Fox v. Fidelity First Home Mortgage Co.

GRAEFF, J. This case arose from a fraudulent foreclosure rescue scheme initiated by appellant, James William Fox, II, who was employed as a loan officer with Fidelity First Home Mortgage Company (“Fidelity First”), appellee. One of the victims, Charlene Williams, sued Fidelity First, which was found liable under a theory of respondeat superior and ordered to pay damages. Fidelity First then filed a complaint in the Circuit Court for Prince George’s County against Mr. Fox and another individual, seeking indemnification. 1 It alleged that “the fraudulent mortgage rescue scheme scam” perpetrated by Mr. Fox was within the scope of his employment with Fidelity First, and Mr. Fox and the other individual were “solely responsible to Fidelity First for any and all damages imposed by the jury on Fidelity First or, in the alternative, are joint tortfeasors.” Mr. Fox argued that the claims for indemnification and contribution were discharged in bankruptcy. The circuit court granted summary judgment in favor of Fidelity First.

It found that, because the claim against Mr. Fox was based on fraud, it was nondischargeable in bankruptcy. Accordingly, it ordered judgment in favor of Fidelity First and against Mr. Fox and another employee for indemnification and contribution in the amount of $340,583.98, plus costs. On appeal, Mr. Fox presents the following questions for our review, which we have rephrased as follows: 1. Did the circuit court err in granting summary judgment in favor of Fidelity First where Mr. Fox previously received a discharge in a no-asset Chapter 7 bankruptcy ⁴⁹⁶ case, and no determination was made that such claim was nondischargeable under the Bankruptcy Code? 2.

Did the circuit court err in granting summary judgment on Fidelity First’s indemnification claim where the jury found Fidelity First negligent, and the record reflected a dispute of material fact whether Fidelity First’s conduct was passive? For the reasons that follow, we shall affirm the judgment of the circuit court. FACTUAL AND PROCEDURAL BACKGROUND A. The Initial Litigation The factual background underlying this appeal was set forth by this Court in the appeal from the initial tort action. Fidelity First Home Mort.

Co. v. Williams, 208 Md.App. 180 , 56 A.3d 501 (2012). We shall reiterate only those facts necessary to resolve this appeal. Ms. Williams sued Fidelity First, Mr. Fox, and James Dan, alleging that Mr. Fox and Mr. Dan had engaged in a fraudulent foreclosure rescue scheme that caused her to lose title to, and be deprived of, the equity in her home. Id. at 183 , 56 A.3d 501 .

She alleged that Fidelity First, Mr. Fox’s employer, was vicariously liable for fraud, breach of fiduciary duty, and violations of the Protection of Homeowners in Foreclosure Act. Id. Ms. Williams subsequently dismissed her claims against Mr. Fox and Mr. Dan and proceeded solely against Fidelity First, asserting that Mr. Fox and Mr. Dan were acting within the scope of their employment, and Fidelity First was vicariously liable on the basis of respondeat superior. Id. at 184, 56 A.3d 501 .

At trial, the evidence showed that Mr. Fox was hired as a loan officer for Fidelity First, a mortgage broker. He became an excellent producer and was rewarded with higher commission rates. Id. at 186 , 56 A.3d 501 . On at least three occasions, however, he was caught forging documents.

He ⁴⁹⁷ was reprimanded and suspended, but he was not terminated. Id. The foreclosure rescue scheme began in 2006. Id. at 187 , 56 A.3d 501 .

Mr. Fox would identify distressed homeowners who were unable to qualify for traditional mortgage refinancing due to poor credit, but who owned equity in their homes. Id. Mr. Fox advised these distressed homeowners that he could assist them in refinancing their mortgages by using his or Mr. Dan’s own credit. Id.

The homeowners were convinced that they could avoid losing their homes to foreclosure by selling their homes to Mr. Fox, Mr. Dan, or a straw buyer, and remaining in the properties as tenants. Id. Mr. Fox and Mr. Dan promised that they would pay the mortgages on the properties for six months to a year, at which time the homeowners would be able to re-acquire title to their properties. Id.

To facilitate the property purchases, Mr. Fox, Mr. Dan, or a straw buyer would apply for and obtain a mortgage in their own name. Id. In at least three of the approximately eight transactions, Fidelity First was the mortgage broker. Id.

The loan applications contained materially false representations with respect to the borrower’s income, assets, and intent to occupy the home, among other things. Id. Ms. Williams was the homeowner in the third transaction, which took place in August 2006. Id. at 188 , 56 A.3d 501 .

