In re O'Brien
| Citation | 423 B.R. 477 |
| Decision Date | 22 January 2010 |
| Docket Number | Bankruptcy No. 03-17448 (RTL).,Adversary No. 08-1676 (RTL). |
| Parties | In re Sean Michael O'BRIEN and Nicole Marie O'Brien, Debtors. Sean Michael O'Brien and Nicole Marie O'Brien, Plaintiffs, v. Frederick Cleveland, Cleveland Development, LLC., and William E. Gahwyler, Defendants. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Gabriel H. Halpern, Esq., Pinilis Halpern, LLP, Morristown, NJ, for Plaintiffs/Debtors.
Eric R. Breslin, Esq., Gia G. Incardone, Esq., Duane Morris LLP, Newark, NJ, for Defendants Cleveland and Cleveland Development, LLC.
William E. Gahwyler, Jr., Esq., pro se.
Plaintiffs accuse the Defendants of defrauding them through a mortgage foreclosure rescue scam. On the eve of a sheriff's foreclosure sale, Plaintiffs deeded their house worth over $800,000 to Defendant Cleveland with an option to buy it back at $650,000. Cleveland took out a new mortgage, paid off Plaintiffs' old mortgage and pocketed over $100,000. He subsequently defaulted on his mortgage and the new lender commenced a second foreclosure action.
This mortgage rescue scam is fraudulent and is an unconscionable commercial practice in violation of New Jersey's Consumer Fraud Act. Furthermore, the sale/leaseback is, in reality, a financing transaction subject to the Truth In Lending Act ("TILA") as amended by the Home Ownership and Equity Protection Act ("HOEPA") as well as the New Jersey Home Ownership Security Act of 2002 ("HOSA"). Since Defendant Cleveland failed to comply with each of these consumer protection statutes, he is liable for the remedies allowed thereunder.
Defendant Gahwyler, an attorney at law, violated certain ethical obligations and conspired with Cleveland in his wrongdoings. Gahwyler is jointly liable for all damages and statutory remedies.
This court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and the Standing Order of Reference by the United States District Court for the District of New Jersey dated July 23, 1984, referring all proceedings arising in or related to a case under Title 11 of the United States Code to the bankruptcy court. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(D) (obtaining credit), (M) (use or lease of property) (N) (sale of property) and (O) (other proceedings affecting the liquidation of assets of the estate).
Sean and Nicole O'Brien (Plaintiffs/Debtors) filed a chapter 13 bankruptcy on March 7, 2003 in an attempt to save their home from foreclosure. The O'Briens had fallen behind on their mortgages after Mr. O'Brien was laid off from his job. Both lenders had started foreclosure actions in state court. The O'Briens' chapter 13 plan proposed to cure the arrears and remain current on post petition payments on both mortgages. Some priority tax claims also had to be paid. The court confirmed the plan. Unfortunately, Mr. O'Brien's new job did not last. When they were unable to keep up the payments under their chapter 13 plan, on September 8, 2006, the first mortgagee received relief from the automatic stay to complete a mortgage foreclosure.
The O'Briens found a buyer for their house at a price of $808,000. The state court stayed the sheriff's sale to permit the sale to go through; however, the buyers backed out of the deal. The buyers offered a lower purchase price of $740,000 which the O'Briens refused. Faced with another deadline for sheriff's sale and being unqualified for conventional financing, the O'Briens found a lender for unconventional financing. Again, that deal fell through at the eleventh hour. The mortgage broker referred the O'Briens to Frederick Cleveland (Defendant) as someone who might be able to help them.
Mr. Cleveland came through with a written proposal by his company, Cleveland Development, LLC.1 He would arrange financing to satisfy the existing mortgages on the property to save it from foreclosure:
I am pleased to inform you that you have been pre-qualified for a mortgage solution loan in the amount of $540,000.00+ to secure your home from foreclosure.
This is not a commitment for a mortgage. A commitment will be issued upon the receipt of an acceptable appraisal, sales contract and satisfactory verification of all additional information provided. Please feel free to contact me with an questions at my office [phone number redacted].
