Fraudulent Aspects of Using a Strawman in the
Part One: Introduction
With the number of short sales rising throughout the United States, a common question that arises is whether the owner of residential real estate can sell shorts sale their home to a relative through the use of a strawman and whether or not such a transaction constitutes as either civil or criminal fraud..
In a short sale, the lender agrees to allow the sale of the residence by the owner/debtor for an amount less than the amount of the loan obligation. Once the residence is sold the owner turns over the proceeds from sale to the lender and the remaining balance of the loan obligation is forgiven by the lender. Short sales have become an increasingly popular economic solution because lenders can avoid having to go through a protracted foreclosure process and borrowers can mitigate damage to their credit history and control their debt.
The possibility of either civil or criminal fraud in a short sale may arise if the owner of the residence and the relative utilize a strawman with the knowledge that the owner's lender would not approve of the short sale if it knows that the relative is a short sale purchaser. For example, the owner of the residence, a strawman, and relative agree that the strawman will make a short sale purchase of the residence and after the lender forgives the owner for the outstanding balance due the strawman will sell the residence to the relative for a profit .
At a short sale closing, the owner and purchaser are generally required to execute an affidavit which represents that the short sale is an "arms length transaction," commonly referred to as an "arms length affidavit." Such affidavits commonly state the following:
No party to this contract is a family member, business associate,
or shares a business interest with the mortgagee. Further, there are
no hidden terms or special understandings between the seller or
buyer or their agents or mortgagee.
The buyers and sellers nor their agents have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission.
See http://www.trulia.com/voices/Home_Selling/Is_a_short_sale_to _a_relative_considered_fraud_-73138. See also http:// brokeralan. com/tag/ mortgage -fraud/.
By signing this affidavit as part of the short sale closing the owner and the strawman will be making a false statement since there is a side agreement to the short sale transaction that the parties have failed to disclose to the lender.
Part Two: Applicable Laws & Considerations
The Florida Supreme Court has defined the elements of civil fraud are as follows:(1) a false statement concerning a material fact; (2) the representor's knowledge that the representation is false; (3) and intention that the representation induce another to act on it; and (4) consequent injury by the party acting in reliance on the representation. Johnson v. Davis, 480 So.2d 625, 627 (Fla. 1985).
Florida law further provides that the elements of civil conspiracy are as follows: (1) a conspiracy between two or more parties; (2) to do an unlawful act or to do a lawful act by unlawful means; (3) the doing of some overt act in pursuance of the conspiracy; and (4) damage to the plaintiff as a result of the acts performed pursuant to the conspiracy. Olson v. Johnson, 961 So.2d 356, 359 (2nd DCA 2007).
Florida Statute Section 817.03 makes it a crime to obtain property or credit via false information, and states:
Any person who shall make or cause to be made any false statement, in writing, relating to his or her financial condition, assets or liabilities, or relating to the financial condition, assets or liabilities of any firm or corporation in which such person has a financial interest, or for whom he or she is acting, with a fraudulent intent of obtaining credit, goods, money or other property, and shall by such false statement obtain credit, goods, money or other property, shall be guilty of a misdemeanor of the first degree, punishable as provided in s. 775.082 or s. 775.083
Florida Statute Section 817.54, further provides that it is a crime to obtain a mortgage via false information and states:
Any person who, with intent to defraud, obtains any mortgage, mortgage note, promissory note or other instrument evidencing a debt from any person or obtains the signature of any person to any mortgage, mortgage note, promissory note or other instrument evidencing a debt by color or aid of fraudulent or false representation or pretenses, or obtains the signature of any person to a mortgage, mortgage note, promissory note, or other instrument evidencing a debt, the false making whereof would be punishable as forgery, shall be guilty of a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084.
