SMITH v. SUNTRUST BANK, et al
Filing
22
MEMORANDUM OPINION and ORDER signed by JUDGE THOMAS D. SCHROEDER on 3/8/2016. For the reasons stated herein, the orders of the Bankruptcy Court dismissing Ms. Smith's adversary complaint and denying her motion to amend are AFFIRMED.(Engle, Anita)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
SUE-ANNA SHULTS SMITH,
Plaintiff-Appellant,
v.
SUNTRUST BANK,
Defendant-Appellee, and
KENNETH DALE SMITH,
Intervenor-Defendant.
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1:15cv160
MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, District Judge.
This matter is before the court on appeal from an order of
the Bankruptcy Court dismissing an adversary proceeding.
18-13.)
(Doc.
The debtor, Sue-Anna Shults Smith, sought a declaration
that she had no obligation to repay a home equity line of credit
because her ex-husband, Intervenor-Defendant Kenneth Dale Smith,
forged her signature on the loan documents, and she asserted statelaw claims against SunTrust Bank (“SunTrust”) arising out of its
conduct related
to the loan.
(Doc. 18-15.)
In a detailed twenty-
four-page memorandum opinion, the Bankruptcy Court concluded that
Ms. Smith ratified the loan and thus dismissed her adversary
complaint.
(Doc. 18-13.)
The Bankruptcy Court also denied Ms.
Smith’s subsequent motion to amend the complaint to assert a claim
for recoupment.
(Doc. 7 at 29–30.)
Following this timely appeal,
the court heard argument on February 11, 2016.
For the reasons
that follow, the Bankruptcy Court’s decisions to dismiss Ms.
Smith’s adversary complaint and to deny her motion to amend will
be affirmed.
I.
BACKGROUND
When reviewing a motion to dismiss, the court construes the
facts in the light most favorable to Ms. Smith as the non-moving
party.
Mr. and Ms. Smith were married in 1978 (Doc. 18-15 ¶ 12)1 and
eventually owned a home in Bahama, North Carolina, as tenants by
the entireties (Doc. 18-16 at 11)2 subject to a mortgage and home
equity line of credit (Doc. 18-15 ¶¶ 7–8).
In 2002, Mr. Smith
took out a second home equity line of credit with Central Carolina
Bank (the “‘4464 Loan”), which purported to be secured by a thirdpriority lien on the home.
(Id. ¶¶ 7–8, 13.)
Mr. Smith did so
without Ms. Smith’s knowledge or consent, forging her signature on
the loan’s originating documents.
(Id. ¶ 13.)
A loan officer for
1
The parties did not include Ms. Smith’s original complaint in the
record on appeal but instead included her proposed amended complaint
(Doc. 18-15), upon which the court relies for her factual allegations
insofar as there appears to be no dispute that both complaints are
identical, save for the addition of a claim for recoupment in the amended
complaint. (See Doc. 11 at 15; Doc. 14 at 33–34.)
2
Although courts are generally limited to the factual allegations in
the complaint when evaluating motions under Rule 12(b)(6), they may also
consider documents attached to the complaint or motion to dismiss so
long as they are “integral to the complaint and authentic.” Sec’y of
State for Defence v. Trimble Navigation Ltd., 484 F.3d 700, 705 (4th
Cir. 2007).
2
Central Carolina Bank notarized the forged signature.
¶¶ 10, 15–17.)
merger.
(See id.
SunTrust later absorbed Central Carolina Bank via
(Id. ¶ 16.)
In 2007, Ms. Smith filed for divorce after learning of the
‘4464 Loan and Mr. Smith’s forgery.
(See Doc. 18-4 at 1–2.)
The
parties entered into a mediated Settlement Agreement, which was
incorporated into a court order by the Family Court in Durham
County, North Carolina (the “Settlement Agreement”).
29.)3
(Id. at 26–
Under the Settlement Agreement, Ms. Smith was granted “sole
possession and ownership” of the couple’s house and farm (id. at
27), and Mr. Smith agreed to sign a deed transferring the house
and farm to Ms. Smith (id. at 28).
Ms. Smith agreed to bring the
mortgage and first home equity line current and to make all future
monthly payments on them.
