[co-author: Stephanie Kozol]*
On March 7, Arizona Attorney General (AG) Kristin Mayes filed a novel lawsuit alleging consumer fraud and racketeering against numerous entities, individuals, and even law firms and title companies involved in the residential real estate market. The lawsuit is now pending in Maricopa County. The lawsuit offers a warning to entities, individuals, title companies, and even attorneys and law firms involved in the residential real estate industry.
What Happened?
Mayes alleges a “convoluted scheme” by dozens of defendants to defraud Arizona homeowners of equity in their homes in the midst of foreclosure actions. The complaint characterizes this conduct as an “equity stripping scheme.” The alleged scheme worked as follows:
- Certain defendants would electronically monitor notices of auction dates online to evaluate homes with significant equity that were undergoing foreclosure;
- Defendants would dispatch “door knockers” to approach the foreclosed-upon homeowners and offer them services as supposed “hardship specialists” who could assist with the foreclosure process and assist the homeowner with avoiding foreclosure;
- The “door knockers” would then allegedly pressure the homeowners into signing purchase agreements that gave the defendants a legal interest in the homes, at times misrepresenting the nature of the agreements, these agreements often allowed the purchaser to cancel for any reason but prohibited the homeowner from canceling;
- The purchase agreements were often, allegedly, for a small fraction of the home’s fair market value;
- Defendants would, at times, file bankruptcy petitions on behalf of the homeowners — sometimes without their knowledge — to slow the foreclosure process so that defendants could take possession of the home in the interim.
The end result of the alleged scheme was that homeowners did not lose their home to mortgage companies, but instead lost their home (and the equity they had built in beyond the amount owed on their mortgage) to the defendants.
Mayes’ lawsuit does not only target the orchestrators of the alleged scheme but also targets title companies, attorneys, and law firms that allegedly took part in the scheme by turning a blind eye to the “obvious signs that the schemes were not legal or ethical.” As to one law firm, the complaint alleges liability based largely on the alleged fact that the firm assisted in eviction proceedings and provided blank eviction forms to other defendants.
The complaint alleges eight claims under different provisions of the Arizona Consumer Fraud Act and three racketeering claims under distinct theories. The complaint seeks damages and injunctive relief.
Why Does It Matter?
Mayes’ lawsuit carries many lessons for any entity or individual involved in the home purchasing, lending, and sale process. The lawsuit demonstrates that theories of fraud liability can, depending on the circumstances, extend far beyond the primary perpetrators of fraud — to vendors, attorneys, law firms, title companies, and beyond. In particular, the lawsuit underscores the need for title companies and even law firms to implement screening procedures and policies that would alert them to the possibility that they are partaking in a fraudulent scheme. In the long term, the lawsuit also raises intricate questions about the extent to which government regulators can pursue claims against the attorneys hired to defend the primary fraudsters and/or defendants targeted by the government. Many of these issues will be litigated as part of Mayes’ lawsuit.
*Senior Government Relations Manager
