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Chemical Mortgage Company v. D’Angelo

A-1149-98T1 (N.J. Super. App. Div. 2000) (Unpublished)

LOANS; FRAUD; AGENCY—Where an agent’s interests are opposed to those of its principal, the presumption is that it will conceal its knowledge; consequently, a loan broker or agent’s fraudulent acts are not necessarily imputed to the lender.

This case involved the foreclosure of the last of a series of four loans, first arising out of a home improvement contract. The loans were arranged over an eighteen month period by a single broker, with each subsequent loan refinancing the prior loan. The borrower was in his late fifties, had a sixth grade education, and earned a modest monthly salary as a packer for a manufacturing company. The first three loans were later found to be unconscionable. The final loan, which was the subject of this litigation, was arranged by the broker primarily to pay off the most recent of the loans, which the broker “probably knew would be in jeopardy.” The loan broker obtained the financing with a lender which assigned the mortgage to a bank pursuant to a contractual arrangement. Aside from this loan, there was no evidence of any relationship between the loan broker and the contractor and the new lender or the bank. The loan was entirely processed by the loan broker and there was no direct contract by the new lender or the bank with the homeowner. Unlike the prior three loans, there was no home improvement contract associated with this final loan. It was fully amortized on a thirty year term at an interest rate of 8.625 percent. The loan charges and transaction fees were significantly less than those of the second and third transactions. In response to a foreclosure of this fourth loan, the homeowner alleged that the three prior financial transactions were violative of the Consumer Fraud Act and the Federal Truth-in-Lending Act. The homeowner contended that the final lender (who had assigned the loan to the bank) was involved in the contractor’s and broker’s “continuing fraud and unconscionable conduct” against him. He further alleged that the foreclosing bank was subject to all claims and defenses that he had against the fourth lender and the loan broker. The lower court granted summary judgment in favor of the homeowner, finding that “it was through this last loan [the bank loan] that [the loan broker] was able to launder all of its activities with respect to [the homeowner].” The lower court was also concerned that the bank had arrangements through an origination and sale agreement with the final lender and that the final lender had acted as the bank’s agent for the origination of 741 mortgage loans over a four year period. Further, the lower court believed that the bank had permitted the final lender to operate illegally in New Jersey, failed to stop the final lender from so operating, and apparently took no steps to insure that the final lender was licensed in New Jersey. Instead, according to the lower court, the bank accepted mortgages, or at least this mortgage, from New Jersey. Further, the lower court found out that the final loan broker was the agent for the bank and, even if it weren’t the agent, the bank was a party to the loan transaction and, as such, was subject to all of the claims and defenses of the homeowner.

The Appellate Division was concerned with three aspects of the lower court’s determination. First, the lower court articulated no factual predicate (except the admitted unconscionability of the three prior loans) when holding that the bank transaction was unconscionable. Second, while the lower court found the bank “was directly involved in the transaction, that finding [was] in the context of its relationship with [the final lender].” This was despite the written agreement between the two entities which expressly described their relationship as that of an independent contractor. Lastly, the Appellate Division was troubled by the lower court’s imputation of all of the earlier entities’ knowledge and involvement in the prior transactions to the bank as forming the basis for the consumer fraud judgment against the bank. “That imputation was predicated upon the conclusion that [the broker], as the broker for the deal, became [the bank/final lender’s] agent or subagent.” The Court reversed the summary judgment because it was not premised upon a finding of independent unconscionability or other illegality of the bank’s loan per se. The fact that the final lender was not licensed in New Jersey was not a basis for the summary judgment. Further, although it is well settled that knowledge of an agent is chargeable to its principal, wherever the principal, if acting for itself, would have received notice of the matters known to the agent. The Court, however, saw no evidence that in the final loan transaction the broker learned anything from the processing of the final loan that the bank would have learned had it processed the loan itself. The loan application showed that the homeowner was applying for a six month adjustable rate mortgage. His credit report showed only one of the earlier loans. The applicant (homeowner) reported the third mortgage of the series. The homeowner’s asset information was verified, as was his income. Consequently, there was nothing in the loan processing documents that showed the earlier loan history. Nothing showed that the prior transactions were laced with “flipping” activity or that the loan broker was the creditor to be benefitted by the refinancing. According to the Court, “[a]ll of that information was, or [sic] course known by [the loan broker] but it is not information learned during the course of its subagency role in the [final bank] loan.” Further, even though all of that prior knowledge might otherwise be imputable under principal and agency law, there is an exception to that imputation. Where “the agent’s interests are opposed to those of his principal, the presumption is, not that he will communicate his knowledge, but that he will conceal it.” Consequently, the Court held that under the circumstances the applicable law did not permit imputation of the prior fraudulent activity. Although the Court recognized that there are certain circumstances that do not permit a principal to escape the imputation of its agent’s fraudulent knowledge and conduct, none of the circumstances that the Restatement (Second), Agency §282 (1958) recites pertained in this case.


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