United States Court of Appeals for the Seventh Circuit - 396 F.3d 869
In the 2005 case David v. G.N. Mortgage Corp., the Seventh Circuit Court of Appeals addressed whether a mortgage buyer could enforce a contract against the seller by using outside evidence to prove a fraudulently obtained five-year prepayment penalty clause. The case involved a dispute over a contract's interpretation and performance.
Thomas and Cathy David refinanced their Illinois home with a $288,000 adjustable-rate mortgage from G.N. Mortgage Corporation. The contract included a five-year prepayment penalty clause, requiring the Davids to pay over $12,000 in penalties if they paid off the loan within 60 months. G.N. later sold the mortgage to Countrywide Home Loans, Inc., which informed the Davids of the prepayment penalty. The Davids paid off the mortgage within three years, resulting in penalties from Countrywide. They objected and filed a lawsuit, claiming the penalty clause was obtained through fraud, violated Illinois statutes, and constituted a breach of contract.
The district court ruled in favor of G.N. and Countrywide, stating that the contract was clear and unambiguous. The Court of Appeals also affirmed, applying Illinois law stating that a written contract is presumed to represent the intentions of the parties, and extrinsic evidence cannot be considered unless the contract is ambiguous. The court found that the mortgage contract was clear and unambiguous and contained a "merger clause," which indicated that the written contract was the complete expression of the agreement.
This case is important because it emphasizes how courts strictly apply the parol evidence rule and do not consider outside evidence to interpret a contract's intent and meaning. It also highlights how courts handle ambiguity, merger clauses, fraud, and statutory violations in contract law. The case is often cited and discussed in legal education for its implications on these subjects.
The case involves a couple who obtained an adjustable rate mortgage with a five-year prepayment penalty rider from GN Mortgage Corporation. The couple filed a lawsuit against GN and Countrywide Home Loans, alleging fraud, breach of contract, and violations of the Illinois Interest Act and the Illinois Consumer Fraud Act. The district court granted the defendants' motions for summary judgment, which the couple appealed. The majority opinion affirmed the district court's decision. The plaintiffs filed a second amended complaint alleging four counts against the defendants, which the district court granted summary judgment in favor of the defendants on all claims. The plaintiffs argue that the district court erred in granting summary judgment to the defendants because there is a genuine issue of material fact regarding whether they signed a two-year prepayment penalty addendum to their loan at the closing. The court applied the substantive law of the forum state, Illinois, in a case based on diversity jurisdiction. The court refused to consider the unsigned document as extrinsic evidence to establish ambiguity in the contract. The Davises' common law fraud claim is defeated by the "due diligence rule" established by Illinois courts. However, the court will examine the plaintiffs' claim that GN's actions violated the Illinois Consumer Fraud Act (ICFA) separately from the common law fraud claim. To establish liability under the ICFA, the plaintiffs must prove that GN undertook a deceptive act or practice, intended that the plaintiffs rely on the deception, the deception occurred in the course of trade and commerce, actual damage occurred, and the damage was caused by the deception. The lack of due diligence in reviewing the document or requesting further assistance during the review period is not dispositive of the ICFA claim.
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