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Derek Davis v. World Savings Bank

August 29, 2011


The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge


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").*fn1 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.*fn2


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.

(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 1/2 % of the then existing Principal and interest payment. This 7 1/2 % 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 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.*fn3


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 ...

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