Saturday, December 22, 2007

Title Transfer To Bona Fide Purchaser Devolving From Forged Instrument Held Void; Mortgage Also Voided

In Toronto, Canada, The Toronto Star reports:

  • For Paul Reviczky, a 90-year-old victim of mortgage fraud, it's the best possible ending to a two-year nightmare. In a precedent-setting decision, Ontario superior court has taken another step toward protecting victims like Reviczky from being on the hook for hundreds of thousands of dollars. The court ruled this week that the Hungarian immigrant isn't responsible for the $300,000 mortgage taken out on his home, after it was sold in 2005 without his knowledge.


  • The decision is the first of its kind in the province since a landmark Court of Appeal ruling in February. That decision found that even a bona fide purchaser can't legally buy property from a fraudster.

  • This decision expands on the previous one by finding that a $300,000 mortgage, obtained by the people who purchased Reviczky's home, was invalid because the basis for the transaction was a fake power of attorney document forged by the fraudsters who sold the elderly man's home.


  • Justice John Macdonald's ruling hands the weighty bill back to the mortgage dispenser, which is HSBC and its insurer (presumably the title insurance underwriter).

For more, see Man, 90, off hook for loan: Court (Landmark ruling lifts $300,000 burden).

To view the decision of the Ontario Superior Court, see Reviczky v. Meleknia, et al. (pdf format; go here for html format - contains embedded links to the relevant Canadian statutes; cases available online courtesy of the Canadian Legal Information Institute).

For follow-up stories, see:

For those looking to get some idea of what the concept of "bona fide purchaser" is all about, see The Bona Fide Purchaser for Value of a Legal Estate Without Notice, and then check the case law of your home state to see how your state's judiciary has applied the legal principles that underlie "bona fide purchaser" status.

Friday, December 21, 2007

Ohio Feds Indict Landlord On Equity Skimming, Other Charges; Allegedly Pocketed Tenant Rent & Allowed HUD-Insured Mortgages To Go Into Default

In a recent press release, Gregory A. White, United States Attorney for the Northern District of Ohio, announced that a federal Grand Jury in Cleveland returned a nine-count indictment charging three individuals and one property management company with various offenses involving fraud against the United States Department of Housing and Urban Development (HUD).

Among the charges was a charge of equity skimming, in which, according to the press release:

  • The indictment [...] alleges that the defendants defrauded HUD by failing to make timely payments on the HUD-insured mortgages for [two housing projects], resulting in additional multi-million dollar losses to HUD. Moreover, the defendants used project funds to pay personal expenses and other unauthorized expenditures in violation of regulatory agreements between the projects and HUD. The total loss to HUD was more than $5 million.Charged in the indictment were Martin L. Shulman, 54, his wife, Gail R. Shulman, 53, Keyetta L. Williams, 35, and S.B.G. Management, Inc., the management company that the Shulmans operated.

For more, see the U.S. Attorney News Release.


For those looking for some Federal case law applying the federal equity skimming statute in cases where Federal authorities have prosecuted landlords / property owners who collected rent from houses and stiffed FHA-insured or VA-guaranteed mortgage lenders, see:

For a California state appellate court case convicting a property owner for pocketing rent while stiffing mortgage lenders and allowing houses to go into foreclosure, in violation of the state's rent skimming statute, Section 890 through Section 894 of the California Civil Code, see People v. Lapcheske (Cal. App. Ct. 1999) (may require free registration).

Go here for Sample Indictment -- Equity Skimming, 18 U.S.C. § 157 (Source: U.S. Attorney Criminal Resource Manual - Title 9 - #882).

Thursday, December 20, 2007

More Publicity For NYC "Home Savers" Rescue Operator

In New York City, WABC-TV Channel 7 ran a follow-up story on Monday on the now well-known area foreclosure rescue operator, Home Savers Consulting Corp. Two separate criminal investigations are reportedly (still) underway into the rescue firm. Channel 7 investigative reporter Sarah Wallace speaks with two more homeowners who fell victim to the alleged equity stripping scam orchestrated by Home Savers' principal, Phil Simon, by unwittingly signing over their homes to a straw buyer.

Channel 7 was able to catch up with Phil Simon (I mean, they literally caught up with him - when Simon saw the Channel 7 camera, he started running away. Wallace, with microphone in hand and camera person in tow, chased Simon down a Brooklyn street before he relented and consented to speak to her). Simon had little to say, however, other than to refer questions to his attorney. Home Savers' co-principal, Garth Celestine, was conspicuous by his absence in this report.

For the transcript of the story, and the link to the Channel 7 video, see Homes stolen by 'Home Savers'? (Heartbroken people lose homes, equity to "Home Savers").

For the earlier Channel 7 report on Home Savers which aired in late November, see A Home Mortgage Mess (transcript) (video).

Go here for other posts on Home Savers Consulting Corp, including links to a couple of the civil lawsuits it has been recently facing.

For a related post, see Foreclosure Rescue - For Criminal Prosecutors Only.

Editor's Note:

According to, what at one time, was the law in the State of New York (see Marden v. Dorthy, 160 N. Y. 39 (NY 1899)):

  • fraudulently procuring the signature of another to an instrument which he has no intention of signing constituted forgery on the part of the procurer. It was not necessary that the act of forgery be done by the hand of the person being charged. It was sufficient that the forgerer caused or procured it to be done; and
  • if the scammed homeowner, during all the time covered by the fraudulent transactions, was in possession of the real property in question, the legal effect of the homeowner's possession constituted notice of the homeowner's rights to the property to all the world, including subsequent purchasers and encumbrancers.

If this is still the law in New York, state and local law enforcement authorities may have grounds to charge these foreclosure rescue operators with forgery. Further, inasmuch as it is generally considered that a forged deed is void, it conveys no title. Accordingly, the scammed homeowners would still own their homes. The burden of the foreclosure rescue scam would be borne by the foreclosure rescue operator, the straw buyer, and the financial institution who financed the equity stripping transaction (and, possibly, the title underwriter who issued the owner and the mortgagee title insurance policies).

If anyone knows for sure that Marden v. Dorthy no longer is reflective of New York law, please drop me a line at and enlighten me as to why not (while I understand that the case is over 100 years old, that in itself doesn't make the case obsolete. Unlike a loaf of bread, court decisions of the highest court of the state don't grow stale by the mere passage of time).

One final note. Even if the deed is not considered a forgery, the foreclosure rescue transaction would still have to withstand scrutiny as an equitable mortgage (and, depending on how much profit the operator pocketed, the claim may be that of a usurious equitable mortgage). Possession by the homeowner throughout the transaction would appear to, as noted above, constitute "notice to the world" of the scammed homeowner's rights in the home, thereby denying "bona fide purchaser / bona fide encumbrancer" status to the straw buyer, the lending institution financing the deal, or anyone else who subsequently acquired an interest in the home.

Tuesday, December 18, 2007

Bear, EMC Accused Of Race Discrimination, Civil Rights Violations In Mortgage Servicing Suit; Class Action Status Sought

A lawsuit filed in a New Haven, Connecticut Federal Court last week alleges that Wall Street investment banking firm Bear Stearns and its EMC Mortgage servicing unit engaged in:

  • "[r]acially discriminatory practices ... in servicing near-prime and sub-prime residential home loans" and claims that "EMC and Bear Stearns intentionally sought out non-prime loans, predominanly made to Hispanics and African Americans, in order to reap profits from their predatory servicing practices."

The predatory servicing practices complained of in the suit include:

  • "[t]he imposition of unwarranted fees and costs, the pyramiding of late fees, the unjustifiable force-placing of insurance, the failure to properly credit payments, the unwarranted reporting of derogatory information regarding borrowers to credit reporting agencies, and the failure to properly administer escrow accounts."

Representing the homeowners are the firms Butler Norris & Gold, Hartford, Connecticut, and James, Hoyer, Newcomer & Smiljanich PA., Tampa, Florida.

To view the lawsuit:

See also, Bear Stearns Mortgage Unit Accused of Predatory Loan Servicing (Bloomberg News).

