DIRT DEVELOPMENT for March 13, 2009
Daniel B. Bogart
Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law, Orange, California
LENDER’S FIDUCIARY DUTY; DISCLOSURE:  Borrower receives minimal damages from mortgage broker for failing to inform her that she could remove her brother’s name from an existing mortgage, and instead refinanced her mortgage into two loans including a HELOC, covering her residence.

Enriquez v. Amerifirst Mortgage Corp., 2009 WL 498072 (Cal. Ct. App. Feb 27, 2009)
Enriquez had a simple desire: she wished to remove her brother’s name from a mortgage. She owned a home with her brother, and that home was subject to a mortgage in favor of WAMU.  Brother and Enriquez were named as mortgagors.  Enriquez’s brother purchased another home, and presumably obtained a mortgage loan and gave a mortgage on that residence.  According to the opinion, “plaintiff’s WAMU loan was assumable, and plaintiff could have removed her brother from the loan for a $900 fee without obtaining a new loan.” Removal of the brother’s name from the mortgage was essentially ministerial under the circumstances. The trial record in an earlier opinion involving the parties reflected WAMU’s understanding that WAMU would in fact have removed the brother’s name from the mortgage. Amerifirst was a licensed mortgage broker for WAMU and Greenpoint Mortgage, among other companies. 

Amerifirst did not inform Enriquez of this inexpensive option.  Instead, its representative steered her to refinance her home. This would remove her brother but would also create two new loans.  Both loans were made by Greenpoint.  The first loan, secured by a deed of trust, was in the principal amount of $144,000.  The second consisted of a HELOC and a second deed of trust in the amount of $15,500.  Enriquez was told she needed two loans because she did not qualify for a single loan in the whole amount. Enriquez told the Amerifirst representative that she wanted to pay off her car loan, and the representative responded that she could use the HELOC for this purpose.  Enriquez gave a copy of her car payment book to the Amerifirst rep. The closing of the loans took place on January 20, 2000, and included a payment of $14,885 to a company called Informed Escrow. The opinion explains that Enriquez thought that some of the loan money would be used to pay off her car loan, but this assu

mption was “mistaken.” The reader can infer from the opinion that Enriquez’s act of delivering a copy of her car payment book demonstrates her belief that Amerifirst would take care of the pay-off.

If this case demonstrates some bad lender behavior, it may suggest more than simple borrower ignorance.  Enriquez told the Amerifirst rep that her monthly income was $3100.  However, a much higher $4600 monthly income figure somehow crept into the actual loan application.  The opinion states that this was the work of “either the Amerifirst representative or an unknown person.”  In its footnote, the court explains: “At trial, plaintiff denied she wrote the $4600 figure on the application.  During cross-examination, Amerifirst read plaintiff’s deposition testimony, where she admitted the $4600 entry “looks like my writing.” On redirect, plaintiff explained that the handwriting looked like hers, except for the 4.”

It is therefore at least possible (but by no means proven) that Enriquez was aware that her income was inflated on the application.

Basically, Enriquez kept waiting to hear that her car loan would be paid off.  This did not happen. She called Greenpoint to ask if the HELOC money was used for this purpose, but Greenpoint sent her to Amerifirst.  Amerifirst in turn told her that they no longer possessed the loan file and did not have the answer.  Enriquez began calling Greenpoint, unsuccessfully, to find out the status of her HELOC loan and how the proceeds were allocated, to not avail.  Eventually, she stopped paying her HELOC loan.  That set in motion the sale on the second trust deed.   A third party, Marin Conveyancing had apparently begun servicing the loan and Greenpoint and Marin commenced foreclosure proceedings.

This bad story only gets worse.  The trustee’s sale noticed a date of February 25, 2004, at 2 p.m.  Enriquez apparently obtained cashier’s checks in the outstanding amount and sent a third party to the sale on the 25th to redeem the property.  Enriquez’s agent presented himself to the auctioneer (a company called Fidelity National Agency Sales and Posting), at 2 pm, but was informed that the auctioneer had already sold the property five minutes earlier (and therefore prior to the time noticed). 

In fact, Fidelity sold Enriquez’s home for $239,050 subject to the $139,602 balance on the first deed of trust.  Greenpoint was paid in full an amount of $17,378 – the balance of the second deed of trust loan.  Enriquez received excess proceeds, which totaled $221,635.  It is fair to suppose that her property could have sold for more than the price generated at a foreclosure sale, and that this amount is on the low side. Enriquez’s equity was reasonably greater than $221,635.

