The Tennessee Appellate Court in Berry v. Mortgage Electronic Registration Systems, et al, No. W2013-00474-COA-R3-CV (Tenn. Ct. App. October 15, 2013), confirmed that a lender is not obligated to modify and restructure a mortgage loan under the Home Affordable Modification Program (HAMP) unless the borrower under the mortgage loan alleges the existence of a contract requiring the lender to restructure the mortgage in the event of a default.
In 2012, after Plaintiff defaulted on her 2004 mortgage, the lender informed her that foreclosure would commence. Plaintiff filed in Shelby County Chancery Court a complaint seeking declaratory judgment and obtained a temporary restraining order. After Plaintiff filed an Amended Complaint, defendants Mortgage Electronic Registration Systems, Inc. (MERS) and Wells Fargo Bank, N.A. (Wells), filed an Answer and a Motion for Judgment on the Pleadings. The Chancery Court entered an order granting the motion. Plaintiff then appealed that order.
On Appeal, Plaintiff initially argued that the Amended Complaint was sufficient to survive the motion because the Amended Complaint was sufficient to obtain a temporary restraining order. The Appellate Court rejected this argument, properly acknowledging that the TRO was entered ex parte the day before the scheduled foreclosure sale and was entered merely to preserve the status quo pending resolution of the underlying dispute. The Appellate Court noted that the standards governing a TRO and motions to dismiss are different.
In defending her HAMP claims under her claim for breach of good faith and fair dealing, the Appellate Court reiterated Tennessee law that “parties to a contract owe each other a duty of good faith and fair dealing as it pertains to the performance of a contract.” The Appellate Court also confirmed that in Tennessee, that duty does not create new contractual rights or obligations and cannot be used to circumvent or alter specific terms of the parties’ agreement. In noting that the duty is not an independent basis for relief, but merely an element or circumstance of recognized torts or breaches of contracts, absent a valid claim for breach of contract, there is no cause of action for breach of the implied covenant of good faith and fair dealing.
In this instance, the Appellate Court determined that Plaintiff’s cause of action for breach of the implied covenant was properly dismissed, as Plaintiff’s claim that defendants breached the implied covenant in failing to agree to a loan modification and failing to comply with the HAMP program did not allege a contract between herself and the defendants that required the restructuring of her mortgage loan in the event of default, and Plaintiff failed to even allege a breach of contract by defendants.
The Appellate Court determined that Plaintiff’s cause of action for intentional misrepresentation, or fraud, should not have been dismissed as Plaintiff asserted sufficiently-specific allegations of falsely-represented signatures on the deed of trust at the time of the recording of the trust deed, leading to the defendants not having the right to foreclose as they held no interest in the property. Additionally, the Appellate Court determined that it was at least plausible that Plaintiff could not have discovered the allegations until foreclosure was commenced, thus tolling the statute of limitations under Tennessee’s “discovery rule.”
To be clear, Plaintiff’s allegations of falsely-represented signatures on the deed of trust at the time of recording are the basis of the Appellate Court’s remand of the fraud action. Plaintiff’s assertion that defendants engaged in a pattern and practice of fraudulent conduct, including underwriting fraudulent mortgages, not following unstated requisite legal procedures, concealing unstated facts and somehow misleading investors were all deemed by the Appellate Court as insufficient to overturn the Chancery Court’s order.
The matter was remanded back to the Shelby County Chancery Court for further litigation as to the remaining claim of fraud based on intentional representation.