NYC Judge: "Rubber Stamp" Method Out-Of-Bounds When Granting Judgment To Zombie Debt Buyers Against Unwitting Consumers; Calls Racket "A Game Of Odds"

In a 2007 court ruling, New York City Civil Court Judge Philip S. Straniere expresses a concern with the growing number of creditors appearing before him seeking judgments against consumers who have allegedly defaulted on credit card debt, and who have failed to make an appearance during the proceedings.

In denying judgment to a creditor in one case, Judge Straniere provides a thorough examination of the procedure that should be applied by judges in New York (and possibly outside New York as well) when scrutinizing creditors in the determination of whether or not to grant judgments on account of the allegedly delinquent debts. His examination may be useful to those consumers (and the attorneys who represent them) being sued by creditors (especially those who are less-than-affectionately referred to as "zombie debt buyers") in attempts to thwart their efforts.(1)

Straniere begins his ruling by providing the following background [all bold text is my emphasis, not in the original; text broken up and enumerated for ease of reading; all citations omitted]:

• Over the past several years this Court has received a plethora of confirmation of arbitration award petitions. These special proceedings commenced by a variety of creditors or their assignees seek judgments validating previously issued arbitration awards against parties who allegedly defaulted on credit card debt payments. In most of these cases the respondents have failed to answer.

• It is almost never apparent, from the filings, (1) what type of process was effectuated on the debtor to notify them of the arbitration proceedings, (2) whether the debtor participated at all in the underlying arbitration, (3) what evidence, if any, the arbitrator considered, (4) what claims the arbitrator ruled upon, and (5) what figures the arbitrator used in calculating each award.

• While the modern day creditor seeks no pound of flesh as did Shakespeare's Shylock in the "Merchant of Venice," the judiciary continues to provide an important role in safeguarding consumer rights and in overseeing the fairness of the debt collection process. As such, this Court does not consider its function to merely rubber stamp confirmation of arbitration petitions.

• A trial court does not have a "mandatory, ministerial duty to grant motion[s] for default judgment on every properly verified complaint on which there has been default; [the] court retains [the] discretionary obligation to determine whether [the] applicant has met th[eir] burden of stating [a] prima facie cause of action," and the same is true for arbitration confirmations pursuant to CPLR Article 75.

• Specifically, "an arbitration award may be confirmed upon nonappearance of the respondent only when the petitioner makes a prima facie showing with admissible evidence that the award is entitled to confirmation." If petitioner fails to establish a prima facie case the confirmation petition must be denied.

• Despite the absence of objections by most of the defaulting respondents, in the interest of justice, this Court chooses to analyze the prima facie showing of each of the petitioners' applications. As a result of such undertaking, the Court often discovers fatal procedural and substantive defects inherent within the petitions.

• The Court is aware of how the market for the sale of debt currently works, where large sums of defaulted debt are purchased, by a small number of firms, for between .04 and .06 cents on the dollar. The incentive therefore, for the firm purchasing the debt, is to herd these cases into arbitration and churn out papers seeking their confirmation as quickly as possible. The entire industry is a game of odds, and in the end as long as enough awards are confirmed to make up for the initial sale and costs of operation the purchase is deemed a successful business venture.

• However, during this process mistakes are made, mistakes that may seriously impact consumers and their credit. The petition at bar is a specimen replete with such defects and the Court takes this opportunity to analyze the filing in detail, in hopes to persuade creditors, not simply to take more care in dotting their "i"s and crossing their "t"s in their filings, but to assure a minimum level of due process to the respondents.

• Why is this debt sold for such a cheap price? Certainly part of the reason is the poor prospects of payment these creditors expect from the defaulting individuals given their past delinquent payment history, while another part is undoubtably to avoid additional costs associated with debt collection. Further yet, is the simple fact that the proof required to obtain a judgment in the creditor's favor is lacking, usually as a result of poor record keeping on the part of the creditor.

• This decision reviews applicable New York cases on confirmation of arbitration awards, and provides additional principles to guide the process. In doing so, it is expected that judicial economy will be served, and more importantly, that the rights, particularly due process, of all parties will be adequately addressed and protected.(2)

For the specific facts of this case, Judge Starniere's examination of the applicable Federal and state law, and his application of the law to the facts in this case, see MBNA Am. Bank, N.A. v Nelson, 2007 NY Slip Op 51200(U), 15 Misc 3d 1148(A) (Civ. Ct. City of New York, Richmond Cty. 2007).

Go here for other posts on zombie debt.

(1) Keep in mind that once a creditor obtains a judgment against a consumer, the recording of the judgment will usually operate to create a lien against any real estate owned by the alleged debtor, and which could result in a forced sale of the property (subject to applicable homestead exemptions under state and Federal bankruptcy law). See Ohio Woman Concerned Over Claim Of Lien On Home For "Zombie" Debt That's Not Hers. For those without real estate, the judgment creditor can still go after wages, bank accounts, and other assets (again, subject to any applicable exemptions under state or Federal bankruptcy law).

(2) Attempts at tightening up the law in this area are being made. See NYC Lawmakers Move To Toughen Regs On Debt Scavengers Buying Up, Filing Lawsuits To Collect "Zombie Debt"

For a post regarding the use of "sewer service" in connection with the filing of lawsuits by zombie debt buyers, see 35 Law Firms Named In Suit Seeking To Void 100,000+ Money Judgments; 20+ Add'l Firms Currently In NY AG's Crosshairs In Ongoing "Sewer Service" Probe.

See also, Justice Disserved, a 2008 report by MFY Legal Services (a nonprofit provider of free legal services in New York) that documents statistics of victims of improper service who had judgments unknowingly entered against them, often to devastating effect.

Family Cops Pleas For Roles In Tax, Bankruptcy Fraud Scam For Hiding Profits, Property Interests In Connection With Hundreds Of Flipped Foreclosures

From the Office of the U.S. Attorney (Greenbelt, Maryland):

• Minh-Vu Hoang, age 59, of Bethesda, Maryland, pleaded guilty [...] to conspiracy to defraud the Internal Revenue Service and the U.S. Bankruptcy Trustee in connection with a scheme to conceal millions in profits earned from the purchase and sale of foreclosure properties.(1)

***

• According to Hoang’s plea agreement, Minh-Vu Hoang, her husband and other family members purchased property at foreclosure auctions beginning in 1999, and resold some of the properties at a profit. Hoang and others deposited and withdrew money from an escrow account for the purchase and sale of properties, and transferred money from the escrow account to business entities they controlled in order to conceal Hoang’s financial interests in the properties. From 2000 to 2005, Hoang and others purchased and sold hundreds of foreclosure properties using the names of their agents or business entities to conceal their involvement in the purchase and sale of the properties, and thereby avoid taxes.

• On May 10, 2005, Minh-Vu Hoang filed for a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland. On May 27, 2005, Minh-Vu Hoang filed several false schedules and a false Statement of Financial Affairs with the Bankruptcy Court, in support of her petition. In her Schedules, Minh-Vu Hoang reported a financial interest in only six properties, knowing that she had an interest in other properties, and further reported income in 2003 and 2004 of only $96,000 each year, knowing that her income for those years was substantially higher. She also failed to report her interest in various bank accounts.

For the rest of the press release, see Leader Pleads Guilty in Family Scheme to Conceal Millions in Profits from the Purchase and Sale of Foreclosed Properties (Concealed from IRS Millions of Dollars of Profits Made from “Flipping” Hundreds of Properties Bought at Foreclosure Auctions).

(1) Minh-Vu Hoang's husband and other family members also copped pleas for their roles in the fraud, according to the U.S. Attorney press release.

Blind Victim Of Sale Leaseback, Equity Stripping Scam Peddled As A Refinance Now Faces The Boot, Despite "Successful" Civil Prosecution By Illinois AG

In Chicago, Illinois, the Chicago Sun Times reports:

• There's no question that Coleamer Hodges was scammed out of her South Side home. In a 2006 complaint, the Illinois attorney general office used Hodges' tragic situation to illustrate the unlawful business practices at the core of home rescue fraud, in which companies claim to help residents stay in their homes but then actually sell the homes to third parties.

• Platinum Investment Group, Advantage Mortgage Consulting, Christopher Bidigare, Suellen Carpenter and First Chicago Real Estate Group were found by a Cook County judge to have "engaged in conduct that violates the Consumer Fraud Act." Hodges, 43, had turned to Platinum for help refinancing her mortgage. Representatives picked her up, served her lunch and, although Hodges is blind, had her sign paperwork that she was told was for a refinancing deal.

