Opinion
Civil Action No. 00-2137-KHV
April 11, 2001
MEMORANDUM AND ORDER
Jeff Schunk and Susan Schunk bring suit against United Financial Mortgage Corporation ("United Financial") alleging forgery, fraud and violations of the Truth In Lending Act, 12 U.S.C. § 3806(a), the Kansas Consumer Protection Act, K.S.A. §§ 50-626 and 50-627, and the Illinois Consumer Fraud And Deceptive Trade Practices Act, 815 Ill. Comp. Stat. 505/1 et seq. This matter comes before the Court on Defendant's Motion To Dismiss Plaintiffs' Complaint (Doc. #24) filed November 17, 2000, which the Court construes as a motion for summary judgment. For reasons stated below, the Court overrules defendant's motion.
Because defendant presents matters outside the pleadings, the Court will treat the motion as one for summary judgment. See Rule 12(b), Fed.R.Civ.P. Plaintiff has already responded to the motion as one for summary judgment, see Plaintiffs' Opposition To Defendant's Motion To Dismiss Plaintiffs' Complaint Or In The Alternative Opposition To Defendants' Motion For Summary Judgment ("Plaintiffs' Opposition") (Doc. #29) filed December 11, 2000, so no additional notice to the parties is necessary. See, e.g., Nichols v. United States, 796 F.2d 361, 364 (10th Cir. 1986); Audiotext Communications Network, Inc. v. US Telecom, Inc., No. 94-2395-GTV, 1995 WL 36543, *2 (D.Kan. Jan. 9, 1995).
Summary Judgment Standards
Summary judgment is appropriate if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Vitkus v. Beatrice Co., 11 F.3d 1535, 1538-39 (10th Cir. 1993). A factual dispute is "material" only if it "might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248. A "genuine" factual dispute requires more than a mere scintilla of evidence. Id. at 252.
The moving party bears the initial burden of showing the absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Hicks v. City of Watonga, 942 F.2d 737, 743 (10th Cir. 1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial "as to those dispositive matters for which it carries the burden of proof." Applied Genetics Int'l, Inc. v. First Affiliated Securities, Inc., 912 F.2d 1238, 1241 (10th Cir. 1990); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986); Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir. 1991). The nonmoving party may not rest on its pleadings but must set forth specific facts. See Applied Genetics, 912 F.2d at 1241.
The Court must view the record in a light most favorable to the party opposing the motion for summary judgment. See Deepwater Invs., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir. 1991). Summary judgment may be granted if the non-moving party's evidence is merely colorable or is not significantly probative. See Anderson, 477 U.S. at 250-51. "In a response to a motion for summary judgment, a party cannot rely on ignorance of facts, on speculation, or on suspicion, and may not escape summary judgment in the mere hope that something will turn up at trial." Conaway v. Smith, 853 F.2d 789, 794 (10th Cir. 1988). Essentially, the inquiry is "whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson, 477 U.S. at 251-52.
Factual Background
The following facts are either uncontroverted or construed in a light most favorable to plaintiffs.
At the time defendant filed its motion, the parties had exchanged documents under Rule 26(a) but had not conducted formal discovery. Plaintiffs' response to defendant's motion is based only on documents and their own affidavit testimony. Consequently, the factual record is not fully developed. Nevertheless, the record is sufficient for the Court to conclude that factual issues preclude the entry of summary judgment.
On October 16, 1998, United Financial loaned plaintiffs $120,150.00 to purchase a house. In connection with the loan, plaintiffs executed a mortgage and an adjustable rate note with an interest rate cap of 10.875 per cent.
United Financial attempted to sell the note and mortgage to First Nationwide Mortgage Corporation ("First Nationwide"). On October 29, 1998, First Nationwide informed Glen Schap, Vice-President of United Financial, that First Nationwide could not accept plaintiffs' loan until United Financial cured five exceptions. Specifically, First Nationwide requested (1) a new assignment which added First Nationwide's name and completed the notary section, (2) a new loan tax information sheet, (3) clarification of the notary's expiration date, (4) correction of the interest rate cap to 11.575 per cent, and (5) a letter of intent to correct the adjustable rate rider interest rate cap to 11.575 per cent.