This process works as follows: We obtain an appraisal for the subject property and your current mortgage payoff balance. Your current mortgage will than [sic] be satisfied. A new title will be created with our company as the lien holder and an addendum with your name being attached stating that we cannot add any additional liens to this property or sell property why [sic] current lease is in good standing. After closing you will pay the current mortgage, taxes, and insurance through us at an amount approximately $4500 to $6,000, * * $5,000 (strike out and insertion by Mr. O'Brien) or a sensible amount that you can afford free from financial hardship starting 6 months after closing. After one year we will deed you back to first position on the current title and you will assume the mortgage or find your own financing if you wish. (Emphasis added.)
Further details of the proposal were somewhat hazy and were revealed piecemeal as the deadline for the sheriff's sale inexorably approached. Mr. Cleveland explained orally, not in writing, that the O'Briens would have to transfer title to him, but they could continue to occupy the house and would pay him $5,000 per month. By faithfully paying $5,000 per month for two years, the O'Briens would establish a track record to show a new lender they could afford the house. They could then buy back the house for approximately $650,000.
The O'Briens accepted Mr. Cleveland's proposal. He then filed a notice of settlement with the county clerk. In the meantime, another foreclosure rescuer ("Rescuer # 2") solicited the O'Briens with a deal they considered superior to Cleveland's. The O'Briens signed a contract to sell their home to Rescuer #2 for $800,000. They gave this contract to their bankruptcy lawyer who moved for approval of the sale before the bankruptcy court, which was granted. However, because Mr. Cleveland had recorded a notice of settlement with the county clerk, the O'Briens could not convey clear title, so they abandoned this transaction and resorted to Mr. Cleveland's deal. No one informed the bankruptcy court or the trustee that the approved sale was not consummated.
The O'Briens are not typical victims. On the contrary, Mr. O'Brien is a sophisticated, educated and experienced business person. He has a bachelor's degree in accounting and has worked at a variety of sales and marketing jobs earning a six-figure income. Mrs. O'Brien is a college graduate and teaches school. She relied on her husband to handle the financial affairs. Mr. O'Brien understands the deal as slowly revealed to him by Mr. Cleveland. He agreed to the deal as explained because he had no other choice. The state court had granted him multiple extensions of time, but had fixed a final deadline. It was either Mr. Cleveland's deal or the street.
What Mr. Cleveland did not explain, and what Mr. O'Brien did not anticipate, was that Cleveland would mortgage the property for $646,400, not merely the $510,000 needed to satisfy O'Briens' mortgages. Nor did the parties discuss servicing Cleveland's new mortgage during the rental period. Mr. O'Brien assumed that his $5,000 monthly payment was servicing the financing. He did not fully appreciate that Mr. Cleveland would have to make monthly payments to a new lender ("New Lender"), and if Mr. Cleveland failed to do so the O'Briens could lose their home even if they faithfully paid the $5,000 per month to Cleveland. Mr. Cleveland prepared three documents that were signed: (1) a Standard Real Estate Purchase And Sale Agreement between Mr. Cleveland as Buyer and Mr. O'Brien as Seller for a price of $555,232; (2) A Lease Agreement Buyback between Mr. Cleveland as Landlord and Mr. O'Brien as Tenant/Original Seller/Original Selling Tenant showing a monthly rental of $5,000 and a Buy Back price of $650,483.83; and (3) another Standard Real Estate Purchase And Sale Agreement with Mr. Cleveland as Seller for a price of $650,483.83. None of these written documents accurately describes the agreements between the O'Briens and Mr. Cleveland. Many of the boiler plate provisions are blatantly inconsistent with the understanding of the parties; for example, there is a provision in the purchase agreement giving Mr. Cleveland the right to possession on closing when the parties agreed that the O'Briens would remain in possession. However, one unusual provision in the Lease Agreement Buyback is notable. The O'Briens are given the right to cancel the lease at any time upon thirty days notice "at which time property will be sold and sales proceeds less any cost will be disbursed to original selling tenant." In other words, if the O'Briens decided to leave the house, it would be sold and they would get the net proceeds.
As the sheriff's gavel was poised to fall, the parties gathered at the law office of William E. Gahwyler, Jr., Cleveland's lawyer. Mr. Gahwyler prepared all the closing documents including the deed and affidavit of title for the O'Briens to sign. The closing statement (RESPA HUD-1) misrepresented the sales price as $808,000 and showed the buyer, Mr. Cleveland, as investing $187,978.91 in cash. Actually, he did not invest any cash; to the contrary, he withdrew over $100,000 from the closing proceeds. The closing statement also showed that after satisfying all liens on the property, the O'Briens were to receive $287,516.17 in cash. This, too, was a...
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