Fractional-Interest Bankruptcy Foreclosure Scams Reappears in Wake of Economic Decline

Fractional-interest bankruptcy foreclosure scams are reemerging as another symptom of the current economic decline.  This scam first appeared in the 1990s, but was eliminated through investigations by the FBI and a task force formed in 1996 by Chief Judge Geraldine Mund of the U.S. Bankruptcy Court for the Central District of California.  The task force consisted of two U.S. Trustees, two U.S. Attorneys, and members of the IRS, FBI, FTC, DRE, several financial institutions, and the Los Angeles County District Attorney’s Office.  The scam has reemerged and is being used by companies or individuals who advertise themselves as “mortgage consultants” or “foreclosure specialists” offering foreclosure relief to desperate homeowners.  The premise of the scam is that a small percent of interest in the property, as low as 1%, is transferred to a bankrupt entity or individual and that transferred interest triggers the automatic stay of a bankruptcy, halting all debt collection activities against the bankrupt debtor, including putting a halt on the pending foreclosure.  It is often the case that the homeowner is unaware that their property has been listed in a bankruptcy or that they have transferred interest in their property to a bankrupt entity or individual.  For a short period of time, the homeowner sees that their foreclosure has been halted and the debt collection calls have ceased, and they believe the foreclosure relief services they paid for are at work, not knowing the details of that relief.  In the meantime, the lenders are expending additional time and money attempting to lift the automatic stay and resume the foreclosure.  There have been occurrences, mostly in Southern California, where these foreclosure relief services have transferred interest in a property dozens of times to several different bankrupt debtors in an effort to evade foreclosure for as long as possible, all the while collecting a monthly fee from the homeowner for foreclosure relief services.  Everyone who is a part of this scam, except those profiting from it, are victimized by it.  Lenders have to spend additional money and time trying to lift the automatic stay in order to foreclose, homeowners are paying for a useless service that will not allow them to stay in their home despite promises to the contrary, and the bankruptcy court is being used as a tool to perpetrate a fraudulent avoidance of a debt.  Most of these scams share the following characteristics:  1) the property was not included in the debtor’s bankruptcy schedules; 2) the interest in the property was transferred after the bankruptcy was filed; 3) the interest in the property is small, usually 5-10%; and 4) similar interests in the property were transferred simultaneously.

San Francisco County Assessor Finds Errors in 84% of Foreclosures

San Francisco County Assessor-Recorder Phil Ting used a third party company to conduct an audit of 382 loans in foreclosure in San Francisco County that occurred between January 2009 and November 2011.  The study claims that 84% contained one or more clear violations of law, 99% of them showed some type of irregularity, and 33% had problems in 4 out of 6 areas of concern, including problems with assignment of loans, notices of default, and substitution of trustees.  59% of the loans had documents that were backdated, with a difference in dates between the date the document was prepared and the date it was notarized and recorded.  In some instances, documents required before a foreclosure can commence were missing, including a state-required affidavit showing the lender has called or met with the borrower to explore options to foreclosure 30 days before the notice of default was filed.   Other examples of irregularities include transfers of loans made by entities that had no right to assign them, financial institutions taking ownership of properties in auctions even though they had not proved ownership, the same deed of trust being assigned to two or more different entities with no clear indication as to which of them had the right to foreclose, and gaps in the chain of title with no indication as to how the entity claiming ownership was transferred that ownership from the original owner.  Many banks contend that despite these technical irregularities, borrowers were behind on their mortgages and the foreclosures should have proceeded anyway.  The audit report counters this contention by saying, “there are indeed legitimate victims in the mortgage crisis. Whether these homeowners are systematically being deprived of legal safeguards and due process rights is an important question.”

