A recent ruling of a Federal bankruptcy court in Philadelphia, Pennsylvania provides a roadmap for one way in which a sale leaseback, equity stripping foreclosure rescue scam can be undone or unwound, invalidating both the initial title transfer (that was coupled with a contemporaneous leaseback of the premises with a repurchase option) by the victimized homeowner to the foreclosure rescue operator, as well as subsequent conveyances to others.
In a nutshell, the facts are as follows:
- Homeowners (husband & wife) transfer property to a trust formed and controlled by a local foreclosure rescue operator ("Operator"),
- Homeowners remain in possession of the property pursuant to a leaseback agreement which includes a right to repurchase the home at some future time,
- Operator then sells property to 3rd party buyer,
- 3rd party buyer gets a mortgage loan from bank to finance purchase.
- Throughout the relevant time period, Homeowners maintained clear, open and exclusive possession of their home.
In ruling that Homeowners were entitled to undo this scam, U.S. Bankruptcy Judge Eric L. Frank found, among other things:
- Operator violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPCPL)" by running this scam,
- Homeowners were entitled to the remedy they requested - the invalidation of the deed to Operator and have their title restored, returning them to the position they were in immediately before they were scammed,
- The transfer of title by Homeowners to Operator, while not void ab initio, was nevertheless voidable by reason of the violations of the UTPCPL,
- The subsequent title transfer by Operator to 3rd party buyer was subject to invalidation because the buyer, by reason of the fact that Homeowners maintained clear, open and exclusive possession of their home, had constructive notice of the scam and, consequently, was not a bona fide purchaser entitled to the protection of the state recording statutes,(1)
- The subsequent mortgage involving the 3rd party buyer and the mortgage lender used in financing the subsequent purchase was subject to invalidation because the lender, by reason of the fact that Homeowners maintained clear, open and exclusive possession of their home, also had constructive notice of the scam and, consequently, was not a bona fide purchaser entitled to the protection of the state recording statutes.
- Homeowners' were entitled to recover attorneys’ fees and costs from Operator.
However, Judge Frank did go further to find that, to the extent that the proceeds of the loan from the mortgage lender were applied to paying off Homeowners' existing mortgage in default, delinquent real estate taxes, and similar type expenses that in some way directly benefitted Homeowners, the mortgage lender was entitled to an equitable lien on the home for the amounts paid thereon. By granting the equitable lien on the home to the lender, Judge Frank refused to allow Homeowners the enjoyment of the significant windfall resulting from the payoff of the existing liens encumbering the property immediately before the scam was executed.
The mortgage lender, however, was not entitled to the protection of an equitable lien on the home for the amount of the excess proceeds, including any amounts pocketed by Operator, paid for closing costs, etc.
For the ruling, see In re Fowler, Chapter 13, Bky. No. 07-11692ELF, Adv. No. 07-00139ELF (Bankr. E.D. Pa. March 3, 2010).
(For those looking for a quick, easy read, don't bother clicking the link to this case. The ruling is 90+ pages and frankly, there's no way to fully address, in one blog post, all the facts and circumstances, and the related points of law, that Judge Frank exhaustively - and exhaustingly - covers.)
Representing Homeowners in the litigation in this case was The Regional Bankruptcy Center of Southeastern PA, Havertown, PA. (In detailing the events that transpired during the relevant times leading up to the lawsuit, Judge Frank noted in his ruling that Homeowners obtained pre-litigation legal assistance from Community Legal Services of Philadelphia).
(1) For more Pennsylvania case law on this point, see:
For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.