Summary
holding that a Complaint failed to allege a fraud on the court claim sufficiently when it failed to allege that defendant intended to deceive the court
Summary of this case from Bevan v. Butler & Assocs., P.A.Opinion
No. 109,276.
2013-12-6
Leon BOLDRIDGE and Saundra Boldridge, Appellants, v. NATIONAL CITY BANK, et al., Appellees.
Appeal from Johnson District Court; Thomas M. Sutherland, Judge. Charles S. Scott, Jr., of Shawnee, for appellants. Emmanuel N. Ayuk and Larry W. Joye, of Stinson Morrison Hecker LLP, of Kansas City, Missouri, for appellees.
Appeal from Johnson District Court; Thomas M. Sutherland, Judge.
Charles S. Scott, Jr., of Shawnee, for appellants. Emmanuel N. Ayuk and Larry W. Joye, of Stinson Morrison Hecker LLP, of Kansas City, Missouri, for appellees.
Before MALONE, C.J., GREEN and BRUNS, JJ.
MEMORANDUM OPINION
PER CURIAM.
Leon and Saundra Boldridge filed this action against National City Bank (NCB) alleging that it committed fraud on the court. Specifically, the Boldridges contend that NCB fraudulently concealed information during discovery in a prior foreclosure action. Although the district court granted NCB's motion for summary judgment, this court reversed and remanded the case for trial. Following a 2–day bench trial, the district court concluded that the Boldridges had failed to meet their burden of proof and that the actions they complained of did not rise to the level of fraud on the court. For the reasons set forth in this opinion, we affirm the district court's decision.
Facts
The Boldridges have been involved in litigation with NCB-formerly National City Mortgage (NCM)—for nearly a decade. See National City Mortgage Co. v. Ross, 34 Kan.App.2d 282, 117 P.3d 880 (2005). In the initial case, the Boldridges asserted a third party quiet title claim against NCM and others relating to a house that they had purchased in 2000 under a contract for deed. The district court found that the Boldridges' rights were subject to two preexisting valid mortgages on the property. On appeal, a panel of this court affirmed the district court's decision. 34 Kan.App.2d at 293–95.
Subsequently, the Boldridges filed the present action alleging that NCB had committed fraud on the court in the prior case by withholding information in discovery. Boldridge v. National City Bank, No. 104,139, 2011 WL 3891867 (Kan.App.2011) (unpublished opinion). The district court granted NCB summary judgment as a matter of law. But a panel of this court reversed and remanded the fraud on the court claim for trial. 2011 WL 3891867, at *7. In doing so, the court recognized that there was a genuine question regarding whether NCB's employees and agents intended to deceive the court. 2011 WL 3891867, at *4, *6–7.
As background, the following are facts from the initial case taken from this court's 2011 opinion:
“In June 2000, the Boldridges purchased a home from Matthew and Elaina Tumberger under a contract for deed. Acting as the Tumbergers' agent, David Kostelec negotiated a sale price of $165,000. When the sale was completed, the property was subject to two preexisting mortgages. The Boldridges did not record their contract for deed.
“Later, in June 2001, the Tumbergers purported to sell the same home to Kevin and Terri Ross. NCM financed the home's purchase with a loan of $208,000. Moreover, NCM paid the two existing mortgage liens on the property with the loan proceeds (the Ross Loan). The warranty deed and NCM's mortgage were recorded with the register of deeds' office.
“About the same time, Kostelec asked the Boldridges to agree to an addendum to the original contract for deed, authorizing refinancing because property taxes were coming due, and the Boldridges had not paid the overdue taxes. The Boldridges agreed and authorized refinancing in the maximum amount of $173,685. Kostelec told the Boldridges the mortgage on their property had been refinanced with NCM under the name of Ross. The Boldridges apparently did not question this and in August 2001 they started making their monthly payments to NCM. In December 2001, however, the Boldridges discovered the amount of the new mortgage was $208,000. They contacted Kostelec and told him that they would not make any further payments until the amount of the new mortgage was reduced to the amount agreed upon.
