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.

Go here for othar posts on the equitable mortgage doctrine in Iowa. Iowa equitable mortgage uranus

Wednesday, October 17, 2007

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.’"

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.

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.
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)."


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.
Retention of the Davises' attorney, Richard Wiener
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.

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.


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.

Tuesday, October 16, 2007

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

A 1992 New York Federal bankruptcy case involving a homeowner facing foreclosure who, in the context of a Chapter 13 bankruptcy, successfully voided a foreclosure rescue, sale leaseback transaction may be of some interest to those representing homeowners in the context of a Federal bankruptcy court proceeding.

The homeowners sought to void the deed transferring their home (property in which they could have claimed a bankruptcy exemption) to the foreclosure rescue operator and to have the property returned to them pursuant to 11 U.S.C. § 550. They successfully attacked the conveyance of their house to the foreclosure rescue operator as a fraudulent conveyance voidable:

The court also described the foreclosure rescue contract signed by the homeowners as being unconscionable, and provides a brief discussion thereon.

What follows below are some highlights and quotes from the case (bold text is my emphasis) and is provided for general information purposes only. Please note that the Federal Bankruptcy Code has been subject to several legislative amendments since this case was decided. If there is anything contained herein that may be of interest to you, please seek out a qualified bankruptcy attorney to determine continued applicability.

Along this vein, one point I want to highlight is that this case makes reference to certain specific Code provisions that, as a result of subsequent amendments, have been repositioned. For example, references made herein to the relevant provisions contained in Section 548 in effect at the time this case was decided are now found in Section 548(a)(1), Section 548(a)(1)(B)(i), and Section 548(a)(1)(B)(ii)(I).


148 B.R. 165
(Bankr. E.D.N.Y. 1992)

Description of the homeowners and family, the foreclosure rescue operator and the transaction & legal documents used therein

On the background, education and existing family situation of the homeowners, the court stated:

1) Living in the house at the [time of the bankruptcy court proceeding] are Mrs. Davis, her two grown daughters, four grandchildren and a greatgrandson, eight people in all. Until the Davises bought the house here involved, they had never bought a home. Apart from the FHA mortgage they had never borrowed money. Mr. Davis has a tenth grade education, obtained in North Carolina, and works as an orderly at a local hospital.

2) In 1982 Mr. Davis moved out of the marital residence and sometime later began divorce proceedings which are still pending. After the divorce action began, he stopped making payments toward the FHA mortgage which fell into arrears.

3) For some years now Mrs. Davis' sole income has been the disability allowance she receives from Social Security. One daughter and her four children also live on an allowance made them by Social Security. The only member of the family living in the house and currently employed is Tammy Davis [one of the Davis' daughters].

4) By 1991 arrears on the mortgage, on which the payments were $195 per month, had grown to approximately $10,000 and FHA commenced a foreclosure proceeding.

5) Depending upon what appraisal is used, the Davises by that time had an equity in their house of somewhere between $19,260 and $49,260.


On the background and experience of the foreclosure rescue operator, the court stated:

6) Mrs. Suderov is a sophisticated and experienced lender. She has entered into at least eight or nine of these sale leaseback transactions. Currently she owns eight houses and three parcels of vacant land and holds five to six mortgages. What her husband holds was not disclosed. Over the years she has developed form documents and rubber stamps calculated to insulate her transactions from legal challenge.


On the sale transaction, and the lease and option agreement, the court said:

7) The documents consisted of a deed, and a twelve page agreement with forty five numbered paragraphs entitled "Agreement with Option to Purchase," ("Agreement") to which was annexed an "Agreement Receipt and Statement," a "Memorandum of Municipal Requirements," and an "Insurance and Option Memo Excerpt." The Agreement is in fact both a lease and an option.

8) In essence, what these documents embody is a sale by Mr. and Mrs. Davis of their house to Mrs. Suderov and a leaseback of the premises to Tammy Davis [the Davis' daughter] with payment of the rent guaranteed by Mr. and Mrs. Davis. Contained in the lease is an option to buy back the premises (but not the fixtures in the house or related personalty) on extremely onerous terms at a price four to five times what the Suderovs were paying.

