Chapter 11 Foreclosure Rescue Scams
new chapter
11.1 Introduction
The rise in real estate prices in recent years has brought
with it a wave of schemes designed to deprive homeowners
of the equity that has built up in their homes. Individuals
who are in financial distress and are having trouble meeting
their mortgage payments are particularly vulnerable to these
schemes. Though their monthly incomes may be low, their
homes may be worth considerably more than their mort-
gages. A homeowner who is facing foreclosure may be
desperate to grab at any hope of saving the home, even if it
risks the home’s built up capital.
This section addresses the problem of foreclosure rescue
scams. These scams come in many variations, but they have
one thing in common: instead of being ‘‘rescued,’’ as prom-
ised, the homeowners lose not only their home, but also their
equity, and end up worse off than they were before the
transaction.
More detail on some of the issues discussed in this chapter
may be found in other National Consumer Law Center
manuals, particularly Truth in Lending,1 Unfair and Decep-
tive Acts and Practices,2 and The Cost of Credit: Regulation,
Preemption, and Industry Abuses.3 Another helpful resource
is Prentiss Cox, Foreclosure Equity Stripping: Legal Theo-
ries and Strategies to Attack a Growing Problem.4
This chapter is organized into five substantive sections.
Section 11.2 provides a short overview of the predominant
types of foreclosure rescue scams. Section 11.3 discusses the
initial issues that confront an attorney with a new client:
how to recognize a foreclosure rescue scam; what informa-
tion and documents to obtain from the client; how to
investigate the claim; the potential defendants; and the first
steps to take to pursue a claim. Section 11.4 discusses the
primary legal theories and remedies that are available to
attack a foreclosure rescue scam. Section 11.5 discusses the
benefits of litigating foreclosure rescue cases in bankruptcy
1 National Consumer Law Center, Truth in Lending (5th ed. 2003
and Supp.).
2 National Consumer Law Center, Unfair and Deceptive Acts and
Practices (6th ed. 2004 and Supp.).
3 National Consumer Law Center, The Cost of Credit: Regulation,
Preemption, and Industry Abuses (3d ed. 2005 and Supp.).
4 39 Clearinghouse Review Journal of Poverty Law and Policy
607 (Mar.–Apr. 2006).
court, and the special issues that arise in that forum. Section
11.6 addresses special issues that arise when there is a
separate state proceeding such as an eviction action or
foreclosure proceeding. A sample complaint in a foreclosure
rescue scam case is included as Appendix I.7, infra. Addi-
tional sample complaints and discovery, a sample rescission
letter, a worksheet for calculating HOEPA points and fees,
and computer programs for calculating interest rates may be
found on the CD-Rom accompanying this manual.
11.2 What Is a Foreclosure Rescue
Scam?
11.2.1 Overview
Foreclosure rescue scams are various types of schemes
targeted at homeowners already facing foreclosure and in
financial distress.5 Typically a ‘‘rescuer’’ identifies potential
victims through public foreclosure notices in newspapers or
at government offices. The homeowner is then contacted by
phone, mail, or personal solicitation, with offers of a ‘‘fresh
start’’ to save the home. While the clock to stop the fore-
closure runs down, the rescuer may impose fees draining the
home of equity, or induce the owner to sign a sheaf of
documents including transfer of home ownership. In the
end, the ‘‘rescuer’’ often evicts the victim from the home he
or she once owned.
Foreclosure rescue scams typically come in three variet-
ies. The first might be called ‘‘phantom help,’’ where a
rescuer charges outrageous fees either for light-duty phone
calls and paperwork that the homeowner could have easily
done or makes a promise of additional assistance that never
occurs. Some of these rescuers merely refer the homeowner
to a bankruptcy attorney. Others actually assist the home-
owner in filing bankruptcy. Typically these rescuers have
little understanding of bankruptcy law and often the bank-
ruptcy case is ultimately dismissed, leaving the homeowner
subject to various restrictions on repeat filing. Whatever
form this variety of the foreclosure rescue scam takes, the
5 See National Consumer Law Center, Dreams Foreclosed:
The Rampant Theft of America’s Homes Through Equity-
Stripping ‘‘Foreclosure Rescue’’ Scams (2005), available at
www.nclc.org/news/content/ForeclosureReportFinal.pdf.
75
§ 11.2.2 Foreclosures / 2006 Supplement
homeowner is usually left without enough assistance to save
the home, and with little or no time left to seek other
assistance.
For example, in In re McNeal,6 the homeowner paid a
‘‘foreclosure consultant,’’ $750 to stop the foreclosure of his
home. The consultant had spoken to the loan servicer three
times and submitted financial information to the servicer,
but failed to obtain a loan modification or otherwise stop the
foreclosure sale. Consequently, the homeowner filed a chap-
ter 7 bankruptcy to postpone the foreclosure. Finding that
the consultant violated California’s foreclosure consultant
statute,7 the court awarded the homeowner actual damages
of $750 and exemplary damages of $2250.8
A second variety involves outright fraud. The homeown-
ers believe they are obtaining refinancing or a new loan and
do not realize they are surrendering ownership of the house.
Alternatively, the deed transferring the house may be forged.
A third variety is a bailout that typically involves the
homeowners’ surrendering title to their homes with the
belief that they will be able to repurchase them at a later
time. Meanwhile, the homeowners become tenants in their
own homes on terms that are often oppressive and unafford-
able, ending with their eviction. The rescuer may even
renege on promises to pay off the mortgage, leaving the
homeowner liable for loans on a house she no longer owns.
This chapter focuses primarily on the second and third
types, both of which involve transfer of ownership, although
the issues discussed may also be applicable to the first type.
Two variations of the repurchase theme, sale/leaseback
transactions and inter vivos trust transfers, are discussed in
more detail in the next two subsections.
11.2.2 Sale/Leaseback Schemes
Sale/leaseback schemes encompass a variety of transac-
tions in which homeowners surrender title to their houses
with the expectation that they will be able to remain in their
homes as renters until they are able to repurchase the
property. Invariably, the terms of the deal are so onerous that
the buyback becomes impossible. Alternatively, the home-
owner’s ability to repurchase the property may be cut off by
a sale to a bona fide third party purchaser.9 In either cir-
6 286 B.R. 910 (Bankr. N.D. Cal. 2002).
7 Cal. Civ. Code §§ 2945 to 2945.11.
8 In re McMeal, 286 B.R. 910, 912 (Bankr. N.D. Cal. 2002); see
also U.S. v. Weaver, 290 F.3d 1166 (9th Cir. 2002) (defendants
told homeowners that they could register a ‘‘common law lien’’
on the home that would take priority over the mortgage security
interest and prevent foreclosure; however, homeowner needed
to convey property to a trust to take advantage of the program);
Fleet v. United States Consumer Council, Inc. 53 B.R. 833
(Bankr. E.D. Pa. 1985); State v. Midland Equities, 117 Misc. 2d
203, 458 N.Y.S.2d 126 (N.Y. Sup. Ct. 1982).
9 See, e.g., Grant v. Lehtinen, 2003 WL 21961404 (Minn. Ct.
App. 2003) (homeowner’s property sold to a neighboring
church in breach of repurchase agreement).
76
cumstance, the homeowners stand to lose most, if not all, of
the equity in their homes. In addition, the homeowners, now
tenants in their own houses, may face eviction proceedings
for failing to comply with oppressive and unaffordable lease
terms.10 In some cases, these homeowners were defrauded
about the deed transfer; others may understand that they
were signing a deed but believed that the home would
ultimately be ‘‘saved.’’
The case of Browner v. District of Columbia provides an
illustrative example of a sale/leaseback transaction.11 The
defendants, Rita Walker and Ferris Browner (doing business
as RAW), placed the following advertisement in the
‘‘Money to Lend’’ column of the classified advertisements:
‘‘NEED MONEY?—Foreclosure Help.’’ The business also
sent letters to homeowners whose homes were being adver-
tised for foreclosure, stating ‘‘I’m sorry to read that your
property, by order of the court, is being foreclosed upon. We
are foreclosure specialists.’’
In one typical transaction, a homeowner contacted the
defendants and was told that RAW would make available
$4591.18 to pay a mortgage arrearage and prevent the
pending foreclosure. In exchange, the homeowner was re-
quired to sign a deed transferring the property to Rita Walker
subject to a one-year lease with an option to repurchase.
When questioned about the necessity of the deed, RAW
assured the homeowner that the deed was merely a techni-
cality, included for the purpose of satisfying the accountant.
During the one-year lease, the homeowner was required to
pay $375 per month to RAW, in lieu of making $118
monthly mortgage payments. Upon exercising the repur-
chase option, the homeowner would have been required to
pay the $4519.18 arrearage payment including fees for title
exam, fire insurance, and an appraisal. At the time of the
‘‘sale’’ to Walker, the property had a market value of
$38,185 and was entirely free of debt except for the balance
of the first mortgage in the amount of $1600. Thus, the
homeowner unwittingly conveyed property worth $38,185
for a total of $6988.18.
The court determined that this transaction and others like
it were not sales, but loans. Because the effective interest
rates on the transactions at issue ranged from 50 to 200%,
the court found the defendants guilty of violating the local
loan sharking statute.
The Nebraska Supreme Court also recently upheld the
claims of thirteen homeowners who were induced to enter
into fraudulent sale/leaseback deals that allowed rescuers to
10 See, e.g., In re Davis, 169 B.R. 285 (E.D.N.Y. 1994). In In re
Davis the lease agreement required monthly rent payments that
were clearly unaffordable and required an entire year’s rent
upon default. Within one month after the sale/leaseback trans-
action closed and two weeks after the first rental payment was
due, the purchaser had perfected a judgment against the former
homeowners for a full year’s rent and cost and obtained a
warrant of eviction for nonpayment of rent.
11 549 A.2d 1107 (D.C. 1988).
 Foreclosure Rescue Scams / 2006 Supplement
take the homes for less than full value. The court found that
even if the homeowners failed to read the contracts—which
allegedly ‘‘unmistakably’’ disclosed the transactions as sales
rather than loans—the contracts were not binding because
they were induced by fraud.12
11.2.3 Inter Vivos Trusts
The use of inter vivos trusts is a growing form of fore-
closure rescue scam.13 This type of scam is appealing to
rescuers because it often requires less money up front than
many sale/leaseback transactions, avoids the due-on-sale
clause in the homeowner’s mortgage and, by creating an
‘‘occupancy agreement’’ rather than a lease, attempts to skirt
the strictures of landlord-tenant law governing leases.14
In a typical inter vivos trust foreclosure scam, the home-
owners, knowingly or unknowingly, transfer title of their
home to a trust. Initially, as settlors of the trust, the home-
owners hold a 100% beneficial interest in the trust. These
types of transactions do not require the homeowner’s un-
derlying mortgages to be paid off. Instead, this scheme seeks
to exploit the exception to the due-on-sale clause for a
transfer into an inter vivos trust in which the borrower is a
beneficiary and which does not affect a transfer of occu-
pancy rights.15
Immediately after the creation of the trust, a small ben-
eficial interest (five to ten percent) in the trust is sold to an
investor or investors.16 The investor’s purchase price for this
beneficial interest is typically the amount necessary to bring
any delinquent mortgages current.17 The term of the trust is
typically two to three years. At the conclusion of the trust,
the house is sold and the trustee distributes the proceeds
according to the trust documents. The trust documents use
complex language to describe the distribution of proceeds,
12 Eicher v. Mid America Fin. Inv. Corp., 702 N.W.2d 792,
803–804 (Neb. 2005).
13 See, e.g., United States v. Weaver, 290 F.3d 1166 (9th Cir. 2002)
(criminal prosecution for equity skimming when homeowners
transferred title to trust and paid rent to trust in expectation that
trust would pay defaulted mortgage).
14 See Garn-St. Germain Depository Institutions Act of 1982, 12
U.S.C. § 1701j-3(d)(8).
15 See Garn-St. Germain Depository Institutions Act of 1982, 12
U.S.C. § 1701j-3(d)(8).
16 Generally, the beneficial interest transferred to investors will be
capped at about 10% to ensure that the original title insurance
policy remains effective. Additionally, the transfer of a small
beneficial interest may avoid conveyance or transfer taxes.
17 Often the trust accounting will show an ‘‘advance’’ to the
homeowner in an amount significantly greater than the amount
that was needed to cure the mortgage arrearage. The difference
is usually comprised of questionable fees imposed by the trust
in connection with the transaction such as documentation, fa-
cilitation, transaction, trust set up, or credit counseling fees and
a contingency fund.
§ 11.3.1
which often results in the investors’ getting back about twice
as much as they invested plus a percentage of any increased
equity.
Under a right of first refusal contained within the trust
documents, the homeowners may purchase back their home
for fair market value. However, the repurchase agreement
requires the homeowners initially to pay the trust the full
market value of the home, and only later to receive reim-
bursement from the trust to compensate them for their
beneficial share. This makes repurchase extremely difficult,
because the homeowners would have to obtain financing to
purchase at full value a home that they already partly own.
As a result, the deal virtually assures that the homeowners
will lose their home and much of their equity.
Inter vivos trust schemes also typically have oppressive
‘‘occupancy agreements’’ between the trust and the home-
owner (now a tenant). Despite their name, these agreements
are essentially leases, and often contain terms that violate
state laws government residential leases. Under these agree-
ments, the homeowner pays ‘‘rent’’ to the trustee or a
collection service employed by the trustee. The amount of
rent is commonly the amount of the mortgage payment plus
an additional service fee. Further, the occupancy agreement
may contain some or all of the following provisions:
• Failure to make a timely monthly ‘‘rent’’ payment to the
trustee constitutes an implied offer to sell the home-
owner’s beneficial interest in the trust;
• A requirement that homeowners (as tenants) make all
necessary repairs, perform all maintenance and main-
tain homeowner’s insurance on the property;
• A provision permitting treble damages in the event that
the homeowners (as tenants) hold over beyond the
termination of the occupancy agreement;
• Funds paid to a ‘‘contingency fund,’’ essentially a
security deposit, often in excess of state limits; and
• A provision for a late charge, also exceeding those
permitted by state law, in the event monthly payments
are not received when due.
Such occupancy agreements, like the trust agreements, are
designed to take as much money from the homeowners as
possible and to evict them as fast as possible when they fail
to make a payment.
11.3 Investigating and Preparing a
Foreclosure Rescue Scam Case
11.3.1 Recognizing a Foreclosure Rescue
Scam
A scam, by its nature, disguises the true intent of the
perpetrator. As a result, the victims in some cases may not
77
§ 11.3.2 Foreclosures / 2006 Supplement
realize that they have been scammed until they are facing
eviction from their own home. The following list of ques-
tions will help advocates recognize when they are dealing
with a foreclosure rescue scam.
Did the homeowner respond to a phone call, letter, posted
sign, or other solicitation to get help saving the home or to
sell it? Rescuers typically use public records to find names
of homeowners facing foreclosure, and then solicit them
with promises of help. Many also post flyers that the home-
owner may have seen.18
Did the homeowners convey their property to someone
else? The telltale sign of a foreclosure rescue scam is a deed
conveying title of the victim’s property to the ‘‘rescuer’’ or
another party affiliated with the rescuer. The grantee could
be a corporation, a trust, an individual unknown to the
victim, a long-time acquaintance or even a family member.
Remember, scammers come in all shapes and sizes.
Were the homeowners aware that they executed a deed
transferring their property to a third party? In some cases,
homeowners are led to believe that they are signing docu-
ments for a new loan to bring their mortgage current, when
in fact, they deed their home away.
Were the homeowners facing foreclosure or otherwise in
financial diffıculty at the time they transferred their prop-
erty? Almost all victims of foreclosure rescue scams are
facing some type of financial difficulty. Commonly, a fore-
closure was imminent. In some cases, homeowners may
have been unsuccessful in their attempts to refinance.
Were the homeowners instructed to stop communications
with their current mortgage company, attorney, or other
housing counselor? Homeowners are frequently told to
cease all contact with lawyers or their mortgage, and let the
rescuers handle the ‘‘negotiations.’’ This tactic simulta-
neously cuts off access to possible refinancing options while
running out the clock on ways to prevent the foreclosure.
Did the homeowners receive less than fair market value
for the transfer of their property? Inadequate consideration
is another hallmark of foreclosure rescue scams. These
scams depend on equity in the property that can be stripped
away when the rescuer refinances or resells the property.
Rescuers, if they provide any consideration at all, may pay
only a fraction of the value of the home.
Did the homeowners continue to live in their home pur-
suant to a lease agreement, occupancy agreement or land
sales contract? In many foreclosure rescue scams, home-
owners surrender title with the expectation that they will be
able to remain in their homes. They may sign lease agree-
ments, occupancy agreements, or land sales contracts that
permit them to retain possession of their home so long as
they pay ‘‘rent’’ to the rescuer. These ‘‘rent’’ payments are
often unaffordable and are frequently higher than the home-
owners’ previous mortgage payments. Homeowners also
18 See § 11.3.2.2.2, infra.
78
may continue to have many of the responsibilities of own-
ership, such as performing property maintenance and mak-
ing tax payments.
Did the homeowners have an option to repurchase the
home sometime in the future? Homeowners who remain in
their homes after relinquishing title often believe that they
will be able to repurchase the property in the future. There
is typically an option or right of repurchase associated with
the transaction. However, the option frequently becomes
ineffective if the homeowners do not make timely ‘‘rent’’
payments. The repurchase price is almost certainly going to
be substantially more than the homeowner originally paid
for the home.
Is the ‘‘homeowner’’ facing eviction? One of the key parts
of many foreclosure rescue scams is to turn the homeowner
into a tenant, who has no claim to the home and can be
removed from the home through an eviction action. Espe-
cially in a judicial foreclosure state, when a homeowner is
facing eviction rather than foreclosure it is a sign of a
foreclosure rescue scam.
11.3.2 Gathering Information
11.3.2.1 The Homeowners’ Story
The client interview process is important to understanding
a foreclosure rescue scam transaction. Homeowners’ testi-
mony can make their story come alive. Unfortunately, the
speed at which these transactions happen, usually as a result
of an impending foreclosure, may leave the consumer con-
fused and unable to remember the details of the transaction.
Often, however, they can re-trace their steps and provide at
least a general overview of the transaction. Discussing the
case in a chronological fashion may also help the home-
owner remember what happened next in the sequence of
events.
Generally, a good place to start is with some basic facts
about the homeowners and the acquisition of their home.
After establishing a basic homeownership history, it is
useful to know about the homeowners’ financial troubles. In
part, this conversation is necessary to determine whether the
homeowners’ financial difficulties were short-term and tem-
porary in nature, or if the homeowners have suffered a more
permanent financial setback. A current and future financial
picture will be important in evaluating the homeowner’s
potential remedies.
Next, the homeowner can be walked through the solici-
tation stage of the scam. What types of solicitations did they
receive? Did they make contact with the rescuer in response
to such materials? If so, how did they make contact (e.g.,
telephone, in person, Internet, etc.) and what made this
rescuer more attractive than any of the others? This conver-
sation should flow into the initial contact and subsequent
contacts that led up to the actual transaction.
 Foreclosure Rescue Scams / 2006 Supplement
In most cases, the homeowners are aware that they signed
some document. However, elderly homeowners may not
remember signing any documents. If this is the situation,
questions of the homeowner’s competency to execute the
deed and any other documents should be explored. Whether
an individual is competent to execute a deed or other legal
document is a question of state law. In general, however, if
the homeowner is lacking sufficient mental capacity to
understand the nature and significance of the contract, the
contract is voidable.19
Where homeowners acknowledge executing some docu-
ments, it is useful to know the circumstances and setting of
the signing. Where was the signing held: in a title insurance
company’s office or in a fast food restaurant? Who was
present? For example, if the notary on the deed is a woman,
was a woman in fact present at the signing? What was said?
How did the homeowner feel at the time? With respect to the
transaction itself, other questions should revolve around the
terms of the deal itself. What were the terms of the trans-
action as understood by the homeowner?
Post-transaction events can be as important as the trans-
action itself. How did the reality of the transaction stack up
to the homeowners’ expectations? What caused the home-
owner to seek legal advice?
Answers to these and similar questions are likely to yield
valuable information about the rescue scam which can be
augmented by thoroughly reviewing the ‘‘document trail’’
discussed below.
11.3.2.2 The Document Trail
11.3.2.2.1 The importance of the documents
The documents related to a foreclosure rescue scam can
tell a significant part of the story—one that is often more
complete than that told by the homeowner. Obtaining any
and all paperwork that may exist—from the solicitation
materials to deeds and leases to eviction papers—is critical
to challenging a foreclosure rescue scam.
All documents obtained should be preserved carefully.
Since duplicate or almost-duplicate documents may be ob-
tained from different sources, the documents obtained from
each source should be separately labeled and filed. The
chain of custody of the documents should be preserved
carefully, especially for the documents in the homeowners’
possession.
What the homeowners did not receive can be just as
important as what they did receive. Being able to prove
exactly what documents were and were not in the home-
owners’ possession at a certain time can turn out to be a key
part of a case.
19 See § 4.8.7.3, supra; National Consumer Law Center, Unfair
and Deceptive Acts and Practices § 9.5.7 (6th ed. 2004 and
Supp.).
§ 11.3.2.2.3
What follows is a discussion of where to find relevant
documents, short of formal discovery.
11.3.2.2.2 Solicitation materials
Rescuers often identify distressed homeowners through
public foreclosure notices in the newspapers or at govern-
ment offices. Rescuers then contact the homeowner by
phone, personal visit, or card or flyer left at the door. In some
cases, homeowners can receive more than fifty offers for
assistance within weeks of the initial public foreclosure
notice. Some rescuers rely on advertising on the Internet or
in local publications. Others plaster posters on telephone
poles and bus stops.
The initial solicitation typically revolves around a simple
message such as ‘‘Stop foreclosure with just one phone
call,’’ ‘‘I’d like to $ buy $ your house,’’ ‘‘You have options,’’
or ‘‘Do you need instant debt relief and CASH?’’ This
contact also frequently contains a ‘‘time is of the essence’’
theme, adding a note of urgency to what is already stressful
and possibly desperate situation.
It is important to collect or obtain any solicitation mate-
rials used by the rescuer. Solicitation documents can be
useful in demonstrating the initial deceptive contact which
led the homeowner into the rescue transaction. Sometimes
these materials contain written promises or terms that are
not embodied in the final transaction.
• Collect any postcards, flyers or letters the client re-
ceived regarding foreclosure help, even those that may
not obviously be from the rescuer.
• Take photographs of any posted sign to which the
homeowner responded.
• Print copies of web pages from the rescuer’s Internet
site. Keep in mind that Internet sites can change in
content from one day to the next. What you find may not
be what your client saw. Further, what you find may not
be there tomorrow. Therefore, it is important to print
copies of any pages you think relevant the first time you
visit the site. If critical inculpatory information is on the
website, consider consulting a computer expert about
preserving a copy of the web content electronically in
a way that can be shown to be tamper-proof.
• Obtain a copy of any advertisement the rescuer used to
solicit your client. Many local publications will have
archives (electronic or paper) of past editions.
11.3.2.2.3 Transaction documents
The number of transaction documents in any given fore-
closure rescue scam can vary dramatically. At one end of the
spectrum, the homeowner may execute only one docu-
ment—a deed. At the other end, some scams involve com-
plex trust arrangements that may contain 10 or more differ-
ent documents.
79
§ 11.3.2.2.4 Foreclosures / 2006 Supplement
The most common source of these documents is the
homeowners themselves. However, if the homeowner does
not have copies, some documents may be obtained from
your local land records. In cases where an apparent closing
took place, the settlement agent or title company is likely to
have copies of the transaction documents. It is important to
request copies from the settlement agent even if the home-
owner has copies, as the documents the homeowner was
given may differ from those in the settlement agent’s files.
The identity of the settlement agent can frequently be
determined by examining the mortgage or deed of trust in
the local land records. Commonly, the first page of the
document will have a name and address for returning the
original document. In many cases, this will be the settlement
agent.
The following is a nonexclusive list of common docu-
ments found in foreclosure rescue scams:
• Purchase and Sale Agreement;
• Deed from homeowner to rescuer (or affiliated party);
• HUD-1 Settlement Statement;
• Other real estate sale closing documents;
• Lease, Occupancy Agreement or Land Installment Con-
tract to the homeowner;
• Option to Purchase;
• Power of Attorney.
In addition, a foreclosure rescue transaction in which the
homeowner transfers property to an inter vivos trust could
include some or all of the following:
• Trust Agreement;
• Assignment of Beneficial Interest;
• Beneficiary Agreement;
• Rider to Trust;
• Facilitation Fee Schedule;
• Property Owner Disclosure and Indemnification;
• Investor Disclosure and Indemnification;
• Certification of Trustee Under Trust;
• Trustee Direction Sheet.
11.3.2.2.4 Local land records
Local land records should be checked to determine a
number of important facts in the case. They will show
whether the homeowner deeded the home to the rescuer or
an affiliate of the rescuer, and whether the transferee deeded
or mortgaged it to someone else. Assignments of the mort-
gage may also be found in the local land records. If the
scammer paid off the existing mortgage, there will probably
be a public record of the release of the mortgage. In addition,
local land records can lead to other cases involving the same
rescuer, which is critically important for Truth in Lending
and fraud claims.
80
Typically land transactions are indexed in one of two
ways—a grantor-grantee index or a tract index.20 In many
cases, the index itself will provide you with some basic
information about the transaction. You will want to obtain
copies of any relevant documents. The following is a list of
documents to look for in the local land records.
• Deed from homeowner to rescuer (or affıliated party).
You will need to determine whether a deed transferring
the property to the rescuer has in fact been recorded.
Note that the grantee may be different than the rescuer
with whom the homeowner has had contact. If so, the
grantee may be affiliated with or conspiring with the
rescuer. If the rescuer set up an inter vivos trust, there
may be a deed from the homeowner to the trust.
• Any subsequent deeds related to the homeowners’ prop-
erty. You will want to determine whether the rescuer (or
affiliated party) remains the current owner of record or
whether the property has been deeded to yet another
party. This is important to: (1) establish who the current
record owner of the property is and (2) provide some
indication of whether there is a possible ‘‘bona fide
purchaser.’’ If the rescuer set up an inter vivos trust and
the home has since been conveyed to a third party, there
may be a deed from the trust to the third party.
• Any other deeds to the rescuer (or affıliated party).
Rescuers generally strike more than once. Other home-
owners who have transferred their properties to the
rescuer (or affiliated party) may also be victims. These
other homeowners can often provide useful information
about the rescuer’s methods of operation and may also
serve as pattern witnesses if the case goes to trial.
Evidence that the rescuer has engaged in prior transac-
tions is also critical for determining the applicability of
the Truth in Lending Act, discussed in § 11.4.2.2, infra,
proving fraud claims, and seeking punitive damages.
• Mortgages. Check to see whether the rescuer or original
grantee has taken out a mortgage against the property.
In many foreclosure rescue scams, rescuers drain the
equity out of the home by refinancing as soon as they
obtain title.
• Release or discharge of mortgage. If the homeowner’s
mortgage has been released, this shows that the rescuer
20 A grantor-grantee index is typically divided into two parts, one
for grantors (the party transferring title to the property) and one
for grantees (the party receiving title to the property). Each part
is alphabetized by business name or by last name of an indi-
vidual. In a foreclosure rescue scam, the homeowner will be
shown as the grantor and the rescuer as the grantee. When
searching for a mortgage, the record owner of the property will
be the grantor and the lender will be the grantee. Historical
grantee-grantor records are often grouped by year. A tract index
lists all the legal transactions pertaining to a piece of property in
one place. This index is typically organized by tract, parcel, plat,
block and/or lot number. This information is commonly found
in the deed itself, or may be obtained from the property tax
assessors office or from the local land records office.
