The Supreme Court of Virginia has brought an end to a tangled case that began with a costly mistake on a mortgage loan.
The error that provided unexpectedly favorable loan terms for a Chesterfield County couple sparked legal disputes that went through three trial judges and led to sanctions for one lawyer – later lifted by the high court – and a two-hour, court-supervised deposition for another attorney.
As the battle over the disputed loan advanced in both state and federal court, external events often overshadowed the legal clash.
As the smoke now clears, one mortgage company involved in the dispute is out of business while the CEO of another is battling obstruction and perjury charges in federal court in Georgia. In a tragic aside, the Chesterfield lawyer who first sought relief for his client in default is dead, killed in a January shootout with police officers.
The Supreme Court of Virginia opinion is AME Financial Corp. v. Kiritsis, VLW 011-6-030.
Orthopedic surgeon Paul Kiritsis and his wife agreed to buy a $1-million home on the James River in Chesterfield County in 2004. Their mortgage broker arranged for an $864,000 loan from Georgia’s AME Financial Corp., according to Richmond lawyer Robert L. Hodges, who represented defendant GreenPoint Mortgage Funding Inc., another defendant in the case.
In preparation for the closing, someone at AME apparently made a wayward keystroke and printed out the wrong loan agreement, Hodges explained. The key difference was a 10-year period of fixed interest at a low rate, instead of interest adjustments beginning in six months, Hodges said. The difference possibly meant $250,000 to $300,000 of additional interest just in the first 10 years of the loan, according to the Kiritsises’ lawyer.
The closing went forward anyway. “Nobody noticed this discrepancy,” Hodges said.
Nobody noticed, that is, until AME tried to sell the promissory note to GreenPoint, Hodges’ client. Officials at GreenPoint noticed the different terms and kicked the loan back to AME.
A few weeks after closing, Kiritsis was contacted by a lawyer for AME who demanded the couple sign a promissory note with less favorable terms. The Kiritsises refused and said so in writing.
Without notifying the Kiritsises, AME then executed the intended promissory note with an AME vice president adding his own signature for the Kiritsises as attorney-in-fact. The AME official apparently relied on a limited power-of-attorney granted by the borrowers to correct minor errors in closing documents, according to Hodges. The Kiritsises’ loan, with the new promissory note signed by the AME V-P, was then sold to GreenPoint.
As the Supreme Court opinion makes clear, the Kiritsises had never granted either of the mortgage companies authority to execute a new note. AME never told GreenPoint that the Kiritsises had refused to sign the revised documents, Hodges said.
The Kiritsises continued to make mortgage payments until they noticed an increased interest charge. In 2006, the couple sued both AME and GreenPoint, claiming fraud and breach of contract, among other claims.
A week after service of process, a vice president of AME called Bradley P. Marrs of Richmond, the Kiritsises’ attorney, who told the AME official he would need an attorney licensed in Virginia to file responsive pleadings. Ignoring that good advice, the AME official himself signed and filed an answer for AME.
The Kiritsises filed a motion to strike AME’s answer and a motion for default judgment. Despite one-month advance notice, AME failed to show at a hearing on the motions. Circuit Judge Michael C. Allen granted the Kiritsises’ motions and held AME in default. AME was deemed to have admitted the allegations of the complaint and could defend only on the issue of damages.
AME then hired Chesterfield lawyer Richard C. Ferris II, who promptly discovered his client had already been found in default. Allen denied Ferris’ initial motion for relief from default and two subsequent motions for reconsideration. Allen expressly accepted as true Marrs’ account of his early warning to AME that the company would need a Virginia lawyer to file its pleadings.
When Allen stepped aside because of a possible appearance of conflict, then-circuit-Judge Cleo E. Powell denied AME’s fourth motion for relief from default.
Powell also imposed an $800 fine against Ferris for his persistence in seeking to overturn the default judgment against AME. The sanction later was overturned by the Supreme Court in an unpublished order in Ferris v. Kiritsis (VLW 010-6-059). The court said Powell had failed to articulate a basis for the fine.
Unable to overturn its default judgment in the Chesterfield County court, AME sued the Kiritsises in federal court in February 2007, claiming tortious interference with contract and interference with business expectancy. The claims were based on a demand letter authored by Marrs and sent to the original lender and other holders of the mortgage. Ultimately, Marrs was compelled to give testimony in a deposition – “two of the less enjoyable hours of my legal career,” Marrs said. To avoid contention, Senior U.S. District Judge Robert E. Payne presided over the Marrs deposition.
Meanwhile, the Chesterfield case went to trial in two phases. Although AME was in default, GreenPoint was not. GreenPoint was able to advance its own defenses and those that would have been available to AME. Nevertheless, the trial court found in favor of the Kiritsises and granted declaratory judgment against the mortgage companies.
