In Bates v. JP Morgan Chase Bank, N.A., No. 13-15340 (11th Cir. Sept. 30, 2014), the Eleventh Circuit ultimately affirmed summary judgment against the borrower, but noted that a lender’s failure to strictly comply with the regulations issued by the Department of Housing and Urban Development while foreclosing on an FHA-insured mortgage could constitute breach of contract.

The borrower filed suit in district court, to stop an imminent foreclosure, alleging violations of RESPA, conversion, wrongful attempted foreclosure, and trespass, and breach of contract for failure to comply with HUD regulations. The district court granted summary judgment against the borrower as to all claims.

On appeal, the Eleventh Circuit noted that neither Georgia courts nor the Eleventh Circuit have directly addressed the question of whether a mortgagor has a cause of action under state law for breach of contract where the deed expressly conditions non-judicial foreclosure on compliance with HUD regulations:

In view of Georgia’s general rule that powers of sale in deeds are to be construed strictly, see Ga. Code Ann. § 23-2-114, we believe Georgia courts would hold that HUD regulations clearly referenced in a deed as conditions precedent to the power to accelerate and the power of sale could form the basis of a breach of contract action.

The Court rejected the lender’s argument that the preexisting duty rule bars the breach of contract, noting that the preexisting duty to comply with HUD regulations was owed to the government, not to the borrower. Moreover, a promise to perform a preexisting duty owed to a third person who is not a party to the contract can give rise to an enforceable obligation. Ultimately, because the borrower failed to put forth any evidence of damages caused by the purported breach of these contract terms, the Court upheld summary judgment.

Although the lender ultimately prevailed here, lenders doing business in Georgia should ensure that they have processes in place to comply with all applicable HUD regulations prior to foreclosure.