 Foreclosure Rescue Scams / 2006 Supplement
or someone connected to the rescuer paid it off. If there
is no release, then the homeowner’s mortgage remains
a lien on the property. This may be a breach of contract
or a fraud if the rescuer promised otherwise. Check the
local practice to determine how long it should take for
a release to be recorded after a loan is paid in full.
• Trust documents. Some foreclosure rescue scams in-
volve homeowners deeding their property to inter vivos
trusts. In certain states, such a trust is evidenced by a
trust agreement recorded with the local land records
11.3.2.2.5 Court records
A good place to start with court records is any pending
eviction case against the homeowner and, in a judicial
foreclosure state, the documents from the homeowner’s
foreclosure case. Obtaining information about other lawsuits
in which the rescuer (or any other party to the transaction)
is involved can also be fruitful. The federal courts and some
local courts have an electronic public access service. Courts
that have electronic access will generally allow you to
search the index by party name. In local courts that do not
have electronic access, you may be thumbing through paper
indices or microfiches for case information. Regardless of
how you access court records, here are some things to look
for:
• Eviction case against homeowner. If the homeowner is
facing eviction, determine the status of the case and
obtain a copy of the case file. This is important not only
so that you can take steps to prevent the eviction,
discussed in § 11.3.4.2, infra, but also because it is not
uncommon for the pleadings filed by a rescuer to
contain information helpful to the homeowners. For
example, the rescuer may have filed a forged lease or a
lease containing terms that violate state residential
leasing statutes.
• Other eviction cases filed by the rescuer (or affıliated
party). Like searching for other deeds to the rescuer in
the local land records, other eviction cases filed by the
rescuer may help you identify other victims. These
victims may then be able to provide you with pattern
and practice evidence that exposes the transaction as a
foreclosure rescue scam and makes it subject to TILA
and other legal claims.
• Other non-eviction cases involving the rescuer (or af-
filiated party). A wealth of additional information may
be found in non-eviction cases to which the rescuer is
a party. Obviously, it is worth checking to see if any
other cases have been filed asserting claims associated
with a foreclosure rescue scam perpetrated on another
homeowner. Other cases to look for are those filed by
former employees of the rescuer. Consider searching
the local court records for workers’ compensation
cases, discrimination cases, or any other cases that
§ 11.3.2.2.6.4
might have been filed by a disgruntled employee. These
employees are often willing to provide very damaging
information about the rescuer’s operation. A search of
the family court records may enable you to locate an
ex-spouse who would be able to provide information on
the rescuer’s business.
11.3.2.2.6 Other documents
11.3.2.2.6.1 General
As discussed below, there are numerous other documents
and information that might be helpful to the homeowner’s
case beyond the transaction documents, land records, and
court records.
11.3.2.2.6.2 Payments to rescuer or lender
If the homeowner has been making ‘‘rent’’ payments to
the rescuer or has made any other payments to the rescuer,
it is useful to obtain evidence of such payments, such as
copies of the cancelled checks or money order receipts. In
some cases, the homeowners have continued to make pay-
ments to mortgage lenders even though they no longer own
their homes. Evidence of these payments should also be
obtained. The total of these payments will be relevant when
calculating damages. They will be also be important in
determining what, if anything, the homeowner will have to
pay to unwind the transaction.
11.3.2.2.6.3 Rescuer’s loan documents
Rescuers frequently cash out the equity in the home by
obtaining a bank loan shortly after obtaining title. These
loan documents, and loan documents for any other loan
obtained by the rescuer, should be collected and reviewed
carefully. The documents may demonstrate that the bank had
actual or constructive notice of the fraud. Loan documents
should be available from the settlement agent. However, if
the loan was not part of a ‘‘sale transaction’’ with the
homeowner and the homeowner is not a party to the loan in
any way, a formal discovery request may be necessary.
11.3.2.2.6.4 Appraisal
An accurate value of the homeowner’s property is critical
for determining what claims the homeowner may be able to
assert as well as what outcomes are realistic for the home-
owner. As noted above, a disparity between the fair market
value of the property and the consideration provided by the
rescuer is common in foreclosure rescue scams. A signifi-
cant disparity may be a factor in persuading a court that the
transaction is unconscionable, that it violates a state fore-
81
§ 11.3.2.2.6.5 Foreclosures / 2006 Supplement
closure rescue statute or an unfairness prohibition in a
UDAP statute, or that the transaction amounts to an equi-
table mortgage.21 A reliable appraisal or broker’s price
opinion can provide an estimate of the fair market value.
The homeowner should obtain an appraisal showing the fair
market value of the home both at the time of the scam and
at present.
Where the rescuer has obtained a loan in connection with
the transfer of the property, an appraisal may have been
done. However, these appraisals should be viewed with
caution as, in some cases, they are artificially inflated to
allow the rescuer to take out a higher loan amount.
11.3.2.2.6.5 Reports of consumer complaints
Through state freedom of information acts, records of
consumer complaints to local consumer protection agencies,
attorney general offices, and licensing divisions can be
obtained to see whether similar complaints have been made
about the rescuer in the past. The Better Business Bureau
should also be contacted for copies of any complaints. In
addition, the Federal Trade Commission’s website has a
search function that allows users to identify Federal Trade
Commission (FTC) complaints filed against any entity. Even
if the FTC has not filed a complaint against an entity, it will
provide copies of complaints that consumers have made to
it (after redacting identifying information about the com-
plainant) in response to a Freedom of Information Act
request.22
11.3.2.2.6.6 Corporate and business documents
Every state requires corporations and other businesses to
file certain documents at the time the company begins
operation in that state and periodically thereafter. The filing
typically consists of the articles of incorporation and annual
reports. When dealing with corporations, this information is
helpful to figure out who stands behind the corporation or
business in the event the corporate veil can be pierced or to
sue these individuals separately. Further, formal links be-
tween the various parties to the transaction can establish a
wider net of liability. Some states may permit you to obtain
a copy of that part of the company’s state tax return that
shows the names and addresses of the current officers.
Another way to find out who is behind a corporation or other
fictitious name is to get the form that the Postal Service
requires a person to file when getting a post office box. The
form requires a real person and a real address.
21 See §§ 11.3, 11.4.5.1, 11.4.7.2, infra.
22 Requests can be emailed to the FTC at foia@ftc.gov. The FTC
charges fees for searching its records plus a per-page copying
charge.
82
11.3.2.2.6.7 Internet searches
Using the Internet and other electronic database services
to conduct a search on a topic of interest or to discover
information about a particular party to the transaction can
prove fruitful. As indicated above, any web pages of note
should be printed out immediately and possibly also pre-
served electronically, as the content of websites can be
changed quickly.
11.3.3 Identifying Possible Defendants
Rescuers come in all shapes and sizes and rescue scams
can involve a number of different players beyond the res-
cuer. To avoid missing parties, in what can sometimes be
complex real estate transactions, it is generally best to cast
the liability net as wide as possible to start.
Rescuers and affıliates. First on the list of defendants is
the rescuer, or person with whom the homeowners had
primary contact, and the grantee to whom the homeowners
transferred title to the property. The grantee may be an
‘‘investor’’ or other third party affiliated with the rescuer.
Any other individuals affiliated with the rescuer and with
whom the homeowners had contact should also be consid-
ered potential defendants.
If the rescuer is a corporate entity, consider naming the
officers or employees of the rescuer individually. The cor-
poration is likely to have no assets. Many claims, including
fraud and unfair and deceptive acts and practices (UDAP)
claims, can be asserted against any person who participated
in or directed the wrongful acts, regardless of whether the
corporate veil is pierced.23
Parties with potential property interests. Regardless of
whether the homeowners’ case asserts fraud claims, argues
equitable mortgage, or otherwise attempts to quiet title, all
parties with potential interests in the property, and their
agents, should be joined as defendants, including trustees,
buyers, mortgagees, assignees, settlement agents, apprais-
ers, and brokers. Some of these entities may have insurance
that will compensate them for any losses they have suffered.
For example, a person who has bought the home from the
rescuer may have title insurance that will cover the losses
suffered because of the homeowner’s claim to the home.
Insurance coverage of these losses will make it much more
likely that the buyer will agree to re-convey the home to the
homeowner.
11.3.4 First Steps
11.3.4.1 Introduction
Time is often of the essence in fighting foreclosure rescue
scams. Many times, these cases present themselves as evic-
23 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 6.4 (6th ed. 2004 and Supp.).
 Foreclosure Rescue Scams / 2006 Supplement § 11.3.4.5
tion cases instead of deed theft or foreclosure rescue cases. stack of documents that are then taken elsewhere for nota-
It is important to act quickly to stop any eviction proceed- rization. Regardless of the reason for the defective acknowl-
ings and to get a notice of lis pendens recorded against the edgment, practitioners should promptly investigate whether
property to preserve the homeowner’s remedies. such defects may render the instrument invalid.26

11.3.4.2 Stop Eviction Proceedings 11.3.4.4 Evaluating Grounds for Rescission/

Rescission Notice
Many foreclosure rescue scam cases initially present
themselves as evictions. Homeowners may not know that
The Truth in Lending Act (TILA) and the Home Own-
they have transferred title to their property and may be
ership and Equity Protection Act (HOEPA), discussed in
confused when they receive notice related to eviction pro-
§§ 11.4.2 and 11.4.3, infra, allow a homeowner to rescind
ceedings. While state landlord-tenant laws vary widely,
certain credit transactions that are secured by the home. This
most eviction cases proceed much faster than other types of
right to rescind may be applicable even if the rescuer
civil cases. Once a judgment against the tenant has been
attempted to structure the transaction as a transfer of the
entered, by reason of default or otherwise, removal of the
home rather than as a loan. The right to rescind expires after
tenant by the sheriff or other government official may occur
three years in most states, so it is important to evaluate this
within days or weeks. In addition, doctrines such as res
claim quickly. (Massachusetts has its own TILA-type law
judicata and Rooker-Feldman will be much more serious
that allows rescission up to four years after consummation
potential problems if a judgment is entered in an eviction or
of the transaction. Maine, Connecticut, Oklahoma, and
foreclosure action.24 Accordingly, the first priority in han-
Wyoming also have state TILA-type laws, so the deadline
dling a foreclosure rescue case is often preventing the
would be controlled by state law in those states. All of these
eviction of the homeowner.
states have been granted partial exemptions from TILA.27)
If you are not familiar with the procedures of your local
Even if the three-year deadline is not close, exercising the
housing court, or the general court handling residential
right to rescind by sending a rescission letter may help create
eviction cases, you may want to consider enlisting the help
a defense to an eviction. It also creates grounds for recording
of a housing or tenant lawyer. If a judgment has already been
a lis pendens, as discussed in the next section.
entered, you may want to consider options for removing or
reopening it, particularly if it is a default judgment. Some
eviction cases may be held over until the title issues are 11.3.4.5 Recording a Lis Pendens
resolved. In other situations, bankruptcy may be an option if
a judgment for possession has not been entered.25 In order to cash in on the homeowner’s equity, rescuers
may attempt to mortgage or resell the home promptly after
11.3.4.3 Reviewing the Deed acquiring it. If the new owner is a ‘‘bona fide purchaser,’’ the
homeowner may not be able to get title to the house back.
Deeds should be scrutinized to determine whether the Therefore, it may be appropriate to record the homeowner’s
formal requisites were followed. For example, improper claim through a lis pendens or similar procedure. Lis pen-
acknowledgment of deeds (or mortgages) may affect the dens is the Latin phrase for ‘‘a suit pending’’ and typically
validity of the instrument. Other documents to the transac- refers to a notice filed with the local land records after a case
tion should be checked as well, but claims related to the has been filed. Recording a lis pendens against a piece of
formal requirements of deeds often have a very short statute property alerts a potential purchaser or lender that the title of
of limitations period (six months or less). It may be helpful property is in question. The procedure for obtaining and
to recruit an attorney who specializes in real estate law at an recording a lis pendens varies from state to state so be sure
early stage in the case to evaluate these potential claims. to check your state statutes and local court rules for more
Deed and mortgage fraud cases may involve situations in information.
which the person whom the notary certified as having
appeared did not, in fact, appear. Improper notarizations also
may result from the taking of an actual acknowledgment
from an imposter, taking an acknowledgment from an in-
competent person, or the taking of an acknowledgment over
the telephone. Homeowners may be instructed to sign a
26 National Consumer Law Center, The Cost of Credit: Regulation,
24 See §§ 6.4, 6.6, infra. Preemption, and Industry Abuses § 12.10.2.7 (3d ed. 2005 and
25 See § 11.5.3, infra; National Consumer Law Center, Consumer Supp.).
Bankruptcy Law and Practice, Special Guide to the 2005 Act 27 Federal Reserve Board, Official Staff Commentary on Regula-
§ 7.3.3 (2005). tion Z, § 226.29(a)-4.

83
§ 11.4 Foreclosures / 2006 Supplement
11.4 Legal Theories to Attack
Foreclosure Rescue Scams
11.4.1 Construing the Transaction As a
Loan
11.4.1.1 The Equitable Mortgage Doctrine
A variety of federal and state causes of action, under both
statutory and common law, can be used to attack foreclosure
rescue scams. Many of these claims begin with the premise
that the homeowner’s transfer of title to the property,
whether in the form of a sale/leaseback or an inter vivos
trust, was not absolute and was merely intended to provide
security for a loan. Once the transaction is seen as a loan,
then the homeowner can invoke a variety of lending laws,
including those governing usury, mortgage lending, and
foreclosures.
Under the common law ‘‘equitable mortgage’’ doctrine,
as well as the statutes of some states, many courts have
recognized that ‘‘sales’’ with repurchase options may in fact
be loans and that the deeds at issue should be construed as
equitable mortgages.28 The question whether the transaction
28 See, e.g., Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb.
27, 2006) (transfer of home created an equitable mortgage
where the consumer was unsophisticated and not represented by
counsel, where the payment made by the ‘‘purchaser’’ was only
10% of the fair market value of the home, and where the
mortgage remained in the consumer’s name); Wilson v. Bel Fury
Investments Group, L.L.C., 2006 WL 297440 (D. Neb. Feb. 6,
2006) (court recognizes equitable mortgage doctrine but denies
summary judgment to both sides due to disputes of material
fact); Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d 1090 (D.
Minn. 2005) (court could not resolve whether the transaction
constituted an equitable mortgage at the summary judgment
stage; court evaluated six factors to determine the existence of
an equitable mortgage; court also held that the landlord-tenant
eviction judgment was not res judicata nor did the Rooker-
Feldman doctrine apply; fraud counterclaim against the con-
sumer based on her alleged statement that she could make the
rental payments was dismissed); Rowland v. Haven Properties,
L.L.C., 2005 WL 1528264 (N.D. Ill. June 24, 2005) (court
refuses to dismiss the equitable mortgage claim where a house
worth $245,000 was deeded away for only $91,500 and where
the homeowner alleged fraud and no intent to sell); Rowland v.
Haven Properties, L.L.C., (N.D. Ill. Aug. 11, 2005) (court did
not grant a preliminary injunction to the plaintiff to protect the
status quo until a trial due to factual disputes; court list factors
to consider in determining whether the transaction constituted
an equitable mortgage); Hruby v. Larsen, 2005 WL 1540130 (D.
Minn. June 30, 2005) (granting preliminary injunction to main-
tain status quo; court reviewed elements to prove an equitable
mortgage and found that the consumers have a likelihood of
success on the merits; court ordered a bond of $1000 plus
monthly payments of $500); Metcalf v. Bartrand, 491 P.2d 747
(Alaska 1971); London v. Gregory, 2001 WL 726940 (Mich. Ct.
App. Feb. 23, 2001); Redmond v. McClelland, 2000 Minn. App.
LEXIS 779 (Minn. Ct. App. July 25, 2000) (deeds created
equitable mortgage even without explicit option to purchase, in
84
represents a bona fide sale or is a loan depends on the intent
of the parties.29 Specific mortgage-negating language in the
documents or the homeowners’ knowledge that they were
signing a transfer deed is not dispositive of intent.30 Courts
have routinely looked beyond the legal form of these trans-
actions to examine their substance and the circumstances
leading up to their execution. Thus, documents that clearly
identify a sale and leaseback arrangement are not conclusive
if the surrounding circumstances indicate that the home-
owner never intended to sell the home and that the transac-
tion should be considered a loan secured by a mortgage.31
In determining whether these transactions are sales or
loans, courts have relied upon a variety of circumstances.
Factors that indicate that an absolute or conditional deed
should instead be seen as an equitable mortgage include:
• Statements by the homeowner or representations by the
purchaser indicating an intention that homeowner con-
tinue ownership;32
light of parties’ intent and their relative sophistication); MERS
v. Wilson, 2005 WL 1284047 (N.J. Super. Ct. Ch. Div. May 27,
2005) (court reviewed common law rules regarding proving an
equitable mortgage; no allegation of usury); Henderson v. Sec.
Mortg. & Fin. Co., 273 N.C. 253, 160 S.E.2d 39 (1968);
Umpqua Forest Ind. v. Neen’ah-Ore Land Co., 188 Or. 605, 217
P.2d 219 (1950); Swenson v. Mills, 198 Or. App. 236, 108 P.3d
77 (2005); Long v. Storms, 622 P.2d 731 (Or. Ct. App. 1981);
Johnson v. Cherry, 726 S.W.2d 4 (Tex. 1987); Sudderth v.
Howard, 560 S.W.2d 511 (Tex. App. 1977); Bown v. Loveland,
678 P.2d 292 (Utah 1984) (sale with oral repurchase option
construed as equitable mortgage); Levy v. Butler, 93 Wash. App.
1001 (1998) (sale with repurchase option coupled with inad-
equate consideration sufficient to overcome presumption of sale
transaction); National Consumer Law Center, The Cost of Credit:
Regulation, Preemption, and Industry Abuses § 7.5.2 (3d ed.
2005). But see Franchi v. Farmholme Inc., 191 Conn. 201, 464
A.2d 35 (1983) (sale and leaseback not an equitable mortgage).
29 See, e.g., In re Offshore Dev. Corp., 802 F.3d 1319 (11th Cir.
1986); Redic v. Gary H. Watts Realty Co., 762 F.2d 1181 (4th
Cir. 1985); Woods-Tucker Leasing Corp. of Ga. v. Hutcheson-
Ingram Dev. Co., 642 F.2d 744 (5th Cir. 1981); Sachs v.
Ginsberg, 87 F.2d 28 (5th Cir. 1936); Perry v. Queen, 2006 WL
481666 (M.D. Tenn. Feb. 27, 2006); Fox v. Peck Iron & Metal,
25 B.R. 674 (Bankr. S.D. Cal. 1982); Redmond v. McClelland,
2000 Minn. App. LEXIS 779 (Minn. Ct. App. July 25, 2000);
Bantuelle v. Williams, 667 S.W.2d 810 (Tex. 1983). But see
Bray v. McNeeley, 682 S.W.2d 615 (Tex. App. 1984).
30 See Restatement (Third) of Property, Mortgages § 3.3(a) & cmt.
D (1997); Josiah Kibe, Comment: Closing the Door on Unfair
Foreclosure Practices in Colorado, 74 U. Colo. Law Rev. 241,
262 (2003) (collecting statutory cites on admission of parol
evidence).
31 See Browner v. District of Columbia, 549 A.2d 1107 (D.C.
1998); London v. Gregory, 2001 WL 726940 (Mich. Ct. App.
Feb. 23, 2001); Swenson v. Mills, 198 Or. App. 236, 108 P.3d
77 (2005). Several states have statutes under which absolute
deeds may be considered mortgages in certain circumstances.
See, e.g., 765 Ill. Comp. Stat. § 905/5; Md. Code Ann., Real
Prop. § 7-101; Okla. Stat. tit. 46, § 1.
32 Restatement (Third) of Property, Mortgages §§ 3.2(b)(1),
3.3(b)(1) (1997).
 Foreclosure Rescue Scams / 2006 Supplement
• A substantial disparity between the value received by
the homeowner and the actual value of the property;33
• Existence of an option to repurchase;34
• The homeowner’s continued possession of the prop-
erty;35
• The homeowner’s continuing duty to bear ownership
responsibilities, such paying real estate taxes or per-
forming property maintenance;36
• Disparity in bargaining power and sophistication, in-
cluding the homeowner’s lack of representation by
counsel;37
33 Restatement (Third) of Property, Mortgages §§ 3.2(b)(2),
3.3(b)(2) & cmt. c (1997); see, e.g., Perry v. Queen, 2006 WL
481666 (M.D. Tenn. Feb. 27, 2006); Browner v. District of
Columbia, 549 A.2d 1107 (D.C. 1998); London v. Gregory,
2001 WL 726940 (Mich. Ct. App. Feb. 23, 2001); Howard v.
Diolosa, 574 A.2d 995 (N.J. Super. Ct. App. Div. 1990);
Bantuelle v. Williams, 667 S.W.2d 810 (Tex. App. 1983); Levy
v. Butler, 93 Wash. App. 1001 (1998) (sale with repurchase
option coupled with inadequate consideration sufficient to over-
come presumption of sale transaction).
34 Restatement (Third) of Property, Mortgages § 3.3(b)(3) (1997).
35 Id. §§ 3.2(b)(3), 3.3(b)(4).
36 Id. §§ 3.2(b)(4)–(5), 3.3.(b)(5)–(6); In re Davis, 169 B.R. 285
(E.D.N.Y. 1994) (looking to whether leaseback actually trans-
fers the normal risks and responsibilities of a lease); accord
McGill v. Biggs, 105 Ill. App. 3d 706 (1982); Howard v.
Diolosa, 574 A.2d 995 (N.J. Super. Ct. App. Div. 1990); cf.
Carlson v. Bertrand, 2004 WL 3030033 (Minn. Dist. Ct. Mar.
19, 2004) (entering judgment for defendant-purchaser where
plaintiff-homeowner failed to demonstrate fraudulent or negli-
gent misrepresentation and where defendant-purchaser had paid
off first and second mortgage, made improvements to the prop-
erty, and paid utility bills owed by the plaintiffs and where the
monthly rent payments were lower than the mortgage pay-
ments).
37 Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb. 27, 2006);
Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998);
London v. Gregory, 2001 WL 726940 (Mich. Ct. App. Feb. 23,
2001); Restatement (Third) of Property, Mortgages
§§ 3.2.(b)(6), 3.3(b)(7) (1997). In Browner the court found that
the lender’s misconduct was not excused by the fact that the
distressed homeowner made an improvident decision. The court
made clear that this is precisely the sort of overreaching sought
to be curbed by usury laws:
The purpose of usury laws from time immemorial
has been to protect desperately poor people from the
consequences of their desperation. Lawmaking au-
thorities in almost all civilizations have recognized
that the crush of financial burdens causes people to
agree to almost any conditions of the lender and to
consent to even the most improvident loans. Lenders,
with the money, have all the leverage; borrowers in
dire need of money, have none.
Browner, 549 A.2d at 1116; see also In re Davis, 169 B.R. 285
(E.D.N.Y. 1994) (equity sellers were people of little means who
lacked any real estate experience while equity purchasers were
sophisticated and experienced in real estate transactions). But cf.
Shelton v. Cunningham, 508 P.2d 55 (Ariz. 1973) (finding no
equitable mortgage when lender and borrower were both older
men with little education).
§ 11.4.1.2
• Evidence showing an irregular purchase process, in-
cluding the fact that the property was not listed for
sale38 or that the parties did not conduct an appraisal or
investigate title;39
• Financial distress of the homeowner, including the
imminence of foreclosure and prior unsuccessful at-
tempts to obtain loans.40
Typically, the homeowner has the burden of demonstrat-
ing by clear and convincing evidence that an absolute deed
is in fact an equitable mortgage.41 However, courts have
held that a sale with an option to repurchase coupled with a
gross disparity between the sale price and the property value
without more can satisfy the homeowner’s burden.42 In
California, the mere presence of an option to repurchase in
an instrument conveying property in foreclosure creates a
presumption that the transaction is a loan.43
The most direct consequence of an equitable mortgage is
that the deed transferring the property from the homeowner
is voidable, and the homeowner may be able to assert
continuing ownership through a quiet title action. If the
homeowner regains title through a quiet title action, there
will still be a debt owed to the rescuer. However, the
homeowner may have damage claims that will offset the
debt. Even if the homeowner is left owing a debt to the
rescuer, the homeowner may be able to save the home by
refinancing that debt with a legitimate lender.
11.4.1.2 The Bona Fide Purchaser Defense
Rescuers often sell or encumber the property quickly after
gaining title, which may cut off the homeowner’s ability to
recover the property. Generally, a bona fide purchaser for
38 See, e.g., In re Davis, 169 B.R. 285 (E.D.N.Y. 1994) (home-
owner expressly stated she did not want to sell her home);
Browner v. District of Columbia, 549 A.2d 1107 (D.C. 1998)
(homeowners had no intent to sell homes); Johnson v. Cherry,
726 S.W.2d 4 (Tex. 1987) (homeowner told real estate agent he
was not interested in selling his property).
39 See, e.g., Long v. Storms, 622 P.2d 731 (Or. Ct. App. 1981)
(appraisal not conducted until after sale).
40 See, e.g., Perry v. Queen, 2006 WL 481666 (M.D. Tenn. Feb.
27, 2006); Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d
1090 (D. Minn. 2005); McElroy v. Grisham, 810 S.W.2d 933
(Ark. 1991) (seller in dire financial straits, which creditor
knew); Browner v. District of Columbia, 549 A.2d 1107 (D.C.
1998) (defendant knew plaintiff were financially distressed and
had been unable to obtain a loan); London v. Gregory, 2001 WL
726940 (Mich. Ct. App. Feb. 23, 2001); Howard v. Diolosa, 574
A.2d 995 (N.J. Super. Ct. App. Div. 1990) (homeowners pre-
viously denied four loans by institutional lenders).
41 See, e.g., McGill v. Biggs, 105 Ill. App. 3d 706 (1982); Long v.
Storms, 622 P.2d 731 (Or. Ct. App. 1981).
42 See, e.g., Koenig v. Van Reken, 89 Mich. App. 102, 279 N.W.2d
590 (1979); Levy v. Butler, 93 Wash App. 1001, 1998 WL
781146 (1998).
43 Cal. Civ. Code § 1695.12; see Boquilon v. Beckwith, 57 Cal.
Rptr. 2d 503 (Cal. Ct. App. 1996).
85
§ 11.4.1.2 Foreclosures / 2006 Supplement
value of property subject to an equitable mortgage, without
notice of such mortgage, takes the property free of the
equitable mortgage.44 However, there are several caveats to
this rule that may preserve the homeowner’s options. While
the following discussion focuses on sales to third party
purchasers, the same principles may apply if the rescuer has
taken out new loans on the property that the homeowner is
attempting to avoid.
First and most important, a purchaser who has notice of
the homeowner’s claim to ownership may still be subject to
the equitable mortgage doctrine. ‘‘[N]otice to [the bona fide
purchaser], actual or constructive, [is] an element essential
to the survival of the [equitable] lien, as against [the bona
fide purchaser].’’45 Moreover, suspicious circumstances that
of themselves may not provide notice may put the purchaser
on ‘‘inquiry notice’’ with a duty to investigate further.46 This
is why homeowners should immediately record a lis pen-
dens to put any subsequent purchasers on notice and pre-
serve remedies against them.
