Brown v Quicken Loans in West Virginia gets appellate review

N THE QUICKEN LOANS, INC., Petitioner v. LOURIE AND MONIQUE BROWN, Respondents

No.11-0910

SUPREME COURT OF APPEALS OF WEST VIRGINIA

November 21, 2012, Filed

OPINION
 [*1]

Appeal from the Circuit Court of Ohio County

Honorable Arthur M. Recht, Judge

Civil Action No. 08-C-36

AFFIRMED, IN PART; REVERSED, IN PART;

AND REMANDED WITH DIRECTIONS

____________________________________________________

Submitted: September 19, 2012

Filed: November 21, 2012


Justice  [*2] McHugh delivered the Opinion of the Court.

SYLLABUS BY THE COURT

1. "In reviewing challenges to the findings and conclusions of the circuit court made after a bench trial, a two-pronged deferential standard of review is applied. The final order and the ultimate disposition are reviewed under an abuse of discretion standard, and the circuit court's underlying factual findings are reviewed under a clearly erroneous standard. Questions of law are subject to a de novo review." Syl. pt. 1, Public Citizen, Inc. v. First Nat. Bank in Fairmont, 198 W.Va. 329, 480 S.E.2d 538 (1996)

2. "'"'The essential elements in an action for fraud are: '(1) that the act claimed to be fraudulent was the act of the defendant or induced by him; (2) that it was material and false; that plaintiff relied on it and was justified under the circumstances in relying upon it; and (3) that he was damaged because he relied on it.' Horton v. Tyree, 104 W.Va. 238, 242, 139 S.E. 737 (1927)." Syl. Pt. 1, Lengyel v. Ling, 167 W.Va. 272, 280 S.E.2d 66 (1981).' Syllabus Point 5, Kidd v. Mull, 215 W.Va. 151, 595 S.E.2d 308 (2004)." Syl. Pt. 5, Folio v. City of Clarksburg, 221 W.Va. 397, 655 S.E.2d 143 (2007).

3. "'"The legislature  [*3] in enacting the West Virginia Consumer Credit and Protection Act, W.Va. Code 46A-1-101, et seq., in 1974, sought to eliminate the practice of including unconscionable terms in consumer agreements covered by the Act. To further this purpose the legislature, by the express language of W.Va. Code, 46A-5-101(1), created a

i

cause of action for consumers and imposed civil liability on creditors who include unconscionable terms that violate W.Va. Code, 46A-2-121 in consumer agreements." Syl. pt. 2, U.S. Life Credit Corp. v. Wilson, 171 W.Va. 538, 301 S.E.2d 169 (1982).' Syl. pt. 1,

Orlando v. Finance One of West Virginia, Inc., 179 W.Va. 447, 369 S.E.2d 882 (1988)." Syl. Pt. 3, Arnold v. United Companies Lending Corp., 204 W.Va. 229, 511 S.E.2d 854 (1998), overruled, in part, on other grounds, Dan Ryan Builders, Inc. v. Nelson, __ W.Va. __, __ S.E.2d __ (No. 12-0502) (Nov. 15, 2012).

4. "'A determination of unconscionability must focus on the relative positions of the parties, the adequacy of the bargaining position, the meaningful alternatives available to the plaintiff, and the "existence of unfair terms in the contract.' Syl. pt. 4, Art's Flower Shop, Inc. v. Chesapeake and Potomac Tel. Co., 186 W.Va. 613, 413 S.E.2d 670 (1991)."  [*4] Syl. Pt. 4, Arnold v. United Companies Lending Corp., 204 W.Va. 229, 511 S.E.2d 854 (1998), overruled, in part, on other grounds, Dan Ryan Builders, Inc. v. Nelson, __ W.Va. __, __ S.E.2d __ (No. 12-0502) (Nov. 15, 2012).

5. "'Statutes which relate to the same subject matter should be read and applied together so that the Legislature's intention can be gathered from the whole of the enactments.' Syllabus Point 3, Smith v. State Workmen's Comp. Comm'r., 159 W.Va. 108, 219 S.E.2d 361

ii

(1975)." Syl. Pt. 4, Community Antenna Serv. Corp. v. Charter Communications, VI, LLC,

227 W.Va. 595, 712 S.E.2d 504 (2011).

6. "'A statute should be so read and applied as to make it accord with the spirit, purposes and objects of the general system of law of which it is intended to form a part; it being presumed that the legislators who drafted and passed it were familiar with all existing law, applicable to the subject matter, whether constitutional, statutory or common, and intended the statute to harmonize completely with the same and aid in the effectuation of the general purpose and design thereof, if its terms are consistent therewith.' Syllabus Point 5, State v. Snyder, 64 W.Va.659, 63 S.E. 385 (1908)."  [*5] Syl. Pt. 5, Community Antenna Serv. Corp. v. Charter Communications, VI, LLC, 227 W.Va. 595, 712 S.E.2d 504 (2011).

7. "'Statutes which relate to the same persons or things, or to the same class of persons or things, or statutes which have a common purpose will be regarded in pari materia

to assure recognition and implementation of the legislative intent. Accordingly, a court should not limit its consideration to any single part, provision, section, sentence, phrase or word, but rather review the act or statute in its entirety to ascertain legislative intent properly.' Syllabus Point 5, Fruehauf Corp. v. Huntington Moving & Storage Co., 159 W.Va. 14, 217 S.E.2d 907 (1975)." Syl. Pt. 6, Community Antenna Serv. Corp. v. Charter Communications, VI, LLC,

iii

227 W.Va. 595, 712 S.E.2d 504 (2011).

8. "'Equity will not enforce a forfeiture.' Syllabus, in part, Craig v. Hukill, 37 W.Va. 520, 16 S.E.363 (1892)." Syl. Pt. 1, Helton v. Reed, 219 W.Va. 557, 638 S.E.2d 160 (2006).

9. "When the trial court instructs the jury on punitive damages, the court should, at a minimum, carefully explain the factors to be considered in awarding punitive damages. These factors are as follows:

(1) Punitive damages  [*6] should bear a reasonable relationship to the harm that is likely to occur from the defendant's conduct as well as to the harm that actually has occurred. If the defendant's actions caused or would likely cause in a similar situation only slight harm, the damages should be relatively small. If the harm is grievous, the damages should be greater.

(2) The jury may consider (although the court need not specifically instruct on each element if doing so would be unfairly prejudicial to the defendant), the reprehensibility of the defendant's conduct. The jury should take into account how long the defendant continued in his actions, whether he was aware his actions were causing or were likely to cause harm, whether he attempted to conceal or cover up his actions or the harm caused by them, whether/how often the defendant engaged in similar conduct in the past, and whether the defendant made reasonable efforts to make amends by offering a fair and prompt settlement for the actual harm caused once his liability became clear to him.

iv

(3) If the defendant profited from his wrongful conduct, the punitive damages should remove the profit and should be in excess of the profit, so that the award discourages  [*7] future bad acts by the defendant.

(4) As a matter of fundamental fairness, punitive damages should bear a reasonable relationship to compensatory damages.

(5) The financial position of the defendant is relevant."

Syl. Pt. 3, Garnes v. Fleming Landfill, Inc., 186 W.Va. 656, 413 S.E.2d 897 (1991).

10. "When the trial court reviews an award of punitive damages, the court should,

at a minimum, consider the factors given to the jury as well as the following additional

factors:

(1) The costs of the litigation;

(2) Any criminal sanctions imposed on the defendant for his conduct;

(3) Any other civil actions against the same defendant, based on

the same conduct; and

(4) The appropriateness of punitive damages to encourage fair and reasonable settlements when a clear wrong has been committed. A factor that may justify punitive damages is the cost of litigation to the plaintiff.

v

Because not all relevant information is available to the jury, it is likely that in some cases the jury will make an award that is reasonable on the facts as the jury know them, but that will require downward adjustment by the trial court through remittitur because of factors that would be prejudicial to the defendant if admitted  [*8] at trial, such as criminal sanctions imposed or similar lawsuits pending elsewhere against the defendant. However, at the option of the defendant, or in the sound discretion of the trial court, any of the above factors may also be presented to the jury."

Syl. Pt. 4, Garnes v. Fleming Landfill, Inc., 186 W.Va. 656, 413 S.E.2d 897 (1991).

11. Attorneys fees and costs awarded under West Virginia Code §46A-5-104 (1994) of the West Virginia Consumer Credit and Protection Act shall be included in the compensatory to punitive damages ratio in cases where punitive damages are available.

12. "Rule 60(a) of the West Virginia Rules of Civil Procedure applied to clerical errors made through oversight or omission which are part of the record and is not intended to adversely affect the rights of the parties or alter the substance of the order, judgment or record beyond what was intended." Syl. Pt. 3, Savage v. Booth, 196 W.Va. 65,

468 S.E.2d 318 (1996).

13. "Where there is a single indivisible loss arising from the actions of multiple parties who have contributed to the loss, the fact that different theories of liability have been

vi

asserted against them does not...prevent them from obtaining a verdict  [*9] credit for settlements made with the plaintiff by one or more of those jointly responsible." Syl. Pt. 8, in part,

Board of Educ. of McDowell County v. Zando, Martin & Milstead, Inc., 182 W.Va. 597, 390 S.E.2d 796 (1990).

14. "Defendants in a civil action against whom awards of compensatory and punitive damages are rendered are entitled to a reduction of the compensatory damage award, but not the punitive damage award, by the amount of any good faith settlements previously made with the plaintiff by other jointly liable parties." Syl. Pt. 1, Burgess v. Porterfield, 196 W.Va. 178, 469 S.E.2d 114 (1996).

vii

McHugh, J.:

Quicken Loans, Inc. ("Quicken"), a Michigan corporation and a large national mortgage lender doing business in West Virginia, appeals the May 2, 2011, order of the Circuit Court of Ohio County, West Virginia, denying post-trial motions for amendment of the circuit court's findings of fact and/or conclusions of law and for offset following a verdict which found it liable for common law fraud and various claims under the West Virginia Consumer Credit and Protection Act, as set forth in Chapter 46A of the West Virginia Code, in connection with a subprime loan made to Plaintiff  [*10] Lourie Brown.

Upon careful review of the briefs and arguments of the parties,1 the record appendix and the applicable legal authority, and for the reasons set forth below, the order of the circuit court is affirmed, in part; reversed, in part; and this matter is remanded for further proceedings.

I. Factual and Procedural Background



1We acknowledge with gratitude the amici briefs of Jay D. Hixson and Martin P. Sheehan, as bankruptcy trustees; and National Association of Consumer Advocates; Mountain State Justice; West Virginia Attorney General; and West Virginia Association for Justice.

1

Plaintiff and her mother purchased the subject property, a duplex, in 1988,

where they or a member of their family have resided ever since.2 The subject property is

located in East Wheeling, West Virginia, and was purchased for $35,000.00.3

Upon the death of her mother in 2002, Plaintiff became solely responsible for

paying all of the property's utilities, maintenance, taxes and insurance premiums thereon.

When these financial obligations, among others, became difficult to meet, Plaintiff refinanced

the subject property in August 2003, for $40,518; in January 2004, for $63,961; and in May

2005, for $67,348. She  [*11] also took out four separate loans for $1,500, $3,060, $5,000 and

$7,650, respectively, with interest rates ranging from 24.99% to 31.00%.4



2Plaintiff's mother died in 2002. When the events herein transpired, Plaintiff was forty-one years old and a single mother to three children. She no longer lives on the subject property but has since married and moved with her youngest child to Pittsburgh. Plaintiff testified that she returns to the subject property most weekends to check on her oldest child, Monique Brown, who resides there, and who, as a result of a 2001 automobile accident from which she suffered a traumatic brain injury, has short term memory loss and other permanent injuries.

3In 1993, Monique paid off the subject property with settlement monies she received from a wrongful death lawsuit following the death of her father and the subject property was transferred to her. According to the parties, at some point during the loan process in the present case, Monique executed a power of attorney appointing Plaintiff with the authority to pledge the subject property and use the loan proceeds in her discretion. The parties represent that Monique is a named party herein only because she  [*12] is owner of the subject property.

4The refinancing and loans as above-described were with CitiFinancial. Additionally, in November 2003, Plaintiff borrowed $5,785 from AmeriFirst Loan, and in February 2006, Plaintiff took out a Refund Anticipation Loan ("RAL") with Jackson Hewitt (continued...)

2

In May of 2006, in an effort to consolidate her debt and lower her monthly

payments, Plaintiff completed a basic on-line loan application after receiving a "pop-up"

advertisement on her computer.5 Thereafter, she began receiving telephone calls from various

lending companies, including Quicken. Of the companies who contacted her, Plaintiff

selected Quicken because she felt most comfortable dealing with mortgage banker Heidi

Johnson, who "seemed very willing to help."6



4(...continued)

for $3,418, with an interest rate of 94.862%.

5As explained by Plaintiff, she "saw an ad for loans, and, like it would list an amount, like if you wanted $ 100,000, it might be $ 500 and some dollars a month, or $140,000 might be 6- to $700 a month. I thought, well, if I could consolidate everything and have a cheaper payment, that would be better for me. So that's what got me interested in that in the first place."

6Ms.  [*13] Johnson's "willingness to help" is apparently derived from Quicken's written training materials. For example, Quicken provided "Selling Tips" to its employees to use when speaking with prospective borrowers on the telephone:

Your credit came back and I've had a chance to review it. Unfortunately, because of your credit score and the trend of how your bills have been paid you don't qualify for conventional mortgage programs. However, the good news is that we specialize in situations like yours and we have a program that can offer you financial relief and can help get you back on track. What we'll do now is review your current credit situation, discuss the program for, its benefits, and then accept your $500 good faith deposit to get the loan into process.

The bottom line is this program is perfect for you and really is Step 1 in our 2 step process toward getting you back on track. Actually most people refer to this as a Stepping Stone Loan. Once you have established a consistent track record of timely

(continued...)

3

On or about May 23, 2006, Quicken requested that Title Source, Inc. ("TSI")

arrange for an appraisal of the subject property. TSI, an appraisal management company, is

a "sister  [*14] company" to Quicken as they are owned by the same parent company, Rock

Holdings.7



6(...continued)

payments, we can revisit your situation and hopefully refinance you to an even better program in the near future. First things first. Let's get this into the system and see if we can get your approval. To begin your loan, for your deposit did you want to use a Visa or Check by phone?

Additional training material included how to overcome a prospective borrower's objections to a loan. For example, when a client indicated that he or she "wants to wait," Quicken trained its employees to explain to him or her that

Some clients in your situation are reluctant to just make a decision. Because of their credit situation they feel paralyzed, fearing they will do the wrong thing (again). This loan is the right decision because it will get you back on track to a strong credit standing and provide you with the benefit(s) of

_________. I just don't want you to be one of the people who hold off thinking things will get better by themselves, and actually have things get worse. At that point there is no loan that you could qualify for.

Let's make a good decision here. I want to put your loan into the system and  [*15] obtain the approval that will be your first step in turning this ship around. Now, to being, for your deposit did you want to use a Visa or a MC?

7TSI also provides for appraisals and other "vendor items" to lenders other than

Quicken.

4

Pursuant to its routine practice, TSI put out an automated (electronic) appraisal

request order, which was shared on the internet with independent-contractor appraisers. For

reasons not entirely clear from the record, TSI's appraisal request order included an estimated

value for the subject property of $262,500.8 The appraisal request order was accepted by

Appraisals Unlimited, Inc. and its appraiser, Dewey Guida.9

Based upon his appraisal of the subject property, Mr. Guida valued it at

$181,700. Quicken reviewed Mr. Guida's appraisal and approved it on May 31, 2006. The

trial court concluded that not only was Mr. Guida's appraisal grossly inflated because the true

fair market value of the subject property was actually $46,000, but also that Quicken's

appraisal review was negligently conducted because it "ignored obvious flaws" in Mr.

Guida's appraisal and "violated its own appraisal review standards and the Uniform Standards

of Professional Appraisal Practice."10



8On  [*16] appeal, Plaintiff suggests that the purpose of including the estimated value on the subject property is to improperly suggest a target value to the appraiser.

9Although Quicken avers that with the automated appraisal request system, it "has no input whatsoever in regard to the selection of the appraiser or who the apprais[al] will be assigned to[,]" the record reveals that Mr. Guida conducted over 100 appraisals for loans made by Quicken.

10The circuit court found, for example, that "the pictures comparing the 'comparable properties' to the subject property . . . . appeared to be architecturally more sophisticated, in better condition and had more expensive landscaping, all of which indicated that the comparables were in a very different neighborhood." Furthermore, Mr. Guida noted the subject property's neighborhood to be downtown, but the comparables were not selected

(continued...)

5

Prior to approving Mr. Guida's appraisal, Quicken presented Plaintiff with a

loan for $112,850, with monthly payments that were higher than what she had expected based

upon the initial "pop up" advertisement. For this reason, Plaintiff became hesitant to proceed

with the loan process. As a result, Plaintiff  [*17] did not return telephone calls from Ms. Johnson

and other Quicken employees about the loan. According to Quicken's own records, on May

30, 2006, Plaintiff

called me back and LVM [left voice message] that she no longer wants to go through with the loan. I forwarded the VM to the MB [mortgage banker Heidi Johnson] and asked her to call me back and let me know how she would like us to proceed.11

(Footnote added).



10(...continued)

from the downtown area. The court further found that Mr. Guida noted the neighborhood price range to be $30,000 to $200,000, "with a predominant value of $65,000. Then he proceeded to appraise the Property for $181,700 with no explanation of the reasoning why the subject Property is so drastically different from the predominant home in the area. This is a violation of USPAP/industry standards and was factually inaccurate as homes do not sell for $200,000 in East Wheeling[,]" where the subject property is located.

Other flaws in the appraisal which should have raised "red flags" to Quicken's appraisal review team were the fact that the condition and age of the home listed in the appraisal were false and that Mr. Guida identified the subject property as a single unit  [*18] dwelling rather than a duplex. The foregoing are just some of the flaws and standards the circuit court found that Quicken's appraisal team should have seen and should have requested an explanation from Mr. Guida.

11This notation was written by Quicken employee Nivin Fathella.

6

Even though Plaintiff had already told Quicken she did not wish to proceed

with the loan, Quicken did not give up efforts to persuade her otherwise. According to Ms.

Johnson's own written notation, on June 1, 2006, the day after Quicken approved Mr. Guida's

$181,700 appraisal of the property, she attempted to contact Plaintiff:

left message w/client that appraisal came in where we need and that we are ready to move forward/asked client to call back and speak w/me cause she wanted to back out/we have appraisal done now though so maybe I can save?

Quicken's records further indicate that Ms. Johnson tried to contact Plaintiff

again on June 2 and June 5, 2006; following the latter attempt, Ms. Johnson noted the

following: "have called and left numerous messages/client is not responding to me/if I don't

hear back by Tues. I will have to kill it and we just charge her for the appraisal."

Ultimately, Plaintiff agreed to the loan  [*19] on June 6, 2006, as indicated in the

following notation by Ms. Johnson: "Client finally reached me/she was being swayed by a

broker and that's why she wanted to back out/client very timid12 and I just had to spend a lot

of time explaining to her being taken advantage of/Adding more cash out and taking up to full

80% LTV [loan to value] and will have closure today."13 (Footnotes added).



12In a subsequent email to a co-worker, Ms. Johnson indicated that she has been "handling [Plaintiff] with kid gloves because she is very fragile[.]"

13As previously indicated, Ms. Johnson offered Plaintiff the loan amount of $144,800 after the appraisal of $181,700 conducted by Mr. Guida was approved by Quicken.

(continued...)

7

For her part, Plaintiff testified that when she conveyed her hesitation to

consummate the loan to Ms. Johnson,

She told me that what they could do would be to refinance the loan in three to four months, and then that I could get it at a cheaper rate, but initially my credit scores weren't high enough; and that, once that loan was in place and I got - everything started to be paid off, then I would be able to refinance my loan."

(A925) Indeed, Plaintiff testified that she believed and trusted  [*20] Ms. Johnson and that the

promise to refinance "was one of the main factors in my decision to do it . . . . because I knew

I couldn't keep up that type of payment for a long period of time, especially with a decreased

income."14

As indicated above, the loan originally presented to Plaintiff, and for which she

received a written "Good Faith Estimate," was in the amount of $112,850. The loan was an

interest-only loan for the first three years and also provided for Plaintiff to purchase 2.5 "loan



13(...continued)

The evidence at trial revealed that Quicken pays commissions to its employees based upon the amount of the loan, the number of loans closed per month and the type of loan. In Plaintiff's case, she received a subprime loan, which pays a higher commission than do prime loans. Commissions to Quicken employees are paid monthly. Ms. Johnson's commission in the case of Plaintiff's loan was $834.40.

