Bradley Petry v. Prosperity Mortgage Company

Citation: 758 F.3d 543Docket: 13-1869, 13-1924

Court: Court of Appeals for the Fourth Circuit; July 10, 2014; Federal Appellate Court

Original Court Document: View Document

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Bradley and Stacey Petry, plaintiffs representing a class of similarly situated individuals, borrowed $220,000 from Prosperity Mortgage Company to purchase a house in Baltimore, Maryland. They allege that Prosperity Mortgage's fee structure violated the Maryland Finder’s Fee Act due to its operational ties with Long Foster Real Estate, Inc. and Wells Fargo Bank, N.A., each of which owned half of Prosperity Mortgage. The Petrys seek a refund of the fees paid at closing, totaling $1,290, along with statutory damages amounting to three times that fee. Their real estate agent from Long Foster connected them with a Prosperity Mortgage loan officer, who facilitated a no-down-payment mortgage. Following the closing, Prosperity Mortgage sold the Petrys’ loan to Wells Fargo. The case was argued on May 14, 2014, and decided on July 10, 2014, with the Fourth Circuit affirming the lower court's ruling.

The Petrys filed a class action complaint against Prosperity Mortgage, alleging the company misrepresented itself as a mortgage lender while acting as a mortgage broker to facilitate loans from Wells Fargo. They contended that all fees charged by Prosperity Mortgage were 'finder’s fees' as defined by the Maryland Finder’s Fee Act, claiming violations of the Act due to (1) charging finder’s fees in dual roles as both broker and lender, and (2) failing to have a separate written agreement for these fees. Additionally, they argued that Long Foster and Wells Fargo acted as aiders and abettors and coconspirators. After class certification and discovery, the district court determined that the fees charged were not considered 'finder’s fees' unless proven to be excessive. The Petrys could not provide evidence of an excessive fee and the court ruled in favor of the defendants. The court affirmed that Prosperity Mortgage, identified as the lender in closing documents, did not meet the definition of a 'mortgage broker' under the Act. 

The Petrys purchased a house for $220,000 with a mortgage from Prosperity Mortgage. A loan officer from Prosperity assisted them in selecting a loan product and preparing necessary documents. Prosperity Mortgage charged $1,290, which included fees for application, appraisal, credit report, processing, and underwriting. The transaction closed with Prosperity identified as the lender, and the loan was sold to Wells Fargo shortly after. Prosperity Mortgage was a joint venture between Prosperity Mortgage Corporation and Wells Fargo Ventures, operating primarily with customers from Long Foster Real Estate and funded through a warehouse line of credit from Wells Fargo, selling most loans to Wells Fargo post-closing.

Prosperity Mortgage received a service release premium when selling loans and used the proceeds to pay off its warehouse line of credit. It was licensed as a mortgage lender in Maryland and other states, employing about 300 staff. The company contracted with Wells Fargo for underwriting services for higher-risk loans and for preparing loans for sale post-closing. Over two years after purchasing their house, the Petrys received an unsolicited letter from Gordon, Wolf, Carney, Chtd., inviting them to join a class action against Prosperity Mortgage, Wells Fargo, and Long Foster. Bradley Petry learned of a potential legal claim regarding alleged violations of the Maryland Finder’s Fee Act, asserting that Prosperity Mortgage acted both as the loan arranger and source. The Petrys became class representatives, and a complaint was filed on June 23, 2008, alleging that Prosperity Mortgage's business model violated the Finder’s Fee Act while implicating Long Foster and Wells Fargo as aiders and abettors. The complaint contended that Prosperity Mortgage, functioning as a broker, unlawfully charged finder’s fees and sought refunds and statutory damages. After five years of litigation, the district court ruled in favor of the defendants, dismissing aiding and abetting claims against Long Foster and Wells Fargo and denying conspiracy liability. However, the court upheld the Petrys' main claim regarding Prosperity Mortgage’s dual role as lender and broker and certified the case as a class action for those involved in similar transactions in Maryland.

