Monday, July 9, 2007

Criminal Prosecutions Of Foreclosure Rescue Operators I

(revised 1-14-08; added Case # 27)
Transactions involving foreclosure rescue arrangements have occasionally been the subject of criminal prosecutions. The cases involved (1) those taking upfront fees and/or ongoing periodic fees for services never performed, (2) those who acquired overleveraged homes with no equity who proceeded to pocket the rent from the home without paying on the existing mortgage (ie. equity skimming / rent skimming), and (3) those who engaged in the so-called foreclosure bailout, foreclosure rescue, equity stripping arrangements.

The following are links to stories involving the criminal prosecutions of foreclosure rescue operators:



Case #1 - California Federal Court

Press Release - U.S. Department Of Justice - Three Defendants Added To Federal Indictment In Foreclosure Scam Targeting Homeowners In Default (7-20-06)

Defendants Face Prison Time for Calif. Foreclosure Scam (7-24-06)

Seal Beach escrow operator pleads guilty in fraud case (2-23-07)

Stipulated Statement of Facts (Cynthia Valenzuela) Plea Bargain Agreement

Let The Borrower Beware

Sentencing In S. California Foreclosure Rescue Scam Postponed To December (8-14-07)

Bond Revoked For Los Angeles Area Foreclosure Rescue Operator Facing Criminal Charges; Allegedly Engaged In More Stripping Scams While Awaiting Trial (12-2-07)



Case # 2 - Ohio Federal Court

Press Release - U.S. Department Of Justice - Springboro Man Indicted In "OperationTruth Or Consequences" National Action Against Bankruptcy Fraud (10-18-06)

Foreclosure scam triggers plea, (The Enquirer / Cincinnati.com - 11-8-07)





Case #3 - Illinois Federal Court

Chicago lawyers charged in bankruptcy fraud probe (10-18-06)

Press Release - U.S. Department of Justice - Five Chicago Area Bankruptcy Attorneys Among A Dozen Defendants Charged In Separate Federal Bankruptcy Fraud Cases (10-18-06)

Case #4 - California State Court
(Stanislaus County)
(revised 9-28-07)
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Foreclosure avoidance partners targeted (The Mortgage Fraud Blog - 7-3-05)

Foreclosure case witnesses take fire (adapted from The Modesto Bee, 10-20-06)

California Judge Decides to Proceed to Trial in Matter of Accused "Deed Thieves", (blog post - 11-21-06),

California Prosecutors Add 26 Charges Against Alleged House Swindling Trio (blog post - 12-6-07)

Plea deal for men accused of fraud? (Prosecutor tells judge both sides talking in Ashlock-Buhler case) (The Modesto Bee - 8-3-07)

Plea Deal In The Works For Foreclosure Rescue Operators? (blog post - 8-3-07)

2 plead guilty to swindling homeowners (One year in jail, restitution for 20 families mark deal) (The Modesto Bee - 9-20-07)

Northern California Prosecutors Get "No Contest" Pleas In Foreclosure Rescue Scam (blog post - 9-24-07)


Case # 5 - New Jersey Federal Court

Lyndhurst, N.J., Men Get Sentenced for Defrauding Homeowners in Mortgage Scam (9-10-03)




Case # 6 - Texas Federal Court

Mortgage Scam Puts Dozens of Dallas Homeowners on the Streets (4-10-01)
.



Case # 7 - New York State Court

Attorneys Arrested In Real Estate Scheme

Mortgage fraud scheme broken up




Case #8 - Florida Federal Court

Press Release - U.S. Department of Justice - Tampa Federal Jury Convicts Five Persons In Home Equity / Bank Fraud Scheme (3-29-07)

Indictment - U.S. vs. Moumneh, et al.

Five convicted in home equity fraud

Florida Foreclosure Rescue Operators Found Guilty In Federal Fraud Trial





Case #9 - Washington, D.C. Court of Appeals

Sale Leaseback Recharacterization As Loan Results In Criminal Conviction

Browner v. Dist. of Columbia, 549 A.2d 1107 (D.C. 1988)




Case #10 - California State Court

California Foreclosure Rescue, Equity Stripping Warning, Consultant Jailed




Case #11 - Maryland State Court

Foreclosure Rescue Scammer Pleads Guilty To Felony Theft




Case #12 - California Federal Court

Sacramento Feds Get Guilty Pleas From Foreclosure Rescue Operator; Two Straw Borrowers

U.S. Attorney's Press Release

Indictment - U.S.A. vs. Christopher Craig, et al.

Plea Agreement - U.S.A. vs. Craig (see pages 13-14)

'Foreclosure specialist' pleads guilty to fraud




Case #13 - Minnesota Federal Court

U.S. Attorney Press Release (5-10-07) - Local Mortgage Broker and Assistant Indicted for Bilking Homeowners.

Foreclosure Rescue Operators Indicted By Minnesota Feds

Indictment - United States vs. Fiorito & Jerde

Prior Lake man pleads guilty in home equity schemes

Minnesota Foreclosure Rescue Scammer Cops Plea To Mail Fraud





Case #14 - California State Court

California Foreclosure Rescue Operator Faces Felony Charges

Santa Cruz resident says her home was stolen in foreclosure scam




Case #15 - Missouri State Court

Real estate’s market crash ensnares guru (No-money-down leader in legal trouble)

Missouri Foreclosure Rescue Operator Facing Felony Theft Charge; Allegedly Cheated 80 Year Old Woman Out Of Home





Case # 16 - New Jersey State Court

Charge he fleeced friend in $270G real estate scam

NJ Man Facing Felonies In Equity Stripping, Straw Buyer Scam




Case # 17 - Maryland State Court

Foreclosure rescue operator Nicholas D. McLeod, 31, of Gaithersburg, Maryland pleaded guilty to:

  1. felony theft,
  2. embezzlement, and
  3. prohibited activities while acting as a foreclosure consultant.

For more, see:

.

