On December 14, the Supreme Court of Virginia reaffirmed in MCR Federal, LLC v. JB&A, Inc. that tort claims for actual and constructive fraud cannot stand where the source of the duty breached arises from the parties’ contractual relationship. The Court’s holding is consistent with established precedent and is beneficial to the mortgage servicing industry in Virginia where relationships with borrowers arise from loan contracts such as a promissory note and a deed of trust.

Bringing suit in tort for misrepresentations has the obvious advantage of greater damage awards and the possibly of punitive damages. However, in Virginia, the source of duty rule prevents “turning every breach of contract into an actionable claim for fraud.” (It is important to note that the source of duty rule does not bar a tort claim to the extent the breach is a statutory or common law duty.)

In MCR Federal, the Court analyzed the breach of warranties in a bring down certificate in an acquisition between two government contractors. The bring down certificate was a condition precedent to the sale, and the breach occurred at closing where the buyer falsely stated that a representation in the bring down certificate remained true. The trial court found the buyer liable for breach of contract and constructive fraud, and awarded damages and attorneys’ fees as equitable relief.

On appeal, the Supreme Court agreed with the buyer that any duty between the parties arose solely by virtue of the purchase agreement, barring the seller’s actual and constructive fraud claims. The Court noted that “[t]he fact that the delivery of the bring down certificate was a condition precedent to closing rather than a contractual duty, ‘does not take the fraud outside of the contractual relationship.’” But for the purchase agreement, the buyer had no duty to provide the seller with the certificate.

While the Court’s opinion also addressed causation and damages, its holding on the source of duty rule is particularly beneficial to the mortgage industry in Virginia where breach of contract claims are sometimes paired with claims of fraud.