COUNTRYWIDE HOME LOANS, INC. v. DENISE BRUCE A/K/A DENISE DAVID; MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. as Nominee for HOMECOMINGS FINANCIAL, LLC, Successor-in-interest to MORTGAGE ELECTRONIC

I. INTRODUCTION

In this case, I decide the priority of liens as between two mortgagees, each claiming to be holder of a first mortgage on the same property. Plaintiff Countrywide Home Loans, Inc. (“Countrywide”) loaned money to defendant Denise Bruce (“Bruce”) secured by a mortgage on the improved residential property in Hingham. The proceeds of this loan were not used to discharge a loan secured by a prior recorded mortgage of the property held by defendant MERS / Fremont; [Note 1] rather, the proceeds were used to discharge a debt which was, in fact, unsecured, leaving the MERS / Fremont mortgage undischarged and outstanding of record, and putting Countrywide in the position of a junior mortgagee. Countrywide claims that MERS / Fremont has been unjustly enriched, and that the court should declare Countrywide the senior lienholder on a theory of equitable subrogation, or order MERS / Fremont to make restitution. [Note 2]

II. PROCEDURAL HISTORY

On April 25, 2011, the court issued an Order Granting Plaintiff's Motion For Partial Summary Judgment. [Note 3] Countrywide Home Loans, Inc. v. Bruce, 19 LCR 207 (2011) (Misc. Case No. 08 MISC 386939) (Piper, J.), 2011 WL 1620779. In its Order, the court ruled it could not apply the doctrine of equitable subrogation, but that Countrywide was entitled to judgment as a matter of law that when MERS / Fremont used the Countrywide funds to pay off the unsecured loan in advance of a secured loan, it misapplied those funds, and Countrywide was entitled to a credit in the amount actually paid, against that lien senior to the Countrywide Mortgage. Id. at 212, *8. On August 24, 2011, after hearing, the court granted in part a motion for reconsideration, having become convinced that “there may be some set of factual circumstances under which Fremont might legally be entitled to apply the funds from the Countrywide loan towards its unsecured loan given to Andrew Curley.” Order Granting In Part Motion for Reconsideration, Land Court Misc. Case No. 08 MISC 386939 (Aug. 24, 2011) (Piper, J.). The court ordered a trial “to determine what inducements and other statements were made by Fremont, or its agents, to Countrywide about the balances and identities of the two outstanding loans, and what if any knowledge Countrywide or its agents had about the existence or validity of the putative mortgage granted by Curley in relation to the apparently valid mortgage given to Fremont by Bruce.” Id. [Note 4]

Trial was held April 9, 2012. A court reporter, Pamela St. Amand, was sworn to transcribe the testimony and proceedings and produce a trial transcript. Defendant MERS / Fremont called one witness, Peter Knapp. Plaintiff called no witnesses. Thirty-eight exhibits were introduced into evidence, most by agreement, including a Joint Stipulation of Facts. At the close of the taking of evidence, I suspended the trial; I directed the parties to await the receipt of the trial transcript, to prepare and file proposed findings of fact, rulings of law, and posttrial memoranda, and return for closing arguments. The required filings were made, and closing arguments were held on May 25, 2012. After considering the parties’ posttrial filings, and hearing their closing statements, I offered the opportunity for parties to file supplemental legal memoranda addressing National Shawmut Bank v. Fidelity Mutual Life Ins., 318 Mass. 142 (1945) and the Restatement (Third) of Restitution §§ 65, 67 (2012). Countrywide and MERS / Fremont filed their supplemental briefs, and I took the matter under advisement.

III. FINDINGS OF FACT

Based on all the evidence properly before the court, including the testimony given at trial, the thirty-eight trial exhibits, and the Joint Stipulation of Facts, I make the following findings of fact:

1. By quitclaim deed dated August 31, 1998, and recorded with the Plymouth County Registry of Deeds (“Registry”) at Book 16566, Page 267, Bruce took title to the Property.