Enriquez brought actions against the auctioneer for negligence in selling the property before the time set for sale.  Fidelity settled the claim against it during trial for $10,000. In the same case, Enriquez brought an action for breach of both contract and fiduciary duty against Amerifirst “based on Amerifirst’s failure to advise plaintiff she could remove her brother’s name from the existing mortgage without getting a new loan, and Amerifirst’s failure to respond to plaintiff’s request for information about the use of the HELOC proceeds.”

The jury concluded, among other things, that Amerifirst breached its fiduciary duty to Enriquez and that this breach was a substantial factor in causing harm to her. The jury determined that she suffered total economic damages of $9837.  Enriquez challenged the amount of damages. However, the trial court denied a motion requesting a new trial to determine the sufficiency of that amount. In addition, during trial, the court treated Amerifirst and Fidelity as joint tortfeasors and offset the $9837 damage award by the $10,000 settlement.  More important, the court awarded prevailing party attorneys fees to Amerifirst (The trust deed provided that a prevailing party would receive attorneys’ fees.) As a result, Enriquez was ordered to pay Amerifirst $61,465 in fees.

The Court of Appeals affirmed many of the trial court rulings, but in the end, found  a way to give Enriquez some relief, if not satisfaction.

The court rejected the damages offset.  The two parties – auctioneer and mortgage broker – were accused by the plaintiff of committing very different sins.  One auctioned the property too soon; the other goosed an unnecessary commission by failing to disclose information to the borrower.  As a result, Enriquez got her $9837 and was freed from the attorney’s fees award (a major relief to be sure).  But she did not gain the substantial damages remedy that was undoubtedly the goal of her lawsuit.

Enriquez also made a succession of arguments that the court of appeals rejects.  The trial court had granted a non suit on punitive damages.  The Court of Appeals said that no reasonable jury would have found the elements for punitives present in the case – that Amerifirst engaged in intentional misconduct.  According to the court, the plaintiff could not provide evidence that it was an Amerifirst employee who filled out and signed the HELOC application on Enriquez’s behalf (and there was at least a suggestion that Enriquez filled in the income information.) In addition, she lost her claim to post foreclosure appreciation damages for her home.  She could demonstrate that Amerifirst’s behavior was technically a proximate cause of her loss of post foreclosure appreciation.  However, “any connection between Amerifirst’s failure to provide plaintiff information regarding refinancing and the foreclosure is too attenuated to allow recovery for lost appreciation.” In essence, the court s

aid that the real reason for the foreclosure was Enriquez’s failure to pay the HELOC, and Amerifirst was not substantially connected to Enriquez’s failure to make these payments. 

Comment 1: This case is not special because it breaks significant new ground in the law.  Instead, it is interesting because it lays out the chain of events that permitted a homeowner with equity to move rapidly to a position of weakness, see her house foreclosed and owe attorneys fees for the privilege.  Many mortgage brokers are no longer in business; Enriquez found an ongoing entity, so she had a party against whom to seek recourse.  Enriquez occupied a powerless position, and her refusal to pay the HELOC was her attempt to use the limited leverage at her disposal.

Comment 2:  That said the law in this case seems right.  The mortgage broker and auctioneer are not really joint tortfeasors in this case; the torts they were accused of committing were entirely different. Enriquez apparently had the ability for a relatively nominal amount to take her brother off the mortgage, and a mortgage broker, informed of her desire, and competent in the responsible practices, would have informed her of this.  The broker did not do so because this would have denied the broker the commission. This is therefore a breach of both the duties of care and loyalty.

The author sympathizes with Enriquez’s dissatisfaction with the meager award of economic damages, but this was a finding of fact by the jury and was left untouched by the court. 

The court’s denial of post foreclosure appreciation damages may be correct, but certainly one can understand Enriquez’s angst.  The court denies Enriquez because Amerifirst’s behavior was not connected in a meaningful way to Enriquez’s failure to pay the HELOC.  Yet, on the facts, Enriquez attempted to talk to Amerifirst about the status of the HELOC and whether it was being used to pay off her car.  Greenpoint and Amerifirst engaged in a game of pointing fingers, thus diverting her from a truthful answer. Amerifirst knew, because Enriquez told Amerifirst, that she wanted the loan proceeds used to pay off the car loan and gave Amerifirst a payment book to allow Amerifirst to do so.  But borrowers generally cannot “get their lenders’ attention” by failing to make payments. 

Comment 3:  It is possible, though not at all certain that the borrower in this case was aware of the inflation of her income as shown on the loan application.  But this is just one more bit of evidence (in this case in a trial setting) of the unfortunate break down of the normal and prudent loan process common in year 2000.  Lenders do not have to rely on the borrower’s statement of monthly income.  The fact that an “unknown” person filled in the application should be undone by a failure of the borrower to submit supporting evidence of income.  The lender or mortgage broker need only demand it. 

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