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Case Study: How Does Reverse Veil Piercing Occur?

An Evolving Way To Attack Assets

reverse veil piercing

Piercing the corporate veil. It sounds painful, and it is. A judgment is entered against a corporation with no assets. To collect the court allows the judgment creditor (the winner in the case) to pierce through the corporation and reach the personal assets of the shareholder.

A new twist on this method of collection has appeared. It is called reverse piercing of the corporate veil. It is reversed because instead of a judgment against a corporation there is a judgment against an individual. The individual has no assets, but their entity does. So in this case the court allows the judgment creditor to go past the individual and gain access to assets of their corporation or LLC. Graphically, the difference is:

diagram of reverse veil piercing

California has joined the list of states allowing for reverse piercing. The following goes through the Curci case in question. If you don’t have time to read the entire case write up, please know that asset protection is a constantly evolving area of law. If the following case write up interests you, you will find further information on this subject and more in my book Veil Not Fail: Protecting Your Personal Assets From Business Attacks (RDA Press, 2022).

Veil not Fail Buy on Amazon

Issue

What is the potential impact on outside reverse veil piercing of the recent California Court of Appeal, Fourth District, decision in Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214, 221 Cal.Rptr.3d 847 (Cal.App., Aug, 10, 2017)

Applicable Law

In Curci Investments, LLC v. Baldwin, 14 Cal.App.5th 214, 221 Cal.Rptr.3d 847 (Cal.App., Aug, 10, 2017), the California Court of Appeal, Fourth District, concluded that a judgment creditor was not per se precluded from outside reverse piercing the corporate veil to add a Delaware limited liability company (LLC), and that the California statute providing for charging order levying distributions from an LLC to a debtor member did not preclude application of outside reverse veil piercing to allow a judgment creditor to add an LLC as a judgment debtor on a judgment against the holder of an LLC interest.

The Facts of Curci

In January 2004, James P. Baldwin (“Baldwin”), a prominent real estate developer, formed JPB Investments, LLC (“JPBI”), a Delaware limited liability company, for the exclusive purpose of holding and investing Baldwin and his wife’s cash balances. Over the course of his lifetime, Baldwin had formed and held interests in hundreds of corporations, partnerships, and LLCs. JPBI had two members: (1) Baldwin with a 99 percent member interest; and (2) his wife with a one percent member interest. Baldwin was a manager and the chief executive officer (“CEO”) of the company. In these roles, and given his member interest, Baldwin determined when, if at all, JPBI made monetary distributions to its members, i.e., Baldwin and his wife. Two years after forming JPBI, Baldwin, individually, borrowed $5.5 million from Curci’s predecessor in interest. The loan was memorialized in a promissory note executed by Baldwin and the managing member of Curci’s predecessor (the “Curci note”). In the Curci note, Baldwin agreed to pay back the principal amount of the loan, with interest, by January 2009. Curci was assigned the lender’s interest in the Curci note shortly after it was executed. One month after executing the Curci note, Baldwin settled eight family trusts to provide for his grandchildren during and after their college years (the “family trusts”). Baldwin’s children were the designated trustees. (At least one of his sons, however, was unaware of the family trusts despite his signature on the trust documents.) Not long after the family trusts were settled, JPBI loaned a total of approximately $42.6 million (the “family notes”) to three general partnerships (the “family partnerships”) formed by Baldwin for estate planning purposes. Because the partners of the family partnerships were various combinations of the family trusts, certain of Baldwin’s children signed the family notes in their capacity as trustees. Baldwin signed the family notes in his capacity as manager of JPBI. Each family note indicated the principal amount of the loan was to be repaid by July, 2015. Although all the family notes were in favor of JPBI, Baldwin and his wife listed them as “Notes Receivable” on their personal financial statements.

When the Curci note came due in January, 2009, Baldwin had not made any payments. Curci filed a lawsuit against him to recover the amount owed. Not long thereafter, the parties entered into a court-approved stipulation establishing a payment schedule for Baldwin to avoid entry of judgment. About a year later, the trial court approved an amended stipulation that modified the payment schedule due to Baldwin’s continued failure to make the agreed upon payments. Baldwin ultimately failed to make the agreed upon payments, so Curci sought entry of judgment against him. In October, 2012, the trial court entered judgment in favor of Curci and against Baldwin in the amount of approximately $7.2 million, including prejudgment interest and attorney’s fees and costs. In the year after entry of judgment, Curci propounded extensive post-judgment discovery requests aimed at understanding the nature, extent, and location of Baldwin’s personal assets. Baldwin did not timely respond to the discovery, and Curci filed a motion to compel. Though the motion was moot by the time it was heard, the trial court awarded sanctions against Baldwin.

