The U.S. Court of Appeal for the First Circuit recently rejected a former homeowner's argument that a mortgage supposedly procured by a third party -- allegedly obtained through a fraudulent "foreclosure rescue" scheme -- was not enforceable against the former homeowner, noting that the former homeowner failed to allege any misconduct on the part of the lender.
A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/13-2222P-01A.pdf
A former homeowner alleged that he fell victim to a fraudulent "foreclosure rescue" scheme, whereby he sold his property to an attorney, who took out a new mortgage with a new lender. The attorney then transferred the property to a trust -- of which the former owner was a, but not the sole, beneficiary -- and began collecting rent from the former owner.
The former homeowner further alleged that the plan failed when the attorney began charging him more in rent than he could afford. The attorney failed to make payments on the loan, and the lender initiated foreclosure proceedings.
The former homeowner then filed an action seeking to have the mortgage declared void. The lower court granted the lender's motion to dismiss, and the former homeowner appealed.
As you may recall, Massachusetts law provides that a lender's mortgage is valid even if the borrower obtained title by fraud, where the lender had no "actual knowledge," notice or "reason to know" of the fraud. See Demoulas v. Demoulas Super Markets, Inc., 424 Mass 501, 547 (1997).
The First Circuit began its analysis by noting that the former homeowner conceded that he transferred title to the attorney, who then granted a mortgage to the lender. In addition, the Court noted that neither the former homeowner's complaint nor his appellate brief included any allegations that the mortgage itself was "marred by fraud, much less by fraud that would void the transaction."
Absent such allegations, the First Circuit determined that "a factfinder accepting [the former homeowner's] allegations as true would conclude that [the lender] received legal title...allowing the bank to foreclose if the terms of repayment in the mortgage are not satisfied.
The former owner sought to avoid this result by arguing that the debt was "nonexistent," because the former homeowner never borrowed any money from the lender, and never consented to the loan. The First Circuit disagreed, observing that "the debt certainly exists," regardless of the former homeowner's consent or lack thereof.
Accordingly, the First Circuit held that the former homeowner's complaint "provides no legal basis for making [the lender] pay for the lawyer's wrongdoing. The First Circuit therefore affirmed the dismissal of the complaint.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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