2. On or about April 22, 2002, Andrew Curley purported to grant a mortgage (“First Curley Mortgage”) on the Property to Option One Mortgage (“Option One”), purporting to secure a note in the original principal amount of $365,600.00 (“First Curley Loan”). At the time of the First Curley Mortgage, and at all times thereafter, Andrew Curley held no title to the Property. The First Curley Mortgage was recorded at the Registry at Book 21987, Page 269, and is notarized by attorney Margaret Connolly.

3. On or about April 25, 2003, Andrew Curley signed a note payable to Fremont Investment and Loan (“Fremont”), in the original principal amount of $390,000.00 (“Curley Loan”). Neither the original note (“Curley Note”), nor a copy, have been introduced into evidence by any party. As part of the same transaction, Curley executed a mortgage purporting to convey the Property in mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”) as nominee for Fremont Investment and Loan, as security for the Curley Loan. This purported mortgage (“Curley Mortgage”) is recorded at the Registry in Book 24977, Page 141.

4. Margaret Connolly was the closing attorney for the Curley Mortgage; the title insurance commitment, also prepared by Connolly as the insurer’s agent, required pay off of the First Curley Mortgage granted to Option One. A portion of the proceeds from the Curley Loan secured by the Curley Mortgage were intended to pay off the loan secured by the First Curley Mortgage. On July 8, 2003, a Discharge of Mortgage was filed at the Registry at Book 25700, Page 34, discharging the First Curley Mortgage held by Option One. All parties agree that funds derived from this lending transaction did in fact pay off the mortgage held by Option One, and no party disputes the validity of the July 8, 2003 discharge.

5. On or about June 27, 2003, Fremont sold the Curley Loan to Residential Funding Corporation, but apparently retained the servicing rights. Residential Funding Corporation is not a party to this case.

6. On or about July 13, 2003, Fremont transferred the servicing rights to the Curley Loan to Homecomings, and Homecomings began servicing the loan.

7. Homecomings assigned tracking number 435920178 to the Curley Loan. In its role as servicer of the Curley Loan, Homecomings handled the administrative aspects of the Curley mortgage loan account, including processing payments and documenting, in the computer records known as “servicing notes,” each contact regarding the account.

8. On October 17, 2003, a Discharge of Mortgage was filed at the Registry at Book 26819, Page 329, purporting to discharge the Curley Mortgage recorded at Book 24977, Page 141. This instrument was prepared by Margaret Connolly and all parties agree (and I find) that the October 17, 2003 discharge is the result of a forgery or a fraud, is void, and that at the time, the Curley Loan remained outstanding. [Note 5]

9. On or about December 22, 2003, Bruce signed a note (“Bruce Note”) payable to Fremont in the original principal amount of $423,750.00 (“Bruce Loan”) and granted as security a mortgage (“Bruce Mortgage”) [Note 6] to MERS as nominee for Fremont Investment and Loan. The Bruce Mortgage is recorded with the Registry at Book 27309, Page 53. The Bruce Note has not been offered into evidence by any party.

10. The parties did not produce a copy of the HUD-1 for the Bruce Loan. MERS claims that funds were disbursed, but it is impossible to tell from the evidence to whom the funds went, and for what purpose. The title commitment (which was not prepared by Margaret Connolly) requires Bruce to “Payoff and Discharge Mortgages to Chase Manhattan Mortgage and Option One Mortgage.” No recording references are provided in the title commitment, or by the parties.

11. In February of 2004, Fremont sold the Bruce Loan to Residential Funding Corporation, but retained servicing rights. Fremont assigned loan number 6000082772 to the Bruce Loan.

12. As of December 30, 2003, the day the Bruce Mortgage was recorded, MERS as nominee for Fremont Investment and Loan had allowed two loans associated with the same property to be granted in the total amount of $813,750.00.

13. In late April 2004, Bruce engaged in a series of communications with Homecomings. This is demonstrated by the servicing notes introduced into evidence, and the trial testimony of Peter Knapp. In April of 2004, Homecomings was servicing the Curley Loan; the Bruce Loan was serviced by Fremont. In particular, on April 26, 2004, Bruce contacted Homecomings and verbally requested a payoff statement. The servicing notes from Homecomings also indicate that the number for Margaret Connolly’s facsimile was given to Homecomings.