(Id. at 27–28.)
Mr. Smith agreed to
make the monthly payments on the ‘4464 Loan, but only for up to
twelve months.
(See id. at 27-28.)
new realtor to sell the house.
Ms. Smith agreed to engage a
(Id. at 28.)
Upon the sale of the
house, the remaining balance of the ‘4464 Loan was to be paid from
the proceeds, with any excess belonging to Ms. Smith.
(Id.)
The home did not sell within twelve months of the Settlement
Agreement.
(See Doc. 18-15 ¶ 9.)
3
As a result, in September 2008
Ms. Smith was represented by counsel during the divorce proceedings
and negotiations culminating in the Settlement Agreement. (See Doc. 184 at 6, 26.)
3
Ms. Smith, who had sole ownership of the house, began making
monthly payments to SunTrust on the ‘4464 Loan.
(See id. ¶ 46.)
She continued to do so through 2011, when she entered into a
Modification Agreement with SunTrust.
(See Doc. 18-16 at 5–6.)
Under the Modification Agreement, SunTrust agreed to temporarily
lower the interest rate on the ‘4464 Loan.
(See id. at 5–6, 13.)
The Modification Agreement lists Ms. Smith as the only borrower
and acknowledges that “there are no defenses, adjustments, or
offsets” to her obligation to pay the loan.
(Id. at 5–6.)
Ms. Smith stopped making payments on the ‘4464 Loan in March
2012.
(Doc. 18-15 ¶ 46.)
As a result, Mr. Smith initiated
contempt proceedings in Family Court, claiming that his credit
score had been negatively impacted by Ms. Smith’s default.
Doc. 18-4 at 30–34.)
(See
In August 2013, the Family Court held Ms.
Smith in contempt for failing to abide by the terms of the
Settlement Agreement (the “Contempt Order”).
(Id.)
In the
Contempt Order, the Family Court concluded: “The fact that [Mr.
Smith] signed [Ms. Smith’s] name to secure [the ‘4464 Loan] cannot
be used as a defense to [Mr. Smith’s] Motion for Contempt” because
Ms. Smith “knew of the same prior to her agreeing to sign the
[Settlement Agreement].”
(Id. at 31.)
The Family Court ordered
Ms. Smith to bring all payments on the ‘4464 Loan current within
sixty days and to re-list the home for sale.
(Id. at 33.)
The
Family Court also sentenced Ms. Smith to thirty days in the Durham
4
County Jail but suspended the sentence so long as Ms. Smith
complied with the Contempt Order.
(Id. at 33–34.)
Ms. Smith filed for bankruptcy protection shortly thereafter.4
SunTrust filed a secured claim for $79,160.57 for the unpaid
balance of the ‘4464 Loan.
Ms.
Smith
filed
this
(Doc. 18-16 at 1–11.)
adversary
proceeding
In response,
against
SunTrust,
claiming that the ‘4464 Loan was not enforceable against her and
seeking damages for unjust enrichment, unfair and deceptive trade
practices under various North Carolina laws, and violations of the
North Carolina Debt Collection Act, N.C. Gen. Stat. § 75-55.
Doc.
18-15.)
The
home
was
sold
at
the
Bankruptcy
(See
Court’s
direction, leaving $55,871.93 in proceeds after the mortgage and
first home equity line were paid.
(Id. ¶ 9.)
That balance was
placed in trust pending the outcome of this adversary proceeding.
(Id.)
On December 8, 2014, the Bankruptcy Court entered a detailed
memorandum opinion and dismissed Ms. Smith’s adversary complaint,
concluding that she ratified the ‘4464 Loan through the Settlement
Agreement and her subsequent conduct.
(Doc. 18-13 at 14–24.)
As
a result, the court held that Ms. Smith was estopped from denying
liability under the ‘4464 Loan, and it ordered that the excess
sale proceeds held in trust be distributed to SunTrust.
4
(Id.)
Ms. Smith’s bankruptcy filing automatically stayed proceedings related
to the Contempt Order. (Doc. 18-13 at 8.)
5
The Bankruptcy Court also denied Ms. Smith’s subsequent motion for
leave to amend her complaint to add a claim for recoupment.
