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Foreclosure Rescue Scams
11.1 Introduction
The rise in real estate prices in recent years has brought with it a wave of schemes designed to deprive homeowners of the equity that has built up in their homes. Individuals who are in financial distress and are having trouble meeting their mortgage payments are particularly vulnerable to these schemes. Though their monthly incomes may be low, their homes may be worth considerably more than their mortgages. A homeowner who is facing foreclosure may be desperate to grab at any hope of saving the home, even if it risks the home's built up capital. This section addresses the problem of foreclosure rescue scams. These scams come in many variations, but they have one thing in common: instead of being ''rescued,'' as promised, the homeowners lose not only their home, but also their equity, and end up worse off than they were before the transaction. More detail on some of the issues discussed in this chapter may be found in other National Consumer Law Center manuals, particularly Truth in Lending,1 Unfair and Deceptive Acts and Practices,2 and The Cost of Credit: Regulation, Preemption, and Industry Abuses.3 Another helpful resource is Prentiss Cox, Foreclosure Equity Stripping: Legal Theories and Strategies to Attack a Growing Problem.4 This chapter is organized into five substantive sections. Section 11.2 provides a short overview of the predominant types of foreclosure rescue scams. Section 11.3 discusses the initial issues that confront an attorney with a new client: how to recognize a foreclosure rescue scam; what information and documents to obtain from the client; how to investigate the claim; the potential defendants; and the first steps to take to pursue a claim. Section 11.4 discusses the primary legal theories and remedies that are available to attack a foreclosure rescue scam. Section 11.5 discusses the benefits of litigating foreclosure rescue cases in bankruptcy
1 National Consumer Law Center, Truth in Lending (5th ed. 2003 and Supp.). 2 National Consumer Law Center, Unfair and Deceptive Acts and Practices (6th ed. 2004 and Supp.). 3 National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses (3d ed. 2005 and Supp.). 4 39 Clearinghouse Review Journal of Poverty Law and Policy 607 (Mar.–Apr. 2006).
court, and the special issues that arise in that forum. Section 11.6 addresses special issues that arise when there is a separate state proceeding such as an eviction action or foreclosure proceeding. A sample complaint in a foreclosure rescue scam case is included as Appendix I.7, infra. Additional sample complaints and discovery, a sample rescission letter, a worksheet for calculating HOEPA points and fees, and computer programs for calculating interest rates may be found on the CD-Rom accompanying this manual.
11.2 What Is a Foreclosure Rescue Scam?
11.2.1 Overview
Foreclosure rescue scams are various types of schemes targeted at homeowners already facing foreclosure and in financial distress.5 Typically a ''rescuer'' identifies potential victims through public foreclosure notices in newspapers or at government offices. The homeowner is then contacted by phone, mail, or personal solicitation, with offers of a ''fresh start'' to save the home. While the clock to stop the foreclosure runs down, the rescuer may impose fees draining the home of equity, or induce the owner to sign a sheaf of documents including transfer of home ownership. In the end, the ''rescuer'' often evicts the victim from the home he or she once owned. Foreclosure rescue scams typically come in three varieties. The first might be called ''phantom help,'' where a rescuer charges outrageous fees either for light-duty phone calls and paperwork that the homeowner could have easily done or makes a promise of additional assistance that never occurs. Some of these rescuers merely refer the homeowner to a bankruptcy attorney. Others actually assist the homeowner in filing bankruptcy. Typically these rescuers have little understanding of bankruptcy law and often the bankruptcy case is ultimately dismissed, leaving the homeowner subject to various restrictions on repeat filing. Whatever form this variety of the foreclosure rescue scam takes, the
5 See National Consumer Law Center, Dreams Foreclosed: The Rampant Theft of America's Homes Through EquityStripping ''Foreclosure Rescue'' Scams (2005), available at www.nclc.org/news/content/ForeclosureReportFinal.pdf.
§ 11.2.2
Foreclosures / 2006 Supplement cumstance, the homeowners stand to lose most, if not all, of the equity in their homes. In addition, the homeowners, now tenants in their own houses, may face eviction proceedings for failing to comply with oppressive and unaffordable lease terms.10 In some cases, these homeowners were defrauded about the deed transfer; others may understand that they were signing a deed but believed that the home would ultimately be ''saved.'' The case of Browner v. District of Columbia provides an illustrative example of a sale/leaseback transaction.11 The defendants, Rita Walker and Ferris Browner (doing business as RAW), placed the following advertisement in the ''Money to Lend'' column of the classified advertisements: ''NEED MONEY?—Foreclosure Help.'' The business also sent letters to homeowners whose homes were being advertised for foreclosure, stating ''I'm sorry to read that your property, by order of the court, is being foreclosed upon. We are foreclosure specialists.'' In one typical transaction, a homeowner contacted the defendants and was told that RAW would make available $4591.18 to pay a mortgage arrearage and prevent the pending foreclosure. In exchange, the homeowner was required to sign a deed transferring the property to Rita Walker subject to a one-year lease with an option to repurchase. When questioned about the necessity of the deed, RAW assured the homeowner that the deed was merely a technicality, included for the purpose of satisfying the accountant. During the one-year lease, the homeowner was required to pay $375 per month to RAW, in lieu of making $118 monthly mortgage payments. Upon exercising the repurchase option, the homeowner would have been required to pay the $4519.18 arrearage payment including fees for title exam, fire insurance, and an appraisal. At the time of the ''sale'' to Walker, the property had a market value of $38,185 and was entirely free of debt except for the balance of the first mortgage in the amount of $1600. Thus, the homeowner unwittingly conveyed property worth $38,185 for a total of $6988.18. The court determined that this transaction and others like it were not sales, but loans. Because the effective interest rates on the transactions at issue ranged from 50 to 200%, the court found the defendants guilty of violating the local loan sharking statute. The Nebraska Supreme Court also recently upheld the claims of thirteen homeowners who were induced to enter into fraudulent sale/leaseback deals that allowed rescuers to
10 See, e.g., In re Davis, 169 B.R. 285 (E.D.N.Y. 1994). In In re Davis the lease agreement required monthly rent payments that were clearly unaffordable and required an entire year's rent upon default. Within one month after the sale/leaseback transaction closed and two weeks after the first rental payment was due, the purchaser had perfected a judgment against the former homeowners for a full year's rent and cost and obtained a warrant of eviction for nonpayment of rent. 11 549 A.2d 1107 (D.C. 1988).
homeowner is usually left without enough assistance to save the home, and with little or no time left to seek other assistance. For example, in In re McNeal,6 the homeowner paid a ''foreclosure consultant,'' $750 to stop the foreclosure of his home. The consultant had spoken to the loan servicer three times and submitted financial information to the servicer, but failed to obtain a loan modification or otherwise stop the foreclosure sale. Consequently, the homeowner filed a chapter 7 bankruptcy to postpone the foreclosure. Finding that the consultant violated California's foreclosure consultant statute,7 the court awarded the homeowner actual damages of $750 and exemplary damages of $2250.8 A second variety involves outright fraud. The homeowners believe they are obtaining refinancing or a new loan and do not realize they are surrendering ownership of the house. Alternatively, the deed transferring the house may be forged. A third variety is a bailout that typically involves the homeowners' surrendering title to their homes with the belief that they will be able to repurchase them at a later time. Meanwhile, the homeowners become tenants in their own homes on terms that are often oppressive and unaffordable, ending with their eviction. The rescuer may even renege on promises to pay off the mortgage, leaving the homeowner liable for loans on a house she no longer owns. This chapter focuses primarily on the second and third types, both of which involve transfer of ownership, although the issues discussed may also be applicable to the first type. Two variations of the repurchase theme, sale/leaseback transactions and inter vivos trust transfers, are discussed in more detail in the next two subsections.
11.2.2 Sale/Leaseback Schemes
Sale/leaseback schemes encompass a variety of transactions in which homeowners surrender title to their houses with the expectation that they will be able to remain in their homes as renters until they are able to repurchase the property. Invariably, the terms of the deal are so onerous that the buyback becomes impossible. Alternatively, the homeowner's ability to repurchase the property may be cut off by a sale to a bona fide third party purchaser.9 In either cir6 286 B.R. 910 (Bankr. N.D. Cal. 2002). 7 Cal. Civ. Code §§ 2945 to 2945.11. 8 In re McMeal, 286 B.R. 910, 912 (Bankr. N.D. Cal. 2002); see also U.S. v. Weaver, 290 F.3d 1166 (9th Cir. 2002) (defendants told homeowners that they could register a ''common law lien'' on the home that would take priority over the mortgage security interest and prevent foreclosure; however, homeowner needed to convey property to a trust to take advantage of the program); Fleet v. United States Consumer Council, Inc. 53 B.R. 833 (Bankr. E.D. Pa. 1985); State v. Midland Equities, 117 Misc. 2d 203, 458 N.Y.S.2d 126 (N.Y. Sup. Ct. 1982). 9 See, e.g., Grant v. Lehtinen, 2003 WL 21961404 (Minn. Ct. App. 2003) (homeowner's property sold to a neighboring church in breach of repurchase agreement).
Foreclosure Rescue Scams / 2006 Supplement take the homes for less than full value. The court found that even if the homeowners failed to read the contracts—which allegedly ''unmistakably'' disclosed the transactions as sales rather than loans—the contracts were not binding because they were induced by fraud.12
§ 11.3.1
11.2.3 Inter Vivos Trusts
The use of inter vivos trusts is a growing form of foreclosure rescue scam.13 This type of scam is appealing to rescuers because it often requires less money up front than many sale/leaseback transactions, avoids the due-on-sale clause in the homeowner's mortgage and, by creating an ''occupancy agreement'' rather than a lease, attempts to skirt the strictures of landlord-tenant law governing leases.14 In a typical inter vivos trust foreclosure scam, the homeowners, knowingly or unknowingly, transfer title of their home to a trust. Initially, as settlors of the trust, the homeowners hold a 100% beneficial interest in the trust. These types of transactions do not require the homeowner's underlying mortgages to be paid off. Instead, this scheme seeks to exploit the exception to the due-on-sale clause for a transfer into an inter vivos trust in which the borrower is a beneficiary and which does not affect a transfer of occupancy rights.15 Immediately after the creation of the trust, a small beneficial interest (five to ten percent) in the trust is sold to an investor or investors.16 The investor's purchase price for this beneficial interest is typically the amount necessary to bring any delinquent mortgages current.17 The term of the trust is typically two to three years. At the conclusion of the trust, the house is sold and the trustee distributes the proceeds according to the trust documents. The trust documents use complex language to describe the distribution of proceeds,
which often results in the investors' getting back about twice as much as they invested plus a percentage of any increased equity. Under a right of first refusal contained within the trust documents, the homeowners may purchase back their home for fair market value. However, the repurchase agreement requires the homeowners initially to pay the trust the full market value of the home, and only later to receive reimbursement from the trust to compensate them for their beneficial share. This makes repurchase extremely difficult, because the homeowners would have to obtain financing to purchase at full value a home that they already partly own. As a result, the deal virtually assures that the homeowners will lose their home and much of their equity. Inter vivos trust schemes also typically have oppressive ''occupancy agreements'' between the trust and the homeowner (now a tenant). Despite their name, these agreements are essentially leases, and often contain terms that violate state laws government residential leases. Under these agreements, the homeowner pays ''rent'' to the trustee or a collection service employed by the trustee. The amount of rent is commonly the amount of the mortgage payment plus an additional service fee. Further, the occupancy agreement may contain some or all of the following provisions: • Failure to make a timely monthly ''rent'' payment to the trustee constitutes an implied offer to sell the homeowner's beneficial interest in the trust; • A requirement that homeowners (as tenants) make all necessary repairs, perform all maintenance and maintain homeowner's insurance on the property; • A provision permitting treble damages in the event that the homeowners (as tenants) hold over beyond the termination of the occupancy agreement; • Funds paid to a ''contingency fund,'' essentially a security deposit, often in excess of state limits; and • A provision for a late charge, also exceeding those permitted by state law, in the event monthly payments are not received when due. Such occupancy agreements, like the trust agreements, are designed to take as much money from the homeowners as possible and to evict them as fast as possible when they fail to make a payment.
12 Eicher v. Mid America Fin. Inv. Corp., 702 N.W.2d 792, 803–804 (Neb. 2005). 13 See, e.g., United States v. Weaver, 290 F.3d 1166 (9th Cir. 2002) (criminal prosecution for equity skimming when homeowners transferred title to trust and paid rent to trust in expectation that trust would pay defaulted mortgage). 14 See Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3(d)(8). 15 See Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3(d)(8). 16 Generally, the beneficial interest transferred to investors will be capped at about 10% to ensure that the original title insurance policy remains effective. Additionally, the transfer of a small beneficial interest may avoid conveyance or transfer taxes. 17 Often the trust accounting will show an ''advance'' to the homeowner in an amount significantly greater than the amount that was needed to cure the mortgage arrearage. The difference is usually comprised of questionable fees imposed by the trust in connection with the transaction such as documentation, facilitation, transaction, trust set up, or credit counseling fees and a contingency fund.
11.3 Investigating and Preparing a Foreclosure Rescue Scam Case
11.3.1 Recognizing a Foreclosure Rescue Scam
A scam, by its nature, disguises the true intent of the perpetrator. As a result, the victims in some cases may not 77
§ 11.3.2
Foreclosures / 2006 Supplement may continue to have many of the responsibilities of ownership, such as performing property maintenance and making tax payments. Did the homeowners have an option to repurchase the home sometime in the future? Homeowners who remain in their homes after relinquishing title often believe that they will be able to repurchase the property in the future. There is typically an option or right of repurchase associated with the transaction. However, the option frequently becomes ineffective if the homeowners do not make timely ''rent'' payments. The repurchase price is almost certainly going to be substantially more than the homeowner originally paid for the home. Is the ''homeowner'' facing eviction? One of the key parts of many foreclosure rescue scams is to turn the homeowner into a tenant, who has no claim to the home and can be removed from the home through an eviction action. Especially in a judicial foreclosure state, when a homeowner is facing eviction rather than foreclosure it is a sign of a foreclosure rescue scam.
realize that they have been scammed until they are facing eviction from their own home. The following list of questions will help advocates recognize when they are dealing with a foreclosure rescue scam. Did the homeowner respond to a phone call, letter, posted sign, or other solicitation to get help saving the home or to sell it? Rescuers typically use public records to find names of homeowners facing foreclosure, and then solicit them with promises of help. Many also post flyers that the homeowner may have seen.18 Did the homeowners convey their property to someone else? The telltale sign of a foreclosure rescue scam is a deed conveying title of the victim's property to the ''rescuer'' or another party affiliated with the rescuer. The grantee could be a corporation, a trust, an individual unknown to the victim, a long-time acquaintance or even a family member. Remember, scammers come in all shapes and sizes. Were the homeowners aware that they executed a deed transferring their property to a third party? In some cases, homeowners are led to believe that they are signing documents for a new loan to bring their mortgage current, when in fact, they deed their home away. Were the homeowners facing foreclosure or otherwise in financial diffıculty at the time they transferred their property? Almost all victims of foreclosure rescue scams are facing some type of financial difficulty. Commonly, a foreclosure was imminent. In some cases, homeowners may have been unsuccessful in their attempts to refinance. Were the homeowners instructed to stop communications with their current mortgage company, attorney, or other housing counselor? Homeowners are frequently told to cease all contact with lawyers or their mortgage, and let the rescuers handle the ''negotiations.'' This tactic simultaneously cuts off access to possible refinancing options while running out the clock on ways to prevent the foreclosure. Did the homeowners receive less than fair market value for the transfer of their property? Inadequate consideration is another hallmark of foreclosure rescue scams. These scams depend on equity in the property that can be stripped away when the rescuer refinances or resells the property. Rescuers, if they provide any consideration at all, may pay only a fraction of the value of the home. Did the homeowners continue to live in their home pursuant to a lease agreement, occupancy agreement or land sales contract? In many foreclosure rescue scams, homeowners surrender title with the expectation that they will be able to remain in their homes. They may sign lease agreements, occupancy agreements, or land sales contracts that permit them to retain possession of their home so long as they pay ''rent'' to the rescuer. These ''rent'' payments are often unaffordable and are frequently higher than the homeowners' previous mortgage payments. Homeowners also
11.3.2 Gathering Information
184.108.40.206 The Homeowners' Story
The client interview process is important to understanding a foreclosure rescue scam transaction. Homeowners' testimony can make their story come alive. Unfortunately, the speed at which these transactions happen, usually as a result of an impending foreclosure, may leave the consumer confused and unable to remember the details of the transaction. Often, however, they can re-trace their steps and provide at least a general overview of the transaction. Discussing the case in a chronological fashion may also help the homeowner remember what happened next in the sequence of events. Generally, a good place to start is with some basic facts about the homeowners and the acquisition of their home. After establishing a basic homeownership history, it is useful to know about the homeowners' financial troubles. In part, this conversation is necessary to determine whether the homeowners' financial difficulties were short-term and temporary in nature, or if the homeowners have suffered a more permanent financial setback. A current and future financial picture will be important in evaluating the homeowner's potential remedies. Next, the homeowner can be walked through the solicitation stage of the scam. What types of solicitations did they receive? Did they make contact with the rescuer in response to such materials? If so, how did they make contact (e.g., telephone, in person, Internet, etc.) and what made this rescuer more attractive than any of the others? This conversation should flow into the initial contact and subsequent contacts that led up to the actual transaction.
18 See § 188.8.131.52.2, infra.
Foreclosure Rescue Scams / 2006 Supplement In most cases, the homeowners are aware that they signed some document. However, elderly homeowners may not remember signing any documents. If this is the situation, questions of the homeowner's competency to execute the deed and any other documents should be explored. Whether an individual is competent to execute a deed or other legal document is a question of state law. In general, however, if the homeowner is lacking sufficient mental capacity to understand the nature and significance of the contract, the contract is voidable.19 Where homeowners acknowledge executing some documents, it is useful to know the circumstances and setting of the signing. Where was the signing held: in a title insurance company's office or in a fast food restaurant? Who was present? For example, if the notary on the deed is a woman, was a woman in fact present at the signing? What was said? How did the homeowner feel at the time? With respect to the transaction itself, other questions should revolve around the terms of the deal itself. What were the terms of the transaction as understood by the homeowner? Post-transaction events can be as important as the transaction itself. How did the reality of the transaction stack up to the homeowners' expectations? What caused the homeowner to seek legal advice? Answers to these and similar questions are likely to yield valuable information about the rescue scam which can be augmented by thoroughly reviewing the ''document trail'' discussed below.
§ 22.214.171.124.3
What follows is a discussion of where to find relevant documents, short of formal discovery. 184.108.40.206.2 Solicitation materials Rescuers often identify distressed homeowners through public foreclosure notices in the newspapers or at government offices. Rescuers then contact the homeowner by phone, personal visit, or card or flyer left at the door. In some cases, homeowners can receive more than fifty offers for assistance within weeks of the initial public foreclosure notice. Some rescuers rely on advertising on the Internet or in local publications. Others plaster posters on telephone poles and bus stops. The initial solicitation typically revolves around a simple message such as ''Stop foreclosure with just one phone call,'' ''I'd like to $ buy $ your house,'' ''You have options,'' or ''Do you need instant debt relief and CASH?'' This contact also frequently contains a ''time is of the essence'' theme, adding a note of urgency to what is already stressful and possibly desperate situation. It is important to collect or obtain any solicitation materials used by the rescuer. Solicitation documents can be useful in demonstrating the initial deceptive contact which led the homeowner into the rescue transaction. Sometimes these materials contain written promises or terms that are not embodied in the final transaction. • Collect any postcards, flyers or letters the client received regarding foreclosure help, even those that may not obviously be from the rescuer. • Take photographs of any posted sign to which the homeowner responded. • Print copies of web pages from the rescuer's Internet site. Keep in mind that Internet sites can change in content from one day to the next. What you find may not be what your client saw. Further, what you find may not be there tomorrow. Therefore, it is important to print copies of any pages you think relevant the first time you visit the site. If critical inculpatory information is on the website, consider consulting a computer expert about preserving a copy of the web content electronically in a way that can be shown to be tamper-proof. • Obtain a copy of any advertisement the rescuer used to solicit your client. Many local publications will have archives (electronic or paper) of past editions. 18.104.22.168.3 Transaction documents The number of transaction documents in any given foreclosure rescue scam can vary dramatically. At one end of the spectrum, the homeowner may execute only one document—a deed. At the other end, some scams involve complex trust arrangements that may contain 10 or more different documents. 79
188.8.131.52 The Document Trail
184.108.40.206.1 The importance of the documents The documents related to a foreclosure rescue scam can tell a significant part of the story—one that is often more complete than that told by the homeowner. Obtaining any and all paperwork that may exist—from the solicitation materials to deeds and leases to eviction papers—is critical to challenging a foreclosure rescue scam. All documents obtained should be preserved carefully. Since duplicate or almost-duplicate documents may be obtained from different sources, the documents obtained from each source should be separately labeled and filed. The chain of custody of the documents should be preserved carefully, especially for the documents in the homeowners' possession. What the homeowners did not receive can be just as important as what they did receive. Being able to prove exactly what documents were and were not in the homeowners' possession at a certain time can turn out to be a key part of a case.
19 See § 22.214.171.124, supra; National Consumer Law Center, Unfair and Deceptive Acts and Practices § 9.5.7 (6th ed. 2004 and Supp.).
§ 220.127.116.11.4
Foreclosures / 2006 Supplement Typically land transactions are indexed in one of two ways—a grantor-grantee index or a tract index.20 In many cases, the index itself will provide you with some basic information about the transaction. You will want to obtain copies of any relevant documents. The following is a list of documents to look for in the local land records. • Deed from homeowner to rescuer (or affıliated party). You will need to determine whether a deed transferring the property to the rescuer has in fact been recorded. Note that the grantee may be different than the rescuer with whom the homeowner has had contact. If so, the grantee may be affiliated with or conspiring with the rescuer. If the rescuer set up an inter vivos trust, there may be a deed from the homeowner to the trust. • Any subsequent deeds related to the homeowners' property. You will want to determine whether the rescuer (or affiliated party) remains the current owner of record or whether the property has been deeded to yet another party. This is important to: (1) establish who the current record owner of the property is and (2) provide some indication of whether there is a possible ''bona fide purchaser.'' If the rescuer set up an inter vivos trust and the home has since been conveyed to a third party, there may be a deed from the trust to the third party. • Any other deeds to the rescuer (or affıliated party). Rescuers generally strike more than once. Other homeowners who have transferred their properties to the rescuer (or affiliated party) may also be victims. These other homeowners can often provide useful information about the rescuer's methods of operation and may also serve as pattern witnesses if the case goes to trial. Evidence that the rescuer has engaged in prior transactions is also critical for determining the applicability of the Truth in Lending Act, discussed in § 18.104.22.168, infra, proving fraud claims, and seeking punitive damages. • Mortgages. Check to see whether the rescuer or original grantee has taken out a mortgage against the property. In many foreclosure rescue scams, rescuers drain the equity out of the home by refinancing as soon as they obtain title. • Release or discharge of mortgage. If the homeowner's mortgage has been released, this shows that the rescuer
20 A grantor-grantee index is typically divided into two parts, one for grantors (the party transferring title to the property) and one for grantees (the party receiving title to the property). Each part is alphabetized by business name or by last name of an individual. In a foreclosure rescue scam, the homeowner will be shown as the grantor and the rescuer as the grantee. When searching for a mortgage, the record owner of the property will be the grantor and the lender will be the grantee. Historical grantee-grantor records are often grouped by year. A tract index lists all the legal transactions pertaining to a piece of property in one place. This index is typically organized by tract, parcel, plat, block and/or lot number. This information is commonly found in the deed itself, or may be obtained from the property tax assessors office or from the local land records office.
The most common source of these documents is the homeowners themselves. However, if the homeowner does not have copies, some documents may be obtained from your local land records. In cases where an apparent closing took place, the settlement agent or title company is likely to have copies of the transaction documents. It is important to request copies from the settlement agent even if the homeowner has copies, as the documents the homeowner was given may differ from those in the settlement agent's files. The identity of the settlement agent can frequently be determined by examining the mortgage or deed of trust in the local land records. Commonly, the first page of the document will have a name and address for returning the original document. In many cases, this will be the settlement agent. The following is a nonexclusive list of common documents found in foreclosure rescue scams: • • • • • Purchase and Sale Agreement; Deed from homeowner to rescuer (or affiliated party); HUD-1 Settlement Statement; Other real estate sale closing documents; Lease, Occupancy Agreement or Land Installment Contract to the homeowner; • Option to Purchase; • Power of Attorney. In addition, a foreclosure rescue transaction in which the homeowner transfers property to an inter vivos trust could include some or all of the following: • • • • • • • • • Trust Agreement; Assignment of Beneficial Interest; Beneficiary Agreement; Rider to Trust; Facilitation Fee Schedule; Property Owner Disclosure and Indemnification; Investor Disclosure and Indemnification; Certification of Trustee Under Trust; Trustee Direction Sheet.
22.214.171.124.4 Local land records Local land records should be checked to determine a number of important facts in the case. They will show whether the homeowner deeded the home to the rescuer or an affiliate of the rescuer, and whether the transferee deeded or mortgaged it to someone else. Assignments of the mortgage may also be found in the local land records. If the scammer paid off the existing mortgage, there will probably be a public record of the release of the mortgage. In addition, local land records can lead to other cases involving the same rescuer, which is critically important for Truth in Lending and fraud claims.