9) Execution of these documents gave rise to an immediate liability in Tammy Davis, guaranteed by her parents, to pay $ 12,719 to Mrs. Suderov. This is because the lease makes the first year's rent payable in its entirety upon execution of the Agreement.

10) These documents are not only complex, they are unintelligible. When Mrs. Suderov was asked at the trial to explain the paragraph calling for a recomputation of the option price each year she was totally unable to do so, offering as a lame explanation that the language represented Mr. Naeder's [her attorney] "legalese."

11) Although Mr. Wiener [the Davis' attorney] claims that he explained the documents to the Davises so that they would understand to what they were committing themselves, it is clear that he did not understand the transaction himself, since it was only at the trial that he realized that the option to buy the property back was given only to Tammy Davis and not to his clients, Mr. and Mrs. Davis. Furthermore, it was doubtful that Mr. Wiener, based on a few hours' examination of the complex documents in a tumultuous atmosphere, could have even understood, let alone intelligently explained, provisions which are so garbled and unintelligible that this Court has been unable to resolve their meaning after reviewing them carefully.

12) Mrs. Davis says that she did not understand what was taking place, that she simply signed where she was told to sign. She admits that she knew that she was transferring title but she relied on Mr. Suderov's representations that the transfer was only a formality necessary to satisfy the FHA and the house would continue to belong to her.

13) Execution of the lease, which was part of the transaction, generated an immediate obligation to pay $ 12,719 to Mrs. Suderov [the entire first year's rent payment was due immediately], dischargeable through equal monthly payments, described as an accommodation to the lessee. [...] The named lessee is Tammy Davis with payment guaranteed by both her parents.

14) The lease and option agreement are so full of penalties, escalation clauses, and monthly increases that it is impossible even for the most sophisticated lawyer to calculate exactly what the rent or the option price is or will be at any point in time.

15) When the transaction was completed, the house in which the Davises were living was the property of Phyllis Suderov and the Davises owed her $ 12,719 for the first year's rent on their former home with a first payment of $ 1,106 per month due two weeks after the closing. No money was given the Davises. They received not a penny for the transfer of an equity in the Bridgehampton home of a value of between $ 19,000 to $ 49,000 to Mrs. Suderov.

16) [O]ne month after the closing and two weeks after the first rental payment was due, Phyllis Suderov perfected a judgment against the Davises for a full year's rent and costs, $ 14,779.56. On that same date, she got a warrant of eviction for nonpayment. In addition, Tammy Davis was served by the Suffolk County sheriff with an income execution.


Voluntary Transfer

One issue that the court addressed was whether the sale of the home by the homeowner to the foreclosure rescue operator, according to the court:
  • "was a voluntary transfer within the meaning of Section 522(g)(1). The Bankruptcy Code does not define the word "voluntary," In re Tackett, 21 Bankr. 107 (Bankr. D.N.M. 1982), and the legislative history accompanying § 522(g) sheds no light on its meaning. In re Seidel, 27 Bankr. 347 (Bankr. E.D. Pa. 1983)."
The court found that the transfer was not a voluntary transfer and addressed that issue with the following observations:

1) By and large, the bankruptcy courts have refused to consider any transfer other than one that takes place by operation of law to be necessarily a voluntary transfer for purposes of Section 522(g)(1).

2) Economic coercion or fraud and misrepresentation have been held to render a transfer involuntary. In re Seidel, 27 Bankr. 347 (Bankr. E.D. Pa. 1983); In re Taylor, 8 Bankr. 578 (Bankr. E.D. Pa. 1981); In re Reaves, 8 Bankr. 177 (Bankr. D.S.D. 1981).

3) The following cases have recognized that general rule, but have concluded that the transfers there at issue were voluntary on the facts: In re Corwin, 135 Bankr. 922 (Bankr. S.D. Fla. 1992); In re Wernly, 91 Bankr. 702 (Bankr. E.D. Pa. 1988); In re Wernly, No. 88-0391 S, 1988 WL 96198 (Bankr. E.D. Pa. Sept. 16, 1988); In re Porter, 40 Bankr. 646 (Bankr. N.D. Tex. 1984); In re Dargis, 36 Bankr. 866 (Bankr. E.D. Pa. 1984); In re Evingham, 27 Bankr. 128 (Bankr. W.D.N.Y. 1983); In re Tackett, 21 Bankr. 107 (Bankr. D.N.M. 1982); In re Echoles, 21 Bankr. 280 (Bankr. D. Ariz. 1982).

