Daily Development for Monday, February 7, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; DISCHARGE; FRAUD: Latest internet scam exposed in court, with homeowners victimized and perpetrators penalized.

The Frances Kenney Family Trust v. World Savings Bank, 2005 WL 106792 (N.D.Cal.1/19/05)

This (to the editor) astonishing report details an amateurish but elaborate internet scam whereby evildoer scammers preyed on homeowners already struggling with mortgage default, promising them that they would establish that their lenders’ loans were invalid because they had been funded with wire transfers (which the scammers characterized as “vapor money”).   The scammers contacted the desperate homeowners over the internet, and extracted from them up front fees of up to $8000 in order to launch a major paper attack on their lenders.  They then created family trusts for the homes and obtained an assignment of the borrower’s rights in these properties for purposes of attacking the lender.

According to the court’s report, the attack consisted of a series of bizarre and incomprehensible devices, including payment of the defaulted note by a bond secured by an alleged letter of credit drawn on a  Swiss trust company with $800 million in assets.  Acceptance of such a payment, however, was designed to commit the lender to admissions or responsibilities that made the payment worthless to the lender.

The second step apparently involved burying the lender with a lengthy set of allegations which, according to the terms of the scammers’ communications, the lenders admitted to by failing to respond.  Then the scammers would concoct a power of attorney from the lender (also allegedly authorized by silence), which the scammers used to execute releases of the mortgages in question.  Borrowers were then urged to seek new loans against the property for the maximum possible amount.  Apparently some lenders actually sucked in on such loans, relying upon the fraudulent title as cleared by the forged power of attorney.  The proceeds of these new loans went largely to the scammers, but the homeowners got $50,000 and a promise from the scammers that their homes were now “free and clear,” despite the fact that they now were encumbered by the new mortgage loan and, of course still encumbered by the old mortgage loan.  Apparently the scammers notion that the properties were free and clear!

  was b
ased on the notion that the new loans, as well, were carried out by wire transfer.  (Of course, if the borrowers indeed were “free and clear” of loans paid by wire transfer, they wouldn’t have needed to give the scammers all that money in the first place.  Some desperate people will believe anything. )

Ultimately, the scammers in fact did back up their claims by filing  lawsuits against some of the lenders.  It is not clear whether these were motions filed in connection with bankruptcy petitions filed by the trusts or straight lawsuits, but they all alleged that the lenders’ claims were invalid because funded with “vapor funding.”   It also is not clear whether the lenders were all the original lenders or whether some were later lenders who relied on the forged powers of attorney.

This case involves attorneys’ fee claims in a number of these lawsuits.  Faced with such claims, the scammers in fact had dismissed their lawsuits and their attorney had resigned.  The court concluded here, though, that even with dismissed lawsuits, it still had jurisdiction to award attorneys’ fees to the various lenders.  It commented: “ The Court here has seen the scam at work. Greater bad faith would be hard to imagine. Plaintiffs and their counsel have employed a smokescreen to burden various lending institutions and impose upon them litigation costs in hopes of extracting settlements.”

The court awarded fees to the victimized lenders in a total amount of about $50,000.  From all appearances, the scammers would have obtained quite a bit more money than that from their prey.  As the court suggests, this is really a matter for criminal prosecution.

Comment 1: Interestingly, one lender did make a bar complaint against the scammers’ attorney, but then dismissed when it was paid $10,000.  The court ordered that copies of the order be sent to the California State Bar and the U.S. Attorney.

Comment 2: The editor regards these scammers as evildoers because of the injury they cause to already weakened homeowners.  He calls them scammers because that’s what the court calls them.  Are they criminals?  Probably - but they probably will defend on the grounds that they themselves are true believers in  this elaborate world of bogus theories that they have concocted, even though the court cites a number of cases that already have dismissed their fanciful claims.

There seems to be an underground network of these people out there exchange bizarre financial theories on the internet.  So long as they only hurt themselves, one would assume that the financial penalties they pay may be adequate, even though the businesses with whom they deal probably lose more than they can ever recover.  But businesses can always pass the cost of these sorts of things on to poor schlubs like us who apply for loans.  What the editor doesn’t like particularly here is the victimization of these desperate homeowners, wringing from them cash and precious time that they might have used to address their financial difficulties in a more straightforward manner.

Readers are encouraged to respond to or criticize this posting.

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