• "A couple of months later, I got a surprise,'' she said. She got a bill for $1,300, which was actually for rent if she wanted to stay in the home because Hodges' home had been transferred to a straw buyer.

• All of the entities and individuals who were involved in the transaction are now barred from acting as "distressed property" consultants. They were also ordered to pay Hodges $50,000 in restitution. But that hasn't helped Hodges. The guilty parties filed for bankruptcy -- and Hodges' $70,000 in home equity is gone. Wells Fargo, the bank that serviced the fraudulent deal, is now demanding to take possession of the property.(1)

***

• "We were able to successfully prosecute and put these people out of business, but that is not good enough," said [Illinois Attorney General spokesperson Natalie] Bauer. "The issue today is that Ms. Hodges is in a devastating condition and needs help. Wells Fargo needs to step up and do the right thing."

For more, see Victim of scammers now battling bank.

(1) The fact that Ms. Hodges was blind when she was tricked into signing the deed and leaseback agreement (which was reportedly represented to her to be a "refinance" of her home) could make the conveyance void ab initio, in which case, the deed, any subsequent cionveyances, and the current mortgage encumbering the home securing the loan used to finance the swindle would be considered nullities. See:

• Unwinding An Abusive Or Fraudulent Real Estate Transaction? Determining If The Deed Is Void, Or Merely Voidable;
• More On Void & Voidable Deeds, & Unwinding Deed & Refinancing Scams.

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Alternatively, assuming the deed was not void, but merely voidable, Ms. Hodges continued possession of her home throughout the course of being screwed over by the foreclosure rescue peddler could help her establish a viable claim against the current mortgage holder of the loan that was obtained to pull off this scam.

Illinois case law appears to make clear that her open and visible possession of the home places the lender financing the scam on notice of any rights or equities she may be able to establish. See Life Savings & Loan Association v. Bryant, 125 Ill. App. 3d 1012, 81 Ill. Dec. 577, 467 N.E.2d 277 (1st Dist. 1984) (case available on request, drop me a line at HomeEquityTheft@yahoo.com, don't forget to put case name in subject line):

• Illinois courts have uniformly held that the actual occupation of land is equivalent to the recording of the instrument under which the occupant claims interest in the property. (Bullard v. Turner (1934), 357 Ill. 279, 192 N.E. 223; Beals v. Cryer (1981), 99 Ill. App. 3d 842, 426 N.E.2d 253). The open and visible possession of land by the equitable owner is sufficient to charge a mortgagee with notice of the rights of such owner, and the mortgagee will take subject to the rights of the person in possession. Williams v. Spitzer (1903), 203 Ill. 505, 68 N.E. 49. [my emphasis added; not in original]

***********************

The issue of whether the retention of possession by the grantor of property after it is conveyed constitutes notice of the grantor of his or her interest in the property, and to those claiming under the grantee, under Illinois law is addressed in Fidelity Trust & Savings Bank v. Williams (1936), 285 Ill. App. 131, 1 N.E.2d 739:

• The rule of law which seems to control in a like situation is that the retention of possession by the grantor of the property conveyed is notice of his or her interest in the property, and to those claiming under the grantee, and such rule is laid down in the case of Ford v. Marcall, 107 Ill. 136, wherein the court said: "The law is, as this court has declared in White v. White, 89 Ill. 460, that when the grantor of real estate remains in possession, all persons acquiring title from the grantee are chargeable with notice of all the claims of the grantor."

• This rule was followed and approved in the case of Ronan v. Bluhm, 173 Ill. 277, where the court said: "It is proper we should remark, in answer to the discussion upon the point, that as it is conceded by all parties that the said Thomas Ronan did not deliver possession of the premises in question to the grantee, Carbine, but remained in the open and exclusive occupancy thereof, appellee, Bluhm, is deemed, as matter of law, to have taken the conveyance from Carbine with full notice of all the rights and equities of said Ronan in the premises. Illinois Central Railroad Co. v. McCullough, 59 Ill. 166; White v. White, 89 id. 460; Ford v. Marcall, 107 id. 136." It is to be noted from what the court said in this opinion that Bluhm was deemed as a matter of law to have taken the conveyance from Carbine, the grantee of Ronan, with full notice as to all the rights and equities of Ronan in the premises.

• This rule has been passed upon by the courts of this State, and the law is again discussed and approved in the case of Rock Island & Peoria Ry. Co. v. Dimick, 144 Ill. 628. The court in this opinion said: "The law is well settled in this State, as generally elsewhere, when not changed by the recording acts, that open and exclusive possession of lands, under an apparent claim of ownership, is notice to those subsequently dealing with the title of whatever interest the possessor has in the premises, whether the interest be legal or equitable in its nature. Wade on Notice, sec. 273; Davis v. Hopkins, 15 Ill. 519; Truesdale v. Ford, 37 Ill. 210; Smith v. Jackson's Heirs, 76 Ill. 254; Partridge v. Chapman, 81 Ill. 137. It has been held also in this State, that if the grantor remains in possession after conveyance, purchasers from the grantee are affected with notice of the grantor's rights in the land. White v. White, 89 Ill. 460; Ford v. Marcall, 107 id. 136."

• In the case of Porter v. Clark, 23 Ill. App. 567, this rule was also approved, and in discussing the subject matter of the litigation, the court there stated what we regard as pertinent in its application to the instant case. This statement is: "If Porter, knowing as he did that Clark was in possession, had gone to him and inquired as to his rights, he would undoubtedly have been told that the purchase money had not been paid, and that he, Clark, claimed a vendor's lien on the land."

*************************

(Note: The unavailability of bona fide purchaser protection to real estate purchasers and lenders when a seller of real estate remains in continued possession of the premises well after the property is sold has, arguably, been best expressed by the California Supreme Court in Pell v. McElroy, 36 Cal. 268, 1868 Cal. LEXIS 186 (1868). See footnote 2 of this November 15, 2009 post.)

Go here for more on the bona fide purchaser doctrine in Illinois.

For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.

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Additionally, the circumstances surrounding the conveyance of Ms. Hodges home may have enough elements that can allow an Illinois court to recharacterize the deed transfer and contemporaneous leaseback as an equitable mortgage. See:

• Equitable Mortgage Doctrine In Illinois - Part 1;
• Equitable Mortgage Doctrine In Illinois - Part 2;
• Nave v. Heinzmann, 344 Ill. App. 3d 815; 801 N.E.2d 121; (Ill. App. Ct., 5th Dist., 2003);
• Robinson v. Builders Supply & Lumber Co., 223 Ill. App. 3d 1007, 586 N.E.2d 316 (Ill. App. Ct. 1st Dist. 1991);
• Flack v. McClure, 206 Ill. App. 3d 976, 565 N.E.2d 131, 151 Ill. Dec. 860 (Ill. App. Ct., 1st Dist. 1990).

Among the factors the above Illinois courts have considered when deciding on whether or not to recharacterize a sale as an equitable mortgage are:

• existence of an indebtedness,
• close relationship of the parties,
• prior unsuccessful attempts for loans,
• circumstances surrounding the transaction,
• disparity of the situations of the parties,
• lack of legal assistance,
• unusual type of sale,
• inadequacy of consideration,
• the way the consideration was paid,
• retention of written evidence of the debt,
• belief that the debt remains unpaid,
• an agreement to repurchase, and
• continued exercise of ownership privileges and responsibilities by the seller.

(Note: A recent ruling by a New Jersey Federal bankruptcy court recharacterized a similar sale leaseback, equity stripping ripoff as an equitable mortgage. In re O'Brien (aka O'Brien v. Cleveland), Case No. 03-17448, Adversary Proceeding Case No. 08-1676; (USBC, D. N.J., January 22, 2010))

A recharacterization of the conveyance as an equitable mortgage, coupled with establishing that the current holder of the mortgage was on notice of the scam (and consequently, not a bona fide purchaser) by reason of Ms. Hodges continued possession of the home could ostensibly leave her with rights to her home having priority over the rights of the current mortgage holder.

California Sets New Records For Real Estate License Revocations, Surrenders As Illegal Foreclosure Rescue & Loan Modification Rackets Rage On

The California Department of Real Estate recently announced in a press release:

• The California State Department of Real Estate (DRE), the state department that issues licenses to real estate professionals and protects consumers in real estate transactions, revoked a record number of real estate licenses for cause in 2009. The DRE also accepted another record number of license surrenders from licensees facing disciplinary action. All told, over 775 licensees had their license revoked or simply surrendered their licenses while facing accusations.

