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Decided: January 15, 2016

The Fourth Circuit remanded the case back to the district court, so it could consider whether Plaintiff Philip McFarland ‘s (“McFarland”) mortgage agreement was unconscionably induced.

McFarland purchased his Hedgesville, West Virginia home in 2004, for approximately $110,000. In June of 2006, McFarland entered into discussions with Greentree Mortgage Corporation (“Greentree”), a third-party mortgage lender. McFarland was informed that the market value of his home and gone up to $202,000 since the time of purchase. McFarland entered into two secured loan agreements. The first was a mortgage agreement with Wells Fargo Bank (“Wells Fargo”), which is the subject of this dispute. The mortgage had a principal amount of $181,800 and an adjustable interest rate that started at 7.75 percent and could increase to 13.75 percent (“Wells Fargo Loan”). The second mortgage was with Greentree. McFarland used the proceeds of those two loans to consolidate all of his debts. In 2007, McFarland began to fall behind on his mortgage payments. In May of 2010, McFarland and Wells Fargo entered into a loan modification in May 2010. McFarland was still unable to make his payments. In 2012, as a result, Wells Fargo foreclosed on McFarland’s home. McFarland brought this suit against Greentree and Wells Fargo, as well as U.S. Bank National Association (“U.S. Bank”).

McFarland raised two “unconscionable contract” arguments in his complaint. McFarland argued that either claim could support an unconsionability finding under the West Virginia Consumer Credit and Protection Act, W. Va Code § 46 A-1-101, et seq. (“WVCCPA”). After several months of extensive discovery, McFarland eventually reached a settlement with Greentree. His case against both Wells Fargo and U.S. Bank (“the Banks”) continued. The district court granted the Banks’ motion for summary judgment and dismissed McFarland’s unconscionable contract claim. The district court found that neither of McFarland’s unconscionable claims provided a basis for a finding of substantive unconscionability because a refinanced loan that exceeds the value of a home is not evidence of substantive unconsionability under West Virginia law. The court found that in light of its finding of no substantive unconscionability, there was no need to consider McFarland’s allegations regarding the process that led to contract formation.

On appeal, the Fourth Circuit agreed with the district court that the amount of a mortgage loan, by itself, cannot show substantive unconscionability under West Virginia law. As a result, the Court found that McFarland had not otherwise made a showing of substantive unconsionability. The Court also agreed with the district court that West Virginia law requires a showing of substantive unconscionability to make out a traditional claim that a contract itself is unconscionable. However, the Court disagreed as to the district court’s interpretation of the WVCCPA and whether it requires a showing of substantive unfairness. The Court, unlike the district court, found that the WVCCPA allows for claims of “unconscionable inducement” even when the substantive terms of a contract are not themselves unfair. The Court held that the district court erred in dismissing McFarland’s claim of unconscionable inducement on the “grounds that substantive unconscionability is a necessary predicate of a finding of unconscionability under the WVCCPA.” The Court took no views as to the merits of McFarland’s unconscionable inducement claim, but remanded the case to the district court to consider McFarland’s evidence that his loan agreement was “induced by misrepresentations” and to determine whether he should be able to proceed with his suit against Wells Fargo and U.S. Bank.

Accordingly, the Court affirmed the judgment of the district court in part and vacated and remanded in part for further proceedings.

Full Opinion

Meredith Weisler