7 at 29–30.)
II.
(Doc.
This appeal followed.
ANALYSIS
This
court
exercises
jurisdiction
pursuant
to
§ 158(a) and Federal Rule of Bankruptcy Procedure 8003.
28
U.S.C.
On appeal
from a bankruptcy proceeding, this court reviews the Bankruptcy
Court’s legal conclusions de novo and its factual findings for
clear error.
Jenkins v. Simpson (In re Jenkins), 784 F.3d 230,
234 (4th Cir. 2015).
A.
Rooker-Feldman
As an initial matter, SunTrust argues that this court lacks
jurisdiction under the Rooker-Feldman doctrine.
this legal question de novo.
The court reviews
See Jenkins, 784 F.3d at 234.5
The Rooker-Feldman doctrine is a jurisdictional bar that
“prohibits the United States District Courts, with the exception
of habeas corpus actions, from ‘sit[ting] in direct review of state
court decisions.’”
Jordahl v. Democratic Party of Va., 122 F.3d
192, 199 (4th Cir. 1997) (quoting D.C. Court of Appeals v. Feldman,
460 U.S. 462, 482 n.16 (1983)).
“The doctrine extends not only to
constitutional claims presented or adjudicated by the state courts
5
The Bankruptcy Court did not directly address this issue, but it
necessarily concluded that Rooker-Feldman does not apply by reaching the
merits of Ms. Smith’s claims. (See Doc. 18-13 at 12–24.)
6
but also to claims that are ‘inextricably intertwined’ with a state
court judgment.”
Id. (quoting Feldman, 460 U.S. at 486–87).
The
Supreme Court has clarified that Rooker-Feldman “is confined to
cases of the kind from which the doctrine acquired its name: cases
brought by state-court losers complaining of injuries caused by
state-court
proceedings
judgments
commenced
rendered
and
before
inviting
rejection of those judgments.”
the
district
district
court
court
review
and
Exxon Mobil Corp. v. Saudi Basic
Indus. Corp., 544 U.S. 280, 284 (2005).
SunTrust
contends
that
Ms.
Smith’s
adversary
proceeding
constitutes an impermissible attempt to review the Contempt Order,
which concluded that Ms. Smith could not use Mr. Smith’s forgery
as a defense to her agreement to make the payments on the ‘4464
Loan.
The court disagrees.
In the Contempt Order, the Family
Court held that Ms. Smith violated her obligations to Mr. Smith
under the Settlement Agreement. (See Doc. 18-4 at 30–34.) Because
SunTrust was not a party to the Settlement Agreement (see id. at
26–29), the Family Court did not (and could not) address whether
or not Ms. Smith also violated any obligations to the bank.
Moreover, Ms. Smith does not seek to modify her obligations to Mr.
Smith or to overturn or enjoin the Contempt Order. In other words,
Ms. Smith’s adversary proceeding does not challenge the Contempt
Order or seek redress for an injury caused by it.
As a result,
Rooker-Feldman does not apply. See Davani v. Va. Dep’t of Transp.,
7
434 F.3d 712, 718–19 (4th Cir. 2006) (“Exxon requires us to examine
whether the state-court loser who files suit in federal district
court seeks redress for an injury caused by the state-court
decision
itself.
If
he
is
not
challenging
the
state-court
decision, the Rooker-Feldman doctrine does not apply.”).
B.
Ratification of the ‘4464 Loan
Ms. Smith first challenges the Bankruptcy Court’s conclusion
that she ratified the ‘4464 Loan.
On appeal from a bankruptcy
proceeding, the court reviews an order granting a motion to dismiss
for failure to state a claim de novo.
See Gerner v. Cty. of
Chesterfield, Va., 674 F.3d 264, 266 (4th Cir. 2012).
“Ratification is defined as ‘the affirmance by a person of a
prior act which did not bind him but which was done or professedly
done on his account, whereby the act, as to some or all persons,
is given effect as if originally authorized by him.’”
Am. Travel
Corp. v. Cent. Carolina Bank & Tr. Co., 57 N.C. App. 437, 442, 291
S.E.2d 892, 895 (1982) (quoting Restatement (Second) of Agency
§ 82 (1958)).