Foreclosure Rescue Scams / 2006 Supplement or someone connected to the rescuer paid it off. If there is no release, then the homeowner's mortgage remains a lien on the property. This may be a breach of contract or a fraud if the rescuer promised otherwise. Check the local practice to determine how long it should take for a release to be recorded after a loan is paid in full. • Trust documents. Some foreclosure rescue scams involve homeowners deeding their property to inter vivos trusts. In certain states, such a trust is evidenced by a trust agreement recorded with the local land records 22.214.171.124.5 Court records A good place to start with court records is any pending eviction case against the homeowner and, in a judicial foreclosure state, the documents from the homeowner's foreclosure case. Obtaining information about other lawsuits in which the rescuer (or any other party to the transaction) is involved can also be fruitful. The federal courts and some local courts have an electronic public access service. Courts that have electronic access will generally allow you to search the index by party name. In local courts that do not have electronic access, you may be thumbing through paper indices or microfiches for case information. Regardless of how you access court records, here are some things to look for: • Eviction case against homeowner. If the homeowner is facing eviction, determine the status of the case and obtain a copy of the case file. This is important not only so that you can take steps to prevent the eviction, discussed in § 18.104.22.168, infra, but also because it is not uncommon for the pleadings filed by a rescuer to contain information helpful to the homeowners. For example, the rescuer may have filed a forged lease or a lease containing terms that violate state residential leasing statutes. • Other eviction cases filed by the rescuer (or affıliated party). Like searching for other deeds to the rescuer in the local land records, other eviction cases filed by the rescuer may help you identify other victims. These victims may then be able to provide you with pattern and practice evidence that exposes the transaction as a foreclosure rescue scam and makes it subject to TILA and other legal claims. • Other non-eviction cases involving the rescuer (or affiliated party). A wealth of additional information may be found in non-eviction cases to which the rescuer is a party. Obviously, it is worth checking to see if any other cases have been filed asserting claims associated with a foreclosure rescue scam perpetrated on another homeowner. Other cases to look for are those filed by former employees of the rescuer. Consider searching the local court records for workers' compensation cases, discrimination cases, or any other cases that
§ 184.108.40.206.6.4
might have been filed by a disgruntled employee. These employees are often willing to provide very damaging information about the rescuer's operation. A search of the family court records may enable you to locate an ex-spouse who would be able to provide information on the rescuer's business. 22.214.171.124.6 Other documents 184.108.40.206.6.1 General As discussed below, there are numerous other documents and information that might be helpful to the homeowner's case beyond the transaction documents, land records, and court records. 18.104.22.168.6.2 Payments to rescuer or lender If the homeowner has been making ''rent'' payments to the rescuer or has made any other payments to the rescuer, it is useful to obtain evidence of such payments, such as copies of the cancelled checks or money order receipts. In some cases, the homeowners have continued to make payments to mortgage lenders even though they no longer own their homes. Evidence of these payments should also be obtained. The total of these payments will be relevant when calculating damages. They will be also be important in determining what, if anything, the homeowner will have to pay to unwind the transaction. 22.214.171.124.6.3 Rescuer's loan documents Rescuers frequently cash out the equity in the home by obtaining a bank loan shortly after obtaining title. These loan documents, and loan documents for any other loan obtained by the rescuer, should be collected and reviewed carefully. The documents may demonstrate that the bank had actual or constructive notice of the fraud. Loan documents should be available from the settlement agent. However, if the loan was not part of a ''sale transaction'' with the homeowner and the homeowner is not a party to the loan in any way, a formal discovery request may be necessary. 220.127.116.11.6.4 Appraisal An accurate value of the homeowner's property is critical for determining what claims the homeowner may be able to assert as well as what outcomes are realistic for the homeowner. As noted above, a disparity between the fair market value of the property and the consideration provided by the rescuer is common in foreclosure rescue scams. A significant disparity may be a factor in persuading a court that the transaction is unconscionable, that it violates a state fore81
§ 220.127.116.11.6.5
Foreclosures / 2006 Supplement 18.104.22.168.6.7 Internet searches Using the Internet and other electronic database services to conduct a search on a topic of interest or to discover information about a particular party to the transaction can prove fruitful. As indicated above, any web pages of note should be printed out immediately and possibly also preserved electronically, as the content of websites can be changed quickly.
closure rescue statute or an unfairness prohibition in a UDAP statute, or that the transaction amounts to an equitable mortgage.21 A reliable appraisal or broker's price opinion can provide an estimate of the fair market value. The homeowner should obtain an appraisal showing the fair market value of the home both at the time of the scam and at present. Where the rescuer has obtained a loan in connection with the transfer of the property, an appraisal may have been done. However, these appraisals should be viewed with caution as, in some cases, they are artificially inflated to allow the rescuer to take out a higher loan amount. 220.127.116.11.6.5 Reports of consumer complaints Through state freedom of information acts, records of consumer complaints to local consumer protection agencies, attorney general offices, and licensing divisions can be obtained to see whether similar complaints have been made about the rescuer in the past. The Better Business Bureau should also be contacted for copies of any complaints. In addition, the Federal Trade Commission's website has a search function that allows users to identify Federal Trade Commission (FTC) complaints filed against any entity. Even if the FTC has not filed a complaint against an entity, it will provide copies of complaints that consumers have made to it (after redacting identifying information about the complainant) in response to a Freedom of Information Act request.22 126.96.36.199.6.6 Corporate and business documents Every state requires corporations and other businesses to file certain documents at the time the company begins operation in that state and periodically thereafter. The filing typically consists of the articles of incorporation and annual reports. When dealing with corporations, this information is helpful to figure out who stands behind the corporation or business in the event the corporate veil can be pierced or to sue these individuals separately. Further, formal links between the various parties to the transaction can establish a wider net of liability. Some states may permit you to obtain a copy of that part of the company's state tax return that shows the names and addresses of the current officers. Another way to find out who is behind a corporation or other fictitious name is to get the form that the Postal Service requires a person to file when getting a post office box. The form requires a real person and a real address.
11.3.3 Identifying Possible Defendants
Rescuers come in all shapes and sizes and rescue scams can involve a number of different players beyond the rescuer. To avoid missing parties, in what can sometimes be complex real estate transactions, it is generally best to cast the liability net as wide as possible to start. Rescuers and affıliates. First on the list of defendants is the rescuer, or person with whom the homeowners had primary contact, and the grantee to whom the homeowners transferred title to the property. The grantee may be an ''investor'' or other third party affiliated with the rescuer. Any other individuals affiliated with the rescuer and with whom the homeowners had contact should also be considered potential defendants. If the rescuer is a corporate entity, consider naming the officers or employees of the rescuer individually. The corporation is likely to have no assets. Many claims, including fraud and unfair and deceptive acts and practices (UDAP) claims, can be asserted against any person who participated in or directed the wrongful acts, regardless of whether the corporate veil is pierced.23 Parties with potential property interests. Regardless of whether the homeowners' case asserts fraud claims, argues equitable mortgage, or otherwise attempts to quiet title, all parties with potential interests in the property, and their agents, should be joined as defendants, including trustees, buyers, mortgagees, assignees, settlement agents, appraisers, and brokers. Some of these entities may have insurance that will compensate them for any losses they have suffered. For example, a person who has bought the home from the rescuer may have title insurance that will cover the losses suffered because of the homeowner's claim to the home. Insurance coverage of these losses will make it much more likely that the buyer will agree to re-convey the home to the homeowner.
11.3.4 First Steps
188.8.131.52 Introduction
Time is often of the essence in fighting foreclosure rescue scams. Many times, these cases present themselves as evic23 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 6.4 (6th ed. 2004 and Supp.).
21 See §§ 11.3, 126.96.36.199, 18.104.22.168, infra. 22 Requests can be emailed to the FTC at email@example.com. The FTC charges fees for searching its records plus a per-page copying charge.
Foreclosure Rescue Scams / 2006 Supplement tion cases instead of deed theft or foreclosure rescue cases. It is important to act quickly to stop any eviction proceedings and to get a notice of lis pendens recorded against the property to preserve the homeowner's remedies.
§ 184.108.40.206
stack of documents that are then taken elsewhere for notarization. Regardless of the reason for the defective acknowledgment, practitioners should promptly investigate whether such defects may render the instrument invalid.26
184.108.40.206 Stop Eviction Proceedings
Many foreclosure rescue scam cases initially present themselves as evictions. Homeowners may not know that they have transferred title to their property and may be confused when they receive notice related to eviction proceedings. While state landlord-tenant laws vary widely, most eviction cases proceed much faster than other types of civil cases. Once a judgment against the tenant has been entered, by reason of default or otherwise, removal of the tenant by the sheriff or other government official may occur within days or weeks. In addition, doctrines such as res judicata and Rooker-Feldman will be much more serious potential problems if a judgment is entered in an eviction or foreclosure action.24 Accordingly, the first priority in handling a foreclosure rescue case is often preventing the eviction of the homeowner. If you are not familiar with the procedures of your local housing court, or the general court handling residential eviction cases, you may want to consider enlisting the help of a housing or tenant lawyer. If a judgment has already been entered, you may want to consider options for removing or reopening it, particularly if it is a default judgment. Some eviction cases may be held over until the title issues are resolved. In other situations, bankruptcy may be an option if a judgment for possession has not been entered.25
184.108.40.206 Evaluating Grounds for Rescission/ Rescission Notice
The Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), discussed in §§ 11.4.2 and 11.4.3, infra, allow a homeowner to rescind certain credit transactions that are secured by the home. This right to rescind may be applicable even if the rescuer attempted to structure the transaction as a transfer of the home rather than as a loan. The right to rescind expires after three years in most states, so it is important to evaluate this claim quickly. (Massachusetts has its own TILA-type law that allows rescission up to four years after consummation of the transaction. Maine, Connecticut, Oklahoma, and Wyoming also have state TILA-type laws, so the deadline would be controlled by state law in those states. All of these states have been granted partial exemptions from TILA.27) Even if the three-year deadline is not close, exercising the right to rescind by sending a rescission letter may help create a defense to an eviction. It also creates grounds for recording a lis pendens, as discussed in the next section.
184.108.40.206 Recording a Lis Pendens
In order to cash in on the homeowner's equity, rescuers may attempt to mortgage or resell the home promptly after acquiring it. If the new owner is a ''bona fide purchaser,'' the homeowner may not be able to get title to the house back. Therefore, it may be appropriate to record the homeowner's claim through a lis pendens or similar procedure. Lis pendens is the Latin phrase for ''a suit pending'' and typically refers to a notice filed with the local land records after a case has been filed. Recording a lis pendens against a piece of property alerts a potential purchaser or lender that the title of property is in question. The procedure for obtaining and recording a lis pendens varies from state to state so be sure to check your state statutes and local court rules for more information.
220.127.116.11 Reviewing the Deed
Deeds should be scrutinized to determine whether the formal requisites were followed. For example, improper acknowledgment of deeds (or mortgages) may affect the validity of the instrument. Other documents to the transaction should be checked as well, but claims related to the formal requirements of deeds often have a very short statute of limitations period (six months or less). It may be helpful to recruit an attorney who specializes in real estate law at an early stage in the case to evaluate these potential claims. Deed and mortgage fraud cases may involve situations in which the person whom the notary certified as having appeared did not, in fact, appear. Improper notarizations also may result from the taking of an actual acknowledgment from an imposter, taking an acknowledgment from an incompetent person, or the taking of an acknowledgment over the telephone. Homeowners may be instructed to sign a
24 See §§ 6.4, 6.6, infra. 25 See § 11.5.3, infra; National Consumer Law Center, Consumer Bankruptcy Law and Practice, Special Guide to the 2005 Act § 7.3.3 (2005).
26 National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 126.96.36.199 (3d ed. 2005 and Supp.). 27 Federal Reserve Board, Official Staff Commentary on Regulation Z, § 226.29(a)-4.
§ 11.4
Foreclosures / 2006 Supplement represents a bona fide sale or is a loan depends on the intent of the parties.29 Specific mortgage-negating language in the documents or the homeowners' knowledge that they were signing a transfer deed is not dispositive of intent.30 Courts have routinely looked beyond the legal form of these transactions to examine their substance and the circumstances leading up to their execution. Thus, documents that clearly identify a sale and leaseback arrangement are not conclusive if the surrounding circumstances indicate that the homeowner never intended to sell the home and that the transaction should be considered a loan secured by a mortgage.31 In determining whether these transactions are sales or loans, courts have relied upon a variety of circumstances. Factors that indicate that an absolute or conditional deed should instead be seen as an equitable mortgage include: • Statements by the homeowner or representations by the purchaser indicating an intention that homeowner continue ownership;32
light of parties' intent and their relative sophistication); MERS v. Wilson, 2005 WL 1284047 (N.J. Super. Ct. Ch. Div. May 27, 2005) (court reviewed common law rules regarding proving an equitable mortgage; no allegation of usury); Henderson v. Sec. Mortg. & Fin. Co., 273 N.C. 253, 160 S.E.2d 39 (1968); Umpqua Forest Ind. v. Neen'ah-Ore Land Co., 188 Or. 605, 217 P.2d 219 (1950); Swenson v. Mills, 198 Or. App. 236, 108 P.3d 77 (2005); Long v. Storms, 622 P.2d 731 (Or. Ct. App. 1981); Johnson v. Cherry, 726 S.W.2d 4 (Tex. 1987); Sudderth v. Howard, 560 S.W.2d 511 (Tex. App. 1977); Bown v. Loveland, 678 P.2d 292 (Utah 1984) (sale with oral repurchase option construed as equitable mortgage); Levy v. Butler, 93 Wash. App. 1001 (1998) (sale with repurchase option coupled with inadequate consideration sufficient to overcome presumption of sale transaction); National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 7.5.2 (3d ed. 2005). But see Franchi v. Farmholme Inc., 191 Conn. 201, 464 A.2d 35 (1983) (sale and leaseback not an equitable mortgage). See, e.g., In re Offshore Dev. Corp., 802 F.3d 1319 (11th Cir. 1986); Redic v. Gary H. Watts Realty Co., 762 F.2d 1181 (4th Cir. 1985); Woods-Tucker Leasing Corp. of Ga. v. HutchesonIngram Dev. Co., 642 F.2d 744 (5th Cir. 1981); Sachs v. Ginsberg, 87 F.2d 28 (5th Cir. 1936); Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006); Fox v. Peck Iron & Metal, 25 B.R. 674 (Bankr. S.D. Cal. 1982); Redmond v. McClelland, 2000 Minn. App. LEXIS 779 (Minn. Ct. App. July 25, 2000); Bantuelle v. Williams, 667 S.W.2d 810 (Tex. 1983). But see Bray v. McNeeley, 682 S.W.2d 615 (Tex. App. 1984). See Restatement (Third) of Property, Mortgages § 3.3(a) & cmt. D (1997); Josiah Kibe, Comment: Closing the Door on Unfair Foreclosure Practices in Colorado, 74 U. Colo. Law Rev. 241, 262 (2003) (collecting statutory cites on admission of parol evidence). See Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998); London v. Gregory, 2001 WL 726940 (Mich. Ct. App. Feb. 23, 2001); Swenson v. Mills, 198 Or. App. 236, 108 P.3d 77 (2005). Several states have statutes under which absolute deeds may be considered mortgages in certain circumstances. See, e.g., 765 Ill. Comp. Stat. § 905/5; Md. Code Ann., Real Prop. § 7-101; Okla. Stat. tit. 46, § 1. Restatement (Third) of Property, Mortgages §§ 3.2(b)(1), 3.3(b)(1) (1997).
11.4 Legal Theories to Attack Foreclosure Rescue Scams
11.4.1 Construing the Transaction As a Loan
22.214.171.124 The Equitable Mortgage Doctrine
A variety of federal and state causes of action, under both statutory and common law, can be used to attack foreclosure rescue scams. Many of these claims begin with the premise that the homeowner's transfer of title to the property, whether in the form of a sale/leaseback or an inter vivos trust, was not absolute and was merely intended to provide security for a loan. Once the transaction is seen as a loan, then the homeowner can invoke a variety of lending laws, including those governing usury, mortgage lending, and foreclosures. Under the common law ''equitable mortgage'' doctrine, as well as the statutes of some states, many courts have recognized that ''sales'' with repurchase options may in fact be loans and that the deeds at issue should be construed as equitable mortgages.28 The question whether the transaction
28 See, e.g., Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006) (transfer of home created an equitable mortgage where the consumer was unsophisticated and not represented by counsel, where the payment made by the ''purchaser'' was only 10% of the fair market value of the home, and where the mortgage remained in the consumer's name); Wilson v. Bel Fury Investments Group, L.L.C., 2006 WL 297440 (D. Neb. Feb. 6, 2006) (court recognizes equitable mortgage doctrine but denies summary judgment to both sides due to disputes of material fact); Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d 1090 (D. Minn. 2005) (court could not resolve whether the transaction constituted an equitable mortgage at the summary judgment stage; court evaluated six factors to determine the existence of an equitable mortgage; court also held that the landlord-tenant eviction judgment was not res judicata nor did the RookerFeldman doctrine apply; fraud counterclaim against the consumer based on her alleged statement that she could make the rental payments was dismissed); Rowland v. Haven Properties, L.L.C., 2005 WL 1528264 (N.D. Ill. June 24, 2005) (court refuses to dismiss the equitable mortgage claim where a house worth $245,000 was deeded away for only $91,500 and where the homeowner alleged fraud and no intent to sell); Rowland v. Haven Properties, L.L.C., (N.D. Ill. Aug. 11, 2005) (court did not grant a preliminary injunction to the plaintiff to protect the status quo until a trial due to factual disputes; court list factors to consider in determining whether the transaction constituted an equitable mortgage); Hruby v. Larsen, 2005 WL 1540130 (D. Minn. June 30, 2005) (granting preliminary injunction to maintain status quo; court reviewed elements to prove an equitable mortgage and found that the consumers have a likelihood of success on the merits; court ordered a bond of $1000 plus monthly payments of $500); Metcalf v. Bartrand, 491 P.2d 747 (Alaska 1971); London v. Gregory, 2001 WL 726940 (Mich. Ct. App. Feb. 23, 2001); Redmond v. McClelland, 2000 Minn. App. LEXIS 779 (Minn. Ct. App. July 25, 2000) (deeds created equitable mortgage even without explicit option to purchase, in
Foreclosure Rescue Scams / 2006 Supplement • A substantial disparity between the value received by the homeowner and the actual value of the property;33 • Existence of an option to repurchase;34 • The homeowner's continued possession of the property;35 • The homeowner's continuing duty to bear ownership responsibilities, such paying real estate taxes or performing property maintenance;36 • Disparity in bargaining power and sophistication, including the homeowner's lack of representation by counsel;37
33 Restatement (Third) of Property, Mortgages §§ 3.2(b)(2), 3.3(b)(2) & cmt. c (1997); see, e.g., Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006); Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998); London v. Gregory, 2001 WL 726940 (Mich. Ct. App. Feb. 23, 2001); Howard v. Diolosa, 574 A.2d 995 (N.J. Super. Ct. App. Div. 1990); Bantuelle v. Williams, 667 S.W.2d 810 (Tex. App. 1983); Levy v. Butler, 93 Wash. App. 1001 (1998) (sale with repurchase option coupled with inadequate consideration sufficient to overcome presumption of sale transaction). 34 Restatement (Third) of Property, Mortgages § 3.3(b)(3) (1997). 35 Id. §§ 3.2(b)(3), 3.3(b)(4). 36 Id. §§ 3.2(b)(4)–(5), 3.3.(b)(5)–(6); In re Davis, 169 B.R. 285 (E.D.N.Y. 1994) (looking to whether leaseback actually transfers the normal risks and responsibilities of a lease); accord McGill v. Biggs, 105 Ill. App. 3d 706 (1982); Howard v. Diolosa, 574 A.2d 995 (N.J. Super. Ct. App. Div. 1990); cf. Carlson v. Bertrand, 2004 WL 3030033 (Minn. Dist. Ct. Mar. 19, 2004) (entering judgment for defendant-purchaser where plaintiff-homeowner failed to demonstrate fraudulent or negligent misrepresentation and where defendant-purchaser had paid off first and second mortgage, made improvements to the property, and paid utility bills owed by the plaintiffs and where the monthly rent payments were lower than the mortgage payments). 37 Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006); Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998); London v. Gregory, 2001 WL 726940 (Mich. Ct. App. Feb. 23, 2001); Restatement (Third) of Property, Mortgages §§ 3.2.(b)(6), 3.3(b)(7) (1997). In Browner the court found that the lender's misconduct was not excused by the fact that the distressed homeowner made an improvident decision. The court made clear that this is precisely the sort of overreaching sought to be curbed by usury laws: The purpose of usury laws from time immemorial has been to protect desperately poor people from the consequences of their desperation. Lawmaking authorities in almost all civilizations have recognized that the crush of financial burdens causes people to agree to almost any conditions of the lender and to consent to even the most improvident loans. Lenders, with the money, have all the leverage; borrowers in dire need of money, have none. Browner, 549 A.2d at 1116; see also In re Davis, 169 B.R. 285 (E.D.N.Y. 1994) (equity sellers were people of little means who lacked any real estate experience while equity purchasers were sophisticated and experienced in real estate transactions). But cf. Shelton v. Cunningham, 508 P.2d 55 (Ariz. 1973) (finding no equitable mortgage when lender and borrower were both older men with little education).
§ 18.104.22.168
• Evidence showing an irregular purchase process, including the fact that the property was not listed for sale38 or that the parties did not conduct an appraisal or investigate title;39 • Financial distress of the homeowner, including the imminence of foreclosure and prior unsuccessful attempts to obtain loans.40 Typically, the homeowner has the burden of demonstrating by clear and convincing evidence that an absolute deed is in fact an equitable mortgage.41 However, courts have held that a sale with an option to repurchase coupled with a gross disparity between the sale price and the property value without more can satisfy the homeowner's burden.42 In California, the mere presence of an option to repurchase in an instrument conveying property in foreclosure creates a presumption that the transaction is a loan.43 The most direct consequence of an equitable mortgage is that the deed transferring the property from the homeowner is voidable, and the homeowner may be able to assert continuing ownership through a quiet title action. If the homeowner regains title through a quiet title action, there will still be a debt owed to the rescuer. However, the homeowner may have damage claims that will offset the debt. Even if the homeowner is left owing a debt to the rescuer, the homeowner may be able to save the home by refinancing that debt with a legitimate lender.
188.8.131.52 The Bona Fide Purchaser Defense
Rescuers often sell or encumber the property quickly after gaining title, which may cut off the homeowner's ability to recover the property. Generally, a bona fide purchaser for
38 See, e.g., In re Davis, 169 B.R. 285 (E.D.N.Y. 1994) (homeowner expressly stated she did not want to sell her home); Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998) (homeowners had no intent to sell homes); Johnson v. Cherry, 726 S.W.2d 4 (Tex. 1987) (homeowner told real estate agent he was not interested in selling his property). 39 See, e.g., Long v. Storms, 622 P.2d 731 (Or. Ct. App. 1981) (appraisal not conducted until after sale). 40 See, e.g., Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006); Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d 1090 (D. Minn. 2005); McElroy v. Grisham, 810 S.W.2d 933 (Ark. 1991) (seller in dire financial straits, which creditor knew); Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998) (defendant knew plaintiff were financially distressed and had been unable to obtain a loan); London v. Gregory, 2001 WL 726940 (Mich. Ct. App. Feb. 23, 2001); Howard v. Diolosa, 574 A.2d 995 (N.J. Super. Ct. App. Div. 1990) (homeowners previously denied four loans by institutional lenders). 41 See, e.g., McGill v. Biggs, 105 Ill. App. 3d 706 (1982); Long v. Storms, 622 P.2d 731 (Or. Ct. App. 1981). 42 See, e.g., Koenig v. Van Reken, 89 Mich. App. 102, 279 N.W.2d 590 (1979); Levy v. Butler, 93 Wash App. 1001, 1998 WL 781146 (1998). 43 Cal. Civ. Code § 1695.12; see Boquilon v. Beckwith, 57 Cal. Rptr. 2d 503 (Cal. Ct. App. 1996).
