Sean and Nicole O’Brien fell behind on their two mortgages of $510,000 after Mr. O’Brien lost his job. In an effort to avoid foreclosure, once Mr. O’Brien was again employed, they filed for Chapter 13 bankruptcy, and made court-approved plans to pay some back taxes and get back into good standing with their mortgage lender, according to court records.

After a few months, Mr. O’Brien lost his new job and they again fell behind on their mortgage payments, and their first mortgage lender asked the court to allow them to foreclose.

The court stayed the foreclosure sale to allow the O’Briens time to consummate several attempts to sell and refinance the home, but these efforts all fell through.

As the foreclosure sale deadline loomed, the O’Briens met Frederick Cleveland, a foreclosure rescue operator. Cleveland agreed to take title to the home and obtain a new $540,000 mortgage on it, paying off the O’Briens’ current mortgages. He also agreed to pay the $46,000 in outstanding debts the O’Briens still owed under the bankruptcy, so they could begin to rebuild their credit.

The O’Briens would stay in the house, paying Cleveland $5,000 a month for two years — which the O’Briens believed Cleveland would use to make the payments on the new mortgage, taxes, insurance, etc., according to court records.

They also reportedly believed that they would have the right to purchase the home back from Cleveland at the end of the two years for $650,000, by when they believed they would have sufficiently repaired their credit to qualify for a new home loan.

Cleveland notified the county recorder’s office of the transaction. The O’Briens then received, accepted and obtained the bankruptcy court’s approval of another rescue arrangement under which the home would be sold for $800,000, but were unable to close that transaction because Cleveland had already recorded a notice of settlement.

The O’Briens proceeded to close the title transfer to Cleveland, failing to notify the court that the $800,000 sale had not been completed.

Unbeknownst to the O’Briens, Cleveland actually placed a $646,000 mortgage on the property, keeping more than $100,000 in cash for himself at closing. Additionally, the closing documents grossly overstated the purchase price by several hundred thousand dollars, and represented that Cleveland had invested nearly $200,000 in cash into the transaction, when in fact he left the closing table with $100,000-plus.

The closing statement showed that the O’Briens received more than $200,000 in cash at closing, when they received only (an unexplained) $15,000 directly from Cleveland’s closing attorney, and Cleveland never even paid the agreed-upon $46,000 toward the O’Briens’ bills in bankruptcy, according to court documents.

In addition to these various misrepresentations and broken agreements, Cleveland defaulted on the payments on the new mortgage, and the O’Briens were facing bankruptcy again within a few months’ time.

When the O’Briens sought the bankruptcy court’s help in forcing Cleveland to comply with these agreements in their pending bankruptcy matter, the bankruptcy trustee pointed out that the Cleveland transaction had never been approved by the bankruptcy court and highlighted all the discrepancies in the closing statement. The bankruptcy court required that the O’Briens actually sue Cleveland to pursue this matter.

So the O’Briens sued Cleveland for damages and equitable relief from his fraud and violations of consumer protection laws; they also sued Cleveland’s closing attorney for legal malpractice and conspiracy.

In finding that Cleveland did commit fraud against the O’Briens, the U.S. Bankruptcy Court for the District of New Jersey pointed out multiple, intentional misrepresentations Cleveland made of facts that were material (e.g., that Cleveland was borrowing $650,000 against the house, not $510,000; that the payment on the new mortgage was $6,800 — more than the $5,000 the O’Briens would be paying Cleveland, etc.).

These misrepresentations and more damaged the O’Briens by causing them to lose title to their home and to owe more on their home than they did before, and were made by Cleveland in order to enrich himself by virtue of stripping more than $100,000 of equity from the O’Briens’ home.

As a result of this finding of fraud, the court imposed a judgment in favor of the O’Briens reversing their deed of title to Cleveland and awarding them damages in the amount of the increased indebtedness on their home, approximately $117,000.

The court planned to hold a separate hearing to determine whether punitive damages should also be imposed against Cleveland.

The court went further to determine that Cleveland’s conduct in this matter also constituted an unconscionable commercial practice under the New Jersey Consumer Fraud Act.

As a result of Cleveland’s violation, the court imposed a judgment reversing the title transfer and imposing treble damages of $350,000 — triple the $117,000 — plus reasonable attorney fees to be paid by Cleveland to the O’Briens, as provided in the Act.

Additionally, the court determined that, because the transaction was a consumer credit transaction, the $100,000 in equity that Cleveland stripped from the O’Briens’ property and the buyback provisions (which would have required the O’Briens to pay Cleveland $95,000 to repurchase the property even if they did so one day following the original transfer of title) rendered the transaction a high-interest transaction under the Truth in Lending Act (TILA).

Cleveland failed to make the required disclosures under TILA and the loan terms themselves were prohibited under TILA, so the transaction was also rescinded under TILA and statutory damages of $240,875 — the actual amount of fees charged and equity stripped, plus a $2,000 statutory damage for nondisclosure — were imposed.

Finally, the court also found that Cleveland’s conduct violated the New Jersey Home Ownership Security Act (HOSA) by imposing excessive late fees under the lease-buyback agreement.

The court imposed statutory damages against Cleveland in the amount of all finance charges under the loan plus 10 percent, totaling nearly $294,000, and declared that it would return to the matter of assessing the award of attorney fees and punitive damages under HOSA at another hearing.  

The court then turned its attention to the O’Briens’ claims against William Gahwyler, Cleveland’s closing attorney. The O’Briens’ legal malpractice claims were rejected on grounds that Gahwyler did not actually have an attorney-client relationship with them.

However, given that Gahwyler’s cooperation with Cleveland’s fraud was necessary for Cleveland to pull off the fraud (because the new lender required a closing attorney’s participation in the transaction and because Gahwyler prepared the fraudulent closing documents and statements), Gahwyler’s ethical duty was to refuse to participate in this fraud.

Gahwyler’s breach of his ethical duties and participation in Cleveland’s misdeeds proximately caused the O’Briens’ damages in the amount of the increased debt on their house. Accordingly, the court ordered a judgment in favor of the O’Briens against Gahwyler for $117,000.

Further, because Gahwyler’s complicity was required for Cleveland to violate the various state and federal consumer protection laws, Gahwyler was found liable for civil conspiracy against the O’Briens, and was ordered to be jointly and severally liable for all damages that Cleveland was ordered to pay.

Before concluding, the court also found that Cleveland had breached the contractual agreement he had signed at closing agreeing to pay $46,000 toward the O’Briens’ bankruptcy account, and ordered him to pay them $46,000 in damages, plus interest, from this breach of contract.

To sum, the court found that Cleveland’s foreclosure rescue and equity stripping scheme was fraudulent and violated the New Jersey Consumer Fraud Act, the federal Truth in Lending Act, and the New Jersey Home Ownership Security Act, as well as breaching his contract with the O’Briens.

As a New Jersey attorney, the court explained, Gahwyler should have refused to participate in Cleveland’s fraud; because he did not, he was jointly and severally liable for all damages arising from this lengthy list of Cleveland’s violations.

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