Daily Development for Thursday, August 17, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; FRAUD: The recording of a deliberately misleading mortgage instrument  in the public record constitutes actionable mortgage fraud, even though there is no direct communication of a fraudulent statement to the victim of the fraud. 

ABN AMRO Mortgage Group, Inc. v. Maximum Mortgage, 2006 WL 1128648 (N.D. Ind. 4/26/06)

This case is still alive, and in the pleadings stage.  The allegations of the complaint are that Wells inveigled ABN/AMRO to make a series of mortgages through a Wells-controlled mortgage broker.  The loans were purchase money mortgages, but Wells and related entities made it appear to ABN/AMRO’s that they were refinancing mortgages.  ABN/AMRO contended that it would not have made the loans had it known that they were purchase money mortgages, perhaps on the theory that there was less liklihood of artificial inflation in value when the original purchase money loan had “ripened” for a while and then was refinanced.  In fact, these acquisitions were 100% debt financed. ABN/AMRO would never had loaned 100% of the purchase price of the properties, but was led to believe it was refinancing loans already made on properties of a value higher than the amount of the mortgages.

The 149 loans were made to two different borrowers.  All of the properties, apparently, were owned originally by Wells (or Wells controlled entities) and being sold to the borrowers as part of single overall transaction.  The court refers to the borrowers themselves as “innocent” of the fraud.  During the course of the transaction, however, Wells allegedly induced these borrowers to execute mortgages to a Wells-controlled entity.  These mortgages actually did not secure any loan, because the mortgagee - the Wells- controlled entity, did not advance any funds.  Instead, these mortgages were recorded to create the appearance that the loans later made by ABN/AMRO were refinancing these loans rather than financing the original purchase of the property.  (The court’s sketchy report in this opinion on the pleadings doesn’t indicate the sequence of dates during which all this occurred.  It may be difficult for ABN/AMRO ultimately to prove that it in fact was defrauded and suffered losses

 as a consequence - but that’s for later.)
Apparently there is no allegation that Wells made any express representation to ABN/AMRO that it was making refinancing loans.  The only act that Wells took was to cause the execution and recording of these “phony” mortgages in the land records.  The question at issue in this case is whether such acts could constitute a fraudulent representation within the meaning of Indiana’s civil fraud law.  The court held that they could, even though Indiana fraud pleadings have to be made with some particularity.

ABN/AMRO began by alleging that Wells controlled all the “Wells entities” and that their actions were attributable to him.  The court agreed that such an allegation was an acceptable basis for a fraud complaint here, where each of the actions, regardless of what entity performed them, was alleged to have been performed in fact by Wells.

Some of the alleged fraudulent representations were in fact made directly by Wells or his alleged co-conspirators to ABN/AMRO - such as representations as to the date that the properties in question were acquired, representations as to acquisition price, and representations as to income from the properties - all contained on loan applications.  It is interesting that the court refers to the owner/loan applicants as “innocent,” as this would suggest that their loan applications were “doctored” after they provided them.

But, apparently concerned that all of the above misrepresentations might not be pinned on Wells, as opposed to the other conspirators, ABN/AMRO also focused on the public recordation of the phony mortgages (from the borrowers to Wells) as an independent fraudulent act.  Finding these mortgages in the record, ABN/AMRO apparently funded into escrow monies to pay these mortgages, which monies apparently were then allegedly used instead, directly or indirectly,  to acquire the properties. 

The court held that, if true, these allegations described a direct fraudulent communication from Wells to ABN/AMRO, since they were intended to lead ABN/AMRO to believe that it was refunding existing mortgages.  The fact that the communication was made indirectly through the title company’s report of the record to ABN/AMRO did not prevent this from being a deliberate communication.               

Finally, Wells argued that ABN/AMRO had not suffered losses due to the fraud, but rather to the subsequent default of the borrowers.  The court responded that the exposure to loss occasioned by inducement of ABN/AMRO to make loans it otherwise wouldn’t have made was a direct cause of it’s loss.

Comment 1: Just in case the editor hasn’t said “allegedly” often enough above, he reiterates that Wells and his co-defendants may prove to be as pure and innocent as driven snow.  All we know are allegations in a lawsuit - words on a page.  The allegations are discussed in order to understand the legal issues.

Comment 2:   Apparently there are lots of ways to sue for fraud in Indiana, and some provide better avenues for relief than others - such as the bank fraud statute.  This elaborate exercise was designed to invoke the elements of the appropriate statutes so that ABN/AMRO could pursue its claims with greatest advantage. 

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