14Plaintiff testified that the decrease in income refers to the fact that child support payments Plaintiff had been receiving at that time were about to come to an end apparently when her son turned eighteen years old.

8

discount points"15 resulting in a variable interest rate of 8.5% and an initial  [*21] payment of $799

per month. This loan had no balloon payment feature.

In contrast, the loan at issue herein was for the much larger amount of

$144,800, and was otherwise quite different from the original loan described above. Under

the terms of this loan, the annual interest rate was 9.25% for the first three years and then

adjusted every six months thereafter, to a maximum rate of 16.25% and a minimum of 7.75%.

Thus, Plaintiff's monthly payment for the first three years was $1,144, excluding taxes and

insurance.16 This was a monthly savings to Plaintiff (for the first three years) in the amount

of $316.17 This loan product was unique because it was a thirty-year loan that was amortized

over forty years, resulting in a $107,015.71 balloon payment at the end of the loan period.

It is undisputed that Quicken did not provide Plaintiff with a written "Good Faith Estimate"



15As explained by Plaintiff's expert Margot Saunders, "loan discount points" are additional amounts of money paid up front by borrowers to buy down the interest rate of a loan which, in turn, lowers the monthly loan payment.

16Comparatively, Plaintiff's previous mortgage with CitiFinancial had a thirty-year fixed rate of 9.75% and  [*22] a monthly payment of $578. Plaintiff's other debt, which was consolidated with the CitiFinancial mortgage under the Quicken loan, was unsecured.

17However, according to Quicken's own financial expert, beginning two years and five months into the loan, Plaintiff no longer saved money as compared to her previous mortgage and other debt. Furthermore, after five years (or 60 payments), Plaintiff's monthly payment would be $ 1,582, as compared to the combined monthly payment for her previous mortgage and other debt, which would have been $578.

9

for this loan after the loan was so drastically revised18 to include, among other things, the

balloon payment that was almost twice as large as the actual fair market value of the subject

property.19

One or two days before the loan was scheduled to close, a packet consisting of

eighty-one pages of closing documents was delivered to Plaintiff at her home. According to

Plaintiff, she did not open the packet prior to the closing. The closing occurred at Plaintiff's

home (the subject property) on July 7, 2006, and was attended only by Plaintiff and a notary

public unaffiliated with Quicken. According to Plaintiff, when the notary arrived, he opened

the packet  [*23] and told her to sign the documents having red "sign here" stickers already on them.

Plaintiff testified that the notary "basically was waiting for me to sign them, and then he

would stamp some of them[;]" that she attempted to ask him questions about what some of

the documents meant, but that he said she would have to speak with someone at Quicken

because he did not know the answers; and that the process was all "kind of hurried and rushed

when we went through the paperwork." Indeed, the loan closing took approximately fifteen



18According to Ms. Saunders, the federal Real Estate Settlement Procedures Act (RESPA) requires that a good faith estimate be provided when there is a new loan product with different closing costs to be charged.

19In the case of Plaintiff's loan, after making 360 loan payments ranging from $1,144 to $1,582 and totaling $550,084, Plaintiff, who, at all times relevant, earned $14.36 per hour as a licensed practical nurse, was required to make a single balloon payment of $107,015.71 to avoid foreclosure.

10

minutes to complete. Plaintiff admitted that she did not closely review the closing documents

in any detail.

As discussed in more detail below, from this Court's review  [*24] of the record, it

appears that the closing documents disclosed that there was "a large balloon payment."

However, the actual and precise amount of the balloon payment was not otherwise disclosed

therein. Plaintiff admitted that she saw the term "balloon payment" during the closing. She

testified that

I believe I saw that on the paper. I wasn't exactly sure what it meant, though. It really - I don't know. I can't say it didn't concern me; it did. But the fact that we were going to be refinancing in three to four months was what I was mainly -."

Additionally, as set forth in the HUD Settlement Statement document also

presented to Plaintiff for her signature at closing, Quicken ostensibly charged Plaintiff four

"loan discount points" amounting to $5,792. However, at the time Plaintiff's loan was

offered, the maximum number of loan discount points available on a loan with a 9.25% initial

interest rate such as hers was 2.5 points. Thus, although Quicken represented to Plaintiff that

she purchased four loan discount points,20 she only actually purchased 2.5 points. (That is,

$3,692 of the total $5,792 loan discount fee paid by Plaintiff actually resulted in a reduction



20In a June 26, 2006, email from  [*25] Ms. Johnson to a co-worker, she stated that Plaintiff "knows that she is buying the rate way down to keep her payment lower. She's very worried and I told her not to be we can still do this."

11

in the interest rate.) Unbeknownst to Plaintiff, therefore, $2,100 (i.e., 1.5 points worth) of the

$5,792 she believed she was paying Quicken to "buy down" her interest rate resulted in no

such benefit to her.

Plaintiff presented evidence at trial that, under Quicken's own policies, Ms.

Johnson had the discretion to charge the additional $2,100 fee, from which she received a

share:

(i) General Rule - As a general rule, Mortgage Bankers are required to adhere to Quicken Loans published daily rates in quoting rates, points, fees and programs to prospective clients.

(ii) Premiums - Mortgage Bankers shall have the discretion to charge a rate/point/fee structure that exceeds the daily price sheet on certain products, provided that the price charged does not exceed the daily price sheet price by more than two points. The additional revenue resulting from the Mortgage Banker's proper exercise of such discretion is considered the 'premium' for purposes of Section I B above.

It is Plaintiff's contention that  [*26] Ms. Johnson charged her such a "premium" in the amount of

$2,100 but falsely represented to her that she was receiving a corresponding reduction in the

interest rate on her loan.

Quicken argued, however, that regardless of how the fee was represented to

Plaintiff on the closing documents, Quicken would still have charged Plaintiff the excess fee

up front because Plaintiff had become delinquent on her existing mortgage with CitiFinancial

12

and as a result, became a greater credit risk to Quicken. Quicken's explanation

notwithstanding, the circuit court found that "[t]he manipulation of the increase of 1.5 percent

'discount points' misrepresented to [Plaintiff] that her interest rate would be reduced."

With the loan proceeds, Plaintiff paid off her previous mortgage and

consolidated debt; received $40,768.78, with which she purchased a new vehicle (for

$28,536.90)21; retired other existing debt; and made the first two payments on the loan.22

After making timely September and October payments, Quicken's telephone calling records

indicate that, beginning in early October 2006, Plaintiff made numerous attempts to contact

Quicken. According to Plaintiff, the purpose of her repeated efforts was to begin  [*27] the



21According to Plaintiff, the extra cash was initiated by Quicken. She testified

that,

[w]ell, she [Ms. Johnson] - when she got the appraisal done, she said that it came in at $181,000, I believe. And she said that - she said: is there anything else that you're going to need because you have this money available to you?

And I kind of thought about it at the time because, once I did the loan, I wasn't really going to have any money available to do anything extra with. And I had an SUV at the time that really cost me a lot of money in gas, and I decided to get a car that was going to last me for a while.

22Under the terms of the loan, the first payment was due September 1, 2006.

13

refinancing process, as promised by Ms. Johnson when Plaintiff agreed to the loan. Quicken refused to refinance the loan.23

Thereafter, in January 2007, Plaintiff was required to undergo surgery and, due to complications, underwent a subsequent emergency surgery. As a result, Plaintiff was unable to work for a time and ultimately, defaulted on the loan. Her repeated requests of Quicken, both by telephone and in writing, to work out a payment arrangement in light of her situation were refused.

According to Plaintiff,  [*28] in August 2007, she provided statutory notice of a claim and afforded Quicken a right to cure under West Virginia Code §46A-6-106(b) (2005) (Repl. Vol. 2006). However, no cure offer was made and Quicken began foreclosure proceedings.

Plaintiff filed suit against Quicken, Appraisals Unlimited, Inc., appraiser Dewey Guida,24 and John Doe Note Holder25 in the Circuit Court of Ohio County, alleging that she



23Quicken denied Plaintiff's request to refinance sometime in October 2006, before Plaintiff's November payment was due on November 1st. Plaintiff did not make the November payment until January 16, 2007.

24The parties represent that Plaintiff settled with Mr. Guida and Appraisals Unlimited prior to trial for the amount of $700,000.

25Plaintiff alleged that "John Doe Note Holder is the current holder of [Plaintiff's] loan" who had not been identified when the complaint herein was filed.

(continued...)

14

was the victim of a predatory lending scheme and consumer fraud relating to the loan at issue.

Following a six-day bench trial, the circuit court entered an order on February 25, 2010, in

which it found that Quicken committed fraud and violated various provisions of the West

Virginia Consumer  [*29] Credit and Protection Act, including West Virginia Code §46A-2-121

(1996), regarding unconscionability; West Virginia Code §46A-6-102(7)(K)(L)(M) and (N)

(2005) and §46A-6-104 (1974), regarding unfair and deceptive acts; and West Virginia Code

§46A-2-105 (1974), regarding illegal balloon notes. The circuit court further found that

Quicken violated West Virginia Code §31-17-8(m)(8) (2002) (Repl. Vol. 2009), regarding

illegal appraisals.26 The relevant findings and conclusions of the circuit court will be more

fully discussed below in connection with Quicken's specific assignments of error.

The circuit court further concluded that the Note and Deed of Trust were

unenforceable as a matter of law; awarded restitution of payments made by Plaintiff to

Quicken in the amount of $17,476.72; ordered Quicken and its successors and assigns to take

action consistent with the court's order to reflect the termination of the Deed of Trust; and

enjoined them from attempting to collect any future payments under the loan. Notably, the



25(...continued)

According to the evidence at trial, Quicken originates loans but does not service them. Rather, it sells "100%" of them to investment banks on Wall Street, which then  [*30] securitize them into trusts and sell them to large corporate investors.

26Plaintiff also filed a claim for breach of the covenant of good faith and fair dealing, which the trial court found "has not been applied to a lender/borrower relationship in West Virginia" and therefore was not addressed by the court.

15

circuit court did not order Plaintiff to repay the loan principal thereby effectively canceling

Plaintiff's loan obligation.

A subsequent trial was conducted on September 1, 2010, on the issue of

attorneys fees and punitive damages. Upon the conclusion thereof, the circuit court entered

an order on February 17, 2011, in which it awarded Plaintiff attorneys fees and litigation costs

in the total amount of $596,199.89, and punitive damages in the amount of $2,168,868.75.

Quicken's post-trial Motion for Amendment of Findings of Fact and/or

Conclusions of Law and Motion for Offset of Judgment Pursuant to Settlement of Defendant

Dewey V. Guida were summarily denied by the circuit court's order entered May 2, 2011.

This appeal followed.

II. Standard of Review

It is well settled that

[i]n reviewing challenges to the findings and conclusions of the circuit court made after a bench trial, a two-pronged  [*31] deferential standard of review is applied. The final order and the ultimate disposition are reviewed under an abuse of discretion standard, and the circuit court's underlying factual findings are reviewed under a clearly erroneous standard. Questions of law are subject to a de novo review.

16

Syl. pt. 1, Public Citizen, Inc. v. First Nat. Bank in Fairmont, 198 W.Va. 329, 480 S.E.2d 538

(1996).

III. Discussion A. Fraud

In its first assignment of error, Quicken asserts that the circuit court erred in

finding that Plaintiff proved, by clear and convincing evidence, that Quicken fraudulently

induced Plaintiff to enter into the loan. The circuit court concluded that Quicken committed

fraud by not only failing to disclose the enormous balloon payment prior to the closing but

also by failing to properly disclose it at the closing; by falsely promising Plaintiff that it

would refinance her loan in three to four months after closing; and by misrepresenting to her

the extent to which she was buying down the interest rate on the loan.

This Court has consistently described the elements of fraud as follows:

"'[t]he essential elements in an action for fraud are: "(1) that the act claimed to be fraudulent was  [*32] the act of the defendant or induced by him; (2) that it was material and false; that plaintiff relied on it and was justified under the circumstances in relying upon it; and (3) that he was damaged because he relied on it." Horton v. Tyree, 104 W.Va. 238, 242, 139 S.E. 737, (1927).' Syl. Pt. 1, Lengyel v. Ling, 167 W.Va. 272, 280 S.E.2d 66 (1981) ." Syllabus Point 5, Kidd v. Mull, 215 W.Va. 151, 595 S.E.2d 308 (2004).

17

Syl. Pt. 5, Folio v. City of Clarksburg, 221 W.Va. 397, 655 S.E.2d 143 (2007). Furthermore,

allegations of fraud must be established by clear and convincing evidence. Syl. Pt. 5, Tri-

State Asphalt Products, Inc. v. McDonough Co., 182 W.Va. 757, 391 S.E.2d 907 (1990).

1. Balloon Payment

The evidence at trial revealed that the loan as originally presented to Plaintiff

(for $112,850) did not include a balloon payment of any kind, as indicated in the written

Good Faith Estimate provided to Plaintiff. In sharp contrast, the loan at issue included an

enormous balloon payment. However, Quicken failed to provide Plaintiff with a written

Good Faith Estimate for the revised loan, which would have set forth this very critical loan

term for Plaintiff to consider.

Moreover, as the circuit  [*33] court found, the $107,015.71 balloon payment was not

conspicuously disclosed on the note as required by West Virginia law. This finding is

undisputed by Quicken. West Virginia Code §46A-2-105 very clearly requires that

whenever any scheduled payment is at least twice as large as the smallest of all earlier scheduled payments other than any down payment any writing purporting to contain the agreement of the parties shall contain the following language typewritten or printed in a conspicuous manner. THIS CONTRACT IS NOT PAYABLE IN INSTALLMENTS OF EQUAL AMOUNTS: Followed, if there is only one installment which is at least twice as large as the smallest of all earlier scheduled payments other than any down payment, by: AN INSTALLMENT OF $..............WILL BE DUE ON ............ or, if there is more than

18

one such installment, by: LARGER INSTALLMENTS WILL BE DUE AS FOLLOWS: (The amount of every such installment and its due date shall be inserted)."

Id. See Mallory v. Mortgage America, 67 F.Supp.2d 601, 608 (S.D.W.Va. 1999) ("With

respect to §46A-2-105(2), the legislature used the word 'shall,' and there being no language

within the statute indicating an intent to the contrary, the court construes  [*34] the statute as

mandatory...[and] strict compliance is required.").

It is Quicken's contention that, despite its failure to comply with the foregoing

statutory requirement, the balloon payment was described "in detail" in the following closing

documents delivered to Plaintiff prior to closing: the "3/6 Adjustable Rate/Balloon Mortgage

Disclosure," the "Adjustable Rate Rider," and the "Adjustable Rate: Balloon Note."

This Court's review of the "3/6 Adjustable Rate/Balloon Mortgage Disclosure"

reveals that the extent of the "Balloon Payment" section in that document is as follows:

BALLOON PAYMENT. With this loan program, you will make 360 monthly payments of principal and interest. The amount of those monthly payments will be based on a 40 year repayment schedule, your interest rate and the amount of your loan. Since this loan is based on a repayment schedule that is longer than your loan term, your last payment at the end of 30 years will be a large balloon payment. At least ninety days before the end of your loan, you will receive notice that your

19

loan balance is due and when you must pay the balance in full.

The "Adjustable Rate Rider" and the "Adjustable Rate Balloon Note"

documents are even  [*35] less descriptive. Both of those documents include language that is very

similar to that which was set forth in the "3/6 Adjustable Rate/Balloon Mortgage Disclosure"

document, above, but neither describes the balloon payment due and payable as "large."

Rather, the "Adjustable Rate Rider" and the "Adjustable Rate Balloon Note" documents

provide only that "THERE WILL BE DUE AND PAYABLE ON THE MATURITY DATE

OF THIS NOTE A FINAL BALLOON PAYMENT OF THE THEN OUTSTANDING

PRINCIPAL BALANCE PLUS ALL ACCRUED AND UNPAID INTEREST." To be clear,

nowhere in the closing documents signed by Plaintiff at the July 7, 2006, closing does the

balloon payment amount of $107,015.71 appear.27

Not surprisingly, the foregoing documents are, under any standard, very

complicated and include sophisticated terms and concepts that require specialized knowledge.

Despite the complex nature of the closing documents, Quicken did not send a representative

to the closing who could answer Plaintiff's questions or point out to her that the loan has a



27We note that the amount of the balloon payment and its due date were set forth on the Federal Truth in Lending Statement but, for reasons that are unclear from the record, it appears that  [*36] Plaintiff was not presented with this document prior to or on the date of closing. Rather, she signed it at a later date. Quicken does not argue on appeal that this document disclosed to Plaintiff prior to or at the July 7, 2006, closing that the amount of the balloon payment was $107,015.71.

20

balloon payment which amounted to $107,015.71. To the contrary, Quicken's position with regard to its failure to disclose the $107,015.71 balloon payment was summed up during oral argument before this Court when its counsel maintained that the amount of the balloon payment was a "math product," thereby suggesting Plaintiff should have simply calculated the amount of the balloon payment on her own.28

Quicken's arguments notwithstanding, the mandatory statutory requirement that the loan agreement "contain the language essentially as set out in the statute and in the conspicuous manner illustrated" therein serves the very reasonable and important purpose of advising borrowers in no uncertain terms that, at some point during the course of the loan, a balloon payment of a precise amount will be due and owing to the lender on an equally precise date. Mallory, 67 F.Supp.2d at 609. The Court in Mallory  [*37] specified that West Virginia Code §46A-2-105(2) "was designed to bring home to the borrower the extraordinary payment that must some day be met." 67 F.Supp.2d at 609.

In light of the foregoing, we now proceed to determine if the circuit court properly concluded that Quicken's above-described conduct with regard to its failure to



28Indeed, calculating the amount of the monthly payments and the amount of the balloon payment would not have been an easy task for the average borrower. Although Plaintiff's initial monthly payment of $1,114 and initial interest rate of 9.25% appeared in the closing documents, the subsequent changes to the monthly payment involved a complicated calculation.

21

properly disclose the enormous balloon payment due on the loan was an act of fraud. This Court has recognized that "[f]raudulent concealment involves the concealment of facts by one with knowledge or the means of knowledge, and a duty to disclose, coupled with an intention to mislead." Trafalgar House Constr. v. ZMM, Inc., 211 W.Va. 578, 584, 567 S.E.2d 294, 300 (2002) (citing Silva v. Stevens, 589 A.2d 852, 857 (1991)). Thus, this Court has recognized that "'"an action for fraud can arise by the concealment  [*38] of truth."'" Smith v. First Community Bancshares, Inc., 212 W.Va. 809, 822, 575 S.E.2d 419, 432 (2002) (internal citations omitted). Indeed, "'[f]raud is the concealment of the truth just as much as it is the utterance of a falsehood.' Frazer v. Brewer, 52 W.Va. 306, 310, 43 S.E. 110, 111 (1902)."

Id.

It is undisputed that the reason Plaintiff sought to refinance was to consolidate her debt and reduce her monthly payments - in short, to save money. Concealing such an enormous balloon payment from Plaintiff was designed to mislead her and to induce her into entering into the loan and, in fact, that is precisely what occurred. With regard to Plaintiff's reliance on Quicken's concealment of the exorbitant balloon payment amount, "'[i]t is not necessary that the fraudulent [concealment]...should be the sole consideration or inducement moving the plaintiff. If the [concealment] contributed to the formation of the conclusion in the plaintiff's mind, that is enough[.]'" Trafalgar House, 211 W.Va. at 585, 567 S.E.2d at 301 (quoting syl. pt. 3, Horton v. Tyree, 104 W.Va. 238, 139 S.E. 737 (1927)). Accordingly,

22

this Court finds that the circuit court properly concluded that Quicken committed  [*39] fraud with regard to its failure to properly disclose to Plaintiff the amount of the balloon payment due on the loan and that Plaintiff proved this failure by clear and convincing evidence.