In order to ratify an agreement, a party must have
“full knowledge of all material facts relative to the unauthorized
transaction.”
Carolina Equip. & Parts Co. v. Anders, 265 N.C.
393, 400–01, 144 S.E.2d 252, 258 (1965).
Ratification
may
principal’s conduct.
S.E.2d at 895.
be
express
or
implied
through
the
Am. Travel Corp., 57 N.C. App. at 442, 291
“However, to constitute ratification as a matter
8
of law, the conduct must be consistent with an intent to affirm
the unauthorized act and inconsistent with any other purpose.”
Id. at 443, 291 S.E.2d at 896.
otherwise
voidable
contract
For example, a party ratifies an
when
performs under [the] agreement.”
she
“accepts
benefits
and
Goodwin v. Webb, 152 N.C. App.
650, 656, 568 S.E.2d 311, 315 (2002) (Greene, J. dissenting), rev’d
per curiam for the reasons stated in the dissent, 357 N.C. 40, 577
S.E.2d 621 (2003); see also Nisselson v. Softbank Am. Corp. (In re
Marketxt Holdings Corp.), 361 B.R. 369, 402 (Bankr. S.D.N.Y 2007)
(stating that a party may ratify an agreement by “intentionally
accepting benefits under the contract, by remaining silent or
acquiescing in the contract for a period of time after he has the
opportunity to avoid it, or by acting upon it, performing under
it, or affirmatively acknowledging it”) (citations and internal
quotation marks omitted); Carolina Equip. & Parts Co., 265 N.C. at
401, 144 S.E.2d at 258 (“It is also a settled principle of
ratification that the principal must ratify the whole of his
agent’s unauthorized act or not at all.
He cannot accept its
benefits and repudiate its burdens.” (citations omitted)).
Under North Carolina law, ratification typically arises in
the domestic context where one party to an otherwise voidable
obligation contained in a divorce-related agreement accepts its
benefits and performs pursuant to its terms.
Lowry,
99
N.C.
App.
246,
253,
9
393
See, e.g., Lowry v.
S.E.2d
141,
145
(1990)
(“[P]laintiff, by signing the agreement, having it incorporated
into a consent judgment and consent order, and receiving the
benefits of the Agreement for almost three years, ratified the
Separation Agreement.”); Hill v. Hill, 94 N.C. App. 474, 479, 380
S.E.2d 540, 544 (1989) (“The materials before us plainly show that
the wife has continued to accept the benefits of both agreements
long after she became aware of the alleged wrongdoing.
She cannot
now avoid the same contracts she acquiesced in for months and the
benefits of which she still enjoys.”); Ridings v. Ridings, 55 N.C.
App. 630, 632–33, 286 S.E.2d 614, 616 (1982) (holding that an exhusband ratified his obligations under a settlement agreement
procured by undue influence when he accepted sole ownership of
marital
property
and
influence subsided).
made
alimony
payments
after
the
undue
Here, the question is slightly different:
whether Ms. Smith ratified the ‘4464 Loan as a matter of law
through
conduct.
the
Settlement
Agreement
and
through
her
subsequent
Based on the record, the court finds that she did.
When Ms. Smith signed the judicially-enforceable Settlement
Agreement to pay the balance of the ‘4464 Loan (see Doc. 18-4 at
27–28), she knew that Mr. Smith had forged her signature on the
loan (Doc. 11 at 19).
She did so, however, in exchange for
receiving sole title to the property (see id. at 27), which she
had previously shared with Mr. Smith as tenants by the entireties
(Doc. 18-16 at 11).
In doing so, she acknowledged that the ‘4464
10
Loan was an “encumbrance” on the house.
(Doc. 18-4 at 28.)
An
encumbrance is “[a] claim or liability that is attached to property
or some other right and that may lessen its value, such as a lien
or mortgage.” Encumbrance, Black’s Law Dictionary (10th ed. 2014).
Thus, Ms. Smith agreed to pay the ‘4464 Loan and acknowledged that
it (and her obligation to pay) would be secured by a valid lien on
the house.
This was important because, under North Carolina law
a loan could encumber a property held by tenants by the entireties
only if both spouses authorized the lien.
