Jefferson Circuit Judge Jim Shake vacated jury verdicts against several banks in a major lender liability/mortgage fraud case in Louisville. The verdict, one of the largest ever in a Kentucky lender liability case, garnered significant media attention when rendered last fall, but the order for a new trial has been ignored.

The case arose out of a mortgage fraud committed by New Age Title company, a mortgage settlement provider that closed a mortgage loan refinance for the borrowers. New Age sent a payoff check from its escrow account to the previous lender, which released its mortgage on borrowers’ residence upon receipt of the check. Before the check cleared, however, New Age stopped payment, effectively stealing the payoff funds and applying them for its own purposes. When the check bounced, the previous lender (Wells Fargo) re-recorded its mortgage, filed an affidavit of mistaken release, and sought a replacement check from New Age. While borrowers made their payments on the new loan, New Age and its counsel covered the loan payments on the old loan for six months, but then defaulted.

Borrowers sued New Age and its owners (who had also been implicated in three other mortgage fraud cases, as well as a massage parlor prostitution ring), who were predictably judgment-proof. They also sued everyone else in sight, including the old lender that didn’t get its payoff (Wells Fargo), the new lender and broker who hired the crooks and failed to supervise the closing (Magnolia Bank and Forcht Bank), and New Age’s lawyer, for negligence, fraud, and civil conspiracy. After a three week trial, the jury awarded $369,000 in compensatory damages to be apportioned among the defendants. The jury also awarded a total of $21.5 million in punitive damages, including $10 million against Wells Fargo and $5 million against Forcht Bank.

This month, the judge vacated the jury verdict and ordered a new trial. His “most egregious error” was failing to require the borrower’s credit damage expert to submit an opinion based on an accepted or credible methodology, and allowing her to testify beyond her field of expertise. In addition, the judge also found that borrowers’ counsel had made prejudicial references to “robosigning” (which was not an issue in the case), and other misstatements of fact and law that poisoned the jury’s consideration. Finally, the judge concluded that the punitive damage award lacked any reasonable relationship to the compensatory damages in the case.

This case is the poster child for the maxim “bad facts make for bad law,” and the new trial order is a welcome development, as this case seemed sure to make bad precedent. It is unclear from the record why the bank that employed and supervised the crooks in the first place was dismissed early, avoiding any liability, while the bank that simply sought to enforce its promised payoff was tagged with the largest share of punitive damages. Hopefully, counsel and the court will do a better job with their second chance.