Philip McFarland v. Wells Fargo Bank, N.A.

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2126
PHILIP MCFARLAND,
Plaintiff – Appellant,
v.
WELLS FARGO BANK, N.A.; U.S. BANK NATIONAL ASSOCIATION,
Defendants – Appellees,
and
CHASE TITLE INC.,
Defendant.
-------------------------
AARP; CENTER FOR RESPONSIBLE LENDING; NATIONAL ASSOCIATION
OF CONSUMER ADVOCATES; NATIONAL CONSUMER LAW CENTER,
Amici Supporting Appellant,
THE COMMUNITY BANKERS OF WEST VIRGINIA, INCORPORATED; THE
WEST VIRGINIA BANKERS ASSOCIATION,
Amici Supporting Appellees.
Appeal from the United States District Court for the Southern
District of West Virginia, at Charleston. Joseph R. Goodwin,
District Judge. (2:12-cv-07997)
Argued: October 28, 2015 Decided: January 15, 2016
Before SHEDD, DIAZ, and HARRIS, Circuit Judges.
Affirmed in part, vacated in part, and remanded by published
opinion. Judge Harris wrote the opinion, in which Judge Shedd
and Judge Diaz joined.
ARGUED: Jennifer S. Wagner, MOUNTAIN STATE JUSTICE, INC.,
Clarksburg, West Virginia, for Appellant. John Curtis Lynch,
TROUTMAN SANDERS LLP, Virginia Beach, Virginia, for Appellees.
ON BRIEF: Bren J. Pomponio, MOUNTAIN STATE JUSTICE, INC.,
Charleston, West Virginia, for Appellant. Jason Manning, Megan
Burns, TROUTMAN SANDERS LLP, Virginia Beach, Virginia, for
Appellees. Jason E. Causey, BORDAS & BORDAS, PLLC, St.
Clairsville, Ohio; Jonathan Marshall, Patricia M. Kipnis, BAILEY
& GLASSER, LLP, Charleston, West Virginia, for Amici The
National Consumer Law Center, AARP, The National Association of
Consumer Advocates, and The Center for Responsible Lending.
Floyd E. Boone, Jr., Stuart A. McMillan, Sandra M. Murphy, James
E. Scott, BOWLES RICE LLP, Charleston, West Virginia, for Amici
Community Bankers of West Virginia, Inc. and The West Virginia
Bankers Association, Inc.
2
PAMELA HARRIS, Circuit Judge:
In 2006, at the height of the housing market, Philip
McFarland was informed by a mortgage broker that his home’s
value had nearly doubled in two years. Acting on that advice,
McFarland refinanced his home so that he could pay down other
debt. But it soon became apparent that McFarland could not
manage the increased interest payments on his new loan, and when
housing prices fell, McFarland was faced with an unaffordable
mortgage and a looming foreclosure.
McFarland sued, alleging that his mortgage agreement,
providing him with a loan far in excess of his home’s actual
value, was an “unconscionable contract” under the West Virginia
Consumer Credit and Protection Act, W. Va. Code § 46A–1–101, et
seq. (the “Act” or the “WVCCPA”). The district court rejected
that claim, holding that a loan exceeding the worth of a home,
without more, is not evidence of “substantive unconscionability”
under West Virginia law. And because the district court
understood a WVCCPA claim always to require a showing of
substantive unconscionability, it stopped its analysis there,
without considering the fairness of the process by which the
agreement was reached.
We agree with the district court that the amount of a
mortgage loan, by itself, cannot show substantive
unconscionability under West Virginia law, and that McFarland
3
has not otherwise made that showing. But we disagree as to the
proper interpretation of the WVCCPA, and find that the Act
allows for claims of “unconscionable inducement” even when the
substantive terms of a contract are not themselves unfair.
Accordingly, we remand so that the district court may consider
in the first instance whether McFarland’s mortgage agreement was
induced by unconscionable conduct.
I.
A.
In 2004, McFarland purchased his Hedgesville, West Virginia
home for roughly $110,000. Just two years later, in June 2006,
he availed himself of then-favorable debt markets to engage in
the refinancing that is the subject of this appeal. Interested
in consolidating his approximately $40,000 in combined student
and vehicle debt with his mortgage, McFarland entered into
discussions with Greentree Mortgage Corporation (“Greentree”), a
third-party mortgage lender. Greentree arranged for an
appraisal of McFarland’s property, and McFarland was informed
that the market value of his home had jumped to $202,000 since
its acquisition two years earlier.
McFarland then entered into two secured loan agreements.
