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.