Tuesday, January 09, 2007

South Dakota Supremes Say "No Sale" In Equitable Mortgage Cases

The South Dakota Supreme Court has held that a purported realty sale by its owner to a buyer (ie. foreclosure rescue operator) coupled with a "buy back" (contract for deed) agreement entered into simultaneously is an equitable mortgage, and not a true sale (see Myers v. Eich).

One point that I feel needs highlighting in this case is that in reaching its decision, the South Dakota high court cites both to its own prior decisions (including at least one case over 100 years old) as well as to equitable mortgage cases from other states (ie. Missouri, Washington, Nebraska, South Carolina, New Mexico, Iowa, Rhode Island, New Jersey, Minnesota, West Virginia, Louisiana, and New York).

(Editor's Note: As I read these cases, its becoming quite clear that there may not be anything novel about asking a judge to declare a foreclosure rescue arrangement to be an "equitable mortgage." Lately, I've reported on some recent court decisions (click here for a list of other equitable mortgage posts on this blog) on how this doctrine has been applied in a couple of states; what's notable is that in reaching these decisions, the courts are citing cases that are both pretty old and come from numerous states.)

Click here for a more extensive post regarding this case and the invocation of South Dakota's equitable mortgage doctrine.

Representing the property owner in this case was attorney Thomas K. Wilka of Hagen, Wilka & Archer, P.C., Sioux Falls, South Dakota.

Myers v. Eich is the second equitable mortgage decision by the South Dakota high court in the last five years. The prior case, Adrian v. McKinnie, similarly held that a deed, absolute in form, was an equitable mortgage under facts involving a title transfer of realty with a simultaneous lease back coupled with a purchase option.

Representing the property owner in this case was attorney Michael W. Strain of the Morman Law Office Sturgis, South Dakota

Case Law Citations:

Myers v. Eich, 2006 SD 69; 720 N.W.2d 76; (S.D. 2006)
Adrian v. McKinnie, 2002 SD 10, 639 N.W.2d 529 (S.D. 2002)

Monday, January 08, 2007

"Air Loans" Mortgage Scams

http://HomeEquityTheft.com
According to the FBI, air loans are "non-existent property loans where there is usually no collateral. To read about the "air loans" mortgage scam, see FBI Names Air Loans as Type of Mortgage Fraud, reported by RISMedia at rismedia.com.

One Stolen Wallet = Three Attempted "Home Equity Thefts"

http://HomeEquityTheft.blogspot.com
Anyone interested in knowing how one stolen wallet in a crowded bar can lead to the victimization of its owner, three Chicago property owners, and three mortgage companies should read this January, 2006 story reported in the Chicago Tribune Online Edition at chicagotribune.com.

In a nutshell, a stolen wallet and its contents ended up in the hands of fraudsters. After assuming the identity of the wallet's owner, they went out and obtained mortgages on three Chicago properties they didn't own, unbeknownst to the true owners of each property.

Each of the three properties ended up with phony mortgages on them. Reportedly,

  • one property owner was able to save her property and clear her property title and straighten out her mess, but declined to say how much it cost her to do so,

  • another property owner was able to forestall a foreclosure sale involving the phony mortgage on his property, but couldn't sell or borrow against it because the mortgage company hasn't released the phony mortgage,

  • a third property owner (for undisclosed reasons) never appeared in the foreclosure action brought by the company holding the phony mortgage on his property; the property (as of the date of the media report) was headed for a foreclosure sale.

Despite the fact that the wallet's owner immediately reported the incident, the incident has cost her a perfect credit rating and her parents about $10,000 in legal bills in fending off the claims from the three mortgage companies (who were also scam victims; reportedly, the wallet's owner got little help from the law enforcement agencies that she met with).

Minnesota Anti Equity Stripping Law

http://HomeEquityTheft.blogspot.com
Minnesota's anti "equity stripping" statute, which was the state's response in curbing the abuses in the foreclosure rescue, foreclosure bailout loan business, became effective on August 1, 2004. It is found in the Minnesota Statutes, Chapter 325N, available here.

Minnesota attorney Brian S. McCool has written an article on Chapter 325N which provides some insight on the basics of this law.

Inspite of the new law, the scams continue, according to this St. Paul Pioneer Press report at twincities.com.

