• Missouri Supreme Court Clarifies When Deceptive Practices Occuring After the Sale May Still be Within Coverage of the Merchandising Practices Act
  • September 18, 2014 | Author: Michael James Smith
  • Law Firm: Baker Sterchi Cowden & Rice, L.L.C. - St. Louis Office
  • The Missouri Merchandising Practices Act (MMPA), enacted in 1967, was meant to expand the common law definition of fraud to protect consumers from unfair or deceptive practices done “in connection with the sale or advertisement of any merchandise.” 407.020.1 RSMo 2013. Two new decisions from the Missouri Supreme Court have clarified the reach of the phrase “in connection with”, in section 407.020.

    In Conway v. CitiMortgage, Inc. and Watson v. Wells Fargo, the plaintiffs alleged that certain acts committed by the defendants relating to loan transactions were unlawful under the MMPA. In Conway, the plaintiffs purchased a renovation property with the assistance of a mortgage loan from Pulaski Bank, who then assigned the loan to Fannie Mae. CitiMortgage serviced the loan. The property was damaged in a fire which occurred during renovations, and the plaintiffs obtained settlement funds from their insurance company to apply to the damages. The funds were then put into an escrow account held by CitiMortgage, and as the Conways submitted bills, CitiMortgage sent payments to the address of the home. However, additional construction was required which the Conways were unable to fully pay for, and the Conways fell behind on their mortgage payments. Though there were still sufficient settlement funds to pay their mortgage, CitiMortgage declined to apply the funds to the loan balance and sent a foreclosure notice to the Conway’s home address. CitiMortgage foreclosed on the property and the Conways filed suit under the MMPA. In its motion to dismiss, CitiMortgage argued that because the alleged unlawful acts concerned post-sale activity with regard to the original loan, the acts were not done “in connection with” the loan and the MMPA did not apply. The trial court agreed with CitiMortgage and granted its motion to dismiss.

    Watson v. Wells Fargo similarly involved activity that occurred after the original loan transaction, in that it involved a loan modification from Wells Fargo. Watson became unable to make monthly payments on the loan, and requested a loan modification. She alleged that the parties reached a modification agreement, yet according to Wells Fargo, the modification was never ratified by the parties. Wells Fargo then foreclosed on the property. In her petition, Watson alleged that Wells Fargo violated the MMPA by: (1) negotiating the loan modification in bad faith; (2) unfairly using its superior bargaining power to obtain Watson’s signature on the modification agreement; (3) falsely stating she had rescinded the modification agreement after accepting it to justify proceeding with the foreclosure sale; (4) foreclosing on the property despite promising to postpone foreclosure proceedings during the modification discussions; and (5) failing to provide notice of the foreclosure sale in violation of section 443.325.

    The Missouri Supreme Court ruled unanimously in Conway that when the operative transaction is the sale of the loan, the “sale” is not complete when the lender extends credit, but continues throughout the time the borrower makes payments. The enforcement of the terms of the loan is “in connection with” the sale of the loan, because the sale continues for the life of the loan. In Watson, however, the court ruled in a 4-3 decision that loan modification negotiations were not “in connection with” the sale of the loan because that was not a service the parties agreed to under the original loan. As a result, the court upheld summary judgment against Watson’s allegations relating to the loan modification, although it reversed as to Watson’s wrongful foreclosure allegations.

    The lesson from Conway and Watson, as stated by the court, is that for the purposes of the MMPA a sale of a loan includes a “bundle of services” that are not limited to the initial sale. Thus, lenders should be wary that the MMPA’s expanded common law definition of fraud extends to activity throughout the life the loan.