L&M Gas Co. v. Leggett,
273 N.C. 547, 550–551, 161 S.E.2d 23, 26 (1968) (“The husband
cannot convey, incumber, or at all prejudice, such estate to any
greater extent than if it rested in the wife exclusively in her
own right.
The unity of husband and wife as one person . . .
prevents the disposition of it otherwise than jointly.”). In light
of the fact that Ms. Smith received sole title to the property in
the Settlement Agreement, her acknowledgment of encumbrance is
wholly inconsistent with a claim that she sought to preserve her
right to contest her signature on the loan but rather confirms the
validity of SunTrust’s lien.
Further, although the ‘4464 Loan proceeds had initially been
paid to Mr. Smith, Ms. Smith benefitted from the loan as part of
the Settlement Agreement insofar as she received (from the pot of
all of the couple’s assets and liabilities) sole title to the house
and farm and the balance of all equity after the lenders were paid
11
(see Doc. 18-4 at 27–28), a fact that her counsel conceded during
oral argument. Moreover, after accepting these benefits, Ms. Smith
repeatedly made monthly payments on the ‘4464 Loan for over three
years, not to Mr. Smith as reimbursement, but directly to SunTrust.
(Doc. 18-15 ¶ 46.)
Collectively,
Agreement,
Ms.
acceptance
Smith’s
of
entry
benefits
from
into
the
the
‘4464
Settlement
Loan,
and
subsequent performance of the loan obligation are consistent with
affirmance of the ‘4464 Loan obligation and inconsistent with any
purpose other than ratification.
Ms. Smith argues that the Settlement Agreement only created
personal obligations between her and Mr. Smith and therefore cannot
qualify as a ratification with respect to SunTrust, a third party.
This argument is unpersuasive.
As both the Bankruptcy Court and
the Family Court concluded (see Doc. 18-13 at 16 n.9; Doc. 18-4 at
31), the language of the Settlement Agreement is not reasonably
susceptible
to
Ms.
Smith’s
interpretation.
The
Settlement
Agreement provided that Ms. Smith was to receive “sole possession
and ownership” of the house, subject to the ‘4464 Loan, which was
an “encumbrance” against it.
(See Doc. 18-4 at 27-28 (requiring
Mr. Smith to sign over title to the house and farm).)
The
Bankruptcy Court correctly noted that insofar as Mr. Smith was
responsible for making only the first twelve monthly payments on
the ‘4464 Loan, unless the home was sold, and insofar as Ms. Smith
12
agreed to pay off the loan from the sale proceeds, it is “illogical
to interpret the order and agreement in a way that, after 12
months, neither party would have an obligation to pay the loan
secured by the ‘encumbrance.’”
(Doc. 18-13 at 16 n.9.)
The
parties’ conduct confirms this interpretation; for over three
years thereafter Ms. Smith repeatedly made payments on the ‘4464
Loan directly to SunTrust, rather than advancing funds to Mr.
Smith.
(Doc. 18-15 ¶ 46.)
This conduct is inconsistent with any
purpose other than ratification of the ‘4464 Loan.6
Ms. Smith also contends that she could not have ratified the
‘4464 Loan because she did not learn the extent of the loan
officer’s participation in the forgery until sometime after she
entered into the Settlement Agreement.
She argues that “the
originating bank’s degree of culpability in the forgery is material
to determine whether [she] should waive her rights against the
bank.”
(Doc. 11 at 19.)
She further contends that “it was not
until the North Carolina Secretary of State’s Notary Division
completed its investigation five (5) years after the [Settlement
Agreement] that [Ms. Smith] could have enjoyed at least a tepid
window into the originating bank’s acts or omissions that resulted
6
This conclusion is not negated by the fact that Ms. Smith also initiated
fraud investigations related to the ‘4464 Loan in 2009. (See Doc. 1815 ¶ 22.) Ms. Smith made payments on the ‘4464 Loan for more than a
year before filing complaints regarding the forgery, and she continued
to make payments for more than two years thereafter. (See id. ¶¶ 22,
46.)
13
in the forgery.”
(Id.)
This argument fails as well.
Ms. Smith concedes that by the time she entered into the
Settlement Agreement, she knew that her ex-husband had forged her
name and that the bank had made the loan to him.
