This began as a predatory lending case. 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 principle is precluded due to a Chapter 11 plan confirmation.”
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. To recover under a mortgage lender bond, is a judgment against the lender necessary in cases where the lender has declared bankruptcy?
The Supreme Court’s analysis was very straightforward: “This court finds that our recent opinion in Hartford Fire Ins. Co. v. Curtis, 231 W.Va. 596, 748 S.E.2d 662 (2013), is the controlling authority on this issue.” Curtis involved the exact same bond language. According to the Court, Curtis “requires a judgment against the principal before an action can be brought on the bond against the surety.” Here, James failed to obtain a judgment against the lender, TBW, which effectively “forclose[s]” any claim on the bond.
James noted that TBW “is judgment proof as a result of bankruptcy.” Accordingly, he argued that obtaining a judgment against TBW would be pointless and would only serve to frustrate the legislature’s purpose in requiring mortgage lenders to post bonds. The Court disagreed. Citing W.Va. Code §31-17-4(e)(3), the Court concluded that the banking commissioner was given discretion to prescribe the appropriate form, terms and conditions of the bond. Because the commissioner “did not provide any exceptions to this requirement for instances where the principal is bankrupt,” the Court refused to do so. Based upon this analysis, the court adopted a new syllabus reading as follows:
“An aggrieved party may not maintain an action solely against a surety on a judgment bond made pursuant to W.Va. Code §31-17-4(e)(3) (2010) absent a judgment against the bond principal unless the specific bond language provides that a judgment against the principal shall not be required to maintain an action on the bond if the principal is no longer in operation or has filed for bankruptcy.”
This is by no means a sweeping opinion, but it will have an effect on predatory lending victims now and in the future. Unfortunately, many lenders who engaged in predatory lending practices went bankrupt years before the victims acquired knowledge of those practices. Obviously, bankruptcy makes it impossible to obtain any kind of direct relief from the lender. The result of this case is to shut the only other door that could provide relief--i.e., the lender’s bond. Perhaps the banking commissioner will amend the language of the bond to provide full protection for victims. In the meantime, it appears that victims of predatory lending have no means of obtaining relief when the lender has opted for bankruptcy.