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Another Mortgage Fraud Empire Crumbles

01 Monday Dec 2014

Posted by in Foreclosure

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Francis N.J. Taman and Ksena J. Court

It has been a complaint of many members of the foreclosure bar that mortgage fraud rarely seems to get the level of attention from the police that it deserves in terms of the losses it generates.  Prosecutions are rare, convictions even rarer.  Indeed, we are only aware of two.  The most recent conviction was in Red Deer.[1]

In MacMullin, the accused was charged with ­­­­­­­­­­­­­­­­­­forty one counts of fraud.  While the trial judge did not convict MacMullin of every count he was charged with, the Justice noted “I stress that even in those cases where I do not find him guilty that is only because the probability of his guilt or the suspicion of his guilt did not coalesce into proof beyond a reasonable doubt.  I have no doubt he was the ringleader and a party to these frauds, either as a direct participant, or as aider, and abettor.[2]

Of greatest interest to lenders, however, is the Justice’s analysis of the various schemes.  Indeed, the case highlights a number of red flags that lenders, mortgage brokers and other real estate professionals need to keep an eye out for.  Justice Germain noted that, despite the number of transactions involved, the misleading statements and deceptive tactics involved really fell into 3 categories:

  • Manipulation of the Real Estate Purchase Contract;
  • Manipulation of background information in the Mortgage Application; and
  • Incorrect statements regarding the borrower’s principal residence.

Manipulation of Real Estate Purchase Contract

MacMullin and his associates used both standard realtor’s contracts and what the Justice described as “self-help press” contracts.  The first tactic, quite familiar to lenders, was the sale at an inflated price.  The defendants found individuals who were willing to sell their property which was priced at a level which they suspected was less than the amount than might be accepted by lenders and mortgage insurers as the value of the property.  MacMillan or his associate would agree to pay the full asking price but would have the sales contract written up for a higher value.  A straw buyer would certify that they would be residing in the house to facilitate them arranging a high ratio mortgage with a 95% loan to value ratio.   This allowed them not just to put no money down, but in some instances to actually take some additional cash out of the property.

A second methodology was to arrange a fictional sale to permit a homeowner to take all of the equity out of their house.  A straw buyer was arranged and the sale price again was set to allow all the equity to be taken out of the house.  The idea was that the original owners would remain the equitable owners of the property.  Although not mentioned in the analysis, presumably at some time down the road, the property would be transferred back to the original owners. MacMullin would get a fee or a portion of the equity. [3]

Straw Buyers[4]

The majority of the deals done by MacMullin involved straw buyers. In some instances, MacMullin would arrange for a straw buyer to obtain a mortgage and purchase a property owned by MacMullin or one of his associates at a price set by MacMullin.  MacMullin would receive all of the mortgage proceeds and would retain beneficial ownership of the property.

MacMullin would also enter into deals with third party vendors to purchase their property.  He would then arrange for a straw buyer to purchase the same property from him at a higher price.  In some instances, MacMullin would take title to the property and then transfer it to the straw buyer.  In others, MacMullin would have the transfer from the third party vendor put in the name of the straw buyer, a process commonly called a skip transfer.

Normally, in these straw buyer deals, the straw buyer is paid a fee.  That is the incentive for them to allow their name and good credit to be used in the scheme.  In addition, they are generally promised that the organizers of the straw man deal will provide them with the mortgage payments until the property is transferred out of the name of the straw buyer.  Interestingly, in many instances, MacMullin never paid the promised fee nor did he provide the money for the mortgage payments.

In some instances, the straw buyer already owned a home.  In order to be able to maximize the amount of the loan, MacMullin would create an imaginary sale of the straw buyer’s existing home.  A real estate purchase contract would be signed documenting the imaginary sale.  The sale also explained the source of the down payment of the “new house”, which simplified the approval process.

A similar approach was used to recycle willing straw buyers.  MacMullin would use his company or one of his associates to purchase the property that the straw buyer had originally pretended to buy.  The “recycled” straw buyer would then enter into a new purchase and obtain a new mortgage for a different property.

Instead of selling a straw buyer’s existing residence, in at least one instance, the lender was advised that the straw buyer would be keeping the existing residence to use as a rental property.  MacMullin created a lease to reinforce this story and it was provided to the lender.

