The Ibanez Property Ring

There’s an interesting new article out on the celebrated Massachusetts U.S. Bank v. Ibanez case that suggests that the defendant, Antonio Ibanez, was at the center of a property fraud ring. It's not clear to me that there was anything illegal about Ibanez's activities, but even if there were, I don't think it much matters.  

 The article is by Zachary K. Kimball, who appears to currently be employed by McKinsey.  The paper itself seems to have been written while Kimball was a law student at Harvard, but with its genesis when Kimball was a researcher at the Boston Fed.  The contribution of the paper is to document the various property dealings of Antonio Ibanez, the defendant in US Bank v. Ibanez. Kimball did some impressive digging into the public property records to discover the various property dealings of Mr. Ibanez. He shows that the property at issue in Ibanez was one of several investment properties in Springfield Massachusetts that Ibanez (a resident of Brookline, Massachusetts, 80 miles away) and certain other parties were involved with.  The various properties were all purchased out of previous foreclosures at low prices.  They were then resold at substantially higher prices, with 90% of the purchase prices financed by bank loans.  The various buyers and sellers in the transactions were all connected with each other in various.  The implication, Kimball suggests, is that Ibanez might have been involved in some sort of a mortgage fraud ring, either unwittingly or deliberately.  The "fraud" would have been as follows: a largely judgment-proof Ibanez (who had his Brookline property protected as a homestead) borrowed at 90% LTV from banks. The loans proceeds were then used to pay grossly inflated purchase prices for the properties. Why would Ibanez do this? Because he never intended to repay the loans and was receiving a kickback from the seller. 

To illustrate, suppose that the seller bought a house out of foreclosure for $30.  The seller then sold to Ibanez for $100.  Ibanez put up $10 of his own money and borrowed $90 from the bank. The seller would then kick back say $40 to Ibanez, who would never repay the bank, which would eventually foreclose. Ibanez would then be up $30, while the seller would be up $30. And the bank would be stuck with the difference between the $90 it loaned out and its foreclosure sale recovery. 

The article takes this insight and suggests that had these dealings been known at the time, Ibanez’s case would not have been supported by legal aid lawyers and amici or favorably received by the courts.  Kimball then further argues that Ibanez was a bad decision because it is out of line with other courts and not supported by economic theory. Unfortunately, there’s a serious disconnect between the observations about Ibanez’s personal merits and the observations about the merits of the decision. Whether or not Ibanez might have been a bad person doesn’t have a lot of bearing on the ultimate decision.  Moreover, it's not at all clear to me that there was anything illegal in what Ibanez was doing.  

Was there something illegal going on?

While there’s clearly something funny going on with Ibanez’s property dealings, it is not clear to me that there was anything illegal.  Property speculation--even leveraged speculation--is as American as apple pie, the Founding Fathers, and Donald Trump.  The paper suggests that there might have been mortgage fraud, but if so, what exactly was the fraud? The paper doesn't say.   

Fraud comes in lots of flavors legally—common law civil fraud and various statutory civil and criminal fraud provisions. I do not claim to have exhaustive knowledge of the field, but none of the ones I know seem obviously applicable to the Ibanez situation.  Fraud is fundamentally based on an intentional misrepresentation (or with federal wire/mail fraud, on an underlying predicate crime). The “fraud” implied here was that Ibanez borrowed money that he never intended to repay. What was the misrepresentation? A typical loan agreement contains a promise to repay, not a representation of a material fact about repayment. Breaching a promise alone isn't fraud. (I don't think the lenders were federally insured depositories, so we don't have to get into FIRREA issues.) And what if these were non-recourse loans? Others may have more insight into the fraud issue, but it isn't clear to me that there was anything illegal in the activity.  

Even if there was fraud, so what? 

Let’s assume that Ibanez was up to something shady—illegal or otherwise--so what?  He wasn’t convicted of anything, and even bad people are entitled to the protections of law, and the law announced in Ibanez applies to everyone, bad and good.  Indeed, even if Antonio Ibanez was up to no good, Kimball omits half the story.  What about the banks?  The mortgage lenders involved were just as shady (again whether illegal or not). If there was fraud here, it would seem to be with the appraisals--why would a bank lend at 90% of LTV against a property that had sold for 30% of LTV several months before? Only a grossly inflated appraisal would make that possible.  

