The U.S. Court of Appeals for the First Circuit recently upheld the dismissal of borrowers' claims against a mortgage lender under Chapter 93A of the Massachusetts consumer protection statute, and for breach of the implied covenant of good faith and fair dealing.
In so doing, the Court ruled that: (1) because borrowers sent the lender a demand letter under Chapter 93A five years after they obtained their mortgages, the four-year statute of limitations under the consumer protection statute barred their consumer protection claim; and (2) because borrowers' complaint alleged only that lender's wrongful conduct supposedly occurred prior to borrowers' execution of their mortgage loans, the implied covenant of good faith and fair dealing did not apply to their claims.
A copy of the opinion is available at: http://www.ca1.uscourts.gov/pdf.opinions/12-1462P-01A.pdf
Plaintiffs borrowers ("Borrowers") took out two mortgages from defendant mortgage lender ("Lender") to purchase a residence in Massachusetts. The first lien was an ARM with a starting interest rate of 6.75%. The second mortgage was a fixed rate loan. Over five years after the loan transaction closed, and citing Chapter 93A of the Massachusetts consumer protection statute, Borrowers sent Lender a demand letter alleging that Lender had failed to adequately disclose the terms of the loans before they signed the loan papers. Borrower sought damages of "at least $100,000" plus interest, costs and attorney's fees. Lender rejected the claims. Borrowers filed suit in federal court.
Borrowers' complaint alleged that Lender had breached the implied covenant of good faith and fair dealing under Massachusetts law, and had violated Chapter 93A of the Massachusetts consumer protection statute. See Mass. Gen. Laws ch. 93A, §§ 2, 9 ("Chapter 93A"). Their injury, Borrowers claimed, consisted of the payment of too much interest on "economically unviable" loan terms.
Borrowers further claimed that, prior to the loan closing Lender had failed to provide Borrowers a proper commitment letter, good-faith estimate, or other documents required by the federal Real Estate Settlement Procedures Act, and that Lender "knew or should have known" that the property appraisal was "too high." See 12 U.S.C. §§ 2601-2617.
Lender filed a motion to dismiss, arguing that Borrowers had failed to allege any acts on Lender's part that breached the covenant of good faith and fair dealing or violated Chapter 93A. Lender also argued that the statute of limitations had run on the consumer claim.
Borrowers failed to respond. The lower court dismissed. Borrowers later sought reconsideration, which the lower court denied. Borrowers appealed. The First Circuit affirmed.
Noting that the implied covenant of good faith and fair dealing is implicit in every contract, and provides that neither party to a contract may interfere with the right of the other party to receive the benefit of the executed contract, the First Circuit pointed out that the doctrine governs only post-contract conduct of the parties. In so doing, the Court reiterated the common-law rule that the covenant may not be invoked to alter the terms of an existing contract. See, e.g., Anthony's Pier Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 820 (Mass. 1991); Massachusetts Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 412 F.3d 215, 230 (1st Cir. 2005); Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 805 N.E.2d 957, 964 (Mass. 2004).
Pointing out that Borrowers had received the "fruits" of the loan transactions, and that the supposedly improper conduct occurred before the contracts existed rather than in the performance of the terms of the contracts, the Firs Circuit upheld the lower court's dismissal of the good faith and fair dealing claim.
The Court next addressed the Chapter 93A claim that Lender had engaged in unfair or deceptive acts or practices causing Borrowers economic injury. Although the First Circuit noted that the lower court's dismissal was based on Borrowers' failure to plead acts that were unfair or deceptive, and on the absence of a causal connection between Lender's supposed acts and Borrowers' alleged damages, the Court upheld the dismissal because the four-year statute of limitations period under the Massachusetts consumer protection statute had run before Borrowers filed suit.
In reaching this conclusion, the First Circuit pointed out that the period started running on the date Borrowers signed their loan agreements, that they sent the required Chapter 93A demand letter more than a year after the limitations period had expired, and that in their motion for reconsideration Borrowers never provided a basis for tolling the limitations period under the so-called discovery rule or the fraud exception.
With respect to the potential bases for tolling the limitations period, the First Circuit noted, first, that the discovery rule applies only in situations where the injuries are "inherently unknowable" at the time of the occurrence, which was not the case here as the interest terms were readily apparent at the time Borrowers signed their loan contracts. Second, the Court noted that nothing in Borrowers' pleadings suggested that Lender engaged in fraud of any sort to justify applying the fraud exception. Accordingly, the First Circuit also upheld the lower court's dismissal of the Chapter 93A claim, but on different grounds.
Ralph T. Wutscher
McGinnis Wutscher LLP
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