On January 15, 2016, the Fourth Circuit issued a published decision affirming summary judgment to the defendant national bank on plaintiff’s unconscionable contract claim under WVCCPA 46A-2-121. Plaintiff relied on a retroactive appraisal in an attempt to prove the loan was “predatory” because “the loan amount was in excess of the property value.”

The ruling is the first appellate decision to address the heavily litigated issue of whether the existence of a retroactive appraisal is sufficient to prove a violation of the WVCCPA on grounds the loan amount improperly exceeded the property value. Agreeing with Judge Goodwin’s analysis over prior decisions to the contrary in West Virginia, the Fourth Circuit held that a loan in excess of the value of a borrower’s property is not, by itself, evidence of substantive unconscionability. Specifically, the Court observed that the mere fact that a loan exceeds the value of the property does not make it substantively unconscionable because the loan does not accrue entirely to the lender’s benefit and lacks the “gross imbalance” and “one-sidedness” necessary to show unconscionability.

In its decision, the Fourth Circuit distinguished Brown v. Quicken Loans, Inc., 230 W. Va. 306, 737 S.E.2d 640 (W. Va. 2012), noting that its holding turned on “much more than the principal amount of the loan.” Importantly, the Fourth Circuit also affirmed the District Court’s decision that it did not need to consider evidence of procedural unconscionability once it had determined that the loan was not substantively unconscionable. Accordingly, the Fourth Circuit affirmed the District Court’s decision that the loan was not an unconscionable contract.

After denying plaintiff’s request to certify the question to the West Virginia Supreme Court of Appeals, the Fourth Circuit became the first court to squarely address and clarify unconscionable inducement under West Virginia Code 46A-2-121(1)(a). The Court held that the statutory language plainly supported such a cause of action, but that the evidence necessary to support a claim for unconscionable inducement is “heightened” and must consist of more than unequal bargaining positions, or other factors outside the control of the lender. Instead, the evidence to support a claim for unconscionable inducement must be based on “affirmative misrepresentations or active deceit.” The case was remanded to Judge Goodwin to determine this limited issue, which is an issue of first impression.

The decision provides clarity to the law of unconscionable contracts under the WVCCPA and, importantly, defends lenders against claims based on retroactive appraisals—a common litigation tactic in West Virginia that the Court has now discredited. The Fourth Circuit also clarifies, for the first time, the contours of a cause of action for unconscionable inducement, making it clear that the claim is akin to fraud and cannot be based solely on allegations of procedural unconscionability.

John Lynch and Jason Manning have represented national banks, lenders, investors, and servicers in hundreds of individual and class cases across the country, obtaining dispositive rulings for their clients on motions, at trial, and through appeal. The Financial Services Litigation team at Troutman Sanders has a national practice representing financial institutions in class action litigation and regulatory compliance.

A copy of the Court’s Opinion is attached here. Plaintiff was represented by Jennifer S. Wagner and Bren J. Pomponio of Mountain State Justice, Inc. The National Consumer Law Center, AARP, The National Association of Consumer Advocates, and The Center for Responsible Lending, were represented by Jason E. Causey of Bordas & Bordas, PLLC, and Jonathan Marshall and Patricia M. Kipnis of Bailey & Glasser, LLP, who filed amicus briefs.