As of February, 2014, no payments had been made on the family notes. Baldwin, as manager of JPBI, and for reasons unexplained, chose to execute amendments to the family notes to extend their terms by five years, to July, 2020. No consideration was provided in exchange for the extensions. A few days later, Baldwin responded to a discovery request made by Curci one year earlier. Among the documents he produced were the family notes, including the five-year payment extensions. Based on Baldwin’s discovery responses, and Baldwin’s failure to pay any of the judgment, Curci filed a motion seeking charging orders against 36 business entities in which Baldwin had an interest. Among those entities was JPBI. The trial court granted Curci’s motion in August, 2014. From and after that date, any monetary distributions made by JPBI to Baldwin, in his capacity as a member, were ordered to be paid to Curci instead. Curci received no money as a result of the charging order.

Although Baldwin caused JPBI to distribute approximately $178 million to him and his wife, as members, between 2006 and 2012, not a single distribution had been made since the October, 2012, entry of judgment on the Curci note.

This is a key factor. When that much money has been previously distributed, courts will ask why Curci can’t be paid. As well, there had been no payments made by the family partnerships to JPBI on the family notes. In June, 2015, Curci filed a motion to add JPBI as a judgment debtor pursuant to California Code of Civil Procedure, Section 187. Curci based its motion on the outside reverse veil piercing doctrine. Curci argued that JPBI was Baldwin’s alter ego, that Baldwin was using JPBI to avoid paying the judgment, and that an unjust result would occur unless JPBI’s assets could be used to satisfy Baldwin’s personal debt. Baldwin did not initially oppose the motion. The trial court issued a tentative ruling denying Curci’s motion, based upon the earlier California Court of Appeal, Fourth District, decision in Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal.App.4th 1510, 77 Cal.Rptr. 3d 96 (Cal.App., Aug. 27, 2008). Following additional briefing from the parties on that issue, and a hearing, the trial court adopted its tentative ruling as its final decision. Because it believed outside reverse veil piercing was not viable in California, it did not make any factual findings related to Curci’s arguments thereunder. Curci timely appealed.

The Decision in Curci

Curci sought to add JPBI as a judgment debtor on the $7.2 million judgment it had against Baldwin personally. Curci asserted that Baldwin held virtually all of the interest in JPBI and controlled its actions, and that Baldwin appeared to be using JPBI as a personal bank account. Curci argued that, under these circumstances, it would be in the interest of justice to disregard the separate nature of JPBI and allow Curci to access JPBI’s assets to satisfy the judgment against Baldwin. Citing Postal Instant Press, Inc., supra, the trial court denied Curci’s motion based on its belief the relief sought by Curci, commonly known as outside reverse veil piercing, was not available in California. On appeal, Curci asserted that Postal Instant Press was distinguishable, and urged the California Court of Appeal to conclude that outside reverse veil piercing was available in California and appropriate in this case. The California Court of Appeal agreed with Curci, that Postal Instant Press was distinguishable, and concluded that outside reverse veil piercing was possible under these circumstances. Therefore, the California Court of Appeal reversed and remanded the case to the trial court to make a factual determination as to whether JPBI’s veil should be pierced.

The Rationale in Curci

In Curci, the California Court of Appeal noted that the question presented was whether outside reverse piercing of the corporate veil could be applied under the circumstances of this case, giving Curci the ability to reach JPBI’s assets by adding it as a judgment debtor. Curci contended that the facts of this case justified making such a remedy available, and argued that neither the decision in Postal Instant Press, nor state statutory law, precluded such a result. Baldwin disagreed, asserting that Postal Instant Press established a broad and all-encompassing rule of no reverse piercing in California; and, alternatively, that California Corporations Code, Section 17705.03, provided the sole remedy available to Curci with respect to JPBI. The Court agreed with Curci, and found that remand was appropriate, in order to allow the court to make the factual determination of whether the facts in this case justified piercing JPBI’s veil.

