First Nat'l Bank v. DDS Constr., LLC.

• Decision Date: 09 March 2012
• Docket Number: No. 2011–C–1418.,2011–C–1418.
• Citation: 91 So.3d 944
• Parties: FIRST NATIONAL BANK, USA v. DDS CONSTRUCTION, LLC.
• Court: Louisiana Supreme Court

91 So.3d 944

FIRST NATIONAL BANK, USA
v.
DDS CONSTRUCTION, LLC.

No. 2011–C–1418.

Supreme Court of Louisiana.

Jan. 24, 2012.
Rehearing Denied March 9, 2012.

[91 So.3d 946]

Newman, Mathis, Brady & Spedale, PLC, Mark Christopher Landry, Metairie, LA, for Applicant.

Sher Garner Cahill Richter Klein & Hilbert, LLC, John Thomas Balhoff, II, Elwood Francis Xavier Cahill, Jr., New Orleans, LA, for Respondent.

CLARK, Justice.

[2011-1418 (La. 1]The issue presented in this matter arose in connection with a motion to rank creditors in a suit for executory process. The district court held a notarial act which cancelled a mortgage could be corrected by an act of correction under La. R.S. 35:2.1 and the lender which erroneously cancelled the mortgage maintained its rank relative to a subsequent mortgage under the statute's provisions. The court of appeal disagreed, holding under these facts the subsequent mortgage primed the mortgage by the first lender, which must be ranked as of the time of the act of correction. After review, we hold the court of appeal erred and reverse, reinstating the ruling of the district court.

BACKGROUND INFORMATION ¹

DDS Construction, LLC (“DDS”), developed the Homewood Place subdivision in Reserve, Louisiana. To fund that development, DDS obtained various loans from First National Bank, USA (“First National”). To secure its repayment of those loans, DDS granted First National a Multiple Indebtedness Mortgage over individual lots located in the Homewood Place subdivision. One such lot is the property at issue in this matter, Lot 8, Square A, which also has a residential address of 131 Homewood Place, in Reserve, Louisiana.

[2011-1418 (La. 2]FACTS AND PROCEDURAL HISTORY ²

On January 6, 2006, DDS granted a Multiple Indebtedness Mortgage to First National as security for several of its loans (“Construction Mortgage”). This Construction Mortgage originally encumbered Lots 1, 2, 5, 6, 7, 8, 9, 11 and 13, Square A, Homewood Place, in Reserve, Louisiana. The Construction Mortgage was filed in the mortgage and conveyance records of St. John the Baptist Parish on January 10, 2006. In executing the Construction Mortgage, DDS was represented by one of its members, Shondrell P. Campbell (“Campbell”), acting under a specific Certification of Authority to Act for the company.³

Lena Bering (“Bering”) bought 131 Homewood Place from DDS on September 29, 2006. In the Act of Cash Sale, the property was described as Lot 8A, Square A. That same day, and in connection with the sale, Bering executed a promissory note (“Bering note”) in favor of her lender, EquiFirst Corporation (“EquiFirst”) and granted to EquiFirst a mortgage over the property (“Bering Mortgage”). In the Bering Mortgage, the property was also

[91 So.3d 947]

described as Lot 8A, Square A. Although EquiFirst was identified as the lender in the Bering Mortgage, Mortgage Electronic Registration Systems, Inc. (“MERS”) was designated as the nominee of EquiFirst and the mortgagee.⁴ Both the Act of Cash Sale and the Bering Mortgage were filed in the mortgage and conveyance records of St. John the Baptist Parish on October 17, 2006.

Although the proceeds from DDS's sale of the property to Bering should [2011-1418 (La. 3]have been used to pay off the Construction Mortgage, both parties agree DDS misappropriated the funds. As a result, the property was not released from the Construction Mortgage at the time of its sale to Bering.

DDS began defaulting on the various promissory notes secured by the Construction Mortgage. First National contends Campbell, on behalf of DDS, met with bank officials on February 27, 2008. At that time, she informed the bank DDS sold one of the lots First National held as collateral, without obtaining a release of the bank's mortgage. First National undertook an investigation of the matter and learned of the Act of Cash Sale by DDS to Bering and the Bering Mortgage, both of which identified the property at issue as “Lot 8A.”

Based on the information received from Campbell and an examination of the mortgage and conveyance records of St. John the Baptist Parish, First National determined the notary who passed both the Bering sale and the Bering Mortgage was Abril B. Sutherland (“Sutherland”), an attorney and notary with Louisiana Property and Title Company, L.L.C. First National's attorney sent a letter to Sutherland, dated March 6, 2008, advising her the bank had a Construction Mortgage on Lot 8, Square A, Homewood Place, and to the extent that the transactions over which she officiated were meant to effect Lot 8, rather than Lot 8A (which did not exist), the bank's mortgage had not been discharged.