“In April 2002, NCM sued Ross and the Boldridges to foreclose its mortgage on the property. The Boldridges filed a third-party petition against NCM, the Tumbergers, and Ross claiming among other things that their contract for deed was superior to NCM's mortgage. They asked the court to quiet title to them in fee simple. The Tumbergers settled with the Boldridges and executed a quitclaim deed to the Boldridges.
“During the pendency of the foreclosure action, Kevin Ross contacted NCM and NCM's attorney, Linda Mock. Ross admitted that he signed the note, mortgage, and loan application, but he told Mock that the loan documents and other supporting material for the loan were false. Ross explained he did this at Kostelec's request with the understanding that the property would be moved out of his name in a couple of months. After consulting with NCM, Mock told the Boldridges' counsel and the trial court of Ross' disclosure.
“The trial court eventually ruled that NCM had a valid first lien on the property and that the mortgage was in default. Nevertheless, the trial court recognized the Boldridges' interest in the property and stayed foreclosure provided the Boldridges resumed payments. Additionally, the court reduced NCM's mortgage loan to the amount the Ross Loan benefitted the Boldridges by elimination of the preexisting mortgages.
“This court affirmed, finding that the trial court properly determined the Boldridges were enriched to the extent that the two prior mortgages were discharged. Further, any negligence on the part of NCM during the processing of the Ross Loan did not bar it from the right of subrogation.
...
“In January 2009, the Boldridges brought an action under K.S.A. 60–260(b) to set aside and void the judgment in the foreclosure action, alleging fraud on the court. The Boldridges contended that during discovery in the foreclosure action that NCB (formerly NCM) and its employees, including Mock, NCB's attorney, intentionally concealed the fraudulent involvement of other NCB employees in the Ross Loan. As a result, the Boldridges asserted that they were prevented from developing their theory that NCB was not entitled to subrogation under equitable principles.
“NCB acknowledged deficiencies in its discovery responses during the previous foreclosure action. Certain employees were not identified during discovery: Vance Patterson, the Ross Loan underwriter, was not identified in interrogatories and Melinda Boughey was identified as an employee involved in the Ross Loan, but she was not specifically identified as the closer for the loan. Additionally, certain documents related to the Ross Loan were not produced in the foreclosure action.” 2011 WL 3891867, at *2.
On remand, the district court conducted a 2–day bench trial on September 10 and 11, 2012. At trial, the Boldridges called Jacob Ivy as an expert. Ivy reviewed the Notification of Loan Action (NOLA) that Vance Patterson used to underwrite the Ross Loan. Ivy testified that, from what he remembered, Fannie Mae Guidelines (FNMA) for underwriting required a copy of a cashed earnest money check for verification of deposit. He claimed that when Patterson accepted a copy of an uncashed cashier's check for verification of deposit, he failed to comply with the guidelines. And as such, Patterson then incorrectly indicated that the Ross Loan was eligible for sale to Fannie Mae. Nevertheless, Ivy testified that he could not say whether Patterson was involved in fraud because mistakes sometimes do occur in underwriting.
Patterson also testified, but he did not specifically remember the Ross Loan. Despite his memory, he provided testimony about underwriting in general, and he also gave his conclusions as to what happened with the NOLA for the Ross Loan. He testified that brokers provided and entered the information for the NOLA into an automated system—the “Desktop Underwriter” (DA). The DA, based on the broker's information, automatically indicated whether the loan was eligible for sale to Fannie Mae. Moreover, he stated that the cashier's check was sufficient under the underwriting guidelines because an individual would need money to purchase the cashier's check. Likewise, a cashier's check was sufficient verification of deposit without being cashed. Finally, he testified that he was not involved in fraud with the Ross Loan or any other loan.
Dorothy Thomas and Linda Mock testified as well at trial. In addition, the deposition testimony of Phillip Cobb and Melinda Boughey was presented to the district court. Each testified that they were unaware of the fraud involving the Ross Loan, that they did not participate in any fraud, and that they did not intentionally withhold any information.