A. CCP 187.

In Curci, the Court initially noted that, pursuant to Code of Civil Procedure, Section 187, a trial court has jurisdiction to modify a judgment to add additional judgment debtors, and that granting or denying a motion to add a judgment debtor lies within the discretion of the trial court.

B. Veil Piercing and the Alter Ego Doctrine

In Curci, with respect to traditional veil piercing, the Court noted that, ordinarily a corporation is considered a separate legal entity, distinct from its stockholders, officers, and directors, with separate and distinct liabilities and obligations; and that the same was true of an LLC and its members and managers. The Court pointed out that legal separation may be disregarded by the courts when a corporation or LLC is used by one or more individuals: (1) to perpetrate a fraud; (2) to circumvent a statute; or (3) to accomplish some other wrongful or inequitable purpose. The Court observed that in those situations, the corporation’s or LLC’s actions will be deemed to be those of the persons or organizations actually controlling the corporation, in most instances the equitable owners; and that the alter ego doctrine prevents individuals or other corporations from misusing the corporate laws by the device of a sham corporate entity formed for the purpose of committing fraud or other misdeeds. The Court stressed that, as an equitable doctrine, its essence is that justice be done. The Court stated that, before the alter ego doctrine will be invoked in California, two conditions generally must be met: (1) first, there must be such a unity of interest and ownership between the corporation and its equitable owner that the separate personalities of the corporation and the shareholder do not in reality exist; and (2) there must be an inequitable result if the acts in question are treated as those of the corporation alone. The Court observed that, while courts have developed a list of factors that may be analyzed in making these determinations, there is no litmus test to determine when the corporate veil will be pierced; rather the result will depend on the circumstances of each particular case.

C. Outside Reverse Veil Piercing

In Curci, the Court noted that outside reverse veil piercing is similar to traditional veil piercing in that when the ends of justice so require, a court will disregard the separation between an individual and a business entity; however, the Court emphasized that the two serve unique purposes and are used in different contexts. Rather than seeking to hold an individual responsible for the acts of an entity, outside reverse veil piercing seeks to satisfy the debt of an individual through the assets of an entity of which the individual is an insider. The Court observed that outside reverse veil piercing arises when the request for piercing comes from a third party outside the targeted business entity; and that as outside reverse piercing has evolved, a growing majority of courts across the country have adopted it as a potential equitable remedy.

D. Postal Instant Press

In Curci, the Court noted that another panel had addressed outside reverse veil piercing in Postal Instant Press, supra. In that case, Postal Instant Press (“PIP”) obtained an $80,000 judgment against an individual, then sought to amend the judgment to add as a judgment debtor a corporation in which the debtor formerly held shares. The PIP court reversed the trial court’s order amending the judgment, based on the conclusion that a third party creditor may not pierce the corporate veil to reach corporate assets to satisfy a shareholder’s personal liability. In reaching its conclusion, the PIP court echoed concerns expressed by non-California courts about making outside reverse veil piercing available with respect to corporations. Among those concerns were: (1) allowing judgment creditors to bypass standard judgment collection procedures; (2) harming innocent shareholders and corporate creditors; and (3) using an equitable remedy in situations where legal theories or legal remedies are available. In Curci, the Court stated that PIP did not preclude application of outside reverse veil piercing of LLCs for several reasons: (1) Curci sought to disregard the separate status of an LLC, not a corporation, and the court’s decision in PIP was expressly limited to corporations; (2) the nature of LLCs did not present the concerns identified in PIP, because Baldwin, the judgment debtor, held a 99 percent interest in JPBI and his wife held the remaining one percent interest, but she was liable for the debt owed to Curci under California community property law, and there simply was no “innocent” member of JPBI that could be affected by reverse piercing; and (3) a creditor does not have the same options against a member of an LLC as it has against a shareholder of a corporation. The Court reasoned that, under California law, when the debtor is a shareholder, the creditor may step straight into the shoes of the debtor, and may acquire the shares and, thereafter, have whatever rights the shareholder had in the corporation, including the right to dividends, to vote, and to sell the shares; whereas, in stark contrast, if the debtor is a member of an LLC, the creditor may only obtain a charging order against distributions made to the member. Thus, the debtor remains a member of the LLC with all the same rights to manage and control the LLC, including, in Baldwin’s case, the right to decide when distributions to members are made, if ever.