The first, which is the subject of this dispute, was a mortgage
agreement with Wells Fargo Bank, N.A. (“Wells Fargo”), with a
4
principal amount of $181,800 and an adjustable interest rate
that started at 7.75 percent and could increase to 13.75 percent
(the “Wells Fargo Loan”). The second, not directly at issue
here, was with Greentree, for an interest-only home equity line
of credit of $20,000. As planned, McFarland used the proceeds
of those two loans to consolidate all of his debts.
McFarland paid the Wells Fargo Loan without incident for
roughly a year. In late 2007, however, he began to fall behind
on his mortgage payments, and contacted Wells Fargo to ask for
assistance. After several failed attempts to restructure
McFarland’s mortgage, Wells Fargo and McFarland entered into a
loan modification in May 2010. The revised agreement reduced
McFarland’s interest rate and extended the term of the loan in
exchange for an increase in the principal amount outstanding.
But even under the new arrangement, McFarland remained unable to
make his payments. In 2012, Wells Fargo initiated foreclosure
on McFarland’s home.
B.
To stop the pending foreclosure, McFarland brought this
action against Greentree and Wells Fargo, as well as U.S. Bank
National Association (“U.S. Bank”), the trustee of a securitized
5
loan trust that now includes the Wells Fargo Loan. 1 Relevant to
this appeal, McFarland alleged in his complaint that the Wells
Fargo Loan was an “unconscionable contract” under the WVCCPA.
See W. Va. Code § 46A-2-121(1)(a).
McFarland raised two distinct “unconscionable contract”
arguments in his complaint and before the district court, either
of which, he contended, could support an unconscionability
finding under the WVCCPA. The first was a traditional
unconscionability claim with its genesis in the common law,
focusing on the terms of the Wells Fargo Loan itself and, in
particular, the size of the mortgage it provided. Put simply,
McFarland argued that Wells Fargo loaned him too much money.
Citing a 2012 retroactive appraisal finding that his home was
worth only $120,000 in June 2006 — considerably less than the
$202,000 valuation that preceded the Wells Fargo Loan —
McFarland claimed that Wells Fargo’s excess loan tied him to an
unaffordable mortgage that increased his housing burden by
several hundred dollars a month and put his home at risk. That
general species of unconscionability claim (if not this
particular variant), alleging the unfairness of the terms of an
1 After originating McFarland’s mortgage loan, Wells Fargo
sold the mortgage on the secondary market as part of a
securitized loan trust. U.S. Bank is the trustee of that trust,
which is owned by investors. Wells Fargo continues to service
the loans in the trust.
6
agreement, is well established in West Virginia: In the context
of consumer agreements, it is now codified under the WVCCPA, see
W. Va. Code § 46A-2-121(1)(a) (court may refuse to enforce a
consumer agreement that is “unconscionable at the time it was
made”), and it has long roots in West Virginia’s common law, see
Brown v. Genesis Healthcare Corp., 729 S.E.2d 217, 226–27 (W.
Va. 2012).
McFarland’s second theory of unconscionability was more
novel. West Virginia’s traditional unconscionability doctrine,
as is customary, requires a showing of both substantive
unconscionability, or unfairness in the contract itself, and
procedural unconscionability, or unfairness in the bargaining
process. Genesis Healthcare, 729 S.E.2d at 221. But
McFarland’s alternative argument was that even if the Wells
Fargo Loan was not unconscionable when made, the district court
could invalidate it on the independent ground that it was
“unconscionably induced” — in other words, based solely on
factors predating acceptance of the contract and relating to the
bargaining process. Specifically, McFarland argued that the
Wells Fargo Loan was “induced by misrepresentations,” focusing
on what he alleged to be the vastly inflated appraisal of his
home in 2006. And according to McFarland, that kind of
unconscionable inducement is, under the text of the WVCCPA,
grounds for relief by itself, without regard to the loan
7
agreement’s substantive terms. See W. Va. Code § 46A-2-
121(1)(a) (court may refuse to enforce a consumer agreement that
is “unconscionable at the time it was made, or . . . induced by
unconscionable conduct”).
After McFarland filed his complaint, he and the defendants
engaged in several months of extensive discovery. McFarland
eventually reached a settlement with Greentree, but his case
against Wells Fargo and U.S. Bank (“the Banks”) proceeded. In
the decision that is the subject of this appeal, the district
court granted the Banks’ motion for summary judgment and
dismissed McFarland’s unconscionable contract claim. McFarland
v. Wells Fargo Bank, N.A., 19 F. Supp. 3d 663, 668–73 (S.D.W.
