Nebraska Supreme Court Ruling A Reminder That Signed Contracts In Sale Leaseback, Foreclosure Rescue Deals May Not Be Binding

A 2005 court ruling by the Nebraska Supreme Court ordered an Omaha-based foreclosure operator to return home titles to a dozen victims who were duped into signing contract documents based upon assertions that the papers were merely refinancing documents, when in fact they constituted title transfers of their homes coupled with contemporaneous leasebacks of the premises in which the victims were granted rights to repurchase.

In issuing its ruling in favor of the homeowners, the court provided the following analysis that serves as a reminder that signed contracts are not always binding(1) [bold text is my emphasis, not in original]:

• Defendants contend that these written contracts were binding, based upon the rule that “[o]ne who signs an instrument without reading it, when he can read and has the opportunity to do so, cannot avoid the effect of his signature merely because he was not informed of the contents of the instrument.” See Bock v. Bank of Bellevue, 230 Neb. 908, 916, 434 N.W.2d 310, 316 (1989). They further contend that because plaintiffs had the contract documents available for review, plaintiffs could not have reasonably relied on any verbal misrepresentation. See Schuelke v. Wilson, 250 Neb. 334, 549 N.W.2d 176 (1996).

• The general rule that one who fails to read a contract cannot avoid the effect of signing it applies only in the absence of fraud. See, Mayer v. Howard, 220 Neb. 328, 370 N.W.2d 93 (1985); Day v. Kolar, 216 Neb. 47, 341 N.W.2d 598 (1983). Restated, the rule that one who signs a contract is bound by its terms does not apply where the controversy is between the parties and the execution of the instrument was induced by fraud. The doctrine that the carelessness or negligence of a party in signing a writing estops him from afterwards disputing the contents of such writing is not applicable in a suit thereon between the original parties thereto when the defense is that such writing, by reason of fraud, does not embrace the contract actually made. West v. Wegner, 172 Neb. 692, 694, 111 N.W.2d 449, 451 (1961).(2)

• Because the district court specifically found that each of the plaintiffs was fraudulently induced to sign what were misrepresented as loan documents, the general rule binding a party to a signed contract does not apply.(3)

For the court ruling, Eicher v. Mid America Financial Investment Corp., 270 Neb. 370, 702 N.W.2d 792 (2005) (made available online by Findlaw.com).

(1) This case also serves as a reminder that attorneys taking these cases need not accept them on a purely pro bono basis, but rather, a contingecy fee basis. Part of this ruling affirmed an attorney fee awarded to the defrauded homeowners' lawyers (and payable by the foreclosure rescue operator) of over $375,000.

(2) The U.S. Supreme Court, in FTC v. Standard Education Society, 302 U.S. 112, 116 (1937), also provides this admonition:

• There is no duty resting upon a citizen to suspect the honesty of those with whom he transacts business. Laws are made to protect the trusting as well as the suspicious. The best element of business has long since decided that honesty should govern competitive enterprises, and that the rule of caveat emptor should not be relied upon to reward fraud and deception.

(3) Similarly, in Moore v. Cycon Enterprises, Inc., (Case No. 1:04-CV-800), 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006), a Federal judge in Michigan made these observations when a foreclosure rescue operator asserted that the homeowner/couple should be bound by the terms of the contract they signed [bold text is my emphasis, not in original]:

• The heart of this case is the determination of whether the transaction between the Moores and Cycon was a true sale and leaseback or whether it was in reality a loan. Cycon has offered a number of arguments supporting its position that the transaction was clearly an absolute sale and a leaseback, including: (1) the unambiguous terms of the closing documents establish that the Moores intended to sell their property to Cycon and lease it back from Cycon; (2) the Moores failed to read the closing documents and are therefore bound by the terms of those documents; (3) the parol evidence rule precludes the consideration of evidence of prior discussions between the Moores and Peltz as well as evidence of the Moores’ intentions regarding the transaction; and (4) the integration clause in the lease precludes the Moores from introducing evidence of their intentions regarding the lease.