After considering the evidence, the district court entered a comprehensive 40–page memorandum decision and journal entry of judgment on December 6, 2012. The district court concluded that the Boldridges had “failed to sustain their burden of showing that NCB (or any of its agents or employees) intentionally withheld information and documents, and/or, provided false answers and responses during the discovery in the Foreclosure Action.” Moreover, the district court concluded that even if the Boldridges' allegations were true, the allegations would not constitute fraud on the court nor would they have materially affected the judgment in the foreclosure action. Finally, the district court concluded that NCB had standing—either as holder of the Note or under a servicing agreement to Freddie Mac—to bring the foreclosure action. Thus, the district court entered judgment in favor of NCB and against the Boldridges.
Analysis
Failure to Prove the Essential Elements of Fraud
The Boldridges contend that NCB and its agents committed fraud on the court by intentionally concealing or withholding information about the Ross Loan in the prior foreclosure action. A district court has the authority to set aside a judgment upon a finding of fraud on the court. See K.S.A.2012 Supp. 60–260(b), (d)(3). To determine if there has been fraud on the court, we look to federal caselaw for guidance. See Cool v. Cool, 203 Kan. 749, 755–56, 457 P.2d 60 (1969); J–F Oil, LLC v. Lansing Energy Corp., No. 91,891, 2005 WL 742073, at *4 (Kan.App.2005) (unpublished opinion), rev. denied September 22, 2005.
When considering whether a fraud on the court claim is sufficient to reopen a judgment, “all doubts must be resolved in favor of the finality of the judgment.” Weese v. Schukman, 98 F.3d 542, 552 (10th Cir.1996); United States v. Peach, Nos. 13–3104, 13–3181, 2013 WL 5495917, at *1 (10th Cir.2013) (unpublished opinion). Only particularly egregious conduct-such as the fabrication of evidence or the bribery of the judge or the jury-has been found to support a finding of fraud on the court. In other words, to prevail on a claim of fraud on the court, one must normally show a deliberate scheme to corrupt or subvert the basic function of the judiciary, which is the impartial adjudication of cases. Fraud between the parties, perjury, and the nondisclosure of pretrial discovery does not generally amount to fraud on the court. See Weese, 98 F.3d at 552–53;Robinson v. Audi Aktiengesellschaft, 56 F.3d 1259, 1266–67 (10th Cir.1995); United States v. Chon, 512 Fed. Appx. 855, 858 (10th Cir.2013); Fraud on the Court, 47 Am.Jur.2d, Judgments § 695.
The success of the Boldridges' particular fraud on the court claim required them to come forward with evidence to prove and link a number of facts. First, the Boldridges must have shown that Patterson and Boughey engaged in fraud in underwriting and closing the Ross Loan. Second, the Boldridges must have shown that Cobb, Thomas, and Mock knew about the fraud. Third, the Boldridges must have shown that Cobb, Thomas, and Mock intentionally concealed Patterson's and Boughey's involvement in a deliberate scheme to defraud the court. Only then would the Boldridges establish fraud on the court. The district court ultimately concluded that the Boldridges failed to prove that NCB committed any fraud that it would later need to cover up in a scheme to defraud the court.
“Fraud is never presumed and must be established by clear and convincing evidence.” See Alires v. McGehee, 277 Kan. 398, Syl. ¶ 1, 85 P.3d 1191 (2004). Clear and convincing evidence is an intermediate standard of proof between a preponderance of the evidence and beyond a reasonable doubt. In re B.D.-Y., 286 Kan. 686, 691, 187 P.3d 594 (2008). Accordingly, before establishing fraud on the court, the Boldridges had the burden to prove to the trier of fact by. clear and convincing evidence that NCB committed fraud. See Reeder v. Guaranteed Foods, Inc., 194 Kan. 386, 387–88, 399 P.2d 822 (1965); Gragg v. Money, 20 Kan.App.2d 123, 129, 884 P.2d 443 (1994) (“The burden of proof upon the party asserting the fraud is heavy.”).
After considering the evidence presented at trial, the district court found that the Boldridges failed to meet their burden to prove that NCB committed any fraud, much less fraud on the court—which is a negative finding. See Hall v. Dillon Companies, Inc., 286 Kan. 777, 781, 189 P.3d 508 (2008). On review of a negative finding, we must determine “whether the district court arbitrarily disregarded undisputed evidence or relied on some extrinsic consideration such as bias, passion, or prejudice to reach its determination.” Hamel v. Hamel, 296 Kan. 1060, 1078, 299 P.3d 278 (2013).