2. Promise to Refinance

As previously indicated, Plaintiff testified that upon seeing the term "balloon payment" in the loan documents, she became "concerned." She further testified that she did not know exactly what the term meant. Indeed, as already established, the amount of the balloon payment was fraudulently concealed. Plaintiff testified that she knew she would be unable to keep up with the monthly payments for a long period of time especially because the child support payments she was then receiving would soon be ending. According to Plaintiff, she went forward with the loan because Quicken promised that she could refinance in three to four months after closing. Though Quicken denies that it made such a promise to refinance, the evidence at trial revealed that precisely three months after the closing - after she had timely made her September and October mortgage payments - Plaintiff made repeated attempts to contact Quicken. Plaintiff's attempts to contact Quicken at that time are clearly  [*40] consistent with Quicken's promise to refinance three to four months after closing. The circuit court concluded that her attempts to contact Quicken were for the purpose of beginning the refinancing process.29



29Quicken concedes that, according to Quicken representative Anthony (continued...)

23

Quicken's fraudulent misrepresentation to Plaintiff that it would refinance the

loan in three to four months was clearly material because, absent that promise, Plaintiff would

not have otherwise entered into the loan.30 Given these facts, this Court finds that the circuit

court properly concluded that Plaintiff proved by clear and convincing evidence that Quicken

falsely promised Plaintiff that it would refinance her loan in three to four months after closing

and that Plaintiff was justified in relying on that promise.

3. Loan Discount Points



29(...continued)

Nuckolls , a client could, in fact, refinance a loan after a four-month period if, among other things, the client had made timely payments on the loan. Quicken contends that if it promised to refinance Plaintiff's loan, Plaintiff breached the alleged bargain because she "did not make her loan payments for four months, as required under her own version  [*41] of the supposed promise."

Quicken's argument in this regard misstates the evidence. Plaintiff's testimony was not that Quicken promised to refinance after Plaintiff made four timely payments on the loan. Rather, Plaintiff testified that Quicken promised to refinance "in three to four months," at which time Plaintiff "could get it at a cheaper rate" and "once that loan was in place and I got - everything started to be paid off, then I would be able to refinance my loan." Plaintiff closed on the loan on July 7, 2006, and three months later, after she timely made her September and October payments, she promptly began efforts to contact Quicken to begin the refinancing process.

30Quicken briefly argues that even if it had promised to refinance, there is no evidence that the promise was false or made with fraudulent intent. Not unlike this Court's decision in Traders Bank v. Dils , 226 W.Va. 691, 704 S.E.2d 691 (2010), this case "involves the exception to the general rule that fraud cannot be predicated on a promise not performed. This exception . . . comes into play where the device used to accomplish the fraud is the promise itself." Id. 226 W.Va. at 695, 704 S.E.2d at 695. Indeed, "[t]he  [*42] critical element of a fraudulent inducement claim is an oral promise that is used as an improper enticement to the consummation of another agreement." Id. 226 W.Va. at 696, 704 S.E.2d at 696.

24

It is undisputed that Quicken charged Plaintiff $5,792 for four loan discount points to buy down the interest rate on the loan. It is further undisputed that, in fact, Plaintiff purchased only 2.5 points because, at the time the loan was offered, 2.5 points were the maximum number of loan discount points available on a loan such as Plaintiff's. Thus, of the $5,792 Plaintiff paid Quicken to ostensibly buy down her interest rate, $2,100 of that amount (or 1.5 points worth) resulted in no such benefit to her. In reality, the facts established in the circuit court below indicated that Quicken charged Plaintiff a $2,100 "premium," which was an additional fee Quicken mortgage bankers were permitted, in their discretion, to charge clients.

The circuit court concluded that "[t]he manipulation of the increase of 1.5 percent 'discount points' misrepresented to [Plaintiff] that her interest would be reduced." (FOF 43). On appeal, Quicken argues that even if a portion of the loan discount points should have  [*43] been labeled differently, there was no evidence presented at trial which proved that if the loan discount had been accurately described on the closing documents, Plaintiff would not have consummated the loan. In other words, Quicken argues, there was no evidence that Quicken's misrepresentation as to the loan discount points being charged were either material or relied upon by Plaintiff such that the misrepresentation was an act of fraud.

This Court's review of the record indicates that Quicken misrepresented to Plaintiff the extent to which she was buying down her interest rate. It charged her $2,100 for

25

a benefit she never received. Quicken's claim that it would have charged Plaintiff this extra fee anyway based upon the fact that she was a high credit risk in no way legitimizes its actions, which this Court finds to be distasteful and opportunistic. Nevertheless, an action in fraud requires that Plaintiff prove that she relied upon the misrepresented discount points when she entered into the loan. From our review of the evidence, we agree with Quicken that clear and convincing evidence in this regard was not presented.

Although we do not find that the elements of fraud were met with  [*44] regard to the misrepresentation of the loan discount points, we otherwise affirm the circuit court's rulings that the evidence relating to the concealment of the balloon payment and promise to refinance were acts of fraud and were proven by clear and convincing evidence.

B. Unconscionability under West Virginia Code §46A-2-121

Quicken also asserts that the circuit court committed error in concluding that, under West Virginia Code §46A-2-121, the loan to Plaintiff was induced by unconscionable conduct; included several unconscionable terms; and was, in and of itself, an unconscionable loan product.

This Court has recognized "unconscionability" to be a "general contract principle, based in equity." Arnold v. United Companies Lending Corp., 204 W.Va. 229,

26

234, 511 S.E.2d 854, 859 (1998), overruled, in part, on other grounds, Dan Ryan Builders,

Inc. v. Nelson, __ W.Va. __, __ S.E.2d __ (No. 12-0502) (Nov. 15, 2012).

As this Court held in syllabus point three of Arnold,

"'The legislature in enacting the West Virginia Consumer Credit and Protection Act, W.Va. Code 46A-1 -101, et seq., in 1974, sought to eliminate the practice of including unconscionable terms in consumer agreements covered by  [*45] the Act. To further this purpose the legislature, by the express language of W.Va. Code 46A-5-101(1), created a cause of action for consumers and imposed civil liability on creditors who include unconscionable terms that violate W.Va. Code, 46A-2-121 in consumer agreements.' Syl. pt. 2, U.S. Life Credit Corp. v. Wilson, 171 W.Va. 538, 301 S.E.2d 169 (1982)." Syl. pt. 1,

Orlando v. Finance One of West Virginia, Inc., 179 W.Va. 447, 369 S.E.2d 882 (1988).

West Virginia Code §46A-2-121 provides, in relevant part, that

(1) With respect to a transaction which is or gives rise to a consumer credit sale, consumer lease or consumer loan, if the court as a matter of law finds:

(a) The agreement or transaction to have been unconscionable at the time it was made, or to have been induced by unconscionable conduct, the court may refuse to enforce the agreement, or

(b)  [*46] Any term or part of the agreement or transaction to have been unconscionable at the time it was made, the court may refuse to enforce the agreement, or may enforce the remainder of the agreement without the unconscionable term or part, or may so limit the application of any unconscionable term or part as to avoid any unconscionable result.

27

The Act does not define the term "unconscionable." However, in past cases,

this Court has relied on the definition provided in the Uniform Consumer Credit Code

("Consumer Credit Code"), the unconscionability provisions of which are identical to West

Virginia Code §46A-2-121(1)(a) and (b). Arnold, 204 W.Va. at 234, 511 S.E.2d at 860;

Herrod v. First Republic Mortgage Corp., Inc., 218 W.Va. 611, 617, 625 S.E.2d 373, 379

(2005); Orlando v. Finance One of West Virginia, Inc., 179 W.Va. 447, 369 S.E.2d 882

(1988). As a result, we found the drafters' comments to the Consumer Credit Code to be

highly instructive, recognizing that

"'the principle of unconscionability "is one of the prevention of oppression and unfair surprise and not the disturbance of reasonable allocation of risks or reasonable advantage because of superior bargaining power or position." See  [*47] Uniform Consumer Credit Code, section 5.108 comment 3, 7A U.L.A. 170 (1974).'"

Arnold, 204 W.Va. at 235, 511 S.E.2d at 860 (internal citation omitted). See Herrod, 218

W.Va. at 617, 625 S.E.2d at 379.

According to the drafters of the Consumer Credit Code,

"The basic test is whether, in the light of the background and setting of the market, the needs of the particular trade or case, and the condition of the particular parties to the conduct or contract, the conduct involved is, or the contract or clauses involved are so one sided as to be unconscionable under the circumstances existing at the time the conduct occurs or is threatened or at the time of the making of the contract."

28

Arnold, 204 W.Va. at 235, 511 S.E.2d at 860 (quoting Orlando, 179 W.Va. at 450, 369

S.E.2d at 885). See Herrod, 218 W.Va. at 617, 625 S.E.2d at 379.

Furthermore, the drafters explained that "'[t]he particular facts involved in each

case are of utmost importance since certain conduct, contracts or contractual provisions may

be unconscionable in some situations but not in others.'" Arnold, 204 W.Va. at 235, 511

S.E.2d at 860 (quoting Orlando, 179 W.Va. at 450, 369 S.E.2d at 885). See Herrod, 218

W.Va. at 617, 625 S.E.2d at 379.

Importantly,

"'[a]  [*48] bargain is not unconscionable merely because the parties to it are unequal in bargaining position, nor even because the inequality results in allocation of risks to the weaker party. But gross inadequacy in bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion or may show that the weaker party had no meaningful, no real alternative, or did not in fact assent or appear to assent to the unfair terms.'"

Arnold, 204 W.Va. at 235, 511 S.E.2d at 860 (quoting Troy Mining Corp. v. Itmann Coal Co.,

176 W.Va, 599, 604, 346 S.E.2d 749, 753 (1986)).

Accordingly, this Court held in syllabus point 4 of Arnold, that "'[a]

determination of unconscionability must focus on the relative positions of the parties, the

29

adequacy of the bargaining position, the meaningful alternatives available to the plaintiff, and "the existence of unfair terms in the contract.' Syl. pt. 4, Art's Flower Shop, Inc. v. Chesapeake and Potomac Tel. Co., 186 W.Va. 613, 413 S.E.2d 670 (1991)."

As indicated above, the circuit court determined that the loan was induced by Quicken's unconscionable conduct, that the  [*49] loan included several unconscionable terms, and that the loan product, in and of itself, was unconscionable.

With regard to unconscionability in the inducement, the circuit court in the present case concluded that the unconscionable conduct of Quicken included "[t]he false promise of refinancing; [i]ntroducing a balloon payment feature at closing; [f]ailing to properly disclose the balloon payment; [f]alsely representing that the plaintiffs were buying the interest rate down; and [n]egligently conducting the appraisal review and failing to realize the highly inflated appraisal from Guida[.]"

In arguing that the circuit court committed error in concluding that the loan was induced by its unconscionable conduct, Quicken reiterates its previous argument that the loan was not fraudulently induced. See One Valley Bank of Oak Hill, Inc. v. Bolen, 188 W.Va. 687, 691, 425 S.E.2d 829, 833 (1992) (stating that "W.Va. Code, 46A-2-121 [1974], expressly deals with conduct that is 'unconscionable' which we have equated with fraudulent

30

conduct." (Footnote omitted)). Having already determined that Quicken acted fraudulently

in inducing Plaintiff into entering into the loan, we therefore conclude that  [*50] there is no merit

to Quicken's contention that it did not violate West Virginia Code §46A-2-121 in this regard.

The circuit court further determined that the loan product, in and of itself, is

unconscionable and that it "contains several unconscionable terms," including loan discount

points of $5,792, without a fully corresponding reduction in the interest rate or any benefit

to Plaintiff31; a $107,015.71 balloon payment that was not properly disclosed under West

Virginia Code §46A-2-105(2); and a loan which was based on an inflated appraisal of

$181,700 "when the proper fair market value of the Property was $46,000." Finally, the

circuit court found that Quicken converted Plaintiff's previously-unsecured debt of

approximately $25,000 into secured debt and, upon consolidating the secured debt with her

outstanding mortgage to CitiFinancial, "raised her secured monthly debt obligation from $578

to $1,114, thus, putting [Plaintiff's] home at risk. The net effect of this conversion is

unconscionable."32 (Footnote added).



31More specifically, as previously discussed, $2,100 of the $5,792 Quicken charged Plaintiff in loan discount points did not have a corresponding reduction in the interest rate.

32Although  [*51] the circuit court also concluded that the "excessive closing costs of $8,889" were unconscionable (which costs included fees to Quicken of $5,792 and $575), the court's order does not discuss the loan's closing costs other than in the context of the loan discount points.

31

It is Quicken's contention that a bargain is unconscionable only when it is so one-sided as to have an overly harsh effect on the disadvantaged party and lead to absurd results. Quicken challenges the circuit court's findings and conclusions arguing that the court failed to weigh the clear and immediate benefits of the loan to Plaintiff. Such benefits, according to Quicken, included a large cash payout with which Plaintiff purchased a new car and satisfied other debt, reduced monthly payments, and a reduced interest rate.

Plaintiff counters that the lower interest rate and lower monthly payment resulting from the loan were temporary because they were good only for three years and were far outweighed by the exorbitant cost of the loan. The loan converted Plaintiff's previous 9.75% fixed rate mortgage with CitiFinancial into a variable rate ranging from 7.75% to 16.25%. According to Plaintiff, who was earning $14.36  [*52] per hour at the time she applied for and received the loan, her mortgage payment would have equaled $1,582 per month (excluding taxes and insurance) at the highest rate.

Plaintiff argues that, as evidence of just how short-lived any savings to Plaintiff would be, Quicken's own financial expert testified that beginning only two years and five months into the loan, Plaintiff's monthly payments would no longer save her money as compared to Plaintiff's previous mortgage payment and other (unsecured) debt, which the Quicken loan consolidated. In fact, as previously noted, Quicken's expert testified that in

32

year five of the loan, the monthly payment would be $1,582, whereas the combined monthly payment for Plaintiff's previous mortgage and other debt would have been $578. Plaintiff points out that, in total, the cost of the Quicken loan, when compared to Plaintiff's prior mortgage and prior debts, was an additional $349,000 in monthly payments.

Furthermore, Plaintiff argues that in consolidating her debt, Plaintiff's formerly unsecured debt was now secured under the Quicken loan. Plaintiff contends that, given her well-documented poor credit history, income and financial obligations, it was  [*53] unconscionable for Quicken to secure all of her debt and to thereby jeopardize her family's home.33

As set forth above, in determining unconscionability, this Court "must focus on the relative positions of the parties, the adequacy of the bargaining positions, the meaningful alternatives available to the Plaintiff, and the 'existence of unfair terms in the contract.'" Arnold, at syl. pt. 4. This is not a close case. Plaintiff was a single mother to three children who earned $14.36 an hour and who had a well-documented poor credit history. She was not a sophisticated borrower. Quicken's own records describe her as "timid," "fragile" and needing to be handled with "kid gloves." When Plaintiff declined the original $112,000 loan because the payments were too high, Quicken continued to pursue her. It tried to contact



33With regard to the cash she received under the loan, with which she purchased a new car, Plaintiff contends that the offer of cash was initiated by Quicken after it approved the grossly-inflated appraisal from Mr. Guida.

33

her numerous times especially after Mr. Guida's appraisal came in at almost four times the actual fair market value of the property.

Furthermore, as previously  [*54] established, the loan contained a $107,015.71 balloon payment (of which Plaintiff was not aware prior to closing). The total cost of the loan was exorbitant, costing Plaintiff an additional $349,000 in monthly payments as compared to her prior mortgage and debts. From this and all of the evidence presented at trial, we conclude that the circuit court correctly found that, given the particular facts involved in this case, the terms of the loan described above and the loan product, in and of itself, were unconscionable.

C. Cancellation of the Loan Obligation (Loan Principal)

Quicken's next assignment of error is that the circuit court lacked the legal authority to cancel Plaintiff's obligation to repay the $144,800 loan principal. It is Quicken's contention that the legislature has strictly limited the circumstances under which this remedy may be awarded under the West Virginia Consumer Credit and Protection Act and that those circumstances are absent in the case sub judice. We agree.

34

Cancellation of debt is a permissible remedy under the following two provisions

of the Act: West Virginia Code §46A-5-101(2) (1996) and §46A-5-105 (1994). West

Virginia Code §46A-5-101(2) provides, in relevant  [*55] part, that

[i]f a creditor has violated the provisions of this chapter respecting authority to make regulated consumer loans, the loan is void and the consumer is not obligated to pay either the principal or the loan finance charge.

This statute specifically applies to "regulated consumer loans," which term is defined in West

Virginia Code §46A-1-102(38) (1996) as "a consumer loan . . . in which the rate of the loan

finance charge exceeds eighteen percent per year[.]" It is undisputed that the loan at issue is

not a "regulated consumer loan," and thus, West Virginia Code §46A-5-101(2) does not apply

to give the circuit court the authority to cancel the loan such that Plaintiff is not obligated to

repay the principal.

Likewise, West Virginia Code §46A-5-105 provides that

[i]f a creditor has willfully violated the provisions of this chapter applying to illegal, fraudulent or unconscionable conduct or any prohibited debt collection practice, in addition to the remedy provided in section one hundred one [§46A-5-101] of this article, the court may cancel the debt when the debt is not secured by a security interest.

In this case, although it has been determined that Quicken violated the

provisions  [*56] of Chapter 46A "applying to illegal, fraudulent or unconscionable conduct or any

35

prohibited debt collection practice," Plaintiff's debt may only be canceled under West

Virginia Code §46A-5-105 if it "is not secured by a security interest." Plaintiff's loan debt

is, of course, secured by a security interest. Thus, West Virginia Code §46A-5-105 does not

apply.

Although the foregoing statutory requirements were not met in this case, the

circuit court canceled the debt under the illegal appraisal, unconscionability, and unfair and

deceptive acts provisions of the Act, and under the common law fraud claim. We will discuss

each in turn.

1. Illegal appraisal

The circuit court concluded that Quicken violated that portion of the illegal

appraisal statute, West Virginia Code §31-17-8(m)(8), which states as follows:

(m) In making any primary or subordinate mortgage loan, no licensee may, and no primary or subordinate mortgage lending transaction may, contain terms which:

. . . .

(8) Secure a primary or subordinate mortgage loan in a principal amount that, when added to the aggregate total of the outstanding principal balances of all other primary or subordinate mortgage loans secured by the same property,  [*57] exceeds the fair market value of the property on the date that the latest mortgage loan is made. For purposes of this paragraph, a broker or lender may rely upon a bona fide written appraisal of the property made by an independent third-party appraiser, duly licensed or certified

36

by the West Virginia real estate appraiser licensing and certification board and prepared in compliance with the uniform standards of professional appraisal practice[.]

As previously described, Dewey Guida, an appraiser who was unaffiliated with

Quicken, appraised the subject property for $181,700. The circuit court found that Mr.

Guida's appraisal was grossly inflated because the actual fair market value of the property

was $46,000. In its February 25, 2010, order, the court set forth numerous "obvious flaws"

that Quicken's appraisal review team ignored with regard to Mr. Guida's appraisal and further

found that Quicken violated its own appraisal review standards and the Uniform Standards

of Professional Appraisal Practice. See n.10, infra.

The circuit court concluded that

[t]he net effect of the negligently performed appraisal review is that all the errors of omission and commission caused a misleading and distorted  [*58] report that should not have been used as a basis for approving this loan. The misleading appraisal, which was negligently performed, gave [Plaintiff] a false sense as to her ability to repay this loan.

It was the intention of Quicken Loans, after the closing of this loan, to not service the loan but instead sell the loan to a third-party. The negligently performed appraisal review facilitated the sale of this loan by giving any third-party purchaser a false sense as to the value of the Property.

(Emphasis added).

37

Pursuant to West Virginia Code §31-17-17(a) (l967), a court may cancel a loan made in violation of the provisions of West Virginia Code §31-17-1, et seq., if the violation is "willful." West Virginia Code §31-17-17(a) states:

If any primary or subordinate mortgage loan is made in willful violation of the provisions of this article, except as a result of a bona fide error, such loan may be canceled by a court of competent jurisdiction.

Because the circuit court found Quicken's violation of West Virginia Code §31-17-8(m)(8) to have been negligent rather than willful, the court committed error in canceling Plaintiff's mortgage obligation under that particular statute.

