Third Fed. S. & L. Assn. of Cleveland v. Formanik
2016 Ohio 7478
| Ohio Ct. App. | 2016Background
- In Aug. 2007 Ronald Formanik obtained a $113,000 bridge loan from Third Federal secured by the Formaniks’ Middleburg Heights residence; maturity date was Sept. 1, 2008, with 7.75% interest and a post-maturity rate provision.
- The Formaniks made interest-only payments Sept. 2007–Aug. 2008 and paid $48,000 principal in late 2007; about $65,000 principal remained at maturity and was not paid.
- Third Federal continued to send monthly interest invoices and accepted interest-only payments after the maturity date through early 2010, though it did not demand payment of principal; automated statements showed only interest due.
- In Feb.–Mar. 2010 Third Federal refused to accept tendered interest payments (account was "frozen"), then began collection letters and reported delinquencies to credit agencies reflecting missed monthly payments; the Formaniks alleged credit harm.
- Third Federal offered refinancing options (including conversion or a 90‑day extension) but would not delete reported delinquencies; the Formaniks declined and Third Federal filed foreclosure in Oct. 2010; the property was later sold, loan paid off, and Third Federal dismissed foreclosure.
- The Formaniks’ counterclaims for breach of implied contract, breach of the covenant of good faith and fair dealing, R.C. 1345.031(B)(12) mortgage-flipping, and wrongful foreclosure were tried to a magistrate; the magistrate and trial court rejected the claims and the appellate court affirmed.
Issues
| Issue | Plaintiff's Argument (Formanik) | Defendant's Argument (Third Federal) | Held |
|---|---|---|---|
| Whether the parties’ post-maturity course of performance created an implied modification extending the loan maturity | Continued invoicing and Third Federal’s acceptance of interest-only payments after maturity created an implied contract to extend maturity | No express agreement to extend maturity; note’s waiver/extension clauses preserved lender’s rights; course of performance did not show clear mutual intent to modify | No implied modification; trial court’s factual finding affirmed (no abuse of discretion) |
| Whether Third Federal breached contract by refusing interest payments, reporting delinquencies, and thereby preventing performance | Refusal to accept payments and reporting "false delinquencies" sabotaged refinancing and prevented performance, constituting breach | Reporting errors did not prevent the borrower’s obligation to pay principal at maturity; reporting in 2010 could not have caused nonperformance in 2008 | No breach; reporting errors did not negate borrower’s past default or create actionable breach |
| Whether Third Federal breached the implied covenant of good faith and fair dealing by its payment refusals and reporting | Bank acted in bad faith by accepting/then refusing payments and refusing to correct credit reporting, abusing its powers and frustrating performance | Lender was entitled to enforce the written contract and exercise reserved rights; enforcement is not bad faith absent other wrongful acts | No bad-faith breach; enforcement of contractual rights here was not bad faith |
| Whether R.C. 1345.031(B)(12) mortgage-flipping or a distinct cause of action for wrongful (attempted) foreclosure apply | Offering to refinance after maturity and conduct surrounding the account amounted to mortgage flipping; foreclosure was wrongful | No new mortgage loan was ever made (so flipping statute not triggered); Ohio does not recognize a freestanding wrongful-foreclosure tort separate from contract defenses | No statutory mortgage-flipping violation (no new loan made); Ohio does not recognize independent wrongful-foreclosure claim here; summary affirmance |
Key Cases Cited
- Blakemore v. Blakemore, 5 Ohio St.3d 217 (Ohio 1983) (abuse-of-discretion standard described)
- Ed Schory & Sons v. Francis, 75 Ohio St.3d 433 (Ohio 1996) (good-faith covenant does not permit courts to override express contractual rights)
- Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990) (definition of good faith and limits on judicial substitution for contract terms)
- Automated Sols. Corp. v. Paragon Data Sys., 167 Ohio App.3d 685 (Ohio App. 2006) (course-of-performance and waiver can modify contractual deadlines or obligations)
- Westgate Ford Truck Sales, Inc. v. Ford Motor Co., 971 N.E.2d 967 (Ohio App. 2012) (modification by course of dealing is a factual question for the trier of fact)