Ms. Williams had been having financial problems and ceased making her mortgage payments. Id. Her lender initiated foreclosure proceedings against her. Id.

Ms. Williams received a solicitation letter from Fidelity First, advising her that she had been pre-approved for a lower interest rate and/or debt consolidation. Id. The letter was signed “Shawn Murphy Director of Customer Service Fidelity First.” Id. at 189 , 56 A.3d 501 . Shawn Murphy was not an employee of Fidelity First, but rather, he was a fictitious person named after a friend of Daniel Eubanks, the president and sole owner of Fidelity First.

Id. Mr. Eubanks assigned different names to the different types of solicitation letters that Fidelity First ⁴⁹⁸ sent to potential borrowers, so when the potential borrower called, the person receiving the call would be able to identity the type of solicitation the potential borrower had received. Id. Ms. Williams called Fidelity First in response to the solicitation letter.

Id. Mr. Fox took the call and informed Ms. Williams that he could assist her in refinancing the mortgage on her property. Id. Mr. Fox determined, however, that Ms. Williams would not qualify for a refinance loan.

On May 11, 2006, Ms. Williams executed a written contract to sell the property to Mr. Dan for $225,000. Id. The next day, Mr. Dan applied for a mortgage loan with First National Bank of Arizona. Id. at 190 , 56 A.3d 501 .

Mr. Fox was the loan officer on the application, and Fidelity First was the mortgage broker. Id. On his application, Mr. Dan made numerous misrepresentations about the amount of his annual income, his savings, and the real property he claimed to own. Id.

Mr. Dan’s mortgage application was approved by a loan processor for Fidelity First. Id. In the ordinary course of business, this mortgage application also would have been reviewed by Mr. Eubanks, but Mr. Eubanks denied having reviewed this particular file. Id.

On August 4, 2006, settlement occurred. Id. Ms. Williams signed a deed, which conveyed the property to Mr. Dan, as well as the HUD-1 settlement sheet and other related papers. Id.

She also signed a contingent deed that would transfer ownership back to her after several years, which document was to be held by the settlement attorney for three years. Id. Ms. Williams believed that she was refinancing the mortgage on her house using Mr. Dan’s credit. At settlement, Ms. Williams received a check for $63,893.79 in net proceeds from the sale.

Id. at 191 , 56 A.3d 501 . Shortly after settlement, she endorsed that check to Mr. Dan, and he cashed it. Id. He gave Ms. Williams $3,000 in cash and told Ms. Williams that the remaining amount would be held in escrow to pay her mortgage.

Id. In actuality, Mr. Dan deposited the remaining proceeds of sale into his own personal ⁴⁹⁹ checking account. He used $44,420.07 to pay settlement costs. Id. at 190-91 , 56 A.3d 501 .

Mr. Fox and Mr. Dan split the remaining balance. In October 2006, Ms. Williams received another check in the amount of $11,804.62 from the title company, which represented a refund for overpayments made to her creditors out of the settlement proceeds. Id. at 191 , 56 A.3d 501 . Mr. Fox called Ms. Williams and convinced her to endorse the check over to him.

Id. She did, and he gave her $3,000 in cash, telling her that the remaining amount would be deposited into escrow. Id. Instead, it was deposited in Mr. Fox’s personal checking account.

Id. Although Ms. Williams thought the mortgage was in her name, and she was paying the loan with the money that Mr. Fox and Mr. Dan were holding in escrow for her, the mortgage actually was in Mr. Dan’s name, and Ms. Williams essentially was making rental payments. Id. at 192 , 56 A.3d 501 . Ms. Williams learned that she no longer owned the property in 2007, when she was served with an eviction notice.

Id. She learned that she was “a tenant in [her] own home,” and that Mr. Dan’s mortgage was in foreclosure. Id. Although she tried to contact the mortgage lender, its representatives would not speak to her because her name was not on the loan.

Id. In December 2009, Mr. Fox and Mr. Dan were indicted in federal court for wire fraud and conspiracy to commit wire fraud. Id. Mr. Fox ultimately pleaded guilty pursuant to an agreed statement of facts.

Id. at 193 , 56 A.3d 501 . Ms. Williams’ case against Fidelity First went to trial on February 7, 2011. Mr. Fox and Mr. Dan testified about their involvement in the foreclosure scheme and the culture at Fidelity First. Id.

Mr. Fox described the considerable pressure for loan officers to produce, and he stated that the failure to produce would lead to termination. Id. Mr. Eubanks denied knowledge that Mr. Fox and/or Mr. Dan were engaging in fraud prior to the transaction with Ms. Williams. Id. at 196 , 56 A.3d 501 .