After the second phase of trial, the court awarded the Kiritsises more than $69,000 in attorney’s fees and court costs on their fraud counts, as well as $25,000 in punitive damages against AME. The court also ordered AME to repurchase the note from GreenPoint, with interest.
When Powell was appointed to the Virginia Court of Appeals, Frederick G. Rockwell III became the third judge to preside over the case at the trial level.
On appeal, AME argued the trial court should have granted relief from its “brief technical default.”
AME argued the court could use a liberalized “good cause” standard for avoiding default, available after revision of the rules in 2006 and the creation of Rule 3:19(b). AME said it qualified for relief from default because it never indicated it intended to abandon its defenses, its answer was timely even if not properly signed, it retained Virginia counsel after learning of the default and the Kiritsises never claimed any adverse effect from the delay.
“A good cause determination invests a trial court with discretion,” wrote Justice S. Bernard Goodwyn for the unanimous court. The use of the word “may” in Rule 3:19(b) “evidences that even after a defendant shows good cause, a trial court has discretion to grant or refuse the defendant’s motion,” the court said.
Goodwyn’s opinion recounts the circumstances involved in AME’s default, suggesting the facts also steered the result. AME filed a pro se answer despite notice of the need for a Virginia attorney. Even with a month’s notice of a potential problem, AME failed to hire a lawyer and failed to appear at the first hearing. AME never provided an explanation for its no-show at the hearing.
The court also rejected AME’s claim that its default was a factor in losing to GreenPoint on GreenPoint’s cross-claim.
In federal court, the case ended without any ruling by the judge. Facing a motion for summary judgment, AME voluntarily dismissed its suit, Marrs said. “There was a massive amount of litigation in federal court, which came to nothing,” he said.
AME wound up in bankruptcy. GreenPoint is out of business. Virginia’s Capital One Financial Corp. purchased GreenPoint in 2006 and shut it down a year later. GreenPoint, or a successor, still holds the note on the Kiritsises’ mortgage, however, according to Marrs.
“My clients are extremely happy that it is over,” Marrs said.
Ferris, the lawyer for AME in both the state and federal actions, was shot and killed by Chesterfield County deputies who were called to his home in January for what was initially reported as a domestic disturbance. After a lengthy standoff, Ferris reportedly emerged and fired at officers, who returned fire and killed him.
Both lawyers involved in the appeal on the default issue find a message of deference to trial judges in the Supreme Court’s opinion. Marrs said the trial court was within its discretion to go either way, and the Kiritsises would have had no grounds to appeal if the ruling on relief from default had gone the other way.
“I think if you look at the totality of the facts, you can see why the court ruled the way it did,” he said. “If you thumb your nose at the court’s authority, it should not surprise you if it does not go well for you.”
The facts suggesting AME’s cavalier attitude toward the court mean the case may not have broad application, Marrs said. “This case is really very fact-specific,” he said. “I have a hard time seeing these circumstances existing again. It’s just not normal.”
Handling the appeal for AME, Virginia Beach attorney L. Steven Emmert pointed to a civil procedure treatise authored by University of Virginia law Prof. Kent Sinclair. Under the revised rules, Sinclair had predicted that almost any conduct short of “bald-faced” obstruction would be forgiven in an early default situation.
As Emmert had interpreted the new rule, “any excuse better than a bad hair day” should require relief from default with a prompt request.
“That isn’t the case any more,” he said. “If there is a legitimate basis for the trial court to say ‘absolutely not,’ they’re going to back the trial court.”
“[T]he opinion will cheer trial judges significantly as they realize that the Supreme Court has their backs,” Emmert posted on his Virginia Appeals blog.
I would clarify that while AME, and thus Greenpoint, alleged that the loan documents presented to the Kiritsises at closing (and thus signed by them) were the product of a simple mistake, that has never been the Kiritsises’ side of the case. The loan documents were in complete conformity with the representations made to them before closing by the mortgage broker who acted as intermediary between them and AME.
AME tried to say the Kiritsises were taking advantage of a simple clerical error. We believe the truth of the matter is that they deliberately sold this particular loan program, not realizing that Greenpoint had pulled it from the market and thus would not buy the loan after closing. Only when Greenpoint refused to fund a purchase did AME believe it had made a mistake. And perhaps it was a mistake at that point, but not the kind of mistake they have argued.
Their worst mistake was in not taking responsibility for matters at that time, and instead, trying to make it all the Kiritsises’ problem through a secretive falsification of a new note document. Up until that point, it was a costly but most likely honest mistake. Then they crossed the line.