***

• The down turn in the real estate market is a big reason disciplinary actions are up. “With so many people struggling to stay in their homes, foreclosure rescue and loan modification scams have risen dramatically,” DRE Commissioner Jeff Davi said. "And what is even more unsettling, a majority of offenders involved in loan modification scams are not even licensed, which limits a consumer’s ability to obtain restitution or verify the legitimacy of a business,” Davi added.

***

• [A] consumer who is defrauded by a licensee and obtains a fraud judgment in civil court, but is unable to collect on the judgment, may be able to receive restitution from the DRE. The DRE administers a recovery account for fraud victims that can pay a victim up to $50,000 for a transaction. The payout from the recovery account is capped at $250,000 for each licensee. Those victims who have been defrauded by unlicensed perpetrators cannot make a claim against the department’s recovery account.(2)

For the press release, see California Department of Real Estate Revokes Record Number of Real Estate Licenses.

(1) In 2009, the DRE initiated over 2,000 investigations involving loan modification complaints, which represents 25% of all cases set-up. The DRE issued over 180 Desist and Refrain orders to nearly 348 different respondents performing loan modification services, ordering them to stop or change their business practices. Of the 348 Desist and Refrain order respondents, approximately 60% were not licensed and ordered to cease licensed activity - which included offering loan modification services. In addition, nearly 100 real estate licensees have been accused of violating the real estate law in connection with loan modification complaints. Many of the completed cases have been referred to law enforcement agencies for criminal prosecution. In order to help inform consumers to stay away from the bad actors, the DRE posts on its website all the recipients of Desist and Refrain orders and Accusations in loan modification complaints along with a copy of the order.

(2) For more on the California Dept. of Real Estate victim's fund, which enables a person who has been defrauded or had trust funds converted by a California licensed real estate broker or salesperson in a transaction requiring that license, and who satisfies specified requirements (California Business and Professions Code Section 10471 et seq.) to recover at least some of his or her actual loss when the licensee has insufficient personal assets to pay for that loss, see:

• Real Estate Recovery Account - General Information (English) (Spanish) (Chinese),
• Real Estate Recovery Account - Instructions to Claimants,
• Real Estate Recovery Account - Links to Other Forms.

Upstate NY Judge Emphasizes Importance Of Scrutinizing Foreclosing Lenders For Proper Standing In Cases Involving Unrepresented Homeowners

In a recent court ruling in Allegany County, New York involving a foreclosure action that was dismissed without prejudice (ie. with a right to refile), and which involved "the usual suspects" (ie. sloppy lender, foreclosure mill law firm, homeowner unrepresented by legal counsel - there was no indication that the homeowner even appeared in the case), Justice Timothy J. Walker discusses the significance of standing and real party in interest in foreclosure litigation and analyzes the applicable law in New York in connection thereto.

He closes with the following excerpt which deserves noting, in which he emphasizes the importance of judges exhibiting the necessary initiative to scrutinize the status of the plaintiffs bringing these foreclosure actions in cases involving homeowners unrepresented by legal counsel:

• Today, with multiple and (and often unrecorded) assignments of mortgage obligations and multiple securitizations often related to the same debt, the courts should carefully scrutinize the status of parties who claim the right to enforce these mortgage obligations.

• For the unrepresented homeowner, the issues of standing and real party in interest status of the foreclosing party are never considered. Without such scrutiny, there is a risk that the courts will give the judicial "seal of approval" to foreclosures against unrepresented homeowners who have little, if any, understanding of these issues, much less the legal significance thereof. To quote my colleague in Kings County, "[a]llowing this case to proceed on behalf of a plaintiff without standing at the commencement of the action would [also] open the door to potential fraud and place in jeopardy the integrity of title to the property to be foreclosed." [my emhasis added; not in original] [Citigroup Global Markets Realty Corp. v. Bowling, 25 Misc 3d 1244; 2009 NY Slip OP 52567U (Kings County, December 18, 2009)].(1)(2)

For the court ruling, see Deutsche Bank Natl. Trust Co. v McRae, 2010 NY Slip Op 20020 [Allegany County, January 25, 2010].

Thanks to both "LL" and to mortgage servicing fraud watchdog Mike Dillon over at GetDShirtz.com for the combined heads-up on this court ruling.

(1) In Citigroup Global Markets Realty Corp. v. Bowling, Kings County (Brooklyn), NY Supreme Court Justice Carolyn E. Demarest dismissed a foreclosure action, without prejudice, where the foreclosing lender screw-ups involved both:

• a failure to properly serve the homeowner (ie. "sewer service" - process server was found to have improperly utilized "nail & mail" method of service), and
• a "standing-lacking" foreclosing entity that initiated the legal action.

(2) An example of "the integrity of title to the property to be foreclosed" being "place[d] in jeopardy" when the foreclosing entity lacks proper authority to foreclose is the mess currently going on in Massachusetts involving the apparently faulty titles to homes that have been foreclosed over the last several years throughout the entire state due to the screw-ups of the foreclosing lenders and their attorneys in the foreclosure process. See:

• Massachusetts Court Ruling Gums Up Resales Of Foreclosed Homes Across State; Title Insurance Unavailable For Clouded Ownership Due To Faulty Paperwork;
• Lenders' Problem "Entirely Of Their Own Making" Says Judge In Affirming Earlier Ruling That Puts Title To Foreclosed Massachusetts Homes Into Question,
• Thousands Of Foreclosures Are Void, Says Massachusetts Class Action Demanding Lenders & Their Lawyers Prove Note Ownership.

In addition, in the following excerpt from a June 24, 2009 story in the South Florida Daily Business Review (see Judge grapples with her discovery of 15,000 unserved foreclosure cases), Miami-Dade Judge Jennifer D. Bailey similarly alluded to possible future title problems to homes going through the foreclosure process when the screw-ups relate to the failure to properly serve the homeowners with the foreclosure lawsuit (ie. the summons and complaint) when the foreclosing entity initiates the legal action:

• “It all starts with service. If people don’t get served, all we’re doing is buying ourselves a bunch of title cases in six years,” the judge said [my emphasis added; not in the original].

See also, Recently Discovered Flaw in Recording System Clouds Titles on Previously Foreclosed Properties.

Closing Lawyers Get Dragged Into NY Deceptive Practices Act Suit Brought By Waitress Stuck With Unaffordable $629K Loan; Judge Refuses To Dismiss Case

In Brooklyn, New York, the New York Law Journal reports:

• A Brooklyn judge has allowed an action to go forward against two attorneys and others who are accused of facilitating a $629,000 mortgage for a waitress who earned less than $25,000 a year. Plaintiff Portia Joseph alleged Brooklyn attorney Adrian A. Ellis, who represented her in connection with the purchase of a house in [Brooklyn], and Rockland County, N.Y., attorney Joseph Kunstlinger, who appeared on behalf of mortgagor Bank of America, encouraged and directed her to execute fraudulent loan documents.

• Faced with a substantial lien and potential foreclosure, Joseph and her mother, Angil Jones, filed claims against Ellis and Kunstlinger, as well as Bank of America, real estate broker Ora Tvilli and Tvilli's company OTN Enterprise, among others. In a decision last week, Supreme Court Justice David I. Schmidt denied in part motions to dismiss by several of the defendants, including the bank's attorney, Kunstlinger.(1)

***

• Reached for comment, Kunstlinger, the principal of the Joseph Kunstlinger Law Firm in Spring Valley, N.Y., said he and Bank of America were among the victims, not the perpetrators, of the alleged fraud. "Our position is that the fraud was pulled on us, not them. It seems pretty funny that we [could be] liable for the fraud they committed," Kunstlinger said, referring to his various co-defendants. "We have almost nothing to do with anything other than the fact that the documents get signed correctly. If there is a trial, we will be completely exonerated."

• Ellis, who represented the plaintiffs at the closing, said his responsibility was to manage the legal issues, not the financial ones. "I never inquire into my client's income," said Ellis, who has not yet responded to a malpractice complaint against him. "If someone is buying a house for $700,000 there's an assumption they can afford the property." Ellis added, "Generally speaking, I don't know how many attorneys ask their clients how much they earn, then do a financial analysis of whether or not they can afford the property."

