Is this note fraud?
Property Manager · Toronto, Ontario · Member since 2012 · 20 posts · 2 votes
I bought a non performing note in Kansas City. It is an institutional note that was originated in 11/2006. Next payment due was 1/2007. This was an investment property. I believe the borrower cashed out the property. The property was purchased in an LLC, but the note was taken out in the borrower's personal name.
The investment property is virtually worthless but the borrower’s personal residence, in California, is worth 7 figures.
The problem is that four months after the funding of this note,the borrower, in 3/2007 put her personal residence into a family trust. That property has lots of equity.
Can I go after her family trust to recover the unpaid balance or has she been able to circumvent her obligation?
What fraudulent conveyance are you all talking about? I don't understand the claim that the conveyance of the CA property has anything to do with fraud. If the CA property wasn't used to secure the subject loan, the borrower is free to sell or transfer the property. If the property was transferred to a family trust, that's not even an attempt to hide an asset. A family trust isn't judgment proof.
If the OP gets a judgment where the property is located and then records that judgment in CA, it will cloud title, even if the property is in a family trust.
Where SOL might apply is on the lack of collection on the note for so many years. Check the SOL for note collection in whatever state the property is in.
Hopefully the OPs note can be turned into a judgment
I'm curious why the OP bought a note and is asking these questions now????
Sounds like its time to foreclose
It's unlikely the family trust (if that's what it is) makes the borrower's CA property judgment proof.
You need to start with a foreclosure/judgment action in MO. Or KS. Which Kansas City is it?
Many state-specific issues here, primarily the statute of limitations and fraudulent conveyance rule in Kansas. You cannot foreclose on a property that has been titled in a trust for 6-7 years and did not originally secure your note without a judgment/court order (assuming KS is a non-judicial foreclosure state). You need to reduce the note to a judgment against the debtor before going after other assets such as the personal residence. Since the transfer to the trust is public record, my guess is that your fraudulent conveyance claim will be time-barred, but you never know...look up how long the statute of limitations is for fraudulent conveyance in Kansas and when it accrues (i.e. actual or constructive notice of the transfer). Not legal advice.
What fraudulent conveyance are you all talking about? I don't understand the claim that the conveyance of the CA property has anything to do with fraud. If the CA property wasn't used to secure the subject loan, the borrower is free to sell or transfer the property. If the property was transferred to a family trust, that's not even an attempt to hide an asset. A family trust isn't judgment proof.
If the OP gets a judgment where the property is located and then records that judgment in CA, it will cloud title, even if the property is in a family trust.
Where SOL might apply is on the lack of collection on the note for so many years. Check the SOL for note collection in whatever state the property is in.
Hopefully the OPs note can be turned into a judgment
I'm curious why the OP bought a note and is asking these questions now????
Red flags or alarm bells should be going off on a note where only one, or none, payments were ever made on a loan. Do you not know if it was a purchase mortgage, or a refi? I assume you just recently bought it, 7 years after it went into default. No idea what the SOL may be there, in which ever state. @Dion DePaoli may have some sobering thoughts.
Yeah, I'd like to hear Dion's sobering thoughts. I've had no problems foreclosing on old notes with no collection for years. CA is non-judicial, and civil code here says a note secured by RE is collectable and foreclosable for 60 years, or something like that.
I'm very curious what happens in judicial states with an old note and no active collection for years. I assume the OP is too.
I don't know the first thing about CA law but it is quite different from GA if a trust offers no asset protection benefits.
We're not talking about a land trust. But if we were, that would be interesting. But rather a transfer into a family trust. Family trusts aren't used for asset protection, they are estate planning tools. It's typically a transparent transfer from the owner(s) to their own trust of which they are the bene(s) and the trustee(s). (Again, typically). To be fair, the OP is calling it a family trust. We have no idea what it really is.
My bigger question was the notion of "fraudulent conveyance". It's not fraudulent for borrowers to transfer their non-collateralized assets to a trust. What supports your idea of fraud here? The OP used the word fraud in his question. But hopefully there's more to the theory than that.
@Robert Howell Any other info on this loan?
@Wayne Brooks @K. Marie Poe
The property is in MO. The personal residence in CA. is owned under a Revocable Living Trust.
