In re Salem Mortg. Co., Bankruptcy No. 83-01607-G

• Decision Date: 17 November 1983
• Docket Number: 83-01611-G and 83-01612-G,Bankruptcy No. 83-01607-G,83-01610-G,Adv. No. 83-0694-G.
• Citation: 34 BR 902
• Parties: In re SALEM MORTGAGE COMPANY, Fidelity Fund, Inc., Fidelity Securities Corp., Nationwide Mortgage Co., Debtors. Frank J. KELLEY, Attorney General of the State of Michigan, Plaintiff, v. SALEM MORTGAGE CO., et al., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

34 B.R. 902 (1983)

In re SALEM MORTGAGE COMPANY, Fidelity Fund, Inc., Fidelity Securities Corp., Nationwide Mortgage Co., Debtors Frank J. KELLEY, Attorney General of the State of Michigan, Plaintiff, v. SALEM MORTGAGE CO., et al., Defendants.

Bankruptcy Nos. 83-01607-G, 83-01610-G, 83-01611-G and 83-01612-G, Adv. No. 83-0694-G.

United States Bankruptcy Court, E.D. Michigan, S.D.

November 17, 1983.

Robert S. Hertzberg, Birmingham, Mich., Luis Fernandez and Frederick Hoffecker, Asst. Attys. Gen., Consumer Protection Div. Dept. of Atty. Gen. Lansing, Mich., Arnold Schafer, Birmingham, Mich., Robert Fineman, Detroit, Mich., for proponents.

Irwin Alterman, Southfield, Mich., for debtor-proponent.

John Anderson, Birmingham, Mich., for trustee.

Clark D. Cunningham and Louis Lessem, Mich. Legal Services, Detroit, Mich., for objectors Pustelak and Soto.

Mark Magidson and Merry Rosenberg, Legal Assistance of St. Clair County, Port Huron, Mich., for objectors Tucker, DeBonville, et al.

Emily Kurrasch, Legal Services of Southeastern Mich., Jackson, Mich., for objectors Nodine, et al.

Michaek Chielens, Legal Aid of Western Mich., Grand Rapids, Mich., for objectors Peter, et. al.

PROPOSED ORDER APPROVING CLASS CERTIFICATION, SETTLEMENT OF CLASS ACTION LITIGATION, AND ENTRY OF CONSENT JUDGMENT

RAY REYNOLDS GRAVES, Bankruptcy Judge.

This adversary proceeding presents the parties, the community, and this Court with a cornucopia of evils demonstrating how questionable business practices may threaten the financial security of homeowners, borrowers, and investors. The individuals effected by the business operation known as Salem Mortgage may or may not have valid and meritorious claims and defenses against the Debtors or, as in the mortgagor mortgagee relationship, against each other. In an effort to bring about an efficient, expeditious, and orderly resolution of possible claims and defenses, the Attorney General of Michigan has proposed the certification of a class action, a settlement of the class action, and a Consent Judgment resolving the issues raised in this adversary proceeding against the Debtor Defendants, and others, in this Court. The proposal advanced by the attorney general creates proposed classes of borrower-plaintiffs and investor-defendants. The Attorney General requests that these classes be certified as proposed, and the settlement of the class action claims be approved by this Court, and a proposed Consent Judgment entered. These proceedings will be submitted as proposed findings of fact and conclusions of law to be reviewed by the United States District Court for the Eastern District of Michigan, under the authority of Interim Rule, as adopted by the United States Court of Appeals for the Sixth Circuit in White Motor Corp., v. Citibank, N.A. (1983) 704 F.2d 254, 265. This Court, through the within Order, sets forth the proposed findings of fact and conclusions of law for the certification of the class action, approval of the settlement, and entry of the Consent Judgment for review and approval by the United States District Court.

STATEMENT OF THE CASE

This cause comes before the Court upon a motion by the ATTORNEY GENERAL OF THE STATE OF MICHIGAN and representatives of mortgagors described as first, incorporated second, and wrap-around mortgagors requesting this Court's certification of proposed classes of plaintiffs and defendants, approval of the stipulated settlement resolving the adversary proceeding, and the entry of the proposed Consent Judgment. The causes of action arose out of the operations of the Salem Mortgage Company, Debtor, and its affiliated companies, Fidelity Fund Inc., Fidelity Securities Corporation, and Nationwide Mortgage Company who allegedly held themselves out to the public as mortgage brokers, or investment vehicles. Individuals, groups, corporations, or associations, acting as investors, deposited substantial amounts of money with one or more of the Debtor corporations and reasonably anticipated a return on their investments. Individual borrowers, many desperately needing emergency cash for personal needs, contacted the Salem Mortgage Company in response to publicly circulated newspaper advertisements and applied to Salem to borrow funds. Salem, holding itself out as a mortgage broker, offered to loan money to individual borrowers under certain terms and conditions. In each case the loans were secured by a first, second, or wrap-around mortgage on the borrower's home. (The second mortgage transactions were loans to corporations formed by the borrower. The loan was made directly to the corporation and secured by a second mortgage on the borrower's home.)

