Victims of Mortgage Fraud Bar Themselves from Restitution

Victims of Mortgage Fraud Bar Themselves from Restitution

A "victim's" participation in a fraudulent mortgage scheme, regardless of criminal liability, will generally exclude the victim from restitution, according to a recent Massachusetts decision.

With the help of Ryan Lazar, a loan originator, R.L. and B.L. participated in a fraudulent mortgage scheme by falsifying documents, taking mortgage proceeds, and failing to disclose Lazar's misrepresentations.

Lazar eventually pled guilty to two counts of wire fraud, but B.L. and R.L. were not charged with a criminal offense. In a matter of first impression, the court in United States v. Lazar, 2011 U.S. Dist. LEXIS 29181 (D. Mass. Mar. 22, 2011) [enhanced version available to subscribers], was asked:

May restitution be ordered in circumstances in which the alleged victim, although not charged with a criminal offense, is nonetheless a knowing participant in the fraudulent obtaining of mortgage financing or would such an order "so adversely [reflect] on the public reputation of the judicial proceedings" as to be barred by considerations of public policy or statutory interpretation?

The court underscored the Second and Ninth Circuits' coconspirator exception to the Mandatory Victims Restitution Act (MVRA), citing three cases to delineate the exception's scope:

  • United States v. Lazarenko, 624 F.3d 1247 (9th Cir. Cal. 2010) [enhanced version / unenhanced version available from lexisONE Free Case Law] - the Ninth Circuit refused to make an exception to the coconspirator exception where the "victim" was a major participant in a money laundering scheme hatched by his coconspirator;
  • United States v. Sanga, 967 F.2d 1332 (9th Cir. Guam 1992) [enhanced version] - the Ninth Circuit found restitution appropriate for a coconspirator who had willingly agreed to her own smuggling into the U.S. to work as a live-in maid but who was then virtually enslaved and raped by her trafficker; and
  • United States v. Ojeikere, 545 F.3d 220 (2d Cir. N.Y. 2008) [enhanced version / unenhanced version] - the Second Circuit noted that the victims were not involved in the offense of conviction, which was a fraudulent scheme to obtain money from the victims themselves. Whatever illegal scheme the victims thought they were involved in, it was not a scheme to lose their own money.

In denying restitution to B.L. and R.L., the court considered their role in the mortgage financing fraud. The court held:

B.L. and R.L. were not the instigators, or the main executors of the scheme, but their intent was in pari materia with that of Lazar. Under the law of conspiracy, they are not exonerated by their claim of imperfect knowledge of all of the details and workings of the scheme. While the court is not without sympathy, given the sad series of events that plunged B.L. and R.L. into dire economic distress, and while the court understands the impulse that led them to a desperate effort to rescue the only home they had ever owned from foreclosure, thousands of other homeowners have faced similar hardships without resorting to mortgage fraud.

For evident reasons of public policy, a federal court cannot be seen as engaging in the shifting of criminal proceeds among or between coconspirators. Consequently, I hold that restitution may not be ordered under the MVRA to a conspirator who participates in a fraudulent scheme with the same criminal intent as his or her coconspirators, whether or not the conspirator is formally charged as a defendant.

(citations omitted)

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