For more, see Suit Proceeds Against Attorneys Accused of Facilitating Mortgage 'Doomed to Failure'.

For the ruling, see Jones v. OTN Enterprise, 31990/08.

(1) According to Justice Schmidt, "Deception and misrepresentation in home buying, appraising and financing services adversely effect the public at large insofar as the acts inevitably lead to mortgage loans which are doomed to failure and which adversely effect the housing market. Practices such as those alleged by plaintiffs herein are particularly troubling as they are calculated to take advantage of lower income potential first time home buyers who are unfamiliar with the process and are more apt to rely on defendants' sophistication."

Homeowner Takes "Product Liability Approach" To Foreclosure Defense, Accusing Lender Of Peddling Defective Product; Seeks Class Action & Voided Loan

In Central Florida, reporter James Thorner of the St. Petersburg Times blogs:

• This is the first I've heard of this novel foreclosure defense. Largo's Linda Soronen, sued in December by her lender for foreclosure, is counter-suing by claiming her fast-and-easy home loan arranged in 2006 constituted a "dangerous financial product." Taking a page from product liability laws, Soronen argues that Wachovia Bank peddled a defective product when it approved no-documentation home loans for barely qualified borrowers. Those tainted loans, made without reference to a borrower's tax forms and pay stubs, ultimately backfired on the nation's financial system, costing taxpayers hundreds of billions of dollars.

• In 2006, Soronen borrowed $162,000 from World Savings Bank, a California lender known as a top purveyor of no-doc loans. Wachovia bought World Savings in 2006. At the time of the loan, Soronen was a "partially disabled, unemployed 57-year-old nurse with no income." Soronen is seeking class action status and wants her loan voided. She's also seeking $10 million in punitive damages, money that would go to the state.

• I don't know if shoddily-approved mortgages rise to the level of faulty automobile accelerators, lead-based paint or poisoned oysters. But they certainly cost the public a lot more.(1)

Source: Pinellas County foreclosure defendant: Banks sold me defective product.

(1) In another recent story with a somewhat similar story line, a Brooklyn, New York judge is reported to have refused to dismiss a lawsuit against two attorneys, a real estate broker, Bank of America and others who are accused of facilitating a $629,000 mortgage for a waitress who earned less than $25,000 a year. See New York Law Journal: Suit Proceeds Against Attorneys Accused of Facilitating Mortgage 'Doomed to Failure'.

Florida To Become A Non-Judicial Foreclosure State? Yes, If The Shameless Banksters Get Their Way; The Push Has Begun!

The St. Petersburg Times reports:

• If bank[st]ers get their way, Floridians facing foreclosure could be kicked out of their homes in as little as three months. The Florida Bankers Association, the 400-member-strong lenders' lobby, has presented state legislators with a bill to upend decades of Florida law and establish "non-judicial" foreclosures in Florida by July 1.

• What's a non-judicial foreclosure? Banks would accelerate foreclosures against defaulting homeowners by bypassing the courts. Judges would no longer rule on foreclosure cases. Some states — 37 in fact — already grant that fast-track foreclosure authority, including California, Georgia, Alabama and Texas. But Florida, with its plethora of vacation and retiree homes, has always been big on homeowner rights.

***

• The bankers association has titled the bill The Florida Consumer Protection and Homeowner Credit Rehabilitation Act (a .doc file; go here for .html version). Association president Alex Sanchez views the bill as a way to break a foreclosure crisis partly caused by mortgage fraud.(1)

For the rest of the story, see Florida bankers move to dramatically speed up the foreclosure process.

Thanks to both 4closureFraud and Foreclosure Hamlet for the combined heads-up on this story.

(1) For the banking industry to propose a new law and use the words "consumer protection" and "homeowner credit rehabilitation" in naming the bill shows that there really is no end to the shamelessness of these characters. Among the so-called "consumer protections" contained in the bill is the obliteration of the Florida Supreme Court's newly endorsed mandatory mediation for lenders and homeowners. The bill provides only for informal meetings between creditors and debtors.

SoCal Loan Modification Operator Facing FTC Civil Charges Now Hit With 165 Criminal Felony Counts By Orange County DA

From the Office of the Orange County, California District Attorney:

• The president of an Irvine loan modification company was arraigned [...] for defrauding and victimizing 165 distressed homeowners out of $177,000 by fraudulently promising to save their homes in exchange for an up-front fee. Kahram Zamani, 37, Laguna Hills, is charged with 165 felony counts of grand theft with sentencing enhancements for aggravated white collar crime for taking more than $100,000.(1)

***

• Zamani is accused of soliciting clients through radio ads. He is accused instructing his employees to make promises to consumers, knowing the promises were false, that the company could obtain a home loan modification or loan forgiveness in exchange for an up-front fee of $995. The defendant is accused of also instructing his employees to make false promises that they could secure low-interest rates on a modified mortgage loan, offer full refunds if a loan could not be modified, and stating that Infinity had a 98 percent success rate in obtaining loan modifications.

For the Orange County DA press release, see Loan Modification Company President Arraigned On Charges Of Defrauding 165 Distressed Homeowners.

(1) Between February 2008 and December 2009, Zamani, a licensed real estate broker, is accused of owning and running Infinity Group Services (Infinity), a loan modification company that targeted distraught homeowners. The company was formerly known as Hope to Homeowners, named to mislead victims into believing it was part of the 2008 program launched by the Bush Administration, “Hope to Homeowners,” which aided struggling families with mortgage payments by refinancing their existing home loan, the DA's press release states.

This case has been a collaborative effort between the Orange County District Attorney’s Office (OCDA), California Department of Real Estate (CDRE), and Federal Trade Commission (FTC). In August 2009, the FTC filed a civil complaint in federal court seeking a temporary restraining order, the freezing of assets, and a preliminary injunction. In November 2009, CDRE filed a formal accusation charging the defendant with violations of real estate law, and has now filed an order against Zamani to desist and refrain from further fraudulent practices.

Extradited Loan Modification Scammer Cops Plea To Pocketing Upfront Fees & Giving Bogus Money-Back Guaranty, Then Failing To Provide Services, Refunds

In Las Vegas, Nevada, KVVU-TV Channel 5 reports:

• A man has pleaded guilty to mortgage fraud for operating a foreclosure rescue scam in Las Vegas. Nevada Attorney General Catherine Cortez Masto announced [...] that Michael Sinclair pleaded guilty to one felony count of mortgage fraud for running the scam under the business name of Federal Housing Aid. Sinclair must pay $60,000 in restitution to the victims of the scam. He was recently extradited from the Philippines, where he fled after learning of the indictment against him, Masto said.

***

• Masto said using a call center located in the Philippines, Sinclair and his business partner, William Vargas, operated a company that claimed to offer loan modification services to help victims avoid foreclosure on their homes. The operation had been in business since February 2007. The two defendants charged the victims between $899 and $1,500 in upfront fees and offered a 100 percent money back guaranty, claiming their company would refund the money if the foreclosure could not be stopped. After paying for services, the defendants failed to provide the services paid for and failed to provide refunds.

For the story, see Man Pleads Guilty In Loan Mod Scam (Las Vegas Company Federal Housing Aid Bilked Customers, AG Says).

For the Nevada AG press release, see Attorney General Announces Guilty Plea In Foreclosure Rescue Scam Operated From The Philippines.

Unlicensed Mortgage Originator Cops Plea To Helping Homeowner Refinance Home, Then Swiping $100K+ In Loan Proceeds Obtained From Closing Agent

From the Office of the Maryland Attorney General:

• Attorney General Douglas F. Gansler announced [...] that David Young Park, 43, the former president of Capital City Financial Group in Ellicott City, entered a plea of guilty to one count of felony theft in Baltimore County Circuit Court.(1)

***

• In June of 2007, Park assisted the victim with the refinance of her home.(2) The victim intended to use the more than $100,000 in equity to purchase a commercial condo for her business. Following settlement, Park obtained the victim’s proceeds from the title company without the victim’s knowledge, deposited them into his escrow account and spent the money on various personal and business expenses over the course of two weeks. When confronted by the victim, Park admitted to having spent all of her money.

For the Maryland AG press release, see Former Mortgage Broker Sentenced for Felony Theft.

(1) Judge John J. Nagel, III sentenced Park to five years in jail with all but 18 months suspended. Park was also ordered to complete five years of supervised probation and make restitution to the victim in the amount of $116,556.

