Davis v. World Savings Bank, Fsb

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

)
)
DEREK DAVIS, )
)
Plaintiff, )
)
v. ) Civil Action No. 10-1761 (RMC)
)
WORLD SAVINGS BANK, FSB, n/k/a )
WACHOVIA MORTGAGE, FSB, et al., )
)
Defendants. )
)

MEMORANDUM OPINION

Derrick Davis purchased a home with a mortgage loan from World Savings Bank

FSB; the loan is allegedly now held by Wachovia Corporation and Wells Fargo Bank, N.A.,

(collectively the “Defendants”).1 Mr. Davis defaulted on payment of the mortgage, and then brought

suit against Defendants asserting claims under District of Columbia common law: breach of

contract/breach of the implied covenant of good faith and fair dealing, promissory estoppel, fraud,

and negligent misrepresentation. Defendants move to dismiss on various grounds, including

preemption under the Homeowners’ Loan Act (“HOLA”), 12 U.S.C. § 1464. As explained below,

the Complaint will be dismissed.2

1
World Savings Bank, FSB, is now known as Wachovia Mortgage, FSB.
2
The Complaint alleges that Wachovia Corporation and Wells Fargo Bank, N.A., are
successors to World Savings Bank by merger, but the actual corporate relationship among
Defendants is unclear. Because the Court dismisses the claim based on preemption and failure to
state a claim, it is not necessary to sort out the relationships among the Defendants or to determine
whether each Defendant could be liable on the claims alleged.
 I. FACTS

Mr. Davis borrowed $280,000 from World Savings Bank FSB (“World Savings

Bank”) in December 2007 pursuant to a fixed-rate mortgage note and a “Pick-a-Payment” mortgage

loan. Notice of Removal [Dkt. #1], Ex. 1 (“Compl.”), Ex. A (“Note”). The Pick-a-Payment loan

provided for various payment options, including a minimum payment, an interest-only payment, a

payment based on a 30-year amortization, or a payment based on a 15-year amortization. Compl.

at 1 (Preliminary Statement). Mr. Davis chose the minimum payment option, which was fixed at the

amount of $1,273.01 per month for an initial term of one year, after which the monthly payment was

subject to change. The Note provided:

1. Borrower’s Promise to Pay
In return for a loan that I have received, I promise to pay US $280,000.00, called
“Principal,” plus interest, and any other charges incurred during the course of the
loan, to the order of the Lender. The Lender is World Savings Bank, FSB, a Federal
Savings Bank, its successors and/or assignees, or anyone to whom this Note is
transferred.
...

3. Payments
(A) Time and Place of Payments
I will pay Principal and interest by making payments every month.
I will make my monthly payments on the 1st day of each month beginning on
February 1, 2008. I will make these payments every month until I have paid (i) all
the Principal and interest; and (ii) any other charges described below that I may owe
under this Note; and (iii) any charges that may be due under the Security Instrument.
If, on January 1, 2038, I still owe amounts under this Note, I will pay those amounts
in full on that date, which is called the “Maturity Date.” . . .

(B) Amount of My Initial Monthly Payments
Each of my initial monthly payments will be in the amount of US $1,273.01. This
amount will change as described in Sections 3(C) and 3(D) below. My initial
monthly payment amount was selected by me from a range of initial payment
amounts approved by the Lender and may not be sufficient to pay the entire amount
of interest accruing on the unpaid Principal Balance.

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 (C) Payment Change Dates
My monthly payment will change as required by Section 3(D) below beginning on
the 1st day of February, 2009 and on that day every 12th month thereafter until the
121st month, which will be the final payment change. Each of these dates is called
a “Payment Change Date.” My monthly payment will also change at any time
Section 3(F) or 3(G) below requires me to pay a different amount. I will pay the
amount of my new monthly payment each month beginning on each Payment Change
Date and as provided in Section 3(F) or 3(G) below.

(D) Calculation of Payment Changes
Subject to Sections 3(F) and 3(G), on the Payment Change Date my monthly payment
may be changed to an amount sufficient to pay the unpaid principal balance together
with interest, including any deferred interest as described in Section 3(E) below, by
the Maturity Date. However, the amount by which my payment can be increased will
not be more than 7 ½ % of the then existing Principal and interest payment. This 7
½ % limitation is called the “Payment Cap.” The Lender will perform this Payment
Change calculation at least 60 but not more than 90 days before the Payment Change
Date.

(E) Deferred Interest; Additions to My Unpaid Principal
From time to time, my monthly payments may be insufficient to pay the total amount
of monthly interest that is due. If this occurs, the amount of interest that is not paid
each month, called “Deferred Interest,” will be added to my Principal and will accrue
interest at the same rate as the Principal.

(F) Limit on My Unpaid Principal; Increased Monthly Payment
My unpaid principal balance can never exceed 125% of the Principal I originally
borrowed, called “Principal Balance Cap.” If, as a result of the addition of deferred
interest to my unpaid principal balance, the Principal Balance Cap limitation would
be exceeded on the date that my monthly payment is due, I will instead pay a new
monthly payment. Notwithstanding Sections 3(C) and 3(D) above, I will pay a new
monthly payment which is equal to an amount that will be sufficient to repay my then
unpaid principal balance in full on the Maturity Date together with interest, in
substantially equal payments.