The record is unclear whether the loan was actually sold. United Financial asserts that it did not complete the sale and that it re-purchased the loan from First Nationwide. See Memorandum In Support Of Defendant's Motion To Dismiss Plaintiffs' Complaint ("Defendant's Memorandum") (Doc. #25) filed November 17, 2000, at 2, ¶ 6. The supporting affidavit, however, states only that United Financial completed the sale and sent the original note to First Nationwide on August 12, 1999. See Affidavit of Jason Schiffman, ¶ 5, attached to Defendant's Memorandum.
The record is unclear why First Nationwide requested the interest rate correction. The memorandum from First Nationwide states: "Returning Note to correct Interest Rate Limit to 11.575% and to endorse." See Exhibit J attached to Plaintiffs' Opposition. Plaintiffs speculate that the interest rate cap in the original loan did not comply with the requirements of First Nationwide. See Plaintiffs' Opposition at 2.
On November 6, 1998, Schap provided First Nationwide a letter of intent to re-record the mortgage to reflect the "corrected" interest rate limit of 11.575 per cent. On or before November 16, 1998, Schap or another employee of United Financial altered the interest rate cap on plaintiffs' note to 11.575 per cent and forged plaintiffs' initials by the change. As a result of the alteration and forgery, on or before November 16, 1998, United Financial fired Schap and First Nationwide discontinued its business relationship with United Financial.
The record is unclear why Schap or another employee altered and forged the document without plaintiffs' consent. Plaintiffs speculate that they did so in order to satisfy the requirements of First Nationwide without having to request the change from plaintiffs. See Plaintiffs' Opposition at 2. United Financial does not deny that Schap or another employee altered and forged the note. Rather, United Financial asserts that it did not authorize such conduct and that such conduct would be outside the scope of authority of its employees. See Defendant's Memorandum at 3, 7. United Financial further asserts that once it discovered the alteration and forgery, it acknowledged the same to plaintiffs and offered to correct and restore the original page of the loan. See id. at 3-4. Plaintiffs deny this contention and allege that United Financial never disclosed the fact that the note had been altered and forged but instead attempted to conceal these facts. See Plaintiffs' Opposition at 5-6.
Sometime after the loan closing, an agent of First Nationwide called plaintiffs and asked them about the alteration of the interest cap rate on their note. The agent opined that someone had altered the note and forged plaintiffs' initials.
In late November 1998, Jason Schiffman, an officer of United Financial, asked plaintiffs to sign a new adjustable rate note and initial an adjustment in the interest cap rate to 11.575 per cent. Schiffman insisted that plaintiffs were legally required to sign the new documents because the bank's underwriting department had made a "clerical error" in setting the initial interest cap rate. Schiffman did not tell plaintiffs that the original note had been altered or forged. Plaintiffs refused to sign the new documents because they had negotiated an interest rate cap of 10.875 per cent. During December 1998, Schiffman repeatedly insisted that plaintiffs approve an increased interest cap rate of 11.575 per cent. When plaintiffs refused, Schiffman threatened to foreclose on their home.
Schiffman denies that he asked plaintiffs to increase the interest rate cap to 11.575 per cent. Instead, he contends that he merely asked plaintiffs to sign a new note with the original interest rate cap of 10.875 per cent. See Affidavit of Jason Schiffman at ¶¶ 10, 14.
According to plaintiffs' theory, defendant used the term "clerical error" to cover up the alteration and forgery to the original note.
In April 1999, Robert Luce, an attorney for United Financial, sent plaintiffs a letter which asked them to sign a duplicate of the original note with an interest rate cap of 10.875 per cent. Luce informed plaintiffs that the original note had somehow become "smudged" and needed to be replaced. Luce did not disclose the fact that the note had been altered and forged. Luce told plaintiffs that they had agreed to cooperate and adjust any loan documents for clerical errors. He further stated that if they refused, he would obtain a court order to compel them to sign and that they would be responsible for court costs and attorneys fees. He also threatened that he had learned of irregularities in the information which plaintiffs had furnished in their loan application, and that plaintiffs could avoid foreclosure and acceleration of the note by signing and returning the duplicate note. Plaintiffs replied that they were not obligated to sign a new note because an employee of United Financial had altered and forged the original note. Plaintiffs also requested to see the "smudged" note, but defendant did not respond.
Construed in a light most favorable to plaintiffs, defendant presumably wanted plaintiffs to sign a new note because it feared that the original note was not enforceable as a result of the alteration and forgery.
According to plaintiff's theory, Luce used the term "smudged" to cover up the alteration and forgery to the original note.
