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hapter 11 Foreclosure Rescue Scamsew chapter

court, and the special issues that arise in that forum. Section
1.1 Introduction
The rise in real estate prices in recent years has broughtith it a wave of schemes designed to deprive homeownersf the equity that has built up in their homes. Individualsho are in financial distress and are having trouble meeting

heir mortgage payments are particularly vulnerable to thesechemes. Though their monthly incomes may be low, theiromes may be worth considerably more than their mort-ages. A homeowner who is facing foreclosure may beesperate to grab at any hope of saving the home, even if itisks the home’s built up capital.

This section addresses the problem of foreclosure rescuecams. These scams come in many variations, but they havene thing in common: instead of being ‘‘rescued,’’ as prom-sed, the homeowners lose not only their home, but also theirquity, and end up worse off than they were before theransaction.

More detail on some of the issues discussed in this chapteray be found in other National Consumer Law Centeranuals, particularly Truth in Lending,1 Unfair and Decep-

ive Acts and Practices,2 and The Cost of Credit: Regulation,reemption, and Industry Abuses.3 Another helpful resource

s Prentiss Cox, Foreclosure Equity Stripping: Legal Theo-ies and Strategies to Attack a Growing Problem.4

This chapter is organized into five substantive sections.ection 11.2 provides a short overview of the predominant

ypes of foreclosure rescue scams. Section 11.3 discusses thenitial issues that confront an attorney with a new client:ow to recognize a foreclosure rescue scam; what informa-ion and documents to obtain from the client; how tonvestigate the claim; the potential defendants; and the firstteps to take to pursue a claim. Section 11.4 discusses therimary legal theories and remedies that are available tottack a foreclosure rescue scam. Section 11.5 discusses theenefits of litigating foreclosure rescue cases in bankruptcy

1 National Consumer Law Center, Truth in Lending (5th ed. 2003and Supp.).

2 National Consumer Law Center, Unfair and Deceptive Acts andPractices (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 Policy607 (Mar.–Apr. 2006).

11.6 addresses special issues that arise when there is aseparate state proceeding such as an eviction action orforeclosure proceeding. A sample complaint in a foreclosurerescue scam case is included as Appendix I.7, infra. Addi-tional sample complaints and discovery, a sample rescissionletter, a worksheet for calculating HOEPA points and fees,and computer programs for calculating interest rates may befound on the CD-Rom accompanying this manual.

11.2 What Is a Foreclosure RescueScam?

11.2.1 Overview

Foreclosure rescue scams are various types of schemestargeted at homeowners already facing foreclosure and infinancial distress.5 Typically a ‘‘rescuer’’ identifies potentialvictims through public foreclosure notices in newspapers orat government offices. The homeowner is then contacted byphone, mail, or personal solicitation, with offers of a ‘‘freshstart’’ to save the home. While the clock to stop the fore-closure runs down, the rescuer may impose fees draining thehome of equity, or induce the owner to sign a sheaf ofdocuments including transfer of home ownership. In theend, the ‘‘rescuer’’ often evicts the victim from the home heor she once owned.

Foreclosure rescue scams typically come in three variet-ies. The first might be called ‘‘phantom help,’’ where arescuer charges outrageous fees either for light-duty phonecalls and paperwork that the homeowner could have easilydone or makes a promise of additional assistance that neveroccurs. Some of these rescuers merely refer the homeownerto a bankruptcy attorney. Others actually assist the home-owner in filing bankruptcy. Typically these rescuers havelittle understanding of bankruptcy law and often the bank-ruptcy case is ultimately dismissed, leaving the homeownersubject to various restrictions on repeat filing. Whateverform 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 Equity-Stripping ‘‘Foreclosure Rescue’’ Scams (2005), available atwww.nclc.org/news/content/ForeclosureReportFinal.pdf.

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homeowner is usually left without enough assistance to saveta

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§ 11.2.2 Foreclosures / 2006 Supplement

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he home, and with little or no time left to seek otherssistance.

For example, in In re McNeal,6 the homeowner paid a‘foreclosure consultant,’’ $750 to stop the foreclosure of hisome. The consultant had spoken to the loan servicer threeimes and submitted financial information to the servicer,ut failed to obtain a loan modification or otherwise stop theoreclosure sale. Consequently, the homeowner filed a chap-er 7 bankruptcy to postpone the foreclosure. Finding thathe consultant violated California’s foreclosure consultanttatute,7 the court awarded the homeowner actual damagesf $750 and exemplary damages of $2250.8

A second variety involves outright fraud. The homeown-rs believe they are obtaining refinancing or a new loan ando not realize they are surrendering ownership of the house.lternatively, the deed transferring the house may be forged.A third variety is a bailout that typically involves the

omeowners’ surrendering title to their homes with theelief that they will be able to repurchase them at a laterime. Meanwhile, the homeowners become tenants in theirwn homes on terms that are often oppressive and unafford-ble, ending with their eviction. The rescuer may evenenege on promises to pay off the mortgage, leaving theomeowner liable for loans on a house she no longer owns.This chapter focuses primarily on the second and third

ypes, both of which involve transfer of ownership, althoughhe issues discussed may also be applicable to the first type.wo variations of the repurchase theme, sale/leaseback

ransactions and inter vivos trust transfers, are discussed inore detail in the next two subsections.

1.2.2 Sale/Leaseback Schemes

Sale/leaseback schemes encompass a variety of transac-ions in which homeowners surrender title to their housesith the expectation that they will be able to remain in theiromes as renters until they are able to repurchase theroperty. Invariably, the terms of the deal are so onerous thathe buyback becomes impossible. Alternatively, the home-wner’s ability to repurchase the property may be cut off bysale to a bona fide third party purchaser.9 In either cir-

6 286 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) (defendantstold homeowners that they could register a ‘‘common law lien’’on the home that would take priority over the mortgage securityinterest and prevent foreclosure; however, homeowner neededto 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. 2d203, 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 neighboringchurch in breach of repurchase agreement).

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the equity in their homes. In addition, the homeowners, nowtenants in their own houses, may face eviction proceedingsfor failing to comply with oppressive and unaffordable leaseterms.10 In some cases, these homeowners were defraudedabout the deed transfer; others may understand that theywere signing a deed but believed that the home wouldultimately be ‘‘saved.’’

The case of Browner v. District of Columbia provides anillustrative example of a sale/leaseback transaction.11 Thedefendants, Rita Walker and Ferris Browner (doing businessas RAW), placed the following advertisement in the‘‘Money to Lend’’ column of the classified advertisements:‘‘NEED MONEY?—Foreclosure Help.’’ The business alsosent letters to homeowners whose homes were being adver-tised for foreclosure, stating ‘‘I’m sorry to read that yourproperty, by order of the court, is being foreclosed upon. Weare foreclosure specialists.’’

In one typical transaction, a homeowner contacted thedefendants and was told that RAW would make available$4591.18 to pay a mortgage arrearage and prevent thepending foreclosure. In exchange, the homeowner was re-quired to sign a deed transferring the property to Rita Walkersubject to a one-year lease with an option to repurchase.When questioned about the necessity of the deed, RAWassured the homeowner that the deed was merely a techni-cality, included for the purpose of satisfying the accountant.During the one-year lease, the homeowner was required topay $375 per month to RAW, in lieu of making $118monthly mortgage payments. Upon exercising the repur-chase option, the homeowner would have been required topay the $4519.18 arrearage payment including fees for titleexam, 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 balanceof the first mortgage in the amount of $1600. Thus, thehomeowner unwittingly conveyed property worth $38,185for a total of $6988.18.

The court determined that this transaction and others likeit were not sales, but loans. Because the effective interestrates on the transactions at issue ranged from 50 to 200%,the court found the defendants guilty of violating the localloan sharking statute.

The Nebraska Supreme Court also recently upheld theclaims of thirteen homeowners who were induced to enterinto 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 reDavis the lease agreement required monthly rent payments thatwere clearly unaffordable and required an entire year’s rentupon default. Within one month after the sale/leaseback trans-action closed and two weeks after the first rental payment wasdue, the purchaser had perfected a judgment against the formerhomeowners for a full year’s rent and cost and obtained awarrant of eviction for nonpayment of rent.

11 549 A.2d 1107 (D.C. 1988).

take the homes for less than full value. The court found thateart

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ven if the homeowners failed to read the contracts—whichllegedly ‘‘unmistakably’’ disclosed the transactions as salesather than loans—the contracts were not binding becausehey were induced by fraud.12

1.2.3 Inter Vivos Trusts

The use of inter vivos trusts is a growing form of fore-losure rescue scam.13 This type of scam is appealing toescuers because it often requires less money up front thanany sale/leaseback transactions, avoids the due-on-sale

lause in the homeowner’s mortgage and, by creating an‘occupancy agreement’’ rather than a lease, attempts to skirthe strictures of landlord-tenant law governing leases.14

In a typical inter vivos trust foreclosure scam, the home-wners, knowingly or unknowingly, transfer title of theirome to a trust. Initially, as settlors of the trust, the home-wners hold a 100% beneficial interest in the trust. Theseypes of transactions do not require the homeowner’s un-erlying mortgages to be paid off. Instead, this scheme seekso exploit the exception to the due-on-sale clause for aransfer into an inter vivos trust in which the borrower is aeneficiary and which does not affect a transfer of occu-ancy rights.15

Immediately after the creation of the trust, a small ben-ficial interest (five to ten percent) in the trust is sold to annvestor or investors.16 The investor’s purchase price for thiseneficial interest is typically the amount necessary to bringny delinquent mortgages current.17 The term of the trust isypically two to three years. At the conclusion of the trust,he house is sold and the trustee distributes the proceedsccording to the trust documents. The trust documents useomplex language to describe the distribution of proceeds,

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 homeownerstransferred title to trust and paid rent to trust in expectation thattrust would pay defaulted mortgage).

14 See Garn-St. Germain Depository Institutions Act of 1982, 12U.S.C. § 1701j-3(d)(8).

15 See Garn-St. Germain Depository Institutions Act of 1982, 12U.S.C. § 1701j-3(d)(8).

16 Generally, the beneficial interest transferred to investors will becapped at about 10% to ensure that the original title insurancepolicy remains effective. Additionally, the transfer of a smallbeneficial interest may avoid conveyance or transfer taxes.

17 Often the trust accounting will show an ‘‘advance’’ to thehomeowner in an amount significantly greater than the amountthat was needed to cure the mortgage arrearage. The differenceis usually comprised of questionable fees imposed by the trustin connection with the transaction such as documentation, fa-cilitation, transaction, trust set up, or credit counseling fees anda contingency fund.

as much as they invested plus a percentage of any increasedequity.

Under a right of first refusal contained within the trustdocuments, the homeowners may purchase back their homefor fair market value. However, the repurchase agreementrequires the homeowners initially to pay the trust the fullmarket value of the home, and only later to receive reim-bursement from the trust to compensate them for theirbeneficial share. This makes repurchase extremely difficult,because the homeowners would have to obtain financing topurchase at full value a home that they already partly own.As a result, the deal virtually assures that the homeownerswill lose their home and much of their equity.

Inter vivos trust schemes also typically have oppressive‘‘occupancy agreements’’ between the trust and the home-owner (now a tenant). Despite their name, these agreementsare essentially leases, and often contain terms that violatestate laws government residential leases. Under these agree-ments, the homeowner pays ‘‘rent’’ to the trustee or acollection service employed by the trustee. The amount ofrent is commonly the amount of the mortgage payment plusan additional service fee. Further, the occupancy agreementmay contain some or all of the following provisions:

• Failure to make a timely monthly ‘‘rent’’ payment to thetrustee constitutes an implied offer to sell the home-owner’s beneficial interest in the trust;

• A requirement that homeowners (as tenants) make allnecessary repairs, perform all maintenance and main-tain homeowner’s insurance on the property;

• A provision permitting treble damages in the event thatthe homeowners (as tenants) hold over beyond thetermination of the occupancy agreement;

• Funds paid to a ‘‘contingency fund,’’ essentially asecurity deposit, often in excess of state limits; and

• A provision for a late charge, also exceeding thosepermitted by state law, in the event monthly paymentsare not received when due.

Such occupancy agreements, like the trust agreements, aredesigned to take as much money from the homeowners aspossible and to evict them as fast as possible when they failto make a payment.

11.3 Investigating and Preparing aForeclosure Rescue Scam Case

11.3.1 Recognizing a Foreclosure RescueScam

A scam, by its nature, disguises the true intent of theperpetrator. As a result, the victims in some cases may not

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viction from their own home. The following list of ques-ions will help advocates recognize when they are dealingith a foreclosure rescue scam.Did the homeowner respond to a phone call, letter, posted

ign, or other solicitation to get help saving the home or toell it? Rescuers typically use public records to find namesf homeowners facing foreclosure, and then solicit themith promises of help. Many also post flyers that the home-wner may have seen.18

Did the homeowners convey their property to someonelse? The telltale sign of a foreclosure rescue scam is a deedonveying title of the victim’s property to the ‘‘rescuer’’ ornother party affiliated with the rescuer. The grantee coulde a corporation, a trust, an individual unknown to theictim, a long-time acquaintance or even a family member.emember, scammers come in all shapes and sizes.Were the homeowners aware that they executed a deed

ransferring their property to a third party? In some cases,omeowners are led to believe that they are signing docu-ents for a new loan to bring their mortgage current, when

n fact, they deed their home away.Were the homeowners facing foreclosure or otherwise in

nancial diffıculty at the time they transferred their prop-rty? Almost all victims of foreclosure rescue scams areacing some type of financial difficulty. Commonly, a fore-losure was imminent. In some cases, homeowners mayave been unsuccessful in their attempts to refinance.Were the homeowners instructed to stop communications

ith their current mortgage company, attorney, or otherousing counselor? Homeowners are frequently told toease all contact with lawyers or their mortgage, and let theescuers handle the ‘‘negotiations.’’ This tactic simulta-eously cuts off access to possible refinancing options whileunning out the clock on ways to prevent the foreclosure.

Did the homeowners receive less than fair market valueor the transfer of their property? Inadequate considerations another hallmark of foreclosure rescue scams. Thesecams depend on equity in the property that can be strippedway when the rescuer refinances or resells the property.escuers, if they provide any consideration at all, may paynly a fraction of the value of the home.Did the homeowners continue to live in their home pur-

uant to a lease agreement, occupancy agreement or landales contract? In many foreclosure rescue scams, home-wners surrender title with the expectation that they will beble to remain in their homes. They may sign lease agree-ents, occupancy agreements, or land sales contracts that

ermit them to retain possession of their home so long ashey pay ‘‘rent’’ to the rescuer. These ‘‘rent’’ payments areften unaffordable and are frequently higher than the home-wners’ previous mortgage payments. Homeowners also

18 See § 11.3.2.2.2, infra.

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ership, such as performing property maintenance and mak-ing tax payments.

Did the homeowners have an option to repurchase thehome sometime in the future? Homeowners who remain intheir homes after relinquishing title often believe that theywill be able to repurchase the property in the future. Thereis typically an option or right of repurchase associated withthe transaction. However, the option frequently becomesineffective if the homeowners do not make timely ‘‘rent’’payments. The repurchase price is almost certainly going tobe substantially more than the homeowner originally paidfor the home.

Is the ‘‘homeowner’’ facing eviction? One of the key partsof many foreclosure rescue scams is to turn the homeownerinto a tenant, who has no claim to the home and can beremoved from the home through an eviction action. Espe-cially in a judicial foreclosure state, when a homeowner isfacing eviction rather than foreclosure it is a sign of aforeclosure rescue scam.

11.3.2 Gathering Information

11.3.2.1 The Homeowners’ Story

The client interview process is important to understandinga foreclosure rescue scam transaction. Homeowners’ testi-mony can make their story come alive. Unfortunately, thespeed at which these transactions happen, usually as a resultof an impending foreclosure, may leave the consumer con-fused and unable to remember the details of the transaction.Often, however, they can re-trace their steps and provide atleast a general overview of the transaction. Discussing thecase in a chronological fashion may also help the home-owner remember what happened next in the sequence ofevents.

Generally, a good place to start is with some basic factsabout the homeowners and the acquisition of their home.After establishing a basic homeownership history, it isuseful to know about the homeowners’ financial troubles. Inpart, this conversation is necessary to determine whether thehomeowners’ financial difficulties were short-term and tem-porary in nature, or if the homeowners have suffered a morepermanent financial setback. A current and future financialpicture will be important in evaluating the homeowner’spotential remedies.

Next, the homeowner can be walked through the solici-tation stage of the scam. What types of solicitations did theyreceive? Did they make contact with the rescuer in responseto such materials? If so, how did they make contact (e.g.,telephone, in person, Internet, etc.) and what made thisrescuer more attractive than any of the others? This conver-sation should flow into the initial contact and subsequentcontacts that led up to the actual transaction.

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Foreclosure Rescue Scams / 2006 Supplement § 11.3.2.2.3

ome document. However, elderly homeowners may notemember signing any documents. If this is the situation,uestions of the homeowner’s competency to execute theeed and any other documents should be explored. Whethern individual is competent to execute a deed or other legalocument is a question of state law. In general, however, ifhe homeowner is lacking sufficient mental capacity tonderstand the nature and significance of the contract, theontract is voidable.19

Where homeowners acknowledge executing some docu-ents, it is useful to know the circumstances and setting of

he signing. Where was the signing held: in a title insuranceompany’s office or in a fast food restaurant? Who wasresent? For example, if the notary on the deed is a woman,as a woman in fact present at the signing? What was said?ow did the homeowner feel at the time? With respect to the

ransaction itself, other questions should revolve around theerms of the deal itself. What were the terms of the trans-ction as understood by the homeowner?

Post-transaction events can be as important as the trans-ction itself. How did the reality of the transaction stack upo the homeowners’ expectations? What caused the home-wner to seek legal advice?

Answers to these and similar questions are likely to yieldaluable information about the rescue scam which can beugmented by thoroughly reviewing the ‘‘document trail’’iscussed below.

1.3.2.2 The Document Trail

1.3.2.2.1 The importance of the documents

The documents related to a foreclosure rescue scam canell a significant part of the story—one that is often moreomplete than that told by the homeowner. Obtaining anynd all paperwork that may exist—from the solicitationaterials to deeds and leases to eviction papers—is critical

o challenging a foreclosure rescue scam.All documents obtained should be preserved carefully.

ince duplicate or almost-duplicate documents may be ob-ained from different sources, the documents obtained fromach source should be separately labeled and filed. Thehain of custody of the documents should be preservedarefully, especially for the documents in the homeowners’ossession.

What the homeowners did not receive can be just asmportant as what they did receive. Being able to provexactly what documents were and were not in the home-wners’ possession at a certain time can turn out to be a keyart of a case.

19 See § 4.8.7.3, supra; National Consumer Law Center, Unfairand Deceptive Acts and Practices § 9.5.7 (6th ed. 2004 andSupp.).

documents, short of formal discovery.

11.3.2.2.2 Solicitation materials

Rescuers often identify distressed homeowners throughpublic foreclosure notices in the newspapers or at govern-ment offices. Rescuers then contact the homeowner byphone, personal visit, or card or flyer left at the door. In somecases, homeowners can receive more than fifty offers forassistance within weeks of the initial public foreclosurenotice. Some rescuers rely on advertising on the Internet orin local publications. Others plaster posters on telephonepoles and bus stops.

The initial solicitation typically revolves around a simplemessage such as ‘‘Stop foreclosure with just one phonecall,’’ ‘‘I’d like to $ buy $ your house,’’ ‘‘You have options,’’or ‘‘Do you need instant debt relief and CASH?’’ Thiscontact also frequently contains a ‘‘time is of the essence’’theme, adding a note of urgency to what is already stressfuland possibly desperate situation.

It is important to collect or obtain any solicitation mate-rials used by the rescuer. Solicitation documents can beuseful in demonstrating the initial deceptive contact whichled the homeowner into the rescue transaction. Sometimesthese materials contain written promises or terms that arenot embodied in the final transaction.

• Collect any postcards, flyers or letters the client re-ceived regarding foreclosure help, even those that maynot obviously be from the rescuer.

• Take photographs of any posted sign to which thehomeowner responded.

• Print copies of web pages from the rescuer’s Internetsite. Keep in mind that Internet sites can change incontent from one day to the next. What you find may notbe what your client saw. Further, what you find may notbe there tomorrow. Therefore, it is important to printcopies of any pages you think relevant the first time youvisit the site. If critical inculpatory information is on thewebsite, consider consulting a computer expert aboutpreserving a copy of the web content electronically ina way that can be shown to be tamper-proof.

• Obtain a copy of any advertisement the rescuer used tosolicit your client. Many local publications will havearchives (electronic or paper) of past editions.

11.3.2.2.3 Transaction documents

The number of transaction documents in any given fore-closure rescue scam can vary dramatically. At one end of thespectrum, the homeowner may execute only one docu-ment—a deed. At the other end, some scams involve com-plex trust arrangements that may contain 10 or more differ-ent documents.

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§ 11.3.2.2.4 Foreclosures / 2006 Supplement

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omeowners themselves. However, if the homeowner doesot have copies, some documents may be obtained fromour local land records. In cases where an apparent closingook place, the settlement agent or title company is likely toave copies of the transaction documents. It is important toequest copies from the settlement agent even if the home-wner has copies, as the documents the homeowner wasiven may differ from those in the settlement agent’s files.he identity of the settlement agent can frequently beetermined by examining the mortgage or deed of trust inhe local land records. Commonly, the first page of theocument will have a name and address for returning theriginal document. In many cases, this will be the settlementgent.

The following is a nonexclusive list of common docu-ents 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 Con-

tract to the homeowner;• Option to Purchase;• Power of Attorney.

n addition, a foreclosure rescue transaction in which theomeowner transfers property to an inter vivos trust couldnclude 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.

1.3.2.2.4 Local land records

Local land records should be checked to determine aumber of important facts in the case. They will showhether the homeowner deeded the home to the rescuer or

n affiliate of the rescuer, and whether the transferee deededr mortgaged it to someone else. Assignments of the mort-age may also be found in the local land records. If thecammer paid off the existing mortgage, there will probablye a public record of the release of the mortgage. In addition,ocal land records can lead to other cases involving the sameescuer, which is critically important for Truth in Lendingnd fraud claims.

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ways—a grantor-grantee index or a tract index.20 In manycases, the index itself will provide you with some basicinformation about the transaction. You will want to obtaincopies of any relevant documents. The following is a list ofdocuments to look for in the local land records.

• Deed from homeowner to rescuer (or affıliated party).You will need to determine whether a deed transferringthe property to the rescuer has in fact been recorded.Note that the grantee may be different than the rescuerwith whom the homeowner has had contact. If so, thegrantee may be affiliated with or conspiring with therescuer. If the rescuer set up an inter vivos trust, theremay be a deed from the homeowner to the trust.