2. Unconscionability

As  [*59] previously indicated, West Virginia Code §46A-2-121(1)(a) and (b) provides that when a consumer loan is found to be unconscionable, a court may, among other things, "refuse to enforce the agreement[.]" It is Quicken's contention that refusal to enforce the agreement does not allow the court to cancel Plaintiff's debt. Quicken compares the language in West Virginia Code §46A-2-121(1) with that contained in West Virginia Code §46A-5-101(2), which, as previously discussed, provides that when a creditor violates the statutory provisions governing regulated consumer loans, "the loan is void and the consumer is not obligated to pay either the principal or the loan finance charge." Quicken argues that the

38

legislature could have used similar language in West Virginia Code §46A-2-121, but clearly

did not do so.

This Court has consistently adhered to the principles of statutory construction

set forth in syllabus points four, five and six of Community Antenna Serv. Corp. v. Charter

Communications, VI, LLC, 227 W.Va. 595, 712 S.E.2d 504 (2011), in which we stated,

respectively, as follows:

Statutes which relate to the same subject matter should be read and applied together so that the Legislature's  [*60] intention can be gathered from the whole of the enactments. Syllabus Point 3,

Smith v. State Workmen's Comp. Comm'r., 159 W.Va. 108, 219 S.E.2d 361 (1975).

A statute should be so read and applied as to make it accord with the spirit, purposes and objects of the general system of law of which it is intended to form a part; it being presumed that the legislators who drafted and passed it were familiar with all existing law, applicable to the subject matter, whether constitutional, statutory or common, and intended the statute to harmonize completely with the same and aid in the effectuation of the general purpose and design thereof, if its terms are consistent therewith. Syllabus Point 5, State v. Snyder, 64 W.Va.659, 63 S.E. 385 (1908).

Statutes which relate to the same persons or things, or to the same class of persons or things, or statutes which have a common purpose will be regarded in pari materia to assure recognition and implementation of the legislative intent. Accordingly, a court should not limit its consideration to any single part, provision, section, sentence, phrase or word, but rather review the act or statute in its entirety to ascertain legislative intent properly. Syllabus  [*61] Point 5, Fruehauf Corp. v. Huntington Moving & Storage Co., 159 W.Va. 14, 217 S.E.2d

39

907 (1975).

Furthermore, as we have made clear in prior cases, "[i]t is not for [courts] arbitrarily to read into [a statute] that which it does not say. Just as courts are not to eliminate through judicial interpretation words that were purposely included, we are obliged not to add to statutes something the Legislature purposely omitted." Williamson v. Greene, 200 W.Va. 421, 426, 490 S.E.2d 23, 28(1997) (emphasis provided) (quoting Banker v. Banker, 196 W.Va. 535, 546-47, 474 S.E.2d 465, 476-77 (1996)).

Applying these rules of statutory construction, therefore, we must conclude that although the circuit court had the authority to refuse to enforce the Note and Deed of Trust in this case pursuant to the provisions of West Virginia Code §46A-2-121, the clear language of the statute simply does not allow the court to cancel Plaintiff's debt obligation. Therefore, this Court finds that the court committed error in canceling Plaintiff's debt obligation under West Virginia Code 46A-2-121.

3. Unfair and Deceptive Acts

Under West Virginia Code §46A-6-104, "[u]nfair methods of competition and unfair or deceptive  [*62] acts or practices in the conduct of any trade or commerce are hereby declared unlawful." In the case sub judice, the circuit court found that Quicken engaged in unfair methods of competition and unfair or deceptive acts or practices by misrepresenting to

40

Plaintiff the extent to which she was buying down her interest rate; by "[n]ot disclosing to [Plaintiff] prior to closing that her loan had an enormous balloon payment and then not properly disclosing the balloon payment at closing;" and by "[c]onducting a negligent appraisal review and approving a loan based on a grossly inflated appraisal." Specifically, the circuit court found that this conduct met the definitions of "unfair methods of competition and unfair or deceptive acts or practices" as set forth in West Virginia Code §46A-6-

41

102(7)(K)(L)(M) and (N).34 Quicken did not appeal the circuit court's conclusion that it

engaged in unfair methods of competition and unfair or deceptive acts or practices.



34West Virginia Code §46A-6-102(7)(K)(L)(M) and (N) provide:

(7) "Unfair methods of competition and unfair or deceptive acts or practices" means and includes, but is not limited to, any one or more of the following:

. . . .

(K) Making  [*63] false or misleading statements of fact concerning the reasons for, existence of or amounts of price reductions;

(L) Engaging in any conduct which similarly creates a likelihood of confusion or of misunderstanding;

(M) The act, use or employment by any person of any deception, fraud, false pretense, false promise or misrepresentation, or the concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any goods or services, whether or not any person has in fact been misled, deceived or damaged thereby;

(N)Advertising, printing, displaying, publishing, distributing or broadcasting, or causing to be advertised, printed, displayed, published, distributed or broadcast in any manner, any statement or representation with regard to the sale of goods or the extension of consumer credit including the rates, terms or conditions for the sale of such goods or the extension of such credit, which is false, misleading or deceptive or which omits to state material information which is necessary to make the statements therein not false, misleading or deceptive[.]

42

Under West Virginia Code §46A-6-106(a),  [*64] a consumer who suffers an "ascertainable loss of money or property, real or personal, as a result of the use or employment by another person of a method, act or practice prohibited or declared to be unlawful by the provisions of this article may . . . recover actual damages or two hundred dollars, whichever is greater. The court may, in its discretion, provide such equitable relief as it deems necessary or proper." Id. in relevant part. (Emphasis added). It is Quicken's contention that cancellation of Plaintiff's debt obligation (i.e., forfeiture of the loan principal) is not an equitable remedy.35

The term "forfeiture" is defined, inter alia, as "[t]he loss of a right, a privilege, or property because of a crime, breach of obligation, or neglect of duty." Black's Law Dictionary 661 (7th ed. 1999). In past cases, this Court has not looked favorably on forfeiture as a remedy. Rather, "[i]t is an 'elementary principle of equity jurisprudence that equity looks with disfavor upon forfeitures, and that equity never enforces a penalty or forfeiture if such can be avoided.' Sun Lumber Co. v. Thompson Land & Coal Co., 138 W.Va. 68, 76, 76 S.E.2d 105, 109 (1953)." Fraley v. Family Dollar Stores of Marlinton, W.Va., Inc., 188 W.Va. 35, 38, 422 S.E.2d 512, 515 (1992).  [*65] As we held in syllabus point one of Helton v. Reed, 219 W.Va. 557, 558, 638 S.E.2d 160, 161(2006), "'[e]quity will not enforce a forfeiture.'" (quoting Syllabus, in part, Craig v. Hukill, 37 W.Va. 520, 16 S.E.363 (1892)). See Carder



35Quicken further argues, and Plaintiff does not dispute, that a forfeiture does not constitute "actual damages." Rather, Quicken argues, it is a windfall.

43

v. Matthey, 127 W.Va. 1, 7, 32 S.E.2d 640, 642 (1944) ("It is familiar law that forfeitures are not favored in courts of equity . . . . not only will a court of equity ordinarily refuse to act affirmatively in the enforcement of a forfeiture, but will often relieve against it.")

Plaintiff has failed to offer any authority tending to support forfeiture of the loan principal as an equitable remedy under the unfair and deceptive acts provisions of the Act, as set forth above. To the contrary, this Court finds that a balancing of the equities requires that the parties be returned to the status quo as nearly as is possible.38 See Go Mart, Inc. v. Olson, 198 W.Va. 559, 563, 482 S.E.2d 176, 180 (1996) (finding that where seller who entered into contract to sell real estate was found to have been incompetent,  [*66] circuit court properly directed her to return full purchase price, thereby balancing the equities in "terms of returning the parties to the status quo . . . 'as far as possible.'").

D. Punitive Damages

Following the trial on the issue of liability, the circuit court conducted a trial on the issues of attorneys fees and punitive damages. Upon the conclusion thereof, the circuit court awarded attorneys fees and costs in the amount of $495,956.25 and expenses in the



38For similar reasons, forfeiture of the loan principal is not a viable remedy under Plaintiff's fraud claim.

44

amount of $100,243.64, for a total of $596,199.89.39 With regard to punitive damages,39 the

court stated in its February 17, 2011, order as follows:

Taking all of the Garnes [v. Fleming Landfill, Inc., 186 W.Va. 656, 413 S.E.2d 897 (1991)], factors into consideration, including applying a factor of three times the compensatory damages and attorneys fees, [the punitive damages award] is $2,168,868.75.

This Court believes that this amount fairly applies the five standards in Garnes including the financial position of the defendant and as a matter of fundamental fairness, assuring that the punitive damage award bears a reasonable  [*67] relationship to the compensatory damages which include the actual compensatory damages and the attorney fees.



39The circuit court characterized this matter as "one of the more confusing, confounding and complex cases both factually and legally that has ever been before" it. After modifying the proposed hourly rate of Plaintiff's attorneys and their staff, the court determined that the billing records submitted by Plaintiff's counsel were "both reasonable and reliable" under the guidelines set forth in Aetna Casualty and Surety Co. v. Pitrolo, 176 W.Va. 190, 342 S.E.2d 156 (1986). Quicken does not challenge the amount of attorneys fees awarded in this case.

39The parties agree that punitive damages are available in an action for common law fraud. Muzelak v. King Chevrolet Inc., 179 W.Va. 340, 368 S.E.2d 710 (1988). They further agree that "punitive damages are not available under the fraud or unconscionability provisions of W.Va. Code, §46A-2-121 [1974], and §46A- 2-102(5) [1974]." One Valley Bank of Oak Hill v. Bolen, 188 W.Va. 687, 692, 425 S.E.2d 829, 834 (1992). Whether punitive damages are available under the remaining provisions of the Act which are at issue herein is not raised  [*68] by either party in this appeal. See e.g., Muzelak, 179 W.Va. at 344, 368 S.E.2d at 715 (where plaintiff alleged claim of "statutory misrepresentation and unfair or deceptive acts" based upon West Virginia Code §46A-6-102(f)(13) [1974], defendant argued plaintiff was limited to actual damages under the language of West Virginia Code §46A-6-106 and that trial court committed error in giving punitive damages instruction to jury. This Court stated that "we need not decide today whether Mrs. Muzelak may recover punitive damages under W.Va. Code §46A-6-102(f)(13) [1974] because Mrs. Muzelak also pleaded and proved a cause of action for common law misrepresentation or fraud."). We, therefore, will not address the issue in this case.

45

Quicken argues that the circuit court deprived it of procedural due process by

failing to perform the required analysis of punitive damages pursuant to syllabus point three

of Garnes v. Fleming Landfill, Inc., 186 W.Va. 656, 413 S.E.2d 897 (1991), in which this

Court held as follows:

When the trial court instructs the jury on punitive damages, the court should, at a minimum, carefully explain the factors to be considered in awarding punitive damages. These factors  [*69] are as follows:

(1) Punitive damages should bear a reasonable relationship to the harm that is likely to occur from the defendant's conduct as well as to the harm that actually has occurred. If the defendant's actions caused or would likely cause in a similar situation only slight harm, the damages should be relatively small. If the harm is grievous, the damages should be greater.

(2) The jury may consider (although the court need not specifically instruct on each element if doing so would be unfairly prejudicial to the defendant), the reprehensibility of the defendant's conduct. The jury should take into account how long the defendant continued in his actions, whether he was aware his actions were causing or were likely to cause harm, whether he attempted to conceal or cover up his actions or the harm caused by them, whether/how often the defendant engaged in similar conduct in the past, and whether the defendant made reasonable efforts to make amends by offering a fair and prompt settlement for the actual harm caused once his liability became clear to him.

(3) If the defendant profited from his wrongful conduct, the punitive damages should remove the profit and should be in excess of  [*70] the profit, so that the award discourages future bad acts by the defendant.

(4)As a matter of fundamental fairness, punitive damages should bear a reasonable relationship to compensatory damages.

46

(5) The financial position of the defendant is relevant.

In syllabus point four of Garnes, we also held that

[w]hen the trial court reviews an award of punitive damages, the court should, at a minimum, consider the factors given to the jury as well as the following additional factors:

(1) The costs of the litigation;

(2) Any criminal sanctions imposed on the defendant for his conduct;

(3) Any other civil actions against the same defendant, based on

the same conduct; and

(4) The appropriateness of punitive damages to encourage fair and reasonable settlements when a clear wrong has been committed. A factor that may justify punitive damages is the cost of litigation to the plaintiff.

Because not all relevant information is available to the jury, it is likely that in some cases the jury will make an award that is reasonable on the facts as the jury know them, but that will require downward adjustment by the trial court through remittitur because of factors that would be prejudicial to the defendant if  [*71] admitted at trial, such as criminal sanctions imposed or similar lawsuits pending elsewhere against the defendant. However, at the option of the defendant, or in the sound discretion of the trial court, any of the above factors may also be presented to the jury.

In the case sub judice, the circuit court's conclusory order on punitive damages

fails to satisfy the requirements set forth in Garnes. Even though this matter was tried before

a judge rather than a jury, it was necessary for the circuit court to conduct a meaningful and

adequate analysis under Garnes so that this Court may, in turn, conduct a meaningful and

47

adequate review of the award on appeal. Id. 186 W.Va. at 667, 413 S.E.2d at 908. As we held

in syllabus point five of Garnes,

Upon petition, this Court will review all punitive damages awards. In our review of the petition, we will consider the same factors that we require the jury and trial judge to consider, and all petitions must address each and every factor set forth in Syllabus Points 3 and 4 of this case with particularity, summarizing the evidence presented to the jury on the subject or to the trial court at the post-judgment review stage. Assignments of error related  [*72] to a factor not specifically addressed in the petition will be deemed waived as a matter of state law.

See Syl. Pt. 5, Alkire v. First Nat'l Bank of Parsons, 197 W.Va. 122, 475 S.E.2d 122 (1996).

Because the circuit court's order on punitive damages lacked the necessary

analysis and findings required by Garnes, this Court is unable to conduct a meaningful and

adequate review of the punitive damages award. See State ex rel. Harper-Adams v. Murray,

224 W.Va. 86, 680 S.E.2d 101 (2009). Because the circuit court failed to conduct a proper

analysis under Garnes, such an analysis must be conducted upon remand.

E. Attorneys Fees as Compensatory Damages

Quicken's next assignment of error is that the circuit court committed error by

including attorneys fees in its calculation of the punitive damages award. As indicated above,

the circuit court took "all of the Garnes factors into consideration, including applying a factor

of three times the compensatory damages and attorneys fees" and awarded punitive damages

48

in the amount of $2,168,868.75.40 It is Quicken's contention that attorneys fees are punitive

in nature and not compensatory and thus, may not be included in the ratio of compensatory to

punitive  [*73] damages.

The circuit court awarded Plaintiff attorneys fees and costs pursuant to West

Virginia Code §46A-5-104 of the West Virginia Consumer Credit and Protection Act, which

provides as follows:

In any claim brought under this chapter applying to illegal, fraudulent or unconscionable conduct or any prohibited debt collection practice, the court may award all or a portion of the costs of litigation, including reasonable attorney fees, court costs and fees, to the consumer. On a finding by the court that a claim brought under this chapter applying to illegal, fraudulent or unconscionable conduct or any prohibited debt collection practice was brought in bad faith and for the purposes of harassment, the court may award to the defendant reasonable attorney fees.

Quicken does not challenge the applicability of this fee-shifting statute to the facts and

circumstances of this case.



40See Syl. Pt. 6, Boyd v. Goffoli, 216 W.Va. 552, 608 S.E.2d 169 (2004) (explaining that "'[t]he outer limit of the ratio of punitive damages to compensatory damages in cases in which the defendant has acted with extreme negligence or wanton disregard but with no actual intention to cause harm and in which compensatory  [*74] damages are neither negligible nor very large is roughly 5 to 1. However, when the defendant has acted with actual evil intention, much higher ratios are not per se unconstitutional.' Syllabus Point 15,

TXO Production Corp. v. Alliance Resources Corp., 187 W.Va. 457, 419 S.E.2d 870 (1992), affirmed by 509 U.S. 443, 113 S.Ct. 2711, 125 L.Ed.2d 366 (1993)").

49

This Court has recognized the Consumer Credit and Protection Act to be "a remedial statute intended to protect consumers from unfair, illegal and deceptive business practices, [which] must be liberally construed to accomplish that purpose." Harper v. Jackson Hewitt, Inc., 227 W.Va. 142, 151, 706 S.E.2d 63, 72 (2010).See State ex rel. McGraw v. Scott Runyan Pontiac-Buick, Inc., 194 W.Va. 770, 777, 461 S.E.2d 516, 523 (1995). Though not specifically articulated in our Act, other jurisdictions have made clear that their consumer protection fee-shifting provisions are compensatory in nature. See Alexander v. S & M Motors, Inc., 28 S.W.3d 303, 305 (Ky. 2000) (stating that Kentucky Consumer Protection Act is "'intended [inter alia] to compensate the prevailing party for the expense of bringing an action under the statute.'" (internal citation  [*75] omitted)); Gordan v. Archer, 1999 WL 788548 *2 (Mass.App.Div. 1999) (finding that attorneys fees awarded under Massachusetts consumer protection fee-shifting statute "are assessed in an amount equal to the reasonable and objective worth of plaintiff counsel's professional time and effort . . . . and are construed as strictly compensatory in nature."); Wilkins v. Peninsula Motor Cars, Inc., 587 S.E.2d 581, 584 (Va. 2003) (stating that purpose of statutory award of attorneys fees and costs under Virginia Consumer Protection Act differs from purposes of punitive damages, the latter of which is designed to punish and deter unlawful conduct, whereas "fee shifting provisions . . . are designed to encourage private enforcement of" statute).

Likewise, the purpose of fee-shifting statutes similar to West Virginia Code §46A-5-104, above, have been considered by this Court to be compensatory in nature. For

50

example, in Farley v. Zapata Coal Corp., 167 W.Va. 630, 639, 281 S.E.2d 238, 244 (1981),

former employees of a defunct strip mine operator sought to recover from the coal rights'

lessee unpaid wages, accrued vacation and sick pay, liquidated damages and attorneys fees and

costs. Upon holding that  [*76] an award of attorneys fees was warranted under the fee-shifting

provision of the West Virginia Wage Payment and Collection Act, this Court stated that the

statutory provisions at issue

are designed to protect the laborer and act as an aid in the collection of compensation wrongfully withheld. Working people should not have to resort to lawsuits to collect wages they have earned. When, however, resort to such action is necessary, the Legislature has said that they are entitled to be made whole by the payment of wages, liquidated damages, and costs, including attorney fees. If the laborer were required to pay attorney fees out of an award intended to compensate him for services performed, the policy of these statutes would be frustrated.

Farley, 167 W.Va. at 639, 281 S.E.2d at 244 (emphasis added).

Likewise, in Orndorff v. West Virginia Dept. of Health, 165 W.Va. 1, 4, 267

S.E.2d 430, 432 (1980), which involved a plaintiff who was unlawfully denied civil service

employment, this Court concluded that the plaintiff was entitled to reasonable attorneys' fees

under the applicable fee-shifting statute. In addressing the "scope of the right to obtain" such

fees in a civil reinstatement proceeding,  [*77] we recognized that

[o]ne obvious purpose of a provision for reasonable attorney fees is to provide a measure of restitution to a civil service employee who has been wrongfully discharged or suspended and, as a result, forced to hire an attorney to seek redress. Equally apparent is another goal, to provide an

51

inducement to the employee who has been wrongfully discharged to challenge the action since, if successful, he is relieved of the burden of paying reasonable attorney fees.

Orndorff, 165 W.Va. at 4-5, 267 S.E.2d at 432 (emphasis added). See Daily Gazette Co., Inc. v. West Virginia Development Office, 206 W.Va. 51, 58, 521 S.E.2d 543, 550 (1999) (stating that FOIA's fee-shifting statute, W.Va. Code §29B-1-7, "which is a marked departure from the general rule that each party bears his/her own litigation costs, is intended to relieve some of the burden associated with the public's pursuit of the right to access public records and to encourage the cooperation of public officials when requests for such records are made." (Footnote omitted and emphasis added)); syl. pt. 14, Bettinger v. Bettinger, 183 W.Va. 528, 396 S.E.2d 709 (1990) (holding that "[t]he purpose of W.Va. Code, 48-2-13(a)(4)(1986),  [*78] is to enable a spouse who does not have financial resources to obtain reimbursement for costs and attorney's fees [incurred] during the course of the litigation." (Emphasis added)).

