Daily Development for Monday, October 15, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

MORTGAGES; VALIDITY; UNLICENSED LENDER: Hawaii court finds that a mortgage loan arranged by an unlicensed mortgage broker is void and lender is barred even from any equitable relief, even when the loan proceeds were used to retire a prior encumbrance against the property.

Beneficial Hawaii, Inc. v. Kida , 30 P.3d 895 (Ha. 2001)

The underlying facts in this case are suitable for "Love of Life" or Jerry Springer, depending upon the spin one wishes to put to them. Kida and Koboyashi, an unmarried couple approaching retirement age entered into a series of informal arrangements by which they would acquire a property where they ultimately would live together. Koboyashi was an active real estate professional who had held a mortgage broker's license in the past. Kida apparently had independent income through a fishing supply store that he owned and operated.

Kida and R&M Associates a company controlled by Koboyashi acquired a property under a contract of purchase in early 1992. Kida advanced $200,000 for a down payment (or perhaps only $150,000 the reported record is conflicting). The purchase price was $400,000. The seller remained living on the property until 1993, when she moved out. It is unclear whether anyone lived there afterwards. It appears that the contract was a long term installment land contract, although, again, this is uncertain.

In late 1992, Kobayashi and Kida were no longer cohabiting and Kida had met his present wife.

In 1994, Kobayashi occupied an office near to Kida's store and they became reacquainted. After this point, the stories diverge. Kobayashi alleged that Kida provided her with the documentation to support a new mortgage loan to "take out" the balance of the seller's interest in the property.

The loan was delayed, and ultimately these papers were no longer valid, and Kobayashi alleged that Kida authorized her to sign for him new mortgage loan papers on the property. The loan was for $300,000. Apparently R&M assigned its contract interest to Kida and the deed was executed to Kida alone. Only Kida's name appeared on the new mortgage and note. Kida denied that he authorized Kobayashi to sign anything in his name, and further denied that he signed anything himself. The proceeds of the loan were used to pay $269,000 principal and $3900 interest to the seller, and the balance went to pay fees.

The papers showed Kida as the borrower/mortgagor and a business called The Mortgage Warehouse as lender/mortgagee. Kobayashi was a principle of The Mortgage Warehouse, but at the time of the loan, neither she nor the company was validly licensed in Hawaii as a mortgage broker. At a "table closing," The Mortgage Warehouse immediately assigned its interest in the note and mortgage to Novus Financial, which provided the funds for the loan.

Over the next two years, the loan was regularly in default, and Novus regularly contacted Kida, who referred Novus to Kobayashi for payment, variously describing her as his accountant, property manager, bookkeeper and other terms. Koboyashi made some of the delinquent payments. Kida made others. At one time, Koboyashi gave to Kida a sports car to compensate him for financial advances on her behalf. The car turned out to be leased, and later was repossessed.

In 1996, for a brief time, the loan was current, and, according to the court, Novus "sold" the loan to Beneficial. There is no indication that either Novus or Beneficial knew that there was any claim of forgery or any other "funny business" about the loan, or that either of them were aware that about the unlicensed status of Koboyashi and her business.

The trial court ruled that Kida has instructed Kobayashi to take care of financing the property acquisition, and that he did in fact execute some loan documents, but that the documents actually used had been forged by Kobayashi because the signed ones had gone out of date. The court found that Novus regularly contacted Kida and that he acknowledged liability for the debt but repeatedly referred Novus to Kobayashi, as she was going arrange for payments to be made. The court concluded that Kobayashi was Kida's agent for purposes of executing the note and mortgage. Further, even if this were not the case, the court held, Beneficial was entitled to equitable ownership of a mortgage against the property under the doctrine of equitable subrogation.

The Supreme Court of Hawaii, reversed, concluding that The Mortgage Company made the loan in question, and was not licensed at the time.

Consequently, under Hawaii's mortgage broker licensing statute, the loan was void. It further denied any equitable relief to Beneficial, concluding that the doctrine of equitable subrogation did not apply because the seller's interest under an installment land contract does not rise to an "interest" in the property to which another can be subrogated. It did concede that other equitable doctrines might support a claim for Beneficial, but stated that Beneficial had not introduced any evidence that it had given value for the loan (although earlier it said that Beneficial had "purchased" the loan). Therefore, Beneficial had not made out a case for affirmative equitable relief.

The court first concluded that The Mortgage Warehouse had in fact acted as a mortgage broker under the Hawaii licensing statute, even though it appeared as lender and mortgagee of record in the transaction. The statute, among other things, applies to parties who "make a loan." It has exemptions for lenders who loan for their own portfolio or are licensed institutional lenders, but none of the exemptions applied here.

The Mortgage Warehouse took fees to arrange the loan and in fact, at the table closing, Novus' funds, and not those of The Mortgage Warehouse, funded the loan.

Critical to the court's decision was HRS Sec. 4548, which provides: "Any contract entered into by any person with any unlicensed mortgage broker or solicitor shall be void and unenforceable." Beneficial argued that this did not mean all contracts, and did not include loan agreements. It argued that the statute applied to compensation agreements for the brokers. The court concluded that the legislature intended to void mortgage loans made by mortgage brokers.

It conceded that certain contracts to which brokers might be a party would not be completely voided, where that portion benefitting the mortgage broker could be severed without doing injury to the rest of the agreement. But here, the court concluded that the loan agreement here was not so divisible.

Comment 1: It's a tough interpretation, and the court justifies it by maintaining that consumer protection statutes should be broadly construed. It works its way carefully through arguments involving legislative intent in circumstances where one wonders whether the legislature was really all that careful with its wording. Note that to be a broker the accused party must be taking actions "on behalf of" the borrower, while to make a contract it must be making a loan to the borrower. There's a bit of an inconsistency here, but the broker and Novus elected to do business in the way that they did, leaving the argument open that the unlicensed broker was the lender.

Clearly Novus was negligent in not verifying the licensure of The Mortgage Warehouse before doing business with it.

Comment 2: The court's conclusion concerning the inapplicability of equitable subrogation here is somewhat confusing to the editor. It's true that one remedy available under the contract is forfeiture, and its hard to view a third party has having that remedy. But in most jurisdictions, an installment land contract may be treated by the court as an equitable mortgage and be foreclosed. This usually can be done at the election of the vendor, and one would think that Beneficial could have been subrogated to that right of election.

The court's conclusion is mitigated somewhat by its acknowledgment that alternative equitable relief might be available under certain circumstances.

Comment 3: It's hard to know just what the court is saying about Beneficial's failure to prove it's equitable entitlement to relief. It earlier states that Beneficial "purchased" the loan, but later indicates that Beneficial did not show that it gave any consideration for the loan. Surely it did give such consideration, so it's bizarre to think that it failed, in all this evidence, to demonstrate how it came to own the loan. There's obviously a story there.

Comment 4: Perhaps Beneficial, having been denied relief, will now turn against Novus. Will Novus have an equitable position that the court will protect? Will the court permit Novus to raise such a claim, or is it somehow estopped? Perhaps Hawaii practitioners can keep us informed.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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