• Any subsequent deeds related to the homeowners’prop-erty. You will want to determine whether the rescuer (oraffiliated party) remains the current owner of record orwhether the property has been deeded to yet anotherparty. This is important to: (1) establish who the currentrecord owner of the property is and (2) provide someindication of whether there is a possible ‘‘bona fidepurchaser.’’ If the rescuer set up an inter vivos trust andthe home has since been conveyed to a third party, theremay 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 home-owners who have transferred their properties to therescuer (or affiliated party) may also be victims. Theseother homeowners can often provide useful informationabout the rescuer’s methods of operation and may alsoserve as pattern witnesses if the case goes to trial.Evidence that the rescuer has engaged in prior transac-tions is also critical for determining the applicability ofthe Truth in Lending Act, discussed in § 11.4.2.2, infra,proving fraud claims, and seeking punitive damages.

• Mortgages. Check to see whether the rescuer or originalgrantee has taken out a mortgage against the property.In many foreclosure rescue scams, rescuers drain theequity out of the home by refinancing as soon as theyobtain title.

• Release or discharge of mortgage. If the homeowner’smortgage has been released, this shows that the rescuer

20 A grantor-grantee index is typically divided into two parts, onefor grantors (the party transferring title to the property) and onefor grantees (the party receiving title to the property). Each partis alphabetized by business name or by last name of an indi-vidual. In a foreclosure rescue scam, the homeowner will beshown as the grantor and the rescuer as the grantee. Whensearching for a mortgage, the record owner of the property willbe the grantor and the lender will be the grantee. Historicalgrantee-grantor records are often grouped by year. A tract indexlists all the legal transactions pertaining to a piece of property inone place. This index is typically organized by tract, parcel, plat,block and/or lot number. This information is commonly foundin the deed itself, or may be obtained from the property taxassessors office or from the local land records office.

or someone connected to the rescuer paid it off. If there

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Foreclosure Rescue Scams / 2006 Supplement § 11.3.2.2.6.4

is no release, then the homeowner’s mortgage remainsa lien on the property. This may be a breach of contractor a fraud if the rescuer promised otherwise. Check thelocal practice to determine how long it should take fora release to be recorded after a loan is paid in full.

• Trust documents. Some foreclosure rescue scams in-volve homeowners deeding their property to inter vivostrusts. In certain states, such a trust is evidenced by atrust agreement recorded with the local land records

1.3.2.2.5 Court records

A good place to start with court records is any pendingviction case against the homeowner and, in a judicialoreclosure state, the documents from the homeowner’soreclosure case. Obtaining information about other lawsuitsn which the rescuer (or any other party to the transaction)s involved can also be fruitful. The federal courts and someocal courts have an electronic public access service. Courtshat have electronic access will generally allow you toearch the index by party name. In local courts that do notave electronic access, you may be thumbing through paperndices or microfiches for case information. Regardless ofow you access court records, here are some things to lookor:

• Eviction case against homeowner. If the homeowner isfacing eviction, determine the status of the case andobtain a copy of the case file. This is important not onlyso that you can take steps to prevent the eviction,discussed in § 11.3.4.2, infra, but also because it is notuncommon for the pleadings filed by a rescuer tocontain information helpful to the homeowners. Forexample, the rescuer may have filed a forged lease or alease containing terms that violate state residentialleasing statutes.

• Other eviction cases filed by the rescuer (or affıliatedparty). Like searching for other deeds to the rescuer inthe local land records, other eviction cases filed by therescuer may help you identify other victims. Thesevictims may then be able to provide you with patternand practice evidence that exposes the transaction as aforeclosure rescue scam and makes it subject to TILAand other legal claims.

• Other non-eviction cases involving the rescuer (or af-filiated party). A wealth of additional information maybe found in non-eviction cases to which the rescuer isa party. Obviously, it is worth checking to see if anyother cases have been filed asserting claims associatedwith a foreclosure rescue scam perpetrated on anotherhomeowner. Other cases to look for are those filed byformer employees of the rescuer. Consider searchingthe local court records for workers’ compensationcases, discrimination cases, or any other cases that

employees are often willing to provide very damaginginformation about the rescuer’s operation. A search ofthe family court records may enable you to locate anex-spouse who would be able to provide information onthe rescuer’s business.

11.3.2.2.6 Other documents

11.3.2.2.6.1 General

As discussed below, there are numerous other documentsand information that might be helpful to the homeowner’scase beyond the transaction documents, land records, andcourt records.

11.3.2.2.6.2 Payments to rescuer or lender

If the homeowner has been making ‘‘rent’’ payments tothe rescuer or has made any other payments to the rescuer,it is useful to obtain evidence of such payments, such ascopies of the cancelled checks or money order receipts. Insome cases, the homeowners have continued to make pay-ments to mortgage lenders even though they no longer owntheir homes. Evidence of these payments should also beobtained. The total of these payments will be relevant whencalculating damages. They will be also be important indetermining what, if anything, the homeowner will have topay to unwind the transaction.

11.3.2.2.6.3 Rescuer’s loan documents

Rescuers frequently cash out the equity in the home byobtaining a bank loan shortly after obtaining title. Theseloan documents, and loan documents for any other loanobtained by the rescuer, should be collected and reviewedcarefully. The documents may demonstrate that the bank hadactual or constructive notice of the fraud. Loan documentsshould be available from the settlement agent. However, ifthe loan was not part of a ‘‘sale transaction’’ with thehomeowner and the homeowner is not a party to the loan inany way, a formal discovery request may be necessary.

11.3.2.2.6.4 Appraisal

An accurate value of the homeowner’s property is criticalfor determining what claims the homeowner may be able toassert as well as what outcomes are realistic for the home-owner. As noted above, a disparity between the fair marketvalue of the property and the consideration provided by therescuer is common in foreclosure rescue scams. A signifi-cant disparity may be a factor in persuading a court that thetransaction is unconscionable, that it violates a state fore-

81

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§ 11.3.2.2.6.5 Foreclosures / 2006 Supplement

8

DAP statute, or that the transaction amounts to an equi-able mortgage.21 A reliable appraisal or broker’s pricepinion can provide an estimate of the fair market value.he homeowner should obtain an appraisal showing the fairarket value of the home both at the time of the scam and

t present.Where the rescuer has obtained a loan in connection with

he transfer of the property, an appraisal may have beenone. However, these appraisals should be viewed withaution as, in some cases, they are artificially inflated tollow the rescuer to take out a higher loan amount.

1.3.2.2.6.5 Reports of consumer complaints

Through state freedom of information acts, records ofonsumer complaints to local consumer protection agencies,ttorney general offices, and licensing divisions can bebtained to see whether similar complaints have been madebout the rescuer in the past. The Better Business Bureauhould also be contacted for copies of any complaints. Inddition, the Federal Trade Commission’s website has aearch function that allows users to identify Federal Tradeommission (FTC) complaints filed against any entity. Even

f the FTC has not filed a complaint against an entity, it willrovide copies of complaints that consumers have made tot (after redacting identifying information about the com-lainant) in response to a Freedom of Information Actequest.22

1.3.2.2.6.6 Corporate and business documents

Every state requires corporations and other businesses tole certain documents at the time the company beginsperation in that state and periodically thereafter. The filingypically consists of the articles of incorporation and annualeports. When dealing with corporations, this information iselpful to figure out who stands behind the corporation orusiness in the event the corporate veil can be pierced or toue these individuals separately. Further, formal links be-ween the various parties to the transaction can establish aider net of liability. Some states may permit you to obtaincopy of that part of the company’s state tax return that

hows the names and addresses of the current officers.nother way to find out who is behind a corporation or otherctitious name is to get the form that the Postal Serviceequires a person to file when getting a post office box. Theorm requires a real person and a real address.

21 See §§ 11.3, 11.4.5.1, 11.4.7.2, infra.22 Requests can be emailed to the FTC at [email protected]. The FTC

charges fees for searching its records plus a per-page copyingcharge.

2

Using the Internet and other electronic database servicesto conduct a search on a topic of interest or to discoverinformation about a particular party to the transaction canprove fruitful. As indicated above, any web pages of noteshould be printed out immediately and possibly also pre-served electronically, as the content of websites can bechanged quickly.

11.3.3 Identifying Possible Defendants

Rescuers come in all shapes and sizes and rescue scamscan involve a number of different players beyond the res-cuer. To avoid missing parties, in what can sometimes becomplex real estate transactions, it is generally best to castthe liability net as wide as possible to start.

Rescuers and affıliates. First on the list of defendants isthe rescuer, or person with whom the homeowners hadprimary contact, and the grantee to whom the homeownerstransferred 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 withwhom the homeowners had contact should also be consid-ered potential defendants.

If the rescuer is a corporate entity, consider naming theofficers or employees of the rescuer individually. The cor-poration is likely to have no assets. Many claims, includingfraud and unfair and deceptive acts and practices (UDAP)claims, can be asserted against any person who participatedin or directed the wrongful acts, regardless of whether thecorporate veil is pierced.23

Parties with potential property interests. Regardless ofwhether the homeowners’ case asserts fraud claims, arguesequitable mortgage, or otherwise attempts to quiet title, allparties with potential interests in the property, and theiragents, should be joined as defendants, including trustees,buyers, mortgagees, assignees, settlement agents, apprais-ers, and brokers. Some of these entities may have insurancethat will compensate them for any losses they have suffered.For example, a person who has bought the home from therescuer may have title insurance that will cover the lossessuffered because of the homeowner’s claim to the home.Insurance coverage of these losses will make it much morelikely that the buyer will agree to re-convey the home to thehomeowner.

11.3.4 First Steps

11.3.4.1 Introduction

Time is often of the essence in fighting foreclosure rescuescams. Many times, these cases present themselves as evic-

23 See National Consumer Law Center, Unfair and Deceptive Actsand Practices § 6.4 (6th ed. 2004 and Supp.).

tion cases instead of deed theft or foreclosure rescue cases.Iip

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Foreclosure Rescue Scams / 2006 Supplement § 11.3.4.5

t is important to act quickly to stop any eviction proceed-ngs and to get a notice of lis pendens recorded against theroperty to preserve the homeowner’s remedies.

1.3.4.2 Stop Eviction Proceedings

Many foreclosure rescue scam cases initially presenthemselves as evictions. Homeowners may not know thathey have transferred title to their property and may beonfused when they receive notice related to eviction pro-eedings. While state landlord-tenant laws vary widely,ost eviction cases proceed much faster than other types of

ivil cases. Once a judgment against the tenant has beenntered, by reason of default or otherwise, removal of theenant by the sheriff or other government official may occurithin days or weeks. In addition, doctrines such as res

udicata and Rooker-Feldman will be much more seriousotential problems if a judgment is entered in an eviction ororeclosure action.24 Accordingly, the first priority in han-ling a foreclosure rescue case is often preventing theviction of the homeowner.

If you are not familiar with the procedures of your localousing court, or the general court handling residentialviction cases, you may want to consider enlisting the helpf a housing or tenant lawyer. If a judgment has already beenntered, you may want to consider options for removing oreopening it, particularly if it is a default judgment. Someviction cases may be held over until the title issues areesolved. In other situations, bankruptcy may be an option ifjudgment for possession has not been entered.25

1.3.4.3 Reviewing the Deed

Deeds should be scrutinized to determine whether theormal requisites were followed. For example, impropercknowledgment of deeds (or mortgages) may affect thealidity of the instrument. Other documents to the transac-ion should be checked as well, but claims related to theormal requirements of deeds often have a very short statutef limitations period (six months or less). It may be helpfulo recruit an attorney who specializes in real estate law at anarly stage in the case to evaluate these potential claims.

Deed and mortgage fraud cases may involve situations inhich the person whom the notary certified as having

ppeared did not, in fact, appear. Improper notarizations alsoay result from the taking of an actual acknowledgment

rom an imposter, taking an acknowledgment from an in-ompetent person, or the taking of an acknowledgment overhe 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).

rization. Regardless of the reason for the defective acknowl-edgment, practitioners should promptly investigate whethersuch defects may render the instrument invalid.26

11.3.4.4 Evaluating Grounds for Rescission/Rescission Notice

The Truth in Lending Act (TILA) and the Home Own-ership and Equity Protection Act (HOEPA), discussed in§§ 11.4.2 and 11.4.3, infra, allow a homeowner to rescindcertain credit transactions that are secured by the home. Thisright to rescind may be applicable even if the rescuerattempted to structure the transaction as a transfer of thehome rather than as a loan. The right to rescind expires afterthree years in most states, so it is important to evaluate thisclaim quickly. (Massachusetts has its own TILA-type lawthat allows rescission up to four years after consummationof the transaction. Maine, Connecticut, Oklahoma, andWyoming also have state TILA-type laws, so the deadlinewould be controlled by state law in those states. All of thesestates have been granted partial exemptions from TILA.27)Even if the three-year deadline is not close, exercising theright to rescind by sending a rescission letter may help createa defense to an eviction. It also creates grounds for recordinga lis pendens, as discussed in the next section.

11.3.4.5 Recording a Lis Pendens

In order to cash in on the homeowner’s equity, rescuersmay attempt to mortgage or resell the home promptly afteracquiring it. If the new owner is a ‘‘bona fide purchaser,’’ thehomeowner may not be able to get title to the house back.Therefore, it may be appropriate to record the homeowner’sclaim through a lis pendens or similar procedure. Lis pen-dens is the Latin phrase for ‘‘a suit pending’’ and typicallyrefers to a notice filed with the local land records after a casehas been filed. Recording a lis pendens against a piece ofproperty alerts a potential purchaser or lender that the title ofproperty is in question. The procedure for obtaining andrecording a lis pendens varies from state to state so be sureto check your state statutes and local court rules for moreinformation.

26 National Consumer Law Center, The Cost of Credit: Regulation,Preemption, and Industry Abuses § 12.10.2.7 (3d ed. 2005 andSupp.).

27 Federal Reserve Board, Official Staff Commentary on Regula-tion Z, § 226.29(a)-4.

83

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§ 11.4 Foreclosures / 2006 Supplement

8

1.4 Legal Theories to AttackForeclosure Rescue Scams

1.4.1 Construing the Transaction As aLoan

1.4.1.1 The Equitable Mortgage Doctrine

A variety of federal and state causes of action, under bothtatutory and common law, can be used to attack foreclosureescue scams. Many of these claims begin with the premisehat the homeowner’s transfer of title to the property,hether in the form of a sale/leaseback or an inter vivos

rust, was not absolute and was merely intended to provideecurity for a loan. Once the transaction is seen as a loan,hen the homeowner can invoke a variety of lending laws,ncluding those governing usury, mortgage lending, andoreclosures.

Under the common law ‘‘equitable mortgage’’ doctrine,s well as the statutes of some states, many courts haveecognized that ‘‘sales’’ with repurchase options may in facte loans and that the deeds at issue should be construed asquitable 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 mortgagewhere the consumer was unsophisticated and not represented bycounsel, where the payment made by the ‘‘purchaser’’ was only10% of the fair market value of the home, and where themortgage remained in the consumer’s name); Wilson v. Bel FuryInvestments Group, L.L.C., 2006 WL 297440 (D. Neb. Feb. 6,2006) (court recognizes equitable mortgage doctrine but deniessummary judgment to both sides due to disputes of materialfact); Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d 1090 (D.Minn. 2005) (court could not resolve whether the transactionconstituted an equitable mortgage at the summary judgmentstage; court evaluated six factors to determine the existence ofan equitable mortgage; court also held that the landlord-tenanteviction judgment was not res judicata nor did the Rooker-Feldman doctrine apply; fraud counterclaim against the con-sumer based on her alleged statement that she could make therental payments was dismissed); Rowland v. Haven Properties,L.L.C., 2005 WL 1528264 (N.D. Ill. June 24, 2005) (courtrefuses to dismiss the equitable mortgage claim where a houseworth $245,000 was deeded away for only $91,500 and wherethe homeowner alleged fraud and no intent to sell); Rowland v.Haven Properties, L.L.C., (N.D. Ill. Aug. 11, 2005) (court didnot grant a preliminary injunction to the plaintiff to protect thestatus quo until a trial due to factual disputes; court list factorsto consider in determining whether the transaction constitutedan equitable mortgage); Hruby v. Larsen, 2005 WL 1540130 (D.Minn. June 30, 2005) (granting preliminary injunction to main-tain status quo; court reviewed elements to prove an equitablemortgage and found that the consumers have a likelihood ofsuccess on the merits; court ordered a bond of $1000 plusmonthly 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 createdequitable mortgage even without explicit option to purchase, in

4

of the parties.29 Specific mortgage-negating language in thedocuments or the homeowners’ knowledge that they weresigning a transfer deed is not dispositive of intent.30 Courtshave routinely looked beyond the legal form of these trans-actions to examine their substance and the circumstancesleading up to their execution. Thus, documents that clearlyidentify a sale and leaseback arrangement are not conclusiveif the surrounding circumstances indicate that the home-owner never intended to sell the home and that the transac-tion should be considered a loan secured by a mortgage.31

In determining whether these transactions are sales orloans, courts have relied upon a variety of circumstances.Factors that indicate that an absolute or conditional deedshould instead be seen as an equitable mortgage include:

• Statements by the homeowner or representations by thepurchaser indicating an intention that homeowner con-tinue ownership;32

light of parties’ intent and their relative sophistication); MERSv. Wilson, 2005 WL 1284047 (N.J. Super. Ct. Ch. Div. May 27,2005) (court reviewed common law rules regarding proving anequitable 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, 217P.2d 219 (1950); Swenson v. Mills, 198 Or. App. 236, 108 P.3d77 (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 optionconstrued as equitable mortgage); Levy v. Butler, 93 Wash. App.1001 (1998) (sale with repurchase option coupled with inad-equate consideration sufficient to overcome presumption of saletransaction); 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, 464A.2d 35 (1983) (sale and leaseback not an equitable mortgage).

29 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 (4thCir. 1985); Woods-Tucker Leasing Corp. of Ga. v. Hutcheson-Ingram Dev. Co., 642 F.2d 744 (5th Cir. 1981); Sachs v.Ginsberg, 87 F.2d 28 (5th Cir. 1936); Perry v. Queen, 2006 WL481666 (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 seeBray v. McNeeley, 682 S.W.2d 615 (Tex. App. 1984).

30 See Restatement (Third) of Property, Mortgages § 3.3(a) & cmt.D (1997); Josiah Kibe, Comment: Closing the Door on UnfairForeclosure Practices in Colorado, 74 U. Colo. Law Rev. 241,262 (2003) (collecting statutory cites on admission of parolevidence).

31 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.3d77 (2005). Several states have statutes under which absolutedeeds may be considered mortgages in certain circumstances.See, e.g., 765 Ill. Comp. Stat. § 905/5; Md. Code Ann., RealProp. § 7-101; Okla. Stat. tit. 46, § 1.

32 Restatement (Third) of Property, Mortgages §§ 3.2(b)(1),3.3(b)(1) (1997).

• A substantial disparity between the value received by • Evidence showing an irregular purchase process, in-


the homeowner and the actual value of the property;33

• Existence of an option to repurchase;34

• The homeowner’s continued possession of the prop-erty;35

• The homeowner’s continuing duty to bear ownershipresponsibilities, such paying real estate taxes or per-forming property maintenance;36

• Disparity in bargaining power and sophistication, in-cluding the homeowner’s lack of representation bycounsel;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 WL481666 (M.D. Tenn. Feb. 27, 2006); Browner v. District ofColumbia, 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); Levyv. Butler, 93 Wash. App. 1001 (1998) (sale with repurchaseoption coupled with inadequate consideration sufficient to over-come 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 trans-fers the normal risks and responsibilities of a lease); accordMcGill 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 whereplaintiff-homeowner failed to demonstrate fraudulent or negli-gent misrepresentation and where defendant-purchaser had paidoff first and second mortgage, made improvements to the prop-erty, and paid utility bills owed by the plaintiffs and where themonthly rent payments were lower than the mortgage pay-ments).

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 thatthe lender’s misconduct was not excused by the fact that thedistressed homeowner made an improvident decision. The courtmade clear that this is precisely the sort of overreaching soughtto be curbed by usury laws:

The purpose of usury laws from time immemorialhas been to protect desperately poor people from theconsequences of their desperation. Lawmaking au-thorities in almost all civilizations have recognizedthat the crush of financial burdens causes people toagree to almost any conditions of the lender and toconsent to even the most improvident loans. Lenders,with the money, have all the leverage; borrowers indire 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 wholacked any real estate experience while equity purchasers weresophisticated and experienced in real estate transactions). But cf.Shelton v. Cunningham, 508 P.2d 55 (Ariz. 1973) (finding noequitable mortgage when lender and borrower were both oldermen with little education).

cluding the fact that the property was not listed forsale38 or that the parties did not conduct an appraisal orinvestigate title;39

• Financial distress of the homeowner, including theimminence of foreclosure and prior unsuccessful at-tempts to obtain loans.40

Typically, the homeowner has the burden of demonstrat-ing by clear and convincing evidence that an absolute deedis in fact an equitable mortgage.41 However, courts haveheld that a sale with an option to repurchase coupled with agross disparity between the sale price and the property valuewithout more can satisfy the homeowner’s burden.42 InCalifornia, the mere presence of an option to repurchase inan instrument conveying property in foreclosure creates apresumption that the transaction is a loan.43

The most direct consequence of an equitable mortgage isthat the deed transferring the property from the homeowneris voidable, and the homeowner may be able to assertcontinuing ownership through a quiet title action. If thehomeowner regains title through a quiet title action, therewill still be a debt owed to the rescuer. However, thehomeowner may have damage claims that will offset thedebt. Even if the homeowner is left owing a debt to therescuer, the homeowner may be able to save the home byrefinancing that debt with a legitimate lender.

11.4.1.2 The Bona Fide Purchaser Defense

Rescuers often sell or encumber the property quickly aftergaining title, which may cut off the homeowner’s ability torecover the property. Generally, a bona fide purchaser for

38 See, e.g., In re Davis, 169 B.R. 285 (E.D.N.Y. 1994) (home-owner 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 hewas 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. 2d1090 (D. Minn. 2005); McElroy v. Grisham, 810 S.W.2d 933(Ark. 1991) (seller in dire financial straits, which creditorknew); Browner v. District of Columbia, 549 A.2d 1107 (D.C.1998) (defendant knew plaintiff were financially distressed andhad been unable to obtain a loan); London v. Gregory, 2001 WL726940 (Mich. Ct. App. Feb. 23, 2001); Howard v. Diolosa, 574A.2d 995 (N.J. Super. Ct. App. Div. 1990) (homeowners pre-viously 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.2d590 (1979); Levy v. Butler, 93 Wash App. 1001, 1998 WL781146 (1998).

43 Cal. Civ. Code § 1695.12; see Boquilon v. Beckwith, 57 Cal.Rptr. 2d 503 (Cal. Ct. App. 1996).

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§ 11.4.1.2 Foreclosures / 2006 Supplement

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otice of such mortgage, takes the property free of thequitable mortgage.44 However, there are several caveats tohis rule that may preserve the homeowner’s options. Whilehe following discussion focuses on sales to third partyurchasers, the same principles may apply if the rescuer hasaken out new loans on the property that the homeowner isttempting to avoid.

