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Fraud as a Defense to Breach of Contract: Capacity to Act Otherwise Required

If a contract is breached, the party breaching the contract will likely be sued. Once in the courthouse, there are many defenses that can be asserted that, if proven, will allow the breaching party to avoid being held liable and avoid having to pay damages for breaching the contract. One such defense is fraud (also called fraud in the inducement). The idea here is that the breaching party would not have entered into the contract but for various false statements or omissions — fraud — made/committed by the other party to the contract. This article discusses those two important words “but for.” Fraud in the inducement can only be a defense if the victim can show that he/she had the capacity to behave differently if he/she had not relied on the allegedly false statement.

A recent unpublished case involving a mortgage illustrates the point. See Billings v. Wells Fargo Bank, N.A., Case No. C084369 (Cal. Appeals 3rd Dist. January 29, 2019). In that case, a married couple, Flag and Paula Billings, purchased a home here in California in 1998 and later refinanced their mortgage in 2005 with Wells Fargo. In 2009, Mr. Billings lost his job and the couple used all of their savings trying to stay current on their mortgage.

About a year later, they contacted Wells Fargo seeking mortgage assistance. In July 2010, the Billings spoke with a Wells Fargo loan officer and were told that to be considered for loan modification, they would first have to miss mortgage payments. Thereafter, the Billings stopped making their mortgage payments. The Billings thereafter entered into various loan modification agreements, but continued to have difficulties making the monthly payments. Eventually in 2015, under financial pressure and still behind in making payments, according to the Billings, they were forced to sell their home under threat of foreclosure from Wells Fargo.

Following what they called this “forced sale,” they sued Wells Fargo alleging that they had suffered emotional distress, anxiety, and depression because of Wells Fargo’s actions and that they suffered damages due to the forced sale of their home. Among the specific allegations made by the Billings was that Wells Fargo made many false statements, including the statement listed above: that in order to be eligible for modification of their loan, they would have to miss payments. The Billings claimed that this statement was false and that, but for that false statement, they would have remained current on their loan, would not have entered into the various modification agreements and would not have been forced to sell their home.

In response, Wells Fargo argued that this statement, even if false, was not fraud under the law because the Billings did not have the capacity of acting in a manner different than the way they acted. In other words, the alleged false statement did not cause the Billings to stop making mortgage payments; the Billings did not have sufficient money to make the payments regardless of whether the statement was true or false. Indeed, such was the evidence. Mr. Billings was still unemployed, the couple had no savings and they presented no evidence that they could have borrowed enough money to cover their mortgage payments. As such, the trial court agreed and dismissed that part of the case involving alleged fraud with respect to that statement. The California Court of Appeals affirmed. The court held that there was no causal connection between the alleged false statement and damages allegedly suffered by the plaintiffs.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard was honored again in 2018 as a “Rising Star” by for the fourth year in a row. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard offers legal services for San Diego and California businesses including contract drafting and review. Like us on Facebook.

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