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Sample Chapter from "23 Legal Defenses to Foreclosure"
Defense #5: Breach of Contract
DEFINED
“Breach of contract” developed as a means of excusing a party’s performance under a contract when the other party breaches its obligations and can be applied as a defense to foreclosure.
Contracts are formed when parties make an agreement and something a value is exchanged by each party.1 In mortgage transactions, the lender agrees to provide money, in exchange for the borrower’s promise to repay the money, and a promise that the loan will be secured by real property. The contract between the parties is extensive, with both the Note and Mortgage (or Deed of Trust) setting conditions between the parties. When one of the parties breaches a condition of the contract, then the other party will seek to enforce its rights. For example, when the borrower stops making payments, the lender forecloses.
Neither party may interfere with the other party’s ability to perform under the contract without risking their own breach of contract. If a party does interfere, that interference may be an excuse for the other’s non-performance. In mortgage lending, the lender may not interfere with the borrower’s ability to make his or her payments within the confines of the contract. For example, if a lender begins to force-place insurance on the property at an excessive rate against the covenants of the mortgage, the lender would be in breach of the contract. If the cost of that insurance is the cause of the borrower’s inability to make his or her payments, then the borrower’s default was caused by the lender’s breach of contract. This is a defense to foreclosure. The borrower can claim the lender’s breach of contract is the cause of the foreclosure, and therefore his default should be excused. (Note: this type of breach forgives the default, but the normal payments will still need to be made up by the borrower.)
The borrower should use breach of contract to supplement his or her other defenses under other laws in an attempt to nullify the contract. The courts usually have broad discretion to remedy breaches of contract, so it is wise to include it if the borrower appears to have grounds.
To show breach of contract, a party claiming breach must generally demonstrate as a matter of law that a valid contract exists, including its essential terms, that the other party breached a duty imposed under the contract, and that damages resulted.2
SPOT IT!
If the borrower includes a claim under a different chapter of this book in defending the foreclosure, the borrower may be well served to include a claim for breach of contract, in addition to an affirmative defense for breach of contract. Law students spend a year or more on contract law alone, so a detailed look into breach of contract is not possible here.3
POTENTIAL RECOVERY
The courts have great leeway in providing remedies for breach of contract. A court can order the contract void, can order specific performance, or can order damages be paid. It could also amend the contract, or strike the offending terms.
STRATEGY
A breach of contract claim gives the court great leeway as to the remedy it can award, so a borrower would be wise to raise breach of contract as a foreclosure defense where he or she can.
APPLICABLE LAW OR CIVIL RULE
Each state has its own set of laws on what constitutes a breach of contract. These laws will include elements, such as the ones listed below under “Elements.” Federal courts will use the state law of the state in which the contract was formed, which would likely be the state in which the property and borrower resides.4
ELEMENTS
Pennsylvania law (and generally): To show breach of contract, a party claiming breach must demonstrate as a matter of law that:
1. A valid contract exists, including its essential terms,
2. That the other party breached a duty imposed under the contract, and
3. That damages resulted.5
Illinois law: "(1) the existence of a valid and enforceable contract; (2) its performance of the contract; (3) breach of contract by the other party; and (4) resulting injury."6
Florida law: “(1) the existence of a contract, (2) a breach of the contract, and (3) damages resulting from the breach.”7 “In addition, in order to maintain an action for breach of contract, a claimant must also prove performance of its obligations under the contract or a legal excuse for its nonperformance.”8
Ohio law: in order to succeed on a breach of contract claim, the plaintiff must show (1) the existence of a binding contract; (2) that the plaintiff performed its contractual obligations; (3) that the defendant failed to fulfill its contractual obligations without legal excuse; and (4) that the plaintiff suffered damages as a result of the breach.9
Searching the internet may not yield a current version of the elements. Going to a law library (any librarian will tell you the closes law library – usually at the local court house or law school) and using Lexis or Westlaw would provide the most current cases on point.
