Foreclosure "Rescues" May Be Illegal
Here’s the situation: A beleaguered home owner is in bankruptcy, overwhelmed by debt. The mortgage lender had begun foreclosure proceedings, but they were stayed by the bankruptcy court. That stay, however, is about to end, and the lender may be allowed to proceed. The owner owes the mortgage lender about $170,000. Another $50,000 (representing 13 cents on the dollar) is owed to unsecured creditors under the approved bankruptcy plan.
Along comes a potential purchaser of the property – a person who just happens to be a real estate broker and owner of both a finance company and a company by the name of Innovative Real Estate Strategies, LLC – who offers her this deal: “I’ll pay you $220,000 for your property – enough to pay off the mortgage and to satisfy the creditors according to the bankruptcy plan. You and I acknowledge that the property may be worth more, but, given the exigencies of the situation, that is a satisfactory amount. It is deemed to be fair and equitable, and in the interest of the seller. [Note: This is not the exact language of the agreement, but it represents the substance.] Furthermore, I, the buyer, will let you remain in the property under a one-year leaseback agreement. Not only that, I will also grant you an option for the next twelve months that allows you to repurchase the property for the amount of $260,000.”
So how does that sound? Does it look like a win-win? The owner is given a way out of her debt, is allowed to stay in the property, and even has an opportunity to purchase it back. Meanwhile, the buyer has positive cash flow for at least a year (the lease amount more than covered expenses) and, if the option isn’t exercised, may be able to turn the property for a good profit.
Well, it sounded good to the bankruptcy trustee who approved the deal, paid off all the creditors, and ultimately discharged the homeowner from her bankruptcy debts.
Unfortunately, things did not turn out so well. Within nine months the former home owner had fallen behind in her rent. She tried to exercise the option, but couldn’t qualify for a loan. When the option expired, the broker/rescuer offered her the property for $315,000. Of course, she was unable to do that. He then listed the property for $369,950; and gave her a sixty-day notice to quit.
The above provides a summary description of the facts underlying the case of Spencer v. Marshall, recently decided by the California First Appellate District Court of Appeal. The home owner was Alanna Spencer and the purchaser was Ryan Marshall.
When Marshall began an unlawful detainer action against Spencer she filed a notice of recession of the sale. Subsequently, she filed a case asking for both compensatory and punitive damages. Spencer alleged that both the form and content of the purchase agreement drawn by Marshall had failed to meet the requirements of the Home Equity Sales Contract Act (HESCA), found at California Civil Code 1695 and following.
The California Legislature enacted HESCA upon a finding that “homeowners whose residences are in foreclosure have been subjected to fraud, deception, and unfair dealing by home equity purchasers.” (An equity purchaser is an investor buyer of an owner-occupied home for which a Notice of Default has been filed.) The purpose of the act is to enable defaulting homeowners “to make an informed and intelligent decision regarding the sale of his or her home…” and “to safeguard the public against deceit and financial hardship; to insure, foster, and encourage fair dealing in the sale and purchase of homes in foreclosure;” and to “prohibit representations that tend to mislead.”
The court determined that Marshall’s purchase agreement did not conform to HESCA requirements. Indeed, the lower court opined that, insofar as their dealings (Marshall had an associate) with Spencer, “defendants were in every respect the ‘archetypal predators’ that HESCA seeks to regulate.”
Marshall’s defense, in part, was that the bankruptcy court had approved the purchase. But the bankruptcy trustee testified that her sole concern was that the payment plan would be satisfied. It was not her concern whether Spencer would be receiving a fair price or a fair deal.
The appellate court upheld the decision against Marshall and the award of $70,000 actual damages and $210,000 exemplary damages.
There is a lesson here for California investors and real estate agents. Homeowners in default are protected by laws that very specifically detail what any contract offered to them must look like. It’s a good idea to pay attention to those laws.
Rob Alley, Realtor
The Avery Group at Roy Wheeler
540-250-3275
roballey@roywheeler.com
http://www.robsellscharlottesville.com
http://www.forestlakesliving.com
http://www.theaverygroup.com
Along comes a potential purchaser of the property – a person who just happens to be a real estate broker and owner of both a finance company and a company by the name of Innovative Real Estate Strategies, LLC – who offers her this deal: “I’ll pay you $220,000 for your property – enough to pay off the mortgage and to satisfy the creditors according to the bankruptcy plan. You and I acknowledge that the property may be worth more, but, given the exigencies of the situation, that is a satisfactory amount. It is deemed to be fair and equitable, and in the interest of the seller. [Note: This is not the exact language of the agreement, but it represents the substance.] Furthermore, I, the buyer, will let you remain in the property under a one-year leaseback agreement. Not only that, I will also grant you an option for the next twelve months that allows you to repurchase the property for the amount of $260,000.”
So how does that sound? Does it look like a win-win? The owner is given a way out of her debt, is allowed to stay in the property, and even has an opportunity to purchase it back. Meanwhile, the buyer has positive cash flow for at least a year (the lease amount more than covered expenses) and, if the option isn’t exercised, may be able to turn the property for a good profit.
Well, it sounded good to the bankruptcy trustee who approved the deal, paid off all the creditors, and ultimately discharged the homeowner from her bankruptcy debts.
Unfortunately, things did not turn out so well. Within nine months the former home owner had fallen behind in her rent. She tried to exercise the option, but couldn’t qualify for a loan. When the option expired, the broker/rescuer offered her the property for $315,000. Of course, she was unable to do that. He then listed the property for $369,950; and gave her a sixty-day notice to quit.
The above provides a summary description of the facts underlying the case of Spencer v. Marshall, recently decided by the California First Appellate District Court of Appeal. The home owner was Alanna Spencer and the purchaser was Ryan Marshall.
When Marshall began an unlawful detainer action against Spencer she filed a notice of recession of the sale. Subsequently, she filed a case asking for both compensatory and punitive damages. Spencer alleged that both the form and content of the purchase agreement drawn by Marshall had failed to meet the requirements of the Home Equity Sales Contract Act (HESCA), found at California Civil Code 1695 and following.
The California Legislature enacted HESCA upon a finding that “homeowners whose residences are in foreclosure have been subjected to fraud, deception, and unfair dealing by home equity purchasers.” (An equity purchaser is an investor buyer of an owner-occupied home for which a Notice of Default has been filed.) The purpose of the act is to enable defaulting homeowners “to make an informed and intelligent decision regarding the sale of his or her home…” and “to safeguard the public against deceit and financial hardship; to insure, foster, and encourage fair dealing in the sale and purchase of homes in foreclosure;” and to “prohibit representations that tend to mislead.”
The court determined that Marshall’s purchase agreement did not conform to HESCA requirements. Indeed, the lower court opined that, insofar as their dealings (Marshall had an associate) with Spencer, “defendants were in every respect the ‘archetypal predators’ that HESCA seeks to regulate.”
Marshall’s defense, in part, was that the bankruptcy court had approved the purchase. But the bankruptcy trustee testified that her sole concern was that the payment plan would be satisfied. It was not her concern whether Spencer would be receiving a fair price or a fair deal.
The appellate court upheld the decision against Marshall and the award of $70,000 actual damages and $210,000 exemplary damages.
There is a lesson here for California investors and real estate agents. Homeowners in default are protected by laws that very specifically detail what any contract offered to them must look like. It’s a good idea to pay attention to those laws.
Rob Alley, Realtor
The Avery Group at Roy Wheeler
540-250-3275
roballey@roywheeler.com
http://www.robsellscharlottesville.com
http://www.forestlakesliving.com
http://www.theaverygroup.com
Comments
Post a Comment