(Id.)
These
were the material facts necessary for her to know that she would
not be bound by the forgery unless she ratified the agreement.
See Wachovia Bank & Tr. Co. v. Turner, 202 N.C. 162, 163, 162 S.E.
221, 221 (1932) (stating that a defendant would not be liable for
a promissory note executed by her husband if the husband forged
the
defendant’s
signature
or
signed
the
note
without
her
authority); L&M Gas Co., 273 N.C. at 550–551, 161 S.E.2d at 26
(“The husband cannot convey, incumber, or at all prejudice, such
estate to any greater extent than if it rested in the wife
exclusively in her own right.
The unity of husband and wife as
one person . . . prevents the disposition of it otherwise than
jointly.”).
This
is
especially
true
where
Ms.
Smith
was
represented by counsel throughout her divorce and negotiations
leading to the Settlement Agreement.
(See Doc. 18-4 at 6, 26.)
Ms. Smith has failed to explain how the notary’s participation in
the forgery could be material to her decision to ratify or reject
the ‘4464 Loan where it had no bearing on the loan’s terms or her
knowledge that she did not participate in its signing.
See
Ehrenhaus v. Baker, 216 N.C. App. 59, 88, 717 S.E.2d 9, 28 (2011)
(stating in a different context that a fact is material if there
14
is a substantial likelihood that a reasonable person would consider
it important in making a decision); Davis v. Egerton (In re UFill’Er-Up, Inc.), No. CIV 2:95cv95, 1996 WL 33676773, at *5
(M.D.N.C. Mar. 1, 1996) (“The standard for identifying a ‘material
fact’ changes depending on the context in which the term is used,
but it means, essentially, a fact that could make a difference to
someone who must decide.” (citations omitted)).7
In sum, while the ‘4464 Loan was initially voidable as to Ms.
Smith due to Mr. Smith’s forgery and the bank’s complicity, Ms.
Smith ratified the loan through the Settlement Agreement (in which
she acknowledged it was an “encumbrance” on the home) and her
7
Of course, Ms. Smith ratified the ‘4464 Loan yet again in the
Modification Agreement in 2011. In accepting the more favorable terms
(lower interest rate) in the Modification Agreement, Ms. Smith confirmed
that she was personally liable for the ‘4464 Loan, that her personal
obligations were not subject to any “defenses, adjustments, or offsets,”
and that these obligations were secured by a valid lien on her home.
(See Doc. 18-16 at 5–6.) These acknowledgements are consistent with her
prior ratification and are thoroughly inconsistent with any position
other than an intent to be bound by the ‘4464 Loan, a point Ms. Smith
essentially conceded both in her brief (see Doc. 11 at 26) and at oral
argument. Because Ms. Smith clearly ratified the ‘4464 Loan before the
Modification Agreement, the court need not reach her alternative argument
that her affirmative claims survive because she only entered into the
modification to delay foreclosure on the home.
As to that claim,
however, it is noteworthy that the Bankruptcy Court concluded that Ms.
Smith’s motives do not “vitiate her unambiguous ratification” of the
‘4464 Loan. (See Doc. 18-13 at 23); see also Metzger v. Hardey (In re
Hardey), No. 04-10199-SSM, 2005 Bankr. LEXIS 2030, at *32 (Bankr. E.D.
Va. Apr. 13, 2005) (“It is true that as between [the debtor] and Woodsboro
Bank, her reasons for signing the modification agreement would have been
immaterial, and that under state law she could not have defended against
a subsequent foreclosure based on the original forgery.”) (applying
Virginia law).
15
subsequent conduct.
Ms. Smith knew all of the material facts
relating to the forgery and her liability as early as 2007,
received the loan’s benefits in the property distribution directed
by the Settlement Agreement, and began performing under the ‘4464
Loan by making payments directly to SunTrust over the course of
several years.
Her actions are comprehensively inconsistent with
any position other than an intent to ratify the ‘4464 Loan.
As a
result, the Bankruptcy Court did not err in reaching that result.8
C.
Recoupment
Ms. Smith also challenges the Bankruptcy Court’s denial of
her motion for leave to amend her adversary complaint to add a
claim for recoupment.