(2) According to the Division of Financial Regulation at the Maryland Department of Labor, Licensing and Regulation, Mr. Park has never been licensed as a mortgage originator and Capital City Financial Group has never been licensed as a mortgage lender.

Closing Agent Cops Plea, Gets Five Years For Using Escrow Funds In Straw Buyer Scheme; Purchased Home That Subsequently Went Into Foreclosure

From the Office of the San Bernardino County, California District Attorney:

• On Wednesday, January 27, 2010, Mojgan Cox, 50, of Alta Loma, pleaded guilty to several felony charges including conspiracy, money laundering, grand theft, and forgery. Cox, also known as "Mona," is a former real estate broker for ReMax Allegiance and owner of Exclusive Escrow Services. She is one of six co-defendants originally charged and arrested by District Attorney Investigators from the San Bernardino County District Attorney's Real Estate Fraud Unit. Mojgan Cox is the third defendant to plead guilty in this matter.

• The case involved laundering money from an escrow trust account into a corporation opened up by her son, Jesse Cox, who is one of the remaining defendants in this case. The money was used to purchase a home in Yucaipa using a "straw buyer," which subsequently went into foreclosure. The defendants had the proceeds from the purchase of that Yucaipa residence transferred back into Exclusive Escrow Services' general account and used for such things as paying the office lease and personal bills. Mojgan Cox pleaded guilty and was sentenced to five years in the California State prison system.

For the San Bernardino County DA press release, see Former Rancho Cucamonga Real Estate Broker Sentenced to Prison.

Connecticut Hubby Faces Charges In Connection With Alleged Forgery Of Wife's Signature On Home Equity Loan

In Litchfield, Connecticut, the Republican American reports:

• A Superior Court judge wants attorneys to resolve the mortgage mess that's at the root of charges that a husband forged his wife's name on a home equity loan. George A. Matos, 42, of [...] Thomaston, appeared [...] in Litchfield Superior Court for a pretrial hearing on charges of conspiracy to commit first-degree forgery and conspiracy to commit criminal impersonation. Judge James P. Ginocchio suggested that solving the financial mess first will push the criminal case forward so it doesn't further harm the victim. "It's important we try to explore many options" to lift the financial burden from Matos' wife, Ginocchio said. "He's going to have to come up with something more creative."

Source: Judge rules in forgery case against husband.

Cracked Slab, Leaky Air Duct Create Havoc, Health Problems For Family In New Condo; Floor Damage, Mold Problems Lead To $184K Award Against Builder

In Clinton, Massachusetts, the Worcester Telegram & Gazette reports:

• The crack running through the slab foundation of a Woodlands condominium owned by Michael T. and Nancy J. Vanasse stretches from the bedroom of their two young sons through two bathrooms — where it results in cracked floor tiles — and probably continues under a hardwood floor beyond that. They aren’t sure, and the couple are done with ripping up the Ledgewood Way unit they spent $375,000 on in 2006.

• They already have been told they need to spend $90,000 or so to replace the duct and heating system, thought to be responsible for the excessive water vapor that forms in the condo, resulting in home damage and respiratory problems to Mr. Vanasse and the boys, ages 3 and 23 months.

• In April, the Vanasses were awarded $184,056 in a Worcester Superior Court civil case against Albro Clinton Inc. and Tall Pines Realty Corp., both owned by Woodlands developer Alfred C. Bafaro of Clinton. But they have yet to see a nickel from the award, which was determined by two arbitrators from the court. “The claimants’ condominium has elevated humidity, abnormal condensation, and outbreaks of mold,” the April 20 decision states. “There were clear deviations from the building code and plans regarding the construction of the concrete slab and grading.”(1)

For more, see Woodlands condo owner still owed damages from suit.

(1) Reportedly, the arbitrators said their decision was based on test results from engineers and a mycologist that found that the leaking duct introduces excessive humidity into the condo, and it should be sealed, abandoned, or re-routed. The ducts, visible through a vent in the floor of the children’s bedroom, are built right into the concrete slab under the unit, and it would be an enormous job to rip them out. The arbitrators also determined that Albro breached its warranty, although it allowed that some attempts were made to correct the problem, and failed to follow through on its promise to install a dehumidifying system, the story states. The couple were told that one solution would be to keep windows open at all times, something they found ridiculous — especially in the winter with an infant and a toddler at home.

The dispute is reportedly the latest in ongoing problems at the 493-unit partially developed complex. Last month, a local building inspector issued a stop work order at Woodlands until questions about ownership and possible zoning violations are resolved, according to the story. Meanwhile, officials from various boards plan to meet with residents, Mr. Bafaro and representatives of Clinton Savings Bank, which took back a large chunk of undeveloped Woodlands property at a foreclosure auction in July.

Mold Infestation Leaves Vacant Condo Units In Foreclosure Uninhabitable; Create Health Concerns For Residents In Surrounding Apartments

In Land O' Lakes, Florida, WTVT-TV Channel 13 reports:

• When two condo units at Glendale Villas in Land O' Lakes went into foreclosure, neighbors were understandably concerned about their own property values. That was last spring. Now, people who live close to units 3 and 4C say property values are the least of their concerns. "This is people's health. These are people's lives, how do you put a price on that," said Andrew Holsinger. The problem is that both units are covered, floor to ceiling, in mold.

• "These particular units in this association are the worst I've ever seen," said Kathy Bramhall, who manages the complex for a company called Condominium Associates. "The units are uninhabitable and would cause respiratory problems for anyone living in a surrounding unit."

• Not long after the units went into foreclosure, there was a sewage leak. That in turn caused the mold to start growing out of control. After numerous complaints, the Pasco County Health Department sent an inspector, and the county ordered that the sewage be cleaned up. [...] Code enforcement officers are legally prohibited from entering private property, and as a result, they are powerless to do anything to force the former property owner or the bank that will soon own the units to clean up the mold.

For the story, see With foreclosure, concern over mold.

Prominent Attorney Feels Financial Squeeze After Being Hit With F'closure, IRS Tax Liens; Faces Suspension For "Inappropriately Borrowing" Client Cash

In Louisville, Kentucky, the Courier Journal reports:

• David Friedman, who won major court victories for the American Civil Liberties Union of Kentucky as its volunteer general counsel for 25 years, including a Ten Commandments case before the U.S. Supreme Court, has left the organization and been ousted from his law firm after being accused of keeping money owed to two clients. The Kentucky Bar Association filed a motion Dec. 7 to temporarily suspend Friedman, 57, from practicing law.

***

• According to court records and interviews, Friedman withheld, for eight months last year, portions of about $116,000 he owed clients who had won a whistleblower case against the Metropolitan Sewer District. He paid them in full only after they threatened to prosecute and alerted other partners at Friedman's law firm, according to one of the clients, Ray Barber, a former MSD inspector.

• In an interview, Friedman's lawyer, Peter Ostermiller, did not dispute that account. Responding to a request for an interview, Friedman issued a statement this week apologizing to his clients, his former law partners and family and friends, saying he has “sought to make amends for what occurred.”

• On Nov. 6, Friedman was “disassociated” from the Louisville firm — then known as Fernandez Friedman Haynes & Kohn — based on “allegations that would bring the firm into disrepute,” said Allan Cobb, its outside counsel. No criminal charges have been filed.

• Court records showed that Friedman and his wife were sued for foreclosure on their Crescent Hill home in 2007 and again in May 2009 for failing to repay loans. Both cases were later resolved. The IRS also placed liens on the home in 2007 and 2008 totaling $180,021 that are still pending. Barber said in an interview that Friedman eventually told him that he faced foreclosure. “I told him if he needed the money, I would have lent it to him,” said Barber, who now is a farmer in Michigan. “I thought the world of David.”(1)

• In his statement, Friedman said he regretted “any pain or problems” he caused Barber and fellow plaintiff Sarah Lynn Cunningham, a former MSD engineer. Ostermiller noted the clients have been reimbursed in full and no other complaints against Friedman have emerged. He also said the incident should be weighed against Friedman's contributions as a lawyer, including his “defense of people who nobody else would defend.”(2)

For more, see Civil liberties lawyer David Friedman accused of keeping cash owed to clients.

