No Implied Covenant Before Mortgage Note Executed

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Massachusetts’ implied covenant of good faith and fair dealing does not apply to negotiations and contract preparations for a mortgage and accompanying promissory note, the First Circuit has held. In Latson v. Plaza Home Mortgage, Inc., the plaintiffs filed suit against their lender alleging, among other claims, violation of the implied covenant based on the lender’s alleged failure to provide a proper commitment letter, good faith estimate, or other documents required by law, and gave them insufficient opportunity to review the terms in the loan documents. The United States District Court for the District of Massachusetts dismissed the case for failure to state a claim, and the borrowers appealed.

On appeal, the borrowers asserted that the implied covenant applies to parties negotiating a contract, such as their mortgage. The First Circuit disagreed, stating that the implied covenant of good faith and fair dealing only “governs conduct of parties after they have entered into the contract.” The fruits of the contracts, the focus of the implied covenant, were the loan funds, which the borrowers unquestionably received. Where there is no allegation that the lender violated any terms of the contracts, and all allegedly wrongful conduct occurred before the contracts existed, no claim for violation of the implied covenant can survive. The full text of the opinion can be found here. Mortgage lenders are not subject to suit in the First Circuit for violation of the implied covenant of good faith and fair dealing for actions prior to the execution of a mortgage contract and promissory note.

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