Bankruptcy Judge Condemns Mortgage Rescue Scheme

DALLAS, March 17, 2008 - Texas Attorney General Greg Abbott’s Bankruptcy and Collections Division successfully intervened in a federal bankruptcy involving an illegal residential foreclosure rescue scheme. In that case, Judge Stacey G.C. Jernigan sharply criticized fraudulent mortgage rescue schemes, which she referred to as “a new cottage industry of bottom feeders.” The judge’s order requires one firm to pay $100,000 in punitive damages for their unlawful conduct, which is unusual in bankruptcy cases.

“At a time when regulators, policy makers and stakeholders are working to help struggling families, unscrupulous operators are scheming to profit at homeowners’ expense,” Attorney General Abbott said. “Judge Jernigan’s order sends a strongly worded signal that the courts will not tolerate fraudulent schemes that abuse the bankruptcy system in an attempt to gain illegal profits. We will continue aggressively pursuing scams that prey upon Texas homeowners.”

The case involved two fraudulent companies promising to stave off residential foreclosures: North American Foreclosure, L.L.P., of California, and Jireh Capital Services, L.L.C., a Dallas-area affiliate. Jireh and its operator, David Curtis, who cooperated with the Attorney General’s investigation, appeared in court and were ordered to pay a $48,000 civil penalty and $10,000 in attorneys’ fees.

However, North American failed to appear at a scheduled hearing in Judge Jernigan’s federal bankruptcy court. At that hearing, which included a full evidentiary presentation by the Attorney General’s Office, Judge Jernigan ordered the North American and its president to pay $100,000 in punitive damages as well as $48,000 in state civil penalties, attorneys’ fees and restitution to a Texas couple, Michael and Brenda White, who were harmed by the fraudulent scheme.

Like many Texans, the Whites relied on a legitimate mortgage company to obtain financing for their Mesquite home. In June 2006, struggling to make their mortgage payments, the Whites sought protection under Chapter 13 of the federal Bankruptcy Code.

After entering bankruptcy, they agreed to a monthly mortgage payment schedule. Despite their efforts to make regular payments, the couple ultimately defaulted. Their mortgage company initiated foreclosure proceedings and the court set a February 2007 foreclosure date. In the days and weeks leading up to the foreclosure date, the Whites received scores of phone calls and correspondence from firms guaranteeing to prevent or delay the foreclosure.

Michael White eventually contacted North American Foreclosure and was routed to a man named Jeremy Mitchell, who also used the alias “Jason.” As a result, North American’s local representative, Curtis of Jireh Capital Services, visited the Whites at their residence to discuss a foreclosure prevention strategy.

Curtis convinced the couple to convey one percent of their home’s value to an out-of-state person who was in bankruptcy, or would agree to file “bankruptcy.” The Whites were told that by transferring a fractional ownership interest in their home to a third person in bankruptcy, they could automatically postpone their foreclosure date. Jireh and North American conveyed the one percent interest in the home to a random California individual who had filed for bankruptcy on her own. The transfer occurred without the Californian’s knowledge.

Under the “client agreement,” the Whites were to pay North American $650 per month for as long as its “services” were needed. However, after the Whites remitted their second payment, the couple’s bankruptcy attorney notified them about Judge Jernigan’s order demanding that they appear in court to discuss North American’s scheme.

In her memorandum opinion and order, the judge referred to North American and Jireh as “bottom-feeding bankruptcy servicers” that deceive all parties involved. She also noted that “this court is satisfied that the Whites have been naively duped in this matter and have not themselves knowingly or fraudulently participated in acts that might be described as a bankruptcy crime. At worst, they appear to be ‘bit characters’ in a scheme to defraud borrowers and lenders alike who are in the midst of foreclosure proceedings.”

The judge referred North American and Jireh Capital to the U.S. Attorney’s Office for an investigation into potential criminal violations. Michael and Brenda White remain in their home and are continuing to work with their mortgage company.

Texans who encounter this or similar practices that may violate the law may call the Attorney General’s toll-free complaint hotline at (800) 252-8011 or file a complaint online at www.texasattorneygeneral.gov.