1. Wells Fargo moves to ...

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