He explained that the ⁵⁰⁰ transaction with Ms. Williams was the first of the foreclosure rescue transactions in which the loan originated through Fidelity First. Following that transaction, Mr. Fox originated two more loans through Fidelity First, but Mr. Eubanks testified that neither of those transactions were on his “radar.” Id. The jury returned a verdict in favor of Ms. Williams. Id.

The jury indicated on the verdict sheet that Fidelity First, acting through one or more of its agents, committed fraud, breached its fiduciary duty, and violated the Maryland Homeowner’s Protection in Foreclosure Act. It also found that Fidelity First was negligent in its retention or supervision of Mr. Fox. The jury awarded Ms. Williams $70,000 in compensatory damages. It awarded $150,000 in punitive damages based on its finding that the conduct engaged in by Fidelity First, through one or more of its agents, amounted to fraud and/or breach of fiduciary duty.

On appeal to this Court, Fidelity First asserted, inter alia, that the evidence was insufficient to support the jury’s findings that it negligently supervised and retained employees. Id. at 184-85 , 56 A.3d 501 . We disagreed, holding that there was evidence from which a reasonable juror could infer that Mr. Eubanks “tolerated and even encouraged forgery in the pursuit of closing more loans,” id. at 199 , 56 A.3d 501 , and that Mr. Eubanks was aware of the foreclosure rescue scheme transactions. Id. at 200 , 56 A.3d 501 .

With respect to respon-deat superior, Fidelity First argued that the evidence of Mr. Fox’s fraud, “did not support a reasonable inference that [he] was acting within the ‘scope of his employment’ at the time of the tortious conduct” because, although his initial contact with Ms. Williams arose out of his role as loan officer, once he began participating in the foreclosure rescue scheme, he ceased acting within the scope of his employment. Id. at 201 , 56 A.3d 501 . We disagreed, holding that a reasonable juror could find that Mr. “Fox was acting within the scope of his employment when he perpetrated the fraudulent scheme against [Ms.] Williams.” Id. at 204 , 56 A.3d 501 . We explained that the jurors “were free to disbelieve” Mr. Eubanks’ ⁵⁰¹ testimony that he did not review the loan file in Ms. Williams’ case, id. at 205 , 56 A.3d 501 , and to find that Mr. Eubanks “had reason to expect that [Mr.] Fox was engaging in foreclosure rescue transactions because [Mr.] Fox had discussed his ‘side business’ with [Mr.] Eubanks and informed him that it was extremely profitable.” Id.

We explained that: There was ample evidence at trial that [Mr.] Eubanks encouraged competition among the loan officers to see who could achieve the highest closing rate; that loan officers who failed to produce enough loans in a given month would be subjected to ridicule; and that failure to produce ultimately would lead to termination.... Given all of this evidence, a reasonable juror could infer that [Mr.] Fox’s foreclosure rescue scheme, while in furtherance of his own interests, also was incidental to the performance of his job duties and in furtherance of Fidelity First’s interest in closing loans.[ 2 ] Id. at 206 , 56 A.3d 501 . B. The Litigation at Issue on Appeal On March 22, 2011, subsequent to the verdict in the underlying action, Fidelity First filed a complaint against Mr. Fox and Mr. Dan, alleging that Ms. Williams’ damages were proximately caused by the acts or omissions of Mr. Fox and Mr. Dan, and therefore, Mr. Fox and Mr. Dan were “solely responsible” to Fidelity First for the damages the jury awarded to Ms. Williams. Mr. Fox answered by denying the allegations in the complaint, and he did not assert any affirmative defenses.

On December 27, 2011, Fidelity First filed a motion for summary judgment, asserting that there were no material facts in dispute because Mr. Fox previously had testified to his ⁵⁰² involvement in the fraudulent mortgage rescue scheme and his intent to defraud his victims, including Ms. Williams. 3 It argued, therefore, that “any damages to Ms. Williams resulted solely from [his] active and primary negligence and any negligence on the part of Fidelity First, if any at all, was merely passive and secondary in nature.” Accordingly, Fidelity First sought indemnification and contribution. Attached to the motion were the transcripts from the initial litigation. On February 24, 2012, Mr. Fox, pro se, filed an opposition, asserting that there were genuine issues of material fact in dispute. In particular, he pointed to Mr. Eubanks’ own conduct, and he argued that any issue of active, independent negligence on the part of Fidelity First had not been litigated.