Manipulation of background information in the Mortgage Application

In addition to creating false transactions, MacMullin “improved” his straw buyers in order to allow them to qualify for the mortgages they were applying for.  Since income is important, one of the improvements that MacMullin employed was to create employment letters and bonus letters.  In one instance, MacMullin created an employment letter for a straw buyer’s wife to hide the fact she was receiving payments under the Alberta Income for the Severely Handcapped.  He also provided her with a bonus letter to “cover” some of the additional costs associated with the fictional deal.

Other straw buyers had generally good credit, but were saddled with unacceptable levels of debt.  Where this was a barrier, the problematic debts, such as credit cards, were paid off by MacMillian.  Sometimes the proceeds from the mortgage advance that the straw buyer had qualified for were used to pay this debt post funding.  The paid credit card voucher would then be provided to the lender to establish that the payout had been made.

Down payments were another area of concern for MacMullin.  Lenders generally wanted to know where the down payment was coming from.  As noted earlier, in some instances a false sale was documented.  Gift letters were a second strategy.  Straw buyer’s parents were asked to sign off promising fictitious gifts of cash for down payments.  Where the lender would not accept a gift letter, a ficitious investment account, sometimes with one of MacMullin’s companies, would be used as the source of the down payment.

MacMullin even went so far as to create engagements and same sex relationships to backstop the application.  The fact that a straw buyer might be married to someone else was not a deterrent.  In one instance, MacMullin stole the identity of one proposed straw buyer who refused to participate in a false relationship.[5]

Incorrect statements regarding the borrower’s principal residence

In order to maximize the amount being borrowed, many of the transactions involved straw buyers claiming that they would be moving into the new property.  This allowed them to qualify for high ratio mortgages with minimal down payments.  Straw buyers even signed statutory declarations or certificates stating the new property was going to be their principal residence.  This, of course, was never going to be the case.

The MacMullin case is not notable because of any originality by the defendant and his associates.  Most of the schemes they engaged in have been seen in hundreds of other mortgage fraud cases during this last down turn of the business cycle.  However, it provides a compendium of many of the methodologies of the 2006-2009 boom/bust cycle – the “Strawman Cycle”.  While we are indeed now wiser to these schemes and are putting systems into place to better identify and thwart them, those of you with perhaps a bit more grey hair will remember the 1980s cycle – the time of the dollar dealers.  The more things change….

Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

[1] R. v. MacMullin, 2014 ABQB 476, 2014 CarswellAlta 1391, [2014] A.W.L.D. 3866, [2014] A.W.L.D. 3867 (“McMullin”).

[2] Ibid. at para. 143.  Italics in original.

[3] One of the saddest features of this case is that the defendant apparently was not content simply to take a large portion of the extra cash – in one instance, he apparently told the owners that the cash that they gave him would be invested and the proceeds would be used to pay the mortgage.  In actuality, the “straw buyers”, who presumably thought that they were investing in the house, made the payments.  The original owners, who had agreed to the idea because they were cash strapped, ended up paying thousands to the straw buyers to buy their house back.

[4] Although the Justice used the label, “Sale of a MacMullin Property to a Straw Buyer”, the description makes it clear that we are dealing the classic straw man tactic of flipping a property or arranging a skip transfer of the property.

[5] Apparently MacMullin would sometimes use the same straw buyer on a second transaction without getting them to agree or even to sign any documents.  All of the documents and information were forwarded to a second mortgage broker for a different deal.

Mortgage Fraud with a New Twist

21 Wednesday May 2014

Posted by in Foreclosure, Mortgage Fraud

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Toronto-Dominion Bank v. Salekin (“Salekin”)[1] is “yet another case where rogues have taken advantage of a person who was willing to sign legal documents with little care for their meaning.”[2]  In the typical mortgage fraud, the “straw buyer” is induced by one or more individuals who are behind the mortgage fraud scheme (often referred to in the cases as “rogues”) to sign mortgage documents.  The inducement is often the payment of money accompanied with a promise that the straw buyer will only have to hold the property and mortgage in their name for a few months.  Salekin is a recent decision from the Alberta Court of Queen’s Bench that involved such a straw buyer.  However, in this instance, the straw buyer ended up with a mortgage in his name without having to sign any mortgage documents.

