Press "Enter" to skip to content

Md. Court of Appeals Rejects Putative Class Action for Loan Application Fraud

FraudThe Maryland Court of Appeals recently affirmed a trial court’s grant of summary judgment in a putative class action “application fraud” case in favor of a mortgage company, bank, loan officers, realtors and a realty group and against the putative class of borrowers.

In so ruling, the Court held:  (1) the borrowers’ allegations were time barred;  (2) the borrowers were put on inquiry notice and presumed to know the contents of the fraudulent loan applications they signed;  (3) the lenders and realtors were not shown to have prevented the borrowers from reading the application documents;  (4) the lenders had no fiduciary obligations to the borrowers; and  (5) there was no evidence that the bank or its loan officer did anything to bring about or conspire with the fraudsters in the alleged false advertising of a HELOC product involved in the supposed scheme.

A copy of the opinion in Suzanne Scales Windesheim, et al. v. Frank Larocca, et al. is available here: Link to Opinion.

In 2006 and 2007, the borrower class representatives engaged realtors to help sell their homes and purchase new ones.  To allow them to purchase new homes before selling their old homes, the realtors advised the borrowers to simultaneously apply for two mortgage loans.  One was a Home Equity Line of Credit (HELOC) against their respective current homes.  Another was a primary mortgage for their respective new homes.  The HELOC was to be used as “bridge financing” to finance a down payment on their respective new homes.

The borrowers worked with loan officers from a mortgage company and a bank.  According to the borrowers, but allegedly unknown to them at the time, underwriting standards would not allow them to apply for a HELOC on a home they were about to sell.  The loan officer for the mortgage company allegedly submitted their application materials for the HELOC to the loan officer at the bank and waited for approval of those loans before she submitted the applications for the primary mortgages on the homes the borrowers wanted to buy.

Additionally, the borrowers alleged that, also allegedly unknown to them at the time, even with the HELOCs approved and bridge financing in place, they still could not qualify for, or afford to purchase their new homes without the proceeds from the sale of the current ones.

According to the borrowers, the lenders and realtors conspired together to create fake rental income to get around this problem.  To accomplish this, they allegedly fabricated leases between the borrowers and fictitious tenants, and then forged the borrowers’ signatures on those documents and used the documents to help the borrowers close on the loans for their new homes.

The borrowers admitted that they signed documents at closing that included the allegedly fraudulent rental income.  Yet, they alleged they did not notice that income and did not become aware that they “may have been victims of mortgage fraud” until class counsel contacted them in 2010 and 2011.

The borrowers claimed that once they “discovered” this fraud, they filed an 11-count class action complaint against the lenders and realtors in 2011.  After extensive discovery, the trial court granted summary judgment in the lenders’ and realtors’ favor and against the borrowers on all counts.  The lenders’ and realtors’ primary argument for summary judgment was that the borrowers’ allegations were barred by the three-year statute of limitations because each of their cause of actions accrued well over three years before they filed suit.

The borrowers appealed and the Maryland Court of Special Appeals reversed.  However, the Maryland Court of Appeals reversed the Court of Special Appeals and affirmed summary judgment in the lenders’ and realtors’ favor.

The Maryland Court of Appeals held that the borrowers had inquiry notice of 10 out of the 11 causes of action in the complaint at the time they signed their closing documents.  Therefore, the statute of limitations accrued at closing, and their allegations were time barred more than three years later when they filed suit.  For the 11th cause of action, an alleged violation of Maryland’s Secondary Mortgage Loan Law (SMLL), the Court of Appeals held the borrowers failed to state a claim for relief and affirmed judgment in the lenders’ and realtors’ favor on that count as well.

In particular, the Maryland Court of Appeals held that when the borrowers executed closing documents for the HELOCs and primary mortgages, they were “presumed to have read and understood the contents” of those documents.  The Court held that with “knowledge of several elements of critical information that suggested that their loan transactions were not proceeding as they expected,” they had “sufficient information for inquiry notice.”   Accordingly, the borrowers could not claim they only “discovered” the allegedly fictitious rental income years later after class counsel contacted them.

Additionally, the Maryland Court of Appeals distinguished the borrowers’ allegations from other cases where it had held that simply signing a document did not mean the signer was presumed to have read and understood its contents.  The Court held that the key distinction in those cases was that the alleged fraudster had taken affirmative steps to prevent the signer from reading the document, or the signer and the alleged fraudster were in some sort of fiduciary relationship.  The Court held that the lenders and realtors were clearly not in a fiduciary relationship with the borrowers, and there was zero evidence that the lenders or realtors prevented or tried to prevent them from reading the closing documents prior to signing.

Moreover, the Maryland Court of Appeals re-affirmed that Maryland law is “cautious in creating fiduciary obligations between banks and borrowers absent special circumstances.”  The Court held that none of the four “special circumstances” was present in this case.

Finally, the Maryland Court of Appeals held that there was no evidence to support the borrowers’ allegations that the lenders and realtors violated the SMLL or conspired to violate.  At best, the Court held, there might have been a conspiracy to commit mortgage fraud by making misrepresentations to a bank, but that is “the wrong conspiracy” because the borrowers’ lawsuit was based upon alleged false advertising in violation of the SMLL.   Thus, the alleged acts in furtherance of a mortgage fraud conspiracy against a bank were irrelevant to proving a false advertising conspiracy against the borrowers.

Accordingly, the Court of Appeals affirmed the trial court’s grant of summary judgment in the lenders’ and realtors’ favor on the SMLL claim as well.

Print Friendly, PDF & Email

The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.