Opinion
NNHCV126034520
07-07-2016
RCS Recovery Services, LLC v. Mary Lennon
July 8, 2016, Filed
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Steven D. Ecker, J.
This is a suit on a promissory note entitled " Secondary Mortgage Loan, " dated September 26, 2006. The loan was in the form of a revolving line of credit in the original principal amount not to exceed $125,000.00 (" GMAC loan"). The original lender was GMAC Mortgage Corporation (" GMAC"). The nominal borrower on the note is defendant Mary Lennon, who signed the instrument as " Borrower, " although, as we shall see, all parties to the transaction knew that the true beneficiary of the loan was Lennon's adult daughter, Katherine Volenec. A mortgage on Volenec's home, located at 81 Clark Street, Milford, provided security for the loan.
The maximum amount of available credit was drawn down by Volenec soon after the GMAC loan was made, and the loan quickly went into default due to Volenec's precarious financial condition. The first mortgage on Volenec's home also was in default by early 2007, resulting in a foreclosure action in May of that year. See Bank of New York, as Trustee v. Volenec, No. NNH-CV076000945-S (J.D. New Haven). Volenec then filed for bankruptcy under Chapter 7. See In re Volenec, No. 07-32486 (LMW) (Bankr.D.Conn.). GMAC ultimately recovered nothing in the foreclosure action due to its subordinate position as second mortgagee. Approximately five years later, on January 12, 2012, the GMAC loan was sold by GMAC's successor-in-interest to plaintiff RCS Recovery Services, LLC (" RCS"), as part of a package of unsecured mortgage notes purchased by RCS. The current loan balance (as of February 10, 2016), including interest and late charges, is $172,506.13.
The original lender on the first mortgage was Countrywide Home Loans, Inc. The Countrywide loan, in the principal amount of $360,400.00, was made on July 6, 2006, less than two months before the GMAC loan. See Complaint, Bank of New York, as Trustee v. Volenec, No. NNH-CV076000945-S.
See Pl. Ex. 1 (" Unsecured Mortgage Note Sale Agreement"). That Agreement defines " unsecured mortgage note" as a note " secured at the time of its making by a first or second Mortgage lien, which has since been rendered unsecured by a completed foreclosure of another lien on the Mortgaged Property . . ." Thus, RCS manifestly was on notice at the time of purchase that the GMAC loan was overdue and in default. Its knowledge is also reflected in the purchase price paid by plaintiff for Volenec's GMAC loan in particular: $812.50. See Def. Ex. K (letter from plaintiff's counsel stating purchase price). Exhibit K was admitted into evidence, over objection, primarily because it is relevant to determining whether plaintiff is a holder in due course. See General Statutes § 42a-3-302(a)(2)(i) (holder in due course must be a purchaser for value). Ultimately, as it turned out, the price paid by plaintiff for the note played no part in the court's decision in this case.
RCS brought suit against Lennon in late 2012. Volenec is not a defendant because her debt was discharged in the bankruptcy proceeding. Lennon, who is self- represented, filed a special defense stating that she was " duped" into signing the note by the GMAC loan officer, Jeffrey Pelliccio, who assured her at the time of the loan closing that she would not be responsible for repayment of the loan. Her pleading alleges, in relevant part:
1. [Lennon] WAS DUPED into signing [the note] by Jeffrey Pelliccio (GMAC Mortgage Corporation Home Equity Line of Credit loan officer) because HE TOLD [her], after she expressly stated that she couldn't sign for the loan because she would never be able to repay it, THAT HER SIGNATURE WAS JUST FOR THE PURPOSE OF OBTAINING A BETTER INTEREST RATE FOR HER DAUGHTER [Volenec]. This was never intended to be the [Lennon's] loan or responsibility. [Lennon] SIGNED THE NOTE IN GOOD FAITH THAT SHE WOULD NOT BE RESPONSIBLE FOR REPAYMENT. [Lennon's] SIGNATURE WAS OBTAINED UNDER FALSE PRETENSES!