Mr. Salekin was approached by an individual (“Mr. D.”) who offered an investment opportunity or joint venture in a property.  Mr. D promised to pay Mr. Salekin a $5,000 “kickback” for participating.  In order to “expedite the process”, Mr. D asked Mr. Salekin to sign a Power of Attorney.  Mr. D promised that the Power of Attorney would only be used if the property came up for sale and Mr. Salekin was out of the province or not available.  The only document that Mr. Salekin signed was the Power of Attorney, but it was this document that allowed the fraud to be perpetrated and which left Mr. Salekin holding the bag at the end of the day.

A Power of Attorney is a document that authorizes another person, called the attorney, to step into your shoes and deal with your property as if it was their own.  A Power of Attorney document can be limited by giving the attorney authorization to deal with only certain property, or it can be very broad and give the attorney unlimited powers to deal with all of your property.  The Power of Attorney that Mr. Salekin signed was a general power of attorney that gave another individual (“Mr. L”) authorization to sign any documents with respect to the property that was being purchased.  It did not contain any statement that it would only be used if Mr. Salekin was unavailable as he alleged was promised by Mr. D.

Unbeknownst to Mr. Salekin, someone had already forged his signature on a purchase contract and a mortgage commitment for the property.  The Power of Attorney was then used to sign further documents respecting the purchase of the property, which included a transfer of the property into Mr. Salekin’s name and a high ratio mortgage in favour of the bank.  As is usually the case, the mortgage payments were not made and the mortgage went into default.  It was at that point in time that Mr. Salekin became aware that he was the registered owner of the property with a mortgage to the bank.

In the foreclosure proceedings, the property was sold to the bank.  Because the balance outstanding under the mortgage was higher than the fair market value of the property, the bank sought a judgment against Mr. Salekin for the difference.  At first instance, the Master denied the bank’s application.  The bank appealed to a Justice of the Court of Queen’s Bench.

The Court held that it was not necessary for the bank to have to prove that Mr. Salekin or someone authorized by him had signed the purchase contract or the mortgage commitment.  The bank had acknowledged that the signatures on these documents were forged.  This was not a sufficient defence for Mr. Salekin as he had signed the Power of Attorney which authorized Mr. L to sign any documents respecting the property for him.  The Court concluded that if the purchase contract and mortgage commitment had not already been signed, Mr. L still would have been able to sign those documents for Mr. Salekin by using the Power of Attorney and so the result would have been the same at the end of the day.

The Power of Attorney enabled the purchasing of the property and the placement of the mortgage against it.  While the Power of Attorney may have been used contrary to the conditions that were promised to Mr. Salekin, and Mr. Salekin may have a claim against Mr. L or Mr. D for breach of their promises, this was not a defence to the bank’s claim against him.  The bank had no notice of any conditions of use placed against the Power of Attorney.

The Court also noted that Mr. Salekin was not a completely innocent party in the transaction.  He was prepared to act as the straw buyer.  While Mr. Salekin did not receive the “kickback” he was promised, by signing the Power of Attorney, he put Mr. D or Mr. L in a position to perpetrate the fraud.  Mr. Salekin therefore did not come to the Court with “clean hands”.[3]

Mr. Salekin also attempted to argue that the bank was negligent in failing to review all of the documentation submitted to it when it granted the mortgage.  His argument was that the bank ought to have known that the Power of Attorney was not legitimate and that the mortgage was not authorized by Mr. Salekin.  This “failure of due diligence” argument was again clearly rejected by the Court as a defence.  The bank “was under no obligation to inquire into the validity of the Power of Attorney.  Further, the Bank’s diligence procedures were for its own protection, not the borrower’s, and it was entitled to follow or waive those procedures as it saw fit.”[4]

What is most interesting about Salekin is that it is a deviation from the standard straw buyer fraud scenario.  With the use of the Power of Attorney document, the straw buyer need only sign one document and does not have to attend a lawyer’s office in order to do so.  This innovation certainly reduces the risk to the “rogues” as the straw buyer no longer attends the lawyer’s office and may therefore not have the opportunity to obtain legal advice regarding the legality of the transaction or their liability under the mortgage.