Furthermore, we are mindful of cases from other jurisdictions in which attorneys fees awarded pursuant to a fee-shifting statute were included as compensatory damages in the ratio of compensatory to punitive damages. In Willow Inn, Inc. v. Public Service Mut. Ins. Co., 399 F.3d 224 (3rdCir. 2005), the insured, Willow Inn, sued its insurer under Pennsylvania's bad faith statute after the insured "encountered sustained resistance to its insurance claim" for property damage resulting from a tornado. 399 F.3d at 227. In the bad faith claim, the insured was awarded $150,000 in punitive damages and attorneys fees and

52

costs in the amount of $135,400. The United States Court of Appeals for the Third Circuit concluded the attorneys fees and costs awarded under the applicable fee-shifting statute to be "the proper term to compare to the punitive damages award for ratio purposes." Id., at 235. The court reasoned, in part, that the statute's fee-shifting provisions "vindicate the statute's policy by enabling plaintiffs  [*79] such as Willow Inn to bring . . . actions alleging bad faith delays [and] to secure counsel on a contingency fee." Id., at 236. The court thus concluded that attorneys fees and costs awarded pursuant to the applicable fee-shifting statute are compensatory damages for "ratio purposes." Id., at 237.

Similarly, in Blount v. Stroud, 915 N.E.2d 925 (Ill.App.Ct.2009), the court recognized "that the amount of attorney fees expended in a case may be taken into account when assessing the propriety of a punitive damage award." 915 N.E.2d at 943. In Blount, the plaintiff prevailed in a retaliation claim against her former employer under the United States Civil Rights Act of 1991 and was awarded attorneys fees under the fee-shifting provision of the statute.41 The court in Blount made clear that the fee-shifting provision of the Civil Rights Act, 42 U.S.C. 1988, is remedial in nature and not punitive. Its purpose "is to ensure effective access to the judicial process for persons with civil rights claims and to encourage litigation to enforce the provisions of the Civil Rights Act and the Constitution" Id. at 944. Thus, the



41In Blount, the jury awarded plaintiff compensatory damages in the amount  [*80] of $282,350, for physical and/or emotional pain and suffering and back pay. She was also awarded in excess of $1,000,000 in attorneys fees and costs under the fee-shifting provision of the Civil Rights Act. The jury awarded her $2.8 million in punitive damages.

53

court in Blount concluded that the attorneys fees awarded under the fee-shifting provision of the Civil Rights Act "should be counted on the compensatory side" of the compensatory to punitive damages ratio. Id. at 945. See Clausen v. Icicle Seafoods, Inc., 272 P.3d 827, 836 (Wash. 2012) (holding that "recovery of attorney fees is compensatory in that those fees attempt to make [plaintiff] whole for the employer's actions in intentionally failing in its maritime duty to provide maintenance and cure. It was proper for trial court to include attorney fees as part of the compensatory damages award when calculating the punitive damages ratio.")

In light of the foregoing, and considering this Court's past recognition that, in general, fee-shifting statutes are compensatory and not punitive in nature, we find persuasive the argument that the attorneys fees and costs awarded under West Virginia Code §46A-5-104 shall be included in the  [*81] compensatory to punitive damages ratio42 where, as here, punitive damages are available to Plaintiff because there was a finding of common law fraud. Accordingly, we hold that attorneys fees and costs awarded under West Virginia Code §46A-5-104 (1994) of the West Virginia Consumer Credit and Protection Act shall be included in the compensatory to punitive damages ratio in cases where punitive damages are available.43



42Indeed, this is wholly consistent with Garnes, which directs that review of a punitive damages award should, at a minimum, consider, among other factors, "[t]he costs of the litigation." Garnes, at syl. pt. 4, 186 W.Va. at 659, 413 S.E.2d at 900.

43We note Quicken's additional argument that because attorneys fees in this (continued...)

54

F. Offset

Quicken's final assignment of error is that the circuit court committed error in

failing to offset the compensatory damages award against Plaintiff's pre-trial settlement with

co-defendants Appraisals Unlimited, Inc. and appraiser Dewey Guida. Quicken represents that

Plaintiff settled with these parties for the amount of $700,000 and that, because all of

Plaintiff's damages flowed from the inflated appraisal by Mr. Guida and his company,  [*82] Plaintiff

is entitled to an offset as a matter of law.

The circuit court entered the judgment order in this case on February 17, 2011.

Quicken filed its motion for offset on April 8, 2011, and the circuit court summarily denied

it by order entered May 2, 2011. Although the circuit court offered no explanation for its

ruling, Plaintiff argues that Quicken failed to file its motion within ten days of the entry of

judgment, pursuant to Rule 59(e) of the West Virginia Rules of Civil Procedure.

Despite Plaintiff's argument to the contrary, the issue of offset is governed by

Rule 60(a) of the West Virginia Rules of Civil Procedure and this Court's decision in Savage

v. Booth, 196 W.Va. 65, 468 S.E.2d 318 (1996). In Savage, during the pendency of a sexual



43(...continued)

case were awarded under West Virginia Code §46A-5 -104 of the Consumer Credit and Protection Act and because, Quicken maintains, the Act does not allow a punitive damages award, it was not "logical" for the circuit court to consider the attorneys fees award in its calculation of punitive damages. Plaintiff provides this Court with no legal authority in support of this argument. We, therefore, decline to address it.

55

harassment trial,  [*83] the plaintiffs settled with one of the defendants for $50,000. The trial against

the remaining defendant proceeded to a jury verdict for $40,000. The judgment order "gave

no credit nor made any reference to the settlement agreement." 196 W.Va. at 67, 468 S.E.2d

at 320. Three months after the entry of judgment, the defendant filed a Rule 60 motion to,

inter alia, "give credit for the $50,000 settlement . . . and to enter a new order stating that there

is no balance due the plaintiffs from the defendant." Id. The trial court ultimately denied the

defendant's motion because he failed to timely file it pursuant to Rule 59(e).

On appeal, this Court reiterated that

Rule 60(a) of the West Virginia Rules of Civil Procedure applies to clerical errors made through oversight or omission which are part of the record and is not intended to adversely affect the rights of the parties or alter the substance of the order, judgment or record beyond what was intended.

Id., at syl. pt. 3, 196 W.Va. at 66, 468 S.E.2d at 319.44



44Rule 60(a) of the West Virginia Rules of Civil Procedure provides as follows:

Clerical mistakes in judgments, orders or other parts of the record and errors therein arising from oversight  [*84] or omission may be corrected by the court at any time of its own initiative or on the motion of any party and after such notice, if any, as the court orders. During the pendency of an appeal, such mistakes may be so corrected before the appeal is docketed in the appellate court, and thereafter while the appeal is pending may be so corrected with leave of the appellate court.

56

This Court in Savage concluded "as a matter of law that upon the defendant's

motion the trial court was required to deduct the settlement amount from the jury verdict prior

to entering the final judgment. The trial court's initial failure to give such credit was a mere

oversight and does not arise to the level of more substantial errors which must be considered

pursuant to Rule 59(e) or Rule 60(b)." Id., 196 W.Va. at 70, 468 S.E.2d at 323.

According to Quicken, Plaintiff suffered a single indivisible loss and, thus, she

is entitled to but one complete satisfaction for her injury. Board of Educ. of McDowell County

v. Zando, Martin & Milstead, Inc., 182 W.Va. 597, 390 S.E.2d 796 (1990). See Pennington

v. Bluefield Orthopedics, P.C., 187 W.Va. 344, 349, 419 S.E.2d 8, 13 (1992). Plaintiff

counters (albeit very superficially)  [*85] that Quicken fails to meet the "'joint obligation' and/or

'single indivisible injury'" elements under Zando.

In syllabus point eight of Zando, we held, in relevant part, that

[w]here there is a single indivisible loss arising from the actions of multiple parties who have contributed to the loss, the fact that different theories of liability have been asserted against them does not...prevent them from obtaining a verdict credit for settlements made with the plaintiff by one or more of those jointly responsible.

182 W.Va. at 600, 390 S.E.2d at 799.

57

Accordingly, given that Plaintiff does not seriously argue otherwise, it is clear

that Plaintiff suffered a single indivisible loss arising from the actions of Quicken and the

settling co-defendants. Quicken is therefore entitled to a credit for the settlement between

Plaintiff and the appraisal defendants, pursuant to Rule 60(a) and Savage.

Finally, we note that the parties are in agreement that any credit for the

settlement between Plaintiff and Quicken's co-defendants is not to be applied to any punitive

damages which may be awarded upon remand in this case. As we held in syllabus point one

of Burgess v. Porterfield, 196 W.Va. 178, 469 S.E.2d 114 (1996),

[d]efendants  [*86] in a civil action against whom awards of compensatory and punitive damages are rendered are entitled to a reduction of the compensatory damage award, but not the punitive damage award, by the amount of any good faith settlements previously made with the plaintiff by other jointly liable parties.

IV. Conclusion

For the reasons stated herein, the order of the Circuit Court of Ohio County

entered May 2, 2011, is affirmed, in part; reversed, in part; and this matter is remanded for

further proceedings consistent with this opinion.

58

Affirmed, in part; Reversed, in part; and Remanded.

59

Who Would You Vote For, JPMorgan Chase Or Goldman Sachs?

I have been asked numerous times during the past few weeks if I will vote for Obama or Romney.  My close friends know me as somewhat Republican-leaning, but many others assume that one who represents the interests of many "common people" such as homeowners, would likely be Democratic.

Without getting too much into the politics of things, I'd like to share that my answer to the question "Who will you vote for?" has consistently been this: "Who would you vote for, JPMorgan Chase or Goldman Sachs?"  Is there really a "lesser" between these to "evils"?  Now, to be sure, I am picking these two particular names just for illustration purposes.  But the point remains: the Government is the head and the Big Money is the neck.

Needless to say, I am excited to see others with a similar point of view, and I was very happy to come across the following post a few days ago: Before the Election was Over, Wall Street Won.  Notably, the post is written by a former banker from Goldman Sachs, so presumably she really knows, by virtue of first-hand experience, what she is talking about.

The bottom line is, Main Street didn't get a bailout, and all the so-called "relief" programs from the government were just for show.  They contained tricky language making them unenforceable and allowing easy limiting construction by the courts.  The banks have been methodically tightening their stranglehold over Washington, lobbying for and passing national laws that distort federalism (the balance of power between the States and the Fed Gov) and otherwise increase the banks' power in almost every single area of activity.

That is why, for instance, ReconTrust, an arm of Bank of America, was chartered as a national "bank" even though it does not make loans and does not take deposits, specifically for the purpose of conducting foreclosures all across the country without regard to State laws.

As an entity completely owned by BOA, ReconTrust bulldozes over homeowners in various states and disregards state laws designed to protect such homeowners.  The power of the Establishment Banks is indeed being centralized even further, and we ain't seen nothin' yet...

Lack of Standing Cannot Be Cured After Filing of Complaint (OH Supreme Court)

FEDERAL HOME LOAN MORTGAGE CORPORATION, APPELLEE, v. SCHWARTZWALD ET AL., APPELLANTS.

Nos. 2011-1201 and 2011-1362

SUPREME COURT OF OHIO

2012 Ohio 5017; 2012 Ohio LEXIS 2628

April 4, 2012, Submitted
October 31, 2012, Decided

NOTICE:

THIS SLIP OPINION IS SUBJECT TO FORMAL REVISION BEFORE IT IS PUBLISHED IN AN ADVANCE SHEET OF THE OHIO OFFICIAL REPORTS.

PRIOR HISTORY:  [**1]
APPEAL from and CERTIFIED by the Court of Appeals for Greene County, No. 2010 CA 41, 194 Ohio App.3d 644, 2011 Ohio 2681, 957 N.E.2d 790.
Fed. Home Loan Mortg. Corp. v. Schwartzwald, 194 Ohio App. 3d 644, 2011 Ohio 2681, 957 N.E.2d 790, 2011 Ohio App. LEXIS 2288 (Ohio Ct. App., Greene County, 2011)

JUDGES: O'DONNELL , J. O'CONNOR , C.J., and PFEIFER , LUNDBERG STRATTON , LANZINGER , CUPP , and MCGEE BROWN , JJ., concur.

OPINION BY: O'DONNELL

OPINION


O'Donnell , J.

 [*P1]  Duane and Julie Schwartzwald appeal from a judgment of the  [**2] Second District Court of Appeals affirming a decree of foreclosure entered in favor of the Federal Home Loan Mortgage Corporation.  In addition, the appellate court certified that its decision in this case conflicts with decisions of the First and Eighth Districts on the following issue: "In a mortgage foreclosure action, the lack of standing or a real party in interest defect can be cured by the assignment of the mortgage prior to judgment."

 [*P2]  Federal Home Loan commenced this foreclosure action before it obtained an assignment of the promissory note and mortgage securing the Schwartzwalds' loan. The Schwartzwalds maintained that Federal Home Loan lacked standing to sue. The trial court granted summary judgment in favor of Federal Home Loan and entered a decree of foreclosure. The appellate court affirmed, holding that Federal Home Loan had remedied its lack of standing when it obtained an assignment from the real party in interest.

 [*P3]  However, standing is required to invoke the jurisdiction of the common pleas court, and therefore it is determined as of the filing of the complaint. Thus, receiving an assignment of a promissory note and mortgage from the real party in interest subsequent  [**3] to the filing of an action but prior to the entry of judgment does not cure a lack of standing to file a foreclosure action.

 [*P4]  Accordingly, the judgment of the court of appeals is reversed, and the cause is dismissed.

Facts and Procedural History

 [*P5]  In November 2006, Duane and Julie Schwartzwald purchased a home in Xenia, Ohio, and received a mortgage loan from Legacy Mortgage in the amount of $251,250. They executed a promissory note and a mortgage granting Legacy Mortgage a security interest in the property. Legacy Mortgage then endorsed the promissory note as payable to Wells Fargo Bank, N.A.,  and assigned it the mortgage.

 [*P6]  In September 2008, Duane Schwartzwald lost his job at Barco, Inc., and the Schwartzwalds moved to Indiana so he could accept a new position. They continued making mortgage payments as they tried to sell the house in Xenia, but they went into default on January 1, 2009. In March 2009, Wells Fargo  agreed to list the property for a short sale, and on April 8, 2009, the Schwartzwalds entered into a contract to sell it for $259,900, with closing set for June 8, 2009.

 [*P7]  However, on April 15, 2009, Federal Home Loan Mortgage Corporation  commenced this foreclosure action, alleging  [**4] that the Schwartzwalds had defaulted on their loan and owed $245,085.18 plus interest, costs, and advances. It attached a copy of the mortgage identifying the Schwartzwalds as borrowers and Legacy Mortgage as lender, but did not attach a copy of the note, claiming that "a copy of [the note] is currently unavailable."

 [*P8]  Julie Schwartzwald then contacted Wells Fargo  about the foreclosure complaint. She testified, "I was told that it was 'standard procedure' and 'don't worry about it' because we were doing a short sale." The Schwartzwalds did not answer the complaint.

 [*P9]  On April 24, 2009, Federal Home Loan filed with the court a copy of the note signed by the Schwartzwalds in favor of Legacy Mortgage. The final page carries a blank endorsement by Wells Fargo  placed above the endorsement by Legacy Mortgage payable to Wells Fargo.

 [*P10]  On May 15, 2009, Wells Fargo  assigned the note and mortgage to Federal Home Loan, and Federal Home Loan filed with the court a copy of the assignment on June 17, 2009. It then moved for a default judgment and a summary judgment, but the trial court discovered that Federal Home Loan had failed to establish a chain of title because no assignment of the mortgage from  [**5] Legacy Mortgage to Wells Fargo  appeared in the record.

 [*P11]  During this time, even though it had assigned its interest in the note and mortgage to Federal Home Loan, Wells Fargo  continued discussing a short sale of the property with the Schwartzwalds, but delays in this process eventually caused the Schwartzwalds' buyer to rescind the offer. On December 14, 2009, the trial court granted the Schwartzwalds leave to file an answer. That same day, Federal Home Loan filed with the court a copy of the assignment of the mortgage from Legacy Mortgage to Wells Fargo  dated November 27, 2006.

 [*P12]  Federal Home Loan again moved for summary judgment, supporting the motion with the affidavit of Herman John Kennerty, vice president of loan documentation for Wells Fargo  as servicing agent for Federal Home Loan, who averred that the Schwartzwalds were in default and who authenticated the note and mortgage as well as the assignment of the note and mortgage from Wells Fargo.  Subsequently, Federal Home Loan filed copies of the notarized assignments from Legacy Mortgage to Wells Fargo  and from Wells Fargo  to Federal Home Loan.

 [*P13]  The Schwartzwalds also moved for summary judgment, asserting that Federal Home Loan lacked  [**6] standing to foreclose on their property.

 [*P14]  The trial court entered summary judgment for Federal Home Loan, finding that the Schwartzwalds had defaulted on the note, and it ordered the equity of redemption foreclosed and the property sold. Federal Home Loan purchased the property at a sheriff's sale.

 [*P15]  On appeal, the Second District Court of Appeals affirmed and held that Federal Home Loan had established its right to enforce the promissory note as a nonholder in possession, because assignment of the mortgage effected a transfer of the note it secured. The court further explained that standing is not a jurisdictional prerequisite and that a lack of standing may be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A). Thus, the court concluded that although Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of judgment.

 [*P16]  The court of appeals certified that its decision conflicted with Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App.3d 285, 2008 Ohio 4603, 897 N.E.2d 722 (1st Dist.), ¶ 15-16; Bank of New York v. Gindele, 1st Dist. No. C-090251, 2010 Ohio 542, ¶ 3-4;  [**7] and Wells Fargo Bank, N.A. v. Jordan, 8th Dist. No. 91675, 2009 Ohio 1092, ¶ 21, cases that held that a lack of standing cannot be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A). We accepted the conflict and the Schwartzwalds' discretionary appeal on the same issue.

Arguments on Appeal

 [*P17]  The Schwartzwalds explain that the essential aspect of standing is injury to a legally protected right and claim that Federal Home Loan had not been injured by their default at the time it commenced this foreclosure action, because it had not obtained the note and mortgage until after it filed the complaint. Relying on federal caselaw, they maintain that standing is determined as of the time the action is brought, so that subsequent events do not cure a lack of standing. They further urge that although the requirement of a real party in interest can be waived, that requirement cannot be equated with the requirement of standing.

 [*P18]  Federal Home Loan asserts that pursuant to R.C. 1303.31, it is a "person entitled to enforce the note" because it is "[a] nonholder in possession of the instrument who has the rights of a holder" by virtue of the negotiation of the  [**8] note from Legacy to Wells Fargo  and the assignment from Wells Fargo.  Further, it maintains that R.C. 1303.31 defines only which party is entitled to enforce a note and that the failure to be a real party in interest at the commencement of suit can be cured pursuant to Civ.R. 17(A) by the assignment of the mortgage and note. It also contends that the jurisdictional requirement of justiciability is satisfied if the allegations of the complaint establish that the plaintiff has standing to present a justiciable controversy and that even if it is determined that those allegations were in fact false, the matter remains justiciable so long as the plaintiff subsequently obtains the right to foreclose prior to judgment. On this basis, it argues that because "the Ohio Constitution bestows general (and not limited) jurisdiction on common pleas courts, common pleas courts have 'jurisdiction' to hear disputes, even if the named plaintiff was not the correct person to invoke it." Thus, it concedes that the record in this case does not establish that it was a person entitled to enforce the note as of the date the complaint was filed, but it maintains that it "proved that it was such a person prior  [**9] to judgment."

 [*P19]  Accordingly, the question presented is whether a lack of standing at the commencement of a foreclosure action filed in a common pleas court may be cured by obtaining an assignment of a note and mortgage sufficient to establish standing prior to the entry of judgment.

Law and Analysis

Standing to Sue

 [*P20]  The Ohio Constitution provides in Article IV, Section 4(B): "The courts of common pleas and divisions thereof shall have such original jurisdiction over all justiciable matters and such powers of review of proceedings of administrative officers and agencies as may be provided by law." (Emphasis added.)