Go here for:

Monday, December 17, 2007

Mortgage Servicer Improperly Clips Consumer For $50K+ Violating Class Action Settlement, Says Lawsuit

According to a lawsuit recently filed in a West Virginia state court, Select Portfolio Servicing, Inc. (the firm formerly known as Fairbanks Capital Corp.) is being accused of collecting over $50,000 more than what was due from a West Virginia homeowner, whose mortgage balance had been previously reduced pursuant to a legal settlement in a previously litigated class action lawsuit. The current lawsuit, filed on November 14, 2007, alleges among other things:

  • "The Defendant [Select] failed to follow the ordered new payoff schedule consistent with the reduced loan. Despite the Court Order, the Defendant continued to treat the entirety of the loan as due, and have month-by-month demanded the full payment. Since January 2001, the Defendant has sent over eighty-two demands for payment that misrepresent the total amount due."

In a procedural maneuver, counsel for Select filed a request last week to move the case from the state court to a West Virginia Federal Court.

Representing the consumer is attorney Daniel F. Hedges, Charleston, West Virginia.

To view the lawsuit, see Helen B. Moss v. Select Portfolio Servicing, Inc. f/k/a Fairbanks Capital Corp.

To view the request to move the case, see Notice of Removal.

For posts on questionable mortgage servicing practices, go here and go here.

Sunday, December 16, 2007

CNN On Foreclosure Rescue

Some time ago, the CNN business program Open House with Gerri Willis featured a Florida couple facing foreclosure and their experience when they unwittingly signed over their home to a title-holding land trust in a deal arranged by foreclosure rescue operator Jack Moussa and his Florida Housing Council ("FHC"). Interviewed for the piece was Florida attorney David Silverstone, who represents the homeowners in a lawsuit against Moussa and FHC in which Silverstone seeks to void the deed transfer, alleging that the foreclosure rescue transaction was a disguised loan that violates the Federal Truth In Lending Act, the Florida Deceptive and Unfair Trade Practices Act, and the Florida usury statute. Based on the transaction the homeowners entered into with Moussa, Silverstone claims that the return on investment on the disguised loan was 300%, more than the maximum amount allowed by Florida law.

To watch the video, see Rescue or Ripoff? (Open House with Gerri Willis; CNN).

Go here for other posts on Florida foreclosure rescue operator Jack Moussa and the Florida Housing Council.

Editor's Note:

There is plenty of case law in Florida (and other places as well) that can be used to support a court's decision to recharacterize sale-leaseback foreclosure rescue deals as (possibly usurious?) secured loans / equitable mortgages. Go here for more on the Florida case law on equitable mortgage (some of which also addresses usury) to consider how the case law may be applied to foreclosure rescue transactions structured as a sale leaseback, or variations thereof, with a right to buy back the property in the future.

It may only be a matter of time before the Florida Attorney General's Office "steps up to the plate" and begins to prosecute foreclosure rescue operators who offer sale leaseback programs for violating Florida's usury statutes:
  • Civil usury - Section 687.03, which currently sets a maximum 18% per annum interest, and applies to advances up to $500,000;
  • Criminal misdemeanor usury - Section 687.071(2), generally applies on interest willfully and knowingly charged in excess of 25% per annum but not exceeding 45% per annum;
  • Criminal felony usury - Section 687.071(3), generally applies to interest willfully and knowingly charged in excess of 45% per annum.
  • Debt unenforceable - Section 687.071(7) states that a loan made in violation of the Florida criminal usury statute is unenforceable.
For more on foreclosure rescue and equity stripping arrangements, generally, see DREAMS FORECLOSED: The Rampant Theft of Americans' Homes Through Equity-stripping Foreclosure 'Rescue' Scams (4.61 MB approx.). florida equitable mortgage alpha

Wednesday, December 12, 2007

Ohio State Court Judge Halts Foreclosure; Lender Fails To Prove Ownership Of Mortgage Loan

In Hamilton County, Ohio, The Enquirer (Cincinnati) reports:

  • [A] Hamilton County Common Pleas Court judge ruled that Wells Fargo Bank couldn't foreclose on [ a couple's] North College Hill home because its lawyers didn't prove that Wells Fargo was the legal owner of the mortgage.

  • The judge said the foreclosure lawsuit was filed before Wells Fargo owned the mortgage - thus, the suit was premature. The ruling - the first of its kind by a state court judge in Ohio since the subprime mortgage crisis erupted this year - could have profound implications on how foreclosures are handled in Ohio, which leads the nation in the percentage of mortgages in foreclosure. The local ruling comes as three federal court judges - in Cleveland, Dayton and Columbus - have issued similar opinions in foreclosure cases in the last month.


  • The [legal] issue [involved] is known as the "real party in interest" rule, which says that a plaintiff must prove that it has a stake in a lawsuit in order to file it. As millions of subprime mortgages are sold and resold on Wall Street, the real "party in interest" isn't always obvious. Often, the holder of the mortgage note - the legal document that gives a lender the right to take someone's home for not making loan payments - is different from the servicing company, or the bank that takes the mortgage payments.


  • "It is troubling that the plaintiff has filed this case before it had any interest in it," Hamilton County Common Pleas Judge Steven E. Martin said in a letter to Wells Fargo's lawyer. Martin then took the unusual step of ordering that the bank's law firm must file proof that its clients actually own the mortgages before filing any new foreclosure actions in Hamilton County. That firm, The Law Offices of John D. Clunk, based in Hudson, Ohio - is the third-largest filer of foreclosure actions in Hamilton County, with 48 properties scheduled for foreclosure sales in the next six weeks.

For more, see Judge halts foreclosures (Says banks must prove they hold mortgages) (if link expires, try here).

For other posts on this issue, either go here, or see:


Qustion for Attorneys:

Assume that there have already been foreclosure sales that have taken place (in which homeowners have already lost their homes) where the party initiating the foreclosure was not the "real party in interest" and the judge didn't catch the error.

  • Wouldn't the fact that the wrong party brought the foreclosure action make the final judgment in the case "void?"

  • If the judgment is void, doesn't that make everything that happened in the case after the judgment (including the actual foreclosure sale) void as well?

  • If the foreclosure sale in a situation like this is void, doesn't that mean that the purchaser at the foreclosure sale (and any subsequent purchaser - even a so-called "bona fide purchaser for value") acquired no title whatsoever, and that title to the home is technically still with the financially strapped homeowner (even though he or she may not realize it - yet),

  • If the answer to all of the above is "Yes," isn't there a significant problem with the real estate titles involving all these foreclosed homes in which the wrong party (one other than the "real party in interest") brought the foreclosure action?

If any attorney wants to substantively chime in on these questions (especially consumer and real estate attorneys, as well as attorneys with or representing title insurance companies), please feel free to drop me a line at I would love to hear the observations.

Sunday, November 25, 2007

"Erie Guessing" In Federal Foreclosure Rescue Scam Litigation

Before I start, let me say that this post really addresses Federal court litigation involving any issue or claim which has its source in state substantive law, among which are some of the issues common to foreclosure rescue, sale leaseback (or sale buy back) arrangements (including, but not limited to, the doctrines of: equitable mortgage, substance over form, and constructive & resulting trusts, as well as statutory causes of action pursuant to state consumer protection, usury, and other statutes).


Let's say you are an attorney representing a homeowner who got screwed over in a foreclosure rescue, sale leaseback (or buyback) transaction. Let's also say that, for whatever the reason, the case is being litigated in a Federal court (ie. maybe because you filed it there in the first place - you may have Federal Truth In Lending Act ("TILA") claims; maybe the homeowner filed for Federal bankruptcy protection and the case was filed as an adverserial proceeding in connection with the bankruptcy case; maybe because, although you filed the case in state court, the foreclosure rescue operator or other defendant successfully had the case transferred into a Federal court - possibly due to the Federal causes of action (ie. TILA) contained in the lawsuit).

Among the causes of action included in the lawsuit is a request that the court invoke the common law doctrines of "equitable mortgage" and/or alternatively, the "substance over form" doctrine and declare that the transaction is an equitable mortgage / disguised loan (and possibly, a usurious equitable mortgage / disguised loan if the recharacterized transaction violates the state usury statutes).

You've done all your research of the state case law from your home state applicable to this type of a transaction and, while you've found a number of equitable mortgage doctrine decisions from your state's judiciary (from the state high court and/or, where the state has (an) intermediate level appellate court(s), from that (those) courts), you can't find a case that involves either the exact fact pattern, or one that is reasonably analogous, to the fact pattern in your client's case.

However, you have found cases that are either directly on point or reasonably analogous from other states. Further, you have also found language supporting your position, contained in one of a number of legal treatises, scholarly works, etc. that are floating around out there in law schools, law libraries, etc. that are generally considered to be respected secondary sources of law by legal scholars.