Among the circumstances that may lead a court to impute
notice are:
• The homeowner’s continued possession of the prop-
erty;47
• The purchaser’s acquisition of title through a quit claim
deed, especially if it is one of a series;48
• The seller’s failure to satisfy the homeowner’s recorded
mortgages;49
44 Lynch v. Murphy, 161 U.S. 247, 255 (1896); see Fla. Stat. Ann.
§ 697.01 (setting forth equitable mortgage rule with exception
that ‘‘no such conveyance shall be deemed or held to be a
mortgage, as against a bona fide purchaser or mortgagee, for
value without notice, holding under the grantee’’); Martinez v.
Affordable Housing Network, Inc., 123 P.3d 1201, 1205 (Colo.
2005) (noting that ‘‘Martinez signed the deed. . . . Thus, the
deed was not void and the burden was on Martinez to rescind the
fraudulently procured deed prior to its conveyance to a subse-
quent bona fide purchaser’’).
45 Lynch v. Murphy, 161 U.S. 247, 255 (1896); see Martinez v.
Affordable Housing Network, Inc., 123 P.3d 1201, 1206 (Colo.
2005) (observing that actual, constructive or inquiry notice can
give a purchaser notice of a title defect and defeat bona fide
purchaser status, and finding that purchaser was on inquiry
notice of foreclosure rescue scam).
46 See Martinez v. Affordable Housing Network, Inc., 123 P.3d
1201, 1206 (Colo. 2005).
47 Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201,
1207 (Colo. 2005).
48 See Martinez v. Affordable Housing Network, Inc., 123 P.3d
1201, 1207–1208 (Colo. 2005) (observing that conveyance by
quitclaim imposes an element of risk on the buyer that, though
not dispositive, ‘‘is a significant factor to be considered when
assessing inquiry notice,’’ and finding two back-to-back quit-
claim conveyances particularly unusual).
49 See Martinez v. Affordable Housing Network, Inc., 123 P.3d
1201, 1208 (Colo. 2005).
86
• The purchaser’s failure to conduct a title search or to
obtain title insurance;50
• Existence of a lis pendens;
• The fact that the purchaser paid significantly less than
market value for the property, indicating awareness of
title defects (or showing that it was not a bona fide
purchase ‘‘for value’’);
• Any other suspicious circumstances—such as a large
discrepancy between the homeowner’s original pur-
chase price and the sale price to the rescuer—that
would lead a reasonable buyer to inquire further and to
discover the homeowner’s claim.
Some of these factors, such as the homeowner’s possession
of the property or a lis pendens, may be sufficient in and of
themselves. Others, such as transfer through a quit claim
deed, are not conclusive but may lend support to other
evidence.
The advocate may wish to consult with a real estate
expert, or a trust expert if the case involved an inter vivos
trust, to determine whether the circumstances would arouse
suspicion in a reasonable buyer. Real estate practices and
customs vary from state to state and from locality to locality,
and any departure from standard practices should be sus-
pect. Documents required for a trust also vary from state to
state and it is important to determine what documents a
reasonable purchaser would inspect and whether there were
unusual features of the trust documents that would have
alerted a buyer that something was amiss.
For foreclosure rescue scams, the homeowner’s continued
possession of the property is clearly the most important
factor that should put a purchaser on at least inquiry notice.
As one court observed, ‘‘possession of real estate is suffi-
cient to put an interested person on inquiry notice of any
legal or equitable claim the person or persons in open,
notorious, and exclusive possession of the property may
have. . . . Further, where the party in possession is the sole
tenant and lessee, certain circumstances may give arise to a
duty to inquire as to their rights as tenants beyond mere
possessory rights.’’51
Second, even if the homeowners cannot recover the prop-
erty from a bona fide purchaser, the equitable mortgage
doctrine may still be asserted to pursue monetary claims
against the original rescuer.
Finally, if the rescuer actually forged the deed from the
homeowner, then it is void ab initio and not merely voidable.
In that case, the rescuer has no title to convey, even to a bona
fide purchaser.52
50 See Martinez v. Affordable Housing Network, Inc., 123 P.3d
1201, 1208 (Colo. 2005).
51 See Martinez v. Affordable Housing Network, Inc., 123 P.3d
1201, 1207 (Colo. 2005).
52 See Martinez v. Affordable Housing Network, Inc., 123 P.3d
1201, 1205 (Colo. 2005); M.M.&G., Inc. v. Jackson, 612 A.2d
186 (D.C. 1992); Harding v. Ja Laur Corp., 315 A.2d 132 (Md.
 Foreclosure Rescue Scams / 2006 Supplement
11.4.2 Truth in Lending
11.4.2.1 Introduction
While the Truth in Lending Act (TILA) is generally a
disclosure statute and does not limit the substantive terms of
loans, it can be useful in attacking foreclosure rescue scams,
because rescuers often structure these transactions as sales
and do not provide the disclosures required by TILA.
TILA contains an express cause of action with remedies
that include actual and statutory damages and attorney fees.
The most important remedy in the foreclosure rescue scam
context, however, is the right to rescission, which includes
voiding of finance charges and closing costs. TILA also
provides the basis for federal jurisdiction, which may or may
not be an advantage, depending on the state.
Because TILA only applies to creditors who have a
regular business of extending credit, it may not apply to
some of the small time rescuers who populate the foreclo-
sure rescue scam market. A subsection of TILA, however,
the Home Ownership and Equity Protection Act (HOEPA),
which applies to certain high cost loans, has a looser defi-
nition of ‘‘creditor,’’ and also provides additional require-
ments and remedies. HOEPA is discussed in § 11.4.3, infra.
11.4.2.2 When Does TILA Apply?
When a sale/leaseback or inter vivos trust is found to be
a disguised loan, it is subject to disclosure requirements and
TILA remedies to the same extent as an explicit secured loan
transaction.53 To fall under TILA, a transaction must involve
‘‘credit’’54 offered or extended by a ‘‘creditor’’55 to a ‘‘con-
sumer’’ (who must be a natural person),56 primarily for
Ct. Spec. App. 1974); see also Ward v. Gray, 374 A.2d 15 (Del.
Super. Ct. 1977) (when there is no jurisdiction to conduct a sale
due to fraud or failure to meet notice requirements, the sale is
void and any resulting title is a nullity).
53 See, e.g., Wilson v. Bel Fury Inv. Group, 2006 WL 297440 at *5
(D. Neb. Feb. 6, 2006) (No. 8:04CV640); James v. Ragin, 432
F. Supp. 887 (W.D.N.C. 1977); Long v. Storms, 622 P.2d 731
(Or. 1981) (transaction whereby investor took a deed in ex-
change for a loan with a repurchase option was an equitable
mortgage, or a loan with a security interest; investor found to be
creditor subject to Truth in Lending Act and homeowner was
entitled to rescind because Truth in Lending disclosures were
not made); National Consumer Law Center, Truth in Lending
§ 6.2.5 (5th ed. 2003 and Supp.); see also In re Mattera, 128
B.R. 107 (Bankr. E.D. Pa. 1991).
54 15 U.S.C. § 1602(e); Reg. Z § 226.2(a)(14); National Consumer
Law Center, Truth in Lending § 2.2.4 (5th ed. 2003 and Supp.).
55 15 U.S.C. § 1602(f); Reg. Z § 226.2(a)(17)(i); National Con-
sumer Law Center, Truth in Lending § 2.3 (5th ed. 2003 and
Supp.).
56 15 U.S.C. § 1602(h); Reg. Z § 116.2.(a)(11); National Consumer
Law Center, Truth in Lending § 2.2.2 (5th ed. 2003 and Supp.).
§ 11.4.2.3
personal, family or household purposes,57 either subject to a
finance charge or payable by written agreement in more than
four installments.58
Substance governs over form, and state common law or
statutory rules governing equitable mortgages can be used to
establish that the transaction meets the definition of ‘‘credit’’
for TILA purposes.59 Once it is established that the trans-
action is in fact a loan, it is likely that it will meet most of
these other criteria.
The most difficult hurdle is establishing that the credit
was extended by a ‘‘creditor.’’ To meet the TILA definition,
a creditor must ‘‘regularly’’ extend consumer credit.60 In
cases of real estate secured loans, ‘‘regularly’’ means six or
more loans per year.61 However, if a high-cost loan that falls
under HOEPA62 is involved, then the creditor need only
make two or more mortgages per year, or one such mortgage
through a broker, to be considered a creditor for all TILA
purposes.63
The ‘‘creditor’’ is the person to whom the obligation is
initially payable on its face. Arrangers are not covered under
TILA. The liability of assignees is discussed in § 11.4.2.6,
infra. TILA also sets forth several exemptions from its
coverage,64 but a foreclosure rescue transaction is unlikely
to fall within any of them.
11.4.2.3 TILA Disclosure Requirements
TILA works primarily by providing standardized defini-
tions of certain loan terms and requiring disclosure of those
terms. TILA provides specific definitions and requirements,
in some cases quite technical, for the required disclosures.65
57 Reg. Z § 226.2(a)(12); National Consumer Law Center, Truth in
Lending §§ 2.2.3, 2.4.2 (5th ed. 2003 and Supp.).
58 15 U.S.C. § 1602(f)(1); Reg. Z. § 226.2(a)(17)(i)(A); National
Consumer Law Center, Truth in Lending § 2.3.4 (5th ed. 2003
and Supp.).
59 Reg. Z § 226.2.(a)(25); Commentary § 226.2(a)(25)-1; Wilson
v. Bel Fury Investments Group, L.L.C., 2006 WL 297440 at *5
(D. Neb. Feb. 6, 2006); Perry v. Queen, 2006 WL 481666 (M.D.
Tenn. Feb. 27, 2006) (No. Civ. 3:05-0599); Hruby v. Larsen,
2005 WL 1540130 (D. Minn. June 30, 2005); James v. Ragin,
432 F. Supp. 887 (W.D.N.C. 1977) (sale/leaseback); Long v.
Storms, 50 Or. App. 39, 622 P.2d 731 (1981) (sale/leaseback);
National Consumer Law Center, Truth in Lending §§ 2.1.2,
2.5.4, n.321, 6.2.5 (5th ed. 2003 and Supp.).
60 15 U.S.C. § 1602(f); Reg. Z § 226.2(a)(17(i).
61 Reg. Z § 226.17(a), n.3. See § 11.3.2.2, supra for a discussion
of records to investigate to obtain evidence of the rescuer’s other
transactions. See generally National Consumer Law Center,
Truth in Lending § 2.3.3 (5th ed. 2003 and Supp.).
62 For a discussion of HOEPA, see § 11.4.3, infra.
63 15 U.S.C. § 1602(f); Reg. Z § 226.2 n.3; see National Consumer
Law Center, Truth in Lending §§ 2.3.6, 9.2.3 (5th ed. 2003 and
Supp.).
64 15 U.S.C. 1603; Reg. Z § 226.3; see National Consumer Law
Center, Truth in Lending § 2.4 (5th ed. 2003 and Supp.).
65 In addition to specific definitions, the disclosures must be
87
§ 11.4.2.4 Foreclosures / 2006 Supplement
In most foreclosure rescue scams, however, the technicali-
ties do not matter, because the rescuer structures the trans-
action as a sale rather than a loan and provides no TILA
disclosures at all.
In the case of ‘‘closed-end’’ loans,66 failure to disclose the
following information gives the consumer a right to both
actual damages and statutory damages of $200 to $2000 per
transaction for real-estate secured transactions:
• Total finance charge;67
• Amount financed;68
• Annual percentage rate;69
• Payment schedule;70
• Total of payments;71
• Security interests.72
More important than the damages, the failure to disclose any
of the items listed above—other than security interests—
also gives rise to a right to rescission.
TILA also requires disclosure of a second list of items,
violations of which give rise only to actual damages and no
right to rescission.73
provided in a timely way, in a form the consumer may keep,
before consummation, and in a clear and conspicuous format,
segregated from other information. See National Consumer Law
Center, Truth in Lending §§ 4.2–4.4 (5th ed. 2003 and Supp.).
66 A closed-end loan has a fixed term, as is the case for most
foreclosure rescue scams. Different rules apply for open-end
loans that, like home equity lines of credit, have no fixed terms
and allow the borrower to repay as much or little as he or she
decides above a minimum amount.
67 15 U.S.C. § 1638(a)(3); Reg. Z § 226.18(d); see National
Consumer Law Center, Truth in Lending Ch. 2, § 4.6.3 (5th ed.
2003 and Supp.).
68 15 U.S.C. § 1638(a)(2)(A); Reg. Z § 226.18(b);see National
Consumer Law Center, Truth in Lending § 4.6.2 (5th ed. 2003
and Supp.).
69 15 U.S.C. § 1638(a)(4); see National Consumer Law Center,
Truth in Lending § 4.6.4 (5th ed. 2003 and Supp.).
70 15 U.S.C. § 1638(a)(6); Reg. Z § 226.18(g). The payment
schedule includes the number, amount, and timing of payments.
See National Consumer Law Center, Truth in Lending § 4.6.5
(5th ed. 2003 and Supp.).
71 15 U.S.C. § 1638(a)(5); Reg. Z § 226.18(h); see National
Consumer Law Center, Truth in Lending § 4.6.6 (5th ed. 2003
and Supp.).
72 15 U.S.C. § 1638(a)(9); Reg. Z § 226.18(m); see National
Consumer Law Center, Truth in Lending § 4.6.7 (5th ed. 2003
and Supp.).
73 This group includes the identity of the creditor, itemization of
the amount financed, prepayment penalties, late payment fees,
security interest charges, insurance charges and debt cancella-
tion agreement, mortgage lender’s assumption policy, a demand
feature, and whether certain other information can be found
elsewhere. See 15 U.S.C. 1638(a)(1), (a)(2), (a)(10), (a)(11);
Reg. Z §§ 226.4(d), (e), 226.17(a)(1) n.38, 226.18(i), (p), (q),
226.20(b); National Consumer Law Center, Truth in Lending
§§ 4.7.3–4.7.11 (5th ed. 2003 and Supp.).
88
11.4.2.4 The Right of Rescission
11.4.2.4.1 Overview
The right of rescission is the most important remedy
TILA provides to attack a foreclosure rescue scam. Rescis-
sion can be quite dramatic because it can:
• Completely undo the transaction, eliminate onerous
agreements, and void transfer of the property to the
rescuer;
• Eliminate the rescuer’s ability to use summary eviction
proceedings to evict the homeowner from the property;
• Void charges, penalty fees, interest, and other costs,
even if already paid; and
• Allow the court to award statutory damages of up to
$2000 in the case of closed end, real estate secured
loans (in addition to any statutory damages for disclo-
sure violations), if the creditor fails to respond to a
proper rescission notice.74
The value of rescission to save homeowners from foreclo-
sure rescue scams cannot be overstated. The lender (and
assignee) literally must undo the deal if it violated certain
requirements. Becoming familiar with the ground rules of
rescission is essential in home defense cases.75
11.4.2.4.2 What transactions can be rescinded
In addition to TILA’s general coverage provisions, only a
non-purchase money security interest in the consumer’s
primary residence is subject to rescission.76 This means that
the mortgage loan in question cannot be the one obtained to
purchase the home. Rescission does apply to non-purchase
money interests, whether first or second mortgages, home
equity loans, bridge loans, home improvement contracts,
and liens arising by operation of law.77 Since foreclosure
rescue scams target people who already own their homes, it
will usually be clear that the transaction is not a purchase
money loan.
74 See §§ 4.8.4.2, 4.8.4.7, supra.
75 This subsection provides only a general overview of the rescis-
sion remedy. The rescission rules appear in 15 U.S.C. § 1635.
Regulation Z and the Official Staff Commentary further flesh out
these provisions: Reg. Z § 226.15 (open-end credit) and
§ 226.23 (closed-end credit). The relevant Official Staff Com-
mentary is located at Official Staff Commentary §§ 226.15
(open-end credit) and 226.23 (closed-end credit). The statute,
regulations, and commentary and extensive analysis can be
found in National Consumer Law Center, Truth in Lending (5th
ed. 2003 and Supp.).
76 National Consumer Law Center, Truth in Lending § 6.2.1 (5th
ed. 2003 and Supp.).
77 Id. When the same creditor refinances the loan, rescission
applies only to the extent of the new money advanced. Id.
§ 6.2.6.2.
 Foreclosure Rescue Scams / 2006 Supplement
11.4.2.4.3 When rescission can be exercised
The homeowner has three business days78 to rescind from
the latest of:
• Consummation of the transaction;
• Delivery of proper notice of right to rescind;79 or
• Delivery of all material disclosures, correctly made.80
The three days begin to run only when all material disclo-
sures and the notice of right to rescind, in the proper form,
are received.
If the creditor fails to make the required disclosures or
provide notice of the right to rescind, there is a continuing
right to rescind for up to three years from consummation.
Since most foreclosure rescue scams are not styled as loans,
the rescuers rarely provide any disclosures, and this three-
year rule will normally apply.81 In addition, in Massachu-
setts and some other states, rescission under a state TILA
law may be permitted defensively by way of recoupment
beyond three years.82
The right to rescind a loan under TILA is normally
extinguished if the consumer’s interest in the property is
sold or transferred (including by foreclosure sale).83 This
rule does not apply if the transaction is determined to be an
equitable mortgage under state law such that any sale or
transfer is invalid.84 As discussed above, there may be issues
in applying the equitable mortgage doctrine to a bona fide
purchaser who takes title without notice of the equitable
mortgage, though the homeowner’s continued possession of
the property may provide sufficient notice.85
For loans that fall under HOEPA,86 violations of most of
the HOEPA protections also trigger the extended three-year
right to rescind.
78 Saturdays are included. Only Sundays and certain specified
federal holidays are excluded. Reg. Z, § 226.2 (a)(6).
79 Specific rules govern the form of the notice of the right to
rescind and the circumstances that make it ineffective or allow
the consumer to waive it National Consumer Law Center, Truth
in Lending §§ 6.2.9, 6.4.3, 6.5 (5th ed. 2003 and Supp.).
80 For closed-end loans, the material disclosures are the amount
financed, the finance charge, the APR, the payment schedule,
and the total of payments. See § 11.4.2.3, supra.
81 Once the three-year period passes, however, the right to rescind
expires and there is generally no right under federal law to raise
rescission as a defense to foreclosure even by way of recoup-
ment. There are some potential arguments to get around this rule
in certain limited circumstances. See National Consumer Law
Center, Truth in Lending § 6.3.3 (5th ed. 2003 and Supp.).
82 See National Consumer Law Center, Truth in Lending § 6.3.3.2
(5th ed. 2003 and Supp.).
83 See National Consumer Law Center, Truth in Lending § 6.3.2.2
(5th ed. 2003 and Supp.).
84 Id. § 6.3.2.2.1 & n.238.
85 See § 11.4.1.2, supra.
86 For a discussion of HOEPA, see § 11.4.3, infra.
§ 11.4.2.4.4
11.4.2.4.4 Exercising the right to rescind
Rescission works through a sequential, three-step pro-
cess.
First, the consumer sends written notice of rescission,
which operates automatically to void the security interest in
the real property and to eliminate the consumer’s obligation
to pay the finance charges (even if accrued) and other
charges.87 In the case of a foreclosure rescue scam, once a
sale/leaseback transaction is restructured into a loan, the
agreements underlying that transaction would be voided,
including any fees or costs the homeowner agreed to pay.
The notice of rescission need not take any special form.
Nevertheless, in the case of a foreclosure rescue scam, some
explanation is obviously needed since the transaction most
likely took the form of a sale or transfer and not of a loan
subject to TILA. A sample letter exercising the right to
rescission is included on the CD-Rom accompanying this
manual. Some courts have held that a complaint filed in
court may serve as the notice of rescission, but a separate
notice is preferable.88
Second, after the notice of rescission has been sent, the
creditor or assignee has twenty days to refund or credit any
money paid (including any money or property given to a
third party) and to take steps to void the security interest.89
For a foreclosure rescue scam, this obligation would include
the obligation to reconvey the property back to the home-
owner and to clear any other clouds or new encumbrances
on the homeowner’s title.
Third, when the creditor performs its ‘‘step 2’’ obligation,
then the consumer must tender back any money or property
received from the creditor.90 Although the scope of their
modification authority is debatable, most courts have con-
cluded that they have equitable authority to require the
consumer to tender before the creditor must perform its
obligations, or conversely to modify the tender obligation.91
The important point to remember is that a homeowner
who seeks rescission must be prepared to tender back his or
her gains from the transaction, i.e., if the creditor paid off the
original mortgage or brought it current, or provided the
87 15 U.S.C. § 1635(b); Reg. Z §§ 226.5(d)(1), 226.23(d)(1); see
National Consumer Law Center, Truth in Lending § 6.6.2 (5th
ed. 2003 and Supp.).
88 Id. § 6.6.2.1.
89 15 U.S.C. § 1635(b): Reg. Z §§ 226.15(d)(2), 226.23(d)(2); see
National Consumer Law Center, Truth in Lending § 6.6.4 (5th
ed. 2003 and Supp.).
90 15 U.S.C. § 1635(b); Reg. Z §§ 226.15(d)(3), 226.23(d)(3); see
National Consumer Law Center, Truth in Lending §§ 6.6.5, 6.8
(5th ed. 2003 and Supp.).
91 See §§ 4.8.4.2, 4.8.4.7, supra; National Consumer Law Center,
Truth in Lending § 6.7 (5th ed. 2003 and Supp.). TILA does not
allow courts to nullify the automatic ‘‘step 1’’ consequences of
the rescission notice—voiding of any security interest and
cancellation of any charges—although many courts still rely on
pre-1980 case law that was in conflict on this point. See id.
§ 6.7.2.
89
§ 11.4.2.5 Foreclosures / 2006 Supplement
homeowner with cash. However, the consumer should be
able to credit any payments made to the rescuer—whether in
the form of rent payments, finance charges, closing costs, or
other disguised fees or payments—because rescission voids
any obligation to pay those costs. In addition, any closing
costs paid to third parties are voided. Finally, any TILA
damages to which the consumer is entitled may also be
credited against the tender obligation.
The consumer may come up with the tender in a variety
of ways. The consumer may be able to refinance elsewhere
with an affordable loan, since all interest, closing costs, and
credit-related charges are eliminated. (Be sure to look for
market rate loans, too.) Elders may wish to explore reverse
mortgage options to obtain refinancing funds.92
Courts may permit the consumer to repay the tender in
installments or allow some time to come up with a payment
or refinancing.93 The consumer may tender in bankruptcy,
and some courts have treated the creditors as unsecured
creditors in chapter 13 proceedings.94
If the creditor fails to respond to the cancellation notice,
the consumer may be forced to file an affirmative action to
enforce the rescission right. In bankruptcy proceedings, this
may be raised in an adversary proceeding. The creditor’s
failure to respond gives rise to a claim for statutory damages
and actual damages. This is in addition to any claim which
may be available for other TILA statutory damages.95
As soon as the rescission notice is sent, the consumer
should start making monthly payments in an affordable
amount into an escrow account or some other protected
account. These payments will help build up a sum to offer
as the tender amount. The consumer’s record of regular
payments will also be useful in persuading the court to allow
the consumer to tender in installments.
In most foreclosure rescue scam cases, the homeowner
will be asserting not just TILA claims, but also a variety of
non-TILA claims that may offer punitive, statutory, or mul-
tiple damages. The possibility of a multiple, statutory, or
punitive damage award on the homeowner’s non-TILA
claims is a strong argument why the court should delay any
determination of the tender obligation until after trial. After
the court resolves all the homeowner’s claims, a net amount
may be owed to the homeowner. Since rescuers tend to be
undercapitalized entrepreneurs, if the homeowner is re-
quired to pay the tender amount early the rescuer may
disappear with it.
92 For a discussion of how to assess when a refinancing is a good
idea, see National Consumer Law Center, The Cost of Credit:
Regulation, Preemption, and Industry Abuses § 6.5 (3d ed. 2005
and Supp.).
93 See § 4.8.4.3, supra; National Consumer Law Center, Truth in
Lending § 6.7 (5th ed. 2003 and Supp.).
94 National Consumer Law Center, Truth in Lending § 6.8.4 (5th
ed. 2003 and Supp.).
95 See § 4.8.4.7, supra.
90
11.4.2.5 Damages and Attorney Fees
TILA gives consumers, with some exceptions, the ability
to collect actual damages without cap and to recover costs
and reasonable attorney fees. In addition, consumers may
collect statutory damages for certain violations96 without
having to prove actual damages, regardless whether the
creditor knew about the violation or whether the consumer
was deceived.
In the case of closed-end credit secured by real property,
the statute sets statutory damages for disclosure violations
between $200 and $2000.97 In general, the consumer may
recover only one statutory recovery per transaction for
disclosure violations, even if multiple violations are com-
mitted or multiple parties are involved.98 Separate and apart
from disclosure violations, TILA provides statutory dam-
ages of $200 to $2000 in the case of closed-end real-estate-
secured loans, if the creditor fails to respond to a proper
rescission notice. Violations of HOEPA prohibitions carry
additional statutory penalties.99
The limitation period for affirmative damages claims is
one year from the date of the violation.100 Consumers can
also assert damage claims defensively by way of recoup-
ment or set-off in an action by the creditor to collect on the
alleged debt filed more than a year from the date of the
violation.101 The one-year statute of limitations for damages
can also be equitably tolled in the event of fraud.102
11.4.2.6 Assignee Liability
Under TILA, assignees are always liable for rescission, to
the same extent as the original creditor.103 However, in order
to exercise TILA rescission in the sale/leaseback context,
the homeowner must first convince the court to apply the
equitable mortgage doctrine to void the transfer deed and
convert the sale into a loan subject to TILA. This may be
more difficult if the rescuer has already transferred the
96 See § 11.4.2.3, supra.
97 15 U.S.C. § 1640(a)(2)(A)(iii). The statute is ambiguous on how
the court is to determine where in this range to set damages. See
National Consumer Law Center, Truth in Lending 8.6.2.1 (5th
ed. 2003 and Supp.).
98 15 U.S.C. § 1640(g). A series of refinancings may be considered
multiple transactions, however, allowing one award of statutory
damages for the disclosure violations in each refinancing. See
National Consumer Law Center, Truth in Lending § 8.6.3.1 (5th
ed. 2003 and Supp.).
99 See § 11.4.3.5, infra.
100 15 U.S.C. § 1640(e); National Consumer Law Center, Truth in
Lending § 7.2 (5th ed. 2003 and Supp.).
101 15 U.S.C. § 1640(e); National Consumer Law Center, Truth in
Lending § 7.2 (5th ed. 2003 and Supp.).
102 See National Consumer Law Center, Truth in Lending § 7.2.3
(5th ed. 2003 and Supp.).
103 15 U.S.C. § 1641(c); National Consumer Law Center, Truth in
Lending §§ 6.9.2, 7.3 (5th ed. 2003 and Supp.).
 Foreclosure Rescue Scams / 2006 Supplement
property to a third party purchaser. The homeowner will
likely have to show that the purchaser had some notice,
actual or constructive, of the homeowner’s claims in order to
invoke the equitable mortgage doctrine against the third
party purchaser.
