It is an old story. Desperate borrowers hurl wild charges at lenders and servicers. One defense borrowers in New York have used on more than a few occasions is “fiduciary duty” – a technical claim whereby borrowers try to create a special relationship between lender and borrower which just doesn’t exist, then asserting that the lender breached this duty. All is not quite warm and fuzzy when borrowers are in default.
To be sure, both sides to a mortgage contract must honor their commitments, but it really doesn’t go beyond that. Case law in New York has been consistent on this issue, a subject explored at length at 1 Bergman on New York Mortgage Foreclosures, §1,01[a], with one case particularly worthy of note for this discussion, not because it is so recent, but rather because it addresses a problem servicers can encounter from time to time: See Standard Fed. Bank v. Healy, 7 A.D.3d 610, 777 N.Y.S.2d 499 (2d Dept. 2004)].
What makes this case a point of focus is that it dealt with a lender’s payment of taxes from an escrow account to the wrong town taxing authority, a miscue which can indeed happen. When the borrower found out about it and complained (understandably), it took the lender only a week after written notice to take its corrective action, which included notifying credit reporting agencies to remove derogatory information about the borrower’s credit and waiving late fees which had accrued because of the resultant failure to make mortgage payments.
Nonetheless, the borrower continued its default in payments and wanted to fight about it, charging “breach of fiduciary duty” for the bank’s error in handling escrow funds.
The court ruled that although the lender/borrower relationship does not normally give rise to a fiduciary duty, a lender as escrow holder of funds to pay property taxes may be held liable under this breach of fiduciary duty theory. However, although here the lender made a mistake, the error was corrected and in any event, a breach of fiduciary duty claim cannot be won unless actual damages are sustained as a natural and probable consequence of the breach. That didn’t happen in this instance.
So, while this fiduciary duty business may not usually be a problem for lenders, it could be in the arena of tax payments. But then, lenders and servicers are wise to fix any error as soon as it is discovered.
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.