"We buy houses": market heroes or criminals?

• Author: Harvey, Cori
• Position: II. Criminal Regulation B. Residential Burglary Statute through V. California v. Barnett (2012

2. Residential Burglary Statute

   Prosecutors have long used burglary statutes as a catchall charge for crimes occurring inside of a home; they are now applying burglary statutes to

   RSLB transactions. (167) Residential burglary alleges that a defendant entered another's premises with the intent to commit a crime therein. (168) Therefore, a prosecutor can attach a burglary charge to many crimes that occur inside of homes, if they can establish that the actor had the intent to commit a crime when he entered the premises, even if it is not the crime with which he is ultimately charged. (169) Applying this charge to white collar allegations is an unusual application. What makes this recent development so dangerous is that convictions on certain street-crime statutes subject white-collar defendants to strikes in three-strike jurisdictions. (170)

   There are four problems with using street crime statutes, specifically the burglary statutes. First, real estate deals normally occur inside of somebody's premises and contracts for and discussions about the sale of real estate can be expected to happen there, whereas, other investments do not require entry into another's premises. (171) This type of permissible entry violates the spirit of the burglary statute and has unique implications for and disproportionate impact on real-estate professionals. Because a part of the nature of real estate transactions is the unique fact that parts of the negotiations and transaction would logically occur at the home, real estate investors are open to a type of risk, including potential criminal strikes, to which other defendants are not subject, unless they are actually in the traditional burglary business.

   Second, burglary statutes may be used over real estate fraud statutes because burglary reserves for the prosecutor the option to invoke three-strikes, allowing for prosecutorial and judicial abuse of discretion. (172) Third, because burglary only requires a finding of intent to commit some crime, (173) it may be easier for a jury to understand and convict on burglary than the actual underlying economic behaviors. Conceivably, a jury could find a burglary even where it finds no actual fraud or theft, which sounds like criminalizing inchoate fraud. (174)

   Finally, the use of street-crime statutes to prosecute white-collar crimes unjustifiably blurs the deeply entrenched divide between white-collar and street offenses. One of the primary distinctions between white-collar activities, such as RSLB, and street crime activities, such as burglary, is the absence of violence or even the potential for violence in white-collar offenses. (175) Because it can be argued that violent and potentially violent crimes are worse than similar, non-violent crimes, to use the burglary statute and potential strikes for white-collar offenses under-compensates victims of actual violent crimes while over-prosecuting non-violent offenders.

3. A Perfect Storm

   Making the case for fraud and burglary in signed-contract cases requires certain evidentiary and inferential leaps and highlights the problems with substituting the logic of criminal jurisprudence for the logic of civil jurisprudence. In fact, a better case can be made that what is actually happening is the criminal regulation of perceived procedural and substantive unconscionability, and that fraud and burglary charges are just the means to that end. None of the RSLB allegations, such as onerous pricing or excessive investor profit, challenge the performance of the contract; nor do they allege a breach of contract or any problems with the performance of the written contract. For that reason, criminalizing contracts closely resembles using fraud and burglary to criminalize unconscionability, not criminalizing affirmative breaches of contract. Of particular concern is the precedential value of cases, which arise during the perfect storm. Bad decisions lead to bad case law, which gets memorialized as bad law and leads to bad plea-bargaining by weary subsequent defendants. (176)

   A perfect storm of social, political, and economic forces in the real estate and securities markets converged and created an environment that blurs the line between normal contracting behaviors and criminal conduct. (177) The perfect storm starts with a uniquely American, deeply-entrenched ideal of homeownership. (178) Homeownership is a part of the American ethos, the crux of the American Dream. Therefore, to take someone's home is considered among the worst things a person can do. (179) The storm is intensified by a culture of systemic white-collar allegations. (180) Public sentiment is enflamed by the media and has created a groundswell of animosity towards white-collar defendants in the wake of Enron in 2001, WorldCom in 2002, and Bernie Madoff in 2010--animosity increasingly reflected in white-collar defendants' sentences. (181) While there appears to be significant public sentiment against most forms of over-criminalization in non-economic areas, that sentiment does not extend to the over-criminalization of economic behaviors. (182) Therefore, such sweeping criminal legislation by Congress, prosecutorial overreach, and expansive judicial interpretation goes largely unchecked because the public has been mobilized against anything that looks even close to fraud due to recent news-making cases. (182)

