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Home Foreclosures: 17.4.9.2 Choice of Law Clauses

Another way that a rescuer may try to avoid state credit and usury laws is by purporting to operate under the laws of another state.599 The rescuer might, for example, insert a clause in the documents the homeowner signs, stating that the transaction will be governed by the laws of some state that imposes few restrictions. Choice of law rules vary from state to state, but such a clause is unlikely to be given effect if the chosen state does not have a substantial relationship to the transaction.

Home Foreclosures: 17.4.9.3 Licensing Provisions of State Usury Laws

In addition to interest rate caps, state usury laws may have lender licensing requirements that the rescuer has violated. States typically require a lender other than a bank or credit union to obtain a state license if it wishes to charge more than the legal rate of interest permitted by the general usury statute. The special usury statutes that govern these licensed creditors usually specify the permissible terms of individual credit transactions.

Home Foreclosures: 17.4.10.1 Introduction

State door-to-door sales laws and state credit repair or credit services laws may provide additional grounds to cancel foreclosure rescue transactions. In some states these laws, especially the credit repair or credit services laws, provide attractive causes of action. One advantage of these laws is that, unlike the Truth in Lending Act, they may not depend on the rescuer’s having engaged in a certain number of prior transactions. Since these are state law claims, they also are useful if the consumer prefers to litigate in state court.

Home Foreclosures: 17.4.10.2 Door-to-Door Sales Laws

Every state has a door-to-door sales law that gives consumers a right to cancel at least certain types of contracts that are solicited outside the seller’s fixed place of business.605 The typical state statute provides a three-day right to cancel the transaction and requires the seller to give the consumer notice of this right.

Home Foreclosures: 17.4.11.1 Formal Requirements for Deeds

The homeowner’s attorney should also check the state’s formal requirements for deeds and real estate transactions, since rescuers often cut corners. The deed may be invalid if it is challenged on formal grounds, but there may be a very short deadline for this type of challenge. Showing that the deed is invalid may be the only sure-fire way to void it after the home has been transferred or mortgaged to an innocent third-party.

Home Foreclosures: 17.4.11.2 False Notarization

States typically require that signatures on deeds or mortgages be notarized. Defects in the notarization of title documents may affect the validity of the instrument. Even if state law does not automatically invalidate a deed that is not notarized (or is improperly notarized), insufficient or improper notarization can make a difference: it may, for example, mean that a recorded deed is not self-authenticating, thus imposing a greater evidentiary burden on a defendant when the deed is being challenged in a quiet title suit.625

Home Foreclosures: 17.4.12 RICO

The federal Racketeer Influenced and Corrupt Organizations Act (RICO)633 provides powerful civil remedies, including attorney fees and treble damages, to victims of a broadly defined range of “racketeering activity” and to those who have been subjected to the collection of an “unlawful debt.” “Unlawful debt” includes any usurious debt bearing interest of at least twice the “enforceable rate.”

Home Foreclosures: 17.4.14 The SAFE Act

Under the SAFE Act,641 states must require individual loan originators (those involved in processing loan applications) to register in the National Mortgage Licensing System (NMLS) under a process administered by the Consumer Financial Protection Bureau (CFPB).

Home Foreclosures: 17.4.15 The Telemarketing Sales Rule

Many of the larger foreclosure rescue scams—particularly loan modification scams—involve mass marketing. If that includes telemarketing, as defined by the Telemarketing Sales Rule,644 the service provider is subject to the requirements and remedies established by the rule.645 The Telemarketing Sales Rule includes provisions for “debt relief services,” but they only apply to unsecured debts.

Home Foreclosures: 17.5.1 Generally

Bankruptcy is an important option for victims of foreclosure rescue scams. Bankruptcy may not only provide the victim a fresh financial start, but it may also be a favorable forum for homeowners in their efforts to regain title to their homes. Under the Bankruptcy Code, certain transfers of property made by the debtor may be voided in a bankruptcy proceeding by either the bankruptcy trustee or the debtor. The debtor may also use bankruptcy to stop eviction or foreclosure proceedings initiated by a rescuer or to bring other nonbankruptcy claims against the rescuer.

Home Foreclosures: 17.5.2 Stopping the Eviction

Many victims of foreclosure rescue scams only seek legal assistance after the rescuer initiates an eviction case. In these cases, a critical first step in defending the homeowner will be to stop the eviction process. In most situations, a bankruptcy filing will automatically stop eviction efforts against the homeowners as well as other creditor actions. However, there are a few exceptions, usually based on prior bankruptcy filings, when the stay may not automatically go into effect or may have a limited duration.

Home Foreclosures: 17.5.3.1 Introduction

As discussed above, one of the most common indicia of a foreclosure rescue scam is that homeowners transfer their property to the rescuer or a party affiliated with the rescuer. These transactions may give rise to state and federal statutory claims such as unfair and deceptive practices (UDAP) and Truth in Lending (TILA), or common law claims such as fraud, conspiracy, and breach of fiduciary duty.