In the foreclosure rescue scam context, however, the
homeowner likely still has possession of the property, which
should be sufficient to put the purchaser on inquiry notice
and defeat a bona fide purchaser defense.104 In that case,
TILA rescission should be available against the assignee/
purchaser.105
In contrast to rescission, assignees are shielded from
TILA liability for damages unless the violation is apparent
on face of disclosure documents or other documents as-
signed.106 Assignees have expended liability for damages if
the loan falls under HOEPA, however.107
It is always important to marshal evidence showing that
the third party had reason to be suspicious of the transaction.
Evidence along these lines will also be necessary if the
homeowner is asserting claims such as fraud directly against
the third party purchaser.
11.4.3 Home Ownership and Equity
Protection Act
11.4.3.1 Scope
11.4.3.1.1 Overview of HOEPA triggers
In 1994, Congress passed the Home Ownership and
Equity Protection Act (HOEPA), designed to prevent some
predatory lending practices.108 HOEPA, which is part of
TILA, imposes additional requirements and remedies on
loans made at high rates or with excessive costs and fees.
HOEPA applies only to those loans that are subject to
rescission under TILA: non-purchase, closed-end credit se-
cured by the homeowner’s primary residence.109 In addition,
reverse mortgages are exempted from HOEPA. TILA’s gen-
eral definition of ‘‘credit’’ applies, but the definition of
‘‘creditor’’ is much looser: a creditor need only make two
HOEPA loans per year, or one such mortgage through a
104 See § 11.4.1.2, supra.
105 In Armstrong v. Real Estate Int’l, Ltd., 2006 WL 354983
(E.D.N.Y. Feb. 14, 2006), the court refused to preliminarily
enjoin the rescuer from transferring the property because any
transferee/assignee would be subject to TILA rescission, and
therefore the plaintiff could not show irreparable injury. The
court did not discuss the bona fide purchaser defense, but there
may have been a lis pendens recorded that would have given any
purchaser notice.
106 15 U.S.C. § 1641(a).
107 See 11.4.3.3, infra.
108 15 U.S.C. §§ 1602(aa), 1639. Regulations promulgated under
HOEPA can be found in Regulation Z, 12 C.F.R. §§ 226.31,
226.32. See generally § 4.8.5, supra.
109 See §§ 11.4.2.2, 11.4.2.4.1, supra.
§ 11.4.3.1.1
broker, to be subject to both HOEPA and the general TILA
provisions.110 As with TILA generally, courts will look
beyond the form of the transaction and may use the equi-
table mortgage doctrine to view a sale transaction as a
loan.111
HOEPA protections apply if either one of two triggers is
met. First, the loan is subject to HOEPA if the annual
percentage rate (APR) exceeds the yield on treasury secu-
rities with comparable maturities by more than eight per-
centage points for a first lien, or ten points for a subordinate
lien.112 For a sale/leaseback transaction, the time period for
a ‘‘comparable’’ treasury maturity can be determined by
looking at the terms of the lease, the expiration date of an
option to purchase, or the date any balloon payment is due.
Second, the loan is subject to HOEPA if the total of the
points and fees exceeds eight percent of the total loan
amount and is over an amount adjusted annually for infla-
tion ($528 for 2006).113 ‘‘Points and fees’’ is defined to
include all noninterest ‘‘finance charges,’’ which in turn are
defined as ‘‘any charge payable directly or indirectly by the
consumer and imposed directly or indirectly by the creditor
as an incident to or a condition of the extension of credit.’’114
In addition, all compensation paid to mortgage brokers and
certain closing costs count as points and fees.115 Once a
foreclosure rescue transaction is reconstructed to be seen as
a loan, the costs that the homeowner incurs can be consid-
ered to be incident to the extension of credit.
To determine whether a foreclosure rescue transaction
meets either of these triggers, one can consider the terms of
the repurchase portion of the transaction alone or the unified
impact of the sale and the repurchase. When the homeown-
er’s repurchase price is higher than the sale price, the lost
equity is arguably a finance charge that should be considered
in the calculation.116
110 15 U.S.C. § 1602(f); Reg. Z § 226.2 n.3; National Consumer
Law Center, Truth in Lending §§ 2.3.6, 9.2.3 (5th ed. 2003 and
Supp.). See, e.g., Hruby v. Larsen, 2005 WL 1540130 (D. Minn.
June 30, 2005).
111 See § 11.4.2.2, supra.
112 The relevant rate is the one in effect on the fifteenth day of the
month immediately preceding the month in which the applica-
tion for the extension of credit is received by the creditor. 15
U.S.C. § 1602(aa)(1)(A). In these cases, there is not likely to be
a formal ‘‘application.’’ The homeowner could argue that the
relevant date is the fifteenth day of the month preceding the
month in which the scammer first discussed the transaction, or
alternatively, in which the transaction itself occurred.
The rates for comparable treasury bonds can be found on the
Federal Reserve’s website at www.federalreserve.gov/Releases/
H15/data.htm, Scroll down to ‘‘treasury constant maturities,’’
find the term of the loan, and click on ‘‘Business Day.’’ The
length of the contract to repay and ‘‘rent’’ the property is the
most likely term to use when selecting the comparable maturity.
113 15 U.S.C. § 1602(aa)(1)(B), 1602(aa)(3); Reg. Z § 226.32(b);
70 Fed. Reg. 46066 (Aug. 9, 2005).
114 12 C.F.R. §§ 226.32(b), 226.4.
115 12 C.F.R. § 226.32(b).
116 See Prentiss Cox, Foreclosure Equity Stripping: Legal Theories
91
§ 11.4.3.1.2 Foreclosures / 2006 Supplement
11.4.3.1.2 Example of APR trigger calculation
The following is an example of how to determine if a
foreclosure rescue scam loan exceeds the HOEPA APR
trigger. Foreclosure rescue scams are structured in a variety
of ways, however, so other ways of determining the APR
may be appropriate for a particular case.
Assume that the homeowner’s regular monthly mortgage
payment was $733.76 per month (this would be the monthly
payment on a $100,000 30-year mortgage at 8%). Assume
also that the homeowner was $10,000 in arrears on mort-
gage payments and $2000 in arrears on property taxes, but
had $40,000 in equity in the property. A typical rescuer
might pay the combined $12,000 arrearage in exchange for
a quit claim deed on the property and allow the homeowner
to ‘‘rent’’ the property for $1233.76 per month (the $733.76
regular mortgage payment plus $500 toward the $12,000
arrearage) for 24 months, followed by a balloon payment of
$60,000 to exercise an option to reacquire the home.
The annual percentage rate for a $12,000 loan with this
payment schedule is 154.15%.117 Assuming that the ‘‘appli-
cation’’ date of the sale/leaseback was June 1, 2006, this
APR is well in excess of the HOEPA APR trigger of 14.99%
(the Treasury bond rate of 4.99% on the 15th of the prior
month plus 10%).118
11.4.3.1.3 Example of points and fees trigger calculation
The HOEPA points and fees trigger is based not on the
APR but on charges such as prepaid finance charges and
broker fees that are paid directly or indirectly by the con-
sumer, at or before closing, as an incident to or a condition
of the loan. Certain closing costs can also count toward the
points and fees trigger if they are inflated or paid to affiliates,
or if the creditor receives a portion of the charge. The rules
for determining whether a charge counts toward the points
and fees trigger are quite complex and are detailed in
NCLC’s Truth in Lending.119 A worksheet for calculating
and Strategies to Attack a Growing Problem, 39 Clearinghouse
Review Journal of Poverty Law and Policy 607, 617–618
(Mar.–Apr. 2006), for a more detailed discussion of how to
calculate these triggers in the context of a foreclosure rescue
scam.
117 The APR was calculated using the NCLC Consumer Law Math
program included on the CD-Rom accompanying this manual
by inserting $12,000 in the ‘‘amount financed’’ box, 25 in the
‘‘number of periodic payments’’ box, $1233.76 in the ‘‘amount
of most common payment’’ box, and $60,000 in the ‘‘amount of
any irregular final payment’’ box, and then pushing the ‘‘cal-
culate’’ button.
118 In this example, the 10% APR trigger for junior lien mortgages
is used. Since the rescuer only paid the delinquent amount of the
existing first mortgage, not the full balance, a conservative
approach treats the transaction with the rescuer as a junior lien
mortgage loan.
119 National Consumer Law Center, Truth in Lending § 9.2.6 (5th
ed. 2003 and Supp.).
92
HOEPA points and fees is included on the CD-Rom accom-
panying this manual. For most foreclosure rescue transac-
tions, the APR trigger will present a clearer analysis. How-
ever, the following example illustrates the application of the
points and fees trigger in a hypothetical foreclosure rescue
transaction.
Assume that in the previous example the rescuer charged
the homeowner an up-front fee of $500 and required the
homeowner to make two additional $400 monthly payments
to the rescuer while the rescuer was finalizing the transac-
tion. Assume also that the rescuer required the homeowner
to pay $300 for an appraisal before closing, but funneled the
money to an appraisal company owned by the rescuer.
All of these up-front charges, totaling $1600, at least
arguably count toward the HOEPA points and fees trigger as
they were ‘‘payable directly or indirectly by the consumer
and imposed directly or indirectly by the creditor as an
incident to or a condition of the extension of credit.’’120
These points and fees would amount to 13.3% of the total
loan amount of $12,000,121 exceeding the HOEPA triggers
of $528 (for 2006) and 8% of the total loan amount.
This example provides a roadmap for calculating the
points and fees trigger in the most conservative manner.
Alternatively, if the rescuer structures the deal to capture a
profit by creating a difference between the homeowner’s
‘‘sale’’ price for the property and a much larger ‘‘repur-
chase’’ price in those cases where there is a ‘‘repurchase’’
contract, the difference arguably is a finance charge and,
consequently, a point and fee.
In conventional loans, the charges that count toward the
points and fees trigger are usually paid out of the proceeds
of the loan at closing (or paid by the lender before closing
and then added to the principal of the loan). Sometimes,
however, borrowers pay these charges in cash before clos-
ing, or bring cash to the closing. With foreclosure rescue
scams, the points and fees analysis is clearest if the home-
owner made cash payments to the rescuer at or before
closing. Charges may also count toward the points and fees
trigger if the rescuer paid them at or before closing, and then
added them to the amount the consumer agreed to pay to
repurchase the home. Foreclosure rescue transactions are
structured in a variety of ways, and the analysis of points
and fees will depend on the details of the transaction.
120 12 C.F.R. §§ 226.32(b), 226.4.
121 In this example, the homeowner paid the points and fees up
front in cash. In a standard mortgage loan, the points and fees
are often paid out of the proceeds of the loan and then financed
as part of that loan. In that case, the ‘‘total loan amount’’ as
defined by HOEPA is the proceeds of the loan minus the points
and fees. See National Consumer Law Center, Truth in Lending
§ 9.2.9.6 (5th ed. 2003 and Supp.).
 Foreclosure Rescue Scams / 2006 Supplement
11.4.3.2 Substantive Prohibitions
Once a loan is determined to be a high-cost one that meets
one of the HOEPA triggers, several additional prohibitions
and requirements kick in, beyond those in TILA gener-
ally.122 Most are relevant only to traditional loans, but some
are useful in dealing with foreclosure rescue scams.
HOEPA prohibits certain contract terms that Congress
determined to be abusive in the high-rate lending context.
Among these, balloon payments are prohibited unless the
loan has a term of five years or more.123 A lease-purchase
arrangement that requires the homeowner to make rent
payments for a period of time, followed by a large lump-sum
payment to exercise the repurchase option, may violate the
balloon payment prohibition.
HOEPA also prohibits certain lender behavior. Of par-
ticular note, creditors may not make a HOEPA loan without
regard to ability to repay, as where the lender looks to the
value of the home, rather than the homeowner’s monthly
income. This prohibition applies only if the lender engages
in a pattern or practice of this activity, which can be a
difficult standard to meet, though it may be revealed through
discovery of all of the lender’s loans. A presumption is
created that a creditor violates this prohibition if it does not
verify and document the borrower’s ability to repay with a
financial statement and credit report.124 Foreclosure rescuers
usually violate this prohibition since they do not assess
ability to repay and do not verify income.
Finally, HOEPA mandates that the consumer receive a
special advance warning at least three business days before
the loan consummation. The lender must warn that the home
and any equity in it might be lost in the event of nonpay-
ment, and must disclose, for fixed-rate loans, the APR, the
amount of regular monthly payments, and any balloon
payment.125 This warning is virtually never made in the
context of a foreclosure rescue scam, both because rescuers
do not generally structure transactions as loans, and because
they often rush the homeowner to complete the transaction
quickly, before the homeowner understands the nature of the
scam or can obtain advice from a lawyer, friend, or relative.
122 See § 4.8.5.3, supra.
123 Additional prohibitions not discussed in this subsection include
prepayment penalties, interest rate increases upon default, nega-
tive amortization, prepaid payment, escrows, and due-on-de-
mand clauses. Some of these terms are prohibited for all HO-
EPA loans, whereas others have exceptions. See National
Consumer Law Center, Truth in Lending § 9.4 (5th ed. 2003 and
Supp.).
124 See Reg. Z § 226.34(a)(4); National Consumer Law Center,
Truth in Lending § 9.5.2 (5th ed. 2003 and Supp.).
125 Additional requirements for the advance notice are discussed in
National Consumer Law Center, Truth in Lending § 9.3 (5th ed.
2003 and Supp.). A recommended model form is contained in
Reg. Z Appx. H-16.
§ 11.4.3.4
11.4.3.3 Expanded Assignee Liability
An important aspect of HOEPA is its expanded assignee
liability: assignees of covered mortgages are liable for all
claims and defenses that the consumer could assert against
the originator, except to the extent of certain limitations on
damages discussed below.126 This expansion of liability
even covers claims and defenses that can be raised against
the original lender under common law, statutes, or other
theories.
An assignee may defeat liability if it legitimately could
not have known the assigned mortgage was a covered
loan.127 In the sale/leaseback, there are two facets to this
defense.
First, as discussed above, the court must decide whether
the assignee had sufficient notice of the true nature of the
transaction to be subject to the equitable mortgage doctrine,
converting the sale/leaseback into a loan potentially subject
to HOEPA.128
Second, even if the assignee can be imputed with knowl-
edge that the transaction was a loan, the assignee can defeat
liability if it carries the burden of showing that a reasonable
person exercising ordinary due diligence could not have
determined the transaction was a high-cost loan covered by
HOEPA.129 In the foreclosure rescue scam context, the
assignee/purchaser may disavow any knowledge of the de-
tails of the original sale/leaseback transaction between the
homeowner and the rescuer. To rebut such a claim, the
homeowner should seek out evidence of warning signs that,
if investigated by a reasonable purchaser, would have re-
vealed the high-cost details that bring the transaction within
HOEPA.
Any damage award against the assignee under non-
HOEPA/TILA theories that is based on the assignee liability
provisions of HOEPA is capped. Damages are limited to the
amount of all remaining indebtedness and the total amount
already paid by the consumer.130 When damages are
awarded based on TILA and on other claims, the TILA
damages must be offset against the damages awarded on the
other claims.131
11.4.3.4 Remedies
Violations of HOEPA are subject to three remedies.
First, violations of HOEPA trigger actual damages and
TILA statutory damages.
126 15 U.S.C. § 1641(d)(1). Assignees are those entities that pur-
chase loans from the original lenders.
127 See § 4.8.5.4, supra.
128 See § 11.4.1.1, supra.
129 Id.
130 15 U.S.C. § 1641(d)(2)(B).
131 15 U.S.C. § 1641(d)(3). For a discussion of how this cap works,
see National Consumer Law Center, Truth in Lending
§§ 9.7.5.2–9.7.5.3 (5th ed. 2003 and Supp.).
93
§ 11.4.4 Foreclosures / 2006 Supplement
Second, HOEPA violations that are ‘‘material’’ (under a
common law standard, not the TILA standard) carry en-
hanced double damages of the sum of all finance charges
and fees paid by the consumer.132 In the foreclosure rescue
scam context, entering into a sale/leaseback transaction
without regard to the homeowner’s ability to exercise a
repurchase option, or requiring a balloon payment beyond
the homeowner’s reach, are certainly material violations.
Damage claims have a one-year statute of limitations for
affirmative suits, but can be raised at any time defen-
sively.133
Third and more important, violations of HOEPA’s disclo-
sure provisions and the inclusion of a prohibited term, such
as a balloon payment, are deemed ‘‘material’’ under TILA,
giving the consumer the right to rescind the transaction for
up to three years after it was consummated. Making a loan
without regard to ability to pay does not trigger the right to
rescind, though it does entitle the homeowner to damages.134
11.4.4 Unfair and Deceptive Acts and Practices
(UDAP) Statutes
11.4.4.1 Overview of State UDAP Statutes
Foreclosure rescue scams can often be challenged under
state unfair and deceptive acts and practices (UDAP)
laws.135 All fifty states, the District of Columbia, Puerto
Rico, Guam, and the Virgin Islands have at least one statute
with broad applicability that addresses deception and abuse
in the marketplace, and all but Iowa and Puerto Rico afford
the consumer a private cause of action.136 In a majority of
states, the UDAP statute prohibits not just deception, but
also unfair or unconscionable practices.
The broad, expansive, developing nature of UDAP stat-
utes is their unique strength. When a practice does not fall
precisely under a debt collection act, state or federal credit
legislation, warranty law, or other statute, UDAP statutes
132 15 U.S.C. § 1640(a).
133 15 U.S.C. § 1640(c).
134 15 U.S.C. § 1639(j); Reg. Z § 226.23(a) n.48
135 See also § 4.8.3.1, supra. For more detailed discussion of UDAP
laws, see National Consumer Law Center, Unfair and Deceptive
Acts and Practices (6th ed. 2004 and Supp.). Another helpful
reference is Prentiss Cox, Foreclosure Equity Stripping: Legal
Theories and Strategies to Attack a Growing Problem, Clear-
inghouse Review (Mar.–Apr. 2006) at 607–626. The use of
UDAP claims to challenge predatory lending is discussed at
National Consumer Law Center, Unfair and Deceptive Acts and
Practices § 5.1.2 (6th ed. 2004 and Supp.); National Consumer
Law Center, The Cost of Credit: Regulation, Preemption, and
Industry Abuses § 11.5 (3d ed. 2005 and Supp.).
136 These statutes are listed and summarized in National Consumer
Law Center, Unfair and Deceptive Acts and Practices Appx. A
(6th ed. 2004 and Supp.). Even though Iowa’s UDAP statute is
generally not privately enforceable, it is possible that it can be
raised defensively. See id. § 7.2.2.
94
can provide an all-purpose remedy. Almost any abusive
business practice aimed at consumers is at least arguably a
UDAP violation, unless the trade practice falls clearly out-
side the scope of the statute.137 Another important point
about UDAP claims is that most courts have held that, since
they are not based on breach of contract, they are unaffected
by the parol evidence rule or by disclaimers and exculpatory
clauses in the contract documents.138
A UDAP claim should always be considered when deal-
ing with a foreclosure rescue scam. This section first com-
pares UDAP with fraud claims and then discusses the
advantages and disadvantages of UDAP claims as compared
to TILA/HOEPA claims. (For a comparison of UDAP
claims and claims under state foreclosure rescue statutes,
see § 11.4.5.1, infra.) This section also discusses the appli-
cation of UDAP statutes to foreclosure rescue scams, and
ends with an overview of UDAP remedies.
11.4.4.2 Comparison of UDAP and Fraud Claims
UDAP claims have a number of advantages when com-
pared to other claims. In contrast to common law fraud,
proof of the seller’s fraudulent intent or knowledge is not
required for a claim under a state UDAP statute. In some
cases, consumer reliance, damage, or even actual deception
is not a prerequisite to a UDAP action. The standard of proof
is typically a preponderance of the evidence, compared with
clear and convincing evidence for a fraud claim. Thus, a
UDAP claim is a far easier cause of action to prove than
common law fraud. The statute of limitations may also be
longer, although states differ widely.
Most UDAP statutes offer enhanced damages such as
statutory or treble damages, and most offer attorney fees. On
the other hand, punitive damages are available for fraud in
most states, while only about ten UDAP statutes authorize
punitive damages.139 Combining a fraud claim with a UDAP
claim may enable the homeowner to recover punitive dam-
ages on the fraud claim and attorney fees on the UDAP
claim.140
A disadvantage of UDAP claims in comparison to fraud
claims is that some state UDAP statutes have restrictive
coverage provisions. In particular, some UDAP statutes
137 National Consumer Law Center, Unfair and Deceptive Acts and
Practices (6th ed. 2004 and Supp.) describes a large body of
Federal Trade Commission rules, guides and cases, state regu-
lations and cases, statutory provisions, and other materials that
can provide clear guidance in initiating most UDAP claims.
138 National Consumer Law Center, Unfair and Deceptive Acts and
Practices § 4.2.15 (6th ed. 2004 and Supp.).
139 National Consumer Law Center, Unfair and Deceptive Acts and
Practices § 8.4.3 (6th ed. 2004 and Supp.).
140 See Eicher v. Mid America Financial Investment Corp., 702
N.W.2d 792 (Neb. 2005) (awarding attorney fees under state
UDAP statute after awarding other relief on fraud claim against
rescuer).
 Foreclosure Rescue Scams / 2006 Supplement
exclude real estate transactions, extensions of credit, or
regulated entities such as banks. Even in states that exclude
real estate transactions, the practitioner may be able to
characterize the transaction with the rescuer as predomi-
nantly involving services other than real estate or a loan,
however. In addition, entities involved downstream from the
rescuer, such as a bank that gives the rescuer a mortgage
loan against the home, may have derivative liability for the
rescuer’s UDAP violations even if they are not covered by
the UDAP statute themselves.141 Nonetheless, the advantage
of a fraud claim is that there are few or no limits on the
applicability of common law fraud.
Another potential disadvantage of a UDAP claim is that
in Colorado, Georgia, Minnesota, Nebraska, New York,
South Carolina, and Washington, courts have interpreted the
UDAP statute to require the consumer to prove that the
challenged practice affects the public interest. Although this
should not be difficult in the case of a foreclosure rescue
scam, it is not a requirement for a fraud claim. Evidence that
the rescuer engaged in similar transactions will help meet
this requirement. Evidence of other transactions is also
highly useful for showing intent, seeking punitive damages,
and establishing coverage under the Truth in Lending Act,
so it is worth developing even where the state UDAP statute
does not require a showing of an effect on the public interest.
Ten states—Alabama, California (under one of its UDAP
statutes), Georgia, Indiana, Maine, Massachusetts, Texas,
Virginia, West Virginia, and Wyoming—require the con-
sumer to send a notice to the defendant a certain number of
days before filing a UDAP action, and Mississippi requires
the consumer to utilize an informal dispute resolution pro-
cedure before filing suit. If it is necessary to file suit quickly
to prevent the rescuer from transferring the property, it may
be necessary to omit the UDAP claim at first in these states,
and then add it by amendment when the notice period
expires. Decisions from the jurisdiction should be consulted
to determine the best course of action.
Fraud claims can almost always be tried to a jury, but
some states have found no jury trial right for UDAP
claims.142 Even in these states, the fraud and UDAP claims
can usually be tried together, with the fraud claims going to
the jury and the judge deciding the UDAP claims.143
11.4.4.3 Comparison to TILA and HOEPA
UDAP claims are much less technical than Truth in
Lending or HOEPA claims. This can be an advantage and a
disadvantage. Once an equitable mortgage is established (an
intensely factual determination), whether a defendant vio-
lated the TILA or HOEPA is usually a very objective
determination, suitable for summary judgment. The sur-
141 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices §§ 6.6, 6.7 (6th ed. 2004 and Supp.).
142 See id. § 7.9.2.
143 Id.
§ 11.4.4.4
rounding circumstances and the underlying fairness or un-
fairness of the transaction will be only marginally relevant.
By contrast, whether a defendant violated a UDAP statute is
much more dependent on the facts and nuances of those
facts. At trial the practitioner can bring out all the facts and
circumstances that show that the transaction was unfair or
deceptive.
Another advantage of state UDAP laws is that the con-
sumer need not show that the rescuer engaged in a certain
number of credit transactions, as is required under TILA and
HOEPA.144 Some UDAP statutes require a showing that the
seller was engaged in trade or commerce, or that the trans-
action occurred in the ordinary course of the seller’s busi-
ness,145 but this is a less rigid test.
UDAP statutes also offer much different relief than TILA
and HOEPA. Actual damages will be available for all of
these claims, but some courts have given a narrow reading
to TILA’s actual damage provision.146 Some UDAP statutes
explicitly authorize rescission as a remedy, but they lack
TILA’s step-by-step provisions for unwinding home mort-
gage transactions.
11.4.4.4 Application of Substantive UDAP
Standards to Foreclosure Rescue Scams
Most UDAP statutes combine a series of specific prohi-
bitions with a broad, general prohibition of unfair, uncon-
scionable, and/or deceptive practices. Often the rescuer will
have violated one of the specific, more clearly defined
prohibitions, and in addition the facts will show a violation
of the general prohibitions. The broad, flexible prohibitions
of most UDAP statutes make them ideal as a way to
challenge creative, new forms of abusive business
schemes.147
The following are some examples of practices prohibited
by UDAP statutes that are likely to be present in foreclosure
rescue scams:
• The advertising surrounding a foreclosure rescue
scheme and the rescuer’s sales pitch are likely to run
afoul of the UDAP statute’s prohibition of deceptive
statements. Even if the statements are literally true, they
will violate the UDAP statute if their implications are
deceptive or if the rescuer has omitted material facts.148
• A number of UDAP statutes prohibit entering into a
transaction knowing that the consumer is unlikely to be
144 See § 11.4.2.2, supra.
145 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 2.3.4 (6th ed. 2004 and Supp.).
146 See National Consumer Law Center, Truth in Lending § 8.5 (5th
ed. 2005 and Supp.).
147 See generally National Consumer Law Center, Unfair and De-
ceptive Acts and Practices § 2.1.3, 4.2–4.4 (6th ed. 2004 and
Supp.).
148 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices §§ 4.2.13, 4.2.14 (6th ed. 2004 and Supp.).
95
§ 11.4.4.5 Foreclosures / 2006 Supplement
able to repay the obligation.149 Structuring a transaction
to create payments and charges that the consumer
cannot afford, in order to precipitate a default and
foreclosure, will be a UDAP violation in these states
and also in states that prohibit unfairness in general.150
Even in states where the UDAP statute does not include
these prohibitions, it is likely that the rescuer misrep-
resented the nature of the obligations that the home-
owner was undertaking.
• Many UDAP statutes specifically prohibit taking ad-
vantage of a consumer who is vulnerable because of
age, infirmity, illiteracy, educational level, or other
causes.151 Even if the UDAP statute does not contain
this prohibition, many decisions require courts to take
the consumer’s vulnerability into account when assess-
ing whether a statement is deceptive.152
• Collecting fees in excess of those allowed by state
usury laws may state a UDAP claim.153 Framing such
a violation as a UDAP claim is particularly helpful if
the state usury law’s remedies are weak or unclear.
A number of courts have entered UDAP judgments
against rescuers. In a private UDAP suit involving a sale/
leaseback scheme, a debtor who lost her home to a home-
saver won as damages the amount of equity in the home,
which the court then trebled.154 The court held that the
rescuer violated the UDAP statute by taking the debtor’s
home, obtaining her signature on a blank deed, selling the
property without returning fair compensation to her, decep-
tively leading her to believe he was acting in her interests,
misrepresenting the import of the agreements she signed,
149 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 5.1.4 (6th ed. 2004 and Supp.).
