Monday, December 06, 2010

2 Sale Leaseback Peddling Cops Accused Of Consumer Fraud Violations; "Equitable Mortgages" Required Disclosures Under TILA, HOEPA: Arizona AG

In Phoenix, Arizona, Courthouse News Service reports:
  • Two men defrauded 140 homebuyers by acquiring title to their homes through so-called "sale-leaseback," then selling the homes elsewhere for hefty profits, the Arizona attorney general says. The state says Lee Brent Shaw and Mark P. Tallman and their companies, Better Choice Investments and Better Solutions, stripped their victims of their equity and their homes.(1)

  • "This case involves an equity stripping scheme that defrauded over 140 Arizona homeowners, ultimately causing them to lost both their home and their home's equity," the complaint states. "Defendants obtained the homes through a foreclosure rescue scheme aimed at vulnerable, often low-income homeowners facing imminent foreclosure. In what is known as a sale-leaseback, defendants took title to the homes after the payment of the arrears on the homeowner's mortgages, in exchange for allowing the homeowner to stay in the property as a tenant. This transaction, also known as an equitable mortgage, violates Arizona law,"(2) the state attorney general says in Maricopa County Court.

  • The state claims that no homeowners were told that their home would be immediately sold to an investor, nor that that if a trustee's sale took place "they would be entitled to excess proceeds," nor were they given the required information by the Homeowners Equity Protection Act or the Truth in Lending Act.(3)(4)

For more, see State Busts Sale-Leaseback Home Scheme.

For the lawsuit, see State of Arizona v. Shaw, et al.

(1) Earlier media reports identify this duo as police lieutenants with the Phoenix Police Department. See:

(2) In a recent New Jersey case involving only one sale leaseback deal (see NJ Federal Judge Upholds Ruling Awarding $690K To Homeowner Screwed Out Of $116K In Sale Leaseback Scam; OK's Add'l $34K For Victims' Attorney Fees), substantially all of the court-awarded damages granted to a homeowner-couple were attibutable to actual damages for the stripped equity of $116,791.49 (which was then tripled to $350,374.47 pursuant to the applicable state consumer fraud statute), and $293,836.17 in statutory damages for violations of the Federal Truth In Lending Act, Federal Home Ownership and Equity Protection Act, and a state consmer lending law.

I wonder if anyone at the Arizona Attorney General's office has attempted to calculate the financial exposure that this duo faces resulting from the 100+ ripoffs they've been accused of perpetrating.

For the treatment of sale leaseback arrangements as equitable mortgages, see generally:

(3) The pair was also accused of acting as unlicensed mortgage brokers and mortgage bankers.

(4) In this case and others (assuming the scammed homeowner can't establish that the conveyance is absolutely void, such as in the case involving forged land documents - in which case all subsequently acquired interests in the home are also absolutely void) where the scammed homeowner retains and maintains continued, undisturbed possession of the home after signing the 'ripoff' documents conveying title to another, a strong case can arguably be made that a successful attempt to void the title conveyance to the scammers could also lead to the voiding of any subsequent mortgage placed on the home, even if the lender had no actual knowledge of the scam and claims to have the protection of the recording statutes as a bona fide purchaser.

In Arizona, (as well as in most other jurisdictions), any purchaser of real estate, or lender acquiring a security interest therein, has a duty to conduct a physical inspection of the realty, and where a physical inspection of the property would reveal an adverse interest or where there is a party in possession other than the record title owner, the purchaser or lien claimant has a duty to inquire of the possessor as to his interest and is charged with knowledge of the facts discoverable from such an inquiry or inspection.

Failure to make such inspections or inquiries could potentially:

  • leave the purchaser's or lender's interest in the property subject and subordinate to any legal rights and equities that the scammed victim can establish, and

  • disqualify the subsequent purchaser or lender from the protections accorded a bona fide purchaser or bona fide encumbrancer.

See, for example, Bianconi v. Smith, 3 Ariz. 320; 28 P. 880 (1892):

  • "Common, ordinary business prudence would have suggested some investigation as to the source of appellee's title, and some inquiry as to who was in possession, before purchasing the property; and appellant's neglect of these indicated either gross carelessness or a degree of credulity not usually exhibited by men of ordinary experience."

and Keck v. Brookfield, 409 P.2d 583 (Ariz. App. Ct. 1965):

  • A purchaser of land in possession of one other than the holder of the record title is compelled to inquire of the possessor by what title he holds possession, or he will be held to have taken subject to whatever rights a proper inquiry would disclose that the possessor had. Roy & Titcomb, Inc. v. Villa, 37 Ariz. 574, 577, 296 P. 260 (1931).

For more on the duty of a subsequent purchaser or encumbrancer to conduct inspections and make the appropriate inquiries of persons in possession of real estate in Arizona, (for which there is case law dating back over a century), see:

In other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

For some insights on the various legal theories and strategies to attacking this type of scam in litigation brought on behalf of the screwed-over homeowner, see:

posted by Home Equity Theft Reporter at 4:02 AM