Home Foreclosures: 17.5.3.2.1 Overview

The starting point in any avoidance action is a determination of whether the transfer is avoidable by the trustee. As noted above, the bankruptcy trustee may set aside or nullify a wide variety of transfers made by a debtor prior to the commencement of a case. In the foreclosure rescue scam context, the most likely statutory sections to be employed are section 548, dealing with fraudulent transfers, and the “strong arm” powers of section 544.

Home Foreclosures: 17.5.3.2.2 Fraudulent transfers

Section 548 of the Bankruptcy Code gives the trustee (and thus the debtor in some instances) the ability to avoid transfers based on either actual or constructive fraud.653 The trustee may avoid a transfer if the transfer was made within the two years654 before the case was filed and the transfer meets certain conditions.655 Specifically, a transfer may be avoided if: (1) the debtor received less than a reasonably equivalent value for the transfer,

Home Foreclosures: 17.5.3.2.3 Use of “strong arm clause”

Besides the power to avoid fraudulent transfers under section 548, section 544(b) in combination with state fraudulent transfer laws provides another basis for avoiding title transfers in foreclosure rescue scams.662 Under almost all state fraudulent transfer laws, a transfer may be deemed fraudulent if: (1) the debtor was insolvent or became insolvent as a result of the transfer, and (2) the conveyance was made without “reasonably equivalent value” or “fair consideration.”663

Home Foreclosures: 17.5.3.3.1 Overview

If the trustee could avoid the title transfer but elects not to do so, the debtor may be able to do so in certain circumstances. Specifically, the debtors may avoid title transfers if they can demonstrate that: (1) the transfer could be avoided by the trustee; (2) the trustee did not attempt to avoid the transfer; (3) the debtor did not conceal the property; (4) the debtor could exempt the property; and (5) the transfer was involuntary.

Home Foreclosures: 17.5.3.3.2 Did the debtor conceal the property?

The answer to this question depends largely on whether the debtor has disclosed the property on their schedules. Because of the potential consequences of failing to list the property in the schedules, it is always better to be over-inclusive rather than under-inclusive.

Home Foreclosures: 17.5.3.3.3 May the debtor exempt the property?

As a general rule, almost all property in which the debtor has a legal or equitable interest becomes property of the bankruptcy estate at the commencement of a case.665 However, the Bankruptcy Code permits a debtor to exempt certain property from the estate pursuant to the federal exemptions, as listed in 11 U.S.C. § 522(d), or the applicable state exemptions.

Fair Debt Collection: 13.3.3.2 When Judicial Estoppel Should Not Apply

A court’s adoption of a position asserted by the party in a prior proceeding is a required element of judicial estoppel. Many bankruptcy cases, particularly under chapter 13, are dismissed without a discharge. Debtors should argue that, in prior bankruptcy cases in which the court never entered a discharge order, the bankruptcy court did not “adopt” any position based on the omission of a claim from schedules.207 There is no risk of inconsistent adjudications in this situation.

Fair Debt Collection: 13.3.2.2 Other Limits to Postbankruptcy Standing Challenges

The bankruptcy standing doctrine has other important limitations. Many bankruptcy cases, particularly under chapter 13, are dismissed without a discharge. Different Bankruptcy Code provisions govern what happens with property of a bankruptcy estate upon a dismissal of a bankruptcy case, as opposed to when a bankruptcy case is closed after entry of a discharge.179

Fair Debt Collection: 13.3.2.3 When Standing Problems Cannot Be Avoided

If the trustee does not abandon the debt collection claim, the court will likely find that the bankruptcy trustee, rather than the consumer plaintiff, has standing to pursue the claim. In this instance, dismissal of the lawsuit is the least appropriate option for the court to choose. The court should allow for substitution of the trustee as plaintiff.185 The reference to “standing” in this context is actually something of a misnomer.

Fair Debt Collection: 13.3.3.1 Generally

Judicial estoppel is another doctrine that courts apply in situations where a plaintiff brings a consumer claim that existed at the time of a prior bankruptcy case, but did not disclose the claim in the schedules filed with the bankruptcy court. Judicial estoppel and lack of standing are related in that both can be consequences of an omitting a preexisting legal claim from bankruptcy schedules.

Fair Debt Collection: 13.3.3.3 Amending Bankruptcy Schedules to Avoid Judicial Estoppel

As with the standing problem, the plaintiff can seek to reopen a closed bankruptcy case, file an amended schedule listing the debt collection claim, and have the claim exempted, administered, or abandoned.224 The defendant in the postbankruptcy action does not have standing to challenge the debtor’s proceeding to reopen the bankruptcy case.225 If the action is taken promptly and there is no evidence of bad faith, the court should decline to impose judicial estopp

Fair Debt Collection: 13.3.3.4 Working with the Trustee as Substituted Plaintiff

In response to an assertion of judicial estoppel debtor’s counsel should emphasize that strict application of the doctrine provides an undeserved windfall to a defendant and does nothing to promote the interests of bankruptcy creditors.238 A court has options for sanctioning debtors who deliberately misrepresent their financial affairs in bankruptcy schedules.