150 See, e.g., Jackson v. Byrd, 2004 WL 3130653 (D.C. Super. Ct.
May 11, 2004) (foreclosure rescue case), later op., 2004 WL
3249693 (D.C. Super. Ct. June 30, 2004) (awarding damages),
later op., 2004 WL 3249692 (D.C. Super. Ct. Sept. 2, 2004)
(awarding attorney fees); Fidelity Fin. Servs. v. Hicks, 574
N.E.2d 15 (Ill. App. Ct. 1991) (allegations of deceptive prac-
tices used to make unaffordable loan for home improvements in
order to acquire equity in home scam stated a UDAP claim);
U.S. Home & Realty Corp. v. Lehnartz, Clearinghouse No.
43,259 (Mich. Dist. Ct. Sept. 30, 1987) (Case No. 87-930),
available at www.consumerlaw.org/unreported.
151 See, e.g., Williams v. First Gov’t Mortg. & Investors Corp., 225
F.3d 738 (D.C. Cir. 2000); Jackson v. Byrd, 2004 WL 3130653
(D.C. Super. Ct. May 11, 2004) (foreclosure rescue case), later
op., 2004 WL 3249693 (D.C. Super. Ct. June 30, 2004) (award-
ing damages), later op., 2004 WL 3249692 (D.C. Super. Ct.
Sept. 2, 2004) (awarding attorney fees). See generally National
Consumer Law Center, Unfair and Deceptive Acts and Practices
§ 4.4.4 (6th ed. 2004 and Supp.).
152 See Billingham v. Dornemann, 771 N.E.2d 166, 178 (Mass.
App. Ct. 2002) (foreclosure rescue case). See generally National
Consumer Law Center, Unfair and Deceptive Acts and Practices
§ 4.2.11 (6th ed. 2004 and Supp.).
153 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 5.1.5.4 (6th ed. 2004 and Supp.).
154 In re Bryant, 111 B.R. 474 (E.D. Pa. 1990).
96
and failing to fulfill his promises. Another court awarded
$50,000 punitive damages in a similar sale and leaseback
situation based on fraud, breach of fiduciary duty, and
UDAP violations.155
The Nebraska Supreme Court upheld a finding that a
rescuer who misrepresented to homeowners that they were
obtaining loans, when actually they were conveying their
homes to the rescuer, violated the state UDAP statute.156 In
another case, a court found a UDAP violation where a
consumer, with no one to counsel her, whose sole source of
income was Aid to Families with Dependent Children, was
pressured into a financing scheme that she did not under-
stand and that was disadvantageous.157 The uneducated,
desperate, low-income borrower ‘‘sold’’ her house for
$20,000 and received a repurchase agreement for $32,000 at
a variable 9% to 11% rate, which sum included a 20% realty
commission.
A District of Columbia trial court found that a homesaver
committed numerous deceptive and unconscionable acts.
These included failure to disclose the appraised value of the
home and that he was the other contracting party and would
profit personally from the transaction; presenting himself as
helping the homeowner save her home, when his real in-
tention was to acquire the home for a pittance; and acquiring
the home at a grossly disproportionate price from an aged
and infirm homeowner.158
In another case, an entrepreneur bought a delinquent
mortgage debt before foreclosure began, then contacted the
homeowner, threatened foreclosure, and ultimately brow-
beat the homeowner into conveying the property to him. A
Massachusetts court held that the entrepreneur may have
committed UDAP violations by representing to the home-
owner that signing the agreements was a mere formality
after the homeowner made it clear that he could not afford
the payments.159
11.4.4.5 UDAP Remedies
The typical UDAP statute offers actual damages plus
statutory, multiple, or punitive damages. Actual damages
can be substantial. Several decisions have awarded the lost
155 Jeffries v. The Lewis Group, Clearinghouse No. 47,473F (Ill.
Cir. Ct. Cook Cty. Oct. 9, 1991); see also R.A. Walker &
Associates, Inc., 3 Trade Reg. Rep. (CCH) ¶ 22,080, F.T.C. File
No. 832 3227 (D.D.C. 1983) (issuing preliminary injunction
against foreclosure rescue scam).
156 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d
792 (Neb. 2005).
157 U.S. Home & Realty Corp v. Lehnartz, Clearinghouse No. 43,259
(Mich. Dist. Ct. 1987), available at www.consumerlaw.org/
unreported.
158 Jackson v. Byrd, 2004 WL 3130653 (D.C. Super. Ct. May 11,
2004), later op., 2004 WL 3249693 (D.C. Super. Ct. June 30,
2004) (awarding damages), later op., 2004 WL 3249692 (D.C.
Super. Ct. Sept. 2, 2004) (awarding attorney fees).
159 Billingham v. Dornemann, 771 N.E.2d 166 (Mass. App. Ct.
2002).
 Foreclosure Rescue Scams / 2006 Supplement
equity in the home as actual damages, and then trebled this
amount, where the homeowner was unable to regain the
home.160 Even a homeowner who regains the home may
have lost wages and suffered substantial expenses for mov-
ing, rent, interest, closing costs, and advice.
Many UDAP statutes either authorize injunctions or au-
thorize ‘‘other equitable relief’’ or ‘‘other relief the court
deems proper.’’161 This broad authority should be aggres-
sively pursued in foreclosure rescue scam cases. It may
enable the court to quiet title, order reconveyance of the
property, reform the contract, or order the record owner not
to reconvey or encumber the property.
A few UDAP statutes explicitly mention rescission as a
potential remedy. In other states, general language autho-
rizing other relief or other equitable relief is probably
sufficient authority for a rescission order.162 Since UDAP
statutes are intended to liberalize the common law, the court
may be willing to dispense with some of the formalities of
common law rescission.163
11.4.5 State Foreclosure Rescue Statutes
11.4.5.1 Overview
Eleven states—California, Colorado, Georgia, Illinois,
Maryland, Michigan, Minnesota, Missouri, New York,
Rhode Island, and Washington164—have special statutes that
provide protections against foreclosure rescue scams. As
knowledge of the nature of foreclosure rescue scams
spreads, more states may adopt such laws, so practitioners
should check for recent legislation in their states. These
statutes typically forbid certain deceptive or abusive prac-
tices, require a right to cancel, and, in most cases, provide
special remedies.
160 In re Bryant, 111 B.R. 474 (E.D. Pa. 1990) (awarding lost equity
as actual damages, trebled); Martinez v. Affordable Housing
Network, Inc., 109 P.3d 983 (Colo. Ct. App. 2004) (awarding
lost equity as actual damages, trebled), rev’d on other grounds,
123 P.3d 1201 (Colo. 2006) (reversing trial court’s determina-
tion that buyer of home from rescuer was bona fide purchaser
without notice; remanding for trial on quiet title claim). See also
Eicher v. Mid America Financial Investment Corp., 702 N.W.2d
792 (Neb. 2005) (affirming award of attorney fees on UDAP
claim where damages and rescission were awarded on fraud
claim).
161 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 8.6 (6th ed. 2004 and Supp.).
162 See id. § 8.7.
163 See id.
164 Cal. Civ. Code §§ 2945.1 to 2945.11, 1695.1 to 1695.17; Colo.
Rev. Stat. §§ 6-1-1101 to 6-1-1120; Ga. Code Ann. § 10-1-
393(b)(20); 765 Ill. Comp. Stat. §§ 940/1 to 940/65 (eff. Jan. 1,
2007); Md. Real Prop. Code Ann. §§ 7-105(A-1), 7-301 to
7-321; Mich. Comp. Laws §§ 445.1822 to 445.1825; Minn. Stat.
Ann. §§ 325N.01 to 325N.18; Mo. Stat. Ann. §§ 407.935 to
407.943; New York Real Prop. Law § 265-a; R.I. Gen. Laws
§§ 5-78-1 to 5-79-9; Wash. Rev. Code §§ 19.134.010 to
19.134.080.
§ 11.4.5.2
A significant advantage of asserting a claim under one of
these laws is the clear, explicit rules that these laws impose
on rescuers. Not only will violation of one of the rules be
actionable under the state foreclosure rescue law, but it may
also help make a case for fraud or a UDAP violation.
Another advantage of these laws is the relief they provide.
They usually authorize attorney fees, and unlike some
UDAP statutes these laws typically make an attorney fee
award mandatory if the consumer prevails. Their multiple
damage provisions may also be mandatory. Many of these
statutes also allow the consumer to seek punitive damages,
which the state UDAP statute may not allow. In addition, in
contrast to some UDAP statutes, these statutes do not
require a litigant to send a pre-suit notice or show an impact
on the public interest.
Like the Truth in Lending Act, these laws allow consum-
ers to cancel contracts with rescuers. One advantage of
cancellation under a state foreclosure rescue law is that most
of the state laws do not require the consumer to tender back
the amount paid by the rescuer. On the other hand, these
state laws tend to be less explicit than TILA about the
procedure that the rescuer must follow to cancel the deed,
and they provide more protection than TILA for those who
buy the home or lend against the home after the rescuer
acquires it. Another advantage is that these laws do not
generally include a requirement like TILA’s that the rescuer
have engaged in a certain number of consumer credit trans-
actions.
11.4.5.2 Coverage
The typical statute covers ‘‘foreclosure consultants’’ or
some similar term. Most statutes define this term broadly to
include anyone who makes an offer, representation, or so-
licitation to perform, or actually performs any service for
compensation that is represented to:
• Stop or postpone a foreclosure sale;
• Obtain forbearance;
• Assist the owner in exercising or getting an extension of
a right of reinstatement;
• Assist the owner in obtaining a loan;
• Obtain a waiver of an acceleration clause;
• Lessen the impact of the foreclosure on the owner’s
credit rating; or
• Save the home from foreclosure.
‘‘Service’’ is typically defined to include providing advice
or assistance about foreclosure and serving as an interme-
diary between the homeowner and creditors. Maryland’s law
also covers any person who systematically contacts owners
of property that court records or newspaper advertisements
show are in danger of foreclosure.165 In Michigan and
165 Md. Real Prop. Code Ann. § 70301(b)(2).
97
§ 11.4.5.3 Foreclosures / 2006 Supplement
Washington, the foreclosure rescue provisions are part of the
state credit repair law, and the definitions are much less
detailed.166
Practitioners in states with a foreclosure rescue statute
should evaluate how many of the actors in the scam can be
covered by the definition. Many of the subsidiary players in
a foreclosure rescue scam may have received compensation
and may have represented that their services would help the
homeowner obtain a loan, save the home, or stop or delay
the sale. Further, even if they do not meet the statutory
definition, subsidiary players may be liable on an aiding and
abetting theory for the principal’s violation of the state
foreclosure rescue law.167 Some courts have used this and
other tort doctrines to find subsidiary players liable for
violating other consumer protection laws, such as state
UDAP laws.168
California, Colorado, Georgia, Illinois, Maryland, Min-
nesota, and Rhode Island have separate provisions regulat-
ing foreclosure purchasers, i.e., those who obtain a deed to
the home with a promise to reconvey it at some future
date.169 New York’s law only covers foreclosure purchasers.
Maryland explicitly covers surplus buyers, i.e., those who
induce homeowners to sign over the surplus proceeds from
the foreclosure sale.170 The general definition of ‘‘foreclo-
sure consultant’’ in most states is broad enough to cover
these variations of the scam, however, and even in Califor-
nia, Georgia, Illinois, Maryland, Minnesota, and Rhode
Island it appears that a person can be both a generic fore-
closure consultant and one of these specific variants. In
Colorado, however, ‘‘foreclosure consultant’’ is defined to
exclude those who acquire an interest in the home, so a
person cannot fit into both categories.
The statutory exemptions should be examined carefully.
The typical statute exempts licensed or chartered lenders,
lawyers, licensed debt management services, credit report-
ing agencies, registered securities advisors and broker-deal-
166 Michigan’s law covers stopping, preventing, or delaying a
foreclosure, or providing advice or assistance on one of those
subjects. Washington’s law covers advice or assistance regard-
ing a foreclosure, or serving as an intermediate between a debtor
and a creditor. Both also cover obtaining an extension of credit
for the homeowner.
167 See § 11.4.6.6, infra.
168 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices §§ 6.1, 6.5.2 (6th ed. 2004 and Supp.).
169 Ga. Code Ann. § 10-1-393(b)(20)(A) (applies to rescuer who
purchases the home), (B) (applies to those who advertise to
assist homeowners); 765 Ill. Cons. Stat. ch. 940; Md. Real Prop.
Code Ann. § 7-301(e); Minn. Stat. §§ 325N.10 to 325N.18.
170 Md. Real Prop. Code Ann. § 7-301(h). See also Cal. Civ. Code
§ 2945.1(a)(9) (defining ‘‘foreclosure consultant’’ to include
people who assist the owner in obtaining the surplus from a
foreclosure sale); Colo. Rev. Stat. § 6-1-1103(4)(a)(IX) (defin-
ing ‘‘foreclosure consultant’’ to include people who assist the
owner in obtaining the surplus from the foreclosure sale);
Boquilon v. Beckwith, 49 Cal. App. 4th 1697, 57 Cal. Rptr. 2d
503 (1996) (sale and leaseback arrangement violates Califor-
nia’s Home Equity Sales Contract Act).
98
ers, non-profit organizations, insurance companies, and, in
some states, other licensed or regulated entities. Many of the
statutes make it clear that the exemption only applies if the
person is acting within the scope of a state license. For
example, an attorney would be exempt only while perform-
ing work that amounted to the practice of law.
11.4.5.3 Right to Cancel
All of the state statutes afford a right to cancel. The
typical statute affords the homeowner a three- to ten-day
right to cancel any contract with a rescuer, and requires the
rescuer to give the homeowner written notice of this right.171
The typical statute is written so that the cancellation
period begins to run from the date that the rescuer gives the
consumer the notice of the right to cancel and a written
contract that complies with the statute. Accordingly, if the
consumer was not given these documents, the practitioner
should take the position that the right to cancel has not even
begun to run.172 Many decisions interpreting comparable
language in state home solicitation statutes have accepted
this argument.173
Before sending a cancellation notice, the practitioner
should ascertain whether the statute obligates the home-
owner to tender back funds that the rescuer advanced, and
what the implications are if the homeowner fails to make
this tender. Maryland requires the homeowner to repay any
funds paid or advanced by the foreclosure consultant, fore-
closure purchaser, or surplus purchaser within 60 days of
cancellation plus 8% interest per annum, though the right to
cancel cannot be conditioned on the payment of this money.
Georgia mandates tender by the homeowner of all monies
paid to him or her within 30 days of cancellation and is silent
on whether the cancellation can be conditioned upon pay-
ment. Colorado requires tender within 60 days after cancel-
lation of a foreclosure consulting contract; as to foreclosure
purchasers there is no tender obligation, but the foreclosure
purchaser is prohibited from paying anything to the home-
owner until the cancellation period has passed. New York
requires the homeowner, as a condition of reconveyance of
title, to tender any consideration received from the foreclo-
sure purchaser. California, Illinois, Michigan, Minnesota,
Missouri, Rhode Island, and Washington do not set any
tender requirement. If a tender offer is mandatory, the
practitioner may still want to send the cancellation notice
promptly because of the danger that the rescuer will convey
or mortgage the house to an unknowing third party. How-
171 Georgia’s right to cancel applies only where the foreclosure
rescue operator buys the home and the debtor remains in
possession of the home. Ga. Code Ann. § 10-1-393(b)(20)(C).
172 New York’s statute provides that a noncomplying contract can
be rescinded for up to two years after the conveyance is
recorded. N.Y. Real Prop. Law § 265-a(8).
173 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 5.8.2.6.3 (6th ed. 2004 and Supp.).
 Foreclosure Rescue Scams / 2006 Supplement
ever, the practitioner and the homeowner should explore
financing options immediately.
When the homeowner cancels, most states explicitly pro-
tect a good faith mortgagor or purchaser who buys or lends
against the home and who does not know of the homeown-
er’s contract with the rescuer or that the rescission period
has not expired. In these states, even if the rescuer has
already conveyed an interest in the home in an ostensibly
arms-length transaction, the practitioner should investigate
all information the buyer or lender had about the rescuer and
the homeowner. Often the buyer or lender had good reason
to suspect that the transaction was irregular.
11.4.5.4 Substantive Prohibitions
The typical foreclosure rescue statute prohibits an array of
deceptive, unfair, and abusive practices, so practitioners
should check their own statutes carefully. Many prohibit
unconscionable contract terms. Some of the statutes prohibit
deception in broad terms. Another common provision is a
cap on fees or interest rates, or a requirement that a rescuer
who purchases the property must pay at least a certain
percentage of its fair market value. Some of the states
prohibit foreclosure rescue consultants from acquiring any
interest in a residence in foreclosure from an owner with
whom the consultant has contracted. New York and Rhode
Island prohibit eviction of the homeowner unless the fore-
closure purchaser has paid the homeowner at least 82% of
the home’s fair market value. Some statutes prohibit the
rescuer from entering into an agreement to reconvey the
home to the homeowner unless the homeowner has a rea-
sonable ability to meet the requirements for reconveyance.
Most prohibit other deceptive or abusive practices as well.
11.4.5.5 Remedies
Most of the statutes provide a special private cause of
action. Most authorize double or treble damages or punitive
damages in addition to actual damages. The typical statute
also authorizes attorney fees. Some specifically authorize
injunctive relief. Some states provide that a violation is
actionable under the state UDAP statute or the state credit
repair statute, either as the only remedy or in addition to a
special private cause of action.
In most states, rescuers can also be prosecuted criminally
for violations of the statute. The homeowner should con-
sider filing criminal charges. A criminal conviction may
prevent the rescuer from defrauding others. Further, the
court may order restitution to the homeowner as part of the
criminal sentence.
§ 11.4.6.2
11.4.6 Fraud and Civil Conspiracy
11.4.6.1 Introduction
Claims of fraud and civil conspiracy should always be
considered in foreclosure rescue cases. Rescuers commonly
rely on false representations to induce homeowners to deed
over their homes.
Common law doctrines allow fraud claims to be asserted
not only against those who dealt directly with the home-
owner, but also against parties who conspired with the
rescuer, knowingly accepted the benefits of the fraud, or
aided and abetted the rescuer’s fraud.174
Civil conspiracy, while less well-known than fraud, is
recognized as a cause of action in almost all states. It
provides another way to hold parties liable who enabled the
fraud to succeed but did not make fraudulent misrepresen-
tations themselves.
11.4.6.2 Elements of a Fraud Claim
The traditional elements of fraud are a false representa-
tion; reliance by the plaintiff; damage; scienter (the defen-
dant’s knowledge of the falsity); and the defendant’s intent
to induce the plaintiff to act in reliance on the misrepresen-
tation.175 These elements make fraud more difficult to es-
tablish than a deception claim under a UDAP statute. For
example, the consumer often need not prove reliance or
intent to deceive under UDAP statutes, and the standard of
proof in a UDAP case is a preponderance of the evidence,
whereas fraud requires clear and convincing evidence.
However, the damages available in a fraud case are
usually much wider. In particular, fraud damages can in-
clude punitive damages in most states, while UDAP statutes
rarely authorize more than treble damages. In addition, fraud
can be asserted against anyone, while some UDAP statutes
have restrictive coverage requirements. Consumer practitio-
ners have also used fraud to reach behind the front person to
the financiers who enable predatory lending. Lenders may
be the only deep pocket left, and reaching them is also an
important way of decreasing the volume of mortgage scams
by drying up their funding. The advantages and disadvan-
tages of a fraud claim in comparison to a UDAP claim are
discussed in more detail in § 11.4.2.2, supra.
Foreclosure rescue scam cases can produce compelling
fraud claims. The plaintiffs are often elderly and vulnerable.
174 See National Consumer Law Center, The Cost of Credit: Regu-
lation, Preemption, and Industry Abuses § 12.10.1 (3d ed. 2005
and Supp.).
175 See D. Dobbs, The Law of Torts §§ (2000); National Consumer
Law Center, Unfair and Deceptive Acts and Practices § 9.6.3
(6th ed. 2004 and Supp.); see also Eicher v. Mid America
Financial Investment Corp., 702 N.W.2d 792, 803 (Neb. 2005)
(reciting fraud elements in foreclosure rescue case).
99
§ 11.4.6.3 Foreclosures / 2006 Supplement
The rescuer’s fraud is often blatant and heartless. Damages
can be significant. Even though fraud is harder to prove than
a UDAP claim, practitioners should not shy away from fraud
claims in foreclosure rescue cases, particularly since these
claims are compelling to juries.
The Nebraska Supreme Court affirmed a judgment of
fraud against a rescuer who induced homeowners to sign
over deeds to their homes by knowingly misrepresenting
that the transactions were loans.176 While the court’s deci-
sion does not itemize the relief awarded to the thirteen
plaintiffs, it affirmed an award of more than $375,000 in
attorney fees on a parallel UDAP claim.
A Colorado Supreme Court decision deals with a rescuer
who obtained a quitclaim deed to the home based on certain
representations about the steps it would take, but then sold
the home. The supreme court affirmed the trial court’s
conclusion that the rescuer had committed fraud.177 It also
held that the trial court had erred in concluding that the
person who bought from the rescuer did not have notice of
the homeowners’ claim to the home, and remanded the case
for a determination about whether the deed was voidable as
to the purchaser.
11.4.6.3 Overcoming Exculpatory Contract
Clauses
In many foreclosure rescue cases, the homeowners are
unaware that the documents they have signed are not loan
documents but transfer the home to the rescuer. The Ne-
braska Supreme Court held that the fact that the documents
the homeowners signed were clearly labeled sales to the
rescuer rather than loans did not undercut their fraud claims.
The court held that even a person who fails to read a contract
before signing it is not bound by it if it was procured by
fraud.178
Similarly, a Massachusetts appellate court held that a
merger clause in the homeowner’s contract with the rescuer
was no defense to fraud.179 The clause stated that, in decid-
ing to enter into the contract, the homeowner had not relied
on any statements or representations by the rescuer.
11.4.6.4 The Important of Pattern Evidence
Evidence that the rescuer defrauded other homeowners in
the same way is powerful. It can confirm in the jury’s mind
176 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d
792, 803 (Neb. 2005).
177 Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201,
1205 (Colo. 2005). See also In re Bryant, 111 B.R. 474 (Bankr.
E.D. Pa. 1990) (rescuer’s actions amounted to common law
fraud so violated UDAP statute).
178 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d
792, 804 (Neb. 2005).
179 Billingham v. Dornemann, 771 N.E.2d 166, 175 (Mass. App. Ct.
2002).
100
that the defendant is a scoundrel who needs to be punished.
Evidence that the rescuer made similar misrepresentations to
other people will also make it clearer to the trier of fact that
the homeowner is telling the truth. Joining several home-
owners in one case was very effective in Eicher v. Mid
America Financial Investment Corp.,180 but this evidence
can also be introduced when the other homeowners are not
parties to the same suit.
Foreclosure rescuers do not usually invent their methods
on the spot. They advertise widely and solicit homeowners
aggressively with a pitch that follows the same pattern.
Thus, pattern evidence can almost always be found. Section
11.3.2.2, supra, suggests various ways of finding pattern
evidence. Locating other homeowners who have been vic-
timized in the same way should be a high priority.
While evidence of other crimes, wrongs, or acts is not
admissible to prove a person’s character, there are many
other ways to admit it. Under the Federal Rules of Evidence
and comparable state rules, evidence of other bad acts is
admissible to show intent or motive, which is a critical issue
in any fraud case. It is also admissible to show knowledge.
Since scienter is an element of a fraud claim, evidence of the
rescuer’s other transactions should be admissible on this
ground. Pattern evidence will also be admissible against
other defendants, for example to show that a purchaser is not
a bona fide purchaser without notice, or to show that a third
party knowingly accepted the benefits of the fraud. In
addition, it is admissible to show habit, routine practice, or
absence of mistake or accident, and to support a punitive
damages claim.181
11.4.6.5 Remedies for Fraud
A homeowner who proves fraud may recover actual
damages. Actual damages may consist of the homeowner’s
lost equity, plus any ‘‘rental’’ payments the homeowner
made to the rescuer that exceeded what the homeowner
would have had to pay on the mortgage.182
The rescuer may argue that the homeowner’s losses were
caused by factors other than the rescuer’s fraud because the
homeowners would have lost their homes in any event. The
Nebraska Supreme Court rejected this argument in Eicher v.
Mid America Financial Investment Corp.183 The plaintiffs
there testified that, although their options were limited, they
could have considered other alternatives to save their homes
if the opportunity with the rescuer had not presented itself.
The court accepted these statements as sufficient to establish
proximate cause. The court also reversed the denial of
damages to a homeowner who paid ‘‘rental payments’’ to
180 702 N.W.2d 792 (Neb. 2005).
181 Fed. R. Evid. 406. See National Consumer Law Center, Auto-
mobile Fraud § 9.8.1 (2d ed. 2003 and Supp.).
182 Eicher v. Mid America Financial Investment Corp., 702 N.W.2d
792, 811 (Neb. 2005).
183 702 N.W.2d 792, 804–805 (Neb. 2005).
 Foreclosure Rescue Scams / 2006 Supplement
the rescuer for two years, but then stopped paying and
moved out, after which the original lender foreclosed on the
home and sold it. The court held that the fraud was fully
perpetrated when the homeowner deeded the home to the
rescuer, and his right to recover the equity he lost at that time
was unaffected by his later termination of payments and loss
of his home to foreclosure.184
In almost all states, a homeowner may also recover
punitive damages for fraud.185 States vary in their standards
for punitive damages, but typically it is necessary to show
some aggravating factors such as malice, oppressiveness, or
wantonness.186
In the alternative to seeking damages, the homeowner
may rescind the transaction.187 As a condition of rescission,
the homeowner will probably have to tender the actual
proceeds received.188 In addition, a deed may be voidable if
fraud is shown.189
11.4.6.6 Acceptance of Fruits of Fraud; Civil
Conspiracy; Aiding and Abetting
To succeed, foreclosure rescue scams often require the
cooperation of more than just the rescuer. Real estate agents,
lenders, brokers, appraisers, closing agents, and others may
be involved behind the scene. Several theories can impose
fraud liability on these less visible participants.190
A party who knowingly receives the benefits of a fraud
can be held liable for it.191 This theory of liability is
sometimes called ‘‘fruits of the fraud’’ liability. It may
amount to ratification of the fraud.192 For example, a trans-
feree of the home who had reason to know of the fraud may
184 Id. at 811.
185 See National Consumer Law Center, Automobile Fraud § 7.11.1
(2d ed. 2003 and Supp.).
186 Id.
187 See Eicher v. Mid America Financial Investment Corp., 702
N.W.2d 792 (Neb. 2005) (affirming awards of rescission and
damages on fraud claims against rescuer). See generally Na-
tional Consumer Law Center, Automobile Fraud § 7.11.1 (2d ed.
2003 and Supp.).
188 Martinez v. Affordable Housing Network, Inc., 123 P.3d 1201
(Colo. 2005) (homeowner who rescinds must tender actual
proceeds before bona fide purchaser acquires the home for value
without notice; remanding for determination whether this pur-
chaser had notice).
189 See, e.g., Martinez v. Affordable Housing Network, Inc., 123
P.3d 1201 (Colo. 2005).
190 See generally National Consumer Law Center, The Cost of
Credit: Regulation, Preemption, and Industry Abuses § 12.10.1
(3d ed. 2005 and Supp.).