DEFENSES IN GENERAL
Breach of Contract can be used as a shield or a sword in foreclosure, depending on your objectives. In a foreclosure action, the borrower would (if he or she has grounds), want to list a breach of contract defense under the affirmative defenses section. Placing it here would put the bank on notice that it did something wrong that caused it to breach the contract, thus excusing the borrower’s performance under the contract. (i.e., the borrower wasn’t obligated to make payments any longer due to the bank’s error.)
Breach of contract can also be added as a counterclaim, using it to secure damages for the borrower from the bank. As a counterclaim, the borrower is suing the bank for its errors. Here, the borrower is saying the banks errors are so egregious that they constitute a material breach of the contract.10 If the borrower is alleging any TILA, HOEPA, RESPA, or other similar claims, he or she should also allege breach of contract in an attempt to nullify the contract and recover all money paid. Even if the TILA violations don’t amount to rescission, a breach of contract finding might enable damages equivalent to rescission (and possibly rescission itself).
DEFENSES
Place this defense under the heading “Affirmative Defenses.”
AFFIRMATIVE DEFENSES
An affirmative defense for breach of contract might read like this:11
[paragraph no.] Defendant’s performance under the contract is excused due to plaintiff’s breach of contract.
STARTER DISCOVERY
You may wish to obtain information surrounding the breach of contract that is alleged, such as training manuals, manuals of loan closing procedure, or other materials that may support an allegation that the bank breached its contract with the borrower. If the breach feeds from a breach under another chapter of this book, you may wish to reference the suggested discovery within those sections.
REQUESTS FOR ADMISSIONS
[paragraph no.] Admit the mortgage creates a binding contract between the plaintiff and the defendant.
[paragraph no.] Admit the plaintiff materially breached the contract between the parties when it…. [state what the bank did, such as “failed to disclose XXX, as required by TILA, 15 U.S.C. § 1601, et seq.]
[paragraph no.] Admit the plaintiff materially breached the contract between the parties when it…. [use as many of these as necessary within the admissions limit set by your state or local rules.]
[paragraph no.] Admit the defendant sustained damages in an amount equal to all costs of this transaction, including his/her down payment, closing costs, taxes, insurance, fees, and costs, due to plaintiff’s breach of contract.
[paragraph no.] Admit the defendant performed all of his/her obligations up until the plaintiff’s breach of contract [on May 1, 2005. You may wish to leave out the date.]
COUNTER CLAIMS
The counterclaim must allege each of the elements of breach of contract, and is state specific. For example, a breach of contact counterclaim under Florida law will need to allege: (1) the existence of a contract, (2) a breach of the contract, and (3) damages resulting from the breach, (4) performance of its obligations under the contract or a legal excuse for its nonperformance.
A counterclaim for breach of contract under Florida law may look something like this:
COUNT ONE
[paragraph no.] Defendant realleges as if set forth in this document paragraphs [1- all paragraphs] of the Answer;
[paragraph no.] Defendant alleges a mortgage contract exists between the parties;12
[paragraph no.] Defendant alleges Plaintiff forced placed hazard, wind, fire, and/or flood insurance upon Defendant about April, 2007 and again in October, 2007, requiring Defendant to pay the premium for said insurance;
[paragraph no.] Defendant alleges said forced placed insurance was substantially more expensive than similar insurance available on the market;
[paragraph no.] Defendant alleges said forced placed insurance was unnecessary because Defendant had sufficient insurance in place;
[paragraph no.] Defendant alleges she repeatedly communicated with Plaintiff about the said forced placed insurance, specifically demonstrating her insurance was sufficient under the terms of the parties’ contract;
[paragraph no.] Defendant alleges Plaintiff breached its contract with Defendant when it forced placed said insurance upon Defendant in an amount in excess of that required under the contract’s “Hazard Insurance Authorization & Requirements”;13
[paragraph no.] Defendant alleges her inability to make the payments under the contract actually and proximately caused the present action in foreclosure, damaging Defendant’s credit, causing her to incur late fees, compounded interest, attorney’s fees, and other damages arising from the breach;14
[paragraph no.] Defendant alleges Plaintiff’s breach of contract actually and proximately caused Defendant to no longer be able to make her payments under the contract;15
[paragraph no.] Defendant alleges Plaintiff was unjustly enriched by force placing said unnecessary insurance and is liable to Defendant for damages;16 and
[paragraph no.] Defendant alleges Plaintiff’s breach of contract by force placing said insurance upon Defendant causes Plaintiff to be liable to Defendant for damages.17
THIRD PARTY CLAIMS
A claim and request for relief can be levied against a third party if that party has breached a contract existing between the borrower and it. However, filing a lawsuit against another party for breach of contract is not necessary (you can sue them separately).