§ 220.127.116.11
Foreclosures / 2006 Supplement • The purchaser's failure to conduct a title search or to obtain title insurance;50 • Existence of a lis pendens; • The fact that the purchaser paid significantly less than market value for the property, indicating awareness of title defects (or showing that it was not a bona fide purchase ''for value''); • Any other suspicious circumstances—such as a large discrepancy between the homeowner's original purchase price and the sale price to the rescuer—that would lead a reasonable buyer to inquire further and to discover the homeowner's claim. Some of these factors, such as the homeowner's possession of the property or a lis pendens, may be sufficient in and of themselves. Others, such as transfer through a quit claim deed, are not conclusive but may lend support to other evidence. The advocate may wish to consult with a real estate expert, or a trust expert if the case involved an inter vivos trust, to determine whether the circumstances would arouse suspicion in a reasonable buyer. Real estate practices and customs vary from state to state and from locality to locality, and any departure from standard practices should be suspect. Documents required for a trust also vary from state to state and it is important to determine what documents a reasonable purchaser would inspect and whether there were unusual features of the trust documents that would have alerted a buyer that something was amiss. For foreclosure rescue scams, the homeowner's continued possession of the property is clearly the most important factor that should put a purchaser on at least inquiry notice. As one court observed, ''possession of real estate is sufficient to put an interested person on inquiry notice of any legal or equitable claim the person or persons in open, notorious, and exclusive possession of the property may have. . . . Further, where the party in possession is the sole tenant and lessee, certain circumstances may give arise to a duty to inquire as to their rights as tenants beyond mere possessory rights.''51 Second, even if the homeowners cannot recover the property from a bona fide purchaser, the equitable mortgage doctrine may still be asserted to pursue monetary claims against the original rescuer. Finally, if the rescuer actually forged the deed from the homeowner, then it is void ab initio and not merely voidable. In that case, the rescuer has no title to convey, even to a bona fide purchaser.52
50 See Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1208 (Colo. 2005). 51 See Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1207 (Colo. 2005). 52 See Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1205 (Colo. 2005); M.M.&G., Inc. v. Jackson, 612 A.2d 186 (D.C. 1992); Harding v. Ja Laur Corp., 315 A.2d 132 (Md.
value of property subject to an equitable mortgage, without notice of such mortgage, takes the property free of the equitable mortgage.44 However, there are several caveats to this rule that may preserve the homeowner's options. While the following discussion focuses on sales to third party purchasers, the same principles may apply if the rescuer has taken out new loans on the property that the homeowner is attempting to avoid. First and most important, a purchaser who has notice of the homeowner's claim to ownership may still be subject to the equitable mortgage doctrine. ''[N]otice to [the bona fide purchaser], actual or constructive, [is] an element essential to the survival of the [equitable] lien, as against [the bona fide purchaser].''45 Moreover, suspicious circumstances that of themselves may not provide notice may put the purchaser on ''inquiry notice'' with a duty to investigate further.46 This is why homeowners should immediately record a lis pendens to put any subsequent purchasers on notice and preserve remedies against them. Among the circumstances that may lead a court to impute notice are: • The homeowner's continued possession of the property;47 • The purchaser's acquisition of title through a quit claim deed, especially if it is one of a series;48 • The seller's failure to satisfy the homeowner's recorded mortgages;49
44 Lynch v. Murphy, 161 U.S. 247, 255 (1896); see Fla. Stat. Ann. § 697.01 (setting forth equitable mortgage rule with exception that ''no such conveyance shall be deemed or held to be a mortgage, as against a bona fide purchaser or mortgagee, for value without notice, holding under the grantee''); Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1205 (Colo. 2005) (noting that ''Martinez signed the deed. . . . Thus, the deed was not void and the burden was on Martinez to rescind the fraudulently procured deed prior to its conveyance to a subsequent bona fide purchaser''). 45 Lynch v. Murphy, 161 U.S. 247, 255 (1896); see Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1206 (Colo. 2005) (observing that actual, constructive or inquiry notice can give a purchaser notice of a title defect and defeat bona fide purchaser status, and finding that purchaser was on inquiry notice of foreclosure rescue scam). 46 See Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1206 (Colo. 2005). 47 Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1207 (Colo. 2005). 48 See Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1207–1208 (Colo. 2005) (observing that conveyance by quitclaim imposes an element of risk on the buyer that, though not dispositive, ''is a significant factor to be considered when assessing inquiry notice,'' and finding two back-to-back quitclaim conveyances particularly unusual). 49 See Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1208 (Colo. 2005).
Foreclosure Rescue Scams / 2006 Supplement
§ 184.108.40.206
11.4.2 Truth in Lending
126.96.36.199 Introduction
While the Truth in Lending Act (TILA) is generally a disclosure statute and does not limit the substantive terms of loans, it can be useful in attacking foreclosure rescue scams, because rescuers often structure these transactions as sales and do not provide the disclosures required by TILA. TILA contains an express cause of action with remedies that include actual and statutory damages and attorney fees. The most important remedy in the foreclosure rescue scam context, however, is the right to rescission, which includes voiding of finance charges and closing costs. TILA also provides the basis for federal jurisdiction, which may or may not be an advantage, depending on the state. Because TILA only applies to creditors who have a regular business of extending credit, it may not apply to some of the small time rescuers who populate the foreclosure rescue scam market. A subsection of TILA, however, the Home Ownership and Equity Protection Act (HOEPA), which applies to certain high cost loans, has a looser definition of ''creditor,'' and also provides additional requirements and remedies. HOEPA is discussed in § 11.4.3, infra.
personal, family or household purposes,57 either subject to a finance charge or payable by written agreement in more than four installments.58 Substance governs over form, and state common law or statutory rules governing equitable mortgages can be used to establish that the transaction meets the definition of ''credit'' for TILA purposes.59 Once it is established that the transaction is in fact a loan, it is likely that it will meet most of these other criteria. The most difficult hurdle is establishing that the credit was extended by a ''creditor.'' To meet the TILA definition, a creditor must ''regularly'' extend consumer credit.60 In cases of real estate secured loans, ''regularly'' means six or more loans per year.61 However, if a high-cost loan that falls under HOEPA62 is involved, then the creditor need only make two or more mortgages per year, or one such mortgage through a broker, to be considered a creditor for all TILA purposes.63 The ''creditor'' is the person to whom the obligation is initially payable on its face. Arrangers are not covered under TILA. The liability of assignees is discussed in § 188.8.131.52, infra. TILA also sets forth several exemptions from its coverage,64 but a foreclosure rescue transaction is unlikely to fall within any of them.
126.96.36.199 When Does TILA Apply?
When a sale/leaseback or inter vivos trust is found to be a disguised loan, it is subject to disclosure requirements and TILA remedies to the same extent as an explicit secured loan transaction.53 To fall under TILA, a transaction must involve ''credit''54 offered or extended by a ''creditor''55 to a ''consumer'' (who must be a natural person),56 primarily for
18.104.22.168 TILA Disclosure Requirements
TILA works primarily by providing standardized definitions of certain loan terms and requiring disclosure of those terms. TILA provides specific definitions and requirements, in some cases quite technical, for the required disclosures.65
57 Reg. Z § 226.2(a)(12); National Consumer Law Center, Truth in Lending §§ 2.2.3, 2.4.2 (5th ed. 2003 and Supp.). 58 15 U.S.C. § 1602(f)(1); Reg. Z. § 226.2(a)(17)(i)(A); National Consumer Law Center, Truth in Lending § 2.3.4 (5th ed. 2003 and Supp.). 59 Reg. Z § 226.2.(a)(25); Commentary § 226.2(a)(25)-1; Wilson v. Bel Fury Investments Group, L.L.C., 2006 WL 297440 at *5 (D. Neb. Feb. 6, 2006); Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006) (No. Civ. 3:05-0599); Hruby v. Larsen, 2005 WL 1540130 (D. Minn. June 30, 2005); James v. Ragin, 432 F. Supp. 887 (W.D.N.C. 1977) (sale/leaseback); Long v. Storms, 50 Or. App. 39, 622 P.2d 731 (1981) (sale/leaseback); National Consumer Law Center, Truth in Lending §§ 2.1.2, 2.5.4, n.321, 6.2.5 (5th ed. 2003 and Supp.). 60 15 U.S.C. § 1602(f); Reg. Z § 226.2(a)(17(i). 61 Reg. Z § 226.17(a), n.3. See § 22.214.171.124, supra for a discussion of records to investigate to obtain evidence of the rescuer's other transactions. See generally National Consumer Law Center, Truth in Lending § 2.3.3 (5th ed. 2003 and Supp.). 62 For a discussion of HOEPA, see § 11.4.3, infra. 63 15 U.S.C. § 1602(f); Reg. Z § 226.2 n.3; see National Consumer Law Center, Truth in Lending §§ 2.3.6, 9.2.3 (5th ed. 2003 and Supp.). 64 15 U.S.C. 1603; Reg. Z § 226.3; see National Consumer Law Center, Truth in Lending § 2.4 (5th ed. 2003 and Supp.). 65 In addition to specific definitions, the disclosures must be
54 55
Ct. Spec. App. 1974); see also Ward v. Gray, 374 A.2d 15 (Del. Super. Ct. 1977) (when there is no jurisdiction to conduct a sale due to fraud or failure to meet notice requirements, the sale is void and any resulting title is a nullity). See, e.g., Wilson v. Bel Fury Inv. Group, 2006 WL 297440 at *5 (D. Neb. Feb. 6, 2006) (No. 8:04CV640); James v. Ragin, 432 F. Supp. 887 (W.D.N.C. 1977); Long v. Storms, 622 P.2d 731 (Or. 1981) (transaction whereby investor took a deed in exchange for a loan with a repurchase option was an equitable mortgage, or a loan with a security interest; investor found to be creditor subject to Truth in Lending Act and homeowner was entitled to rescind because Truth in Lending disclosures were not made); National Consumer Law Center, Truth in Lending § 6.2.5 (5th ed. 2003 and Supp.); see also In re Mattera, 128 B.R. 107 (Bankr. E.D. Pa. 1991). 15 U.S.C. § 1602(e); Reg. Z § 226.2(a)(14); National Consumer Law Center, Truth in Lending § 2.2.4 (5th ed. 2003 and Supp.). 15 U.S.C. § 1602(f); Reg. Z § 226.2(a)(17)(i); National Consumer Law Center, Truth in Lending § 2.3 (5th ed. 2003 and Supp.). 15 U.S.C. § 1602(h); Reg. Z § 116.2.(a)(11); National Consumer Law Center, Truth in Lending § 2.2.2 (5th ed. 2003 and Supp.).
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In most foreclosure rescue scams, however, the technicalities do not matter, because the rescuer structures the transaction as a sale rather than a loan and provides no TILA disclosures at all. In the case of ''closed-end'' loans,66 failure to disclose the following information gives the consumer a right to both actual damages and statutory damages of $200 to $2000 per transaction for real-estate secured transactions: • • • • • • Total finance charge;67 Amount financed;68 Annual percentage rate;69 Payment schedule;70 Total of payments;71 Security interests.72
18.104.22.168 The Right of Rescission
22.214.171.124.1 Overview The right of rescission is the most important remedy TILA provides to attack a foreclosure rescue scam. Rescission can be quite dramatic because it can: • Completely undo the transaction, eliminate onerous agreements, and void transfer of the property to the rescuer; • Eliminate the rescuer's ability to use summary eviction proceedings to evict the homeowner from the property; • Void charges, penalty fees, interest, and other costs, even if already paid; and • Allow the court to award statutory damages of up to $2000 in the case of closed end, real estate secured loans (in addition to any statutory damages for disclosure violations), if the creditor fails to respond to a proper rescission notice.74 The value of rescission to save homeowners from foreclosure rescue scams cannot be overstated. The lender (and assignee) literally must undo the deal if it violated certain requirements. Becoming familiar with the ground rules of rescission is essential in home defense cases.75 18.104.22.168.2 What transactions can be rescinded In addition to TILA's general coverage provisions, only a non-purchase money security interest in the consumer's primary residence is subject to rescission.76 This means that the mortgage loan in question cannot be the one obtained to purchase the home. Rescission does apply to non-purchase money interests, whether first or second mortgages, home equity loans, bridge loans, home improvement contracts, and liens arising by operation of law.77 Since foreclosure rescue scams target people who already own their homes, it will usually be clear that the transaction is not a purchase money loan.
74 See §§ 184.108.40.206, 220.127.116.11, supra. 75 This subsection provides only a general overview of the rescission remedy. The rescission rules appear in 15 U.S.C. § 1635. Regulation Z and the Official Staff Commentary further flesh out these provisions: Reg. Z § 226.15 (open-end credit) and § 226.23 (closed-end credit). The relevant Official Staff Commentary is located at Official Staff Commentary §§ 226.15 (open-end credit) and 226.23 (closed-end credit). The statute, regulations, and commentary and extensive analysis can be found in National Consumer Law Center, Truth in Lending (5th ed. 2003 and Supp.). 76 National Consumer Law Center, Truth in Lending § 6.2.1 (5th ed. 2003 and Supp.). 77 Id. When the same creditor refinances the loan, rescission applies only to the extent of the new money advanced. Id. § 18.104.22.168.
More important than the damages, the failure to disclose any of the items listed above—other than security interests— also gives rise to a right to rescission. TILA also requires disclosure of a second list of items, violations of which give rise only to actual damages and no right to rescission.73
69 70
provided in a timely way, in a form the consumer may keep, before consummation, and in a clear and conspicuous format, segregated from other information. See National Consumer Law Center, Truth in Lending §§ 4.2–4.4 (5th ed. 2003 and Supp.). A closed-end loan has a fixed term, as is the case for most foreclosure rescue scams. Different rules apply for open-end loans that, like home equity lines of credit, have no fixed terms and allow the borrower to repay as much or little as he or she decides above a minimum amount. 15 U.S.C. § 1638(a)(3); Reg. Z § 226.18(d); see National Consumer Law Center, Truth in Lending Ch. 2, § 4.6.3 (5th ed. 2003 and Supp.). 15 U.S.C. § 1638(a)(2)(A); Reg. Z § 226.18(b);see National Consumer Law Center, Truth in Lending § 4.6.2 (5th ed. 2003 and Supp.). 15 U.S.C. § 1638(a)(4); see National Consumer Law Center, Truth in Lending § 4.6.4 (5th ed. 2003 and Supp.). 15 U.S.C. § 1638(a)(6); Reg. Z § 226.18(g). The payment schedule includes the number, amount, and timing of payments. See National Consumer Law Center, Truth in Lending § 4.6.5 (5th ed. 2003 and Supp.). 15 U.S.C. § 1638(a)(5); Reg. Z § 226.18(h); see National Consumer Law Center, Truth in Lending § 4.6.6 (5th ed. 2003 and Supp.). 15 U.S.C. § 1638(a)(9); Reg. Z § 226.18(m); see National Consumer Law Center, Truth in Lending § 4.6.7 (5th ed. 2003 and Supp.). This group includes the identity of the creditor, itemization of the amount financed, prepayment penalties, late payment fees, security interest charges, insurance charges and debt cancellation agreement, mortgage lender's assumption policy, a demand feature, and whether certain other information can be found elsewhere. See 15 U.S.C. 1638(a)(1), (a)(2), (a)(10), (a)(11); Reg. Z §§ 226.4(d), (e), 226.17(a)(1) n.38, 226.18(i), (p), (q), 226.20(b); National Consumer Law Center, Truth in Lending §§ 4.7.3–4.7.11 (5th ed. 2003 and Supp.).
Foreclosure Rescue Scams / 2006 Supplement 18.104.22.168.3 When rescission can be exercised The homeowner has three business days78 to rescind from the latest of: • Consummation of the transaction; • Delivery of proper notice of right to rescind;79 or • Delivery of all material disclosures, correctly made.80 The three days begin to run only when all material disclosures and the notice of right to rescind, in the proper form, are received. If the creditor fails to make the required disclosures or provide notice of the right to rescind, there is a continuing right to rescind for up to three years from consummation. Since most foreclosure rescue scams are not styled as loans, the rescuers rarely provide any disclosures, and this threeyear rule will normally apply.81 In addition, in Massachusetts and some other states, rescission under a state TILA law may be permitted defensively by way of recoupment beyond three years.82 The right to rescind a loan under TILA is normally extinguished if the consumer's interest in the property is sold or transferred (including by foreclosure sale).83 This rule does not apply if the transaction is determined to be an equitable mortgage under state law such that any sale or transfer is invalid.84 As discussed above, there may be issues in applying the equitable mortgage doctrine to a bona fide purchaser who takes title without notice of the equitable mortgage, though the homeowner's continued possession of the property may provide sufficient notice.85 For loans that fall under HOEPA,86 violations of most of the HOEPA protections also trigger the extended three-year right to rescind. 126.96.36.199.4 Exercising the right to rescind
§ 184.108.40.206.4
78 Saturdays are included. Only Sundays and certain specified federal holidays are excluded. Reg. Z, § 226.2 (a)(6). 79 Specific rules govern the form of the notice of the right to rescind and the circumstances that make it ineffective or allow the consumer to waive it National Consumer Law Center, Truth in Lending §§ 6.2.9, 6.4.3, 6.5 (5th ed. 2003 and Supp.). 80 For closed-end loans, the material disclosures are the amount financed, the finance charge, the APR, the payment schedule, and the total of payments. See § 22.214.171.124, supra. 81 Once the three-year period passes, however, the right to rescind expires and there is generally no right under federal law to raise rescission as a defense to foreclosure even by way of recoupment. There are some potential arguments to get around this rule in certain limited circumstances. See National Consumer Law Center, Truth in Lending § 6.3.3 (5th ed. 2003 and Supp.). 82 See National Consumer Law Center, Truth in Lending § 184.108.40.206 (5th ed. 2003 and Supp.). 83 See National Consumer Law Center, Truth in Lending § 22.214.171.124 (5th ed. 2003 and Supp.). 84 Id. § 18.104.22.168.1 & n.238. 85 See § 220.127.116.11, supra. 86 For a discussion of HOEPA, see § 11.4.3, infra.
Rescission works through a sequential, three-step process. First, the consumer sends written notice of rescission, which operates automatically to void the security interest in the real property and to eliminate the consumer's obligation to pay the finance charges (even if accrued) and other charges.87 In the case of a foreclosure rescue scam, once a sale/leaseback transaction is restructured into a loan, the agreements underlying that transaction would be voided, including any fees or costs the homeowner agreed to pay. The notice of rescission need not take any special form. Nevertheless, in the case of a foreclosure rescue scam, some explanation is obviously needed since the transaction most likely took the form of a sale or transfer and not of a loan subject to TILA. A sample letter exercising the right to rescission is included on the CD-Rom accompanying this manual. Some courts have held that a complaint filed in court may serve as the notice of rescission, but a separate notice is preferable.88 Second, after the notice of rescission has been sent, the creditor or assignee has twenty days to refund or credit any money paid (including any money or property given to a third party) and to take steps to void the security interest.89 For a foreclosure rescue scam, this obligation would include the obligation to reconvey the property back to the homeowner and to clear any other clouds or new encumbrances on the homeowner's title. Third, when the creditor performs its ''step 2'' obligation, then the consumer must tender back any money or property received from the creditor.90 Although the scope of their modification authority is debatable, most courts have concluded that they have equitable authority to require the consumer to tender before the creditor must perform its obligations, or conversely to modify the tender obligation.91 The important point to remember is that a homeowner who seeks rescission must be prepared to tender back his or her gains from the transaction, i.e., if the creditor paid off the original mortgage or brought it current, or provided the
87 15 U.S.C. § 1635(b); Reg. Z §§ 226.5(d)(1), 226.23(d)(1); see National Consumer Law Center, Truth in Lending § 6.6.2 (5th ed. 2003 and Supp.). 88 Id. § 184.108.40.206. 89 15 U.S.C. § 1635(b): Reg. Z §§ 226.15(d)(2), 226.23(d)(2); see National Consumer Law Center, Truth in Lending § 6.6.4 (5th ed. 2003 and Supp.). 90 15 U.S.C. § 1635(b); Reg. Z §§ 226.15(d)(3), 226.23(d)(3); see National Consumer Law Center, Truth in Lending §§ 6.6.5, 6.8 (5th ed. 2003 and Supp.). 91 See §§ 184.108.40.206, 126.96.36.199, supra; National Consumer Law Center, Truth in Lending § 6.7 (5th ed. 2003 and Supp.). TILA does not allow courts to nullify the automatic ''step 1'' consequences of the rescission notice—voiding of any security interest and cancellation of any charges—although many courts still rely on pre-1980 case law that was in conflict on this point. See id. § 6.7.2.
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homeowner with cash. However, the consumer should be able to credit any payments made to the rescuer—whether in the form of rent payments, finance charges, closing costs, or other disguised fees or payments—because rescission voids any obligation to pay those costs. In addition, any closing costs paid to third parties are voided. Finally, any TILA damages to which the consumer is entitled may also be credited against the tender obligation. The consumer may come up with the tender in a variety of ways. The consumer may be able to refinance elsewhere with an affordable loan, since all interest, closing costs, and credit-related charges are eliminated. (Be sure to look for market rate loans, too.) Elders may wish to explore reverse mortgage options to obtain refinancing funds.92 Courts may permit the consumer to repay the tender in installments or allow some time to come up with a payment or refinancing.93 The consumer may tender in bankruptcy, and some courts have treated the creditors as unsecured creditors in chapter 13 proceedings.94 If the creditor fails to respond to the cancellation notice, the consumer may be forced to file an affirmative action to enforce the rescission right. In bankruptcy proceedings, this may be raised in an adversary proceeding. The creditor's failure to respond gives rise to a claim for statutory damages and actual damages. This is in addition to any claim which may be available for other TILA statutory damages.95 As soon as the rescission notice is sent, the consumer should start making monthly payments in an affordable amount into an escrow account or some other protected account. These payments will help build up a sum to offer as the tender amount. The consumer's record of regular payments will also be useful in persuading the court to allow the consumer to tender in installments. In most foreclosure rescue scam cases, the homeowner will be asserting not just TILA claims, but also a variety of non-TILA claims that may offer punitive, statutory, or multiple damages. The possibility of a multiple, statutory, or punitive damage award on the homeowner's non-TILA claims is a strong argument why the court should delay any determination of the tender obligation until after trial. After the court resolves all the homeowner's claims, a net amount may be owed to the homeowner. Since rescuers tend to be undercapitalized entrepreneurs, if the homeowner is required to pay the tender amount early the rescuer may disappear with it.
188.8.131.52 Damages and Attorney Fees
TILA gives consumers, with some exceptions, the ability to collect actual damages without cap and to recover costs and reasonable attorney fees. In addition, consumers may collect statutory damages for certain violations96 without having to prove actual damages, regardless whether the creditor knew about the violation or whether the consumer was deceived. In the case of closed-end credit secured by real property, the statute sets statutory damages for disclosure violations between $200 and $2000.97 In general, the consumer may recover only one statutory recovery per transaction for disclosure violations, even if multiple violations are committed or multiple parties are involved.98 Separate and apart from disclosure violations, TILA provides statutory damages of $200 to $2000 in the case of closed-end real-estatesecured loans, if the creditor fails to respond to a proper rescission notice. Violations of HOEPA prohibitions carry additional statutory penalties.99 The limitation period for affirmative damages claims is one year from the date of the violation.100 Consumers can also assert damage claims defensively by way of recoupment or set-off in an action by the creditor to collect on the alleged debt filed more than a year from the date of the violation.101 The one-year statute of limitations for damages can also be equitably tolled in the event of fraud.102
22.214.171.124 Assignee Liability
Under TILA, assignees are always liable for rescission, to the same extent as the original creditor.103 However, in order to exercise TILA rescission in the sale/leaseback context, the homeowner must first convince the court to apply the equitable mortgage doctrine to void the transfer deed and convert the sale into a loan subject to TILA. This may be more difficult if the rescuer has already transferred the
96 See § 220.127.116.11, supra. 97 15 U.S.C. § 1640(a)(2)(A)(iii). The statute is ambiguous on how the court is to determine where in this range to set damages. See National Consumer Law Center, Truth in Lending 184.108.40.206 (5th ed. 2003 and Supp.). 98 15 U.S.C. § 1640(g). A series of refinancings may be considered multiple transactions, however, allowing one award of statutory damages for the disclosure violations in each refinancing. See National Consumer Law Center, Truth in Lending § 188.8.131.52 (5th ed. 2003 and Supp.). 99 See § 22.214.171.124, infra. 100 15 U.S.C. § 1640(e); National Consumer Law Center, Truth in Lending § 7.2 (5th ed. 2003 and Supp.). 101 15 U.S.C. § 1640(e); National Consumer Law Center, Truth in Lending § 7.2 (5th ed. 2003 and Supp.). 102 See National Consumer Law Center, Truth in Lending § 7.2.3 (5th ed. 2003 and Supp.). 103 15 U.S.C. § 1641(c); National Consumer Law Center, Truth in Lending §§ 6.9.2, 7.3 (5th ed. 2003 and Supp.).
92 For a discussion of how to assess when a refinancing is a good idea, see National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 6.5 (3d ed. 2005 and Supp.). 93 See § 220.127.116.11, supra; National Consumer Law Center, Truth in Lending § 6.7 (5th ed. 2003 and Supp.). 94 National Consumer Law Center, Truth in Lending § 6.8.4 (5th ed. 2003 and Supp.). 95 See § 126.96.36.199, supra.
Foreclosure Rescue Scams / 2006 Supplement property to a third party purchaser. The homeowner will likely have to show that the purchaser had some notice, actual or constructive, of the homeowner's claims in order to invoke the equitable mortgage doctrine against the third party purchaser. In the foreclosure rescue scam context, however, the homeowner likely still has possession of the property, which should be sufficient to put the purchaser on inquiry notice and defeat a bona fide purchaser defense.104 In that case, TILA rescission should be available against the assignee/ purchaser.105 In contrast to rescission, assignees are shielded from TILA liability for damages unless the violation is apparent on face of disclosure documents or other documents assigned.106 Assignees have expended liability for damages if the loan falls under HOEPA, however.107 It is always important to marshal evidence showing that the third party had reason to be suspicious of the transaction. Evidence along these lines will also be necessary if the homeowner is asserting claims such as fraud directly against the third party purchaser.