191 See, e.g., Cumis Ins. Society, Inc. v. Peters, 983 F. Supp. 787,
794–795 (N.D. Ill. 1997) (knowing acceptance of fruits of fraud
is basis for fraud liability).
192 See, e.g., Duckworth v. Nat’l Bank of Commerce, 656 So. 2d
340 (Ala. 1994) (reversing directed verdict for defendant bank
in business fraud case; bank that continued to take payments
after learning of forgery, but did not disclose the forgery, may
have ratified the forger’s fraud).
§ 11.4.7.2
be liable for fraud even without having ever dealt personally
with the homeowner. Other parties, such as closing agents,
who profit from the fraud may also be liable.
Civil conspiracy is another means of spreading liability
for fraud to all those involved in it. All jurisdictions except
Wyoming recognize civil conspiracy as a cause of action.193
The major benefit of a civil conspiracy claim is that the
plaintiff does not have to show that all conspirators com-
mitted the tort or committed any unlawful act. Instead, civil
conspiracy requires an agreement by two or more persons to
perform an unlawful act. The plaintiff must also show some
overt act that was accomplished in furtherance of the agree-
ment, and must show damages proximately resulting there-
from.
A third basis for casting fraud liability upon subsidiary
players is aiding and abetting. Under this theory, a person
who knowingly and substantially assists the principal in
performing a fraudulent act that causes injury is liable for
the principal’s fraud. At the time of providing the assistance,
the subsidiary player must be generally aware of his or her
role as part of an overall tortious activity.194 In contrast to
civil conspiracy, it is not necessary to show an agreement.195
11.4.7 Other Common Law Claims
11.4.7.1 Introduction
Common law claims such as unconscionability and
breach of fiduciary duty or duty of good faith and fair
dealing are often useful in attacking foreclosure rescue
scams.196 These claims offer both advantages and disadvan-
tages over the statutory claims discussed in this section.
11.4.7.2 Unconscionability
The doctrine of unconscionability can be useful in attack-
ing foreclosure rescue agreements, especially where the
remedies under a state statute are not adequate or where the
transaction is not covered by the UDAP statute. The remedy
for unconscionability is usually limited to a defense against
the enforcement of the unconscionable contract or terms,
and does not normally include restitution or the tort damages
available for a fraud claim. Except where it is part of a
statute that allows affirmative claims, it usually can only be
193 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 6.5.2.3 (6th ed. 2004 and Supp.).
194 Halberstam v. Welch, 705 F.2d 472 (D.C. Cir. 1983).
195 Id.
196 See, e.g., Rowland v. Haven Properties, L.L.C., 2005 WL
1528264 (N.D. Ill. June 24, 2005) (finding plaintiff involved in
sale/leaseback transaction sufficiently alleged claim for rescis-
sion on the basis of duress, fraud or unconscionability); In re
Davis, 169 B.R. 285 (E.D.N.Y. 1994) (finding sale/leaseback
transaction unconscionable and void under New York law).
101
§ 11.4.7.3 Foreclosures / 2006 Supplement
raised defensively, not affirmatively. However, unconscio-
nability requires less evidence of intent than fraud.
There are five sources of the unconscionability doctrine.
First, Article 2 of the Uniform Commercial Code (UCC)
allows courts to refuse to enforce unconscionable contracts
or clauses.197 Article 2A has a similar provision applicable
to leases.198 Since Articles 2 and 2A only apply to sales and
leases of goods, they are unlikely to be applicable to a
foreclosure rescue transaction. Second, in about a third of
the states the UDAP statute prohibits unconscionable acts or
practices.199 UDAP statutes vary in their scope,200 but many
will be applicable to foreclosure rescue scams. Third, a
number of jurisdictions, particularly those that have con-
sumer credit statutes based on the Uniform Consumer Credit
Code, have a non-UCC non-UDAP statute that prohibits
unconscionability. These statutes are likely to apply to
foreclosure rescue scams. Fourth, many state foreclosure
rescue statutes contain their own explicit prohibition of
unconscionable terms.201 And, finally, a common law un-
conscionability doctrine is widely recognized and broadly
applicable.
There are two forms of unconscionability: procedural and
substantive. Procedural unconscionability involves the bar-
gaining process when the contract was made. The most
common type of procedural unconscionability involves op-
pression or surprise in the bargaining process. Oppression
occurs when there is a disparity in bargaining power be-
tween the parties. Surprise occurs when creditors hide con-
tract terms from the consumer in fine print or unusually
complex clauses. Special vulnerabilities often associated
with low-income consumers—such as financial distress or
limited education—are also relevant in evaluating proce-
dural unconscionability.
Substantive unconscionability focuses on the content of
the contract: whether the contract contains terms that are
one-sided and unreasonably, unacceptably or unfairly harsh.
Some courts require the consumer to show both substantive
and procedural unconscionability to invalidate a term of a
contract
Many of the aspects of contracts found to be unconscio-
nable apply to foreclosure rescue scams:
• A grossly excessive price;
• Lack of a substantial benefit for the consumer;
• No reasonable probability of payment in full by the
consumer;
• Misleading the consumer into accepting false assur-
ances.202
197 U.C.C. § 2-302.
198 U.C.C. § 2A-108.
199 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 4.4.1 (6th ed. 2004 and Supp.).
200 See § 11.4.4.1, supra.
201 See § 4.5.4, supra.
202 See generally National Consumer Law Center, Unfair and De-
ceptive Acts and Practices § 4.4 (6th ed. 2004 and Supp.);
102
For example, in one case a federal court found enough merit
in a homeowner’s unconscionability claim to issue a pre-
liminary injunction against a rescuer who lured her into a
sale-reconveyance transaction.203 The court found that the
homeowner was not aware of the terms of the reconveyance
contract until closing, and even then did not fully compre-
hend its one-sided nature and the almost certain outcome of
the transaction—default and eviction. The reconveyance
contract required the homeowner to pay thousands of dollars
to the rescuer in unspecified management and yield spread
fees; charged her more than triple the actual closing costs;
required a $26,000 down payment that she had no ability to
make; set her monthly payments at an amount significantly
higher than they had been, yet with an interest rate so high
that the balance would negatively amortize; imposed pre-
payment penalties and other terms that would keep her from
refinancing or selling the home; and allowed the rescuer to
retain all her payments if she defaulted.
In the absence of legislatively prescribed usury ceilings,
unconscionability can serve as an outer limit on the price of
credit. Even in states where interest rate caps have been
removed, courts or sometimes regulators have found exces-
sive rates to be unconscionable, particularly where it can be
shown that the borrowers had little choice of credit op-
tions.204
11.4.7.3 Breach of Duty of Good Faith and Fair
Dealing
The duty of good faith and fair dealing between parties to
a contract is based both in common law and the UCC.205
Unlike unconscionability, which is ordinarily determined by
looking at contract terms at the time the contract was made,
the duty of good faith is imposed on parties to an existing
contract. It prevents overreaching in the later stages of the
relationship ‘‘to prohibit improper behavior in the perfor-
mance and enforcement’’ of that contract.206
For example, when a rescuer has induced a homeowner
into a transaction with a balloon payment with the assurance
that refinancing will be available, the refinancing decision
may be subject to the duty of good faith and fair dealing.207
National Consumer Law Center, The Cost of Credit: Regulation,
Preemption, and Industry Abuses § 12.7 (3d ed. 2005 and Supp.).
203 Brantley v. Grant Holding, L.L.C., Civil No. 03-6098 (D. Minn.
Dec. 23, 2003), available at www.consumerlaw.org/unreported.
204 National Consumer Law Center, The Cost of Credit: Regulation,
Preemption, and Industry Abuses § 11.7.2 (3d ed. 2005 and
Supp.).
205 Id. at § 11.8.
206 Baldwin v. Laurel Ford Lincoln-Mercury, Inc., 32 F. Supp. 2d
894 (S.D. Miss. 1998); National Consumer Law Center, The
Cost of Credit: Regulation, Preemption, and Industry Abuses
§ 12.8, n.652 (3d ed. 2005 and Supp.).
207 See National Consumer Law Center, The Cost of Credit: Regu-
lation, Preemption, and Industry Abuses § 12.8 (3d ed. 2005 and
Supp.).
 Foreclosure Rescue Scams / 2006 Supplement
The rescuer may also be bound by this duty when declaring
a default on the lease or leaseback agreement.
Breach of this duty constitutes a breach of the contract.
Contract remedies, therefore, apply. Some states have held
that this duty gives rise to a tort claim as well.208
11.4.7.4 Breach of Fiduciary Duty
The existence of a fiduciary or quasi-fiduciary duty gives
rise to a duty of fair and honest disclosure of all facts that
might influence the consumer’s decisions. Fiduciary rela-
tionships may be express or implied. An implied duty can
arise where the weaker party places trust and confidence in
another, who is aware of this trust and takes on the role of
advisor.
Breach of a fiduciary duty by failing to disclose all
relevant information gives rise to a tort action, which may
permit repudiation of the contract as well as damages.209
11.4.8 State Credit and Usury Laws
11.4.8.1 State Usury Laws and Their Penalties
Once a transaction is restructured as a loan, state credit
and usury laws may apply. Most states have several different
usury statutes.210 The oldest of these laws are the so-called
‘‘general’’ usury statutes, which purport to set the maximum
rate of interest that can be charged in any loan transaction in
a jurisdiction. More recent statutes are generally structured
as exceptions to the general law and apply only to particular
types of transactions. Credit secured by real estate may be
separately regulated, and first and junior mortgages may be
treated differently. The statutes may also base distinctions on
the type of lender, i.e., whether it is a bank, credit union,
licensed finance company, or other lender. Thus, it is im-
portant to determine which statute applies. Some states
have, however, repealed many of their usury ceilings and
now allow any interest rate agreed upon by the parties.
After determining which, if any, state usury law applies,
the next step is to calculate the actual interest charged. Since
foreclosure rescue transactions are typically so one-sided in
favor of the rescuer, it is likely that, if the transaction can be
characterized as a loan, it will run afoul of any applicable
usury statute. The definition of interest is sometimes a
complicated issue because it varies from statute to statute,
however, so the practitioner will need to be prepared to
prove what the interest rate is.
208 Id.
209 See generally National Consumer Law Center, The Cost of
Credit: Regulation, Preemption, and Industry Abuses § 12.9 (3d
ed. 2005 and Supp.).
210 A state-by-state list of usury statutes may be found in National
Consumer Law Center, The Cost of Credit: Regulation, Pre-
emption, and Industry Abuses Appx. A (3d ed. 2005 and Supp.).
§ 11.4.8.1
In the case of a foreclosure rescue scam, one way to
calculate the interest rate is to treat the amount actually
expended by the rescuer as the loan principal. This figure
would include amounts the rescuer paid to reinstate or pay
off a delinquent mortgage or to pay other charges that relate
to the home, such as homeowner’s property taxes or insur-
ance premiums. The dollar amount of interest would be
calculated as the difference between this figure and the total
of all payments the consumer would have to pay to reacquire
the home.211 (State law may, however, allow the lender to
collect certain types of fees, such as document preparation
fees, and treat them as part of the principal rather than as
interest.)
The next step is to convert the dollar amount of interest to
a percentage rate. A calculation tool, such as that included
on the CD-Rom accompanying this manual, should be used
for this calculation. Since the typical sale/leaseback requires
a large balloon payment after a series of smaller monthly
payments, it is important to use a calculation tool that can
handle an irregular payment schedule.
An example will illustrate this method of calculation.212
Assume that the homeowner’s regular monthly mortgage
payment was $733.76 per month (this would be the monthly
payment on a $100,000 30-year mortgage at 8%). Assume
also that the homeowner was $10,000 in arrears on mort-
gage payments and $2000 in arrears on property taxes. A
typical rescuer might pay the combined $12,000 arrearage
and require the homeowner to repay $1233.76 per month
(the $733.76 regular mortgage payment plus $500 toward
the $12,000 arrearage) for 24 months, followed by a balloon
payment of $60,000 to reacquire the home. The annual
percentage rate for a $12,000 loan with this payment sched-
ule is 154.51%.213
If the case goes to trial, it may be necessary to have an
expert witness testify about the effective rate of interest.214
It should also be noted that the definition of the components
211 See River Run Props. L.L.C. v. Kappedahl, File No. C2-03-
10463 (Minn. Dist. Ct. July 12, 2004), slip op. at 33-5 (principal
is amount that rescuer actually paid on existing first mortgage;
usury calculation should be based on the difference between the
principal and the total of the payments required to reacquire the
home), available at www.consumerlaw.org/unreported.
212 This is the same example as appears in § 11.4.3.1.2, supra, as
an illustration of the calculation of the HOEPA trigger. How-
ever, the interest rate for purposes of a state usury statute and the
APR for purposes of TILA are not always the same because of
different definitions and exclusions.
213 See River Run Props. L.L.C. v. Kappedahl, File No. C2-03-
10463 (Minn. Dist. Ct. July 12, 2004), slip op. at 33-5 (principal
is amount that rescuer actually paid on existing first mortgage;
usury calculation should be based on the difference between the
principal and the total of the payments required to reacquire the
home), available at www.consumerlaw.org/unreported.
214 For example in Browner v. District of Columbia, 549 A.2d 1107,
1111 (D.C. 1988), described in § 2.2, supra, the court accepted
expert testimony that the sale/leaseback transactions at issue
carried effective interest rates of 50% to 200%.
103
§ 11.4.8.2 Foreclosures / 2006 Supplement
of the interest rate in state usury laws may differ from the
TILA definition of the components of the finance charge, so
state law should be carefully reviewed when calculating the
interest rate.
The remedies for usury are determined by individual state
statutes.215 Often the loan will be void as to all or part of the
interest, with even double or triple damages, while leaving
the principal obligation intact. Some statutes declare usuri-
ous loans to be completely void, and may require the return
of all monies paid.216 Equitable remedies, such as enjoining
a foreclosure, may also be available.
11.4.8.2 Federal Preemption
11.4.8.2.1 Introduction
Before concluding that a rescuer has violated a state usury
statute, another important step is to determine whether the
state law has been preempted by federal law. Even though
rescuers are typically individuals rather than lending insti-
tutions, two of the federal usury preemption laws—the
Depository Institutions Deregulation and Monetary Control
Act (DIDA) and the Alternative Mortgage Transactions
Parity Act (AMTPA)—may apply to them.
11.4.8.2.2 DIDA
The first statute, the Depository Institutions Deregulation
and Monetary Control Act (DIDA), covers not only a variety
of financial institutions but also any creditor who makes or
invests in residential real estate loans or mobile home credit
sales in excess of $1 million per year.217 Some foreclosure
rescuers may meet the $1 million threshold. Only the prin-
cipal amount of the loan (as determined by the court after
finding that the transaction is indeed a loan) should be
counted toward the $1 million threshold, however. Thus, if
a rescuer pays off a $80,000 mortgage loan, and requires the
homeowner to repay $200,000 to reacquire the home, only
the $80,000 principal should count toward the $1 million
threshold.
To qualify for DIDA preemption, the transaction must
involve a first lien on residential real property.218 The lien
need not be a purchase money lien, however. A rescuer who
actually pays off all existing liens on the property may meet
this requirement. However, many rescuers pay off only some
of the existing liens, pay only the delinquent amount rather
than the full debt, or acquire the property subject to all
existing liens. In all of these situations, DIDA will not
preempt state laws.
215 See § 4.8.7.5, supra.
216 See, e.g., id. (voiding the transaction and eliminating rescuer’s
entitlement to both interest and principal; foreclosure rescue
transaction was a usurious loan).
217 12 U.S.C. § 1735f-5(b).
218 12 U.S.C. § 1735f-7a.
104
If DIDA applies, it preempts state laws that limit ‘‘the rate
or amount of interest, discount points, finance charges, or
other charges’’ on the loan.219 DIDA does not preempt other
consumer protections that may be found in state usury laws,
such as restrictions on late charges, balloon payments, and
negative amortization.
States have the right to opt out of DIDA preemption, and
many have done so, at least in part. Specifically, Colorado,
Georgia, Hawaii, Idaho, Iowa, Kansas, Maine, Massachu-
setts, Minnesota, Nebraska, Nevada, North Carolina, Puerto
Rico, South Carolina, and South Dakota have expressly
reimposed all or part of their state usury laws.220
11.4.8.2.3 AMTPA
The second statute, the Alternative Mortgage Transac-
tions Parity Act (AMTPA), does not affect state interest
ceilings on mortgage loans. Instead, it addresses the struc-
ture of mortgage loans by overriding certain state laws
which restrict ‘‘creative finance,’’ e.g., laws limiting vari-
able interest rates and balloon payments. These state statutes
are replaced, at the option of the lender, by federal regula-
tions. Six states—Arizona, Maine, Massachusetts, New
York, South Carolina, and Wisconsin—opted out of
AMTPA, so this statute is irrelevant in those states.
AMTPA applies to ‘‘housing creditors,’’ which is broadly
defined to include any person who regularly makes loans,
credit sales, or advances secured by interests in residential
real property or a mobile home.221 It also includes any
transferee of such a lender.222 AMTPA only applies to these
creditors when they are making an ‘‘alternative mortgage
transaction,’’ defined as one:
• In which the finance charge or interest rate may be
adjusted or renegotiated;
• With a balloon payment or a similar structure;
• With any similar type of rate, method of determining
return, term, repayment, or other variation not common
to traditional fixed-rate, fixed-term transactions (for
example, loans that negatively amortize).223
As noted in § 11.4.2.2, supra, to bring a rescuer under the
Truth in Lending Act it is necessary to show that the rescuer
regularly engages in consumer credit transactions. Since
AMTPA is applicable only to lenders who ‘‘regularly’’ make
home-secured credit transactions, the same evidence that
shows that TILA applies will also tend to show that AMTPA
preemption is applicable. However, since TILA includes a
219 Id.
220 National Consumer Law Center, The Cost of Credit: Regulation,
Preemption, and Industry Abuses § 3.9.4.1 (3d ed. 2005 and
Supp.).
221 12 U.S.C. § 3802(2)(C).
222 12 U.S.C. § 3802(2)(D).
223 12 U.S.C. § 3802(1).
 Foreclosure Rescue Scams / 2006 Supplement
specific numerical definition of ‘‘regularly’’ and AMTPA
does not, it is possible that a court would find that a rescuer
met the TILA definition but was not a ‘‘housing creditor’’
for AMTPA purposes.
Assuming that AMTPA applies, the rescuer need not
comply with state law, but must comply with federal regu-
lations governing:
• Adjustments to the interest rate, the payment, the bal-
ance, or the loan term during the course of the loan.224
The federal regulations allow adjustments, but require
certain safeguards such as use of a readily available and
independently verifiable index for interest rate adjust-
ments.225
• Disclosures.226
The AMTPA regulations formerly preempted state limits on
prepayment penalties and late charges for housing creditors,
but as of July 1, 2003, they were revised to eliminate this
preemption.227 AMTPA does not preempt state licensing
laws,228 state restrictions on attorney fees that the holder can
collect in the event of default,229 or state restrictions on
deceptive advertising and practices.230
11.4.8.3 Choice of Law Clauses
Another way that a rescuer may avoid state credit and
usury laws is by purporting to operate under the laws of
another state.231 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. Nor will the clause be given effect if the
result would be contrary to a fundamental policy of the state
with the most significant relation to the transaction. Since
rescuers tend to be local entrepreneurs, they are unlikely to
be successful in arguing that the transaction has a substantial
relationship to any state other than the one where the
homeowner lives.
224 12 C.F.R. § 560.220.
225 12 C.F.R. § 560.35.
226 12 C.F.R. § 560.210.
227 See National Consumer Law Center, The Cost of Credit: Regu-
lation, Preemption, and Industry Abuses § 3.10.2 (3d ed. 2005
and Supp.).
228 12 U.S.C. § 3802(2).
229 In re Jones, 2000 Bankr. LEXIS 1741 (Bankr. E.D.N.C. Dec.
22, 2000).
230 Black v. Fin. Freedom Senior Funding Corp., 112 Cal. Rptr. 2d
445 (Cal. Ct. App. 2001).
231 The effect of choice of law clauses on usury claims is discussed
in detail in National Consumer Law Center, The Cost of Credit:
Regulation, Preemption, and Industry Abuses § 9.2.9 (3d ed.
2005 and Supp.).
§ 11.4.9.1
11.4.8.4 Licensing Provisions of State Usury Laws
In addition to interest rate caps, state usury laws may also
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 and include significant penal-
ties for creditors who either fail to obtain a required license
or violate their licenses by ignoring statutory consumer
protections. Since obtaining the requisite license may be a
precondition to lending under some special usury statutes,
failure to do so may give rise to a usury claim under the
statute.
The effects of failure to obtain a proper license vary.
Many licensing statutes clearly specify the result of failure
to obtain a required license. Sometimes the specified result
is to void the transaction in which the unlicensed lender has
participated. This is the case with many small loan acts.
Other states may provide lesser penalties. Operating without
a required license is also a UDAP violation in many
states.232
Transactions with lenders who are not licensed, but
should be, may be void even in the absence of a special
statutory provision to that effect. The common law principle
that contracts made in violation of regulatory statutes en-
acted for the protection of the public are rendered null and
unenforceable has been applied where creditors failed to
comply with appropriate licensing requirements.233 This
general rule applies to licensing statutes enacted for the
protection of the public, rather than those enacted merely to
raise revenue. Special usury licensing statutes are clearly in
the former category, as they are designed to protect borrow-
ers through the strict regulation and supervision of the
creditors themselves.
11.4.9 Other State Statutes
11.4.9.1 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
232 National Consumer Law Center, Unfair and Deceptive Acts and
Practices § 4.7.7.2 (6th ed. 2004 and Supp.).
233 National Consumer Law Center, The Cost of Credit: Regulation,
Preemption, and Industry Abuses § 10.8.4 (3d ed. 2005 and
Supp.).
105
§ 11.4.9.2 Foreclosures / 2006 Supplement
of prior transactions. Since these are state law claims, they
also are useful if the consumer prefers to litigate in state
court. The statute of limitations may also be longer than for
other claims.
One disadvantage of these statutes is that they lack the
detailed provisions for unwinding real estate transactions
that the Truth in Lending Act provides. These statutes are
also less clear as to how they apply to assignees.
11.4.9.2 Door-to-Door Sales Laws
Every state has a door-to-door sales law that gives con-
sumers a right to cancel at least certain types of contracts
that are solicited outside the seller’s fixed place of busi-
ness.234 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. A Federal Trade Commission
rule also provides a right to cancel sales of goods or services
where the seller personally solicits the sale and the buyer’s
agreement or offer to purchase is made at a place other than
the seller’s place of business.235
234 Ala. Code §§ 5-19-1(8), 5-19-12; Alaska Stat. §§ 45.02.350
(door-to-door sales; five-day period), 45.63.030 (telephonic so-
licitations; seven-day period); Ariz. Rev. Stat. Ann. §§ 44-5001
to 44-5008; Ark. Stat. Ann. §§ 4-89-101 to 4-89-110; Cal. Civ.
Code §§ 1689.5 to 1689.14; Colo. Rev. Stat. §§ 5-3-401 to
5-3-405; Conn. Gen. Stat. Ann. §§ 42-134a to 42-143; Del.
Code Ann. tit 6, §§ 4401 to 4405; D.C. Code Ann. § 28-3811;
Fla. Stat. Ann. §§ 501.021 to 501.055; Ga. Code Ann. § 10-1-6;
Haw. Rev. Stat. §§ 481C-1 to 481C-6; Idaho Code §§ 28-43-401
to 28-43-405; 815 Ill. Comp. Stat. Ann. § 505/2B; Ind. Code
Ann. §§ 24-4.4-2-501 to 24-4.4-2-502, §§ 24-5-10-1 to 24-5-
10-18; Iowa Code Ann. §§ 555A.1 to 555A.6; Kan. Stat. Ann.
§ 50-640; Ky. Rev. Stat. Ann. §§ 367.410 to 367.460; La. Rev.
Stat. Ann. §§ 9:3538 to 9:3541; Me. Rev. Stat. Ann. tit. 32,
§§ 4661 to 4670 and tit. 9-A, §§ 3-501 to 3-507; Md. Com. Law
Code Ann. §§ 14-301 to 14-306; Mass. Gen. Laws Ann. ch. 93,
§ 48; Mich. Comp. Laws Ann. §§ 445.111 to 445.117; Minn.
Stat. Ann. §§ 325G.06 to 325G.11; Miss. Code Ann. §§ 75-66-1
to 75-66-11; Mo. Rev. Stat. §§ 407.700 to 407.720; Mont. Code
Ann. §§ 30-14-501 to 30-14-508; Neb. Rev. Stat. §§ 69-1601 to
69-1607; Nev. Rev. Stat. §§ 598.140 to 598.280 and 598.2801;
N.H. Rev. Stat. Ann. §§ 361-B:1 to 361-B:3; N.J. Rev. Stat.
Ann. §§ 17:16C-61.1 to 17:16C-61.9; N.M. Stat. Ann. § 57-12-
21; N.Y. Pers. Prop. Law §§ 425 to 431; N.C. Gen. Stat.
§§ 25A-38 to 25A-42; N.D. Cent. Code §§ 51-18-01 to 51-18-
09; Ohio Rev. Code Ann. §§ 1345.21 to 1345.28; Okla. Stat.
Ann. tit. 14A, §§ 2-501 to 2-505; Or. Rev. Stat. §§ 83.710 to
83.750; Pa. Stat. Ann. tit. 73, § 201-7; R.I. Gen. Laws §§ 6-28-1
to 6-28-8; S.C. Code Ann. §§ 37-2-501 to 37-2-506; S.D. Comp.
Laws Ann. §§ 37-24-5.1 to 37-24-5.7; Tenn. Code Ann. §§ 47-
18-701 to 47-18-708; Tex. Bus. & Com. Code Ann. §§ 39.001
to 39.009; Utah Code Ann. §§ 70C-5-101 to 70C-1-105; Vt.
Stat. Ann. tit. 9, §§ 2451a, 2454; Va. Code Ann. §§ 59.1-21.1 to
59.1-21.7:1; Wash. Rev. Code Ann. §§ 63.14.040, 63.14.120,
63.14.150, 63.14.154; W. Va. Code §§ 46A-2-132 to 46A-2-
135; Wis. Stat. Ann. §§ 423.201 to 423.205; Wyo. Stat. §§ 40-
12-104, 40-14-251 to 40-14-255.
235 16 C.F.R. § 429.0(a).
