A federal bankruptcy court in New Jersey recently ruled in favor of a homeowner/couple who were screwed over for over $100,000 in home equity by a foreclosure rescue operator in a bogus sale leaseback, equity stripping scam. In addition to holding the operator liable for damages to the tune of $116,791.49 for the amount of stripped equity (to be tripled to $350,374
pursuant to the New Jersey Consumer Fraud Act, N.J. STAT. ANN §56:8-1, et seq., plus other damages, costs and homeowner's attorney fees(1)),
the court also made the attorney acting as the closing agent equally liable for those damages for his role in the fraud.
According to this story in the New Jersey Law Journal
, the sale-leaseback agreement also contained excessive late fees barred by HOSA, resulting in statutory damages of $293,836
, an amount that includes the $240,875 awarded under TILA and HOEPA, plus punitive damages. The judge added $46,000
for the operator's breach of his agreement to pay that sum for the homeowner in the Chapter 13 proceeding. When added to the $350,374 noted above, the damages total up to to $690,210
The following summary of the case is taken from the Introduction appearing at the beginning of the written decision:(3)
- Plaintiffs accuse the Defendants of defrauding them through a mortgage foreclosure rescue scam. On the eve of a sheriff's foreclosure sale, Plaintiffs deeded their house worth over $800,000 to Defendant Cleveland with an option to buy it back at $650,000. Cleveland took out a new mortgage, paid off Plaintiffs' old mortgage and pocketed over $100,000. He subsequently defaulted on his mortgage and the new lender commenced a second foreclosure action.
- This mortgage rescue scam is fraudulent and is an unconscionable commercial practice in violation of New Jersey's Consumer Fraud Act. Furthermore, the sale/leaseback is, in reality, a financing transaction subject to the Truth In Lending Act ("TILA") as amended by the Home Ownership and Equity Protection Act ("HOEPA") as well as the New Jersey Home Ownership Security Act of 2002 ("HOSA"). Since Defendant Cleveland failed to comply with each of these consumer protection statutes, he is liable for the remedies allowed thereunder.
- Defendant Gahwyler, an attorney at law, violated certain ethical obligations and conspired with Cleveland in his wrongdoings. Gahwyler is jointly liable for all damages and statutory remedies.(4)(5)
Representing the homeowner/debtors in this case was attorney Gabriel H. Halpern, Esq., of the law firm PinilisHalpern LLP.
For the court's findings of fact, its discussion of the aforementioned legal issues raised in this case, and its conclusion, see In re O'Brien (aka O'Brien v. Cleveland), Case No. 03-17448, Adversary Proceeding Case No. 08-1676; (USBC, D. N.J., January 22, 2010).
See also, New Jersey Law Journal: Real Estate Lawyer Liable for Damages for Role in Client's Mortgage Scam.
(1) According to the New Jersey Law Journal article, the homeowners' attorney Gabriel H. Halpern, of PinilisHalpern in Morristown, N.J., has already filed an application for $33,932 in legal fees and asked U.S. Bankruptcy Judge Raymond Lyons Jr. to multiply the amount by three, for an enhanced fee of $101,797. (Requesting that a "risk multiplier" be applied to a legal fee calculation as is being reported in this story is not uncommon in contingency fee cases brought under state law). This amount, if approved by the judge, will be added to the total damages to be borne by the foreclosure rescue operator and the closing attorney.
(2) The foreclosure operator and the closing attorney may also be slammed with punitive damages as well.
(3) In addition to the issues of law set forth in the Introduction to the case, the court also addressed the following issues:
- Common law fraud under New Jersey law: "The New Jersey Supreme Court has defined fraud as follows: The five elements of common-law fraud are: (1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages. Gennari v. Weichert Co. Realtors, 691 A.2d 350, 367 (N.J. 1997) (citation omitted)."
