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Mortgage Lender Not Entitled to Subrogate Refinance Mortgage to Gain Priority as Creditor - Matrix Financial Services Corp. v. Frazer

August 23, 2011

Our Lake Elsinore foreclosure defense attorneys handle many bankruptcies involving mortgages as well as many foreclosure defense lawsuits and negotiations. This has given us a great deal of experience with mortgage lenders who are willing to play underhanded legal and accounting tricks or even submit false paperwork to the court in order to get paid. So we were interested but not surprised to see the decision in Matrix Financial Services Corp. v. Frazer, a South Carolina Supreme Court decision denying a mortgage lender a chance to "cut in line" ahead of another creditor in the homeowners' bankruptcy. Matrix held the mortgage for Louis and Linda Frazer, who defaulted on a legal judgment here in California in 2000, then moved to South Carolina and bought a house in 2001. The opinion says the creditor in the California lawsuit, Matthew Kundinger, should have first priority.

The Supreme Court did not explain what the underlying lawsuit was about, although it noted that another defendant along with Kundinger is the Parks Grove Homeowners Association. The Frazers defaulted on that lawsuit in 2000, before their January 2001 purchase of a home in South Carolina. The home was later assigned to Matrix, and they started a refinancing process in September of 2001. The new mortgage was closed in November of 2001 and recorded in April of 2002. Meanwhile, default judgment against the Frazers was entered in California in September of 2001. The Frazers later (the court didn't specify when) filed for consumer bankruptcy, and Matrix sought to foreclose the refinance mortgage. Kundinger opposed this, arguing that his default judgment had higher priority. Matrix then asked the court to allow it to subrogate its refinance mortgage to its original mortgage issued in January of 2001, giving it priority, and the court granted this. Kundinger appealed.

The South Carolina Supreme Court agreed that the master-in-equity should not have granted equitable subrogation to Matrix. A 1992 case, Dedes v. Strickland, had very similar facts, the court noted, and eventually found against the bank seeking to subrogate to itself. Under the law, the court went on, equitable subrogation is about a third party satisfying the mortgage, not the lender satisfying the debt against itself. Thus, it found that the lender could not use equitable subrogation to jump ahead in line, although it expressly left open the possibility that a lender in Matrix's position could use an alternative theory of replacement and modification. The court then went on to find that Matrix has unclean hands because it refinanced the loan unlawfully. Specifically, Matrix apparently closed the loan without an attorney present, as required by South Carolina law, and thus engaged in the unauthorized practice of law. The high court took a dim view of unauthorized law practice, and issued a blanket warning to all mortgage lenders: "Lenders cannot ignore established laws of this state and yet expect this Court to overlook their unlawful disregard. We take this opportunity to definitively state that a lender may not enjoy the benefit of equitable remedies when that lender failed to have attorney supervision during the loan process as required by our law."

This last statement made the strongest impression on our Dana Point foreclosure defense lawyers. The court expressly put South Carolina lenders on notice that in any case filed after this opinion, it will not tolerate failure to follow the law by having an attorney supervise the loan's closing. This is yet another example of courts cracking down on the sloppy practices endemic to the mortgage industry during the housing boom. Now that the robo-signing scandal has exposed widespread shoddy or missing paperwork, forged names and failure to follow legal requirements, judges are catching on and starting to scrutinize lenders' filings and behavior much more carefully. This can form the basis of a legal challenge to the foreclosure, if the circumstances are right, and possibly even save the home. As Norwalk foreclosure defense attorneys, we look for opportunities like this with each foreclosure case, to give our clients the best possible chance of staying in their homes.

If you're looking for an alternative to foreclosure and your loan servicer has been consistently unhelpful, call Howard Law PC instead. For a free, confidential case evaluation, send us a message online or call 1-800-872-5925.

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