Can a Lender’s Failure to Provide a Promised Refinancing be an Unfair or Deceptive Trade Practice?
When a borrower asserts an alleged violation of N.C. Gen. Stat. § 75-1.1 against a lender, the claim often presents a familiar fact pattern. Frequently, the borrower alleges that the lender promised to refinance or modify the borrower’s loan and then broke that promise, causing injury to the borrower.
A borrower who asserts this type of claim usually faces several substantial hurdles to avoid dismissal or summary judgment. In Hetzel v. JPMorgan Chase Bank, N.A., however, a borrower’s 75-1.1 claim based on a bank’s alleged broken promise to refinance a real estate loan survived summary judgment.
This post analyzes Hetzel. For reasons that I’ll explain, the somewhat unique fact pattern led to a decision by United States District Court Judge Terrence W. Boyle that may have limited application in future cases.
The bank pays off the wrong mortgage
In Hetzel, the borrower owned multiple coastal properties. Those properties secured multiple loans to JPMorgan Chase Bank. The borrower started the process of refinancing the loans with another lender. The borrower thought that he could obtain better loan terms with the other lender.
The borrower successfully obtained a refinancing commitment from the new lender on one of the properties. The new lender sent the refinancing proceeds to JPMorgan to pay off JPMorgan’s mortgage on that property. Unfortunately, JPMorgan inadvertently paid off the mortgage on one of the borrower’s other properties, and not on the refinanced property.
Compounding the mistake, the borrower stopped making payments to JPMorgan for the mortgage on the refinanced property. The borrower claimed that he was unaware that the first mortgage had not been paid off.
Once he stopped paying on the first mortgage, the loan fell into arrears, and JPMorgan started foreclosure proceedings. JPMorgan also reported the borrower’s payment delinquencies to credit bureaus.
Eventually, the borrower discovered the payoff error and demanded that JPMorgan fix the problem. The bank worked to correct the misapplication of the proceeds. But the borrower alleged that JPMorgan further promised that it would refinance the borrower’s other properties should the other lender be unwilling to proceed with refinancing because of the error (i.e. because of the loan delinquencies JPMorgan erroneously reported).
Ultimately, neither JPMorgan nor the other lender refinanced the remaining loans. The borrower disputed his ongoing payment obligations to JPMorgan, and JPMorgan commenced foreclosure proceedings.
Among other defendants, the borrower then sued JPMorgan. The borrower asserted multiple claims against the bank, including a 75-1.1 claim based on JPMorgan’s alleged promises to the borrower that it would refinance the borrower’s remaining properties but failed to do so. The borrower alleged that JPMorgan’s promises were false and made “in an unfair attempt to delay plaintiff from seeking legal redress.”
The borrower filed his suit in Carteret County Superior Court. With the consent of the other defendants, JPMorgan removed the case to the United States District Court for the Eastern District of North Carolina.
The borrower’s 75-1.1 claim survives summary judgment
After several rounds of motion practice and amended pleadings, JPMorgan ended up as the lone defendant at the close of discovery. JPMorgan filed a motion for summary judgment. Judge Boyle granted summary judgment to JPMorgan on certain claims, but denied summary judgment as to the 75-1.1 claim.
Significantly, Judge Boyle found that the bank did not have a contractual obligation to modify the loans. Judge Boyle opined that there cannot be a 75-1.1 claim based on a failure to modify a loan or contract if the lender has no obligation to make the modification.
The court allowed the 75-1.1 claim to go forward, however, based on JPMorgan’s alleged promises that the borrower would receive a loan modification. Judge Boyle indicated that there was “just enough” evidence to allow the 75-1.1 claim to make it to the jury.
Although it is notable that the court here allowed the 75-1.1 claim to survive, this case presents a slightly different fact pattern than in other cases. The borrower here was able to raise a genuine issue of material fact that JPMorgan was responsible for the borrower being unable to refinance or modify the loans in the first place. In allowing the borrower’s negligence claim to also survive summary judgment, Judge Boyle determined that the lender’s alleged misapplication of the loan proceeds could give rise to a duty of care that the lender would not otherwise owe to the borrower.
It also does not appear that the parties briefed whether the borrower had actually or reasonably relied on any statement by the bank. As we have pointed out in previous posts, the North Carolina Supreme Court has held that both actual and reasonable reliance are necessary if a 75-1.1 claim is premised on misrepresentations.
In Hetzel, the court found that the lender may have owed a duty to the borrower that would not normally arise in the debtor/creditor context. It will be left to other courts to explore the significance of that special duty on a lender’s liability under 75-1.1—the parties in Hetzel settled at mediation before trial.
Author: George Sanderson