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Campidoglio LLC v. Wells Fargo & Co.

United States Court of Appeals, Ninth Circuit

September 12, 2017

Campidoglio LLC; Carmen LLC; San Marco LLC, Plaintiffs-Appellants/ Cross-Appellees,
v.
Wells Fargo & Company, Defendant, and Wells Fargo Bank, NA, Defendant-Appellee/ Cross-Appellant.

          Argued and Submitted June 8, 2017 Seattle, Washington

         Appeal from the United States District Court No. 2:12-cv-00949-TSZ for the Western District of Washington Thomas S. Zilly, Senior District Judge, Presiding

          Benjamin Gould (argued), Ryan McDevitt, Raymond J. Farrow, and Mark A. Griffin, Keller Rohrback L.L.P., Seattle, Washington, for Plaintiffs-Appellants/Cross-Appellees.

          Robert Collings Little (argued), Robin C. Campbell, Mark T. Flewelling, and Leigh O. Curran, Anglin Flewelling Rasmussen Campbell & Trytten LLP, Pasadena, California, for Defendant-Appellee/Cross-Appellant.

          Before: M. Margaret McKeown, Consuelo M. Callahan, and Sandra S. Ikuta, Circuit Judges.

         SUMMARY[*]

         Home Owners' Loan Act

         The panel vacated the district court's order dismissing, as preempted by the Home Owners' Loan Act ("HOLA"), the plaintiffs/borrowers' claim that the Lenders (comprised of Wells Fargo Bank, N.A. and its predecessors) breached their contracts by using indexes other than those actually approved by their "primary regulator" to calculate the borrowers' interest rates; affirmed the district court's grant of summary judgment in Wells Fargo Bank's favor on the borrowers' claims premised on the Lenders' alleged failure to obtain approval from the "primary regulators" to substitute the "cost of savings index" as the index; affirmed the district court's denial of borrowers' Fed.R.Civ.P. 37 discovery motion; vacated without prejudice the district court's denial of Wells Fargo's motion for attorneys' fees; and remanded.

         The borrowers filed their putative class action against Wells Fargo in Washington state court alleging causes of action based on the Lenders' alleged miscalculation of interest on the borrowers' loans. Wells Fargo removed the case to federal court under diversity jurisdiction, and moved to dismiss.

         The panel held that the borrowers sufficiently raised their "Interest Rate Calculation" breach of contract claim before the district court, and borrowers did not waive their right to challenge the dismissal of the claim. The panel further held that the federal Home Owners' Loan Act ("HOLA") did not preempt the borrowers' Washington state law "Interest Rate Calculation" breach of contract claim. Specifically, the panel held that a common law breach of contract claim was not the type of law listed in paragraph (b) of 12 C.F.R. § 560.2, but it came within paragraph (c) of that regulation, and was a law that only incidentally affected the lending operations of federal savings associations; and hence, it was not preempted by HOLA.

         Next, the panel addressed whether the district court erred in granting summary judgment in Wells Fargo's favor on the borrowers' "Use of Unapproved Indexes" breach of contract claim, and the other claims related to this alleged conduct by the Lenders. The panel affirmed the summary judgment because the Lenders gave notice to their primary regulators of their intent to substitute the indexes used to calculate interest on the borrowers' loans and the regulators did not object.

         The panel affirmed the district court's denial of the borrowers' motion for discovery sanctions pursuant to Federal Rule of Civil Procedure 37 because the borrowers failed to show prejudice resulting from this ruling.

         Finally, in light of its determination that HOLA did not preempt the borrowers' "Interest Rate Calculation" claim, the panel vacated the district court's denial of attorneys' fees without prejudice. The panel vacated without prejudice to the district court's consideration of the prevailing party's entitlement to fees after entry of a new judgment.

          OPINION

          CALLAHAN, Circuit Judge.

