Anatomy of a Short Sale

INTRODUCTION:  

Recently in the local news, we have heard that a State of Michigan Supreme Court Justices is accused of Bank Fraud in relation to the short sale of a home that she and her husband owned in Gross Pointe Park.  Judge Hathaway and her husband allegedly transferred a property in Florida to her step-daughter before the short sale and then the property was transferred back into their names after the short sale.  A short sale is a voluntary modification of the contractual agreement between a short sale lender and the Borrower wherein the short sale lender agrees to accept less than the full amount of the debt in the case of a legitimate hardship by the Borrower. The author, having formerly worked with the Wayne County Prosecutor’s Office Deed Fraud and Mortgage Fraud Unit has seen many ways to commit bank fraud and fraudulent transfers and works with clients to avoid this trap when requesting a short sale on the client’s behalf.  It should be the goal of any short sale negotiator to zealously advocate for the client while protecting the client from claims of fraud and the negotiator from legal malpractice.

For some background, According to the Cornell law Website (http://www.law.cornell.edu/uscode/text/18/1344) , 18 USC section 1344 states:

”Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. “

M.C.L. 566.34-566.35, Michigan’s Uniform Fraudulent Transfer Act Statute, defines a transfer and when a transfer by a debtor would be considered to be with the intent to defraud a creditor. 

CLIENT PREPARATION:

When completing the client intake for a short sale, an attorney should require a complete and thorough disclosure of the client’s assets, liabilities, income, debts and the hardship reasons for a short sale.  This complete and thorough disclosure is necessary to best counsel the client on, not just the short sale, but when or how to avoid a Fraudulent Transfer or conveyance. Assets or property can legitimately be moved around within the confines of the law and the attorney and client should work together to come up with creative options based on the client’s situation and needs.

THE REQUEST FOR SHORT SALE:

The short sale lender typically asks for and requires a request for a short sale to include a full financial disclosure package of documents. Most request packages contain 1) the last two years’ tax returns; 2) the last two months paycheck stubs or proofs of income; 3) the last two months bank statements for all accounts; 4) a letter explaining hardship reason, and; 5) a monthly budget listing income and debts along with all assets and liabilities. However, other short sale lenders are more comprehensive and require the last 6 months bank statements and two year’s tax returns with all schedules.  The attorney must work closely with the client to determine where red flags may be raised regarding disclosure, how to avoid unnecessary disclosure, and still disclose what is required to avoid a claims of fraud or fraudulent conveyance.

NEGOTIATION:

The short sale lender and Borrower should have adequate, good faith disclosure in order to negotiate an agreeable solution while keeping in mind that the short sale lender is under no obligation to voluntarily modify the current debt obligation. The short sale lender assesses what they will accept based on what it determines to be an honest full disclosure by the Borrower.  Without full disclosure, the short sale lender retains the right to void the transaction and pursue any claims against the Borrower.  It is incumbent upon the attorney for the Borrower to give the requested disclosure as adequately and completely as necessary to avoid later claims.

CLOSING THE SHORT SALE TRANSACTION:

Not only is adequate, good faith disclosure necessary for negotiation, but it becomes mandatory during the actual closing of the short sale transaction. Documents presented for the Borrower’s signature at the short sale closing include affidavits that the Borrower has given full and accurate disclosure of financial information during both the request and negotiation process. The short sale lender also requires disclosure that there are no side agreements regarding the property. The reservation by the short sale lender of any and all rights to void the transaction and to pursue any and all legal claims against the Borrower, including claims of Fraud, is within those documents at closing.

CONCLUSION:  

A short sale negotiation can be a potential trap for the unwary short sale negotiator and the Borrower. Careful attention must be paid to disclose the information that is necessary, but protect the client where prudent and legitimately possible. An attorney negotiating a short sale should be clear with the Client as to potential claims of fraud or fraudulent transfer if full disclosure is not made.  Judge Hathaway’s situation should be a cautionary tale to any short sale negotiator to be zealous in negotiating but cautious in dealing with clients to ensure adequate good faith disclosure when requesting a short sale while avoiding any possible claims of malpractice.