4) In re Reaves, applied a two prong test. In that case a debtor had given, pre-petition, a third mortgage on her real property to a bank. An employee of the bank had contacted the debtor, and had pressured the debtor into signing the mortgage by telling her that her estranged husband's business would fail unless she executed the mortgage. The debtor had no legal connection with the business, but was unemployed and dependent solely upon her husband for her income. In considering whether the debtor could avoid the mortgage under Section 522(g)(1), the bankruptcy court stated:
  • An 11 U.S.C. Section 522(g)(1)(A) voluntary transfer occurs when a debtor, with knowledge of all essential facts and free from the persuasive influence of another, chooses of her own free will to transfer property to the creditor. A voluntary transfer does not occur where a creditor has harassed, insulted, and shamed a debtor into transferring the property to the creditor. Nor has a voluntary transfer occurred where a creditor has concealed or failed to inform a debtor of essential facts necessary for the debtor to make an intelligent decision on whether to transfer the property to the creditor. This is especially true where a debtor can show that she would not have made the transfer had she been informed of all the essential facts.
5) The court [in In re Reaves] concluded that the debtor had not voluntarily transferred her interest in the real property to the bank. She had signed the mortgage as a result of the pressure applied by the bank and the bank had failed to explain to her the effect of a clause in the mortgage which waived her right to claim a homestead exemption, and the debtor would not have signed the mortgage had she understood the effect of the clause. While a failure to explain the clause would not, standing alone, have been sufficient to justify a holding that the debtor did not voluntarily transfer the property, continual pressure, coupled with a failure to inform the debtor of the consequences of the transfer, resulted in an involuntary transfer.

6) Other courts have adopted the approach in Reaves, or cited it with approval. In re Corwin, 135 Bankr. 922 (Bankr. S.D. Fla. 1992); In re Evingham, 27 Bankr. 128 (Bankr. W.D.N.Y. 1983); In re Echoles, 21 Bankr. 280 (Bankr. D. Ariz. 1982); In re Tackett, 21 Bankr. 107 (Bankr. D.N.M. 1982).

7) At least one court has gone further, and held that the pressure present in Reaves is not prerequisite to a finding of an involuntary transfer where there has been misrepresentation. In In re Seidel, 27 Bankr. 347 (Bankr. E.D. Pa. 1983), the court concluded that a voluntary transfer does not occur where a debtor does not have knowledge of all of the essential facts pertaining to the transfer, the creditor to whom the transfer is made fails to inform the debtor of any essential facts within the creditor's knowledge, and the debtor would not have made the transfer had he been aware of all of the essential facts.

8) In In re Wernly, No. 88-0391 S, 1988 WL 96198 (Bankr. E.D. Pa. Sept. 16, 1988), a Chapter 13 debtor sought to avoid his purchase of a home on the ground that it was a fraudulent conveyance. He contended that the seller and real estate broker had misrepresented the cost of necessary repairs. Recognizing that the purchase could be considered an involuntary transfer where "the wrongdoing on the part of the seller, or the seller's agent, [is] manifest, raising to the level of fraudulent conduct, or [is] at least manifested by the application of extraordinary sales pressure," the court held that in the case before it the transfer was voluntary, because the misstatements "were relatively innocent." See also In re Wernly, 91 Bankr. 702 (Bankr. E.D. Pa. 1988).

9) The misrepresentations by Richard Suderov, acting on behalf of his wife, can hardly be termed "innocent" and they were accompanied by "extraordinary sales pressure." In this case there was fraud and misrepresentation, coupled with the economic coercion inherent in the fact that the Davises thought they were facing foreclosure of their mortgage and the Suderovs were aware of that fact. Considering the totality of the circumstances present here, the transfer to Phyllis Suderov of the deed to the Davis residence was not a voluntary transfer.


Fraudulent Conveyance

The court then had to decide whether the transfer of the home to the foreclosure rescue operator was a fraudulent conveyance within the meaning of the Bankruptcy Code or New York's Debtor & Creditor Law.

