This is a tale of woe which may not have a real lesson for servicers, even though an instructive result is always a purpose of these alerts. But we will let the readers decide because there should be solid guidance for the origination department.
A new case [Fremont Inv. & Loan v. Delsol, 65 A.D. 3d 1013, 885 N.Y.S. 2d 505 (2d Dept. 2009)] highlights what a dangerous world it can be for lenders (no surprise there) and how a remedy which seems as if it could have been granted was not.
Facts and Analysis
Here are the critical facts which explain how the lender was snookered. Owner is selling his property and the prospective purchaser went to the lender for a mortgage. An attorney who was to receive the loan proceeds (it is not absolutely clear who the lawyer was representing) got a wire transfer from the lender, paid some $258,000 to the holder of the existing mortgage to satisfy it (which is typical), obtained the satisfaction, disbursed $22,000 in additional proceeds to the owner, but never recorded either the purchaser’s deed or the lender’s mortgage. Not only that, the lawyer absconded with the balance of the wired mortgage proceeds. The result of all this is that the owner remained in title, conveniently without a mortgage burdening his property, the purchaser never got title, and the new lender was out all that money but without a mortgage as security; what a mess.
Lender needed to sue, of course, but assumed that the doctrine of an equitable mortgage should save them. Where parties intend that a mortgage is to be executed but it fails for want of some factor, such as signature is forgotten, the original is lost but a copy remains, or a vital statement in the mortgage was left out, the court can decree that an equitable mortgage exists. Here, though, the court found the intent to deliver a mortgage – a necessary component – did not exist and so there could be no equitable mortgage. (It is not clear why the doctrine of equitable subrogation was not invoked but that is another, far more intertwined, concept.)
The lender was left with possible success via a claim of unjust enrichment; the owner certainly was enriched. When this case finally ends the result of that aspect will be revealed.
There is not much here for servicers. They inherit this problem and they need to explore with counsel the sometimes obscure legal theories to pursue.
But there is something to be suggested to the lenders’ origination department. As a business decision, and to be more competitive, lenders may allow the borrower’s attorney to do the closing for them. (That might have happened here.) Or they may have some settlement agent attend to it. Having one’s own counsel, with a fiduciary duty to the lender, and an attorney-client relationship which can support a claim to a malpractice carrier can provide considerably more protection. It may not eliminate all the trauma when a genuine crook is encountered, but it can help.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.