Va. 2014).
As to substantive unconscionability, the district court
explained that McFarland had identified two allegedly
unconscionable features of the Wells Fargo Loan in both his
complaint and his opposition to the Banks’ motion for summary
judgment: that the loan far exceeded the value of the property,
and that the loan provided no “net tangible benefit” to
McFarland. But neither, the district court held, provided a
basis for a finding of substantive unconscionability.
That a refinanced loan exceeds the value of a home, the
court ruled, is not evidence of substantive unconscionability
under West Virginia law. “It is not ‘overly harsh’ or ‘one-
8
sided’ against the plaintiff that he received more financing
than he was allegedly entitled to receive.” McFarland, 19 F.
Supp. 3d at 670 (emphasis in original). If anything, the court
reasoned, an under-secured mortgage disadvantages the lender,
not the borrower. Absent unfairness in specific loan terms like
the rate of interest charged or the timing of payments, the
court concluded, there is nothing substantively unconscionable
about a loan simply because of its size.
Nor does West Virginia law require that a contract provide
a “net tangible benefit” to either party, the court held. Under
West Virginia law, a contract is substantively unconscionable
only if it is “one-sided,” with an “overly harsh effect on the
disadvantaged party.” Id. at 673 (quoting Genesis Healthcare,
729 S.E.2d at 221). That is a different standard, the court
reasoned, and whether the Wells Fargo Loan was of net benefit to
McFarland is simply not relevant to the substantive
unconscionability inquiry.
Finally, the district court held that in light of its
holding as to substantive unconscionability, there was no need
even to consider McFarland’s allegations regarding the process
that led to contract formation. According to the district
court, West Virginia law does not allow for a finding of
unconscionable contract without some showing of substantive
unconscionability. As a result, the court dismissed McFarland’s
9
claim — including his allegation of “unconscionable inducement”
under the WVCCPA — without further addressing the purported
misrepresentations that led to the Wells Fargo Loan.
McFarland timely appealed the dismissal of his
unconscionable contract claim.
II.
We review a district court’s award of summary judgment de
novo, and view the facts and the reasonable inferences that may
be drawn from them in the light most favorable to the nonmoving
party — here, McFarland. See Woollard v. Gallagher, 712 F.3d
865, 873 (4th Cir. 2013). Summary judgment is appropriate only
“if the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter
of law.” Fed. R. Civ. P. 56(a). As a federal court sitting in
diversity, our role is to apply governing West Virginia contract
law, “or, if necessary, predict how the state’s highest court
would rule on an unsettled issue.” Horace Mann Ins. Co. v. Gen.
Star Nat’l Ins. Co., 514 F.3d 327, 329 (4th Cir. 2008).
A.
We begin with McFarland’s contention that the district
court erred as a matter of West Virginia law when it rejected
McFarland’s theories of substantive unconscionability. As the
district court explained, McFarland identified, first in his
10
complaint and again in response to the Banks’ motion for summary
judgment, two and only two aspects of the Wells Fargo Loan that
he claimed made it substantively unconscionable: “(1) that the
loan far exceeded the value of the property and (2) that the
loan did not provide a net tangible benefit.” J.A. 266. Like
the district court, we will limit our analysis to those two
contentions. McFarland directed the district court to consider
two specific terms of the Wells Fargo Loan, and to the extent
that he now contends on appeal that other terms also are
substantively unconscionable, those arguments are waived. See
Malbon v. Pa. Millers Mut. Ins. Co., 636 F.2d 936, 941 (4th Cir.
1980).
1.
McFarland’s primary argument is that the district court
erred when it ruled that a refinanced loan exceeding the value
of a home is not evidence of substantive unconscionability under
West Virginia law. Because the West Virginia courts have not
decided this question, 2 our task is to apply the relevant
2
McFarland relies on two decisions of the West Virginia
Supreme Court of Appeals, but in neither of those cases did the
court hold that a loan exceeding the value of a home is evidence
of substantive unconscionability. In Quicken Loans, Inc. v.
Brown, 737 S.E.2d 640, 656–59 (W. Va. 2012) (“Quicken Loans I”),
the court was presented with evidence that a loan was based on
an inflated appraisal. But the loan also contained significant
fees, a particularly high interest rate, and an undisclosed
balloon payment. See id. So when the court found the loan to
11
principles of state contract law as we believe they would be
applied by the West Virginia Supreme Court of Appeals in this
context. See Horace Mann, 514 F.3d at 329.