(1) According to the story, ACLU supporters — and Friedman's legal adversaries — said they were stunned by the allegations. Suzy Post, a past director of the organization, said she was saddened. “He is such a sterling guy.” Bill Stone, a longtime ACLU member and former city law director, said he was “surprised and disappointed. It will be a serious setback if he's not fighting religious liberty cases.” Francis Manion, senior counsel for the conservative American Center for Law and Justice, which frequently battles the ACLU, said, “I have never known David to be anything but an honorable, highly professional and skilled attorney.” State Rep. Tom Riner of Louisville, a Baptist minister, once said of him: “I just wish we had a couple of Christian lawyers like David Friedman,” and U.S. District Judge John G. Heyburn II called him “an exceptional advocate for his causes and clients.”

Friedman, who reportedly has argued more than 40 cases before the 6th U.S. Circuit Court of Appeals, won his biggest triumph in 2005 when he persuaded the U.S. Supreme Court that Ten Commandments displays in two Kentucky courthouses illegally crossed the line separating church and state, according to the story.

(2) A recent California story in The Fresno Bee [see Valley lawyers turn to crime in tough times] noted that the the bad economy may be driving some attorneys to "temporarily borrow" client escrow money, only to later find that the can't pay it all back:

• Attorneys who steal from clients often start off by "borrowing" money from their clients' trust accounts. They put a little bit of the money back, but not all. After a while, they end up being unable to repay, said Andrew Kaufman, a professor of legal ethics at Harvard Law School. [Carol] Langford[, a San Francisco lawyer who defends lawyers before the California State Bar Court in disbarment cases,] said lawyers often are in denial. They believe they can pay the money back. "Probably 65% to 75% of the time, they're wrong," she said.

Newlyweds Say Mold, Bacteria Drove Them From Recently-Purchased New Home; Pending Foreclosure Could Jeopardize Hubby's Job

In Gloucester County, New Jersey, The Phialdelphia Inquirer reports:

• After a honeymoon in Mexico, Danielle and David Beety returned to their dream home, a $407,000 yellow stucco on a cul-de-sac in Gloucester County. Their future seemed golden. "We were on cloud nine," said Danielle Beety, a first-grade teacher who also coached high school field hockey. "Everything was going completely great," added David Beety, a mortgage loan originator. That lasted two weeks.

• Suddenly, Danielle Beety was stricken with severe throat pain and developed flulike symptoms. Her baffled doctors ordered myriad tests. Three times they admitted her to Thomas Jefferson University Hospital in Philadelphia. She required two operations to remove a 5-centimeter abscess inside her neck. "It was like living a live episode of House," David Beety said, referring to the Fox TV show in which the eccentric Dr. House diagnoses mystery illnesses. Each time Danielle Beety returned to their home [...], her fever returned. Her neck would stiffen with such pain she would cry out when she moved.

• Their house emerged as a suspect when they received an urgent phone call from an environmental engineer who did air and wipe testing in their leaky basement. Michael Stocknoff, owner of A&M Engineering Services in Cherry Hill, reported that he had found elevated levels of mold and gram-negative bacteria - a resistant group of superbugs that can cause respiratory and other ailments. He said they should grab their dog and move out immediately. Doctors seconded the advice.

• That was nearly a year ago. The couple moved in with Danielle Beety's parents, leaving all their belongings behind. Her health quickly improved, but now the couple struggle to pay mounting bills and to replace their possessions.(1)

For the rest of the story, see Newlyweds chased from their home by mold, bacteria.

(1) Reportedly, the Beetys received notice last week from PHH Mortgage/Charles Schwab that foreclosure on their vacant house would begin next month. David Beety said that could jeopardize his license and job, under new regulations on lenders, plunging them into deeper debt.

Bank Gives Dozens Of Families The Boot From Recently-Foreclosed Motel Loaded w/ Code Violations; Failure To Repair Left Premises Unsafe For Occupancy

In Fulton County, Georgia, MyFoxAtlanta reports:

• Dozens of families searched for a new place to live [last week] after they were told to move out of their motel rooms on short notice. [...] The Moseley Motel on Fulton Industrial Boulevard was taken over by a California bank after the owner went into foreclosure. But nothing was done to fix the long list of problems which meant dozens of families living at the motel were forced to move.

***

• Fulton County's Code Enforcement and Health and Human Services were at the motel [last week] to try and help about 125 people, several dozen families relocate. Officials said the motel went into disrepair years ago and several months ago was foreclosed on. The bank which took over the property apparently never fixed any of the problems. "There are a number of code, health and fire code violations. The accumulation of those makes occupancy unsafe at this particular hotel," said Code enforcement administrator Tony Phillips. [...] Fulton County officials said the bank managing the motel is from California and may have jumped the gun in telling the residents to get out so quickly, but still they are going to have to go.

For the story, see Residents at Fulton Motel Told to Leave.

English Regulators Put Heat On British Barristers Suspected Of Mortgage Fraud, Real Estate Scams

In London, England, Financial Times reports:

• More than 100 law firms suspected of mortgage fraud were investigated last year as part of a crackdown on rogue solicitors. New figures show that last year the Solicitors Regulation Authority, which supervises 113,000 solicitors, completed 106 investigations into firms where there was suspected misconduct in relation to mortgages or property. Of these 106, 22 firms have been closed down, 24 cases have been referred to the police for investigation, and 30 cases have been referred by the SRA to the Solicitors Disciplinary Tribunal, which has the power to strike off solicitors. There are other investigations continuing. The action is estimated to have saved lenders more than £15m.

• There has been concern about rising levels of property fraud with the SRA’s own figures showing an increase in reports of suspected property fraud involving solicitors up from 85 cases in 2005 to 400 in 2009. In the past, property fraudsters have used corrupt or incompetent solicitors to help them carry out property fraud. [...] Detective Superintendent Robert Wishart, of the City of London Police, national lead force for fraud investigation, said: "We are committed to working closely with the SRA during 2010 and beyond to target corrupt solicitors who we believe are a significant enabler of property fraud.”

Source: Law firms probed over mortgage fraud.

Oregon Regulator Imposes Crackdown On Unlicensed Home Repair Handymen; State Fines Cash-Strapped Homeowner $600 For Soliciting Work On Craigslist

In North Bend, Oregon, The Register Guard reports:

• Unemployed paper-mill worker Mark Driscoll said he was just trying to pay his bills when he started doing handyman work more than a year ago. Driscoll, a North Bend resident, said he was unaware the state of Oregon requires people who do any kind of construction work for pay, including handyman-type fix-it jobs or minor remodeling, to have a state contractor’s license.

• So when Driscoll, who did not have a contractor’s license, solicited work via the Internet on the advertising site craigslist, state construction regulators noticed him and fined him $600 for violating state law. The recession has pushed many Oregonians besides Driscoll to try and make ends meet by hiring themselves out, unlicensed, to fix fences, clean gutters, paint houses and perform other handyman tasks.

• Their rising numbers and the ease of advertising on the Internet has prompted a crackdown by the state Construction Contractors Board. State regulators have issued record numbers of penalties to people like Driscoll.

• Facing bankruptcy and possible foreclosure on his home, Driscoll said a fine is the last thing he and other unemployed people need as they struggle in the recession. “They are fining people $600 who can least afford it,” Driscoll said. “This is unbelievable. They are throwing people over the edge.”

For more, see A license to repair (In a tough economy, some handymen run afoul of state rules).

Another Foreclosed Homeowner Suspected In Murder-Suicide; Bodies Found In Burning Home Hours Before Eviction Proceedings

In Henrico County, Virginia, the Richmond Times Dispatch reports:

• A father, mother and son found shot to death in their burning Henrico County home last week were scheduled hours later to undergo eviction proceedings in district court. The state medical examiner's office said [...] that Virginia A. and Robert L. Ware and their adult son, Ashton, each died Friday of a single gunshot wound inside their home [...]. A search warrant filed in Henrico Circuit Court indicates that investigators are searching for evidence of murder and arson in the case, although the medical examiner's office said yesterday that Virginia Ware, 44, died from a self-inflicted gunshot wound.

***

• [C]ourt documents show the Wares were scheduled to be in court Friday at 10 a.m. to answer to eviction proceedings being brought by Deutsche Bank National Trust. The Ware family property [...] was sold at a foreclosure auction Dec. 2 because of defaulting on a $98,000 loan. Court records show that the home sold for $102,000. A notice to vacate the property within five days was posted on the front door of the family's home New Year's Eve by a Henrico sheriff's deputy.

For the story, see Three bodies in Henrico fire ruled a murder-suicide.