(G) Final Payment Change
On the 10th Payment Change Date my monthly payment will be calculated as
described in Section 3(D) above except that the Payment Cap limitation will not
apply.

Note §§ 1, 3(A)-(G). In sum, when the minimum payment was sufficient to pay only a portion of

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the interest due on the loan, the Note provided that the unpaid portion of the interest, called

“Deferred Interest,” would be added to the principal balance and would, in turn, accrue interest. Id.

§ 3(E). So that the Note would still be paid in full by its maturity date, the minimum payment was

subject to periodic increases. Id. § 3(D), (F), (G).

Mr. Davis alleges that although his loan carried a fixed interest rate of 8.8%, see id.

§ 2, by opting for the minimum payment Mr. Davis was effectively charged a much higher interest

rate. Compl. ¶ 15. “Plaintiff was promised . . . a fixed rate note. In fact[,] Plaintiff’s note states on

its face that the note in which Plaintiff received was a fixed rate note. However, Plaintiff never

received a fixed rate note [because the note] is really an adjustable rate note with a negative

amortization component hidden within.” Id. ¶ 23. Mr. Davis also claims that, at least during the

initial minimum payment period, the Note was negatively amortized. Id. ¶ 13. Despite the plain

language of the Note, Mr. Davis contends that Defendants failed to provide sufficient disclosures

to him regarding the nature of the loan, the risk of negative amortization, and the fact that the

minimum payment did not cover the full amount of interest due or the full cost of the loan. See,

e.g., Compl. ¶¶ 13-14, 16-17. Also, he complains that Defendants failed to inform him that if his

balance increased to a certain level, he could no longer select the minimum payment option. Id. ¶ 18.

As a result, Mr. Davis brought suit, alleging breach of contract/breach of the implied covenant of

good faith and fair dealing, promissory estoppel, fraud, and negligent misrepresentation. See Compl.

¶¶ 25-60 (Counts I-IV). Defendants move to dismiss.3

3
Mr. Davis also brought suit against Defendants in D.C. Superior Court on two loans that
are not at issue here. See Davis v. World Savings Bank, FSB, No. 2010 CA 007432 B (D.C. Superior
Ct.). Mr. Davis asserted claims similar to those alleged here, and the court dismissed the case based

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 II. LEGAL STANDARDS

A. Jurisdiction

Although Mr. Davis initially filed this case in D.C. Superior Court, Defendants

removed the case to this Court on the basis of diversity jurisdiction. Federal courts have diversity

jurisdiction where the suit is between citizens of different states and the amount in controversy

exceeds $75,000. 28 U.S.C. § 1332(a)(1). A court lacks diversity jurisdiction if there are litigants

from the same state on opposing sides of the controversy. See Prakash v. Am. Univ., 727 F.2d 1174,

1178 n.25 (D.C. Cir. 1984). A corporation is deemed to be a citizen of the state in which it is

incorporated and the state where it maintains its principal place of business. 28 U.S.C. § 1332(c)(1).

The principal place of business for a corporation is usually its headquarters, where day-to-day

business is conducted. Masterson-Cook v. Criss Bros. Iron Works, Inc., 722 F. Supp. 810, 812

(D.D.C. 1989).

Here, Mr. Davis is a citizen of the State of Maryland. World Savings Bank,

Wachovia Corporation, and Wells Fargo are all federally chartered and their principal places of

business are Texas, North Carolina, and South Dakota, respectively. As the Complaint seeks to

rescind a loan or prevent foreclosure, see Compl. at 17 (Prayer for Relief), the amount in controversy

is the loan amount, i.e., over $280,000. See Order Denying Mot. to Remand [Dkt. # 12] at 2. The

diversity of citizenship and jurisdictional amount requirements are met, and diversity jurisdiction

applies.

on HOLA preemption and failure to state a claim. See Defs.’ Notice of Subsequent Authority [Dkt.
# 18].

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 B. Motion to Dismiss

A motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil

Procedure 12(b)(6) challenges the adequacy of a complaint on its face. Fed. R. Civ. P. 12(b)(6). A

complaint must be sufficient “to give a defendant fair notice of what the . . . claim is and the grounds

upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations

omitted). Although a complaint does not need detailed factual allegations, a plaintiff’s obligation

to provide the grounds of his entitlement to relief “requires more than labels and conclusions, and

a formulaic recitation of the elements of a cause of action will not do.” Id. To survive a motion to

dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim for relief

that is “plausible on its face.” Id., 550 U.S. at 570.

A court must treat the complaint’s factual allegations as true, “even if doubtful in

fact.” Id., 550 U.S. at 555. But a court need not accept as true legal conclusions set forth in a

complaint. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009). In deciding a motion under Rule

12(b)(6), a court considers the facts alleged in the complaint, documents attached to the complaint

as exhibits or incorporated by reference, and matters about which the court may take judicial notice.