         Campidoglio LLC, Carmen LLC, and San Marco LLC (the Borrowers) sued Wells Fargo Bank, N.A. (Wells Fargo) based on Wells Fargo and its predecessors' (together, the Lenders) alleged miscalculation of interest on the Borrowers' loans. This case presents four issues for our review. First, we are called upon to determine whether the Home Owners' Loan Act ("HOLA") preempts the Borrowers' "Interest Rate Calculation" breach of contract claim, which arises under Washington law. Because we find that a common law breach of contract claim is not the type of law listed in paragraph (b) of 12 C.F.R. § 560.2, but comes within paragraph (c) of that regulation and is a law that only incidentally affects the lending operations of federal savings associations, we conclude that this claim is not preempted by HOLA. Second, we address whether the district court erred in granting summary judgment in Wells Fargo's favor on the Borrowers' "Use of Unapproved Indexes" breach of contract claim, and the other claims related to this alleged conduct by the Lenders. We affirm the grant of summary judgment because the Lenders gave notice to their primary regulators of their intent to substitute the Indexes used to calculate interest on the Borrowers' loans and the regulators did not object. Third, we affirm the district court's denial of the Borrowers' motion for discovery sanctions pursuant to Federal Rule of Civil Procedure 37 because the Borrowers fail to show prejudice resulting from this ruling. Finally, in light of our determination that HOLA does not preempt the Borrowers' "Interest Rate Calculation" claim, we vacate the district court's denial of attorneys' fees without prejudice.

         I

         A

         Each Borrower executed an adjustable-rate mortgage promissory note in favor of World Savings Bank (the Notes). The interest rate for all three Notes is calculated by adding the "stated margin, " which is a constant value, and the "current index" (the Index), which has a fluctuating value. When the Borrowers executed the Notes, the Notes defined "Index" to mean the "weighted average of the interest rates in effect as of the last day of each calendar month on the deposit accounts of the federally insured depository institution subsidiaries . . . of Golden West Financial Corporation" (Golden West). It also provided that "[i]f an index is substituted as described in this Section . . . the alternative index will become the Index." At that time, World Savings Bank was Golden West's subsidiary, and the Index was the Golden West "cost of savings" index, or the "Golden West COSI." The Notes also provide:

The Lender may choose an alternative to be the Index if the Index is no longer available. . . . The selection of the alternative index shall be at the Lender's sole discretion. The alternative index may be a national or regional index or another type of index approved by the Lender's primary regulator. The Lender will give notice to the Borrower of the alternative index.

         Wachovia Corporation (Wachovia) later acquired Golden West and World Savings Bank, and World Savings Bank changed its name to Wachovia Mortgage, FSB. On December 15, 2006, Wachovia submitted a letter to its primary regulator, the Office of Thrift Supervision (OTS), stating that Wachovia intended to change the Index from the Golden West COSI to the Wachovia COSI.[1] The letter discusses both new and existing loans. In January 2007, the OTS responded to Wachovia. The response describes Wachovia's December 2006 letter as seeking "to establish an alternative adjustable-rate loan index for new mortgage loans, " and states that:

[B]ased upon the regulatory criteria and the representations made in the Notice, the OTS takes no objection to World [Savings Bank's] use of the proposed alternative adjustable-rate loan index.

         The OTS's January 2007 letter does not, however, specifically mention existing loans. The OTS and Wachovia later communicated about Wachovia's plan for substituting the Index for existing loans. In July 2007, the Borrowers were notified that because the Golden West COSI would no longer be available, the Wachovia COSI would be used as the Index going forward.

         Then, in 2008, Wells Fargo acquired Wachovia, including Wachovia Mortgage. Because the Wachovia COSI would no longer be available for use as the Index, Wells Fargo sent letters to Wachovia's primary regulator, the OTS, and its own primary regulator, the Office of the Comptroller of the Currency (OCC), seeking approval to use a new Index value: the Wells Fargo COSI.[2] The OCC responded, indicating that, based on the information provided by Wells Fargo, it had no objection to Wells Fargo using the Wells Fargo COSI as the Index. In a footnote, the OCC's letter recites that the "Wachovia COSI was approved by the OTS for use by World Savings [Bank] in May 2007. Wachovia COSI replaced a similar World Savings [Bank] index the OTS had approved in 1997." The OTS similarly informed Wells Fargo that ...


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