When making your case that the arrangement your financially strapped, vulnerable homeowner / client entered into is an equitable mortgage / disguised loan, do you cite the cases from the other jusrisdictions and the language that you found in one of the many well-known and respected legal treatises, or do you simply limit yourself to the cases from your home state, even though they may not involve a fact pattern that is directly on point or closely analogous to the fact pattern your client is entangled in?

Rather than trying to come up with an answer to the question, I will simply provide the following information and hope that some may find it useful in arriving at your own conclusion.


The Erie Doctrine

The Erie Doctrine, the legal doctrine that came from the U.S. Supreme Court in Erie Railroad Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), is a legal doctrine which, to this day, seems to be the subject of much commentary, debate, interpretation and (some may say) misinterpretation. Any attempt to fully discuss this doctrine is also far beyond the scope of this blog. However, the aspect of the Erie Doctrine that applies in the context of this post appears to be pretty straightforward.

Under Erie, in litigation that involves issues of state law, it has been said that the federal court's task is not to reach its own judgment regarding the substantive state law, but simply to ascertain and apply the state law (while the Federal courts are to apply state law to resolve substantive questions, they are to apply federal law to resolve procedural and evidentiary issues). Accordingly, when deciding whether or not a foreclosure rescue, sale leaseback transaction is an equitable mortgage / disguised loan, the Federal courts are duty bound to look to state law and apply it either in the way the issue has been determined by the highest court of the state or as it would be by that court if the present case were before it.


Making An Erie Guess

What happens if there is no controlling state decision that is binding on the Federal courts. What is a Federal District or Bankruptcy Court supposed to do? (In order to keep this post simple, we'll assume that your client is in a state where the state law does not allow a Federal District or Bankruptcy court to certify an issue of state law directly to the highest court of the state for a determination of what the applicable state law is. We will also assume that the intermediate state appellate courts of your state (if any), like the state high court, have not spoken on the issue).

When there is no controlling state court decision to apply, it is up to the Federal court to attempt to predict what the state's highest court would do. It has been said that the court is to make an "informed prophecy" -- to discern the rule the state's highest court would be most likely to follow, even if the Federal court's independent judgment might differ. The making of this prediction, or "informed prophecy", is often referred to as making an "Erie guess."

In making the Erie guess, it has been said that the Federal courts are "to seek to eliminate inconsistency between federal and state courts in the application of state substantive law". Nationwide Ins. Co. v. Patterson, 953 F.2d 44, 47 (3d Cir. 1991). This elimination, along with the discouraging of forum shopping, have been said to be the dual aims of the Erie Doctrine.

Regarding the restrictions imposed on the Federal courts when making an Erie guess, one court said "What a federal court ... cannot do is simply substitute its judgment for that of the state court." Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 997, 1002-03 (4th Cir. 1998) [citation omitted].

When a Federal court ventures on the making of an Erie guess, the excerpts from the following selected cases from the various Federal Courts of Appeals may offer some guidance as to what sources of law a federal court will look to in making its prediction of what the state law is. It will hopefully also give you and your aggrieved client who is stuck in a foreclosure rescue, sale leaseback or other similar arrangement some guidance as to whether or not to use the relevant case law from other jurisdictions, pronouncements made in treatises, scholarly works, etc. when there is no case law from one's home state that is either directly on point or very similar to the fact pattern being litigated.

Note: Most, if not all, of the following cases involved applying the Erie Doctrine in Federal diversity jurisdiction cases. While there may be a belief among some that Erie only applies in diversity jurisdiction cases, and only applies to Article III courts (the Federal bankruptcy courts, for example, are not Article III courts), others have concluded that Erie applies in any Federal case which has its source in state law. See, for example, Edwards v. Hovensa, LLC, 497 F.3d 355 (3rd Cir. 2007), in which the 3rd Circuit recently made the following observation regarding the application of the Erie Doctrine in Federal litigation (this case involved litigation in the Virgin Islands):

  • "The fact that the District Court of the Virgin Islands is an Article IV court rather than an Article III court does not preclude the application of Erie. For example, the Erie doctrine is applied by bankruptcy courts. See generally Thomas E. Plank, The Erie Doctrine and Bankruptcy, 79 Notre Dame L. Rev. 633 (2004). In Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234 F.2d 538, 540-41 n.1 (2d Cir. 1956), the court stated that "the Erie Doctrine applies, whatever the ground for federal jurisdiction, to any issue or claim which has its source in state law."

If one has any doubts about Erie's applicability to any issue or claim which has its source in state law, consultation with counsel expert in the Erie Doctrine may be necessary.

To find out which Federal appeals court has jurisdiction over appeals from the lower Federal courts in your state, you can check the Circuit Map.


1st Circuit Court of Appeals:

1- North Am. Specialty Ins. Co. v. Lapalme, 258 F.3d 35 (1st Cir. 2001):

  • "In the absence of a definitive ruling by the highest state court, a federal court may consider analogous decisions, considered dicta, scholarly works, and any other reliable data tending convincingly to show how the highest court in the state would decide the issue at hand . . . ." Gibson v. City of Cranston, 37 F.3d 731, 736 (1st Cir. 1994) (citation and internal quotation marks omitted). Our duty is to make an informed prophecy -- to "discern the rule the state's highest court would be most likely to follow under these circumstances, even if our independent judgment might differ." Ambrose v. New Engl. Ass'n of Schs. & Colls., 252 F.3d 488, 497-98 (1st Cir. 2001).

2- Ambrose v. New Engl. Ass'n of Schs. & Colls., 252 F.3d 488 (1st Cir. 2001):

  • Our task, then, is to discern the rule the state's highest court would be most likely to follow under these circumstances, even if our independent judgment might differ. See Blinzler v. Marriott Int'l, Inc., 81 F.3d 1148, 1151 (1st Cir. 1996). In making this informed prophecy, we are guided, inter alia, by persuasive case law from other jurisdictions and relevant public policy considerations. Id.

3- Blinzler v. Marriott Int'l, Inc., 81 F.3d 1148, 1151 (1st Cir. 1996):

When attempting to make an "informed prophecy" as to how the state's highest court would rule in the same situation, the court observed:

  • [W]e seek guidance in analogous state court decisions, persuasive adjudications by courts of sister states, learned treatises, and public policy considerations identified in state decisional law. See Ryan v. Royal Ins. Co., 916 F.2d 731, 734-35 (1st Cir. 1990); Kathios v. General Motors Corp., 862 F.2d 944, 949 (1st Cir. 1988).

4- Gibson v. City of Cranston, 37 F.3d 731 (1st Cir. 1994):

In making an Erie guess as to the law of the State of Rhode Island in one case, the court made this observation:

  • [W]e believe that the proper analysis is informed by certain commentaries and decisions from outside Rhode Island. Michelin Tires (Canada), Ltd. v. First Nat'l Bank, 666 F.2d 673, 682 (1st Cir. 1981) ("In the absence of a definitive ruling by the highest state court, a federal court may consider analogous decisions, considered dicta, scholarly works, and any other reliable data tending convincingly to show how the highest court in the state would decide the issue at hand, taking into account the broad policies and trends so evinced.") (citation and internal quotation marks omitted).

    The Restatement is an especially helpful source of guidance because Rhode Island courts frequently turn to the Restatement to fill gaps in state law. See, e.g., Bibby's Refrig., Heating & Air Cond. Inc. v. Salisbury, 603 A.2d 726, 729 (1992); Durapin, Inc. v. American Prods., Inc., 559 A.2d 1051, 1059 (1989).

5- Michelin Tires (Canada), Ltd. v. First Nat'l Bank, 666 F.2d 673, 682 (1st Cir. 1981):

In Erie guessing how Massachusetts law would be applied by the Supreme Judicial Court of Massachusetts, the court said:

  • In the absence of a definitive ruling by the highest state court, a federal court may consider "analogous decisions, considered dicta, scholarly works, and any other reliable data tending convincingly to show how the highest court in the state would decide the issue at hand," taking into account the broad policies and trends so evinced. McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 663 (3d Cir. 1980).

