A Duty Not Owed By Lenders

Borrowers (and others as this alert will relate) enjoy claiming that lenders owe them a special level of duty or care.  While of course, lenders and servicers strive to be careful, forthright and caring, there are indeed legal limits to their responsibilities.  In this regard, the prevailing principle (in New York, and elsewhere) is that the relationship between borrower and lender is one of debtor and creditor and not a fiduciary relationship.  If there were such a special relationship it would create a closer degree of trust than actually does exist.  [For a review of case law on point and its practical consequences, see 1 Bergman On New York Mortgage Foreclosures §1.01[1][a], LexisNexis Matthew Bender (rev. 2008).]

Just how far some people try to push lenders’ supposed responsibilities and liabilities is illustrated by a recent case: Harris v. Adejumo, 36 A.D.3d 855, 830 N.Y.S. 2d 561 (2d Dept. 2007).

There, Alberta Harris (Harris) happened to be in foreclosure and was understandably anxious to sell her house.  Her attorney said he would help and found a buyer for $430,000.  At the closing, Harris claimed she did not read any of the papers and did not realize she sold the property to some other purchaser –  and for $575,000 – with that additional $145,000 never given to her.  (That purchase was funded in part  by a mortgage lender (“new lender”).

Claiming fraud, Harris sued her lawyer, the intended purchaser, the actual purchasers and divers others – including the new lender!!  New lender moved to dismiss the action against it because there was no allegation that it participated in or profited from the supposed scheme.  Oh, said Harris, if new lender had compared her signature on a closing document to that on the fraudulent contract, it would have seen a discrepancy, questioned the transaction and averted the fraud.

Could the new lender have had such a responsibility?  “Yes”, said the trial judge.  Of course not, held the appeals court.  As prospective mortgagee, new lender did not owe Harris a duty of care to examine and confirm the authenticity of Harris’ signature on the contract of sale.  Without such a duty, new lender was properly let out of the case.

But those assaults on lenders continue…

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.