Khan v. White

Thomas D. Horne, Judge

MEMORANDUM OPINION

This case is before the Court on demurrers and a plea in bar to the Amended Complaint. Previously, the Court considered various demurrers filed in response to the original complaint. In ruling upon those demurrers, the Court found that the demurrers of defendants Samuel I. White, P.C., Wells Fargo & Co. d/b/a America's Servicing Company, HSBC Bank, NA as Trustee for Numura Asset Acceptance Corporation Mortgage Pass Through Certificates Series 2006-ARI, and J.P. Morgan Chase Bank, NA should be sustained to eight of the nine counts of the complaint. The one count (Count I) surviving demurrer sought a declaratory judgment with respect to the rights of the parties. As to the remaining counts, the Court granted leave for the plaintiffs to file amended pleadings with respect to claims of rescission (Count II), reformation (Count V), and relief under the Virginia Consumer Protection Act (Count IX). Count III (paid obligations), Count IV (§§55-66.3 and 55-66.5, Va. Code Ann.), Count VI (malicious prosecution), Count VII (intentional infliction of emotional distress), and Count VIII (abuse of process) were dismissed with prejudice.

In the Amended Complaint, the plaintiffs restated their claim for declaratory relief (Count I) and revised their pleadings as to claims for rescission (Count II), reformation (Count III), and violation of the Virginia Consumer Protection Act (Count IV).

Plaintiffs suggest they were defrauded by one Vijay Taneja, acting through his closely held company Financial Mortgage, Inc., in connection with mortgage financing of their residence. Plaintiffs, as well as other émigrés from Southeast Asia, are alleged to have been targets of deceit and to have been bamboozled by Taneja. As a part of Taneja's scheme to cheat the plaintiffs, purchase money financing was provided by Financial Mortgage to plaintiffs in the form of a first and second trust secured by the residence. At the time of the initial financing, it was represented by Financial Mortgage that attractive refinancing would be provided to pay off the purchase money loans. This refinancing would take the form of "rate and term" or "negative amortization" loans. It is alleged that this form of financing, while providing apparently attractive short term benefits to the unsophisticated borrower, would lead to much larger payment requirements during the course of the loan. However, it is also alleged this form of financing provides the loan seller with a higher resale premium than other types of loans.

After the plaintiffs obtained refinancing through and forwarded the proceeds to Financial Mortgage for repayment of the initial loans, the lender failed to release the lien on the purchase money notes and failed to mark them as paid. Financial Mortgage then sold all the notes, and through the use of an elaborate plan of deceit, retained all the proceeds from the refinancing, the resale proceeds of the purchase money and refinancing notes and the resale premium from the refinancing notes. In order to conceal his deceptive practices, the lender made payments on the purchase money notes, which continued until he could no longer make such payments and the illusory bubble burst. Neither the plaintiffs, nor the defendants to whom the secured notes were transferred, knew of the scheme until bankruptcy proceedings were commenced and the actions of Taneja and Financial Mortgage were brought to light. Taneja is currently serving time in a Federal prison as a result of the deceptive practices engaged in by him, through his mortgage company.

The Court will sustain and dismiss with prejudice Counts II and IV. Absent from the instant pleadings are any allegations of fraud or misrepresentation by the defendants that would serve as the basis of recovery or damages in these counts. As one commentator has observed, "[r]escission is an equity, i.e., a right or claim of one person against another." John L. Costello, Virginia Remedies §11.01 (3rd ed., 2009). None of the defendants are responsible for the injury to the plaintiffs. Indeed, they are also victims of Taneja's scheme.

Plaintiffs rely upon the limitations of enforcement by a holder in due course of a note as provided by §8.3A-305, Va. Code Ann. and tender of payment to a person entitled to enforce the instrument as set forth in §8.3A-603, Va. Code Ann. These issues are fully raised by the allegations set forth in Count I (declaratory relief), and constitute a case of an actual controversy based upon allegations of threatened foreclosure. Should the issue be resolved in favor of plaintiffs, these issues also support further relief in accordance with such finding. §§8.01-184,186, Va. Code Ann.

The Court will overrule the demurrer as to Count III (reformation) of the refinancing notes. As alleged, through the scope of the deferential standard granted a review of plaintiffs' pleadings on demurrer, the count states a claim for reformation. Objection to this claim is more appropriately raised by a motion for summary judgment after discovery in the case.

Given the ruling on the demurrers, the Court does not believe it necessary to rule on the plea in bar at this time.

Counsel for the defendants may draw an appropriate Order consistent with this opinion, to which objection may be noted.

The Clerk shall forthwith forward a copy of this opinion to all counsel of record.

Entered this 11^th day of August 2010

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Thomas D. Horne, Judge