2nd Circuit Court of Appeals:

DiBella v. Hopkins, 403 F.3d 102 (2nd Cir. 2005):

In Erie guessing on how the New York Court of Appeals would determine state law in New York, the court said the following:

  • Our prediction is based on several sources. Principally, we consider the language of the state intermediate appellate courts to be helpful indicators of how the state's highest court would rule. See [Michalski v. Home Depot, Inc., 225 F.3d 113, 116 (2d Cir. 2000)]. Although we are not strictly bound by state intermediate appellate courts, rulings from such courts are a basis for "ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise." West v. Am. Tel. & Tel. Co., 311 U.S. 223, 237, 85 L. Ed. 139, 61 S. Ct. 179 (1940); Statharos v. New York City Taxi & Limousine Comm'n, 198 F.3d 317, 321 (2d Cir. 1999).

    We also look to the language of other jurisdictions on the same issue and other sources the state's highest court might rely upon in deciding the question, including scholarly writings. Michalski, 225 F.3d at 116.


3rd Circuit Court of Appeals:

Canal Ins. Co. v. Underwriters at Lloyd's London, 435 F.3d 431 CA-3 (2006):

The court said the following when wrestling with Pennsylvania state law:

  • When there is no Pennsylvania Supreme Court decision directly on point, we are charged with predicting how it would resolve the question at issue. Travelers Indem. Co. of Illinois v. DiBartolo, 131 F.3d 343, 348 (3d Cir. 1997). In order to do so, we must take into consideration (1) what the Pennsylvania Supreme Court has said in related areas, (2) the decisional law of the Pennsylvania intermediate courts, (3) federal cases interpreting state law, and (4) decisions from other jurisdictions that have discussed the issue. Werwinski v. Ford Motor Co., 286 F.3d 661, 675 (3d Cir. 2002).


4th Circuit Court of Appeals:

1- Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Bev. Co. of S.C., LP, 433 F.3d 365 (4th Cir. 2005):

In attempting to Erie predict South Carolina state law, the court commented:

  • In making that prediction, we may consider lower court opinions in South Carolina, the teachings of treatises, and "the practices of other states." Wade v. Danek Med., Inc., 182 F.3d 281, 286 (4th Cir. 1999).

2- Wade v. Danek Med., Inc., 182 F.3d 281 (4th Cir. 1999):

In trying to Erie guess whether an equitable tolling rule is applicable in Virginia, the court said:

  • In predicting whether the Virginia Supreme Court would apply an equitable tolling rule, we are mindful of the general principle that, "in trying to determine how the highest state court would interpret the law, we should not create or expand that State's public policy." Talkington v. Atria Reclamelucifers Fabrieken BV, 152 F.3d 254, 260 (4th Cir.), cert. dismissed, 119 S. Ct. 634 (1998); see also St. Paul Fire & Marine Ins. Co. v. Jacobson, 48 F.3d 778, 783 (4th Cir. 1995) ("The federal courts in diversity cases, whose function it is to ascertain and apply the law of a State as it exists, should not create or expand that State's public policy.").

  • In the absence of any relevant Virginia law, we naturally look to the practices of other states in predicting how the Virginia Supreme Court would rule.

3- Wells v. Liddy, 186 F.3d 505, 528 (4th Cir. 1999):

  • To forecast a decision of the state's highest court we can consider, inter alia: canons of construction, restatements of the law, treatises, recent pronouncements of general rules or policies by the state's highest court, well considered dicta, and the state's trial court decisions. See Liberty Mut. Ins. Co. v. Triangle Indus., 957 F.2d 1153, 1156 (4th Cir. 1992).

4- Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 997 (4th Cir. 1998):

Commenting on looking to the state intermediate appeals court for guidance when making an Erie guess at Maryland state law, the court said (in a diversity case):

  • When seeking such guidance we defer to a decision of the state's intermediate appellate court to a lesser degree than we do to a decision of the state's highest court. Nevertheless, we do defer. Indeed, the Supreme Court has specifically directed:

"where an intermediate appellate state court rests its considered judgment upon the rule of law which it announces, that is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other per suasive data that the highest court of the state would decide otherwise."

West v. A T & T, 311 U.S. 223, 237, 85 L. Ed. 139, 61 S. Ct. 179 (1940); accord, Hicks v. Feiock, 485 U.S. 624, 630 n.3, 99 L. Ed. 2d 721, 108 S. Ct. 1423 (1988); see also Stoner v. New York Life Ins. Co., 311 U.S. 464, 467, 85 L. Ed. 284, 61 S. Ct. 336 (1940) ("Federal courts, under the doctrine of Erie . . . must follow the decisions of intermediate state courts in the absence of convincing evidence that the highest court of the state would decide differently.").

  • Thus, a federal court must "present" persuasive data when it chooses to ignore a decision of a state intermediate appellate court that is directly on point. United States v. Little, 52 F.3d 495, 498 (4th Cir. 1995). What a federal court, sitting in diversity, cannot do is simply substitute its judgment for that of the state court. Id.


  • Generally, only if the decision of a state's intermediate court cannot be reconciled with state statutes, or decisions of the state's highest court, or both, may a federal court sitting in diversity refuse to follow it.


  • A federal court can depart from an intermediate court's fully reasoned holding as to state law only if "convinced" that the state's highest court would not follow that holding. West, 311 U.S. at 237.


5th Circuit Court of Appeals:

Stanley v. Trinchard, 500 F.3d 411; (5th Cir. 2007):

The court stated the following when predicting what the applicable Louisiana state law is in one case (involving legal malpractice):

  • As no Louisiana case is directly on point, we must make an "Erie-guess" and predict how a Louisiana court would rule. In doing so, we may consult a variety of sources, including the general rule on the issue, and the rules in other states. Having now considered (1) the "general rule" evident from Louisiana court decisions in contexts other than legal malpractice, (2) decisions from other jurisdictions, and (3) general policy concerns, we predict that Louisiana would be more likely to follow the judgment rule than the payment rule when faced with a legal malpractice case like this one.


6th Circuit Court of Appeals:

Combs v. Int'l Ins. Co., 354 F.3d 568 (6th Cir. 2004):

In considering how the Kentucky high court would decide an issue of state law, the court (in a diversity case) said that it must make:


7th Circuit Court of Appeals:
1- Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087 (7th Cir. 1999):
When Erie guessing in a case involving the state substantive law of Wisconsin, the court observed:

  • [W]e attempt to predict how the Wisconsin Supreme Court would decide the issues presented here. Allen v. TransAmerica Ins. Co., 128 F.3d 462, 466 (7th Cir. 1997). Where the state supreme court has not ruled on an issue, decisions of the state appellate courts control, unless there are persuasive indications that the state supreme court would decide the issue differently. Id. In the absence of Wisconsin authority, we may consider decisions from other jurisdictions. Valerio v. Home Ins. Co., 80 F.3d 226, 228 (7th Cir. 1996).
2- Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630 (7th Cir. 2002):
In commenting on how to approach deciding an issue of state substantive law, the court stated (in another diversity case):
  • Although we believe that the task of the federal court sitting in diversity is to ascertain the substantive content of state law as it either has been determined by the highest court of the state or as it would be by that court if the present case were before it now, we pause to emphasize that this determination in no way implies any erosion of our precedent that, in the absence of prevailing authority from the state's highest court, federal courts ought to give great weight to the holdings of the state's intermediate appellate courts and ought to deviate from those holdings only when there are persuasive indications that the highest court of the state would decide the case differently from the decision of the intermediate appellate court. See State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001); Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087, 1090 (7th Cir. 1999); Allen v. Transamerica Ins. Co., 128 F.3d 462, 466 (7th Cir. 1997). See generally E. Chemerinsky, Federal Jurisdiction § 5.3 at 323-26 (3d ed. 1999) (discussing Supreme Court authorities); Yonover, supra 38 DePaul L. Rev. 1, at 5 n.21.
3- Harper v. Vigilant Ins. Co., 433 F.3d 521 (7th Cir. 2005):
The court commented on its duty under Erie as follows involving a guess as to the applicable Missouri law (in a case involving insurance policy provision interpretation):
  • Where the Missouri Supreme Court has not confronted a particular issue (e.g., whether the term "household" as used in an insurance contract is ambiguous), we are called upon to predict how that court would decide if presented with the same question. See Smith v. Equitable Life Assurance Soc'y of the United States, 67 F.3d 611, 615 (7th Cir. 1995). In the absence of a Missouri Supreme Court ruling on an issue, the decisions of the Missouri Court of Appeals will control unless there is persuasive evidence that the Missouri Supreme Court would rule differently. See Clarin Corp. v. Mass. Gen. Life Ins. Co., 44 F.3d 471, 474 (7th Cir. 1994).