This court reviews the Bankruptcy Court’s
denial of a motion for leave to amend for abuse of discretion.
See Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 630 (4th Cir.
2008).
Leave to amend should be freely granted when justice so
requires.
Fed. R. Civ. P. 15(a)(2).
“A motion to amend should be
denied only where it would be prejudicial, there has been bad
faith, or the amendment would be futile.”
Nourison Rug Corp. v.
Parvizian, 535 F.3d 295, 298 (4th Cir. 2008).
“Ordinarily, a party who has been fraudulently induced to
enter a contract or sale has a choice of remedies.”
8
Daniel Boone
This conclusion should not be read to condone the bank’s conduct.
Falsely notarizing the signature of a borrower would be plainly
deceptive.
16
Complex, Inc. v. Furst, 43 N.C. App. 95, 104, 258 S.E.2d 379, 387
(1979).
She may rescind the contract; or she may ratify it,
“keeping whatever property or advantage [s]he has derived under
it, and may recover in an action for deceit the damages caused by
the fraud.”
Id.
The latter option can be accomplished through a
claim for recoupment, which permits the ratifying party to recover
the pecuniary injury inflicted upon her by the wrong.
Holt, 232 N.C. 497, 501, 61 S.E.2d 448, 452 (1950).
Holt v.
Recoupment
claims arise when there is a problem with the transaction that
gave rise to a debt.
See RL Regi N.C., LLC v. Lighthouse Cove,
LLC, 229 N.C. App. 71, 79, 748 S.E.2d 723, 728 (2013) (“Recoupment
allows a defendant to defend against a claim by asserting – up to
the amount of the claim – the defendants own claim against the
plaintiff
growing
out
of
the
same
transaction.”
(citations
omitted)), rev’d on other grounds, 367 N.C. 425 (2014); Van Gilder
v. Bullen, 159 N.C. 235,9 238, 74 S.E. 1059, 1061 (1912) (approving
recoupment for a party who was fraudulently induced to purchase
real property subject to a mortgage); Frick Co. v. Shelton, 197
N.C. 296, 297, 148 S.E. 318, 318–19 (1929) (approving recoupment
for a party who was fraudulently induced to purchase personal
property subject to a mortgage).
9
This case starts on page 235 of the North Carolina Reports, but the
table of cases incorrectly states that it starts on page 291, and Westlaw
and Lexis have picked up that error in their databases.
17
Recoupment
claims
typically
involve
a
defect
in
the
consideration that forms the subject of the contract. As a result,
recoupment damages generally “consist of the difference between
the value of the property sold as it was and as it would have been
if it had come up to the fraudulent representations.”
Davis, 230 N.C. 67, 73, 52 S.E.2d 210, 214 (1949).
Hutchins v.
In Van Gilder,
for example, a party was defrauded into purchasing what he believed
to be a fee simple in a parcel of land subject to a mortgage, when
he actually purchased only a life estate.
S.E. at 1060–61.
See 159 N.C. at 236, 74
Although the defrauded party ratified the
contract, the North Carolina Supreme Court held that he was
nevertheless entitled to damages in “the amount paid out . . . to
make
his
title
as
it
was
represented
to
be,”
that
is,
the
difference between the value of a life estate and the value of a
fee simple.
Id. at 238, 74 S.E. at 1061.
Similarly, in Frick
Co., a party was defrauded into purchasing defective milling
equipment in exchange for a promissory note.
S.E. at 318.
197 N.C. at 296, 148
After the defrauded party ratified the contract, the
court held that “the measure of damages is the difference between
the value of the article as warranted and the value of the article
as delivered.”
Id. at 297, 148 S.E. at 318–19.
Here, Ms. Smith argues that, if she ratified the ‘4464 Loan,
she is entitled to recoup damages she claims to have suffered as
a
result
of
fraud
in
the
execution
18
of
the
originating
loan
documents.
Specifically, her proposed amended complaint seeks
damages equaling the “difference between the Loan amount she
ratified and the amount of the Loan proceeds she has actually
received,” as well as damages for “severe emotional distress.”
(Doc. 18-15 ¶ 80.)
