Statute of Limitations: Inquiry Notice

In Windesheim v. Larocca, 443 Md. 312 (2015), the Court of Appeals discussed Maryland’s statute of limitations in detail, and reaffirmed its holding in Bank of New York v. Sheff, 382 Md. 235 (2004). In Windesheim, Borrowers filed a putative class action lawsuit against PNC Mortgage and PNC’s Loan Officer, Suzanne Windesheim, as well as realtors and other parties involved in the loan transactions, for an alleged mortgage fraud scheme. The Borrowers simultaneously applied for two loans in order to “bridge” the financing in purchasing new homes. The Borrowers obtained (1) home equity lines of credit (“HELOC”) on their existing homes, and (2) primary mortgages on new homes. Through the HELOCs, the Borrowers extracted equity from their current homes, allowing them to make offers on new homes that were not contingent on the sale of their current homes.

The Borrowers believed that they were obtaining loans through Prosperity Mortgage Company and its loan officer Michelle Mathews; however, Mathews sent the Borrowers’ financial information to PNC Mortgage and Ms. Windesheim, who prepared the HELOC applications. The Borrowers alleged that the HELOC applications falsely represented that the lines of credit would be secured by the Borrowers’ primary residences (the HELOCs were secured by the existing homes, which the Borrowers intended to sell, and underwriting standards would not have allowed the lenders to approve HELOCs on homes intended for sale). Similarly, underwriting standards would not have allowed approval of the primary residential mortgages on the new homes given the new debt created by the HELOCs. The Borrowers alleged that, to get around this issue, Mathews falsely represented on the primary residential mortgage applications that the Borrowers received rental income and fabricated leases between the Borrowers and fictitious tenants.

It was undisputed that the Borrowers signed the HELOC and primary mortgage applications; however, the Borrowers argued that they did not have time to read and understand all of the numerous documents provided to them at closing. Notwithstanding this contention, the Court of Appeals applied the “signature doctrine,” holding that where there is no dispute that the Borrowers signed the applications, “they are presumed to have read and understood those documents as a matter of law.” Id. at 963-964.

The Windesheim Court then determined that the loan applications, which the Borrowers are charged with under-standing, placed the Borrowers on inquiry notice of their mortgage fraud claims. The Court cited Bank of New York v. Sheff, 382 Md. 235 (2004), where the Court held that plaintiffs who received a closing binder that contained all of the closing documents, including financing statements filed with the Maryland SDAT and Prince George’s County, but which did not contain a financing statement sent to the District of Columbia, that the plaintiffs were on notice that the bond transaction was not proceeding as expected because the financing statement was not filed. Similarly, the Court of Appeals found that the Borrowers in Windesheim had notice of their mortgage fraud claims because the HELOC applications expressly stated that Windesheim was processing them (as opposed to Mathews and National City), and because the primary mortgage applications expressly identified “gross rental income,” where the Borrowers claimed that they were received based upon the falsely represented rental income. The Court found that the loan applications provided the Borrowers with “knowledge of facts about which they claim they were deceived and that suggested that their loan transactions were not proceeding as they expected…” Windesheim at 967.

The Court held that the Borrowers were on inquiry notice when they closed on their HELOCs and primary residential mortgages in 2006 and 2007, and their lawsuit, filed in December 2011, was not timely. As there was no evidence that the Borrowers were encouraged not to read the loan applications, and no evidence of a fiduciary relationship between the Borrowers and the lenders, the Court found that the lawsuit was barred, as a matter of law.