8th Circuit Court of Appeals:
Midwest Oilseeds, Inc. v. Limagrain Genetics Corp., 387 F.3d 705 (8th Cir. 2004):
This case involved Iowa state law:

  • As the Iowa Supreme Court has not directly answered the question, we must predict how that Court would decide this unresolved issue of state law, using decisions from other jurisdictions as aids. See Gravquick A/S v. Trimble Navigation Int'l. Ltd., 323 F.3d 1219, 1222 (9th Cir. 2003).


9th Circuit Court of Appeals:
1- Gravquick A/S v. Trimble Navigation Int'l. Ltd., 323 F.3d 1219 (9th Cir. 2003):

  • A federal court applying California law must apply the law as it believes the California Supreme Court would apply it. Astaire v. Best Film & Video Corp., 116 F.3d 1297, 1300 (9th Cir.), amended by 136 F.3d 1208 (9th Cir. 1997). In the absence of a controlling California Supreme Court decision, the panel must predict how the California Supreme Court would decide the issue, using intermediate appellate court decisions, statutes, and decisions from other jurisdictions as interpretive aids. Id.; see also Soltani v. W. & S. Life Ins. Co., 258 F.3d 1038, 1045-46 (9th Cir. 2001).
2- Vestar Dev. II, LLC v. Gen. Dynamics Corp., 249 F.3d 958 (9th Cir. 2001):

  • When interpreting state law, federal courts are bound by decisions of the state's highest court. In the absence of such a decision, a federal court must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance. However, where there is no convincing evidence that the state supreme court would decide differently, a federal court is obligated to follow the decisions of the state's intermediate appellate courts. Lewis v. Tel. Employees Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996) (internal quotations and citations omitted).

3- Lewis v. Tel. Employees Credit Union, 87 F.3d 1537 (9th Cir. 1996):

  • "When interpreting state law, federal courts are bound by decisions of the state's highest court. `In the absence of sucha decision, a federal court must predict how the highest statecourt would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance." Arizona Elec. Power Coop., Inc. v. Berkeley, 59 F.3d 988, 991 (9th Cir. 1995) (quoting In re Kirkland, 915 F.2d 1236, 1239 (9th Cir. 1990)). However, where there is no convincing evidence that the state supreme court would decide differently, "a federal court is obligated to follow the decisions of the state's intermediate appellate courts." Kirkland, 915 F.2d at 1239.

10th Circuit Court of Appeals:
1- Wade v. Emcasco Ins. Co., 483 F.3d 657 (10th Cir. 2007):
The 10th Circuit recently described its responsibility under Erie as follows:

  • "Where no controlling state decision exists, the federal court must attempt to predict what the state's highest court would do." [Wankier v. Crown Equip. Corp., 353 F.3d 862, 866 (10th Cir. 2003)]. In doing so, it may seek guidance from decisions rendered by lower courts in the relevant state, Progressive Cas. Ins. Co. v. Engemann, 268 F.3d 985, 988 (10th Cir. 2001), appellate decisions in other states with similar legal principles, United States v. DeGasso, 369 F.3d 1139, 1148 (10th Cir. 2004), district court decisions interpreting the law of the state in question, Sapone v. Grand Targhee, Inc., 308 F.3d 1096, 1100, 1104-05 (10th Cir. 2002), and "the general weight and trend of authority" in the relevant area of law, MidAmerica Constr. Mgmt., Inc. v. Mastec N. Am., Inc., 436 F.3d 1257, 1262 (10th Cir. 2006) (internal quotation marks omitted). Ultimately, however, the Court's task is to predict what the state supreme court would do.
2- MidAmerica Constr. Mgmt., Inc. v. Mastec N. Am., Inc., 436 F.3d 1257, 1262 (10th Cir. 2006):

  • When the highest court of a state whose law is being applied in a diversity case has not decided the issue presented, we must determine what decision the court would make if faced with the same facts and circumstances. See Progressive Cas. Ins. Co. v. Engemann, 268 F.3d 985, 987 (10th Cir. 2001). In making that determination, we may “consider a number of authorities, including analogous decisions by the state Supreme Court, the decisions of the lower courts in the state, the decisions of the federal courts and of other state courts, and the general weight and trend of authority.” Id. at 988 (quotations and alteration omitted).

  • “[W]here jurisdiction rests solely on diversity of citizenship and there is no controlling decision by the highest court of a state, a decision by an intermediate court should be followed by the Federal court, absent convincing evidence that the highest court of the state would decide otherwise.” Webco Indus., Inc. v. Thermatool Corp., 278 F.3d 1120, 1132 (10th Cir. 2002) (quotations and alteration omitted).


11th Circuit Court of Appeals:

1- Guideone Elite Ins. Co. v. Old Cutler Presbyterian Church, Inc., 420 F.3d 1317 (11th Cir. 2005):

The court described its duty under Erie as follows (in another diversity case involving insurance policy provision interpretation):

  • The Florida Supreme Court has not spoken definitively on the issues before us, therefore, we look to relevant decisions of Florida's intermediate appellate courts. State Farm Fire & Casualty Co. v. Steinberg, 393 F.3d 1226, 1231 (11th Cir. 2004). A lack of explicit Florida case law on an issue does not absolve us of our duty to decide what the state courts would hold if faced with it. Arceneaux v. Texaco, Inc., 623 F.2d 924, 926 (5th Cir. 1980) (citations omitted). (In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this court adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to October 1, 1981.)

    "In the absence of precedents from Florida's intermediate appellate courts, however, we may consider the case law of other jurisdictions that have examined similar policy provisions." Steinberg, 393 F.3d at 1231 (citations omitted). Our objective is to determine issues of state law as we believe the Florida Supreme Court would, therefore a federal court attempting to forecast state law must consider whatever might lend it insight, including "relevant state precedents, analogous decisions, considered dicta, scholarly works, and any other reliable data tending convincingly to show how the highest court in the state would decide the issue at hand." McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 663 (3d Cir. 1980).

2- State Farm Fire & Cas. Co. v. Steinberg, 393 F.3d 1226 (11th Cir. 2004):

In applying Erie (in another insurance case), the court stated:

  • The Florida Supreme Court has not spoken definitively on the issue before us. In the absence of definitive guidance from the Florida Supreme Court, we follow relevant decisions of Florida's intermediate appellate courts. [Davis v. Nat'l Med. Enters., 253 F.3d 1314, 1319 n.6 (11th Cir. 2001)]. In the absence of precedents from Florida's intermediate appellate courts, however, we may consider the case law of other jurisdictions that have examined similar policy provisions.


DC Circuit Court of Appeals:

Friends for All Children, Inc. v. Lockheed Aircraft Corp., 746 F.2d 816 (DC Cir. 1984):

The court, in attempting to Erie guess whether a certain tort action in a diversity jurisdiction case would be recognized under the local law of the District of Columbia, the court described its duty under Erie as follows:

  • As this action comes before us as a diversity case, we are, of course, obligated to apply District of Columbia law. See Anchorage-Hynning & Co. v. Moringiello, 225 U.S. App. D.C. 114, 697 F.2d 356, 360-61 (D.C. Cir. 1983) (holding that the principle of Erie Railroad Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), fully applies to federal courts in the District of Columbia when they exercise jurisdiction over state-created causes of action). District of Columbia law, however, is silent on the specific issue whether a plaintiff may maintain an action for diagnostic examinations in the absence of proof that he or she was physically injured.

  • The lack of clarity of tort law in this jurisdiction, however, does not absolve this court of the duty of resolving the issue in the manner which, in our best lights, we predict that the District of Columbia Court of Appeals would were it presented with the question. In light of general principles of tort law, the Restatement (Second) of Torts, and the law of other jurisdictions, we believe that the District of Columbia Court of Appeals would recognize such a cause of action.


Wednesday, November 7, 2007

MERS Clipping Homeowners In Foreclosure With Inflated Legal & Appraisal Fees, Says Class Action Lawsuit

In a class action lawsuit originally filed in a Delaware Federal Court in September, with an amended complaint filed yesterday, two Missouri homeowners accuse Mortgage Electronic Registration Systems, Inc. ("MERS"), a home loan registration system allegedly controlled by an all star team of nine big time nationwide mortgage lenders, of overcharging borrowers for legal services in foreclosures. MERS reportedly charged borrowers for "attorney fees" of as much as $1,200 - $2,000 and upwards (see Lawsuit - page 18, paragraph 49) while MERS is only charged $400 - $500 by the attorney actually handling the foreclosure (see Lawsuit - page 15, paragraph 36).

