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Consumer Protection – Borrower Claims ‘Unconscionable Inducement’

McFarland v. Wells Fargo Bank NA (Lawyers Weekly No. 001-013-16, 29 pp.) (Harris, J.) No. 14-2126, Jan. 15, 2016; USDC at Charleston, W.Va. (Goodwin, J.) 4th Cir.

Holding: A borrower who alleges he refinanced his home based on a mortgage broker’s assertion that his home had doubled in value, and then lost his home when he could not manage the increased interest payments, cannot show substantive unconscionability under West Virginia law based solely on the amount of the loan; however, the 4th Circuit remands the case because a West Virginia statute allows for claims of “unconscionable inducement” even when the substantive terms of the contract are not unfair.

Plaintiff sued Greentree Mortgage Corporation and Wells Fargo Bank, as well as U.S. Bank National Association, the trustee of a securitized loan trust that now includes the Wells Fargo loan. Plaintiff alleged in his complaint that the Wells Fargo loan was an “unconscionable” contract under the W.Va. Consumer Credit and Protection Act, W.Va. Code § 46A-1-101.

The district court granted summary judgment to defendants.

Plaintiff’s primary argument is that the district court erred when it ruled that a refinanced loan exceeding the value of a home is not evidence of substantive unconscionability under West Virginia law.

The West Virginia courts have not decided this question. Fortunately, the West Virginia courts have made very clear the standard for substantive unconscionability under state law: a contract term is substantively unconscionable only if it is both “one-sided” and “overly harsh” as to the disadvantaged party. We agree with the district court that under this standard, a mortgage agreement would not be deemed substantively unconscionable solely because it provides a borrower with more money than his home is worth. Plaintiff argues the practice of over-valuing homes in mortgage lending is widespread and harmful. But the fact that a practice is harmful does not by itself make it substantively unconscionable as a matter of West Virginia contract law.

We think it unlikely the West Virginia Supreme Court of Appeals would reach out to create a new variant of substantive unconscionability for which there appears to be no sensible remedy.

Unconscionable Inducement

Though the question is not fully settled under West Virginia law, we believe the West Virginia Supreme Court of Appeals would rule that the WVCCPA authorizes a stand-alone claim for unconscionable inducement, predicated on the process leading up to contract formation and independent of any showing of substantive unconscionability.

Reading W.Va. Code § 46A-2-121(1)(a) to allow for a stand-alone unconscionable inducement claim is in no way inconsistent with West Virginia precedent holding that procedural unconscionability alone cannot show that a contract was itself unconscionable when made. We of course leave to West Virginia law the precise contours of an unconscionable inducement claim, but it appears that it will turn not on status considerations that are outside the control of the defendant, but instead on affirmative misrepresentations or active deceit. In other words, the standard for unconscionable inducement is different and higher than that for procedural unconscionability.

We hold the district court erred in dismissing plaintiff’s claim of unconscionable inducement on the ground that substantive unconscionability is a necessary predicate of a finding of unconscionability under the WVCCPA.

Affirmed in part, vacated in part and remanded.

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