§ 188.8.131.52.1
11.4.3 Home Ownership and Equity Protection Act
18.104.22.168 Scope
18.104.22.168.1 Overview of HOEPA triggers In 1994, Congress passed the Home Ownership and Equity Protection Act (HOEPA), designed to prevent some predatory lending practices.108 HOEPA, which is part of TILA, imposes additional requirements and remedies on loans made at high rates or with excessive costs and fees. HOEPA applies only to those loans that are subject to rescission under TILA: non-purchase, closed-end credit secured by the homeowner's primary residence.109 In addition, reverse mortgages are exempted from HOEPA. TILA's general definition of ''credit'' applies, but the definition of ''creditor'' is much looser: a creditor need only make two HOEPA loans per year, or one such mortgage through a
104 See § 18.104.22.168, supra. 105 In Armstrong v. Real Estate Int'l, Ltd., 2006 WL 354983 (E.D.N.Y. Feb. 14, 2006), the court refused to preliminarily enjoin the rescuer from transferring the property because any transferee/assignee would be subject to TILA rescission, and therefore the plaintiff could not show irreparable injury. The court did not discuss the bona fide purchaser defense, but there may have been a lis pendens recorded that would have given any purchaser notice. 106 15 U.S.C. § 1641(a). 107 See 184.108.40.206, infra. 108 15 U.S.C. §§ 1602(aa), 1639. Regulations promulgated under HOEPA can be found in Regulation Z, 12 C.F.R. §§ 226.31, 226.32. See generally § 4.8.5, supra. 109 See §§ 220.127.116.11, 188.8.131.52.1, supra.
broker, to be subject to both HOEPA and the general TILA provisions.110 As with TILA generally, courts will look beyond the form of the transaction and may use the equitable mortgage doctrine to view a sale transaction as a loan.111 HOEPA protections apply if either one of two triggers is met. First, the loan is subject to HOEPA if the annual percentage rate (APR) exceeds the yield on treasury securities with comparable maturities by more than eight percentage points for a first lien, or ten points for a subordinate lien.112 For a sale/leaseback transaction, the time period for a ''comparable'' treasury maturity can be determined by looking at the terms of the lease, the expiration date of an option to purchase, or the date any balloon payment is due. Second, the loan is subject to HOEPA if the total of the points and fees exceeds eight percent of the total loan amount and is over an amount adjusted annually for inflation ($528 for 2006).113 ''Points and fees'' is defined to include all noninterest ''finance charges,'' which in turn are defined as ''any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.''114 In addition, all compensation paid to mortgage brokers and certain closing costs count as points and fees.115 Once a foreclosure rescue transaction is reconstructed to be seen as a loan, the costs that the homeowner incurs can be considered to be incident to the extension of credit. To determine whether a foreclosure rescue transaction meets either of these triggers, one can consider the terms of the repurchase portion of the transaction alone or the unified impact of the sale and the repurchase. When the homeowner's repurchase price is higher than the sale price, the lost equity is arguably a finance charge that should be considered in the calculation.116
110 15 U.S.C. § 1602(f); Reg. Z § 226.2 n.3; National Consumer Law Center, Truth in Lending §§ 2.3.6, 9.2.3 (5th ed. 2003 and Supp.). See, e.g., Hruby v. Larsen, 2005 WL 1540130 (D. Minn. June 30, 2005). 111 See § 220.127.116.11, supra. 112 The relevant rate is the one in effect on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor. 15 U.S.C. § 1602(aa)(1)(A). In these cases, there is not likely to be a formal ''application.'' The homeowner could argue that the relevant date is the fifteenth day of the month preceding the month in which the scammer first discussed the transaction, or alternatively, in which the transaction itself occurred. The rates for comparable treasury bonds can be found on the Federal Reserve's website at www.federalreserve.gov/Releases/ H15/data.htm, Scroll down to ''treasury constant maturities,'' find the term of the loan, and click on ''Business Day.'' The length of the contract to repay and ''rent'' the property is the most likely term to use when selecting the comparable maturity. 113 15 U.S.C. § 1602(aa)(1)(B), 1602(aa)(3); Reg. Z § 226.32(b); 70 Fed. Reg. 46066 (Aug. 9, 2005). 114 12 C.F.R. §§ 226.32(b), 226.4. 115 12 C.F.R. § 226.32(b). 116 See Prentiss Cox, Foreclosure Equity Stripping: Legal Theories
§ 126.96.36.199.2
Foreclosures / 2006 Supplement HOEPA points and fees is included on the CD-Rom accompanying this manual. For most foreclosure rescue transactions, the APR trigger will present a clearer analysis. However, the following example illustrates the application of the points and fees trigger in a hypothetical foreclosure rescue transaction. Assume that in the previous example the rescuer charged the homeowner an up-front fee of $500 and required the homeowner to make two additional $400 monthly payments to the rescuer while the rescuer was finalizing the transaction. Assume also that the rescuer required the homeowner to pay $300 for an appraisal before closing, but funneled the money to an appraisal company owned by the rescuer. All of these up-front charges, totaling $1600, at least arguably count toward the HOEPA points and fees trigger as they were ''payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.''120 These points and fees would amount to 13.3% of the total loan amount of $12,000,121 exceeding the HOEPA triggers of $528 (for 2006) and 8% of the total loan amount. This example provides a roadmap for calculating the points and fees trigger in the most conservative manner. Alternatively, if the rescuer structures the deal to capture a profit by creating a difference between the homeowner's ''sale'' price for the property and a much larger ''repurchase'' price in those cases where there is a ''repurchase'' contract, the difference arguably is a finance charge and, consequently, a point and fee. In conventional loans, the charges that count toward the points and fees trigger are usually paid out of the proceeds of the loan at closing (or paid by the lender before closing and then added to the principal of the loan). Sometimes, however, borrowers pay these charges in cash before closing, or bring cash to the closing. With foreclosure rescue scams, the points and fees analysis is clearest if the homeowner made cash payments to the rescuer at or before closing. Charges may also count toward the points and fees trigger if the rescuer paid them at or before closing, and then added them to the amount the consumer agreed to pay to repurchase the home. Foreclosure rescue transactions are structured in a variety of ways, and the analysis of points and fees will depend on the details of the transaction.
126.96.36.199.2 Example of APR trigger calculation The following is an example of how to determine if a foreclosure rescue scam loan exceeds the HOEPA APR trigger. Foreclosure rescue scams are structured in a variety of ways, however, so other ways of determining the APR may be appropriate for a particular case. Assume that the homeowner's regular monthly mortgage payment was $733.76 per month (this would be the monthly payment on a $100,000 30-year mortgage at 8%). Assume also that the homeowner was $10,000 in arrears on mortgage payments and $2000 in arrears on property taxes, but had $40,000 in equity in the property. A typical rescuer might pay the combined $12,000 arrearage in exchange for a quit claim deed on the property and allow the homeowner to ''rent'' the property for $1233.76 per month (the $733.76 regular mortgage payment plus $500 toward the $12,000 arrearage) for 24 months, followed by a balloon payment of $60,000 to exercise an option to reacquire the home. The annual percentage rate for a $12,000 loan with this payment schedule is 154.15%.117 Assuming that the ''application'' date of the sale/leaseback was June 1, 2006, this APR is well in excess of the HOEPA APR trigger of 14.99% (the Treasury bond rate of 4.99% on the 15th of the prior month plus 10%).118 184.108.40.206.3 Example of points and fees trigger calculation The HOEPA points and fees trigger is based not on the APR but on charges such as prepaid finance charges and broker fees that are paid directly or indirectly by the consumer, at or before closing, as an incident to or a condition of the loan. Certain closing costs can also count toward the points and fees trigger if they are inflated or paid to affiliates, or if the creditor receives a portion of the charge. The rules for determining whether a charge counts toward the points and fees trigger are quite complex and are detailed in NCLC's Truth in Lending.119 A worksheet for calculating
and Strategies to Attack a Growing Problem, 39 Clearinghouse Review Journal of Poverty Law and Policy 607, 617–618 (Mar.–Apr. 2006), for a more detailed discussion of how to calculate these triggers in the context of a foreclosure rescue scam. 117 The APR was calculated using the NCLC Consumer Law Math program included on the CD-Rom accompanying this manual by inserting $12,000 in the ''amount financed'' box, 25 in the ''number of periodic payments'' box, $1233.76 in the ''amount of most common payment'' box, and $60,000 in the ''amount of any irregular final payment'' box, and then pushing the ''calculate'' button. 118 In this example, the 10% APR trigger for junior lien mortgages is used. Since the rescuer only paid the delinquent amount of the existing first mortgage, not the full balance, a conservative approach treats the transaction with the rescuer as a junior lien mortgage loan. 119 National Consumer Law Center, Truth in Lending § 9.2.6 (5th ed. 2003 and Supp.).
120 12 C.F.R. §§ 226.32(b), 226.4. 121 In this example, the homeowner paid the points and fees up front in cash. In a standard mortgage loan, the points and fees are often paid out of the proceeds of the loan and then financed as part of that loan. In that case, the ''total loan amount'' as defined by HOEPA is the proceeds of the loan minus the points and fees. See National Consumer Law Center, Truth in Lending § 22.214.171.124 (5th ed. 2003 and Supp.).
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§ 126.96.36.199
18.104.22.168 Substantive Prohibitions
Once a loan is determined to be a high-cost one that meets one of the HOEPA triggers, several additional prohibitions and requirements kick in, beyond those in TILA generally.122 Most are relevant only to traditional loans, but some are useful in dealing with foreclosure rescue scams. HOEPA prohibits certain contract terms that Congress determined to be abusive in the high-rate lending context. Among these, balloon payments are prohibited unless the loan has a term of five years or more.123 A lease-purchase arrangement that requires the homeowner to make rent payments for a period of time, followed by a large lump-sum payment to exercise the repurchase option, may violate the balloon payment prohibition. HOEPA also prohibits certain lender behavior. Of particular note, creditors may not make a HOEPA loan without regard to ability to repay, as where the lender looks to the value of the home, rather than the homeowner's monthly income. This prohibition applies only if the lender engages in a pattern or practice of this activity, which can be a difficult standard to meet, though it may be revealed through discovery of all of the lender's loans. A presumption is created that a creditor violates this prohibition if it does not verify and document the borrower's ability to repay with a financial statement and credit report.124 Foreclosure rescuers usually violate this prohibition since they do not assess ability to repay and do not verify income. Finally, HOEPA mandates that the consumer receive a special advance warning at least three business days before the loan consummation. The lender must warn that the home and any equity in it might be lost in the event of nonpayment, and must disclose, for fixed-rate loans, the APR, the amount of regular monthly payments, and any balloon payment.125 This warning is virtually never made in the context of a foreclosure rescue scam, both because rescuers do not generally structure transactions as loans, and because they often rush the homeowner to complete the transaction quickly, before the homeowner understands the nature of the scam or can obtain advice from a lawyer, friend, or relative.
22.214.171.124 Expanded Assignee Liability
An important aspect of HOEPA is its expanded assignee liability: assignees of covered mortgages are liable for all claims and defenses that the consumer could assert against the originator, except to the extent of certain limitations on damages discussed below.126 This expansion of liability even covers claims and defenses that can be raised against the original lender under common law, statutes, or other theories. An assignee may defeat liability if it legitimately could not have known the assigned mortgage was a covered loan.127 In the sale/leaseback, there are two facets to this defense. First, as discussed above, the court must decide whether the assignee had sufficient notice of the true nature of the transaction to be subject to the equitable mortgage doctrine, converting the sale/leaseback into a loan potentially subject to HOEPA.128 Second, even if the assignee can be imputed with knowledge that the transaction was a loan, the assignee can defeat liability if it carries the burden of showing that a reasonable person exercising ordinary due diligence could not have determined the transaction was a high-cost loan covered by HOEPA.129 In the foreclosure rescue scam context, the assignee/purchaser may disavow any knowledge of the details of the original sale/leaseback transaction between the homeowner and the rescuer. To rebut such a claim, the homeowner should seek out evidence of warning signs that, if investigated by a reasonable purchaser, would have revealed the high-cost details that bring the transaction within HOEPA. Any damage award against the assignee under nonHOEPA/TILA theories that is based on the assignee liability provisions of HOEPA is capped. Damages are limited to the amount of all remaining indebtedness and the total amount already paid by the consumer.130 When damages are awarded based on TILA and on other claims, the TILA damages must be offset against the damages awarded on the other claims.131
126.96.36.199 Remedies
122 See § 188.8.131.52, supra. 123 Additional prohibitions not discussed in this subsection include prepayment penalties, interest rate increases upon default, negative amortization, prepaid payment, escrows, and due-on-demand clauses. Some of these terms are prohibited for all HOEPA loans, whereas others have exceptions. See National Consumer Law Center, Truth in Lending § 9.4 (5th ed. 2003 and Supp.). 124 See Reg. Z § 226.34(a)(4); National Consumer Law Center, Truth in Lending § 9.5.2 (5th ed. 2003 and Supp.). 125 Additional requirements for the advance notice are discussed in National Consumer Law Center, Truth in Lending § 9.3 (5th ed. 2003 and Supp.). A recommended model form is contained in Reg. Z Appx. H-16.
Violations of HOEPA are subject to three remedies. First, violations of HOEPA trigger actual damages and TILA statutory damages.
126 15 U.S.C. § 1641(d)(1). Assignees are those entities that purchase loans from the original lenders. 127 See § 188.8.131.52, supra. 128 See § 18.104.22.168, supra. 129 Id. 130 15 U.S.C. § 1641(d)(2)(B). 131 15 U.S.C. § 1641(d)(3). For a discussion of how this cap works, see National Consumer Law Center, Truth in Lending §§ 188.8.131.52–22.214.171.124 (5th ed. 2003 and Supp.).
§ 11.4.4
Foreclosures / 2006 Supplement can provide an all-purpose remedy. Almost any abusive business practice aimed at consumers is at least arguably a UDAP violation, unless the trade practice falls clearly outside the scope of the statute.137 Another important point about UDAP claims is that most courts have held that, since they are not based on breach of contract, they are unaffected by the parol evidence rule or by disclaimers and exculpatory clauses in the contract documents.138 A UDAP claim should always be considered when dealing with a foreclosure rescue scam. This section first compares UDAP with fraud claims and then discusses the advantages and disadvantages of UDAP claims as compared to TILA/HOEPA claims. (For a comparison of UDAP claims and claims under state foreclosure rescue statutes, see § 18.104.22.168, infra.) This section also discusses the application of UDAP statutes to foreclosure rescue scams, and ends with an overview of UDAP remedies.
Second, HOEPA violations that are ''material'' (under a common law standard, not the TILA standard) carry enhanced double damages of the sum of all finance charges and fees paid by the consumer.132 In the foreclosure rescue scam context, entering into a sale/leaseback transaction without regard to the homeowner's ability to exercise a repurchase option, or requiring a balloon payment beyond the homeowner's reach, are certainly material violations. Damage claims have a one-year statute of limitations for affirmative suits, but can be raised at any time defensively.133 Third and more important, violations of HOEPA's disclosure provisions and the inclusion of a prohibited term, such as a balloon payment, are deemed ''material'' under TILA, giving the consumer the right to rescind the transaction for up to three years after it was consummated. Making a loan without regard to ability to pay does not trigger the right to rescind, though it does entitle the homeowner to damages.134
22.214.171.124 Comparison of UDAP and Fraud Claims 11.4.4 Unfair and Deceptive Acts and Practices (UDAP) Statutes 22.214.171.124 Overview of State UDAP Statutes
Foreclosure rescue scams can often be challenged under state unfair and deceptive acts and practices (UDAP) laws.135 All fifty states, the District of Columbia, Puerto Rico, Guam, and the Virgin Islands have at least one statute with broad applicability that addresses deception and abuse in the marketplace, and all but Iowa and Puerto Rico afford the consumer a private cause of action.136 In a majority of states, the UDAP statute prohibits not just deception, but also unfair or unconscionable practices. The broad, expansive, developing nature of UDAP statutes is their unique strength. When a practice does not fall precisely under a debt collection act, state or federal credit legislation, warranty law, or other statute, UDAP statutes
132 133 134 135 15 U.S.C. § 1640(a). 15 U.S.C. § 1640(c). 15 U.S.C. § 1639(j); Reg. Z § 226.23(a) n.48 See also § 184.108.40.206, supra. For more detailed discussion of UDAP laws, see National Consumer Law Center, Unfair and Deceptive Acts and Practices (6th ed. 2004 and Supp.). Another helpful reference is Prentiss Cox, Foreclosure Equity Stripping: Legal Theories and Strategies to Attack a Growing Problem, Clearinghouse Review (Mar.–Apr. 2006) at 607–626. The use of UDAP claims to challenge predatory lending is discussed at National Consumer Law Center, Unfair and Deceptive Acts and Practices § 5.1.2 (6th ed. 2004 and Supp.); National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 11.5 (3d ed. 2005 and Supp.). 136 These statutes are listed and summarized in National Consumer Law Center, Unfair and Deceptive Acts and Practices Appx. A (6th ed. 2004 and Supp.). Even though Iowa's UDAP statute is generally not privately enforceable, it is possible that it can be raised defensively. See id. § 7.2.2.
UDAP claims have a number of advantages when compared to other claims. In contrast to common law fraud, proof of the seller's fraudulent intent or knowledge is not required for a claim under a state UDAP statute. In some cases, consumer reliance, damage, or even actual deception is not a prerequisite to a UDAP action. The standard of proof is typically a preponderance of the evidence, compared with clear and convincing evidence for a fraud claim. Thus, a UDAP claim is a far easier cause of action to prove than common law fraud. The statute of limitations may also be longer, although states differ widely. Most UDAP statutes offer enhanced damages such as statutory or treble damages, and most offer attorney fees. On the other hand, punitive damages are available for fraud in most states, while only about ten UDAP statutes authorize punitive damages.139 Combining a fraud claim with a UDAP claim may enable the homeowner to recover punitive damages on the fraud claim and attorney fees on the UDAP claim.140 A disadvantage of UDAP claims in comparison to fraud claims is that some state UDAP statutes have restrictive coverage provisions. In particular, some UDAP statutes
137 National Consumer Law Center, Unfair and Deceptive Acts and Practices (6th ed. 2004 and Supp.) describes a large body of Federal Trade Commission rules, guides and cases, state regulations and cases, statutory provisions, and other materials that can provide clear guidance in initiating most UDAP claims. 138 National Consumer Law Center, Unfair and Deceptive Acts and Practices § 4.2.15 (6th ed. 2004 and Supp.). 139 National Consumer Law Center, Unfair and Deceptive Acts and Practices § 8.4.3 (6th ed. 2004 and Supp.). 140 See Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792 (Neb. 2005) (awarding attorney fees under state UDAP statute after awarding other relief on fraud claim against rescuer).
Foreclosure Rescue Scams / 2006 Supplement exclude real estate transactions, extensions of credit, or regulated entities such as banks. Even in states that exclude real estate transactions, the practitioner may be able to characterize the transaction with the rescuer as predominantly involving services other than real estate or a loan, however. In addition, entities involved downstream from the rescuer, such as a bank that gives the rescuer a mortgage loan against the home, may have derivative liability for the rescuer's UDAP violations even if they are not covered by the UDAP statute themselves.141 Nonetheless, the advantage of a fraud claim is that there are few or no limits on the applicability of common law fraud. Another potential disadvantage of a UDAP claim is that in Colorado, Georgia, Minnesota, Nebraska, New York, South Carolina, and Washington, courts have interpreted the UDAP statute to require the consumer to prove that the challenged practice affects the public interest. Although this should not be difficult in the case of a foreclosure rescue scam, it is not a requirement for a fraud claim. Evidence that the rescuer engaged in similar transactions will help meet this requirement. Evidence of other transactions is also highly useful for showing intent, seeking punitive damages, and establishing coverage under the Truth in Lending Act, so it is worth developing even where the state UDAP statute does not require a showing of an effect on the public interest. Ten states—Alabama, California (under one of its UDAP statutes), Georgia, Indiana, Maine, Massachusetts, Texas, Virginia, West Virginia, and Wyoming—require the consumer to send a notice to the defendant a certain number of days before filing a UDAP action, and Mississippi requires the consumer to utilize an informal dispute resolution procedure before filing suit. If it is necessary to file suit quickly to prevent the rescuer from transferring the property, it may be necessary to omit the UDAP claim at first in these states, and then add it by amendment when the notice period expires. Decisions from the jurisdiction should be consulted to determine the best course of action. Fraud claims can almost always be tried to a jury, but some states have found no jury trial right for UDAP claims.142 Even in these states, the fraud and UDAP claims can usually be tried together, with the fraud claims going to the jury and the judge deciding the UDAP claims.143
§ 188.8.131.52
rounding circumstances and the underlying fairness or unfairness of the transaction will be only marginally relevant. By contrast, whether a defendant violated a UDAP statute is much more dependent on the facts and nuances of those facts. At trial the practitioner can bring out all the facts and circumstances that show that the transaction was unfair or deceptive. Another advantage of state UDAP laws is that the consumer need not show that the rescuer engaged in a certain number of credit transactions, as is required under TILA and HOEPA.144 Some UDAP statutes require a showing that the seller was engaged in trade or commerce, or that the transaction occurred in the ordinary course of the seller's business,145 but this is a less rigid test. UDAP statutes also offer much different relief than TILA and HOEPA. Actual damages will be available for all of these claims, but some courts have given a narrow reading to TILA's actual damage provision.146 Some UDAP statutes explicitly authorize rescission as a remedy, but they lack TILA's step-by-step provisions for unwinding home mortgage transactions.
220.127.116.11 Application of Substantive UDAP Standards to Foreclosure Rescue Scams
Most UDAP statutes combine a series of specific prohibitions with a broad, general prohibition of unfair, unconscionable, and/or deceptive practices. Often the rescuer will have violated one of the specific, more clearly defined prohibitions, and in addition the facts will show a violation of the general prohibitions. The broad, flexible prohibitions of most UDAP statutes make them ideal as a way to challenge creative, new forms of abusive business schemes.147 The following are some examples of practices prohibited by UDAP statutes that are likely to be present in foreclosure rescue scams: • The advertising surrounding a foreclosure rescue scheme and the rescuer's sales pitch are likely to run afoul of the UDAP statute's prohibition of deceptive statements. Even if the statements are literally true, they will violate the UDAP statute if their implications are deceptive or if the rescuer has omitted material facts.148 • A number of UDAP statutes prohibit entering into a transaction knowing that the consumer is unlikely to be
144 See § 22.214.171.124, supra. 145 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 2.3.4 (6th ed. 2004 and Supp.). 146 See National Consumer Law Center, Truth in Lending § 8.5 (5th ed. 2005 and Supp.). 147 See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 2.1.3, 4.2–4.4 (6th ed. 2004 and Supp.). 148 See National Consumer Law Center, Unfair and Deceptive Acts and Practices §§ 4.2.13, 4.2.14 (6th ed. 2004 and Supp.).
220.127.116.11 Comparison to TILA and HOEPA
UDAP claims are much less technical than Truth in Lending or HOEPA claims. This can be an advantage and a disadvantage. Once an equitable mortgage is established (an intensely factual determination), whether a defendant violated the TILA or HOEPA is usually a very objective determination, suitable for summary judgment. The sur141 See National Consumer Law Center, Unfair and Deceptive Acts and Practices §§ 6.6, 6.7 (6th ed. 2004 and Supp.). 142 See id. § 7.9.2. 143 Id.
§ 18.104.22.168
Foreclosures / 2006 Supplement and failing to fulfill his promises. Another court awarded $50,000 punitive damages in a similar sale and leaseback situation based on fraud, breach of fiduciary duty, and UDAP violations.155 The Nebraska Supreme Court upheld a finding that a rescuer who misrepresented to homeowners that they were obtaining loans, when actually they were conveying their homes to the rescuer, violated the state UDAP statute.156 In another case, a court found a UDAP violation where a consumer, with no one to counsel her, whose sole source of income was Aid to Families with Dependent Children, was pressured into a financing scheme that she did not understand and that was disadvantageous.157 The uneducated, desperate, low-income borrower ''sold'' her house for $20,000 and received a repurchase agreement for $32,000 at a variable 9% to 11% rate, which sum included a 20% realty commission. A District of Columbia trial court found that a homesaver committed numerous deceptive and unconscionable acts. These included failure to disclose the appraised value of the home and that he was the other contracting party and would profit personally from the transaction; presenting himself as helping the homeowner save her home, when his real intention was to acquire the home for a pittance; and acquiring the home at a grossly disproportionate price from an aged and infirm homeowner.158 In another case, an entrepreneur bought a delinquent mortgage debt before foreclosure began, then contacted the homeowner, threatened foreclosure, and ultimately browbeat the homeowner into conveying the property to him. A Massachusetts court held that the entrepreneur may have committed UDAP violations by representing to the homeowner that signing the agreements was a mere formality after the homeowner made it clear that he could not afford the payments.159
able to repay the obligation.149 Structuring a transaction to create payments and charges that the consumer cannot afford, in order to precipitate a default and foreclosure, will be a UDAP violation in these states and also in states that prohibit unfairness in general.150 Even in states where the UDAP statute does not include these prohibitions, it is likely that the rescuer misrepresented the nature of the obligations that the homeowner was undertaking. • Many UDAP statutes specifically prohibit taking advantage of a consumer who is vulnerable because of age, infirmity, illiteracy, educational level, or other causes.151 Even if the UDAP statute does not contain this prohibition, many decisions require courts to take the consumer's vulnerability into account when assessing whether a statement is deceptive.152 • Collecting fees in excess of those allowed by state usury laws may state a UDAP claim.153 Framing such a violation as a UDAP claim is particularly helpful if the state usury law's remedies are weak or unclear. A number of courts have entered UDAP judgments against rescuers. In a private UDAP suit involving a sale/ leaseback scheme, a debtor who lost her home to a homesaver won as damages the amount of equity in the home, which the court then trebled.154 The court held that the rescuer violated the UDAP statute by taking the debtor's home, obtaining her signature on a blank deed, selling the property without returning fair compensation to her, deceptively leading her to believe he was acting in her interests, misrepresenting the import of the agreements she signed,
149 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 5.1.4 (6th ed. 2004 and Supp.). 150 See, e.g., Jackson v. Byrd, 2004 WL 3130653 (D.C. Super. Ct. May 11, 2004) (foreclosure rescue case), later op., 2004 WL 3249693 (D.C. Super. Ct. June 30, 2004) (awarding damages), later op., 2004 WL 3249692 (D.C. Super. Ct. Sept. 2, 2004) (awarding attorney fees); Fidelity Fin. Servs. v. Hicks, 574 N.E.2d 15 (Ill. App. Ct. 1991) (allegations of deceptive practices used to make unaffordable loan for home improvements in order to acquire equity in home scam stated a UDAP claim); U.S. Home & Realty Corp. v. Lehnartz, Clearinghouse No. 43,259 (Mich. Dist. Ct. Sept. 30, 1987) (Case No. 87-930), available at www.consumerlaw.org/unreported. 151 See, e.g., Williams v. First Gov't Mortg. & Investors Corp., 225 F.3d 738 (D.C. Cir. 2000); Jackson v. Byrd, 2004 WL 3130653 (D.C. Super. Ct. May 11, 2004) (foreclosure rescue case), later op., 2004 WL 3249693 (D.C. Super. Ct. June 30, 2004) (awarding damages), later op., 2004 WL 3249692 (D.C. Super. Ct. Sept. 2, 2004) (awarding attorney fees). See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 4.4.4 (6th ed. 2004 and Supp.). 152 See Billingham v. Dornemann, 771 N.E.2d 166, 178 (Mass. App. Ct. 2002) (foreclosure rescue case). See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 4.2.11 (6th ed. 2004 and Supp.). 153 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 22.214.171.124 (6th ed. 2004 and Supp.). 154 In re Bryant, 111 B.R. 474 (E.D. Pa. 1990).
