Fraud And Breach Of Mortgage

DATE PUBLISHED

1 August, 2005

CATEGORY

Mortgage Lender and Servicer Alerts

It is hardly unheard of that some unscrupulous borrowers can lie, scheme and generally abuse the lending process.  When that chicanery is combined with mortgage default (as is so often the case), the lender or servicer who may have been badly burned sometimes asks the attorney to “also sue for fraud”.

That sounds like a good idea, but it really can’t be done and if it is attempted, it will only lead to greater legal expenditure and waste of time in the foreclosure process.  So it is helpful to know the applicable rule as highlighted by a recent case [Lee v. Matarrese, 17 A.D.3d 539, 793 N.Y.S.2d 457 (2d Dept. 2005)].

The controlling principle is that a cause of action for fraud cannot be maintained where the only fraud relates to a breach of contract.  (And a mortgage is a contract, the foreclosure action in essence suing for a breach of that contract.)

Having said that, there is an exception which under unusual circumstances might be helpful.  A cause of action for fraud can be separated from a claim on a contract when the legal relations binding the parties is created by utterance of a falsehood, with the intent to defraud, reliance by the party who was defrauded with the cause of action entirely independent of the contract between the parties.

In most instances, where a defaulting borrower has also perpetrated a fraud, the fraud will be intertwined with the mortgage contract.  In any event, why bother with trying to prove fraud when breach of the mortgage is usually so apparent?  Then, too, the property is already pledged as security for the debt.  Of course the goal in the end is to proceed as quickly as possible at minimal cost.

In the end, mortgage foreclosure is most often the best and most efficient path – not a claim for fraud, no matter how satisfying it may seem as a method to send a message.


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.