The Boldridges contend that the district court failed to consider some of the evidence. Based on our review of the record, however, we do not find that the district court failed to consider any of the evidence presented by the parties. Rather, a review of the record reveals that the district court weighed all the evidence and—as the finder of fact—concluded that the Boldridges had failed to prove the essential elements of fraud. See Alires v. McGehee, 277 Kan. at 403.
Vance Patterson—the Underwriter
The Boldridges claim that Patterson falsely certified that the Ross Loan was FNMA eligible. Although Patterson was the underwriter for the Ross Loan, he did not specifically remember this loan. In fact, he testified that he had underwritten tens of thousands of loans during his career. Further, he testified that he worked for PMI who performed contract underwriting for NCB. According to Patterson, the Ross Loan would have been randomly assigned to him after the broker, Mercury Mortgage, originated the loan by inputting information into the automated DA system.
Patterson also testified that based on the information the broker entered, the DA system would have automatically checked the box indicating that the loan was eligible for sale to FNMA. If Mercury Mortgage entered incorrect information—regardless of the reason why, then the DA system would have approved the loan for sale. We note that the Boldridges did not call anyone from Mercury Mortgage to controvert Patterson's testimony. Because the DA system automatically checked the FNMA-eligible box based on information entered by Mercury Mortgage—not Patterson—it was reasonable for the district court to conclude that the Boldridges failed to prove that Patterson fraudulently certified the loan as FNMA eligible.
Patterson testified that when he placed the conditions that would need to be fulfilled prior to closing the Ross Loan, he did not know what type of check he would receive. He also testified that he would have approved the loan upon the receipt of a copy of the cashier's check because he believed such checks were appropriate verifications of deposits under the Fannie Mae Guidelines. In other words, Patterson believed that there was no need for a cashier's check to be cashed to be verified. According to Patterson, a cashier's check—unlike a personal check—would likely have remained uncashed until closing, which would not happen until sometime after Patterson had given his approval as the underwriter.
Ivy, the Boldridges' expert, was a long-time friend of Leon Boldridge and had spent several years in his retirement underwriting loans. In contrast to Patterson, Ivy testified that a copy of a cashier's check was not sufficient verification under the Fannie Mae Guidelines. But Ivy admitted that he did not review the guidelines that existed at the time of the Ross Loan, and he recognized that the guidelines often change. Furthermore, Ivy testified that mistakes are sometimes made in the underwriting process, and he could not say whether Patterson was involved in fraud.
We are not to reweigh the evidence or the credibility of witnesses on appeal. See Wolfe Electric, Inc. v. Duckworth, 293 Kan. 375, 407, 266 P.3d 516 (2011). The testimony regarding Patterson boiled down to him saying that he complied with Fannie Mae Guidelines and Ivy saying that he was probably not in compliance. After considering the evidence presented, the district court gave more weight to Patterson's testimony than it did to Ivy's testimony. Moreover, Ivy admitted that Patterson could have simply made a mistake. Thus, we do not find that the district court disregarded undisputed evidence in concluding that the Boldridges had not proven that Patterson's actions relating to the Ross Loan were fraudulent.
Melinda Boughey—the Closing Officer
It is unclear what act the Boldridges claim Boughey did when serving as the closing officer for the Ross Loan that would constitute fraud. Apparently, they assert that Boughey knowingly closed a loan that was fraudulent. Boughey testified by deposition that she had no knowledge of underwriting and was not responsible for approving loans. And Ivy, the Boldridges' expert, conceded that a person without underwriter training would have no way of knowing whether a loan complied with Fannie Mae Guidelines.