Fortunately, the West Virginia courts have made very clear
the standard for substantive unconscionability under state law:
A contract term is substantively unconscionable only if it is
both “one-sided” and “overly harsh” as to the disadvantaged
party. See, e.g., Dan Ryan Builders, Inc. v. Nelson, 737 S.E.2d
550, 558 (W. Va. 2012); Genesis Healthcare, 729 S.E.2d at 221.
The point is not to disturb the “reasonable allocation of risks
or reasonable advantage because of superior bargaining power.”
Arnold v. United Cos. Lending Corp., 511 S.E.2d 854, 860 (W. Va.
1998) (quoting Unif. Consumer Credit Code 1974 § 5.108 cmt. 3),
overruled on other grounds by Dan Ryan Builders, 737 S.E.2d 550.
Rather, substantive unconscionability screens for cases in which
a “gross imbalance, one-sidedness or lop-sidedness in a
be unconscionable because its “total cost . . . was exorbitant,”
its holding turned on much more than the principal amount of the
loan. See id. at 659. And in Herrod v. First Republic Mortgage
Corp., 625 S.E.2d 373, 379–81 (W. Va. 2005), although the court
reversed summary judgment where it found evidence that the
“house was worth at least $20,000 less than the amount for which
it was mortgaged,” its analysis concentrated singularly upon
issues of fact relating to procedural unconscionability —
namely, whether the loan was based on a fraudulent appraisal —
and the decision never mentions substantive unconscionability.
See id.
12
contract” will justify a court’s refusal to enforce the
agreement as written. Genesis Healthcare, 729 S.E.2d at 220.
We agree with the district court that under this standard,
a mortgage agreement would not be deemed substantively
unconscionable solely because it provides a borrower with more
money than his home is worth. Whatever the pitfalls, receiving
too much money from a bank is not what is generally meant by
“overly harsh” treatment, and we have no reason to think that
the West Virginia Supreme Court of Appeals would apply its
standard in such a counterintuitive manner. As the district
court noted, it is not the borrower but the bank that typically
is disadvantaged by an under-collateralized loan. That is why
borrowers may pay a premium for under- or non-collateralized
loans, see Benjamin E. Hermalin & Andrew K. Rose, Risks to
Lenders and Borrowers in International Capital Markets, in
International Capital Flows 363, 369 (Martin Feldstein ed.,
1999); why it is common practice for banks, as many borrowers
can attest, to ensure that their real estate loans are for
significantly less than property value, see Michael T. Madison
et al., 1 Law of Real Estate Financing § 5:14 (2015); and why a
generous mortgage loan is usually cause for celebration and not
a lawsuit.
13
McFarland, with the support of multiple amici, 3 rejects that
common-sense application of West Virginia’s substantive
unconscionability law, arguing that it fails to take account of
the broader social and economic context. According to
McFarland, the Wells Fargo Loan is but one example of a
widespread practice of overvaluing homes and lending too much
money that has contributed to a national home foreclosure
crisis: When a borrower is bound to a mortgage that exceeds the
value of his home, he is trapped, unable to refinance to obtain
better terms or sell his home to relocate, and foreclosure is
the result. It is that harm to borrowers and to public policy,
McFarland argues, that renders mortgage loans in excess of home
value substantively unconscionable under West Virginia law.
We certainly agree that consumers may be harmed, sometimes
grievously, when they take on more mortgage debt than their
homes are worth. Cf. McCauley v. Home Loan Inv. Bank, F.S.B.,
710 F.3d 551, 559 n.5 (4th Cir. 2013) (finding in the context of
a fraud claim that a borrower could be injured by an under-
collateralized loan). And we have no reason to doubt that West
Virginia’s courts would acknowledge that disproportionate debt
may be dangerous both for homeowners and for the broader
3McFarland is joined in this argument by amici curiae The
National Consumer Law Center, AARP, The National Association of
Consumer Advocates, and The Center for Responsible Lending.
14
economy. See, e.g., IMF, Dealing with Household Debt, in Growth
Resuming, Dangers Remain, World Economic Outlook 89, 96 (Apr.
2012) (economic downturns “are more severe when they are
preceded by larger increases in household debt”). Indeed, we
note that West Virginia already has decided to regulate by
statute precisely the lending practices of which McFarland
complains, with a law aimed squarely at predatory mortgage
lending. See W. Va. Code § 31-17-8(m)(8) (prohibiting “a
primary or subordinate mortgage loan in a principal amount that
. . . exceeds the fair market value of the property”).
