Making a referral is most often understood as a recommendation as to the quality of that professional’s services or products. In turn, there are different tort theories that are recognized in many states for negligence in doing so, and potential liability for the actions of a referred professional. What is far less common is to allow liability to flow through several parties even absent independent conduct or a theory of agency.
A recent New Jersey Appellate decision appears to do just that by holding a creditor liable for actions of a contractor. In Emigrant Mortgage Company, Inc. v. Costa, a homeowner responded to a contractor’s advertisement in a newspaper about certain renovations at her property. The next day, a mortgage broker already familiar with this discussion contacted the homeowner about taking out a mortgage to complete the work. This broker happened to have a non-exclusive agreement with a bank, and so submitted a loan application on behalf of the homeowner. After the application was accepted, the homeowner closed on the loan and the contractor began work. But, the contractor never finished the job and the bank eventually sought to foreclose on the loan.
The homeowner filed a third party complaint against the mortgage broker, title company, and contractor, in addition to a counterclaim against the bank. Included in the claims against the bank were alleged violations of the New Jersey Home Ownership Security Act of 2002 (“HOSA”), based on the actions of the contractor. HOSA explicitly permits a homeowner to assert a claim against a lender based on the actions of a home improvement contractor if the contractor “arranged” for the loan.
The crucial rulings in this case revolve around the separation between the bank and borrower. First, the court stated that the contractor’s fraud was done “with the knowing or unknowing assistance” of the mortgage broker and title company. In other words, the court did not seem particularly concerned whether all parties were conspiring to commit a fraud.
Furthermore, the Appellate Division left it to the trial court to further explore whether the separation between the bank and contractor should prohibit a HOSA claim against the bank. The decision therefore leaves open the possibility that a home improvement contractor’s fraud could trickle its way through a mortgage broker, title company, and bank, regardless of any knowing participation from those other parties.
Banks, brokers, and title companies alike must therefore be aware of the potential liability that can exist when a contractor is approaching them for loans on behalf of third-party borrower. While it is never easy to turn down referred business, there are liabilities that can come attached. The particular contractor here had multiple employees and advertised in the newspaper – it was far from the average fly-by-night, unlicensed contractor. The bank, broker, and title company likely had no obvious reason to be suspicious or question whether the contractor was legitimate. These types of arrangements should therefore be approached with extreme caution, and all relevant documents examined especially closely.