Arkansas Appellate Court Finds Usury In "Sale - Buy Back" Deal

In a case decided about three weeks ago, an Arkansas Court of Appeals recently invoked the "equitable mortgage" doctrine in finding that a "sale-buyback" deal was really a disguised usurious loan secured by an equitable mortgage in a dispute between a pawn shop owner and his customer.

In Smith v. Eisen, a dispute arose out of a transaction in which the customer "signed over" title to her home to the pawn shop owner in exchange for a sum of money and, simultaneously with this purported sale, an agreement between the parties was entered into entitling the customer to repurchase the property for twice the amount of the “sale.”

In addition to finding that the transaction was a usurious loan secured by an equitable mortgage, the court ruled that the customer was also entitled to an award of her attorney's fees to be paid by the pawn shop owner (Arkansas law generally provides for an award of attorney’s fees in usury cases involving consumer loans and credit sales).

In reaching its decision, the court made the following observations:

1. "the “seller’s” obvious financial troubles;
2. her expressed intent to keep the property;
3. her remaining in possession of the property;
4. the substantial disparity between what she paid for the property and the “purchase” price; and
5. the immediate renegotiation of a contract for resale

all point to the conclusion that none of the parties intended for the property to come into the hands of [the pawn shop owner] any more than was necessary to secure the loan and for [the pawn shop owner] to make a profit from such loan."
"Also relevant were

1. [the customer's] ninth-grade education,
2. her medical disabilities, and
3. her lack of sophistication in business matters in comparison to [the pawn shop owner's]."

See Smith v. Eisen, at page 18.

Representing the homeowner in this case was Robert R. Cloar, a member of the National Association of Consumer Advocates ("NACA"), of Fort Smith, Arkansas.
Other Arkansas consumer attorneys who are members of NACA are listed here.
Eligible Arkansas residents can check out the non profit Arkansas Legal Services Partnership, a partnership of two nonprofit Legal Services Programs that work together to provide free civil legal assistance to low-income residents and the elderly throughout all 75 counties. Click here for the branch office nearest to you.

Click here to search for other equitable mortgage posts on this blog
Case Law Citatations:

Smith v. Eisen, 245 S.W.3d 160, Ark. App. Ct., 2006 Ark. App. LEXIS 858, December 13, 2006.

Go here for links to some other Arkansas cases where judges have delved into the particulars of a financial arrangement to expose its usurious nature (ie. where a financial arrangement was used as a cloaking device to disguise a usurious loan).

Go here for other cases involving attempts to cloak usurious loans, usurious schemes.