14. On or about April 30, 2004, Denise Bruce f/k/a Denise David granted a mortgage of the property to SLM Financial Corporation, 593 Washington Street, Weymouth, Massachusetts, securing a note (“Countrywide Loan”) in the original principal amount of $473,600.00, and recorded with the Registry at Book 28137, Page 245. SLM Financial later assigned that mortgage (“Countrywide Mortgage”) to Countrywide Home Loans. Margaret Connolly was SLM Financial’s closing agent. At the closing, Bruce also signed a loan application, a HUD-1 Settlement Statement, and a Good Faith Estimate. In Section IV of the Loan Application, Bruce represented that she had liability to “Freemont,” [sic] identified account number 60000082772, and that the account had an unpaid balance of $423,750.00. In Section VII of the Loan Application, Bruce represented that the “Details of the Transaction” included a “Refinance” in the amount of $423,750. In the Good Faith Estimate, Bruce represented that the “Total Estimated Funds Needed to Close” included a “Purchase Price/Payoff” in the amount of $423,750. All of these details match, more or less, Bruce’s debt to Fremont, the so-called “Bruce Mortgage” and not the Homecomings Mortgage. The HUD-1, however, showed a “Payoff 1” to “Homecomings Financial” in the amount of $394,388.11.

15. On May 5, 2004, a Margaret Connolly (identified as a “third party” in the servicing notes) contacted Homecomings and represented that the payoff quote received showed $28,000 in unapplied funds, that the “new loan” closed on April 30, 2004 and was funding that day. That same day, Homecomings issued a payoff statement for the Curley Loan (“Payoff Statement”).

16. The Payoff Statement:

• identified the “Requestor Information: FAX” as “7818710606,” which was the facsimile number for the Margaret Connolly’s office;
• identified the “Mortgagor & Property address” as “Andrew J Curley, 56 Parkview Drive, Hingham MA 02043”;
• identified “Loan Number: 0435920178,” which is the number for the Curley Loan;
• advised the payor to “PLEASE CHECK THIS INFORMATION TO ENSURE IT MATCHES THE LOAN YOU INTEND TO PAY OFF”;
• provided a payoff amount of $394,030.85 plus $71.45 per diem;
• identified a specific address for remittance of the payoff funds; and
• directed that “Any funds received MUST reference the Homecomings loan number.”

17. On or about May 5, 2004, check number 16850 (“Check 16850”) issued from the Conveyancing Account of Margaret Connolly, SLM’s closing attorney. Check 16850 was made out to “Homecomings Mortgage” in the amount of $394,388.11. In the memo line of the check is printed “Bruce, Denise” followed by “ #0435920178” which had been written in by hand.

18. On or about May 7, 2004, Homecomings received Check 16850 at the address identified on the Payoff Statement and applied the proceeds to pay off the Curley Loan. The check cleared on May 10, 2004.

19. By letter dated May 12, 2004, Bruce was informed that the servicing rights to the Bruce Loan were being transferred from Fremont to Homecomings. On June 1, 2004, Homecomings began servicing the Bruce Loan.

20. On or about September 1, 2005, a discharge (“Bruce Discharge”) of the Bruce Mortgage was recorded at the Registry at Book 31268, Page 252. The Bruce Discharge is fraudulent and void.

21. Recorded at the Registry on September 2, 2005, at Book 31275, Page 337 is a document (“Countrywide Discharge”) purporting to discharge the Countrywide Mortgage. This discharge is also fraudulent and void.