First and most important, a purchaser who has notice ofhe homeowner’s claim to ownership may still be subject tohe equitable mortgage doctrine. ‘‘[N]otice to [the bona fideurchaser], actual or constructive, [is] an element essentialo the survival of the [equitable] lien, as against [the bonade purchaser].’’45 Moreover, suspicious circumstances thatf themselves may not provide notice may put the purchasern ‘‘inquiry notice’’ with a duty to investigate further.46 Thiss why homeowners should immediately record a lis pen-ens to put any subsequent purchasers on notice and pre-erve remedies against them.

Among the circumstances that may lead a court to imputeotice are:

• The homeowner’s continued possession of the prop-erty;47

• The purchaser’s acquisition of title through a quit claimdeed, especially if it is one of a series;48

• The seller’s failure to satisfy the homeowner’s recordedmortgages;49

44 Lynch v. Murphy, 161 U.S. 247, 255 (1896); see Fla. Stat. Ann.§ 697.01 (setting forth equitable mortgage rule with exceptionthat ‘‘no such conveyance shall be deemed or held to be amortgage, as against a bona fide purchaser or mortgagee, forvalue 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, thedeed was not void and the burden was on Martinez to rescind thefraudulently procured deed prior to its conveyance to a subse-quent 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 cangive a purchaser notice of a title defect and defeat bona fidepurchaser status, and finding that purchaser was on inquirynotice of foreclosure rescue scam).

46 See Martinez v. Affordable Housing Network, Inc., 123 P.3d1201, 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.3d1201, 1207–1208 (Colo. 2005) (observing that conveyance byquitclaim imposes an element of risk on the buyer that, thoughnot dispositive, ‘‘is a significant factor to be considered whenassessing inquiry notice,’’ and finding two back-to-back quit-claim conveyances particularly unusual).


6

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 oftitle defects (or showing that it was not a bona fidepurchase ‘‘for value’’);

• Any other suspicious circumstances—such as a largediscrepancy between the homeowner’s original pur-chase price and the sale price to the rescuer—thatwould lead a reasonable buyer to inquire further and todiscover the homeowner’s claim.

Some of these factors, such as the homeowner’s possessionof the property or a lis pendens, may be sufficient in and ofthemselves. Others, such as transfer through a quit claimdeed, are not conclusive but may lend support to otherevidence.

The advocate may wish to consult with a real estateexpert, or a trust expert if the case involved an inter vivostrust, to determine whether the circumstances would arousesuspicion in a reasonable buyer. Real estate practices andcustoms vary from state to state and from locality to locality,and any departure from standard practices should be sus-pect. Documents required for a trust also vary from state tostate and it is important to determine what documents areasonable purchaser would inspect and whether there wereunusual features of the trust documents that would havealerted a buyer that something was amiss.

For foreclosure rescue scams, the homeowner’s continuedpossession of the property is clearly the most importantfactor that should put a purchaser on at least inquiry notice.As one court observed, ‘‘possession of real estate is suffi-cient to put an interested person on inquiry notice of anylegal or equitable claim the person or persons in open,notorious, and exclusive possession of the property mayhave. . . . Further, where the party in possession is the soletenant and lessee, certain circumstances may give arise to aduty to inquire as to their rights as tenants beyond merepossessory rights.’’51

Second, even if the homeowners cannot recover the prop-erty from a bona fide purchaser, the equitable mortgagedoctrine may still be asserted to pursue monetary claimsagainst the original rescuer.

Finally, if the rescuer actually forged the deed from thehomeowner, then it is void ab initio and not merely voidable.In that case, the rescuer has no title to convey, even to a bonafide purchaser.52



52 See Martinez v. Affordable Housing Network, Inc., 123 P.3d1201, 1205 (Colo. 2005); M.M.&G., Inc. v. Jackson, 612 A.2d186 (D.C. 1992); Harding v. Ja Laur Corp., 315 A.2d 132 (Md.

11.4.2 Truth in Lending

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While the Truth in Lending Act (TILA) is generally aisclosure statute and does not limit the substantive terms ofoans, it can be useful in attacking foreclosure rescue scams,ecause rescuers often structure these transactions as salesnd do not provide the disclosures required by TILA.

TILA contains an express cause of action with remedieshat include actual and statutory damages and attorney fees.he most important remedy in the foreclosure rescue scamontext, however, is the right to rescission, which includesoiding of finance charges and closing costs. TILA alsorovides the basis for federal jurisdiction, which may or mayot be an advantage, depending on the state.

Because TILA only applies to creditors who have aegular business of extending credit, it may not apply toome of the small time rescuers who populate the foreclo-ure rescue scam market. A subsection of TILA, however,he Home Ownership and Equity Protection Act (HOEPA),hich applies to certain high cost loans, has a looser defi-ition of ‘‘creditor,’’ and also provides additional require-ents and remedies. HOEPA is discussed in § 11.4.3, infra.

1.4.2.2 When Does TILA Apply?

When a sale/leaseback or inter vivos trust is found to bedisguised loan, it is subject to disclosure requirements andILA remedies to the same extent as an explicit secured loan

ransaction.53 To fall under TILA, a transaction must involve‘credit’’54 offered or extended by a ‘‘creditor’’55 to a ‘‘con-umer’’ (who must be a natural person),56 primarily for

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 saledue to fraud or failure to meet notice requirements, the sale isvoid and any resulting title is a nullity).

53 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, 432F. Supp. 887 (W.D.N.C. 1977); Long v. Storms, 622 P.2d 731(Or. 1981) (transaction whereby investor took a deed in ex-change for a loan with a repurchase option was an equitablemortgage, or a loan with a security interest; investor found to becreditor subject to Truth in Lending Act and homeowner wasentitled to rescind because Truth in Lending disclosures werenot made); National Consumer Law Center, Truth in Lending§ 6.2.5 (5th ed. 2003 and Supp.); see also In re Mattera, 128B.R. 107 (Bankr. E.D. Pa. 1991).

54 15 U.S.C. § 1602(e); Reg. Z § 226.2(a)(14); National ConsumerLaw Center, Truth in Lending § 2.2.4 (5th ed. 2003 and Supp.).

55 15 U.S.C. § 1602(f); Reg. Z § 226.2(a)(17)(i); National Con-sumer Law Center, Truth in Lending § 2.3 (5th ed. 2003 andSupp.).

56 15 U.S.C. § 1602(h); Reg. Z § 116.2.(a)(11); National ConsumerLaw Center, Truth in Lending § 2.2.2 (5th ed. 2003 and Supp.).

finance charge or payable by written agreement in more thanfour installments.58

Substance governs over form, and state common law orstatutory rules governing equitable mortgages can be used toestablish that the transaction meets the definition of ‘‘credit’’for TILA purposes.59 Once it is established that the trans-action is in fact a loan, it is likely that it will meet most ofthese other criteria.

The most difficult hurdle is establishing that the creditwas extended by a ‘‘creditor.’’ To meet the TILA definition,a creditor must ‘‘regularly’’ extend consumer credit.60 Incases of real estate secured loans, ‘‘regularly’’ means six ormore loans per year.61 However, if a high-cost loan that fallsunder HOEPA62 is involved, then the creditor need onlymake two or more mortgages per year, or one such mortgagethrough a broker, to be considered a creditor for all TILApurposes.63

The ‘‘creditor’’ is the person to whom the obligation isinitially payable on its face. Arrangers are not covered underTILA. The liability of assignees is discussed in § 11.4.2.6,infra. TILA also sets forth several exemptions from itscoverage,64 but a foreclosure rescue transaction is unlikelyto fall within any of them.

11.4.2.3 TILA Disclosure Requirements

TILA works primarily by providing standardized defini-tions of certain loan terms and requiring disclosure of thoseterms. 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 inLending §§ 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); NationalConsumer Law Center, Truth in Lending § 2.3.4 (5th ed. 2003and Supp.).

59 Reg. Z § 226.2.(a)(25); Commentary § 226.2(a)(25)-1; Wilsonv. 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 § 11.3.2.2, supra for a discussion

of records to investigate to obtain evidence of the rescuer’s othertransactions. 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 andSupp.).

64 15 U.S.C. 1603; Reg. Z § 226.3; see National Consumer LawCenter, Truth in Lending § 2.4 (5th ed. 2003 and Supp.).

65 In addition to specific definitions, the disclosures must be

87

In most foreclosure rescue scams, however, the technicali-tad

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11.4.2.4 The Right of Rescission


8

ies do not matter, because the rescuer structures the trans-ction as a sale rather than a loan and provides no TILAisclosures at all.In the case of ‘‘closed-end’’ loans,66 failure to disclose the

ollowing information gives the consumer a right to bothctual damages and statutory damages of $200 to $2000 perransaction 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

ore important than the damages, the failure to disclose anyf the items listed above—other than security interests—lso gives rise to a right to rescission.

TILA also requires disclosure of a second list of items,iolations of which give rise only to actual damages and noight to rescission.73

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 LawCenter, Truth in Lending §§ 4.2–4.4 (5th ed. 2003 and Supp.).

66 A closed-end loan has a fixed term, as is the case for mostforeclosure rescue scams. Different rules apply for open-endloans that, like home equity lines of credit, have no fixed termsand allow the borrower to repay as much or little as he or shedecides above a minimum amount.

67 15 U.S.C. § 1638(a)(3); Reg. Z § 226.18(d); see NationalConsumer Law Center, Truth in Lending Ch. 2, § 4.6.3 (5th ed.2003 and Supp.).

68 15 U.S.C. § 1638(a)(2)(A); Reg. Z § 226.18(b);see NationalConsumer Law Center, Truth in Lending § 4.6.2 (5th ed. 2003and Supp.).

69 15 U.S.C. § 1638(a)(4); see National Consumer Law Center,Truth in Lending § 4.6.4 (5th ed. 2003 and Supp.).

70 15 U.S.C. § 1638(a)(6); Reg. Z § 226.18(g). The paymentschedule includes the number, amount, and timing of payments.See National Consumer Law Center, Truth in Lending § 4.6.5(5th ed. 2003 and Supp.).

71 15 U.S.C. § 1638(a)(5); Reg. Z § 226.18(h); see NationalConsumer Law Center, Truth in Lending § 4.6.6 (5th ed. 2003and Supp.).

72 15 U.S.C. § 1638(a)(9); Reg. Z § 226.18(m); see NationalConsumer Law Center, Truth in Lending § 4.6.7 (5th ed. 2003and Supp.).

73 This group includes the identity of the creditor, itemization ofthe amount financed, prepayment penalties, late payment fees,security interest charges, insurance charges and debt cancella-tion agreement, mortgage lender’s assumption policy, a demandfeature, and whether certain other information can be foundelsewhere. 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.).

8

11.4.2.4.1 Overview

The right of rescission is the most important remedyTILA provides to attack a foreclosure rescue scam. Rescis-sion can be quite dramatic because it can:

• Completely undo the transaction, eliminate onerousagreements, and void transfer of the property to therescuer;

• Eliminate the rescuer’s ability to use summary evictionproceedings 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 securedloans (in addition to any statutory damages for disclo-sure violations), if the creditor fails to respond to aproper rescission notice.74

The value of rescission to save homeowners from foreclo-sure rescue scams cannot be overstated. The lender (andassignee) literally must undo the deal if it violated certainrequirements. Becoming familiar with the ground rules ofrescission is essential in home defense cases.75

11.4.2.4.2 What transactions can be rescinded

In addition to TILA’s general coverage provisions, only anon-purchase money security interest in the consumer’sprimary residence is subject to rescission.76 This means thatthe mortgage loan in question cannot be the one obtained topurchase the home. Rescission does apply to non-purchasemoney interests, whether first or second mortgages, homeequity loans, bridge loans, home improvement contracts,and liens arising by operation of law.77 Since foreclosurerescue scams target people who already own their homes, itwill usually be clear that the transaction is not a purchasemoney loan.

74 See §§ 4.8.4.2, 4.8.4.7, supra.75 This subsection provides only a general overview of the rescis-

sion remedy. The rescission rules appear in 15 U.S.C. § 1635.Regulation Z and the Official Staff Commentary further flesh outthese provisions: Reg. Z § 226.15 (open-end credit) and§ 226.23 (closed-end credit). The relevant Official Staff Com-mentary 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 befound in National Consumer Law Center, Truth in Lending (5thed. 2003 and Supp.).

76 National Consumer Law Center, Truth in Lending § 6.2.1 (5thed. 2003 and Supp.).

77 Id. When the same creditor refinances the loan, rescissionapplies only to the extent of the new money advanced. Id.§ 6.2.6.2.

11.4.2.4.3 When rescission can be exercised

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11.4.2.4.4 Exercising the right to rescind


The homeowner has three business days78 to rescind fromhe latest of:

• Consummation of the transaction;• Delivery of proper notice of right to rescind;79 or• Delivery of all material disclosures, correctly made.80

he three days begin to run only when all material disclo-ures and the notice of right to rescind, in the proper form,re received.

If the creditor fails to make the required disclosures orrovide notice of the right to rescind, there is a continuingight to rescind for up to three years from consummation.ince most foreclosure rescue scams are not styled as loans,

he rescuers rarely provide any disclosures, and this three-ear rule will normally apply.81 In addition, in Massachu-etts and some other states, rescission under a state TILAaw may be permitted defensively by way of recoupmenteyond three years.82

The right to rescind a loan under TILA is normallyxtinguished if the consumer’s interest in the property isold or transferred (including by foreclosure sale).83 Thisule does not apply if the transaction is determined to be anquitable mortgage under state law such that any sale orransfer is invalid.84 As discussed above, there may be issuesn applying the equitable mortgage doctrine to a bona fideurchaser who takes title without notice of the equitableortgage, though the homeowner’s continued possession of

he property may provide sufficient notice.85

For loans that fall under HOEPA,86 violations of most ofhe HOEPA protections also trigger the extended three-yearight to rescind.

78 Saturdays are included. Only Sundays and certain specifiedfederal holidays are excluded. Reg. Z, § 226.2 (a)(6).

79 Specific rules govern the form of the notice of the right torescind and the circumstances that make it ineffective or allowthe consumer to waive it National Consumer Law Center, Truthin Lending §§ 6.2.9, 6.4.3, 6.5 (5th ed. 2003 and Supp.).

80 For closed-end loans, the material disclosures are the amountfinanced, the finance charge, the APR, the payment schedule,and the total of payments. See § 11.4.2.3, supra.

81 Once the three-year period passes, however, the right to rescindexpires and there is generally no right under federal law to raiserescission as a defense to foreclosure even by way of recoup-ment. There are some potential arguments to get around this rulein certain limited circumstances. See National Consumer LawCenter, Truth in Lending § 6.3.3 (5th ed. 2003 and Supp.).

82 See National Consumer Law Center, Truth in Lending § 6.3.3.2(5th ed. 2003 and Supp.).

83 See National Consumer Law Center, Truth in Lending § 6.3.2.2(5th ed. 2003 and Supp.).

84 Id. § 6.3.2.2.1 & n.238.85 See § 11.4.1.2, supra.86 For a discussion of HOEPA, see § 11.4.3, infra.

Rescission works through a sequential, three-step pro-cess.

First, the consumer sends written notice of rescission,which operates automatically to void the security interest inthe real property and to eliminate the consumer’s obligationto pay the finance charges (even if accrued) and othercharges.87 In the case of a foreclosure rescue scam, once asale/leaseback transaction is restructured into a loan, theagreements 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, someexplanation is obviously needed since the transaction mostlikely took the form of a sale or transfer and not of a loansubject to TILA. A sample letter exercising the right torescission is included on the CD-Rom accompanying thismanual. Some courts have held that a complaint filed incourt may serve as the notice of rescission, but a separatenotice is preferable.88

Second, after the notice of rescission has been sent, thecreditor or assignee has twenty days to refund or credit anymoney paid (including any money or property given to athird party) and to take steps to void the security interest.89

For a foreclosure rescue scam, this obligation would includethe obligation to reconvey the property back to the home-owner and to clear any other clouds or new encumbranceson the homeowner’s title.

Third, when the creditor performs its ‘‘step 2’’ obligation,then the consumer must tender back any money or propertyreceived from the creditor.90 Although the scope of theirmodification authority is debatable, most courts have con-cluded that they have equitable authority to require theconsumer to tender before the creditor must perform itsobligations, or conversely to modify the tender obligation.91

The important point to remember is that a homeownerwho seeks rescission must be prepared to tender back his orher gains from the transaction, i.e., if the creditor paid off theoriginal 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); seeNational Consumer Law Center, Truth in Lending § 6.6.2 (5thed. 2003 and Supp.).

88 Id. § 6.6.2.1.89 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 (5thed. 2003 and Supp.).

90 15 U.S.C. § 1635(b); Reg. Z §§ 226.15(d)(3), 226.23(d)(3); seeNational Consumer Law Center, Truth in Lending §§ 6.6.5, 6.8(5th ed. 2003 and Supp.).

91 See §§ 4.8.4.2, 4.8.4.7, supra; National Consumer Law Center,Truth in Lending § 6.7 (5th ed. 2003 and Supp.). TILA does notallow courts to nullify the automatic ‘‘step 1’’ consequences ofthe rescission notice—voiding of any security interest andcancellation of any charges—although many courts still rely onpre-1980 case law that was in conflict on this point. See id.§ 6.7.2.

89

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9

ble to credit any payments made to the rescuer—whether inhe form of rent payments, finance charges, closing costs, orther disguised fees or payments—because rescission voidsny obligation to pay those costs. In addition, any closingosts paid to third parties are voided. Finally, any TILAamages to which the consumer is entitled may also beredited against the tender obligation.

The consumer may come up with the tender in a varietyf ways. The consumer may be able to refinance elsewhereith an affordable loan, since all interest, closing costs, and

redit-related charges are eliminated. (Be sure to look forarket rate loans, too.) Elders may wish to explore reverseortgage options to obtain refinancing funds.92

Courts may permit the consumer to repay the tender innstallments or allow some time to come up with a paymentr refinancing.93 The consumer may tender in bankruptcy,nd some courts have treated the creditors as unsecuredreditors in chapter 13 proceedings.94

If the creditor fails to respond to the cancellation notice,he consumer may be forced to file an affirmative action tonforce the rescission right. In bankruptcy proceedings, thisay be raised in an adversary proceeding. The creditor’s

ailure to respond gives rise to a claim for statutory damagesnd actual damages. This is in addition to any claim whichay be available for other TILA statutory damages.95

As soon as the rescission notice is sent, the consumerhould start making monthly payments in an affordablemount into an escrow account or some other protectedccount. These payments will help build up a sum to offers the tender amount. The consumer’s record of regularayments will also be useful in persuading the court to allowhe consumer to tender in installments.

In most foreclosure rescue scam cases, the homeownerill be asserting not just TILA claims, but also a variety ofon-TILA claims that may offer punitive, statutory, or mul-iple damages. The possibility of a multiple, statutory, orunitive damage award on the homeowner’s non-TILAlaims is a strong argument why the court should delay anyetermination of the tender obligation until after trial. Afterhe court resolves all the homeowner’s claims, a net amountay be owed to the homeowner. Since rescuers tend to be

ndercapitalized entrepreneurs, if the homeowner is re-uired to pay the tender amount early the rescuer mayisappear with it.

92 For a discussion of how to assess when a refinancing is a goodidea, see National Consumer Law Center, The Cost of Credit:Regulation, Preemption, and Industry Abuses § 6.5 (3d ed. 2005and Supp.).

93 See § 4.8.4.3, supra; National Consumer Law Center, Truth inLending § 6.7 (5th ed. 2003 and Supp.).


95 See § 4.8.4.7, supra.

0

TILA gives consumers, with some exceptions, the abilityto collect actual damages without cap and to recover costsand reasonable attorney fees. In addition, consumers maycollect statutory damages for certain violations96 withouthaving to prove actual damages, regardless whether thecreditor knew about the violation or whether the consumerwas deceived.

In the case of closed-end credit secured by real property,the statute sets statutory damages for disclosure violationsbetween $200 and $2000.97 In general, the consumer mayrecover only one statutory recovery per transaction fordisclosure violations, even if multiple violations are com-mitted or multiple parties are involved.98 Separate and apartfrom disclosure violations, TILA provides statutory dam-ages of $200 to $2000 in the case of closed-end real-estate-secured loans, if the creditor fails to respond to a properrescission notice. Violations of HOEPA prohibitions carryadditional statutory penalties.99

The limitation period for affirmative damages claims isone year from the date of the violation.100 Consumers canalso assert damage claims defensively by way of recoup-ment or set-off in an action by the creditor to collect on thealleged debt filed more than a year from the date of theviolation.101 The one-year statute of limitations for damagescan also be equitably tolled in the event of fraud.102

11.4.2.6 Assignee Liability

Under TILA, assignees are always liable for rescission, tothe same extent as the original creditor.103 However, in orderto exercise TILA rescission in the sale/leaseback context,the homeowner must first convince the court to apply theequitable mortgage doctrine to void the transfer deed andconvert the sale into a loan subject to TILA. This may bemore difficult if the rescuer has already transferred the

96 See § 11.4.2.3, 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. SeeNational Consumer Law Center, Truth in Lending 8.6.2.1 (5thed. 2003 and Supp.).

98 15 U.S.C. § 1640(g). A series of refinancings may be consideredmultiple transactions, however, allowing one award of statutorydamages for the disclosure violations in each refinancing. SeeNational Consumer Law Center, Truth in Lending § 8.6.3.1 (5thed. 2003 and Supp.).

99 See § 11.4.3.5, 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.).

property to a third party purchaser. The homeowner willlaip

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ikely have to show that the purchaser had some notice,ctual or constructive, of the homeowner’s claims in order tonvoke the equitable mortgage doctrine against the thirdarty purchaser.

In the foreclosure rescue scam context, however, theomeowner likely still has possession of the property, whichhould be sufficient to put the purchaser on inquiry noticend defeat a bona fide purchaser defense.104 In that case,ILA rescission should be available against the assignee/urchaser.105

In contrast to rescission, assignees are shielded fromILA liability for damages unless the violation is apparentn face of disclosure documents or other documents as-igned.106 Assignees have expended liability for damages ifhe loan falls under HOEPA, however.107

It is always important to marshal evidence showing thathe third party had reason to be suspicious of the transaction.vidence along these lines will also be necessary if theomeowner is asserting claims such as fraud directly againsthe third party purchaser.