The lawsuit also accuses MERS of charging borrowers appraisal fees ranging from $300 to $500 for appraisals that are (1) often times not done at all, or (2) done but some times are nothing more than "drive by" appraisals where the appraiser never actually gets out of his or her automobile (see Lawsuit - page 19, paragraph 52). In addition to MERS, the lawsuit names as additional defendants the following all star lineup of mortgage lenders who are allegedly the controlling shareholders of MERS:
  • Citigroup, Inc., Countrywide Financial Corporation, Fannie Mae, Freddie Mac, GMAC-RFC Holding Company, LLC, (doing business as GMAC Residential Funding Corporation), HSBC Finance Corporation, JP Morgan Chase & Co., Washington Mutual Bank, and Wells Fargo & Company.
Among other things, the lawsuit alleges that "MERS is grossly undercapitalized to cover the potential liability stemming directly from its role as primary mortgagee on tens of millions of Mortgage Notes." Because of this, the homeowners / borrowers also seek to hold the above listed all star lineup of mortgage lenders jointly and severally liable for damages as well as MERS (see Lawsuit - page 8, paragraphs 9(l) and 9(m)).

Representing the homeowners are Carmella P. Keener, of Rosenthal, Monhait, & Goddess, P.A., Wilmington, DE, Jeffrey M. Norton, of Harwood Feffer LLP, New York City, and Matthew S. Chase, University City, MO.


To view the lawsuit, see Trevino v. Merscorp Inc., et al..

For a media report which makes reference to this lawsuit, see Borrowers Face Dubious Charges in Foreclosures (subscription may be required; if no subscription, try here).

For another lawsuit with similar allegations against Countrywide Home Loans, see Class Action Sought Against Countrywide For Allegedly Squeezing Homeowners With Improper Fees When Servicing Mortgage Loans.

Go here , go here , and go here for posts on questionable mortgage servicing practices. foreclosure

Monday, October 29, 2007

Release Won't Shield Lender From Usury Claim Of Borrower

In Massachusetts, Massachusetts Lawyers Weekly reports:

  • A defaulting borrower should be allowed to proceed with its usury claim against a lender, even where language in a forbearance agreement purported to release the lender from any prior obligation or default, a Superior Court judge has ruled. The borrower argued that the release did not cover its underlying claim because statutory causes of action enacted out of public-policy concerns, like the state's criminal usury statute, cannot be waived by contract. Judge Allan van Gestel agreed, granting partial summary judgment to the borrower. "Where a statute 'rests on grounds of public policy, it is not the power of one who may be directly affected by it to contract in advance that it may be disregarded,'" wrote van Gestel. "[The usury law] is sufficiently infected with public policy such that it cannot be the subject of any ordinary release or waiver." [...] Van Gestel looked to the Supreme Judicial Court's 1980 decision in Begelfer v. Najarian, which held that the usury statute was a clear statement of Massachusetts policy that was a "matter of grave legislative concern." Because the usury statute was effectively entrenched in public policy, it could not be subject to an ordinary release or waiver, van Gestel ruled.

For more, see Release won't shield lender from usury claim of borrower (Public policy can't be waived by agreement).

Saturday, October 27, 2007

Due Process Being Trampled By Maryland’s Home Foreclosure System, Argues Appeal

From Public Citizen Litigation Group, the litigating arm of the consumer advocacy group Public Citizen:

  • Maryland resident Joyce Griffin lost her house in a foreclosure sale because she never received notice until it was too late for her to save her home. Her case is a stunning example of how predatory subprime lenders, high-volume foreclosure mills, and a hands-off legal system can combine to wreak havoc on people's lives.

  • Griffin's mortgage company, the now-defunct Ameriquest, tricked her into refinancing the home she owned, when, after her fiancĂ© died, she'd simply wanted to have his name taken off the mortgage. When the single mother could no longer make the increased mortgage payments, a "foreclosure mill" law firm representing Ameriquest quickly began foreclosure proceedings. After they made a bare-bones and unsuccessful effort to notify her of any pending action, Griffin lost her home when it was literally auctioned off on the courthouse steps. She never learned that her home had been sold until the new owner tacked a note on her door.

  • Griffin immediately hired a lawyer to block the sale, arguing that the notice procedures violated her constitutional right to due process, but the court upheld the lender's actions. Public Citizen and Baltimore-based Civil Justice Inc. are appealing that decision. We argue that the 2006 decision in Jones v. Flowers — a case that Public Citizen argued in the U.S. Supreme Court — means that additional reasonable steps must be taken to notify a property owner if a foreclosure notice is returned as unclaimed by the post office. But the lawyers who conducted the foreclosure of Ms. Griffin's house say they can ignore undelivered letters and do not have to make any effort to follow-up before selling someone's house.

  • If Griffin had been a defendant in a small-claims case, a property tax foreclosure, a federal tax foreclosure, or even a tenant in an eviction proceeding, the law would have required that the documents be served in person, sent via restricted certified mail (complete only upon delivery) or be posted by mail-and-nail notification in which the mailed documents are also posted directly on a dwelling's door. Even in a routine debt collection action, Ameriquest's mishandling of Griffin's case would have violated her constitutional rights. The Constitution demands more when someone's home is at stake.

Source: Description Of Pending Case in Griffin v. Bierman, et al. in the Maryland Court of Special Appeals (Public Citizen Litigation Group).

In a separate press release, Public Citizen attorney Deepak Gupta noted:

  • "People are waking up to the reality of predatory subprime mortgages, but what they may not yet realize is the one-two punch of shifty loans and shiftier foreclosure firms that can knock them right out of their homes.”

For the entire press release, see Homeowners Facing Mortgage Foreclosures Denied Constitutional Right to Proper Notification.

To view the appellate brief in this case filed last week on behalf of the homeowner, see Brief - Griffin v. Bierman, et al.

Representing the homeowner in this case are: Deepak Gupta, Micahel T. Kirkpatrick, and Brian Wolfman, with Public Citizen Litigation Group (Washington, DC); Phillip Robinson, with Civil Justice Inc. (Baltimore, MD); and Scott Borison, with Legg Law Firm, LLC (Frederick, MD).

Tuesday, October 23, 2007

Central Florida Homeowners File Suit Against Foreclosure Rescue Operator; Others

A group of eleven Central Florida homeowners filed suit earlier this month against foreclosure rescue operator Peter Porcelli and a group of at least 16 other individuals and companies in which they allege having been scammed out of their home equity. They allege that the operators targeted homeowners with significant equity in their home who were facing temporary financial distress.

The typical equity stripping, foreclosure rescue transaction generally involves a home sale by a financially hard-up homeowner, coupled with a leaseback of the home, and an option to repurchase it at a future date. According to the lawsuit (paragraphs 46 through 54) filed in this case, however:

  1. the money advanced by the foreclosure rescue operator actually took the form of a loan, and not a home sale with leaseback and repurchase option,
  2. while most homeowners needed only a few thousand dollars to avoid foreclosure, loans were arranged that incorporated finance charges, origination fees, and underwriting fees that doubled or tripled the size of the loan,
  3. the charges and fees were received by the operators and the others involved in the alleged conspiracy,
  4. in some cases, the loans arranged had effective annual interest rates of 500% or greater. In all cases, they exceeded the 45% threshold set in Fla. Stat. Chapter 687 for criminal usury,
  5. in addition to the criminally usurious interest rates, the loans incorporated a purchase option for the benefit of the lender, effective upon the default of the borrower; the option purchase price was calculated by subtracting the current equity in the home from the estimated value of the home, thereby allowing the purported option purchaser to obtain all the equity in the home by simply paying off any liens senior to its own, with little or no money going to the homeowner. Because of the criminal usury, the homeowners found it difficult or impossible to avoid default, thereby triggering the lender’s option and effectively forfeiting all of the homeowner’s equity. One member of the alleged conspiracy was an attorney who aided the operators in enforcing these purchase options by filing lawsuits for specific performance in state court against the financially strapped homeowners.
The suit also alleges that one of the entities used in the alleged scam was held out as a non-profit entity to enhance the lure to its prospective targets.

