There is more than one
way to lose a house. Foreclosure rescue scammers can steal the title and equity
from your client's home. What are you going to do about it? In this Analysis, Linda
E. Fisher and Leena Khandwala discuss available legal rights and remedies. They
write:
3. Potential Legal
and Equitable Claims, Defenses, and Remedies of Defrauded Homeowners
A typical foreclosure rescue
case involves a wide range of actors. Homeowners may be able to assert multiple
legal claims against them, depending on the nature of the scheme and their
particular circumstances. Before that occurs, though, homeowners in judicial
foreclosure states frequently must seek to vacate a default foreclosure
judgment entered against the straw buyer and to intervene in the reopened
foreclosure. If they can demonstrate the existence of potentially meritorious
defenses to the foreclosure, courts may grant these motions. At that point, the
homeowner may also be able to bring germane third-party claims against the
scammers and their confederates. Unfortunately, one major practical difficulty
is that the scammers themselves frequently have disappeared or are
judgment-proof; this is often the case with other third-parties, such as
mortgage brokers and appraisers, as well. In addition, liability of the
scammers generally will only affect the foreclosure itself if the plaintiff
bank had notice of underlying fraud or was otherwise not a bona fide purchaser
or holder-in-due-course.
Below, this commentary
explores some legal and equitable claims and remedies that may apply to
foreclosure rescue situations. Note that this list is not exhaustive, nor does
it address the possible vicarious liability of other parties. As mentioned
above, many of these claims have particular relevance to the sale/leaseback
scheme:
a.) Potential
Claims and Remedies Against the Straw Buyer and Other Scammers:
Equitable mortgage: under this theory, the sale to the straw buyer may
constitute an equitable mortgage, a type of equitable lien. It is an ancient
rule that a deed, although absolute on its face, will be treated as a mortgage
if the parties intended it to secure a debt. In other words, an equitable
mortgage is a transaction that has the intent, but not the form, of a mortgage "Equity
gives effect to the transaction as a mortgage because the conveyance was
intended as security only, and enforcement of it as such is necessary to
prevent forfeiture." This is typically a fact-based determination, but an
agreement to reconvey the property is significant to a finding of equitable
mortgage.
Other factors include:
(1) whether the transaction documents use the terms "debt,"
"security," or "mortgage";
(2) a large disparity between the value of the property and the loan
amount;
(3) the scammer's representations concerning the transaction;
(4) whether the owner attempted to sell the property on the open market;
(5) whether the sale price was negotiated between the parties;
(6) whether the seller continues to reside in the property, perhaps
with a lease;
(7) a disparity in bargaining power between the parties, including lack
of legal representation of the seller; and
(8) the financial distress of the homeowner.
(footnotes omitted)
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