Debtor’s failure to pay wrap around mortgage note results in debt being non-dischargeable

30 Nov Debtor’s failure to pay wrap around mortgage note results in debt being non-dischargeable

The Bankruptcy Court in the Eastern District of Texas, Sherman Division, recently found that a Debtor who sold his home through a wrap around note and who did not pay the mortgage company the money the debtor was receiving from the buyer could not discharge the debt owed to the buyer.
In this case, Mr. Davis, the Debtor, sold his home, which was financed with Union Planters Bank, to Mr. Wallace. Mr. Davis financed the purchase with a “wrap-around” mortgage whereby Mr. Wallace was to make payments to Mr. Davis, and then Mr. Davis would make the payments to Union Bank. Approximately 3 months later, Mr. Davis stopped making the payments to Union Bank even though he was still receiving the mortgage payments from Mr. Wallace.

Then Mr. Wallace decided to sell the property and listed it with Mr. Davis (the debtor) who was a realtor. Unfortunately, Mr. Davis made demands and representations to Mr. Wallace that turned out to be false, fraudulent and inaccurate, according to the court. The court also found that these demands and representations were made with “total disregard for the truth or validity thereof.” Mr. Davis essentially lied about the amounts owed on Mr. Wallace’s mortgage account and then attempted to foreclose on the property.

The Court found that Mr. Davis repeatedly refused to recognize payments that Mr. Wallace had made on his account. Further, after Mr. Davis ceased to make payments to Union Bank, Mr. Davis continued to accept payments from Mr. Wallace under false pretenses – thereby defrauding Mr. Wallace. Additionally, Mr. Davis purported to initiate foreclosure proceedings on the property based on Mr. Wallace’s alleged nonpayment. Mr. Davis also imposed numerous foreclosure related charges to Mr. Wallace’s mortgage loan account. The Court concluded Mr. Davis slandered Mr. Wallace’s credit reputation, defamed his credit, and exposed him to ridicule in the community.

The Court also found that Mr. Davis deliberately and intentionally injured Mr. Wallace by accepting payments from Mr. Wallace but then failing to make the rquired payments to Union Bank. The failure to pay Union Bank led to the foreclosure of the property (by Union Bank) and the loss of Mr. Wallace’s equity in the property.

Mr. Wallace was awarded actual damages in the amount of $29,645.79 for the loss of his equity plus exemplary damages of treble the amount of actual damages. Mr. Wallace was also awarded $5,000 for mental anguish damages and $11,000 for attorneys’ fees he paid. Further, these amounts are non-dischargeable in bankruptcy pursuant to Sections 523(a)(2) and (a)(6) of the Bankruptcy Code.

What shouldyou take away from this case? First, before you enter into any kind of “owner” financing when buying a home, you should have an attorney review the documents and advise you of any risks you may be taking. Second, if you are going to cheat someone – there are consequences for your actions. In this case, the Debtor got what he deserved.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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