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The preceding is Defense #5 in 23 Legal Defenses to Foreclosure. If you found it helpful, we recommend you purchase 23 Legal Defenses to Foreclosure by clicking here.
*This chapter may not be representative of the information in each chapter. Some chapters contain less information about the defense and some contain greater information, depending on the applicability of that defense to foreclosure. http://www.foreclosure-fight.com
References:
1 A contract is technically mutual assent to the exchange with consideration. Unilateral contracts are beyond the scope of this book and are not discussed here.
2 As described as Pennsylvania’s common law: Omicron Systems v. Weiner, 860 A.2d 554, 564 (Pa.Super.Ct.2004); Robert Craig Attig v. DRG, Inc., Civ. Act. No. 04-CV-3740 (E.D. Pa., March 30, 2005);
3 For more on understanding contracts, visit your local law library. A book some law students find helpful is Understanding Contracts by Ferriell and Navin (2004), ISBN-10: 0820554502
4 While things can get complicated when a borrower lives in, or signed the contract in, another state. However, for all intents and purposes, use the state law of whatever state the borrower was sued in. If there are concerns here, look towards the end of the mortgage, which may state which state laws shall govern.
5 Robert Craig Attig v. DRG, Inc., Civ. Act. No. 04-CV-3740 (E.D. Pa., March 30, 2005); Omicron Systems v. Weiner, 860 A.2d 554, 564 (Pa.Super.Ct.2004).
6 Preibe v. Autobarn, Ltd., 240 F.3d 584, 587 (7th Cir. 2001).
7 Rollins v. Butland, 951 So.2d 860 (Fla. 2d DCA 2006), citing Knowles v. C.I.T. Corp., 346 So.2d 1042, 1043 (Fla. 1st DCA 1977).
8 Rollins, 951 So.2d 860, citing Old Republic Ins. Co. v. Von Onweller Constr. Co., 239 So.2d 503, 505 (Fla.2d DCA 1970).
9 S&S Pallet Co., Inc. v. Delta Asphalt Co., Inc. (Apr. 11, 2001), 9th Dist. No. 20170, citing Garofalo v. Chicago Title Ins. Co. (1995), 104 Ohio App.3d 95, 108.
10 Material breach is one that can excuse performance. A non-material breach would be one that is not critical to the performance of the contract, like when yellow colored installation is installed inside the walls of a house instead of pink colored installation. While damages might be available, installing the wrong color installation would not be a material breach.
11 An Answer only needs to contain a “short and plain” statement its defenses to each claim asserted. Fed. Civ. R. 8(b)(1)(A). (Check your state rules for the corresponding rule.)
12 Element one is alleged here.
13 After alleging some general facts surrounding the breach, element two is alleged here.
14 Element three is alleged here.
15 Element four is alleged here; the borrower’s inability to make the payments is excused because of bank’s breach.
16 This allegation lays the foundation for seeking restitution damages from the court. That is, asking the court to give the borrower back all the extra money paid for the unnecessary insurance.
17 This is a catch all allegation for damages.
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