   Finally, when the American ethos of homeownership and the culture of white-collar activity are coupled with large foreclosures and plummeting home values, which result from a downturn in the real estate and securities markets, the perfect storm erupts. Within the eye of this storm are RSLB investors, who are easier to identify and prosecute than the large banks which many believe caused the most recent financial crisis. (184) RSLB and other small investors become the scapegoats. (185)

   Public sentiment exists prior to the commission of any acts and is the fertile ground from which over-criminalization sprouts. (186) The surge in animosity towards large corporate and high-dollar actors has created legislation and judicial outcomes that are impacting smaller, individual defendants whose offenses involve significantly smaller and less socially-harmful situations. (187) Although certain scholars of over-criminalization argue that the swelling of sentences has been limited to large, high-profile defendants and has not trickled down to average defendants, (188) recent sentences challenge this wisdom. (189)

4. Criminalizing Unconscionability?

   The doctrine of unconscionability is most closely associated with Justice Skelly Wright's decision in the Williams v. Walker-Thomas Furniture Company case and UCC [section] 2-302's earlier codification of the doctrine. (190) Advancing the reasoning in Wright's decision, scholars further developed the doctrine into what is commonly known as unconscionability doctrine today--a two-pronged doctrine, which includes substantive and procedural elements. (191) As the contract doctrine of unconscionability becomes less available for the aggrieved, (192) have the criminal courts stepped in to fill that gap? (193) The unconscionability defense to contract enforcement can be found in one of two ways: procedural unconscionability and substantive unconscionability. (194) A procedurally unconscionable contract is one where the circumstances surrounding the formation of the contract are unfair, exploitative, or likely to bring about an unfair contract result. (195) A substantively unconscionable contract is one where the terms of the contract are significantly weighted in the favor of the stronger party and onerous to the other party. (196)

   Several of the major criticisms of the RSLB transaction sound a lot like civil unconscionability. First, there is the criticism that these investors target poor, minority, and elderly homeowners and exploit demographic affinities. (197) Second, there is the criticism that the homeowners are forced to make their decisions under very tense time pressures. (198) Third, there is the criticism that the homeowners do not understand the transactions because the contract documents are too complicated. (199) Finally, there is the criticism that the terms are too onerous for the homeowners to manage. (200)

   In order to criminalize unconscionability, prosecutors must allege actual fraud and misrepresentation. Where there is actual fraud or misrepresentation, no one would argue legitimately in defense of those contracts; the real problem, however, occurs when over-zealous prosecutors lay their allegations before a less skeptical or more sympathetic judiciary or jury, leading to findings of fraud and misrepresentation when there is just the perception of unconscionability. A careful analysis of this market suggests that the latter phenomenon is occurring.

5. Procedural Unconscionability: Targeting Vulnerable Groups

   Procedural unconscionability can be found when the circumstances surrounding the formation of a contract would likely lead to an unfair contract. (201) Critics of the RSLB transaction often accuse investors of seeking out elderly, minority, or poor homeowners. They allege that investors seek out these groups because these groups are vulnerable. (202) This is a mistaken conclusion. Critics mistake a causal relationship for what is more likely a corollary relationship. For example, if an investor sees herself as a substitute for traditional financing, she will be a good match for those homeowners who cannot get traditional financing, often due to poor credit. Further, because this transaction is a response to the pre-foreclosure problem, the investors' contracting partners will be facing foreclosure, meaning they are more likely to be poor or working class. Finally, small investors often have a limited pool of capital, which they seek to diversify with as many deals as possible, meaning more, but smaller, deals. Smaller deals are done on lower-cost homes, which likely belong to...