On Tuesday, May 7, 2014, the Montana Supreme Court rendered its decision in Morrow v. Bank of America, ushering in what could be a new era of tort liability for lenders and servicers.
The Morrows had retired to Montana in 2006 and built a home financed by Countrywide. They lost their source of income in the downturn in 2009, and – while still current on their loan – reached out to their lender to discuss a modification of their loan. First, the Morrows' claim they were told by Bank of America to skip a loan payment so that they would be eligible for a modification. Then, they were informed by a representative of Bank of America that "they were 'locked' for a modification with trial payments of $1,239.99" per month which the Morrows started paying in December 2009. A few months later Bank of America sent the Morrows a notice of acceleration. Another employee of Bank of America advised them that their account was "under review". They continued to make payments through February of 2011. The Morrows were invited to apply for the Federal Home Affordable Modification Program or HAMP but the notices of acceleration continued. On January 11, 2011, the Morrows were advised that modification of their loan under HAMP had been denied. Their final payment was rejected by Bank of America, and a sale of the property was scheduled.
The Morrows then sued Bank of America in state district court, asserting claims of breach of contract, negligence, negligent misrepresentation, and fraud, among others. The district court eventually granted the Bank's motion for summary judgment on all counts. The Morrows appealed to the Montana Supreme Court. The Supreme Court has now held that the district court erred in granting summary judgment to the Bank on several of the claims.
- The Court found that a bank that goes "beyond the ordinary role of lender of money and actively advises customers in the conduct of their affairs" may owe a fiduciary duty to a borrower. Going "beyond the ordinary role of lender" might include activities like advising a borrower to stop making payments, or to make lower payments and ignore foreclosure notices.
- The Supreme Court held the Bank could be negligent for the way it handled the Morrows' request for a modification of their loan. The Court stated that Bank of America had no duty to avoid foreclosure or to actually grant the modification of the loan. Instead, the Bank "owed a duty to manage the modification process in a manner that would not cause the Morrows to suffer loss or injury by reason of its negligence." A jury trial on this issue will be required.
- The Court also held that summary judgment on the Morrows' claim of negligent misrepresentation was granted in error. The Morrows allege that Bank of America made several false statements regarding the servicing of their existing loan and the status of the application for modification. The Court noted that "the allegations by the Morrows raise questions of fact regarding whether Bank of America 'exercise[d] reasonable care or competence' in obtaining or communicating the information" regarding their request for modification. A jury trial on that issue will be required.
- A jury trial will also be required on the Morrows' claims of fraud, constructive fraud, and violation of the Montana Consumer Protection Act (a statute that provides for treble damages).
- Bank of America pointed out to the Court that the Morrows have not been damaged – the mortgage has not yet been foreclosed. The Court refused to visit that question leaving it, instead, to the trial court and, presumably, the jury.
The case includes a fairly detailed recitation of lender liability case law. Many of the cases date to the 1980s and will cause some lenders to remember the days when lender liability was alleged by every disgruntled borrower. In Morrow v. Bank of America, the Supreme Court did little to undercut the decisions that ended the so-called "bad faith" era. Instead, it signaled to lenders and servicers that the way they service distressed loans will be scrutinized and may be the subject of negligence and fraud claims.
Every lender should read the full text of the decision which is available on the Court's website or from Holland & Hart upon request.