This case is a follow-up to Hartford Fire Ins. Co. v. Curtis, 231 W.Va. 596, 748 S.E.2d 662 (2013), which dealt with bonds issued under the West Virginia Residential Mortgage Lender, Broker And Servicers Act, W.Va. Code 31-17-1 et seq.
The respondent, Franklin James, Jr., alleges that he was a victim of predatory lending practices in 2008. The lender was Taylor Bean and Whitaker (“TBW”). In January, 2009, TBW filed for bankruptcy relief. Two years later, TBW’s chapter 11 bankruptcy plan was confirmed. The confirmation order barred the filing of any claims involving conduct that occurred before the confirmation date.
James filed suit in January, 2013. Rather than joining TBW, James joined the petitioner, Fidelity and Deposit Company of Maryland (“Fidelity”), which had issued the mortgage lender bond covering TBW. Fidelity moved to dismiss citing Curtis. Fidelity argued that obtaining a judgment against the lender was an express condition of the bond. Because James had not obtained a judgment against TBW, he was not entitled to any relief under the bond. The trial court then certified the following question:
“May a plaintiff maintain an action solely against the surety on a bond made pursuant to W.Va. Code §31-17-4 without a judgment against the principle on the bond, when the principle has filed bankruptcy, and a judgment against the principal is precluded due to a Chapter 11 plan confirmation.”
Fidelity’s arguments fall into three categories.
First, Fidelity argues that both the language of the statute and the bond itself require a judgment against the lender before a recovery of bond proceeds can be made. Curtis made it clear that a bond issued to a mortgage lender or broker is, in fact, a judgment bond.
Second, Fidelity argues that, under W.Va. Code 31-17-4(e), any mortgage lender or broker bond must be “in a form and with conditions as the [insurance] commissioner may prescribe. Essentially, Fidelity argues this gives the commissioner unbridled discretion to dictate the form and content of the bond, and courts may not “rewrite” the bond to their liking.
Third, Fidelity argues that James could have brought his claim via an adversary proceeding in the bankruptcy case before the chapter 11 plan was confirmed. Thus, it is wrong for James to suggest that he did not have any means of obtaining a judgment against TBW.
James points to language in W.Va. Code 31-17-4(e) stating that mortgage lender and broker bonds are to be issued “for the benefit of consumers.” This is consistent with the legislature’s intent: to provide a remedy for consumers who are victimized by illegal lending practices, especially when the lender is defunct or bankrupt. Where it is impossible for the consumer to obtain a judgment, this remedial purpose must control and any bond conditions that would otherwise prevent a direct suit against the surety must be disregarded.
Regarding the bond form, James argues that while the commissioner does, indeed, have discretion in writing the bond, he cannot contravene the legislative intent. Here, the intent is clear--the legislature intended to provide protection for all predatory lending victims, and did not intend to leave victims of defunct or bankrupt lenders without a remedy.
Regarding TBW’s bankruptcy proceedings, James points out how difficult it would be for West Virginia consumers to litigate claims in distant forums (in this instance, Florida). Furthermore, under the facts of this case, TBW’s chapter 11 plan was confirmed nearly two years before James had any knowledge of its predatory lending practices. Thus, it was impossible for James to obtain a judgment against TBW.
This is another important consumer case. We can expect a new syllabus point addressing the liability of sureties under the mortgage lender and broker bonds they write. Overall, the outcome of the consumer cases decided in the spring 2014 term was a mixed bag. It will be interesting to see if the Supreme Court will continue to give a pro-consumer interpretation to these statutory bond provisions.