Daily Development for Monday, November 1, 1999

Thanks to the redoubtable H.E. Peterson for tipping us on this one.

Daily Development for Monday, November 15, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

LENDER LIABILITY; GOOD FAITH AND FAIR DEALING: Potentially important Illinois appellate decision upholds tort duty of good faith and fair dealing by mortgage lender in dealing with borrower, bars application of economic loss doctrine, permits punitive damages.

Voyles v. Sandia Mortgage Corp., No. 2-98-0753 (Ill. App. 2nd District,11/4/99)

Borrower, a real estate licensee, owned a house financed by lender, but relocated to another town and leased the property to her attorney, giving the attorney power of attorney to deal with the property. The attorney commenced making payments on the loan. The lender, however, became suspicious that the property actually had been sold to the attorney, which would have triggered the due on sale clause.

According to the court's view of the record, the lender decided to make an issue of this case, and devised a scheme to put the property in default without attempting to prove a sale triggering the due on sale clause. The lender noted that the taxes had increased and that the tax escrow had been depleted. It increased the payment requirement without notifying the borrower or the attorney of this fact, and commenced rejecting payments that did not meet the new amount that it had set. Then it instituted a foreclosure.

In the meantime, the borrower, beset with personal problems including the death of her son and her subsequent adoption of her granddaughter, was attempting to refinance another house that she had bought in another city. Adverse credit information from the foreclosure action on her old house prevented her from qualifying for a loan. Later, when the lender finally relented and corrected the credit record, acknowledging that its problem was with the attorney, the borrower unexpectedly lost her job, and therefore was still unable to get a loan. This forced her to sell her home under emergency circumstances, which she claims led to a significant loss.

Borrower proceeded to sue lender on a variety of counts, including breach of the duty of good faith and fair dealing and tortious interference with prospective economic advantage. The trial court refused relief on both of these grounds, partly on the grounds that it concluded that the lender's acts were based upon a misunderstanding and were not intentional. But the trial court did award $10,000 damages based upon a theory of negligence in dealing with the credit reporting agencies.

Both sides appealed: Held: Plaintiff's appeals granted. Case made out a claim for breach of good faith and fair dealing and for tortious interference, defamation, and breach of the mortgage contract, and record supports finding breaches by defendant on each of these counts. The trial court is reversed and the case remanded solely for the purpose of finding damages. The $10,000 verdict is vacated in light of the fact that the new damages determination will be duplicative.

In making its finding the court noted that a recent Illinois case, Citicorp Savings of Illinois v. Rucker, 295 Ill. App. 3d 801, 808 (1998), permitted a case to go to the jury on the theory of a breach of the implied duty of good faith and fair dealing, so it concluded that such a theory of tort law does exist in Illinois. It characterized the duty as arising in circumstances in which the a contracting party is given broad discretion, and noted that such party has a duty, borne of the implicit understanding of the parties, to behave in a reasonable fashion in exercising that discretion.

The court rejected the defendant's theory that the economic loss doctrine bars recover in tort here. Under that doctrine, contract claims for economic loss cannot be made into tort claims. The court held that the tortious interference claim and the defamation claim both involve conduct that the defendant had a general tort duty to avoid, and consequently such damages are not barred by the economic loss doctrine. The court did not make such a finding, it should be noted, with regard to the claimed breach of the duty of good faith and fair dealing, perhaps the only ray of hope for lenders in an opinion that is certain to keep them up nights.

With respect to the trial court's finding that the defendant's conduct was "unintentional," the appeals court held that the defendant knew absolutely what it was doing in refusing to accept late payments and also in reporting to the credit reporting agency. The fact that the lender might have been no more than negligent in making the analysis that led it to take these actions does not detract from the deliberate character of its harmful actions. It knew that it was wrecking plaintiff's credit and it intended to do so.

Comment 1: The court actually is somewhat conservative in its description and application of the duty of good faith and fair dealing, so the editor will skip his usual diatribe on this score. The application of defamation and tortious interference in the credit reporting context likely also is not new, but the significant complete victory in convincing the appeals court the reverse the trial court's findings on these counts is certainly noteworthy. Most likely the appeals court was motivated by what it saw as in essence a breach of good faith and fair dealing in using the tax increase as a pretext to default the mortgage. Note that although the trial court had been "soft" on the defendant, it had made the critical finding that the defendant had not notified the borrower of the increased payments.

Comment 2: If this case stands on appeal, it will be a good one for the casebooks, as it encapsulates in a few paragraphs a wide range of causes of action for very common lender misbehavior regarding credit reporting. But the editor must admit that the fundamental offense - targeting this borrower and deliberately concocting a default in order to terminate the loan relationship - strikes the editor as outside the likely behavior of any rational institutional lender. If this case really went down as the plaintiff alleges, all the paranoid fears of all the credit victims of the nation's lenders are vindicated. They really are out there planning how to do you in!!

But the editor doesn't believe it. There was virtually nothing to gain and everything to lose by going after this borrower, especially when the lender knew from the outset that it was dealing with the borrower's lawyer. It seems particularly strange that the appeals court, from its distant vantage, felt so comfortable reversing all the critical findings of the trier of fact. What's really going on here?

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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