In Curci, Baldwin asserted that Corporations Code, Section 17705.03, preempted the Court from making reverse piercing available with respect to an LLC, because it provides the sole remedy creditors have against a debtor who has a member interest in an LLC. However, the Court disagreed, and pointed out that Section 17705.03 was not as all-encompassing as Baldwin suggested, and that it more narrowly provided a charging order levying distributions from the LLC to the debtor member is the exclusive remedy by which a judgment creditor may satisfy the judgment from the judgment debtor’s transferable interest. The Court reasoned that, because outside reverse veil piercing was a means of reaching the LLC’s assets, and not the debtor’s transferable interest in the LLC, Section 17705.03 did not preclude outside reverse veil piercing. The Court noted that its rationale was underscored by the drafters’ comments to the Revised Uniform Limited Liability Company Act, from which Section 17705.03 was adopted without substantive change; and that those comments state the charging provisions are not intended to prevent a court from effecting a “reverse pierce” where appropriate.

Application of the Rationale in Curci to the Facts of Curci

In Curci, the Court noted that the case before it presented a situation where outside reverse veil piercing might well be appropriate, because Curci had been attempting to collect on a judgment for nearly half a decade, frustrated by Baldwin’s non-responsiveness and claimed lack of knowledge concerning his own personal assets and the web of business entities in which he had an interest. The Court pointed out that, although the formation of JPBI predated the underlying judgment, its purpose had always remained the same–to serve as a vehicle for holding and investing Baldwin’s money; and that, with Baldwin’s possession of near complete interest in JPBI, and his roles as CEO and managing member, Baldwin effectively had complete control over what JPBI did and did not do, including whether to make any disbursements to its members, i.e., to Baldwin and his wife. The Court observed that, since the time judgment was entered in Curci’s favor, Baldwin had used that power to extend the payback date on loans made to ultimately benefit his grandchildren (loans on which not a single cent had been repaid), and to cease making distributions to JPBI’s members, i.e., himself and his wife, despite having made $178 million in such distributions in the six years leading up to the judgment.

For all of these reasons, the Court concluded that outside reverse veil piercing might well be available in this case; however, the Court expressed no opinion as to whether JPBI’s veil should actually be pierced. Instead, the Court remanded the matter for the trial court to engage in the required fact-driven analysis in the first instance. The Court stated that, as with traditional veil piercing, there is no precise litmus test; rather, the key was whether the ends of justice required disregarding the separate nature of JPBI under the circumstances. In making that determination, the trial court should, at minimum, evaluate the same factors as are employed in a traditional veil piercing case, as well as whether Curci had any plain, speedy, and adequate remedy at law.

Brief Discussion

The following observations may be noted with respect to Curci:

1. To date, it does not appear that Baldwin has filed an appeal with the California Supreme Court; after all, the case was remanded to the trial court for further evaluation.

2. The decision in Curci applies only to LLCs, and it does not apply to corporations. Conversely, the court’s decision in PIP was expressly limited to corporations, and it did not preclude application of outside reverse veil piercing to LLCs.

3. In Curci, the California Court of Appeal did not even mention the internal affairs doctrine, even though JPBI was a Delaware LLC. This is just more evidence that courts in general, and California courts in particular, apply local law to determine judgment enforcement issues.

4. In Curci, the Court recognized that JPBI was, in effect, a single-member LLC with no non-debtor members. The Court could have rested its decision upon the alternate ground that JPBI was akin to a predominantly single-member LLC, and that limiting judgment creditors of members of predominantly single-member LLCs to a charging order would run afoul of the California Corporations Code relating to LLCs by creating in essence an exempt personal piggy bank.

5. Outside reverse veil piercing always is easier, where, as here, the judgment debtor rather clearly was attempting to conceal assets from his judgment creditor. In Curci, the facts were fairly extreme.