1.4.3 Home Ownership and EquityProtection Act

1.4.3.1 Scope

1.4.3.1.1 Overview of HOEPA triggers

In 1994, Congress passed the Home Ownership andquity Protection Act (HOEPA), designed to prevent someredatory lending practices.108 HOEPA, which is part ofILA, imposes additional requirements and remedies on

oans made at high rates or with excessive costs and fees.HOEPA applies only to those loans that are subject to

escission under TILA: non-purchase, closed-end credit se-ured by the homeowner’s primary residence.109 In addition,everse mortgages are exempted from HOEPA. TILA’s gen-ral definition of ‘‘credit’’ applies, but the definition of‘creditor’’ is much looser: a creditor need only make twoOEPA loans per year, or one such mortgage through a

104 See § 11.4.1.2, supra.105 In Armstrong v. Real Estate Int’l, Ltd., 2006 WL 354983

(E.D.N.Y. Feb. 14, 2006), the court refused to preliminarilyenjoin the rescuer from transferring the property because anytransferee/assignee would be subject to TILA rescission, andtherefore the plaintiff could not show irreparable injury. Thecourt did not discuss the bona fide purchaser defense, but theremay have been a lis pendens recorded that would have given anypurchaser notice.

106 15 U.S.C. § 1641(a).107 See 11.4.3.3, 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 §§ 11.4.2.2, 11.4.2.4.1, supra.

provisions.110 As with TILA generally, courts will lookbeyond the form of the transaction and may use the equi-table mortgage doctrine to view a sale transaction as aloan.111

HOEPA protections apply if either one of two triggers ismet. First, the loan is subject to HOEPA if the annualpercentage rate (APR) exceeds the yield on treasury secu-rities with comparable maturities by more than eight per-centage points for a first lien, or ten points for a subordinatelien.112 For a sale/leaseback transaction, the time period fora ‘‘comparable’’ treasury maturity can be determined bylooking at the terms of the lease, the expiration date of anoption to purchase, or the date any balloon payment is due.

Second, the loan is subject to HOEPA if the total of thepoints and fees exceeds eight percent of the total loanamount and is over an amount adjusted annually for infla-tion ($528 for 2006).113 ‘‘Points and fees’’ is defined toinclude all noninterest ‘‘finance charges,’’ which in turn aredefined as ‘‘any charge payable directly or indirectly by theconsumer and imposed directly or indirectly by the creditoras an incident to or a condition of the extension of credit.’’114

In addition, all compensation paid to mortgage brokers andcertain closing costs count as points and fees.115 Once aforeclosure rescue transaction is reconstructed to be seen asa loan, the costs that the homeowner incurs can be consid-ered to be incident to the extension of credit.

To determine whether a foreclosure rescue transactionmeets either of these triggers, one can consider the terms ofthe repurchase portion of the transaction alone or the unifiedimpact of the sale and the repurchase. When the homeown-er’s repurchase price is higher than the sale price, the lostequity is arguably a finance charge that should be consideredin the calculation.116

110 15 U.S.C. § 1602(f); Reg. Z § 226.2 n.3; National ConsumerLaw Center, Truth in Lending §§ 2.3.6, 9.2.3 (5th ed. 2003 andSupp.). See, e.g., Hruby v. Larsen, 2005 WL 1540130 (D. Minn.June 30, 2005).

111 See § 11.4.2.2, supra.112 The relevant rate is the one in effect on the fifteenth day of the

month immediately preceding the month in which the applica-tion for the extension of credit is received by the creditor. 15U.S.C. § 1602(aa)(1)(A). In these cases, there is not likely to bea formal ‘‘application.’’ The homeowner could argue that therelevant date is the fifteenth day of the month preceding themonth in which the scammer first discussed the transaction, oralternatively, in which the transaction itself occurred.

The rates for comparable treasury bonds can be found on theFederal 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.’’ Thelength of the contract to repay and ‘‘rent’’ the property is themost 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

91

11.4.3.1.2 Example of APR trigger calculation

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HOEPA points and fees is included on the CD-Rom accom-

§ 11.4.3.1.2 Foreclosures / 2006 Supplement

9

The following is an example of how to determine if aoreclosure rescue scam loan exceeds the HOEPA APRrigger. Foreclosure rescue scams are structured in a varietyf ways, however, so other ways of determining the APRay be appropriate for a particular case.Assume that the homeowner’s regular monthly mortgage

ayment was $733.76 per month (this would be the monthlyayment on a $100,000 30-year mortgage at 8%). Assumelso that the homeowner was $10,000 in arrears on mort-age payments and $2000 in arrears on property taxes, butad $40,000 in equity in the property. A typical rescueright pay the combined $12,000 arrearage in exchange forquit claim deed on the property and allow the homeowner

o ‘‘rent’’ the property for $1233.76 per month (the $733.76egular mortgage payment plus $500 toward the $12,000rrearage) for 24 months, followed by a balloon payment of60,000 to exercise an option to reacquire the home.The annual percentage rate for a $12,000 loan with this

ayment schedule is 154.15%.117 Assuming that the ‘‘appli-ation’’ date of the sale/leaseback was June 1, 2006, thisPR is well in excess of the HOEPA APR trigger of 14.99%

the Treasury bond rate of 4.99% on the 15th of the prioronth plus 10%).118

1.4.3.1.3 Example of points and fees trigger calculation

The HOEPA points and fees trigger is based not on thePR but on charges such as prepaid finance charges androker fees that are paid directly or indirectly by the con-umer, at or before closing, as an incident to or a conditionf the loan. Certain closing costs can also count toward theoints and fees trigger if they are inflated or paid to affiliates,r if the creditor receives a portion of the charge. The rulesor determining whether a charge counts toward the pointsnd fees trigger are quite complex and are detailed inCLC’s Truth in Lending.119 A worksheet for calculating

and Strategies to Attack a Growing Problem, 39 ClearinghouseReview Journal of Poverty Law and Policy 607, 617–618(Mar.–Apr. 2006), for a more detailed discussion of how tocalculate these triggers in the context of a foreclosure rescuescam.

117 The APR was calculated using the NCLC Consumer Law Mathprogram included on the CD-Rom accompanying this manualby inserting $12,000 in the ‘‘amount financed’’ box, 25 in the‘‘number of periodic payments’’ box, $1233.76 in the ‘‘amountof most common payment’’ box, and $60,000 in the ‘‘amount ofany irregular final payment’’ box, and then pushing the ‘‘cal-culate’’ button.

118 In this example, the 10% APR trigger for junior lien mortgagesis used. Since the rescuer only paid the delinquent amount of theexisting first mortgage, not the full balance, a conservativeapproach treats the transaction with the rescuer as a junior lienmortgage loan.


2

panying this manual. For most foreclosure rescue transac-tions, the APR trigger will present a clearer analysis. How-ever, the following example illustrates the application of thepoints and fees trigger in a hypothetical foreclosure rescuetransaction.

Assume that in the previous example the rescuer chargedthe homeowner an up-front fee of $500 and required thehomeowner to make two additional $400 monthly paymentsto the rescuer while the rescuer was finalizing the transac-tion. Assume also that the rescuer required the homeownerto pay $300 for an appraisal before closing, but funneled themoney to an appraisal company owned by the rescuer.

All of these up-front charges, totaling $1600, at leastarguably count toward the HOEPA points and fees trigger asthey were ‘‘payable directly or indirectly by the consumerand imposed directly or indirectly by the creditor as anincident to or a condition of the extension of credit.’’120

These points and fees would amount to 13.3% of the totalloan amount of $12,000,121 exceeding the HOEPA triggersof $528 (for 2006) and 8% of the total loan amount.

This example provides a roadmap for calculating thepoints and fees trigger in the most conservative manner.Alternatively, if the rescuer structures the deal to capture aprofit by creating a difference between the homeowner’s‘‘sale’’ price for the property and a much larger ‘‘repur-chase’’ 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 thepoints and fees trigger are usually paid out of the proceedsof the loan at closing (or paid by the lender before closingand then added to the principal of the loan). Sometimes,however, borrowers pay these charges in cash before clos-ing, or bring cash to the closing. With foreclosure rescuescams, the points and fees analysis is clearest if the home-owner made cash payments to the rescuer at or beforeclosing. Charges may also count toward the points and feestrigger if the rescuer paid them at or before closing, and thenadded them to the amount the consumer agreed to pay torepurchase the home. Foreclosure rescue transactions arestructured in a variety of ways, and the analysis of pointsand fees will depend on the details of the transaction.

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 feesare often paid out of the proceeds of the loan and then financedas part of that loan. In that case, the ‘‘total loan amount’’ asdefined by HOEPA is the proceeds of the loan minus the pointsand fees. See National Consumer Law Center, Truth in Lending§ 9.2.9.6 (5th ed. 2003 and Supp.).

11.4.3.2 Substantive Prohibitions

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11.4.3.3 Expanded Assignee Liability


Once a loan is determined to be a high-cost one that meetsne of the HOEPA triggers, several additional prohibitionsnd requirements kick in, beyond those in TILA gener-lly.122 Most are relevant only to traditional loans, but somere useful in dealing with foreclosure rescue scams.

HOEPA prohibits certain contract terms that Congressetermined to be abusive in the high-rate lending context.mong these, balloon payments are prohibited unless the

oan has a term of five years or more.123 A lease-purchaserrangement that requires the homeowner to make rentayments for a period of time, followed by a large lump-sumayment to exercise the repurchase option, may violate thealloon payment prohibition.

HOEPA also prohibits certain lender behavior. Of par-icular note, creditors may not make a HOEPA loan withoutegard to ability to repay, as where the lender looks to thealue of the home, rather than the homeowner’s monthlyncome. This prohibition applies only if the lender engagesn a pattern or practice of this activity, which can be aifficult standard to meet, though it may be revealed throughiscovery of all of the lender’s loans. A presumption isreated that a creditor violates this prohibition if it does noterify and document the borrower’s ability to repay with anancial statement and credit report.124 Foreclosure rescuerssually violate this prohibition since they do not assessbility to repay and do not verify income.

Finally, HOEPA mandates that the consumer receive apecial advance warning at least three business days beforehe loan consummation. The lender must warn that the homend any equity in it might be lost in the event of nonpay-ent, and must disclose, for fixed-rate loans, the APR, the

mount of regular monthly payments, and any balloonayment.125 This warning is virtually never made in theontext of a foreclosure rescue scam, both because rescuerso not generally structure transactions as loans, and becausehey often rush the homeowner to complete the transactionuickly, before the homeowner understands the nature of thecam or can obtain advice from a lawyer, friend, or relative.

122 See § 4.8.5.3, supra.123 Additional prohibitions not discussed in this subsection include

prepayment penalties, interest rate increases upon default, nega-tive amortization, prepaid payment, escrows, and due-on-de-mand clauses. Some of these terms are prohibited for all HO-EPA loans, whereas others have exceptions. See NationalConsumer Law Center, Truth in Lending § 9.4 (5th ed. 2003 andSupp.).

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 inNational Consumer Law Center, Truth in Lending § 9.3 (5th ed.2003 and Supp.). A recommended model form is contained inReg. Z Appx. H-16.

An important aspect of HOEPA is its expanded assigneeliability: assignees of covered mortgages are liable for allclaims and defenses that the consumer could assert againstthe originator, except to the extent of certain limitations ondamages discussed below.126 This expansion of liabilityeven covers claims and defenses that can be raised againstthe original lender under common law, statutes, or othertheories.

An assignee may defeat liability if it legitimately couldnot have known the assigned mortgage was a coveredloan.127 In the sale/leaseback, there are two facets to thisdefense.

First, as discussed above, the court must decide whetherthe assignee had sufficient notice of the true nature of thetransaction to be subject to the equitable mortgage doctrine,converting the sale/leaseback into a loan potentially subjectto HOEPA.128

Second, even if the assignee can be imputed with knowl-edge that the transaction was a loan, the assignee can defeatliability if it carries the burden of showing that a reasonableperson exercising ordinary due diligence could not havedetermined the transaction was a high-cost loan covered byHOEPA.129 In the foreclosure rescue scam context, theassignee/purchaser may disavow any knowledge of the de-tails of the original sale/leaseback transaction between thehomeowner and the rescuer. To rebut such a claim, thehomeowner should seek out evidence of warning signs that,if investigated by a reasonable purchaser, would have re-vealed the high-cost details that bring the transaction withinHOEPA.

Any damage award against the assignee under non-HOEPA/TILA theories that is based on the assignee liabilityprovisions of HOEPA is capped. Damages are limited to theamount of all remaining indebtedness and the total amountalready paid by the consumer.130 When damages areawarded based on TILA and on other claims, the TILAdamages must be offset against the damages awarded on theother claims.131

11.4.3.4 Remedies

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 pur-chase loans from the original lenders.

127 See § 4.8.5.4, supra.128 See § 11.4.1.1, 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§§ 9.7.5.2–9.7.5.3 (5th ed. 2003 and Supp.).

93

Second, HOEPA violations that are ‘‘material’’ (under achaswrt

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9

ommon law standard, not the TILA standard) carry en-anced double damages of the sum of all finance chargesnd fees paid by the consumer.132 In the foreclosure rescuecam context, entering into a sale/leaseback transactionithout regard to the homeowner’s ability to exercise a

epurchase option, or requiring a balloon payment beyondhe homeowner’s reach, are certainly material violations.

Damage claims have a one-year statute of limitations forffirmative suits, but can be raised at any time defen-ively.133

Third and more important, violations of HOEPA’s disclo-ure provisions and the inclusion of a prohibited term, suchs a balloon payment, are deemed ‘‘material’’ under TILA,iving the consumer the right to rescind the transaction forp to three years after it was consummated. Making a loanithout regard to ability to pay does not trigger the right to

escind, though it does entitle the homeowner to damages.134

1.4.4 Unfair and Deceptive Acts and Practices(UDAP) Statutes

1.4.4.1 Overview of State UDAP Statutes

Foreclosure rescue scams can often be challenged undertate unfair and deceptive acts and practices (UDAP)aws.135 All fifty states, the District of Columbia, Puertoico, Guam, and the Virgin Islands have at least one statuteith broad applicability that addresses deception and abuse

n the marketplace, and all but Iowa and Puerto Rico affordhe consumer a private cause of action.136 In a majority oftates, the UDAP statute prohibits not just deception, butlso unfair or unconscionable practices.

The broad, expansive, developing nature of UDAP stat-tes is their unique strength. When a practice does not fallrecisely under a debt collection act, state or federal creditegislation, warranty law, or other statute, UDAP statutes

132 15 U.S.C. § 1640(a).133 15 U.S.C. § 1640(c).134 15 U.S.C. § 1639(j); Reg. Z § 226.23(a) n.48135 See also § 4.8.3.1, supra. For more detailed discussion of UDAP

laws, see National Consumer Law Center, Unfair and DeceptiveActs and Practices (6th ed. 2004 and Supp.). Another helpfulreference is Prentiss Cox, Foreclosure Equity Stripping: LegalTheories and Strategies to Attack a Growing Problem, Clear-inghouse Review (Mar.–Apr. 2006) at 607–626. The use ofUDAP claims to challenge predatory lending is discussed atNational Consumer Law Center, Unfair and Deceptive Acts andPractices § 5.1.2 (6th ed. 2004 and Supp.); National ConsumerLaw Center, The Cost of Credit: Regulation, Preemption, andIndustry Abuses § 11.5 (3d ed. 2005 and Supp.).

136 These statutes are listed and summarized in National ConsumerLaw Center, Unfair and Deceptive Acts and Practices Appx. A(6th ed. 2004 and Supp.). Even though Iowa’s UDAP statute isgenerally not privately enforceable, it is possible that it can beraised defensively. See id. § 7.2.2.

4

business practice aimed at consumers is at least arguably aUDAP violation, unless the trade practice falls clearly out-side the scope of the statute.137 Another important pointabout UDAP claims is that most courts have held that, sincethey are not based on breach of contract, they are unaffectedby the parol evidence rule or by disclaimers and exculpatoryclauses in the contract documents.138

A UDAP claim should always be considered when deal-ing with a foreclosure rescue scam. This section first com-pares UDAP with fraud claims and then discusses theadvantages and disadvantages of UDAP claims as comparedto TILA/HOEPA claims. (For a comparison of UDAPclaims and claims under state foreclosure rescue statutes,see § 11.4.5.1, infra.) This section also discusses the appli-cation of UDAP statutes to foreclosure rescue scams, andends with an overview of UDAP remedies.

11.4.4.2 Comparison of UDAP and Fraud Claims

UDAP claims have a number of advantages when com-pared to other claims. In contrast to common law fraud,proof of the seller’s fraudulent intent or knowledge is notrequired for a claim under a state UDAP statute. In somecases, consumer reliance, damage, or even actual deceptionis not a prerequisite to a UDAP action. The standard of proofis typically a preponderance of the evidence, compared withclear and convincing evidence for a fraud claim. Thus, aUDAP claim is a far easier cause of action to prove thancommon law fraud. The statute of limitations may also belonger, although states differ widely.

Most UDAP statutes offer enhanced damages such asstatutory or treble damages, and most offer attorney fees. Onthe other hand, punitive damages are available for fraud inmost states, while only about ten UDAP statutes authorizepunitive damages.139 Combining a fraud claim with a UDAPclaim may enable the homeowner to recover punitive dam-ages on the fraud claim and attorney fees on the UDAPclaim.140

A disadvantage of UDAP claims in comparison to fraudclaims is that some state UDAP statutes have restrictivecoverage provisions. In particular, some UDAP statutes

137 National Consumer Law Center, Unfair and Deceptive Acts andPractices (6th ed. 2004 and Supp.) describes a large body ofFederal Trade Commission rules, guides and cases, state regu-lations and cases, statutory provisions, and other materials thatcan provide clear guidance in initiating most UDAP claims.

138 National Consumer Law Center, Unfair and Deceptive Acts andPractices § 4.2.15 (6th ed. 2004 and Supp.).

139 National Consumer Law Center, Unfair and Deceptive Acts andPractices § 8.4.3 (6th ed. 2004 and Supp.).

140 See Eicher v. Mid America Financial Investment Corp., 702N.W.2d 792 (Neb. 2005) (awarding attorney fees under stateUDAP statute after awarding other relief on fraud claim againstrescuer).

exclude real estate transactions, extensions of credit, orrrcnhrlrtoa

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egulated entities such as banks. Even in states that excludeeal estate transactions, the practitioner may be able toharacterize the transaction with the rescuer as predomi-antly involving services other than real estate or a loan,owever. In addition, entities involved downstream from theescuer, such as a bank that gives the rescuer a mortgageoan against the home, may have derivative liability for theescuer’s UDAP violations even if they are not covered byhe UDAP statute themselves.141 Nonetheless, the advantagef a fraud claim is that there are few or no limits on thepplicability of common law fraud.

Another potential disadvantage of a UDAP claim is thatn Colorado, Georgia, Minnesota, Nebraska, New York,outh Carolina, and Washington, courts have interpreted theDAP statute to require the consumer to prove that the

hallenged practice affects the public interest. Although thishould not be difficult in the case of a foreclosure rescuecam, it is not a requirement for a fraud claim. Evidence thathe rescuer engaged in similar transactions will help meethis requirement. Evidence of other transactions is alsoighly useful for showing intent, seeking punitive damages,nd establishing coverage under the Truth in Lending Act,o it is worth developing even where the state UDAP statuteoes not require a showing of an effect on the public interest.

Ten states—Alabama, California (under one of its UDAPtatutes), Georgia, Indiana, Maine, Massachusetts, Texas,irginia, West Virginia, and Wyoming—require the con-

umer to send a notice to the defendant a certain number ofays before filing a UDAP action, and Mississippi requireshe consumer to utilize an informal dispute resolution pro-edure before filing suit. If it is necessary to file suit quicklyo prevent the rescuer from transferring the property, it maye necessary to omit the UDAP claim at first in these states,nd then add it by amendment when the notice periodxpires. Decisions from the jurisdiction should be consultedo determine the best course of action.

Fraud claims can almost always be tried to a jury, butome states have found no jury trial right for UDAPlaims.142 Even in these states, the fraud and UDAP claimsan usually be tried together, with the fraud claims going tohe jury and the judge deciding the UDAP claims.143

1.4.4.3 Comparison to TILA and HOEPA

UDAP claims are much less technical than Truth inending or HOEPA claims. This can be an advantage and aisadvantage. Once an equitable mortgage is established (anntensely factual determination), whether a defendant vio-ated the TILA or HOEPA is usually a very objectiveetermination, suitable for summary judgment. The sur-

141 See National Consumer Law Center, Unfair and Deceptive Actsand Practices §§ 6.6, 6.7 (6th ed. 2004 and Supp.).

142 See id. § 7.9.2.143 Id.

fairness of the transaction will be only marginally relevant.By contrast, whether a defendant violated a UDAP statute ismuch more dependent on the facts and nuances of thosefacts. At trial the practitioner can bring out all the facts andcircumstances that show that the transaction was unfair ordeceptive.

Another advantage of state UDAP laws is that the con-sumer need not show that the rescuer engaged in a certainnumber of credit transactions, as is required under TILA andHOEPA.144 Some UDAP statutes require a showing that theseller was engaged in trade or commerce, or that the trans-action occurred in the ordinary course of the seller’s busi-ness,145 but this is a less rigid test.

UDAP statutes also offer much different relief than TILAand HOEPA. Actual damages will be available for all ofthese claims, but some courts have given a narrow readingto TILA’s actual damage provision.146 Some UDAP statutesexplicitly authorize rescission as a remedy, but they lackTILA’s step-by-step provisions for unwinding home mort-gage transactions.

11.4.4.4 Application of Substantive UDAPStandards to Foreclosure Rescue Scams

Most UDAP statutes combine a series of specific prohi-bitions with a broad, general prohibition of unfair, uncon-scionable, and/or deceptive practices. Often the rescuer willhave violated one of the specific, more clearly definedprohibitions, and in addition the facts will show a violationof the general prohibitions. The broad, flexible prohibitionsof most UDAP statutes make them ideal as a way tochallenge creative, new forms of abusive businessschemes.147

The following are some examples of practices prohibitedby UDAP statutes that are likely to be present in foreclosurerescue scams:

• The advertising surrounding a foreclosure rescuescheme and the rescuer’s sales pitch are likely to runafoul of the UDAP statute’s prohibition of deceptivestatements. Even if the statements are literally true, theywill violate the UDAP statute if their implications aredeceptive or if the rescuer has omitted material facts.148

• A number of UDAP statutes prohibit entering into atransaction knowing that the consumer is unlikely to be

144 See § 11.4.2.2, 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 De-

ceptive Acts and Practices § 2.1.3, 4.2–4.4 (6th ed. 2004 andSupp.).

148 See National Consumer Law Center, Unfair and Deceptive Actsand Practices §§ 4.2.13, 4.2.14 (6th ed. 2004 and Supp.).

95

able to repay the obligation.149 Structuring a transaction

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and failing to fulfill his promises. Another court awarded


9

to create payments and charges that the consumercannot afford, in order to precipitate a default andforeclosure, will be a UDAP violation in these statesand also in states that prohibit unfairness in general.150

Even in states where the UDAP statute does not includethese prohibitions, it is likely that the rescuer misrep-resented the nature of the obligations that the home-owner was undertaking.

• Many UDAP statutes specifically prohibit taking ad-vantage of a consumer who is vulnerable because ofage, infirmity, illiteracy, educational level, or othercauses.151 Even if the UDAP statute does not containthis prohibition, many decisions require courts to takethe consumer’s vulnerability into account when assess-ing whether a statement is deceptive.152

• Collecting fees in excess of those allowed by stateusury laws may state a UDAP claim.153 Framing sucha violation as a UDAP claim is particularly helpful ifthe state usury law’s remedies are weak or unclear.