106
Many foreclosure rescue transactions will be subject to
the FTC rule or the state law. Foreclosure rescue scams often
involve solicitations at the consumer’s home, so this element
of coverage is satisfied. The services the rescuer is offering
must also fall within the state statute or the federal rule. The
rescuer is likely to argue that the transaction involved real
estate rather than goods or services. Showing that the res-
cuer promised advice and other efforts that would save the
home may establish that the transaction was a mixed trans-
action that involved not just real estate but also covered
services. (Arguing that the transaction involved only ser-
vices, not real estate, may be counterproductive if the
homeowner is asserting an equitable mortgage or TIL re-
scission claim.) Home solicitation sales laws may also be
helpful in cases where the rescuer did not acquire the home,
but provided advice, referrals, a bankruptcy filing, or similar
services.236
If the FTC rule or the state statute covers the transaction,
but (as is likely) the rescuer failed to give the consumer
notice of the right to cancel, a number of decisions hold that
the consumer has a continuing right to cancel.237 At an early
stage, after investigating coverage and reviewing the docu-
ments, the homeowner’s attorney should consider sending
the rescuer a notice invoking this right to cancel. The FTC
rule requires the seller to honor the buyer’s notice of can-
cellation, and, within ten business days, refund all payments
made, return all property traded in, cancel and return any
negotiable instruments, and terminate any security inter-
est.238 While this list of specific steps does not mention
voiding of a deed, that step would be encompassed by the
requirement to terminate the security interest if the transac-
tion is viewed as a loan.239
If the state home solicitation law does not create its own
private cause of action, a violation may be actionable under
the state UDAP statute. Even without explicit language in
the statute, in many states a violation of another consumer
protection statute is a per se UDAP violation.240 There is no
private cause of action under the FTC Act to enforce an FTC
rule, but in most states violations will also be UDAP
violations.241 In addition, if a statute or the FTC rule affords
a right to cancel that the rescuer refuses to recognize, the
right to cancel can probably be enforced through a cancel-
lation action in equity or through a declaratory judgment
action.242
236 See § 11.2.1, supra.
237 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 5.8.2.6.3 (6th ed. 2004 and Supp.).
238 16 C.F.R. § 429.1(g).
239 See § 11.4.1, supra.
240 National Consumer Law Center, Unfair and Deceptive Acts and
Practices § 3.2.7 (6th ed. 2004 and Supp.).
241 Id. §§ 3.2.7, 9.1.
242 Id. § 5.8.2.7.
 Foreclosure Rescue Scams / 2006 Supplement
11.4.9.3 State Credit Services or Credit Repair
Organization Laws
About three-fourths of the states have credit services or
credit repair organization laws.243 These laws cover organi-
zations that offer to improve a person’s credit rating for a
fee. Most also cover organizations that offer, for a fee, to
obtain an extension of credit for a consumer and that are not
licensed or chartered by the state or federal government.244
A rescuer who claims to be able to arrange an extension
of credit that will enable the consumer to save the home may
be covered by the state credit services statute. The key
question will be whether the rescuer falls within any of the
exceptions set forth in the statute, which usually include
licensed real estate agents and attorneys as well as banks,
credit unions, and other licensed lenders.
The typical credit repair statute gives the consumer a
three- to five-day right to cancel the contract, and requires
the organization to give the consumer notice of this right.
Many prohibit various deceptive and unfair practices and
regulate the terms of the contract.
The breadth of remedies offered by state credit services or
credit repair organization laws is their chief advantage. First
is the right to cancel. If the rescuer did not give the consumer
the required notice of this right, the practitioner should argue
that the right to cancel continues indefinitely.245 The statute
may also provide that the consumer’s contract with the
rescuer is void if the rescuer did not comply with the statute.
The typical statute provides a private cause of action for
actual damages, often with a minimum recovery set at the
amount paid by the consumer. The measure of actual dam-
ages is generally left undefined in these statutes, but could
include the value of the equity in the home that the home-
owner lost if a causal connection can be established between
243 See National Consumer Law Center, Fair Credit Reporting
Appx. B (5th ed. 2002 and Supp.) (state-by-state summaries of
state credit repair organization laws).
244 The Arizona, Arkansas, California, Delaware, District of Co-
lumbia, Florida, Illinois, Indiana, Kansas, Maryland, Massachu-
setts, Minnesota, Missouri, Nebraska, Nevada, New Hampshire,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Ten-
nessee, Texas, Utah, Virginia, Washington, West Virginia, and
Wisconsin credit services statutes cover entities that offer to
obtain extensions of credit for consumers, require a right to
cancel, and afford the consumer a private cause of action.
Georgia’s statute covers entities that offer to obtain extensions
of credit but the statute does not afford a right to cancel or a
private cause of action. Statutes in Maine and Michigan cover
entities that offer to obtain extensions of credit and provide a
private right of action but do not require a right to cancel. The
Michigan and Washington statutes explicitly include rescuers in
the definitions and are discussed in § 11.4.5, supra.
245 See National Consumer Law Center, Unfair and Deceptive Acts
and Practices § 5.8.2.6.3 (6th ed. 2004 and Supp.) (collecting
cases holding that consumer has continuing right to cancel
under state home solicitation sales statutes if seller fails to give
proper notice of right to cancel).
§ 11.4.10.2
that loss and the violation of the statute. Most authorize
punitive damages and attorney fees, and some explicitly
provide for injunctive relief.
Many of these statutes explicitly apply their prohibitions
not only to the organization itself, but also to its agents and
representatives, including independent contractors. Courts
have differed on the question whether a claim under the state
credit services organization law can be asserted against
other entities that are working in tandem with the credit
services organization. One decision finds that a lender who
prepared a broker agreement for a mortgage broker, and then
funded the loan, violated the state credit repair law even
though only the broker met the statutory definition of credit
services organization.246 But another decision from the same
district holds that others who participate in the scheme with
a credit repair organization but do not themselves meet the
statutory definition are not subject to the statute.247
11.4.10 State Real Estate Requirements
11.4.10.1 Formal Requirements for Deeds
The homeowner should also check the details of the
state’s formal requirements for deeds, 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. State
real estate requirements vary from state to state and can be
quite technical, so it may be best to get detailed information
from the client and then consult with an attorney who has
expertise in real estate law.
11.4.10.2 False Notarization
States typically require that signatures on deeds or mort-
gages be notarized. Defects in the notarization of title
documents may affect the validity of the instrument.
Many foreclosure rescue scam cases involve situations in
which the person whom the notary certified as having
appeared did not, in fact, appear. Borrowers are often in-
structed to sign a stack of documents that are then taken
246 Lewis v. Delta Funding Corp. (In re Lewis), 290 B.R. 541
(Bankr. E.D. Pa. 2003). But cf. Strang v. Wells Fargo Bank,
2005 WL 1655886 (E.D. Pa. July 13, 2005) (lender had no
derivative liability under state credit repair law for acts of
closing agent and loan broker who were not shown to be
covered by that law).
247 Allen v. Advanta Fin. Corp., 2002 U.S. Dist. LEXIS 11650
(E.D. Pa. Jan. 3, 2002); see also Herrod v. First Republic Mortg.
Corp., 625 S.E.2d 373 (W. Va. 2005) (lender did not have a legal
duty to ensure that independent broker complied with state
credit repair law).
107
§ 11.4.11 Foreclosures / 2006 Supplement
elsewhere for notarization. Alternatively, improper notari-
zations may result from the taking of an actual acknowl-
edgment from an imposter, taking an acknowledgment from
an incompetent person, or the taking of an acknowledgment
over the telephone.
Regardless of the reason for the defective acknowledg-
ment, practitioners should investigate whether such defects
render the instrument invalid, providing grounds to void a
transfer.248 Most courts distinguish between defective ac-
knowledgments and failure to acknowledge. Courts are
more likely to find instruments valid where the defect is
technical in nature, such as use of a notary residing in the
wrong county or failure to read the acknowledgment aloud,
but will invalidate them when the signatory did not in fact
appear before the notary.249
In addition to invalidating the deed, the homeowner may
be able to seek damages against the notary for false nota-
rization. Notaries are required to perform their duties with
honesty, integrity, diligence, and skill.250 In addition to
causes of action under a state UDAP statute or common law
theories, such as negligence per se, state statutes may set
forth specific causes of action for notary misconduct.251
Notary liability is particularly important because states typi-
cally require notaries to be bonded.
The California Court of Appeals has found that a notary
who negligently notarizes a trust deed is liable not only for
economic damages but also for emotional distress damages,
noting ‘‘the important function notaries serve in our soci-
ety.’’252 If the false notarization was not a proximate cause
of the homeowner’s losses, however, courts may be unwill-
248 See In re Miller, 320 B.R. 203 (N.D. Ala. 2006) (stating, but not
deciding, mortgage invalid for lack of proper acknowledgment
and therefore insufficient to transfer legal title in the collateral
to lender); In re Fisher, 320 B.R. 52 (E.D. Pa. 2005) (permitting
chapter 13 trustee to avoid mortgage where notary was not
present to acknowledge mortgagor’s identity and voluntary
acquiescence to be bound by terms of the agreement); In re
Bowling, 314 B.R. 127 (Bankr. S.D. Ohio 2004) (same); Gold-
ome Credit Corp. v. Hardy, 503 So. 2d 1227 (Ala. Civ. App.
1987) (affirming trial court’s determination that the mortgage
not executed before a notary was invalid and setting aside
foreclosure). But see In re Nichols, 265 B.R. 831 (B.A.P. 10th
Cir. 2001) (distinguishing between validity and perfection of
improperly notarized mortgage and affirming denial of debtor’s
motion to avoid mortgagee’s lien).
249 See, e.g., In re Fisher, 320 B.R. 52 (E.D. Pa. 2005); Poole v.
Hyatt, 689 A.2d 82 (Md. 1997). But see In re Biggs, 377 F.3d
515 (6th Cir. 2004) (failure to include mortgagor’s name in
notarization section rendered the deed of trust invalid under
Tennessee law).
250 McComber v. Wells, 72 Cal. App. 4th 512, 85 Cal. Rptr. 2d 376
(1999).
251 See, e.g., Calif. Gov. Code § 8214. (‘‘For the official misconduct
or neglect of a notary public, the notary public and the sureties
on the notary public’s official bond are liable in a civil action to
the persons injured thereby for all the damages sustained.’’).
252 Id. at 519, 85 Cal. Rptr. 2d at 380.
108
ing to award damages.253 But the false notarization may still
provide grounds to invalidate the deed.
11.4.11 RICO
The federal Racketeer Influenced and Corrupt Organiza-
tions Act (RICO)254 provides powerful civil remedies, in-
cluding 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.’’
Although RICO is aimed at organized crime, the statute is
broadly written to encompass a myriad of fraudulent activi-
ties conducted by theoretically ‘‘legitimate’’ organizations
and creditors. Therefore, consumers who have been the
victim of either fraudulent overcharging or overcharging of
at least twice the civil usury rate may wish to consider a
RICO claim.255
RICO claims have advantages and disadvantages. They
offer treble damages, attorney fees, and federal jurisdiction.
However, the elements of a RICO claim are complex and
rigorous. Courts may be hostile to RICO claims, and many
impose special pleading requirements on them. Before mak-
ing a RICO claim, the homeowner’s attorney should evalu-
ate whether the state UDAP statute or a common law fraud
claim would offer equivalent relief.
About half the states have their own RICO statutes, and
all but a few of these statutes afford a private cause of
action.256 Most are modeled on the federal statute, but some
have more relaxed elements. While a federal RICO claim
will provide a basis for removing a case to federal court, a
claim under a state RICO statute will not, so it is useful if
the plaintiff wants to stay in state court. Asserting consumer
253 Davis v. Adoption Auto, 731 F. Supp. 1475 (D. Kan. 1999);
Craig v. Metro Bank of Dallas, 601 S.W.2d 734 (Tex. Civ. App.
1980).
254 18 U.S.C. §§ 1961–1968. See § 4.8.7.5, supra; National Con-
sumer Law Center, Unfair and Deceptive Acts and Practices
§§ 9.2, 9.3 (6th ed. 2004 and Supp.) (extensive analysis of
RICO); National Consumer Law Center, The Cost of Credit:
Regulation, Preemption, and Industry Abuses § 10.8.5.3 (3d ed.
2005 and Supp.) (overview of using RICO in the credit context).
255 For an overview of using RICO in the credit context, see
National Consumer Law Center, The Cost of Credit: Regulation,
Preemption, and Industry Abuses § 10.8.5.3 (3d ed. 2005 and
Supp.).
256 See, e.g., Martinez v. Affordable Housing Network, Inc., 109
P.3d 983 (Colo. Ct. App. 2004) (affirming jury verdict on state
RICO claim against rescuer, but awarding damages only on
UDAP claim to avoid duplication), rev’d on other grounds, 123
P.3d 1201 (Colo. 2006) (reversing trial court’s determination
that buyer of home from rescuer was bona fide purchaser
without notice; remanding for trial on quiet title claim). See
generally National Consumer Law Center, Unfair and Decep-
tive Acts and Practices § 9.3 and Appx. C.2 (6th ed. 2004 and
Supp.).
 Foreclosure Rescue Scams / 2006 Supplement
claims under federal and state RICO statutes is discussed in
detail in NCLC’s Unfair and Deceptive Acts and Practices
manual.257
11.5 Challenging Foreclosure Rescue
Scams in Bankruptcy
11.5.1 Introduction
Bankruptcy is an important option for victims of foreclo-
sure 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.
This section provides an overview of bankruptcy and how
it can be used in challenging foreclosure rescue scams. Most
bankruptcy cases are complicated, and those who are not a
bankruptcy practitioners should consult with a bankruptcy
attorney before filing a case. Selected bankruptcy issues that
arise most frequently in foreclosure cases are discussed in
Ch. 7, supra. NCLC’s Consumer Bankruptcy Law and
Practice258 is a comprehensive analysis of bankruptcy law
as applied to consumers.
11.5.2 Bankruptcy Basics
11.5.2.1 Two Common Types of Bankruptcy for
Consumers
11.5.2.1.1 General
Bankruptcy law provides for two main types of consumer
cases: chapter 7 and chapter 13. Both types are generally
effective at stopping a pending eviction or foreclosure ac-
tion. Similarly, debtors may seek to void certain property
transfers under both chapters. However, if an outstanding
mortgage on the homeowner’s property is in default, chapter
13 will frequently be the better choice.
11.5.2.1.2 Chapter 7 (straight bankruptcy)
In bankruptcy cases under chapter 7, the debtors file a
petition asking the court to discharge their debts. The basic
257 Id. §§ 9.2, 9.3.
258 For a more detailed discussion of bankruptcy, see National
Consumer Law Center, Consumer Bankruptcy Law and Practice
(7th ed. 2004) and National Consumer Law Center, Consumer
Bankruptcy Law and Practice, Special Guide to the 2005 Act
(2005).
§ 11.5.2.2
idea in a chapter 7 bankruptcy is to wipe out (discharge)
debts in exchange for giving up property, except for ‘‘ex-
empt’’ property that the law allows the debtor to keep. In
most cases, all of the debtor’s property will be exempt. But
property that is not exempt is sold, with the money distrib-
uted to creditors.
In some foreclosure rescue scams, the rescuer may not
cure the mortgage default or pay off the mortgage that may
have been one source of the homeowner’s financial diffi-
culties. If there is an outstanding mortgage in default, a
chapter 7 case probably will not be the right choice because
it does not eliminate the right of mortgage holders (or other
secured creditors) to take the debtor’s property to cover the
debt.
11.5.2.1.3 Chapter 13 (reorganization)
In chapter 13 cases, the debtor must file a ‘‘plan’’ showing
how she will pay off past-due and current debts over a period
of up to five years. The most important fact about chapter 13
bankruptcy for victims of foreclosure rescue scams is that it
allows debtors to cure defaults on secured loans such as
home mortgages.259 In most cases, payments to the mort-
gage lender will be at least as much as the regular monthly
payments, with some additional payment to get caught up on
the delinquent amount. Chapter 13 cases also allow debtors
to keep both exempt property, which would be protected in
chapter 7, and non-exempt property, which would be sold in
chapter 7. For a chapter 13 plan to be a viable option, the
homeowners will need to have enough income to pay for
their necessities and to keep up with the required payments
as they come due.
11.5.2.2 Gathering the Necessary Information
While the primary purpose in filing for bankruptcy may
be to regain title to the home, homeowners will be required
to complete a significant amount of paperwork detailing
their financial situation. Homeowners must provide the
attorney with the information necessary to accurately pre-
pare the bankruptcy petition and schedules.260 The attorney
will need to obtain a complete list of creditors and current
addresses, account numbers, and balances owed for each
debt. It is more important in chapter 13 than in chapter 7 to
know the precise amount owed on each debt, as this may
affect the feasibility of the plan. Particularly in cases where
the homeowners are proposing to pay less than 100% to
259 See §§ 7.3, 7.4, supra.
260 A sample bankruptcy questionnaire is provided in Appendix H
to National Consumer Law Center, Consumer Bankruptcy Law
and Practice (7th ed. 2004). An updated version of the ques-
tionnaire reflecting the 2005 Act changes is found in Appendix
H to National Consumer Law Center, Consumer Bankruptcy
Law and Practice (Special Guide to the 2005 Act).
109
§ 11.5.2.3 Foreclosures / 2006 Supplement
unsecured creditors or to avoid a judicial lien, the attorney
also should try to obtain a copy of a recent appraisal of the
home. The trustee or secured creditor simply may not rely
upon the tax assessment value. It also is very important that
the homeowners provide a realistic budget of expenses so
that the attorney can determine the amount of excess income
available to make monthly plan payments.
11.5.2.3 Credit Counseling Requirements
Bankruptcy law requires that most debtors receive budget
and credit counseling within 180 days before the bankruptcy
case is filed.261 If time is critical in the foreclosure rescue
case, homeowners should immediately be referred to an
approved credit counseling agency. The counseling require-
ment may be temporarily or permanently waived, but only
in very limited circumstances.262 Organizations providing
this counseling must be approved by the United States
Trustee Program (or the Bankruptcy Administrator in North
Carolina and Alabama). Agencies must also provide the
bankruptcy counseling and necessary certificates without
regard to ability to pay. If homeowners cannot afford the fee,
they should ask for a fee waiver or reduced fee.
To receive a discharge in a chapter 7 or chapter 13 case,
the debtor must complete a financial education course. This
course is different from the budget and credit counseling that
must be completed prior to filing.
11.5.2.4 Litigating in a Bankruptcy Case
Lawsuits within a bankruptcy case are called ‘‘adversary
proceedings.’’ The proceedings are initiated by a complaint
and are governed by rules that closely parallel the Federal
Rules of Civil Procedure. Depending on the specific circum-
stances of the case, the bankruptcy court may be a preferable
forum for litigating foreclosure rescue scams.263 In many
districts, the bankruptcy judges and federal judges may be a
good deal more sympathetic to the homeowner’s case than
judges in local courts. Not only do bankruptcy judges
regularly see the problem of debtors in trouble, but also they
are generally more aware of the unfair creditor practices that
often take place. Many bankruptcy judges are pleased to be
presented with novel and creative cases that provide both a
change of pace from routine bankruptcy matters and a
means for ruling on unfair practices.
In addition, most bankruptcy judges are far more knowl-
edgeable in commercial law, and often in consumer law
261 11 U.S.C. § 109(h). A list of approved agencies is available on
the website for the Executive Office of the United States Trustee,
at www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
262 See In re Gee, 332 B.R. 602 (Bankr. W.D. Mo. 2005); National
Consumer Law Center, Consumer Bankruptcy Law and Prac-
tice, Special Guide to the 2005 Act § 4.3.5.3 (2005).
263 See generally National Consumer Law Center, Consumer Bank-
ruptcy Law and Practice Ch. 13 (7th ed. 2004).
110
(such as the Truth in Lending Act), than the average state
judge. Bankruptcy judges and federal appellate judges may
be more disposed, because of lower case loads and greater
availability of law clerk assistance, to give careful consid-
eration to bona fide legal arguments on behalf of debtors.
11.5.3 Stopping the Eviction
Many victims of foreclosure rescue scams may only seek
legal assistance after the rescuer has initiated 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 most
eviction efforts against the homeowners as well as other
creditor actions. However, there are a few exceptions, usu-
ally based on prior bankruptcy filings, when the stay may
not automatically go into effect or may have a limited
duration. There is also a special set of procedures that apply
to eviction cases.
If the rescuer has initiated an eviction case against the
homeowner, the automatic stay will prevent the rescuer from
evicting the homeowner if the bankruptcy case is filed
before the state court has entered a judgment for possession
against the landlord. If the bankruptcy case is filed after
judgment for possession against the homeowner, the full
automatic stay will come into effect only for a period of 30
days, and then only if documents are filed with the court
certifying that: (1) the debtor has a right to cure the rent
default under state law, and (2) the debtor has deposited with
the bankruptcy court the rent that will come due during the
first 30 days of the bankruptcy case (usually one month’s
rent). To get a stay longer than 30 days, the debtor is
required to pay the landlord all of the back rent statement in
the judgment for possession. These issues are discussed in
more detail in § 11.6.5, infra.
Because in most cases it is unlikely that victims of
foreclosure rescue scams will have the financial resources to
pay all the back rent in the judgment for possession within
30 days, the attorney should consider options for removing
the judgment or reopening the eviction case before filing for
bankruptcy.
11.5.4 Voiding Title Transfers in
Foreclosure Rescue Scams
11.5.4.1 Overview
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 statu-
tory claims such as unfair and deceptive practices (UDAP)
and truth in lending (TILA), or common law claims such as
 Foreclosure Rescue Scams / 2006 Supplement
fraud, conspiracy, and breach of fiduciary duty. Legal theo-
ries for attacking foreclosure rescue scams are discussed in
§ 11.4, supra. However, for homeowners whose primary
goal is to regain ownership of their home, bankruptcy may
provide an alternative route.
Bankruptcy trustees (and administrators) have the power
to avoid or nullify transfers of property pursuant to several
sections of the Bankruptcy Code. While these avoidance
powers have limitations, they can be extremely powerful in
challenging title transfers in foreclosure rescue scams. The
Code also permits debtors to utilize the trustee’s avoiding
powers with some limitations set forth in section 522(g) and
522(h).
While the complex relationship of the bankruptcy provi-
sions used by the debtor to void title transfers may at first
appear daunting, especially to nonbankruptcy practitioners,
the interplay of the statutes can be reduced to five essential
elements. The debtor may avoid a transfer if: (1) the transfer
is avoidable by the trustee; (2) the trustee does 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. The most difficult hurdle for
some victims of foreclosure rescue scams is likely to be
demonstrating that the transfer was not voluntary. However,
if the homeowner cannot show the last three elements,
another option is to persuade the trustee to avoid the transfer,
as discussed in § 11.5.4.5, infra.
11.5.4.2 Trustees’ Powers to Avoid Transfers
11.5.4.2.1 General
The starting point in any avoidance action is a determi-
nation 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.
11.5.4.2.2 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.264 The
trustee may avoid a transfer if the transfer was made within
the two years265 before the case was filed and the transfer
meets certain conditions. Specifically, a transfer may be
avoided if: (1) the debtor received less than a reasonably
264 See § 10.1.4.2, supra (general discussion of § 548).
265 For cases filed on or before April 20, 2006, fraudulent transfers
may only be set aside if the transfer was made within one year
prior to the commencement of the case.
§ 11.5.4.2.3
equivalent value for the transfer, and (2) the debtor was
insolvent on the date of the transfer or became insolvent as
a result of the transfer.
Whether a debtor received less than a reasonably equiva-
lent value will depend on the facts and circumstances of
each case. The focus of the inquiry is on what the home-
owners received in return for what they surrendered. In
foreclosure rescue scams, homeowners often receive little or
nothing for the equity in their homes. Even where rescuers
have cured mortgage arrears, it is doubtful whether such
payments are of any benefit to the homeowners who have
simultaneously lost title to their homes.266
To avoid a transfer under section 548, the debtor must
also have been insolvent at the time of transfer or have
become insolvent as a result of the transfer. The insolvency
inquiry is essentially a balance-sheet test that looks at the
difference between the debtor’s non-exempt assets and li-
abilities. Most consumer debtors are insolvent under the
Code’s definition. For those debtors that may have had
non-exempt equity in their homesteads, transferring title to
their property in a foreclosure rescue scam almost always
renders the homeowner insolvent.
11.5.4.2.3 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. Under almost all
state fraudulent transfer laws, a transfer may be deemed
fraudulent if: (1) the debtor was insolvent or became insol-
vent as a result of the transfer, and (2) the conveyance was
made without ‘‘reasonably equivalent value’’ or ‘‘fair con-
sideration.’’267
Despite their similarities, the right to avoid fraudulent
transfers under the Code differs slightly from the right to
avoid transfers under state law. Most significantly, state
fraudulent transfer laws have a longer ‘‘reach-back’’ period,
typically four years. As a result, debtors may use section
544(b) to challenge title transfers outside of the two-year
period specified in section 548. Some state laws also provide
that a debtor is presumed to be insolvent if he or she is not
paying debts as they become due. Under this definition,
homeowners who are in financial distress and falling further
behind on their mortgage will be presumed to be insolvent.
266 See In re Davis, 148 B.R. 165, 174 (Bankr. E.D.N.Y.), aff’d, 169
B.R. 285, 300 (E.D.N.Y. 1994).
267 Almost all state fraudulent transfer laws are based either on the
Uniform Fraudulent Conveyance Act, which uses the term ‘‘fair
consideration,’’ or the more recent Uniform Fraudulent Transfer
Act, which uses the term ‘‘reasonably equivalent value.’’ Courts
have drawn little to no distinction between the ‘‘reasonably
equivalent value’’ standard and the ‘‘fair consideration’’ stan-
dard. See, e.g., In re AppliedTheory Corp., 323 B.R. 838 (Bankr.
S.D.N.Y. 2005); In re Tiger Petroleum Co., 319 B.R. 225, 232
(Bankr. N.D. Okla. 2004).
111
§ 11.5.4.3 Foreclosures / 2006 Supplement
11.5.4.3 Debtor’s Power to Avoid Title Transfers
11.5.4.3.1 General
If the trustee could avoid the title transfer but elects not to
do so, the debtor may be able to do so in certain circum-
stances. 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.
11.5.4.3.2 Did the debtor conceal the property?
The answer to this question depends largely on whether
the debtor has disclosed the property on his or her 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. At a minimum, the
causes of action against the rescue scammers should be
listed on Schedule B—Personal Property.268 It may also be
prudent to list the property on Schedule A—Real Property
with an explanatory note that the debtor had been the title
owner of the real property before the transfer, that the debtor
believes that the transfer is avoidable, and the debtor retains
an equitable interest in the property.
11.5.4.3.3 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.269 How-
ever, 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. For debtors in states that have ‘‘opted out’’
of the federal exemption scheme, only the state law exemp-
tions and exemptions provided by federal non-bankruptcy
law are available.270
So long as the debtor may exempt some portion of the
property, the debtor may avoid transfers of that property
using the trustee’s powers. The amount recovered up to the
amount of the exemption is for the benefit of the debtor,
while any amount in excess of the exemption is preserved
for the benefit of the estate. So, for example, if the debtor
avoids transfer of a $100,000 home that has a $65,000 first
268 Debtors may be judicially estopped from later bringing claims
not listed in their schedules. See, e.g., Hamilton v. State Farm
Fire & Cas. Co., 270 F.3d 778 (9th Cir. 2001); Wolfork v.
Tackett, 273 Ga. 328, 540 S.E.2d 611 (2001).
269 See 11 U.S.C. § 541(a)(1).
270 For more information see National Consumer Law Center,
Consumer Bankruptcy Law and Practice § 10.2 (7th ed. 2004).
112
mortgage, and there is a $30,000 homestead exemption, the
remaining $5000 in equity is preserved for the benefit of the
estate. In a chapter 7 bankruptcy, the home may be sold,
with the debtor receiving the $30,000 exemption and the
remaining $5000 going to unsecured creditors. (The debtor
may still be able to save the home, however, by buying out
the trustee’s interest in the home through refinancing or
some other way.) In a chapter 13 bankruptcy, the debtor is
required to pay unsecured creditors at least the amount of
non-exempt assets that would have been distributed to them
in a chapter 7 bankruptcy, so the debtor must pay at least
$5000 to the unsecured creditors under the plan. (Of course,
a debtor who owes less than $5000 to unsecured creditors
need only pay them the amount of their debts.)
