Third Circuit Affirms Foreclosure Judgment Finding Lender Had No Duty To Borrower To Monitor Property Inspections On Residential Construction Loan
In a case successfully litigated by Riker Danzig partner Jonathan Vuotto, the Third Circuit Court of Appeals recently affirmed the District Court of New Jersey’s grant of foreclosure judgment in favor of plaintiff, Bank of America, N.A., successor in interest to Merrill Lynch Credit Corporation, by and through its servicer and attorney-in-fact, PHH Mortgage Corporation (collectively, “lender”), finding that borrower failed to assert any meritorious defense or counterclaim and did not otherwise contest the core New Jersey elements of a prima facie mortgage foreclosure case. See Bank of America v. Westheimer, 2017 WL 1048054 (3d Cir. March 20, 2017). In the case, defendant mortgaged his New Jersey home and entered into a construction loan agreement (the “Agreement”) with lender in September 2008. The Agreement contemplated a construction period ending in March 2010, and any extensions of this deadline were subject to lender’s approval. The Agreement also contained sections that pertained to lender’s right to conduct inspections of the property during the pendency of the construction, as well as an integration clause and subsection entitled “Borrower-Lender Relationship,” which provided that lender “will not be considered . . . a partner, agent or joint venturer.” In 2012, lender filed for foreclosure, alleging that defendant had defaulted on the Agreement by failing to complete the improvements to his home by the agreed-upon date and subsequently failed to correct his defaults. Defendant filed an answer containing affirmative defenses and various state-law counterclaims, all of which “ar[ose] out of the [allegedly] negligent and otherwise improper manner and means by which [plaintiff] inspected and/or failed to inspect the [construction project] as a precondition of its disbursement of the Loan proceeds.” Defendant alleged that lender essentially conducted “sham” inspections and did not adequately monitor the project.
Lender filed a combined motion to dismiss defendant’s counterclaims and motion for summary judgment on its foreclosure claim. The district court granted lender’s motion in its entirety. Defendant appealed the district court’s decision and obtained a stay of foreclosure pending the outcome of his appeal.
On appeal, the Third Circuit noted that defendant did not “contest the core New Jersey elements of a prima facie mortgage foreclosure case,  such as the underlying existence of a mortgage debt, the validity of the mortgage, or default under the note.” Instead, defendant’s argument primarily focused on the existence of the alleged duty owed by lender to him under state law. However, the Third Circuit held that under New Jersey law, absent an egregious breach of good faith, there is “no duty on the part of lenders to disclose information they may have concerning the financial viability of the transactions the borrowers were about to enter.” Further, the Agreement specifically disclaimed any quality assurances arising from the inspections and defendant could not meaningfully show that lender owed a duty to conduct the inspections for his benefit, or that he reasonably relied on them for that purpose.