Case # 18 - New York State Court
.
.
Nassau County DA Press Release (11-1-05) - DA's press release announcing the arrest of the three participants in foreclosure rescue scheme.
.
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Case # 19 - Ohio State Court
(Franklin County)
(revised 9-29-07)
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(An alleged title transfer / refinancing scam that did not involve a foreclosure rescue. However, the suspect / defendant allegedly used an approach similar to that of some foreclosure rescue opertaors - (1) a bogus proposal by the suspect / defendant to assist the homeowner in the refinancing of her home, coupled with (2) a scheme to have the title to the property transferred into the name of a third party (straw buyer), which included the unwitting signing of certain legal documents by the homeowner to accomplish that purpose, and (3) ending with the architect of the scam pocketing money from the proceeds of a mortgage loan at the transaction closing / settlement, with the homeowner no longer having title to the home. The suspect here was charged with the felonies of Theft, Securing Writings by Deception, and Money Laundering.)
.
.
Ohio AG Press Release - Attorney General Marc Dann’s Organized Crime Investigations Commission busts Columbus man for mortgage fraud (Man preyed on elderly victim soon after hospital visit) (9-7-07).
.
Local man indicted for mortgage fraud (Business First of Columbus) (9-7-07).
.
...
Case # 20 - Florida State Court
.
(An alleged real estate title transfer scam that did not involve a foreclosure rescue. However, the suspect/defendant allegedly used an approach that parallels the approach used by some foreclosure rescue opertaors - (1) a bogus proposal by the suspect/defendant to assist the homeowners in the sale of their home, (2) the unwitting signing of legal documents by the homeowners (ie. power of attorney and warranty deed) to facilitate a title transafer and giving the documents to the suspect/defendant, and (3) ending with the suspect/defendant having the title to the home in his name, with he claiming to have purchased the equity in the property from the homeowners "for $10" - and with the homeowners no longer having title to the home. The suspect here was charged with the felony of first-degree grand theft.)
.
.
.
,
Case # 21 - Florida State Court
.
.
.
Case # 22 - New York Federal Court
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Indictment - U.S. vs. McDowell, et al. (U.S. District Court - S.D. N.Y.)
.
.
.
.
Case # 23 - Florida Federal Court
.
Criminal Complaint (Information) - U.S. v. Kligerman (U.S. District Court - M.D. Fla.),
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Plea Agreement (requires PACER registration; 22 pages - $1.76; the admitted facts of the scheme are found at paragraph B-9, pages 19-21; or drop me a line at HomeEquityTheft@yahoo.com and I'll email it to you - be sure and put "U.S. v. Kligerman Plea Agreement" on the subject line),
.
Disbarred lawyer to plead guilty to fraud (Prosecutors say Graham Kligerman misled banks into making millions of dollars in loans) (St. Petersburg Times),
.
.
.
Case # 24 - Ohio Federal Court
.
.
U.S. Attorney News Release (upfront fee foreclosure rescue; defendant alleged to have misled homeowners into believing he could save their homes and charged upfront fee for "rescue services.").
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Case # 25 - Texas State Court
(added 12-31-07)
.
(While this case was not a criminal prosecution, but rather a civil prosecution brought by the Texas Attorney General, it reflects a willingness on the part of the Texas AG to go after those who cause vulnerable homeowners to unwittingly sign away their homes through deception. The lawsuit was brought against a foreclosure rescue operator that the AG accused of fraudulently taking possession of the home of an 85-year-old Houston man under the guise of helping the homeowner prevent foreclosure. The man allegedly was led to believe he was only allowing the operator to consult with his mortgage company, but in fact the transaction allowed her to take ownership of his home.)
.
Texas AG press release - Attorney General Abbott Files Emergency Action Halting Bogus Foreclosure Rescue Operation (Asset freeze and restraining order granted by judge severely restricts activities of pair scamming homeowners) (Go here for Spanish version of the press release),
.
Temporary Restraining Order issued in this case by the state court.
.
.
Case # 26 - Texas State Court
(added 12-31-07)
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(This case did not involve foreclosure rescue; but rather, a criminal prosecution and conviction by a local District Attorney's office of a scam artist who caused an 80+ year-old man to unwittingly sign away his home to her. The scam artist was sentenced to 10 years in prison and ordered to pay more than $380,000 in restitution after pleading no contest to criminal charges of securing execution of documents by deception.
.
Inasmuch as I can't figure out any reason why criminal charges of "securing execution of documents by deception" would not be equally applicable to those foreclosure rescue operators who cause homeowners facing foreclosure to unwittingly sign away their homes, I concluded that this story merited a place on this post. Whether or not such a charge would apply in the context of foreclosure rescue is a question best left for prosecutors to ponder.)
.
Woman pleads no contest to fleecing octogenarian (San Antonio Express-News, 9-25-06),
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Woman gets 10 years for home sale scheme (San Antonio Express-News, 10-24-06)
.
.

***

For the continuation of this regularly updated post, see Criminal Prosecutions Of Foreclosure Rescue Operators, Refinancing Scams II.

Posted by Home Equity Theft Reporter at 1:13 PM 0 comments

Saturday, June 30, 2007

Mortgage Servicer "Has Standing" To Bring Foreclosure Actions, Say Three Courts

The national mortgage servicer Mortgage Electronic Registration Systems, Inc. ("MERS") has recently been determined to "have standing" to bring foreclosure actions on behalf of mortgage lenders by three state appellate courts in two states.

In Florida, the Second District Court of Appeal in Mortgage Electronic Registration Systems, Inc. v. Azize, ___ So. 2d ___; (Fla. App. Ct. 2nd Dist., 2007; Fla. App. LEXIS 2418) ruled that MERS did, in fact, have standing in bringing a foreclosure action on behalf of the actual mortgage holder, thereby reversing a Pinellas Count Circuit Court order ruling to the contrary (in re Mortgage Electronic Registration Systems).

Shortly thereafter, Florida's Third District Court of Appeal decided to follow the decision of its sister court in Mortgage Electronic Registration Systems, Inc. v. Revoredo, 955 So. 2d 33; (Fla. App. Ct., 3rd Dist, 2007), in which it, too, found MERS to have standing to bring a foreclosure action on a mortgage it was servicing for another. The 3rd district decision also reversed the decision of a lower court to the contrary.

Finally, a recent New York case in Mortgage Electronic Registration Systems, Inc. v. Coakley, 2007 NY Slip Op 5478 (NYS App. Div., 2nd Dept., 2007); 2007 N.Y. App. Div. LEXIS 7703, affirmed a lower court ruling holding that MERS had standing to bring a foreclosure action on behalf of another, notwithstanding that MERS was not the true owner of the mortgage.

These decisions specifically dealt with whether a mortgage servicer has the legal right to bring a foreclosure action on a mortgage it services on behalf of another. The decisions in these cases, however, did not relieve either a mortgage servicer or lender of any obligation it may have to actually have and present in court the legally required mortgage documents necessary to proceed with a foreclosure, or any obligation to file an action to reestablish a promissory note, if a mortgage note is claimed to have been lost, stolen, or destroyed.

Posted by Home Equity Theft Reporter at 7:14 PM 1 comments

Monday, June 25, 2007

Sale Leaseback Recharacterization As Loan Results In Criminal Conviction

The following post below is a reprint of a blog post appearing on April 23, 2007 on this blog's companion blog, The Home Equity Theft Reporter. The case, decided in 1988 by the Washington, D.C. Court of Appeals (the D.C. high court), involved the recharacterization of a foreclosure rescue, sale leaseback transaction as a disguised loan made at legally impermissible rates and without a license, in violation of a then-existing Washington, D.C. criminal statute. While the particular D.C. statute at issue has been repealed, the case (in my view) still stands as support for the general proposition that courts are to disregard the form of a transaction when the substance of the transaction indicates it was structured in a manner designed to disguise or otherwise hide conduct that would violate the law (especially in the context of a foreclosure rescue, sale leaseback transaction).

(Washington, D.C. currently has a usury statute that can be found in the District Of Columbia Official Code, at Title 28, Subtitle II, Chapter 33 - Interest And Usury).

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I came across a court case decided (in 1988) by the Court of Appeals for the District of Columbia (D.C.'s high court) that involved the prosecution and conviction of two foreclosure rescue operators for violating a D.C. law then in effect known as the Loan Sharking Act. This law (D.C. Code Ann. § 26-701 (1981)) provided in pertinent part that it was unlawful and illegal to engage in the District of Columbia in the business of loaning money upon which a rate of interest greater than 6 per centum per annum is charged on any security of any kind, direct or collateral, tangible or intangible, without procuring a license.

The principal question in this case was whether the two foreclosure rescue operators (husband and wife), according to the court, "[w]ere actually engaged in the criminal enterprise of making loans in a disguised form at legally impermissible rates and without a license."

