Daily Development for
Tuesday, November 11, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

Three happy cases for Southern mortgagees . . .

MORTGAGES; DEFICIENCY; DEFENSE: Where mortgagee assumes fiduciary duty toward mortgagor with respect to mortgaged property two years following mortgagor's execution of note and mortgage, alleged breach of duty will not provide mortgagor with defense to liability on note.

Schwegmann Bank and Trust Company v. Dunne, 693 So.2d 349 (La.App. 4 Cir. 1997).

The mortgage note was in default and the bank had noticed a judicial foreclosure. It sent a letter to mortgagors seeking their consent to a private sale of the property that, it represented, would fully satisfy the obligation. This letter, and other representations made at the time, mortgagors alleged, created a fiduciary relationship to borrowers, and mortgagee's breach of this relationship led to a situation in which the proposed private sale was not completed and the property was sold at a sheriff's sale, creating a deficiency amount.

The trial court, having reviewed affidavits, entered summary judgment for the mortgagee bank, and the court here affirms. In response to the fiduciary relationship allegation, the court holds that even if a fiduciary relationship did arise, its existence had nothing to do with the borrowers' obligations on the note, as did not arise in connection with their execution of the note.

There is a dissenter from the court's overall result, who argues that there were sufficient earmarks of equitable estoppel or other equitable defenses here to survive summary judgment.

Comment: It is important to recognize that this case arises in Louisiana, which recognizes (the opinion acknowledges) a general duty of good faith and fair dealing between lender and borrower. Other details of Louisiana practice (use of a "collateral note" and a "hand note" and other perplexing discussions of "pledges") make the case difficult to appreciate fully, but it does appear that the court is finding categorically that a breach by the mortgagee in dealing with the mortgaged property prior to foreclosure and as part of the debt resolution process will give no defense to the obligation on the note.

Although the court's conclusion might be true as regards a holder in due course, there is no holder in due course in this case. It is difficult for the editor to understand why damages caused by the bank's mismanagement of a fiduciary duty concerning collateral is not cognizable in a suit to collect a deficiency on the secured note. The court doesn't say why it so concludes other than the fact that the note and the fiduciary relationship arose at different times. Surely they are part of the same overall financial relationship and should be considered together. Louisiana lawyers, please explain!!

MORTGAGES; FORECLOSURE; PRIVATE FORECLOSURE; FIDUCIARY DUTY: Neither bank, its officers nor attorneys who carry out a non judicial foreclosure owe general fiduciary duty to mortgagors with regard to foreclosure.

Brabham v. American National Bank of Union Springs, 689 So.2d 82 (Ala.Civ.App. 1996).

Disputing the mortgagor's interpretation of prior Alabama authority, the court concludes that there is *no fiduciary duty* on the part of the the mortgagee toward the mortgagor when the mortgagee conducts a private foreclosure sale. The sole duty is one of good faith and fair dealing, and the facts of this case suggest that there were allegation that would have made a difference had the mortgagee's duty been characterized as a fiduciary one.

Comment 1: The editor finds it difficult to accept that an American court can conclude that a mortgagee has no fiduciary duty to a mortgagor in connection with the conduct of a foreclosure sale. This is a forced "distress sale" auction. Where the mortgagee purports to carry it out through its own attorneys, without using an independent trustee, it would appear that the even if state law condones the practice, there should be a high standard.

In this case, the bank did not actually buy at the sale. But a local politician (acting through an intermediary,) who had a nephew on the Bank's board, did. Of course, in many small communities there are blood relationships and economic relationships among many in the real estate investment community, so it is difficult to draw too many inferences from this somewhat attenuated relationship. The mortgagor ultimately redeemed, apparently at somewhat greater cost.

The bank "played hardball" in dealing with the mortgagor's last minute effort to avoid foreclosure. The editor sees nothing wrong with a creditor concluding finally that the time for accomodation is over. But it is a lot cleaner in these cases for the bank to then submit the foreclosure process to a disinterested party.

Comment 2: There was an allegation that the banks' attorney did not acknowledge a last second bid made by the mortgagor as the hammer was falling. Under the circumstances, even when there is no fiduciary duty, summary judgment seems to be an inappropriate vehicle through which to evaluate this kind of conduct.

Comment 3: Even if the bank had no fiduciary duty, wasn't there an ethical duty on the part of the attorney, who had undertaken in essence to perform a trust responsitility in disposing of the mortgagor's property?

MORTGAGES; MORTGAGEE'S DUTIES; FIDUCIARY DUTY: Although duty of good faith and fair dealing applies to mortgage contracts, there is no fiduciary relationship as a matter of law between bank and mortgagor, reversing prior position on rehearing en banc. The basic holding here is consistent with most jurisdictions. There were no specific facts upon which to base a fiduciary relationship, and the alleged fiduciary breaches did not involve foreclosure, but rather discussions with the borrower regarding transfer of the note to a third party.

Merchants & Planters Bank of Raymond v. Williamson, 691 So.2d 398 (Miss. 1997).

The court does make an interesting analysis of the question of whether the bank was in violation of its admitted duty of good faith and fair dealing in providing notice of default and pending assignment of the mortgagee note only to the one of two co-mortgagors, and this will be discussed in tomorrow's DD.

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