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CSA: Lawsuit gave lender notice

Banks that loan money on property after a lawsuit has been filed may not be able to foreclose on it, the Court of Special Appeals has held.

The appellate panel held 3-0 that a trial judge should have delayed or stopped the foreclosure of a loan because the borrower’s title was being disputed in a separate lawsuit when the loan was made, which had ended with a finding that the borrower held the property in trust for another party.

The filing of the lawsuit a month before the loan was made put the bank on notice of the litigation, whether or not the bank actually knew about it, the court held. This marks the first time Maryland courts have addressed that issue.

“It’s been a tour de force,” said the appellant’s attorney, Charles Bagley IV of Bagley & Rhody P.C. in Annapolis. “Some people said you should have given up and I said we are going to take this to the Court of Special Appeals. We are going to keep going until we lose.”

The attorney for the lender, Brent M. Ahalt with McNamee, Hosea, Jernigan, Kim, Greenan & Lynch P.A. in Greenbelt, did not return calls for comment.

Since this ruling was the first of its kind, Bagley said he was unsure if it would have broader implications.

“Whenever an appellate court answers a question, the answer is as narrow as possible, because they don’t want to go overbroad,” Bagley said. “If a case had the facts we had, it would be persuasive. I don’t know if it will mushroom into a bunch of other cases.”

Attorney Phillip Robinson, who defends homeowners facing foreclosure, also said he did not think the decision would affect his future casework since he said the circumstances in this case were so unusual.

“It sure seemed to me that this is heavy-duty litigation that is not normal,” Robinson said.

Dorothy Mae Urban died in June 2007 at the age of 73. A few weeks earlier, she had deeded her Pasadena property to her son, Robert Street Sr.

In her original will, her property was supposed to go to St. Jude Children’s Research Hospital, Bagley said.

“You are seeing a lot of people taking advantage of older people,” Bagley said. “That is what you see here. He knew there was a will. He knew he would not get the house. The only way was to have her deed him the house.”

The personal representative of Urban’s estate contended that Street had unduly influenced her. She filed a complaint in Anne Arundel County Circuit Court in January 2008 saying Street obtained the property through a breach of confidential relationship, undue influence and fraud.

That February, Street obtained a mortgage secured by a deed of trust from 1st Chesapeake Home Mortgage LLC. In doing so, Street paid off the existing mortgage his mother had put on the property.

More than two years later, in March 2010, the court ordered the imposition of a constructive trust on the property for the benefit of the estate.

On Dec. 1, 2010, the lender — by then, MidFirst Bank — filed a foreclosure action on the property.

Prior to any sale, the personal representative filed a motion to dismiss the foreclosure action, arguing that the bank could not foreclose because it loaned the money after the lawsuit challenging the deed was filed.

The circuit court denied the estate’s motion in May 2011, finding no proof that the lender had actual knowledge of the other lawsuit. The Court of Special Appeals, however, reversed the decision, finding that the pending lawsuit — or lis pendens — was sufficient to put the bank on constructive notice before it loaned money on the property.

“The Lender took the Property subject to constructive notice of the Estate litigation and, as such, does not qualify for the protection to which a bona fide purchaser is entitled,” Judge Shirley M. Watts wrote last week for the appellate court.

The court also rejected MidFirst’s claim that it acquired the rights of the lender whose loan had been paid off, which predated the transfer to Street.

“Not very often do you get vindicated this way,” Bagley said. “They are going to argue they were not put on notice. We felt comfortable with lis pendens and, in the end, it worked.”

The estate also argued that the lender could have learned of the lawsuit by doing a title search beforehand.

“It’s a classic situation where we filed well before they got the loan and then they are on notice,” Bagley said. “The fact is, they may not have been on notice but should have done the title search to do it.”

Robinson said most firms have established policies where they check a title before moving forward with a foreclosure.

“If it was an innocent error, that is one thing,” Robinson said. “If they don’t have policy to do that, that is another problem. You would just pull a title report and it will show lawsuits associated with the property, as well.”

WHAT THE COURT HELD

Case:

Shelia Murphy, Personal Representative of the Estate of Dorothy Mae Urban v. Jeremy K. Fishman, et al., September Term 2011, No. 786. Argued June 11, 2012. Decided Sept. 4, 2012. Opinion by Watts, J.

Issue:

Did the circuit court err in ruling that a bank that loans money on a property after another lawsuit is filed, which resulted in the imposition of a constructive trust, was entitled to foreclose absent actual knowledge of the pending litigation?

Holding:

Yes, reversed. The filing of the other lawsuit prior to the loan being made put the lender on constructive notice of the litigation, which prevents the foreclosing lender from acquiring the rights of a bona fide purchaser for value. Actual notice is not required.

Counsel:

Charles Bagley IV of Bagley & Rhody P.C. for appellant; Brent M. Ahalt of McNamee, Hosea, Jernigan, Kim, Greenan & Lynch P.A. for appellee.

RecordFax 12-0904-03 (32 pages).