• While Cycon’s arguments would no doubt be fine, and certainly persuasive, grounds for summary judgment in a typical contract case, the Moores have invoked Michigan’s “equitable mortgage” doctrine in this case, as to which such arguments are not necessarily applicable. “The power of a court of equity to decree an equitable mortgage under proper circumstances and to construe an instrument in the form of an absolute conveyance as security for the payment of a debt, or the performance of some other obligation, is well established.” Judd v. Carnegie, 324 Mich. 583, 587, 37 N.W.2d 558, 589 (1949). See also Grant v. Van Reken, 71 Mich. App. 121, 125, 246 N.W.2d 348, 350 (1976) (“It is well settled that a court of equity can declare a deed absolute on its face to be a mortgage.”).

• In Wilcox v. Moore, 354 Mich. 499, 93 N.W.2d 288 (1958), the Michigan Supreme Court, in discussing the doctrine, observed: Suffice to say that its purpose is to protect the necessitous borrower from extortion. In the accomplishment of this purpose a court must look squarely at the real nature of the transaction, thus avoiding, so far as lies within its power, the betrayal of justice by the cloak of words, the contrivances of form, or the paper tigers of the crafty. We are interested not in form or color but in nature and substance. Id. at 504, 93 N.W.2d at 291.

• Because a court is concerned with the true intention of the parties based upon the surrounding circumstances in considering whether a transaction is an equitable mortgage, traditional legal principles, such as the parol evidence rule, do not apply. See Ferd L. Alpert Indus., Inc. v. Oakland Metal Stamping Co., 379 Mich. 272, 276, 150 N.W.2d 765, 767 (1967) (“One of the many exceptions to the parol evidence rule is that parol evidence may be admitted to prove that a written conveyance absolute in its terms was intended by the parties to operate only as a mortgage.”).

Moore v. Cycon Enterprises, Inc. & Flack v. McClure - Equitable Mortgage Cases

http://HomeEquityTheft.blogspot.com
Re: Moore v. Cycon Enterprises, Inc., (Case No. 1:04-CV-800), 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished)

For those readers recently attempting to find the name of legal counsel who successfully litigated the equitable mortgage issue for the property owner in this case, it was attorney Phillip C. Rogers, Grand Rapids, Michigan. Mr. Rogers is a member of the National Association of Consumer Advocates.

I referred to this case in two earlier posts, December 17, 2006 and January 2, 2007.

In addition, the Illinois equitable mortgage case Flack v. McClure, 206 Ill. App. 3d 976, 565 N.E.2d 131, 151 Ill. Dec. 860 (Ill. App. Ct. 1990) is now posted here, for those recent visitors looking for this case.

Click here for a list equitable mortgage posts on this blog.

NY Lawyers Land Legal Fee Of $1 Million In Pro Bono Case

I stumbled across a recent New York Law Journal article (appearing in New York Lawyer) that reports on a case heard by a New York Federal Court where the lawyers representing a group of waiters, busboys and captains who worked in a restaurant in New York's Chinatown successfully challenged an unfair labor practice engaged in by their employer. While the attorneys (Skadden, Arps, Slate, Meagher & Flom and the Urban Justice Center) reportedly took on the case on behalf of their clients on a pro bono basis (ie. no legal fees charged to the restaurant employees), a federal judge nevertheless awarded the employees' attorneys a legal fee of $957,710; with liability for the payment thereof being imposed on the restaurant who engaged in the unfair labor practice.

For more, see NY BigLaw Leader Scores $1 Million Fee in Pro Bono Case.

For a copy of the Federal Court decision, see Heng Chan v. Sung Yue Tung Corp.

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I make mention of this case because, in the context of foreclosure rescue litigation, I have no doubt that there are some people who wonder how a financially strapped homeowner, someone who can't afford to make his/her mortgage payments, can possibly be able to afford an attorney to sue a foreclosure rescue operator in order to get his/her home back. The reason that there are a growing number of homeowners bringing lawsuits against foreclosure rescue operators is because their attorneys, like the attorneys who represented the waiters, busboys, and captains in the New York labor law case, are suing for violations of statutes that allow a judge to award a successful plaintiff's attorney a legal fee, and impose the obligation for its payment on the party who violated the law.

Examples of such laws are:

1) The Federal Truth In Lending Act (see, for example, Moore vs. Cycon Enterprises, where a Michigan Federal Court ruled that a foreclosure rescue operator violated that law in a purported sale leaseback arrangement with a financially strapped homeowner).

