Bankruptcy Trends and Possible Scams

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1 Presents Bankruptcy Trends and Possible Scams Thursday, March 24, a.m. CDT PRESENTER Richard Melamed Attorney at Law

2 THANK YOU TO OUR EDUCATION SPONSORS Upcoming TLTA LIVE & In Person Training! Special Delivery Seminar: College Station Thursday, April 21 College Station Conference Center Topics Include: Endorsements, Policy Preparation, Liens & Closing Documents SOUTH TEXAS SEMINAR Saturday, May 7 Hilton Garden Inn, South Padre Island Topics Include: Basic Manual Update, Fraud Prevention, Liens, Short Sales & Workouts and Survey Reviews & Title Insurance For program and registration information:

3 Richard Melamed 6750 West Loop South Suite 615 Bellaire, Texas Phone: Fax: Richard Melamed is a real estate and business attorney doing deals in Harris, Fort Bend and surrounding counties. He is board certified by the Texas Board of Legal Specialization in Residential, Commercial and Farm & Ranch Real Estate law. He is listed in the Martindale Hubbell Registry of Preeminent Lawyers, and holds an A-V rating. Mr. Melamed s daily practice involves representation of borrowers and purchasers of residential and commercial real estate properties, including homes, investment properties, office buildings, retail centers and land to be developed. He operates a fee attorney title office for First American Title Company, and has been in the title insurance business for over 25 years. He is also a licensed real estate agent and mortgage broker. Additionally, he is litigating various cases pending before the courts representing land owners in litigation to clear the title to their properties or to establish title by adverse possession. Education: University of Texas, (B.A., Government/ History, 1975); South Texas College of Law (J.D., 1978). Board Certification: Board Certified in Residential Real Estate Law by the Texas Board of Legal Specialization, and twice certified in Commercial and Farm and Ranch Real Estate law. Admitted to Practice: U. S. District Court, Southern District of Texas; U. S. Court of Appeals, Fifth Circuit; U. S. Court of Appeals for the Federal Circuit; U. S. Court of Customs and Patent Appeals; U. S. Supreme Court; U. S. Tax Court; all state Courts of Texas. Member: American Bar Association; State Bar of Texas; Houston Bar Association; Texas Land Title Association; Texas Association of Business Brokers; State Bar of Texas/Texas Real Estate Commission- Broker Lawyer Committee Listed: Who s Who in American Law , Kensington s Who s Who , The Best Lawyers in America , and one of the top 100 Real Estate Lawyers in Inside Houston Magazine, ; Listed- Houston s Top Lawyers, H Texas Magazine , Superlawyers

4 Bankruptcy Trends And Possible Scams Presented by Richard Melamed Attorney at Law, Bellaire March 24, 2011 Mortgage Fraud Meets Bankruptcy Fraud An Unholy Confluence Mortgage Fraud By now you are all familiar with mortgage fraud

5 Mortgage Fraud is: A crime punishable by law where Buyers of properties attempt to deceive lenders by providing incorrect information or blatantly omitting details which would have caused the lender NOT to loan the money. It has risen in numbers and notoriety in the first decade of the 21 st century, especially during the United States Financial Crisis of Various Mortgage Fraud Schemes Appraisal fraud Income Fraud Occupancy fraud Hidden liabilities Cash back schemes False lien and payoff Identity Theft Nondisclosure How Did That Happen? Once Wall Street developed a way to securitize mortgages and resell them to investors world wide, they could not originate mortgages fast enough to keep up with demand by the secondary market to purchase them

6 This Led to Lower Underwriting Standards New products developed to streamline the process Stated Income 100% financing FNMA reduces underwriting requirements Which Led to An Environment of Making Dumb Loans Savvy loan officers and originators learned how to manipulate the approval process and originate loans to people who had no ability to repay Market Crash- Loss of Confidence Many of the loans depended on market value to increase When it stopped, and the investors lost confidence in the product, they quit buying the loans

7 So Here We are Today Values depressed Loan Servicers bound by their own agreements Government gives money to banks to make loans And they use the money buy other banks Credit tightens Hard to refinance Rampant foreclosures We Turn the Bright Light on to Mortgage Fraud And they find new scams to perpetrate Now that the borrowers are in trouble, they are susceptible to new scams Straw men borrowers claim to be victims As We Look Around, We find More and More Incidents of Fraud Stock market fraud Ponzi schemes Nigerian scams False s New schemes for mortgage fraud New ways to hide old fraudulent acts

8 Foreclosure Rescue Scams These companies offer: Stop foreclosures Stop creditor calls Prevent evictions Stop other lawsuits Protect credit Charge Upfront Fees May want deed to property Bankruptcy Law Bankruptcy law has the purpose of allowing the debtor to restructure his debts, and if they cannot be restructured, allow him to discharge most of them on a pro-rata basis Filing Bankruptcy Upon the moment of filing, the debtor creates the estate. The estate is like a freeze frame snapshot Whatever assets and debts owned at that moment are part of the estate

9 Post Petition The debtor is required to pay his debts as they come due Likewise, whatever is owned and owed by the debtor at the time of filing (and whatever amounts are past due) is part of the estate. Chapter 7, 11 and 13 Chapter 7 Liquidation Chapter 11 Reorganization Chapter 13 Wage Earner Plan Chapter 7 Since the debtor is in a liquidation, the house is ultimately going to be liquidated, that is, sold or given to the secured party All personal obligation and liability of the borrower extinguished