The law, as originally written, is set to expire on December 31, 2009.

Sunday, January 07, 2007

Houston FBI Pursuing Fraudsters With Mortgage Fraud Unit

Mortgage fraud has become so popular in the Houston area that the local FBI office has dedicated a unit within their office solely to fight mortgage fraud. The office currently has open about 25 multimillion-dollar cases involving various types of mortgage fraud.

This information, reported in an article in the Houston Chronicle at chron.com, is part of a larger story about a local individual who filed a civil lawsuit in 2004 against several people involving an alleged "straw buyer" scam. Subsequent to the civil lawsuit, one of the alleged scammers was indicted and arrested by the FBI. Ultimately, the scammer pleaded guilty to wire and mail fraud. Other charges against him were dropped "in exchange for his cooperation" (presumably for his cooperation in prosecuting his cohorts).

One point that I find notable here is that a civil lawsuit by a scam victim apparently preceded a criminal prosecution of the scam artists. This could possibly indicate that, given that criminal investigators may lack the resources to investigate every single case, bringing a civil lawsuit may be a way for "some" (financially well-heeled) victims to publicly bring attention to their cases and "discover" information from the scam artist (which could potentially be used in a subsequent criminal case), in addition to an attempt to recover damages.

Alleged Scam Artists Sued, Class Action Status To Be Sought

http://HomeEquityTheft.blogspot.com
Allegations of a massive mortgage fraud scheme involving as many as 400 investors and an estimated $1.2 billion of property were filed by Temecula attorney Richard Ackerman, on behalf of a client, in a civil lawsuit in Riverside County, California Superior Court on Friday, according to this story in the North County Times.

What I found notable in this story is:

  • While the fraud allegations were made against a local network of alleged real estate scam operators by one alleged victim, the attorney for the alleged victim reportedly will be seeking class action status for the case, an attempt to enable him to pursue this network on behalf of all other potential victims who are similarly situated,
  • The local county prosecutor has not, as yet, filed any charges in this case (although they are reportedly investigating the matter).

(I wonder if an attempt by a private individual to bring a civil lawsuit and seek class action status against those who are allegedly involved in potenially criminal conduct will be helpful or hurtful to a local prosecutor's criminal investigation of those same people regarding the same alleged conduct.)

For follow up story, see Real-estate investors bought on faith (1-13-07)

revised 1-29-07

California Laws Regulating Foreclosure Rescue & Equity Skimming Available Here

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California has two statutes, both passed in 1979, that regulate home sale transactions involving homeowners facing foreclosure, investors purchasing from these financially strapped homeowners, and mortgage foreclosure consultants. It is the state's response for curbing the abuses associated with foreclosure rescue and foreclosure bailout loan situations.

1) California's Home Equity Sales Contract Act, which was explicitly passed:
  • "To provide each homeowner with information necessary to make an informed and intelligent decision regarding the sale of his or her home to an equity purchaser; to require that the sales agreement be expressed in writing; to safeguard the public against deceit and financial hardship; to insure, foster, and encourage fair dealing inthe sale and purchase of homes in foreclosure; to prohibit representations that tend to mislead; to prohibit or restrict unfair contract terms; to afford homeowners a reasonable and meaningful opportunity to rescind sales to equity purchasers; and to preserve and protect home equities for the homeowners of this state" (Section 1695(d)(1)),

can be found at Section 1695 through Section 1695.17 of the California Civil Code.

2) California's Mortgage Foreclosure Consultants Act, which was explicitly passed:

  • "To require that foreclosure consultant service agreements be expressed in writing; to safeguard the public against deceit and financial hardship; to permit rescission of foreclosure consultation contracts; to prohibit representations that tend to mislead; and to encourage fair dealing in the rendition of foreclosure services" (Section 2945(c)(1)),

can be found at Section 2945 through Sction 2945.11 of the California Civil Code.

3) In addition, California also has a statute prohibiting rent skimming (equity skimming) and can be found at Section 890 through Section 894 of the California Civil Code.

revised 1-19-07

Rhode Island Mortgage Foreclosure Consultant Law Available Here

Rhode Island passed two new laws in 2006 designed to curb the abuses associated with foreclosure rescue situations. One law regulates the activities of so-called foreclosure consultants; the other addresses the activities of foreclosure purchasers, those who purchase realty from property owners facing foreclosure.