Rhode Island State Cops Probe Allegations Of Lawyers w/ Sticky Fingers; Bag Two Suspected Of Swiping Client Cash, At Least Seven Others In Crosshairs

In Providence, Rhode Island, The Providence Journal reports:

• Disbarred lawyer Robert D. Natal has been arrested by the police and charged with 11 felony counts for misappropriating $1,136,013 from real-estate transactions.(1) He is the second disbarred lawyer within a week to be charged with misappropriating clients’ money.

• Todd M. Amaral, a correctional officer at the Adult Correctional Institutions who lost his license to practice law last October, was charged on Jan. 16 with two counts of unlawful appropriation and two counts of forgery. The total in his case was just over $50,000. According to the Supreme Court’s disciplinary counsel, David D. Curtin, Amaral eventually repaid the money owed to the clients, but not until Curtin’s office began investigating the alleged thefts.

***

• Lt. John Lemont, head of the Financial Crimes Unit of the state police, said Monday that there are at least seven other attorneys under investigation for theft of client money, ranging in amounts of $60,000 to $300,000, but that the cases often take a long time to probe because of all the paperwork involved.(2)

For more, see State police: Ex-lawyer took clients’ money.

(1) According to the story, the criminal charges against Natal, who owned Security Title and Escrow Co. Inc., allege that he received funds from real estate closings and failed to remit them to the sellers or to pay off mortgages, taxes, sewer fees and title insurance premiums. They also allege that in one case involving a client he had worked with for nine years, he pocketed a $24,900 deposit for a piece of real estate the client wanted to buy. In another case, he allegedly bounced a $286,076 check to an estate. Reportedly, Natal was so strapped for cash that he hit up his mother-in-law for a $185,000 loan to him and his wife, the proceeds of which were obtained from a reverse mortgage on the mother-in-law's home.

(2) Could it be that the "giant sucking sound" I'm starting to hear is the money draining out of the Lawyers' Funds For Client Protection maintained by the state bar associations across the country? As I've noted on numerous occasions, these funds have been established to reimburse clients who have suffered a loss due to the dishonest conduct of an attorney. The sums of client money that a number of attorneys around the country are allegedly ripping off must have the officials at the state bar associations administering these funds "running around with their hair on fire." In one recent post, I noted a recent story in which the senior counsel for the State Bar of California's Client Security Fund commented that the glut of discipline cases involving loan modification ripoffs committed by California attorneys is "really sort of impacting the bar and the fund specifically." See Calif. State Bar Probers Have Hands Full With Loan Mod Ripoff Complaints; 1200 Probes Pending; Attorney Scams Begin To Drain Client Security Fund.

Some Foreclosed & Short Selling Homeowners Find Themselves Still "On The Hook" For Deficiencies

In Miami, Florida, Bloomberg reports:

• When John King stopped making payments on his home in Coral Gables, Florida, two years ago, he assumed the foreclosure ended his mortgage contract, he said. Last month, a Miami-Dade County court gave collectors permission to pursue him for $44,000 stemming from the default.

• King is among a rising number of borrowers who are learning that they can be on the hook for years after losing their homes. Amid a crisis that stripped $6.4 trillion, or 28 percent, from the value of U.S. residential real estate since the 2006 peak, lenders are exercising their rights to pursue unpaid mortgage balances. To get their money, they can seize wages, tap bank accounts and put liens on other assets held by debtors.(1)

***

• It’s not just foreclosures that can trigger debt collections. Short sales also may lead to deficiency judgments years after former homeowners have moved on, according to [Ben] Hillard, [an] attorney in Largo. [...] “Banks are being very careful to preserve their rights, either outright in the short sale agreement or by using vague language that leaves that door open,” Hillard said. About 90 percent of people who do a short sale think they are “off the hook.”

• That was the case when two of his clients, Brigitte and John Howard, sold their home in New Port Richey, Florida, almost two years ago without using a lawyer to check the bank’s short sale agreement. “We got a call out of the blue saying we owed $20,000,” said Brigitte Howard, 45. “It was a shock. There was no mention in the short-sale contract that the bank might come after us for the difference.”

For the story, see Lenders Pursue Mortgage Payoffs Long After Homeowners Default.

(1) According to the story, in Florida, courts give mortgage holders as long as five years to seek a deficiency judgment and, if granted, up to 20 years to collect. Usually, they have the option of renewing the judgment if it’s not paid off within 20 years. About a third of U.S. states, including California and Arizona, prohibit collection efforts on primary residences after foreclosure. In some cases, homeowners waive that protection if they refinance. Most states allow collection on unpaid home equity loans.

The story states that the Federal Deposit Insurance Corp., which tracks the amount banks collect after defaulted loans were written off, has reported that these mortgage recoveries rose 48 percent to a record $1.01 billion in the first nine months of last year compared with the year-earlier period. Recoveries on defaulted home-equity loans almost doubled to $392 million, the FDIC data shows. Reportedly, these figures don’t include money retrieved by trusts overseeing mortgage-backed securities, such as the one that holds the loan on King’s former home, or efforts by distressed- asset funds and companies that buy bad loans to profit from collection rights. Such judgments usually tack on court fees, fines and interest.

Foreclosure Rescue Operator Admits To Unauthorized Practice Of Law; Agrees To Refund Pocketed Upfront Fees, Dodges Civil Penalties

The Ohio Supreme Court recently approved a consent decree in which upfront fee foreclosure rescue operator American Foreclosure Specialists, L.L.C. admitted "that it engaged in the unauthorized practice of law by drafting and preparing a court pleading and providing it to one of its customers with instructions to file the same with the court," agreed to refund the $995 fee it clipped from a homeowner/couple, and promised to never engage in the unauthorized practice law again in the State of Ohio.(1)

For the court's ruling, see Ohio State Bar Assn. v. Am. Foreclosure Specialists, L.L.C., Slip Opinion No. 2010-Ohio-148 (January 27, 2010).

(1) American Foreclosure Specialists, L.L.C. dodged the imposition of any civil penalties because, according to the court:

• it fully and completely cooperated in the investigation of the complaint and admitted engaging in the unauthorized practice of law,
• only one instance of the unauthorized practice of law was committed,
• it had never previously been charged with the unauthorized practice of law, and
• it agreed to fully refund the fee it pocketed.

County Backs Down On Imposing Deed Recording Taxes On Debt Forgiveness In Short Sale Transactions After State AG Weighs In

In Anne Arundel County, Maryland, The Baltimore Sun reports:

• Anne Arundel County said it will no longer tax short sales on more than a home's purchase price, reacting to an opinion from the Maryland attorney general's office Wednesday that the practice isn't supported by state law. Richard Drain, the county comptroller, said Anne Arundel will collect recordation tax on the sales price, rather than the sales price plus any debt forgiven by the lender. Drain said five homes were taxed at the higher amount, and the money - less than $4,000 total - would be refunded.

***

• The American Land Title Association wasn't aware of any other community in the country taxing short sales on forgiven debt. But the attorney general's opinion noted that Washington state had begun doing so and then reversed course a year ago. Closer to home, Montgomery County said this month that it had intended to start but decided to hold off to seek legal guidance.(1)

For the story, see Anne Arundel backs down on taxing short sales (State attorney general's office opinion leads to reversal).

(1) According to the story, Bonnie A. Kirkland, the assistant attorney general who wrote the newly issued opinion, said that debt forgiveness is a separate transaction from the sale. Recordation tax is charged on the balance owed on a mortgage when lenders accept the deed to a property in lieu of foreclosing. But in a short sale, the buyer is a third party who has nothing to do with the debt, Kirkland said.

Michigan Man Found Guilty Of Using Rubber Checks To Make Court-Mandated Payments In Connection With Earlier Deed Theft Conviction

In Detroit, Michigan, the Detroit Free Press reports:

• A Grosse Pointe Woods man who used bad checks to pay $26,000 in property taxes as part of a sentencing agreement in a real estate fraud case was found guilty Tuesday in Wayne County Circuit Court of check fraud. A jury found John Matouk guilty of four counts of writing checks with nonsufficient funds over $500, a 2-year felony, and three counts of check, no account, a 2-year felony. A count of tampering with evidence was dismissed at preliminary examination.

