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McCulley v. U.S. Bank of Montana

Supreme Court of Montana

April 14, 2015

MARY MCCULLEY, Plaintiff, Appellee and Cross-Appellant,
U.S. BANK OF MONTANA, Defendant, Appellee and Cross-Appellee.

Submitted on Briefs: February 25, 2015

APPEAL FROM District Court of the Eighteenth Judicial District, In and For the County of Gallatin, Cause No. DV 09-562C Honorable John C. Brown, Presiding Judge

For Appellant F. Matthew Ralph; Ben D. Kappelman, Dorsey & Whitney LLP, Minneapolis, Minnesota

For Appellee James A. Patten; Patricia D. Peterman, Patten, Peterman, Bekkedahl & Green, PLLC, Billings, Montana

Jim Rice Justice

¶1 U.S. Bank of Montana (hereinafter U.S. Bank or the Bank) appeals from the judgment entered by the Eighteenth Judicial District Court, Gallatin County, following a jury trial. In 2006, Mary McCulley (McCulley) purchased a condominium in Bozeman and sought a 30-year residential financing loan from Heritage Bank, predecessor to U.S. Bank, in the amount of $300, 000. In June 2009, McCulley brought action against U.S. Bank alleging the Bank defrauded her by issuing, without notice, an 18-month, $300, 000 commercial loan, rather than the 30-year residential property loan for which she applied. Relying on erroneous sworn affidavits and documents submitted by U.S. Bank, the District Court dismissed McCulley's claims and entered summary judgment in favor of the Bank. Following McCulley's pro se appeal, this Court reversed and remanded for further proceedings regarding McCulley's allegations of fraud. McCulley v. Am. Land Title Co., 2013 MT 89, ¶ 36, 369 Mont. 433, 300 P.3d 679.

¶2 After remand, the jury found in favor of McCulley, awarding $1, 000, 000 in compensatory damages and $5, 000, 000 in punitive damages. Pursuant to § 27-1-221(7)(c), MCA, the District Court reviewed the punitive damages award and issued an order confirming it. The District Court also ordered post-judgment interest to accrue from the date of the court's decision confirming the award. McCulley cross-appeals from the court's determination of the date from which post-judgment interest accrues. We affirm the direct appeal and reverse the cross-appeal.

¶3 We address the following issues on appeal:

¶4 1. Did the District Court abuse its discretion by excluding lay witness testimony?

¶5 2. Did the District Court abuse its discretion by excluding McCulley's medical records?

¶6 3. Did McCulley present sufficient evidence for the jury to find U.S. Bank committed actual fraud?

¶7 4. Did the District Court err by concluding U.S. Bank could be held liable for punitive damages arising out of Heritage Bank's pre-merger conduct?

¶8 5. Did the District Court err in upholding the jury's award of punitive damages?

¶9 We address the following issue on cross-appeal:

¶10 6. Did the District Court err by ordering the accrual of post-judgment interest from the date of its order confirming the jury's award of punitive damages?


¶11 On May 1, 2006, McCulley entered into an agreement to purchase a condominium in Bozeman. On May 25, 2006, McCulley approached Heritage Bank, later purchased by U.S. Bank, and applied for a 30-year residential loan for $300, 000. Jeff Mortensen (Mortensen), Heritage Bank General Manager, took McCulley's application over the phone. The following day, Mortensen emailed an internal credit memorandum to Heritage Bank Senior Vice-President, Steve Feurt (Feurt), favorably analyzing McCulley's credit, but noting that, while the condominium was "residential, " the lot upon which it was built was zoned "commercial B-2." The memorandum indicated that the commercial zoning precluded the use of "standard secondary market sources for financing a residential condominium." As a result, Mortensen suggested to Feurt, and Feurt approved, an 18-month, $300, 000 commercial loan in lieu of the loan McCulley had requested, stating in an email: "Might be the only business we get from her. With the risk might as well make it worth our while." The Bank recognized McCulley could not pay back the $300, 000 loan in 18 months due to McCulley's low income relative to the loan amount. The Bank further understood it would be very difficult for McCulley to find refinancing at the end of the 18 months because of the way in which the property was zoned. McCulley was not privy to the internal memo and was unaware of the significance of the commercial zoning. The Bank did not advise McCulley that it was changing the terms of the loan she had applied for to an 18-month commercial interest loan.

¶12 On May 30, 2006, the Bank sent McCulley a disclosure statement pursuant to the Truth-In-Lending Act (TILA)[1] regarding her loan application. The TILA disclosure statement reflected a 30-year adjustable interest rate loan for only $200, 000. Upon receiving the TILA disclosure, McCulley contacted Mortensen and requested that the loan amount be raised to $300, 000, as she had originally requested. Mortensen agreed to raise the amount to $300, 000 after McCulley offered additional collateral. The Bank generated a Good Faith Estimate that referenced a 30-year payment plan for the proposed loan.[2] The Bank did not provide a written document to McCulley explaining that the term of the loan it was approving would be changed to 18 months. McCulley proceeded with the understanding that her loan would be for the 30-year term she had applied for, as reflected on the TILA disclosure statement and the Good Faith Estimate.