Abhe & Svoboda, Inc. v. Chao, 508 F.3d 1052, 1059 (D.C. Cir. 2007). Further, “[a] copy of a written

instrument that is an exhibit to a pleading is a part of the pleading for all purposes.” Fed. R. Civ. P.

10(c).

III. ANALYSIS

A. Preemption Under the Homeowners’ Loan Act

Defendants assert that all of the claims set forth in the Complaint are preempted by

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HOLA. There are three ways that federal law can preempt state law. First, Congress may preempt

state law by expressly stating that preemption applies. Jones v. Rath Packing Co., 430 U.S. 519, 525

(1977); Bank of Am. v. City and County of S.F., 309 F.3d 551, 558 (9th Cir. 2001). Second, “field

preemption” applies when federal regulation is so pervasive that it is reasonable to infer that

Congress left no room for the states to supplement an area of law. Rice v. Santa Fe Elevator Corp.,

331 U.S. 218, 230 (1947); Bank of Am., 309 F.3d at 558. Third, preemption may apply when state

law conflicts with federal law such that compliance with both laws is impossible, Florida Lime &

Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963), or when application of state law would

impede Congress’s purposes and objectives, Hines v. Davidowitz, 312 U.S. 52, 67 (1941); Bank of

Am., 309 F.3d at 558.

HOLA empowered the Office of Thrift Supervision (“OTS”) to supervise and regulate

federal savings associations and federal savings banks. 12 U.S.C. § 1464; see also Fidelity Fed. Sav.

& Loan Ass’n v. de la Cuesta, 458 U.S. 141, 161-62 (1982). In order to ensure that the public had

access to home financing and to ensure the solvency of federal savings associations, OTS regulated

federal savings associations through a uniform set of regulations that occupied the entire field of

lending regulation pursuant to 12 C.F.R. § 560.2(a). Section 560.2(a) provided:

(a) Occupation of field.
Pursuant to 4(a) and 5(a) of the HOLA, 12 U.S.C. § 1463(a), 1464(a),
OTS is authorized to promulgate regulations that preempt state laws
affecting the operations of federal savings associations when deemed
appropriate to facilitate the safe and sound operation of federal
savings associations, to enable federal savings associations to conduct
their operations in accordance with the best practices of thrift
institutions in the United States, or to further other purposes of the
HOLA. To enhance safety and soundness and to enable federal
savings associations to conduct their operations in accordance with

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 best practices (by efficiently delivering low-cost credit to the public
free from undue regulatory duplications and burden), OTS hereby
occupies the entire field of lending regulation for federal savings
associations. OTS intends to give federal savings associations
maximum flexibility to exercise their lending powers in accordance
with a uniform federal scheme of regulation. Accordingly, federal
savings associations may extend credit as authorized under federal
law, including this part, without regard to state laws purporting to
regulate or otherwise affect their credit activities, except to the extent
provided in paragraph (c) of this section or 560.110 of this part.4 For
purposes of this section, “state law” includes any state statute,
regulation, ruling, order or judicial decision.

Id. (emphasis added).5 While ordinarily there is a presumption against preemption over state police

powers, this presumption does not apply when there has been a history of significant federal

presence, such as in the area of national banking. United States v. Locke, 529 U.S. 89, 108-20

4
12 C.F.R. § 560.110 is not relevant here. It provided that a federal savings association may
charge interest at the maximum rate permitted to any state-chartered lending institution under the
laws of that state.
5
On July 21, 2011, OTS was transferred to the Office of the Comptroller of the Currency
pursuant to a new statute, the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010, P.L. 111-203, 124 Stat. 2017 (“Dodd-Frank Act”). See 12 U.S.C. § 5412. Effective 90 days
after the transfer date, the OTS will be abolished. Id. § 5413. The Dodd-Frank Act provides that
HOLA does not occupy the field in any area of state law and that preemption is governed by the
standards applicable to national banks. Id. § 1465(a), (b); see Barnett Bank of Marion County, N.A.
v. Nelson, 517 U.S. 25 (1996) (conflict preemption applies to national banks). The OCC has issued
an Interim Final Rule that changes the preemption regulations. See 76 Fed. Reg. 48950 (Aug. 9,
2011) (§ 150.136 sets forth a new preemption regulation, superseding 12 C.F.R. § 560.2)). The new
regulation, however, does not govern this case because regulations, like statutes, cannot be applied
retroactively absent express direction from Congress. Bowen v. Georgetown Univ. Hosp., 488 U.S.
204, 208 (1988) (“[C]ongressional enactments and administrative rules will not be construed to have
retroactive effect unless their language requires this result.”); see also Nat’l Min. Ass’n v. Dep’t of
Labor, 292 F.3d 849, 859 (D.C. Cir. 2002). Congress did not direct retroactive application of the
new regulation, and the Dodd-Frank Act provided that section 1465 of Title 12 was enacted and
amended effective on the transfer date, i.e. July 21, 2011. See P.L. 111-203, 124 Stat. 2017,
§§ 1046, 1047(b), 1048. Section 560.2 governs here because it was the regulation in effect when the
parties entered into the Pick-a-Payment mortgage loan transaction.