The Mortgage Foreclosure Consultant Regulation became effective immediately upon passage, can be found in Title 5, Chapter 79 of the Rhode Island Statutes, and encompasses Sections 5-79-1 through 5-79-9 (each section has its own link).

In addition, the new statute regulating Mortgage Foreclosure Purchasers can be found in Title 5, Chapter 80 of the Rhode Island Statutes and encompasses Sections 5-80-1 through 5-80-9 (each section has its own link).

Saturday, January 06, 2007

Brooklyn DA Indicts Three In Theft Of Dying Senior's Home

Kings County (Brooklyn), NY District Attorney Charles J. Hynes has recently obtained indictments against three men for allegedly using forged documents in the theft of a now-deceased, elderly cancer victim's home. Two have been taken into custody. The third is on the lam.

A fourth defendant, the notary public who notarized a power of attorney used in the alleged theft, has been charged with lying on a notary public renewal application, in which he denied that he was a convicted felon.

For more details, go here on The Mortgage Fraud Blog, presented by The Prieston Group.

Go here for Brooklyn DA's Press Release.

Maryland Home Equity Theft Law Available Here

Maryland's equity stripping prevention, home equity theft protection act was signed into law on May 26, 2005 by Governor Robert Erlich to protect homeowners at risk of foreclosure, from self-styled foreclosure rescue consultants who promise to help them avoid foreclosure but end up
  • owning the home themselves, or
  • stripping off the property owner's built-up home equity in some other manner.

The law can be found in Title 7 of the Maryland Real Property Law. (More specifically, the law is contained in Title 7, Subtitle 3 - Protection of Homeowners in Foreclosure (Sections 7-301 through 7-321). Each section of the statute has its own link.

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Friday, January 05, 2007

Arkansas Appellate Court Finds Usury In "Sale - Buy Back" Deal

In a case decided about three weeks ago, an Arkansas Court of Appeals recently invoked the "equitable mortgage" doctrine in finding that a "sale-buyback" deal was really a disguised usurious loan secured by an equitable mortgage in a dispute between a pawn shop owner and his customer.

In Smith v. Eisen, a dispute arose out of a transaction in which the customer "signed over" title to her home to the pawn shop owner in exchange for a sum of money and, simultaneously with this purported sale, an agreement between the parties was entered into entitling the customer to repurchase the property for twice the amount of the “sale.”

In addition to finding that the transaction was a usurious loan secured by an equitable mortgage, the court ruled that the customer was also entitled to an award of her attorney's fees to be paid by the pawn shop owner (Arkansas law generally provides for an award of attorney’s fees in usury cases involving consumer loans and credit sales).

In reaching its decision, the court made the following observations:
  1. "the “seller’s” obvious financial troubles;
  2. her expressed intent to keep the property;
  3. her remaining in possession of the property;
  4. the substantial disparity between what she paid for the property and the “purchase” price; and
  5. the immediate renegotiation of a contract for resale
all point to the conclusion that none of the parties intended for the property to come into the hands of [the pawn shop owner] any more than was necessary to secure the loan and for [the pawn shop owner] to make a profit from such loan."
"Also relevant were
  1. [the customer's] ninth-grade education,
  2. her medical disabilities, and
  3. her lack of sophistication in business matters in comparison to [the pawn shop owner's]."
See Smith v. Eisen, at page 18.

Representing the homeowner in this case was Robert R. Cloar, a member of the National Association of Consumer Advocates ("NACA"), of Fort Smith, Arkansas.
Other Arkansas consumer attorneys who are members of NACA are listed here.
Eligible Arkansas residents can check out the non profit Arkansas Legal Services Partnership, a partnership of two nonprofit Legal Services Programs that work together to provide free civil legal assistance to low-income residents and the elderly throughout all 75 counties. Click here for the branch office nearest to you.

Click here to search for other equitable mortgage posts on this blog
Case Law Citatations:

Smith v. Eisen, 245 S.W.3d 160, Ark. App. Ct., 2006 Ark. App. LEXIS 858, December 13, 2006.

Go here for links to some other Arkansas cases where judges have delved into the particulars of a financial arrangement to expose its usurious nature (ie. where a financial arrangement was used as a cloaking device to disguise a usurious loan).