The transactions for which the foreclosure rescue operators were prosecuted and convicted were the typical, "sale-leaseback-repurchase option" foreclosure rescue deals. While the transactions (which took place in 1981 and 1982) took the form of actual purchases of people's homes with a contemporaneous leasing back of the premises to the homeowner with an accompanying buyback option, the D.C. trial court disregarded the form of the transactions and, instead, looked to the substance of the transactions and treated the deals as disguised loans, and then applied the then-existing D.C. statute accordingly. The D.C. Court of Appeals subsequently affirmed the convictions.

While the foreclosure rescue operators insisted at their criminal trial that they were not in the business of lending money, the D.C. Court of Appeals listed a number of factors that, in their view, supported the trial judge's determination that the transactions were nothing more than disguised loans. The court's observations follow (bold text is my emphasis):

  • "Each of the homeowners was drawn to the [operators] by advertising which promised the availability of "money to lend" to stop imminent foreclosure"
  • "When the homeowners asked for the loans which they believed that the advertisements were describing, and then posed questions about the form of the transactions, the [operators] couched their answers to these questions in language which confirmed to the [homeowners] that they were receiving the very loans for which they had come"
  • "The [operators] often simply calmed the inquiring homeowners' fears by pretending that it was usual practice, perhaps required by the accountant, to sign instruments transferring title to the homes."

---------------------

The D.C. Court of Appeals then went on to make these additional observations:

  • "Moreover, if the transactions were in fact sales, as [the foreclosure rescue operators] contend, they were surely most extraordinary ones. When a homeowner sells his home, which is usually his most valuable possession, one would expect at least some measure of bargaining over the sales price. Here, there was none. In each instance, what the [foreclosure rescue operators] characterize as the "sales" price bore no relation whatever to the value of the equity. It is absurd to suggest that Mrs. Carroll would knowingly sell her home, in which she had an equity of more than $ 36,500.00, for $ 8,100.00. None of the "sellers" had placed his or her home on the market or expressed the slightest interest in selling it. Each "seller" remained in possession after the purported sale, and [the foreclosure rescue operators] were indeed depicting their service as one that would enable their clients to "save" their homes from foreclosure. Although the transaction also lacked one of the common characteristics of a loan -- an evaluation of the borrower's credit -- no such investigation was needed because the home itself, which in each case was worth far more than the amount expended by the [foreclosure rescue operators], served as their security. It was therefore altogether reasonable for the trial judge to find that the depiction of each of these transactions as a sale and lease back was a transparent sham which masked an unlawful loan."

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The D.C. Court of Appeals opinion cites cases from a number of states (ie. New York, Oregon, Alaska, Hawaii, Washington State, Tennessee, and California), so if any of these states is your home state, there might be something of interest in this case for you.

In conclusion, the D.C. high court, quoting from a case decided by the New York Court of Appeals (New York's high court), made the following memorable quote (among others) about usury laws:

  • "The purpose of usury laws, from time immemorial, has been to protect desperately poor people from the consequences of their own desperation. Law-making authorities in almost all civilizations have recognized that the crush of financial burdens causes people to agree to almost any conditions of the lender and to consent to even the most improvident loans. Lenders, with the money, have all the leverage; borrowers, in dire need of money, have none."

For the text of the entire D.C. case, see:

For other posts on the issue of usury in the context of a sale leaseback, see:

Washington D.C. equitable mortgage doctrine kappa

Posted by Home Equity Theft Reporter at 11:44 AM 0 comments

Thursday, June 21, 2007

Missing Loan Documents Stall Mortgage Foreclosure

An example of the sloppiness of many mortgage lenders (and their attorneys) in going about their obligations in bringing foreclosure actions is illustrated in a recent decision of a New York City trial court. While there is nothing necessarily remarkable about the case in terms of its value as precedent, it nevertheless highlights the importance for an attorney representing a homeowner facing foreclosure to hold the lender's feet to the fire and make sure the lender presents in court all the crucial paperwork necessary to establish its right to foreclose.

In this case, the foreclosing mortgage lender simply failed to present in court the legal paperwork associated with the loan that proves that it was the owner of the mortgage in court. In denying the mortgage lender a judgment of foreclosure, the court stated the following:

  • "A plaintiff seeking to foreclose upon a mortgage must establish that it has legal or equitable interest in the mortgage and underlying debt. Ownership of the note and mortgage may be established by the lending documents themselves or by proof that the plaintiff is the owner of the note and mortgage by reason of an assignment of both the note and mortgage by the owner thereof to the plaintiff or by the owner’s indorsement of the note and its written assignment of mortgage to the plaintiff." (all citations to New York case law omitted).

In this case, the lender failed to either present the properly indorsed promissory note or any properly executed documentation establishing the chain of title supporting the lender's claim that it was the rightful owner of the mortgage. Accordingly, the judge refused to allow the foreclosure action to continue. See Terwin Advisors LLC vs. Balbachan (New York Supreme Court - Queens County; April 16, 2007).

One concluding point on this post. Buried in a recent article on Bloomberg.com that makes reference to "damaged goods" in the context of Wall Street mortgage investors buying and selling problem residential mortgage loans at steep discounts (see Bad Loans Pit Vranos Against Cayne as Hedge Funds Outbid Street), the article states:

  • "In the loan business, the term denotes damaged goods whose borrowers missed payments or walked away entirely, as well as mortgages where lenders misplaced crucial documents or applied rules too loosely." (my emphasis added)

What this seems to suggest is that the misplacement of mortgage loan documents by a mortgage lender is a relatively common occurrence. Further, such a misplacement will operate to seriously impair the value of the loan they are holding and in addition, it can seriously impair the lender's ability to easily enforce the mortgage loan by bringing a foreclosure action.

Admittedly, this fact may not be an issue in most foreclosures in view of the fact that homeowners facing foreclosure are typically not represented by an attorney and the foreclosing mortgage lender typically will get away with not presenting the "crucial documents" in court if they don't have them. However, for those attorneys who do represent homeowners facing foreclosure, forcing the lender to present all the legally required paperwork in court (ie. properly indorsed, original promissory note, assignments of mortgage. etc.) may, at a minimum, buy your client some time and some leverage in negotiating a resolution with the lender; or it could possibly result in an unexpected windfall for the homeowner. (Personally, I think a mortgage lender's inability to present all the legally required paperwork in court in a foreclosure action is, potentially, a much bigger problem for the lender than they would want a homeowner -- or homeowner's legal counsel -- to realize).

For a recent Massachusetts Federal Bankruptcy case where the judge refused to allow a foreclosing mortgage lender to evict a homeowner facing foreclosure because because the party bringing the foreclosure (HomEq Servicing Corporation) failed to prove (by presenting the necessary loan documents) that it was the correct party to bring and conduct the foreclosure proceedings, see In re Shwartz, (Bankr. Ct., Ma. April 19, 2007).

For a 2005 court order from a Pinellas County, Florida trial court ruling that a mortgage servicer, Mortgage Electronic Registration Systems, Inc. ("MERS") "lacked standing" to bring foreclosure actions on behalf of the actual mortgage holders whose loans MERS was servicing (because MERS was not the true owner of the mortgage loans that it sued to foreclose on), and accordingly, dismissed twenty foreclosure actions that MERS brought on their behalf), see in re Mortgage Electronic Registration Systems, Inc. (MERS), available online courtesy of Mortgage Servicing Fraud .org, at msfraud.org.