 [*P21]  In Cleveland v. Shaker Hts., 30 Ohio St.3d 49, 51, 30 Ohio B. 156, 507 N.E.2d 323 (1987), we stated:
"'Whether a party has a sufficient stake in an otherwise justiciable controversy to obtain judicial resolution of that controversy is what has traditionally been referred to as the question of standing to sue. Where the party does not rely on any specific statute authorizing invocation of the judicial process, the question of standing depends on whether the party has alleged * * * a "personal stake in the outcome of the controversy."'"
Id., quoting Middletown v. Ferguson, 25 Ohio St.3d 71, 75, 25 Ohio B. 125, 495 N.E.2d 380 (1986),  [**10] quoting Sierra Club v. Morton, 405 U.S. 727, 731-732, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972), quoting Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 7 L.Ed.2d 663 (1972). Similarly, the United States Supreme Court observed in Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 102, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998), that "[s]tanding to sue is part of the common understanding of what it takes to make a justiciable case."

 [*P22]  We recognized that standing is a "jurisdictional requirement" in State ex rel. Dallman v. Franklin Cty. Court of Common Pleas, 35 Ohio St.2d 176, 179, 298 N.E.2d 515 (1973), and we stated: "It is an elementary concept of law that a party lacks standing to invoke the jurisdiction of the court unless he has, in an individual or representative capacity, some real interest in the subject matter of the action." (Emphasis added.) See also New Boston Coke Corp. v. Tyler, 32 Ohio St.3d 216, 218, 513 N.E.2d 302 (1987) ("the issue of standing, inasmuch as it is jurisdictional in nature, may be raised at any time during the pendency of the proceedings"); Steinglass & Scarselli, The Ohio State Constitution: A Reference Guide 180 (2004) (noting that the jurisdiction  [**11] of the common pleas court is limited to justiciable matters).

 [*P23]  And recently, in Kincaid v. Erie Ins. Co., 128 Ohio St.3d 322, 2010 Ohio 6036, 944 N.E.2d 207, we affirmed the dismissal of a complaint for lack of standing when it had been filed before the claimant had suffered any injury. There, Kincaid asserted claims that his insurer had breached the insurance contract by failing to pay expenses covered by the policy; however, he had never presented a claim for reimbursement to the insurer. We concluded that Kincaid lacked standing to assert the cause of action, explaining, "Until Erie refuses to pay a claim for a loss, Kincaid has suffered no actual damages for breach of contract, the parties do not have adverse legal interests, and there is no justiciable controversy." Id. at ¶ 13.

 [*P24]  Because standing to sue is required to invoke the jurisdiction of the common pleas court, "standing is to be determined as of the commencement of suit." Lujan v. Defenders of Wildlife, 504 U.S. 555, 570-571, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), fn. 5; see also Friends of the Earth, Inc. v. Laidlaw Environmental Servs. (TOC), 528 U.S. 167, 180, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000); Nova Health Sys. v. Gandy, 416 F.3d 1149, 1154-1155 (10th Cir.2005);  [**12] Focus on the Family v. Pinellas Suncoast Transit Auth., 344 F.3d 1263, 1275 (11th Cir.2003); Perry v. Arlington Hts., 186 F.3d 826, 830 (7th Cir.1999); Carr v. Alta Verde Industries, Inc., 931 F.2d 1055, 1061 (5th Cir.1991).

 [*P25]  Further, invoking the jurisdiction of the court "depends on the state of things at the time of the action brought," Mollan v. Torrance, 22 U.S. 537, 539, 6 L.Ed. 154 (1824), and the Supreme Court has observed that "[t]he state of things and the originally alleged state of things are not synonymous; demonstration that the original allegations were false will defeat jurisdiction." Rockwell Internatl. Corp. v. United States, 549 U.S. 457, 473, 127 S.Ct. 1397, 167 L.Ed.2d 190 (2007).

 [*P26]  Thus, "[p]ost-filing events that supply standing that did not exist on filing may be disregarded, denying standing despite a showing of sufficient present injury caused by the challenged acts and capable of judicial redress." 13A Wright, Miller & Cooper, Federal Practice and Procedure 9, Section 3531 (2008); see Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 575, 124 S.Ct. 1920, 158 L.Ed.2d 866 (2004), quoting Caterpillar Inc. v. Lewis, 519 U.S. 61, 75, 117 S.Ct. 467, 136 L.Ed.2d 437  [**13] (rejecting argument that "'finality, efficiency, and judicial economy'" can justify suspension of the time-of-filing rule); Utah Assn. of Counties v. Bush, 455 F.3d 1094, 1101, and fn. 6 (10th Cir.2006) (a plaintiff cannot rely on injuries occurring after the filing of the complaint to establish standing).

 [*P27]  This principle accords with decisions from other states holding that standing is determined as of the filing the complaint. See, e.g., Deutsche Bank Natl. Trust v. Brumbaugh, 2012 OK 3, 270 P.3d 151, ¶ 11 ("If Deutsche Bank became a person entitled to enforce the note as either a holder or nonholder in possession who has the rights of a holder after the foreclosure action was filed, then the case may be dismissed without prejudice * * *" [emphasis added]); U.S. Bank Natl. Assn. v. Kimball, 190 Vt. 210, 2011 VT 81, 27 A.3d 1087, ¶ 14 ("U.S. Bank was required to show that at the time the complaint was filed it possessed the original note either made payable to bearer with a blank endorsement or made payable to order with an endorsement specifically to U.S. Bank" [emphasis added]); Mtge. Electronic Registration Sys., Inc. v. Saunders, 2010 ME 79, 2 A.3d 287, ¶ 15 ("Without possession  [**14] of or any interest in the note, MERS lacked standing to institute foreclosure proceedings and could not invoke the jurisdiction of our trial courts" [emphasis added]); RMS Residential Properties, L.L.C. v. Miller, 303 Conn. 224, 229, 232, 32 A.3d 307 (2011), quoting Hiland v. Ives, 28 Conn.Supp. 243, 245, 257 A.2d 822 (1966) (explaining that "'[s]tanding is the legal right to set judicial machinery in motion'" and holding that the plaintiff had standing because it proved ownership of the note and mortgage at the time it commenced foreclosure action); McLean v. JP Morgan Chase Bank Natl. Assn., 79 So.3d 170, 173 (Fla.App.2012) ("the plaintiff must prove that it had standing to foreclose when the complaint was filed"); see also Burley v. Douglas, 26 So.3d 1013, 1019 (Miss.2009), quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 571, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), fn. 5 (" 'standing is to be determined as of the commencement of suit' "); In re 2007 Administration of Appropriations of Water of the Niobrara, 278 Neb. 137, 145, 768 N.W.2d 420 (2009) ("only a party that has standing may invoke the jurisdiction of a court or tribunal. And the junior appropriators did not lose  [**15] standing if they possessed it under the facts existing when they commenced the litigation" [footnote omitted]).

 [*P28]  Here, Federal Home Loan concedes that there is no evidence that it had suffered any injury at the time it commenced this foreclosure action. Thus, because it failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court.

The Real-Party-in-Interest Rule

 [*P29]  The court of appeals and Federal Home Loan relied on the plurality opinion in State ex rel. Jones v. Suster, 84 Ohio St.3d 70, 77, 1998 Ohio 275, 701 N.E.2d 1002 (1998), which suggested that "[t]he lack of standing may be cured by substituting the proper party so that a court otherwise having subject matter jurisdiction may proceed to adjudicate the matter. Civ.R. 17." However, four justices declined to join that portion of the opinion, and therefore it is not a holding of this court. See Ohio Constitution, Article IV, Section 2(A) ("A majority of the supreme court shall be necessary to constitute a quorum or to render a judgment").

 [*P30]  At common law, all actions had to be brought in the name of the person holding legal title to the right asserted, and  [**16] individuals possessing only equitable or beneficial interests could not sue in their own right. See generally Clark & Hutchins, The Real Party in Interest, 34 Yale L.J. 259 (1925); 6A Wright, Miller & Kane, Federal Practice and Procedure, Section 1541 (2010). However, the practice in equity relaxed this requirement, and states later abrogated the common-law rules and adopted "rules that permitted any 'real party in interest' to bring suit." Sprint Communications Co., L.P. v. APCC Servs., Inc., 554 U.S. 269, 279, 128 S.Ct. 2531, 171 L.Ed 2d 424 (2008).

 [*P31]  In Ohio, Civ.R. 17(A) governs the procedural requirement that a complaint be brought in the name of the real party in interest and provides:
Every action shall be prosecuted in the name of the real party in interest. An executor, administrator, guardian, bailee, trustee of an express trust, a party with whom or in whose name a contract has been made for the benefit of another, or a party authorized by statute may sue in his name as such representative without joining with him the party for whose benefit the action is brought. When a statute of this state so provides, an action for the use or benefit of another shall be brought in the name  [**17] of this state. No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest. Such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.


 [*P32]  Considering Civ.R. 17(A) in Shealy v. Campbell, 20 Ohio St.3d 23, 24-25, 20 Ohio B. 210, 485 N.E.2d 701 (1985), we observed:
The purpose behind the real party in interest rule is "'* * * to enable the defendant to avail himself of evidence and defenses that the defendant has against the real party in interest, and to assure him finality of the judgment, and that he will be protected against another suit brought by the real party at interest on the same matter.' Celanese Corp. of America v. John Clark Industries (5 Cir.1954), 214 F.2d 551, 556." [In re Highland Holiday Subdivision (1971), 27 Ohio App.2d 237] 240 [273 N.E.2d 903].


 [*P33]  As the Supreme Court explained in Lincoln Property Co. v. Roche, 546 U.S. 81, 90, 126 S.Ct. 606, 163 L.Ed.2d 415 (2005), the real-party-in-interest  [**18] rule concerns only proper party joinder. Civ.R. 17(A) does not address standing; rather, the point of the rule is that "suits by representative plaintiffs on behalf of the real parties in interest are the exception rather than the rule and should only be allowed when the real parties in interest are identifiable and the res judicata scope of the judgment can be effectively determined." Consumer Fedn. of Am. v. Upjohn Co., 346 A.2d 725, 729 (D.C.1975) (construing analogous District of Columbia rule).

 [*P34]  Thus, the Third and the Ninth Circuits have rejected the notion that Fed.R.Civ.P. 17(a), on which Civ.R. 17(A) is based, allows a party with no personal stake in a controversy to file a claim on behalf of a third party, obtain the cause of action by assignment, and then have the assignment relate back to commencement of the action, stating:
"Rule 17(a) does not apply to a situation where a party with no cause of action files a lawsuit to toll the statute of limitations and later obtains a cause of action through assignment. Rule 17(a) is the codification of the salutary principle that an action should not be forfeited because of an honest mistake; it is not a provision to be distorted by  [**19] parties to circumvent the limitations period."
Gardner v. State Farm Fire & Cas. Co., 544 F.3d 553, 563 (3d Cir.2008), quoting United States ex rel. Wulff v. CMA, Inc., 890 F.2d 1070, 1075 (9th Cir.1989).

 [*P35]  The Sixth Circuit Court of Appeals' decision in Zurich Ins. Co. v. Logitrans, Inc., 297 F.3d 528 (6th Cir.2002), illustrates this point. In that case, a fire at a warehouse destroyed property insured by American Guarantee, which paid out a claim for damages. However, another insurance company, Zurich Switzerland, filed a complaint claiming to be the insured's subrogee, notwithstanding the fact that Zurich Switzerland had neither issued an insurance policy nor paid out any money to the insured. The defendants moved to dismiss for lack of standing, and Zurich Switzerland sought to substitute American Guarantee as the real party in interest pursuant to Fed.R.Civ.P. 17(a). The district court dismissed the action.

 [*P36]  The Sixth Circuit Court of Appeals acknowledged that the statute of limitations would bar American Guarantee's claim unless Fed.R.Civ.P. 17(a) allowed it to be substituted for Zurich Switzerland. However, the court distinguished between the requirement of standing and the objection  [**20] that the plaintiff is not the real party in interest, and it held that because "Zurich American admittedly has not suffered injury in fact by the defendants, it had no standing to bring this action and no standing to make a motion to substitute the real party in interest." Id.

 [*P37]  Other courts have also determined that a plaintiff cannot rely on procedural rules similar to Civ.R. 17(A) to cure a lack of standing at the commencement of litigation. Davis v. Yageo Corp., 481 F.3d 661, 678 (9th Cir.2007) ("whether or not Dux was the real-party-in-interest, it does not have standing, and it cannot cure its standing problem through an invocation of Fed.R.Civ.P. 17(a)"); Clark v. Trailiner Corp., 242 F.3d 388 (10th Cir.2000) (table), opinion reported at 2000 U.S. App. LEXIS 29006, 2000 WL 1694299 (noting that the plaintiff cannot "retroactively become the real-party-in-interest" in order to cure a lack of standing at the filing of the complaint [emphasis sic]); accord State v. Property at 2018 Rainbow Drive, 740 So.2d 1025, 1027-1028 (Ala.1999) (rejecting the argument that a lack of standing can be cured after filing of the complaint); Consumer Fedn. of Am. v. Upjohn Co., 346 A.2d 725, 729 (D.C.App.1975) (explaining that  [**21] dismissal for lack of standing is consistent with D.C. Super.Ct.Civ.R. 17(a)); see also McLean v. JP Morgan Chase Bank Natl. Assn., 79 So.3d 170, 173 (Fla.App.2012) ("a party is not permitted to establish the right to maintain an action retroactively by acquiring standing to file a lawsuit after the fact").

 [*P38]  We agree with the reasoning and analysis presented in these cases. Standing is required to invoke the jurisdiction of the common pleas court. Pursuant to Civ.R. 82, the Rules of Civil Procedure do not extend the jurisdiction of the courts of this state, and a common pleas court cannot substitute a real party in interest for another party if no party with standing has invoked its jurisdiction in the first instance.

 [*P39]  Accordingly, a litigant cannot pursuant to Civ.R. 17(A) cure the lack of standing after commencement of the action by obtaining an interest in the subject of the litigation and substituting itself as the real party in interest.

Effect of Lack of Standing on Foreclosure Actions

 [*P40]  The lack of standing at the commencement of a foreclosure action requires dismissal of the complaint; however, that dismissal is not an adjudication on the merits and is therefore without prejudice.  [**22] See State ex rel. Coles v. Granville, 116 Ohio St.3d 231, 2007 Ohio 6057, 877 N.E.2d 968, ¶ 51. Because there has been no adjudication on the underlying indebtedness, our dismissal has no effect on the underlying duties, rights, or obligations of the parties.

Conclusion

 [*P41]  It is fundamental that a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court. Civ.R. 17(A) does not change this principle, and a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest.

 [*P42]  Here, it is undisputed that Federal Home Loan did not have standing at the time it commenced this foreclosure action, and therefore it failed to invoke the jurisdiction of the court of common pleas. Accordingly, the judgment of the court of appeals is reversed, and the cause is dismissed.

Judgment reversed and cause dismissed.

O'Connor , C.J., and Pfeifer , Lundberg Stratton , Lanzinger , Cupp , and McGee Brown , JJ., concur.

CNBC: Major Banks, Governmental Officials and Their Comrade Capitalists Targets of Spire Law Group, LLP's Racketeering and Money Laundering Lawsuit Seeking Return of $43 Trillion to the United States Treasury

NEW YORK, Oct. 25, 2012 /PRNewswire via COMTEX/ -- Spire Law Group, LLP's national home owners' lawsuit, pending in the venue where the "Banksters" control their $43 trillion racketeering scheme (New York) - known as the largest money laundering and racketeering lawsuit in United States History and identifying $43 trillion ($43,000,000,000,000.00) of laundered money by the "Banksters" and their U.S. racketeering partners and joint venturers - now pinpoints the identities of the key racketeering partners of the "Banksters" located in the highest offices of government and acting for their own self-interests.

In connection with the federal lawsuit now impending in the United States District Court in Brooklyn, New York (Case No. 12-cv-04269-JBW-RML) - involving, among other things, a request that the District Court enjoin all mortgage foreclosures by the Banksters nationwide, unless and until the entire $43 trillion is repaid to a court-appointed receiver - Plaintiffs now establish the location of the $43 trillion ($43,000,000,000,000.00) of laundered money in a racketeering enterprise participated in by the following individuals (without limitation): Attorney General Holder acting in his individual capacity, Assistant Attorney General Tony West, the brother in law of Defendant California Attorney General Kamala Harris (both acting in their individual capacities), Jon Corzine (former New Jersey Governor), Robert Rubin (former Treasury Secretary and Bankster), Timothy Geitner, Treasury Secretary (acting in his individual capacity), Vikram Pandit (recently resigned and disgraced Chairman of the Board of Citigroup), Valerie Jarrett (a Senior White House Advisor), Anita Dunn (a former "communications director" for the Obama Administration), Robert Bauer (husband of Anita Dunn and Chief Legal Counsel for the Obama Re-election Campaign), as well as the "Banksters" themselves, and their affiliates and conduits. The lawsuit alleges serial violations of the United States Patriot Act, the Policy of Embargo Against Iran and Countries Hostile to the Foreign Policy of the United States, and the Racketeer Influenced and Corrupt Organizations Act (commonly known as the RICO statute) and other State and Federal laws.

In the District Court lawsuit, Spire Law Group, LLP -- on behalf of home owner across the Country and New York taxpayers, as well as under other taxpayer recompense laws -- has expanded its mass tort action into federal court in Brooklyn, New York, seeking to halt all foreclosures nationwide pending the return of the $43 trillion ($43,000,000,000.00) by the "Banksters" and their co-conspirators, seeking an audit of the Fed and audits of all the "bailout programs" by an independent receiver such as Neil Barofsky, former Inspector General of the TARP program who has stated that none of the TARP money and other "bailout money" advanced from the Treasury has ever been repaid despite protestations to the contrary by the Defendants as well as similar protestations by President Obama and the Obama Administration both publicly on national television and more privately to the United States Congress. Because the Obama Administration has failed to pursue any of the "Banksters" criminally, and indeed is actively borrowing monies for Mr. Obama's campaign from these same "Banksters" to finance its political aspirations, the national group of plaintiff home owners has been forced to now expand its lawsuit to include racketeering, money laundering and intentional violations of the Iranian Nations Sanctions and Embargo Act by the national banks included among the "Bankster" Defendants.

The complaint - which has now been fully served on thousands of the "Banksters and their Co-Conspirators" - makes it irrefutable that the epicenter of this laundering and racketeering enterprise has been and continues to be Wall Street and continues to involve the very "Banksters" located there who have repeatedly asked in the past to be "bailed out" and to be "bailed out" in the future.

The Havens for the money laundering schemes - and certain of the names and places of these entities - are located in such venues as Switzerland, the Isle of Man, Luxembourg, Malaysia, Cypress and entities controlled by governments adverse to the interests of the United States Sanctions and Embargo Act against Iran, and are also identified in both the United Nations and the U.S. Senate's recent reports on international money laundering. Many of these entities have already been personally served with summons and process of the complaint during the last six months. It is now beyond dispute that, while the Obama Administration was publicly encouraging loan modifications for home owners by "Banksters", it was privately ratifying the formation of these shell companies in violation of the United States Patriot Act, and State and Federal law. The case further alleges that through these obscure foreign companies, Bank of America, J.P. Morgan, Wells Fargo Bank, Citibank, Citigroup, One West Bank, and numerous other federally chartered banks stole trillions of dollars of home owners' and taxpayers' money during the last decade and then laundered it through offshore companies.

This District Court Complaint - maintained by Spire Law Group, LLP -- is the only lawsuit in the world listing as Defendants the Banksters, let alone serving all of such Banksters with legal process and therefore forcing them to finally answer the charges in court. Neither the Securities and Exchange Commission, nor the Federal Deposit Insurance Corporation, nor the Office of the Attorney General, nor any State Attorney General has sued the Banksters and thereby legally chased them worldwide to recover-back the $43 trillion ($43,000,000,000,000.00) and other lawful damages, injunctive relief and other legal remedies.

James N. Fiedler, Managing Partner of Spire Law Group, LLP, stated: "It is hard for me to believe as a 47-year lawyer that our nation's guardians have been unwilling to stop this theft. Spire Law Group, LLP stands for the elimination of corruption and implementation of lawful strategies, and that is what we're doing here. Spire Law Group, LLP's charter is to not allow such corruption to go unanswered." Comments were requested from the Attorney Generals' offices in NY, CA, NV, NH , OH, MA and the White House, but no comment was provided.

