Dallas Judge Investigates Mortgage Rescue Scam; Urges Debtor's Bar to Warn Clients

Dallas Judge Stacey Jernigan recently issued an opinion concerning a mortgage protection scheme which the court found to prey upon both desperate debtors and mortgage lenders seeking to protect their legal rights. In re Michael White, No. 06-32324 (Bankr. N.D. Tex. 12/7/07). The Court ultimately concluded that the debtors were naive victims of a shady operation designed to fraudulently delay enforcement of mortgage liens. In addition to ordering the perpetrators to appear and show cause, the Court made a referral for a possible bankruptcy crime violation and urged the consumer debtor's bar to warn their clients about similar schemes.

Desperate Debtors

The debtors in this case filed chapter 13 to save their homestead. Unfortunately, they were not able to make the post-petition payments required. This led to an order conditioning the stay, which the debtors defaulted upon as well. With the stay lifted, the stage was set for the debtors to receive a barrage of solicitations (eight to twelve per day) from "foreclosure specialists" offering to legally save the house. The debtors responded to one of these offers from an operation calling itself "North American Foreclosure." According to North American Foreclosure, the debtors could delay foreclosure for years if they were to deed a 1% interest in their home to a company which would file bankruptcy and invoke a new automatic stay. In return for this service, the debtors would pay $650 per month to buy back the interest they had deeded over for as long as they needed the service. North American Foreclosure assured the debtors that everything was legitimate because: (a) the document transferring the 1% interest would be notarized; and (b) the transaction would be disclosed to the new bankruptcy court.

Although North American Foreclosure was apparently located in California, they arranged for a local agent named David Curtis, whose business card identified him as working for Jireh Capital Services, LLC to visit the debtor's home. This local agent had the debtors sign several contracts which required that payment be made in cash only. The Debtors were then given a backdated deed to sign. The deed was executed in the name of "C**** C****" who the debtors were assured was an agent of the company. On the eve of foreclosure, the mortage company's servicer received an anonymous fax containing a copy of the deed to C**** C**** and a copy of C**** C****'s bankruptcy petition which had been filed in the Central District of California the previous month.

The Lender Shows Good Sense

The mortgage servicer acted with remarkable restraint. As noted by the Court: "In any event, despite the questionable validity and effect of the Warranty Deed document, and despite the mysterious manner of its delivery (from anonymous senders), HomEq did what one might hope any prudent creditor would do: it took no further action with regard to its collection efforts as to the Homestead (i.e., it did not record the substitute trustee's deed reflecting the foreclosure sale that had already occurred earlier in the day) out of concern over the implications of the C**** C**** bankruptcy case and the automatic stay as to her alleged 1% interest." Memorandum Opinion and Order, p. 5.

HomEq's restraint was commendable in that this was not the first time they had received a notice involving conveyance of a fractional interest to a bankruptcy filer. According to HomEq, this was something which happened several times a month. As a result, they filed a Motion Requesting Show Cause Order. The Court ordered that both sets of debtors appear and show cause. The debtors in both the Northern District of Texas and the Central District of California showed remarkably good judgment by cooperating with Judge Jernigan's Show Cause Order. The Texas debtors testified and produced copies of their documents with North American Foreclosure. It turned out that the California debtor had filed a pro se petition and had nothing to do with the scheme. Instead, North American Foreclosure obtained the name of a random pro se debtor who had recently filed bankruptcy in the Central District of California and arranged for the deed to be executed in the name of an innocent third party.

Judge Jernigan accepted the Debtors' testimony. She concluded that, "This court is satisfied that the Whites have been naively duped in this matter and have not themselves knowingly or fraudulently participated in acts that might be described as a bankruptcy crime. (citation omitted). At worst, they appear to be 'bit characters' in a scheme to defraud borrowers and lenders alike who are in the midst of foreclosure proceedings." Memorandum Opinion and Order, p. 13.

A Cottage Industry of Bottom Feeders

Judge Jernigan had much greater concern for the perpetrators of the scheme. In a section of her opinion entitled "A New Cottage Industry of Bottom Feeders: For Every Action (i.e., Foreclosure Crisis) there is an Opposite Reaction (i.e., Folks Trying to Make a Buck)," she detailed other instances in which similar shenanigans had surfaced.

Judge Jernigan ordered North American Foreclosure, LLP (the instigator of the scheme), David Curtis (the local agent who signed the debtors up and took their money) and Jireh Capital Services, LLC (Curtis's company) to appear and show cause why they should not be found to have violated the automatic stay and be held liable for damages. The Court ominously noted that David Curtis might come to regret the fact that he had accepted a check from the debtors (despite the contract's cash only requirement), which created a paper trail.

The Court annulled the automatic stay to allow HomEq to record its substitute trustee's deed. This was more in the nature of a comfort order, since it appears unlikely that there was ever a new automatic stay arising from the C**** C**** bankruptcy.

The Court gave notice to the U.S. Attorney that a possible bankruptcy crime had taken place.

Plea to the Debtor's Bar

Finally, the Court issued a "Plea to the Consumer Debtor Bankruptcy Bar," stating:

"The court urges attorneys representing consumer debtors to warn their clients of the apparent schemes being solicited to debtors such as the Whites. while this court is of teh view in this matter that the Whites were naive 'bit characters' who did not fully understand the consequences of their actions and did not set out to defraud HomEq, this may not always be the case. The Whites have lost $1,300 and have not saved their home. This court suspects other debtors have lost even more. The court hopes that it will become a standard part of consumer debtor representation in this district to warn debtors of the hazards of dealing with some of the non-attorney Bankruptcy Services that are offering the illusion of relief from foreclosure for a steep fee."

Memorandum Opinion and Order, pp. 21-22. So, there you have it. Warn your clients. If something seems to be too easy, it is probably a scam. Also, please tell your clients that if you, as a trained bankruptcy professional cannot help them, that they should not expect that a non-lawyer who sends them a slick brochure and expects to be paid in cash can do any better.