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(2000); Bank of Am., 309 F.3d at 559. “That is, in the absence of the presumption against

preemption, full field preemption effectively gives the court a presumption of preemption.” Aguayo

v. U.S. Bank, Civ. No. 09-56679, 2011 WL 3250465, *6 (9th Cir. Aug. 1, 2011).

Section 560.2(b) provided thirteen examples of the types of state laws that were

preempted, including the following:

(b) Illustrative examples.
[T]he types of state laws preempted by paragraph (a) of this section
include, without limitation, state laws purporting to impose
requirements regarding:

...

(4) The terms of credit, including amortization of loans and the
deferral and capitalization of interest and adjustments to the interest
rate, balance, payments due, or term to maturity of the loan, including
the circumstances under which a loan may be called due and payable
upon the passage of time or a specified event external to the loan;

(5) Loan-related fees, including without limitation, initial charges,
late charges, prepayment penalties, servicing fees, and overlimit fees;

...

(9) Disclosure and advertising, including laws requiring specific
statements, information, or other content to be included in credit
application forms, credit solicitations, billing statements, credit
contracts, or other credit-related documents and laws requiring
creditors to supply copies of credit reports to borrowers or applicants;

(10) Processing, origination, servicing, sale or purchase of, or
investment or participation in, mortgages;

(11) Disbursements and repayments . . . .

12 C.F.R. § 560.2(b).

Section 560.2 also provided examples of state laws that are not preempted:

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 (c) State laws that are not preempted.
State laws of the following types are not preempted to the extent that
they only incidentally affect the lending operations of Federal savings
associations or are otherwise consistent with the purposes of
paragraph (a) of this section:

(1) Contract and commercial law;

...

(4) Tort law;

...

(6) Any other law that OTS, upon review, finds:

(i) Furthers a vital state interest; and

(ii) Either has only an incidental effect on lending operations
or is not otherwise contrary to the purposes expressed in
paragraph (a) of this section.

Id. § 560.2(c).

OTS outlined the steps it would take to analyze whether a state law is preempted:

When analyzing the status of state laws under § 560.2, the first step
will be to determine whether the type of law in question is listed in
paragraph (b). If so, the analysis will end there; the law is preempted.
If the law is not covered by paragraph (b), the next question is
whether the law affects lending. If it does, then, in accordance with
paragraph (a), the presumption arises that the law is preempted. This
presumption can be reversed only if the law can clearly be shown to
fit within the confines of paragraph (c). For these purposes,
paragraph (c) is intended to be interpreted narrowly. Any doubt
should be resolved in favor of preemption.

61 Fed. Reg. 50951-01 (Sept. 30, 1996).

While the D.C. Circuit has not addressed the issue of preemption under HOLA, three

other circuits have. The Eighth and Ninth Circuits have applied § 560.2 to find broad preemption;

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in contrast, the Seventh Circuit has read § 560.2 quite narrowly. Compare Casey v. FDIC, 583 F.3d

586 (8th Cir. 2009) (finding claims under Missouri Merchandising Practices Act preempted by

HOLA) and Silvas v. E*Trade Mort. Corp., 514 F.3d 1001 (9th Cir. 2008) (finding claims under

California Unfair Competition Law preempted by HOLA) with In re Ocwen Loan Servicing, LLC,

Mort. Servicing Litig., 491 F.3d 638 (7th Cir. 2007) (finding common law claims generally are not

preempted). In arguing for preemption, Defendants rely on Silvas. In arguing against it, Mr. Davis

relies on Ocwen.

In Silvas, the Ninth Circuit determined that claims under the California Unfair

Competition Law (“UCL”) were preempted by HOLA. There, mortgage applicants brought suit

alleging that E*Trade Mortgage Corporation violated the UCL’s unfair advertising and unfair

competition rules (1) by including false information in its website and in its advertising and (2) by

misrepresenting consumer legal rights in its advertising and other documents. 514 F.3d at 1003. The

Ninth Circuit held that the claims were preempted under § 560.2(b)(9), which preempts state laws

claims regarding disclosure and advertising. Id. at 1006. The mortgage applicants also claimed that

E*Trade violated the UCL’s unfair competition provision by charging an interest rate lock-in fee that

was not refunded when loan applicants cancelled their loan transactions. The Ninth Circuit found

that under § 560.2(b)(5), state laws that purport to impose requirements on loan fees are preempted.

Id. Because the UCL was the type of state law that was contemplated under § 560.2(a) and (b), the

court ended its analysis, explaining that there was no need to address whether the UCL was a state

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law with only an incidental effect on lending under § 560.2(c). Id. at 1006.6 The Ninth Circuit

affirmed the district court’s dismissal on preemption grounds. Id. at 1008.