Shortly before trial, the district court communicated with the parties regarding their differing interpretations of a 'finder’s fee.' The court indicated a belief that fees charged by Prosperity Mortgage for services rendered, such as processing and underwriting, did not qualify as finder’s fees under Maryland's statutory definition. The statute defines a finder’s fee as compensation for services related to procuring or assisting in obtaining a loan. The court highlighted that the plaintiffs needed to demonstrate they had paid an excessive fee to Prosperity in the guise of a finder’s fee from Wells Fargo. However, the plaintiffs conceded their inability to meet this burden, leading the court to remove the case from the trial calendar and render a final judgment in favor of the defendants on June 20, 2013. The court asserted that legitimate fees for work performed do not violate the Finder’s Fee Act and noted the plaintiffs had no evidence to support their claims. The defendants filed a conditional cross-appeal regarding class certification, while the Petrys sought to dismiss this cross-appeal and asked the Maryland Court of Appeals to clarify the definition of finder’s fees and the potential for conspiracy under the Finder’s Fee Act. The district court expressed dissatisfaction with the Petrys' evolving theories of liability, noting that their initial claim of Prosperity acting as a sham lender was unsupported by evidence from discovery. Ultimately, the court found that the fees paid to Prosperity were less than what would have been paid had Wells Fargo been the lender, leading to the conclusion that no excess or redundant fees were charged. Consequently, the court determined that without evidence of inflated fees, there were no issues remaining for jury deliberation, resulting in a judgment for the defendants.

The Petrys contend that the district court misinterpreted the Maryland Finder’s Fee Act by defining finder’s fees solely as 'redundant and excessive' fees for unperformed work. They argue that the statute's definition encompasses all fees charged by a broker, asserting that Prosperity Mortgage, acting as a broker by placing loans with Wells Fargo, charged finder’s fees. However, the district court found that Prosperity Mortgage, as the lender named in the loan documents, was not a mortgage broker under the Act, as defined in Md. Code Ann. Com. Law. 12-801. The Act specifies that finder’s fees are only applicable to brokers assisting borrowers in obtaining loans. The court concluded that because Prosperity Mortgage was identified as the lender in the relevant documents, it could not be classified as a mortgage broker and thus did not violate the Finder’s Fee Act. The Petrys argue that the statutory exclusion of named lenders from the definition of mortgage broker is inconsistent with another provision stating that a broker may not charge a finder’s fee if it is also the lender. However, this argument does not alter the statutory interpretation that excludes lenders from the definition of mortgage brokers, rendering the Petrys’ claims unviable.

The provision in question aligns with the statute’s definition of 'mortgage broker,' which states that an entity identified as the lender in loan documents cannot simultaneously act as a mortgage broker and thus cannot violate § 12-804(e) by charging a finder’s fee. However, an entity may still violate this provision if it accepts a finder’s fee while engaging in a dual role—specifically, if a broker helps a borrower secure a loan while the lender's name appears on the documents, but the broker secretly funds the loan. In this scenario, the broker would be charging a finder’s fee while acting as both a mortgage broker and a lender. 

The court emphasizes that it must adhere to the clear wording of the Finder’s Fee Act, which distinguishes the role of a mortgage broker from that of a lender. The plaintiffs' claim that the definition results from legislative error lacks substantiation. Since Prosperity Mortgage was named as the lender in the Petrys’ closing documents, it is legally considered not to be a mortgage broker, and therefore any fees charged do not qualify as finder’s fees. Consequently, Prosperity Mortgage did not violate the Finder’s Fee Act, rendering the need to explore potential liability of Long Foster and Wells Fargo for aiding and abetting unnecessary. The court affirms the lower court's judgment, denies the Petrys’ motion to certify questions to the Maryland Court of Appeals, and dismisses their motion regarding the defendants' cross-appeal as moot.