Federal Home Loan Mortgage Corporation v. Moye

97-1847 (U.S. Dist. Ct. D. N.J. 1999) (Unpublished)
  • Opinion Date: August 17, 1999

MORTGAGES; FRAUD—Telling a borrower that a new mortgage would be granted at the expiration of an existing mortgage and failing to grant the new mortgage is not a representation of a past or present fact and therefore may not constitute a basis for actionable fraud.

After purchasing a property in violation of the due on sale provision in a first mortgage, the buyer negotiated a “Modification Agreement” with the first mortgage lender. The buyer testified that at the time of the modification it was told that it would have to sign an “Assumption and Modification Agreement and be personally liable for 25% of the mortgage debt.” The buyer also testified that it was assured that it would be granted a new mortgage upon the expiration of the modified mortgage. Further, it was told that for “obvious reasons,” reference to the new mortgage could not be put in writing, but that it would be marked on the file. When the term of the modified mortgage expired, no new mortgage was tendered and the buyer failed to pay the remaining balance under the existing loan. A foreclosure action was commenced and the buyer defended by stating that it would not have entered into the Assumption Agreement but for the lender’s purported oral representation that it would be granted a new mortgage upon expiration of the modified mortgage. The Court agreed that contracts, such as the Assumption Agreement, are subject to rescission when they are the product of fraud. In addition, the fraud may be either legal or equitable. On the other hand, “[t]o establish legal fraud, a plaintiff must prove a ‘material misrepresentation of a presently existing or past fact made with knowledge of its falsity, with the intention that the other party rely thereon, and he does so rely to his damage.’” Here, the Court believed that the buyer could not establish its claim. Although the buyer suggested in its counterclaim that the lender’s material misrepresentations rose to the level of fraud, there was no showing that the lender, through its employee, “intended to fraudulently induce [the buyer] into entering the Assumption Agreement. Because the intent to defraud is an essential element of legal fraud, the buyer’s admission “that there was no intention on behalf of the lender effectively foreclosed its access to that claim.” Further, the buyer was unable to prove a claim of equitable fraud in light of the nature of the alleged misrepresentations. “Instead of a representation as to a past or future fact, the alleged misrepresentation at issue in this case is plaintiff’s ‘assurance that the mortgage would be recast, renewed or extended upon the expiration of that term, which was to be [a given date].’” Because this assurance was directed to a potential future event, it was not a representation as to a past or present fact. Consequently, the buyer was unable to prove its claim of fraud, and the foreclosure was permitted to go forward.