Bergman on Foreclosure: Hidden Danger in Claim that "the Lender Said"

Bergman on Foreclosure: Hidden Danger in Claim that "the Lender Said"

Hidden danger to lenders lurks in a mortgage contract that allows a borrower's account of lender's oral statements to defeat a mortgage foreclosure action, as illustrated in Libertypointe Bank v. 75 East 125th Street [enhanced version available to subscribers]. This analysis by foreclosure expert Bruce J. Bergman includes the deficient language in the merger clause at issue in Libertypointe and sets out different language that would protect the lender. The author writes:

Can it be possible? Could a borrower defeat a mortgage foreclosure action with a tale about what this bank employee said or that banking officer promised? (One would think that the parol evidence rule and/or the merger clause in the documents would take care of that.) Although it is actually an established principle, the answer confirmed by a 2012 case is "yes" - depending upon how assiduously the mortgage contract was drafted.

No Shortage of Borrower Defenses

The rather stunning example in the cited new case is particularly troublesome - for lenders and servicers - in these extraordinary times when borrower defenses are ever more common and vociferous. While the surfeit of borrower-friendly statutory protections of recent years is premised upon the notion that borrowers are feckless, helpless victims of foreclosing behemoths, attorneys for lenders and servicers can attest that there is no shortage of borrower defensive thrusts which serve rather well to impede the foreclosure process.

Claim of Fraudulent Inducement in Libertypointe Bank v. 75 East 125th Street

In the case which elicited this sojourn, the borrower defendants asserted in an affirmative defense and counterclaim that they were fraudulently induced to sign the mortgage by misrepresentations of the lender bank's former president, including in particular his statement that the bank would not foreclose until the former president paid a pre-existing debt he owed to the borrowers' silent partner in the deal. Of course, such a promise directly contradicted the obligation to pay in the sacred written, executed, note and mortgage.

So who wins? Well, the preamble here gives it away. The borrower wins - at least to the extent that the relief sought was vacatur of the borrower's default in the action because the claim of fraudulent inducement was sufficiently meritorious.


Merger Clause Should Be Broad Enough

In the end, the case which torpedoed the lender and allowed the borrower to assert fraud in the inducement with an incredible claim of a bank's promise, was based upon a simple miscue. The merger clause could, and it would be added, should, have been broad enough to eliminate reliance upon any statements. The terse language in the mentioned case, though, was clearly not up to the standard. And so the lender was stuck with the problem of litigating a fraud in the inducement claim.

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