2) State consumer protection and/or unfair and deceptive trade practices statutes (see, for example, Eicher v. Mid America Financial Investment Corp., where the Nebraska Supreme Court affirmed an attorney fee award of $378,000 to the lawyers representing a group of foreclosure rescue victims, and imposed the obligation for its payment on the foreclosure rescue operator, who was found to have violated the Nebraska Consumer Protection Act).

3) In addition, there is at least one state that allows for a similar award of attorney fees by a court for violation of the state usury laws involving consumer loans and credit sales (see, for example, Smith v. Eisen, where an Arkansas appellate court ruled that a homeowner was entitled to an award of her attorney's fees to be paid by a pawn shop owner; in this case, the court found that a sale of a home with a contemporaneously executed buyback arrangement between the homeowner and a local pawn shop owner was nothing more than a usurious loan secured by an equitable mortgage).

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I am also compelled to mention one other case reported on this blog in the past. In this case, the Washington, D.C. law firm Hogan and Hartson LLP obtained a substantial jury verdict, including $3.3 million in punitive damages, against a foreclosure rescue operator in the Washington, D.C. metropolitan area for violating the D.C. Consumer Protection Act (see Hogan & Hartson Wins $3.3 Million Verdict in Pre-Foreclosure Scam Case). While the news release does not discuss attorney fee awards (and presumably the D.C. statutes allows for an attorney fee award on top of the damages award), it is not unreasonable to believe that the law firm will, at a bare minimum, share in a part of the $3.3 million punitive damage award. Assume a cut of between 20% and 40%, and you can do the math yourself.

Whether you are a financially strapped homeowner, an experienced or aspiring foreclosure rescue operator, or an attorney thinking of representing either, I hope the foregoing has given you some insight as to:

1) How foreclosure rescue victims can go about retaining the services of an attorney for the purpose of undoing a foreclosure rescue arrangement and either getting back their homes, or otherwise salvaging the equity in their homes, and

2) who will end up footing the bill for the foreclosure rescue victim's legal fees in a successful litigation.

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Go here for other posts referencing Moore vs. Cycon Enterprises.

Go here for other posts referencing Eicher vs. Mid America Financial Investment Corp.

Go here for other posts referencing Smith vs. Eisen.

Go here for other posts referencing Hogan & Hartson. equitable mortgage yak

Assistance Available For Attorneys Representing Scam Victims

Let's say you are an attorney with some litigation experience and you have an elderly widow, who we will call Mrs. Jones, who is the victim of a "home equity theft" scam walk into your office desparately looking for some legal help in keeping her home of 47 years.

After speaking with her at length, you determine the following:

• Mrs. Jones is the victim of a classic "foreclosure rescue" arrangement, whereby she unwittingly signed over ownership of her home to someone she describes as "a nice man who showed up at my front door offering to help me with a foreclosure bailout loan" (ie. foreclosure rescue operator) in exchange for him (1) bringing current a low-balance, defaulted home improvement loan mortgage that she obtained two years ago, (2) entering into a one year leaseback of the home to her allowing her to retain temporary possession of her home, (3) giving her a "buy back option", whereby she has the right to buy back her home from "the nice man" at price far above what she sold it to him for,

• there may be a serious question of whether or not Mrs. Jones understood what documents she was actually signing; she is adamant in telling you that under no circumstance would she ever consider selling her home of 47 years to a complete stranger (she wants to leave the home to her grandchildren) and that "the nice man" told her that all she was doing was "signing some standard loan papers" in exchange for a loan to reinstate a mortgage that was in arrears (you wonder if Mrs. Jones' signature on the deed was procured through fraud),

• Mrs. Jones knows that she has a big problem but that, even though she has two adult children and several adult grandhildren that could possibly be of some assistance to her, the overwhelming sense of embarassment that she is feeling for doing something her entire family might perceive as being foolish keeps her from telling anybody.

You feel terrible about what was done to Mrs. Jones, and you would really like to help her. The trouble is that you've never handled a case like this, you don't really know how to approach it, and that, if you took the case (on a pro bono basis, of course; after all, Mrs. Jones has no money to pay you), it would take you a tremendous amount of time, time that you don't have, to properly handle the case. At the end of your meeting with her, you tell Mrs. Jones that you're going to look into the situation and get back to her in a couple of days (obviously, you don't have the heart to tell her right away that you can't take her case without at least trying to do a little something to see if you can be helpful).