(Please note that the Pinellas County, Florida trial court decision, the logic of which might still be found to be persuasive in courts outside Florida, has subsequently been reversed by a Florida appellate court. For more on this point, see Mortgage Servicer "Has Standing" To Bring Foreclosure Actions, Say Three Courts.)

For a reported court decision from a Florida appellate court affirming a lower court decision denying a mortgage lender's request to proceed with a foreclosure sale because it failed to either present the original promissory note or give a satisfactory explanation for its failure to do so, see State St. Bank & Trust Co. v. Lord, 851 So. 2d 790; (Fla. App. Ct. 4th Dist., 2003), and the cases cited therein.

For other posts that reference the sloppiness and carelessness of some mortgage lenders and their attorneys when bringing foreclosure actions, either go here, or see:

Posted by Home Equity Theft Reporter at 10:07 PM 3 comments

Tuesday, June 5, 2007

Defending Consumers In Foreclosure Actions

A number of articles have recently addressed the use of the Federal Truth In Lending Act by attorneys defending homeowners facing foreclosure as a way to undo subprime mortgages where it is alleged that the loan originator failed to fully comply with Federal law when making the loan. For prior posts on this point, containing links to online media reports, see:

Another approach in defending homeowners facing foreclosure is addressed in a recent article in Forbes magazine. Mortgage loans get sold and resold in the open market and, if they end up in the hands of the Wall Street players who issue mortgage-backed securities, the ownership interests in those mortgages will then get "sliced and diced" among short, medium, and long term "investor pools". The focus of the Forbes article is the apparent difficulty many foreclosing mortgage lenders are having in maintaining, keeping track of, and presenting in court the required mortgage loan paperwork when they initiate a foreclosure action, given the number of times the mortgage loans are sold, resold, sliced, and diced.

Stated another way, some attorneys representing homeowners are making an issue of the sloppiness with which foreclosing mortgage lenders maintain their loan paperwork and the sloppiness with which they present their case in court. In one case in Florida, Jacksonville Area Legal Aid lawyer April Charney got a foreclosure filed against her client withdrawn after discovering that the company that filed to foreclose didn't own the mortgage loan that they were attempting to foreclose. The following excerpt from the article reflects the thinking behind this approach in defending homeowners:
  • ""I buy time, then get lenders to cut interest rates and fees," says Charney, who claims she's stopped dozens of foreclosures over ownership issues. Other lawyers are making similar moves in Maryland, New York, Massachusetts, Ohio, Kansas and Washington State--often forcing sloppy lenders to offer generous terms to avoid litigation."

The article goes on to report that Charney "stumbled upon the industry's paperwork problem two years ago after noticing that nearly all lenders seeking to foreclose against clients were filing "affidavits of lost notes."" These affidavits are filed in court by foreclosing mortgage lenders in an attempt to get the judge to, in effect, waive the legal requirement that they present the required paperwork that proves that they, in fact, own the loan they are trying to foreclose.

Reference is also made in the article to prominent foreclosure filer--Mortgage Electronic Registration Systems ("MERS"), a Vienna, Virginia company whose name is reportedly on 30% of the mortgages in county clerk offices around the country, and have been known in the industry as a company that files foreclosure actions in connection with mortgage loans that they may service but do not actually own.

For more, see Paper Chase (You're in luck. Your mortgage lender has flipped, sliced and diced your loan--and now no one knows who holds it).

Postscript

The carelessness and sloppiness in which some foreclosing mortgage lenders and their attorneys often go about their business when initiating forecloure actions has been observed by at least one Federal bankruptcy judge in Massachusetts. In fact, the judge, Judge Joel B. Rosenthal, "has observed instances in which attorneys representing alleged mortgagees or their servicing agents did not know whether the client was a mortgagee or a serving agent, or how their client came to acquire its role." For more on the apparent cluelessness (or possibly willful ignorance) that some lenders and their attorneys seem to possess as it relates to their legal obligations when initiating a foreclosure action, see Judge Rosenthal's Memorandum of Decision in In re Shwartz, (Bankr. Ct., Ma. April 19, 2007).

For a comment on the significance of a foreclosing mortgage lender's failure to present in court the actual, original promissory note, signed by the borrower / homeowner when bringing a foreclosure action, see "Editorial Note" in my prior post, Dillon Continues Battle Against Alleged Predatory Mortgage Servicer.

For a copy of a court order from a Pinellas County, Florida trial court ruling that the mortgage servicer mentioned above, Mortgage Electronic Registration Systems, Inc. ("MERS") "lacked standing" to bring foreclosure actions on behalf of the actual mortgage holders whose loans MERS was servicing, (and, accordingly, dismissed twenty foreclosure actions that MERS brought on their behalf), see in re Mortgage Electronic Registration Systems, Inc. (MERS), available online courtesy of Mortgage Servicing Fraud .org, at msfraud.org.

Posted by Home Equity Theft Reporter at 9:36 PM 0 comments

Friday, May 25, 2007

NY Lawyers Land Legal Fee Of $1 Million In Pro Bono Case

I stumbled across a recent New York Law Journal article (appearing in New York Lawyer) that reports on a case heard by a New York Federal Court where the lawyers representing a group of waiters, busboys and captains who worked in a restaurant in New York's Chinatown successfully challenged an unfair labor practice engaged in by their employer. While the attorneys (Skadden, Arps, Slate, Meagher & Flom and the Urban Justice Center) reportedly took on the case on behalf of their clients on a pro bono basis (ie. no legal fees charged to the restaurant employees), a federal judge nevertheless awarded the employees' attorneys a legal fee of $957,710; with liability for the payment thereof being imposed on the restaurant who engaged in the unfair labor practice. For more, see NY BigLaw Leader Scores $1 Million Fee in Pro Bono Case.

I make mention of this case because, in the context of foreclosure rescue litigation, I have no doubt that there are some people who wonder how a financially strapped homeowner (someone who can't afford to make his/her mortgage payments) can possibly be able to afford an attorney to sue a foreclosure rescue operator in order to get his/her home back. The reason that there are a growing number of homeowners bringing lawsuits against foreclosure rescue operators is because their attorneys, like the attorneys who represented the waiters, busboys, and captains in the New York labor law case, are suing for violations of statutes that allow a judge to award a successful plaintiff's attorney a legal fee, and impose the obligation for its payment on the party who violated the law.

Examples of such laws are:

1) The Federal Truth In Lending Act (see, for example, Moore vs. Cycon Enterprises, where a Michigan Federal Court ruled that a foreclosure rescue operator violated that law in a purported sale leaseback arrangement with a financially strapped homeowner)

2) State consumer protection and/or unfair and deceptive trade practices statutes (see, for example, Eicher v. Mid America Financial Investment Corp., where the Nebraska Supreme Court affirmed an attorney fee award of $378,000 to the lawyers representing a group of foreclosure rescue victims, and imposed the obligation for its payment on the foreclosure rescue operator, who was found to have violated the Nebraska Consumer Protection Act).