Hence, we find no evidence in the record suggesting that Boughey was involved in fraud. The testimony revealed that each loan was randomly assigned to a closing officer. Although Boughey could not specifically remember the Ross Loan, she admitted after reviewing the documents in this case that she served as the closing officer. She testified that it was the underwriter's job to determine if loan conditions had been met. She further testified that she was unaware that the Ross Loan was fraudulent and that she had not participated in fraud in any way. Thus, we find that the district court did not disregard undisputed evidence in concluding that the Boldridges had failed in their burden to prove that Boughey engaged in fraud. The district court's finding that Patterson and Boughey engaged in no fraud significantly undercut the Boldridges' claim that NCB intended to defraud the court by covering up their actions.
Dorothy Thomas, Phillip Cobb, and Linda Mock
It is undisputed that discovery in this case revealed information that was not disclosed in the prior foreclosure action. Namely, NCB disclosed the NOLA—which revealed that Patterson was the underwriter for the Ross Loan. Additionally, NCB divulged information about Boughey's service as the closing officer for the Ross Loan. In the first case, NCB stated only that Boughey prepared the mortgage for the Ross Loan. Although the Boldridges contend that the district court was required to presume fraud from those facts, a presumption of fraud is contrary to law and the Boldridges presented little other evidence suggesting that NCB had any intent or reason to be deceptive. See Alires, 277 Kan. at 403 (fraud is never presumed).
Thomas worked for NCB and was responsible for gathering the documents to respond to the Boldridges' discovery requests in the prior foreclosure action. Thomas testified that she sent the entire Ross Loan origination file to Mock, who served as NCB's attorney in the foreclosure case. Although she admitted that NCB disclosed documents during discovery in the current case that it did not disclose in the first, Thomas could not remember or say why that occurred. Thomas also testified that she would not “pick and choose” which documents to send to NCB's attorney, that she did not intentionally withhold information, that she did not know how to identify fraud, and that she did not commit fraud.
Mock also testified that, to the best of her knowledge, she handed over all the documents that the Boldridges requested during discovery in the foreclosure action and did not intentionally conceal anything. Prior to responding to interrogatories in the earlier case, Thomas and Mock obtained Cobb's signature as an officer at NCB with the authority to respond to discovery requests. In his deposition, Cobb testified that he had no reason to believe the interrogatory answers were incorrect or incomplete and that he would not have signed off on the responses if he knew they were not accurate. Likewise, Cobb testified that he was not involved in the Ross Loan fraud.
Intent to Deceive
On appeal, the Boldridges contend that there was sufficient evidence presented to the district court regarding NCB's intent to deceive them and the court in the prior foreclosure action. The intent to deceive, or at least reckless disregard for the truth, is an essential element of actual fraud as alleged by the Boldridges in this case. See Andres v. Claassen, 238 Kan. 732, 741–42, 714 P.2d 963 (1986) (distinguishing actual fraud from constructive fraud that involves the breach of a legal or equitable duty regardless of dishonesty or intentional deception); Alires, 277 Kan. at 403.
The Boldridges focus on testimony offered by Thomas. When asked why NCB did not identify Patterson in the first case, Thomas said that she recalled that one interrogatory asked who approved the loan and not who was the underwriter for the loan. And since NCB contracted with underwriters using the automated DA system, it was difficult to definitively state who actually approved the loan. The Boldridges claim this testimony shows actual intent not to disclose Patterson's identity.
The mere fact that NCB did not disclose Patterson's name does not, on its own, prove that NCB chose not to disclose Patterson with the intent to deceive either the Boldridges or the court. Again, the district court found that the Boldridges failed to prove that Patterson engaged in fraudulent activity concerning the Ross Loan. So the choice not to disclose Patterson, or even reckless disregard in not disclosing him, was not probative to the Boldridges' allegation of fraud. NCB had nothing to hide.
When this court previously reversed the district court's granting of summary judgment to NCB, we reviewed the evidence in the light most favorable to the Boldridges. See Boldridge, 2011 WL 3891867, at *7. Here, following a bench trial, we must review the evidence in a light most favorable to the prevailing party—NCB. Further, in light of the district court's negative finding that the Boldridge's failed to meet their burden of proof, we must be highly deferential to the district court's factual findings.