The lawsuit sets forth the following six counts:
  1. Civil Rico, (18 USC § 1961 et seq.),
  2. Truth In Lending (15 USC § 1601 et seq.),
  3. Unlawful Mortgage Brokering & Mortgage Lending (Fla Stat. Chapter 494),
  4. Usury (Fla. Stat. Chapter 687),
  5. Declaratory Judgment,
  6. Civil Conspiracy.

In addition to actual and punitive damages, the suit asks for declarations that (1) the loans are unenforceable, and (2) that the plaintiffs are the true owners of the homes involved in the alleged scam, thereby voiding any title transfers and mortgage loans against the homes that resulted as a result of the alleged scam.

In addition to the "usual suspects" being named as defendants, the suit also names title insurance underwriter First American Title Insurance Company.

Representing the homeowners is Michael Alex Wasylik Esq., with the law firm Ricardo & Wasylik PL, Dade City, Florida.

To view a copy of the lawsuit, see Heise, et al. vs. Porcelli, et al. (U.S. District Court, M.D. Fla.).

For media reports from the St. Petersburg Times related to this story, see:

Peter Porcelli currently awaits an October 29 felony sentencing in Federal Court on an unrelated scam.


Note: A financial arrangement similar to that described in this case (where a so-called "money lender" also acquires an option to buy the property in question at a price well below market value) was ruled to be a device used to circumvent the Virginia state usury law that the Virginia Supreme Court prohibited in Carter v. Hook, 116 Va. 812; 83 S.E. 386 (Va. 1914). Go here for more on the Use Of Devices To Circumvent Usury Statutes - Virginia.


Allegations of racketeering (RICO) act violations, requests for punitive damages, and the naming of title insurance companies as defendants in these alleged equity stripping real estate scams seem to be occurring with more frequency. See, for example, the following recent lawsuits targeting the Maryland-based foreclosure rescue scammer, Metropolitan Money Store:

Monday, October 22, 2007

Federal Court Says Foreclosure Rescue Sale Leaseback Is A Usurious Loan, North Carolina Equitable Mortgage Doctrine Invoked

In a 1985 case, the U.S. Court of Appeals for the 4th Circuit affirmed a lower court jury verdict finding that North Carolina's usury statute (N.C. Gen. Stat. § 24-2; for interest, generally, links to provisions of N.C. Gen. Stat. § 24, or for the text of the entire chapter, see N.C. Gen. Stat. § 24) was violated in a foreclosure rescue deal that involved a sale leaseback transaction with a homeowner facing foreclosure who was given a right to repurchase her home. The lower court determined that the arrangement, in substance, was a mortgage under North Carolina's equitable mortgage doctrine.

On a cautionary note, however, to those making claims under the Federal Truth In Lending Act ("TILA"), the Federal appeals court reversed a lower court finding that the TILA applied to the transaction in question. Notwithstanding the fact that it was undisputed that the foreclosure operator had entered into twelve similar sale leaseback transactions with other financially strapped homeowners in the year in question, the appeals court ruled that the foreclosure rescue operator did not fall within the definition of a "creditor", as specifically defined by the TILA, and accordingly, the TILA was inapplicable. In essence, the court said that the evidence presented as to the other twelve sale leaseback transactions did not show that enough of those transactions could be found to be equitable mortgages. Therefore, the evidence was lacking to show that the foreclosure rescue operator engaged in the requiste number of equitable mortgage transactions that would cause the operator to fall within the definition of "creditor" as defined by the TILA.

In this case, the homeowner presented affidavits from only four of the other 12 homeowners claiming that they thought their transactions were mortgage arrangements (one of whom recanted the assertion at trial); the operator, on the other hand, presented affidavits from eight of the 12 other homeowners in which they asserted that they knew the transactions were sale leasebacks. Several of these homeowners later testified at trial on behalf of the operators. In this regard, the court stated:

  • We do not think a jury is free to recharacterize another transaction not the subject of the suit as a loan with a security interest, rather than a sale with an option to repurchase, when the transaction is evidenced by a general warranty deed absolute on its face and both parties to the transaction give unrefuted testimony that the transaction was a sale with an option to repurchase. To allow a jury to recharacterize such a transaction as a loan with a security interest would be contrary to the North Carolina Supreme Court's command that the true nature of a transaction depends upon the intention of the parties.


With respect to the equitable mortgage doctrine, the court set forth the applicable North Carolina law as follows (text broken up for ease of reading, bold text is my emphasis):

A) Under North Carolina law, the test for determining whether a conveyance with an option to repurchase represents a true sale or merely a loan with a security interest focuses on the intent of the parties and not the form of the transaction. O'Briant v. Lee, 214 N.C. 723, 200 S.E. 865 (1939); McKinley v. Hinnant, 242 N.C. 245, 87 S.E.2d 568 (1955). In ascertaining the real intention of the parties, however, the simple declaration of the plaintiff, who was grantor in the deed, will not suffice to show that the parties intended to create a mortgage. The North Carolina Supreme Court has stated:

  • The intention [to create a mortgage] must be established, not by simple declaration of the parties, but by proof of the facts and circumstances dehors the deed, inconsistent with the idea of an absolute purchase; otherwise, solemnity of deeds would always be exposed to the slippery memory of witnesses.
O'Briant v. Lee, 214 N.C. at 731, 200 S.E. at 870 (quoting Watkins v. Williams, 123 N.C. 170, 31 S.E. 388 (1898)). Thus, although a plaintiff may repeatedly testify that the transaction was intended to be a loan and that the land was conveyed for the sole purpose of securing the payment of that loan, the plaintiff must present more than his own simple declaration. Instead, the plaintiff must present proof of facts and circumstances dehors the deed inconsistent with the idea of an absolute purchase.

B) The North Carolina Supreme Court has identified six factors as pertinent in determining whether a transaction is a sale or a loan:
  1. whether there was a debtor-creditor relationship created at the time of the transaction, Hardy v. Neville, 261 N.C. 454, 457, 135 S.E.2d 48, 51 (1964);
  2. whether the "grantor" remains in possession or whether the grantee takes immediate possession of the property, id. at 457, 135 S.E.2d at 51;
  3. whether the "grantor" was under distress and hard-pressed for money at the time of the transaction, O'Briant v. Lee, supra; Hardy v. Neville, 261 N.C. at 457, 135 S.E.2d at 51;
  4. whether the transaction originated out of an application for a loan, O'Briant v. Lee, 214 N.C. at 733, 200 S.E. at 871;
  5. whether the purported sale price is less than the net worth of the property, id. at 733, 200 S.E. at 871; and
  6. whether the "grantor" was obligated to exercise the "option to repurchase." Hodges v. Hodges, 37 N.C. App. 459, 246 S.E.2d 812 (1978).

The North Carolina Supreme Court has counseled that doubts about whether the transaction is a sale or a mortgage are to be construed in favor of a mortgage in order to prevent the possibility of oppression created by an outright sale. O'Briant v. Lee, 214 N.C. at 732, 200 S.E. at 869; McKinley v. Hinnant, 242 N.C. at 252, 87 S.E.2d at 573.


In affirming the jury verdict with respect to the violation of the state usury statute, the only issue of law addressed was whether, in light of the reversal of the Federal claims under the TILA, the pendent state usury claim should be dismissed for lack of federal jurisdiction. In this regard, the court stated:

A) In United Mine Workers v. Gibbs, 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966), the Supreme Court held that if a federal claim against a party is dismissed before trial, the pendent state law claims should be dismissed as well.

B) The Ninth Circuit has held, however, that once a trial is held a court of appeals should order dismissal of a pendent claim on remand only "when the federal cause of action was so insubstantial and devoid of merit that there was no federal jurisdiction to hear it." Traver v. Meshriy, 627 F.2d 934, 939 (9th Cir. 1980) (citing Hagans v. Lavine, 415 U.S. 528, 94 S. Ct. 1372, 39 L. Ed. 2d 577 (1973)). It also stated that if the federal claim was not frivolous, then the issue of whether the district court should have heard the pendent state claim is a matter committed to the sound discretion of the district court. Traver, 627 F.2d at 939.

