The U.S. Court of Appeals for the Fifth Circuit recently rejected common law fraud and fraudulent inducement allegations brought by two borrowers arising from their default on a mortgage loan. 

In so ruling, the Fifth Circuit affirmed the district court's order granting summary judgment in the mortgagees' favor due to insufficient evidence of damages, and held that alleged misrepresentations in the course of loan modification efforts did not increase the arrearages as the arrearages would otherwise have been due under the terms of the mortgage loan.

A copy of the opinion is available at: http://www.ca5.uscourts.gov/opinions/pub/15/15-50515-CV0.pdf

Husband and wife borrowers purchased their home with a mortgage loan in 2008 and defaulted in 2011. The servicer then accelerated the mortgage and started foreclosure proceedings.

During initial negotiations to modify the mortgage pursuant to the federal Home Affordable Modification Program ("HAMP"), the mortgage servicer allegedly represented to the borrowers that their loan was ineligible for modification pursuant to Texas law. The servicer agreed to a repayment plan, but the borrowers made only one payment pursuant to that plan and then re-defaulted.

In November of 2011, the servicer informed the borrowers that their loan was in fact eligible for HAMP modification. The foreclosure sale had been rescheduled four times while the parties negotiated, but was then re-set for December 2011. The borrowers submitted the required application materials, but the servicer allegedly told the borrowers their application could not be processed in time to avoid the December 2011 foreclosure sale.

The borrowers sued the mortgagee and servicer in Texas state court in September of 2013 and the defendants removed the case to federal district court.  The mortgagee defendants moved for summary judgment and the magistrate judge recommended the motion be granted, except for the claims for common law fraud and fraudulent inducement, reasoning that a genuine issue of material fact existed as to whether the misrepresentation about the loan's HAMP eligibility prevented the borrowers from selling the house or induced them to enter into the failed repayment agreement.  The mortgagee defendants objected to the report on the basis that any damages were too speculative.

The district judge rejected the magistrate judge's recommendation on the fraud and inducement claims, reasoning that the borrowers had withdrawn their claim for mental anguish damages and there was insufficient evidence of other damages to withstand summary judgment. The borrowers appealed.

On appeal, the Fifth Circuit rejected the borrowers' first argument that they sustained damages in the form of lost time and postage expenses because the borrowers offered no evidence that they actually incurred the alleged damages or the amount of the alleged damages.

The Court also rejected as too speculative the borrowers' second argument that they were deprived of the opportunity to sell their home because, once again, they offered no evidence that they intended to sell the house and for how much.

The Fifth Circuit then rejected the borrowers' third argument that the servicer's alleged misrepresentations regarding HAMP eligibility caused the arrearage to accumulate because, although the monthly amount increased under the failed repayment plan, the total amount of the mortgage obligation remained the same.  Accordingly, arrears were not damages because they were already owed under the original, valid mortgage loan.

The Court also rejected as too speculative the borrowers' argument that they suffered damages in the form of the difference between their monthly payments under the mortgage and the lower payments they would have had after a HAMP modification, reasoning that they offered no evidence that the servicer had offered them one, that they accepted it, or what the terms were.

The borrowers final argument, that the district court erred by not granting them a continuance to allow discovery and an opportunity to amend their pleading, also failed because, reviewing the magistrate's decision for "plain error," the Fifth Circuit found that even if the denial was an obvious error that affected substantial rights, it would not exercise its discretion to correct the error because the borrowers "filed only a one-line request for a continuance without any supporting evidence regarding the need for additional discovery or why existing discovery had been incomplete."

Finding no error, let alone any plain error, the Fifth Circuit affirmed the district court's denial of the continuance and its grant of summary judgment in the mortgagee defendants' favor.