Continued here

"Split" of Note and Deed of Trust addressed by Nevada Supreme Court

Interestingly, the Nevada Supreme Court noted that the designation of MERS as initial beneficiary resulted in a split of the note from the deed of trust, which split would normally prevent a nonjudicial foreclosure based on either the note or the deed of trust.  The court then went on to hold that when the note and deed of trust are reunited, the party holding both can proceed with nonjudicial foreclosure.
--------------------

DAVID EDELSTEIN, Appellant, vs. BANK OF NEW YORK MELLON, Respondent.

No. 57430

SUPREME COURT OF NEVADA

128 Nev. Advance Rep. 48; 2012 Nev. LEXIS 90

September 27, 2012, Filed

COUNSEL: Law Office of Jacob Hafter & Associates and Jacob L. Hafter and Michael K. Naethe, Las Vegas, for Appellant.

Pite Duncan, LLP, and Gregg A. Hubley and Allison R. Schmidt, Las Vegas, for Respondent.

JUDGES: Hardesty, J. We concur: Cherry, C.J., Douglas, J., Saitta, J., Gibbons, J., Pickering, J., Parraguirre, J.

OPINION BY: HARDESTY

OPINION


BEFORE THE COURT EN BANC.

By the Court, HARDESTY, J.:

In this appeal, which arises out of Nevada's Foreclosure Mediation Program (FMP), we examine the note-holder and beneficial-interest status of a party seeking to foreclose. We conclude that, to participate in the FMP and ultimately obtain an FMP certificate1 to proceed with the nonjudicial foreclosure of an owner-occupied residence, the party seeking to foreclose must demonstrate that it is both the beneficiary of the deed of trust and the current holder of the promissory note.

FOOTNOTES

1 For a valid nonjudicial foreclosure sale to occur under NRS 107.080, a Program certificate must be issued. NRS 107.086; Holt v. Regional Trustee Services Corp., 127 Nev.    ,    , 266 P.3d 602, 606 (2011).

In  [*2] determining whether the party seeking to foreclose in this case met those requirements, we also address whether, as is argued here, the designation of Mortgage Electronic Registration System, Inc. (MERS), as the initial beneficiary of the deed of trust irreparably splits the promissory note and the deed of trust so as to preclude foreclosure. We conclude that when MERS is the named beneficiary and a different entity holds the promissory note, the note and the deed of trust are split, making nonjudicial foreclosure by either improper. However, any split is cured when the promissory note and deed of trust are reunified. Because the foreclosing bank in this case became both the holder of the promissory note and the beneficiary of the deed of trust, we conclude that it had standing to proceed through the FMP.

FACTS AND PROCEDURAL HISTORY

In 2006, appellant David Edelstein executed a promissory note (the note) in favor of lender New American Funding, which provided Edelstein with a loan to buy a house. The note provided that "the Lender may transfer [the] [n]ote," and that "[t]he Lender or anyone who takes [the] [n]ote by transfer and who is entitled to receive payments under this [n]ote  [*3] is called the 'Note Holder.'"

Edelstein and New American Funding also executed a deed of trust to secure the note, which named New American Funding as the lender, Chicago Title as the trustee, and MERS as the beneficiary. Specifically, the deed of trust described "MERS [as] a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." It also characterized "MERS [as] the beneficiary under this Security Instrument," and later characterized MERS as "[t]he beneficiary of this Security Instrument . . . (solely as nominee for Lender and Lender's successors and assigns) and the successors and assigns of MERS." The deed of trust also stated that "Borrower understands and agrees that MERS holds only legal title to the Interests granted by Borrower in this Security Instrument," but that "MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender . . . ."

Subsequently, both the note and the deed of trust were transferred several times. With regard to the note, New American  [*4] Funding created an allonge (the allonge),2 endorsing the note to the order of Countrywide Bank, N.A. Countrywide Bank then endorsed the note to the order of Countrywide Home Loans, Inc., which in turn endorsed the note in blank, as follows: "Pay to the order of       Without Recourse." Meanwhile, the deed of trust was also conveyed when MERS granted, assigned, and transferred "all beneficial interest" under the deed of trust to respondent Bank of New York Mellon (BNY Mellon); the conveyance language on the assignment stated that it was assigned and transferred "together with the [N]ote . . . ."3 BNY Mellon designated ReconTrust Company as its new trustee, replacing Chicago Title. At the time of the mediation, ReconTrust physically possessed (1) the note, which was endorsed in blank, and (2) an assignment of the deed of trust, which named BNY Mellon as the beneficiary.

FOOTNOTES

2 An allonge is a "slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further [e]ndorsements when the original paper is filled with [e]ndorsements." Black's Law Dictionary 1859 (9th ed. 2009). However, an "allonge is valid even if space is available on the instrument." Id.; see also  [*5] NRS 104.3204(1) ("For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.").

3 The MERS assignment is dated February 19, 2010, but the allonge and both endorsements are undated. Thus, it is unclear which event occurred first.

The foreclosure mediation

Edelstein stopped paying on the note and consequently received a notice of default and election to sell; he subsequently elected to participate in the FMP.

Attending the July 2010 foreclosure mediation was Edelstein and his counsel, as well as counsel for BNY Mellon's loan servicer, Bank of America, who appeared as BNY Mellon's agent and representative. A Bank of America representative with purported authority to negotiate the loan participated by telephone. Bank of America provided certified copies of the note, endorsed in blank, the deed of trust and its assignment, and the substitution of trustee. It also provided a short sale proposal and a broker's price opinion.

After the mediation concluded without resolving the foreclosure issue, the mediator filed a report determining that "[t]he parties participated but were unable to agree to a loan modification or  [*6] make other arrangements." Notably, the mediator did not report that the beneficiary or its representative failed to attend the mediation, failed to participate in good faith, failed to bring the required documents to the mediation, or did not have authority to mediate.

The proceedings before the district court

On August 5, 2010, Edelstein, acting in proper person, filed a petition for judicial review with the district court, seeking a determination that BNY Mellon had participated in the mediation in bad faith and sanctions for statutory violations. He argued that BNY Mellon failed to "provide sufficient documents concerning the assignment of the mortgage note, deed of trust[,] and interest in the trust," and an appraisal or broker's price opinion. He further argued that BNY Mellon failed to "have the authority or access to a person with the authority" to modify the loan as required by NRS 107.086 because the "person representing [BNY Mellon] was not available to fully negotiate in good faith, and did not provide sufficient documentation that [BNY Mellon] held a legal claim to the beneficial proceeds of the [D]eed." Finally, he argued that BNY Mellon "failed to offer any modification  [*7] offers." Edelstein requested sanctions from the district court based on "bad faith or failure to comply with statutory requirements."

Bank of America (on behalf of BNY Mellon) responded, generally disagreeing with each of Edelstein's arguments and also arguing that Edelstein's petition should not be considered because it was untimely. Edelstein, now represented by counsel, replied. He argued that because the allonge was an invalid "assignment," BNY Mellon was "required legally to show that it own[ed] those rights[,] or it ha[d] no legal authority to be attempting any foreclosure of the Edelstein home." Moreover, he contended that MERS' assignment of the deed of trust was invalid because MERS was a "sham" beneficiary. Edelstein also argued that his petition for judicial review was timely filed.

The parties reiterated their arguments in multiple hearings before the district court. Edelstein emphasized that "[BNY] Mellon ha[d] no standing in [the] matter" because "[t]here was no chain of title that [came] from New American [Funding] to the acting party, . . . [BNY] Mellon." The district court subsequently issued two separate orders. In the first order, the district court found that Edelstein  [*8] timely filed his petition for judicial review and that BNY Mellon had properly appeared at the mediation. In its second order, the court found that BNY Mellon did not participate in bad faith, that the parties agreed to negotiate further, and that "absent a timely appeal, a Letter of Certification will issue." Edelstein now appeals.

DISCUSSION

The primary issue on appeal is whether BNY Mellon may properly participate in the FMP and obtain an FMP certificate to proceed with foreclosure proceedings against Edelstein.4 To resolve this issue, we first address the party-status requirements to pursue nonjudicial foreclosure in Nevada and next address whether BNY Mellon met those requirements in the context of NRS 107.086.

FOOTNOTES

4 BNY Mellon also argues that Edelstein's petition was untimely filed and should not have been considered by the district court. Edelstein actually received the statement by mail on or after July 20, 2010. Accordingly, his petition for judicial review was timely filed. FMR 6(2) (2010) (amended and renumbered as FMR 21(2) (effective March 1, 2011)).

The parties also dispute the appropriate standard of review and whether the Program requirements must be strictly or substantially  [*9] complied with, but the opening and answering briefs on appeal were filed before this court's decisions in Leyva v. National Default Servicing Corp., 127 Nev.    , 255 P.3d 1275 (2011), and Pasillas v. HSBC Bank USA, 127 Nev.    , 255 P.3d 1281 (2011), which resolve both issues.


Requirements to pursue nonjudicial foreclosure in Nevada

Edelstein argues that "[t]he first step [within the FMP] requires the beneficiary of a deed of trust to prove to the homeowner that the beneficiary has a right to foreclose on the property." With some explanation, we agree.

Background of nonjudicial foreclosures in Nevada

In Nevada, promissory notes on real estate loans are typically secured by deeds of trust on the property. "The note represents the right to the repayment of the debt, while the [deed of trust] . . . represents the security interest in the property that is being used to secure the note." Robert E. Dordan, Mortgage Electronic Registration Systems (MERS), Its Recent Legal Battles, and the Chance for a Peaceful Existence, 12 Loy. J. Pub. Int. L. 177, 180 (2010). Thus, the borrower, or grantor, executes both the note and the deed of trust in favor of the lender, who was historically the beneficiary  [*10] under both, and who names a trustee on the deed of trust "to assure the payment of the debt secured by the trust deed." 54A Am. Jur. 2d Mortgages § 122 (2009); see also NRS 107.028; NRS 107.080. The deed of trust may then be recorded. Former NRS 106.210.5

FOOTNOTES

5 Prior to 2011, Nevada law provided that any assignment of the beneficial interest under a deed of trust "may" be recorded. Assembly Bill 284 amended this statute to now require that "any assignment of the beneficial interest under a deed of trust must be recorded." NRS 106.210 (emphasis added); 2011 Nev. Stat., ch. 81, § 1, at 327.


Considered a form of mortgage in Nevada,6 the deed of trust does not convey title so as to allow the beneficiary to obtain the property without foreclosure and sale, but is considered merely a lien on the property as security for the debt, subject to the laws on foreclosure and sale. Hamm v. Arrowcreek Homeowners' Ass'n, 124 Nev. 290, 298-99, 183 P.3d 895, 901-02 (2008); Orr v. Ulyatt, 23 Nev. 134, 140, 43 P. 916, 917-18 (1896). To enforce the obligation by nonjudicial foreclosure and sale, "[t]he deed and note must be held together because the holder of the note is only entitled to repayment, and does not  [*11] have the right under the deed to use the property as a means of satisfying repayment." Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1039 (9th Cir. 2011). "Conversely, the holder of the deed alone does not have a right to repayment and, thus, does not have an interest in foreclosing on the property to satisfy repayment." Id.; see also Leyva v. National Default Servicing Corp., 127 Nev.    ,    , 255 P.3d 1275, 1279-80 (2011) (recognizing that the note and the deed of trust must be held by the same person to foreclose under NRS Chapter 107).

FOOTNOTES

6 NRS 0.037 states, "Except as used in chapter 106 of NRS and unless the context otherwise requires, 'mortgage' includes a deed of trust." For purposes of this opinion, the two terms will be used interchangeably.


When the grantor defaults on the note, the deed-of-trust beneficiary can select the judicial process for foreclosure pursuant to NRS 40.430 or the "nonjudicial" foreclosure-by-trustee's sale procedure under NRS Chapter 107. Nevada Land & Mtge. v. Hidden Wells, 83 Nev. 501, 504, 435 P.2d 198, 200 (1967). At issue here, in a nonjudicial foreclosure, the trustee may sell the property to satisfy the obligation only after certain statutory  [*12] requirements are met. NRS 107.080. First, the trustee must give notice by recording a notice of default and election to sell and serving the grantor with a copy of that notice. NRS 107.080(2)(c). The grantor then has a certain number of days in which to make good the deficiency. NRS 107.080(2)(a) and (b). After at least three months have passed from the recording of the notice of default, the trustee must give notice of the sale. NRS 107.080(4). Once the sale is completed, title vests in the purchaser; upon court action, however, a sale may be voided if carried out without substantially complying with the statutory requirements. NRS 107.080(5). See Rose v. First Federal Savings & Loan, 105 Nev. 454, 456-57, 777 P.2d 1318, 1319 (1989).

In 2009, amid concerns with the rapidly growing foreclosure rate in this state, the Legislature enacted additional requirements that trustees must meet before proceeding with a nonjudicial foreclosure of owner-occupied housing. A.B. 149, 75th Leg. (Nev. 2009); see Pasillas v. HSBC Bank USA, 127 Nev.    ,    , 255 P.3d 1281, 1284 (2011). The legislation increased the redemption period for owner-occupied housing, see NRS 107.080(2)(b), and it created the  [*13] FMP, requiring the trustee to obtain and record an FMP certificate before proceeding with the foreclosure. See NRS 107.086.

Under the FMP, as described in Pasillas, the trustee must serve an election-of-mediation form with the notice of default and election to sell. 127 Nev.    , 255 P.3d 1284; see also Holt v. Regional Trustee Services Corp., 127 Nev.    ,    , 266 P.3d 602, 606 (2011). If the grantor/homeowner elects to mediate, the beneficiary of the deed of trust or a representative must, in order for an FMP certificate to issue, "(1) attend the mediation; (2) mediate in good faith; (3) provide the required documents; or (4) if attending through a representative, have a person present with authority to modify the loan or access to such a person." Pasillas, 127 Nev. at    , 255 P.3d at 1284 (citing NRS 107.086(5)); see also Holt, 127 Nev. at    , 266 P.3d at 606. The documents required under the third item are designed to enable a determination both of whether a person with the required authority over the note is available and of whether the party seeking to foreclose is in fact "[t]he beneficiary of the deed of trust or a representative." NRS 107.086(4); see Leyva, 127 Nev. at    , 255 P.3d at 1279  [*14] (explaining that "[t]he legislative intent behind requiring a party to produce the assignments of the deed of trust and mortgage note is to ensure that whoever is foreclosing actually owns the note and has authority to modify the loan," and that "[a]bsent a proper assignment of a deed of trust," one "lacks standing to pursue foreclosure proceedings" (internal quotations omitted)). In other words, the party seeking to obtain an FMP certificate through the FMP must show that it is the proper entity, under the nonjudicial foreclosure statutes, to proceed against the property. Id.

As explained above, to have standing to foreclose, the current beneficiary of the deed of trust and the current holder of the promissory note must be the same.7 Here, the note, the deed of trust, and each assignment were produced at the mediation. NRS 107.086(4). However, as Edelstein argues, "[j]ust providing documents is not enough, as the documents need to demonstrate . . . authority, as proven through the authenticated documents, to foreclose on a home." Edelstein primarily argues that no documents were provided to demonstrate a clear chain of both the deed of trust and the note from New American Funding,  [*15] the original lender, to BNY Mellon. Specifically, he asserts that because "MERS was merely a nominee and failed to provide evidence of its authority on behalf of . . . New American Funding to assign an interest in the deed of trust, [BNY Mellon] could not legally become beneficiary and noteholder for the purpose of participating in the mediation." In other words, Edelstein argues, BNY Mellon lacked "authority to foreclose" because the note was "split" from the deed of trust. To determine whether BNY Mellon had standing to foreclose, we consider whether the use of MERS irreparably "splits" the note and the deed of trust or otherwise impacts BNY Mellon's entitlement to enforce the note and the deed of trust.

FOOTNOTES

7 Indeed, in placing the onus of complying with the FMP requirements on the "beneficiary of the deed of trust," the Legislature considered the beneficiary of the deed of trust to be the same party as the note holder. For example, the Legislature expressed that it does "not want anyone who has no beneficial interest in the process to be required to attend the mediation. This is for the holder of the note." Hearing on A.B. 149 Before the Joint Commerce and Labor Comm., 75th Leg. (Nev.,  [*16] February 11, 2009) (testimony of Assemblywoman Barbara Buckley). Moreover, the Legislature has characterized the requirement that "the person who is foreclosing actually owns the note" as "an elemental legal step." Id. The Program rules, at least as they existed at the time of Edelstein's mediation, likewise anticipated a single note and deed beneficiary, and they interchangeably used the term beneficiary of the deed of trust and lender. See, e.g., former FMR 5(8)(a) (2010) (amended and renumbered as FMR 10(1)(a) (effective March 1, 2011)) (describing requirements for the "Beneficiary (lender)").


The effect of MERS

"MERS is a private electronic database . . . that tracks the transfer of the 'beneficial interest' in home loans, as well as any changes in loan servicers." Cervantes, 656 F.3d at 1038; see also Jackson v. Mortgage Electronic, 770 N.W.2d 487, 490 (Minn. 2009). Before discussing MERS' impact on this case, we explain how MERS works, as described in various reported decisions.

MERS was created in response to state recording laws governing deed of trust assignments. Many lenders sell all or part of their beneficial interests in home loan notes; they also change servicers. Cervantes, 656 F.3d at 1038.  [*17] Indeed, "[i]t has become common for original lenders to bundle the beneficial interest in individual loans and sell them to investors as mortgage-backed securities, which may themselves be traded." Id. at 1039. Correspondingly, the beneficial interest in the security—the deeds of trust—would also be assigned. In most states, however, lenders are required to record any changes to the deed of trust beneficiary and trustee. Id. As the selling of loans increased, "[t]his recording process became cumbersome to the mortgage industry," id., often causing "confusion, delays, and chain-of-title problems." Jackson, 770 N.W. 2d at 490. Thus, "MERS was designed to avoid the need to record multiple transfers of the deed." Cervantes, 656 F.3d at 1039.

Typically, when a loan is originated, "MERS is designated in the deed of trust as a nominee for the lender and the lender's 'successors and assigns,' and as the deed's 'beneficiary' which holds legal title to the security interest conveyed." Id. MERS' role in subsequent note transfers depends on whether or not the note is transferred to another MERS member or a non-MERS member. "If the lender sells or [transfers] the . . . [note] to another MERS member,  [*18] the change is recorded only in the MERS database, not in county records, because MERS continues to [be the beneficiary of record] on the new lender's behalf." Id.; see also In re Agard, 444 B.R. 231, 248 (Bankr. E.D.N.Y. 2011) ("So long as the sale of the note involves a MERS Member, . . . [t]he seller of the note does not and need not assign the [deed of trust] because under the terms of that security instrument, MERS remains the holder of title to the [deed of trust], that is, the mortgagee, as the nominee for the purchaser of the note, who is then the lender's successor and/or assign." (internal quotations omitted)), vacated in part by Agard v. Select Portfolio Servicing, Inc., Nos. 11-CV-1826(JS), 11-CV-2366(JS), 2012 WL 1043690 (E.D.N.Y. Mar. 28, 2012). "According to MERS, this system 'saves lenders time and money, and reduces paperwork, by eliminating the need to prepare and record assignments when trading loans.'" Jackson, 770 N.W.2d 490. However, "[a] side effect . . . is that a transfer of an interest in a mortgage [note] between two MERS members is unknown to those outside the MERS system." Id. Conversely, "[i]f the . . . [note] is sold to a non-MERS member, the [assignment]  [*19] of the deed from MERS to the new lender is recorded in county records and the [note] is no longer tracked in the MERS system." Cervantes, 656 F.3d at 1039.

A representative from MERS testified before a bankruptcy court that its "members often wait until a default or bankruptcy case is filed to have a mortgage or deed of trust assigned to them so that they can take steps necessary to seek stay relief and/or to foreclose." In re Tucker, 441 B.R. 638, 644 (Bankr. W.D. Mo. 2010). In general, "[t]he reason they wait is that, if a note is paid off eventually, as most presumably are, MERS is authorized to release the [deed of trust] without going to the expense of ever recording any assignments." Id.