6. In Curci, the Court concluded that, although a charging order was the exclusive remedy for reaching a judgment debtor’s “transferrable assets,” it was not the exclusive remedy for reaching an LLC’s assets. In reaching this conclusion, the Court relied in part upon the Revised Uniform Limited Liability Company Act, which included comments that the charging provisions “were not intended to prevent a court from effecting reverse veil piercing where appropriate.”

7. The Curci decision makes it easier for a creditor to reach an individual LLC member’s assets when they use a predominantly single-member LLC to avoid paying a judgment.

8. In Curci, it is arguable that Baldwin blatantly misused the LLC, acted arbitrarily and capriciously, and that he got precisely what he deserved in the end.

9. In Curci, the Court instructed the trial court on remand that, in making its determination as to whether outside reverse veil piercing was appropriate with respect to JPBI, the trial court should, at a minimum, evaluate the same factors as are employed in a traditional veil piercing case, including presumably such factors as: (a) commingling of funds and other assets of the two entities; (b) the holding out by one entity that it is liable for the debts of the other; (c) identical equitable ownership in the two entities; (d) use of the same offices and employees; (e) use of one entity as a mere shell or conduit for the affairs of the other; (f) inadequate capitalization; (g) disregard of corporate formalities; (h) lack of segregation of corporate records; and (i) identical directors and officers. However, it should be noted that California Corporations Code, Section 17703.04(b), explicitly provides that “the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that a member or the members have alter ego or personal liability for any debt, obligation, or liability of the limited liability company where the articles of organization or operating agreement do not expressly require the holding of meetings of members or managers.” (Emphasis added.)

Conclusion

On the one hand, the decision in Curci highlights the fact that asset protection is never a sure thing. It is, as previously noted, an evolving area of the law.

On the other hand, members of a predominantly single-member LLC, who are using the LLC as their personal piggy bank, cannot reasonably expect for the LLC to be respected, when they deliberately are using the LLC to take advantage of their judgment debtor. As we have said before, bad facts make bad law. Still, Nevada and Wyoming continue to protect single member LLCs. In traditional cases absent the extreme facts of the Curci case they will serve you well. But again, the law does evolve and it is important to stay updated on it.

Win, lose, or draw, it should be anticipated that the decision by the trial court on remand in Curci will once again be appealed to the California Court of Appeal and then to the California Supreme Court. We will keep you informed.

Is Bitcoin a Scam? Scam-Proof Your Assets

Scam-Proof Your Assets: Guarding Against Widespread Deception, my newest Rich Dad Advisor book in several years, was released near the end of 2020. Cyber criminality is everywhere, costing people not only financial losses but emotional damage as well. You must be vigilant.

To learn the protective strategies you need against the cyber onslaught you may purchase the book from the RDA Press website.

I couldn’t fit all of the scams into Scam-Proof Your Assets. So the following excerpt isn’t in the book but is important for you to know.

While some frauds become harder to perpetrate due to better oversight, others become easier thanks to technology. One type of fraud that didn’t even exist just a few years ago is that involving cryptocurrency.

To illustrate what this is, let’s establish right now that currency is something that at least two parties agree has value and constitutes a type of payment. It’s a unit of exchange. When they taught real economics you would learn this. If I hold a dollar bill out to you, you see that as valuable because you can use it to buy things. We agree it’s money, so it is. Each dollar bill has a serial number on it, so according to the Treasury Department, that serial number represents legal tender in the amount of a dollar.

Well, in the case of cryptocurrency, a series of numbers—a sort of cryptography—represents an agreed-upon value. That series of numbers is currency, and it’s used to conduct transactions online. And like money, which the U.S. Treasury only produces a finite (albeit inflated) amount of, there is supposedly a finite amount of cryptocurrency. Promoters claim it is a finite amount but there is no intermediary—say the U.S. Treasury or a bank—to authenticate the value associated with that number. So in cyberspace it has value, but elsewhere, it’s a toss-up. You can’t go buy ice cream with it. Its price volatility is very high, making it unreliable. And it’s not a thing you can see or touch. It’s ideal for criminals.

The biggest and most well-known type of cryptocurrency is Bitcoin, though there’s no stopping anyone from creating their own cryptocurrency. In recent years, there are more than 1,500 of them, with more on the way. Because cryptocurrency is just a series of numbers, and because numbers, despite all claims, can be infinite, there’s no shortage.