The trust actually pre-dates the financing on the Kansas City property by a few months (my error).
My suspicion on the fraud comes from the fact that she never made a payment on this KC property and four months later she put a $750.000.00 HELOC on the trust property.
One interesting added point is that I found five other properties owned by the LLC in the same area in KC. I don't know the status of the financing on those properties.
My dilemma is, can I go after a primary residence held in a Revocable Living Trust?
@Account Closed For what it's worth, my wife is an estate planning attorney and many "family trusts" are used for asset protection, but you're right that many are not - just depends on the specific trust language. To answer your question, the fraudulent conveyance theory is based on the general rule that, speaking very broadly, in many states transfers by a debtor while insolvent in order to "hinder, delay, or defraud" creditors are subject to being set aside. In the OP's original scenario, the debtor apparently defaulted on a loan (suggesting insolvency) and then transferred property out of her own name into a trust (suggesting intent to hinder, delay, or defraud). The new fact that the transfer to the trust preceded the investment loan substantially hinders the claim, I would think, since the original lender presumably did not rely on the equity in the house when making the loan if it wasn't a personal asset, and OP steps into the lender's shoes.
There are of course many, many caveats. Was just offering a general impression that the best bet might be a fraudulent conveyance claim.
@Robert Howell No one other than a MO/CA lawyer is going to be able to answer that question with any degree of confidence. My baseless opinion: your claim is very shaky, both because you have no real evidence of fraud and because you likely have a statute of limitations problem.
Adam posted again, so I edited here to add: Setting property aside prior to the loan may be an issue in showing that the transfer was in contemplation of the loan so that such theory may be pursued. :)
Follow Adam's advice, all still pertains in Mo. You can not go after other assets until after receiving a judgment, otherwise you are only limited to the collateral pledged. The home was never pledged, that is irrelevant.
Fraudulent conveyance may apply to placing the house in trust, may be hard to do, the note and the LLC ownership may have an issue in that same line, what were the warranties made in connection with your note sale? Did the past holder seek collections or did they allow it to become a stale note where they abandoned their rights of collection, which is a bigger issue. A Revocable Trust won't offer protection against claims as Adam mentioned, an Irrevocable Trust can.
Mo is a non-judicial state, commence foreclosure, the borrower would have to object to get a judicial proceeding. Sell the property, if there is a deficiency seek a judgment, rather easy after foreclosure. I suggest at that point turn it over to a collections attorney or agency.
Did you get the collection file on the note at the sale? If not, well, that's a due diligence issue.
The target of my concerns would be toward the seller/broker of the note.
You may have something to frame next to your degree(s) chalking it up to an education! It gets expensive not knowing, especially with N/P notes. :)
I wish I could tell you these are uncommon but they are not. Lots of tangents here and I am not sure they amount to much. Borrower took out loan. Borrower stopped paying. Foreclose. Pretty straight forward.
OP said, Mortgagor is natural person. Property title is in LLC. Not that big of a deal. Mortgage is superior to that conveyance. I don't see where OP said this is cross collateralized.
Not a huge fan this asset sat around for years with no FCL action, any reason why?
Stop worrying about the primary residence, that is not your collateral. All this stuff about the trust and primary residence is simply off base. The PR, not offered as collateral has nothing to do here. She could put it in a trust or blow it up, who cares? It's not your collateral, seems like we read that idea into the thread and it doesn't belong.
If you foreclose and get a deficiency, get a judgement if you need to recoup funds. If you purchased this loan and need deficiency judgement to get your capital back, you paid way too much for this asset.
I don't see any bad sales/trade here. OP knew LPD was 1/2007. It's an NPN. I would have concerns of some paperwork defect or would want to know why no Mortgage took this through FCL years ago. That seems to be the only elephant in the room.
I took this somewhat vague statement to mean that a foreclosure of the investment property was unavailable/undesirable for whatever reason, which is why the OP was attempting to look to other assets to collect on his note.
And I was thinking that the house was of interest if you know or thought you can't proceed with foreclosure.
Painting a picture here.
Borrower can't sell and needs cash. Has other obligations, credit cards, car loans, whatever. Wants to move to Cali.
