Minn. Sale Leaseback, Equity Stripping Victim Wins Back Free & Clear Home With Help From Non-Profit Law Firm As Judge Voids Sale & Subsequent Mortgage

In St. Paul, Minnesota, the Housing Preservation Project announces:

• The Foreclosure Relief Law Project(1) won a major victory [...] in a prolonged equity stripping lawsuit. After a two day trial, the Court ordered that the homeowner now owns her home free and clear of a mortgage.

• Almost two years ago, Ms. Sandra Gustafson approached the Foreclosure Relief Law Project because she was facing eviction from the home she has owned for almost 20 years. Ms. Gustafson was the victim of an elaborate equity stripping scheme orchestrated by a now-defunct company called Midwest Equity Consultants. Midwest Equity linked homeowners in foreclosure with “investors.”

• An “investor” purchased Ms. Gustafson’s house and immediately sold it back to her on a contract for deed. Per the terms of the contract for deed, Ms. Gustafson was to refinance her home after 15 months. As is true with most equity stripping transactions, Ms. Gustafson was in no position to refinance her property, leaving her on the brink of eviction, as well as the loss of her $125,000 in equity to the “investors.”

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• In previous hearings before the Court, the Plaintiff successfully argued that Midwest Equity and the “investors” violated various provisions of Minnesota’s equity stripping laws. The Court also agreed with the Plaintiff that the mortgage that financed the transaction was void, because it violated state law and public policy.(2)

• At trial, the bank that financed the transaction asked the Court to force Ms. Gustafson to repay the bank for its loss. The Court held that there was no legal basis to do so and denied the bank’s request.

For the entire press release, see Major Victory For Coon Rapids Homeowner In Equity Stripping Case.

(1) The Foreclosure Relief Law Project is a program of the Housing Preservation Project (“HPP”). HPP is a non-profit law firm based in St. Paul, Minnesota. Ms. Gustafson was represented by Jane Bowman and Mark Ireland.

(2) I suspect that the court found that the mortgage lender (presumably unwittingly) financing the sale leaseback ripoff was not entitled to bona fide purchaser status and, accordingly, was not entitled to the protection of the state recording statutes, thereby leading to its security interest in the premises being voided in favor of the superior, albeit unrecorded, rights and equities of the defrauded homeowner.

When dealing in real estate under Minnesota law (and under the law of most, if not all, other states as well), it is not enough for a purchaser or mortgage lender to merely examine defects in the record chain of title, but also, to discover anyone who is in open possession of land. If a person other than the seller/mortgage borrower is found to be in open possession of the premises, the purchaser/mortgage lender has a duty to inquire directly of the person in possession as to what the nature of that possession is.

A purchase/mortgage loan against the premises without first inquiring into the facts underlying that possession has generally been regarded as the strongest evidence of bad faith on the part of the purchaser/lender, and accordingly, said purchaser/lender acquires its interest in the premises subject to any unrecorded rights and equities that the possessor can establish. Such a failure to make inquiry, a negligent or willful closing of the eyes to visible pertinent facts, has been regarded as an intentional avoidance of the truth which it would have disclosed.

Such a purchaser/mortgage lender is generally considered to be on notice of such outstanding unrecorded rights and equities and, accordingly, is not a bona fide purchaser entitled to the protection of the state recording statutes.

For a survey on some of the Minnesota case law in this regard, see Minnesota Bona Fide Purchaser, Possession, Duty Of Inquiry.

For other states, see Bona Fide Purchaser Doctrine, Possession Of Property By Occupants Other Than The Vendor & The Duty To Inquire.