While the bank was successful in obtaining judgment against the borrower in this case, and clearly does not have any obligation to inquire into whether the Power of Attorney that is presented to it is legitimate, it may be prudent during the underwriting and loan transaction process to do so in any event.  As the inventiveness of the “rogues” involved in mortgage fraud continues to evolve, the banks will clearly need to continually adapt their underwriting practices to reduce the risk of having to deal with these scenarios.

Francis N.J. Taman and Ksena J. Court practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

 

[1] 2014 ABQB 168 (Alta. Q.B.).

[2] Justice Clark quoting from MCAP Service Corp. v. Halbersma, 2013 ABQB 185 (Alta. Q.B.) at para. 1.  Our blog post regarding this decision was posted May 22, 2013 (see https://albertaforeclosureblog.com/2013/05/22/if-it-sounds-too-good-to-be-true/).

[3] Salekin, at para.39.

[4] Salekin, at para 43.

Death changes everything – the interplay between death, bankruptcy and debt

21 Monday Oct 2013

Posted by in Bankruptcy, Foreclosure

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When underwriting loans, lenders should consider not only the assets that the borrower has available but also the assets that would be available in the event that the borrower dies.  Re Cameron Estate[1] is an example of how creditors may be out of luck in the event of the borrower’s death.

Cameron Estate involved the deaths of two doctors.  Both doctors had matrimonial homes which were jointly owned with their wives.  Doctor 1 obtained a $70,000 operating line of credit with the bank.  The security that the bank had against doctor 1 was a General Security Agreement.  Doctor 2 had a $75,000 demand overdraft facility with the bank.  The bank took security against doctor 2 in the form of a General Assignment of Book Debts.  When doctor 1 died, all his payments with the bank were current.  He owed approximately $56,000 to the bank.  Similarly, doctor 2 was also not in default with the bank when he died.  Doctor 2 owed approximately $70,000 to the bank.  In both cases there were insufficient assets in the doctors’ estates to pay the bank.  The main asset of each estate was the matrimonial home, which passed to the wives outside of the doctors’ estates due to the right of survivorship as a joint tenant.

The bank applied for and obtained orders for bankruptcy against each of the doctors’ estates.  Under s. 96 of the Bankruptcy and Insolvency Act,[2] a trustee in bankruptcy has the ability to apply to set aside transfers of property that have been made by the bankrupt before the bankruptcy for less than fair market value.  This section prohibits a bankrupt from making pre-bankruptcy attempts to defeat the claims of his creditors.  The Trustee in each case refused to take proceedings against the wives to have the transfer of the matrimonial home set aside on this basis.  The bank then obtained a court order allowing it to make the applications.

The bank argued that the transfers of the matrimonial homes to the wives in each case should be set aside because there was no payment by the wives for the transfer that occurred.  As such, the doctors’ half of the value of the matrimonial home should be declared an asset of their estates.  The bank also argued that court should order that the wives held the doctors’ half of the matrimonial home in trust for their estates.

Although these were very creative arguments advanced by the bank, the court rejected both.  In order for s. 96 of the BIA to apply, the bank must show that there was a “transfer” at undervalue that occurred within one year of the bankruptcy.  The court examined whether the wives’ becoming sole owners of the matrimonial homes due to survivorship constituted a “transfer” within the meaning of the BIA.  One of the fundamental features of joint tenancy is the right of survivorship – the surviving joint tenant automatically becomes the owner of the whole property upon the death of the other owner.

The court held that on the death of one joint tenant, the deceased does not “dispose” or “part with” his asset.  Rather, his interest in the jointly held asset is extinguished, which leaves nothing for the deceased to “transfer”.   The court noted that quite often parties intentionally hold assets jointly because they know that upon death the property will not form part of the deceased’s estate.  As the automatic vesting of the matrimonial homes to the wives by their right of survivorship was not a “transfer” under the BIA, the bank’s motion failed.

