By: Julia M. Wei, Esq.
The Ninth Circuit ruled on the case of Wes Johnson v. Wells Fargo Home Mortgage, Inc. dba America's Servicing company yesterday (Case No. 09-15937) and while the bulk of the ruling was really dealing with procedural issues related to arbitration, the facts themselves were rather fascinating (at least to me).
Johnson was a real estate investor, he had purchased 200-300 properties since the 1970's. Definitely NOT your typical borrower. He was highly leveraged and his whole business strategy depended on his ability to borrow.
It all came crashing down one day over a small error--he (or his wife) put the wrong loan number on a check, sending 2 checks to one loan instead of 1 check per loan. ie, checks for loan A and loan B were both applied to loan B. Wells Fargo applied the payments incorrectly, and then began reporting a delinquency on loan A, and then put loan A into foreclosure.
For Johnson, the big problem was that then Wells Fargo began reporting delinquencies onto his credit, thereby jeopardizing his ability to get more credit and secure financing to continue his business.
He sued Wells Fargo on a variety of claims, like TILA, RESPA, FRCA, FDCPA violations and plain old negligence. Well, TILA and RESPA are for consumer loans. Mr. Johnson is clearly in the business of real estate and these loans were for a business purpose. (No surprise here. I have defended TILA claims like this for lender clients before and prevailed.)
Also, the direct lender is not a “debt collector” under FDCPA so Wells Fargo could not be liable for FDCPA violations.
That left the Fair Credit Reporting Act and negligence claim.
Ultimately, Johnson and Wells Fargo agreed to go to binding arbitration, and the majority of the opinion goes on and on (and on) about why you (the lawyers) cannot draft an arbitration provision that goes straight to the Ninth Circuit for a review appeal if you don’t like the arbitration award.
What was more interesting to me was the award itself, which may or may not survive further efforts by Wells to appeal it.
Justice Nott found that Wells Fargo had violated FCRA and that Johnson should recover on approximately half of his remaining categories of claimed damages. Justice Nott awarded Johnson a total of $260,910 in damages, including $100,000 for emotional distress, as well as $464,808.11 in attorneys’ fees, and $37,069.15 in costs.
Amazing! So despite the fact that the Court also found that Johnson had intentionally destroyed evidence by wiping his hard drives (spoliation sanctions were awarded to Wells Fargo), the arbitrator clearly weighed the facts and concluded that between the two parties, Wells Fargo was the bad actor.
This goes to show you that Lenders cannot be too careful about credit reporting. In the last decade, I recall Wells Fargo had already settled out (something like $10M) with a local borrowers for erroneous credit reporting. That means lender errors caused by inaccurate clerical entry, general incompetence, poor internal policies and the like can be extremely expensive when it comes to what are essentially reputation damages.