220.127.116.11 UDAP Remedies
The typical UDAP statute offers actual damages plus statutory, multiple, or punitive damages. Actual damages can be substantial. Several decisions have awarded the lost
155 Jeffries v. The Lewis Group, Clearinghouse No. 47,473F (Ill. Cir. Ct. Cook Cty. Oct. 9, 1991); see also R.A. Walker & Associates, Inc., 3 Trade Reg. Rep. (CCH) ¶ 22,080, F.T.C. File No. 832 3227 (D.D.C. 1983) (issuing preliminary injunction against foreclosure rescue scam). 156 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792 (Neb. 2005). 157 U.S. Home & Realty Corp v. Lehnartz, Clearinghouse No. 43,259 (Mich. Dist. Ct. 1987), available at www.consumerlaw.org/ unreported. 158 Jackson v. Byrd, 2004 WL 3130653 (D.C. Super. Ct. May 11, 2004), later op., 2004 WL 3249693 (D.C. Super. Ct. June 30, 2004) (awarding damages), later op., 2004 WL 3249692 (D.C. Super. Ct. Sept. 2, 2004) (awarding attorney fees). 159 Billingham v. Dornemann, 771 N.E.2d 166 (Mass. App. Ct. 2002).
Foreclosure Rescue Scams / 2006 Supplement equity in the home as actual damages, and then trebled this amount, where the homeowner was unable to regain the home.160 Even a homeowner who regains the home may have lost wages and suffered substantial expenses for moving, rent, interest, closing costs, and advice. Many UDAP statutes either authorize injunctions or authorize ''other equitable relief'' or ''other relief the court deems proper.''161 This broad authority should be aggressively pursued in foreclosure rescue scam cases. It may enable the court to quiet title, order reconveyance of the property, reform the contract, or order the record owner not to reconvey or encumber the property. A few UDAP statutes explicitly mention rescission as a potential remedy. In other states, general language authorizing other relief or other equitable relief is probably sufficient authority for a rescission order.162 Since UDAP statutes are intended to liberalize the common law, the court may be willing to dispense with some of the formalities of common law rescission.163
§ 18.104.22.168
11.4.5 State Foreclosure Rescue Statutes
22.214.171.124 Overview
Eleven states—California, Colorado, Georgia, Illinois, Maryland, Michigan, Minnesota, Missouri, New York, Rhode Island, and Washington164—have special statutes that provide protections against foreclosure rescue scams. As knowledge of the nature of foreclosure rescue scams spreads, more states may adopt such laws, so practitioners should check for recent legislation in their states. These statutes typically forbid certain deceptive or abusive practices, require a right to cancel, and, in most cases, provide special remedies.
160 In re Bryant, 111 B.R. 474 (E.D. Pa. 1990) (awarding lost equity as actual damages, trebled); Martinez v. Affordable Housing Network, Inc., 109 P.3d 983 (Colo. Ct. App. 2004) (awarding lost equity as actual damages, trebled), rev'd on other grounds, 123 P.3d 1201 (Colo. 2006) (reversing trial court's determination that buyer of home from rescuer was bona fide purchaser without notice; remanding for trial on quiet title claim). See also Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792 (Neb. 2005) (affirming award of attorney fees on UDAP claim where damages and rescission were awarded on fraud claim). 161 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 8.6 (6th ed. 2004 and Supp.). 162 See id. § 8.7. 163 See id. 164 Cal. Civ. Code §§ 2945.1 to 2945.11, 1695.1 to 1695.17; Colo. Rev. Stat. §§ 6-1-1101 to 6-1-1120; Ga. Code Ann. § 10-1393(b)(20); 765 Ill. Comp. Stat. §§ 940/1 to 940/65 (eff. Jan. 1, 2007); Md. Real Prop. Code Ann. §§ 7-105(A-1), 7-301 to 7-321; Mich. Comp. Laws §§ 445.1822 to 445.1825; Minn. Stat. Ann. §§ 325N.01 to 325N.18; Mo. Stat. Ann. §§ 407.935 to 407.943; New York Real Prop. Law § 265-a; R.I. Gen. Laws §§ 5-78-1 to 5-79-9; Wash. Rev. Code §§ 19.134.010 to 19.134.080.
A significant advantage of asserting a claim under one of these laws is the clear, explicit rules that these laws impose on rescuers. Not only will violation of one of the rules be actionable under the state foreclosure rescue law, but it may also help make a case for fraud or a UDAP violation. Another advantage of these laws is the relief they provide. They usually authorize attorney fees, and unlike some UDAP statutes these laws typically make an attorney fee award mandatory if the consumer prevails. Their multiple damage provisions may also be mandatory. Many of these statutes also allow the consumer to seek punitive damages, which the state UDAP statute may not allow. In addition, in contrast to some UDAP statutes, these statutes do not require a litigant to send a pre-suit notice or show an impact on the public interest. Like the Truth in Lending Act, these laws allow consumers to cancel contracts with rescuers. One advantage of cancellation under a state foreclosure rescue law is that most of the state laws do not require the consumer to tender back the amount paid by the rescuer. On the other hand, these state laws tend to be less explicit than TILA about the procedure that the rescuer must follow to cancel the deed, and they provide more protection than TILA for those who buy the home or lend against the home after the rescuer acquires it. Another advantage is that these laws do not generally include a requirement like TILA's that the rescuer have engaged in a certain number of consumer credit transactions.
22.214.171.124 Coverage
The typical statute covers ''foreclosure consultants'' or some similar term. Most statutes define this term broadly to include anyone who makes an offer, representation, or solicitation to perform, or actually performs any service for compensation that is represented to: • Stop or postpone a foreclosure sale; • Obtain forbearance; • Assist the owner in exercising or getting an extension of a right of reinstatement; • Assist the owner in obtaining a loan; • Obtain a waiver of an acceleration clause; • Lessen the impact of the foreclosure on the owner's credit rating; or • Save the home from foreclosure. ''Service'' is typically defined to include providing advice or assistance about foreclosure and serving as an intermediary between the homeowner and creditors. Maryland's law also covers any person who systematically contacts owners of property that court records or newspaper advertisements show are in danger of foreclosure.165 In Michigan and
165 Md. Real Prop. Code Ann. § 70301(b)(2).
§ 22.214.171.124
Foreclosures / 2006 Supplement ers, non-profit organizations, insurance companies, and, in some states, other licensed or regulated entities. Many of the statutes make it clear that the exemption only applies if the person is acting within the scope of a state license. For example, an attorney would be exempt only while performing work that amounted to the practice of law.
Washington, the foreclosure rescue provisions are part of the state credit repair law, and the definitions are much less detailed.166 Practitioners in states with a foreclosure rescue statute should evaluate how many of the actors in the scam can be covered by the definition. Many of the subsidiary players in a foreclosure rescue scam may have received compensation and may have represented that their services would help the homeowner obtain a loan, save the home, or stop or delay the sale. Further, even if they do not meet the statutory definition, subsidiary players may be liable on an aiding and abetting theory for the principal's violation of the state foreclosure rescue law.167 Some courts have used this and other tort doctrines to find subsidiary players liable for violating other consumer protection laws, such as state UDAP laws.168 California, Colorado, Georgia, Illinois, Maryland, Minnesota, and Rhode Island have separate provisions regulating foreclosure purchasers, i.e., those who obtain a deed to the home with a promise to reconvey it at some future date.169 New York's law only covers foreclosure purchasers. Maryland explicitly covers surplus buyers, i.e., those who induce homeowners to sign over the surplus proceeds from the foreclosure sale.170 The general definition of ''foreclosure consultant'' in most states is broad enough to cover these variations of the scam, however, and even in California, Georgia, Illinois, Maryland, Minnesota, and Rhode Island it appears that a person can be both a generic foreclosure consultant and one of these specific variants. In Colorado, however, ''foreclosure consultant'' is defined to exclude those who acquire an interest in the home, so a person cannot fit into both categories. The statutory exemptions should be examined carefully. The typical statute exempts licensed or chartered lenders, lawyers, licensed debt management services, credit reporting agencies, registered securities advisors and broker-deal166 Michigan's law covers stopping, preventing, or delaying a foreclosure, or providing advice or assistance on one of those subjects. Washington's law covers advice or assistance regarding a foreclosure, or serving as an intermediate between a debtor and a creditor. Both also cover obtaining an extension of credit for the homeowner. 167 See § 18.104.22.168, infra. 168 See National Consumer Law Center, Unfair and Deceptive Acts and Practices §§ 6.1, 6.5.2 (6th ed. 2004 and Supp.). 169 Ga. Code Ann. § 10-1-393(b)(20)(A) (applies to rescuer who purchases the home), (B) (applies to those who advertise to assist homeowners); 765 Ill. Cons. Stat. ch. 940; Md. Real Prop. Code Ann. § 7-301(e); Minn. Stat. §§ 325N.10 to 325N.18. 170 Md. Real Prop. Code Ann. § 7-301(h). See also Cal. Civ. Code § 2945.1(a)(9) (defining ''foreclosure consultant'' to include people who assist the owner in obtaining the surplus from a foreclosure sale); Colo. Rev. Stat. § 6-1-1103(4)(a)(IX) (defining ''foreclosure consultant'' to include people who assist the owner in obtaining the surplus from the foreclosure sale); Boquilon v. Beckwith, 49 Cal. App. 4th 1697, 57 Cal. Rptr. 2d 503 (1996) (sale and leaseback arrangement violates California's Home Equity Sales Contract Act).
184.108.40.206 Right to Cancel
All of the state statutes afford a right to cancel. The typical statute affords the homeowner a three- to ten-day right to cancel any contract with a rescuer, and requires the rescuer to give the homeowner written notice of this right.171 The typical statute is written so that the cancellation period begins to run from the date that the rescuer gives the consumer the notice of the right to cancel and a written contract that complies with the statute. Accordingly, if the consumer was not given these documents, the practitioner should take the position that the right to cancel has not even begun to run.172 Many decisions interpreting comparable language in state home solicitation statutes have accepted this argument.173 Before sending a cancellation notice, the practitioner should ascertain whether the statute obligates the homeowner to tender back funds that the rescuer advanced, and what the implications are if the homeowner fails to make this tender. Maryland requires the homeowner to repay any funds paid or advanced by the foreclosure consultant, foreclosure purchaser, or surplus purchaser within 60 days of cancellation plus 8% interest per annum, though the right to cancel cannot be conditioned on the payment of this money. Georgia mandates tender by the homeowner of all monies paid to him or her within 30 days of cancellation and is silent on whether the cancellation can be conditioned upon payment. Colorado requires tender within 60 days after cancellation of a foreclosure consulting contract; as to foreclosure purchasers there is no tender obligation, but the foreclosure purchaser is prohibited from paying anything to the homeowner until the cancellation period has passed. New York requires the homeowner, as a condition of reconveyance of title, to tender any consideration received from the foreclosure purchaser. California, Illinois, Michigan, Minnesota, Missouri, Rhode Island, and Washington do not set any tender requirement. If a tender offer is mandatory, the practitioner may still want to send the cancellation notice promptly because of the danger that the rescuer will convey or mortgage the house to an unknowing third party. How171 Georgia's right to cancel applies only where the foreclosure rescue operator buys the home and the debtor remains in possession of the home. Ga. Code Ann. § 10-1-393(b)(20)(C). 172 New York's statute provides that a noncomplying contract can be rescinded for up to two years after the conveyance is recorded. N.Y. Real Prop. Law § 265-a(8). 173 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 184.108.40.206.3 (6th ed. 2004 and Supp.).
Foreclosure Rescue Scams / 2006 Supplement ever, the practitioner and the homeowner should explore financing options immediately. When the homeowner cancels, most states explicitly protect a good faith mortgagor or purchaser who buys or lends against the home and who does not know of the homeowner's contract with the rescuer or that the rescission period has not expired. In these states, even if the rescuer has already conveyed an interest in the home in an ostensibly arms-length transaction, the practitioner should investigate all information the buyer or lender had about the rescuer and the homeowner. Often the buyer or lender had good reason to suspect that the transaction was irregular.
§ 18.104.22.168
11.4.6 Fraud and Civil Conspiracy
184.108.40.206 Introduction
Claims of fraud and civil conspiracy should always be considered in foreclosure rescue cases. Rescuers commonly rely on false representations to induce homeowners to deed over their homes. Common law doctrines allow fraud claims to be asserted not only against those who dealt directly with the homeowner, but also against parties who conspired with the rescuer, knowingly accepted the benefits of the fraud, or aided and abetted the rescuer's fraud.174 Civil conspiracy, while less well-known than fraud, is recognized as a cause of action in almost all states. It provides another way to hold parties liable who enabled the fraud to succeed but did not make fraudulent misrepresentations themselves.
188.8.131.52 Substantive Prohibitions
The typical foreclosure rescue statute prohibits an array of deceptive, unfair, and abusive practices, so practitioners should check their own statutes carefully. Many prohibit unconscionable contract terms. Some of the statutes prohibit deception in broad terms. Another common provision is a cap on fees or interest rates, or a requirement that a rescuer who purchases the property must pay at least a certain percentage of its fair market value. Some of the states prohibit foreclosure rescue consultants from acquiring any interest in a residence in foreclosure from an owner with whom the consultant has contracted. New York and Rhode Island prohibit eviction of the homeowner unless the foreclosure purchaser has paid the homeowner at least 82% of the home's fair market value. Some statutes prohibit the rescuer from entering into an agreement to reconvey the home to the homeowner unless the homeowner has a reasonable ability to meet the requirements for reconveyance. Most prohibit other deceptive or abusive practices as well.
220.127.116.11 Elements of a Fraud Claim
The traditional elements of fraud are a false representation; reliance by the plaintiff; damage; scienter (the defendant's knowledge of the falsity); and the defendant's intent to induce the plaintiff to act in reliance on the misrepresentation.175 These elements make fraud more difficult to establish than a deception claim under a UDAP statute. For example, the consumer often need not prove reliance or intent to deceive under UDAP statutes, and the standard of proof in a UDAP case is a preponderance of the evidence, whereas fraud requires clear and convincing evidence. However, the damages available in a fraud case are usually much wider. In particular, fraud damages can include punitive damages in most states, while UDAP statutes rarely authorize more than treble damages. In addition, fraud can be asserted against anyone, while some UDAP statutes have restrictive coverage requirements. Consumer practitioners have also used fraud to reach behind the front person to the financiers who enable predatory lending. Lenders may be the only deep pocket left, and reaching them is also an important way of decreasing the volume of mortgage scams by drying up their funding. The advantages and disadvantages of a fraud claim in comparison to a UDAP claim are discussed in more detail in § 18.104.22.168, supra. Foreclosure rescue scam cases can produce compelling fraud claims. The plaintiffs are often elderly and vulnerable.
174 See National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 12.10.1 (3d ed. 2005 and Supp.). 175 See D. Dobbs, The Law of Torts §§ (2000); National Consumer Law Center, Unfair and Deceptive Acts and Practices § 9.6.3 (6th ed. 2004 and Supp.); see also Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792, 803 (Neb. 2005) (reciting fraud elements in foreclosure rescue case).
188.8.131.52 Remedies
Most of the statutes provide a special private cause of action. Most authorize double or treble damages or punitive damages in addition to actual damages. The typical statute also authorizes attorney fees. Some specifically authorize injunctive relief. Some states provide that a violation is actionable under the state UDAP statute or the state credit repair statute, either as the only remedy or in addition to a special private cause of action. In most states, rescuers can also be prosecuted criminally for violations of the statute. The homeowner should consider filing criminal charges. A criminal conviction may prevent the rescuer from defrauding others. Further, the court may order restitution to the homeowner as part of the criminal sentence.
§ 18.104.22.168
Foreclosures / 2006 Supplement that the defendant is a scoundrel who needs to be punished. Evidence that the rescuer made similar misrepresentations to other people will also make it clearer to the trier of fact that the homeowner is telling the truth. Joining several homeowners in one case was very effective in Eicher v. Mid America Financial Investment Corp.,180 but this evidence can also be introduced when the other homeowners are not parties to the same suit. Foreclosure rescuers do not usually invent their methods on the spot. They advertise widely and solicit homeowners aggressively with a pitch that follows the same pattern. Thus, pattern evidence can almost always be found. Section 22.214.171.124, supra, suggests various ways of finding pattern evidence. Locating other homeowners who have been victimized in the same way should be a high priority. While evidence of other crimes, wrongs, or acts is not admissible to prove a person's character, there are many other ways to admit it. Under the Federal Rules of Evidence and comparable state rules, evidence of other bad acts is admissible to show intent or motive, which is a critical issue in any fraud case. It is also admissible to show knowledge. Since scienter is an element of a fraud claim, evidence of the rescuer's other transactions should be admissible on this ground. Pattern evidence will also be admissible against other defendants, for example to show that a purchaser is not a bona fide purchaser without notice, or to show that a third party knowingly accepted the benefits of the fraud. In addition, it is admissible to show habit, routine practice, or absence of mistake or accident, and to support a punitive damages claim.181
The rescuer's fraud is often blatant and heartless. Damages can be significant. Even though fraud is harder to prove than a UDAP claim, practitioners should not shy away from fraud claims in foreclosure rescue cases, particularly since these claims are compelling to juries. The Nebraska Supreme Court affirmed a judgment of fraud against a rescuer who induced homeowners to sign over deeds to their homes by knowingly misrepresenting that the transactions were loans.176 While the court's decision does not itemize the relief awarded to the thirteen plaintiffs, it affirmed an award of more than $375,000 in attorney fees on a parallel UDAP claim. A Colorado Supreme Court decision deals with a rescuer who obtained a quitclaim deed to the home based on certain representations about the steps it would take, but then sold the home. The supreme court affirmed the trial court's conclusion that the rescuer had committed fraud.177 It also held that the trial court had erred in concluding that the person who bought from the rescuer did not have notice of the homeowners' claim to the home, and remanded the case for a determination about whether the deed was voidable as to the purchaser.
126.96.36.199 Overcoming Exculpatory Contract Clauses
In many foreclosure rescue cases, the homeowners are unaware that the documents they have signed are not loan documents but transfer the home to the rescuer. The Nebraska Supreme Court held that the fact that the documents the homeowners signed were clearly labeled sales to the rescuer rather than loans did not undercut their fraud claims. The court held that even a person who fails to read a contract before signing it is not bound by it if it was procured by fraud.178 Similarly, a Massachusetts appellate court held that a merger clause in the homeowner's contract with the rescuer was no defense to fraud.179 The clause stated that, in deciding to enter into the contract, the homeowner had not relied on any statements or representations by the rescuer.
22.214.171.124 Remedies for Fraud
A homeowner who proves fraud may recover actual damages. Actual damages may consist of the homeowner's lost equity, plus any ''rental'' payments the homeowner made to the rescuer that exceeded what the homeowner would have had to pay on the mortgage.182 The rescuer may argue that the homeowner's losses were caused by factors other than the rescuer's fraud because the homeowners would have lost their homes in any event. The Nebraska Supreme Court rejected this argument in Eicher v. Mid America Financial Investment Corp.183 The plaintiffs there testified that, although their options were limited, they could have considered other alternatives to save their homes if the opportunity with the rescuer had not presented itself. The court accepted these statements as sufficient to establish proximate cause. The court also reversed the denial of damages to a homeowner who paid ''rental payments'' to
180 702 N.W.2d 792 (Neb. 2005). 181 Fed. R. Evid. 406. See National Consumer Law Center, Automobile Fraud § 9.8.1 (2d ed. 2003 and Supp.). 182 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792, 811 (Neb. 2005). 183 702 N.W.2d 792, 804–805 (Neb. 2005).
126.96.36.199 The Important of Pattern Evidence
Evidence that the rescuer defrauded other homeowners in the same way is powerful. It can confirm in the jury's mind
176 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792, 803 (Neb. 2005). 177 Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201, 1205 (Colo. 2005). See also In re Bryant, 111 B.R. 474 (Bankr. E.D. Pa. 1990) (rescuer's actions amounted to common law fraud so violated UDAP statute). 178 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792, 804 (Neb. 2005). 179 Billingham v. Dornemann, 771 N.E.2d 166, 175 (Mass. App. Ct. 2002).
Foreclosure Rescue Scams / 2006 Supplement the rescuer for two years, but then stopped paying and moved out, after which the original lender foreclosed on the home and sold it. The court held that the fraud was fully perpetrated when the homeowner deeded the home to the rescuer, and his right to recover the equity he lost at that time was unaffected by his later termination of payments and loss of his home to foreclosure.184 In almost all states, a homeowner may also recover punitive damages for fraud.185 States vary in their standards for punitive damages, but typically it is necessary to show some aggravating factors such as malice, oppressiveness, or wantonness.186 In the alternative to seeking damages, the homeowner may rescind the transaction.187 As a condition of rescission, the homeowner will probably have to tender the actual proceeds received.188 In addition, a deed may be voidable if fraud is shown.189
§ 18.104.22.168
22.214.171.124 Acceptance of Fruits of Fraud; Civil Conspiracy; Aiding and Abetting
To succeed, foreclosure rescue scams often require the cooperation of more than just the rescuer. Real estate agents, lenders, brokers, appraisers, closing agents, and others may be involved behind the scene. Several theories can impose fraud liability on these less visible participants.190 A party who knowingly receives the benefits of a fraud can be held liable for it.191 This theory of liability is sometimes called ''fruits of the fraud'' liability. It may amount to ratification of the fraud.192 For example, a transferee of the home who had reason to know of the fraud may
184 Id. at 811. 185 See National Consumer Law Center, Automobile Fraud § 7.11.1 (2d ed. 2003 and Supp.). 186 Id. 187 See Eicher v. Mid America Financial Investment Corp., 702 N.W.2d 792 (Neb. 2005) (affirming awards of rescission and damages on fraud claims against rescuer). See generally National Consumer Law Center, Automobile Fraud § 7.11.1 (2d ed. 2003 and Supp.). 188 Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201 (Colo. 2005) (homeowner who rescinds must tender actual proceeds before bona fide purchaser acquires the home for value without notice; remanding for determination whether this purchaser had notice). 189 See, e.g., Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201 (Colo. 2005). 190 See generally National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 12.10.1 (3d ed. 2005 and Supp.). 191 See, e.g., Cumis Ins. Society, Inc. v. Peters, 983 F. Supp. 787, 794–795 (N.D. Ill. 1997) (knowing acceptance of fruits of fraud is basis for fraud liability). 192 See, e.g., Duckworth v. Nat'l Bank of Commerce, 656 So. 2d 340 (Ala. 1994) (reversing directed verdict for defendant bank in business fraud case; bank that continued to take payments after learning of forgery, but did not disclose the forgery, may have ratified the forger's fraud).
be liable for fraud even without having ever dealt personally with the homeowner. Other parties, such as closing agents, who profit from the fraud may also be liable. Civil conspiracy is another means of spreading liability for fraud to all those involved in it. All jurisdictions except Wyoming recognize civil conspiracy as a cause of action.193 The major benefit of a civil conspiracy claim is that the plaintiff does not have to show that all conspirators committed the tort or committed any unlawful act. Instead, civil conspiracy requires an agreement by two or more persons to perform an unlawful act. The plaintiff must also show some overt act that was accomplished in furtherance of the agreement, and must show damages proximately resulting therefrom. A third basis for casting fraud liability upon subsidiary players is aiding and abetting. Under this theory, a person who knowingly and substantially assists the principal in performing a fraudulent act that causes injury is liable for the principal's fraud. At the time of providing the assistance, the subsidiary player must be generally aware of his or her role as part of an overall tortious activity.194 In contrast to civil conspiracy, it is not necessary to show an agreement.195
11.4.7 Other Common Law Claims
18.104.22.168 Introduction
Common law claims such as unconscionability and breach of fiduciary duty or duty of good faith and fair dealing are often useful in attacking foreclosure rescue scams.196 These claims offer both advantages and disadvantages over the statutory claims discussed in this section.
220.127.116.11 Unconscionability
The doctrine of unconscionability can be useful in attacking foreclosure rescue agreements, especially where the remedies under a state statute are not adequate or where the transaction is not covered by the UDAP statute. The remedy for unconscionability is usually limited to a defense against the enforcement of the unconscionable contract or terms, and does not normally include restitution or the tort damages available for a fraud claim. Except where it is part of a statute that allows affirmative claims, it usually can only be
193 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 18.104.22.168 (6th ed. 2004 and Supp.). 194 Halberstam v. Welch, 705 F.2d 472 (D.C. Cir. 1983). 195 Id. 196 See, e.g., Rowland v. Haven Properties, L.L.C., 2005 WL 1528264 (N.D. Ill. June 24, 2005) (finding plaintiff involved in sale/leaseback transaction sufficiently alleged claim for rescission on the basis of duress, fraud or unconscionability); In re Davis, 169 B.R. 285 (E.D.N.Y. 1994) (finding sale/leaseback transaction unconscionable and void under New York law).