The use of MERS does not irreparably split the note and the deed of trust

Edelstein contends that MERS "is merely a nominee or agent that cannot act without authorization by its principal," and that the use of MERS irreparably splits the note and the deed of trust, thereby divesting BNY Mellon of ability to foreclose or to modify the loan. He further argues that "[a]ny actions by MERS with respect to the mortgage note or deed of trust would be ineffective." Because nothing in Nevada law prohibited  [*20] MERS' actions, we reject Edelstein's argument and examine the two more common approaches taken by other jurisdictions to resolve the issue of whether splitting a promissory note and a deed of trust is irreparable or fatal to a beneficiary's entitlement to enforce the note and the deed of trust.8

FOOTNOTES

8 We recognize that there exist other approaches to this issue. Each state must individually determine whether this system designed to create a national electronic promissory note tracking system comports with state law concerning both promissory notes and title to real property. See Bain v. Metropolitan Mortg. Group, Inc.,     P.3d    , 2012 WL 3517326 (Wash. 2012) (holding that MERS is not a deed of trust beneficiary for failure to meet Washington's statutory requirement that a beneficiary of a deed of trust must hold the promissory note and rejecting the proposition that phrase nominee creates an agency relationship between MERS and note holders); Niday v. GMAC Mortgage,     P.3d    , 2012 WL 2915520 (Or. Ct. App. 2012) (holding that the secured party note holder is always the beneficiary of the deed of trust and rejecting MERS' standing in nonjudicial foreclosure); U.S. Bank Nat. Ass'n v. Ibanez, 941 N.E.2d 40, 53-54 (Mass. 2011)  [*21] (discussing MERS' standing in foreclosure proceedings).


The traditional rule

Under the traditional rule, a court need follow only the ownership of the note, not the corresponding deed of trust, to determine who has standing to foreclose. Specifically, "when a note secured by a mortgage is transferred, 'transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.'" In re Vargas, 396 B.R. 511, 516 (Bankr. C.D. Cal. 2008) (quoting Carpenter v. Longan, 83 U.S. 271, 275 (1872)). "'The [deed] can have no separate existence.'" Id. at 517 (quoting Carpenter, 83 U.S. at 275). Put another way, "'an assignment of the note carries the [deed] with it, while an assignment of the latter alone is a nullity.' While the note is 'essential,' the [deed] is only 'an incident' to the note." Id. (quoting Carpenter, 83 U.S. at 274). Thus, under the traditional rule, splitting the note and the deed of trust is impossible. The holder of the note always has both.

Pursuant to the traditional rule, MERS' "assignment of the deed of trust separate from the note" would have no force. Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623-24 (Mo. Ct. App. 2009)  [*22] (explaining that "MERS never held the promissory note, thus its assignment of the deed of trust . . . separate from the note had no force"). Adopting the traditional rule would be inconsistent with our holding in Leyva v. National Default Servicing Corp., however, in which we explained that "[t]ransfers of deeds of trust and mortgage notes are distinctly separate." 127 Nev.    ,    , 255 P.3d 1275, 1279 (2011). Indeed, to foreclose, one must be able to enforce both the promissory note and the deed of trust. Id.; NRS 107.086(4). Under the traditional rule, entitlement to enforce the promissory note would be sufficient to foreclose; it would be superfluous to then require one to separately prove that a previous beneficiary "properly assigned its interest in land via the deed of trust" by requiring the new beneficiary "to provide a signed writing . . . demonstrating that transfer of interest." Leyva, 127 Nev. at    , 255 P.3d at 1279. Accordingly, we decline to adopt the traditional rule and instead consider the Restatement approach.

The Restatement approach

Under the Restatement approach, a promissory note and a deed of trust are automatically transferred together unless the parties agree  [*23] otherwise. Specifically, "[a] transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise." Restatement (Third) of Prop.: Mortgages § 5.4(a) (1997). Similarly, "[e]xcept as otherwise required by the Uniform Commercial Code, a transfer of a [deed of trust] also transfers the obligation the [deed of trust] secures unless the parties to the transfer agree otherwise." Id. at § 5.4(b). Thus, unlike the traditional rule, a transfer of either the promissory note or the deed of trust generally transfers both documents. The Restatement also diverges from the traditional rule in that it permits the parties to separate a promissory note and a deed of trust, should the parties so agree.

The Restatement notes that "[i]t is conceivable that on rare occasions a mortgagee will wish to disassociate the obligation and the [deed of trust], but that result should follow only upon evidence that the parties to the transfer so agreed. The far more common intent is to keep the two rights combined." Id. at § 5.4 cmt. a. This is because, as we have discussed, both the promissory note and the deed must be held together to foreclose; "[t]he [general]  [*24] practical effect of [severance] is to make it impossible to foreclose the mortgage." Id. at § 5.4 cmt. c; see also Cervantes, 656 F.3d at 1039.

In this case, New American Funding was the initial holder of the note, whereas MERS was characterized in the deed of trust as "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." (Emphasis added.) The deed of trust also stated that "MERS is the beneficiary under this Security Instrument." (Emphasis added.) When interpreting a written agreement between parties, this court "is not at liberty, either to disregard words used by the parties . . . or to insert words which the parties have not made use of. It cannot reject what the parties inserted, unless it is repugnant to some other part of the instrument." Royal Indem. Co. v. Special Serv., 82 Nev. 148, 150, 413 P.2d 500, 502 (1966) (internal quotations omitted). Thus, we examine the effect of designating MERS both as a nominee for New American Funding and its successors and assigns, and as a beneficiary of the deed of trust. Other courts have held that MERS' designation as nominee "is more than sufficient to create an agency relationship between  [*25] MERS and the Lender and its successors." In re Tucker, 441 B.R. at 645; In re Martinez, 444 B.R. 192, 205-06 (Bankr. D. Kan. 2011) (concluding that based on the language in the relevant documents giving MERS a role as "nominee" for "[the lender] and its successors and assigns, . . . sufficient undisputed evidence [was presented] to establish that MERS was acting as an agent," and that the choice of the word "'nominee,' rather than 'agent,' does not alter the relationship between the[ ] . . . parties, especially given the fact that the two terms have nearly identical legal definitions"); Cervantes, 656 F.3d at 1044 (explaining MERS' role as an agent).

We agree with the reasoning of these jurisdictions and conclude that, in this case, MERS holds an agency relationship with New American Funding and its successors and assigns with regard to the note. Pursuant to the express language of the deed of trust, "MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender . . . ." Accordingly, MERS, as an agent for  [*26] New American Funding and its successors and assigns, had authority to transfer the note on behalf of New American Funding and its successors and assigns. See generally Leyva, 127 Nev. at    , 255 P.3d at 1279-80 (discussing "[t]he proper method of transferring . . . a mortgage note").

The deed of trust also expressly designated MERS as the beneficiary; a designation we must recognize for two reasons. First, it is an express part of the contract that we are not at liberty to disregard, and it is not repugnant to the remainder of the contract. See Royal Indem. Co., 82 Nev. at 150, 413 P.2d at 502. In Beyer v. Bank of America, the United States District Court for the District of Oregon examined a deed of trust which, like the one at issue here, stated that "MERS is the beneficiary under this Security Instrument." 800 F. Supp. 2d 1157, 1160-62 (D. Or. 2011). After examining the language of the trust deed and determining that the deed granted "MERS the right to exercise all rights and interests of the lender," the court held that "MERS [is] a proper beneficiary under the trust deed." Id. at 1161-62. Further, to the extent the homeowners argued that the lenders were the true beneficiaries,  [*27] "the text of the trust deed contradicts [their] position." Id. at 1161; accord Reeves v. ReconTrust Co., N.A., 846 F. Supp. 2d 1149 (D. Or. 2012). Similarly here, the deed of trust's text, as plainly written, repeatedly designated MERS as the beneficiary, and we thus conclude that MERS is the proper beneficiary. Second, it is prudent to have the recorded beneficiary be the actual beneficiary and not just a shell for the "true" beneficiary. In Nevada, the purpose of recording a beneficial interest under a deed of trust is to provide "constructive notice . . . to all persons."9 NRS 106.210. To permit an entity that is not really the beneficiary to record itself as the beneficiary would defeat the purpose of the recording statute and encourage a lack of transparency. However, whether designating MERS as the beneficiary on the deed of trust demonstrates an agreement to separate the promissory note from the deed of trust is an issue of first impression for this court.

FOOTNOTES

9 As noted earlier, Nevada law changed in 2011 to now require that "any assignment of the beneficial interest under a deed of trust must be recorded." NRS 106.210 (emphasis added); 2011 Nev. Stat., ch. 81, § 1, at 327.


Although  [*28] we conclude that MERS is the proper beneficiary pursuant to the deed of trust, that designation does not make MERS the holder of the note. Designating MERS as the beneficiary does, as Edelstein suggests, effectively "split" the note and the deed of trust at inception because, as the parties agreed, an entity separate from the original note holder (New American Funding) is listed as the beneficiary (MERS). See generally In re Agard, 444 B.R. 231, 247 (Bankr. E.D.N.Y. 2011). And a beneficiary is entitled to a distinctly different set of rights than that of a note holder. See Cervantes, 656 F.3d at 1039 (explaining that a "holder of [a] note is only entitled to repayment," whereas a "holder of [a] deed alone does not have a right to repayment," but rather, has the right "to use the property as a means of satisfying repayment." (Emphasis added)); Leyva, 127 Nev. at    , 255 P.3d at 1279 (explaining that while a deed of trust "is an instrument that 'secure[s] the performance of an obligation or the payment of any debt,'" a mortgage note is a negotiable instrument that entitles the note holder to a payment of debt (alteration in original) (quoting NRS 107.020)).

However, this split at the  [*29] inception of the loan is not irreparable or fatal. "Separation of the note and security deed creates a question of what entity would have authority to foreclose, but does not render either instrument void." Morgan v. Ocwen Loan Servicing, LLC, 795 F. Supp. 2d 1370, 1375 (N.D. Ga. 2011). Rather, "[a]ssuming arguendo, that there was a problem created by the physical separation of the Security Deed from the Note, that problem vanishe[s]" when the same entity acquires both the security deed and the note. In re Corley, 447 B.R. 375, 384-85 (Bankr. S.D. Ga. 2011). Indeed, while entitlement to enforce both the deed of trust and the promissory note is required to foreclose, nothing requires those documents to be unified from the point of inception of the loan. In re Tucker, 441 B.R. 638, 644 (Bankr. W.D. Mo. 2010). Instead, "[a] promissory note and a security deed are two separate, but interrelated, instruments," Morgan, 795 F. Supp. 2d at 1374, and their transfers are also "distinctly separate," Leyva, 127 Nev. at    , 255 P.3d at 1279.10

FOOTNOTES

10 The idea that various rights concerning real property may be severed and freely assigned without destroying such rights is not novel or unique. Indeed,  [*30] real property is generally described as a bundle of rights. See ASAP Storage, Inc. v. City of Sparks, 123 Nev. 639, 173 P.3d 734 (2007). In other contexts of real property, it is commonly accepted that a right may be severed and later reunified. For example, the right to travel over a property may be carved out by the creation of an easement, but if that easement is later transferred to the title holder, the easement merges back into the fee. Breliant v. Preferred Equities Corp., 109 Nev. 842, 846-47, 858 P.2d 1258, 1261 (1993). This general concept is consistent with our holding here.


Because the Restatement approach is more consistent with reason and public policy and with our recent holding in Leyva, we adopt the approach of the Restatement (Third) of Property and hold that MERS is capable of being a valid beneficiary of a deed of trust, separate from its role as an agent (nominee) for the lender. We further conclude that such separation is not irreparable or fatal to either the promissory note or the deed of trust, but it does prevent enforcement of the deed of trust through foreclosure unless the two documents are ultimately held by the same party. Cervantes, 656 F.3d at 1039.  [*31] MERS, as a valid beneficiary, may assign its beneficial interest in the deed of trust to the holder of the note, at which time the documents are reunified. Applying these holdings to the facts of this case, we now address whether BNY Mellon was entitled to enforce both the deed of trust and the note.

BNY Mellon is entitled to enforce the deed of trust and the note11

FOOTNOTES

11 Edelstein argues that there was no "written statement" proving Bank of America's authority to attend the mediation. Neither party provides evidence that BNY Mellon authorized Bank of America to enforce the note. See generally In re Veal, 450 B.R. 897, 920 (B.A.P. 9th Cir. 2011); see also NRS 111.205(1) (requiring an agent negotiating an interest in real property to have written authority). However, BNY Mellon indicated at the hearing before the district court that Bank of America was BNY Mellon's servicer, and a servicer is a representative within the meaning of NRS 107.086(4). Additionally, in responding to Edelstein's petition for judicial review, counsel appearing on behalf of BNY Mellon described her law firm as "[a]ttorneys for Bank of America, duly authorized servicer for The Bank of New York Mellon," and she alleged  [*32] that she was informed by Bank of America's representative attending the mediation that "he had full authority to negotiate the loan on behalf of [BNY Mellon]." Further, Edelstein informed the district court that he was making his payments to Bank of America, and "[t]he servicer of the loan collects payments from the borrower." Cervantes, 656 F.3d at 1039. We note that while a servicing agreement would have been helpful to discern the extent of Bank of America's authority in this mediation, production of such an agreement is not expressly required by statute or the Program rules.


In his petition in the district court, Edelstein requested sanctions based on his arguments that BNY Mellon did not have authority to foreclose and that it participated in the mediation in bad faith. The district court also refused to impose sanctions and authorized issuance of the FMP certificate. This court reviews a district court's factual determinations deferentially, Ogawa v. Ogawa, 125 Nev. 660, 668, 221 P.3d 699, 704 (2009) (explaining that a "district court's factual findings . . . are given deference and will be upheld if not clearly erroneous and if supported by substantial evidence"), and its legal  [*33] determinations de novo. Clark County v. Sun State Properties, 119 Nev. 329, 334, 72 P.3d 954, 957 (2003). Absent factual or legal error, the choice of sanction in an FMP judicial review proceeding is committed to the sound discretion of the district court. Pasillas v. HSBC Bank USA, 127 Nev.    ,    , 255 P.3d 1281, 1287 (2011).

To prove that a previous beneficiary properly assigned its beneficial interest in the deed of trust, the new beneficiary can demonstrate the assignment by means of a signed writing. Leyva, 127 Nev. at    , 255 P.3d at 1279. Here, BNY Mellon claims that it can enforce the deed of trust because MERS assigned its beneficial interest in the deed of trust to BNY Mellon. Certified copies of the deed of trust and the subsequent assignment were produced at the mediation; thus, BNY Mellon is entitled to enforce the deed of trust.12 With respect to the note, MERS also assigned its beneficial interest in the deed of trust "[t]ogether with the note or notes therein . . ." to BNY Mellon. Because we hold that MERS, as agent (nominee) for New American Funding's successors and assigns, can transfer the note on behalf of the successors and assigns, we conclude that this action  [*34] also transferred the note to BNY Mellon. See id. at    , 255 P.3d at 1281 (explaining that, without showing a valid negotiation, a party can establish its right to enforce the note by demonstrating a proper transfer).

FOOTNOTES

12 On appeal, Edelstein contends that the assignment of the deed of trust is invalid because the notary predates the date of the assignment. In this, and without citation to specific authority, Edelstein claims that the assignment was void. However, Edelstein did not raise this issue in the district court; thus, we need not address it on appeal. See In re AMERCO Derivative Litigation, 127 Nev.    ,     n.6, 252 P.3d 681, 697 n.6 (2011) (declining to consider an issue raised for the first time on appeal).


Even independently of MERS' assignment, BNY Mellon was entitled to enforce the note. The Uniform Commercial Code, Article 3, governs transfers of negotiable instruments, like the note. Leyva, 127 Nev. at    , 255 P.3d at 1279. Therefore, for a subsequent lender to establish that it is entitled to enforce a note, it must present "evidence showing [e]ndorsement of the note either in its favor or in favor of [its servicer]." In re Veal, 450 B.R. 897, 921 (B.A.P. 9th Cir. 2011);  [*35] see also Leyva, 127 Nev. at    , 255 P.3d at 1279.

When a note is endorsed to another party, Article 3 of the UCC permits a note to "be made payable to bearer or payable to order," depending on the type of endorsement. Leyva, 127 Nev. at    , 255 P.3d at 1280 (citing NRS 104.3109). Relevant here, "[w]hen endorsed in blank, an instrument becomes payable to bearer . . . ." NRS 104.3205(2). Further, "a note initially made payable 'to order' can become a bearer instrument, if it is endorsed in blank." Bank of New York v. Raftogianis, 13 A.3d 435, 439 (N.J. Super. Ct. Ch. Div. 2010); see also U.C.C. § 3-205 cmt. 2 (2004) (explaining that if "the holder of an instrument, intending to make a special [e]ndorsement, writes the words 'Pay to the order of without . . . writing the name of the [e]ndorsee," the instrument becomes bearer paper). Here, New American Funding, the original lender, endorsed the note to Countrywide Bank, N.A., who then endorsed the note to Countrywide Home Loans, Inc.13 Countrywide Home Loans endorsed the note, in blank, as follows: "Pay to the order of       Without Recourse." Thus, the note was bearer paper.

FOOTNOTES

13 Edelstein argues in his reply brief that because the document  [*36] merely says "Patty Arvielo and the term 'V.P.,'" not V.P. of New American Funding, it was an "anomalous endorsement and would not be sufficient to negotiate the note to Countrywide Home Loans, Inc." However, he does not make this argument in his opening brief; thus, we do not consider it. See generally Weaver v. State, Dep't of Motor Vehicles, 121 Nev. 494, 502, 117 P.3d 193, 198-99 (2005) (stating that this court need not consider issues raised for the first time in an appellant's reply brief).


"If the note is payable to bearer, that 'indicates that the person in possession of the promise or order is entitled to payment.'" Leyva, 127 Nev. at    , 255 P.3d at 1280 (quoting NRS 104.3109(1)(a)); see also NRS 104.3205(2) (explaining that an instrument endorsed in blank is payable to bearer and "may be negotiated by transfer of possession alone"); NRS 104.3201(2) ("If an instrument is payable to bearer, it may be negotiated by transfer of possession alone."). This means that to be entitled to enforce the note, BNY Mellon would merely have to possess the note. Cf. Leyva, 127 Nev. at    , 255 P.3d at 1280 (discussing the process to be entitled to enforce order paper).

At the time of the mediation,  [*37] ReconTrust, BNY Mellon's trustee, physically possessed the note. Edelstein argues that because ReconTrust "was in possession, not [BNY Mellon]," ReconTrust was arguably "the holder and person entitled to enforce bearer paper." However, Edelstein did not raise this issue in the district court. See In re AMERCO Derivative Litigation, 127 Nev.    ,     n.6, 252 P.3d 681, 697 n.6 (2011) (declining to consider an issue raised for the first time on appeal). Accordingly, we conclude that because ReconTrust as trustee possessed the note, BNY Mellon, the beneficiary, was entitled to enforce it. See generally Monterey S.P. Part. v. W.L. Bangham, 777 P.2d 623, 627 (Cal. 1989) (explaining that "[b]ecause a deed of trust typically secures a debt owed the beneficiary, it is the beneficiary, not the trustee, whose economic interests are threatened when the existence or priority of the deed of trust is challenged," and noting that the beneficiary is the real party in interest); accord In re Veal, 450 B.R. at 917 (holding that Wells Fargo could not establish holder status because "it did not show that it or its agent had actual possession"); cf. NRS 104.9313 and UCC § 9-313, cmt. 3 "Possession" (explaining  [*38] that principles of agency apply in determining actual possession in the UCC, and that where an agent of a secured party has physical possession of a note, the secured party has taken actual possession).

Because BNY Mellon was entitled to enforce both the note and the deed of trust, which were reunified,14 we conclude that BNY Mellon demonstrated authority over the note and to foreclose, and thus, there was no abuse of discretion or legal error on the part of the district court.15

FOOTNOTES

14 Because it is not at issue in this case, we need not address what occurs when the promissory note and the deed of trust remain split at the time of the foreclosure. See, e.g., U.S. Bank Nat. Ass'n v. Ibanez, 941 N.E.2d 40, 53-54 (Mass. 2011) (discussing what occurs in instances "where a note has been [transferred] but there is no written assignment of the [deed] underlying the note").

15 Edelstein argues that BNY Mellon failed to act in good faith because it lacked authority and failed to produce adequate documents to establish its authority. Based on our holdings in this opinion, we reject his argument.


Accordingly, we affirm the judgment of the district court.

/s/ Hardesty, J.

Hardesty

We concur:

/s/ Cherry, C.J.
Cherry

/s/  [*39] Douglas, J.
Douglas

/s/ Saitta, J.
Saitta

/s/ Gibbons, J.
Gibbons

/s/ Pickering, J.
Pickering

/s/ Parraguirre, J.
Parraguirre