A January, 2010 ruling by a U.S. Bankruptcy Court judge (O'Brien v. Cleveland
(In re O'Brien
), 423 B.R. 477 (Bankr. D.N.J. 2010)) slamming a peddler of a sale leaseback, foreclosure rescue scam who stripped the home equity from a financially strapped homeowner was affirmed in all aspects earlier this month by U.S. District Judge Garrett E. Brown of New Jersey.(1)
According to a January 28, 2010 New Jersey Law Journal
story reporting on the bankruptcy court ruling (see Real Estate Lawyer Liable for Damages for Role in Client's Mortgage Scam
), the total damages awarded to the homeowners was $690,210,(2)
even though they were only screwed out of $116,791
In a subsequent U.S. Bankruptcy Court hearing
, U.S. Bankruptcy Judge Raymond Lyons then approved an additional award for the victim-homeowners' attorney fees in the net amount of $33,932.50 for 81.5 hours of work and $627.50 in costs.(3)
For those involved in unwinding these types of scams, especially in cases where a state's equitable mortgage doctrine is successfully invoked (ie. which treats the substance of the arrangement as a secured loan, and disregards the 'masquerading' form of a sale leaseback - ie. "substance over form
"), in order to then apply Federal and state consumer lending laws to the scam, the ruling makes for some good reading.
For Judge Brown's ruling, see Cleveland v. O'Brien
, Civ. No. 10-3169 (GEB), (D. N.J., November 12, 2010).(1) Specifically, the Bankruptcy Court found in favor of the screwed-over homeowners:
- on the First Count of the complaint, for fraud, for damages in the amount of $116,791.49;
- on the Second Count of the complaint, for violations of the New Jersey Consumer Fraud Act ("CFA"), for treble damages in the amount of $350,374.47;
- as additional equitable relief for violation of CFA voiding the deed from Plaintiffs to Cleveland dated July 31, 2007;
- on the Fourth and Sixth Count of the complaint, for violation of the Federal Truth In Lending Act ("TILA"), as amended by the Federal Home Ownership and Equity Protection Act ("HOEPA"), damages equal to the sum of all finance charges and fees in the amount of $240,875.32 plus statutory damages of $4,000;
- for violation of TILA rescinding the transaction by voiding the deed from Plaintiffs to Defendant Frederick Cleveland dated July 31, 2007;
- on the Fifth Count of the complaint, for violation of the New Jersey Home Ownership Security Act of 2002 ("HOSA"), N.J. STAT. ANN. § 46:10B-22, et seq., for statutory damages equal to the finance charges plus 10% of the amount financed being a total of $293,836.17;
- on the Seventh Count of the complaint, breach of contract, for damages in the amount of $46,000 plus pre-judgment interest to be calculated at the federal rate from the date of filing of the complaint.
In an attempt to seek a reversal of the Bankruptcy Court ruling, the sale leaseback peddler presented the following issues on appeal:
- 1. Whether the Bankruptcy Court erred in permitting Edward Hanratty, Esq. to testify as an expert witness regarding `mortgage foreclosure rescue scams' . . . .
2. Whether the Court erred in considering the expert testimony and a purported expert report by Edward Hanratty, Esq. . . . .
3. Whether the Court erred in finding in favor of Plaintiffs regarding their claim for fraud, and entering judgment: (a) avoiding Plaintiffs' deed to Cleveland and (b) awarding damages in the amount of $116,791.49.
4. Whether the Court erred in finding in favor of Plaintiffs regarding their [CFA] claim, and entering judgment awarding treble damages to Plaintiffs in the amount of $359,374.47.
5. Whether the Court erred in finding that the transaction between Cleveland and Plaintiffs constituted an equitable mortgage.
6. Whether the Court erred in finding that the Plaintiffs did not act with unclean hands, and finding that Cleveland could not rely on such equitable defense with respect to the Court's findings.
7. Whether the Court erred in finding, with respect to [TILA]: (a) that Cleveland is a `creditor' under TILA; (b) that the transaction between Plaintiffs and Cleveland constituted a `high interest loan' under TILA; (c) that Cleveland was required to make standard disclosures under TILA; (d) that Cleveland was required to make enhanced disclosures under [HOEPA], as incorporated by TILA; and (e) that Cleveland failed to comply with TILA and HOEPA's prohibition of certain terms.
8. Whether the Court erred in finding in favor of Plaintiffs regarding their claim(s) under TILA and HOEPA, awarding damages in the amount of $242,875.32, along with attorneys' fees and costs, and rescinding the transaction between Plaintiffs and Cleveland.
9. Whether the Court erred in finding in favor of Plaintiffs regarding their claim under [HOSA], awarding damages in the amount of $293,836.17.
10. Whether the Court erred in finding in favor of Plaintiffs on their breach of contact claim, awarding damages in the amount of $46,000 plus prejudgment interest.
11. Whether the Court erred in granting Plaintiffs an award of attorneys' fees in the amount of $33,932.50, plus costs in the amount of $627.50 for violations of [CFA, TILA, and HOSA].
(2) The following excerpt in Real Estate Lawyer Liable for Damages for Role in Client's Mortgage Scam explains the breakdown of the $690,210 damages award (alterations added, bold text is my emphasis, not in the original text):
- The O'Briens' [actual] damages were the difference between the new mortgage of $646,000 and the amount paid to benefit the O'Briens [ie. $529,209 - presumably, the outstanding balance of any existing mortgage that was paid off during the execution of the scam, as well as any other liens on the home or other expenses legitimately owed by the victim-homeowners], $116,791, which [U.S. Bankruptcy Judge Raymond Lyons] tripled to $350,374.
Lyons also found the sale-leaseback was an equitable mortgage and violated laws governing mortgages: New Jersey's Homeowner Security Act and two federal laws, the Truth in Lending Act and the Home Ownership and Equity Protection Act.
Cleveland failed to make disclosures required under TILA and HOEPA and the loan included a prohibited balloon payment, resulting in a right to rescind and damages of $240,875 in finance charges and fees, plus $2,000 in statutory damages, held Lyons.
The sale-leaseback agreement 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.
Lyons added $46,000 for Cleveland's breach of his agreement to pay that sum for the Chapter 13 balance, bringing the damages to $690,210.
(3) In re O'Brien, (Bankr. D. N.J., May 18, 2010).