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 fiancé 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).

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:

• Victims strike back at shady lenders (The companies promised foreclosure protection only to wind up taking the homes themselves) (10-13-07),
• Facing new fields of fraud (Guilty in one scam, an Oldsmar man is scrutinized in a high-risk loan scheme that preyed on those facing foreclosure) (5-20-07).

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

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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.

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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:

• Brown, et al. vs. Fordham, Jackson, Metropolitan Money Store, et al. (First American Title also named as a defendant in this case, as well as the local title insurance agents who issued the title policies),
• Winston vs. Daniels, Fordham & Fordham, Metropolitan Money Store et al. (both Southern Title Insurance Corportation, the title insurance underwriter and the policy-issuing title agent named as additional defendants),
• Proctor, et al. v. Metropolitan Money Store, et al. (names both Chicago Title Insurance Company and Southern Title Insurance Corportation (title company underwriters), as well as the policy-issuing title agents as defendants).

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.

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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.

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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.

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