The investors ultimately became the mortgagees. Each mortgagor represented in this adversary proceeding had a corresponding investor as a mortgagee. These transactions give rise to the possibility of numerous causes of action which the objectors to this proposed settlement claim have not been properly analyzed or resolved in the attorney general's proposed settlement.

Plaintiff class members have possible claims for fraud, deceit, usury, breach of fiduciary duty, violations of the Michigan Consumer Protection Act (M.C.P.A.) M.C.L.A. § 445.901 et seq., the Consumer Credit Protection Act (together with the Truth and Lending Regulations) 15 U.S.C. § 1601 et seq., misappropriation of escrow funds and causes of action for damages.

The Court began a hearing on the objections to the settlement on Thursday, October 6, 1983, and continued hearings on non-consecutive days, evenings, and Saturdays until the hearings were concluded on November 1, 1983. Oral arguments were presented on November 3, 1983. The parties were directed to file proposed findings of fact and conclusions of law no later than November 14, 1983, in order to afford this Court the opportunity to give immediate consideration to this case and announce a decision on November 16, 1983. (Under separate Order, this Court has rejected the late and untimely filing of the objectors' proposed findings of fact and conclusions of law; however this Court is bound to consider all of the arguments, testimony, and exhibits presented in the record of these proceedings.)

PROPOSED FINDINGS OF FACT

On March 30, 1983, the Debtor Defendants Salem, Fidelity Fund, Fidelity Securities, and Nationwide filed separate voluntary petitions under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Reform Act of 1978). Thomas J. Barrow was appointed Trustee for all four Debtors after this Court entered an Order Consolidating the Debtors for purposes of administration. Frank J. Kelley, the Attorney General of the State of Michigan, filed the within adversary proceeding under the Michigan Consumer Protection Act (MCPA) M.C.L.A. § 445.901 et seq. on April 11, 1983. The Attorney General also filed a motion to certify seven plaintiff subclasses with himself as the sole class representative for each class. The class certification motion was heard, in part, by this Court on May 3, 1983, and adjourned after preliminary arguments. It was represented on the record that the Attorney General, the trustee and the Salem defendants met and entered into settlement negotiations on both the class certification motion and the merits of the claims raised in the Attorney General's complaint.

On May 23, 1983, a stipulation for temporary class certification and a proposed final Consent Judgment was presented to the Court. An amended stipulation was filed on June 13, 1983. By order of the Court on June 14, 1983, the proposed settlement and Consent Judgment was published in newspapers of general circulation on five separate business days: the Detroit Free Press; Detroit News; Macomb Daily; Flint Journal; Saginaw News; Grand Rapids Press; Kalamazoo Gazette; Jackson Citizen Patriot; The Mining Journal; and The Michigan Chronicle. The notice published in newspapers advised readers of the terms and conditions of the proposed settlement and how they could decline to be bound by the proposed class action by notifying the Clerk of the United States Bankruptcy Court. This Court set August 17, 1983, as the date for the hearing on certification of the class and approval of the proposed settlement. The August 17, 1983, hearing was adjourned to September 15, 1983, at the request of the Michigan Attorney General to afford additional time to give notice to first mortgagors. The adjourned date of September 15, 1983, for the hearing on the proposed settlement and objections to same was continued to October 6, 1983, in order to afford the objectors an opportunity to present objections after this Court granted the objectors' motion to intervene. Following opening arguments on October 6, 1983, this Court took testimony in support of the proposed settlement and Consent Judgment and in opposition to same.

The Court also finds the facts as follows:

(1) There are approximately 2,175 first mortgages, 332 incorporated second mortgages, and 52 wrap-around mortgages.

(2) The mortgages are held as follows:

(a) First mortgages are held by approximately 625 investors (mortgagees.) (2,175 mortgagors).

(b) incorporated second mortgages are held by 54 investors, (mortgagees) (332 mortgagors).

(c) wrap-around mortgages are held by 22 investors (mortgagees) (52 mortgagors).

(3) The properties securing all of the mortgages are located in a land area covering the lower two thirds of the lower peninsular of the State of Michigan.

(4) The first mortgages were closed in the following manner:

(a) The borrower signed and was given a Broker\'s Agreement purporting to engage Salem Mortgage Company as the borrower\'s mortgage broker, in exchange for a broker\'s fee. The broker then secured a lender for the borrower.

(b) The borrower signed a promisory note to a lender which was usually identified as either Roland A. Benge and Company or Federation Mortgage Company for an amount equal to the monies actually advanced to the borrower, a

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