400 Sale Leasebacks Are Disguised Equitable Mortgages, Says AZ AG In Invoking State Consumer Fraud Act, TILA In Suit Against Foreclosure Rescue Firm

From the Office of Arizona Attorney General Terry Goddard:

• Attorney General Terry Goddard [Thursday] announced that he has filed a lawsuit against an alleged foreclosure rescue operation believed to have defrauded approximately 400 Arizonans of their homes.(1) This action comes as part of Goddard’s crackdown on con artists who prey upon vulnerable homeowners struggling to avoid foreclosure. "Instead of offering legitimate help to homeowners, this operation misled and exploited them to turn a handsome profit," Goddard said. "The housing crisis has given rise to a number of rescue scams, and we are going after them aggressively."

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Among the allegations made in the lawsuit are:

• Falsely and deceptively representing to homeowners that they would save their homes when, in fact, the defendants structured the transactions to take ownership and equity away from homeowners for the benefit and profit of defendants,(2)

• Misleading homeowners and circumventing and concealing from them the defendants’ obligations and homeowners’ rights and remedies under a mortgage loan agreement,

• Evading the protections of the Federal Truth in Lending Act (TILA) which required defendants to disclose the annual percentage rate of the mortgage and the homeowner’s right to rescind the transaction within three days of receiving notification of the right.(3)

For more, see Terry Goddard Files Lawsuit to Stop Foreclosure Rescue Operation.

For the lawsuit, including details of how the alleged foreclosure rescue scheme operated, see State of Arizona v. Winer, et al.(4)

(1) The state AG alleged violations of the following Arizona laws:

• Consumer Fraud Act: A.R.S. §44-1521 thru 1534,
• Debt Management Companies Act: A.R.S. §6-701 thru 716,
• Mortgage Brokers Act: A.R.S. §6-901 thru 911,
• Mortgage Bankers Act: A.R.S. §6-941 thru 948.

In addition, the Arizona AG asserts that the sale leasebacks are loans/equitable mortgages pursuant to A.R.S. §33-702(A), A.R.S. §6-901, A.R.S. §6-941, and Merryweather v. Pendleton, 91 Ariz. 334, 372 P.2d 335 (1962). In the Merryweather case, the Arizona Supreme Court cited English common law dating back over 500 years when making the following observation, "The ruse of an absolute deed or deed with an option to repurchase has long been used in attempts to cut off a mortgagor's equity of redemption. Equity courts created the concept of equitable mortgages to avoid such abuses". Y.B. 9 Edw. IV 25, 34 (1470).

(2) In a 2006 Washington, D.C. case, the court rejected a foreclosure rescue operator's claim that the D.C. consumer protection statute was inapplicable. Specifically, the operator attempted to characterize the relationship between himself and a homeowner facing foreclosure as "a purchaser-seller relationship in which the [homeowner], in an arm's length transaction, sold her house to him in circumstances admittedly unfavorable to her but not of his making." The court found that, by presenting himself to the homeowner as a "foreclosure specialist" who would aid her in keeping her home -- and not as a prospective buyer, a merchant-consumer relationship was created, thereby making the D.C. consumer protection statute applicable. Byrd v. Jackson, No. 04-CV-940, 902 A.2d 778; 2006 D.C. App. LEXIS 362 (2006).

It appears that any attempt by the foreclosure rescue operator targeted in the Arizona AG's lawsuit to claim that the state Consumer Fraud Act is inapplicable in this case could very well meet with the same outcome as in the D.C. case.

(3) The sale leaseback arrangements in this case apparently did not violate any applicable state usury statute, since the complaint contains no allegation thereof. In Arizona, contractual arrangements that are found by a court to be nothing more than disguised loans masquerading as sale leasebacks (and other buyback arrangements) are subject to any applicable state usury statute. See SAL Leasing v. State ex rel. Napolitano, 198 Ariz. 434; 10 P.3d 1221 (Ariz. Ct. App. 2000).

(4) Last year, the Massachusetts Attorney General's office took a similar approach in the pursuit of a foreclosure rescue operator accused of scamming 26 homeowners out of the equity in their homes. Like the Arizona AG, the Massachusetts AG also invoked its state's consumer protection statutes and the equitable mortgage doctrine; and it alleged violations of the Federal Truth In Lending Act, among other state law violations. It was also alleged in that case that the sale-leaseback arrangements were usurious equitable mortgages (See Complaint - Commonwealth of Massachusetts v. Sohmer, paragraphs 68-70 and paragraphs 123-126). The Massachusetts AG ultimately reached a satisfactory settlement with the foreclosure rescue operator and the mortgage lenders involved in, and providing the financing for, the associated equity stripping transactions. See Massachusetts AG press release: Bankruptcy Court Approves Settlement Between Attorney General’s Office and Ten Mortgage Lenders and Servicers Involved in Foreclosure Rescue Transactions. Go here for the earlier posts on the Massachusetts equity stripping case.