A TRUSTING COUPLE, NOW THROWN FOR TWO LOOPS
c.2013 New York Times News Service
For most of their 38-year marriage, Ivor Rose and Rita Starr lived relatively modestly in Miami Beach, buying and renting commercial and residential properties there. Rose, 79, was a child of parents who lived through the Depression, and he embraced their thrifty values and their strong distaste for debt, said Starr, 63. The couple never borrowed money to buy the six warehouses and eight homes that, by 2006, had a value of around $15 million and made up the bulk of their assets.
But then along came Michael A. Stern. A Miami businessman, Stern rented space from Rose in 2000 to open a Foot Locker store. Over the next four years, Stern, now 53, gained the trust of Rose and Starr, and they began investing in properties with him.
In addition to the investments the couple knew about, Stern was also secretly taking out mortgages on other of the couple’s properties, according to a 2012 federal indictment. Their lawyer said he found that Stern had forged their signatures or cut and pasted them from other documents. Rose and Starr, who never received a nickel from the loans taken out on their properties, the records show, were on the hook for tens of millions of dollars in mortgages they didn’t know existed.
In early 2009, Rose and Starr started receiving foreclosure notices from institutions claiming to hold mortgages on properties the couple had owned outright. They thought it was some kind of mistake.
If only. Stern, who had left Florida for Uruguay, had stopped paying on the mortgages. Now the banks were coming after them. “Michael Stern was smooth and we’re not that perceptive,” Starr said. “He played us.”
In October, Stern was sentenced to five years in prison for swindling Dwight Freeney, a linebacker for the San Diego Chargers, out of $3 million. In California, Stern went by the name of Michael Millar. He will soon face prosecution in the Florida matter, said the prosecutor in California.
But the federal indictment didn’t end the troubles for the couple. They could lose all their properties and also be on the hook for millions of dollars. This is because Stewart Title, the company that insured the fraudulent mortgage loans — and whose policies require it to cover all the losses on the loans arising from forgeries and other defects — has refused to make a settlement on most of the properties.
And Stewart Title is doing this at the same time it is asserting, in another court venue, that one of its agents helped Stern secure bogus loans. It is suing that agent.
So how did this situation take such a twist?
First, it helps to understand the role of a title insurer. When a borrower applies for a mortgage on a property, the prospective holder of the note — usually a bank or investor in a mortgage trust — pays a title insurer to guarantee that the property’s title is free of defects, such as previous liens or taxes owed. Title insurance also protects a noteholder from loss if the lien created by the mortgage is invalid or unenforceable. Forgery, for one noteworthy example, invalidates a lien.
Stewart Title, a unit of Stewart Information Services, is based in Houston and is among the larger companies in the business. It is prospering, generating almost $2 billion in revenue last year, up 17 percent from 2011. Revenue in its title insurance unit rose 14.6 percent last year, while the money put aside to cover future losses declined $2 million, to $140 million.
Title insurers like Stewart hire agents to sell insurance policies to lenders and to handle mortgage closings. Court documents show that Stewart signed a contract in 2003 with Arlene Raijman to represent it as a title agent and lawyer. She collected title insurance premiums and was authorized to issue policies up to $500,000.
According to a lawsuit Stewart filed against her, Raijman breached her duties at more than two dozen loan closings, issuing title insurance even though loan documentation was improper. Fifteen of those closings were for properties belonging to Rose and Starr.
Chief among the improprieties, the documents show, was her disbursement of loan proceeds to Stern rather than to the couple, as the loan documents required.
Stewart’s own court filings state, “Stern, with the assistance of Raijman, systematically induced Rose and Starr to use their property as security for loans for which they received no benefit and which benefited Stern, Raijman and the Raijman family entities.”
The insurer terminated Raijman in June 2009 and has sued her for breach of duty and professional malpractice. Raijman declined to comment. But court filings made by her family dispute that Rose and Starr were victims of Stern.