She has a pending obligation, a contingent liability, might be divorce, might be a business going south, might be anything.
She maps out a bankruptcy down the road to avoid liabilities. She can't sell the property secured/collateral or house, her credit is still good but thinks that will change anyway.
She sets up a trust and transfers the home to the trust, thinking she sets it aside from creditors.
She then refinances the property cashing out.
Then she moves, maybe dropped other obligations. Maybe the contingent liability didn't become the problem she thought.
She gets to Cali, but can't or decides not to make the payments as she planned. Loan goes in default.
This is an issue that Adam spoke of, setting up a series of events with the intent to walk away and stop paying I believe. A fraudulent conveyance or scheme of mortgage fraud when there was no intent to honor the terms of the mortgage. Setting others assets aside is an indication of such schemes, selling other assets, "cleaning house" and not depositing funds or cashing them out. Making a few payments on the mortgage simply makes the case to show an intent was there to pay it.
As Adam mentioned, it's tough to prove this or to show ill intent.
The note may no longer have a valid lien due to the failure to collect. Seeking the collateral may not be profitable.
The note holder may still make a demand for payment on the note, even if there is no valid security interest in the collateral, it's still a debt. In order to find the ability to pay the debt, you simply forget about the collateral and look under the carpet for other assets that may be attached by a judgment.
You can bring a suit for judgment based on the note alone. You have to bring suit to find out.
For those that recall the environmental contamination days banks or lenders faced, they didn't want to touch the collateral until after the laws changed relieving them of clean-up obligations. So, they sought payment without the collateral simply as a debt created, and obtained judgments, usually then had bankruptcy issues. That's another story..
Which is why, absent of recent or specific posts by our OP, as to why he may have had concerns with the other property, attaching a lien from a judgment to other assets.
Would I be concerned trying to go this route? Well. I'd try the non-judicial foreclosure first, if there was no objection it might fly, if they don't bring up the issue it will never be a question at the clerk of courts office starting the FC process.
If they did object, I might try obtaining a judgment on just the note, that route just explained. Then seek collections taking me to the trust question above.
If that didn't work, I'd look to my note purchase agreement as to claims and warranties made by the note holder selling me a worthless note and see if I could bring a claim against them. Could well be fraudulent matters there.
If all was good there, my last resort might be to see if the borrower intentionally set up a sham transaction scheme without the intent to pay, this is tough to do, but can be done. Another matter related to the trust and prior conveyances.
If that wasn't promising, I'd frame the darn note to remind me to do better due diligence before I bought another note. :)
@Bill Gulley
I believe this was a scheme of mortgage fraud. There was never a payment made on the KC property. The CA. property she had owned since 1996.
She admitted to me she took the money out of the KC property in 06 and "lent" it to somebody. This is a few months after she had set up the trust. She then, I believe, paid off the CA property which she had purchased for $450,000.00 and took a HELOC out on the property.
Here's the thing I find intriguing. I think she did this six times over and has gotten away with it.
By my estimations, she has potentially pulled $300 to $400,000.00 out of these properties. She has done short sales previously and I believe she is one smart cookie, or should I say one very daring cookie.
Btw I am planning to release the collateral in a short sale but not release the promissory note. The collateral will barely cover the realty fees and taxes.
Then go with the note and judgment.
Are you working with her? Doing a short sale? I really suggest you see an attorney in KC, I'd not call it a short sale at this point, but release the collateral from the obligation for the payment on the debt.
Such payment will reinstate the note obligation wiping out the abandonment issues she could claim, she will be perfecting the obligation, leaving the note in a better standing as a valid debt! Dumb move on her part at this point, great for you!
When you seek a judgment for collections on the note, that is the time to bring up her past dealings. IMO!
Might PM me in this matter if you like, wondering if I know of the borrower???? :)
Btw I am planning to release the collateral in a short sale but not release the promissory note. The collateral will barely cover the realty fees and taxes.
Is your borrower on board with your short sale plan? Only she and/her LLC can sell the property and sign the deed. Given that your plan is to not release the note, why would she participate in the short sale?
I believe this was a scheme of mortgage fraud. There was never a payment made on the KC property. The CA. property she had owned since 1996.