After she leaves your office, you get onto the Internet and you "Google" a couple of key words to see if you can "stumble into" any information that might shed some light on how to approach Mrs. Jones' circumstances. Interestingly enough, you "stumble into" the following:

• On the website of The First American Corporation (which is a national title insurance underwriter, among other things), you find an article titled Michigan Appellate Court Sends Warning to 'Foreclosure Consultants', co-authored by Albert Rush and John C. Murray. This article discusses a Michigan case involving a "foreclosure rescue" deal involving a sale of a home by a financially strapped homeowner to a foreclosure rescue operator and a susbequent leaseback of the home to the homeowner. A Michigan Court of Appeals affirmed the decisions of two lower courts in deciding that the deed transfering the home from the homeowner (ie. Mrs. Jones) to the "rescue" operator should not be treated as a deed, but rather, it was deemed to be an "equitable mortgage" (ie. the arrangement was treated as a mortgage loan to the homeowner, and not as a sale to the foreclosure operator with a simultaneous leaseback to the homeowner)

• You find another article on The First American Corporation website titled When is a Sale-Leaseback an Equitable Mortgage?, co-authored by Gregory A. Thorpe and John C. Murray. This article discusses an Illinois case (not a "foreclosure rescue" deal) involving two sets of sophisticated real estate investors represented by experienced counsel where the court decided that the sale-leaseback involved was not an "equitable mortgage". However (and more importantly), the article sets forth a list of thirteen factors that the Illinois state courts apparently look at when determining whether a sale-leaseback should be respected as such, or whether it should be deemed an "equitable mortgage"
  
  
• On the online newsletter of a Michigan law firm (Lipson, Neilson, Cole, Seltzer & Garin, P.C.), you find a brief summary of a recent Michigan Federal District Court case captioned Court Clobbers Foreclosure Rescue Plan, involving a "foreclosure rescue" sale-leaseback deal. The court found that, not only was the arrangement to be deemed an "equitable mortgage", but additionally, (because the arrangement was treated as a loan) it held that there were violations of the federal Truth in Lending Act ("TILA") and the Home Ownership and Equity Protection Act of 1994 ("HOEPA"), and also held that the lease was void and uncollectible, and that the purported sale leaseback was usurious

• The online newletter provided a link to the above referenced Federal Court decision, Moore v. Cycon Enterprises, Inc., which was kindly posted on the Internet by the Michigan Bar Association

• You found a Florida appellate court case, decided in 2006, involving a homeowner who signed over his home to another. In exchange, financing was to be arranged by the new title owner and/or a related party in order to refinance the existing mortgage on the home. Further, the homeowner claimed that there was an oral understanding whereby the now former homeowner would have the title to his home deeded back to him upon either his satisfaction or assumption of the newly arranged financing (the new title owner denied the existence of any such oral agreement). When the time came to deed back the home, the new title owner refused to do so. The homwowner filed suit seeking, among other things, to impose a constructive trust and an equitable lien on the property. The trial court dismissed these claims. The Florida appellate court, in reversing, held that Florida's Statute of Frauds does not bar claims for equitable relief such as these and, accordingly, directed the lower court to allow the case to continue and allow the homeowner the chance to provide oral evidence to support his claim that there was an oral agreement between the parties to deed back the home to him upon him either satisfying or assuming the new financing.

Based on all of the above (including the significant amount of case law cited within the above sources of information), you believe that Mrs. Jones may have a good case to rescind or void the transaction; however, you still have the problem that you've never handled this type of case. Further, you are exclusively a state court practitioner and some of Mrs. Jones potential claims are federal claims, and you're not sure whether they need to be litigated in Federal Court, where you've never practiced, or whether they can be brought in state court. Also, you're still going to have to do a significant amount of case law research (after all, you can't simply "cite stuff that you stumbled into on the Internet" in your briefs). In addition, the state case law involved above may only apply to Michigan, Illinois or Florida (there may not necessarily be similar case law that applies to Mrs. Jones' potential state law claims in your home state).

You would like to help Mrs. Jones but you feel like you're going to have your "back against the wall" if you do take her case.

How should you proceed?

According to their website, the National Consumer Law Center (NCLC), who are nationally recognized as consumer law experts, offers a variety of consulting services on consumer law issues for attorneys nationwide. You may want to consider contacting them, discussing Mrs. Jones' situation with them, and finding out what their services will cost you. They are particularly familiar with "foreclosure rescue" scams (see their exhaustive report on these types of scams - available here).

