Implied Covenant Protects Defaulting Borrower

The Richmond U.S. District Court denies lenders’ motion to dismiss borrower’s complaint alleging breach of contract, equitable estoppel and constructive fraud in connection with the foreclosure sale of his home; the court says borrower stated a claim as to breach of the implied covenant of good faith and fair dealing existing in all valid and binding contracts in Virginia, as stated in Ward’s Equip. v. New Holland N. Am., 254 Va. 379 (1997).

In late 2007, borrower obtained a $162,000 federally insured home mortgage loan evidenced by a note secured by a deed of trust on his home. In April 2009, lender and the federal loan insurer entered a federally sponsored agreement for the Home Affordable Mortgage Program (HAMP). Also at this time, borrower began struggling with his mortgage and contacted lender in late 2009 and early 2010 for a modification. A lender representative informed him his request would receive priority if he defaulted and he withheld payments for April, May and June, according to the complaint. Lender denied modification and proposed to spread out the deficiency. Borrower was unable to make those payments and lender advised him to pay what he could Lender accepted borrower’s July payment of $1,000, but returned his check for August. Lender began foreclosure in July but later that month sent borrower HAMP modification documents and told him in August the sale noticed for that month would be put on hold. The property was sold to federal insurer which filed for eviction. Borrower sued in federal court for breach of contract, equitable estoppel and constructive fraud.

The district court dismissed all of borrower’s counts except breach of contract based on the implied covenant of good faith and fair dealing existing in all valid and binding contracts in Virginia as stated in Ward’s Equip. v. New Holland N. Am., 254 Va. 379 (1997). Following cases from other jurisdictions, the court held the HAMP agreement does not create a private right of action, nor does it confer third-party beneficiary status on the affected borrower under applicable federal contract law analysis. Borrower’s equitable estoppel count also fails for lack of changed position in reliance on the alleged misrepresentations as to withholding payments and postponing the sale. Borrower can proceed based on sufficiently alleging breach of the implied covenant of good faith and fair dealing in inducing default to increase chances of loan modification, making false assurances as to the status of his modification and postponing sale, and failing to follow HAMP guidelines. Borrower does not state breach of any common law duty requiring dismissal of his constructive fraud count under Mortarino v. Consultant Eng’g Servs., 251 Va. 289 (1996).

Acuna v. Chase Home Finance LLC (Spencer) No. 3:10cv905, May 16, 2011; USDC at Richmond, Va. VLW 011-3-278, 13 pp.