The court made the following statements in connection with this issue:

1) Indisputably, the transfer was made within one year [Editor's note: now two years, under current law] before the date of the filing of the petition. Therefore, it is avoidable under Section 548(a)(2) if (1) the Debtors received less than a reasonably equivalent value for the transfer and (2) they were then or were rendered thereby insolvent.

2) It is likewise avoidable as a fraudulent conveyance under Section 544 by reference to New York's Debtor and Creditor Law, which parallels the Federal statute and makes fraudulent any conveyance made without a fair consideration which renders the transferor insolvent.

3) Since the Debtors received nothing for their equity in the house, there can be no question but that they received less than reasonably equivalent value or fair consideration.


4) Whatever criterion is employed and however the facts are examined, it is indisputable that the price paid the Davises for the equity in their home was unconscionably low. How could it be otherwise when the Suderovs emerged with title to the property and with the Davises committed to pay Mrs. Suderov $ 1,106 per month for continuing to reside in the property to which Phyllis Suderov now held title and the Davises were left with nothing. Indeed, they were left with less than nothing in the view of the fact that the Suderovs, on one pretext or another, had earlier extracted $4,000 from them. [Editor's Note: Mr. Sudarov received $2,000 - appraisal, and $2,000 - for service rendered in negotiating satisfaction of a second mortgage].

5) Whatever value is placed on the house, since the Debtors received nothing in exchange for the transfer of their equity, Mrs. Suderov did not give the Debtors reasonably equivalent value. Nor did she give them fair consideration under New York law. N.Y. Debt. & Cred. Law, § 272 (McKinney 1990). Nothing was given the Debtors in exchange for their house "as a fair equivalent therefor," nor did Mrs. Suderov act in good faith.

6) Because the transfer was so unfair it rendered the Davises insolvent. It stripped them of their one significant asset, their equity in their house and left them with all their prior debts. That the transaction eliminated their liability on the mortgage and on the mortgage arrears was of no benefit since they no longer owned the house.



While the homeowners' complaint in this case did not request the court to void the transaction with the foreclosure rescue operator based on unconscionability, the court's "conscience" was presumably "sufficiently shocked" so as to cause it to address the issue of unconscionability anyway (possibly, this was the judge's attempt to (1) telegraph the legal grounds by which the Davises' counsel could use to go after the Suderovs' supporting cast who assisted in the screwing of the Davises, or possibly to (2) telegraph to future foreclosure rescue victims who are situated similarly to the Davises to include unconscionability in their complaint - maybe both). The court spoke as follows:

1) The Court limited itself to the issue of the existence of a fraudulent conveyance and has not considered whether the entire transaction, including the lease, is voidable as unconscionable. The complaint did not request such a determination.

2) The New York courts will not enforce an unconscionable contract. An unconscionable contract is "one which is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms." Sablosky v. Edward S. Gordon Co., 73 N.Y.2d 133, 538 N.Y.S.2d 513, 535 N.E.2d 643 (1989).

3) The doctrine contains both substantive and procedural aspects, and whether a contract is unconscionable is to be determined against the background of the contract's commercial setting, purpose, and effect. Id.

4) In determining whether a contract is substantively unconscionably, courts consider whether one or more key terms are unreasonably favorable to one party. Id.

5) All the elements of an unconscionable contract are present here, including gross imbalance in bargaining power and sophistication and a result which must shock any disinterested observer.

6) Mr. and Mrs. Suderov, under the pretense of helping the Davises, legally stole from them the house which has been home to them for 15 years and which shelters their children and grandchildren. The Suderovs knew that the moment the Davises committed themselves to pay $ 1,100 a month, the house was lost to them.

7) The deal into which the Davises were tricked into entering was worse than usurious. All those who participated deserve to be condemned. The Davises should explore recouping from Fran, from Mr. Naeder, Mr. Golub, Final Touch, Mr. Wiener, the money paid them by Mrs. Suderov for helping victimize the Davises.


Davis v. Suderov (In re Davis), 148 B.R. 165; (Bankr. E.D.N.Y. 1992).

Go here for Part 2 of this post.