Rare Branching Judgment Won by MortgageNow

Guaranteed Home plans to appeal the judge's decision in this non-jury trial. Credit: ThinkStock.

MortgageNow Inc., Shrewsbury, N.J., has won a $340,000 judgment against Guaranteed Home Mortgage Corp., White Plains, N.Y., and a former MortgageNow branch manager, Bryan Stone, in a non-jury trial involving allegations of actions made by the defendants in opening their own Guaranteed Home branch in Destin, Fla.

A federal court judge in Pensacola, Fla., ruled in favor of another defendant in the case, Phillip Heppding, who at the time of the incident was employed as MortgageNow’s Destin office’s sales manager.

A spokeswoman for Guaranteed Home said, “This is an important labor relations issue for the entire mortgage industry. Guaranteed Home does not agree with the opinion of the court and we intend to appeal.”

She added those interested should read the source material involved in the case.

James Marchese, CEO of MortgageNow, said the company has filed a number of suits regarding activities of its branch managers seeking new homes for their offices; there were settlements in three of the cases, but this one is the first to go to trial, he said. Switching of branch employee loyalties is something that is rarely litigated.

MortgageNow, he said in an interview, operated traditional retail branches, where it paid for the infrastructure, owned all the equipment, purchased the leads and hired the managers, who in turn would hire staff. Marchese specifically said the set up was not a net branch operation, where the manager is compensated on such things as branch profitability.

He called the ruling “a nice message” to send to the industry about “illegal net branching.”

If someone wants to go and work for another mortgage company, “that’s their prerogative,” but they can’t take their former employer’s infrastructure and that is what the judge found to be an illegal activity, Marchese said.

The actions of Stone, Heppding and Guaranteed Home Mortgage involving the Destin office took place starting in late 2008 through March 2009, the legal papers said.

Between 2007 and 2009, MortgageNow was experiencing some financial turmoil. Its previous management team had turned to an entity where Marchese held a 37.5% ownership stake in where that entity, Core Financial, would make an investment in MortgageNow in exchange for control of the company. (The information provided by Marchese spells MortgageNow as one word; the legal filings have it as two.)

The court record noted that the Destin office employees were upset over the financial situation, which involved late and bounced checks.

Stone had spoken with the previous management in what had become a dispute with Marchese over MortgageNow. On Dec. 26, 2008, he contacted Guaranteed Home about opening an office in Destin for that company. Eventually Stone would obtain a lease for an office across the street from the MortgageNow location and the decision says he had employees fill out employment applications for Guaranteed Home.

The judge found that during February, loan officers were sitting on their MortgageNow pipelines waiting to officially become a part of Guaranteed Home (during this period, these LOs had access to Guaranteed Home’s loan origination system). At least one LO testified that originators were taking leads MortgageNow purchased on LendingTree and submitting them to Guaranteed Home.

But in the ruling, Judge M. Casey Rogers wrote, “Despite the apparent and admitted uploading and downloading activity, and sitting on loans, no MortgageNow loan officers closed any MortgageNow loans at Guaranteed.”

However, Rogers ruled that Stone owed MortgageNow both a fiduciary duty and a duty of loyalty, while Heppding owed a duty of loyalty. But Heppding’s actions did not result in damages to MortgageNow.

The court rejected claims of damages from lost credit pulls and lost wages due to disloyal employees. It did rule Guaranteed Home and Stone owed lost profits of $280,261 to MortgageNow, with the rest of the judgment being interest payments.

The implications of the actions of the Destin branch (which also apparently involved offices in Georgia and Tennessee but which were not part of this case) were for MortgageNow to close its retail branch network, Marchese said.

Instead, he continued, it “resolved to become a single large megabranch.”

Locations in those states, plus Illinois, Ohio and Michigan were closed. The company went from a $700 million originator to a $100 million originator concentrating on New Jersey and adjacent states, he said.

Marchese blames the actions of what he terms net branching companies and “I am committed to suing every single one of these companies and I will get a judgment against every single one.”