In Casey, the Eighth Circuit found claims that lenders violated the Missouri

Merchandising Practices Act by charging fees for preparation of documents by nonlawyers were

preempted by HOLA under § 560.2(b)(5). Section 560.2 provides that laws that are preempted

include “state laws purporting to impose requirements” regarding “[l]oan-related fees.” 12 C.F.R.

§ 560.2(b)(5). The plaintiff homeowners in Casey interpreted the phrase “state laws purporting to

impose requirements” to mean state laws that on their face impose requirements on lenders. Casey,

583 F.3d at 593. Because the Missouri Merchandising Practices Act was a law of general application

that did not on its face impose requirements on lenders, the homeowners reasoned that the statute

was not preempted by HOLA.

In contrast, the lenders viewed the phrase “state laws purporting to impose

requirements” to mean state laws that as applied imposed requirements on lenders. Id. at 595.

Because OTS had previously used an “as applied” analysis to determine whether a state law was

preempted, and because an agency’s interpretation of its own regulation is owed deference, the

Eighth Circuit concluded that “a state law that either on its face or as applied imposes requirements

regarding the examples listed in § 560.2(b) is preempted.” Id. (citing Auer v. Robbins, 519 U.S. 452,

461 (1997) (agency’s interpretation of its own regulation is entitled to deference)). Even though the

6
Thus, Silvas followed the steps set forth in 61 Fed. Reg. 50951-01 and ended its analysis
without making a determination of whether the state law had only an “incidental effect” effect on
lending under § 560.2(c). In dicta, the court noted that if it did reach the issue, the same result would
follow. Silvas, 514 F.3d at 1007 n.3. The court explained that when federal law preempts a field,
it leaves no room for supplementation by state law. Id.

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Missouri Merchandising Practices Act was a law of general application, as applied to the

homeowners’ claims against their lenders, the state statute would impose requirements regarding

loan-related fees such as the document preparation fee. Accordingly, the Eighth Circuit found that

HOLA preempted the statute and affirmed the district court’s dismissal of the claims. 583 F.3d at

596.

In a case strikingly similar to this one, a federal court in this district followed Silvas

and found contract and tort claims against the same lenders on the same type of loan to be

preempted. In Bopp v. Wells Fargo Bank, N.A., 740 F. Supp. 2d 12 (D.D.C. 2010), the plaintiff

brought suit against World Savings Bank and its successors in interest, Wachovia Mortgage, and

Wells Fargo Bank, on a Pick-a-Payment mortgage. In addition to claims under the Truth in Lending

Act (“TILA”), 15 U.S.C. § 1638, Mr. Bopp asserted claims for common law fraud and breach of the

covenant of good faith and fair dealing. Like Mr. Davis, Mr. Bopp complained that the lender did

not provide sufficient notice that negative amortization would result from his Pick-a-Payment loan.

The court rejected Mr. Bopp’s claims, explaining:

First, negative amortization was not certain to occur. It resulted
because of the payment option that Bopp himself chose. Second, the
[deferred interest disclosure] clearly and conspicuously disclose[d]
that negative amortization would in fact occur if Bopp chose to make
a payment less than the interest owed on the loan.

740 F. Supp. 2d at 16. The court noted that “[i]t is clear that the gravamen of Bopp’s state law claims

is the same as what underlies his TILA claim. A thorough reading of plaintiff’s Complaint reveals

that he is challenging the terms of his credit, the manner in which his loan was amortized, the quality

and quantity of information disclosed to him, and the manner in which his mortgage application loan

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and origination was processed. All of these complaints are expressly enumerated in HOLA as

illustrative examples of preempted state law.” Id. at 16-17 (citing 12 C.F.R. § 560.2(b)(4), (5), (9)-

(11)). The court also found that the plaintiff could not demonstrate that the state law claims had only

incidental effect on lending operations under § 560.2(c), that subsection (c) must be interpreted

narrowly, and that any doubt should be resolved in favor of preemption. Id. at 17. The court

concluded that the claims of fraud and breach of the covenant of good faith and fair dealing were

preempted by HOLA. See also Jones-Boyle v. Washington Mutual Bank, FA, Civ. No. 08-02142JF,

2010 WL 2724287, * 7 (N.D. Cal. July 8, 2010) (following Silvas, the court held that claims

including fraud, breach of contract, and breach of the implied covenant of good faith and fair dealing

were preempted by HOLA).

In contrast, in Ocwen the Seventh Circuit held that as a general proposition HOLA

does not preempt state common law claims. In that case, the lower court had denied the lenders’

motion to dismiss numerous state law claims on HOLA preemption grounds, including claims for

fraud and breach of contract. The lenders were permitted an interlocutory appeal. On appeal, the

Seventh Circuit was most troubled by the fact that HOLA does not provide a private cause of action.7

Ocwen, 491 F.3d at 643. “Against this background of limited remedial authority, we read

[§ 560.2(c)] to mean that OTS’s assertion of plenary regulatory authority does not deprive persons

harmed by the wrongful acts of savings and loans associations of their basic [s]tate common-law-

7
In contrast, a borrower has a private cause of action under TILA and may sue for rescission
or statutory penalties if a creditor fails to make certain required disclosures. 15 U.S.C. § 1640(a).
However, a one year statute of limitations applies. Id. § 1640(e). Mr. Davis filed suit more than
one-year after closing on his loan and he did not assert a claim under TILA.

