The Seventh Circuit Court of Appeals put an end to a borrower’s tactics to overcome a mortgage loan default in Jackson v. Bank of America Corporation, 711 F.3d 788 (7th Cir. 2013). The case provides some good law for lenders/mortgagees. Specifically, the opinion addresses the claims/defenses of negligence, fiduciary duty, unconscionability and quiet title. Interestingly, the mortgagee had not yet filed a foreclosure action. Apparently the borrower attempted a preemptive strike by filing his own lawsuit to thwart any future loan enforcement suit by the mortgagee.
Negligence/fiduciary duty. The borrower first contended that the mortgagee “negligently evaluated . . . the ability [of borrower] to repay the loan,” including specifically the utilization of gross income rather than net income. In Indiana, claims of negligence involve three elements: duty, breach of duty and injury proximately caused by breach. To meet the first (relationship-related) element, the borrower contended that the mortgagee owed him a fiduciary duty. The Court noted that, under Indiana law, such a duty generally does not arise between a lender and a borrower. “A mortgage contract does not, on its own, create a confidential relationship between a creditor and a debtor.” Accordingly, the Seventh Circuit affirmed the District Court’s dismissal of the borrower’s negligence claim.
Unconscionability. The second assertion of the borrower was that the mortgage was “unconscionable” and should be set aside. Under Indiana law, an unconscionable (and thus unenforceable) contract is one that “no sensible man not under delusion, duress or in distress would make, and that no honest and fair man would accept.” The Court rejected the borrower’s claim with a nice discussion of unconscionable-related contract law in Indiana. The Court’s opinion touched upon the borrower’s suggestions that the mortgagee committed fraud based on the borrower’s lack of “specialized knowledge” required to evaluate whether the loan was in his best interests. The Court reasoned that the borrower had “not shown how this contract, which is so similar to untold numbers of other mortgage refinancing contracts, could possibly be one that ‘no sensible man not under delusion, duress or in distress would make, and that no honest and fair man would accept.’”
Quiet title. The borrower’s quiet title claim was odd, and the Court disposed of it with brief comments. From what I can gather, the borrower’s claim was an attempt to extinguish the mortgage from the chain of title. The borrower’s effort to pound a square peg in a round hole did not survive the mortgagee’s motion to dismiss. The opinion on this point is not particularly educational, primarily due to what the Court noted to be the borrower’s attempt to “cut new turf” in Indiana quiet title law. The Seventh Circuit did not allow any new turf to be cut.
Jackson is yet another recent Indiana opinion that helps lenders with early dispositions of borrowers’ attempts to delay the inevitable. And, federal courts appear to be more receptive than state courts to Rule 12(b)(6) motions to dismiss.
(Please forgive the absence of posts lately. My day job has put me on the road a lot this Spring and thus away from my blog.)