Bankruptcy Court Voids Foreclosure Rescue Sale Leaseback; Calls It A Fraudulent Conveyance - Part 2

The following excerpt appears in The National Consumer Law Center's 2005 report on foreclosure rescue scams, DREAMS FORECLOSED: The Rampant Theft of Americans' Homes Through Equity-stripping Foreclosure 'Rescue' Scams, page 17 (4.61 MB), describing the view of California attorney William Flanagan on foreclosure scammers:

• Flanagan’s developed a hardened view of the foreclosure scammers. "They’re sociopaths," he says. Then he points to his wallet on a nearby desk for emphasis, saying: "If I leave my wallet on that table most people won’t take it. But a sociopath will say: ‘If you’re stupid enough to leave it there you deserve to lose it.’"

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When expressing this point of view, Mr. Flanagan could very well have been describing Mr. & Mrs. Suderov, the foreclosure rescue operators featured in Part 1 of this post. I say this because, despite the hammering they received by the bankruptcy court judge when she voided the foreclosure rescue transaction they entered into with the debtor / homeowner, the Suderovs decided to file an appeal of the judge's decision.

In a lengthy decision, a Federal District Court, sitting in an appellate capacity, methodically went through each point addressed by the bankruptcy judge, reviewed the applicable law, and affirmed the bankruptcy court's conclusions on each point of law as applied to the facts of the case.

For the District Court's review of the bankruptcy decision, I refer you to the case itself. I write here simply to highlight a couple of points that caught my interest.

Davis v. Suderov (In re Davis)

169 B.R. 285

(E.D. N.Y. 1994)

Scene at the closing of the

foreclosure rescue transaction

1) The court reviewed an excerpt from the transcript of the bench trial in the bankruptcy court that described the scene at the closing table when the financially strapped homeowners, the Davises, and their daughter, Tammy, signed the legal documents in which title to the home in question was transferred and in which they obligated themselves to the onerous terms of the leaseback which, the bankruptcy judge found, was sure to fail.

2) The scene was described as one where the Suderhovs, the attorneys, the title closer, etc. were all in a hurry to leave. It was late in the day; none of the documents were explained to the Davises or their daughter, Tammy. Questions that they had went unanswered. Tammy apparently felt that something bad was going on because she rushed out of the room in tears at least once, possibly twice. Papers were simply being put in front of the Davises and their daughter, Tammy and they were being pressured either for their signatures or initials.

3) The closing of the transaction, according to the court, occurred under tremendous pressure.

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The finding that the Davises' transfer of

their home was not made voluntarily within

the meaning of Section 522(g)(1) of the Bankruptcy Code

In determining that the Davises' transfer of their home was not a voluntary transfer, the District Court made the following observations in this excerpt from the decision (text broken up for ease of reading):

• The record amply shows that the Davises did not know all of the material facts of the transaction, that misrepresentations were made to them by Mr. Suderov, and that they were under considerable pressure to transfer the property.

• Moreover, it is clear that if the Davises had been made aware of the true nature of the transaction, then they would have not transferred the property to Mrs. Suderov.

• Mrs. Davis repeatedly stated that she did not want to sell her house. She transferred this valuable, irreplaceable asset to Phyllis Suderov only because of the misrepresentations by Mr. Suderov that the Davises would get the house back after the closing.

• The Davises were under the impression that Suderov had worked out a deal with the FHA that required the house being sold as a mere formality to satisfy the FHA mortgage, and they believed that they would get their house back after the closing. Mr. Suderov told them that they would get their house back, even though he knew that this was not true.

• Had the Davises known that they would not be getting their property back after the closing they would not have transferred title to Mrs. Suderov.

• Moreover, there is ample evidence in the record to show that the Davises were under pressure to execute the transfer. Apart from the significant coercion they faced as a result of the threatened foreclosure on their home, which led them out of desperation to the Suderovs in the first place, the closing transaction occurred under tremendous pressure.

At this point, the court decision sets forth the description of the scene at the closing of the transaction (described above) in which the Davises and their daughter Tammy were pressured into signing the documents pushed in front of them without explanation and with their questions left unanswered.

It was on the basis of the foregoing that the District judge ruled that the bankruptcy judge "did not err as a matter of law in her determination that the Davises involuntarily transferred their property to Phyllis Suderov within the meaning of section 522(g)(1)(A)."