Would the case have been litigated if these facts were known?

Would the lawyers have cared?  I can only speak for myself.  I was not directly involved with the Ibanez litigation, but I was involved in the follow-up suits as an amicus.  I could have cared less if Ibanez was shady.  The case wasn't about him.  It was about establishing broader principles of procedural protection for all homeowners.  Ibanez just happened to have a case with good facts for litigating. If the facts were different, as Kimball suggests, then perhaps it would have been a different case that was litigated up to the Supreme Judicial Court, but nothing in the opinions depended on the particulars of Antonio Ibanez. What mattered were the all too common deficiencies in the foreclosure paperwork.  

What about the merits of the decision?

While Kimball’s paper tells us an interesting story about Springfield Massachusetts property transactions, it doesn’t tell us much about the merits of the Ibanez decision itself.  Kimball repeatedly asserts that Ibanez is out of line with every other state.  That’s just not true, and the article cites no authority on this point whatsoever.  Very few states have definitive law on whether the “mortgage follows the note”.  In some states there are decisions that the “note follows the mortgage.”  The only uniform law on this is a UCC Article 9 provision (actually, it doesn’t apply in South Carolina, if I recall).  But the banks deliberately avoided raising the UCC Article 9 argument in the Ibanez litigation.  They were aware of it, but they also knew that the facts of the case were such that they would lose even under Article 9.  They were also worried that if they lost on an Article 9 argument in Massachusetts it would undermine the Article 9 argument elsewhere, particularly in title theory states, where there is a serious disconnect between Article 9 and real property law.  

Even if Ibanez were out of line with every other state, that doesn’t tell us that it was wrong.  Kimball tosses out another argument, that the Ibanez rule that the foreclosing party must have both the note and the mortgage at the time the foreclosure is commenced has no economic purpose.  I don’t think that’s a deeply considered conclusion.  First, law is not merely an expression of economics.  And second, there are some economic benefits of the Ibanez ruling. Ibanez allows the note and mortgage to be split.  That can have some benefits. It enables the granting of a contingent mortgage, and it enables the use of a deed of trust structure in which a supposedly neutral trustee holds the mortgage, while the lender holds the note.  In theory, the deed of trust structure means that it is a neutral party that decides when there has been a default. That could be a good thing. (I say in theory because that’s not how the DOT structure generally works…) And, perhaps most importantly, the Ibanez ruling requires lenders to take care with property records—a mortgage is a contingent property interest.  Well-maintained property records have huge positive externalities for everyone, as the follow-up Bevilaqua case regarding the rights of a purchaser in an improper foreclosure sale illustrates.

All told, while this paper was really interesting, I find myself responding because it is another example of missing the forest for the trees in the foreclosure crisis. The paper's moral point is a spruced up version of Rick Santelli's rant suggesting that distressed homeowners shouldn’t get relief because they were bad people who lived beyond their means or speculated on properties, etc. The point of foreclosure relief—and of procedural checks on foreclosures—is not about protecting the bad folks, but about protecting society at large.  (Kimball and his Boston Fed mentor Paul Willen might disagree with me about whether more procedural checks on foreclosure are good for society, but that’s a different argument.) It might be a better pill to swallow, but policies should not be based on whether we like people, but on what’s good for society.  

Comments

[Ebenezer Scrooge]

"In a shoot-out with the weapons of the UCC, there is no guarantee that the survivor will be the party wearing the white hat." American Fed. Sav. & Loan v. Madison Valley Properties, Inc., 1998 MT 93 ¶ 44, 288 Mont. 365, 380, 958 P.2d 57, 66.

Adam is right--commercial law is amoral in rhetoric, and sometimes even immoral as applied to individual cases. And that's how it should be. A commercial law deontological in rhetoric and rules, would create its own form of injustice--unpredictability and even greater strengthening of the powerful. (Why do you think that conservatives are so eager to adopt deontology?)