At Howard Law, P.C., our Riverside County foreclosure defense attorneys have written here many times about the paperwork problems that have flooded the courts since the mortgage crisis. This includes some instances of shady or semilegal behavior by lenders, such as robo-signing, post-dating documents and failure to check into evidence. However, we have never read a case in which the lender was accused of outright forgery, until Sutter v. U.S. National Bank, a Sixth U.S. Circuit Court of Appeals decision. Daniel and Sheryl Sutter refinanced their Michigan mortgage in 2004, but never signed a mortgage at the closing. The refinance proceeded normally otherwise, but the Sutters began missing payments and filed for Chapter 13 bankruptcy. U.S. National Bank, the assignee of the mortgage, filed a proof of claim with an attached mortgage bearing false signatures. The bankruptcy court ultimately decided to impose an equitable mortgage, but the district court voided the mortgage outright and the Sixth Circuit agreed.
The Sutters caught the forgery because they had arranged to close the loan in Sacramento, California, where they happened to be vacationing at the time their refinance closed. The forged mortgage expressly said it had been signed and notarized in Michigan. The Sutters used the forgery to object to the proof of claim, then filed an adversary proceeding seeking to disallow the claim or avoid the transfer of the debt. The bankruptcy court granted both requests and expressly reserved the right to decide on an equitable mortgage. The court then allowed the trustee to sell the mortgage back to the bank for $30,000, then abandon the home to allow foreclosure to finish, in exchange for a waiver of any additional claims on the estate. The Sutters appealed to the district court, which sent the case back for an equitable mortgage ruling. The bankruptcy court imposed an equitable mortgage, holding that the Sutters had gotten the benefit of the mortgage and the assignee did not have unclean hands. The district court voided this on appeal, however, saying the mortgage was void because no transfer ever occurred.
U.S. National appealed the ruling that there was no mortgage on the property and that the original mortgage was void under Michigan law. After dismissing some threshold issues, the Sixth Circuit considered the question of whether the mortgage is void in Michigan. It is undisputed that the Sutters could not have signed the mortgage; U.S. National admitted that forgery by its predecessor was the most likely explanation, and steps have been taken to penalize the notary. Furthermore, the Sixth said, caselaw says a forged mortgage is void ab initio in Michigan, even when innocent successors in interest are affected. An equitable mortgage is possible, the court noted, but Michigan does not allow an equitable mortgage when one party has unclean hands, and assignees stand in the shoes of their predecessors. Thus, U.S. National cannot benefit from an equitable mortgage. Finally, the court dismissed claims that the Sutters would inequitably get a "free house" from this decision, since they intended to grant a mortgage in the first place. Filing for bankruptcy is not inherently inequitable, the court said, and the Sutters will remain obligated on the unsecured note they actually did sign.
As Irvine foreclosure defense lawyers, we're pleased to see the courts take such a firm stance on the rights of mortgage borrowers to be free of illegal and deceptive conduct. The case ultimately did not leave the Sutters in a great position, since they were ultimately unable to receive a bankruptcy discharge. (They converted to Chapter 7 but were unable to obtain a discharge because they had filed a previous Chapter 7 case.) However, nor did it allow the forgers or their successors in interest to benefit from patently illegal behavior -- and that's as it should be. It's becoming clear that during the mortgage bubble, when the Sutters refinanced their home, many untrustworthy companies sought to make a quick dollar from refinances like this one, without regard to the risk of the loans. In this case, apparently it was also done sloppily and fixed in a blatantly illegal manner. Led by experienced attorney Vincent Howard, our San Diego County foreclosure defense attorneys aggressively defend cases with these kinds of improprieties.
If you're facing foreclosure and you believe you've been pushed around or ignored by your lender, don't hesitate to call Howard Law, P.C., for help. For a consultation or to learn more, send us an email or call 1-800-872-5925.