Although the record is not clear, it appears that plaintiffs refused to sign a new note because they believed the original note was not enforceable.
The current interest rate of plaintiff's loan is well below 10.875 per cent and to date, it has not exceeded the cap of 10.875 per cent.
Analysis
K.S.A. § 84-3-407 provides that a fraudulent alteration to an instrument discharges a party whose obligation is affected by the alteration unless that party assents or is precluded from asserting the alteration. Alteration is defined as "an unauthorized change in an instrument that purports to modify in any respect the obligation of a party." K.S.A. § 84-3-407(a)(1).
K.S.A. § 84-3-407(c) provides an exception to discharge in cases which involve a payor bank or drawee paying a fraudulently altered instrument or a person taking it for value, in good faith and without notice of the alteration.
Defendant maintains that plaintiffs cannot void the altered note because United Financial did not authorize or consent to the alteration. Specifically, defendant asserts that its agents and employees are not authorized to alter, amend or modify any term of an approved and closed loan without originating a new loan. Thus, even if an employee or agent altered the document, defendant argues that he or she did so without authority. Therefore, defendant concludes, the alteration was performed by a stranger and constitutes mere spoilation which does not void the note. In support of its argument, defendant cites 4 Am. Jur.2d Alteration of Instruments § 13, which provides in part:
An alteration of an instrument by an agent of a party to the instrument is deemed to be the act of the agent's principal if such alteration is within the express or implied authority of the agent; otherwise the alteration is deemed to be the act of a stranger, constituting a mere spoilation unless subsequently ratified.
The general principle of law which defendant cites is not sufficient to sustain summary judgment. The record supports an inference that the note was forged by or at the direction of Schap, who was Vice-President of United Financial. Under Kansas law, a corporation is liable for the torts of its agent, when committed within the scope of the agent's authority and course of employment, even though it did not authorize or ratify the tortious acts. See Battenfeld of America Holding Co. v. Baird, Kurtz Dobson, 60 F. Supp.2d 1189, 1215 (D.Kan. 1999). Likewise a corporation is responsible for the torts of its agent where the tortious acts are incidental to and in furtherance of the principal's business, even though the tortious acts are outside the scope of the agent's authority. See id. Thus the fact that United Financial did not expressly authorize Schap to forge the document is not dispositive. Questions of fact remain whether Schap acted within the scope of his implied authority as vice-president. Moreover, it appears that Schap acted in furtherance of the business of Unified Financial. Also, defendant's later efforts to coerce plaintiffs to sign a new note support an inference that United Financial may have ratified the alteration. See, e.g., BioCore, Inc. v. Khosrowshahi, 41 F. Supp. d 1214, 1231 (D.Kan. 1999) (Kansas law presumes that principal has ratified and affirmed agent's unauthorized act if principal does not promptly repudiate act upon learning of it) (citing Schraft v. Leis, 236 Kan. 28, 37, 686 P.2d 865, 873 (1984)). Thus defendant is not entitled to summary judgment on plaintiffs' claim that the note is void.
Defendant also argues that plaintiffs have suffered no damages as a result of the alteration. Under K.S.A. § 84-3-407, however, damages are not a precondition to discharge. Likewise, no showing of actual damages is required to recover for violations of the Truth In Lending Act. See Hinkle v. Rock Springs Nat'l Bank, 538 F.2d 295, 297 (10th Cir. 1976). Moreover, plaintiffs claim that they have incurred actual damages in the form of attorneys' fees and other expenses in investigating and otherwise dealing with defendant's conduct. IT IS THEREFORE ORDERED that Defendant's Motion To Dismiss Plaintiffs' Complaint (Doc. #24) filed November 17, 2000 be and hereby is OVERRULED.
The Court does not consider defendant's conclusory arguments that (1) plaintiffs have failed to identify particular provisions of the statutes which have been violated and have not stated exactly what actions constitute a violation of those provisions; (2) plaintiffs do not allege that they relied upon or changed their conduct as a result of any misrepresentation; and (3) plaintiffs have not properly pleaded a claim for emotional distress under Kansas law. Defendant provides no analysis and cites no legal authority for its conclusions, and the Court will not sift through the record in attempt to construct legal arguments or theories for defendant. See, e.g., Scott v. Hern, 216 F.3d 897, 910 n. 7 (10th Cir. 2000).