• Matouk pleaded guilty in October to defrauding an elderly couple in a real estate scheme [see Michigan Man Cops Plea In Alleged Home Theft From Elderly Couple]. Before his sentencing, he was required to pay $26,000 in real estate taxes and the outstanding balance on a $650,000 loan. At his sentencing in November, he told Wayne County Circuit Judge Gregory Bill that he paid the taxes. It was discovered later after the checks bounced that he had used bad checks.

For the story, see Man guilty of check fraud in $26,000 debt.

Foreclosure Rescue Operator, Closing Attorney Found Jointly Liable For $690K+ In Bogus Sale Leaseback, Equity Stripping Ripoff

A federal bankruptcy court in New Jersey recently ruled in favor of a homeowner/couple who were screwed over for over $100,000 in home equity by a foreclosure rescue operator in a bogus sale leaseback, equity stripping scam. In addition to holding the operator liable for damages to the tune of $116,791.49 for the amount of stripped equity (to be tripled to $350,374 pursuant to the New Jersey Consumer Fraud Act, N.J. STAT. ANN §56:8-1, et seq., plus other damages, costs and homeowner's attorney fees(1)), the court also made the attorney acting as the closing agent equally liable for those damages for his role in the fraud.

According to this story in the New Jersey Law Journal, the sale-leaseback agreement also contained excessive late fees barred by HOSA, resulting in statutory damages of $293,836, an amount that includes the $240,875 awarded under TILA and HOEPA, plus punitive damages. The judge added $46,000 for the operator's breach of his agreement to pay that sum for the homeowner in the Chapter 13 proceeding. When added to the $350,374 noted above, the damages total up to to $690,210.(2)
The following summary of the case is taken from the Introduction appearing at the beginning of the written decision:(3)

• Plaintiffs accuse the Defendants of defrauding them through a mortgage foreclosure rescue scam. On the eve of a sheriff's foreclosure sale, Plaintiffs deeded their house worth over $800,000 to Defendant Cleveland with an option to buy it back at $650,000. Cleveland took out a new mortgage, paid off Plaintiffs' old mortgage and pocketed over $100,000. He subsequently defaulted on his mortgage and the new lender commenced a second foreclosure action.

• This mortgage rescue scam is fraudulent and is an unconscionable commercial practice in violation of New Jersey's Consumer Fraud Act. Furthermore, the sale/leaseback is, in reality, a financing transaction subject to the Truth In Lending Act ("TILA") as amended by the Home Ownership and Equity Protection Act ("HOEPA") as well as the New Jersey Home Ownership Security Act of 2002 ("HOSA"). Since Defendant Cleveland failed to comply with each of these consumer protection statutes, he is liable for the remedies allowed thereunder.

• Defendant Gahwyler, an attorney at law, violated certain ethical obligations and conspired with Cleveland in his wrongdoings. Gahwyler is jointly liable for all damages and statutory remedies.(4)(5)

Representing the homeowner/debtors in this case was attorney Gabriel H. Halpern, Esq., of the law firm PinilisHalpern LLP.
For the court's findings of fact, its discussion of the aforementioned legal issues raised in this case, and its conclusion, see In re O'Brien (aka O'Brien v. Cleveland), Case No. 03-17448, Adversary Proceeding Case No. 08-1676; (USBC, D. N.J., January 22, 2010).
See also, New Jersey Law Journal: Real Estate Lawyer Liable for Damages for Role in Client's Mortgage Scam.

---------------------------

(1) According to the New Jersey Law Journal article, the homeowners' attorney Gabriel H. Halpern, of PinilisHalpern in Morristown, N.J., has already filed an application for $33,932 in legal fees and asked U.S. Bankruptcy Judge Raymond Lyons Jr. to multiply the amount by three, for an enhanced fee of $101,797. (Requesting that a "risk multiplier" be applied to a legal fee calculation as is being reported in this story is not uncommon in contingency fee cases brought under state law). This amount, if approved by the judge, will be added to the total damages to be borne by the foreclosure rescue operator and the closing attorney.

(2) The foreclosure operator and the closing attorney may also be slammed with punitive damages as well.

(3) In addition to the issues of law set forth in the Introduction to the case, the court also addressed the following issues:

• Common law fraud under New Jersey law: "The New Jersey Supreme Court has defined fraud as follows: The five elements of common-law fraud are: (1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon by the other person; and (5) resulting damages. Gennari v. Weichert Co. Realtors, 691 A.2d 350, 367 (N.J. 1997) (citation omitted)."

• Equitable Mortgage: "In order for TILA, HOEPA or HOSA to apply, the Plaintiffs must first establish that the sale and lease-back transaction constitutes consumer credit. They attempt to do so by categorizing the transaction as an equitable mortgage. New Jersey courts of equity have long recognized the doctrine of equitable mortgage [...]. Rutherford Nat. Bank v. H.R. Bogle & Co., 169 A. 180, 182 (N.J. Ch. 1933); [...]."

• Doctrine of Unclean Hands: The court refused to apply this doctrine against the screwed-over homeowner, who may have engaged in somewhat questionable conduct himself ("A successful unclean hands defense to an injunction proceeding requires a showing by defendant that plaintiff's conduct is inequitable and that it involves the subject matter of the plaintiff's claim." Ciba-Geigy Corp. v. Bolar Pharm. Co., 747 F.2d 844, 855 (1984)).

• Attorney Malpractice: "Under certain circumstances, an attorney may be liable to a non-client. Petrillo v. Bachenberg, 655 A.2d 1354, 1357 (N.J. 1995) (typically courts limit a lawyer's duty to situations where the lawyer should have foreseen that the third party would rely on the lawyer's work). An attorney also has an ethical obligation to refrain from participating in an illegal or fraudulent transaction. In re Labendz, 471 A.2d 21, 21 (N.J. 1984)."

• Conspiracy: "Under New Jersey law an attorney may be liable for damages if he assists a client in violating a law or committing a wrongful act. Banco Popular N. Am. v. Gandi, 876 A.2d 253, 263 (N.J. 2005)."

(4) According to the New Jersey Law Journal article, closing attorney Gahwyler faces possible discipline as a result of the case, and is currently facing another civil lawsuit involving a similar scam:

• The judiciary Web site shows he is charged, in a bankruptcy/foreclosure case, with violating Rule of Professional Conduct 8.4(c), for conduct involving fraud or deceit. The grievance date is listed as June 8, 2008, 12 days after [U.S. Bankruptcy Judge Raymond Lyons] wrote to the U.S. Attorney's Office to report "what may involve violation of the criminal laws of the United States," copying the letter to the Office of Attorney Ethics and the Passaic County prosecutor, as well as to Gahwyler, Cleveland and the O'Briens.

• Gahwyler, who apparently has closed his law office and could not be reached for comment, is also a defendant in a similar suit, Acerra v. Gahwyler, MON-L- 4579-08, referred to in Lyons' opinion. Edward Hanratty, who represents the plaintiffs in that case, filed the complaint in 2008, but says he only succeeded in serving the "very elusive" Gahwyler in early January. Hanratty plans to move for summary judgment based on Lyons' opinion and testimony from Cleveland's deposition, taken last fall.

(5) To the extent the victimized homeowners can't collect any money on its judgment from the attorney, they might consider filing a claim with the New Jersey Lawyers' Fund for Client Protection, which was established to reimburse clients who have suffered a loss due to dishonest conduct of a member of the New Jersey Bar. According to the Fund's website, for loss claims that are determined to be eligible for a reimbursement there currently is a limit of $400,000 per claimant for claims arising after January 1, 2007 and an aggregate maximum for claims against a single attorney of $1,500,000. Lower per claimant maximums apply to claims arising prior to January 1, 2007, its website states.
A similar recovery fund in Minnesota (Minnesota Department of Commerce's Real Estate Education, Research and Recovery Fund) established to reimburse clients who have suffered a loss due to dishonest conduct of a licensed real estate broker or salesperson, or a licensed closing agent, recently agreed to pay $116,972 to an 87-year-old woman who was cheated out of the equity in her home of 50 years in a similar scam. See State Recovery Fund To Cough Up $116K+ To Compensate Elderly Victim Of Bogus Sale Leaseback Equity Stripping Scam Involving Licensed Real Estate Agent.
For similar funds established to reimburse clients who have suffered a loss due to the dishonest conduct of attorneys in other states and Canada, see:

• Directory Of Lawyers' Funds For Client Protection (courtesy of the American Bar Association);
• Check the USA Client Protection Funds Map;
• Check the Canada Client Protection Funds Map.

Maps available courtesy of The National Client Protection Organization, Inc.