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Description of the closing statement prepared

by the Suderovs' attorney, Daniel Naeder

The court described the closing statement prepared by the Suderovs' attorney in this excerpt:

• In this Court's view, the statement of closing expenses and costs prepared by Naeder is an accounting exercise that is devoid of reality, fraudulent in nature, and aimed at suiting the needs of Suderov by showing that more was paid for the property than what was actually paid. The Court need only point to the $5,000 expense for installation of cabinets never installed and the $1,000 "real estate commission" to Wiener [the Davises' attorney] as evidence of the statement's questionable character.

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Retention of the Davises' attorney, Richard Wiener

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One point that I missed in Part 1 of this post is that the Davises' original attorney, after seeing the documents that the Davises were being asked to sign, refused to represent the Davises in the transaction and suggested that they file bankruptcy instead. Failing to heed his advice, the Davises went ahead with the closing anyway, which was rescheduled for the following day. At that time, a new attorney, Richard Wiener, appeared and introduced himself to the Davises as their new attorney. He was obtained by the loan broker who originally put the Davises in touch with the Suderhovs in the first place.

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The District Court's comments on the

unconscionability of the transaction

In finding that the Bankruptcy Court correctly ruled that the transaction was unconscionable, the District Court state the following:

• Judge Goetz found that all of the elements of an unconscionable lease are present, "including gross imbalance in bargaining power and sophistication and a result which must shock any disinterested observer." Davis, 148 Bankr. at 177. This Court agrees.

• The Davises were people of little means who lacked any real estate experience. The Suderovs were sophisticated and experienced in real estate transactions, having entered into eight similar sale/leaseback transactions. Procedurally, the Davises did not comprehend the transaction and closing documents, were the victims of misrepresentations by Mr. Suderov, and were under considerable pressure to sign the closing documents under the impression that they would be getting their house back. There was no "meaningful choice" for them in this transaction, particularly since they had already expended $ 4,000 in cash in order to consummate the closing. Simply put, choice and a balance of bargaining power were lacking.

• Substantively, the terms of the transaction documents, particularly the Lease, were favorable to the Suderovs. This is reflected in the overall transaction, where Suderov effectively bought-out the Davises for $ 7,058 and made them indebted to her for rent payments she knew they could not meet, while the Davises paid Suderov $4,000 to be relieved of their $11,058 debt on the mortgage arrears, but lost title and the entire equity in their home in addition to incurring an obligation to guarantee $ 1,106 in monthly rent payments.

• The unfavorable terms of this transaction are also reflected in the Lease agreement. Under the Lease, Tammy Davis is obligated to pay, and the Davises guarantee, $ 1,106 a month and the entire year's rent upon default. As stated above, it is clear from the record that neither Tammy Davis nor her parents could meet this obligation. Moreover, the Lease is for a one year term renewable annually five times, and terminates on the fifth year unless the Davises exercise the option to purchase the property. According to paragraph 31 of the Lease agreement, it would cost $ 56,500 to purchase the property in the first year. The Bankruptcy Court determined that the cost to purchase the property would be $ 109,000 by the fifth year. If the Davises decided not to purchase the property but to remain tenants after the fifth year, their rent would increase according to paragraph 37 by "33 and 1/3 percent over the gross payment at the end of the term." The Bankruptcy Court found that by the fifth year, the rent would be just under $ 1800 per month. A 33 and 1/3 percent increase would raise the rent to approximately $ 2,400 a month. In effect, the Lease terms ensure that the Davises will loose the leasehold after five years because they would never be able to afford to purchase the property, or to pay the monthly rent at the end of the term of the Lease.

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The District Court judge's parting shot at the Suderovs and their confederates who participated in the foreclosure rescue transaction

In concluding its opinion in this case, the District Judge offers this parting shot at the foreclosure rescue operators, the Suderovs, and their enablers who participated in ripping off the Davises:

• In this Court's view, this case unfortunately reveals a picture of greed and unconscionable conduct. A family of eight people living on limited income was exploited by a group of real estate sophisticates with the aim of taking away from them their only real asset, the family home. But for the protection of the Bankruptcy Court, the family would have probably been evicted and would face a bleak residential future. The Court agrees with Judge Goetz's assessment, that "the deal into which the Davises were tricked into entering was worse than usurious. All those who participated deserve to be condemned." Davis, 148 Bankr. at 177.

Davis v. Suderov (In re Davis), 169 B.R. 285 (E.D.N.Y. 1994)

Go here for Bankruptcy Court Voids Foreclosure Rescue Sale Leaseback; Calls It A Fraudulent Conveyance - Part 1.