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type remedies.” Id. The court listed two examples of state law claims that would not be preempted:

[S]uppose an S & L signs a mortgage agreement with a homeowner
that specifies an annual interest rate of 6 percent and a year later bills
the homeowner at a rate of 10 percent and when the homeowner
refuses to pay institutes foreclosure proceedings. It would be
surprising for a federal regulation to forbid the homeowner’s state to
give the homeowner a defense based on the mortgagee’s breach of
contract. Or if the mortgagee (or a servicer like Ocwen) fraudulently
represents to the mortgagor that it will forgive a default, and then
forecloses, it would be surprising for a federal regulation to bar a suit
for fraud.

Id. at 643-44.

Even so, the Seventh Circuit recognized that preemption depends on the nature of the

claims alleged and examined each of the twenty-two causes of action at issue. The court described

the complaint as a “hideous sprawling mess,” and found it “difficult and in many instances

impossible to ascertain the nature of the charges.” Id. at 641.8 The court noted, for example, that

the fraud allegation “does not appear to be preempted, though this could depend on the nature of the

fraud, which is unexplained.” Id. at 648. The court concluded that the case was “largely unripe for

a determination of preemption,” affirmed the lower court’s denial of the motion to dismiss and

8
The court commented:

It would have been better had the defendants deferred their motion [to
dismiss], and the district judge his ruling, until either the defendants
served contention interrogatories designed to smoke out what exactly
the plaintiffs are charging, or better, because quicker and cheaper, the
judge told the plaintiffs to specify the acts of the defendants that they
are complaining about so that he could decide how much of the
complaint was preempted. Still, the defendants can hardly be blamed
for wanting to strangle the monster in its crib.

491 F.3d at 641.

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remanded. The Seventh Circuit directed that “[o]n remand, the judge must focus on the acts alleged

in the complaint, seeking clarification from the plaintiffs where necessary and deciding in accordance

with this opinion which [claims] are preempted and which are not.” Id. at 648.

District courts have reached conflicting conclusions in this area of law. Some follow

Silvas/Casey and find broad preemption, while others follow Ocwen and find no preemption. See,

e.g., Dixon v. Wells Fargo Bank, N.A., Civ. No. 11-10368-WGY, 2011 WL 2945795, *16 & nn. 9-10

(D. Mass. July 22, 2011) (collecting cases). In some cases, district courts have attempted to dissect

the claims. See, e.g., Thomas v. Onewest Bank, FSB, No. 10-6234-AA, 2011 WL 867880 (D. Or.

Mar. 10, 2011) (fraud claim was preempted and breach of contract claim was not); but see Down v.

Flagstaff Bank, FSB, Civ. No. 3:10-847, 2011 WL 1326961, *4-6 (E.D. Va. Apr. 4, 2011) (HOLA

preempted fraud claim; the alleged fraudulent representations and the loan transaction were

“inextricably linked to one another” and could not be dissected by the court).9

Mr. Davis points to the statement in Ocwen that HOLA “does not deprive persons

harmed by the wrongful acts of savings and loans associations of their basic [s]tate common-law-

type remedies.” See Ocwen, 491 F.3d at 643. From this, he summarily concludes that his claims for

breach of contract/breach of the implied covenant of good faith and fair dealing, promissory

estoppel, fraud, and negligent misrepresentation are not preempted by HOLA. This is an overly

broad interpretation of Ocwen. The Seventh Circuit did not hold that HOLA never preempts any

9
When a claim is based on allegations that fall completely outside the loan transaction and
its supporting documents, the claim may not be preempted. See, e.g., Dixon, 2011 WL 2945795,
*15-17 (promissory estoppel claim alleging that lender promised to enter into a loan modification
if the borrowers took certain steps was not preempted by HOLA).

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common law claim. As explained above, Ocwen pointed out that preemption was dependent upon

the precise allegations in support of a claim.

An analysis of preemption in this case must start with the proposition that there is

a presumption of preemption here. See 61 Fed. Reg. 50951-01 (any doubt should be resolved in

favor of preemption); Aguayo, 2011 WL 3250465, *6 (because field preemption applies, there is a

presumption of preemption). Further, a close reading of the Complaint and the Note reveals that all

of the common law claims raised are inextricably linked to the loan transaction and the documents

related to the loan.10 The claims of promissory estoppel, fraud, and negligent misrepresentation are

based on the allegation that Defendants fraudulently represented that the loan was fixed-rate when

it was really an adjustable rate loan with a negative amortization component “hidden within.”