Because Ms. Smith claims that Mr. Smith
received the entirety of the ‘4464 Loan proceeds (see id. ¶ 78),
she effectively seeks to nullify her ratification by claiming a
right to recoup the full value of the ‘4464 Loan.
Ms. Smith cites
no precedent for such a far-reaching result, and the court is not
inclined to create one here.
Although the ‘4464 Loan obligated
both Mr. and Ms. Smith, it permitted SunTrust to extend credit to
“any or either of them.”
13.)
(See Doc. 18-16 at 7; see also id. at
Ms. Smith cannot claim a right to “recoup” the ‘4464 Loan
when the agreement she ratified did not give her a personal right
to receive those funds.
To the extent that Ms. Smith has a legal or equitable claim
on some portion of the funds that SunTrust loaned to Mr. Smith,
the appropriate course would be to assert that claim against the
party in possession of those funds: Mr. Smith.
As she conceded at
oral argument, Ms. Smith cannot do so because she waived any such
claim against her ex-husband – such as conversion of marital
property – as part of the Settlement Agreement.
Her share of the
‘4464 Loan was negotiated as part of the couple’s equitable
distribution of all their assets and liabilities.
19
Regardless of
whether it was wise to ratify the loan in exchange for her property
distribution, she knowingly entered the deal and received the
benefits she bargained for when she ratified the ‘4464 Loan.
Ms.
Smith’s
similarly flawed.
demand
for
emotional
distress
damages
is
Ms. Smith alleges that the bank fraudulently
notarized Mr. Smith’s forgery “for the purpose of indebting” Ms.
Smith, and that she suffered “severe emotional distress” as a
result.
(Doc. 18-15 ¶ 75, 80.)
True, emotional distress damages
may be recovered as part of a fraud claim.
Williams v. HomEq Serv.
Corp., 184 N.C. App. 413, 424, 646 S.E.2d 381, 388 (2007).
But
Ms. Smith does not assert a fraud claim in this case,10 and she
cites no authority for the proposition that a party may recover
emotional
distress
damages
in
connection
with
a
claim
for
recoupment.11
When fully contemplated, the recoupment claim offers only an
ersatz aura of substance.
Ms. Smith’s attempt to “recoup” the
10
Nor does it appear that she could assert a fraud claim against
SunTrust, as she does not claim to have been deceived by the forgery.
See Ragsdale v. Kennedy, 286 N.C. 130, 138, 209 S.E.2d 494, 500 (1974)
(listing actual deception as an element of a fraud claim).
11
No party has addressed whether in the Modification Agreement Ms. Smith
waived any claim for recoupment she may have had against SunTrust in
exchange for a lower interest rate and other benefits associated with
the modification.
(See Doc. 18-6 at 5–6.)
In the Modification
Agreement, Ms. Smith acknowledged that she had “no defenses, adjustments,
or offsets” to her obligation to pay the ‘4464 Loan. (Doc. 18-16 at 5.)
Recoupment claims function as a defense or offset to liability. See RL
Regi N.C., LLC, 229 N.C. App. at 79, 748 S.E.2d at 728 (2013). Because
waiver is a defense that must be asserted, the court declines to reach
the question here.
20
full
value
of
the
‘4464
Loan
would
effectively
nullify
her
ratification and bypass her obligation to state a valid, standalone basis for recovering the emotional distress damages she
seeks. In light of all these pleading deficiencies, the Bankruptcy
Court did not abuse its discretion in concluding that Ms. Smith’s
proposed amendment to her complaint would be futile.
Ms. Smith cannot complain that this result is unfair.
While
Mr. Smith acted deceptively in signing her name to the ‘4464 Loan
and
the
bank
acted
wrongly
in
accepting
and
notarizing
her
purported signature, and while Ms. Smith had options for recovery
against both for that misconduct, she swapped them for what she
and
Mr.
Smith
bargained
for
and
received
in
the
Settlement
Agreement.
III. CONCLUSION
For the foregoing reasons, therefore, the orders of the
Bankruptcy Court dismissing Ms. Smith’s adversary complaint and
denying her motion to amend are AFFIRMED.
/s/ Thomas D. Schroeder
United States District Judge
March 8, 2016
21
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