3) In addition, there is at least one state that allows for a similar award of attorney fees by a court for violation of the state usury laws involving consumer loans and credit sales (see, for example, Smith v. Eisen, where an Arkansas appellate court ruled that a homeowner was entitled to an award of her attorney's fees to be paid by a pawn shop owner; in this case, the court found that a sale of a home with a contemporaneously executed buyback arrangement between the homeowner and a local pawn shop owner was nothing more than a usurious loan secured by an equitable mortgage).

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I am also compelled to mention one other case reported on the companion blog to this blog in the past. In this case, the Washington, D.C. law firm Hogan and Hartson LLP obtained a substantial jury verdict, including $3.3 million in punitive damages, against a foreclosure rescue operator in the Washington, D.C. metropolitan area for violating the D.C. Consumer Protection Act (see Hogan & Hartson Wins $3.3 Million Verdict in Pre-Foreclosure Scam Case). While the news release does not discuss attorney fee awards, it is not unreasonable to believe that the law firm will, at a bare minimum, share in a part of the $3.3 million punitive damage award. Assume a cut of between 20% and 40%, and you can do the math yourself.

Whether you are a financially strapped homeowner, an experienced or aspiring foreclosure rescue operator, or an attorney thinking of representing either, I hope the foregoing has given you some insight as to:

1) how foreclosure rescue victims can go about retaining the services of an attorney for the purpose of undoing a foreclosure rescue arrangement and either getting back their homes, or otherwise salvaging the equity in their homes, and

2) who will end up footing the bill for the foreclosure rescue victim's legal fees in a successful litigation.

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Go here for other posts referencing Moore vs. Cycon Enterprises.

Go here for other posts referencing Eicher vs. Mid America Financial Investment Corp.

Go here for other posts referencing Smith vs. Eisen.

Go here for other posts referencing Hogan & Hartson.

Posted by Home Equity Theft Reporter at 9:33 AM 0 comments

Wednesday, May 9, 2007

Establishing "Intent" To Charge Or Receive Usurious Interest

The number of lawsuits by financially strapped homeowners suing foreclosure rescue operators to undo sale leaseback transactions that are coupled with an option (or a contract) to repurchase the subject property appears to be increasing. In some of these lawsuits, homeowners are alleging claims of usury against the operator, asserting that the foreclosure rescue transaction is nothing more than an equitable mortgage or disguised loan, and that setting up the form of the transaction as a sale leaseback is simply a transparent attempt to shield a usurious loan (as well as an attempt by the operator to avoid (1) the homeowners' redemption rights and (2) the need to pursue a foreclosure action to obtain title and possession of the property).

The State of Florida is one jurisdiction that has statutes that impose the penalty of forfeiture by the creditor of the entire loan principal on those making usurious loans bearing interest over 25% per annum (see Section 687.071, Florida Statutes - Criminal usury, loan sharking; shylocking; criminal prosecutors can also get involved in such situations, if they "catch wind" of the transaction).

Because the statute requires that the money lender "willfully" or "knowingly" charged or accepted an illegally excessive interest rate on the loan in order to trigger the statute, I feel compelled to at least briefly touch on the following cases that deal with the issue of "intent" in a usury case, including the use of a "usury savings clause" by a creditor in a loan agreement in an attempt by a creditor to "create an opportunity" to "claim" that he/she/it "didn't really mean" to charge an illegally excessive rate of interest in the event usury is raised as an issue in the enforcement of a loan agreement.
-----------------------------

Jersey Palm-Gross, Inc. v. Paper, 639 So. 2d 664 (Fla. 4th DCA 1994)

This case dealt with whether or not a lender intentionally charged interest in excess of the maximum allowed by the Florida usury statute, and whether the existence of a "usury savings clause" will automatically cure a loan that is otherwise usurious. (A usury savings clause is a provision in a loan agreement that attempts to negate any other provisions in the agreement that might result in the extraction of an illegal rate of interest).

The facts of the case are as follows:

1) The borrower, a partnership, needed funds to (a) pay off a $1.1 million mortgage on unimproved land, and (b) build an office building on the unimproved land.

2) Borrower obtained a commitment from a bank for most of the needed capital but was $200,000 short.

3) Borrower approached an individual ("Lender") who was an experienced real estate developer and suggested he become an equity partner for $200,000.

4) After becoming fully apprised of the borrower's urgent need for the funds, Lender refused to become an equity partner but instead, offered to lend the borrower the $200,000 at 15% for 18 months.

5) Shortly before the loan closing, Lender presented the borrowers with loan documents which included a demand for a 15% equity interest in the partnership as additional consideration for making the loan. Lender made no attempt to hide its motives, even though he had previously agreed to loan the money at a 15% interest rate. Lender knew the value of the partnership based on the borrowers' disclosures and was aware of the borrowers' urgent need for funds. The borrowers were in desperate financial straits. With closing imminent, they were in no position to bargain or to seek another source of the money. The borrowers accepted the loan on the revised terms.

6) After ultimately defaulting on the loan, Lender brought suit, and borrower asserted a usury defense, claiming that between the stated rate on the loan, plus the value of the 15% equity interest in the partnership that Lender received upfront, the total consideration for the loan totaled 45% per annum.

----------------------------

In determining that the lender knowingly and willfully intended to charge interest in excess of the maximum amount allowed by Florida law, the Florida District Court of Appeal made the following observations (bold text is my emphasis):

1) "We agree that mathematical calculations alone do not equate with usurious intent." [citation omitted]

2) "However, here the lender knew at the outset the total value of the amount he was receiving in consideration for making the loan. [Lender] is a developer with 40 years experience and not an unsophisticated lender. He knew that the borrowers had an urgent need for the money. He dictated the terms of the loan. The fact that the borrowers were "in distress" or "necessitous" when the loan was made is as significant as the fact that the lender dictated the terms of the loan. [citation omitted]. Our supreme court explained the purpose of Florida's usury statute:

  • "The very purpose of statutes prohibiting usury is to bind the power of creditors over necessitous debtors and prevent them from extorting harsh and undue terms in the making of the loans.""
    Dixon, 276 So. 2d at 820, citing Chandler, 146 So. at 551.
3) "The lender's claimed ignorance of the specifics of Florida's usury laws does not preclude a finding of intent. Shorr v. Skafte, 90 So. 2d 604, 607 (Fla. 1956); Rollins; Ross v. Whitman, 181 So. 2d 701 (Fla. 3d DCA), cert. denied, 194 So. 2d 624 (Fla. 1966).

4) [Lender's] testimony that he did not intend to charge an unlawful rate of interest is also not determinative. Rollins. Obviously, such testimony is self-serving."

5) "Despite the lender's assertions to the contrary, the requisite intent was established by proving the lender's
  • knowledge of the amount of interest to be received and
  • intent to receive the amount charged."

North American Mortg. Investors v. Cape San Blas Joint Venture, 378 So. 2d 287, 291 (Fla. 1979); Dixon; Shorr; Rollins; Curtiss Nat'l Bank of Miami Springs v. Solomon, 243 So. 2d 475, 477 (Fla. 3d DCA 1971); River Hills, Inc. v. Edwards, 190 So. 2d 415, 424 (Fla. 2d DCA 1966).

6) "The evidence thus fully supports the trial court's conclusion that the lending scheme resulted in interest in excess of 25% per annum and that such result was intended by the lender."