IV. ANALYSIS

A. Equitable Estoppel

Countrywide’s main position is that the court got it right on summary judgment--that there is no need for evidence in this case because MERS / Fremont should be estopped from keeping Countrywide’s money as a matter of law. Countrywide relies on a case from the Court of Appeals of Tennessee, Stewart Title Guaranty Co. v. Fed. Deposit Ins. Corp., 936 S.W.2d 266 (1996). In the Stewart Title case, the plaintiff’s agent contacted a bank for payoff information on a loan secured by a deed of trust. Id. at 268. The plaintiff provided the name of the debtor, the address of the property that served as security, but not a loan number. Id. The bank provided a payoff amount for a different debt, owed by the same debtor, but for a substantially smaller amount, and not secured by a deed of trust on the subject property. Id. In a suit brought to prevent a foreclosure on a theory of equitable estoppel, the Court of Appeals upheld the Chancery Court’s determination that equitable estoppel applied. 936 S.W.2d at 269-70. The Court of Appeals concluded that “this appears to us to be a classic case for the application of the doctrine of equitable estoppel” because “when provided with correct information..., the Bank gave Stewart Title the wrong loan...” Id. at 270.

In Stewart Title, the plaintiff requested payoff information for a secured loan, and the bank provided the wrong loan number, and the wrong payoff amount, despite having had the ability to provide the correct information. But this is a key distinction between Stewart Title and the case at bar. Here, it is not clear that Homecomings made a mistake or a misrepresentation. It has not been shown that Homecomings had the ability to provide “correct” payoff information for the Bruce Loan, which Homecomings was not servicing. What is clear, however, is that Bruce received basically what she requested, which was the payoff for the Curley Loan. The evidence is that Homecomings at the time was servicing only one loan, the Curley Loan; the Payoff Statement from Homecomings clearly referred to the Curley Loan; and Check 16850 was exactly what one would expect in response to that Payoff Statement. Thus, Homecomings did not make any misrepresentation—intentional or otherwise—upon which Countrywide relied. For these reasons, equitable estoppel should not apply against MERS / Fremont. [Note 7]

B. The Discharge for Value Rule

The court’s April 25, 2011 Order on summary judgment in this case reasoned that (1) a mortgage given by a stranger to the title is not a valid encumbrance, and (2) Fremont and Homecomings are, as matter of equity, the same pocketbook. Therefore, a payment to either Fremont or Homecomings must be applied to clear the title, and there was only one valid encumbrance on the title. Whether or not funds from Check 16850 were applied to the Curley Loan or the Homecomings Loan was not a material question of fact. The court reasoned it made no difference: both loans were owned by the same company, so as a matter of law, the funds were required to go to the Homecomings Loan because the Curley Loan was not secured by a valid mortgage. The court thus held that, where there is one holder of two debts, one secured and one unsecured, and the debtor tenders a payment, the payee must pay off the secured debt. The court granted the motion to reconsider this conclusion, however, because it was persuaded that some set of facts might exist to show that the payee might be entitled to apply the funds to the unsecured loan.

MERS / Fremont argues that such a set of facts is present in this case. They argue that, for whatever reason, Bruce intended to pay off the unsecured Curley Loan, and did not intend to pay off the secured Homecomings Loan; and that even if Bruce subjectively intended to pay off the Homecomings Loan, Fremont had no knowledge or reason to suspect that Bruce was mistaken as to which debt she was paying off; therefore, Countrywide (standing in Bruce’s shoes) is not entitled to restitution under either the “discharge for value rule” or because Fremont was a “bona fide payee.”

The classic “discharge for value rule” is set out clearly in section 14 of the 1937 Restatement of Restitution:

A creditor of another or one having a lien on another's property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor's mistake.

RESTATEMENT (FIRST) OF RESTITUTION § 14 (1937).

The first issue is whether MERS / Fremont had notice of Countrywide’s “mistake.” The answer must be in the negative. For substantially the reasons set forth in the analysis concerning the doctrine of equitable estoppel, supra, Part IV.A, I determine that MERS / Fremont did not have notice of Countywide’s mistake. Again, all information provided in the Payoff Statement accurately reflected the Curley Loan, which was the loan actually paid off. To be sure, Countrywide made a mistake by paying off the Curley Loan and not the Bruce Loan, but the issue is not whether a mistake was made. It is whether MERS / Fremont had notice of the mistake, and I find and rule they did not.