But here is where we disagree with McFarland: The fact
that a practice is harmful does not by itself make it
substantively unconscionable as a matter of West Virginia
contract law. Rather, as noted above, substantive
unconscionability is an equitable doctrine reserved for those
cases in which a contract is “so one-sided that it has an overly
harsh effect on the disadvantaged party.” Dan Ryan Builders,
737 S.E.2d at 558. And an under-collateralized loan, though it
ultimately may cause harm, cannot meet this standard, because it
will benefit the borrower in at least some respects and operate
to the detriment of the lender in others. Here, for example,
the Wells Fargo Loan provided McFarland with the money he needed
to pay off approximately $40,000 of student and automobile debt,
as he had hoped. And while it undoubtedly exposed McFarland to
15
certain risks, it posed risks for the bank, as well: When a
bank writes a mortgage for more money than a borrower’s home is
worth, it takes the chance that it will forfeit at least some of
its capital in the event of a default. 4 So a loan in excess of
home value does not accrue entirely to the lender’s benefit, and
thus lacks the kind of “gross imbalance, one-sidedness or lop-
sidedness,” id., and evident impropriety that West Virginia
courts have identified in setting aside contract terms as
substantively unconscionable. See, e.g., id. at 559–60
(striking down unilateral arbitration clause because it was
wholly one-sided and unfair); U.S. Life Credit Corp. v. Wilson,
301 S.E.2d 169, 171–72 (W. Va. 1982) (invalidating provision in
4 McFarland contends that today this risk is more illusory
than real, given that mortgage lenders can sell their loans on
the secondary market and remove them from their balance sheets.
But as the Banks explain, they remain accountable to the
purchasers of their loans, and in some circumstances even may
have to repurchase loans that prove “defective.” And indeed,
many banks experienced a solvency crisis during the recent
economic downturn because of the number of “bad loans” they had
issued. See Eamonn K. Moran, Wall Street Meets Main Street:
Understanding the Financial Crisis, 13 N.C. Banking Inst. 5, 55
(2009). We acknowledge that the growth of loan securitization
in the years leading up to the financial crisis significantly
affected the allocation of risk associated with under-
collateralized loans. But that does not mean that banks are
fully insulated from the consequences of bad loans, and it is
enough here that loans in excess of home value continue to carry
risk for all parties involved.
16
consumer loan agreement that waives debtor’s statutory right to
be free from publication of his indebtedness).
Our belief that the West Virginia Supreme Court of Appeals
would not recognize loan size, by itself, as evidence of
substantive unconscionability is confirmed when we consider the
problems that would arise in fashioning a remedy in such
circumstances. In the typical case, when what is challenged is
a particular contract term — say, a rate of interest, or a
prepayment penalty — courts may sever the unconscionable term or
reform it to avoid an “unconscionable result.” See W. Va. Code
§ 46A-2-121(1)(b). But here, the only way to avoid what
McFarland alleges is the unconscionable feature of having been
loaned too much money would be to cancel the loan agreement
altogether — which would spare McFarland a foreclosure but also
require that he return the loan principal to Wells Fargo, which
is of course the very outcome he seeks to avoid. See Quicken
Loans, Inc. v. Brown, 777 S.E.2d 581, 592 (W. Va. 2014)
(“Quicken Loans II”) (requiring return of loan principal as part
of remedy for unconscionable loan agreement). The West Virginia
Supreme Court of Appeals has been clear that “cancellation of
the debt” — relieving McFarland of the obligation to repay his
Wells Fargo Loan altogether — “is not a permissible remedy” in
circumstances like these. See Quicken Loans II, 777 S.E.2d at
591. And with that off the table and no good alternative
17
proposed, we think it unlikely that the West Virginia Supreme
Court of Appeals would reach out to create a new variant of
substantive unconscionability for which there appears to be no
sensible remedy. Cf. Mallet v. Pickens, 522 S.E.2d 436, 441 n.6
(W. Va. 1999) (interpreting West Virginia common law to avoid an
“illogical, counterintuitive outcome”). 5
2.