Court Disallows Indemnification Clause on Unsigned Invoice

The Fourth District Court of Appeal has recently ruled that a pre-printed indemnification clause on the backside of an unsigned invoice does not become part of an agreement between parties.  In this case, the appellant leased several helium-filled tanks from the respondent.  While respondent was delivering the tanks to appellant, one of them fell onto a young boy, resulting in personal injuries.  The boy’s family sued appellant and respondent, who both paid to settle the case.  Respondent filed a cross-complaint against appellant for indemnity, claiming the indemnification clause on the back of the invoice bound appellant to indemnify respondent for the sum paid to the injured boy’s family and the attorneys’ fees associated with defending the case.  The trial court agreed with respondent and granted judgment in its favor.  The case was appealed and the Fourth District Court of Appeal overturned the trial court’s ruling, finding that an unsigned invoice itself is not a contract and repeated delivery of an identical invoice in previous transactions does not make the invoice part of the parties’ current agreement.  The appellate court also found that an indemnification provision is a material alteration to an oral agreement between parties and payment of an invoice with terms different from those of an oral contract does not constitute acceptance of those additional terms.  For a copy of the opinion in C9 Ventures v. SVC-West, L.P., please click here.

California Rejects Offer from Banks in Nationwide Foreclosure Settlement Negotiations

California Attorney General Kamala Harris has rejected the most recent offer from ongoing settlement negotiations between the nation’s 50 states and several large US Banks.  A spokesperson for the AG’s office said “the deal does not suffice for California” and lawyers in the AG’s office found that the proposal offered by the banks prevents the state from pursuing legal actions against lenders.  In a previous statement, Kamala Harris said that her ability to go after potential wrongdoing by mortgage lenders “remains a key lens through which she will evaluate any proposals.”  This issue over preventing future legal investigations and claims has been a source of contention for several other states and is one I previously discussed in my blog.  Although the terms of the settlement offer aren’t public, an article in the Sacramento Bee claims that $17 billion would be earmarked for reducing principal balances owed on mortgages of struggling homeowners, $5 billion would be placed in a reserve account for various state and federal programs and a portion of that money would go out to homeowners who were affected by deceptive practices in the form of $1,800.00 checks, and the remaining $3 billion would be used to help homeowners refinance at 5.25%.  A recent Businessweek article claims that the major sticking point for California in the proposed settlement is “the origination of mortgages . . . along with other releases of liability for violations of state “false claim” laws, and securitization, or the packaging of mortgages into bonds sold to investors” and that the proposal “ignores victims of the most egregious origination fraud who were the first to lose their homes to foreclosure.”  The Newsweek article goes on to say that $6 billion of the $25 billion offer is earmarked for California homeowners and that Kamala Harris may be delaying settlement to obtain a bigger portion of the total settlement for California homeowners, the state with the highest number of foreclosures as a result of the mortgage meltdown.  Consumer groups are split on their support for the settlement offer.  The Center for Responsible Lending announced its tentative support for the settlement proposal, acknowledging that it is “not perfect” but one that would “provide an important template for ways banks can use principal reduction to reduce unnecessary foreclosures and put the country back on a path to economic recovery.”  However, labor groups and mortgage counselors such as the California Labor Federation and the Community Housing Council of Fresno say the proposed settlement doesn’t go far enough to provide relief for homeowners and “if you take the top 5 states, California has more foreclosures than the other 4 put together,” John Shore of the Community Housing Council of Fresno said.  ”To settle for the same amount Rhode Island would settle for I don’t think is fair because we have had far more losses in values as plain foreclosures.”  However, homeowners are in dire straits and this settlement could offer them some relief.  Mr. Harris herself has conceded that “every single day of conversation and delay — every single day — we are talking about specific homeowners that will lose their home and in that way, we have to take seriously not only what must be punishment and consequences and accountability and restitution, but also take into account what must happen on a time frame that works to get the greatest relief for the greatest number of people.”

US Attorney Files Suit in Sacramento to Seize Real Property Used as Medical Marijuana Dispensary

The US Attorney filed an in rem forfeiture action against real property located in Midtown Sacramento yesterday, the first federal seizure action of its kind in Sacramento against property used as a medical marijuana dispensary, since the enactment of California’s Compassionate Care Act.  The dispensary is owned and operated by Sacramento Holistic Healing Center, which operates the dispensary under a conditional use permit issued by the City of Sacramento.    The property, however, is owned by Legacy Ventures, LLC, which now risks losing its property in the seizure action.  In the Complaint, the US Attorney alleges that the commercial building where the dispensary operated “was used to sell and distribute marijuana in violation of the Controlled Substances Act, 21 U.S.C. §§ 801 et seq., since at least July 2009.”  The US Attorney also alleges that the dispensary is within 1,000 miles of two schools, a violation of 21 U.S.C. § 860, which “establishes enhanced criminal penalties for ‘distributing, possessing with intent to distribute, or manufacturing a controlled substance [marijuana] within one thousand feet of, the real property comprising a public or private elementary, vocational, or secondary school.’”