The court also went on to consider whether the automatic vesting was made at “undervalue”, which was the other element that the bank would have had to prove.  In the court’s opinion, the right of survivorship was acquired when the doctors and their wives acquired the property.  The doctors and their wives provided equal consideration for such right – each party had a risk of predeceasing the other and having nothing.  Marriage is considered an economic partnership and each of the wives acquired a right to the sole ownership of the property at the time the matrimonial homes were acquired with their equal, joint efforts.  The court concluded that the wives had already provided adequate consideration for the right of survivorship.

Finally, the court also refused to find that the wives held the doctors’ share of the matrimonial home in trust for the bank.  Because the court had found that there was adequate consideration provided by the wives and the widows owned the whole of the matrimonial homes prior to the bankruptcies, the estates were not deprived of anything.  The right of survivorship under joint tenancy also provided a juristic reason for a trust not to be implied in this instance.

The lesson to be learned is to ensure that the proper security is taken at the time the loan is granted.  The bank in Cameron Estate obtained security from each of the doctors for their loans, but as it turned out, it took the wrong type of security.  Mortgage security against the matrimonial homes would have protected the bank in this instance.  In Alberta, it is possible for a joint tenant to mortgage only his interest in real property.  Upon the death of the borrower, the surviving joint tenant would then take the property subject to the mortgage.  It is therefore important for lenders to carefully consider the assets that the borrower has, not only during the life of the borrower but also after his death.

Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.

Bankruptcy – it’s not the end!

21 Wednesday Aug 2013

Posted by in Bankruptcy, Foreclosure

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Under the Law of Property Act,[1] a mortgagee is limited to recovery of the property unless the mortgage is high ratio, insured by CMHC, or granted by a corporation.  If one of these latter circumstances exist, then the mortgagee is entitled to both recovery of the property and a judgment against the mortgagor for the deficiency in the event that the amount owed under the mortgage exceeds the value of the property.  The mortgagee can then take steps to collect on the deficiency judgment in order to make itself whole.

Unfortunately for mortgagees, the deficiency judgment is an unsecured debt, and if the mortgagor makes an assignment into bankruptcy, the mortgagee ends up lumped in with all of the other unsecured creditors ranking at the bottom of the distribution list of the bankrupt mortgagor’s estate.  If bankruptcy occurs, should the mortgagee give up?  Is bankruptcy the end of the mortgagee’s rights to collect?  As with most things, timing (in this case, the timing of the bankruptcy) is everything.

In CIBC Mortgage Corp. v. Stenerson,[2] the Donalds granted a mortgage to CIBC which was insured by CMHC.  Subsequently, the Donalds transferred the property to the Stenersons and by operation of the Land Titles Act, the Stenersons became liable for payment of the mortgage.  In March 1996, Cherie Stenerson assigned herself into bankruptcy.  For seven months after the assignment, she continued to make the mortgage payments.  In November 1996, the mortgage went into default, and in December 1996, Ms. Stenerson was discharged from bankruptcy.  Foreclosure proceedings were started by CIBC in February 1997.  Because the amount owed under the mortgage exceeded the value of the property, CIBC was granted a deficiency judgment against Mr. Stenerson.  The issue before the Court was whether CIBC was also entitled to a deficiency judgment against Ms. Stenerson given her bankruptcy.

The Court held that yes, CIBC was entitled to its deficiency judgment because Ms. Stenerson had affirmed the contractual relationship with CIBC by making the required mortgage payments during the bankruptcy.

The mortgagee’s right to a deficiency judgment is therefore dependent upon the timing of the date of bankruptcy and the date that payments are made.  If the default under the mortgage occurs before the date of bankruptcy and no further payments are made under the mortgage, then the mortgagee will be limited to recovery of the property and a declaration of the deficiency.  The mortgagee will then be able to register a proof of claim in the bankruptcy for the amount of the deficiency, but will rank alongside the other unsecured creditors.  However, if even one payment is made under the mortgage after the date of bankruptcy, the mortgage is affirmed and the mortgagee will be entitled to claim for both the property and any deficiency judgment against the bankrupt mortgagor.  Bankruptcy is not always the end to the rights of creditors!

Ksena J. Court and Francis N.J. Taman practice commercial and residential foreclosure, and secured and unsecured debt collection at Bishop & McKenzie LLP in Calgary, Alberta.