On March 13, 2008, First National received a fax communication from Louisiana Property and Title Company, L.L.C., Sutherland's company, requesting a loan payoff amount for Lot 8.⁵ First National responded the same day with another letter addressed to Sutherland, indicating the bank would accept a certain sum as the payoff amount for Lot 8, if paid within 10 days. If the requested sum was not paid in that amount within that time frame, First National reserved the [2011-1418 (La. 4]right to require that all of the indebtedness, or a larger portion of that indebtedness, secured by the Construction Mortgage, be paid before the property would be released. The bank made clear in its letter the only property that would be released from any mortgage under these terms was Lot 8. First National received no reply to this communication.

When the DDS loans continued in default, First National chose to accelerate all of its debt, and, on April 29, 2008, filed a petition for executory process in St. John the Baptist Parish.⁶ In connection with

[91 So.3d 948]

the Construction Mortgage at issue, the bank sought to foreclose on Lots 1 and 8. The district court signed the order of executory process on April 29, 2008.

Thereafter, DDS made certain payments on the notes sued upon and First National agreed to voluntarily release certain property from the Construction Mortgage. On February 9, 2009, First National filed a supplemental petition for executory process, informing the court of the payments made by DDS and the partial releases agreed upon. Based on the payments made, First National agreed to release Lot 1 from the Construction Mortgage, but not Lot 8, which remained encumbered.⁷ The district court ordered the executory process to issue as prayed for in the supplemental petition on February 10, 2009.

Having heard nothing from Sutherland, First National sought to apprise the holder of the Bering Mortgage of the pending foreclosure.⁸ After investigation, [2011-1418 (La. 5]First National determined the servicer of the Bering Mortgage was HomEq Servicing, of Sacramento, California (“HomeEq”).⁹ On April 27, 2009, counsel for First National faxed and mailed a letter to HomEq, advising it of the issues surrounding the property in question, the pending sheriff's sale, and the bank's intention to proceed.

In connection with its voluntary agreement to release certain of the mortgaged properties from the multiple indebtedness mortgages based on partial payment, First National executed on May 13, 2009, a Request for Cancellation by Licensed Financial Institution (“Request for Cancellation”). This request instructed and requested the Recorder of Mortgages of St. John the Baptist Parish to cancel from her mortgage records the Construction Mortgage dated January 6, 2006, to the extent that it encumbered “Lots 1, 2, 5, 6, 7, 8, 9, 11 and 13, Square A, Homewood Place.” (Emphasis added). According to First National, the inclusion of Lot 8 in the listing of residential lots was error. The Request for Cancellation was executed by Prentiss S. Wilks (“Wilks”), vice-president of First National, on behalf of the bank, before Brandt J. Dufrene, Jr. (“Dufrene”), notary public. The Request for Cancellation of the Construction Mortgage by First National was recorded in the mortgage and conveyance records of the parish on June 10, 2009.¹⁰

[91 So.3d 949]

On June 3, 2009, Sutherland, the notary for the sale of the property by DDS to Bering, executed an Act of Correction (“Sutherland Act of Correction”), indicating an error occurred in the description of the property in both the Bering note and the Bering [2011-1418 (La. 6]Mortgage when the property was described as “Lot 8A,” instead of Lot 8. The Sutherland Act of Correction was filed in the mortgage and conveyance records of St. John the Baptist Parish on June 5, 2009.

On June 15, 2009, First National recorded an Act of Correction executed by it through its vice-president, Wilks, and notarized by Dufrene, which sought to amend the Request for Cancellation filed five days earlier (“First National Act of Correction”). First National's Act of Correction stated the release of the Construction Mortgage as to Lot 8 was in error when, in fact, the mortgage remained in full force and effect as to Lot 8.

Copies of email communications show HomEq, the servicer of the Bering Mortgage, received the information sent to it by First National. A HomEq employee forwarded to its title insurance company a copy of the supplemental petition for executory process on June 19, 2009, which had been sent to her by First National's counsel. Counsel for HomEq contacted First National's attorney by email on August 25, 2009, indicating his law firm was evaluating the matter. HomEq's counsel asked for a payoff amount to release Lot 8 and a copy of the petition for executory process.

Recognizing there may be problems with the statutory compliance of the First National Act of Correction, a second act of correction to the Request for Cancellation was made. On October 28, 2009, Dufrene, the notary before whom the original Request for Cancellation by First National was passed, executed an Act of Correction, which was filed on October 29, 2009 in the mortgage and conveyance records of St. John the Baptist Parish (“Dufrene Act of Correction”). In the Dufrene Act of...