Without certainty, but subject to animal spirits, the corresponding demand and value go up and down. Certainty arises when the two parties using it to buy and sell things agree on its value. So investment in Bitcoins or any other cryptocurrency is speculative at best. It only has value if people continue to want it and see it as valuable. The jury is still out. For all those who believe in crypto, that is fine. Go ahead and take down the Fed. But, for the rest of us, keep your guard up!

Bitcoin isn’t a scam—whether it has value or is useful is for you to decide. But what is a scam is when some fraudster throws out a lot of technical jargon and makes cryptocurrency sound like some unconquerable wave of the future. They claim they have some special insight to forecast a huge rise in cybercurrency, that it will eventually be the currency. In other words, for all its futurity, it is just another age old big pump-and-dump scheme. In December 2017, that’s what happened. Scammers intentionally pumped the value of Bitcoin so they could solicit investors, inflate the price up, then unload the ‘coins’ at a much higher value.

And many small investors fell for it, dumping all their money into it. Dipping a toe in is one thing, but pouring all your money into one investment is rarely a good idea—even a commodity you can actually see and use and has value. More on this subject in the book, Scam-Proof Your Assets.

In early 2017, Bitcoin’s prices went from under $1,000 to nearly $20,000 by the end of that same year. But then the market fell 80 percent, devastating investors who lost millions.

That hasn’t stopped scammers from plaguing Facebook with Bitcoin ads promising riches to savvy investors. In January 2018, Facebook instituted a policy banning Bitcoin and other cryptocurrency ads, but then later it relaxed those rules, allowing pre-approved advertisers to use its platform for these purposes, priming the pump yet again for a surge in cryptocurrency.

It bears repeating: Bitcoin and similar currencies have little, if any, actual intrinsic value, making it a prime target for crime. In fact, William H. Harris, Jr., founder of Personal Capital Corporation, a digital wealth management firm, reports that about 90 percent of all remote hacking is focused on Bitcoin theft by taking control of computers to mine their coins.

In 2019, a Ukrainian firm scammed $70 million from elderly investors in Britain, Australia and New Zealand. The company’s online ads featured interviews with celebrities such as Hugh Jackman and Gordon Ramsey who supposedly made a killing in crypto. High pressure salesmen in Kiev promised extraordinary returns. And the money all went down a Ukrainian rabbit hole.

“In what rational universe,” Harris writes, “could someone simply issue electronic scrip—or just announce that they intend to—and create, out of the blue, billions of dollars of value? It makes no sense.”

As Keller points out, “I get the idea that some of these ‘Bitcoin funds’ actually own no, or very few, Bitcoins, but are simply the next wave of Ponzi schemes. It’s actually a Ponzi schemer’s dream: Something that most folks don’t understand, but are being led by media buzz to believe it is the next big thing … Note to file: Nothing that you don’t understand is likely to ever turn out well.”

Scam-Proof Your Assets covers the many threats we face from cyber criminals. Everyone needs a guide book against deception.

Scam-Proof Your Assets

Are Reverse Mortgages a Scam?

Scam-Proof Your Assets: Guarding Against Widespread Deception comes out in October. It is my newest Rich Dad Advisor book in several years. It covers the very important issue of cyber criminality now harming all of us. The monetary losses are staggering. The emotional damage is disturbing. Email, internet and telephone scams take our assets. You must be vigilant at all times.

Scam-Proof Your Assets also argues that the government must take greater action to end this crime wave. You can help. Buy the book from RDA-Press.com by clicking below.

I’ve covered so many scams I couldn’t fit all of them into Scam-Proof Your Assets. So the following is an excerpt that didn’t make the book, but is important for you to know.

Home Equity Conversion Mortgage Scam

First, a home equity conversion mortgage is an actual, legitimate type of mortgage, one type of what’s known as a reverse mortgage, and some say they can be helpful for seniors. Whereas in a typical mortgage, you take out a bank loan and slowly make payments until you’ve paid it off, a reverse mortgage, like its name suggests, works in reverse: The bank pays you all the money for the house—in a lump sum, in monthly payments, or through a line of credit—so your debt grows rather than decreases. You can’t really pay the loan back until you sell the house, with anything that might be left over going to heirs. Reverse mortgages are often promoted to seniors as a way for them to afford life in their later years. Family members left behind can then sell the home once the elderly owner has passed away and pay off the debt.