7) "A more troublesome question is whether the existence of a contractual disclaimer of intent to violate the usury laws commonly known as a "usury savings clause" in the loan documents in this case removes the determination of usurious intent from a factual inquiry and conclusively proves as a matter of law that the lender could not have "willfully" or knowingly charged or accepted an excessive interest rate. [omitted footnote] The trial court held that "the exculpatory language [usury savings clause] inserted into the $ 200,000.00 Promissory Note does not negate Plaintiff's knowledge that it was charging and intended to charge consideration for making the loan in excess of 25% of the value thereof."

8) "While we are unwilling to hold that usury savings clauses are unenforceable as against this state's public policy, neither are we willing to hold that the insertion of a usury savings clause in one of several documents to a loan transaction will shield the lender from the reach of Florida's usury laws as a matter of law."

9) "A usury savings clause is one factor to which the finder of fact should look in determining whether all of the circumstances surrounding the transaction support a finding of intent on the part of the lender to take more than the legal rate of interest for the use of the money loaned."

10) "Where the actual interest charged is close to the legal rate, or where the transaction is not clearly usurious at the outset but only becomes usurious upon the happening of a future contingency, the clause may be determinative on the issue of intent."

11) "Here, the amount charged for the loan exceeded the lawful rate of interest by 27%."

12) "The usurious amount was exacted at the outset, and did not depend on the occurrence of a future contingency, which might or might not have made the loan usurious."

13) "The borrowers were in desperate need of money. The lender had full knowledge of the borrower's financial situation and took full advantage of the situation by overreaching."

14) "The usurious charges did not occur by happenstance, but through the lender's purposeful actions."

15) "We find that the insertion of a usury savings clause in a single document does not save this lender under these circumstances from the usury penalties, nor preclude the trial court's finding of usurious intent."

-------------------------

Jersey Palm-Gross v. Paper, 658 So. 2d 531; (Fla. 1995)

The Florida Supreme Court was asked to review the state District Court of Appeal decision, above. The appeal dealt solely with the question of whether the mere existence of a "usury savings clause" in the loan documents conclusively proves that a money lender could not have "willfully" or knowingly charged or accepted an illegally excessive interest rate on the loan. In affirming the Florida appellate court, the Supreme Court held as follows:

  • "[W]e conclude that a usury savings clause cannot, by itself, absolutely insulate a lender from a finding of usury. Rather, we approve and adopt the Fourth District's holding, that a usury savings clause is one factor to be considered in the overall determination of whether the lender intended to exact a usurious interest rate. Such a standard strikes a balance between the legislative policy of protecting borrowers from overreaching creditors and the need to preserve otherwise good faith, albeit complex, transactions which may inadvertently exact an unlawful interest rate."

-------------------------

The Florida Supreme Court went on to explain its rationale (bold text is my emphasis):

1) "In rejecting the use of a savings clause as an absolute bar to a usury claim, we note, as have other courts, that a contrary holding would permit a lender to "relieve himself of the pains and penalties visited by law upon such an act by merely writing into the contract a disclaimer of any intention to do that which under his contract he has plainly done."" First State Bank v. Dorst, 843 S.W.2d 790, 792 (Tex. Ct. App. 1992)(quoting Nevels v. Harris, 129 Tex. 190, 102 S.W.2d 1046, 1050 (Tex. 1937)).

2) "If approved, we believe this practice would undermine public policy as set by the legislature and defeat the purpose of Florida's usury statute."

3) "Indeed, such a practice might encourage lenders to charge excessive interest, since, even if caught, the only penalty would be the loss of the excess interest."

4) "However, we also believe that savings clauses serve a legitimate function in commercial loan transactions and should be enforced in appropriate circumstances. For instance, we agree with Judge Pariente's illustration, in the majority opinion below, of the proper utilization of a savings clause:

  • "Where the actual interest charged is close to the legal rate, or where the transaction is not clearly usurious at the outset but only becomes usurious upon the happening of a future contingency, the clause may be determinative on the issue of intent.""
    Jersey Palm-Gross, 639 So. 2d at 671.

5) "While not exhaustive, this illustration captures the essence of the legitimate use of a savings clause. This illustration is also consistent with the way savings clauses were discussed or applied in Szenay and First American Bank & Trust."

----------------------------

Foreclosure rescue operators may be vulnerable to claims of usury in their sale leaseback deals with financially strapped homeowners if a court recharacterizes their transaction as an equitable mortgage / disguised loan. How they will attempt to avoid usury claims in the case the transaction is recharcterized remains to be seen.

However, as the Florida District Court of Appeals has held (and as noted above), the requisite intent can be established simply by proving the lender's:

  1. knowledge of the amount to be received, and
  2. intent to receive the amount charged.

Claiming ignorance of the law or providing self-serving testimony won't carry the day. Further, it appears that slipping a "conditional" usury savings clause into a sale leaseback agreement (conditional on the transaction being recharacterized as a loan / equitable mortgage), may not provide the needed safety net either, inasmuch as Florida Supreme Court, in approving the intermediate appellate court's approach regarding such a clause, appears to be saying that the effectiveness of such clauses are limited to legitimate, good faith attempts by a creditor to avoid charging or receiving usurious interest.

In the transaction that was the subject of these cases, Lender, according to the Florida appeals court:

  • "knew at the outset the total value of the amount he was receiving in consideration for making the loan",
  • "[was] a developer with 40 years experience and not an unsophisticated lender"
  • "knew that the borrowers had an urgent need for the money"'
  • "dictated the terms of the loan. The fact that the borrowers were "in distress" or "necessitous" when the loan was made is as significant as the fact that the lender dictated the terms of the loan."

In the view of both Florida courts, the lender, here, could hardly qualify as a creditor legitimately attempting, in "good faith", to avoid charging or receiving of usurious interest.

A foreclosure rescue operator offering a sale leaseback, coupled with a buyback option, to a financially strapped homeowner desperate to "save" his or her home, will often earn a return on investment in excess of the maximum amount allowed by the usury statute. In that event (assuming a court recharacterizes the transaction as a disguised loan / equitable mortgage), in my view, said foreclosure rescue operator should find itself in the same or similar shoes as the Lender in the above cases.

-----------------------

For Florida cases addressing the issue of usury in the context of an equitable mortgage claim, see:

florida equitable mortgage alpha

Posted by Home Equity Theft Reporter at 9:57 AM 0 comments

Sunday, April 29, 2007

Binding Effect Of State Court Decisions On Federal Courts On State Law Issues

On at least a couple of posts, I have made references to comments made in the Florida Supreme Court decision in Pardo v. State, 596 So. 2d 665 (Fla. 1992) that sets forth the law in the State of Florida that unless and until the Florida Supreme Court decides an issue, and absent a conflicting decision with another Florida intermediate appellate court, the decision of any Florida District Court of Appeal is binding on all Florida trial courts throughout the state (and not merely on the trial courts physically located within the jurisdiction covered by the Florida appellate court issuing the decision).

