Today, the Appellate Division provided another reminder that it is not “bad faith” for a lender to abide by the terms of its mortgage with a borrower. In Warner v. Sovereign Bank, borrowers fell behind on their residential mortgage and contacted their lender to request a modification. While their request was under review, the lender filed a foreclosure complaint. The lender eventually denied the borrower’s request for a modification, but the two sides entered into a forbearance agreement.
The borrowers claimed — without evidential support according to the Appellate Division — that the lender required, as a condition of its agreeing to review their request for a modification, that borrowers not list their home for sale. Therefore, after their loan modification request was denied, the borrowers sued the lender claiming, among other things, that the lender acted in bad faith by initially not allowing them to list their home for sale and for then not providing them with a timely answer about their request for a modification. The borrowers claimed that both of these actions prevented them from selling their home, which caused them to sustain a substantial loss of their equity.
The court rejected this claim, holding as follows:
Plaintiffs, by urging us to find that defendant had a good faith duty to affirmatively cooperate with their efforts to sell their home by refraining from foreclosing on the mortgage, are in effect asking us to expand the existing duty of good faith to create additional obligations on the parties that counteract the terms in the mortgage. This we will not do. The duty to cooperate exists only in relation to performance of a specific contract term. As a matter of law, there cannot be a breach of the duty of good faith when a party simply stands on its rights to require performance of a contract according to its terms.
This is just the latest example of the well-settled principle of New Jersey law that a lender cannot generally be deemed to have acted in bad faith when it seeks to enforce the terms of a note or mortgage as written. Stated differently, lenders cannot be barred from enforcing loan and mortgage documents merely because they seek to enforce their express contractual rights. Indeed, “a creditor's duty to act in good faith does not extend to foregoing its right to accelerate upon default or otherwise compromising its contractual rights in order to aid its debtor.” Glenfed Financial Corp. v. Penick Corp. For instance, in Creeger Brick & Building Supply, Inc. v. Mid-State Bank & Trust Co., — a decision cited by the Appellate Division with approval in Glenfed — a Pennsylvania appeals court held:
. . . a lending institution does not violate a separate duty of good faith by adhering to its agreement with the borrower or by enforcing its legal and contractual rights as a creditor. The duty of good faith imposed upon contracting parties does not compel a lender to surrender rights which it has been given by statute or by the terms of its contract. Similarly, it cannot be said that a lender has violated a duty of good faith merely because it has negotiated terms of a loan which are favorable to itself. As such, a lender generally is not liable for harm caused to a borrower by refusing to advance additional funds, release collateral, or assist in obtaining additional loans from third persons. A lending institution also is not required to delay attempts to recover from a guarantor after the principal debtor has defaulted.
In other words, if a borrower accuses a lender of bad faith simply because the lender enforced its rights under the plain language of the relevant note and mortgage, the result will generally be the same as it was in the decision the Appellate Division handed down today.