A pair of 2008 Brooklyn, New York lower court rulings may provide some guidance to those seeking an approach to undoing bogus sale leaseback, foreclosure rescue scams on behalf of financially strapped homeowners who have been screwed over in these equity stripping rackets.
In each case, both the deed that was unwittingly signed over by the victims to the scammers, as well as the subsequent mortgage that was put on the subject home by the operator and used to drain the equity out of it, were successfully voided by the attorney for the homeowners, Brooklyn Legal Services Corporation A.(1)(2)
The cases are both fact-heavy, and describe the convoluted fact patterns that are typical of these sale leaseback scams.(3)
There's no easy-to-read media report for this post; for those interested in the reading the rulings themselves, see:
- Watson v. Melnikoff, 2008 NY Slip Op 50954(U) [19 Misc 3d 1130(A)], (May 6, 2008);
- Johnson v. Melnikoff, 2008 NY Slip Op 51832(U) [20 Misc 3d 1142(A)], (September 11, 2008); aff'd Johnson v Melnikoff, 2009 NY Slip Op 06119 [65 AD3d 519, NYS App.Div. 2nd Dept.], (August 4, 2009).
(1) However, the lenders left holding the bag with the voided mortgages were entitled to be subrogated to the rights of existing lienholders to the extent the new money they supplied to the scam was applied to satisfy the homeowners' existing mortgages on the homes that were encumbering the properties immediately prior to the ripoff.
(2) Brooklyn A is a non-profit law firm that provides high-quality, neighborhood-based civil legal services to low-income individuals and groups in North and East Brooklyn. For more, see Wagner Casts Shadow over BLS Consolidation.
(3) These cases serve as a reminder that, when attepting to undo a foreclosure rescue scam, it's not enough to simply void the deed used by the foreclosure rescue scammer to swipe the title to the home; the mortgage placed on the property by the scammer to drain out the home equity as well has to be voided as well. In one case, this was done by establishing that the deed transfer involved was void ab initio, in which case the lender's mortgage was never a valid mortgage to begin with, and therefore, void as well. In the other case, it was established that the deed involved, while not void ab initio, was nevertheless voidable. In that case, because the deed was only consisdered voidable, it was then necessary to establish that the mortgage lender providing the financing for the equity stripping scam was on notice of the scam, thereby disqualifying it from status as a bona fide purchaser / bona fide encumbrancer and, accordingly, not entitled to the protection of the state recording statutes.
One point in this regard not addressed by these cases but deserves mentioning anyway is the effect, on the mortgage lender providing the financing for the equity stripping transaction, of the scammed homeowner's continued possession of the premises after signing away title to the property. Generally, when ordinary inspection of the premises by a purchaser or mortgage lender, followed by reasonable inquiry, would reveal the existence any right held by persons in possession, the title transfer, and any mortgage given contemporaneous therewith or subsequent thereto, would be subject to those rights (whether recorded or unrecorded). "Actual possession of real estate is sufficient notice to a person proposing to take a mortgage on the property, and to all the world of the existence of any right which the person in possession is able to establish." Phelan v. Brady, 119 N.Y. 587; 23 N.E. 1109; (NY 1890).
The following excerpt describing the fact pattern involved in Phelan v. Brady captures this point:
- At the time of the execution and delivery of the mortgage to the plaintiff, the defendant Mrs. Brady was in the actual possession of the premises under a perfectly valid but unrecorded deed. Her title must, therefore, prevail as against the plaintiff. It matters not, so far as Mrs. Brady is concerned, that the plaintiff in good faith advanced his money upon an apparently perfect record title of the defendant John E. Murphy. Nor is it of any consequence, so far as this question is concerned, whether the plaintiff was in fact ignorant of any right or claim of Mrs. Brady to the premises. It is enough that she was in possession under her deed and the contract of purchase, as that fact operated in law as notice to the plaintiff of all her rights.
- It may be true, as has been argued by the plaintiff's counsel, that when a party takes a conveyance of property situated as this was, occupied by numerous tenants, it would be inconvenient and difficult for him to ascertain the rights or interests that are claimed by all or any of them. But this circumstance cannot change the rule. Actual possession of real estate is sufficient notice to a person proposing to take a mortgage on the property, and to all the world of the existence of any right which the person in possession is able to establish. Governeur v. Lynch, 2 Paige, 300; Bank of Orleans v. Flagg, 3 Barb. 318; Moyer v. Hinman, 14 N. Y. 184; Tuttle v. Jackson, 6 Wend. 213; Trustees of Union College v. Wheeler, 61 N. Y. 88, 98; Cavalli v. Allen, 57 id. 517.)
(It should be obvious that, based on the foregoing, the importance to a real estate purchaser or mortgage lender of determining who, if anyone, is in possession of the subject property on the date of closing (ie. by conducting a so-called "walk-through" on the closing date, whether it be on a purchase transaction or a refinancing transaction, and by obtaining estoppel certificates from anyone in possession of the premises on that date attesting to the nature of their rights, if any) can't be emphasized strongly enough. If, on the date of closing, the homeowner being scammed has yet to move his/her belongings out of the premises and is still in possession thereof, this fact would appear to be enough to lead a reasonably prudent purchaser or mortgage lender to make further inquiry as to the true nature of the transaction - and obtain estoppel certificates from those in possession fully disclosing the nature of their occupancy).
For some relatively recent New York cases referencing the effect of continued possession of an occupant on the status of a buyer or lender as a bona fide purchaser / bona fide encumbrancer, see:
- Ward v. Ward, 503624,2008 NY Slip Op 4984; 52 A.D.3d 919; 859 N.Y.S.2d 774; 2008 N.Y. App. Div. LEXIS 4816 (App. Div. 3d Dept. 2008;
- Doyle v. Siddo, 31 A.D.3d 697, 818 N.Y.S.2d 474, 2006 N.Y. App. Div. LEXIS 9569 (N.Y. App. Div. 2d Dep't, 2006).
For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.