The actual language from the Florida high court in Pardo follows:

"Initially, we note that the district court erred in commenting that decisions of other district courts of appeal were not binding on the trial court. This Court has stated that "the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by this Court." Stanfill v. State, 384 So. 2d 141, 143 (Fla. 1980). Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts. Weiman v. McHaffie, 470 So. 2d 682, 684 (Fla. 1985). The purpose of this rule was explained by the Fourth District in State v. Hayes:

  • "The District Courts of Appeal are required to follow Supreme Court decisions. As an adjunct to this rule it is logical and necessary in order to preserve stability and predictability in the law that, likewise, trial courts be required to follow the holdings of higher courts--District Courts of Appeal. The proper hierarchy of decisional holdings would demand that in the event the only case on point on a district level is from a district other than the one in which the trial court is located, the trial court be required to follow that decision. Alternatively, if the district court of the district in which the trial court is located has decided the issue, the trial court is bound to follow it. Contrarily, as between District Courts of Appeal, a sister district's opinion is merely persuasive."
    333 So. 2d 51, 53 (Fla. 4th DCA 1976) (footnote and citations omitted).

--------------------------------

Issues of state law, however, are not only heard in the state courts, but in the Federal courts as well (ie. diversity jurisdiction cases, federal question litigation that include pendent state law claims, determination of property rights defined by state law arising in federal bankruptcy and tax law cases). It is important to point out that, under the Federal "Erie Doctrine," when deciding issues of Florida state law, the Federal Courts are bound by the decisions of the Florida state appellate courts when applying substantive law (as opposed to procedural law) when (1) there is no state high court precedent, (2) there is no conflict between or among a state's intermediate appellate courts, and (3) when there is no persuasive indication that the state high court would rule differently from an existing decision of a state intermediate appellate court.

As it specifically relates to Florida state law, the U.S. Court of Appeals for the 11th Circuit (which has jurisdiction over the lower Federal Courts - District and Bankruptcy - located in Florida) has specifically acknowledged this point on numerous occasions. See, for example:

McMahan v. Toto, 311 F.3d 1077; (11th Cir. 2002)

The court provided the following narrative in emphatically reminding us of this basic principle (in a case involving the application of Florida's offer of judgment statute; bold text is my emphasis):

  • "Recent events in this case illustrate that "when we write to a state law issue, we write in faint and disappearing ink." Sultenfuss v. Snow, 35 F.3d 1494, 1504 (11th Cir. 1994) (en banc) (Carnes, J., dissenting). The disappearing ink here is that which we used in our previous opinion in this case to express our holding about whether the Florida Supreme Court would apply its offer of judgment statute, Fla. Stat. § 768.79, in a case tried in Florida but for which the substantive law of another state governed. There were no Florida decisions on point, and we made an Erie guess that the Florida Supreme Court would not apply the statute in those circumstances. As a result, we reversed the part of the district court's judgment awarding attorney's fees under the statute. McMahan v. Toto, 256 F.3d 1120, 1130-35 (11th Cir. 2001)."

  • "Our earlier opinion was barely in the hardback books when the Fourth District Court of Appeal in Florida issued a decision disagreeing with our estimate of Florida law. See BDO Seidman, LLP v. British Car Auctions, Inc., 802 So. 2d 366 (Fla. 4th DCA 2001), review denied, 828 So. 2d 384, 2002 Fla. LEXIS 2048 (Fla. Sept. 24, 2002). If the BDO Seidman decision had been around when we issued our first decision in this case, we would have followed it. We would have been compelled to do so because the rule is that, absent a decision from the state supreme court on an issue of state law, we are bound to follow decisions of the state's intermediate appellate courts unless there is some persuasive indication that the highest court of the state would decide the issue differently. See Galindo v. ARI Mut. Ins. Co., 203 F.3d 771, 775 (11th Cir. 2000); Trumpet Vine Invs., N.V. v. Union Capital Partners I, Inc., 92 F.3d 1110, 1120 (11th Cir. 1996); Williams v. Singletary, 78 F.3d 1510, 1515 (11th Cir. 1996)."

  • "That rule is, if anything, particularly appropriate in Florida, where the state's highest court has held that "the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by [the Florida Supreme Court]." Pardo v. State, 596 So. 2d 665, 666 (Fla. 1992) (quoting Stanfill v. State, 384 So. 2d 141, 143 (Fla. 1980))."

  • "There is no persuasive indication that the Florida Supreme Court would not follow the Fourth District Court of Appeal's BDO Seidman decision on whether its offer of judgment statute, Fla. Stat. § 768.79, applies when the case is governed by the substantive law of another state."

  • "The fact that we decided the issue differently is not a persuasive indication that the Florida Supreme Court would agree with us and not with one of its own intermediate appellate courts, which presumably knows more about Florida law than we do."

  • "Nor is the fact that one of the three judges dissented on this point in BDO Seidman, 802 So. 2d at 374 (Polen, C.J., dissenting), a persuasive indication that the Florida Supreme Court would decide the issue differently."

  • "Two is a majority of three, and a majority of participating judges controls a court's decision. See Fla. R. Jud. Admin. 2.040(a)(1) (2002) ("Three judges shall constitute a panel for and shall consider each case, and the concurrence of a majority of the panel shall be necessary to a decision.")."

  • "The holding in BDO Seidman is and will remain Florida law until such time, if any, as the Florida Supreme Court has the inclination and opportunity to rule to the contrary."

-------------------------------

The reason I highlight this point is because it is highly likely that, as more and more litigation is brought against foreclosure rescue operators, much of the litigation will be conducted in the Federal courts. It may be that causes of actions by a homeowner against a foreclosure rescue operator for violations of the Federal Truth In Lending Act ("TILA") and the Federal Home Ownership Equity and Protection Act ("HOEPA") will be brought by a Federal practitioner in a Federal Court (although such actions can also be brought in state court).

Alternatively, it may be that financially strapped homeowners who are either facing foreclosure, or who are in the process of being illegally stripped of their homes by foreclosure rescue operators, may file for bankruptcy to halt the process; in which case, any foreclosure rescue litigation related to the case will likely take place in the Federal Bankruptcy Court.

It is important, both for the foreclosure rescue victim's legal counsel, as well as the Federal judge hearing the case, to understand that the Federal Courts are bound by the Erie Doctrine to apply the state law, as interpreted by the state judiciary, when deciding state law issues. Such issues, in the context of a foreclosure rescue litigation include, but are not limited to, the following:

  • equitable mortgage claims,
  • inapplicability of the Florida Residential Landlord Tenant Act when claims or defenses of equitable mortgage are asserted,
  • sham loans that are disguised as sale leasebacks or otherwise,
  • usury statutes (both civil and criminal) that apply to the disguised loans,
  • violations of state unfair and deceptive trade practices statutes,
  • common law fraud,
  • conspiracy to commit fraud,
  • constructive trust,
  • voiding unconscionable contracts,
  • voiding contracts of adhesion,
  • etc.

Further, one pitfall to be avoided is for a Federal court to attempt to determine what the applicable state law is by looking at either its own prior decisions or those of other Federal courts sitting in the state in question. I, personally, have noted that, in the area of applying the Florida homestead law (relating to the exemption of the family homestead from forced sale), it is not uncommon to see some Federal Bankruptcy judges in Florida to seemingly give more weight to prior Federal Bankruptcy Court decisions applying the Florida homestead law than to the decisions of a Florida intermediate state appellate court (which are binding upon them, absent a state high court decision to the contrary), or even old Florida Supreme Court decisions. See, for example, In re Radtke, Case No. 05-30640 (Bankr. S.D. Fla. 2006), where, in my view, a misapplication of the Florida homestead law resulted in a significant loss of the debtors' homestead protection.

