Daily Development for
Thursday, April 30, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
MORTGAGES; FRAUD; INQUIRY NOTICE: Lender's knowledge that borrower, in midst of closing to purchase property, no longer needs loan proceeds to acquire property, but will take proceeds in cash, places lender on inquiry notice that borrower is engaged in fraudulent scheme, and thus lender's deed of trust is voidable by defrauded seller.
Akins v. Vermast, 945 P.2d 640 (Or. App. 1997).
Seller agreed to sell land to Buyer subject to an existing mortgage. The parties agreed that the buyer would pay $5000 in cash and the balance of the purchaser price (over the first mortgage balance) pursuant to a note secured by a second mortgage. While the closing was pending, buyer advertised in the newspaper to borrow money secured by the land, offering attractive terms. Lender, a private party, responded to the ad and agreed to lend money secured by a first mortgage on the property. Lender had no actual knowledge of the arrangement concerning the purchase money mortgage. Buyer told Lender that Buyer was using the proceeds of Lender's loan to acquire the property.
Later, Buyer renegotiated with Lender, increased the loan amount somewhat, subject to an agreement to pay some prepaid interest to Lender, and also obtained Lender's consent to take some of the loan proceeds in cash. Lender testified that Lender assumed that Buyer had made other arrangements with respect to the balance needed to acquire the property, but did not inquire. In a classic scam, Buyer used a portion of the Lender's loan proceeds to pay the $5000 down payment to the Seller, paid the prepaid interest to the Lender, and disappeared with the loan proceeds.
Seller contended that it had been defrauded in the sale of the property and was entitled to have the deed (and Lender's mortgage) revoked. Lender claimed that it had a valid mortgage with priority over Seller. On cross motions for summary judgment, the trial court found that Lender was an innocent bona fide purchaser, and therefore had a lien on the property, but that the lien was junior to the purchase money mortgage. Both sides appealed.
On appeal held: reversed. The Oregon Court of Appeals held that Lender had inquiry notice of Buyer's fraud. The court concluded that Lender was on inquiry notice of the Buyer's fraud, because Buyer initially had represented that she needed the entire loan from plaintiff for purchase of the property and gave no explanation why she should be permitted to retain cash from the loan at the closing. Therefore, the court rejected Buyer's contention that it was a bona fide purchaser of its trust deed for value without notice of purchaser's fraud, and canceled both the deed to Buyer and the Lender's mortgage.
Comment: It is difficult to pass this opinion off as simply "fact based," because the trial court come to a different conclusion than the court found here. The trial court found for lender. The appeals court found as a matter of law that the knowledge of Lender that Buyer was going to take cash out of the closing put Lender on inquiry notice of an incipient fraud.
Note that the Lender was careless in any event, since it had demanded a first mortgage securing its loan, and didn't verify that the existing first mortgage would be paid off at closing. Further, Lender did not get a lender's title policy. But was it on inquiry notice of fraud?
Lender believed that it was getting a first mortgage securing $21,500 on property worth at least $40,000 (the purchase price). If the Buyer were paying the balance of the cost in cash, then indeed it is difficult to understand why the Buyer would then take cash away from the closing. But there are alternative explanations as to why a Buyer might walk away from a closing with cash: there may be non cash items involved as part of the consideration either real property or other valuable items being liquidated or exchanged, with only a portion necessary to complete the sale price. Assuming that the Lender was satisfied (which perhaps it shouldn't have been here) that it was lending with the proper priority position, is it really appropriate to conclude that it has to "look behind" the borrower's assertion that it is not taking out a purchase money mortgage? And even if it should be punished for such a "crime," isn't the loss of priority enough? Why destroy the entire lien? The purchase money mortgagee also was quite careless in the way it participated in this closing.
The editor concludes that this is a very scanty record upon which to reverse the trial court's finding that the lender had a bona fide junior lien. It may be that the appeals court suspected that Lender was in league with the Buyer's fraud, but is it really for the appeals court to make such a determination based upon a naked record? This case is likely to cause confusion in future precedent in Oregon. The cat should have been skinned some other way.
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