2. This loan was to be [Volenec's] loan with regard to property at 81 Clark Street, Milford, CT. [Lennon] had no interest in said property, financial or otherwise. [Lennon] was never asked by the loan officer if she had any such interest. Any and all monies received went directly to [Volenec] at 81 Clark St., Milford, CT as did any and all paperwork connected with said loan. Defendant's daughter also made any payments that were made on the loan.
The case originally was tried to the court (Hadden, J.T.R.) last year, but a mistrial was declared as a result of the judge's declining health. A new trial was held, before the undersigned, on February 10, 2016. Post-trial argument was heard on March 9, 2016.
The only real issue for decision is whether the GMAC loan is unenforceable against Lennon due to the deceptive conduct alleged in her special defense. After careful consideration of the evidence presented at trial, the court has determined that Lennon was, in fact, affirmatively misled by the GMAC loan officer's misrepresentations, made at the time of the loan transaction, regarding her obligations in the event of default. The misrepresentations were made by the loan officer for the purpose of inducing Lennon's reliance; she relied on the loan officer's false reassurances regarding her obligations, and that reliance was reasonable under all of the circumstances. Based on these findings, the plaintiff cannot prevail in this lawsuit.
The pertinent facts can be summarized without difficulty. At the time of the loan, in 2006, Lennon was a sixty-nine-year-old widow who had resided since 1963 in Madison, Connecticut. She earned $22,000.00 annually ($5500.00 quarterly) doing office work at Diebolt & Co. In July 2006, Lennon's daughter, Katherine Volenec, purchased a home located at 81 Clark Street, Milford (" Clark Street property"). Lennon at no time held any ownership interest in the Clark Street property, and never resided there. She visited twice. In late summer, 2006, Volenec needed funds to make repairs on the recently-purchased home. She was referred by one mortgage lender to a loan officer named Jeffrey Pelliccio at GMAC in Milford. Volenec phoned Pelliccio to inquire about a loan. Pelliccio told Volenec that she would qualify for a more advantageous interest rate if she could produce someone to sign for the loan with her. Volenec asked her mother, Lennon, if she would help her for that purpose.
The transaction evidently proceeded quickly. Unfortunately, the underwriting and due diligence performed by GMAC in connection with the loan was, by all appearances, abysmal. GMAC seems to have paid no attention to the first mortgage on the Clark Street property. GMAC also appears to have made virtually no effort to determine the financial wherewithal of Volenec or Lennon to repay the loan. The only information requested by GMAC from Volenec was her home address, her mother's social security number, and her mother's salary/wage information. No documentation of any kind was requested at any time from Volenec or Lennon--no pay stubs, no tax returns, no bank statements, no financial statements, nothing. An illustration of the stunning sloppiness of GMAC's mortgage lending protocol, at least the one followed in this particular instance, is provided by the loan " application" form used by GMAC to obtain and verify information relating to the Volenec loan. See Def. Ex. F (" New Account Application"). The form was filled out by GMAC, based (very loosely, to put it kindly) on information given to Pelliccio by Volenec during their brief telephone conversation at the beginning of the process. The application is rife with errors--almost certainly deliberate misstatements--attributable to GMAC itself. Thus, the purchase date of Volenec's Clark Street property is stated as 1/2004, when in fact the property was purchased in July 2006; the estimated value of the property is stated as $475,000, when in fact it was purchased for $450,000; Lennon is identified as the title owner of the property, and her address is given as 81 Clark Street, none of which is true; and Lennon's monthly salary is stated as $5,500.00, when in fact that is her quarterly income.
The court's observation on this particular point stems from three facts. First, the July 2006 Countrywide loan secured by the first mortgage was in the principal amount of $360,400. The GMAC loan, which extended credit in the amount of $125,000 in September 2006, resulted in total principal indebtedness of $485,400 secured by property worth only $450,000 (assuming that Volenec had paid fair market value when she purchased the Clark Street property in late July 2006). Therefore, if GMAC knew anything about the first mortgage, it chose to make a recklessly undersecured loan to Volenec/Lennon. Second, the settlement charges on the GMAC loan reflect no title search fee. Third, the loan application form completed by GMAC, discussed at greater length in the text following this footnote, states that the current balance on the first mortgage is $0.00--at a time when any diligence at all would have made it clear to GMAC that the actual balance on that loan was approximately $360,000.