The next issue is whether MERS / Fremont discharged a valid debt or lien. There are two decisions applying Massachusetts law in this area that stand out. In National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142 (1945), the Supreme Judicial Court declined to apply the discharge for value rule, and instead ordered restitution. In Greenwald v. Chase Manhattan Mtge. Corp., 241 F.3d 76 (1st Cir. 2001), the First Circuit denied a claim for restitution based on the discharge for value rule. To resolve the car at bar, I must determine: is Countrywide’s claim more like that in National Shawmut Bank, or more like Greenwald?

In National Shawmut Bank, a swindler borrowed money from several life insurance companies using, without right, the life insurance policies of an innocent party as collateral. 318 Mass. at 143-44. The swindler then refinanced with the plaintiff, National Shawmut Bank, who paid off the prior liens the life insurance companies had placed on the policies, in exchange for a promissory note from the swindler and the bank’s own liens on the policies. Id. at 144-45. When the swindler’s scheme was discovered, National Shawmut Bank sought restitution from the insurance companies. Id. at 145.

The court in National Shawmut Bank, on a case stated reported from the trial court without decision, held that “the plaintiff has a superior right to the money, and that the defendant shows no escape from the general rule that one receiving money of another without just right to it must restore it.” 318 Mass. at 152. The court first stated that the basic principle of restitution is that “a person who has been unjustly enriched at the expense of another is required to make restitution to the other.” Id. at 145-46 (quoting RESTATEMENT (FIRST) OF RESTITUTION § 1 (1937)). The court recognized the principle memorialized in section 14 of the First Restatement, “that restitution will not be ordered against an innocent defendant who has given value for the benefit received.” Id. at 147. The National Shawmut Bank court framed the issue as “whether the defendant has received money which in equity and good conscience belongs to the plaintiff. If so, the defendant must restore it.” Id. at 150. The court answered the question in the negative, and ordered restitution, reasoning that when “money was obtained from the plaintiff and the defendant’s past loss was thereby repaired at the plaintiff’s expense, we think the plaintiff acquired a right to restitution[.]” 318 Mass. at 150. This is because “[b]efore plaintiff even considered making payment to the defendant, the defendant had already lost its money, although it did not realize the fact.” Id. Essentially, when the defendant insurance company loaned money to the swindler based on a fraud and forgery, the insurance company lost that money and could not make itself whole at the expense of the plaintiff bank.

The First Circuit, applying Massachusetts law, came out the other way on this question in Greenwald v. Chase Manhattan Mtge. Corp., 241 F.3d 76 (1st Cir. 2001). The plaintiffs were partners of the Greenwald law firm, employed by a financial institution, Abbey, as a closing agent for some of its loans. Id. at 77. Abbey made two loans, and sold them to Chase Manhattan, who paid Abbey for them by wire transfer. Id. at 77. Abbey then sent uncertified checks to Greenwald, who, without waiting for these checks to clear, paid off the prior mortgages. Id. Abbey’s checks bounced, and Abbey went into bankruptcy. 241 F.3d at 77-78. In an action by Greenwald against Chase to recover the money Greenwald used to pay off the prior mortgages, the First Circuit upheld the district court’s denial of the restitution claim. Id. at 81.

The Greenwald court reasoned that the principles of the discharge for value rule, set out in section 14 of the Restatement (First) of Restitution, supra, favored the defendant because in that case, “[t]here was a real debt to the creditor; the person now seeking restitution chose to pay it off; and the creditor got only what was due to him.” 241 F.3d at 80 (emphasis in original). Essentially, the defendant in Greenwald, Chase, ended up with exactly what it bargained for. Chase paid full value for a loan, which they received, and the loan was in fact secured by a first mortgage, as they expected. Greenwald paid off the prior mortgages for Chase’s benefit, which was exactly what Greenwald expected to do. The problem was that the plaintiff, Greenwald, expected to be paid by their client, Abbey, and was not. But in the reasoning of the First Circuit, Greenwald was not to be made whole at Chase’s expense.

