Deutsche Bank v Pauk (WI)

Summary: A lender’s failure to provide a timely payoff statement for a short sale was a breach of a mortgage contract that the borrower may argue as a defense to the foreclosure of the mortgage.

Deutsche Bank v Pauk, 2010 AP 1583 (Wis. Ct. App., 2012).

Facts: Deutsche Bank had the first mortgage on Diane Pauk’s property, with GMAC Mortgage LLC holding the second mortgage. Pauk listed the property for sale at $329,000 based upon an estimate stating that amount was the residual amount owed. Pauk received an offer of $315,000 and entered into a binding contract to purchase that was set to close on July 8, 2008. While this would leave Pauk short of the amount of her second mortgage, she believed that GMAC would agree to a short sale. Avelo Mortgage, the company who had been servicing Pauk’s first mortgage, contacted Pauk and told her that the servicing of her mortgage would be transferred to Litton. Pauk and her closing officer attempted to contact Litton several times to receive a payoff statement concerning the first mortgage to no avail. The trial court held that this was outside the industry standard and that Pauk made diligent and reasonable attempts to receive the payoff statement.

On the day of the closing, GMAC stated that it would not approve the short sale because it had not received the payoff statement concerning the first mortgage. Based upon the advice of her attorney, Pauk gave possession of the property to the buyer until she could receive the payoff statement. After several more tries and threats from her lawyer, Pauk received a payoff statement from Litton, which was faxed to and approved by GMAC for the short sale. 

A new closing date was set, but the buyer rescinded the contract, citing the late closing date and a misrepresentation as to the amount of water damage as the reasons for rescission. Deutsche Bank sought to foreclose on the property, and Pauk counter-claimed for breach of contract, among other things. The court found that Deutsche Bank’s failure to timely provide a payoff statement was the reason the sale failed to close and that the foreclosure would therefore be inequitable. Despite holding that the foreclosure would be inequitable, the court ordered that Pauk transfer title to Deutsche Bank, and that the Deutsche Bank release Pauk from her mortgage. Deutsche Bank appealed, and Pauk cross-appealed.

Holding: Affirmed in part, reversed in part, and cause remanded. The court of appeals found that, while the elements of a foreclosure were proven, it would be inequitable to order one. The court held that, because the mortgage contract directly regulates the relationship between the lender and the borrower, a lender’s breach of the mortgage contract may constitute a defense to foreclosure.  Deutsche Bank breached the implied covenant of good faith and fair dealing in the mortgage contract by failing to timely provide a payoff statement. Based upon this breach, and based upon the finding that a transfer of title without a foreclosure would be inequitable, the court affirmed in part, remanded in part, and sent the case back to the circuit court for fact finding and appropriate relief.

Opinion Year: 
By: ATG Underwriting Department | Posted on: Tue, 07/31/2012 - 11:10am