Go here for other cases involving attempts to cloak usurious loans, usurious schemes.

Northeast Ohio Prosecutors Crack Down On Mortgage Fraud & Predatory Lending

59 defendants were indicted Wednesday on 269 charges of racketeering, forgery and theft involving a mortgage fraud scheme in the Cleveland metropolitan area, according to the office of Cuyahoga County Prosecutor Bill Mason. Additional indictments are pending.

The story, reported here at Cleveland.com (the online presence of Cleveland's The Plain Dealer), describes the indictments as "part of a long-awaited crackdown on shady real estate and lending practices that have left homes abandoned and helped Cuyahoga County rack up one of the highest foreclosure rates in the nation."

An assistant county prosecutor was hired by County Prosecutor Mason's office last year to focus on crimes such as mortgage fraud and predatory lending.

In a prepared statement, Mason said "You predators are now put on notice. Those of you who engage in deception in the lending process will face criminal charges."

There is no indication in this article, however, as to whether Mason's policy will be extended and applied to predatory "foreclosure bailout loans" made to financially strapped homeowners attempting to save their homes from forced sale. Such loans are often "disguised" as sale-leasebacks by "foreclosure rescue" companies in the belief that structuring the transaction in this way enables an investor to avoid usury statutes, eliminate the hassle of foreclosure proceedings and homeowners' redemption rights, and provide for an effective way for the investor to either:

  • earn interest income on their investment in an amount that exceeds the maximum allowed by law, or
  • acquire a financially desperate property owner's home equity at well below market value.

For The Plain Dealer follow up story, see:

Fraud Squad - Indictments send a sign that local law officers are serious, but pervasive predatory lending demands more urgent action

Click here for the Channel 3 story, at wkyc.com

Click here to watch/listen to Channel 3 video news report

(Revised 1-6-07, 1-20-07)

Thursday, January 04, 2007

Tennessee Federal Court Declares Sale-Leaseback Foreclosure Rescue Deal An "Equitable Mortgage"

A Tennessee Federal Court has invoked the "equitable mortgage" doctrine in a case involving a transaction between a foreclosure rescue operator and a homeowner in financial straits attempting to save his home from a forced sale.

The court, in the case of Perry v. Queen, relied on a 1996 Tennessee Court of Appeals case which set forth a number of factors that Tennessee courts consider in determining the homeowner's intent in conveying title to his/her home to another in a sale leaseback transaction, including the following:

  1. the relationship between the parties;
  2. whether the parties had access to legal counsel;
  3. the sophistication and circumstances of the parties;
  4. the adequacy of consideration; and
  5. whether the grantor retained possession of the property.
The Federal Court made the following observations in reaching its decision:

  • "The disparity between the parties as to their sophistication and the circumstances under which they were operating is particularly relevant. Courts view [property owners] who are lacking in sophistication or who are laboring under stressful circumstances as more likely to have intended their conveyances to serve as security devices, as opposed to as transfers of their land."

  • "[t]he relatively low amount of consideration paid by the [foreclosure rescue investor] in exchange for the [property owner's] warranty deed here furthers a determination that the [property owner] intended the deed to serve as security for the loan. Where consideration received by the [property owner] is much less than the value of his property, there is an inference that a security device, as opposed to an outright sale, was intended."

  • "[t]he fact that [the property owner] retained physical possession of his house after he gave the [foreclosure rescue investor] the warranty deed. Where a [property owner] continues to occupy the premises, there is an inference that a security device was intended."

  • "The last of the relevant Hensley factors directs the court to consider whether the parties to the transaction in question were represented by legal counsel. [W]hile the [property owner] did not have access to legal advice at the time the deal was executed, the [foreclosure rescue investor] did. [L]ike the other factors, this one also leads the court to a determination that the [property owner] intended his deed to serve as a security device."

Representing the homeowner in this case was Sharmila L. Murthy, a consumer lawyer with the Nashville office of the Legal Aid Society of Middle Tennessee and the Cumberlands, Nashville, TN.

Eligible residents throughout Tennessee seeking low cost legal help can begin their search with the TennLegalAid.com website.

Tennessee consumer protection attorneys who are members of the National Association of Consumer Advocates (NACA) can be found here.

