Daily Development for Tuesday, November 11, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
MORTGAGES; SUBROGATION: Victim of fraud who advances money to pay senior mortgage may not acquire subrogation as against subsequent purchaser of property at foreclosure of junior mortgage.
Casstevens v. Smith, 2008 WESTLAW 4660152 (Tex. App. 10/23/08)
This little case doesn’t make any major decisions of law, but certainly is an interesting story and stands as useful precedent for a number of minor points of law, and is worth noting for those reasons.
Carrolls and Casses [abbreviated name] were next store neighbors. Carrolls convinced Casses to purchase Carroll’s home on a seller financing arrangement. Casses paid $34,000 in cash and executed a note for $90,000 for a warranty deed. Casses did not seek title insurance or otherwise check title. If they had, they would have discovered that Carrolls owed $88,000 on a prior bank mortgage and around $18,000 on a junior purchase money mortgage to Campbells- the prior owners of Carroll’s home.
For some time, Casses made payments to Carrolls, and Carrolls apparently passed on some of the money paid to service the bank loan, and perhaps some on the Campbell loan. But the, in 2004, Casses discovered the existence of the bank loan. In one of the slickest scams likely to have occurred in that Texas neighborhood in a while, Carrolls convinced Casses to prepay the bank mortgage by giving $64,000 to the Carrolls. The Casses gave this money to the Carrolls, but Carrolls simply kept it and never paid down the bank loan.
In less than a year, the Campbell loan was in default and foreclosed. The amount of the lien had increased - probably through accumulated interest on unpaid debt - to $22,000, and a third party, Smiths - bought the property at a non judicial foreclosure sale.
Smiths sent a notice to the Carrolls at the residence address notifying them that they had acquired the property and seeking to make arrangements to take possession. This letter apparently was opened by the Casses, who learned for the first time of the second loan to Campbells. There ensued a series of negotiations. Casses believed that Smiths were willing to let them refinance and ultimately pay off Smiths and preserve their home. Smiths, however, at least in the end, were open only to a lease arrangement. Smiths ultimately paid off the $44,000 then owing on the bank mortgage.
Casses, of course, got a fraud judgment against Carroll, but this likely was uncollectable and anyway didn’t solve their problem with Smiths. Ultimately failing to get what they wanted in negotiations, they went to court. The trial court entered a summary judgment for defendants, and the appeals court affirmed in significant part. The various holdings, some of them valuable as precedent, as indicated, although minor in scope, are set forth below.
1. A Texas forcible entry and detainer action can be brought by a foreclosure purchaser entitled to possession, and not only by a landlord against a tenant. In essence, the court concluded, the Casses were “tenants” of the Smiths in that they had begun occupancy lawfully and peaceably but the Smiths now wanted them out.
2. Although Casses alleged that they had given monies to Carrolls that were paid over to the bank mortgagee, this did not result in a subrogation to that position for the Casses superior to the claim of the Smiths. The court does not comment on the obvious fact that subrogation typically is not available for a partial payoff in any event. It states (incorrectly) that subrogation is only available to protect the subrogee’s rights as against the original debtor whom the subrogee paid. As we have seen often on these pages, mortgagee subrogation often is available to protect a refinancing mortgagee against a junior mortgagee in the same property. It was unwilling to permit Casses to obtain subrogation against the Smiths.
Another problem for Casses is that Smiths bought without knowledge of the fraud and in the expectation that they were liable to the existing bank lien. Casses did not thereafter make any payments, or have any payments made in their behalf, on that lien. Thus, the fundamental basis for equitable subrogation, unjust enrichment, doesn’t exist.
3. The fact that Smiths got a bargain when they bought the property for $22,000 subject to a $44,000 lien - apparently less than half the value paid for it originally by the Casses, and perhaps substantially less than that because all this happened when home prices still were soaring - was not unjust enrichment. Although the Casses were treated unfairly, that wasn’t the Smiths’ doing. Casses were defrauded by their old neighbors, the Carrolls.
4. Various conciliatory statements made by Smiths in correspondence with Casses did not work a fraud - lulling Casses into a false sense of security while the Smiths were planning to pay off the first mortgage. Casses alleged that they would have purchased the first mortgage if Smiths had not led them on, but the court noted that this really would not have preserved their title. They would have just been the ones receiving Smiths’ payoff. In any event, the statements made by Smiths were pretty standard statements of good faith negotiating position, and nothing more: “We desire to work with you to salvage something positive from this . . . wrongdoing by [Carrolls]” Smith did say: “If we work together, we might be able to do something about these prior liens,” but this was at a time when Smith thought that there might be a title insurer with some liability here. He subsequently discovered Casses had not obtained title insurer or checked title. There was no fraudulent intent
or effect in his statement.
The case went on to discuss, rather ambiguously, an allegation that the Smiths may have violated a fair debt collection statute by asking an employee to bring the eviction action in her own name, rather than that of their company. The court acknowledges that there may be some basis for finding a violation, but doesn’t seem to view it as very serious. Of course, we don’t have all the evidence on this issue as yet.
Comment 1: The discussion of subrogation is perhaps the most substantial part of the case. But, as noted, the editor believes that the court was right for the wrong reason. Even if the Casses had paid off the senior mortgage in full, they couldn’t get around the fact that Smiths bought on the basis of current record information concerning the mortgage. If they had paid it off, the mortgage would have been cancelled at the time that Smiths bought. Consequently, there could be no subrogation against them, as they relied on a clean record. The essence of the subrogation argument is that a party who is already junior to an existing lien might be unjustly enriched as against a third party who pays it off without realizing that the junior interest might then elevate to senior status.
Comment 2: People who don’t check title, of course, are inviting this kind of problem. In the current confused world, with desperate people given to desperate acts, one suspects we’ll see more, rather than less, of this kind of blatant fraud.
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