Based on our review of the record on appeal, we do not find that the district court disregarded undisputed evidence in finding that the Boldridges failed to prove that NCB or its representatives committed fraud—much less fraud on the court. Similarly, we do not find that the district court relied on some extrinsic consideration such as bias, passion, or prejudice in reaching its decision. Rather, we find that the district court dutifully considered the disputed evidence and issued a well-reasoned memorandum decision supported by the evidence presented during the bench trial.
Fraud on the Court
The Boldridges contend that the district court made an error of law by concluding that even if their allegations were true, NCB's representatives did not commit fraud on the court. Specifically, the Boldridges allege that had they known Patterson's identity during the prior foreclosure action, they would have been able to discover that he committed fraud and then would have argued about NCB's unclean hands. Consequently, they argue that the district court might have considered their unclean-hands argument and given the Boldridges the property free and clear of NCB's interest.
To reiterate, fraud between the parties, perjury, and the nondisclosure of pretrial discovery does not generally amount to fraud on the court. See Weese, 98 F.3d at 552–53. In Weese, it was alleged that the defendant “made material misrepresentations or omitted information needed to make his answers fully truthful.” The 10th Circuit held that the allegations, “even if true, simply [did] not rise to the level necessary to constitute ‘fraud on the court.’ “ 98 F.3d at 553. Similarly, the Boldridges claim in the present action that NCB was intentionally deceptive in failing to disclose Patterson's and Boughey's involvement with the Ross Loan during discovery in the prior foreclosure action. Even if that were true, that would only amount to the nondisclosure of discovery and not rise to the level of fraud on the court.
Fraud on the court does not occur merely because an intentional deception resulted in an inequitable judgment. Robinson, 56 F.3d at 1265–67. So even if the judgment in the foreclosure case was inequitable as a result of the failure to disclose Patterson's name and the fact that Boughey served as the closing officer for the Ross Loan, this is not the type of egregious conduct that constitutes fraud on the court. In other words, the Boldridges did not prove a deliberate scheme on NCB's part to subvert the impartial function of the judiciary.
Additionally, the Boldridges assert that NCB committed fraud on the court by willfully failing to disclose that it sold the Ross Loan to Freddie Mac in August 2001. But testimony in this case revealed that lenders routinely originate mortgage loans and subsequently sell the income stream from the loans to investors like Freddie Mac. In turn, this arrangement provides lenders with the funds necessary to continue lending.
Uncontroverted testimony established that after Freddie Mac purchases a loan, it does not service the loan itself. Instead, it requires the lender to handle matters relating to collection of payments, notices of default, and filing of foreclosure actions. In the present case, as is the common practice, NCB endorsed the note for the Ross Loan in blank and held on to it—together with the mortgage—to enable it to legally act to foreclose the mortgage if necessary.
The record further reveals that when the default occurred on the Ross Loan, NCB was required by Freddie Mac to foreclose. The Boldridges admit that if NCB had failed to recover the property, Freddie Mac would have forced NCB to repurchase the Ross Loan. In turn, NCB would have lost the property and its money. Thus, contrary to the Boldridges' assertion, NCB did have something to lose in the foreclosure action.
As an extension of their argument, the Boldridges allege that NCB hid the fact that it lacked standing to foreclose by willfully failing to disclose the sale of the Ross Loan's income stream to Freddie Mac. This court recently addressed a similar claim concerning standing in Bank of America v. Inda, 48 Kan.App.2d 658, 303 P.3d 696 (2013). In Inda, the defendant argued that Bank of America lacked standing to foreclose because it had sold its interest in the income stream generated by a mortgage to Freddie Mac. In other words, Bank of America sold the note. Nevertheless, this court found that because Bank of America was in possession of the note, which was endorsed in blank, it had standing to enforce the note as the holder regardless of the fact that Freddie Mac owned the note. 48 Kan.App. at 666–67; see also K.S.A. 84–3–301 (a holder can enforce an instrument even though the person is not the owner of the instrument); K.S.A. 84–3–205(b) (a person in possession of an instrument endorsed in blank is the holder).
Here, despite selling the income stream generated from the Ross Loan to Freddie Mac, NCB remained the holder of the note, which was endorsed in blank. In addition, NCB held the mortgage. Accordingly, we conclude that NCB had standing as the holder of the note to institute the prior foreclosure action.
Affirmed.