C) We conclude that Redic's Truth in Lending claim was not frivolous and that the district court did not abuse its discretion in hearing Redic's pendent North Carolina claim for usury. Therefore, we affirm that portion of the district court's decision awarding her $1,944 in damages against Schwartz for charging her usurious interest.


Redic v. Gary H. Watts Realty Co., 762 F.2d 1181 (4th Cir. 1985) North Carolina equitable mortgage kappa

Thursday, October 18, 2007

Iowa Appellate Court Recharacterizes Sale Leaseback As A Mortgage

Last week, the Court of Appeals of Iowa ruled that a transaction taking the form of a sale of a home by a financially strapped homeowner coupled with a contemporaneously executed leaseback of the home with an option to buy was to be disregarded and, rather, was to be treated as an equitable mortgage.

Iowa App. Ct.
October 12, 2007

The facts of the case are as follows:

A) Tullis's father died testate and left a house he owned at 2728 Sheridan Avenue in Des Moines to Tullis. It was the house Tullis had lived in her entire life. The house was valued for tax purposes at $90,000. Tullis found herself in need of money to pay real estate taxes and attorney fees, among other things. In early 2004 Tullis attempted to obtain a loan with the house as security from Iowa Mortgage. Tullis had not been employed for two years, and as a consequence was unable to obtain a loan from Iowa Mortgage. Christy Frank, an employee of Iowa Mortgage who was working with Tullis, said she would help Tullis make other arrangements. Frank contacted her fiance, Andrew Weeks, to help Tullis get the money she needed.

B) Weeks was able to provide Tullis with $40,000. An agreement was reached which included:

  1. a deed from the estate conveying the property to Weeks for $40,000,
  2. an agreement signed April 9, 2004, whereby Weeks agreed to sell the real estate to Tullis on contract for $50,000 with a two-year balloon payment required, interest at 10.5%, (the interest rate is actually substantially higher than this because Tullis obtained only $40,000 but is paying interest on $50,000) and a further provision that the loan must be paid in full on the 1st day of May, 2006,
  3. a lease of the property entered into on May 24, 2004, from Weeks to Tullis to commence April 1, 2004, and run through April 2006 for $520 a month, which included an option for Tullis to repurchase the house. The rent Tullis was to pay was to be credited against the payment to repurchase the property if the option was exercised. The April 9th agreement was made an addendum to the lease.
C) Tullis fell behind on rent payments. On July 31, 2005, Tullis advised Weeks in writing that she wished to exercise her option to purchase the home outlined in Section 18 of the lease. She offered to pay a balance of $49,749.75, which she said was pursuant to an amortization schedule. Weeks did not honor the option. His opinion was that because she was behind on her rent payments the option was null and void.

D) On August 31, 2005, Tullis filed a petition to quiet title and enforce her option claiming (1) specific performance, (2) deed as security, and (3) fraudulent practice. The case went to trial and the district court, among other things, found the deed to the property given to Weeks by Tullis's father's estate did not create a deed of security and was not a mortgage.

In reviewing (and ultimately reversing) the decision of the lower court, the Iowa Court of Appeals set forth the principles of the equitable mortgage doctrine as it exists in Iowa. It then applied those principles to the facts of this case (Text broken up for ease of reading).

1) A conveyance absolute on its face may, by proper evidence, be shown to be but a mortgage. Steckelberg v. Randolph, 404 N.W.2d 144, 148-149 (Iowa 1987); Trucks v. Lindsey, 18 Iowa 504, 504 (1865).

2) It is a well-established rule that, where a conveyance absolute upon its face is accompanied by a contract or agreement, by which the grantee undertakes to reconvey the land to the grantor on specified conditions, and the terms of such agreement or the circumstances under which it was made render it doubtful whether a mortgage or conditional sale was intended, the courts will hold it to be a mortgage. Collins v. Isaacson, 261 Iowa 1236, 1243, 158 N.W.2d 14, 18 (1968); Greene v. Bride & Son Constr. Co., 252 Iowa 220, 224-25, 106 N.W.2d 603, 606-07 (1960); Brown v. Hermance, 233 Iowa 510, 514-15, 10 N.W.2d 66, 68 (1943); Fort v. Colby, 165 Iowa 95, 102, 144 N.W. 393, 395 (1913).

3) It is proper to show by parole evidence a warranty deed was in fact intended as security only, and upon payment of the debt the debtor is decreed to be the legal, as well as the equitable, owner of the property. Collins, 261 Iowa at 1243, 158 N.W.2d at 18.

4) If a deed is to be construed as a security instrument, the supportive evidence must be clear, satisfactory, and convincing. See Lovlie v. Plumb, 250 N.W.2d 56, 59 (Iowa 1977); North v. Manning Trust & Sav. Bank, 169 N.W.2d 780, 784 (Iowa 1969).

5) In arriving at the intention of the parties courts look behind the form of the instruments to the real relationship between the parties. Collins, 261 Iowa at 1243, 158 N.W.2d at 18.

6) The instruments will be read in the light of the surrounding circumstances and the practical construction the parties themselves placed thereon. Id.; Guttenfelder v. Iebsen, 230 Iowa 1080, 1084, 300 N.W. 299, 301-02 (1941).

7) If it is unclear whether a mortgage or absolute deed was intended, we resolve the doubt in favor of an equitable mortgage. Greene, 252 Iowa at 226-27, 106 N.W.2d at 607; Fort, 165 Iowa at 102, 144 N.W. at 395.

8) We are reluctant to recognize as an absolute conveyance an agreement between the parties that continues or creates an obligor-obligee relationship. Steckelberg, 404 N.W.2d at 148-49; see also Koch v. Wasson, 161 N.W.2d 173, 177 (Iowa 1968) (citing Guttenfelder, 230 Iowa at 1084, 300 N.W. at 301).

9) With these principles in mind we look at the following factors:

  1. intent of the parties to the transaction,
  2. consideration for transfer, and
  3. retention of possession.

In determining intent of the parties, courts look behind the form of an instrument to ascertain the actual relationship between participants. Furthermore, a document will be read in light of surrounding circumstances and given such practical construction as is placed thereon by the concerned parties. Lovlie, 250 N.W.2d at 59; see also Collins, 261 Iowa at 1243, 158 N.W.2d at 18; Fort, 165 Iowa at 102, 144 N.W. at 395.

It is clear Tullis's intent was to convey title to her home to Weeks as a security arrangement rather than an absolute conveyance. Weeks was aware that she was seeking such an arrangement and not a sale of her property. Frank, who referred Tullis to Weeks, testified the agreement Tullis and Weeks made, "was more of a mortgage than a rental agreement."


Weeks advanced Tullis $40,000 for a property valued at $90,000. The inadequacy of consideration is a strong circumstance tending to show the transaction was intended to be a mortgage. Koch, 161 N.W.2d at 176-80; Greene, 252 Iowa at 226, 106 N.W.2d at 607.


Tullis retained possession of the property. Retention of possession by the grantor is considered a circumstance consistent with the claim of creditor-debtor relationship and inconsistent with the theory of absolute conveyance. Koch, 161 N.W.2d at 176-180; Guttenfelder, 230 Iowa at 1084, 300 N.W. at 301. Resolving all doubts in favor of finding a mortgage, the only conclusion we can reach is that the transaction between Weeks and Tullis created an equitable mortgage. See Brown, 233 Iowa at 514-15, 10 N.W.2d at 68.


An equitable redemption right attaches necessarily and conclusively to any grant given as security. Also, equity forbids an irredeemable mortgage. Lovlie, 250 N.W.2d at 59; see also Koch, 161 N.W.2d at 176. The equity right of redemption is the right of the mortgagor to pay what is owed to the mortgagee and take the property. Koch, 161 N.W.2d at 178-80; Swartz v. State, 243 Iowa 128, 134, 49 N.W.2d 475, 478 (1951).


Based on the analysis of the foregoing factors, the Iowa Court of Appeals ruled that the transaction was an equitable mortgage, thereby reversing the decision of the lower court, and remanded to the lower court to determine the amount owed and, when such amount is determined, to establish a reasonable period for Tullis to redeem.

Representing the homeowner in this case was Laura Lockard, of Iowa Legal Aid, Des Moines, Iowa.

Tullis v. Weeks, Iowa App. Ct., 2007 October 12, 2007.


For another recent case applying the Iowa law on the equitable mortgage doctrine, see in re Litwiller, Bankr. N.D. Ia. (2006), a Federal Bankruptcy case decided in Iowa.

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