McFarland also continues to press his alternative theory of
substantive unconscionability: that his contract with Wells
Fargo is substantively unconscionable under West Virginia law
because the Wells Fargo Loan did not provide him a “net tangible
benefit.” Like the district court, we think it is clear that
the “net tangible benefit” inquiry to which McFarland alludes is
5 Like the district court, we acknowledge that some federal
courts in West Virginia appear to have reached a different
conclusion, holding or assuming, without significant analysis,
that a mortgage’s size may be evidence of substantive
unconscionability. See, e.g., Petty v. Countrywide Home Loans,
Inc., No. 3:12-cv-6677, 2013 WL 1837932, at *5 (S.D.W. Va. May
1, 2013). The district court distinguished those cases on the
ground that they arose prior to discovery, and that early
dismissal of the cases would have been inconsistent with the
WVCCPA’s policy of allowing unconscionability claims to proceed
through discovery. See McFarland, 19 F. Supp. 3d at 672–73
(citing W. Va. Code § 46A-2-121(2) (“[T]he parties shall be
afforded a reasonable opportunity to present evidence . . . to
aid the court in making the [unconscionability]
determination.”)). And regardless, we agree with the district
court that the cases are unpersuasive on the merits, see id. at
672, decided without sustained examination of the issue and
providing no reason to think that West Virginia would apply its
law in this manner.
18
irrelevant to substantive unconscionability under West Virginia
law.
McFarland appears to have borrowed the “net tangible
benefit” test he proposes from West Virginia’s anti-predatory
lending statute, which prohibits mortgage brokers from charging
certain fees “unless the new loan has a reasonable, tangible net
benefit to the borrower considering all of the circumstances.”
See W. Va. Code § 31-17-8(d). But McFarland has not alleged
that the Wells Fargo Loan violated this provision, nor pointed
to any West Virginia case law borrowing its language and
applying it in the very different context of a § 46A-2-121
“unconscionable contract” claim. Nor can we see any reason why
the “tangible net benefit” standard would be transposed to the
unconscionability context. Again, unconscionability under West
Virginia law is concerned with whether a loan agreement is so
“one-sided” and “overly harsh” that it should not be enforced as
written. Genesis Healthcare, 729 S.E.2d at 221. Whether a
contract provides either or both parties with a “tangible net
benefit” is an entirely separate question; contracts are made
all the time that include terms that might not provide either
party with a “net tangible benefit” yet remain fair and even-
handed — or at least fair and even-handed enough not to be
considered substantively unconscionable under West Virginia’s
standard. Cf. Pingley v. Perfection Plus Turbo-Dry, LLC, 746
19
S.E.2d 544, 551–52 (W. Va. 2013) (contract between homeowner and
sewage removal company not substantively unconscionable even
though it disclaimed liability for damages caused by mold);
State ex rel. AT & T Mobility, LLC v. Wilson, 703 S.E.2d 543,
550–51 (W. Va. 2010) (arbitration agreement’s ban on class
actions does not render it substantively unconscionable). 6
III.
We turn now to McFarland’s contention that the district
court erred by dismissing his unconscionable contract claim
solely on the ground that he could not show substantive
unconscionability. According to McFarland, neither of his
unconscionable contract claims — that the loan agreement itself
was unconscionable when made, or that it was induced by
unconscionable means — could be dismissed under West Virginia
law without some assessment of the fairness of the process
leading up to contract formation.
We agree, but only in part. Like the district court, we
think West Virginia law clearly requires a showing of
6The Banks argue in the alternative that even if the
“tangible net benefit” standard were applicable here, it would
be satisfied, given that the Wells Fargo Loan allowed McFarland
to pay off his student and vehicle debt and thus reduce his
total monthly loan payments. Because we find that West Virginia
law does not call for an inquiry into “tangible net benefit” in
this context, we need not address that contention.
20
substantive unconscionability to make out a traditional claim
that a contract is itself unconscionable. But we think it is
equally plain that the WVCCPA authorizes a stand-alone
unconscionable inducement claim which, unlike its common-law
antecedents, may be based entirely on evidence going to process
and requires no showing of substantive unfairness.
A.
Having found that McFarland could not show substantive
unconscionability, the district court granted the Banks summary
judgment on McFarland’s unconscionable contract claim. No
further analysis was required, the district court held, because
under West Virginia law, a claimant must prove substantive
unconscionability in order to prevail on a claim of
unconscionable contract.
As to McFarland’s first unconscionable contract claim —
that the loan agreement itself was unconscionable when made, see
W. Va. Code § 46A-2-121(1)(a) (courts may refuse to enforce
agreement that is “unconscionable at the time it was made”) — we
agree. West Virginia law clearly requires evidence of both
substantive and procedural unconscionability to make out this
traditional unconscionability claim, now codified under West
Virginia Code § 46A-2-121(1)(a). See, e.g., Genesis Healthcare,
729 S.E.2d at 221; Arnold, 511 S.E.2d at 861 n.6. Given its
holding that McFarland could not show the requisite substantive
21
unconscionability — with which we agree — the district court
properly awarded summary judgment to the Banks on McFarland’s
claim that his contract with Wells Fargo was unconscionable at
the time it was made.
