As subrogee for a lender, a title insurer filed a malpractice suit against a firm arising from the firm’s representation of the lender following the refinancing of a loan.
The case is Old Republic National Title Insurance Co., as subrogee of First Horizon Loans, f/k/a First Horizon Home Loan Corp., a wholly owned subsidiary of First Tennessee Bank, National Association; as subrogee of the Bank of New York Mellon, as trustee for the First Horizon Alternative Mortgage Securities Trust 2006-FA8 mortgage pass-through certificates, series 2006-FA8 v. Shulman, Rogers, Gandal, Pordy & Kecker Pa; Morton Faller (Fourth U.S. Circuit Court of Appeals, No. 20-1049).
Heinz and Susan Georg purchased property in Cockeysville, Md., in February 2002 as tenants by the entirety. They executed deeds of trust in favor of Chevy Chase Bank F.S.B. for a construction loan in September 2004 and a home equity line of credit in September 2006.
First Horizon Loans refinanced the Chevy Chase loans in October 2006. While the loan application listed both Heinz and Susan Georg, Heinz Georg was listed as the only borrower on the loan application and certain documents were only signed by Heinz Georg. The First Horizon note and deed of trust were not signed by Susan Georg. However, believing both the Georgs did sign the deed of trust, Old Republic National Title Insurance Co. issued a title policy on the property to First Horizon.
The note and deed of trust were transferred to Bank of New York Mellon in December 2006, pursuant to a pooling and servicing agreement, with First Horizon remaining the master servicer of the loan. In July 2007, the Georgs signed another deed of trust as security for a new home equity line of credit provided by Bank of America.
The Georgs defaulted on the First Horizon loan in June 2009. First Horizon could not foreclose on the property because only Heinz Georg had signed the deed of trust. First Horizon submitted a claim to old Republic.
Old Republic retained Morton Faller of Shulman, Rogers, Gandal, Pordy & Kecker Pa. to file suit against the Georgs on First Horizon’s behalf. The complaint, filed in September 2010, sought reformation of the deed of trust, equitable subrogation and equitable mortgage. It listed First Horizon as the plaintiff and the Georgs, PRLAP Inc., and Bank of America as the defendants.
The Georgs moved for judgment, arguing that First Horizon failed to demonstrate standing to bring the suit because Bank of New York Mellon was the note’s holder and there was no evidence that the omission of Susan Georg’s signature on the deed of trust was a mutual mistake. The state trial court granted the Georgs’ motion.
Faller filed a notice of appeal on behalf of First Horizon, but the lower court had not entered final judgment at that time because First Horizon’s claims against PRLAP and Bank of America remained pending. The Georgs moved to dismiss the appeal and the Maryland Court of Special Appeals dismissed the appeal. First Horizon did not seek review in the Maryland Court of Appeals.
Old Republic then retained new counsel to initiate a second suit against the Georgs. The suit, filed on behalf of Bank of New York Mellon, raised substantially similar causes of action based on the same facts raised in the first state court action. The lower court granted the Georgs’ motion for judicial decision based on res judicata and collateral estoppel. That decision was affirmed by the Court of Special Appeals and the Court of Appeals.
Old Republic filed the current suit on Nov. 30, 2018 in its capacity as subrogee of First Horizon and Bank of New York Mellon against Faller and his law firm, alleging legal malpractice and breach of contract. It alleged that Faller and his firm breached the standard of care in the first state court action by failing to establish standing and to note a timely appeal.
Faller and the firm moved to dismiss the suit, which the district court granted. It held that Old Republic could not demonstrate harm to establish a claim for legal malpractice. It found that no harm arose from any alleged negligence because the state trial court proceeded to adjudicate the merits of First Horizon’s case in the alternative to its determination on standing.
Old Republic timely appealed, citing the firm’s failure to establish standing and file a timely notice of appeal in support of its legal malpractice claim. It specifically argued that had Faller and the firm established standing in the underlying state court action, First Horizon would have prevailed on its claims for equitable subrogation, equitable mortgage and reformation.
The Fourth U.S. Circuit Court of Appeals affirmed the lower court’s ruling.
It noted first that Old Republic could not proceed with its claim for legal malpractice based on Faller and the firm’s failure to establish standing in the underlying case because First Horizon experienced no harm as a result because the state trial court conducted an analysis of the case on the merits instead of dismissing the case on standing grounds.
“Nonetheless, Old Republic asserts that First Horizon experienced harm on the standing issue because the circuit court did not fully adjudicate First Horizon’s claims for equitable subrogation and equitable mortgage,” the court stated. “We find this argument unpersuasive. The circuit court expressly reached equitable subrogation. And as for equitable mortgage, although the circuit court did not expressly address this claim, it extensively discussed its factual finding that the evidence did not reflect an intent on Susan Georg’s part to be included on the deed of trust. This factual finding leads to the necessary conclusion that equitable mortgage was unavailable because the parties’ intent to create a mortgage is paramount in assessing the applicability of this remedy.”
It said Old Republic could not proceed with its claim for legal malpractice based on the firm’s failure to timely file First Horizon’s notice of appeal because even if Faller had timely filed the notice, the Court of Special Appeals would have denied relief to First Horizon on its claims for equitable subrogation, equitable mortgage and reformation.
It noted that the circuit court found that First Horizon failed to inform Susan Georg of the significance of obtaining her signature on the deed of trust and that Susan Georg was unaware that a mutual mistake had occurred.
“Applying the deferential clear error standard, these findings and the inferences reasonably drawn from them were supported by competent and material evidence in the record and were therefore not clearly erroneous,” the court stated. “The record contains evidence sufficient to show that First Horizon failed to inform Mrs. Georg about the need for her signature on the Deed of Trust, with First Horizon’s vice president of asset recovery testifying that he ‘saw nothing that indicated a direct request to [Mrs. Georg] for [her to sign the Deed of Trust].’ And, as the circuit court reasonably inferred, the record evidence indicates that she was unaware of a mutual mistake having occurred when she did not sign the document. This conclusion is supported by the fact that the party who created the documents relevant to the refinancing, First Horizon, failed to include her name on some pertinent documents, including the Deed of Trust.”
Because it held there was insufficient evidence to conclude that Susan Georg intended to be included on the deed of trust, the court said it was compelled to conclude that Old Republic’s claim for equitable subrogation, equitable mortgage and reformation fail.
“We therefore conclude that Old Republic’s claims for equitable subrogation, equitable mortgage, and reformation are foreclosed due to the circuit court’s factual finding that the evidence was insufficient to demonstrate that Mrs. Georg intended to be included on the Deed of Trust,” the court stated. “In other words, had the appellees timely filed First Horizon’s notice of appeal, we are persuaded that the Court of Special Appeals would have denied First Horizon’s requested forms of relief on the basis of this factual finding. Having determined this to be the probable outcome had the case proceeded on appeal, we conclude that Old Republic cannot rely upon appellees’ failure to timely file the notice of appeal to demonstrate loss in support of its legal malpractice claim. Accordingly, the district court’s grant of summary judgment in favor of the appellees was proper.”