Wednesday, December 16, 2015

Maryland Appeals Court Declares Reverse Mortgage Loan Void, Not Merely Voidable When Made To Borrower Adjudicated 'Disabled' & Where Court-Ordered 'Guardianship' Appointment Is Properly Recorded; Title Agent Screw-up Leaves Bankster Holding The Bag & Entitled To No Relief (ie. No Mortgage Ratification, No Restitution Via Unjust Enrichment, No Lien Subrogation)

From a client alert from the law firm Pessin Katz Law, P.A.:
  • The Maryland guardianship laws do not fully describe the consequences of a disabled person’s entry into a transaction without the knowledge of their guardian.

    Is the transaction void or voidable? Is one who advances funds entitled to ratification of that act by a guardian? Are they entitled to restitution? Can such a person earn a right of subrogation in the case of the payment of a prior lien?

     In Nutter v Black, (No. 1563, Sept. 30, 2015, Kehoe, J.), the Maryland Court of Special Appeals, agreeing with the Baltimore County Circuit Court, held that a reverse mortgage entered into by Edwina E. Black, (“Black”) without the knowledge of her court appointed guardian, attorney David L. Moore, (“Moore”) was void. Consequently, James B. Nutter & Co. (“Nutter”) was not entitled to ratification by Moore, reimbursement by way of a theory of “unjust enrichment”, or subrogation as a result of the loan transaction and the satisfaction of Black’s existing mortgage.

    The opinion of the Court of Special Appeals described Black as “disabled”, meaning one of those “…persons who have been adjudicated by a court to be unable to manage their property and for whom a guardian of the property has been appointed.” The Court stated that such an individual is to be distinguished from an “incompetent”, the latter being one of those “…individuals who may be unable to manage their property, but who are not subject to guardianship proceedings.” The Court remarked that the distinction was “critical to the outcome of this appeal”.

    The facts of the case were straightforward. Black was a disabled person. Nutter was a reverse mortgage lender. Moore was Black’s court appointed guardian. Black entered into a reverse mortgage involving Black’s residence with Nutter without Moore’s knowledge or consent. Nutter asked Moore to ratify the transaction or make restitution. Moore refused. Nutter filed suit to compel ratification or, in the alternative, for restitution or subrogation under the prior purchase money mortgage for Black’s residence.

    Title to Black’s residence was in the name of Moore, as her guardian, and was subject to a deed of trust, again in the name of Moore.

    The parties stipulated that the title agent for the reverse mortgage “failed to properly identify the guardianship action in the Court record.” The stipulation did not mention if the title agent was aware of Black’s disability based upon the deed and deed of trust for her residence.

    As part of the closing on the reverse mortgage, Nutter paid off the deed of trust on Black’s residence, paid settlement costs and advanced funds to Black. After Moore was notified of the satisfaction of the loan used to purchase Black’s residence he investigated the Nutter loan. After several months of trying to reach Moore, Nutter subsequently wrote to Moore and asked him to either ratify the transaction or return the funds paid out at closing.

    Moore advised Nutter that the transaction was void as a matter of law and he had no obligation to return the monies paid out by Nutter. Nutter contended that the transaction was voidable and it was entitled to a declaratory judgment so stating and related relief.

    The Baltimore County Circuit Court agreed with Moore. The reverse mortgage was void, not voidable; Nutter had “constructive notice of Ms. Black’s disability”; and, therefore, Nutter was not entitled to restitution because the transaction was void, not voidable.

    The Circuit Court denied Nutter’s claim for restitution because that claim was premised solely upon Nutter’s contention that the reverse mortgage transaction was voidable. The reasoning of the Circuit Court was that because the transaction was void, Nutter acquired no rights in Black’s residence property and “thus was not compelled to pay the [existing] mortgage in order to preserve any rights.”

    Before the Court of Special Appeals, Moore argued that because of Ms. Black’s disability, the reverse mortgage transaction was void and Nutter’s only rights, if any, lie in restitution or subrogation. Nutter contended that the reverse mortgage transaction was voidable based upon Moore’s not timely rescinding the loan. Had he done so, Nutter argued, it would have been made whole by repayment upon rescission. Because of the delay and failure to rescind on the part of Moore, Nutter asserted that he “constructively affirmed” the reverse mortgage.

    The Court of Special Appeals noted that Maryland courts have limited ruling deeds to be void due to possible subsequent consequences involving the chain of title to those circumstances involving the “face of the deed”, meaning forgery, by example. However, Moore was, in essence, asking the Court to rule that Black’s deed was, indeed, a forgery due to her lack of capacity.

    The Court of Special Appeals agreed with Moore. It reasoned that because Maryland’s guardianship statute vested title to all property of a disabled person in that person’s guardian, the disabled person was like a forger: “Owning nothing, she can convey nothing.”

    Furthermore, the Court stated that a properly recorded court appointment of a guardian is “constructive notice to the world that the disabled person is without authority to convey his or her property.” The Court noted that “imprudence” in a title search bears its own risks, and a deed by a disabled person should be treated no differently than “any other readily-recognizable title flaw.”

    From an equitable standpoint the Court pointed out there were policy reasons to treat the transaction as void rather than voidable citing depletion of the guardianship estate by the reduced equity in the property as a result of the transaction; and, consequently, any increase in the property’s value inuring solely to Nutter; and, furthermore, ratification of the transaction possibly depriving Black eventually of all equity in the property; and, finally, rescission of the loan forcing Black to produce funds which were not available to her or her guardian and which would have to be secured from other sources.

    Nutter’s woes were further compounded on appeal by the observation of the Court of Special Appeals that any argument regarding Nutter’s right to restitution had not been properly preserved for appeal. As a result, the Court refused consideration of any argument regarding a right of Nutter to restitution.

    The Court of Special Appeals also spoke to the voluntary nature of the payoff of the existing mortgage on the property. It indicated that an “officious payor” (volunteer) would not be entitled to any relief for its actions by way of the argument of “unjust enrichment” and, in this case, that is how it viewed Nutter.

    In finding Nutter an “officious payor”, the Court stated that since Black lacked capacity any “contract” between she and Nutter was void and, therefore, Nutter was not acting under a legal duty when it paid off the existing mortgage. Nor did Nutter act “under any sense of moral duty” due to the business nature of the transaction. Also, because the contract was void, it was not acting to protect any interest it might have had in the property. Finally, Nutter could not claim it was acting at Black’s behest since she lacked the capacity to enter into the business transaction. The fact that Nutter may have been acting on mistaken information was irrelevant to its argument for relief.

    In conclusion, the Court’s opinion was that Black’s lack of capacity; Nutter’s lack of “diligence and prudence” in extending the loan to Black; and the deed to Black’s residence and the associated purchase money deed of trust “unambiguously informed anyone who bothered to read them that [Black] was under a disability and that Moore was the guardian of her property” were sufficient to deny Nutter any equitable relief arising out of theories of unjust enrichment or subrogation. Nutter was a volunteer, purely as a result of the action of Black being void, not entitled to equitable relief.

    Nutter highlights the observation that those who deal with a disabled person whose guardian has attended to all formalities of a court ordered guardianship do so at their own peril. Had Black been merely incompetent, the result of the case may have been different. In Nutter, the Court of Special Appeals has stated that it will not allow the rights of the disabled to be compromised because of the actions of third parties. The case may find its way to the Maryland Court of Appeals, the State’s highest court.

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