NJ Supreme Court: If Borrower Abides By Terms Of Settlement Agreement, Lender Must Modify Mortgage

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

Lawsuits arising out of foreclosures and mortgage modifications are common. (Even more common than lawsuits about gyms or health clubs if you can believe that.) Nearly every day there is a decision from the Appellate Division arising out of a residential foreclosure. Most of these fall into the same category — borrower defaults and loses home through foreclosure then challenges lender's standing to foreclose after the fact — but some are more interesting. That was the case with GMAC Mortgage, LLC v. Willoughby, a decision released yesterday by the New Jersey Supreme Court involving a mortgage modification agreement entered into to settle a foreclosure lawsuit.

Almost two years ago, I wrote a post about Arias v. Elite Mortgage, a lawsuit over the alleged breach of a mortgage modification agreements. In that case, borrowers entered into a mortgage modification agreement with their lenders that included a Trial Period Plan ("TPP"). As the name suggests, a TPP requires borrowers to make reduced monthly payments in a timely manner for a trial period, after which, if they make the payments, the lender agrees to modify their mortgage. In Arias, the Appellate Division held, as a matter of first impression, that if a borrower makes the trial payments under the TPP, the lender must modify the mortgage, and if it doesn't, the borrower can sue for breach. However, the holding was purely academic because the borrower in that case failed to make one of the trial payments in a timely manner so it could not sue.

In GMAC Mortgage, the New Jersey Supreme Court faced a similar situation with a much less academic result.

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No Pay, No Play: Defendant’s Failure To Advance Arbitration Fees Is A Material Breach Of Arbitration Agreement And Precludes Enforcement Of Agreement

by: Peter J. Gallagher (@pjsgallagher) (LinkedIn)

One of the more vexing procedural issues in arbitration arises when the other side refuses to pay its share of the arbitration fees. The arbitrator won't work for free so you are faced with a dilemma, advance the fees for the other side and try to recover them through the arbitration or have your arbitration dismissed. And, if you opt for the latter approach, can you then sue in court notwithstanding the admittedly valid and binding agreement to arbitrate? The New Jersey Supreme answered one aspect of this question in Roach v. BM Motoring, LLC, holding that defendant's refusal to advance arbitration fees as it was required to do under an arbitration agreement with plaintiffs was a material breach of the contract that precluded defendant from later trying to enforce the agreement.

In Roach, plaintiffs each purchased used cars, at separate times, from defendant. As part of their purchases, each signed a Dispute Resolution Agreement, which provided that "any and all claims, disputes or issues" would be resolved through arbitration. It further required that the arbitration be conducted "in accordance with the rules of the American Arbitration Association before a single arbitrator who shall be a retired judge or attorney," and that defendant would "advance both party's [sic] filing, service, administration, arbitrator, hearing, or other fees, subject to reimbursement by decision of the arbitrator."

After purchasing her car, Plaintiff Jackson filed an arbitration demand against defendant, alleging that defendant violated the Consumer Fraud Act. The AAA advised defendant that it was required to pay the applicable filing fees and arbitrator compensation, but defendant never did. Accordingly, the AAA declined to administer the claim and further advised (1) that it would not administer "any other consumer disputes" involving defendant as a result of defendant's failure to comply with the AAA's rules, and (2) that defendant should remove the AAA name from its arbitration agreement. Jackson never received a response from defendant's to her arbitration demand.

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It is Still Not a Breach Of The Duty Of Good Faith And Fair Dealing For Lenders To Enforce The Terms Of Their Loan Documents

by: Peter J. Gallagher (@pjsgallagher)

It seems like I read cases like this every few weeks: A borrower defaults on a loan, tries to work something out with the bank, but the bank for some reason decides not to work out a deal and instead decides to enforce the terms of the underlying loan documents (usually through foreclosure or some other means). The borrower then sues, alleging that the lender acted in bad faith by thinking about working out a deal, and maybe even taking some steps to do so, but eventually deciding not to. Although I have obviously summarized these cases in broad terms and the devil is often in the details, the result is almost always the same – the borrower loses.

The reason for this is simple. The law in New Jersey is well settled that a lender will not 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.

Try as borrowers might, New Jersey courts have repeatedly and consistently rejected efforts to hold lenders liable for violating the duty of good faith and fair dealing when those lenders have simply attempted to enforce the terms of their loan agreements.

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Borrower Can Sue Lender To Compel Loan Modification (But Only If It Does What It Promised To Do First)

by: Peter J. Gallagher (@pjsgallagher)

A recent published decision from the Appellate Division — Arias v. Elite Mortgage — resolved a question of first impression in New Jersey that is important as the State continues to dig its way out of the credit crisis. The issue in Arias involved mortgage modifications under the federal Home Affordable Mortgage Program, and specifically modifications that involve Trial Period Plan (“TPP”) agreements. As the name suggests, TPP agreements require borrowers who cannot make their regular monthly payments to make agreed upon reduced monthly payments in a timely manner for a trial period. Essentially, it allows borrowers to demonstrate to lenders that if their monthly payments are reduced then they can make their monthly mortgage payments. Accordingly, if they are able to make these payments during the trial period, then the lender agrees to modify their mortgage.

In Arias, Plaintiffs defaulted on their mortgage and then pursued a loan modification with their lender, which included a TPP agreement. However, the lender eventually refused to modify plaintiffs’ mortgage. Plaintiffs argued that this amounted to a breach of the promises the lender made in the TPP agreement, or alternatively, violated the implied covenant of good faith and fair dealing contained in the TPP agreement. The trial court rejected their claims and the Appellate Division affirmed.

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Appellate Division Holds That Buyer Can Sue Seller’s Broker For Failing To Relay Offer To Seller

by: Peter J. Gallagher (@pjsgallagher)

In a decision issued earlier this week, the Appellate Division reinstated a lawsuit against a real estate broker who failed to relay an offer from the buyer to its client, the seller. If you are thinking, as I was, "of course the court would do this, why wouldn't you be able to sue" then read on because the facts of the case make the trial court's decision to dismiss the complaint even more unbelievable. (Of course, at this point in the case, all we have are plaintiff’s allegations, which the court had to assume were true for purposes of evaluating the trial court’s decision on the motion to dismiss.)

In D'Agastino v. Gesher LLC, plaintiff wanted to buy a home in Jackson, New Jersey. The home, which had been foreclosed, was owned by the lender and was being offered for sale at $184,900. Plaintiff instructed his broker to contact the seller's broker and make an offer of $150,000. After receiving no response, plaintiff's broker faxed a written offer to the seller's broker, sent a confirming email to the broker, and eventually tried to contact the seller directly to confirm that the offer was received. None of these efforts were successful.

Seller's broker eventually responded and told plaintiff that the seller had lowered its price to $129,000 and suggested that plaintiff lower its bid. Plaintiff's broker said this "sounded fishy" and advised plaintiff not to lower the bid. Plaintiff took his broker's advice.

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