The loan application is not signed by Lennon or Volenec, nor is there is any reason to believe it was ever shown to them at the time of the loan.
GMAC apparently conducted no appraisal of its own.
Based on the evidence presented at trial, the court is confident that all of these errors/misstatements are attributable solely to GMAC. No effort was made by Volenec or Lennon to mislead GMAC or provide it with materially false information. The factual errors contained in the loan " application" appear to be intended by GMAC (Pelliccio) to provide at least superficial justification for making the loan in the event of an audit of some kind. This clearly was a " no documentation loan, " one of the many careless lending practices that contributed, by 2008, to one of worst financial meltdowns in United States history. If the lending practices utilized in this particular case are any indication of its general lending practices, it is no wonder that GMAC required massive government assistance in 2008 and thereafter.
See Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, at 110 (2011) (describing " no documentation" loans).
See Baird Webel and Bill Canis, Congressional Research Service, Government Assistance for GMAC/Ally Financial: Unwinding the Government Stake (January 26, 2015) (detailing corporate history of General Motors Acceptance Corporation [GMAC] and its successors, and describing government assistance it received during the 2008-09 financial crisis, including over $16 billion in TARP assistance); Steven Davidoff Solomon, " Profits in G.M.A.C. Bailout to Benefit Financiers, Not U.S., " New York Times (8/21/12) (reporting that GMAC's mortgage lending subsidiary, GMAC ResCap, was finally put into bankruptcy in May 2011). To be clear, none of these facts bear on the outcome of the instant case. References to the larger economic context are provided only to demonstrate that the lending practices seen in this particular case, while unfathomable by reference to accepted standards of prudent underwriting, were evidently not so unthinkable in what plaintiff's counsel described as the " buccaneer days" of mortgage lending.
The loan closed on September 22, 2006, at GMAC's Milford office. Lennon accompanied her daughter based on her daughter's request that she sign the documents needed to allow Volenec to qualify for a lower interest rate. Before signing anything, Lennon sought clarification from Pelliccio about the consequences of her participation. Specifically, she told Pelliccio in clear and unambiguous terms that she already had a $150,000 mortgage on her own home in Madison, and could never repay this loan. She stated her understanding that the loan was " my daughter's loan, " not Lennon's loan, and Lennon was signing only so that her daughter was given a lower interest rate. Pelliccio, in response, assured Lennon that the loan was Volenec's loan, and Lennon would not have to repay the loan in the event of a default. Lennon then proceeded to sign where she was told to sign on the " wad" of documents presented to her. In doing so, Lennon signed the promissory note as maker.
The court bases these specific findings primarily on the testimony of Volenec and Lennon. That testimony was subject to vigorous cross examination, and the court's factual determinations on this point are the result of its careful consideration of the relevant testimony viewed in light of the credibility of the witnesses. Pelliccio was not a witness at trial, but his deposition testimony was in evidence, and was read by the court.
Plaintiff argues that Lennon signed the note and must be held responsible for the legal obligations thereby incurred. Plaintiff's legal position is simple and compelling, and would carry the day in the vast majority of cases involving contractual and other legal undertakings. Adults who sign a legal document ordinarily cannot later be heard to say that they should be excused from performance because they did not read or understand its terms. See, e.g., Abele Tractor and Equipment Co. v. Sono Stone and Gravel, LLC, 151 Conn.App. 486, 506, 95 A.3d 1184 (2014); First Charter National Bank v. Ross, 29 Conn.App. 667, 671, 617 A.2d 909 (1992). But " [t]he rule applies only if nothing has been said or done to mislead the person sought to be charged . . ." Id., quoting Ursini v. Goldman, 118 Conn. 554, 562, 173 A. 789 (1934). GMAC and its agents have two permissible options when a person in Lennon's circumstances stands in its offices and pauses before signing a pile of legal documents, and expresses confusion or concern to a loan officer about the consequences of an undertaking that involves large sums of money, and states in point-blank terms that she does not have the financial ability to repay the loan in the event of default, and then, finally, seeks reassurance that repayment is not her own responsibility. First, the GMAC loan officer can tell the would-be borrower nothing, except perhaps to read the documents carefully and consult a lawyer with any questions. Second, the loan officer can speak the truth, answer the questions and concerns accurately, and correct the would-be borrower's misunderstandings. What he cannot do is lie, or otherwise reinforce the would-be borrower's misunderstandings.
