Mary Pat Gallagher, New Jersey Law Journal

Homeowners who enter into trial agreements to modify their mortgages under the federal Home Affordable Modification Program (HAMP) and comply with the terms can sue for breach of contract if a modification is denied and might even have a consumer fraud claim, a New Jersey appeals court has held in a precedential decision of first impression.

“While there are no reported New Jersey cases addressing the contractual status of a [Trial Period Plan] Agreement, case law suggests that an agreement that purports to bind a debtor to make payments while leaving the mortgage company free to give her nothing in return might violate the New Jersey Consumer Fraud Act,” Judge Susan Reisner, joined by Ellen Koblitz and Michael Haas, said in the Jan. 23 ruling in Arias v. Elite Mortgage Group Inc.  

Joshua Denbeaux of Denbeaux & Denbeaux in Westwood, N.J., whose chief area of practice is mortgage foreclosure defense but who was not involved in Arias, said he saw the decision as the Appellate Division “announcing to the world that the servicing industry is not going to be permitted in New Jersey to breach contracts and make false inducement promises to New Jersey homeowners without the court stepping in and protecting its citizens.”

Joseph Chang, who heads a Paterson, N.J., firm and represents the plaintiffs in Arias, said the decision “has removed a significant hurdle for homeowners seeking to sue banks in the New Jersey state courts.”

Previously, courts were dismissing claims by borrowers with valid mortgage modification claims on the theory that HAMP preempts state law contractual and other claims, but the decision has put that rationale to rest, Chang said.

Though the decision in Arias may be good news going forward for people in New Jersey who seek mortgage modifications, it did not help plaintiffs Leonardo Arias and Ruth Padilla because they failed to live up to their end of the bargain by not making the agreed payments, according to the opinion.

The appeals court affirmed the dismissal of their breach of contract lawsuit, reaching the same conclusion as the judge below but by a different route, as the panel pointed out.

Arias and Padilla fell behind on their mortgage and entered into a Trial Period Plan (TPP) agreement with Bank of America, the loan servicer, the opinion said.

HAMP requires borrowers to enter into a TPP before receiving a permanent mortgage modification. During the trial period, they have to make specified payments and provide required forms and documents.

Arias and Padilla agreed to trial payments of $1,860 each, by Oct. 1, 2009, Nov. 1, 2009 and Dec. 1, 2009, according to the opinion.

The agreement’s opening sentence said, “‘If I am in compliance with this trial period plan... and my representations in Section 1 continue to be true in all material respects, then the servicer will provide me with a home affordable modification agreement,’” according to the opinion. Similar language appeared elsewhere.

The effective date of the modification was to be the first day of the month in which the last payment was due, or Jan. 1, 2010, the opinion said. The TPP made clear that it was not a loan modification and that failure to strictly comply with its terms would result in denial.

For example, it said: “‘I further understand and agree that the servicer will not be obligated or bound to make any modification of the loan documents if I fail to meet any one of the requirements under this plan,’” according to the opinion.

Arias and Padilla’s first payment, made Oct. 15, 2009, was two weeks late and they sent $930 for the second one on Nov. 17, 2009 and nothing in December 2009, falling $2,790 short of the agreed total, the opinion said. The bank sent a letter on Jan. 20, 2010, giving them another month to make the monthly payments and supply missing documents.

They sent another $3,720 on Feb. 16, 2010, but with another $1,860 accruing each month of the TPP, fell further behind, by $6,510, according to the opinion.

On April, 27, 2010, the bank notified them they were not eligible for modification because they did not make the required payments.

Arias and Padilla sued in Bergen County Superior Court for breach of contract, as well as breach of the covenant of good faith and fair dealing.

In April 2013, Judge Joseph Conte dismissed the suit on summary judgment, finding that the TPP agreement was not a binding contract to modify the loan and that the bank was not obligated to provide Arias and Padilla with a modification based on its determination that they did not qualify for one.

Conte further found that the plaintiffs had no viable cause of action under the HAMP guidelines or for breach of good faith.

The appeals court, however,  concluded that the TPP agreement was “a unilateral offer,” by which the bank promised to give plaintiffs a loan modification, if they complied fully and timely with their obligations.

The panel followed Wigod v. Wells Fargo Bank N.A., decided in 2012 by the U.S. Court of Appeals for the Seventh Circuit, which held that a mortgage borrower can assert a common-law contract claim based on a bank’s failure to honor promises made in a TPP agreement.

Wigod rejected the bank’s arguments that it retained unbridled discretion under the TPP on whether to offer a modification and that there was no consideration for a promise to do so, noting that the debtor there agreed to provide additional financial information and attend debt counseling if asked.

The New Jersey appeals court also cited the state Supreme Court’s 2011  decision in Gonzalez v. Wilshire Credit Corp., saying that even though it involved a different factual scenario, it “strongly signaled its disapproval of post-foreclosure financing deals that essentially turned debtors into ‘cash cows’ without ever restoring their mortgages to current status.”

But the appeals panel affirmed the dismissal of Arias’ and Padilla’s claims because they “engaged in a pattern of nonpayment and inadequate payment which constituted a breach of the TPP Agreement and justified the bank in refusing to give them a loan modification.”

The panel found no breach of the duty of good faith and fair dealing either, saying the duty “does not alter the terms of a written agreement.”

Bank of America lawyer Aaron Bender, of Reed Smith in Princeton, N.J., referred a request for comment to company spokesman Richard Simon, who said, “We’re going to let the ruling stand on its own without comment.”

Peter Gallagher of Porzio  Bromberg & Newman in Morristown, N.J., a commercial litigator who has represented lenders and wrote about Arias on the firm’s “Real Property” blog, said he did not expect too much of an impact on lenders beyond spurring them to review their TPP agreements to ensure they are as clear as the one in that case.

For borrowers, the message is “you need to do what you said you would do in the TPP agreement or you will not get the modification,” he added.

According to statistics from the U.S. Department of the Treasury, many TPPs do not lead to modifications. Of the 2,246,680 trial programs nationwide since HAMP was launched in the spring of 2009 through the third quarter of 2014, 1,416,705—or about 63 percent— resulted in permanent modifications.