Relating to Real Estate

Suzanne Scales Windesheim, et al. v. Frank Larocca, et al., 443 Md. 312, 116 A.3d 954 (2015), involved a class action lawsuit brought by three married couples (the “Borrowers”) alleging that several realtors and lenders (the “Defendants”) engaged in a “buy-first-sell-later” mortgage fraud scheme. The Court of Appeals held that the Borrowers were on inquiry notice that their loan transactions were not proceeding as they expected when they signed their mortgage applications, and thus the three-year statute of limitations began to run at that time. Accordingly, the Court of Appeals concluded that the Borrowers’ claims were time-barred.

The Scheme

In 2006 and 2007, the Borrowers separately contracted with certain realtors (the “Realtor Defendants”) to represent them in selling their current homes and purchasing new homes. The Realtor Defendants encouraged the Borrowers to use home equity lines of credit (“HELOCs”) to extract equity from their current homes and use it to purchase new homes before selling their current homes, or “buy-first-sell-later.” To effectuate the buy-first-sell-later arrangement, the Realtor Defendants advised each of the Borrowers to simultaneously apply for two loans: a bridge financing HELOC against their current homes and a primary residential mortgage for their new homes. To facilitate these loans, the Borrowers contacted Prosperity Mortgage Company (“Prosperity”). Prosperity pre-approved the Borrowers for primary residential mortgages for their new homes that were not contingent on the sale of their current homes. However, the Borrowers did not actually have sufficient funds to buy new homes without selling their current homes.

Unbeknownst to the Borrowers, Prosperity had to get a separate mortgage lender, National City Mortgage (“National City”), to provide the bridge financing HELOCs. Prosperity sent the Borrowers’ financial information to Suzanne Scales Windesheim, a loan officer for National City, who completed the Borrowers’ HELOC applications (the “HELOC Applications”) without ever speaking with the Borrowers. Windesheim falsely represented on the HELOC Applications (1) that she had contact with the Borrowers to obtain their financial information, and (2) that the HELOCs would be secured by the Borrowers’ primary residences. Based on these misrepresentations, National City approved the HELOCs.

Prosperity then submitted the Borrowers’ applications for the primary residential mortgages (the “Primary Mortgage Applications”) to its underwriters. Because the Primary Mortgage Applications would not be approved with the new debt created by the HELOCs and without the proceeds from the sales of the Borrowers’ current homes, Prosperity had to create additional monthly income for the Borrowers. To accomplish this, Prosperity fabricated leases between the Borrowers and fictitious tenants, forged the Borrowers’ signatures, and inserted the fraudulent rental income on the Primary Mortgage Applications. The Borrowers signed both the HELOC Applications and the Primary Mortgage Applications at the closings of the purchases of their new homes.

The Litigation

In 2010 and 2011, after attorneys contacted the Borrowers to inform them that they may have been the victims of mortgage fraud, the Borrowers allegedly then discovered the fabricated leases and the false rental income on the Primary Mortgage Applications. The Borrowers filed their class action lawsuit, contending that they were deceived when Prosperity represented that it commonly dealt with bridge loan financing, but then sent the HELOC Applications to National City. The Borrowers alleged that this mortgage fraud caused them to incur unnecessary expenses, sell their homes below market value as a result of the financial burden imposed by the HELOC debt, and pay above-market prices on their new homes without reasonable home-sale contingencies.
Concluding that the statute of limitations barred the lawsuit, the Circuit Court for Howard County granted the Defendants’ motion for summary judgment. The Court of Special Appeals reversed, concluding that there was a genuine dispute as to whether the Borrowers reasonably should have discovered the mortgage fraud before the attorneys contacted them. The Defendants petitioned for cert.

The Statute of Limitations

The Court of Appeals noted in its decision that civil actions in Maryland are generally subject to a three-year statute of limitations, commencing when the cause of action accrues. Maryland Code, Courts and Judicial Proceedings Article (“CJP”) §5-101. Historically, a cause of action accrues when the wrongful act occurred, even if the plaintiff did not know of the wrongful act until long after it happened. Because this approach was unduly harsh on claimants, in 1981 the Court of Appeals adopted the “discovery rule,” under which the limitations period does not begin until the plaintiff knows or should know of the potential claim, for all actions. Poffenberger v. Risser, 290 Md. 631, 636, 431 A.2d 677, 680 (1981).* The discovery rule does not require a plaintiff’s actual knowledge before time starts to run, but rather only that the plaintiff be on “inquiry notice” of a potential claim. Inquiry notice occurs “when the plaintiff has knowledge of circumstances which would cause a reasonable person in the position of the plaintiff to undertake an investigation which, if pursued with reasonable diligence, would have led to knowledge of the alleged tort.” Pennwalt Corp. v. Nasios, 314 Md. 433, 448-49, 550 A.2d 1155, 1163 (1988) (internal quotations omitted).

The Court in Windesheim began its analysis by holding that because the Borrowers signed the HELOC Applications and the Primary Mortgage Applications (collectively, the “Applications”), the Borrowers are presumed to have read those documents and understood their contents as a matter of long-settled law. Next, the Court stated that the Applications contained information suggesting that the loan transactions were not proceeding as the Borrowers expected: first, the HELOC Applications expressly indicated that National City was the intended lender, despite the Borrowers’ providing information only to Prosperity; and second, the Primary Mortgage Applications identified false gross rental income. Accordingly, the Court concluded that the Borrowers’ knowledge of the contents of Applications in 2006 and 2007 was sufficient to place them on inquiry notice of their claims against the Defendants then.

The Court next addressed the Borrowers’ argument that the statute of limitations should have been tolled because (a) the Defendants concealed the fraud, and (b) the Borrowers and Defendants were in a fiduciary relationship. CJP §5-203 provides that “[i]f the knowledge of a cause of action is kept from a party by the fraud of an adverse party, the cause of action shall be deemed to accrue at the time when the party discovered, or by the exercise of ordinary diligence should have discovered the fraud.” In this case, the Court found no evidence that the Defendants fraudulently concealed the contents of the Applications by discouraging the Borrowers from reading them, as the Borrowers alleged. Also, holding that none of the four circumstances under which a fiduciary relationship may exist between a borrower and a lender – that the Defendants (1) took on extra services other than furnishing money, (2) received a greater economic benefit from the transaction other than the mortgage, (3) exercised extensive control, or (4) were asked by the Borrowers if there were any lien actions pending – were present, the Court ruled that there was no evidence that the Borrowers and Defendants were ever in a fiduciary relationship. Therefore, neither CJP §5-203 nor the fiduciary rule tolled the statute of limitations in this instance.

Conclusion

Therefore, the Court of Appeals concluded that the Borrowers’ claims were barred by the three-year statute of limitations because the Borrowers were on inquiry notice of their causes of action in 2006 and 2007 when they closed their HELOCs and primary residential mortgages, the statute of limitations was not tolled, and the Borrowers did not file suit until 2011. Accordingly, the Court reversed the judgment of the Court of Special Appeals and remanded the case with instructions to affirm the decision of the Circuit Court for Howard County granting the Defendants’ motions for summary judgment.

* ENDNOTE: The Court of Appeals first applied the discovery rule in Hahn v. Claybrook, 130 Md. 179, 100 A. 83 (1917), ruling that the limitations period began when the plaintiff discovered the discoloration of her skin caused by a prescribed medication. In 1978 the Court extended the rule to cases involving dormant illnesses. Harig v. Johns-Manville Products Corp., 284 Md. 70, 394 A.2d 299 (1978). A few years later, in Poffenberger the Court held that the discovery rule is applicable in all actions.

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