Utah AG Busts Alleged Equity Stripping, Foreclosure Rescue Ring; Hurting Homeowners Get Boot From Homes As Unwitting Straw Buyers Left Holding The Bag

From the Office of Utah Attorney General Mark Shurtleff:

• Four people were arrested [last week] for allegedly defrauding financially troubled homeowners out of more than $1 million in property.(1) The alleged victims were all Polynesian and were offered new mortgages to help save their homes from foreclosure. The defendants allegedly had straw buyers purchase the properties and then took out all of the equity.(2)

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• Here is how the scheme allegedly worked: Polynesian homeowners were approached for help after they fell behind on their mortgage payments. The victim would sign a quit claim to give title to the property. Another Polynesian would be asked to purchase the property with the promise that all the mortgage bills would be paid. However, the monthly payments were not paid, the homeowners were evicted and the straw buyers were left with bad credit.

The suspects were variously charged with multiple felony counts of second degree:

• communications fraud,
• identity fraud, and
• racketeering.

For the Utah AG's press release, see Four Arrested In Mortgage Fraud Scheme Targeting Polynesian Victims.

(1) Those arrested were: Elenoa Moala, 46, Salt Lake City, Haloti Moala Liavaa, 42, Salt Lake City, Laura Solorio, 40, Salt Lake City, and Kathryn Thompson, 45, South Jordan.

(2) Should the homeowners victimized by the alleged fraud attempt to void or cancel the deed to the straw buyer, or the mortgage obtained by the straw buyer, central to such an effort (assuming the lender had no actual knowledge of the fraud) would be the ability to charge them with notice of the fraud and/or any other unrecorded rights and equities (ie. equitable mortgage) the victimized homeowners may have had at the time the straw buyer took title and the lender made the mortgage loan. Lack of participation in the fraud, and lack of any actual knowledge thereof, by subsequent purchasers & encumbrancers is not enough to sustain a claim of bona fide purchaser / encumbrancer. In this case, the homeowners' continued possession of the property after signing away the quit claim deed may have triggered a duty to inquire, upon both the straw buyer, and the the straw buyer's mortgagee, into the nature of the homeowners' continued occupancy. See Ault v. Holden, 2002 UT 33; 44 P.3d 781; 444 Utah Adv. Rep. 3; 2002 Utah LEXIS 60 (2002), where the Utah Supreme Court observed:

• [P]ossession requires [...] inquiry into any rights in the property the possessor may hold. Hottinger v. Jensen, 684 P.2d 1271, 1273 (Utah 1984). Traditionally, in race-notice states like Utah, a purchaser takes subject to rights of parties in possession that are open and visible. See, e.g., Mathis v. Madsen, 1 Utah 2d 46, 57, 261 P.2d 952, 959 (1953); Neponset Land & Livestock Co. v. Dixon, 10 Utah 334, 336-37, 37 P. 573, 574 (1894); Ayers v. Jack, 7 Utah 249, 252-53, 26 P. 300, 300 (1891). In other words, possession by someone other than the seller engenders a duty to inquire on the part of the purchaser into the rights of the party in possession. See Webster v. Knop, 6 Utah 2d 273, 278, 312 P.2d 557, 560 (1957); Salt Lake, Garfield & W. Ry. Co. v. Allied Materials Co., 4 Utah 2d 218, 222, 291 P.2d 883, 886 (1955); Williams v. Barney, 119 Utah 61, 84-85, 224 P.2d 1042, 1053 (1950); Meagher v. Dean, 97 Utah 173, 179, 91 P.2d 454, 456 (1939).

Should a court determine that, had such an inquiry been pursued, the fraud upon the homeowners would have been discovered, both the straw buyer and the mortgage lender could find themselves being charged, by imputation, with notice of the fraud, thereby defeating any claim of bona fide purchaser / encumbrancer that they may assert. For support for the proposition that "the continued exclusive possession of a vendor after his formal conveyance of the legal title is a fact in conflict with the legal effect of his deed, and is presumptive evidence that he still retains an interest in the premises, and is sufficient to put a purchaser upon inquiry [...]", see Pell v. McElroy, 36 Cal. 268, 1868 Cal. LEXIS 186 (Cal. 1868).

For cases, generally, that support the proposition that possession of real estate by one other than the seller is enough to trigger this imposition of the duty to inquire as to possible unrecorded rights and equities of the possessor, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.