§ 188.8.131.52
Foreclosures / 2006 Supplement For example, in one case a federal court found enough merit in a homeowner's unconscionability claim to issue a preliminary injunction against a rescuer who lured her into a sale-reconveyance transaction.203 The court found that the homeowner was not aware of the terms of the reconveyance contract until closing, and even then did not fully comprehend its one-sided nature and the almost certain outcome of the transaction—default and eviction. The reconveyance contract required the homeowner to pay thousands of dollars to the rescuer in unspecified management and yield spread fees; charged her more than triple the actual closing costs; required a $26,000 down payment that she had no ability to make; set her monthly payments at an amount significantly higher than they had been, yet with an interest rate so high that the balance would negatively amortize; imposed prepayment penalties and other terms that would keep her from refinancing or selling the home; and allowed the rescuer to retain all her payments if she defaulted. In the absence of legislatively prescribed usury ceilings, unconscionability can serve as an outer limit on the price of credit. Even in states where interest rate caps have been removed, courts or sometimes regulators have found excessive rates to be unconscionable, particularly where it can be shown that the borrowers had little choice of credit options.204
raised defensively, not affirmatively. However, unconscionability requires less evidence of intent than fraud. There are five sources of the unconscionability doctrine. First, Article 2 of the Uniform Commercial Code (UCC) allows courts to refuse to enforce unconscionable contracts or clauses.197 Article 2A has a similar provision applicable to leases.198 Since Articles 2 and 2A only apply to sales and leases of goods, they are unlikely to be applicable to a foreclosure rescue transaction. Second, in about a third of the states the UDAP statute prohibits unconscionable acts or practices.199 UDAP statutes vary in their scope,200 but many will be applicable to foreclosure rescue scams. Third, a number of jurisdictions, particularly those that have consumer credit statutes based on the Uniform Consumer Credit Code, have a non-UCC non-UDAP statute that prohibits unconscionability. These statutes are likely to apply to foreclosure rescue scams. Fourth, many state foreclosure rescue statutes contain their own explicit prohibition of unconscionable terms.201 And, finally, a common law unconscionability doctrine is widely recognized and broadly applicable. There are two forms of unconscionability: procedural and substantive. Procedural unconscionability involves the bargaining process when the contract was made. The most common type of procedural unconscionability involves oppression or surprise in the bargaining process. Oppression occurs when there is a disparity in bargaining power between the parties. Surprise occurs when creditors hide contract terms from the consumer in fine print or unusually complex clauses. Special vulnerabilities often associated with low-income consumers—such as financial distress or limited education—are also relevant in evaluating procedural unconscionability. Substantive unconscionability focuses on the content of the contract: whether the contract contains terms that are one-sided and unreasonably, unacceptably or unfairly harsh. Some courts require the consumer to show both substantive and procedural unconscionability to invalidate a term of a contract Many of the aspects of contracts found to be unconscionable apply to foreclosure rescue scams: • A grossly excessive price; • Lack of a substantial benefit for the consumer; • No reasonable probability of payment in full by the consumer; • Misleading the consumer into accepting false assurances.202
197 U.C.C. § 2-302. 198 U.C.C. § 2A-108. 199 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 4.4.1 (6th ed. 2004 and Supp.). 200 See § 188.8.131.52, supra. 201 See § 4.5.4, supra. 202 See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 4.4 (6th ed. 2004 and Supp.);
184.108.40.206 Breach of Duty of Good Faith and Fair Dealing
The duty of good faith and fair dealing between parties to a contract is based both in common law and the UCC.205 Unlike unconscionability, which is ordinarily determined by looking at contract terms at the time the contract was made, the duty of good faith is imposed on parties to an existing contract. It prevents overreaching in the later stages of the relationship ''to prohibit improper behavior in the performance and enforcement'' of that contract.206 For example, when a rescuer has induced a homeowner into a transaction with a balloon payment with the assurance that refinancing will be available, the refinancing decision may be subject to the duty of good faith and fair dealing.207
National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 12.7 (3d ed. 2005 and Supp.). Brantley v. Grant Holding, L.L.C., Civil No. 03-6098 (D. Minn. Dec. 23, 2003), available at www.consumerlaw.org/unreported. National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 11.7.2 (3d ed. 2005 and Supp.). Id. at § 11.8. Baldwin v. Laurel Ford Lincoln-Mercury, Inc., 32 F. Supp. 2d 894 (S.D. Miss. 1998); National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 12.8, n.652 (3d ed. 2005 and Supp.). See National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 12.8 (3d ed. 2005 and Supp.).
203 204
205 206
Foreclosure Rescue Scams / 2006 Supplement The rescuer may also be bound by this duty when declaring a default on the lease or leaseback agreement. Breach of this duty constitutes a breach of the contract. Contract remedies, therefore, apply. Some states have held that this duty gives rise to a tort claim as well.208
§ 18.104.22.168
184.108.40.206 Breach of Fiduciary Duty
The existence of a fiduciary or quasi-fiduciary duty gives rise to a duty of fair and honest disclosure of all facts that might influence the consumer's decisions. Fiduciary relationships may be express or implied. An implied duty can arise where the weaker party places trust and confidence in another, who is aware of this trust and takes on the role of advisor. Breach of a fiduciary duty by failing to disclose all relevant information gives rise to a tort action, which may permit repudiation of the contract as well as damages.209
11.4.8 State Credit and Usury Laws
18.104.22.168 State Usury Laws and Their Penalties
Once a transaction is restructured as a loan, state credit and usury laws may apply. Most states have several different usury statutes.210 The oldest of these laws are the so-called ''general'' usury statutes, which purport to set the maximum rate of interest that can be charged in any loan transaction in a jurisdiction. More recent statutes are generally structured as exceptions to the general law and apply only to particular types of transactions. Credit secured by real estate may be separately regulated, and first and junior mortgages may be treated differently. The statutes may also base distinctions on the type of lender, i.e., whether it is a bank, credit union, licensed finance company, or other lender. Thus, it is important to determine which statute applies. Some states have, however, repealed many of their usury ceilings and now allow any interest rate agreed upon by the parties. After determining which, if any, state usury law applies, the next step is to calculate the actual interest charged. Since foreclosure rescue transactions are typically so one-sided in favor of the rescuer, it is likely that, if the transaction can be characterized as a loan, it will run afoul of any applicable usury statute. The definition of interest is sometimes a complicated issue because it varies from statute to statute, however, so the practitioner will need to be prepared to prove what the interest rate is.
208 Id. 209 See generally National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 12.9 (3d ed. 2005 and Supp.). 210 A state-by-state list of usury statutes may be found in National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses Appx. A (3d ed. 2005 and Supp.).
In the case of a foreclosure rescue scam, one way to calculate the interest rate is to treat the amount actually expended by the rescuer as the loan principal. This figure would include amounts the rescuer paid to reinstate or pay off a delinquent mortgage or to pay other charges that relate to the home, such as homeowner's property taxes or insurance premiums. The dollar amount of interest would be calculated as the difference between this figure and the total of all payments the consumer would have to pay to reacquire the home.211 (State law may, however, allow the lender to collect certain types of fees, such as document preparation fees, and treat them as part of the principal rather than as interest.) The next step is to convert the dollar amount of interest to a percentage rate. A calculation tool, such as that included on the CD-Rom accompanying this manual, should be used for this calculation. Since the typical sale/leaseback requires a large balloon payment after a series of smaller monthly payments, it is important to use a calculation tool that can handle an irregular payment schedule. An example will illustrate this method of calculation.212 Assume that the homeowner's regular monthly mortgage payment was $733.76 per month (this would be the monthly payment on a $100,000 30-year mortgage at 8%). Assume also that the homeowner was $10,000 in arrears on mortgage payments and $2000 in arrears on property taxes. A typical rescuer might pay the combined $12,000 arrearage and require the homeowner to repay $1233.76 per month (the $733.76 regular mortgage payment plus $500 toward the $12,000 arrearage) for 24 months, followed by a balloon payment of $60,000 to reacquire the home. The annual percentage rate for a $12,000 loan with this payment schedule is 154.51%.213 If the case goes to trial, it may be necessary to have an expert witness testify about the effective rate of interest.214 It should also be noted that the definition of the components
211 See River Run Props. L.L.C. v. Kappedahl, File No. C2-0310463 (Minn. Dist. Ct. July 12, 2004), slip op. at 33-5 (principal is amount that rescuer actually paid on existing first mortgage; usury calculation should be based on the difference between the principal and the total of the payments required to reacquire the home), available at www.consumerlaw.org/unreported. 212 This is the same example as appears in § 184.108.40.206.2, supra, as an illustration of the calculation of the HOEPA trigger. However, the interest rate for purposes of a state usury statute and the APR for purposes of TILA are not always the same because of different definitions and exclusions. 213 See River Run Props. L.L.C. v. Kappedahl, File No. C2-0310463 (Minn. Dist. Ct. July 12, 2004), slip op. at 33-5 (principal is amount that rescuer actually paid on existing first mortgage; usury calculation should be based on the difference between the principal and the total of the payments required to reacquire the home), available at www.consumerlaw.org/unreported. 214 For example in Browner v. District of Columbia, 549 A.2d 1107, 1111 (D.C. 1988), described in § 2.2, supra, the court accepted expert testimony that the sale/leaseback transactions at issue carried effective interest rates of 50% to 200%.
§ 18.104.22.168
Foreclosures / 2006 Supplement If DIDA applies, it preempts state laws that limit ''the rate or amount of interest, discount points, finance charges, or other charges'' on the loan.219 DIDA does not preempt other consumer protections that may be found in state usury laws, such as restrictions on late charges, balloon payments, and negative amortization. States have the right to opt out of DIDA preemption, and many have done so, at least in part. Specifically, Colorado, Georgia, Hawaii, Idaho, Iowa, Kansas, Maine, Massachusetts, Minnesota, Nebraska, Nevada, North Carolina, Puerto Rico, South Carolina, and South Dakota have expressly reimposed all or part of their state usury laws.220 188.8.131.52.3 AMTPA
of the interest rate in state usury laws may differ from the TILA definition of the components of the finance charge, so state law should be carefully reviewed when calculating the interest rate. The remedies for usury are determined by individual state statutes.215 Often the loan will be void as to all or part of the interest, with even double or triple damages, while leaving the principal obligation intact. Some statutes declare usurious loans to be completely void, and may require the return of all monies paid.216 Equitable remedies, such as enjoining a foreclosure, may also be available.
22.214.171.124 Federal Preemption
126.96.36.199.1 Introduction Before concluding that a rescuer has violated a state usury statute, another important step is to determine whether the state law has been preempted by federal law. Even though rescuers are typically individuals rather than lending institutions, two of the federal usury preemption laws—the Depository Institutions Deregulation and Monetary Control Act (DIDA) and the Alternative Mortgage Transactions Parity Act (AMTPA)—may apply to them. 126.96.36.199.2 DIDA The first statute, the Depository Institutions Deregulation and Monetary Control Act (DIDA), covers not only a variety of financial institutions but also any creditor who makes or invests in residential real estate loans or mobile home credit sales in excess of $1 million per year.217 Some foreclosure rescuers may meet the $1 million threshold. Only the principal amount of the loan (as determined by the court after finding that the transaction is indeed a loan) should be counted toward the $1 million threshold, however. Thus, if a rescuer pays off a $80,000 mortgage loan, and requires the homeowner to repay $200,000 to reacquire the home, only the $80,000 principal should count toward the $1 million threshold. To qualify for DIDA preemption, the transaction must involve a first lien on residential real property.218 The lien need not be a purchase money lien, however. A rescuer who actually pays off all existing liens on the property may meet this requirement. However, many rescuers pay off only some of the existing liens, pay only the delinquent amount rather than the full debt, or acquire the property subject to all existing liens. In all of these situations, DIDA will not preempt state laws.
215 See § 184.108.40.206, supra. 216 See, e.g., id. (voiding the transaction and eliminating rescuer's entitlement to both interest and principal; foreclosure rescue transaction was a usurious loan). 217 12 U.S.C. § 1735f-5(b). 218 12 U.S.C. § 1735f-7a.
The second statute, the Alternative Mortgage Transactions Parity Act (AMTPA), does not affect state interest ceilings on mortgage loans. Instead, it addresses the structure of mortgage loans by overriding certain state laws which restrict ''creative finance,'' e.g., laws limiting variable interest rates and balloon payments. These state statutes are replaced, at the option of the lender, by federal regulations. Six states—Arizona, Maine, Massachusetts, New York, South Carolina, and Wisconsin—opted out of AMTPA, so this statute is irrelevant in those states. AMTPA applies to ''housing creditors,'' which is broadly defined to include any person who regularly makes loans, credit sales, or advances secured by interests in residential real property or a mobile home.221 It also includes any transferee of such a lender.222 AMTPA only applies to these creditors when they are making an ''alternative mortgage transaction,'' defined as one: • In which the finance charge or interest rate may be adjusted or renegotiated; • With a balloon payment or a similar structure; • With any similar type of rate, method of determining return, term, repayment, or other variation not common to traditional fixed-rate, fixed-term transactions (for example, loans that negatively amortize).223 As noted in § 188.8.131.52, supra, to bring a rescuer under the Truth in Lending Act it is necessary to show that the rescuer regularly engages in consumer credit transactions. Since AMTPA is applicable only to lenders who ''regularly'' make home-secured credit transactions, the same evidence that shows that TILA applies will also tend to show that AMTPA preemption is applicable. However, since TILA includes a
219 Id. 220 National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 18.104.22.168 (3d ed. 2005 and Supp.). 221 12 U.S.C. § 3802(2)(C). 222 12 U.S.C. § 3802(2)(D). 223 12 U.S.C. § 3802(1).
Foreclosure Rescue Scams / 2006 Supplement specific numerical definition of ''regularly'' and AMTPA does not, it is possible that a court would find that a rescuer met the TILA definition but was not a ''housing creditor'' for AMTPA purposes. Assuming that AMTPA applies, the rescuer need not comply with state law, but must comply with federal regulations governing: • Adjustments to the interest rate, the payment, the balance, or the loan term during the course of the loan.224 The federal regulations allow adjustments, but require certain safeguards such as use of a readily available and independently verifiable index for interest rate adjustments.225 • Disclosures.226 The AMTPA regulations formerly preempted state limits on prepayment penalties and late charges for housing creditors, but as of July 1, 2003, they were revised to eliminate this preemption.227 AMTPA does not preempt state licensing laws,228 state restrictions on attorney fees that the holder can collect in the event of default,229 or state restrictions on deceptive advertising and practices.230
§ 220.127.116.11
18.104.22.168 Licensing Provisions of State Usury Laws
In addition to interest rate caps, state usury laws may also have lender licensing requirements that the rescuer has violated. States typically require a lender other than a bank or credit union to obtain a state license if it wishes to charge more than the legal rate of interest permitted by the general usury statute. The special usury statutes that govern these licensed creditors usually specify the permissible terms of individual credit transactions and include significant penalties for creditors who either fail to obtain a required license or violate their licenses by ignoring statutory consumer protections. Since obtaining the requisite license may be a precondition to lending under some special usury statutes, failure to do so may give rise to a usury claim under the statute. The effects of failure to obtain a proper license vary. Many licensing statutes clearly specify the result of failure to obtain a required license. Sometimes the specified result is to void the transaction in which the unlicensed lender has participated. This is the case with many small loan acts. Other states may provide lesser penalties. Operating without a required license is also a UDAP violation in many states.232 Transactions with lenders who are not licensed, but should be, may be void even in the absence of a special statutory provision to that effect. The common law principle that contracts made in violation of regulatory statutes enacted for the protection of the public are rendered null and unenforceable has been applied where creditors failed to comply with appropriate licensing requirements.233 This general rule applies to licensing statutes enacted for the protection of the public, rather than those enacted merely to raise revenue. Special usury licensing statutes are clearly in the former category, as they are designed to protect borrowers through the strict regulation and supervision of the creditors themselves.
22.214.171.124 Choice of Law Clauses
Another way that a rescuer may avoid state credit and usury laws is by purporting to operate under the laws of another state.231 The rescuer might, for example, insert a clause in the documents the homeowner signs, stating that the transaction will be governed by the laws of some state that imposes few restrictions. Choice of law rules vary from state to state, but such a clause is unlikely to be given effect if the chosen state does not have a substantial relationship to the transaction. Nor will the clause be given effect if the result would be contrary to a fundamental policy of the state with the most significant relation to the transaction. Since rescuers tend to be local entrepreneurs, they are unlikely to be successful in arguing that the transaction has a substantial relationship to any state other than the one where the homeowner lives.
224 225 226 227 12 C.F.R. § 560.220. 12 C.F.R. § 560.35. 12 C.F.R. § 560.210. See National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 3.10.2 (3d ed. 2005 and Supp.). 12 U.S.C. § 3802(2). In re Jones, 2000 Bankr. LEXIS 1741 (Bankr. E.D.N.C. Dec. 22, 2000). Black v. Fin. Freedom Senior Funding Corp., 112 Cal. Rptr. 2d 445 (Cal. Ct. App. 2001). The effect of choice of law clauses on usury claims is discussed in detail in National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 9.2.9 (3d ed. 2005 and Supp.).
11.4.9 Other State Statutes
220.127.116.11 Introduction
State door-to-door sales laws and state credit repair or credit services laws may provide additional grounds to cancel foreclosure rescue transactions. In some states these laws, especially the credit repair or credit services laws, provide attractive causes of action. One advantage of these laws is that, unlike the Truth in Lending Act, they may not depend on the rescuer's having engaged in a certain number
232 National Consumer Law Center, Unfair and Deceptive Acts and Practices § 126.96.36.199 (6th ed. 2004 and Supp.). 233 National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 10.8.4 (3d ed. 2005 and Supp.).
228 229 230 231
§ 126.96.36.199
Foreclosures / 2006 Supplement Many foreclosure rescue transactions will be subject to the FTC rule or the state law. Foreclosure rescue scams often involve solicitations at the consumer's home, so this element of coverage is satisfied. The services the rescuer is offering must also fall within the state statute or the federal rule. The rescuer is likely to argue that the transaction involved real estate rather than goods or services. Showing that the rescuer promised advice and other efforts that would save the home may establish that the transaction was a mixed transaction that involved not just real estate but also covered services. (Arguing that the transaction involved only services, not real estate, may be counterproductive if the homeowner is asserting an equitable mortgage or TIL rescission claim.) Home solicitation sales laws may also be helpful in cases where the rescuer did not acquire the home, but provided advice, referrals, a bankruptcy filing, or similar services.236 If the FTC rule or the state statute covers the transaction, but (as is likely) the rescuer failed to give the consumer notice of the right to cancel, a number of decisions hold that the consumer has a continuing right to cancel.237 At an early stage, after investigating coverage and reviewing the documents, the homeowner's attorney should consider sending the rescuer a notice invoking this right to cancel. The FTC rule requires the seller to honor the buyer's notice of cancellation, and, within ten business days, refund all payments made, return all property traded in, cancel and return any negotiable instruments, and terminate any security interest.238 While this list of specific steps does not mention voiding of a deed, that step would be encompassed by the requirement to terminate the security interest if the transaction is viewed as a loan.239 If the state home solicitation law does not create its own private cause of action, a violation may be actionable under the state UDAP statute. Even without explicit language in the statute, in many states a violation of another consumer protection statute is a per se UDAP violation.240 There is no private cause of action under the FTC Act to enforce an FTC rule, but in most states violations will also be UDAP violations.241 In addition, if a statute or the FTC rule affords a right to cancel that the rescuer refuses to recognize, the right to cancel can probably be enforced through a cancellation action in equity or through a declaratory judgment action.242
of prior transactions. Since these are state law claims, they also are useful if the consumer prefers to litigate in state court. The statute of limitations may also be longer than for other claims. One disadvantage of these statutes is that they lack the detailed provisions for unwinding real estate transactions that the Truth in Lending Act provides. These statutes are also less clear as to how they apply to assignees.
184.108.40.206 Door-to-Door Sales Laws
Every state has a door-to-door sales law that gives consumers a right to cancel at least certain types of contracts that are solicited outside the seller's fixed place of business.234 The typical state statute provides a three-day right to cancel the transaction, and requires the seller to give the consumer notice of this right. A Federal Trade Commission rule also provides a right to cancel sales of goods or services where the seller personally solicits the sale and the buyer's agreement or offer to purchase is made at a place other than the seller's place of business.235
234 Ala. Code §§ 5-19-1(8), 5-19-12; Alaska Stat. §§ 45.02.350 (door-to-door sales; five-day period), 45.63.030 (telephonic solicitations; seven-day period); Ariz. Rev. Stat. Ann. §§ 44-5001 to 44-5008; Ark. Stat. Ann. §§ 4-89-101 to 4-89-110; Cal. Civ. Code §§ 1689.5 to 1689.14; Colo. Rev. Stat. §§ 5-3-401 to 5-3-405; Conn. Gen. Stat. Ann. §§ 42-134a to 42-143; Del. Code Ann. tit 6, §§ 4401 to 4405; D.C. Code Ann. § 28-3811; Fla. Stat. Ann. §§ 501.021 to 501.055; Ga. Code Ann. § 10-1-6; Haw. Rev. Stat. §§ 481C-1 to 481C-6; Idaho Code §§ 28-43-401 to 28-43-405; 815 Ill. Comp. Stat. Ann. § 505/2B; Ind. Code Ann. §§ 24-4.4-2-501 to 24-4.4-2-502, §§ 24-5-10-1 to 24-510-18; Iowa Code Ann. §§ 555A.1 to 555A.6; Kan. Stat. Ann. § 50-640; Ky. Rev. Stat. Ann. §§ 367.410 to 367.460; La. Rev. Stat. Ann. §§ 9:3538 to 9:3541; Me. Rev. Stat. Ann. tit. 32, §§ 4661 to 4670 and tit. 9-A, §§ 3-501 to 3-507; Md. Com. Law Code Ann. §§ 14-301 to 14-306; Mass. Gen. Laws Ann. ch. 93, § 48; Mich. Comp. Laws Ann. §§ 445.111 to 445.117; Minn. Stat. Ann. §§ 325G.06 to 325G.11; Miss. Code Ann. §§ 75-66-1 to 75-66-11; Mo. Rev. Stat. §§ 407.700 to 407.720; Mont. Code Ann. §§ 30-14-501 to 30-14-508; Neb. Rev. Stat. §§ 69-1601 to 69-1607; Nev. Rev. Stat. §§ 598.140 to 598.280 and 598.2801; N.H. Rev. Stat. Ann. §§ 361-B:1 to 361-B:3; N.J. Rev. Stat. Ann. §§ 17:16C-61.1 to 17:16C-61.9; N.M. Stat. Ann. § 57-1221; N.Y. Pers. Prop. Law §§ 425 to 431; N.C. Gen. Stat. §§ 25A-38 to 25A-42; N.D. Cent. Code §§ 51-18-01 to 51-1809; Ohio Rev. Code Ann. §§ 1345.21 to 1345.28; Okla. Stat. Ann. tit. 14A, §§ 2-501 to 2-505; Or. Rev. Stat. §§ 83.710 to 83.750; Pa. Stat. Ann. tit. 73, § 201-7; R.I. Gen. Laws §§ 6-28-1 to 6-28-8; S.C. Code Ann. §§ 37-2-501 to 37-2-506; S.D. Comp. Laws Ann. §§ 37-24-5.1 to 37-24-5.7; Tenn. Code Ann. §§ 4718-701 to 47-18-708; Tex. Bus. & Com. Code Ann. §§ 39.001 to 39.009; Utah Code Ann. §§ 70C-5-101 to 70C-1-105; Vt. Stat. Ann. tit. 9, §§ 2451a, 2454; Va. Code Ann. §§ 59.1-21.1 to 59.1-21.7:1; Wash. Rev. Code Ann. §§ 63.14.040, 63.14.120, 63.14.150, 63.14.154; W. Va. Code §§ 46A-2-132 to 46A-2135; Wis. Stat. Ann. §§ 423.201 to 423.205; Wyo. Stat. §§ 4012-104, 40-14-251 to 40-14-255. 235 16 C.F.R. § 429.0(a).
236 See § 11.2.1, supra. 237 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 184.108.40.206.3 (6th ed. 2004 and Supp.). 238 16 C.F.R. § 429.1(g). 239 See § 11.4.1, supra. 240 National Consumer Law Center, Unfair and Deceptive Acts and Practices § 3.2.7 (6th ed. 2004 and Supp.). 241 Id. §§ 3.2.7, 9.1. 242 Id. § 18.104.22.168.