He asserted that Mr. Eubanks “orchestrated Fidelity’s corruption,” directed Mr. Fox to “conduct unlawful activity,” “encouraged employees to falsify documents,” and “completely controlled” Mr. Fox’s work activities. Mr. Fox did not raise his discharge in bankruptcy. Mr. Fox also made his own motion for summary judgment, on the grounds of res judicata or collateral estoppel, asserting that the issues raised in the complaint were, or should have been, raised in the initial litigation. ⁵⁰³ On March 23, 2012, the court denied both motions for summary judgment. It stated that “there are still genuine disputes of material fact.” On October 25, 2012, Fidelity First filed a second motion for summary judgment, asserting that “[a]ny damages it owes to Ms. Williams resulted solely from the active and primary negligence of Fox and Dan.

No direct liability on the part of Fidelity First was alleged by Ms. Williams and the jury verdict was based upon a finding of vicarious liability.” It attached Mr. Fox’s trial testimony in the Williams’ case, as well as the agreed statement of facts from the federal case. Fidelity First stated that it was “undisputed that Fox and Dan perpetrated the fraud against Ms. Williams which gave rise to her cause of action against Fidelity First for respondeat superior,” and “[b]oth Fox and Dan admitted to the underlying fraudulent conduct and for which they were found to have acted within the scope of employment.” It argued that there were no material facts in dispute with respect to its claim for indemnification and contribution. Mr. Fox did not file an opposition to Fidelity First’s second motion for summary judgment. Instead, on November 9, 2012, Mr. Fox filed in the United States Bankruptcy Court for the District of Maryland a motion to reopen a Chapter 7 voluntary bankruptcy case that he originally filed on January 16, 2009. 4 Mr. Fox asserted that, pursuant to 11 U.S.C. § 524 (a)(2) of the Bankruptcy Code, a discharge under § 727 of the Bankruptcy Code “ ‘operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not the discharge of such debt is waived.’ ” He sought to include ⁵⁰⁴ Fidelity First as a creditor, as the events giving rise to Fidelity First’s claim for indemnification and contribution occurred prior to his original bankruptcy petition date.

He conceded that “Fidelity First was not scheduled as a creditor” in the bankruptcy case “because it[s] claims were not asserted until well after” the bankruptcy case was closed. Furthermore, as the “Chapter 7 Trustee reported this as a ‘no asset’ case, ... the claims of unscheduled creditors,” including Fidelity First, “were discharged.” Thus, he sought to reopen the case to “add Fidelity First as a creditor, and to enforce the discharge injunction.” On November 13, 2012, Mr. Fox filed in the circuit court a notice of discharge, discharge order, and discharge injunction, asserting for the first time that he had filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. He argued that the order by the Bankruptcy Court granting a discharge operated as an injunction against the continuation of the case. The circuit court stayed the proceedings pending a decision from the Bankruptcy Court.

On November 15, 2012, the Bankruptcy Court issued a memorandum order denying Mr. Fox’s motion to reopen his Chapter 7 case to add Fidelity First as a creditor, finding that “[n]o ground exists to reopen the case.” It stated: [T]he failure by the Debtor[s] to list the Creditor does not automatically deprive the Debtor(s) of a discharge of the claim held by the Creditor. 11 U.S.C. § 523 (a)(3) prevents the discharge of an unlisted claim if the failure to schedule the claim results in that Creditor being deprived of the opportunity to timely file a proof of claim. In addition, if the claim is of a kind which would have been held nondis-chargeable by reason of false pretenses, fraud, willful and malicious injury, as more fully set forth in 11 U.S.C. §§ 523 (a)(2), (4), or (6), the failure to schedule the claim will prevent the discharge of the unscheduled claim where such failure also prevented the Creditor from filing a timely request for determination of dischargeability. ⁵⁰⁵ Because this bankruptcy case was a no asset case, the notice sent to creditors who had been scheduled did not contain a deadline for filing proofs of claims. Accordingly, the failure to schedule the Creditor did not deprive the Creditor of the opportunity to timely file a proof of claim; and it therefore appears that the Creditor’s claims may have been discharged, even though it had not been scheduled. If the Creditor’s claim arises from fraud, misrepresentations, willful or malicious injury, as more fully set forth in 11 U.S.C. § 528 (a)(2), (4), or (6), that claim may not have been discharged.