The resolution of the case between MERS / Fremont and Countrywide turns on whether this case is more like National Shawmut Bank, or more like Greenwald. It is telling that National Shawmut Bank begins: “In this case we must decide which of the innocent parties must bear a loss caused by... forgery and fraud[.]” 318 Mass. at 143. The Greenwald court provides a nice treatment of the National Shawmut Bank case. “Without disavowing the [discharge for value] rule, the court found it inapplicable in the Shawmut-Fidelity transaction because the mortgage that Shawmut discharged was not valid, the application to Fidelity for the original mortgage policy having been made by a forger and not the owner of the policy.” 241 F.3d at 80. Continuing, “On our reading of Shawmut, the case turned on the fact that the payment sought to be recovered did not discharge a valid mortgage but a counterfeit one.” Id. The National Shawmut Bank case “involves payment on a nonexistent debt premised on a forged instrument, not the mistaken discharge of a valid debt.” Id. This detail is key to deciding the case before me.

Here, the Curley Loan does not present an instance where MERS / Fremont was swindled out of money. Rather, they simply made a loan with seriously flawed collateral. They well may have expected the loan to be a conventionally-secured one, and only later came to appreciate that, due to a variety of unsavory tactics and events, they had as “security” only a “mortgage” granted by a non-owner. But the loan was a real one, albeit unsecured. The distinction is key. In National Shawmut Bank, the original lender/victim (the defendant insurance company) lost its money as soon as the swindler absconded with it. 318 Mass. at 150. Recall that everything about the loan was a fraud: the swindler was not the man he claimed to be; the insurance company did not loan money to the person to whom it believed it was loaning money. Thus, the defendant had no superior claim to the plaintiff’s money, because defendant was not discharging a debt as much as “repair[ing]” a “past loss[.]” 318 Mass. at 150. Here, even given the great deficiencies of the Curley Mortgage, the Curley Loan remained a valid debt. A third party swindler did not impersonate Andrew Curley, forge his signature on loan applications, and abscond with the money. MERS / Fremont loaned money to the person to whom they believed they were loaning the money. So, when MERS / Fremont used the proceeds from Countrywide’s loan to pay off the Curley debt, they were discharging a valid debt, not repairing a past loss. Although the issue is a perplexing one, which has me probing for the limits of the right to restitution, I conclude that under the Discharge for Value Rule, Countrywide is not entitled to restitution. [Note 8]

C. The Bona Fide Payee

The rule of the Bona Fide Payee is set forth in section 67 of the Restatement (Third) of Restitution, published in 2012:

(1) A payee without notice takes payment free of a restitution claim to which it would otherwise be subject, but only to the extent that

(a) the payee accepts the funds in satisfaction or reduction of the payee’s valid claim as creditor of the payor or of another person;

(b) the payee’s receipt of the funds reduces the amount of the payee’s claim pursuant to an obligation or instrument that the payee has previously acquired for value and without notice of any infirmity; or

(c) the payee’s receipt of the funds reduces the amount of the payee’s inchoate claim in restitution against the payor or another person.

RESTATEMENT (THIRD) OF RESTITUTION § 67 (2012).

There is no need for a lengthy analysis under the principles of the Third Restatement, because the rule of the Bona Fide Payee is actually a broader defense to restitution than previously afforded under the Discharge for Value Rule, section 14 of the original Restatement, supra. See RESTATEMENT (THIRD) OF RESTITUTION § 67, cmt. a (2012). Here, MERS / Fremont is a payee without notice, see supra Part IV.B, and MERS / Fremont accepted funds in satisfaction of a valid claim, the Curley Loan, see supra Part IV.B. For these reasons, I conclude that rule of the Bona Fide Payee is an independently sufficient ground for denying Countrywide’s restitution claim. I reach this conclusion recognizing that the comments to the Third Restatement set up an opportunity for override–for an award of restitution where its denial “results in a dramatic windfall to the payee as a result of fraud or mistake, and where the payee (if required to do so) would be unable to show any change or position....” Given the facts as I have found them, I do not see this case as one where the equities cry out for restitution. [Note 9]

Judgment accordingly.