Foreclosure Rescue Scams / 2006 Supplement
§ 188.8.131.52
126.96.36.199 State Credit Services or Credit Repair Organization Laws
About three-fourths of the states have credit services or credit repair organization laws.243 These laws cover organizations that offer to improve a person's credit rating for a fee. Most also cover organizations that offer, for a fee, to obtain an extension of credit for a consumer and that are not licensed or chartered by the state or federal government.244 A rescuer who claims to be able to arrange an extension of credit that will enable the consumer to save the home may be covered by the state credit services statute. The key question will be whether the rescuer falls within any of the exceptions set forth in the statute, which usually include licensed real estate agents and attorneys as well as banks, credit unions, and other licensed lenders. The typical credit repair statute gives the consumer a three- to five-day right to cancel the contract, and requires the organization to give the consumer notice of this right. Many prohibit various deceptive and unfair practices and regulate the terms of the contract. The breadth of remedies offered by state credit services or credit repair organization laws is their chief advantage. First is the right to cancel. If the rescuer did not give the consumer the required notice of this right, the practitioner should argue that the right to cancel continues indefinitely.245 The statute may also provide that the consumer's contract with the rescuer is void if the rescuer did not comply with the statute. The typical statute provides a private cause of action for actual damages, often with a minimum recovery set at the amount paid by the consumer. The measure of actual damages is generally left undefined in these statutes, but could include the value of the equity in the home that the homeowner lost if a causal connection can be established between
243 See National Consumer Law Center, Fair Credit Reporting Appx. B (5th ed. 2002 and Supp.) (state-by-state summaries of state credit repair organization laws). 244 The Arizona, Arkansas, California, Delaware, District of Columbia, Florida, Illinois, Indiana, Kansas, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, Nevada, New Hampshire, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wisconsin credit services statutes cover entities that offer to obtain extensions of credit for consumers, require a right to cancel, and afford the consumer a private cause of action. Georgia's statute covers entities that offer to obtain extensions of credit but the statute does not afford a right to cancel or a private cause of action. Statutes in Maine and Michigan cover entities that offer to obtain extensions of credit and provide a private right of action but do not require a right to cancel. The Michigan and Washington statutes explicitly include rescuers in the definitions and are discussed in § 11.4.5, supra. 245 See National Consumer Law Center, Unfair and Deceptive Acts and Practices § 184.108.40.206.3 (6th ed. 2004 and Supp.) (collecting cases holding that consumer has continuing right to cancel under state home solicitation sales statutes if seller fails to give proper notice of right to cancel).
that loss and the violation of the statute. Most authorize punitive damages and attorney fees, and some explicitly provide for injunctive relief. Many of these statutes explicitly apply their prohibitions not only to the organization itself, but also to its agents and representatives, including independent contractors. Courts have differed on the question whether a claim under the state credit services organization law can be asserted against other entities that are working in tandem with the credit services organization. One decision finds that a lender who prepared a broker agreement for a mortgage broker, and then funded the loan, violated the state credit repair law even though only the broker met the statutory definition of credit services organization.246 But another decision from the same district holds that others who participate in the scheme with a credit repair organization but do not themselves meet the statutory definition are not subject to the statute.247
11.4.10 State Real Estate Requirements
220.127.116.11 Formal Requirements for Deeds
The homeowner should also check the details of the state's formal requirements for deeds, since rescuers often cut corners. The deed may be invalid if it is challenged on formal grounds, but there may be a very short deadline for this type of challenge. Showing that the deed is invalid may be the only sure-fire way to void it after the home has been transferred or mortgaged to an innocent third-party. State real estate requirements vary from state to state and can be quite technical, so it may be best to get detailed information from the client and then consult with an attorney who has expertise in real estate law.
184.108.40.206 False Notarization
States typically require that signatures on deeds or mortgages be notarized. Defects in the notarization of title documents may affect the validity of the instrument. Many foreclosure rescue scam cases involve situations in which the person whom the notary certified as having appeared did not, in fact, appear. Borrowers are often instructed to sign a stack of documents that are then taken
246 Lewis v. Delta Funding Corp. (In re Lewis), 290 B.R. 541 (Bankr. E.D. Pa. 2003). But cf. Strang v. Wells Fargo Bank, 2005 WL 1655886 (E.D. Pa. July 13, 2005) (lender had no derivative liability under state credit repair law for acts of closing agent and loan broker who were not shown to be covered by that law). 247 Allen v. Advanta Fin. Corp., 2002 U.S. Dist. LEXIS 11650 (E.D. Pa. Jan. 3, 2002); see also Herrod v. First Republic Mortg. Corp., 625 S.E.2d 373 (W. Va. 2005) (lender did not have a legal duty to ensure that independent broker complied with state credit repair law).
§ 11.4.11
Foreclosures / 2006 Supplement ing to award damages.253 But the false notarization may still provide grounds to invalidate the deed.
elsewhere for notarization. Alternatively, improper notarizations may result from the taking of an actual acknowledgment from an imposter, taking an acknowledgment from an incompetent person, or the taking of an acknowledgment over the telephone. Regardless of the reason for the defective acknowledgment, practitioners should investigate whether such defects render the instrument invalid, providing grounds to void a transfer.248 Most courts distinguish between defective acknowledgments and failure to acknowledge. Courts are more likely to find instruments valid where the defect is technical in nature, such as use of a notary residing in the wrong county or failure to read the acknowledgment aloud, but will invalidate them when the signatory did not in fact appear before the notary.249 In addition to invalidating the deed, the homeowner may be able to seek damages against the notary for false notarization. Notaries are required to perform their duties with honesty, integrity, diligence, and skill.250 In addition to causes of action under a state UDAP statute or common law theories, such as negligence per se, state statutes may set forth specific causes of action for notary misconduct.251 Notary liability is particularly important because states typically require notaries to be bonded. The California Court of Appeals has found that a notary who negligently notarizes a trust deed is liable not only for economic damages but also for emotional distress damages, noting ''the important function notaries serve in our society.''252 If the false notarization was not a proximate cause of the homeowner's losses, however, courts may be unwill-
The federal Racketeer Influenced and Corrupt Organizations Act (RICO)254 provides powerful civil remedies, including attorney fees and treble damages, to victims of a broadly defined range of ''racketeering activity'' and to those who have been subjected to the collection of an ''unlawful debt.'' ''Unlawful debt'' includes any usurious debt bearing interest of at least twice the ''enforceable rate.'' Although RICO is aimed at organized crime, the statute is broadly written to encompass a myriad of fraudulent activities conducted by theoretically ''legitimate'' organizations and creditors. Therefore, consumers who have been the victim of either fraudulent overcharging or overcharging of at least twice the civil usury rate may wish to consider a RICO claim.255 RICO claims have advantages and disadvantages. They offer treble damages, attorney fees, and federal jurisdiction. However, the elements of a RICO claim are complex and rigorous. Courts may be hostile to RICO claims, and many impose special pleading requirements on them. Before making a RICO claim, the homeowner's attorney should evaluate whether the state UDAP statute or a common law fraud claim would offer equivalent relief. About half the states have their own RICO statutes, and all but a few of these statutes afford a private cause of action.256 Most are modeled on the federal statute, but some have more relaxed elements. While a federal RICO claim will provide a basis for removing a case to federal court, a claim under a state RICO statute will not, so it is useful if the plaintiff wants to stay in state court. Asserting consumer
253 Davis v. Adoption Auto, 731 F. Supp. 1475 (D. Kan. 1999); Craig v. Metro Bank of Dallas, 601 S.W.2d 734 (Tex. Civ. App. 1980). 254 18 U.S.C. §§ 1961–1968. See § 188.8.131.52, supra; National Consumer Law Center, Unfair and Deceptive Acts and Practices §§ 9.2, 9.3 (6th ed. 2004 and Supp.) (extensive analysis of RICO); National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 10.8.5.3 (3d ed. 2005 and Supp.) (overview of using RICO in the credit context). 255 For an overview of using RICO in the credit context, see National Consumer Law Center, The Cost of Credit: Regulation, Preemption, and Industry Abuses § 10.8.5.3 (3d ed. 2005 and Supp.). 256 See, e.g., Martinez v. Affordable Housing Network, Inc., 109 P.3d 983 (Colo. Ct. App. 2004) (affirming jury verdict on state RICO claim against rescuer, but awarding damages only on UDAP claim to avoid duplication), rev'd on other grounds, 123 P.3d 1201 (Colo. 2006) (reversing trial court's determination that buyer of home from rescuer was bona fide purchaser without notice; remanding for trial on quiet title claim). See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 9.3 and Appx. C.2 (6th ed. 2004 and Supp.).
248 See In re Miller, 320 B.R. 203 (N.D. Ala. 2006) (stating, but not deciding, mortgage invalid for lack of proper acknowledgment and therefore insufficient to transfer legal title in the collateral to lender); In re Fisher, 320 B.R. 52 (E.D. Pa. 2005) (permitting chapter 13 trustee to avoid mortgage where notary was not present to acknowledge mortgagor's identity and voluntary acquiescence to be bound by terms of the agreement); In re Bowling, 314 B.R. 127 (Bankr. S.D. Ohio 2004) (same); Goldome Credit Corp. v. Hardy, 503 So. 2d 1227 (Ala. Civ. App. 1987) (affirming trial court's determination that the mortgage not executed before a notary was invalid and setting aside foreclosure). But see In re Nichols, 265 B.R. 831 (B.A.P. 10th Cir. 2001) (distinguishing between validity and perfection of improperly notarized mortgage and affirming denial of debtor's motion to avoid mortgagee's lien). 249 See, e.g., In re Fisher, 320 B.R. 52 (E.D. Pa. 2005); Poole v. Hyatt, 689 A.2d 82 (Md. 1997). But see In re Biggs, 377 F.3d 515 (6th Cir. 2004) (failure to include mortgagor's name in notarization section rendered the deed of trust invalid under Tennessee law). 250 McComber v. Wells, 72 Cal. App. 4th 512, 85 Cal. Rptr. 2d 376 (1999). 251 See, e.g., Calif. Gov. Code § 8214. (''For the official misconduct or neglect of a notary public, the notary public and the sureties on the notary public's official bond are liable in a civil action to the persons injured thereby for all the damages sustained.''). 252 Id. at 519, 85 Cal. Rptr. 2d at 380.
Foreclosure Rescue Scams / 2006 Supplement claims under federal and state RICO statutes is discussed in detail in NCLC's Unfair and Deceptive Acts and Practices manual.257
§ 18.104.22.168
11.5 Challenging Foreclosure Rescue Scams in Bankruptcy
11.5.1 Introduction
Bankruptcy is an important option for victims of foreclosure rescue scams. Bankruptcy may not only provide the victim a fresh financial start, but it may also be a favorable forum for homeowners in their efforts to regain title to their homes. Under the Bankruptcy Code, certain transfers of property made by the debtor may be voided in a bankruptcy proceeding by either the bankruptcy trustee or the debtor. The debtor may also use bankruptcy to stop eviction or foreclosure proceedings initiated by a rescuer or to bring other nonbankruptcy claims against the rescuer. This section provides an overview of bankruptcy and how it can be used in challenging foreclosure rescue scams. Most bankruptcy cases are complicated, and those who are not a bankruptcy practitioners should consult with a bankruptcy attorney before filing a case. Selected bankruptcy issues that arise most frequently in foreclosure cases are discussed in Ch. 7, supra. NCLC's Consumer Bankruptcy Law and Practice258 is a comprehensive analysis of bankruptcy law as applied to consumers.
idea in a chapter 7 bankruptcy is to wipe out (discharge) debts in exchange for giving up property, except for ''exempt'' property that the law allows the debtor to keep. In most cases, all of the debtor's property will be exempt. But property that is not exempt is sold, with the money distributed to creditors. In some foreclosure rescue scams, the rescuer may not cure the mortgage default or pay off the mortgage that may have been one source of the homeowner's financial difficulties. If there is an outstanding mortgage in default, a chapter 7 case probably will not be the right choice because it does not eliminate the right of mortgage holders (or other secured creditors) to take the debtor's property to cover the debt. 126.96.36.199.3 Chapter 13 (reorganization) In chapter 13 cases, the debtor must file a ''plan'' showing how she will pay off past-due and current debts over a period of up to five years. The most important fact about chapter 13 bankruptcy for victims of foreclosure rescue scams is that it allows debtors to cure defaults on secured loans such as home mortgages.259 In most cases, payments to the mortgage lender will be at least as much as the regular monthly payments, with some additional payment to get caught up on the delinquent amount. Chapter 13 cases also allow debtors to keep both exempt property, which would be protected in chapter 7, and non-exempt property, which would be sold in chapter 7. For a chapter 13 plan to be a viable option, the homeowners will need to have enough income to pay for their necessities and to keep up with the required payments as they come due.
11.5.2 Bankruptcy Basics
18.104.22.168 Two Common Types of Bankruptcy for Consumers
188.8.131.52.1 General Bankruptcy law provides for two main types of consumer cases: chapter 7 and chapter 13. Both types are generally effective at stopping a pending eviction or foreclosure action. Similarly, debtors may seek to void certain property transfers under both chapters. However, if an outstanding mortgage on the homeowner's property is in default, chapter 13 will frequently be the better choice. 18.104.22.168.2 Chapter 7 (straight bankruptcy) In bankruptcy cases under chapter 7, the debtors file a petition asking the court to discharge their debts. The basic
257 Id. §§ 9.2, 9.3. 258 For a more detailed discussion of bankruptcy, see National Consumer Law Center, Consumer Bankruptcy Law and Practice (7th ed. 2004) and National Consumer Law Center, Consumer Bankruptcy Law and Practice, Special Guide to the 2005 Act (2005).
18.104.22.168 Gathering the Necessary Information
While the primary purpose in filing for bankruptcy may be to regain title to the home, homeowners will be required to complete a significant amount of paperwork detailing their financial situation. Homeowners must provide the attorney with the information necessary to accurately prepare the bankruptcy petition and schedules.260 The attorney will need to obtain a complete list of creditors and current addresses, account numbers, and balances owed for each debt. It is more important in chapter 13 than in chapter 7 to know the precise amount owed on each debt, as this may affect the feasibility of the plan. Particularly in cases where the homeowners are proposing to pay less than 100% to
259 See §§ 7.3, 7.4, supra. 260 A sample bankruptcy questionnaire is provided in Appendix H to National Consumer Law Center, Consumer Bankruptcy Law and Practice (7th ed. 2004). An updated version of the questionnaire reflecting the 2005 Act changes is found in Appendix H to National Consumer Law Center, Consumer Bankruptcy Law and Practice (Special Guide to the 2005 Act).
§ 184.108.40.206
Foreclosures / 2006 Supplement (such as the Truth in Lending Act), than the average state judge. Bankruptcy judges and federal appellate judges may be more disposed, because of lower case loads and greater availability of law clerk assistance, to give careful consideration to bona fide legal arguments on behalf of debtors.
unsecured creditors or to avoid a judicial lien, the attorney also should try to obtain a copy of a recent appraisal of the home. The trustee or secured creditor simply may not rely upon the tax assessment value. It also is very important that the homeowners provide a realistic budget of expenses so that the attorney can determine the amount of excess income available to make monthly plan payments.
11.5.3 Stopping the Eviction
Many victims of foreclosure rescue scams may only seek legal assistance after the rescuer has initiated an eviction case. In these cases, a critical first step in defending the homeowner will be to stop the eviction process. In most situations, a bankruptcy filing will automatically stop most eviction efforts against the homeowners as well as other creditor actions. However, there are a few exceptions, usually based on prior bankruptcy filings, when the stay may not automatically go into effect or may have a limited duration. There is also a special set of procedures that apply to eviction cases. If the rescuer has initiated an eviction case against the homeowner, the automatic stay will prevent the rescuer from evicting the homeowner if the bankruptcy case is filed before the state court has entered a judgment for possession against the landlord. If the bankruptcy case is filed after judgment for possession against the homeowner, the full automatic stay will come into effect only for a period of 30 days, and then only if documents are filed with the court certifying that: (1) the debtor has a right to cure the rent default under state law, and (2) the debtor has deposited with the bankruptcy court the rent that will come due during the first 30 days of the bankruptcy case (usually one month's rent). To get a stay longer than 30 days, the debtor is required to pay the landlord all of the back rent statement in the judgment for possession. These issues are discussed in more detail in § 11.6.5, infra. Because in most cases it is unlikely that victims of foreclosure rescue scams will have the financial resources to pay all the back rent in the judgment for possession within 30 days, the attorney should consider options for removing the judgment or reopening the eviction case before filing for bankruptcy.
188.8.131.52 Credit Counseling Requirements
Bankruptcy law requires that most debtors receive budget and credit counseling within 180 days before the bankruptcy case is filed.261 If time is critical in the foreclosure rescue case, homeowners should immediately be referred to an approved credit counseling agency. The counseling requirement may be temporarily or permanently waived, but only in very limited circumstances.262 Organizations providing this counseling must be approved by the United States Trustee Program (or the Bankruptcy Administrator in North Carolina and Alabama). Agencies must also provide the bankruptcy counseling and necessary certificates without regard to ability to pay. If homeowners cannot afford the fee, they should ask for a fee waiver or reduced fee. To receive a discharge in a chapter 7 or chapter 13 case, the debtor must complete a financial education course. This course is different from the budget and credit counseling that must be completed prior to filing.
184.108.40.206 Litigating in a Bankruptcy Case
Lawsuits within a bankruptcy case are called ''adversary proceedings.'' The proceedings are initiated by a complaint and are governed by rules that closely parallel the Federal Rules of Civil Procedure. Depending on the specific circumstances of the case, the bankruptcy court may be a preferable forum for litigating foreclosure rescue scams.263 In many districts, the bankruptcy judges and federal judges may be a good deal more sympathetic to the homeowner's case than judges in local courts. Not only do bankruptcy judges regularly see the problem of debtors in trouble, but also they are generally more aware of the unfair creditor practices that often take place. Many bankruptcy judges are pleased to be presented with novel and creative cases that provide both a change of pace from routine bankruptcy matters and a means for ruling on unfair practices. In addition, most bankruptcy judges are far more knowledgeable in commercial law, and often in consumer law
261 11 U.S.C. § 109(h). A list of approved agencies is available on the website for the Executive Office of the United States Trustee, at www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm. 262 See In re Gee, 332 B.R. 602 (Bankr. W.D. Mo. 2005); National Consumer Law Center, Consumer Bankruptcy Law and Practice, Special Guide to the 2005 Act § 22.214.171.124 (2005). 263 See generally National Consumer Law Center, Consumer Bankruptcy Law and Practice Ch. 13 (7th ed. 2004).
11.5.4 Voiding Title Transfers in Foreclosure Rescue Scams
220.127.116.11 Overview
As discussed above, one of the most common indicia of a foreclosure rescue scam is that homeowners transfer their property to the rescuer or a party affiliated with the rescuer. These transactions may give rise to state and federal statutory claims such as unfair and deceptive practices (UDAP) and truth in lending (TILA), or common law claims such as
Foreclosure Rescue Scams / 2006 Supplement fraud, conspiracy, and breach of fiduciary duty. Legal theories for attacking foreclosure rescue scams are discussed in § 11.4, supra. However, for homeowners whose primary goal is to regain ownership of their home, bankruptcy may provide an alternative route. Bankruptcy trustees (and administrators) have the power to avoid or nullify transfers of property pursuant to several sections of the Bankruptcy Code. While these avoidance powers have limitations, they can be extremely powerful in challenging title transfers in foreclosure rescue scams. The Code also permits debtors to utilize the trustee's avoiding powers with some limitations set forth in section 522(g) and 522(h). While the complex relationship of the bankruptcy provisions used by the debtor to void title transfers may at first appear daunting, especially to nonbankruptcy practitioners, the interplay of the statutes can be reduced to five essential elements. The debtor may avoid a transfer if: (1) the transfer is avoidable by the trustee; (2) the trustee does not attempt to avoid the transfer; (3) the debtor did not conceal the property; (4) the debtor could exempt the property; and (5) the transfer was involuntary. The most difficult hurdle for some victims of foreclosure rescue scams is likely to be demonstrating that the transfer was not voluntary. However, if the homeowner cannot show the last three elements, another option is to persuade the trustee to avoid the transfer, as discussed in § 126.96.36.199, infra.
§ 220.127.116.11.3
equivalent value for the transfer, and (2) the debtor was insolvent on the date of the transfer or became insolvent as a result of the transfer. Whether a debtor received less than a reasonably equivalent value will depend on the facts and circumstances of each case. The focus of the inquiry is on what the homeowners received in return for what they surrendered. In foreclosure rescue scams, homeowners often receive little or nothing for the equity in their homes. Even where rescuers have cured mortgage arrears, it is doubtful whether such payments are of any benefit to the homeowners who have simultaneously lost title to their homes.266 To avoid a transfer under section 548, the debtor must also have been insolvent at the time of transfer or have become insolvent as a result of the transfer. The insolvency inquiry is essentially a balance-sheet test that looks at the difference between the debtor's non-exempt assets and liabilities. Most consumer debtors are insolvent under the Code's definition. For those debtors that may have had non-exempt equity in their homesteads, transferring title to their property in a foreclosure rescue scam almost always renders the homeowner insolvent. 184.108.40.206.3 Use of ''strong arm clause'' Besides the power to avoid fraudulent transfers under section 548, section 544(b) in combination with state fraudulent transfer laws provides another basis for avoiding title transfers in foreclosure rescue scams. Under almost all state fraudulent transfer laws, a transfer may be deemed fraudulent if: (1) the debtor was insolvent or became insolvent as a result of the transfer, and (2) the conveyance was made without ''reasonably equivalent value'' or ''fair consideration.''267 Despite their similarities, the right to avoid fraudulent transfers under the Code differs slightly from the right to avoid transfers under state law. Most significantly, state fraudulent transfer laws have a longer ''reach-back'' period, typically four years. As a result, debtors may use section 544(b) to challenge title transfers outside of the two-year period specified in section 548. Some state laws also provide that a debtor is presumed to be insolvent if he or she is not paying debts as they become due. Under this definition, homeowners who are in financial distress and falling further behind on their mortgage will be presumed to be insolvent.
266 See In re Davis, 148 B.R. 165, 174 (Bankr. E.D.N.Y.), aff'd, 169 B.R. 285, 300 (E.D.N.Y. 1994). 267 Almost all state fraudulent transfer laws are based either on the Uniform Fraudulent Conveyance Act, which uses the term ''fair consideration,'' or the more recent Uniform Fraudulent Transfer Act, which uses the term ''reasonably equivalent value.'' Courts have drawn little to no distinction between the ''reasonably equivalent value'' standard and the ''fair consideration'' standard. See, e.g., In re AppliedTheory Corp., 323 B.R. 838 (Bankr. S.D.N.Y. 2005); In re Tiger Petroleum Co., 319 B.R. 225, 232 (Bankr. N.D. Okla. 2004).
184.108.40.206 Trustees' Powers to Avoid Transfers
18.104.22.168.1 General The starting point in any avoidance action is a determination of whether the transfer is avoidable by the trustee. As noted above, the bankruptcy trustee may set aside or nullify a wide variety of transfers made by a debtor prior to the commencement of a case. In the foreclosure rescue scam context, the most likely statutory sections to be employed are section 548, dealing with fraudulent transfers, and the ''strong arm'' powers of section 544. 188.8.131.52.2 Fraudulent transfers Section 548 of the Bankruptcy Code gives the trustee (and thus the debtor in some instances) the ability to avoid transfers based on either actual or constructive fraud.264 The trustee may avoid a transfer if the transfer was made within the two years265 before the case was filed and the transfer meets certain conditions. Specifically, a transfer may be avoided if: (1) the debtor received less than a reasonably
264 See § 10.1.4.2, supra (general discussion of § 548). 265 For cases filed on or before April 20, 2006, fraudulent transfers may only be set aside if the transfer was made within one year prior to the commencement of the case.
§ 18.104.22.168
Foreclosures / 2006 Supplement mortgage, and there is a $30,000 homestead exemption, the remaining $5000 in equity is preserved for the benefit of the estate. In a chapter 7 bankruptcy, the home may be sold, with the debtor receiving the $30,000 exemption and the remaining $5000 going to unsecured creditors. (The debtor may still be able to save the home, however, by buying out the trustee's interest in the home through refinancing or some other way.) In a chapter 13 bankruptcy, the debtor is required to pay unsecured creditors at least the amount of non-exempt assets that would have been distributed to them in a chapter 7 bankruptcy, so the debtor must pay at least $5000 to the unsecured creditors under the plan. (Of course, a debtor who owes less than $5000 to unsecured creditors need only pay them the amount of their debts.) 188.8.131.52.4 Was the transfer involuntary? The debtor may use the trustee's avoidance powers only where the transfer to be avoided was ''involuntary.'' Neither the term ''voluntary'' nor ''involuntary'' is defined in the Bankruptcy Code. Involuntary transfers, however, generally refer to transfers effectuated by operation of law, such as an execution of judgment, repossession, foreclosure, or garnishment. A transfer may also be considered ''involuntary'' if it resulted from fraud, material misrepresentation, or coercion. According to this standard, a voluntary transfer does not occur where a creditor has concealed or failed to inform a debtor of the essential facts necessary for the debtor to make an intelligent decision on whether to transfer the property to the creditor. In foreclosure rescue cases where homeowners are led to believe they are taking out a second mortgage or additional financing to cure mortgage arrears, when in reality they are unknowingly transferring title to their home to a third party, the ''involuntary'' nature of the transaction should not be difficult to establish. Even in cases where homeowners are aware that they are transferring title, it may still be possible to characterize the transaction as involuntary if they did not know all of the material facts of the transaction, misrepresentations were made to them, they faced significant economic coercion as a result of a threatened foreclosure sale, or the closing transaction occurred under tremendous pressure.271
18.104.22.168 Debtor's Power to Avoid Title Transfers
220.127.116.11.1 General If the trustee could avoid the title transfer but elects not to do so, the debtor may be able to do so in certain circumstances. Specifically, the debtors may avoid title transfers if they can demonstrate that: (1) the transfer could be avoided by the trustee; (2) the trustee did not attempt to avoid the transfer; (3) the debtor did not conceal the property; (4) the debtor could exempt the property; and (5) the transfer was involuntary. 18.104.22.168.2 Did the debtor conceal the property? The answer to this question depends largely on whether the debtor has disclosed the property on his or her schedules. Because of the potential consequences of failing to list the property in the schedules, it is always better to be overinclusive rather than under-inclusive. At a minimum, the causes of action against the rescue scammers should be listed on Schedule B—Personal Property.268 It may also be prudent to list the property on Schedule A—Real Property with an explanatory note that the debtor had been the title owner of the real property before the transfer, that the debtor believes that the transfer is avoidable, and the debtor retains an equitable interest in the property. 184.108.40.206.3 May the debtor exempt the property? As a general rule, almost all property in which the debtor has a legal or equitable interest becomes property of the bankruptcy estate at the commencement of a case.269 However, the Bankruptcy Code permits a debtor to exempt certain property from the estate pursuant to the federal exemptions, as listed in 11 U.S.C. § 522(d), or the applicable state exemptions. For debtors in states that have ''opted out'' of the federal exemption scheme, only the state law exemptions and exemptions provided by federal non-bankruptcy law are available.270 So long as the debtor may exempt some portion of the property, the debtor may avoid transfers of that property using the trustee's powers. The amount recovered up to the amount of the exemption is for the benefit of the debtor, while any amount in excess of the exemption is preserved for the benefit of the estate. So, for example, if the debtor avoids transfer of a $100,000 home that has a $65,000 first
268 Debtors may be judicially estopped from later bringing claims not listed in their schedules. See, e.g., Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001); Wolfork v. Tackett, 273 Ga. 328, 540 S.E.2d 611 (2001). 269 See 11 U.S.C. § 541(a)(1). 270 For more information see National Consumer Law Center, Consumer Bankruptcy Law and Practice § 10.2 (7th ed. 2004).