Fraud, if proven, vitiates Lennon's obligations on the note. Plaintiff purchased the note in 2012, and it was on notice that the note was in default at the time. See n.2 above. It is not a holder in due course, see General Statutes § 42a-3-302(a)(2)(iii), and therefore its claim is subject to any defenses that would be available to Lennon under a simple contract for payment. See General Statutes § 42a-3-305(a)(2). Here, Lennon alleges that the contract is vitiated by fraud. To prevail, she must satisfy the requisite burden of proof with respect to the elements of that defense. See, e.g., Miller v. Appleby, 183 Conn. 51, 55, 438 A.2d 811 (1981).
Upon review of the evidence presented at trial, the court has concluded that Lennon was affirmatively misled by false statements of fact knowingly made by Pelliccio at the loan closing; that Pelliccio knew his statements were false when made, and were made by him for the purpose of inducing Lennon to sign the note; and that Lennon signed the note in reliance on Pelliccio's false reassurances. Pelliccio had a single objective on September 22, 2006: to close the loan and thereby earn his commission. He and his principal ignored or removed any and all impediments to making the loan. The facts--the truth--did not much matter to Pelliccio, as demonstrated by the false information that GMAC (presumably Pelliccio) inserted in the loan " application" form, Def. Ex. F. See above at p. 3 (discussing false statements included by GMAC in the " application"). The court listened and watched carefully as Lennon and Volenec testified, and each of them impressed the court as extremely credible witnesses. Their respective versions of events rang true, and the court believes that Lennon was induced by fraudulent misrepresentations to sign the note.
He testified at his deposition that his basic job duty at GMAC was " [t]o find people that needed to borrow money . . ." Def. Ex. L at 16. He was paid on commission; he earned money when he closed loans. Id. at 16.
The court also finds that her reliance was reasonable under the circumstances. Lennon clearly was not sophisticated in business matters. She entered GMAC's offices on September 22, 2006, under a profound misunderstanding regarding her role in the loan transaction. She understandably did not trust herself to digest the meaning of the stack of paperwork placed in front of her, and so she asked Pelliccio--the loan officer whose business it was to understand what was happening--to confirm that she was not responsible for repayment of the loan in the event of default. She was an honest and credulous person, and apparently it never occurred to her that Pelliccio might not act honorably in response. Her behavior was reasonable for a person of her age and background in these circumstances. Unfortunately, rather than correct Lennon's grave misunderstanding, Pelliccio did the opposite; he reinforced and hardened her misunderstandings by providing her with false information. His false statements would have seemed reasonable and worthy of reliance to Lennon, because what he said was consistent with the most basic realities surrounding the event: (a) the loan was being made to her daughter, (b) the money was going directly to her daughter's account, without passing through Lennon's account; (c) Lennon received no benefit from the loan; and (d) the loan was secured by a mortgage on her daughter's house, not her house. What Pelliccio told her made sense.
It is true that the actual words of the note said something very different than what Pelliccio told Lennon and her daughter. The court takes this point very seriously. As noted, the law ordinarily holds all competent adults responsible for the contents of the documents they sign, whether they read the documents or not, whether they understand them or not. That rule of responsibility is right and proper, and serves as a strong incentive to induce anyone with any doubts or concerns to pause and ask questions or obtain advice before signing a legal document. But, once the questions are asked, it is fair to prohibit the party responding to the question from supplying false or misleading answers. The common law of fraud provides relief to a person in Lennon's shoes under the unusual circumstances of this case.
Judgment for defendant.