Compl. ¶ 23; see also id. ¶¶ 38-43, 44-51, 52-60. The claim of breach of contract/breach of good

faith claim is based solely on one sentence of § 3(A) of the Note, which provides “I will pay

Principal and Interest by making payments every month.” See id. ¶ 28. Mr. Davis alleges that

Defendants breached the loan by “agreeing” that initial monthly payments would be sufficient to pay

both the principal and interest owed on the Note and by failing to apply any of the initial monthly

payments to principal. See id. ¶ 31. All of these claims are based on the loan transaction and are

grounded in the loan documents. Because the common law claims cannot be removed from the loan

transaction, they are preempted by the federal regulations that govern the loan transaction. See

Down, 2011 WL 1326961 at *4-6 (HOLA preempted fraud claim that was inextricably linked to the

10
See Abhe & Svoboda, 508 F.3d at 1059 (in deciding a motion to dismiss, a court may
consider the facts alleged in the complaint and attached exhibits); Fed. R. Civ. P. 10(c) (written
instrument attached to a pleading is part of the pleading).000000000000000000000000000000

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loan transaction).

Moreover, this case is almost identical to Bopp, where the court found that HOLA

preempted fraud and breach of contract claims. Like Mr. Bopp, Mr. Davis complains that

Defendants did not provide sufficient notice that negative amortization could occur. The Note,

however, clearly and conspicuously disclosed that negative amortization could occur if Mr. Davis

chose to make a payment amounting to less than the interest owed on the loan. The Note expressly

set forth a fixed interest rate and also expressly set forth the possibility of negative amortization. Mr.

Davis chose to make a minimum payment. The Note explained that the borrower had selected the

payment amount and that such payment might not be sufficient to pay the entire amount of interest

that was accruing. Note § 3(B). It further warned that if monthly payments did not cover interest

charges, such unpaid charges would be added to the principal as Deferred Interest and would accrue

interest at the same rate as the principal. Id. § 3(E). The Note also set forth the manner in which

monthly payments could be increased annually to an amount sufficient to repay principal and

interest, including the Deferred Interest. Id. § 3(C), (D), (F). Mr. Davis’s claims for breach of

contract/breach of the covenant of good faith, promissory estoppel, fraud, and negligent

misrepresentation all assert that different terms of credit should have been offered and that different

disclosures should have been made.

In sum, Mr. Davis is challenging the terms of his credit, the manner in which his loan

was amortized, and the quality and quantity of information disclosed to him — all claims that were

expressly enumerated in §560.2(b) as illustrative examples of preempted state law. See 12 C.F.R.

560.2(b)(4), (9); Silvas, 514 F.3d at 1006; Bopp, 740 F. Supp. 2d at 16-17. Also, in these

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circumstances where the allegations are inextricably linked to the loan transaction, Mr. Davis cannot

demonstrate that his claims have only an incidental affect on lending operations. See Bopp, 740 F.

Supp. 2d at 17. Counts I through IV of the Complaint — the claims for breach of contract/breach

of the covenant of good faith, promissory estoppel, fraud, and negligent misrepresentation — will

be dismissed as preempted by HOLA.

B. Failure to State a Claim

Even if the claims were not preempted, they would still be dismissed for failure to

state a claim.

1. Breach of Contract

Mr. Davis’s breach of contract/breach of good faith11 allegation rests solely on one

sentence of § 3(A) of the Note, which provides “I will pay Principal and Interest by making payments

every month.” See Compl. ¶ 28. Mr. Davis alleges that Defendants “agreed” that initial monthly

payments would be sufficient to pay both the principal and interest owed on the Note and by failing

to apply any of the initial monthly payments to principal. See Compl. ¶ 31. Mr. Davis’s breach of

contract allegation, based on a single sentence of the Note taken out of context, is unreasonable

because it is flatly contradicted by the express terms of the Note.

“[O]ne who signs a contract has a duty to read it and is obligated according to its

terms.” Paterson v. Reeves, 304 F.2d 950, 951 (D.C. Cir. 1962); Watson v. Gold N Diamonds, Inc.,

736 F. Supp. 2d 266, 269 (D.D.C. 2010). Further, “when the bare allegations of the complaint

11
A claim for breach of the covenant of good faith and fair dealing must arise out of a
contract between the parties. C & E Servs., Inc. v. Ashland, Inc., 601 F. Supp. 2d 262, 265 (D.D.C.
2009).

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conflict with any exhibits or documents, whether attached or adopted by reference, the exhibits or

documents prevail.” Miller v. Pacific Shore Funding, 224 F. Supp. 2d 977, 984 n.1 (D.D.C. 2002)

(citing Fayetteville Investors v. Commercial Builders, Inc., 936 F.2d 1462, 1465 (4th Cir. 1991));

see also Thompson v. Ill. Dep’t of Professional Regulation, 300 F.3d 750, 754 (7th Cir. 2002).

Here, there is only one reasonable interpretation of the Note,12 and it contradicts Mr.

Davis’s claim for breach of contract. The Note stated that the minimum payment might not be

sufficient to pay the entire amount of interest that was accruing, Note § 3(B); that when monthly

payments were not large enough to cover interest, the Deferred Interest would be added to the

principal and would accrue interest, id. § 3(E); and that monthly payments could be increased

annually to an amount sufficient to pay the principal and interest, including the Deferred Interest.

