The U.S. Court of Appeals for the First Circuit recently ruled that the economic loss doctrine barred a borrower's claims against a loan servicer and others for negligence and negligent misrepresentation, reasoning that the borrower failed to show how an exception to the economic loss doctrine applied to his claims that the defendants voluntarily assumed duties beyond the mortgage agreement to consider his loan modification application and to provide him with a reinstatement amount.
In so ruling, the Court noted that recognizing such duties would contradict the terms of the mortgage agreement allowing the lender to accelerate payments and to foreclose.
A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/12-2388P-01A.pdf.
Plaintiff borrower ("Borrower") obtained a home refinance loan that was later assigned to defendant savings bank and serviced by defendant loan servicer ("Servicer"). The mortgage agreement provided among other things that in the event of default, the loan could be accelerated and foreclosed, and that Borrower could reinstate the mortgage upon payment of any past due amounts, penalties, interest and fees.
Borrower defaulted on the loan, was able to obtain a loan modification, but subsequently fell behind on his payments a second time. Servicer then sent Borrower a letter informing him of the amount due and that additional fees would be assessed after a certain date. The letter did not specifically refer to a "reinstatement amount."
Shortly thereafter, Borrower allegedly received a letter from a foreclosure law firm ("Foreclosure Counsel"), informing him that the loan was being accelerated according to the terms of the loan agreement. Directing Borrower to Foreclosure Counsel's website, the letter indicated that Borrower could reinstate the loan, but did not provide a reinstatement amount. Borrower allegedly requested a reinstatement amount from Foreclosure Counsel, but never received one.
Next, having received a notice from Servicer of a scheduled foreclosure sale of the property, Borrower faxed Servicer a loan modification application. Borrower then allegedly exchanged communications with a number of Servicer representatives and was supposedly instructed in two separate letters to submit additional financial information. Each letter provided a different fax number for submitting the information. Per the instructions in the second letter, Borrower submitted the additional information to the number specified in that letter, but not to the number listed in the previous letter.
Servicer later allegedly contacted Borrower by phone to inquire about the status of the submission of the additional information. Borrower explained that he had submitted the information to the number listed in the second letter. Servicer allegedly instructed him to disregard that second letter and to resend the information to the number listed in the first letter, which Borrower did. Borrower allegedly heard nothing further and the foreclosure sale took place as scheduled.
Seeking damages as well as injunctive relief nullifying the foreclosure, barring the pending eviction, and allowing him to modify or reinstate the mortgage, Borrower filed suit claiming that Servicer and others were negligent in failing to provide him with a reinstatement amount and in mishandling his loan modification application. Borrower further claimed that Servicer engaged in negligent misrepresentation in connection with the second letter. Borrower also asserted a contract claim -- but later abandoned it -- based on Servicer's alleged failure to delay the foreclosure while reviewing his application for a loan modification.
Removing to federal court, the defendants moved to dismiss, arguing that Borrower's tort claims were barred by the economic loss doctrine and that they had breached no duties to Borrower. The lower court granted the motions to dismiss. Borrower appealed.
The First Circuit affirmed, concluding that no exceptions to the economic loss doctrine applied to salvage Borrower's tort claims.
Explaining that the economic loss doctrine prohibits tort recovery for purely economic or commercial losses deriving from a contractual agreement, the Court of Appeals went on to observe that in the absence of a specific duty assumed by a contracting party, no general duty exists to avoid negligently causing economic loss.
Accordingly, in noting the lack of clarity in New Hampshire law, the First Circuit observed that Borrower's claims essentially relied on an exception to the economic loss doctrine for assumed duties outside the contractual agreement. Specifically, Borrower's claims hinged on the alleged assumed duties to provide a reinstatement amount and to consider his application for a loan modification. In so doing, the Court concluded that New Hampshire's economic loss doctrine bars tort recovery for a breach of either of these alleged duties.
As the Court discussed, under the economic loss doctrine, even if the mortgage agreement to allow reinstatement necessarily included a promise to provide Borrower with a reinstatement amount upon request, a tort claim based on that contractual duty must fail because a party to a contract may not pursue tort recovery for purely economic or commercial losses stemming from the contractual relationship. Thus, pointing out that Borrower had abandoned his breach of contract claim on appeal, the Court stressed that Borrower could not recover in tort for breach of alleged duties that contradict the express terms of the contract, such as the right to accelerate the payments and foreclose in the event of default.
As the First Circuit explained, the alleged duty to process a loan modification application before foreclosure was not merely an additional duty, but one that actually contradicted the mortgage agreement by restricting Servicer's right to foreclose. Therefore, observing that New Hampshire does not recognize a statutory or common-law right to reinstate a mortgage, the Court refused to alter the terms of the contract by recognizing such alleged duties.
With regard to the negligent misrepresentation claim concerning the second letter, the Court acknowledged an exception to the economic loss doctrine for certain misrepresentation claims, but concluded that Borrower's claim fell outside that exception since Servicer's representations were made during the course of contract performance and related to the mortgage agreement itself in that the representations concerned the process by which the Servicer would decide whether to exercise the contractual right to foreclose. See Wyle v. Lees, 33 A.3d 1187, 1190-93 (N.H. 2011)(applying the negligent misrepresentation exception to situations in which the representations preceded the formation of the contract or related to a transaction other than the one that constitutes the subject of the contract).
Having thus concluded that no exception to the economic loss doctrine applied to Borrower's tort claims, the First Circuit affirmed the lower court's dismissal of the negligence and negligent misrepresentation claims.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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