10 Chapter 11 Business Reorganization I can t pay all of my creditors everything I owe right now, but if you keep me in business, I can pay them back more than if I am forced into liquidation Chapter 13 Personal Reorganization Debtor makes a 3 to 5 year plan to make monthly payments to a Trustee who distributes payments to creditors Section 362 Bankruptcy Code Automatic Stay Stops creditors acts Stops all foreclosures Automatic upon filing- no notice necessary

11 Last Minute The debtor can file the last minute before the foreclosure sale, and the sale will be void. Foreclosure Day is always the first Tues Monday: biggest day for Bankruptcy filings Once You are Posted for Foreclosure The bankruptcy attorneys take the foreclosure mailing list, and send solicitations to the borrowers offering to stop the foreclosure Current Web Ad The next large foreclosure proceeding will occur on Tuesday April 5th, 2011 when approximately 12,500 metro Atlanta and North Georgia homes will be auctioned on county court house steps. The Sandberg Law Firm can help homeowners stop foreclosure proceedings as late as Monday April 4th, the day prior to the court house foreclosure auctions.

12 Stop Foreclosure- How Long? Chapter 7- A few months Chapter 13- Maybe forever Plan catches up delinquency and keeps current for a 3 to 5 year period Lien Stripping It is possible in a Chapter 13 plan to eliminate junior and inferior liens and then use the money that would have been paid to them for funding the Chapter 13 plan It Almost Got Worse A recent move by Congress to reform the bankruptcy act and allow the Court to reduce first lien balances failed as a result of the strong banking lobby So first liens survive bankruptcy

13 Types of Bankruptcy Fraud Bustouts Bleedouts Assignment for Benefit of Creditors Equity Skimming Property Title Skim Concealing Assets Straw Buyers Serial Filers Red Flags of Bankruptcy Fraud om/wpcontent/uploads/2010/01 /red-flags-button1.jpg Serial filings Lack of usual records Incomplete books Unanswered questions Departed officers Lack of knowledgeable representative at 345 hearing More Red Flags Inconsistencies Inflated salaries Transfers to insiders Frequent amendment Payoff director loans Inability to contact Complicated structure Nonpayment of W\H and sales tax

14 So- How Do Mortgage Fraud and Bankruptcy Fraud Meet? Conceal an earlier crime Buy time while perpetrator finds way to avoid victims or leave town Maximize a profit from an ongoing scheme As a scheme in itself So What Do They Do? The debtor deeds an undivided percentage interest in the property (like 1% or 5%) to a person or entity that files bankruptcy The Automatic Stay Stops the Sale If they deed to a person or entity who then files bankruptcy, that portion of the property is part of the bankruptcy estate, available to the creditors of the person or entity that filed bankruptcy

15 So Here is a Current Example Borrower defaulted and was sent a default letter and threat of foreclosure Transfer of Interest Borrower executes and records a deed conveying 1% interest in the property to a third party, who files bankruptcy They Do Not Always File In Town In one case the property was outside of Dallas and they transferred 51% interest to a guy who filed Bankruptcy in Florida

16 The Borrower Testified In our case, the Dallas property was deeded to a Florida man in bankruptcy who testified he never knew who or why the property was transferred to him So Meanwhile, Back with My Filers I am mad at the borrower for pulling this trick But is my borrower really this savvy of a con man to know how to do this? Who is Conning Whom? In Re: White 2007 WL ( Bankr. N.D. Tex. 12/7/07) North American Foreclosure ( NAF ) White to pay NAF a fee of $650/month Bankruptcy filed in California

17 National Association of Attorneys General As early as January 2008 the National Association of Attorneys General took notice of the White case and began crackdown on NAF and other fraud schemes What Took So Long Believe it or not, when recently asked what took NAAG so long to focus on this problem, they replied that they have been bogged down with mortgage fraud and other financial fraud that they didn t have time Extraordinary Orders The Bankruptcy Judges, US Trustees and US Attorneys are now tuned into the problem Harsh remedies are available

18 US Trustee s Response The Courts and their officers are now aware of the problem- but: They can t always recognize it from just the paperwork they see The Court Handwritten filing No schedules No show on 341 Phone doesn t work Who helped them? Friend = 19 cases Secured Creditor The Lender knows what is going on Lender knows more about this borrower than anyone Lender s attorneys see it repeatedly

19 So How Does the Lender Respond? Contact the Trustee and alert him NOT to dismiss the case File in rem against the property, not the person US Trustee urges: Don t get mad- just get even Part of the Estate? We have seen some instances where the borrower deeds the property to a party who is already in bankruptcy- If so, it is NOT part of the Estate Civil Responses Immediate Trustee Compel Filing schedules Expedite 704 duties Adversary hearings Freeze bank accounts Insider preferences Motions to Dismiss and prohibit refiling

20 What Can the Court Do? Super lifting of stay Forbid refiling Grant sanctions Refer for criminal charges Void transfers Dismiss cases Criminal Statutes Mail Fraud 18 USC 1341 Wire Fraud 18 USC 1343 Bankruptcy Fraud 18 USC 152 & 157 Use of False SS # 42 USC 408 Credit Card Fraud 18 USC 1029 Tax Fraud 26 USC 7201 Lender Cannot Foreclose Until The Automatic Stay is Lifted It could take a while, but ultimately the Court will sign an Order upon which the title company can rely

21 Take Away Don t assume you can tell the good guys from the bad guys by looking Bankruptcy stops everything until you have a Court Order dismissing the case or authorizing the sale The Future Expect more and more fraudulent schemes Expect more bankruptcy actions Be suspicious of everyone Don t get conned by a victim