In addition, you learn that Federal & State consumer protection statutes typically provide for an award of attorney's fees if you prevail in the case. So, to the extent you can prove violations of any state unfair & deceptive trade practices laws in your state, or any violations of Federal law (like TILA & HOEPA), you may end up being entitled to an attorney fee award to be paid by the losing party (The fee, generally calculated as a function of how many hours that you spent on the case multiplied by an hourly rate, subject to court approval, may be increased by a "contingency fee multiplier" in a state court case if you're in a state like Florida that allows for the application of such a multiplier).

All of a sudden you now realize that a case that you initially thought you would have to do for free (if you indeed took the case) is no longer a pro bono case, but rather, a contingency fee case. Needless to say, there is now much more incentive to take Mrs. Jones' case.

Whether or not you ultimately decide to take Mrs. Jones' case is a decision that shouldn't be taken lightly. There may be other issues that you may have to consider that aren't discussed here. However, at least now you are aware that if you do decide to take her case, there may be a financial incentive (provided by the consumer protection statutes) for you to do so and there is technical & advisory support available (NCLC) if you choose to avail yourself of it.

I will conclude here by briefly mentioning the National Association of Consumer Advocates (NACA). NACA is a non-profit association of attorneys and consumer advocates that are private and public sector attorneys, legal services attorneys, law professors and law students whose primary focus is the protection and representation of consumers.

While NACA is generally considered to be a good source for a consumer to use when seeking a consumer protection attorney, state court practioners should not hesitate using the NACA membership as well in cases where he/she is seeking a co-counsel arrangement with someone experienced in both consumer law issues and Federal practice, particularly in cases that may involve Federal claims, such as the TILA & HOEPA claims that may apply in Mrs. Jones case. While this is not necessarily intended as an endorsement of NACA as a whole, I am simply saying that if you're seeking a Federal consumer practitioner to work with (or if you're an individual looking for a consumer lawyer, for that matter), the NACA website may be a pretty decent place to start your search. A list of attorneys who are members of NACA, listed by state, can be found here.

For more on attorneys taking consumer cases, see Use Of Consumer Attorneys To Unwind Predatory Loans.

For other posts on the equitable mortgage, see Equitable Mortgage Doctrine I , II , and III.

Case Law Citations:

London v. Gregory, 2001 Mich. App. LEXIS 1700 (Mi. App. Ct. 2001) (unpublished) (click here for case)

Moore v. Cycon Enterprises, Inc., (Case No. 1:04-CV-800), 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished) (click here for case) or you can access the Michigan Western District Federal Court website directly by clicking here for case (requires PACER registration, login and password)

185 North Wabash, LLC v. Lake Wabash, LLC, No. 1-03-0751 (Ill. App., 1st Dist. Dec. 24, 2003) (unpublished) (copy unavailable)

Robinson vs. Builders Supply & Lumber Co., 223 Ill. App. 3d 1007, 586 N.E.2d 316 (1st Dist. 1991) 223 Ill. App. 3rd 1007 (1991) (click here for case)

Guest v. Claycomb, 932 So. 2d 567 (Fla. App. Ct. 5th Dist. 2006) (click here for case)

(revised 10-7-07)

Michigan Federal Judge Orders Return Of Home By Foreclosure Rescue Operator

This post is a follow up on a prior post dated January 2, 2007 titled Foreclosure Rescue Operator Violates Federal Law, State Usury Law.

In an order and accompanying opinion dated this past Friday (2-9-07), a Michigan Federal judge has officially declared the foreclosure rescue arrangement at issue in the case an equitable mortgage, and has ordered the foreclosure rescue operator to reconvey the title to a house back to the homeowner (the original "rescue" transaction took place in June, 2003). In addition, the judge has ordered that the homeowner is:

• entitled to statutory damages of $2,000 for the rescue operator's failure to comply with the disclosure requirements of the Federal Truth In Lending Act ("TILA"),

• entitled to additional statutory damages of $2,000 for the rescue operator's failure to respond to the homeowner's notice of rescission, in violation of the TILA,

• entitled to a rent credit for $6,700 for rent payments paid to the rescue operator on the leaseback agreement for the period of time immediately after the "rescue" transaction was consummated and the time that the homeowner defaulted on the "leaseback",

• not liable for over $25,000 in "origination fees and other settlement charges" paid on his behalf when the sale leaseback arrangement was consummated.