A number of courts have entered UDAP judgmentsgainst rescuers. In a private UDAP suit involving a sale/easeback scheme, a debtor who lost her home to a home-aver won as damages the amount of equity in the home,hich the court then trebled.154 The court held that the

escuer violated the UDAP statute by taking the debtor’some, obtaining her signature on a blank deed, selling theroperty without returning fair compensation to her, decep-ively leading her to believe he was acting in her interests,

isrepresenting the import of the agreements she signed,

149 See National Consumer Law Center, Unfair and Deceptive Actsand 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 WL3249693 (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, 574N.E.2d 15 (Ill. App. Ct. 1991) (allegations of deceptive prac-tices used to make unaffordable loan for home improvements inorder 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., 225F.3d 738 (D.C. Cir. 2000); Jackson v. Byrd, 2004 WL 3130653(D.C. Super. Ct. May 11, 2004) (foreclosure rescue case), laterop., 2004 WL 3249693 (D.C. Super. Ct. June 30, 2004) (award-ing damages), later op., 2004 WL 3249692 (D.C. Super. Ct.Sept. 2, 2004) (awarding attorney fees). See generally NationalConsumer 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 NationalConsumer 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 Actsand Practices § 5.1.5.4 (6th ed. 2004 and Supp.).

154 In re Bryant, 111 B.R. 474 (E.D. Pa. 1990).

6

$50,000 punitive damages in a similar sale and leasebacksituation based on fraud, breach of fiduciary duty, andUDAP violations.155

The Nebraska Supreme Court upheld a finding that arescuer who misrepresented to homeowners that they wereobtaining loans, when actually they were conveying theirhomes to the rescuer, violated the state UDAP statute.156 Inanother case, a court found a UDAP violation where aconsumer, with no one to counsel her, whose sole source ofincome was Aid to Families with Dependent Children, waspressured into a financing scheme that she did not under-stand 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 ata variable 9% to 11% rate, which sum included a 20% realtycommission.

A District of Columbia trial court found that a homesavercommitted numerous deceptive and unconscionable acts.These included failure to disclose the appraised value of thehome and that he was the other contracting party and wouldprofit personally from the transaction; presenting himself ashelping the homeowner save her home, when his real in-tention was to acquire the home for a pittance; and acquiringthe home at a grossly disproportionate price from an agedand infirm homeowner.158

In another case, an entrepreneur bought a delinquentmortgage debt before foreclosure began, then contacted thehomeowner, threatened foreclosure, and ultimately brow-beat the homeowner into conveying the property to him. AMassachusetts court held that the entrepreneur may havecommitted UDAP violations by representing to the home-owner that signing the agreements was a mere formalityafter the homeowner made it clear that he could not affordthe payments.159

11.4.4.5 UDAP Remedies

The typical UDAP statute offers actual damages plusstatutory, multiple, or punitive damages. Actual damagescan 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. FileNo. 832 3227 (D.D.C. 1983) (issuing preliminary injunctionagainst foreclosure rescue scam).

156 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d792 (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).

equity in the home as actual damages, and then trebled thisahhi

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mount, where the homeowner was unable to regain theome.160 Even a homeowner who regains the home mayave lost wages and suffered substantial expenses for mov-ng, rent, interest, closing costs, and advice.

Many UDAP statutes either authorize injunctions or au-horize ‘‘other equitable relief’’ or ‘‘other relief the courteems proper.’’161 This broad authority should be aggres-ively pursued in foreclosure rescue scam cases. It maynable the court to quiet title, order reconveyance of theroperty, reform the contract, or order the record owner noto reconvey or encumber the property.

A few UDAP statutes explicitly mention rescission as aotential remedy. In other states, general language autho-izing other relief or other equitable relief is probablyufficient authority for a rescission order.162 Since UDAPtatutes are intended to liberalize the common law, the courtay be willing to dispense with some of the formalities of

ommon law rescission.163

1.4.5 State Foreclosure Rescue Statutes

1.4.5.1 Overview

Eleven states—California, Colorado, Georgia, Illinois,aryland, Michigan, Minnesota, Missouri, New York,hode Island, and Washington164—have special statutes thatrovide protections against foreclosure rescue scams. Asnowledge of the nature of foreclosure rescue scamspreads, more states may adopt such laws, so practitionershould check for recent legislation in their states. Thesetatutes typically forbid certain deceptive or abusive prac-ices, require a right to cancel, and, in most cases, providepecial remedies.

160 In re Bryant, 111 B.R. 474 (E.D. Pa. 1990) (awarding lost equityas actual damages, trebled); Martinez v. Affordable HousingNetwork, Inc., 109 P.3d 983 (Colo. Ct. App. 2004) (awardinglost equity as actual damages, trebled), rev’d on other grounds,123 P.3d 1201 (Colo. 2006) (reversing trial court’s determina-tion that buyer of home from rescuer was bona fide purchaserwithout notice; remanding for trial on quiet title claim). See alsoEicher v. Mid America Financial Investment Corp., 702 N.W.2d792 (Neb. 2005) (affirming award of attorney fees on UDAPclaim where damages and rescission were awarded on fraudclaim).

161 See National Consumer Law Center, Unfair and Deceptive Actsand 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. § 10-1-393(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 to7-321; Mich. Comp. Laws §§ 445.1822 to 445.1825; Minn. Stat.Ann. §§ 325N.01 to 325N.18; Mo. Stat. Ann. §§ 407.935 to407.943; New York Real Prop. Law § 265-a; R.I. Gen. Laws§§ 5-78-1 to 5-79-9; Wash. Rev. Code §§ 19.134.010 to19.134.080.

these laws is the clear, explicit rules that these laws imposeon rescuers. Not only will violation of one of the rules beactionable under the state foreclosure rescue law, but it mayalso 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 someUDAP statutes these laws typically make an attorney feeaward mandatory if the consumer prevails. Their multipledamage provisions may also be mandatory. Many of thesestatutes also allow the consumer to seek punitive damages,which the state UDAP statute may not allow. In addition, incontrast to some UDAP statutes, these statutes do notrequire a litigant to send a pre-suit notice or show an impacton the public interest.

Like the Truth in Lending Act, these laws allow consum-ers to cancel contracts with rescuers. One advantage ofcancellation under a state foreclosure rescue law is that mostof the state laws do not require the consumer to tender backthe amount paid by the rescuer. On the other hand, thesestate laws tend to be less explicit than TILA about theprocedure that the rescuer must follow to cancel the deed,and they provide more protection than TILA for those whobuy the home or lend against the home after the rescueracquires it. Another advantage is that these laws do notgenerally include a requirement like TILA’s that the rescuerhave engaged in a certain number of consumer credit trans-actions.

11.4.5.2 Coverage

The typical statute covers ‘‘foreclosure consultants’’ orsome similar term. Most statutes define this term broadly toinclude anyone who makes an offer, representation, or so-licitation to perform, or actually performs any service forcompensation 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 adviceor assistance about foreclosure and serving as an interme-diary between the homeowner and creditors. Maryland’s lawalso covers any person who systematically contacts ownersof property that court records or newspaper advertisementsshow are in danger of foreclosure.165 In Michigan and

165 Md. Real Prop. Code Ann. § 70301(b)(2).

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9

tate credit repair law, and the definitions are much lessetailed.166

Practitioners in states with a foreclosure rescue statutehould evaluate how many of the actors in the scam can beovered by the definition. Many of the subsidiary players inforeclosure rescue scam may have received compensation

nd may have represented that their services would help theomeowner obtain a loan, save the home, or stop or delayhe sale. Further, even if they do not meet the statutoryefinition, subsidiary players may be liable on an aiding andbetting theory for the principal’s violation of the stateoreclosure rescue law.167 Some courts have used this andther tort doctrines to find subsidiary players liable foriolating other consumer protection laws, such as stateDAP laws.168

California, Colorado, Georgia, Illinois, Maryland, Min-esota, and Rhode Island have separate provisions regulat-ng foreclosure purchasers, i.e., those who obtain a deed tohe home with a promise to reconvey it at some futureate.169 New York’s law only covers foreclosure purchasers.aryland explicitly covers surplus buyers, i.e., those who

nduce homeowners to sign over the surplus proceeds fromhe foreclosure sale.170 The general definition of ‘‘foreclo-ure consultant’’ in most states is broad enough to coverhese variations of the scam, however, and even in Califor-ia, Georgia, Illinois, Maryland, Minnesota, and Rhodesland it appears that a person can be both a generic fore-losure consultant and one of these specific variants. Inolorado, however, ‘‘foreclosure consultant’’ is defined toxclude those who acquire an interest in the home, so aerson cannot fit into both categories.The statutory exemptions should be examined carefully.

he typical statute exempts licensed or chartered lenders,awyers, licensed debt management services, credit report-ng agencies, registered securities advisors and broker-deal-

166 Michigan’s law covers stopping, preventing, or delaying aforeclosure, or providing advice or assistance on one of thosesubjects. Washington’s law covers advice or assistance regard-ing a foreclosure, or serving as an intermediate between a debtorand a creditor. Both also cover obtaining an extension of creditfor the homeowner.

167 See § 11.4.6.6, 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 toassist 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 includepeople who assist the owner in obtaining the surplus from aforeclosure sale); Colo. Rev. Stat. § 6-1-1103(4)(a)(IX) (defin-ing ‘‘foreclosure consultant’’ to include people who assist theowner in obtaining the surplus from the foreclosure sale);Boquilon v. Beckwith, 49 Cal. App. 4th 1697, 57 Cal. Rptr. 2d503 (1996) (sale and leaseback arrangement violates Califor-nia’s Home Equity Sales Contract Act).

8

some states, other licensed or regulated entities. Many of thestatutes make it clear that the exemption only applies if theperson is acting within the scope of a state license. Forexample, an attorney would be exempt only while perform-ing work that amounted to the practice of law.

11.4.5.3 Right to Cancel

All of the state statutes afford a right to cancel. Thetypical statute affords the homeowner a three- to ten-dayright to cancel any contract with a rescuer, and requires therescuer to give the homeowner written notice of this right.171

The typical statute is written so that the cancellationperiod begins to run from the date that the rescuer gives theconsumer the notice of the right to cancel and a writtencontract that complies with the statute. Accordingly, if theconsumer was not given these documents, the practitionershould take the position that the right to cancel has not evenbegun to run.172 Many decisions interpreting comparablelanguage in state home solicitation statutes have acceptedthis argument.173

Before sending a cancellation notice, the practitionershould ascertain whether the statute obligates the home-owner to tender back funds that the rescuer advanced, andwhat the implications are if the homeowner fails to makethis tender. Maryland requires the homeowner to repay anyfunds paid or advanced by the foreclosure consultant, fore-closure purchaser, or surplus purchaser within 60 days ofcancellation plus 8% interest per annum, though the right tocancel cannot be conditioned on the payment of this money.Georgia mandates tender by the homeowner of all moniespaid to him or her within 30 days of cancellation and is silenton whether the cancellation can be conditioned upon pay-ment. Colorado requires tender within 60 days after cancel-lation of a foreclosure consulting contract; as to foreclosurepurchasers there is no tender obligation, but the foreclosurepurchaser is prohibited from paying anything to the home-owner until the cancellation period has passed. New Yorkrequires the homeowner, as a condition of reconveyance oftitle, to tender any consideration received from the foreclo-sure purchaser. California, Illinois, Michigan, Minnesota,Missouri, Rhode Island, and Washington do not set anytender requirement. If a tender offer is mandatory, thepractitioner may still want to send the cancellation noticepromptly because of the danger that the rescuer will conveyor mortgage the house to an unknowing third party. How-

171 Georgia’s right to cancel applies only where the foreclosurerescue operator buys the home and the debtor remains inpossession of the home. Ga. Code Ann. § 10-1-393(b)(20)(C).

172 New York’s statute provides that a noncomplying contract canbe rescinded for up to two years after the conveyance isrecorded. N.Y. Real Prop. Law § 265-a(8).

173 See National Consumer Law Center, Unfair and Deceptive Actsand Practices § 5.8.2.6.3 (6th ed. 2004 and Supp.).

ever, the practitioner and the homeowner should explorefi

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11.4.6 Fraud and Civil Conspiracy


nancing options immediately.When the homeowner cancels, most states explicitly pro-

ect a good faith mortgagor or purchaser who buys or lendsgainst the home and who does not know of the homeown-r’s contract with the rescuer or that the rescission periodas not expired. In these states, even if the rescuer haslready conveyed an interest in the home in an ostensiblyrms-length transaction, the practitioner should investigatell information the buyer or lender had about the rescuer andhe homeowner. Often the buyer or lender had good reasono suspect that the transaction was irregular.

1.4.5.4 Substantive Prohibitions

The typical foreclosure rescue statute prohibits an array ofeceptive, unfair, and abusive practices, so practitionershould check their own statutes carefully. Many prohibitnconscionable contract terms. Some of the statutes prohibiteception in broad terms. Another common provision is aap on fees or interest rates, or a requirement that a rescuerho purchases the property must pay at least a certainercentage of its fair market value. Some of the statesrohibit foreclosure rescue consultants from acquiring anynterest in a residence in foreclosure from an owner withhom the consultant has contracted. New York and Rhode

sland prohibit eviction of the homeowner unless the fore-losure purchaser has paid the homeowner at least 82% ofhe home’s fair market value. Some statutes prohibit theescuer from entering into an agreement to reconvey theome to the homeowner unless the homeowner has a rea-onable ability to meet the requirements for reconveyance.ost prohibit other deceptive or abusive practices as well.

1.4.5.5 Remedies

Most of the statutes provide a special private cause ofction. Most authorize double or treble damages or punitiveamages in addition to actual damages. The typical statutelso authorizes attorney fees. Some specifically authorizenjunctive relief. Some states provide that a violation isctionable under the state UDAP statute or the state creditepair statute, either as the only remedy or in addition to apecial private cause of action.

In most states, rescuers can also be prosecuted criminallyor violations of the statute. The homeowner should con-ider filing criminal charges. A criminal conviction mayrevent the rescuer from defrauding others. Further, theourt may order restitution to the homeowner as part of theriminal sentence.


Claims of fraud and civil conspiracy should always beconsidered in foreclosure rescue cases. Rescuers commonlyrely on false representations to induce homeowners to deedover their homes.

Common law doctrines allow fraud claims to be assertednot only against those who dealt directly with the home-owner, but also against parties who conspired with therescuer, knowingly accepted the benefits of the fraud, oraided and abetted the rescuer’s fraud.174

Civil conspiracy, while less well-known than fraud, isrecognized as a cause of action in almost all states. Itprovides another way to hold parties liable who enabled thefraud to succeed but did not make fraudulent misrepresen-tations themselves.

11.4.6.2 Elements of a Fraud Claim

The traditional elements of fraud are a false representa-tion; reliance by the plaintiff; damage; scienter (the defen-dant’s knowledge of the falsity); and the defendant’s intentto induce the plaintiff to act in reliance on the misrepresen-tation.175 These elements make fraud more difficult to es-tablish than a deception claim under a UDAP statute. Forexample, the consumer often need not prove reliance orintent to deceive under UDAP statutes, and the standard ofproof 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 areusually much wider. In particular, fraud damages can in-clude punitive damages in most states, while UDAP statutesrarely authorize more than treble damages. In addition, fraudcan be asserted against anyone, while some UDAP statuteshave restrictive coverage requirements. Consumer practitio-ners have also used fraud to reach behind the front person tothe financiers who enable predatory lending. Lenders maybe the only deep pocket left, and reaching them is also animportant way of decreasing the volume of mortgage scamsby drying up their funding. The advantages and disadvan-tages of a fraud claim in comparison to a UDAP claim arediscussed in more detail in § 11.4.2.2, supra.

Foreclosure rescue scam cases can produce compellingfraud claims. The plaintiffs are often elderly and vulnerable.

174 See National Consumer Law Center, The Cost of Credit: Regu-lation, Preemption, and Industry Abuses § 12.10.1 (3d ed. 2005and Supp.).

175 See D. Dobbs, The Law of Torts §§ (2000); National ConsumerLaw Center, Unfair and Deceptive Acts and Practices § 9.6.3(6th ed. 2004 and Supp.); see also Eicher v. Mid AmericaFinancial Investment Corp., 702 N.W.2d 792, 803 (Neb. 2005)(reciting fraud elements in foreclosure rescue case).

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The rescuer’s fraud is often blatant and heartless. Damagescacc

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an be significant. Even though fraud is harder to prove thanUDAP claim, practitioners should not shy away from fraudlaims in foreclosure rescue cases, particularly since theselaims are compelling to juries.

The Nebraska Supreme Court affirmed a judgment ofraud against a rescuer who induced homeowners to signver deeds to their homes by knowingly misrepresentinghat the transactions were loans.176 While the court’s deci-ion does not itemize the relief awarded to the thirteenlaintiffs, it affirmed an award of more than $375,000 inttorney fees on a parallel UDAP claim.

A Colorado Supreme Court decision deals with a rescuerho obtained a quitclaim deed to the home based on certain

epresentations about the steps it would take, but then soldhe home. The supreme court affirmed the trial court’sonclusion that the rescuer had committed fraud.177 It alsoeld that the trial court had erred in concluding that theerson who bought from the rescuer did not have notice ofhe homeowners’ claim to the home, and remanded the caseor a determination about whether the deed was voidable aso the purchaser.

1.4.6.3 Overcoming Exculpatory ContractClauses

In many foreclosure rescue cases, the homeowners arenaware that the documents they have signed are not loanocuments but transfer the home to the rescuer. The Ne-raska Supreme Court held that the fact that the documentshe homeowners signed were clearly labeled sales to theescuer rather than loans did not undercut their fraud claims.he court held that even a person who fails to read a contractefore signing it is not bound by it if it was procured byraud.178

Similarly, a Massachusetts appellate court held that aerger clause in the homeowner’s contract with the rescueras no defense to fraud.179 The clause stated that, in decid-

ng to enter into the contract, the homeowner had not reliedn any statements or representations by the rescuer.

1.4.6.4 The Important of Pattern Evidence

Evidence that the rescuer defrauded other homeowners inhe same way is powerful. It can confirm in the jury’s mind

176 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d792, 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 lawfraud so violated UDAP statute).

178 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d792, 804 (Neb. 2005).

179 Billingham v. Dornemann, 771 N.E.2d 166, 175 (Mass. App. Ct.2002).

00

Evidence that the rescuer made similar misrepresentations toother people will also make it clearer to the trier of fact thatthe homeowner is telling the truth. Joining several home-owners in one case was very effective in Eicher v. MidAmerica Financial Investment Corp.,180 but this evidencecan also be introduced when the other homeowners are notparties to the same suit.

Foreclosure rescuers do not usually invent their methodson the spot. They advertise widely and solicit homeownersaggressively with a pitch that follows the same pattern.Thus, pattern evidence can almost always be found. Section11.3.2.2, supra, suggests various ways of finding patternevidence. Locating other homeowners who have been vic-timized in the same way should be a high priority.

While evidence of other crimes, wrongs, or acts is notadmissible to prove a person’s character, there are manyother ways to admit it. Under the Federal Rules of Evidenceand comparable state rules, evidence of other bad acts isadmissible to show intent or motive, which is a critical issuein any fraud case. It is also admissible to show knowledge.Since scienter is an element of a fraud claim, evidence of therescuer’s other transactions should be admissible on thisground. Pattern evidence will also be admissible againstother defendants, for example to show that a purchaser is nota bona fide purchaser without notice, or to show that a thirdparty knowingly accepted the benefits of the fraud. Inaddition, it is admissible to show habit, routine practice, orabsence of mistake or accident, and to support a punitivedamages claim.181

11.4.6.5 Remedies for Fraud

A homeowner who proves fraud may recover actualdamages. Actual damages may consist of the homeowner’slost equity, plus any ‘‘rental’’ payments the homeownermade to the rescuer that exceeded what the homeownerwould have had to pay on the mortgage.182

The rescuer may argue that the homeowner’s losses werecaused by factors other than the rescuer’s fraud because thehomeowners would have lost their homes in any event. TheNebraska Supreme Court rejected this argument in Eicher v.Mid America Financial Investment Corp.183 The plaintiffsthere testified that, although their options were limited, theycould have considered other alternatives to save their homesif the opportunity with the rescuer had not presented itself.The court accepted these statements as sufficient to establishproximate cause. The court also reversed the denial ofdamages 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, Auto-

mobile 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).

the rescuer for two years, but then stopped paying andmhprwo

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oved out, after which the original lender foreclosed on theome and sold it. The court held that the fraud was fullyerpetrated when the homeowner deeded the home to theescuer, and his right to recover the equity he lost at that timeas unaffected by his later termination of payments and lossf his home to foreclosure.184

In almost all states, a homeowner may also recoverunitive damages for fraud.185 States vary in their standardsor punitive damages, but typically it is necessary to showome aggravating factors such as malice, oppressiveness, orantonness.186

In the alternative to seeking damages, the homeowneray rescind the transaction.187 As a condition of rescission,

he homeowner will probably have to tender the actualroceeds received.188 In addition, a deed may be voidable ifraud is shown.189

1.4.6.6 Acceptance of Fruits of Fraud; CivilConspiracy; Aiding and Abetting

To succeed, foreclosure rescue scams often require theooperation of more than just the rescuer. Real estate agents,enders, brokers, appraisers, closing agents, and others maye involved behind the scene. Several theories can imposeraud liability on these less visible participants.190

A party who knowingly receives the benefits of a fraudan be held liable for it.191 This theory of liability isometimes called ‘‘fruits of the fraud’’ liability. It maymount to ratification of the fraud.192 For example, a trans-eree 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 anddamages on fraud claims against rescuer). See generally Na-tional 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 actualproceeds before bona fide purchaser acquires the home for valuewithout notice; remanding for determination whether this pur-chaser had notice).

189 See, e.g., Martinez v. Affordable Housing Network, Inc., 123P.3d 1201 (Colo. 2005).

190 See generally National Consumer Law Center, The Cost ofCredit: 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 fraudis basis for fraud liability).

192 See, e.g., Duckworth v. Nat’l Bank of Commerce, 656 So. 2d340 (Ala. 1994) (reversing directed verdict for defendant bankin business fraud case; bank that continued to take paymentsafter learning of forgery, but did not disclose the forgery, mayhave ratified the forger’s fraud).

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 liabilityfor fraud to all those involved in it. All jurisdictions exceptWyoming recognize civil conspiracy as a cause of action.193

The major benefit of a civil conspiracy claim is that theplaintiff does not have to show that all conspirators com-mitted the tort or committed any unlawful act. Instead, civilconspiracy requires an agreement by two or more persons toperform an unlawful act. The plaintiff must also show someovert act that was accomplished in furtherance of the agree-ment, and must show damages proximately resulting there-from.