¶13 On June 16, 2006, the loan closing was held at a title company. Mortensen was present. McCulley was presented with a stack of documents bound by a metallic clip and directed to sign where "sign here" sticky notes had been placed on the documents. An explanation of the individual documents was not provided to McCulley. Included in the stack of documents were three loan applications disclosing three different and inconsistent loans to McCulley, as follows:

Loan Application 1: Amount: $300, 000; Term: 18 months; Rate: 8.75%
Loan Application 2: Amount: $200, 000; Term: 12 months; Rate: 8.75%
Loan Application 3: Amount: $200, 000; Term: 30 years; Rate: 7.75%

The Bank also provided a disclosure form for McCulley's signature captioned: "NON ASSUMABLE FIXED RATE LOAN DISCLOSURE." The disclosure form described the term of McCulley's loan as 30 years with an interest rate of 7.75%. However, a loan application form for a 30-year, $300, 000 loan, as requested by McCulley and promised by the Bank, was not provided. McCulley signed all of the documents, including the three varying and inapposite loan applications, and the disclosure form, in reliance on the Bank's previous representations that the loan was for a term of 30 years.

¶14 U.S. Bank acknowledged at trial it is not customary banking practice to have a borrower sign three different and inconsistent loan applications on the day of closing because it "would be misleading to the borrower." The Bank also admitted that it failed to provide McCulley with a Loan Commitment Letter, identifying the terms of the loan, although this is a customary practice in the banking industry.

¶15 McCulley made monthly payments throughout 2006 and 2007, believing the monthly payments were the required payments under a 30-year mortgage. In 2007, Heritage Bank merged with U.S. Bank. In a joint letter, Heritage Bank and U.S. Bank informed McCulley the merger would not impact her loan. In late 2007, U.S. Bank sent a notice to McCulley advising her that the balloon payment on her 18-month loan would be due in December. For the first time McCulley understood she did not have the 30-year residential mortgage for which she had applied. McCulley contacted U.S. Bank, which initially agreed to convert the loan into a 30-year term loan if McCulley made a principal reduction payment in the amount of $100, 000. However, following McCulley's assent to do so, the Bank notified McCulley in writing that it would instead require a principal reduction of $200, 000, and not the $100, 000 previously agreed upon, to convert the loan. McCulley persisted in attempting to convince U.S. Bank to restructure the loan, but the Bank refused. McCulley was unable to locate long-term residential financing and the Bank placed the loan into foreclosure. McCulley sold her home to a buyer one week before the scheduled foreclosure sale for approximately $40, 000 less than the loan balance. U.S. Bank's refusal to restructure the loan and the following foreclosure process created significant emotional distress for McCulley. Though previously physically and mentally healthy, McCulley began suffering from depression, which culminated in a near-fatal suicide attempt.

¶16 In June 2009, McCulley brought this action against U.S. Bank. McCulley alleged that the Bank committed actual fraud by engaging in "bait and switch" tactics to surreptitiously alter the terms of the 30-year residential mortgage she had requested to an 18-month balloon loan. The Bank countered that it had never represented to McCulley that it had approved a 30-year residential loan. The Bank asserted it had sent McCulley a letter dated May 26, 2006, outlining the terms of her loan and explaining that she was getting an 18-month consumer bridge loan in the amount of $300, 000. In a sworn affidavit, Feurt further declared that the Bank possessed a "term sheet" that set forth the correct terms of the loan. Both parties moved for summary judgment. On January 12, 2012, the District Court issued an order denying McCulley's motion for summary judgment and granting U.S. Bank's motion. McCulley appealed pro se to this Court. We reversed the grant of summary judgment, concluding, in light of the "chronology of events, and in particular noting McCulley's arguably legitimate contention that the May 26 'letter' was not a letter to her at all, " that genuine issues of material fact existed. McCulley, ¶ 35.

¶17 During the course of litigation after remand, the District Court learned that the sworn statements made by U.S. Bank to the court, about documents accurately communicating to McCulley the terms of the 18-month loan, and on which the court had relied in granting summary judgment, were inaccurate. Specifically, the court learned that the May 26 "letter" the Bank indicated had been sent to McCulley did not exist; the "term sheet" that Feurt had attested contained the terms of the loan did not exist; and affidavits submitted by the Bank indicating that it had never represented to McCulley that she would obtain a 30-year mortgage were untrue. The case was set for trial.

¶18 The jury returned a verdict in favor of McCulley on February 7, 2014. The jury awarded McCulley compensatory damages of $1, 000, 000 and punitive damages of $5, 000, 000. On April 14, 2014, the District Court entered its order affirming the punitive damages award as granted by the jury, pursuant to § 27-1-221(7)(c), MCA, and ordered that post-judgment ...

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