She admitted to me she took the money out of the KC property in 06 and "lent" it to somebody. This is a few months after she had set up the trust. She then, I believe, paid off the CA property which she had purchased for $450,000.00 and took a HELOC out on the property.
Here's the thing I find intriguing. I think she did this six times over and has gotten away with it.
By my estimations, she has potentially pulled $300 to $400,000.00 out of these properties. She has done short sales previously and I believe she is one smart cookie, or should I say one very daring cookie.
Btw I am planning to release the collateral in a short sale but not release the promissory note. The collateral will barely cover the realty fees and taxes.
I realize it's tempting to look at the loan history and what you perceive as cleverness and make all kinds of assumptions about the borrower's motives. I think the fraud angle is weak and that you'd have a hard time (and a lot of expense) going that route.
IMO you should really focus on what you can do with your note. Turn it into a judgment if you can. Then see what you can do with it in CA, if anything. That may wake up the borrower and get her to negotiate with you.
Did you buy this note as part of a package, or individually? Was it brokered to you?
If that didn't work, I'd look to my note purchase agreement as to claims and warranties made by the note holder selling me a worthless note and see if I could bring a claim against them. Could well be fraudulent matters there.
This is interesting to me. Do NPNs get sold with any actual warranties? My experience is buyer beware and a lot of disclaimers.
I agree with KMP - can you collect on a MO judgment by recording and attempting to enforce in CA? I think that's the correct question to be asking.
I attempted to reach (unsuccessfully) one of my own personal trust litigators. I'll follow up next week with him. It's not that difficult to penetrate a trust however a bit of strategy is required. My thoughts:
1) Litigation in CA is slow and expensive (not that we're unique in that sense). You can blow through $50,000 - $100,000 pretty easy and quickly.
2) Judicially foreclosing on CA owner-occ residential property is a possibility, albeit much trickier than land or commercial real estate. Harder to satisfy levying officer guidelines here.
3) Employing tactics that mess with the debtor might be the most cost-effective manner to extract a payday and certainly the most fun. A debtor exam would be part of the entertainment as would anything that makes her life unbearable.
Just remember that you're dealing with a professional thief; a con artist. They may be smarter than you and the time, money and effort that you spend chasing her for a bit of dough may not be worth what the education that you're getting is. Only you can decide how important us is to shake the money out of her...if she really has any left.
BP is not responding again, so a quick one.
Not sure what experience you have KMP is buying institutional notes but there are always representations and warranties, expressed and implied, regardless of disclaimers, they weren't non-performing from the inception.
Rick knows you can't harass a borrower, that's a great way to lose amounts due and pay up to $100K in fines, not the smart way. Why people shouldn't be collecting their own notes anymore. :)
This is the take-away for me on this thread. If the deal requires a deficiency judgment in order to profit on an NPN, it's most likely a losing proposition. Thanks again to Dion for his sobering thoughts.
Not sure what experience you have KMP is buying institutional notes but there are always representations and warranties, expressed and implied, regardless of disclaimers, they weren't non-performing from the inception.
Rick knows you can't harass a borrower, that's a great way to lose amounts due and pay up to $100K in fines, not the smart way. Why people shouldn't be collecting their own notes anymore. :)
Interestingly this note was non-performing from the beginning. The OP indicates no payments were ever made.
I think Rick is referring to all the legal ways in which collection attempts and legal suits can make a borrower's life miserable. If the OP goes as far as to obtain a judgment and records it in the CA county where the borrower owns property, the borrower might feel harassed. If the the OP goes even farther and sues to foreclose on the note in CA, the borrower will definitely feel the pain.
Most of this is probably moot, because the cost of the legal steps to turn this note into something collectable in CA might be more than the face value of the note.
Yep, and notes that never have a payment made are easy targets to push into a fraud case, I saw that in later posts.
Best time to hit on fraud for an individual note holder is in seeking a judgment, you're already before the court, otherwise, you are seeking an attorney to take a mortgage fraud case, mush more expensive as that is a tougher case to push initially.
Costs of judgments and amounts outstanding need to be weighed. I'd think just getting a judgment on a note would not be that expensive, I'm sure banks seek deficiency judgments on unsecured and secured loans every day out there. :)