Stewart has settled with Rose and Starr on three of the fraudulent loans, returning the properties to the couple free and clear and absorbing the loss. But the title company has refused to settle with the couple on the 12 remaining loans. Moreover, it has turned around and hired foreclosure counsel to sue on behalf of the entities that hold the notes backing the properties. If the couple lose these suits, those entities will be able to take ownership of the properties and Stewart will not have to pay out the roughly $8 million in title insurance that it has written on them.
Moreover, because the properties are now worth less than the dollar amounts Stern received on the fraudulent mortgages, Rose and Starr could also face lawsuits demanding them to make good on the difference, known as a deficiency. Their lawyer estimates that the deficiencies on the properties could reach $5 million.
There’s more. Stewart has also sued the couple in another matter, demanding that they pay $4.2 million to cover its losses on a loan received by Stern. Never mind that the court documents show a signature by Rose that was executed in Florida the same day he was in a New York City hospital having heart surgery.
I asked John Arcidiacono, a spokesman for Stewart, why it is going after Rose and Starr so aggressively, given that they had nothing to do with the fraud and were only hurt by it.
He declined to comment on specifics, citing the litigation. But he said the cases the company had settled with the couple benefited them significantly.
In its various court battles with Rose and Starr in Florida, Stewart maintains that Raijman was not one of its agents or employees and that the company, therefore, should not be held responsible for her dealings.
But that’s not the story Stewart has told to a court in Texas. In that case, it has sued Great American Insurance Co., a reinsurer from which Stewart bought a $15 million insurance bond. Stewart bought the bond in April 2009 to protect against losses resulting “directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others,” its lawsuit says.
In that lawsuit against the reinsurer, Stewart says Raijman was indeed its agent. As such, it hopes to collect on the bond and to recoup roughly $10 million in losses it has incurred so far over her work.
Great American argues that it should not have to pay on the bond because Stewart knew about the defective loans when it bought the coverage.
Amid this tangled legal mess, Mark Gunderson, a lawyer in Fort Lauderdale who represents Rose and Starr, said battling Stewart had become a full-time job. “Stewart’s actions are egregious,” Gunderson said. “They are tying up my clients in court for five years and suing everyone in sight so that they don’t have to face up to the fact that they hired a dishonest agent.”
The false signatures of Rose and Starr were not the only forgeries on some of the Stern loans. Among the 12 mortgage loans Stewart will not settle are four issued in 2006 by Countrywide, now a unit of Bank of America. These loans, totaling $4.56 million, all contained the forged signature of Daniel Scherrer, then the manager of the Countrywide office in Miami Beach. All four loans went into mortgage securitizations issued that year by Bear Stearns, Goldman Sachs and JPMorgan Chase.
Scherrer left Countrywide in 2007. But in September he filed an affidavit, swearing that he had not signed the loan papers.
In an interview last month, Scherrer said again that the signatures were forged. He also said that while he was running the Countrywide office, he met Stern several times. “He tried to get a condo conversion approved through Countrywide,” Scherrer recalled, “but he would never bring me the correct documents. He was unhappy that we wouldn’t approve, but he was not an upfront individual. He never looked me in the eye.”
Stern filed for bankruptcy in February 2009. He could not be reached for comment for this article. According to the Federal Bureau of Prisons, he was in Oklahoma City before Thanksgiving, in transit from California to Florida to face prosecution in the Rose and Starr matter.
Why did Stewart settle with Rose and Starr on three of the problematic loans? The company declined to comment on specifics, but the settlements followed threats by the lenders that underwrote the fraudulent mortgages that they would file claims of bad faith against the insurer, court documents show. If Stewart lost such a claim, it could be forced to pay punitive damages. Faced with that prospect, Stewart may have decided to settle.
Hoping to persuade Stewart to settle on the remaining loans, Starr said she had written a letter to the company’s board. She received no response.
The legal battle has taken a toll on Rose and Starr, costing them millions of dollars in fees as well as raising grave concerns about their financial future.
Bewildered by Stewart’s legal tactics, Starr said: “I don’t know how they could try to collect millions of dollars” for Raijman’s behavior “and yet try to take our properties, too.”