Worse Comes to Worst: Successor Lender Sanctioned for Failing to Correct Predecessor’s False Documents

September 7, 2017

The Court of Appeals recently ruled in Central Bank v. Hanson that a successor lender was properly sanctioned for the false testimony of its predecessor.  The predecessor lender made errors in its loan documents and then submitted false affidavits to the trial court to hide its mistakes.  The successor bank, instead of taking steps to correct the problem, perpetuated the first lender’s misrepresentations to the trial court.  The trial court sanctioned the second lender and the Court of Appeals affirmed.

Mr. and Mrs. Hanson executed a promissory note and a mortgage to RiverBank.  The loan officer notarized Ms. Hanson’s signature on the mortgage despite the fact that she did not sign in his presence.  RiverBank subsequently determined that the legal description in the mortgage was incorrect.  To fix the faulty legal description, RiverBank recorded an affidavit of correction signed only by the bank.  The affidavit was supported by the written authorization purportedly from Mr. and Mrs. Hanson.  However, Mr. Hanson signed the authorization both for himself and his wife, a fact known to the bank.

After the borrowers defaulted on their loan, RiverBank filed a foreclosure and money judgment action.  During the foreclosure proceedings to support the bank’s claims, the loan officer submitted affidavits containing numerous false statements related to the execution of the mortgage and the authorization as well as other dealings with the borrowers.  Presumably the loan officer submitted the affidavits to hide the fact that the mortgage being foreclosed had multiple significant defects for which the loan officer was largely to blame.

While the case was pending, RiverBank failed, was put into receivership by the FDIC, and was purchased by Central Bank.  Central Bank retained all employees associated with the loan and continued to pursue the foreclosure action against the Hansons.

Central Bank relied upon the RiverBank false affidavits in its summary judgment brief.  The former RiverBank employees falsely testified at trial that the mortgage was properly executed.  At trial, the court found that the affidavits submitted to the court by the loan officer were “patently false” as was the testimony offered by bank employees.

As a result of Central Bank’s use of the false affidavits and testimony, the court sanctioned Central Bank and awarded the borrowers costs and attorneys’ fees.  On appeal, the Court of Appeals found that the circuit court did not abuse its discretion when it exercised its inherent authority to impose sanctions for conduct akin to perjury.

Although this case presents a particularly egregious example, errors in loan documents are not unheard of.  Most mistakes are innocent.  Attempting to hide those mistakes instead of facing them risks turning a simple error into a lie.  The risk of perpetuating an error is heightened when a lender is dealing with a loan that it did not originate.  This case tells us that courts are willing to sanction the successor bank for a problem originated by its predecessor.

If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at nfarnam@stroudlaw.com, Diana Eisenberg at deisenberg@stroudlaw.com or (608) 257‑2281 or your Stroud attorney.

DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.