A third basis for casting fraud liability upon subsidiaryplayers is aiding and abetting. Under this theory, a personwho knowingly and substantially assists the principal inperforming a fraudulent act that causes injury is liable forthe principal’s fraud. At the time of providing the assistance,the subsidiary player must be generally aware of his or herrole as part of an overall tortious activity.194 In contrast tocivil conspiracy, it is not necessary to show an agreement.195

11.4.7 Other Common Law Claims


Common law claims such as unconscionability andbreach of fiduciary duty or duty of good faith and fairdealing are often useful in attacking foreclosure rescuescams.196 These claims offer both advantages and disadvan-tages over the statutory claims discussed in this section.

11.4.7.2 Unconscionability

The doctrine of unconscionability can be useful in attack-ing foreclosure rescue agreements, especially where theremedies under a state statute are not adequate or where thetransaction is not covered by the UDAP statute. The remedyfor unconscionability is usually limited to a defense againstthe enforcement of the unconscionable contract or terms,and does not normally include restitution or the tort damagesavailable for a fraud claim. Except where it is part of astatute that allows affirmative claims, it usually can only be

193 See National Consumer Law Center, Unfair and Deceptive Actsand Practices § 6.5.2.3 (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 insale/leaseback transaction sufficiently alleged claim for rescis-sion on the basis of duress, fraud or unconscionability); In reDavis, 169 B.R. 285 (E.D.N.Y. 1994) (finding sale/leasebacktransaction unconscionable and void under New York law).

101

raised defensively, not affirmatively. However, unconscio-n

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ability requires less evidence of intent than fraud.There are five sources of the unconscionability doctrine.

irst, Article 2 of the Uniform Commercial Code (UCC)llows courts to refuse to enforce unconscionable contractsr clauses.197 Article 2A has a similar provision applicableo leases.198 Since Articles 2 and 2A only apply to sales andeases of goods, they are unlikely to be applicable to aoreclosure rescue transaction. Second, in about a third ofhe states the UDAP statute prohibits unconscionable acts orractices.199 UDAP statutes vary in their scope,200 but manyill be applicable to foreclosure rescue scams. Third, aumber of jurisdictions, particularly those that have con-umer credit statutes based on the Uniform Consumer Creditode, have a non-UCC non-UDAP statute that prohibitsnconscionability. These statutes are likely to apply tooreclosure rescue scams. Fourth, many state foreclosureescue statutes contain their own explicit prohibition ofnconscionable terms.201 And, finally, a common law un-onscionability doctrine is widely recognized and broadlypplicable.

There are two forms of unconscionability: procedural andubstantive. Procedural unconscionability involves the bar-aining process when the contract was made. The mostommon type of procedural unconscionability involves op-ression or surprise in the bargaining process. Oppressionccurs when there is a disparity in bargaining power be-ween the parties. Surprise occurs when creditors hide con-ract terms from the consumer in fine print or unusuallyomplex clauses. Special vulnerabilities often associatedith low-income consumers—such as financial distress or

imited education—are also relevant in evaluating proce-ural unconscionability.Substantive unconscionability focuses on the content of

he contract: whether the contract contains terms that arene-sided and unreasonably, unacceptably or unfairly harsh.ome courts require the consumer to show both substantivend procedural unconscionability to invalidate a term of aontract

Many of the aspects of contracts found to be unconscio-able 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 assur-

ances.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 § 11.4.4.1, supra.201 See § 4.5.4, supra.202 See generally National Consumer Law Center, Unfair and De-

ceptive Acts and Practices § 4.4 (6th ed. 2004 and Supp.);

02

in a homeowner’s unconscionability claim to issue a pre-liminary injunction against a rescuer who lured her into asale-reconveyance transaction.203 The court found that thehomeowner was not aware of the terms of the reconveyancecontract until closing, and even then did not fully compre-hend its one-sided nature and the almost certain outcome ofthe transaction—default and eviction. The reconveyancecontract required the homeowner to pay thousands of dollarsto the rescuer in unspecified management and yield spreadfees; charged her more than triple the actual closing costs;required a $26,000 down payment that she had no ability tomake; set her monthly payments at an amount significantlyhigher than they had been, yet with an interest rate so highthat the balance would negatively amortize; imposed pre-payment penalties and other terms that would keep her fromrefinancing or selling the home; and allowed the rescuer toretain all her payments if she defaulted.

In the absence of legislatively prescribed usury ceilings,unconscionability can serve as an outer limit on the price ofcredit. Even in states where interest rate caps have beenremoved, courts or sometimes regulators have found exces-sive rates to be unconscionable, particularly where it can beshown that the borrowers had little choice of credit op-tions.204

11.4.7.3 Breach of Duty of Good Faith and FairDealing

The duty of good faith and fair dealing between parties toa contract is based both in common law and the UCC.205

Unlike unconscionability, which is ordinarily determined bylooking at contract terms at the time the contract was made,the duty of good faith is imposed on parties to an existingcontract. It prevents overreaching in the later stages of therelationship ‘‘to prohibit improper behavior in the perfor-mance and enforcement’’ of that contract.206

For example, when a rescuer has induced a homeownerinto a transaction with a balloon payment with the assurancethat refinancing will be available, the refinancing decisionmay 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.).

203 Brantley v. Grant Holding, L.L.C., Civil No. 03-6098 (D. Minn.Dec. 23, 2003), available at www.consumerlaw.org/unreported.

204 National Consumer Law Center, The Cost of Credit: Regulation,Preemption, and Industry Abuses § 11.7.2 (3d ed. 2005 andSupp.).

205 Id. at § 11.8.206 Baldwin v. Laurel Ford Lincoln-Mercury, Inc., 32 F. Supp. 2d

894 (S.D. Miss. 1998); National Consumer Law Center, TheCost of Credit: Regulation, Preemption, and Industry Abuses§ 12.8, n.652 (3d ed. 2005 and Supp.).

207 See National Consumer Law Center, The Cost of Credit: Regu-lation, Preemption, and Industry Abuses § 12.8 (3d ed. 2005 andSupp.).

The rescuer may also be bound by this duty when declaringa

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default on the lease or leaseback agreement.Breach of this duty constitutes a breach of the contract.

ontract remedies, therefore, apply. Some states have heldhat this duty gives rise to a tort claim as well.208

1.4.7.4 Breach of Fiduciary Duty

The existence of a fiduciary or quasi-fiduciary duty givesise to a duty of fair and honest disclosure of all facts thatight influence the consumer’s decisions. Fiduciary rela-

ionships may be express or implied. An implied duty canrise where the weaker party places trust and confidence innother, who is aware of this trust and takes on the role ofdvisor.

Breach of a fiduciary duty by failing to disclose allelevant information gives rise to a tort action, which mayermit repudiation of the contract as well as damages.209

1.4.8 State Credit and Usury Laws

1.4.8.1 State Usury Laws and Their Penalties

Once a transaction is restructured as a loan, state creditnd usury laws may apply. Most states have several differentsury statutes.210 The oldest of these laws are the so-called‘general’’ usury statutes, which purport to set the maximumate of interest that can be charged in any loan transaction injurisdiction. More recent statutes are generally structured

s exceptions to the general law and apply only to particularypes of transactions. Credit secured by real estate may beeparately regulated, and first and junior mortgages may bereated differently. The statutes may also base distinctions onhe type of lender, i.e., whether it is a bank, credit union,icensed finance company, or other lender. Thus, it is im-ortant to determine which statute applies. Some statesave, however, repealed many of their usury ceilings andow allow any interest rate agreed upon by the parties.

After determining which, if any, state usury law applies,he next step is to calculate the actual interest charged. Sinceoreclosure rescue transactions are typically so one-sided inavor of the rescuer, it is likely that, if the transaction can beharacterized as a loan, it will run afoul of any applicablesury statute. The definition of interest is sometimes aomplicated issue because it varies from statute to statute,owever, so the practitioner will need to be prepared torove 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 (3ded. 2005 and Supp.).

210 A state-by-state list of usury statutes may be found in NationalConsumer Law Center, The Cost of Credit: Regulation, Pre-emption, and Industry Abuses Appx. A (3d ed. 2005 and Supp.).

calculate the interest rate is to treat the amount actuallyexpended by the rescuer as the loan principal. This figurewould include amounts the rescuer paid to reinstate or payoff a delinquent mortgage or to pay other charges that relateto the home, such as homeowner’s property taxes or insur-ance premiums. The dollar amount of interest would becalculated as the difference between this figure and the totalof all payments the consumer would have to pay to reacquirethe home.211 (State law may, however, allow the lender tocollect certain types of fees, such as document preparationfees, and treat them as part of the principal rather than asinterest.)

The next step is to convert the dollar amount of interest toa percentage rate. A calculation tool, such as that includedon the CD-Rom accompanying this manual, should be usedfor this calculation. Since the typical sale/leaseback requiresa large balloon payment after a series of smaller monthlypayments, it is important to use a calculation tool that canhandle an irregular payment schedule.

An example will illustrate this method of calculation.212

Assume that the homeowner’s regular monthly mortgagepayment was $733.76 per month (this would be the monthlypayment on a $100,000 30-year mortgage at 8%). Assumealso that the homeowner was $10,000 in arrears on mort-gage payments and $2000 in arrears on property taxes. Atypical rescuer might pay the combined $12,000 arrearageand require the homeowner to repay $1233.76 per month(the $733.76 regular mortgage payment plus $500 towardthe $12,000 arrearage) for 24 months, followed by a balloonpayment of $60,000 to reacquire the home. The annualpercentage rate for a $12,000 loan with this payment sched-ule is 154.51%.213

If the case goes to trial, it may be necessary to have anexpert 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. C2-03-10463 (Minn. Dist. Ct. July 12, 2004), slip op. at 33-5 (principalis amount that rescuer actually paid on existing first mortgage;usury calculation should be based on the difference between theprincipal and the total of the payments required to reacquire thehome), available at www.consumerlaw.org/unreported.

212 This is the same example as appears in § 11.4.3.1.2, supra, asan illustration of the calculation of the HOEPA trigger. How-ever, the interest rate for purposes of a state usury statute and theAPR for purposes of TILA are not always the same because ofdifferent definitions and exclusions.

213 See River Run Props. L.L.C. v. Kappedahl, File No. C2-03-10463 (Minn. Dist. Ct. July 12, 2004), slip op. at 33-5 (principalis amount that rescuer actually paid on existing first mortgage;usury calculation should be based on the difference between theprincipal and the total of the payments required to reacquire thehome), 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 acceptedexpert testimony that the sale/leaseback transactions at issuecarried effective interest rates of 50% to 200%.

103

of the interest rate in state usury laws may differ from theTsi

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If DIDA applies, it preempts state laws that limit ‘‘the rate


1

ILA definition of the components of the finance charge, sotate law should be carefully reviewed when calculating thenterest rate.

The remedies for usury are determined by individual statetatutes.215 Often the loan will be void as to all or part of thenterest, with even double or triple damages, while leavinghe principal obligation intact. Some statutes declare usuri-us loans to be completely void, and may require the returnf all monies paid.216 Equitable remedies, such as enjoiningforeclosure, may also be available.

1.4.8.2 Federal Preemption

1.4.8.2.1 Introduction

Before concluding that a rescuer has violated a state usurytatute, another important step is to determine whether thetate law has been preempted by federal law. Even thoughescuers are typically individuals rather than lending insti-utions, two of the federal usury preemption laws—theepository Institutions Deregulation and Monetary Controlct (DIDA) and the Alternative Mortgage Transactionsarity Act (AMTPA)—may apply to them.

1.4.8.2.2 DIDA

The first statute, the Depository Institutions Deregulationnd Monetary Control Act (DIDA), covers not only a varietyf financial institutions but also any creditor who makes ornvests in residential real estate loans or mobile home creditales in excess of $1 million per year.217 Some foreclosureescuers may meet the $1 million threshold. Only the prin-ipal amount of the loan (as determined by the court afternding that the transaction is indeed a loan) should beounted toward the $1 million threshold, however. Thus, ifrescuer pays off a $80,000 mortgage loan, and requires theomeowner to repay $200,000 to reacquire the home, onlyhe $80,000 principal should count toward the $1 millionhreshold.

To qualify for DIDA preemption, the transaction mustnvolve a first lien on residential real property.218 The lieneed not be a purchase money lien, however. A rescuer whoctually pays off all existing liens on the property may meethis requirement. However, many rescuers pay off only somef the existing liens, pay only the delinquent amount ratherhan the full debt, or acquire the property subject to allxisting liens. In all of these situations, DIDA will notreempt state laws.

215 See § 4.8.7.5, supra.216 See, e.g., id. (voiding the transaction and eliminating rescuer’s

entitlement to both interest and principal; foreclosure rescuetransaction was a usurious loan).

217 12 U.S.C. § 1735f-5(b).218 12 U.S.C. § 1735f-7a.

04

or amount of interest, discount points, finance charges, orother charges’’ on the loan.219 DIDA does not preempt otherconsumer protections that may be found in state usury laws,such as restrictions on late charges, balloon payments, andnegative amortization.

States have the right to opt out of DIDA preemption, andmany have done so, at least in part. Specifically, Colorado,Georgia, Hawaii, Idaho, Iowa, Kansas, Maine, Massachu-setts, Minnesota, Nebraska, Nevada, North Carolina, PuertoRico, South Carolina, and South Dakota have expresslyreimposed all or part of their state usury laws.220

11.4.8.2.3 AMTPA

The second statute, the Alternative Mortgage Transac-tions Parity Act (AMTPA), does not affect state interestceilings on mortgage loans. Instead, it addresses the struc-ture of mortgage loans by overriding certain state lawswhich restrict ‘‘creative finance,’’ e.g., laws limiting vari-able interest rates and balloon payments. These state statutesare replaced, at the option of the lender, by federal regula-tions. Six states—Arizona, Maine, Massachusetts, NewYork, South Carolina, and Wisconsin—opted out ofAMTPA, so this statute is irrelevant in those states.

AMTPA applies to ‘‘housing creditors,’’ which is broadlydefined to include any person who regularly makes loans,credit sales, or advances secured by interests in residentialreal property or a mobile home.221 It also includes anytransferee of such a lender.222 AMTPA only applies to thesecreditors when they are making an ‘‘alternative mortgagetransaction,’’ defined as one:

• In which the finance charge or interest rate may beadjusted 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 commonto traditional fixed-rate, fixed-term transactions (forexample, loans that negatively amortize).223

As noted in § 11.4.2.2, supra, to bring a rescuer under theTruth in Lending Act it is necessary to show that the rescuerregularly engages in consumer credit transactions. SinceAMTPA is applicable only to lenders who ‘‘regularly’’ makehome-secured credit transactions, the same evidence thatshows that TILA applies will also tend to show that AMTPApreemption is applicable. However, since TILA includes a

219 Id.220 National Consumer Law Center, The Cost of Credit: Regulation,

Preemption, and Industry Abuses § 3.9.4.1 (3d ed. 2005 andSupp.).

221 12 U.S.C. § 3802(2)(C).222 12 U.S.C. § 3802(2)(D).223 12 U.S.C. § 3802(1).

specific numerical definition of ‘‘regularly’’ and AMTPAdmf

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11.4.8.4 Licensing Provisions of State Usury Laws


oes not, it is possible that a court would find that a rescueret the TILA definition but was not a ‘‘housing creditor’’

or AMTPA purposes.Assuming that AMTPA applies, the rescuer need not

omply with state law, but must comply with federal regu-ations governing:

• Adjustments to the interest rate, the payment, the bal-ance, or the loan term during the course of the loan.224

The federal regulations allow adjustments, but requirecertain safeguards such as use of a readily available andindependently verifiable index for interest rate adjust-ments.225

• Disclosures.226

he AMTPA regulations formerly preempted state limits onrepayment penalties and late charges for housing creditors,ut as of July 1, 2003, they were revised to eliminate thisreemption.227 AMTPA does not preempt state licensingaws,228 state restrictions on attorney fees that the holder canollect in the event of default,229 or state restrictions oneceptive advertising and practices.230

1.4.8.3 Choice of Law Clauses

Another way that a rescuer may avoid state credit andsury laws is by purporting to operate under the laws ofnother state.231 The rescuer might, for example, insert alause in the documents the homeowner signs, stating thathe transaction will be governed by the laws of some statehat imposes few restrictions. Choice of law rules vary fromtate to state, but such a clause is unlikely to be given effectf the chosen state does not have a substantial relationship tohe transaction. Nor will the clause be given effect if theesult would be contrary to a fundamental policy of the stateith the most significant relation to the transaction. Since

escuers tend to be local entrepreneurs, they are unlikely toe successful in arguing that the transaction has a substantialelationship to any state other than the one where theomeowner lives.

224 12 C.F.R. § 560.220.225 12 C.F.R. § 560.35.226 12 C.F.R. § 560.210.227 See National Consumer Law Center, The Cost of Credit: Regu-

lation, Preemption, and Industry Abuses § 3.10.2 (3d ed. 2005and Supp.).

228 12 U.S.C. § 3802(2).229 In re Jones, 2000 Bankr. LEXIS 1741 (Bankr. E.D.N.C. Dec.

22, 2000).230 Black v. Fin. Freedom Senior Funding Corp., 112 Cal. Rptr. 2d

445 (Cal. Ct. App. 2001).231 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.).

In addition to interest rate caps, state usury laws may alsohave lender licensing requirements that the rescuer hasviolated. States typically require a lender other than a bankor credit union to obtain a state license if it wishes to chargemore than the legal rate of interest permitted by the generalusury statute. The special usury statutes that govern theselicensed creditors usually specify the permissible terms ofindividual credit transactions and include significant penal-ties for creditors who either fail to obtain a required licenseor violate their licenses by ignoring statutory consumerprotections. Since obtaining the requisite license may be aprecondition to lending under some special usury statutes,failure to do so may give rise to a usury claim under thestatute.

The effects of failure to obtain a proper license vary.Many licensing statutes clearly specify the result of failureto obtain a required license. Sometimes the specified resultis to void the transaction in which the unlicensed lender hasparticipated. This is the case with many small loan acts.Other states may provide lesser penalties. Operating withouta required license is also a UDAP violation in manystates.232

Transactions with lenders who are not licensed, butshould be, may be void even in the absence of a specialstatutory provision to that effect. The common law principlethat contracts made in violation of regulatory statutes en-acted for the protection of the public are rendered null andunenforceable has been applied where creditors failed tocomply with appropriate licensing requirements.233 Thisgeneral rule applies to licensing statutes enacted for theprotection of the public, rather than those enacted merely toraise revenue. Special usury licensing statutes are clearly inthe former category, as they are designed to protect borrow-ers through the strict regulation and supervision of thecreditors themselves.

11.4.9 Other State Statutes


State door-to-door sales laws and state credit repair orcredit services laws may provide additional grounds tocancel foreclosure rescue transactions. In some states theselaws, especially the credit repair or credit services laws,provide attractive causes of action. One advantage of theselaws is that, unlike the Truth in Lending Act, they may notdepend on the rescuer’s having engaged in a certain number

232 National Consumer Law Center, Unfair and Deceptive Acts andPractices § 4.7.7.2 (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 andSupp.).

105

of prior transactions. Since these are state law claims, theyaco

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Many foreclosure rescue transactions will be subject to


1

lso are useful if the consumer prefers to litigate in stateourt. The statute of limitations may also be longer than forther claims.One disadvantage of these statutes is that they lack the

etailed provisions for unwinding real estate transactionshat the Truth in Lending Act provides. These statutes arelso less clear as to how they apply to assignees.

1.4.9.2 Door-to-Door Sales Laws

Every state has a door-to-door sales law that gives con-umers a right to cancel at least certain types of contractshat are solicited outside the seller’s fixed place of busi-ess.234 The typical state statute provides a three-day right toancel the transaction, and requires the seller to give theonsumer notice of this right. A Federal Trade Commissionule also provides a right to cancel sales of goods or serviceshere the seller personally solicits the sale and the buyer’s

greement or offer to purchase is made at a place other thanhe 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 so-licitations; seven-day period); Ariz. Rev. Stat. Ann. §§ 44-5001to 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 to5-3-405; 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 §§ 28-43-401to 28-43-405; 815 Ill. Comp. Stat. Ann. § 505/2B; Ind. CodeAnn. §§ 24-4.4-2-501 to 24-4.4-2-502, §§ 24-5-10-1 to 24-5-10-18; 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. LawCode 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. §§ 75-66-1to 75-66-11; Mo. Rev. Stat. §§ 407.700 to 407.720; Mont. CodeAnn. §§ 30-14-501 to 30-14-508; Neb. Rev. Stat. §§ 69-1601 to69-1607; 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. § 57-12-21; 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 51-18-09; Ohio Rev. Code Ann. §§ 1345.21 to 1345.28; Okla. Stat.Ann. tit. 14A, §§ 2-501 to 2-505; Or. Rev. Stat. §§ 83.710 to83.750; Pa. Stat. Ann. tit. 73, § 201-7; R.I. Gen. Laws §§ 6-28-1to 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. §§ 47-18-701 to 47-18-708; Tex. Bus. & Com. Code Ann. §§ 39.001to 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 to59.1-21.7:1; Wash. Rev. Code Ann. §§ 63.14.040, 63.14.120,63.14.150, 63.14.154; W. Va. Code §§ 46A-2-132 to 46A-2-135; Wis. Stat. Ann. §§ 423.201 to 423.205; Wyo. Stat. §§ 40-12-104, 40-14-251 to 40-14-255.

235 16 C.F.R. § 429.0(a).

06

the FTC rule or the state law. Foreclosure rescue scams ofteninvolve solicitations at the consumer’s home, so this elementof coverage is satisfied. The services the rescuer is offeringmust also fall within the state statute or the federal rule. Therescuer is likely to argue that the transaction involved realestate rather than goods or services. Showing that the res-cuer promised advice and other efforts that would save thehome may establish that the transaction was a mixed trans-action that involved not just real estate but also coveredservices. (Arguing that the transaction involved only ser-vices, not real estate, may be counterproductive if thehomeowner is asserting an equitable mortgage or TIL re-scission claim.) Home solicitation sales laws may also behelpful in cases where the rescuer did not acquire the home,but provided advice, referrals, a bankruptcy filing, or similarservices.236

If the FTC rule or the state statute covers the transaction,but (as is likely) the rescuer failed to give the consumernotice of the right to cancel, a number of decisions hold thatthe consumer has a continuing right to cancel.237 At an earlystage, after investigating coverage and reviewing the docu-ments, the homeowner’s attorney should consider sendingthe rescuer a notice invoking this right to cancel. The FTCrule requires the seller to honor the buyer’s notice of can-cellation, and, within ten business days, refund all paymentsmade, return all property traded in, cancel and return anynegotiable instruments, and terminate any security inter-est.238 While this list of specific steps does not mentionvoiding of a deed, that step would be encompassed by therequirement to terminate the security interest if the transac-tion is viewed as a loan.239

If the state home solicitation law does not create its ownprivate cause of action, a violation may be actionable underthe state UDAP statute. Even without explicit language inthe statute, in many states a violation of another consumerprotection statute is a per se UDAP violation.240 There is noprivate cause of action under the FTC Act to enforce an FTCrule, but in most states violations will also be UDAPviolations.241 In addition, if a statute or the FTC rule affordsa right to cancel that the rescuer refuses to recognize, theright to cancel can probably be enforced through a cancel-lation action in equity or through a declaratory judgmentaction.242

236 See § 11.2.1, supra.237 See National Consumer Law Center, Unfair and Deceptive Acts

and Practices § 5.8.2.6.3 (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. § 5.8.2.7.