Id. § 3(C), (D), (F). Mr. Davis’s allegation that Defendants breached the loan by “agreeing” that

initial monthly payments would be sufficient to pay both the principal and interest owed on the Note

and by failing to apply any of the initial monthly payments to principal are contrary to the

express terms of the Note. Mr. Davis had a duty to read the Note, and he is bound by its

unambiguous terms. Thus, Count I, alleging breach of contract/breach of the covenant of good faith,

12
Under District of Columbia law, contracts are construed in accord with the intention of
the parties insofar as it can be discerned from the text of the instrument. See Washington Metro.
Area Transit Auth. v. Georgetown Univ., 347 F.3d 941, 945-46 (D.C. Cir. 2003); Found. for the
Pres. of Historic Georgetown v. Arnold, 651 A.2d 794, 796 (D.C. 1994). Whether a contract is
ambiguous is a question of law for the court. See Holland v. Hannan, 456 A.2d 807, 815 (D.C.
1983). A contract is not rendered ambiguous merely because the parties disagree over its proper
interpretation. Id. Instead, a contract is ambiguous only when it is reasonably and fairly susceptible
of different interpretations. See Morgan v. Am. Univ., 534 A.2d 323, 330 (D.C. 1987); Burbridge
v. Howard Univ., 302 A.2d 245, 247 (D.C. 1973). The Court finds that the Note is not susceptible
to more than one interpretation; it is not ambiguous.

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fails to state a claim.

2. Promissory Estoppel

Count II, the claim for promissory estoppel, must also be dismissed. Promissory

estoppel provides a remedy for the enforcement of a promise where the formal requirements of a

contract have not been satisfied. Vila v. Inter-Am. Inv. Corp., 570 F.3d 274, 280 (D.C. App. 2009).

District of Columbia courts generally prohibit litigants from asserting a claim for promissory

estoppel when an express contract governs the parties’ conduct. Plesha v. Ferguson, 725 F. Supp.

2d 106, 112 (D.D.C. 2009). Here, the Note and other written mortgage documents govern. Count

II will be dismissed.

3. Fraud and Negligent Misrepresentation

In order to state a claim for fraud under District of Columbia law, a plaintiff must

allege that the defendant made a material misrepresentation, with knowledge of its falsity and with

intent to deceive, and that the plaintiff reasonably relied on such misrepresentation resulting in

provable damages. Essroc Cement Corp. v. CTI/D.C., Inc., 740 F. Supp. 2d 131, 145 (D.D.C. 2010).

The elements of a negligent misrepresentation claim are similar except that they do not include the

scienter requirements of a fraud claim. Parr v. Ebrahimian, 774 F. Supp. 2d 234, 240 (D.D.C.

2011). While reasonable reliance can be a jury issue, dismissal for failure to state a claim is proper

when no reasonable person would have relied on the representation. Burman v. Phoenix Worldwide

Indus., Inc., 384 F. Supp. 2d 316, 329 (D.D.C. 2005) (citing Alicke v. MCI Comm. Corp., 111 F.3d

909, 912 (D.C. Cir. 1997)).

Counts III and IV, alleging fraud and negligent misrepresentation, are based on the

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claim that although the Note stated on its face that it is fixed-rate, it is really an adjustable rate note

with a negative amortization component “hidden within.” Compl. ¶ 23. Again, in considering

Defendants’ motions to dismiss, the Court must consider the Note attached to the complaint. See

Abhe & Svoboda, 508 F.3d at 1059; Fed. R. Civ. P. 10(c). Because the allegations of the Complaint

conflict with the Note, the terms of the Note prevail. See Fayetteville Investors,, 936 F.2d at 1465;

Thompson, 300 F.3d at 754; Miller, 224 F. Supp. 2d at 984 n.1.

Contrary to Mr. Davis’s allegations, the Note does not “hide” anything. On its face

it expressly and clearly provided that the while the interest rate is fixed, the minimum payment might

not be sufficient to pay the entire amount of interest accruing, Note § 3(B); that when monthly

payments were not large enough to cover interest, Deferred Interest would be added to the principal

and would accrue interest, id. § 3(E); and that monthly payments would be increased annually to an

amount sufficient to pay the principal and interest, including the Deferred Interest. Id. § 3(C), (D),

(F). In light of the terms of the Note, Mr. Davis fails to allege a fraudulent or negligent

misrepresentation and fails to allege reasonable reliance. Because the claims for fraud and negligent

misrepresentation are flatly contradicted by the express terms of the Note, they fail to state a claim.

Counts III and IV of the Complaint will be dismissed.

IV. CONCLUSION

For the foregoing reasons, the motion to dismiss filed by World Savings Bank, FSB

[Dkt. #6] and the motion to dismiss filed by Wachovia Mortgage Corporation and Wells Fargo Bank

N.A. [Dkt. #7] will be granted. The Complaint will be dismissed. A memorializing Order

accompanies this Memorandum Opinion.

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Date: August 29, 2011 /s/
ROSEMARY M. COLLYER
United States District Judge

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