McFarland’s contrary argument rests on cases in which the
West Virginia Supreme Court of Appeals has instructed state
courts against dismissing unconscionable contract claims when
there are outstanding issues of fact relating to procedural
unconscionability. See, e.g., Herrod, 625 S.E.2d at 379
(existence of questions of fact regarding grossly unequal
bargaining power precludes resolution by summary judgment).
That policy is driven by a practical concern that
unconscionability claims are context-specific, so that evidence
of procedural unconscionability may in some cases also inform
the substantive unconscionability analysis. See Quicken Loans
I, 737 S.E.2d at 657; Arnold, 511 S.E.2d at 860–61. Whatever
its merits, that guidance is a matter of state civil procedure,
not substantive law, and does not bind a federal court sitting
in diversity. Federal courts apply federal rules of procedure.
See Rowland v. Patterson, 852 F.2d 108, 110 (4th Cir. 1988).
And under Federal Rule of Civil Procedure 56, the only
requirement for summary judgment is that the movant be entitled
to judgment as a matter of law. Because McFarland could not
succeed on his claim that his contract with Wells Fargo was
22
unconscionable when entered even accepting as true all of his
allegations regarding the bargaining process, the district court
properly awarded summary judgment to the Banks.
B.
We reach a different conclusion with respect to McFarland’s
claim of unconscionable inducement. Though the question is not
fully settled under West Virginia law, we believe the West
Virginia Supreme Court of Appeals would rule that the WVCCPA
authorizes a stand-alone claim for unconscionable inducement,
predicated on the process leading up to contract formation and
independent of any showing of substantive unconscionability.
The terms of the WVCCPA are plain enough: Section 46A-2-
121 authorizes a court to refuse enforcement of an agreement on
one of two distinct findings: that the agreement was
“unconscionable at the time it was made, or [that it was]
induced by unconscionable conduct.” W. Va. Code § 46A-2-
121(1)(a) (emphasis added). What makes the question interesting
is the interplay between West Virginia’s unconscionability
common law and the codification of an unconscionability
provision in the WVCCPA. At common law, some showing of
substantive unconscionability is a prerequisite to an
unconscionability claim. And it is settled as a matter of West
Virginia law that the same requirement applies to claims under
the first part of § 46A-2-121(1)(a), alleging that a contract
23
was “unconscionable at the time it was made.” See Credit
Acceptance Corp. v. Front, 745 S.E.2d 556, 559, 564 (W. Va.
2013). So the question is whether the second part of § 46A-2-
121(1)(a), covering contracts “induced by unconscionable
conduct,” is to be read as diverging from this traditional
understanding and authorizing a claim for unconscionable
inducement that does not require a showing of substantive
unconscionability. See id. at 571 (Ketchum, J., concurring)
(noting that legislature has suggested that substantive
unconscionability is not required and urging court to clarify
the matter).
For several reasons, we think the West Virginia Supreme
Court of Appeals would answer this question in the affirmative.
First, it has come very close to doing so already. In its 2012
decision in Quicken Loans I, the court sustained findings of
“unconscionability in the inducement” based entirely on conduct
predating acceptance of the contract and allegations going to
the fairness of the process, without regard to substantive
unconscionability: a “false promise” of refinancing, the sudden
introduction of a balloon payment at closing, a negligently
conducted appraisal review, and other similar factors. 737
S.E.2d at 657–58. Because the court’s analysis of
unconscionable inducement was only one portion of its overall
unconscionability analysis — which also reflected that the loan
24
agreement included several substantively unconscionable terms,
id. at 658 — we will err on the side of caution and treat it as
something less than a clear holding on the question. But at a
minimum, it is a strong indication that the West Virginia
Supreme Court of Appeals understands the WVCCPA to allow for
unconscionable inducement claims separate and apart from
substantive unconscionability.
Second, the West Virginia Supreme Court of Appeals takes a
plain meaning approach to statutory construction: “Where the
language of a statutory provision is plain, its terms should be
applied as written.” DeVane v. Kennedy, 519 S.E.2d 622, 632 (W.
Va. 1999). And the language of the WVCCPA fits the bill. It
expressly authorizes courts to refuse to enforce an agreement
that they find “to have been unconscionable at the time it was
made, or to have been induced by unconscionable conduct.” W.