11.4.9.3 State Credit Services or Credit Repair

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that loss and the violation of the statute. Most authorize


Organization Laws

About three-fourths of the states have credit services orredit repair organization laws.243 These laws cover organi-ations that offer to improve a person’s credit rating for aee. Most also cover organizations that offer, for a fee, tobtain an extension of credit for a consumer and that are noticensed or chartered by the state or federal government.244

A rescuer who claims to be able to arrange an extensionf credit that will enable the consumer to save the home maye covered by the state credit services statute. The keyuestion will be whether the rescuer falls within any of thexceptions set forth in the statute, which usually includeicensed real estate agents and attorneys as well as banks,redit unions, and other licensed lenders.

The typical credit repair statute gives the consumer ahree- to five-day right to cancel the contract, and requireshe organization to give the consumer notice of this right.

any prohibit various deceptive and unfair practices andegulate the terms of the contract.

The breadth of remedies offered by state credit services orredit repair organization laws is their chief advantage. Firsts the right to cancel. If the rescuer did not give the consumerhe required notice of this right, the practitioner should arguehat the right to cancel continues indefinitely.245 The statuteay also provide that the consumer’s contract with the

escuer is void if the rescuer did not comply with the statute.The typical statute provides a private cause of action for

ctual damages, often with a minimum recovery set at themount paid by the consumer. The measure of actual dam-ges is generally left undefined in these statutes, but couldnclude the value of the equity in the home that the home-wner lost if a causal connection can be established between

243 See National Consumer Law Center, Fair Credit ReportingAppx. B (5th ed. 2002 and Supp.) (state-by-state summaries ofstate credit repair organization laws).

244 The Arizona, Arkansas, California, Delaware, District of Co-lumbia, Florida, Illinois, Indiana, Kansas, Maryland, Massachu-setts, Minnesota, Missouri, Nebraska, Nevada, New Hampshire,North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Ten-nessee, Texas, Utah, Virginia, Washington, West Virginia, andWisconsin credit services statutes cover entities that offer toobtain extensions of credit for consumers, require a right tocancel, and afford the consumer a private cause of action.Georgia’s statute covers entities that offer to obtain extensionsof credit but the statute does not afford a right to cancel or aprivate cause of action. Statutes in Maine and Michigan coverentities that offer to obtain extensions of credit and provide aprivate right of action but do not require a right to cancel. TheMichigan and Washington statutes explicitly include rescuers inthe definitions and are discussed in § 11.4.5, supra.

245 See National Consumer Law Center, Unfair and Deceptive Actsand Practices § 5.8.2.6.3 (6th ed. 2004 and Supp.) (collectingcases holding that consumer has continuing right to cancelunder state home solicitation sales statutes if seller fails to giveproper notice of right to cancel).

punitive damages and attorney fees, and some explicitlyprovide for injunctive relief.

Many of these statutes explicitly apply their prohibitionsnot only to the organization itself, but also to its agents andrepresentatives, including independent contractors. Courtshave differed on the question whether a claim under the statecredit services organization law can be asserted againstother entities that are working in tandem with the creditservices organization. One decision finds that a lender whoprepared a broker agreement for a mortgage broker, and thenfunded the loan, violated the state credit repair law eventhough only the broker met the statutory definition of creditservices organization.246 But another decision from the samedistrict holds that others who participate in the scheme witha credit repair organization but do not themselves meet thestatutory definition are not subject to the statute.247

11.4.10 State Real Estate Requirements

11.4.10.1 Formal Requirements for Deeds

The homeowner should also check the details of thestate’s formal requirements for deeds, since rescuers oftencut corners. The deed may be invalid if it is challenged onformal grounds, but there may be a very short deadline forthis type of challenge. Showing that the deed is invalid maybe the only sure-fire way to void it after the home has beentransferred or mortgaged to an innocent third-party. Statereal estate requirements vary from state to state and can bequite technical, so it may be best to get detailed informationfrom the client and then consult with an attorney who hasexpertise in real estate law.

11.4.10.2 False Notarization

States typically require that signatures on deeds or mort-gages be notarized. Defects in the notarization of titledocuments may affect the validity of the instrument.

Many foreclosure rescue scam cases involve situations inwhich the person whom the notary certified as havingappeared did not, in fact, appear. Borrowers are often in-structed 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 noderivative liability under state credit repair law for acts ofclosing agent and loan broker who were not shown to becovered 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 legalduty to ensure that independent broker complied with statecredit repair law).

107

elsewhere for notarization. Alternatively, improper notari-zeao

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weneo

ing to award damages.253 But the false notarization may still


1

ations may result from the taking of an actual acknowl-dgment from an imposter, taking an acknowledgment fromn incompetent person, or the taking of an acknowledgmentver the telephone.Regardless of the reason for the defective acknowledg-ent, practitioners should investigate whether such defects

ender the instrument invalid, providing grounds to void aransfer.248 Most courts distinguish between defective ac-nowledgments and failure to acknowledge. Courts areore likely to find instruments valid where the defect is

echnical in nature, such as use of a notary residing in therong county or failure to read the acknowledgment aloud,ut will invalidate them when the signatory did not in factppear before the notary.249

In addition to invalidating the deed, the homeowner maye able to seek damages against the notary for false nota-ization. Notaries are required to perform their duties withonesty, integrity, diligence, and skill.250 In addition toauses of action under a state UDAP statute or common lawheories, such as negligence per se, state statutes may setorth specific causes of action for notary misconduct.251

otary liability is particularly important because states typi-ally require notaries to be bonded.

The California Court of Appeals has found that a notaryho negligently notarizes a trust deed is liable not only for

conomic damages but also for emotional distress damages,oting ‘‘the important function notaries serve in our soci-ty.’’252 If the false notarization was not a proximate causef the homeowner’s losses, however, courts may be unwill-

248 See In re Miller, 320 B.R. 203 (N.D. Ala. 2006) (stating, but notdeciding, mortgage invalid for lack of proper acknowledgmentand therefore insufficient to transfer legal title in the collateralto lender); In re Fisher, 320 B.R. 52 (E.D. Pa. 2005) (permittingchapter 13 trustee to avoid mortgage where notary was notpresent to acknowledge mortgagor’s identity and voluntaryacquiescence to be bound by terms of the agreement); In reBowling, 314 B.R. 127 (Bankr. S.D. Ohio 2004) (same); Gold-ome Credit Corp. v. Hardy, 503 So. 2d 1227 (Ala. Civ. App.1987) (affirming trial court’s determination that the mortgagenot executed before a notary was invalid and setting asideforeclosure). But see In re Nichols, 265 B.R. 831 (B.A.P. 10thCir. 2001) (distinguishing between validity and perfection ofimproperly notarized mortgage and affirming denial of debtor’smotion 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.3d515 (6th Cir. 2004) (failure to include mortgagor’s name innotarization section rendered the deed of trust invalid underTennessee 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 misconductor neglect of a notary public, the notary public and the suretieson the notary public’s official bond are liable in a civil action tothe persons injured thereby for all the damages sustained.’’).

252 Id. at 519, 85 Cal. Rptr. 2d at 380.

08

provide grounds to invalidate the deed.

11.4.11 RICO

The federal Racketeer Influenced and Corrupt Organiza-tions Act (RICO)254 provides powerful civil remedies, in-cluding attorney fees and treble damages, to victims of abroadly defined range of ‘‘racketeering activity’’ and tothose who have been subjected to the collection of an‘‘unlawful debt.’’ ‘‘Unlawful debt’’ includes any usuriousdebt bearing interest of at least twice the ‘‘enforceable rate.’’

Although RICO is aimed at organized crime, the statute isbroadly written to encompass a myriad of fraudulent activi-ties conducted by theoretically ‘‘legitimate’’ organizationsand creditors. Therefore, consumers who have been thevictim of either fraudulent overcharging or overcharging ofat least twice the civil usury rate may wish to consider aRICO claim.255

RICO claims have advantages and disadvantages. Theyoffer treble damages, attorney fees, and federal jurisdiction.However, the elements of a RICO claim are complex andrigorous. Courts may be hostile to RICO claims, and manyimpose special pleading requirements on them. Before mak-ing a RICO claim, the homeowner’s attorney should evalu-ate whether the state UDAP statute or a common law fraudclaim would offer equivalent relief.

About half the states have their own RICO statutes, andall but a few of these statutes afford a private cause ofaction.256 Most are modeled on the federal statute, but somehave more relaxed elements. While a federal RICO claimwill provide a basis for removing a case to federal court, aclaim under a state RICO statute will not, so it is useful ifthe 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 § 4.8.7.5, supra; National Con-sumer Law Center, Unfair and Deceptive Acts and Practices§§ 9.2, 9.3 (6th ed. 2004 and Supp.) (extensive analysis ofRICO); 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, seeNational Consumer Law Center, The Cost of Credit: Regulation,Preemption, and Industry Abuses § 10.8.5.3 (3d ed. 2005 andSupp.).

256 See, e.g., Martinez v. Affordable Housing Network, Inc., 109P.3d 983 (Colo. Ct. App. 2004) (affirming jury verdict on stateRICO claim against rescuer, but awarding damages only onUDAP claim to avoid duplication), rev’d on other grounds, 123P.3d 1201 (Colo. 2006) (reversing trial court’s determinationthat buyer of home from rescuer was bona fide purchaserwithout notice; remanding for trial on quiet title claim). Seegenerally National Consumer Law Center, Unfair and Decep-tive Acts and Practices § 9.3 and Appx. C.2 (6th ed. 2004 andSupp.).

claims under federal and state RICO statutes is discussed indm

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etail in NCLC’s Unfair and Deceptive Acts and Practicesanual.257

1.5 Challenging Foreclosure RescueScams in Bankruptcy

1.5.1 Introduction

Bankruptcy is an important option for victims of foreclo-ure rescue scams. Bankruptcy may not only provide theictim a fresh financial start, but it may also be a favorableorum for homeowners in their efforts to regain title to theiromes. Under the Bankruptcy Code, certain transfers ofroperty made by the debtor may be voided in a bankruptcyroceeding by either the bankruptcy trustee or the debtor.he debtor may also use bankruptcy to stop eviction or

oreclosure proceedings initiated by a rescuer or to bringther nonbankruptcy claims against the rescuer.

This section provides an overview of bankruptcy and howt can be used in challenging foreclosure rescue scams. Mostankruptcy cases are complicated, and those who are not aankruptcy practitioners should consult with a bankruptcyttorney before filing a case. Selected bankruptcy issues thatrise most frequently in foreclosure cases are discussed inh. 7, supra. NCLC’s Consumer Bankruptcy Law andractice258 is a comprehensive analysis of bankruptcy laws applied to consumers.

1.5.2 Bankruptcy Basics

1.5.2.1 Two Common Types of Bankruptcy forConsumers

1.5.2.1.1 General

Bankruptcy law provides for two main types of consumerases: chapter 7 and chapter 13. Both types are generallyffective at stopping a pending eviction or foreclosure ac-ion. Similarly, debtors may seek to void certain propertyransfers under both chapters. However, if an outstandingortgage on the homeowner’s property is in default, chapter

3 will frequently be the better choice.

1.5.2.1.2 Chapter 7 (straight bankruptcy)

In bankruptcy cases under chapter 7, the debtors file aetition 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, ConsumerBankruptcy Law and Practice, Special Guide to the 2005 Act(2005).

debts in exchange for giving up property, except for ‘‘ex-empt’’ property that the law allows the debtor to keep. Inmost cases, all of the debtor’s property will be exempt. Butproperty that is not exempt is sold, with the money distrib-uted to creditors.

In some foreclosure rescue scams, the rescuer may notcure the mortgage default or pay off the mortgage that mayhave been one source of the homeowner’s financial diffi-culties. If there is an outstanding mortgage in default, achapter 7 case probably will not be the right choice becauseit does not eliminate the right of mortgage holders (or othersecured creditors) to take the debtor’s property to cover thedebt.

11.5.2.1.3 Chapter 13 (reorganization)

In chapter 13 cases, the debtor must file a ‘‘plan’’ showinghow she will pay off past-due and current debts over a periodof up to five years. The most important fact about chapter 13bankruptcy for victims of foreclosure rescue scams is that itallows debtors to cure defaults on secured loans such ashome mortgages.259 In most cases, payments to the mort-gage lender will be at least as much as the regular monthlypayments, with some additional payment to get caught up onthe delinquent amount. Chapter 13 cases also allow debtorsto keep both exempt property, which would be protected inchapter 7, and non-exempt property, which would be sold inchapter 7. For a chapter 13 plan to be a viable option, thehomeowners will need to have enough income to pay fortheir necessities and to keep up with the required paymentsas they come due.

11.5.2.2 Gathering the Necessary Information

While the primary purpose in filing for bankruptcy maybe to regain title to the home, homeowners will be requiredto complete a significant amount of paperwork detailingtheir financial situation. Homeowners must provide theattorney with the information necessary to accurately pre-pare the bankruptcy petition and schedules.260 The attorneywill need to obtain a complete list of creditors and currentaddresses, account numbers, and balances owed for eachdebt. It is more important in chapter 13 than in chapter 7 toknow the precise amount owed on each debt, as this mayaffect the feasibility of the plan. Particularly in cases wherethe 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 Lawand Practice (7th ed. 2004). An updated version of the ques-tionnaire reflecting the 2005 Act changes is found in AppendixH to National Consumer Law Center, Consumer BankruptcyLaw and Practice (Special Guide to the 2005 Act).

109

unsecured creditors or to avoid a judicial lien, the attorneyahutta

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lso should try to obtain a copy of a recent appraisal of theome. The trustee or secured creditor simply may not relypon the tax assessment value. It also is very important thathe homeowners provide a realistic budget of expenses sohat the attorney can determine the amount of excess incomevailable to make monthly plan payments.

1.5.2.3 Credit Counseling Requirements

Bankruptcy law requires that most debtors receive budgetnd credit counseling within 180 days before the bankruptcyase is filed.261 If time is critical in the foreclosure rescuease, homeowners should immediately be referred to anpproved credit counseling agency. The counseling require-ent may be temporarily or permanently waived, but only

n very limited circumstances.262 Organizations providinghis counseling must be approved by the United Statesrustee Program (or the Bankruptcy Administrator in Northarolina and Alabama). Agencies must also provide theankruptcy counseling and necessary certificates withoutegard to ability to pay. If homeowners cannot afford the fee,hey should ask for a fee waiver or reduced fee.

To receive a discharge in a chapter 7 or chapter 13 case,he debtor must complete a financial education course. Thisourse is different from the budget and credit counseling thatust be completed prior to filing.

1.5.2.4 Litigating in a Bankruptcy Case

Lawsuits within a bankruptcy case are called ‘‘adversaryroceedings.’’ The proceedings are initiated by a complaintnd are governed by rules that closely parallel the Federalules of Civil Procedure. Depending on the specific circum-

tances of the case, the bankruptcy court may be a preferableorum for litigating foreclosure rescue scams.263 In manyistricts, the bankruptcy judges and federal judges may be aood deal more sympathetic to the homeowner’s case thanudges in local courts. Not only do bankruptcy judgesegularly see the problem of debtors in trouble, but also theyre generally more aware of the unfair creditor practices thatften take place. Many bankruptcy judges are pleased to beresented with novel and creative cases that provide both ahange of pace from routine bankruptcy matters and aeans for ruling on unfair practices.In addition, most bankruptcy judges are far more knowl-

dgeable in commercial law, and often in consumer law

261 11 U.S.C. § 109(h). A list of approved agencies is available onthe 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); NationalConsumer Law Center, Consumer Bankruptcy Law and Prac-tice, Special Guide to the 2005 Act § 4.3.5.3 (2005).

263 See generally National Consumer Law Center, Consumer Bank-ruptcy Law and Practice Ch. 13 (7th ed. 2004).

10

judge. Bankruptcy judges and federal appellate judges maybe more disposed, because of lower case loads and greateravailability of law clerk assistance, to give careful consid-eration to bona fide legal arguments on behalf of debtors.

11.5.3 Stopping the Eviction

Many victims of foreclosure rescue scams may only seeklegal assistance after the rescuer has initiated an evictioncase. In these cases, a critical first step in defending thehomeowner will be to stop the eviction process. In mostsituations, a bankruptcy filing will automatically stop mosteviction efforts against the homeowners as well as othercreditor actions. However, there are a few exceptions, usu-ally based on prior bankruptcy filings, when the stay maynot automatically go into effect or may have a limitedduration. There is also a special set of procedures that applyto eviction cases.

If the rescuer has initiated an eviction case against thehomeowner, the automatic stay will prevent the rescuer fromevicting the homeowner if the bankruptcy case is filedbefore the state court has entered a judgment for possessionagainst the landlord. If the bankruptcy case is filed afterjudgment for possession against the homeowner, the fullautomatic stay will come into effect only for a period of 30days, and then only if documents are filed with the courtcertifying that: (1) the debtor has a right to cure the rentdefault under state law, and (2) the debtor has deposited withthe bankruptcy court the rent that will come due during thefirst 30 days of the bankruptcy case (usually one month’srent). To get a stay longer than 30 days, the debtor isrequired to pay the landlord all of the back rent statement inthe judgment for possession. These issues are discussed inmore detail in § 11.6.5, infra.

Because in most cases it is unlikely that victims offoreclosure rescue scams will have the financial resources topay all the back rent in the judgment for possession within30 days, the attorney should consider options for removingthe judgment or reopening the eviction case before filing forbankruptcy.

11.5.4 Voiding Title Transfers inForeclosure Rescue Scams

11.5.4.1 Overview

As discussed above, one of the most common indicia ofa foreclosure rescue scam is that homeowners transfer theirproperty to the rescuer or a party affiliated with the rescuer.These transactions may give rise to state and federal statu-tory claims such as unfair and deceptive practices (UDAP)and truth in lending (TILA), or common law claims such as

fraud, conspiracy, and breach of fiduciary duty. Legal theo-r§gp

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equivalent value for the transfer, and (2) the debtor was


ies for attacking foreclosure rescue scams are discussed in11.4, supra. However, for homeowners whose primary

oal is to regain ownership of their home, bankruptcy mayrovide an alternative route.

Bankruptcy trustees (and administrators) have the powero avoid or nullify transfers of property pursuant to severalections of the Bankruptcy Code. While these avoidanceowers have limitations, they can be extremely powerful inhallenging title transfers in foreclosure rescue scams. Theode also permits debtors to utilize the trustee’s avoidingowers with some limitations set forth in section 522(g) and22(h).

While the complex relationship of the bankruptcy provi-ions used by the debtor to void title transfers may at firstppear daunting, especially to nonbankruptcy practitioners,he interplay of the statutes can be reduced to five essentiallements. The debtor may avoid a transfer if: (1) the transfers avoidable by the trustee; (2) the trustee does not attempto avoid the transfer; (3) the debtor did not conceal theroperty; (4) the debtor could exempt the property; and (5)he transfer was involuntary. The most difficult hurdle forome victims of foreclosure rescue scams is likely to beemonstrating that the transfer was not voluntary. However,f the homeowner cannot show the last three elements,nother option is to persuade the trustee to avoid the transfer,s discussed in § 11.5.4.5, infra.

1.5.4.2 Trustees’ Powers to Avoid Transfers

1.5.4.2.1 General

The starting point in any avoidance action is a determi-ation of whether the transfer is avoidable by the trustee. Asoted above, the bankruptcy trustee may set aside or nullifywide variety of transfers made by a debtor prior to the

ommencement of a case. In the foreclosure rescue scamontext, the most likely statutory sections to be employedre section 548, dealing with fraudulent transfers, and the‘strong arm’’ powers of section 544.

1.5.4.2.2 Fraudulent transfers

Section 548 of the Bankruptcy Code gives the trustee (andhus the debtor in some instances) the ability to avoidransfers based on either actual or constructive fraud.264 Therustee may avoid a transfer if the transfer was made withinhe two years265 before the case was filed and the transfer

eets certain conditions. Specifically, a transfer may bevoided 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 yearprior to the commencement of the case.

insolvent on the date of the transfer or became insolvent asa result of the transfer.

Whether a debtor received less than a reasonably equiva-lent value will depend on the facts and circumstances ofeach case. The focus of the inquiry is on what the home-owners received in return for what they surrendered. Inforeclosure rescue scams, homeowners often receive little ornothing for the equity in their homes. Even where rescuershave cured mortgage arrears, it is doubtful whether suchpayments are of any benefit to the homeowners who havesimultaneously lost title to their homes.266

To avoid a transfer under section 548, the debtor mustalso have been insolvent at the time of transfer or havebecome insolvent as a result of the transfer. The insolvencyinquiry is essentially a balance-sheet test that looks at thedifference between the debtor’s non-exempt assets and li-abilities. Most consumer debtors are insolvent under theCode’s definition. For those debtors that may have hadnon-exempt equity in their homesteads, transferring title totheir property in a foreclosure rescue scam almost alwaysrenders the homeowner insolvent.

11.5.4.2.3 Use of ‘‘strong arm clause’’

Besides the power to avoid fraudulent transfers undersection 548, section 544(b) in combination with statefraudulent transfer laws provides another basis for avoidingtitle transfers in foreclosure rescue scams. Under almost allstate fraudulent transfer laws, a transfer may be deemedfraudulent if: (1) the debtor was insolvent or became insol-vent as a result of the transfer, and (2) the conveyance wasmade without ‘‘reasonably equivalent value’’ or ‘‘fair con-sideration.’’267

Despite their similarities, the right to avoid fraudulenttransfers under the Code differs slightly from the right toavoid transfers under state law. Most significantly, statefraudulent transfer laws have a longer ‘‘reach-back’’ period,typically four years. As a result, debtors may use section544(b) to challenge title transfers outside of the two-yearperiod specified in section 548. Some state laws also providethat a debtor is presumed to be insolvent if he or she is notpaying debts as they become due. Under this definition,homeowners who are in financial distress and falling furtherbehind 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, 169B.R. 285, 300 (E.D.N.Y. 1994).

267 Almost all state fraudulent transfer laws are based either on theUniform Fraudulent Conveyance Act, which uses the term ‘‘fairconsideration,’’ or the more recent Uniform Fraudulent TransferAct, which uses the term ‘‘reasonably equivalent value.’’ Courtshave drawn little to no distinction between the ‘‘reasonablyequivalent value’’ standard and the ‘‘fair consideration’’ stan-dard. 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).