22.214.171.124 Persuading the Trustee to Avoid the Transfer
If the homeowner cannot show all of the elements discussed above, it may be possible to persuade the trustee to avoid the transfer. The advantage of having the trustee avoid the transfer is that the trustee need not show the last three elements: that the debtor did not conceal the property; that
271 See In re Davis, 169 B.R. 285, 295, 298 (E.D.N.Y. 1994).
Foreclosure Rescue Scams / 2006 Supplement the debtor may exempt the property; and that the transfer was involuntary. The trustee is likely to be interested in avoiding the transfer if the home has some non-exempt equity. If the trustee avoids the transfer, the homeowner will benefit in two ways. First, the homeowner will be able to exempt whatever portion of the home is exempt. Second, if a portion of the home's value is not exempt, it will be under the control of the trustee rather than the rescuer. In a chapter 13 bankruptcy, the debtor is required to pay the unsecured creditors the amount they would have received in a chapter 7 bankruptcy. Since the amount that unsecured creditors receive in a chapter 7 case is based on the amount of non-exempt assets in the bankruptcy estate, bringing the debtor's non-exempt equity in the home back into the bankruptcy estate increases the amount that will have to be distributed to unsecured creditors in a chapter 13 case.272
§ 11.6.2
11.6 Issues Posed by Separate State Court Proceedings
11.6.1 Introduction
Several issues complicate the homeowner's ability to pursue a foreclosure rescue scam lawsuit when there is a related state proceeding. These issues are most likely to arise when the homeowner files an action in federal court to rescind a foreclosure rescue transaction and there is a threatened, pending, or concluded action in state court to foreclose on the home or to evict the homeowner. Defendants often raise Younger abstention, the Anti-Injunction Act, and the Rooker-Feldman doctrine, in addition to res judicata and collateral estoppel. These issues should be evaluated when the homeowner decides whether to file an independent action or whether to seek relief in the foreclosure or eviction case. They should also be considered when choosing between state and federal court, since Younger, the Anti-Injunction Act, and Rooker-Feldman only apply in federal court (though states might have similar doctrines). In general, the farther the existing state court proceeding is from judgment the more likely a federal or state court is to reach the merits and grant relief in an independent action. These issues are discussed in more detail in NCLC's Truth in Lending manual.273
interfere with pending state proceedings.274 Younger abstention applies if (1) there are ongoing state proceedings that are judicial in nature; (2) the state proceedings implicate state interests so important that exercise of the federal judicial power would disregard the comity between the states and the national government; and (3) the state proceedings afford an adequate opportunity to raise the federal claims.275 The first and third requirements for Younger abstention are fairly straightforward. If the state case is merely threatened rather than filed, Younger does not bar declaratory relief because there is no ongoing state proceeding and the first Younger requirement is not met.276 In foreclosure rescue scam cases, the third requirement for Younger abstention— an adequate opportunity to raise federal claims—is often not met, because some jurisdictions sharply curtail the homeowner's ability to raise consumer law claims such as TILA in response to foreclosure or eviction actions.277 The scope of the second requirement for Younger abstention—important state interests—has evolved. Younger involved pending state criminal prosecutions, and the doctrine has since been applied in other contexts, such as civil contempt proceedings, that involve enforcement actions by the state or state courts and are akin to criminal prosecutions.278 In 1987, in Pennzoil v. Texaco, Inc.,279 the Supreme Court extended the doctrine to bar a company's federal challenge
274 Younger v. Harris, 401 U.S. 37, 91 S. Ct. 746, 27 L. Ed. 2d 669 (1971). 275 Middlesex County Ethics Committee v. Garden State Bar Ass'n, 457 U.S. 423, 435 (1982). 276 Steffel v. Thompson, 415 U.S. 452, 94 S. Ct. 1209, 39 L. Ed. 2d 505 (1974); see also Hicks v. Miranda, 422 U.S. 332, 95 S. Ct. 2281, 45 L. Ed. 2d 223 (1975) (Younger prevents declaratory relief where state criminal proceeding is filed after federal suit but before any proceedings of substance on merits in federal suit). 277 Miller v. Granados, 529 F.2d 393 (5th Cir. 1976) (Younger abstention does not bar injunction against state foreclosure proceedings where state courts could not grant the relief plaintiffs sought under federal antitrust laws). See generally National Consumer Law Center, Truth in Lending § 7.6.8 (5th ed. 2003 and Supp.). 278 Huffman v. Pursue, Ltd., 420 U.S. 592, 95 S. Ct. 1200, 43 L. Ed. 2d 482 (1975) (public nuisance proceeding brought by the state); Juidice v. Vail, 430 U.S. 327, 97 S. Ct. 1211, 51 L. Ed. 2d 376 (1977) (civil contempt proceeding); Trainor v. Hernandez, 431 U.S. 434, 97 S. Ct. 1911, 52 L. Ed. 2d 486 (1977) (civil action by the state to collect fraudulently obtained welfare benefits); Moore v. Sims, 442 U.S. 411, 99 S. Ct. 2371, 60 L. Ed. 2d 994 (1979) (action by governmental agency for temporary custody of allegedly abused child); Middlesex Co. Ethics Committee v. Garden State Bar Ass'n, 457 U.S. 423, 432, 102 S. Ct. 2515, 73 L. Ed. 2d 116 (1982) (state bar disciplinary proceedings); Ohio Civil Rights Commission v. Dayton Christian Schools, Inc. 477 U.S. 619, 106 S. Ct. 2718, 91 L. Ed. 2d 512 (1986) (administrative agency action commenced by state civil rights commission). 279 481 U.S. 1, 107 S. Ct. 1519, 95 L. Ed. 2d 1 (1987).
11.6.2 Younger Abstention
The Younger abstention doctrine prevents a federal court from issuing declaratory or injunctive relief that would
272 See § 22.214.171.124.2, supra. 273 National Consumer Law Center, Truth in Lending § 8.4.2 (5th ed. 2003 and Supp.).
§ 11.6.3
Foreclosures / 2006 Supplement judgment is pending, enjoining the enforcement of the judgment comes closer to Pennzoil, but it still may be possible to argue that the plaintiff's federal challenge is not to the state court procedures themselves. (However, the Rooker-Feldman doctrine, discussed in § 11.6.4, infra, may be an additional impediment.) Apart from the three formal requirements for Younger abstention, abstention can also be avoided if the state proceedings are undertaken in bad faith or for purposes of harassment, or some other extraordinary circumstances exist, such as proceedings pursuant to a flagrantly unconstitutional statute.283
to a state requirement that a bond be posted as a condition of an appeal of a state civil case. The Court characterized the case as involving a challenge to the process by which the state compels compliance with the judgments of courts, similar to civil contempt proceedings. It held that the state's interests in this civil proceeding were so important that exercise of federal judicial power would disregard the comity between the states and the federal government. The Court took pains, however, to state that it was not announcing a rule that would be applicable to all civil cases between private parties.280 Eviction or foreclosure proceedings that may be pending in state court in foreclosure rescue scam cases involve only private parties, and a TILA case does not generally challenge a state's enforcement efforts. Therefore, these cases are not likely to implicate important state interests under Younger. Since Pennzoil, when the state court suit is a civil case between private parties, courts have been more likely to abstain if the federal suit is a constitutional challenge to the state court's procedures.281 If the federal suit does not challenge the state court's procedures, but instead seeks a ruling on some issue between the private parties, a state eviction or foreclosure proceeding is less likely to be seen as implicating the important state interests that the Younger doctrine requires.282 If the state case has gone to judgment and a sheriff's sale or a writ of possession to enforce that
280 Id., 481 U.S. at 14 n.12. 281 Schall v. Joyce, 885 F.2d 101 (3d Cir. 1989) (state had special interest in enforcing the orders and judgments where judgment debtor sought relief in federal court to challenge confession of judgment procedures); accord Doscher v. Menifee Circuit Court, 2003 WL 22220534, 75 Fed. Appx. 996 (6th Cir. Sept. 24, 2003) (unpublished) (Younger abstention bars challenge to state court foreclosure procedures; pro se debtor sought federal court order blocking foreclosure sale and reopening foreclosure judgment); see also Scott v. Mortgage Elec. Registration Systems, 2004 WL 1925008 (E.D. Pa. Aug. 27, 2004) (Younger abstention bars due process challenge in federal court to state foreclosure procedures); Fisher v. Fed. Nat'l Mortg. Ass'n, 360 F. Supp. 207 (D. Md. 1973) (pre-Pennzoil case invoking Younger abstention to refuse to hear constitutional challenge to state foreclosure procedures); Ungar v. Isaias, 336 F. Supp. 1233 (S.D.N.Y. 1972) (same). 282 See Schall v. Joyce, 885 F.2d 101 (3d Cir. 1989) (finding that Younger abstention is not always appropriate whenever a civil proceeding is pending in a state court; ''Pennzoil's limiting principle is its focus on the special interest that a state has in enforcing the orders and judgments of its courts''); Rowland v. Novus Fin. Corp., 949 F. Supp. 1447, 1456–1457 (D. Haw. 1996) (noting that Pennzoil ''directly implicat[ed] the state judiciary process itself'' whereas the plaintiff's '' federal suit does not directly attack the validity of the state foreclosure proceeding per se, but rather involves a claim for rescission that could ultimately affect the final distribution of the bankruptcy estate''); Schumacher v. ContiMortgage Corp., 2000 WL 34030847 (N.D. Iowa June 21, 2000) (relying on Roland to deny abstention despite TILA affirmative defense in state foreclosure suit).
11.6.3 The Anti-Injunction Act
Another potential impediment to federal court relief when there is an ongoing state court proceeding is the AntiInjunction Act, which prohibits federal courts from granting injunctions to stay proceedings in state courts.284 This prohibition cannot be evaded by addressing the injunction to a party rather than the state court.285 The Anti-Injunction Act contains three explicit exceptions, all of which are to be narrowly construed.286 First, a federal court may enjoin state proceedings ''as expressly authorized by Act of Congress.''287 To invoke this exception, the other law need not expressly refer to the AntiInjunction Act, or expressly authorize an injunction against a state court proceeding.288 The question is whether the other law creates a federal right or remedy, enforceable in a federal court of equity, that can be given its intended scope only by the stay of a state court proceeding.289 Some courts have held that TILA does not fall within this exception.290 A second explicit exception to the Anti-Injunction Act is that a federal court can enjoin a state proceeding where
283 Middlesex County Ethics Committee v. Garden State Bar Ass'n, 457 U.S. 423, 435 (1982); Younger v. Harris, 401 U.S. 37, 53–54, 91 S. Ct. 746, 27 L. Ed. 2d 669 (1971). 284 28 U.S.C. § 2283. 285 Atlanta Coast Line R.R. Co. v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 287 (1970). 286 Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S. Ct. 1684, 100 L. Ed. 2d 127 (1988). 287 18 U.S.C. § 2283. 288 Mitchum v. Foster, 407 U.S. 225, 237, 92 S. Ct. 2151, 32 L. Ed. 2d 705 (1972). 289 Id.; see also Vendo Co. v. Lektro Vend Corp., 433 U.S. 623, 97 S. Ct. 2881, 53 L. Ed. 2d 1009 (1977) (plurality opinion holding that Clayton Act was not express authorization for injunction, since neither statute nor legislative history mentioned § 2283 or the enjoining of state court proceedings). 290 Clark v. U.S. Bank Nat'l Ass'n, 2004 WL 1380166, at *3 (E.D. Pa. June 18, 2004) (holding, in case where plaintiff raised TILA and other claims, that none of the exceptions to Anti-Injunction Act are applicable); see also Tropf v. Fidelity Nat'l Title Ins. Co., 289 F.3d 929, 942 n.21 (6th Cir. 2002) (plaintiffs raised TILA and many other claims; opinion does not focus on whether TILA is an exception, but states that no statute authorized the injunction plaintiffs sought).
Foreclosure Rescue Scams / 2006 Supplement necessary in aid of its jurisdiction. This rule applies when ''necessary to prevent a state court from so interfering with a federal court's consideration or disposition of a case as to seriously impair the federal court's flexibility and authority to decide the case.''291 This exception has been applied to cases in which a federal court obtains in rem jurisdiction prior to a state court suit, to removal cases, and to multidistrict litigation.292 In other cases, the mere fact that a state court might rule first on an issue before the federal court (and expose the homeowner to res judicata or collateral estoppel) is not enough to invoke this exception.293 But if the state action threatens not simply to reach judgment first, but also to interfere with the federal court's own path to judgment—such as by preventing relief on the federal claims even if they are proven—then a preliminary injunction may be necessary in aid of the federal court's jurisdiction.294 This exception might allow a federal court to enjoin the actual eviction of the homeowner or sale of the property (through foreclosure or otherwise) in order to protect the ability of the federal court to grant the homeowner the relief sought on a TILA rescission claim.295 Related to the second exception (though not based directly on it) is a dispute among the courts of appeal about whether a federal court may enjoin state court proceedings when the federal court had already obtained (in personam) jurisdiction over the injunctive claim before the state proceeding was filed. The Seventh Circuit, followed by the First and Eight, has held that the jurisdiction of the federal court is determined at the time that its injunctive powers are
291 Atlantic Coast Line R.R. Co. v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 295, 90 S. Ct. 1739, 26 L. Ed. 2d 234 (1970). 292 See James v. Bellotti, 733 F.2d 989, 993 (1st Cir. 1984); 1975 Salaried Retirement Plan for Eligible Employees of Crucible, Inc. v. Nobers, 968 F.2d 401, 407 (3d Cir. 1992). 293 Retirement Sys. v. J.P. MorganChase & Co., 386 F.3d 419, 429 (2d Cir. 2004). See also Atlantic Coast Line R. Co. v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 294–296, 90 S. Ct. 1739, 26 L. Ed. 2d 234 (1970); Signal Props., Inc. v. Farha, 482 F.2d 1136 (5th Cir. 1973). 294 See In re Diet Drugs, 282 F.3d 220, 235 (3d Cir. 2002); Piper v. Portnoff Law Assocs., 262 F. Supp. 2d 520 (E.D. Pa. 2003). 295 See Piper v. Portnoff Law Assocs., 262 F. Supp. 2d 520 (E.D. Pa. 2003) (applying this exception to enjoin sheriff's sale); Cottonwood Christian Center v. Cypress Redevelopment Agency, 218 F. Supp. 2d 1203, 1217–1218 (C.D. Cal. 2002) (federal court may enjoin state condemnation proceeding in order to protect its ability to rule on landowner's challenge to city's land use decisions). But see Clark v. U.S. Bank Nat'l Ass'n, 2004 WL 1380166 (E.D. Pa. June 18, 2004) (Anti-Injunction Act bars TILA plaintiff's prayer for injunction against sheriff's sale that was scheduled to enforce state court foreclosure judgment); Armstrong v. Real Estate Int'l, Ltd., 2006 WL 354983 at *4–*5 (E.D.N.Y. Feb. 14, 2006) (injunction was not necessary in aid of federal court's jurisdiction in TILA challenge to foreclosure rescue scam because state eviction case had already entered judgment and state courts, including eviction court, could hear TILA claims).
§ 11.6.4
invoked, whether in the complaint or by motion.296 The Fourth, Fifth, and Sixth Circuits have held that the AntiInjunction Act applies whenever the state action is filed before the federal court rules on a request for injunctive relief, and the Second Circuit has indicated agreement with this rule.297 In either case, it is clear that the Anti-Injunction Act only prohibits injunctions against pending state proceedings, and does not preclude injunctions against the institution of state proceedings.298 The final exception is that a federal court can enjoin state court proceedings as necessary to protect or effectuate its judgments. This exception is intended to prevent relitigation of an issue that was presented to and decided by the federal court, and is similar to the doctrines of res judicata and collateral estoppel.299 This exception would allow a federal court that had issued a final judgment in a foreclosure rescue scam case to enjoin the rescuer from filing or pursuing an eviction action in state court to relitigate the issues.
11.6.4 The Rooker-Feldman Doctrine
Under the Rooker-Feldman doctrine, a federal court lacks subject matter jurisdiction over and must dismiss a claim that is the functional equivalent of an appeal from a state court judgment.300 In two decisions in 2005 and 2006, the Supreme Court has made clear that the doctrine is extremely narrow and that lower courts were interpreting it too broadly.301 The doctrine ''is confined . . . to cases brought by state-court losers complaining of injuries caused by statecourt judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.''302 It does not apply if the
296 Baranick v. Investors Funding Corp., 489 F.2d 933, 937 (7th Cir. 1973); Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 842 n.6 (1st Cir. 1988); National City Lines, Inc. V. L.L.C. Corp., 687 F.2d 1122, 1127 (8th Cir. 1982); see also Hruby v. Larsen, 2005 WL 1540130 at *2 (D. Minn. June 30, 2005) (following National City Lines in foreclosure rescue scam case). 297 Denny's Inc. v. Cake, 364 F.3d 521 (4th Cir. 2004); Royal Inc. Co. v. Quinn-L Capital Corp., 3 F.3d 877, 885 (5th Cir. 1993); Roth v. Bank of the Commonwealth, 583 F.2d 527, 533 (6th Cir. 1978); see Standard Microsystems Corp. v. Texas Instruments, 916 F.2d 58, 61–62 (2d Cir. 1990). 298 Dombrowski v. Pfister, 380 U.S. 479, 485 n.2, 85 S. Ct. 1116, 14 L. Ed. 2d 22 (1965); Tropf v. Fidelity Nat'l Title Ins. Co., 289 F.3d 929, 941 (6th Cir. 2002). 299 Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S. Ct. 1684, 100 L. Ed. 2d 127 (1988); Tropf v. Fidelity Nat'l Title Ins. Co., 289 F.3d 929, 942 n.21 (6th Cir. 2002). 300 District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 482–486, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983); Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362 (1923). 301 See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059 (2006); Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280, 283–284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005). 302 Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280,
§ 11.6.5
Foreclosures / 2006 Supplement
federal plaintiff was not a party to the state case, even if the parties were in privity.303 Even if the state claim has gone to judgment, RookerFeldman does not apply if a federal plaintiff presents an independent claim, even one that denies a legal conclusion that a state court has reached in a case to which the federal plaintiff was a party.304 The case might be governed by res judicata or claim preclusion, but Rooker-Feldman neither supplants nor augments those doctrines.305 After these two recent decisions, it is not clear if the doctrine retains any vitality outside of the strict context in which a federal action is filed for the direct purpose of revisiting a state court judgment.306 In the foreclosure rescue scam context, even if a state court has already rendered an eviction judgment, a TILA claim is an independent claim because it is not aimed at the rescuer's right to evict under the lease, but rather at the underlying sale/leaseback transaction.307 The Third Circuit applied Rooker-Feldman post-Exxon to dismiss a bankruptcy adversary proceeding brought to void a state court foreclosure judgment and vacate a sheriff's sale as allegedly violating the debtor's due process rights.308 This case more closely tracks Rooker-Feldman because it was a direct attack on the state court foreclosure judgment. Another post-Exxon case held that Rooker-Feldman barred jurisdiction in a TILA case brought to challenge a state court foreclosure judgment.309 Neither court considered whether the actions were independent claims, nor did they have the benefit of the Supreme Court's second warning, in 2006, that lower courts were interpreting the doctrine too broadly.310
11.6.5 The Bankruptcy Automatic Stay As an Alternative
If an eviction or foreclosure case or some other type of collection action is pending against the homeowner, the consumer should consider bankruptcy court as a forum. In most cases, as soon as a bankruptcy case is filed, all such actions are automatically stayed without the need to consider the impediments to injunctive relief discussed above.311 The 2005 amendments to the Bankruptcy Code imposed certain restrictions on the automatic stay that may be relevant in foreclosure rescue scam cases. First, the stay may not be automatic or may be limited in duration if the homeowner filed another bankruptcy case that was dismissed within the previous year.312 In addition, if a judgment for possession was entered in an ''eviction, unlawful detainer action, or similar proceeding'' before the bankruptcy case was filed, the automatic stay will prevent enforcement of the judgment only if documents are filed with the court certifying that the debtor has a right to cure under state law and the debtor has deposited with the bankruptcy court the rent that will come due during the first 30 days of the bankruptcy case.313 Even if the debtor files these documents, the stay only lasts 30 days. After that, the stay continues only if the debtor pays the rescuer/landlord all the back rent stated in the judgment for possession. These restrictions do not apply if the bankruptcy case is filed before judgment for possession is entered, however. In addition, they only apply if the debtor resides at the home ''as a tenant under a lease or rental agreement.''314 The rescuer may have characterized the agreement with the homeowner as something other than a lease in an attempt to avoid state landlord-tenant laws. It also might be possible to persuade the bankruptcy court to pierce the form of the transaction and conclude that even a document that is titled a lease is something other than a ''lease or rental agreement'' in a foreclosure rescue scam. If a state court eviction action is pending but no judgment of possession has been entered, the homeowner should consider filing the bankruptcy case immediately. If a judgment of possession has already been entered, the homeowner should, after filing the bankruptcy case, evaluate the possibility of proceeding in state court to reopen the judgment. The homeowner should coordinate reopening of the judgment with the bankruptcy trustee, who may want to litigate the issue, either alone or with the homeowner, or may be willing to abandon the claim to the homeowner.
303 304 305
308 309 310
284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005) (emphasis added). Lance v. Dennis, 126 S. Ct. 1198, 163 L. Ed. 2d 1059 (2006). Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280, 283, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005). Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280, 283–284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005); Lance v. Dennis, 126 S. Ct. 1198, 1202, 163 L. Ed. 2d 1059 (2006). See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059 (2006) (noting that the Court has never applied the doctrine since Rooker and Feldman and listing the cases in which the Court rejected the doctrine); Marshall v. Marshall, 126 S. Ct. 1735, 164 L. Ed. 2d 480 (2006) (Steven, J., concurring in part and concurring in the judgment) (referring to the grave in which Rooker-Feldman was buried). See Brown v. Grant Holding, 394 F. Supp. 2d 1090, 1099 (D. Minn. 2005) (Rooker-Feldman does not apply to TILA/HOEPA foreclosure rescue scam case because prior state eviction case only decided whether homeowner could retain possession of the property and could not decide the equitable claim to rescind the sale/leaseback transaction). Knapper v. Bankers Trust Co. (In re Knapper), 407 F.3d 573 (3d Cir. 2005). McKay v. Sacks, 2005 WL 1206810 (E.D.N.Y. May 20, 2005). See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059 (2006).
311 312 313 314
See § 11.5.3, supra. See § 11.5.3, supra. 11 U.S.C. § 362(b)(22), (l). 11 U.S.C. § 362(b)(22).
Foreclosure Rescue Scams / 2006 Supplement
§ 11.6.6
11.6.6 Res Judicata and Collateral Estoppel
Younger abstention, the Anti-Injunction Act, and the Rooker-Feldman doctrine all apply only in federal court (although state courts may have similar doctrines). But even if a TILA action is filed in state court, or if a federal case gets beyond those obstacles, the plaintiff may still have to contend with res judicata or collateral estoppel from a prior state eviction or foreclosure judgment. For example, the First Circuit held that a default judgment in a state court foreclosure action prevented a homeowner from asserting rescission under TILA in federal court.315 The Full Faith and Credit Clause requires federal courts to give state court
315 R.G. Fin. Corp. v. Vergara-Nunez, 446 F.3d 178 (1st Cir. 2006).
judgments the same preclusive effect they would have in state court, so the issue is fundamentally one of state law.316 In some states, counterclaims such as TILA are not allowed in eviction or foreclosure proceedings, or those proceedings enjoy summary fast-track dispositions and limited discovery that make it difficult to litigate complicated counter-claims. For those reasons, issue or claim preclusion may not apply to eviction or foreclosure judgments.317
316 Id. 317 See, e.g., Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d 1090 (D. Minn. 2005) (holding that, even if equitable mortgage counterclaim could have been raised in eviction case, which was unclear, equitable claims are preferably resolved in a separate proceeding to avoid interfering with the summary nature of eviction proceedings, and therefore res judicata did not apply).