Va. Code § 46A-2-121(1)(a) (emphasis added). The word “or”
unmistakably signals two distinct causes of action when it comes
to consumer loans: one for unconscionability in the loan terms
themselves, and one for unconscionable conduct that causes a
party to enter into a loan. If the legislature had intended to
require both substantive and process-related unconscionability,
subjecting creditors to liability only where an agreement itself
is unconscionable, then all it had to do was replace the “or”
with an “and.” Cf. U.S. Life, 301 S.E.2d at 173 (engaging in
25
same plain meaning analysis of § 46A-2-121(1)(a) and rejecting
defendant’s argument that it allows claims only for
unconscionable inducement and not also for substantively
unconscionable contract terms).
Finally, the West Virginia courts have advised that the
comments to the Uniform Consumer Credit Code (“UCCC”) are
“highly instructive” when it comes to construing § 46A-2-121
because its unconscionability provisions are “identical” to
those of the statute. Quicken Loans I, 737 S.E.2d at 656–57.
And the comments to the UCCC not only indicate that a stand-
alone unconscionable inducement claim exists, but also explain
its purpose:
Subsection (1), as does UCC Section 2-302, provides
that a court can refuse to enforce or can adjust an
agreement or part of an agreement that was
unconscionable on its face at the time it was made.
However, many agreements are not in and of themselves
unconscionable according to their terms, but they
would never have been entered into by a consumer if
unconscionable means had not been employed to induce
the consumer to agree to the contract. It would be a
frustration of the policy against unconscionable
contracts for a creditor to be able to utilize
unconscionable acts or practices to obtain an
agreement. Consequently subsection (1) also gives to
the court the power to refuse to enforce an agreement
if it finds as a matter of law that it was induced by
unconscionable conduct.
Unif. Consumer Credit Code 1974 § 5.108 cmt. 1. That is
McFarland’s argument in a nutshell: that regardless of whether
his loan agreement with Wells Fargo is “in and of [itself]
26
unconscionable according to [its] terms” — that is,
substantively unconscionable — § 46A-2-121(1)(a) allows for a
finding of unconscionability if “unconscionable means [were]
employed to induce [him] to agree to the contract.” Id. It
appears that the West Virginia legislature adopted precisely
this approach, and we think that the West Virginia Supreme Court
of Appeals would so hold.
Reading § 46A-2-121(1)(a) to allow for a stand-alone
unconscionable inducement claim, we should note, is in no way
inconsistent with West Virginia precedent holding that
procedural unconscionability alone cannot show that a contract
was itself unconscionable when made. The kind of procedural
unconscionability that is required (in combination with
substantive unconscionability) to render a contract or contract
term unconscionable in and of itself may turn on such “status”
factors as the “relative positions of the parties, the adequacy
of the bargaining position, [and] the meaningful alternatives
available to the plaintiff.” Quicken Loans I, 737 S.E.2d at
657. We of course leave to West Virginia law the precise
contours of an unconscionable inducement claim, but it appears
that it will turn not on status considerations that are outside
the control of the defendant, but instead on affirmative
misrepresentations or active deceit. See id. at 653–55, 657
(unconscionable inducement findings include lender’s concealment
27
of balloon payment and false promise to allow refinancing). As
McFarland concedes, in other words, the standard for
unconscionable inducement is different and higher than that for
procedural unconscionability.
Accordingly, we hold that the district court erred in
dismissing McFarland’s claim of unconscionable inducement on the
ground that substantive unconscionability is a necessary
predicate of a finding of unconscionability under the WVCCPA.
We take no view as to the underlying merits of McFarland’s
unconscionable inducement claim, and remand to the district
court to consider McFarland’s evidence that his loan agreement
was “induced by misrepresentations” and determine whether it
allows him to proceed against the Banks. 7
7
In a separate count of his complaint, McFarland sought to
hold the Banks liable for unconscionable contract under agency
and joint venture theories. The district court dismissed that
count of the complaint on the ground that McFarland had failed
to make the necessary showing of unconscionability. McFarland,
19 F. Supp. 3d at 674 (“Here, joint venture and agency may not
be used to impose liability for unconscionable contract [], as
that claim is dismissed.”). Accordingly, we vacate that portion
of the district court’s judgment, as well, and remand for
reconsideration of McFarland’s joint venture and agency claims
in light of this opinion.
28
IV.
For the foregoing reasons, we affirm the judgment of the
district court in part and vacate and remand in part.
AFFIRMED IN PART,
VACATED IN PART,
AND REMANDED
29