111

11.5.4.3 Debtor’s Power to Avoid Title Transfers

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1.5.4.3.1 General

If the trustee could avoid the title transfer but elects not too so, the debtor may be able to do so in certain circum-tances. Specifically, the debtors may avoid title transfers ifhey can demonstrate that: (1) the transfer could be avoidedy the trustee; (2) the trustee did not attempt to avoid theransfer; (3) the debtor did not conceal the property; (4) theebtor could exempt the property; and (5) the transfer wasnvoluntary.

1.5.4.3.2 Did the debtor conceal the property?

The answer to this question depends largely on whetherhe debtor has disclosed the property on his or her schedules.ecause of the potential consequences of failing to list theroperty in the schedules, it is always better to be over-nclusive rather than under-inclusive. At a minimum, theauses of action against the rescue scammers should beisted on Schedule B—Personal Property.268 It may also berudent to list the property on Schedule A—Real Propertyith an explanatory note that the debtor had been the titlewner of the real property before the transfer, that the debtorelieves that the transfer is avoidable, and the debtor retainsn equitable interest in the property.

1.5.4.3.3 May the debtor exempt the property?

As a general rule, almost all property in which the debtoras a legal or equitable interest becomes property of theankruptcy estate at the commencement of a case.269 How-ver, the Bankruptcy Code permits a debtor to exemptertain property from the estate pursuant to the federalxemptions, as listed in 11 U.S.C. § 522(d), or the applicabletate exemptions. For debtors in states that have ‘‘opted out’’f the federal exemption scheme, only the state law exemp-ions and exemptions provided by federal non-bankruptcyaw are available.270

So long as the debtor may exempt some portion of theroperty, the debtor may avoid transfers of that propertysing the trustee’s powers. The amount recovered up to themount of the exemption is for the benefit of the debtor,hile any amount in excess of the exemption is preserved

or the benefit of the estate. So, for example, if the debtorvoids transfer of a $100,000 home that has a $65,000 first

268 Debtors may be judicially estopped from later bringing claimsnot listed in their schedules. See, e.g., Hamilton v. State FarmFire & 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).

12

remaining $5000 in equity is preserved for the benefit of theestate. In a chapter 7 bankruptcy, the home may be sold,with the debtor receiving the $30,000 exemption and theremaining $5000 going to unsecured creditors. (The debtormay still be able to save the home, however, by buying outthe trustee’s interest in the home through refinancing orsome other way.) In a chapter 13 bankruptcy, the debtor isrequired to pay unsecured creditors at least the amount ofnon-exempt assets that would have been distributed to themin 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 creditorsneed only pay them the amount of their debts.)

11.5.4.3.4 Was the transfer involuntary?

The debtor may use the trustee’s avoidance powers onlywhere the transfer to be avoided was ‘‘involuntary.’’ Neitherthe term ‘‘voluntary’’ nor ‘‘involuntary’’ is defined in theBankruptcy Code. Involuntary transfers, however, generallyrefer to transfers effectuated by operation of law, such as anexecution of judgment, repossession, foreclosure, or gar-nishment. A transfer may also be considered ‘‘involuntary’’if it resulted from fraud, material misrepresentation, orcoercion. According to this standard, a voluntary transferdoes not occur where a creditor has concealed or failed toinform a debtor of the essential facts necessary for the debtorto make an intelligent decision on whether to transfer theproperty to the creditor.

In foreclosure rescue cases where homeowners are led tobelieve they are taking out a second mortgage or additionalfinancing to cure mortgage arrears, when in reality they areunknowingly transferring title to their home to a third party,the ‘‘involuntary’’ nature of the transaction should not bedifficult to establish. Even in cases where homeowners areaware that they are transferring title, it may still be possibleto characterize the transaction as involuntary if they did notknow all of the material facts of the transaction, misrepre-sentations were made to them, they faced significant eco-nomic coercion as a result of a threatened foreclosure sale,or the closing transaction occurred under tremendous pres-sure.271

11.5.4.4 Persuading the Trustee to Avoid theTransfer

If the homeowner cannot show all of the elements dis-cussed above, it may be possible to persuade the trustee toavoid the transfer. The advantage of having the trustee avoidthe transfer is that the trustee need not show the last threeelements: 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).

the debtor may exempt the property; and that the transferwae

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interfere with pending state proceedings.274 Younger absten-


as involuntary. The trustee is likely to be interested invoiding the transfer if the home has some non-exemptquity.

If the trustee avoids the transfer, the homeowner willenefit in two ways. First, the homeowner will be able toxempt whatever portion of the home is exempt. Second, ifportion of the home’s value is not exempt, it will be under

he control of the trustee rather than the rescuer.In a chapter 13 bankruptcy, the debtor is required to pay

he unsecured creditors the amount they would have re-eived in a chapter 7 bankruptcy. Since the amount thatnsecured creditors receive in a chapter 7 case is based onhe amount of non-exempt assets in the bankruptcy estate,ringing the debtor’s non-exempt equity in the home backnto the bankruptcy estate increases the amount that willave to be distributed to unsecured creditors in a chapter 13ase.272

1.6 Issues Posed by Separate StateCourt Proceedings

1.6.1 Introduction

Several issues complicate the homeowner’s ability toursue a foreclosure rescue scam lawsuit when there is aelated state proceeding. These issues are most likely to arisehen the homeowner files an action in federal court to

escind a foreclosure rescue transaction and there is a threat-ned, pending, or concluded action in state court to foreclosen the home or to evict the homeowner.

Defendants often raise Younger abstention, the Anti-In-unction Act, and the Rooker-Feldman doctrine, in additiono res judicata and collateral estoppel. These issues shoulde evaluated when the homeowner decides whether to file anndependent action or whether to seek relief in the foreclo-ure or eviction case. They should also be considered whenhoosing between state and federal court, since Younger, thenti-Injunction Act, and Rooker-Feldman only apply in

ederal court (though states might have similar doctrines). Ineneral, the farther the existing state court proceeding isrom judgment the more likely a federal or state court is toeach the merits and grant relief in an independent action.hese issues are discussed in more detail in NCLC’s Truth

n Lending manual.273

1.6.2 Younger Abstention

The Younger abstention doctrine prevents a federal courtrom issuing declaratory or injunctive relief that would

272 See § 11.5.4.4.2, supra.273 National Consumer Law Center, Truth in Lending § 8.4.2 (5th

ed. 2003 and Supp.).

tion applies if (1) there are ongoing state proceedings thatare judicial in nature; (2) the state proceedings implicatestate interests so important that exercise of the federaljudicial power would disregard the comity between thestates and the national government; and (3) the state pro-ceedings afford an adequate opportunity to raise the federalclaims.275

The first and third requirements for Younger abstentionare fairly straightforward. If the state case is merely threat-ened rather than filed, Younger does not bar declaratoryrelief because there is no ongoing state proceeding and thefirst Younger requirement is not met.276 In foreclosure rescuescam cases, the third requirement for Younger abstention—an adequate opportunity to raise federal claims—is often notmet, because some jurisdictions sharply curtail the home-owner’s ability to raise consumer law claims such as TILAin response to foreclosure or eviction actions.277

The scope of the second requirement for Younger absten-tion—important state interests—has evolved. Younger in-volved pending state criminal prosecutions, and the doctrinehas since been applied in other contexts, such as civilcontempt proceedings, that involve enforcement actions bythe state or state courts and are akin to criminal prosecu-tions.278

In 1987, in Pennzoil v. Texaco, Inc.,279 the Supreme Courtextended 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. 2d505 (1974); see also Hicks v. Miranda, 422 U.S. 332, 95 S. Ct.2281, 45 L. Ed. 2d 223 (1975) (Younger prevents declaratoryrelief where state criminal proceeding is filed after federal suitbut before any proceedings of substance on merits in federalsuit).

277 Miller v. Granados, 529 F.2d 393 (5th Cir. 1976) (Youngerabstention does not bar injunction against state foreclosureproceedings where state courts could not grant the relief plain-tiffs sought under federal antitrust laws). See generally NationalConsumer Law Center, Truth in Lending § 7.6.8 (5th ed. 2003and 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 thestate); Juidice v. Vail, 430 U.S. 327, 97 S. Ct. 1211, 51 L. Ed.2d 376 (1977) (civil contempt proceeding); Trainor v. Hernan-dez, 431 U.S. 434, 97 S. Ct. 1911, 52 L. Ed. 2d 486 (1977) (civilaction by the state to collect fraudulently obtained welfarebenefits); Moore v. Sims, 442 U.S. 411, 99 S. Ct. 2371, 60 L. Ed.2d 994 (1979) (action by governmental agency for temporarycustody of allegedly abused child); Middlesex Co. Ethics Com-mittee v. Garden State Bar Ass’n, 457 U.S. 423, 432, 102 S. Ct.2515, 73 L. Ed. 2d 116 (1982) (state bar disciplinary proceed-ings); Ohio Civil Rights Commission v. Dayton ChristianSchools, Inc. 477 U.S. 619, 106 S. Ct. 2718, 91 L. Ed. 2d 512(1986) (administrative agency action commenced by state civilrights commission).

279 481 U.S. 1, 107 S. Ct. 1519, 95 L. Ed. 2d 1 (1987).

113

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1

f an appeal of a state civil case. The Court characterized thease as involving a challenge to the process by which thetate compels compliance with the judgments of courts,imilar to civil contempt proceedings. It held that the state’snterests in this civil proceeding were so important thatxercise of federal judicial power would disregard the co-ity between the states and the federal government. Theourt took pains, however, to state that it was not announc-

ng a rule that would be applicable to all civil cases betweenrivate parties.280

Eviction or foreclosure proceedings that may be pendingn state court in foreclosure rescue scam cases involve onlyrivate parties, and a TILA case does not generally chal-enge a state’s enforcement efforts. Therefore, these casesre not likely to implicate important state interests underounger.

Since Pennzoil, when the state court suit is a civil caseetween private parties, courts have been more likely tobstain if the federal suit is a constitutional challenge to thetate court’s procedures.281 If the federal suit does nothallenge the state court’s procedures, but instead seeks auling on some issue between the private parties, a stateviction or foreclosure proceeding is less likely to be seen asmplicating the important state interests that the Youngeroctrine requires.282 If the state case has gone to judgmentnd 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 judgmentdebtor sought relief in federal court to challenge confession ofjudgment procedures); accord Doscher v. Menifee CircuitCourt, 2003 WL 22220534, 75 Fed. Appx. 996 (6th Cir. Sept.24, 2003) (unpublished) (Younger abstention bars challenge tostate court foreclosure procedures; pro se debtor sought federalcourt order blocking foreclosure sale and reopening foreclosurejudgment); see also Scott v. Mortgage Elec. Registration Sys-tems, 2004 WL 1925008 (E.D. Pa. Aug. 27, 2004) (Youngerabstention bars due process challenge in federal court to stateforeclosure procedures); Fisher v. Fed. Nat’l Mortg. Ass’n, 360F. Supp. 207 (D. Md. 1973) (pre-Pennzoil case invokingYounger abstention to refuse to hear constitutional challenge tostate 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 thatYounger abstention is not always appropriate whenever a civilproceeding is pending in a state court; ‘‘Pennzoil’s limitingprinciple is its focus on the special interest that a state has inenforcing 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 statejudiciary process itself’’ whereas the plaintiff’s ‘‘ federal suitdoes not directly attack the validity of the state foreclosureproceeding per se, but rather involves a claim for rescission thatcould ultimately affect the final distribution of the bankruptcyestate’’); Schumacher v. ContiMortgage Corp., 2000 WL34030847 (N.D. Iowa June 21, 2000) (relying on Roland todeny abstention despite TILA affirmative defense in state fore-closure suit).

14

judgment comes closer to Pennzoil, but it still may bepossible to argue that the plaintiff’s federal challenge is notto the state court procedures themselves. (However, theRooker-Feldman doctrine, discussed in § 11.6.4, infra, maybe an additional impediment.)

Apart from the three formal requirements for Youngerabstention, abstention can also be avoided if the state pro-ceedings are undertaken in bad faith or for purposes ofharassment, or some other extraordinary circumstances ex-ist, such as proceedings pursuant to a flagrantly unconstitu-tional statute.283

11.6.3 The Anti-Injunction Act

Another potential impediment to federal court relief whenthere is an ongoing state court proceeding is the Anti-Injunction Act, which prohibits federal courts from grantinginjunctions to stay proceedings in state courts.284 This pro-hibition cannot be evaded by addressing the injunction to aparty rather than the state court.285

The Anti-Injunction Act contains three explicit excep-tions, all of which are to be narrowly construed.286 First, afederal court may enjoin state proceedings ‘‘as expresslyauthorized by Act of Congress.’’287 To invoke this excep-tion, the other law need not expressly refer to the Anti-Injunction Act, or expressly authorize an injunction againsta state court proceeding.288 The question is whether theother law creates a federal right or remedy, enforceable in afederal court of equity, that can be given its intended scopeonly by the stay of a state court proceeding.289 Some courtshave held that TILA does not fall within this exception.290

A second explicit exception to the Anti-Injunction Act isthat 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 holdingthat Clayton Act was not express authorization for injunction,since neither statute nor legislative history mentioned § 2283 orthe 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 TILAand other claims, that none of the exceptions to Anti-InjunctionAct are applicable); see also Tropf v. Fidelity Nat’l Title Ins.Co., 289 F.3d 929, 942 n.21 (6th Cir. 2002) (plaintiffs raisedTILA and many other claims; opinion does not focus on whetherTILA is an exception, but states that no statute authorized theinjunction plaintiffs sought).

necessary in aid of its jurisdiction. This rule applies when‘astcpdc(etbjcttt(as

rwwjcai

invoked, whether in the complaint or by motion.296 The


‘necessary to prevent a state court from so interfering withfederal court’s consideration or disposition of a case as to

eriously impair the federal court’s flexibility and authorityo decide the case.’’291 This exception has been applied toases in which a federal court obtains in rem jurisdictionrior to a state court suit, to removal cases, and to multi-istrict litigation.292 In other cases, the mere fact that a stateourt might rule first on an issue before the federal courtand expose the homeowner to res judicata or collateralstoppel) is not enough to invoke this exception.293 But ifhe state action threatens not simply to reach judgment first,ut also to interfere with the federal court’s own path toudgment—such as by preventing relief on the federallaims even if they are proven—then a preliminary injunc-ion may be necessary in aid of the federal court’s jurisdic-ion.294 This exception might allow a federal court to enjoinhe actual eviction of the homeowner or sale of the propertythrough foreclosure or otherwise) in order to protect thebility of the federal court to grant the homeowner the reliefought on a TILA rescission claim.295

Related to the second exception (though not based di-ectly on it) is a dispute among the courts of appeal abouthether a federal court may enjoin state court proceedingshen the federal court had already obtained (in personam)

urisdiction over the injunctive claim before the state pro-eeding was filed. The Seventh Circuit, followed by the Firstnd Eight, has held that the jurisdiction of the federal courts determined at the time that its injunctive powers are

291 Atlantic Coast Line R.R. Co. v. Brotherhood of LocomotiveEngineers, 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); 1975Salaried 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. Brother-hood 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); Cotton-wood Christian Center v. Cypress Redevelopment Agency, 218F. Supp. 2d 1203, 1217–1218 (C.D. Cal. 2002) (federal courtmay enjoin state condemnation proceeding in order to protect itsability to rule on landowner’s challenge to city’s land usedecisions). But see Clark v. U.S. Bank Nat’l Ass’n, 2004 WL1380166 (E.D. Pa. June 18, 2004) (Anti-Injunction Act barsTILA plaintiff’s prayer for injunction against sheriff’s sale thatwas 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 offederal court’s jurisdiction in TILA challenge to foreclosurerescue scam because state eviction case had already enteredjudgment and state courts, including eviction court, could hearTILA claims).

Fourth, Fifth, and Sixth Circuits have held that the Anti-Injunction Act applies whenever the state action is filedbefore the federal court rules on a request for injunctiverelief, and the Second Circuit has indicated agreement withthis rule.297 In either case, it is clear that the Anti-InjunctionAct only prohibits injunctions against pending state pro-ceedings, and does not preclude injunctions against theinstitution of state proceedings.298

The final exception is that a federal court can enjoin statecourt proceedings as necessary to protect or effectuate itsjudgments. This exception is intended to prevent relitigationof an issue that was presented to and decided by the federalcourt, and is similar to the doctrines of res judicata andcollateral estoppel.299 This exception would allow a federalcourt that had issued a final judgment in a foreclosure rescuescam case to enjoin the rescuer from filing or pursuing aneviction action in state court to relitigate the issues.

11.6.4 The Rooker-Feldman Doctrine

Under the Rooker-Feldman doctrine, a federal court lackssubject matter jurisdiction over and must dismiss a claimthat is the functional equivalent of an appeal from a statecourt judgment.300 In two decisions in 2005 and 2006, theSupreme Court has made clear that the doctrine is extremelynarrow and that lower courts were interpreting it toobroadly.301 The doctrine ‘‘is confined . . . to cases brought bystate-court losers complaining of injuries caused by state-court judgments rendered before the district court proceed-ings commenced and inviting district court review andrejection 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, 842n.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) (followingNational 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., 289F.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); Rookerv. 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., 544U.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,

115

federal plaintiff was not a party to the state case, even if thep

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11.6.5 The Bankruptcy Automatic Stay As


1

arties were in privity.303

Even if the state claim has gone to judgment, Rooker-eldman does not apply if a federal plaintiff presents an

ndependent claim, even one that denies a legal conclusionhat a state court has reached in a case to which the federallaintiff was a party.304 The case might be governed by resudicata or claim preclusion, but Rooker-Feldman neitherupplants nor augments those doctrines.305

After these two recent decisions, it is not clear if theoctrine retains any vitality outside of the strict context inhich a federal action is filed for the direct purpose of

evisiting a state court judgment.306

In the foreclosure rescue scam context, even if a stateourt has already rendered an eviction judgment, a TILAlaim is an independent claim because it is not aimed at theescuer’s right to evict under the lease, but rather at thenderlying sale/leaseback transaction.307

The Third Circuit applied Rooker-Feldman post-Exxon toismiss a bankruptcy adversary proceeding brought to voidstate court foreclosure judgment and vacate a sheriff’s sales allegedly violating the debtor’s due process rights.308 Thisase more closely tracks Rooker-Feldman because it was airect attack on the state court foreclosure judgment. An-ther post-Exxon case held that Rooker-Feldman barredurisdiction in a TILA case brought to challenge a state courtoreclosure judgment.309 Neither court considered whetherhe actions were independent claims, nor did they have theenefit of the Supreme Court’s second warning, in 2006, thatower courts were interpreting the doctrine too broadly.310

284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005) (emphasisadded).

303 Lance v. Dennis, 126 S. Ct. 1198, 163 L. Ed. 2d 1059 (2006).304 Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280,

283, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005).305 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).

306 See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059(2006) (noting that the Court has never applied the doctrinesince Rooker and Feldman and listing the cases in which theCourt rejected the doctrine); Marshall v. Marshall, 126 S. Ct.1735, 164 L. Ed. 2d 480 (2006) (Steven, J., concurring in partand concurring in the judgment) (referring to the grave in whichRooker-Feldman was buried).

307 See Brown v. Grant Holding, 394 F. Supp. 2d 1090, 1099 (D.Minn. 2005) (Rooker-Feldman does not apply to TILA/HOEPAforeclosure rescue scam case because prior state eviction caseonly decided whether homeowner could retain possession of theproperty and could not decide the equitable claim to rescind thesale/leaseback transaction).

308 Knapper v. Bankers Trust Co. (In re Knapper), 407 F.3d 573 (3dCir. 2005).

309 McKay v. Sacks, 2005 WL 1206810 (E.D.N.Y. May 20, 2005).310 See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059

(2006).

16

an Alternative

If an eviction or foreclosure case or some other type ofcollection action is pending against the homeowner, theconsumer should consider bankruptcy court as a forum. Inmost cases, as soon as a bankruptcy case is filed, all suchactions are automatically stayed without the need to con-sider the impediments to injunctive relief discussedabove.311

The 2005 amendments to the Bankruptcy Code imposedcertain restrictions on the automatic stay that may be rel-evant in foreclosure rescue scam cases. First, the stay maynot be automatic or may be limited in duration if thehomeowner filed another bankruptcy case that was dis-missed 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 willprevent enforcement of the judgment only if documents arefiled with the court certifying that the debtor has a right tocure under state law and the debtor has deposited with thebankruptcy court the rent that will come due during the first30 days of the bankruptcy case.313 Even if the debtor filesthese documents, the stay only lasts 30 days. After that, thestay continues only if the debtor pays the rescuer/landlordall the back rent stated in the judgment for possession. Theserestrictions do not apply if the bankruptcy case is filedbefore judgment for possession is entered, however. Inaddition, they only apply if the debtor resides at the home‘‘as a tenant under a lease or rental agreement.’’314 Therescuer may have characterized the agreement with thehomeowner as something other than a lease in an attempt toavoid state landlord-tenant laws. It also might be possible topersuade the bankruptcy court to pierce the form of thetransaction and conclude that even a document that is titleda lease is something other than a ‘‘lease or rental agree-ment’’ in a foreclosure rescue scam.

If a state court eviction action is pending but no judgmentof possession has been entered, the homeowner shouldconsider filing the bankruptcy case immediately. If a judg-ment of possession has already been entered, the home-owner should, after filing the bankruptcy case, evaluate thepossibility of proceeding in state court to reopen the judg-ment. The homeowner should coordinate reopening of thejudgment with the bankruptcy trustee, who may want tolitigate the issue, either alone or with the homeowner, ormay be willing to abandon the claim to the homeowner.

311 See § 11.5.3, supra.312 See § 11.5.3, supra.313 11 U.S.C. § 362(b)(22), (l).314 11 U.S.C. § 362(b)(22).

11.6.6 Res Judicata and Collateral

R(igcsFfrC

judgments the same preclusive effect they would have in


Estoppel

Younger abstention, the Anti-Injunction Act, and theooker-Feldman doctrine all apply only in federal court

although state courts may have similar doctrines). But evenf a TILA action is filed in state court, or if a federal caseets beyond those obstacles, the plaintiff may still have toontend with res judicata or collateral estoppel from a priortate eviction or foreclosure judgment. For example, theirst Circuit held that a default judgment in a state courtoreclosure action prevented a homeowner from assertingescission under TILA in federal court.315 The Full Faith andredit Clause requires federal courts to give state court

315 R.G. Fin. Corp. v. Vergara-Nunez, 446 F.3d 178 (1st Cir. 2006).

state court, so the issue is fundamentally one of state law.316

In some states, counterclaims such as TILA are notallowed in eviction or foreclosure proceedings, or thoseproceedings enjoy summary fast-track dispositions and lim-ited discovery that make it difficult to litigate complicatedcounter-claims. For those reasons, issue or claim preclusionmay 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 mortgagecounterclaim could have been raised in eviction case, which wasunclear, equitable claims are preferably resolved in a separateproceeding to avoid interfering with the summary nature ofeviction proceedings, and therefore res judicata did not apply).

117