Lender Loses Lawsuit to Government

SunTrust said it would rather foreclose and then sell the 150-year-old building.

The Atlanta, Ga.-based bank gave Ronald Scot West and his wife, Bernadette, a $1.2 million mortgage on the property in Knoxville’s Market Square in 2003. The building’s tenants include shops, restaurants, clothing boutiques and several loft apartments. Cardinal Enterprises Inc. also gave the couple a mortgage — $200,000 — on the property.

The husband played a role a key role in spearheading the revitalization of the popular downtown neighborhood.

He pleaded guilty in September 2006 in federal criminal court to conspiracy to distribute marijuana and conspiracy to commit money laundering. Mrs. West pleaded guilty to money laundering.

The feds were tipped off by an insider who agreed to cooperate.

The Wests agreed to forfeit the property after a federal court determined the building was purchased and maintained with profits derived from the marijuana and money-laundering scheme.

Although mortgage payments from July 2006 until December 2006 were paid from funds left by the Wests with an attorney at the federal government’s insistence, the loans went into default in January 2007.

SunTrust fought the forfeiture, arguing before the U.S. District Court for the Eastern District of Tennessee in Knoxville that the decision was made without a mandatory hearing and without regard for the bank’s rights under state foreclosure law.

Although the feds have promised to pay off the building’s lienholders, SunTrust would rather foreclose and then sell the property.

When deeds of trust are involved in Tennessee, state law provides for the conveyance of the legal title to the property with equitable title remaining in the borrower, SunTrust attorney R. Louis Crossley Jr. explained in a telephone interview with MortgageDaily.com. The government can not trump that legal title even under criminal forfeiture laws simply upon the promise that someday the government will pay off the bank’s mortgage on the property.

SunTrust and Cardinal have argued that the United States “stepped into the shoes” of the Wests, obligating it to make the mortgage payments. When payments ceased in December 2006, the lienholders said they were entitled to take advantage of their state rights to foreclose upon the building.

Cardinal Enterprises’ attorneys called the government’s attempt to assert a superior hold over the property “overreaching.”

But Assistant U.S. Attorney D. Gregory Weddle disagreed.

Under federal law, lienholders lose the right to foreclose after the filing of a criminal forfeiture action, he said in a telephone interview with MortgageDaily.com. That’s the law in every circuit that has ruled on the issue.

When a property is forfeited, the government finds out who holds liens, notifies them, advertises the action and then pays all legitimate claims, he explained.

In court documents, government attorneys argued that the United States has a strong interest in selling the Market Square property for the highest possible price, either through a broker or via auction, in order to maximize the forfeited equity in the building. Weddle indicated that the property, when sold, is expected to fetch much more than is presently owed on it.

Indeed, Weddle said, because the property seems to hold substantial equity, the government has already agreed to pay the lienholders out of a federal asset forfeiture fund. He said the government has already said it will pay every category of cost and expense sought by SunTrust and Cardinal with the exception of some of the attorney’s fees which means SunTrust won’t have to assume the risks of sale and would get paid much more quickly. He estimated payment, after the federal government gets a final payoff figure, could be received by the lienholders in no more than six weeks.

But federal attorneys don’t want SunTrust to foreclose on the property.

They told the court SunTrust and Cardinal have no incentive to seek a buyer who will pay a penny more than the outstanding balance on their mortgage loans. Thus, the attorneys continued, sale by the United States is likely to benefit both it and the lienholders, while a foreclosure sale is likely to benefit only SunTrust and Cardinal.

The attorneys also said that SunTrust and Cardinal want to declare a default under the terms of the deed so as to take advantage of a provision that triggers more expensive penalty features in the promissory notes.

Last week, in a nine-page order, the federal court ruled in the government’s favor — deciding that federal law supersedes.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: burdenlisa@yahoo.com