Implicit in the court order is that the homeowner has obtained the benefit of an interest free loan on the money advanced by the "rescue" operator from the date the initial "foreclosure rescue, sale leaseback" was consummated ( June 11, 2003) until the date of the court order (February 9, 2007), a little over 3 1/2 years.

In addition, the court awarded the operator approximately $6,500 for amounts advanced for property taxes and insurance on behalf of the homeowner, and 7% interest on the equitable mortgage (commencing 2-9-07). The court has given the homeowner 90 days to satisfy the unpaid balance of the court-declared equitable mortgage (approximately $186,000), at which point the "rescue" operator will be free to foreclose on his equitable mortgage.

The amount of attorney's fees that the operator will have to pay to the homeowner's attorney as a result of its losing this case has yet to be determined by the court and, unless the parties reach a settlement on this issue, will be the subject of a future court order.

There is no indication in the record as yet as to whether the operator will appeal this decision.

For the court order and opinion, see

Moore - Summary Judgment Order

Moore - Summary Judgment Opinion

Click here for other Moore v. Cycon court documents in this case. equitable mortgage zebra

Grand Rapids Couple In Foreclosure Accuse Equity Stripper Of Pocketing Home Equity, Defaulting On Mortgage; Cops Investigate

In Grand Rapids, Michigan, WOOD-TV Channel 8 reports:

• Jason and Tricia Wise were losing their home on Grand Rapids' northwest side when they got a mailer from a company called Canal Street Financial. "It was one of the first letters we got that actually said, 'we're interested in saving your home,'" Jason Wise said. But it didn't turn out that way. "Basically they got a mortgage and robbed all the equity out of our home and then never made those payments and then waited for the bank to foreclose and kick us out of our house," Wise laments.

***

• The Wises deeded their house for $1 to a company called Wells Financial, operated by an employee of Canal Street. Then Wells Financial deeded the house to Canal Street's boss, Norman Long. Long, using another corporate identity, NTW Investments, sold the house back to the Wises on a land contract which had them making monthly payments of $719 until the total amount was paid off, at which time they would get back the deed to the house.

• But Norman Long had a secret. He had his own deal to make money off the house, unknown to the Wise family. He got a new mortgage on the house for $119,000, paid off their old mortgage of $86,000, and pocketed the $33,000 difference. In addition, Long was receiving the Wises faithful monthly payments on their land contract.

• "For the next two years we make all of our payments and we think everything is fine, that we're rebuilding our credit," Jason Wise said. But what he didn't know is that, despite all that income, Long didn't make the payments on his mortgage. That lender foreclosed and the Wises were back where they started with an even bigger payoff needed to save their home.

***

• A Grand Rapids police detective and a US Postal Inspector are investigating to see if they can charge Long with a crime.(1)

For more, see Secret deal leaves family facing foreclosure - again (go here for video).

Editor's Note:

Arguably, the transaction described in this report could constitute an equitable mortgage. In that case, the homeowners who were screwed out of their home title would still be considered the owners of the property.

Further, because the Wises remained in possession of the home throughout the entire relevant period, and were in possession when the bank made the mortgage loan to Long, it is arguable that the mortgage lender making the $119,000 mortgage was on notice of any property rights the Wise's could establish, and consequently, would not be entitled to bonafide purchaser status - thereby making their mortgagee's interest in the home inferior to the Wise's (at least to the extent that the $119,000 loan exceeded the $86,000 balance on the existing mortgage that was paid off). Essentially, a case could be made that it's the bank that loaned the $119,000 that would be screwed out of $33,000 - not the Wises.

For examples of what a lawsuit against a foreclosure rescue operator looks like, one that asserts equitable mortgage and usury, see:

• Moore v. Cycon Enterprises, Inc. (a Michigan foreclosure rescue case),
• Commonwealth of Massachusetts vs. Sohmer (a Massachusetts foreclosure rescue case).

Go here for information on equitable mortgages in Michigan. Go here for information on bonafide purchaser case law in Michigan.

Go here for a recent post in which this scenario was played out.

(1) Go here for Criminal Prosecutions Of Foreclosure Rescue Operators, Refinancing & Other Deed & Equity Scams.