Click here for list of other equitable mortgage blog posts

Case Law Citations:

Perry v. Queen, (M.D. Tn. Civil No. 3:05-0599) 2006 U.S. Dist. LEXIS 17120, February 27, 2006 (unpublished), available on the website of the Federal Court for the Middle District of Tennessee (PACER registration, login, and password required).

Hensley v. Britt, 1996 Tenn. App. LEXIS 793, No. 01A01-9607-CH-00296, 1996 WL 709375 (Tenn. Ct. App. Dec. 11, 1996) (made available courtesy of the Tennessee Administrative Office of the Courts)

Note:

PACER (Public Access to Court Electronic Records) registration, for public access to electronic court records filed in the Federal Court system, is available free of charge to the general public. To obtain a PACER registration, login code and password, you can register here. Once registered, you can view available electronic court information filed in the Federal courts at a cost of $.08 per page; however, some Federal courts will allow viewing of the court's "Written Opinions", such as the opinion in this case, free of charge. Check with the specific Federal court website for details.

revised 1-17-07

NYS Home Equity Theft Prevention Act

(revised 10-25-07)
For those of you who are interested, a copy of the New York State Home Equity Theft Prevention Act is available here (available online courtesy of the New York State Banking Department).

The bulk of the new law has been incorporated into the New York statute at Section 265-A of the NY Real Property Law. The law becomes effective on February 1, 2007.

I apologize to those who were unable to access the new law by clicking the link provided in my December 24, 2006 blog post. The problem with that link has since been corrected.

See 1-12-07 Post For Updated Information On This New Law.

Click here for other articles on the new law.

On a housekeeping note, if anyone ever encounters a problem with any link found on this blog, please don't hesitate to drop me a line either by clicking the "comments" link appearing after any post or by e-mail at HomeEquityTheft@yahoo.com.

Wednesday, January 03, 2007

Michigan State Court Declares "Foreclosure Rescue" Transaction An "Equitable Mortgage"

In this 2001 court decision by the Michigan Court of Appeals, a transaction involving a foreclosure rescue operator who entered into a "lease buyback", foreclosure bailout arrangement with a homeowner facing foreclosure was legally deemed to be nothing more than a loan transaction. Through the invocation of Michigan's "equitable mortgage" doctrine, the homeowner was deemed to have retained all of her ownership rights to the property involved, notwithstanding the fact that she had actually signed documents, including a warranty deed, that purported to transfer title to the property from her to a foreclosure rescue operator.

Both this 2001 case (London v. Gregory, which is available here), along with the 2006 Moore v. Cycon case from a Michigan Federal Court (available here) that I referred to in yesterday's post, appear to cite to a rather extensive body of Michigan case law on the "equitable mortgage" issue that can be utilized by homeowners (and their attorneys) to help them retain their ownership rights in those cases where, unwittingly or not, they sign over the title to their real estate to a rescue operator for the purpose of borrowing money. (Neither of these decisions, nor the cases cited therein, appear to have revolved around any fraud, trickery, deception, or any other egregious conduct by the foreclosure rescue operator). However, it does appear clear that, while there are a number of factors that the Michigan courts will consider in each case, there is no fixed, litmus test to be applied in all cases when invoking this doctrine. Because the facts in each case will not be exactly the same, the courts will apparently determine the applicability of the doctrine on a case-by-case basis.

I previously alluded to this case in an earlier blog post. An article titled Michigan Appellate Court Sends Warning to 'Foreclosure Consultants', co-authored by Albert Rush and John C. Murray, discusses this case in some detail and appears on the website of The First American Corporation, a national title insurance underwriter.

My highlights of this court decision can be found here.

On a concluding note, I have found cases from other states that indicate that not only is the "equitable mortgage" doctrine not something that is limited to the State of Michigan, but rather, this doctrine dates back centuries (back to the days of the old English common law) and apparently is available in some form in most, if not possibly all, states.

I expect to be reporting more on this doctrine on a somewhat periodic basis. I welcome input on this issue from attorneys from anywhere in the country as to the availability of this doctrine in their home states.

Click here to search for list of other equitable mortgage blog posts

Case Law Citation:

London v. Gregory, No. 216473, Mi. App. Ct., 2001, (2001 Mich. App. LEXIS 1700) Decided February 23, 2001 (available courtesy of the Michigan Bar Association)

Revised 1-17-07