According to its complaint, the US Attorney sent the property owner a letter on October 6, 2011, notifying it that its tenant was selling marijuana at the property in violation of federal law and that the continued operation of the dispensary at this location could result in forfeiture of the property.  The US Attorney also issued a press release regarding the forfeiture action which said the “civil forfeiture complaint was filed today after the property owners declined to take action to stop the commercial sale of marijuana.”

The US Attorney had no comment as to whether or not its office intends to actually seize the property or is leveraging its ability to seize the property in order to halt the operation of the dispensary.  The complaint states that “the United States does not request authority from the Court to seize the defendant property at this time,” although in its prayer for relief it asks “the Court to enter a judgment of forfeiture of said defendant property to the United State.”  The US Attorney did not submit a proposed order of forfeiture with its complaint.

In a press release issued by the US Attorney in October 2011, the US Attorneys in the four federal districts in California announced coordinated enforcement actions targeting the commercial marijuana industry in California.  Benjamin Wagner, the US Attorney for the Eastern District of California, based in Sacramento, stated “Large commercial operations cloak their moneymaking activities in the guise of helping sick people when in fact they are helping themselves. Our interest is in enforcing federal criminal law, not prosecuting seriously sick people and those who are caring for them. We are making these announcements together today so that the message is absolutely clear that commercial marijuana operations are illegal under federal law, and that we will enforce federal law.”  The US Attorney also announced that it had sent “dozens of letters . . . over the past few days to the owners and lienholders of properties where commercial marijuana stores and grows are located. In the Southern and Eastern Districts, the owners of buildings where marijuana stores operate have received letters warning that they risk losing their property and money derived from renting the space used for marijuana sales.”  In a phone call with my office, the US Attorney said that most of these letters had a positive response, where the owners of the properties terminated their leases with marijuana retail outlets, grow operations in leased warehouses, or grow farms.  The property owner in this case did not respond to that letter and is now facing forfeiture of its property.

Please click on the following for copies: Complaint; 1/13/12 Sac Bee News Article; USA Press Release.

Tenant Sues Landlord for Closing Marijuana Dispensary According to Lawful Use Clause in Lease

A case has been filed in Sacramento Superior Court by a tenant against its landlord involving a site that was permitted under the City of Sacramento’s ordinance as a medical marijuana dispensary in late 2011.  The tenant is seeking damages for erecting substantial improvements and other trade fixtures, claiming the landlord was well aware of the use.  On the other hand, the landlord appears to have taken notice of a letter and subsequent news articles indicating that the U.S. Attorney intended to seize the property under Federal Law since the property is being used to distribute marijuana which is still considered an illegal controlled substance.  Whether the landlord is able to avoid paying damages for knowingly allowing the tenant to occupy the space and expend substantial sums of money to construct a medical dispensary, all the while knowing that Federal Law prohibited the sale of marijuana, will remain to be seen.  For a copy of the complaint click here.  For a copy of the staff report concerning the tenant’s permit issued by the City of Sacramento, click here.

California Law Creates New Form of Corporate Entity known as a Benefit Corporation

California has created a new type of corporate entity known as a benefit corporation, which is governed by Corporation Code § 14600, et seq.  Specifically, Benefit corporations must either 1) provide low-income or underserved individuals or communities with beneficial products or services, 2) promote economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, 3) preserve the environment, 4) improve human health, 5) promote the arts, sciences, or advancement of knowledge, 6) increase the flow of capital to entities with a public benefit purpose, or 7) accomplish any other purpose of particular benefit to society or the environment.  Prior to the enactment of the benefit corporation laws, California corporate law required that companies and directors place shareholder interests before any other interest, including the pursuit of philanthropic goals, and shareholders could sue the company and its directors for making unprofitable decisions that diluted the value of shareholder stock.  Forming a benefit corporation allows companies to pursue their philanthropic goals without risk of litigation from shareholders while still maintaining their ability to operate as a for-profit corporation, so long as the corporation adheres to the defined activity identified under the new law.  A recent article in the Los Angeles Times concerning the subject of the new benefit corporation law can be found here.