Another Court Recharacterizes A Sale Leaseback As An Equitable Mortgage

(originally posted 10-19-07)
Last week, a court decision from the Iowa Court of Appeals ruled that an arrangement involving the sale of a home to "an investor" coupled with a contemporaneously executed leaseback giving the homeowner an option to repurchase the home was, in substance, a mortgage and not a true sale. The effect of this decision was to void the sale to the investor and continue to treat the the homeowner as the true owner of the property, even though she actually signed over the deed purportedly transferring title to her home to the investor.

In the case (not technically a foreclosure rescue; the homeowner apparently owned her home free and clear of any liens), a homeowner ("Ms. Tullis") in need of money to pay a number of bills went to a local mortgage company for a loan to be secured by her lifelong home that she inherited from her deceased father. The mortgage company turned her down for a mortgage. The employee at the mortgage company ("Ms. Christy"), wanting to be ever so helpful, told Tullis that she would help her make other arrangements. Coincidentally, Ms. Christy had "a fiance" ("Weeks") who just so happened to be in the business of offering sale-leaseback arrangements to financially hard-up homeowners.

Tullis the homeowner ended up doing business with Weeks whereby she sold Weeks a $90,000 home for $40,000, and then rented back the home for two years. She ultimately fell behind on her rent, and Weeks claimed that her default on the lease voided the lease and repurchase agreement, thereby making Weeks the true owner of the home. Tullis sued Weeks.

Unfortunately for Tullis, the lower local court ruled that Weeks was, in fact, the true owner and that Tullis was out of luck. Had Tullis not pursued the matter further, she would have lost all her equity in her lifelong home. Fortunately for her, however, she was represented by legal counsel who no doubt felt that the court decision was clearly erroneous and accordingly, filed an appeal with the Iowa Court of Appeals.

In reversing the lower court (thereby ruling that Ms. Tullis continued to be the true owner, despite that the legal documents signed by her stated otherwise), the Iowa appeals court ruled that the equitable mortgage doctrine applied in this case. Among other things, the court stated:

• In arriving at the intention of the parties courts look behind the form of the instruments to the real relationship between the parties. The instruments will be read in the light of the surrounding circumstances and the practical construction the parties themselves placed thereon.

For more on this case, including excepts from the Iowa appeals court decision, see Iowa Appellate Court Recharacterizes Sale Leaseback As A Mortgage on the companion blog to this blog.

For the actual case itself, see Tullis v. Weeks, Iowa Court of Appeals, October 12, 2007.

Representing the homeowner in this case was Laura Lockard, of Iowa Legal Aid, Des Moines, Iowa.

For more on equity stripping scams, generally,see DREAMS FORECLOSED: The Rampant Theft of Americans' Homes Through Equity-stripping Foreclosure 'Rescue' Scams (4.61 MB approx.). foreclosure rescue