- Equitable Mortgage: "In order for TILA, HOEPA or HOSA to apply, the Plaintiffs must first establish that the sale and lease-back transaction constitutes consumer credit. They attempt to do so by categorizing the transaction as an equitable mortgage. New Jersey courts of equity have long recognized the doctrine of equitable mortgage [...]. Rutherford Nat. Bank v. H.R. Bogle & Co., 169 A. 180, 182 (N.J. Ch. 1933); [...]."
- Doctrine of Unclean Hands: The court refused to apply this doctrine against the screwed-over homeowner, who may have engaged in somewhat questionable conduct himself ("A successful unclean hands defense to an injunction proceeding requires a showing by defendant that plaintiff's conduct is inequitable and that it involves the subject matter of the plaintiff's claim." Ciba-Geigy Corp. v. Bolar Pharm. Co., 747 F.2d 844, 855 (1984)).
- Attorney Malpractice: "Under certain circumstances, an attorney may be liable to a non-client. Petrillo v. Bachenberg, 655 A.2d 1354, 1357 (N.J. 1995) (typically courts limit a lawyer's duty to situations where the lawyer should have foreseen that the third party would rely on the lawyer's work). An attorney also has an ethical obligation to refrain from participating in an illegal or fraudulent transaction. In re Labendz, 471 A.2d 21, 21 (N.J. 1984)."
- Conspiracy: "Under New Jersey law an attorney may be liable for damages if he assists a client in violating a law or committing a wrongful act. Banco Popular N. Am. v. Gandi, 876 A.2d 253, 263 (N.J. 2005)."
(4) According to the New Jersey Law Journal article, closing attorney Gahwyler faces possible discipline as a result of the case, and is currently facing another civil lawsuit involving a similar scam:
- The judiciary Web site shows he is charged, in a bankruptcy/foreclosure case, with violating Rule of Professional Conduct 8.4(c), for conduct involving fraud or deceit. The grievance date is listed as June 8, 2008, 12 days after [U.S. Bankruptcy Judge Raymond Lyons] wrote to the U.S. Attorney's Office to report "what may involve violation of the criminal laws of the United States," copying the letter to the Office of Attorney Ethics and the Passaic County prosecutor, as well as to Gahwyler, Cleveland and the O'Briens.
- Gahwyler, who apparently has closed his law office and could not be reached for comment, is also a defendant in a similar suit, Acerra v. Gahwyler, MON-L- 4579-08, referred to in Lyons' opinion. Edward Hanratty, who represents the plaintiffs in that case, filed the complaint in 2008, but says he only succeeded in serving the "very elusive" Gahwyler in early January. Hanratty plans to move for summary judgment based on Lyons' opinion and testimony from Cleveland's deposition, taken last fall.
(5) To the extent the victimized homeowners can't collect any money on its judgment from the attorney, they might consider filing a claim with the New Jersey Lawyers' Fund for Client Protection, which was established to reimburse clients who have suffered a loss due to dishonest conduct of a member of the New Jersey Bar. According to the Fund's website, for loss claims that are determined to be eligible for a reimbursement there currently is a limit of $400,000 per claimant for claims arising after January 1, 2007 and an aggregate maximum for claims against a single attorney of $1,500,000. Lower per claimant maximums apply to claims arising prior to January 1, 2007, its website states.
A similar recovery fund in Minnesota (Minnesota Department of Commerce's Real Estate Education, Research and Recovery Fund) established to reimburse clients who have suffered a loss due to dishonest conduct of a licensed real estate broker or salesperson, or a licensed closing agent, recently agreed to pay $116,972 to an 87-year-old woman who was cheated out of the equity in her home of 50 years in a similar scam. See State Recovery Fund To Cough Up $116K+ To Compensate Elderly Victim Of Bogus Sale Leaseback Equity Stripping Scam Involving Licensed Real Estate Agent.
For similar funds established to reimburse clients who have suffered a loss due to the dishonest conduct of attorneys in other states and Canada, see:
Maps available courtesy of The National Client Protection Organization, Inc.