Michigan State Court Declares "Foreclosure Rescue" Transaction An "Equitable Mortgage"

In this 2001 court decision by the Michigan Court of Appeals, a transaction involving a foreclosure rescue operator who entered into a "lease buyback", foreclosure bailout arrangement with a homeowner facing foreclosure was legally deemed to be nothing more than a loan transaction. Through the invocation of Michigan's "equitable mortgage" doctrine, the homeowner was deemed to have retained all of her ownership rights to the property involved, notwithstanding the fact that she had actually signed documents, including a warranty deed, that purported to transfer title to the property from her to a foreclosure rescue operator.

Both this 2001 case (London v. Gregory, which is available here), along with the 2006 Moore v. Cycon case from a Michigan Federal Court (available here) that I referred to in yesterday's post, appear to cite to a rather extensive body of Michigan case law on the "equitable mortgage" issue that can be utilized by homeowners (and their attorneys) to help them retain their ownership rights in those cases where, unwittingly or not, they sign over the title to their real estate to a rescue operator for the purpose of borrowing money. (Neither of these decisions, nor the cases cited therein, appear to have revolved around any fraud, trickery, deception, or any other egregious conduct by the foreclosure rescue operator). However, it does appear clear that, while there are a number of factors that the Michigan courts will consider in each case, there is no fixed, litmus test to be applied in all cases when invoking this doctrine. Because the facts in each case will not be exactly the same, the courts will apparently determine the applicability of the doctrine on a case-by-case basis.

I previously alluded to this case in an earlier blog post. An article titled Michigan Appellate Court Sends Warning to 'Foreclosure Consultants', co-authored by Albert Rush and John C. Murray, discusses this case in some detail and appears on the website of The First American Corporation, a national title insurance underwriter.

My highlights of this court decision can be found here.

On a concluding note, I have found cases from other states that indicate that not only is the "equitable mortgage" doctrine not something that is limited to the State of Michigan, but rather, this doctrine dates back centuries (back to the days of the old English common law) and apparently is available in some form in most, if not possibly all, states.

I expect to be reporting more on this doctrine on a somewhat periodic basis. I welcome input on this issue from attorneys from anywhere in the country as to the availability of this doctrine in their home states.

Click here to search for list of other equitable mortgage blog posts

Case Law Citation:

London v. Gregory, No. 216473, Mi. App. Ct., 2001, (2001 Mich. App. LEXIS 1700) Decided February 23, 2001 (available courtesy of the Michigan Bar Association)

Revised 1-17-07

Foreclosure Rescue Operator Violates Federal Law, State Usury Law

A Michigan Federal Court has ruled that a foreclosure rescue operator violated two Federal laws as well as the state usury statute when entering into a "lease buyback", foreclosure bailout arrangement with a financially distressed homeowner.

Moreover, the court, in invoking Michigan's "equitable mortgage" doctrine, declared the homeowners as being the true owners of the home involved in the transaction, in spite of the fact that they actually signed over the ownership of the home to the rescue operator. The court declared the rescue operator to be merely a secured lender in this arrangement, thereby disregarding the fact that all the documents signed between the operator and the homeowners pointed to the operator as having title ownership to the home involved and the homeowners as being mere tenants.

Representing the property owner in this case was attorney Phillip C. Rogers, Grand Rapids, Michigan. Mr. Rogers is a member of the National Association of Consumer Advocates.

This case, which I alluded to in an earlier blog post, is available here (Michigan Bar Association website; no registration necessary) and is also available here (U.S. District Court for the Western District of Michigan website; PACER registration, login and password necessary).

A summary and comment on this case is available from the online newsletter of the Michigan law firm Lipson, Neilson, Cole, Seltzer & Garin, P.C., (see the caption title Court Clobbers Foreclosure Rescue Plan).

My highlights of this court decision can be found here.

Click here for list of other equitable mortgage blog posts

Case Law Citation:

Moore v. Cycon Enterprises, Inc., (Case No. 1:04-CV-800), 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished) (click here for case) or you can access the Michigan Western District Federal Court website directly by clicking here for case (requires PACER registration, login and password)

Note:

If there is an "equitable mortgage" doctrine in other states that can be interpreted similarly to the one in this Michigan case, this may be a great way to attack those transactions by and between rescue operators and financially strapped homeowners where the operators walk away with all of the homeowners' equity and the homeowners wind up either having to pay excessive amounts to re-purchase their homes or being evicted from their homes.

revised 1-12-07