According to HUD, HECMs are the most common type of reverse mortgage, and it’s the only type that’s insured by the Federal Housing Administration. In this scenario, the homeowner is able to take advantage of equity earned in a home. The maximum loan amount of about $680,000 is available to a homeowner aged 62 or older who lives in it as the primary residence. The homeowner must have paid off the home or at least paid a significant portion of it. Terms are available at fixed or adjustable rates for a period of time that may be selected by the homeowner. The reason it’s endorsed by the government is that the homeowner doesn’t have to start paying on the loan until he or she is no longer living in it as a primary residence. Also, the loan involves FHA mortgage insurance that guarantees the owner or the heirs won’t have to pay more than the value of the home, even if that amount is lower than the loan amount.

But it’s definitely not a low-risk mortgage, which is why anyone considering a reverse mortgage of any sort has to go through mortgage counseling. It’s not a decision to make on the spur of the moment during a time of financial hardship. But scam artists and unscrupulous mortgage and financial insiders know that HECM’s are legitimized by the U.S. government, and they take advantage of this fact to con seniors who are concerned about making ends meet without a salary. This is a particularly easy sell because the terms of reverse mortgages are hazy at best to most people, so it’s easy for con artists to gloss over the important details.

Even though they may not blatantly be attempting to steal money, business people hungry to sell reverse mortgage products may use high-pressure sales tactics to sell the product to homeowners who aren’t a good fit for it. The Wall Street Journal actually says that the majority of these scams are perpetrated by people the victims know, such as financial advisors.

Reverse mortgage scams include the following:

  • The fraudster may take out an HECM without the homeowner’s knowledge in order to obtain the loan for the value of a home that the homeowner is now responsible for paying. Often this is done by relatives of seniors who are preying on their neediness and abusing their personal connections. They may take the monthly payments and keep some or all of it themselves rather than give it to the homeowner.
  • Obviously, those taking out lump-sum loans are at greater risk of scams. Some scammers find out who is opting for a cash-out reverse mortgage, in which the total value of the loan is taken as a lump sum, then fraudulently take the money or transfer it to a personal account. This can be done by an insider—for instance, a mortgage broker or relative, who endorses the check and puts it in his or her own account. Then the person may explain that the borrower has to go through this person to receive the money. The scammer only distributes a portion of the full amount and keeps the rest for him or herself. In one Michigan case detailed in a report by the Consumer Financial Protection Bureau, a loan officer directed the closing agent to write two checks: One to himself for over $42,000, and one to the actual borrower, for just over $61,000. In the end, the borrower was left with a balance of more than $131,000—nowhere near the amount received.
  • Some scammers convince reverse mortgage recipients to invest those loan dollars into shady schemes, promising they’ll double their money and preying on their desire for financial security or wish to leave money to their heirs.
  • Some crooked loan salesmen may offer reverse mortgages as “free income,” when in fact a mortgage isn’t income, it’s a loan payment, which is why it’s not taxed. This type of pitch cleverly hides the associated fees as well as many of the terms of the loan, such as the fact that the homeowner still must keep up the property and pay the property taxes each year. Other tactics suggest taking reverse mortgages as a way to delay Social Security benefits until 70, despite the fact that the CFPB found that the costs of doing so always exceed the cumulative savings created by delaying retirement benefits. Or they may create straw buyers in order to purchase distressed properties, convincing unwitting seniors to “purchase” the low-cost properties by taking over the deed without exchanging any money. Then, in this too-good-to-be-true scenario, the homeowner is convinced to take a cash-out reverse mortgage based on inflated appraisals, and the scammer makes off with the loan amount.

Reverse mortgages are a calculated risk that should involve insights from numerous professionals. Be sure, before considering any such option, that you speak with a certified HUD housing counselor and consult Better Business Bureau reports regarding any mortgage broker or lender. Of course, don’t believe anyone who claims to be able to offer you a home—or money for your home—with no strings attached. There are always strings, and they may be really pricey ones.

Scam-Proof You Assets: Guarding Against Widespread Deception covers the threats we all face from cyber criminals. It can be found at RDA-Press.com or on Amazon.