11.5.4.3.4 Was the transfer involuntary?
The debtor may use the trustee’s avoidance powers only
where the transfer to be avoided was ‘‘involuntary.’’ Neither
the term ‘‘voluntary’’ nor ‘‘involuntary’’ is defined in the
Bankruptcy Code. Involuntary transfers, however, generally
refer to transfers effectuated by operation of law, such as an
execution of judgment, repossession, foreclosure, or gar-
nishment. A transfer may also be considered ‘‘involuntary’’
if it resulted from fraud, material misrepresentation, or
coercion. According to this standard, a voluntary transfer
does not occur where a creditor has concealed or failed to
inform a debtor of the essential facts necessary for the debtor
to make an intelligent decision on whether to transfer the
property to the creditor.
In foreclosure rescue cases where homeowners are led to
believe they are taking out a second mortgage or additional
financing to cure mortgage arrears, when in reality they are
unknowingly transferring title to their home to a third party,
the ‘‘involuntary’’ nature of the transaction should not be
difficult to establish. Even in cases where homeowners are
aware that they are transferring title, it may still be possible
to characterize the transaction as involuntary if they did not
know all of the material facts of the transaction, misrepre-
sentations were made to them, they faced significant eco-
nomic coercion as a result of a threatened foreclosure sale,
or the closing transaction occurred under tremendous pres-
sure.271
11.5.4.4 Persuading the Trustee to Avoid the
Transfer
If the homeowner cannot show all of the elements dis-
cussed above, it may be possible to persuade the trustee to
avoid the transfer. The advantage of having the trustee avoid
the transfer is that the trustee need not show the last three
elements: that the debtor did not conceal the property; that
271 See In re Davis, 169 B.R. 285, 295, 298 (E.D.N.Y. 1994).
 Foreclosure Rescue Scams / 2006 Supplement
the debtor may exempt the property; and that the transfer
was involuntary. The trustee is likely to be interested in
avoiding the transfer if the home has some non-exempt
equity.
If the trustee avoids the transfer, the homeowner will
benefit in two ways. First, the homeowner will be able to
exempt whatever portion of the home is exempt. Second, if
a portion of the home’s value is not exempt, it will be under
the control of the trustee rather than the rescuer.
In a chapter 13 bankruptcy, the debtor is required to pay
the unsecured creditors the amount they would have re-
ceived in a chapter 7 bankruptcy. Since the amount that
unsecured creditors receive in a chapter 7 case is based on
the amount of non-exempt assets in the bankruptcy estate,
bringing the debtor’s non-exempt equity in the home back
into the bankruptcy estate increases the amount that will
have to be distributed to unsecured creditors in a chapter 13
case.272
11.6 Issues Posed by Separate State
Court Proceedings
11.6.1 Introduction
Several issues complicate the homeowner’s ability to
pursue a foreclosure rescue scam lawsuit when there is a
related state proceeding. These issues are most likely to arise
when the homeowner files an action in federal court to
rescind a foreclosure rescue transaction and there is a threat-
ened, pending, or concluded action in state court to foreclose
on the home or to evict the homeowner.
Defendants often raise Younger abstention, the Anti-In-
junction Act, and the Rooker-Feldman doctrine, in addition
to res judicata and collateral estoppel. These issues should
be evaluated when the homeowner decides whether to file an
independent action or whether to seek relief in the foreclo-
sure or eviction case. They should also be considered when
choosing between state and federal court, since Younger, the
Anti-Injunction Act, and Rooker-Feldman only apply in
federal court (though states might have similar doctrines). In
general, the farther the existing state court proceeding is
from judgment the more likely a federal or state court is to
reach the merits and grant relief in an independent action.
These issues are discussed in more detail in NCLC’s Truth
in Lending manual.273
11.6.2 Younger Abstention
The Younger abstention doctrine prevents a federal court
from issuing declaratory or injunctive relief that would
272 See § 11.5.4.4.2, supra.
273 National Consumer Law Center, Truth in Lending § 8.4.2 (5th
ed. 2003 and Supp.).
§ 11.6.2
interfere with pending state proceedings.274 Younger absten-
tion applies if (1) there are ongoing state proceedings that
are judicial in nature; (2) the state proceedings implicate
state interests so important that exercise of the federal
judicial power would disregard the comity between the
states and the national government; and (3) the state pro-
ceedings afford an adequate opportunity to raise the federal
claims.275
The first and third requirements for Younger abstention
are fairly straightforward. If the state case is merely threat-
ened rather than filed, Younger does not bar declaratory
relief because there is no ongoing state proceeding and the
first Younger requirement is not met.276 In foreclosure rescue
scam cases, the third requirement for Younger abstention—
an adequate opportunity to raise federal claims—is often not
met, because some jurisdictions sharply curtail the home-
owner’s ability to raise consumer law claims such as TILA
in response to foreclosure or eviction actions.277
The scope of the second requirement for Younger absten-
tion—important state interests—has evolved. Younger in-
volved pending state criminal prosecutions, and the doctrine
has since been applied in other contexts, such as civil
contempt proceedings, that involve enforcement actions by
the state or state courts and are akin to criminal prosecu-
tions.278
In 1987, in Pennzoil v. Texaco, Inc.,279 the Supreme Court
extended the doctrine to bar a company’s federal challenge
274 Younger v. Harris, 401 U.S. 37, 91 S. Ct. 746, 27 L. Ed. 2d 669
(1971).
275 Middlesex County Ethics Committee v. Garden State Bar Ass’n,
457 U.S. 423, 435 (1982).
276 Steffel v. Thompson, 415 U.S. 452, 94 S. Ct. 1209, 39 L. Ed. 2d
505 (1974); see also Hicks v. Miranda, 422 U.S. 332, 95 S. Ct.
2281, 45 L. Ed. 2d 223 (1975) (Younger prevents declaratory
relief where state criminal proceeding is filed after federal suit
but before any proceedings of substance on merits in federal
suit).
277 Miller v. Granados, 529 F.2d 393 (5th Cir. 1976) (Younger
abstention does not bar injunction against state foreclosure
proceedings where state courts could not grant the relief plain-
tiffs sought under federal antitrust laws). See generally National
Consumer Law Center, Truth in Lending § 7.6.8 (5th ed. 2003
and Supp.).
278 Huffman v. Pursue, Ltd., 420 U.S. 592, 95 S. Ct. 1200, 43 L. Ed.
2d 482 (1975) (public nuisance proceeding brought by the
state); Juidice v. Vail, 430 U.S. 327, 97 S. Ct. 1211, 51 L. Ed.
2d 376 (1977) (civil contempt proceeding); Trainor v. Hernan-
dez, 431 U.S. 434, 97 S. Ct. 1911, 52 L. Ed. 2d 486 (1977) (civil
action by the state to collect fraudulently obtained welfare
benefits); Moore v. Sims, 442 U.S. 411, 99 S. Ct. 2371, 60 L. Ed.
2d 994 (1979) (action by governmental agency for temporary
custody of allegedly abused child); Middlesex Co. Ethics Com-
mittee v. Garden State Bar Ass’n, 457 U.S. 423, 432, 102 S. Ct.
2515, 73 L. Ed. 2d 116 (1982) (state bar disciplinary proceed-
ings); Ohio Civil Rights Commission v. Dayton Christian
Schools, Inc. 477 U.S. 619, 106 S. Ct. 2718, 91 L. Ed. 2d 512
(1986) (administrative agency action commenced by state civil
rights commission).
279 481 U.S. 1, 107 S. Ct. 1519, 95 L. Ed. 2d 1 (1987).
113
§ 11.6.3 Foreclosures / 2006 Supplement
to a state requirement that a bond be posted as a condition
of an appeal of a state civil case. The Court characterized the
case as involving a challenge to the process by which the
state compels compliance with the judgments of courts,
similar to civil contempt proceedings. It held that the state’s
interests in this civil proceeding were so important that
exercise of federal judicial power would disregard the co-
mity between the states and the federal government. The
Court took pains, however, to state that it was not announc-
ing a rule that would be applicable to all civil cases between
private parties.280
Eviction or foreclosure proceedings that may be pending
in state court in foreclosure rescue scam cases involve only
private parties, and a TILA case does not generally chal-
lenge a state’s enforcement efforts. Therefore, these cases
are not likely to implicate important state interests under
Younger.
Since Pennzoil, when the state court suit is a civil case
between private parties, courts have been more likely to
abstain if the federal suit is a constitutional challenge to the
state court’s procedures.281 If the federal suit does not
challenge the state court’s procedures, but instead seeks a
ruling on some issue between the private parties, a state
eviction or foreclosure proceeding is less likely to be seen as
implicating the important state interests that the Younger
doctrine requires.282 If the state case has gone to judgment
and a sheriff’s sale or a writ of possession to enforce that
280 Id., 481 U.S. at 14 n.12.
281 Schall v. Joyce, 885 F.2d 101 (3d Cir. 1989) (state had special
interest in enforcing the orders and judgments where judgment
debtor sought relief in federal court to challenge confession of
judgment procedures); accord Doscher v. Menifee Circuit
Court, 2003 WL 22220534, 75 Fed. Appx. 996 (6th Cir. Sept.
24, 2003) (unpublished) (Younger abstention bars challenge to
state court foreclosure procedures; pro se debtor sought federal
court order blocking foreclosure sale and reopening foreclosure
judgment); see also Scott v. Mortgage Elec. Registration Sys-
tems, 2004 WL 1925008 (E.D. Pa. Aug. 27, 2004) (Younger
abstention bars due process challenge in federal court to state
foreclosure procedures); Fisher v. Fed. Nat’l Mortg. Ass’n, 360
F. Supp. 207 (D. Md. 1973) (pre-Pennzoil case invoking
Younger abstention to refuse to hear constitutional challenge to
state foreclosure procedures); Ungar v. Isaias, 336 F. Supp. 1233
(S.D.N.Y. 1972) (same).
282 See Schall v. Joyce, 885 F.2d 101 (3d Cir. 1989) (finding that
Younger abstention is not always appropriate whenever a civil
proceeding is pending in a state court; ‘‘Pennzoil’s limiting
principle is its focus on the special interest that a state has in
enforcing the orders and judgments of its courts’’); Rowland v.
Novus Fin. Corp., 949 F. Supp. 1447, 1456–1457 (D. Haw.
1996) (noting that Pennzoil ‘‘directly implicat[ed] the state
judiciary process itself’’ whereas the plaintiff’s ‘‘ federal suit
does not directly attack the validity of the state foreclosure
proceeding per se, but rather involves a claim for rescission that
could ultimately affect the final distribution of the bankruptcy
estate’’); Schumacher v. ContiMortgage Corp., 2000 WL
34030847 (N.D. Iowa June 21, 2000) (relying on Roland to
deny abstention despite TILA affirmative defense in state fore-
closure suit).
114
judgment is pending, enjoining the enforcement of the
judgment comes closer to Pennzoil, but it still may be
possible to argue that the plaintiff’s federal challenge is not
to the state court procedures themselves. (However, the
Rooker-Feldman doctrine, discussed in § 11.6.4, infra, may
be an additional impediment.)
Apart from the three formal requirements for Younger
abstention, abstention can also be avoided if the state pro-
ceedings are undertaken in bad faith or for purposes of
harassment, or some other extraordinary circumstances ex-
ist, such as proceedings pursuant to a flagrantly unconstitu-
tional statute.283
11.6.3 The Anti-Injunction Act
Another potential impediment to federal court relief when
there is an ongoing state court proceeding is the Anti-
Injunction Act, which prohibits federal courts from granting
injunctions to stay proceedings in state courts.284 This pro-
hibition cannot be evaded by addressing the injunction to a
party rather than the state court.285
The Anti-Injunction Act contains three explicit excep-
tions, all of which are to be narrowly construed.286 First, a
federal court may enjoin state proceedings ‘‘as expressly
authorized by Act of Congress.’’287 To invoke this excep-
tion, the other law need not expressly refer to the Anti-
Injunction Act, or expressly authorize an injunction against
a state court proceeding.288 The question is whether the
other law creates a federal right or remedy, enforceable in a
federal court of equity, that can be given its intended scope
only by the stay of a state court proceeding.289 Some courts
have held that TILA does not fall within this exception.290
A second explicit exception to the Anti-Injunction Act is
that a federal court can enjoin a state proceeding where
283 Middlesex County Ethics Committee v. Garden State Bar Ass’n,
457 U.S. 423, 435 (1982); Younger v. Harris, 401 U.S. 37,
53–54, 91 S. Ct. 746, 27 L. Ed. 2d 669 (1971).
284 28 U.S.C. § 2283.
285 Atlanta Coast Line R.R. Co. v. Brotherhood of Locomotive
Engineers, 398 U.S. 281, 287 (1970).
286 Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S. Ct.
1684, 100 L. Ed. 2d 127 (1988).
287 18 U.S.C. § 2283.
288 Mitchum v. Foster, 407 U.S. 225, 237, 92 S. Ct. 2151, 32 L. Ed.
2d 705 (1972).
289 Id.; see also Vendo Co. v. Lektro Vend Corp., 433 U.S. 623, 97
S. Ct. 2881, 53 L. Ed. 2d 1009 (1977) (plurality opinion holding
that Clayton Act was not express authorization for injunction,
since neither statute nor legislative history mentioned § 2283 or
the enjoining of state court proceedings).
290 Clark v. U.S. Bank Nat’l Ass’n, 2004 WL 1380166, at *3 (E.D.
Pa. June 18, 2004) (holding, in case where plaintiff raised TILA
and other claims, that none of the exceptions to Anti-Injunction
Act are applicable); see also Tropf v. Fidelity Nat’l Title Ins.
Co., 289 F.3d 929, 942 n.21 (6th Cir. 2002) (plaintiffs raised
TILA and many other claims; opinion does not focus on whether
TILA is an exception, but states that no statute authorized the
injunction plaintiffs sought).
 Foreclosure Rescue Scams / 2006 Supplement
necessary in aid of its jurisdiction. This rule applies when
‘‘necessary to prevent a state court from so interfering with
a federal court’s consideration or disposition of a case as to
seriously impair the federal court’s flexibility and authority
to decide the case.’’291 This exception has been applied to
cases in which a federal court obtains in rem jurisdiction
prior to a state court suit, to removal cases, and to multi-
district litigation.292 In other cases, the mere fact that a state
court might rule first on an issue before the federal court
(and expose the homeowner to res judicata or collateral
estoppel) is not enough to invoke this exception.293 But if
the state action threatens not simply to reach judgment first,
but also to interfere with the federal court’s own path to
judgment—such as by preventing relief on the federal
claims even if they are proven—then a preliminary injunc-
tion may be necessary in aid of the federal court’s jurisdic-
tion.294 This exception might allow a federal court to enjoin
the actual eviction of the homeowner or sale of the property
(through foreclosure or otherwise) in order to protect the
ability of the federal court to grant the homeowner the relief
sought on a TILA rescission claim.295
Related to the second exception (though not based di-
rectly on it) is a dispute among the courts of appeal about
whether a federal court may enjoin state court proceedings
when the federal court had already obtained (in personam)
jurisdiction over the injunctive claim before the state pro-
ceeding was filed. The Seventh Circuit, followed by the First
and Eight, has held that the jurisdiction of the federal court
is determined at the time that its injunctive powers are
291 Atlantic Coast Line R.R. Co. v. Brotherhood of Locomotive
Engineers, 398 U.S. 281, 295, 90 S. Ct. 1739, 26 L. Ed. 2d 234
(1970).
292 See James v. Bellotti, 733 F.2d 989, 993 (1st Cir. 1984); 1975
Salaried Retirement Plan for Eligible Employees of Crucible,
Inc. v. Nobers, 968 F.2d 401, 407 (3d Cir. 1992).
293 Retirement Sys. v. J.P. MorganChase & Co., 386 F.3d 419, 429
(2d Cir. 2004). See also Atlantic Coast Line R. Co. v. Brother-
hood of Locomotive Engineers, 398 U.S. 281, 294–296, 90 S.
Ct. 1739, 26 L. Ed. 2d 234 (1970); Signal Props., Inc. v. Farha,
482 F.2d 1136 (5th Cir. 1973).
294 See In re Diet Drugs, 282 F.3d 220, 235 (3d Cir. 2002); Piper v.
Portnoff Law Assocs., 262 F. Supp. 2d 520 (E.D. Pa. 2003).
295 See Piper v. Portnoff Law Assocs., 262 F. Supp. 2d 520 (E.D. Pa.
2003) (applying this exception to enjoin sheriff’s sale); Cotton-
wood Christian Center v. Cypress Redevelopment Agency, 218
F. Supp. 2d 1203, 1217–1218 (C.D. Cal. 2002) (federal court
may enjoin state condemnation proceeding in order to protect its
ability to rule on landowner’s challenge to city’s land use
decisions). But see Clark v. U.S. Bank Nat’l Ass’n, 2004 WL
1380166 (E.D. Pa. June 18, 2004) (Anti-Injunction Act bars
TILA plaintiff’s prayer for injunction against sheriff’s sale that
was scheduled to enforce state court foreclosure judgment);
Armstrong v. Real Estate Int’l, Ltd., 2006 WL 354983 at *4–*5
(E.D.N.Y. Feb. 14, 2006) (injunction was not necessary in aid of
federal court’s jurisdiction in TILA challenge to foreclosure
rescue scam because state eviction case had already entered
judgment and state courts, including eviction court, could hear
TILA claims).
§ 11.6.4
invoked, whether in the complaint or by motion.296 The
Fourth, Fifth, and Sixth Circuits have held that the Anti-
Injunction Act applies whenever the state action is filed
before the federal court rules on a request for injunctive
relief, and the Second Circuit has indicated agreement with
this rule.297 In either case, it is clear that the Anti-Injunction
Act only prohibits injunctions against pending state pro-
ceedings, and does not preclude injunctions against the
institution of state proceedings.298
The final exception is that a federal court can enjoin state
court proceedings as necessary to protect or effectuate its
judgments. This exception is intended to prevent relitigation
of an issue that was presented to and decided by the federal
court, and is similar to the doctrines of res judicata and
collateral estoppel.299 This exception would allow a federal
court that had issued a final judgment in a foreclosure rescue
scam case to enjoin the rescuer from filing or pursuing an
eviction action in state court to relitigate the issues.
11.6.4 The Rooker-Feldman Doctrine
Under the Rooker-Feldman doctrine, a federal court lacks
subject matter jurisdiction over and must dismiss a claim
that is the functional equivalent of an appeal from a state
court judgment.300 In two decisions in 2005 and 2006, the
Supreme Court has made clear that the doctrine is extremely
narrow and that lower courts were interpreting it too
broadly.301 The doctrine ‘‘is confined . . . to cases brought by
state-court losers complaining of injuries caused by state-
court judgments rendered before the district court proceed-
ings commenced and inviting district court review and
rejection of those judgments.’’302 It does not apply if the
296 Baranick v. Investors Funding Corp., 489 F.2d 933, 937 (7th Cir.
1973); Hyde Park Partners, L.P. v. Connolly, 839 F.2d 837, 842
n.6 (1st Cir. 1988); National City Lines, Inc. V. L.L.C. Corp.,
687 F.2d 1122, 1127 (8th Cir. 1982); see also Hruby v. Larsen,
2005 WL 1540130 at *2 (D. Minn. June 30, 2005) (following
National City Lines in foreclosure rescue scam case).
297 Denny’s Inc. v. Cake, 364 F.3d 521 (4th Cir. 2004); Royal Inc.
Co. v. Quinn-L Capital Corp., 3 F.3d 877, 885 (5th Cir. 1993);
Roth v. Bank of the Commonwealth, 583 F.2d 527, 533 (6th Cir.
1978); see Standard Microsystems Corp. v. Texas Instruments,
916 F.2d 58, 61–62 (2d Cir. 1990).
298 Dombrowski v. Pfister, 380 U.S. 479, 485 n.2, 85 S. Ct. 1116,
14 L. Ed. 2d 22 (1965); Tropf v. Fidelity Nat’l Title Ins. Co., 289
F.3d 929, 941 (6th Cir. 2002).
299 Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S. Ct.
1684, 100 L. Ed. 2d 127 (1988); Tropf v. Fidelity Nat’l Title Ins.
Co., 289 F.3d 929, 942 n.21 (6th Cir. 2002).
300 District of Columbia Court of Appeals v. Feldman, 460 U.S.
462, 482–486, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983); Rooker
v. Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362
(1923).
301 See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059
(2006); Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544
U.S. 280, 283–284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005).
302 Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280,
115
§ 11.6.5 Foreclosures / 2006 Supplement
federal plaintiff was not a party to the state case, even if the 11.6.5 The Bankruptcy Automatic Stay As
parties were in privity.303 an Alternative
Even if the state claim has gone to judgment, Rooker-
Feldman does not apply if a federal plaintiff presents an
If an eviction or foreclosure case or some other type of
independent claim, even one that denies a legal conclusion
collection action is pending against the homeowner, the
that a state court has reached in a case to which the federal
consumer should consider bankruptcy court as a forum. In
plaintiff was a party.304 The case might be governed by res
most cases, as soon as a bankruptcy case is filed, all such
judicata or claim preclusion, but Rooker-Feldman neither
actions are automatically stayed without the need to con-
supplants nor augments those doctrines.305
sider the impediments to injunctive relief discussed
After these two recent decisions, it is not clear if the
above.311
doctrine retains any vitality outside of the strict context in
The 2005 amendments to the Bankruptcy Code imposed
which a federal action is filed for the direct purpose of
certain restrictions on the automatic stay that may be rel-
revisiting a state court judgment.306
evant in foreclosure rescue scam cases. First, the stay may
In the foreclosure rescue scam context, even if a state
not be automatic or may be limited in duration if the
court has already rendered an eviction judgment, a TILA
homeowner filed another bankruptcy case that was dis-
claim is an independent claim because it is not aimed at the
missed within the previous year.312
rescuer’s right to evict under the lease, but rather at the
In addition, if a judgment for possession was entered in an
underlying sale/leaseback transaction.307
‘‘eviction, unlawful detainer action, or similar proceeding’’
The Third Circuit applied Rooker-Feldman post-Exxon to
before the bankruptcy case was filed, the automatic stay will
dismiss a bankruptcy adversary proceeding brought to void
prevent enforcement of the judgment only if documents are
a state court foreclosure judgment and vacate a sheriff’s sale
filed with the court certifying that the debtor has a right to
as allegedly violating the debtor’s due process rights.308 This
cure under state law and the debtor has deposited with the
case more closely tracks Rooker-Feldman because it was a
bankruptcy court the rent that will come due during the first
direct attack on the state court foreclosure judgment. An-
30 days of the bankruptcy case.313 Even if the debtor files
other post-Exxon case held that Rooker-Feldman barred
these documents, the stay only lasts 30 days. After that, the
jurisdiction in a TILA case brought to challenge a state court
stay continues only if the debtor pays the rescuer/landlord
foreclosure judgment.309 Neither court considered whether
all the back rent stated in the judgment for possession. These
the actions were independent claims, nor did they have the
restrictions do not apply if the bankruptcy case is filed
benefit of the Supreme Court’s second warning, in 2006, that
before judgment for possession is entered, however. In
lower courts were interpreting the doctrine too broadly.310
addition, they only apply if the debtor resides at the home
‘‘as a tenant under a lease or rental agreement.’’314 The
rescuer may have characterized the agreement with the
homeowner as something other than a lease in an attempt to
284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005) (emphasis avoid state landlord-tenant laws. It also might be possible to
added).
303 Lance v. Dennis, 126 S. Ct. 1198, 163 L. Ed. 2d 1059 (2006).
persuade the bankruptcy court to pierce the form of the
304 Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280, transaction and conclude that even a document that is titled
283, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005). a lease is something other than a ‘‘lease or rental agree-
305 Exxon Mobil Corp v. Saudi Basic Indus. Corp., 544 U.S. 280, ment’’ in a foreclosure rescue scam.
283–284, 125 S. Ct. 1517, 161 L. Ed. 2d 454 (2005); Lance v. If a state court eviction action is pending but no judgment
Dennis, 126 S. Ct. 1198, 1202, 163 L. Ed. 2d 1059 (2006).
306 See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059
of possession has been entered, the homeowner should
(2006) (noting that the Court has never applied the doctrine consider filing the bankruptcy case immediately. If a judg-
since Rooker and Feldman and listing the cases in which the ment of possession has already been entered, the home-
Court rejected the doctrine); Marshall v. Marshall, 126 S. Ct. owner should, after filing the bankruptcy case, evaluate the
1735, 164 L. Ed. 2d 480 (2006) (Steven, J., concurring in part possibility of proceeding in state court to reopen the judg-
and concurring in the judgment) (referring to the grave in which
Rooker-Feldman was buried).
ment. The homeowner should coordinate reopening of the
307 See Brown v. Grant Holding, 394 F. Supp. 2d 1090, 1099 (D. judgment with the bankruptcy trustee, who may want to
Minn. 2005) (Rooker-Feldman does not apply to TILA/HOEPA litigate the issue, either alone or with the homeowner, or
foreclosure rescue scam case because prior state eviction case may be willing to abandon the claim to the homeowner.
only decided whether homeowner could retain possession of the
property and could not decide the equitable claim to rescind the
sale/leaseback transaction).
308 Knapper v. Bankers Trust Co. (In re Knapper), 407 F.3d 573 (3d
Cir. 2005). 311 See § 11.5.3, supra.
309 McKay v. Sacks, 2005 WL 1206810 (E.D.N.Y. May 20, 2005). 312 See § 11.5.3, supra.
310 See Lance v. Dennis, 126 S. Ct. 1198, 1201, 163 L. Ed. 2d 1059 313 11 U.S.C. § 362(b)(22), (l).
(2006). 314 11 U.S.C. § 362(b)(22).

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 Foreclosure Rescue Scams / 2006 Supplement
11.6.6 Res Judicata and Collateral
Estoppel
Younger abstention, the Anti-Injunction Act, and the
Rooker-Feldman doctrine all apply only in federal court
(although state courts may have similar doctrines). But even
if a TILA action is filed in state court, or if a federal case
gets beyond those obstacles, the plaintiff may still have to
contend with res judicata or collateral estoppel from a prior
state eviction or foreclosure judgment. For example, the
First Circuit held that a default judgment in a state court
foreclosure action prevented a homeowner from asserting
rescission under TILA in federal court.315 The Full Faith and
Credit Clause requires federal courts to give state court
315 R.G. Fin. Corp. v. Vergara-Nunez, 446 F.3d 178 (1st Cir. 2006).
§ 11.6.6
judgments the same preclusive effect they would have in
state court, so the issue is fundamentally one of state law.316
In some states, counterclaims such as TILA are not
allowed in eviction or foreclosure proceedings, or those
proceedings enjoy summary fast-track dispositions and lim-
ited discovery that make it difficult to litigate complicated
counter-claims. For those reasons, issue or claim preclusion
may not apply to eviction or foreclosure judgments.317
316 Id.
317 See, e.g., Brown v. Grant Holding, L.L.C., 394 F. Supp. 2d 1090
(D. Minn. 2005) (holding that, even if equitable mortgage
counterclaim could have been raised in eviction case, which was
unclear, equitable claims are preferably resolved in a separate
proceeding to avoid interfering with the summary nature of
eviction proceedings, and therefore res judicata did not apply).
117