Abusing Bankruptcy Filings : Unscrupulous operators use court to create delays on bank foreclosures on home loans

Just as the federal bankruptcy court in Los Angeles is beating one huge problem into submission, another is raising its head.

Both arise from the fact that a bankruptcy filing halts all collection actions, stopping an eviction or foreclosure in its tracks at least for a while. So unscrupulous operators often use it as a delaying tactic.

For years, scam artists who collect fees from broke tenants and promise to head off eviction have clogged the court with bankruptcy filings in the tenants’ name but often without their knowledge. Federal attorneys estimated that a staggering 30% to 40% of the filings in Los Angeles in 1991 were made by so-called petition mills.

According to a just-released court report, this situation has improved sharply. Petition-mill cases in a test month last year were down 42% from 1991. “I think we’ve changed the climate out there” with several well-publicized prosecutions, says Maureen Tighe, the federal attorney in charge of a Los Angeles bankruptcy fraud unit.

But a new problem has arisen, exemplified by the story of Bernard Gross of Studio City who is suspected of victimizing banks that are foreclosing on home loans.

It’s alleged that Gross’ associates, promising to stave off foreclosure and save the homeowners’ credit, would offer to take over ownership of the homes. They promised to sell them later and share the profit with the ex-owners, authorities said. The residents were allowed to live there and pay rent.

Ownership of the properties would then be fragmented among individuals and businesses headed for or already in bankruptcy court. This created delays, but eventually the banks foreclosed anyway. Meanwhile, the rent continued to flow.

No charges have been filed against Gross. His lawyer says everything he did was legal. A decision on whether to prosecute is promised by midyear.

About one such operation a week is referred to the U.S. attorney’s office for investigation, according to Tighe. Unfortunately, resources are limited compared with the problems. Tighe says only one federal prosecutor devotes full time to bankruptcy-court frauds, while five could be kept busy. And in all the congressional enthusiasm to fight crime, she hears no talk of more resources for the white-collar variety.

While economic crooks can do enormous damage to their victims, they are bright enough to be deterred by the threat of prosecution. They richly deserve the highest possible law enforcement priority.