Further, if one of the other exceptions to discharge in 11 U.S.C. § 523 (a) is found to be applicable to the Creditor’s claim, the claim will not have been discharged. The Debtor(s) may raise the issue of discharge in a non-bankruptcy court as a potential defense to collection] litigation. The non-bankruptcy court has concurrent jurisdiction with the bankruptcy court to determine if a Debtor(s)’ discharge applies to a particular claim. Consequently, if the Creditor alleges that the claim on which suit is brought is nondischargeable, the non-bankruptcy court may rule whether the claim is discharged.

Accordingly, the Bankruptcy Court determined that it was not necessary to reopen the case, and it denied Mr. Fox’s motion. On January 9, 2013, the circuit court lifted the stay. It gave Mr. Fox 18 days to respond to the motion for summary judgment. On January 25, 2013, Mr. Fox, through counsel, filed a “Response To Order Lifting Stay And Motion For Summary Judgment; And Notice of Discharge, Discharge Order, And Discharge Injunction.” He did not request a hearing.

Mr. Fox asserted that, as “provided in the Bankruptcy Court Order, the claims of unscheduled creditors are discharged in a no asset case, unless an exception from discharge under Section 523(a)(2), (4) or (6) of the Bankruptcy Code applies.” He argued that, “unless a determination is made that one of the exceptions from discharge listed in Section ⁵⁰⁶ 523(a)(2), (4) or (6) of the Bankruptcy Code applies, the claims of Plaintiff have been discharged in the Chapter 7 case,” and therefore, the circuit court was required to “make the threshold determination of whether any of Plaintiffs claims are excepted from discharge under Section 523(a)(2), (4) or (6) of the Bankruptcy Code.” He further argued that, under the Bankruptcy Code, “a creditor must commence an adversary proceeding to determine the dischargeability of a debt which is procedurally subject to the Bankruptcy Rules,” and if Fidelity First “believes that any exceptions to discharge apply, it should amend the [circuit court] Complaint or file other appropriate pleadings seeking such relief and asserting such allegations which would support any such determination.” Moreover, he stated that, if Fidelity First “believes that it is entitled to summary judgment on any of the exceptions from discharge duly raised by [it], then it can file a motion for summary judgment at that time briefing the applicable bankruptcy law issues and asserting undisputed facts that support such legal requirements.” Mr. Fox stated that, in the absence of Fidelity First asserting “in any pleading that its indemnification claim is excepted from discharge,” Fidelity First’s “claims ... have been discharged in the Chapter 7 case,” and “ruling on the motion for summary judgment on the indemnification claim is not appropriate at this time. Fidelity First filed a reply to Mr. Fox’s response, noting that there was “no response to Plaintiffs Motion for Summary Judgment,” but rather, the response solely addressed whether the claim was dischargeable. In that regard, Fidelity First stated as follows: It is undisputed that claims arising from the debtor’s fraud and/or misrepresentations are non-dischargeable under a Chapter 7 petition. Without providing any supporting authority, Defendant Fox contends that Plaintiff must amend its original pleading to include an allegation that its claim is subject to an exception from a Chapter 7 discharge.

This ... [c]ourt has concurrent jurisdiction with the U.S. Bankruptcy Court to determine whether Mr. Fox’s Chapter 7 discharge incorporates the instant suit, a claim for indem ⁵⁰⁷ nification arising out of Mr. Fox’s admitted perpetration of fraud and misrepresentation upon Charlene Williams, and therefore, it is not necessary for Plaintiff to amend its pleading. See attached Bankruptcy Court Order, dated November 14, 2012. Nevertheless, Mr. Fox’s attempt to retroactively discharge this claim is yet another attempt to delay these proceedings. At the time he filed his Chapter 7 Bankruptcy proceeding, Mr. Fox was already on notice of Charlene Williams’ claims against him for fraud, among other things, as the actions that gave rise to her claim all occurred in 2006 and 2007, long before his 2009 bankruptcy filing.

Furthermore, by virtue of the federal indictment dated December 8, 2009 and his subsequent guilty plea, Mr. Fox failed to either reopen or amend his petition at that time, despite the fact that the Williams’ claim, as well as this action in which we stand in her shoes against him, have been going on since 2009. Thus, Mr. Fox had ample opportunities to raise this issue well before the time of trial and/or summary judgment. This [cjourt should therefore find that this claim, being non-dischargeable, is not subject to Mr. Fox’s Bankruptcy petition and grant summary judgment for the reasons set forth in Plaintiffs motion and supporting memorandum. On June 10, 2013, the court granted Fidelity First’s motion for summary judgment.

The court concluded: “As this matter includes a claim for fraud, it is