Sale Leaseback Deal A Constructively Fraudulent Transfer, Violated State Consumer Protection Act, Says Judge In Granting $244K+ Triple Damage Award

In a recent ruling from a U.S. Bankruptcy Court in Boston, Massachusetts, 3 individuals and one company were found liable for the return of over $81,000 in home equity that was pocketed from a couple facing foreclosure in a sale leaseback, foreclosure rescue arrangement which was found to constitute a constructively fraudulent transfer under sections 548 and 550 of the U.S. Bankruptcy Code.(1)

In addition, as a result of a default in the case by the company involved and one of the individuals who failed to show up to the trial to defend himself, the court found them liable for violating the Massachusetts Consumer Protection Act [Mass. Gen. Laws ch. 93A]. Accordingly, it assessed an award in favor of the Bankruptcy Trustee (who brought the lawsuit on behalf of the bankruptcy estate) in the amount of $244,513.11, which represents triple damages allowed under state law, and is based on the amount of the home equity ripoff ($81,504.37 x 3).

For the ruling, see Lassman v. Reilly (In re Feeley), Chapter 7, Case No. 06-13582-JNF, Adv. P. No. 07-1201 (Bankr. D. Mass., April 13, 2010).

(1) In this regard, the court observed:

• Under section 548(a)(1)(B), the trustee must prove the following elements: "(1) a transfer of the debtor's property or interest therein; (2) made within one year of the filing of the bankruptcy petition; (3) for which the debtor received less than a reasonably equivalent value in exchange for the transfer; and (4) either (a) the debtor was insolvent when the transfer was made or was rendered insolvent thereby. . . ." In re Cahillane, 408 B.R. at 188-89 (citations omitted). Additionally, the trustee must prove each element by a preponderance of the evidence. Id. at 189 (citing, inter alia, Frierdich v. Mottaz, 294 F.3d at 867). See also Tomsic v. Pitocchelli (In re Tri-Star Techs. Co., Inc.), 260 B.R. 319 (Bankr. D. Mass. 2001).

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• Having found that the Trustee is entitled to avoid the transaction, section 550 permits the trustee to recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from "the initial transferee of such transfer [Reilly] or the entity for whose benefit such transfer was made [the remaining defendants]." 11 U.S.C. § 550(a)(1). In his Amended Complaint, the Trustee did not specify which alternative he sought, but in his Memorandum, the Trustee clarified that he is seeking the value of the property transferred, namely the Debtors' equity which equaled $81,504.37 on March 29, 2006.

(Note that the sale leaseback deal was consummated between the homeowners and the foreclosure rescue operators on March 29, 2006, which was at or near the height of the recent real estate boom/bubble. Between that time and now, the value of the home has presumably suffered a significant loss in value. Given that, when filing a lawsuit to unwind or undo this type of home equity scam, a decision must be made (typically by the screwed over homeowner, or in this case, the bankruptcy trustee) whether to seek to restore the property title in the name of the homeowner, or allow the foreclosure rescue operator (or whoever the current homeowner is) to keep the house and, instead, seek financial damages for the amount of the home equity ripoff, it may be in the homeowner's best interest to opt for the financial damages (assuming, of course, that the foreclosure rescue operators have deep enough pockets to cough up the cash to cover the court's damage award). This may be especially true if the homeowner is in a state/jurisdiction that has a consumer protection statute that provides for a recovery of triple damages. In this case, the amount of the $81,000+ in recoverable damages (increased to $244,000+ with respect to two of the defendants for violating the Massachusetts Consumer Protection Act) was calculated based on the home's value on March 29, 2006 (the day the ripoff was consummated). Had the Bankruptcy Trustee sought recovery of the home itself, the bankruptcy estate would be getting back the home at today's (presumably significantly lower) worth, encumbered by a mortgage debt that may exceed the home's now-lesser value.

It appears that, when seeking to unwind or undo one of these sale leaseback, foreclosure rescue scams that was consummated at or near the height of the recent real estate boom/bubble, the victim - and the victim's attorney - must "be careful what they ask for" and exercise great care with respect to the specific remedy they seek, the way (I suspect) the Bankruptcy Trustee did in this case (or maybe he just got real lucky).)