Florida case law has shown that the use of a strawman in real estate transactions has been found to be unlawful and/or illegal in a number of contexts, including, without limitation: where a strawman purchaser is used to thwart the rights of one with a right of first refusal to property, Kjesbo v. Ricks, 517 N.W.2d 585 (Minn. 1994); where a strawman purchase is used to circumvent the real estate commission to which the procuring real estate broker would be entitled if the true identity of the actual purchase was known, Shands v. Winton, 91 P.3d 416 (Colo. App. 2003); where a strawman is used to thwart the rent control laws/regulation and/or deprive a tenant of the benefits of same, Art Omni, Inc. v. Vallejos, 832 N.Y.S.2d 915 (N.Y.Civil Court 2007); and where a strawman is used to defeat the inheritance rights of a spouse, Karsenty v. Schoukroun, 959 A.2d 1147 (Md.App. 2008). See also, Alderman v. Bradley, 957 S.W.2d 24 (Ky.App. 1997) (unlawful to use strawman to circumvent gun purchase laws); Fishman v. Maginn, No. 040673BLS1 (Ma. Super. Court April 12, 2006) (use of a strawman to circumvent SEC rules regarding who may own/hold certain stock is unlawful); Szilagyi v. State, 564 So.2d 44 (Fla. 4th DCA 1990) (unlawful to use strawman to defeat rights of creditors to a corporation via the owners of the corporation raiding the assets thereof, then selling to a strawman for a deflated price, then leaving the creditors of said corporation in the lurch when the strawman purchaser closes the business); Grossman v. Greenberg, 619 So.2d 406 (Fla. 3d DCA 1993) (unlawful for partner to utilize strawman to hide profit from other partners, and take profit for himself).
Part Three: Conclusion
Many real estate experts and commentators are of the view that the type of transaction discussed in this article does amount to civil and/or criminal fraud. Lenders are attempting to stop these type of transactions from occurring via the use of the arms length transaction affidavits. See "Why Does the Bank Require an Arms-Length Affidavit on a Short Sale?" By Elizabeth Weintraub, www.About.com; Blog by Alan Nyugen, Realtor in Jacksonville, Florida, www.brokeralan.com; "Homeowner Fraud Exacerbates Mortgage Crisis," by Leslie Berkman, The Press Enterprise, August 30, 2008, www.pe.com; "Bank Take Losses on Short Sales as Foreclosures Soar," By John Gittelsohn and Margaret Collins, Bloomberg.com, December 4, 2009. Additionally, one title company actually has a power point presentation used to train its brokers to spot potential straw borrower fraud (i.e. use of a strawman to "act" as the borrower to gain loan approval when the actual borrower would not be able to qualify), which is similar to the use of a strawman to "act" as the purchase in a short sale to hide the identity of the actual purchaser. See TRGC Internet Conference Training Program. Similarly, where a second mortgage holder tells an owner to pay money to the second mortgage holder outside of the short sale closing (thus depriving the first mortgage holder of all of the short sale proceeds) that this is also considered to be fraud on the first mortgage holder. See "Big Banks Accused of Short Sale Fraud," By Diana Olick, CNBC Real Estate Reporter, January 15, 2010, www.CNBC.com.
In the above stated example, if the owner and strawman are required to sign an arms length transaction affidavit as part of the short sale closing, then there is no question that they will be making a false statement and subject to liability since: (1) the owner and strawman have a business arrangement together (the strawman will sell the home to the relative); (2) there is a side arrangement between the strawman and owner (agreement that the strawman will sell the home to relative and receive compensation for it); (3) there is an agreement between the parties and funds are being paid to a person outside of the closing.
Furthermore, the owner and strawman are making these false statements, as well as engaging in the entire transaction for the purpose of effectuating a short sale that the lender would never have agreed to, and the ultimate purpose of the transaction is to benefit the relative.
The owner and strawman will clearly be engaging in fraud based on the elements set out by the Florida Supreme Court in Johnson v. Davis inasmuch as the owner and strawman will be making a false statement, knowing the statement is false, with the intent that the lender rely on the statement. Additionally, the relative who purchases the residence from the strawman after the owner and the strawman have made the foregoing false statements for the purpose of effectuation an ultimate sale to the relative could be engaging in a conspiracy to defraud the owner's lender, even if the relative is not directly perpetrating the actual fraud.
In the case that an arms length transaction affidavit is not required at the closing, if a lender would not allow the short sale directly to the relative, then the entire plan is clearly intended to effectuate a transaction which the relative and the owner would not be able to effectuate but for creating, in essence, a fictional buyer via the strawman. By trying to circumvent the lender's policy and requirements in order to approve a short sale, the owner and relative would be denying the lender's right to foreclose on the property, obtain a sale thereof said foreclosure, and then obtain a deficiency judgment against the owner for the difference between the sale price and the full loan amount. A lender, by approving a short sale, will only receive the short sale purchase price and will be forgiving the amount of the loan less the short sale purchase price. Therefore, a lender has the absolute right to determine under what circumstances it will give up the foregoing rights.
Short Sale of Residential Property
to a Family Member in Florida