Based on the Erie Doctrine, Federal Court decisions on issues of state law are not binding precedent and, when relevant state appellate court decisions exist that are on point, the Federal court decisions have no controlling weight as precedent. As one Federal appellate court observed, in reviewing a lower court decision involving the ascertaining of the state law of California (bold text is my emphasis):

  • "Like the district judge, the parties in this court seek to find California's law in the decisions of federal bankruptcy judges sitting in California, and they debate the significance of what these judges have said about the subject. Yet federal judges are not the source of state law or even its oracles. To find state law we must examine California's statute books and the decisions of its judiciary." (United Airlines v. HSBC Bank, 416 F.3d 609, 7th Cir. 2005).

-----------------------------

For an illustration of what, in my view, is the correct approach for a Federal District or Bankrutcy judge to take when they strongly disagree with the precedent of a Florida intermediate state appeals court decision when deciding an issue of Florida law, see the 11th Circuit's discussion, in Tobin v. Mich. Mut. Ins. Co., 398 F.3d 1267; (11th Cir. 2005), of the District Court judge's decision in that case. The 11th Circuit made the following comments:

1) "Although disagreeing with [the Florida intermediate appeals court], the district court then acknowledged that "[a] federal court applying state law is bound to adhere to decisions of the state's intermediate appellate courts absent some persuasive indication that the state's highest court would decide the issue otherwise.""

2) "The district court further noted that "the Supreme Court of Florida has held that decisions of district courts of appeal represent the law of Florida unless they are overruled by the Supreme Court of Florida." See Pardo v. State, 596 So. 2d 665, 666 (Fla. 1992). Because the Florida Supreme Court had not ruled on this issue, nor had any other Florida intermediate appellate court except Perez, the district court then sought to "determine whether there is any 'persuasive authority' that the Florida Supreme Court would decide this issue differently than the court in Perez."" [...]

3) "However, the district court ultimately concluded that Florida case law did not provide a "persuasive indication" that the Florida Supreme Court would decide the issue differently. (fn8). In this regard, the district court concluded:

  • "In sum, although I disagree with the decision in Perez, and believe that the Third District failed to apply certain well-established principles of contract interpretation, I find no "persuasive authority" that the Supreme Court of Florida would decide this issue differently. I am, therefore, bound by the Third District's decision. Unfortunately, I lack the power to certify this issue to the Supreme Court of Florida, unlike the Eleventh Circuit. Perhaps, if there is an appeal, the parties will have the opportunity to truly discern the stance of Florida's highest court on whether Ford's insurance policy applies to retail lessees.""

------------------------------

It appears clear that the Federal District Court judge, in Tobin v. Mich. Mut. Ins. Co., vigorously disagreed with the state court precedent from the Florida intermediate appellate court that was available to him and that he was "forced" to apply. However, he readily acknowledged that he was absolutely duty bound to apply the precedent from the Florida state appellate court in making his decision, notwithstanding how incorrect he thought that decision might have been (although he was clear in extending to the losing party an invitation to appeal his decision, in the hope that the 11th Circuit would certify the legal issue to the Florida Supreme Court; the 11th Circuit ultimately did just that).

-------------------------------

Go here for a list of links to several other 11th Circuit Court of Appeals decisions that reference the proposition that, on issues of state law, the Federal Courts are bound by the decisions of the state intermediate appellate courts when there is no precedent from the state high court and when there is no persuasive indication that the state high court would rule differently from an existing decision of a state intermediate appellate court.

Postscript

For those of you outside the jurisdiction of the 11th Circuit Court of Appeals (Florida, Georgia, Alabama), the following sampling of cases from other U.S. Circuit Courts of Appeal may be of some value to you in connection with the foregoing discussion (most citations and internal quotations omitted).

----------------------

1) Hamm v. Latessa, 72 F.3d 947 (1st Cir. 1995), ("Whether state statutes shall be construed one way or another is a state question, the final decision of which rests with the courts of the State. The due process of law clause in the Fourteenth Amendment does not take up the statutes of the several States and make them the test of what it requires; nor does it enable this Court to revise the decisions of the state courts on questions of state law.")

2) Universal Acupuncture Pain Servs., P.C. v. Quadrino & Schwartz, P.C., 370 F.3d 259; (2nd Cir. 2004) ("We are bound, as was the district court, to apply the law as interpreted by New York's intermediate appellate courts . . . unless we find persuasive evidence that the New York Court of Appeals, which has not ruled on this issue, would reach a different conclusion." (citations omitted))

3) 181 South Inc. v. Fischer, 454 F.3d 228; (3rd Cir. 2006) ("When interpreting a State regulation, we generally defer to the interpretations of state trial or intermediate appellate courts. See Nationwide Mut. Ins. Co. v. Buffetta, 230 F.3d 634, 637 (3d Cir. 2000) ("The opinions of intermediate appellate state courts are '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.'"))

4) Jones v. Liberty Mutual Ins. Co. (In re Wallace & Gale Co.), 385 F.3d 820; (4th Cir. 2004) ("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 persuasive data that the highest court of the state would decide otherwise.")

4a) Sanderson v. Rice, 777 F.2d 902, 905 (4th Cir. 1985) (noting that "[a]n opinion of an intermediate appellate court is persuasive in situations where the highest state court has not spoken").

5) Tex. Dep't of Hous. & Cmty. Affairs v. Verex Assurance, Inc., 68 F.3d 922 (5th Cir. 1995) ("a decision by an intermediate appellate state court is a datum 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.")

6) Hampton v. United States, 191 F.3d 695, 700-01 (6th Cir. 1999) ("Generally, in order to analyze a conflict between a federal interpretation of state law and a subsequent determination by an intermediate state court: 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 persuasive data that the highest court of the state would decide otherwise[.]")

7) Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630; (7th Cir. 2002) ("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.")

8) Holden Farms, Inc. v. Hog Slat, Inc., 347 F.3d 1055; (8th Cir. 2003) ("Although "various intermediate appellate [state] courts are not [binding on us], . . . they are persuasive authority, and we must follow them when they are the best evidence of what [state] law is." Garnac Grain Co. v. Blackley, 932 F.2d 1563, 1570 (8th Cir. 1991). Further, the Supreme Court has held that an intermediate state appellate court's decision "is a datum 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."")

9) Hangarter v. Provident Life & Accident Ins. Co., 373 F.3d 998; (9th Cir. 2004) ("It is well established that a state court's interpretation of its statutes is binding on the federal courts unless a state law is inconsistent with the federal Constitution. ... The California Court of Appeal's announcement of a rule of law "'is a datum 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 . . . .'" ")

10) Combs v. PriceWaterhouse Coopers, LLP, 382 F.3d 1196; (10th Cir. 2004) ("While not binding on this court, decisions by a state's intermediate appellate courts provide evidence of how the state's highest court would rule on the issue, and we can consider them as such." [...] We will not disregard such intermediate rulings "unless [we are] convinced by other persuasive data that the highest court of the state would decide otherwise.")

11) Waremart Foods v. NLRB, 359 U.S. App. D.C. 312; 354 F.3d 870; (D.C. Cir. 2004) ("Given the absence of any controlling precedent from the California Supreme Court, we will follow these intermediate appellate decisions. Here, as in a diversity suit, if 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 persuasive data that the highest court of the state would decide otherwise.")

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Posted by Home Equity Theft Reporter at 1:23 PM 0 comments

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