Nebraska Supreme Court Ruling A Reminder That Signed Contracts In Sale Leaseback, Foreclosure Rescue Deals May Not Be Binding

A 2005 court ruling by the Nebraska Supreme Court ordered an Omaha-based foreclosure operator to return home titles to a dozen victims who were duped into signing contract documents based upon assertions that the papers were merely refinancing documents, when in fact they constituted title transfers of their homes coupled with contemporaneous leasebacks of the premises in which the victims were granted rights to repurchase.

In issuing its ruling in favor of the homeowners, the court provided the following analysis that serves as a reminder that signed contracts are not always binding(1) [bold text is my emphasis, not in original]:

• Defendants contend that these written contracts were binding, based upon the rule that “[o]ne who signs an instrument without reading it, when he can read and has the opportunity to do so, cannot avoid the effect of his signature merely because he was not informed of the contents of the instrument.” See Bock v. Bank of Bellevue, 230 Neb. 908, 916, 434 N.W.2d 310, 316 (1989). They further contend that because plaintiffs had the contract documents available for review, plaintiffs could not have reasonably relied on any verbal misrepresentation. See Schuelke v. Wilson, 250 Neb. 334, 549 N.W.2d 176 (1996).

• The general rule that one who fails to read a contract cannot avoid the effect of signing it applies only in the absence of fraud. See, Mayer v. Howard, 220 Neb. 328, 370 N.W.2d 93 (1985); Day v. Kolar, 216 Neb. 47, 341 N.W.2d 598 (1983). Restated, the rule that one who signs a contract is bound by its terms does not apply where the controversy is between the parties and the execution of the instrument was induced by fraud. The doctrine that the carelessness or negligence of a party in signing a writing estops him from afterwards disputing the contents of such writing is not applicable in a suit thereon between the original parties thereto when the defense is that such writing, by reason of fraud, does not embrace the contract actually made. West v. Wegner, 172 Neb. 692, 694, 111 N.W.2d 449, 451 (1961).(2)

• Because the district court specifically found that each of the plaintiffs was fraudulently induced to sign what were misrepresented as loan documents, the general rule binding a party to a signed contract does not apply.(3)

For the court ruling, Eicher v. Mid America Financial Investment Corp., 270 Neb. 370, 702 N.W.2d 792 (2005) (made available online by Findlaw.com).

(1) This case also serves as a reminder that attorneys taking these cases need not accept them on a purely pro bono basis, but rather, a contingecy fee basis. Part of this ruling affirmed an attorney fee awarded to the defrauded homeowners' lawyers (and payable by the foreclosure rescue operator) of over $375,000.

(2) The U.S. Supreme Court, in FTC v. Standard Education Society, 302 U.S. 112, 116 (1937), also provides this admonition:

• There is no duty resting upon a citizen to suspect the honesty of those with whom he transacts business. Laws are made to protect the trusting as well as the suspicious. The best element of business has long since decided that honesty should govern competitive enterprises, and that the rule of caveat emptor should not be relied upon to reward fraud and deception.

(3) Similarly, in Moore v. Cycon Enterprises, Inc., (Case No. 1:04-CV-800), 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006), a Federal judge in Michigan made these observations when a foreclosure rescue operator asserted that the homeowner/couple should be bound by the terms of the contract they signed [bold text is my emphasis, not in original]:

• The heart of this case is the determination of whether the transaction between the Moores and Cycon was a true sale and leaseback or whether it was in reality a loan. Cycon has offered a number of arguments supporting its position that the transaction was clearly an absolute sale and a leaseback, including: (1) the unambiguous terms of the closing documents establish that the Moores intended to sell their property to Cycon and lease it back from Cycon; (2) the Moores failed to read the closing documents and are therefore bound by the terms of those documents; (3) the parol evidence rule precludes the consideration of evidence of prior discussions between the Moores and Peltz as well as evidence of the Moores’ intentions regarding the transaction; and (4) the integration clause in the lease precludes the Moores from introducing evidence of their intentions regarding the lease.

• While Cycon’s arguments would no doubt be fine, and certainly persuasive, grounds for summary judgment in a typical contract case, the Moores have invoked Michigan’s “equitable mortgage” doctrine in this case, as to which such arguments are not necessarily applicable. “The power of a court of equity to decree an equitable mortgage under proper circumstances and to construe an instrument in the form of an absolute conveyance as security for the payment of a debt, or the performance of some other obligation, is well established.” Judd v. Carnegie, 324 Mich. 583, 587, 37 N.W.2d 558, 589 (1949). See also Grant v. Van Reken, 71 Mich. App. 121, 125, 246 N.W.2d 348, 350 (1976) (“It is well settled that a court of equity can declare a deed absolute on its face to be a mortgage.”).

• In Wilcox v. Moore, 354 Mich. 499, 93 N.W.2d 288 (1958), the Michigan Supreme Court, in discussing the doctrine, observed: Suffice to say that its purpose is to protect the necessitous borrower from extortion. In the accomplishment of this purpose a court must look squarely at the real nature of the transaction, thus avoiding, so far as lies within its power, the betrayal of justice by the cloak of words, the contrivances of form, or the paper tigers of the crafty. We are interested not in form or color but in nature and substance. Id. at 504, 93 N.W.2d at 291.

• Because a court is concerned with the true intention of the parties based upon the surrounding circumstances in considering whether a transaction is an equitable mortgage, traditional legal principles, such as the parol evidence rule, do not apply. See Ferd L. Alpert Indus., Inc. v. Oakland Metal Stamping Co., 379 Mich. 272, 276, 150 N.W.2d 765, 767 (1967) (“One of the many exceptions to the parol evidence rule is that parol evidence may be admitted to prove that a written conveyance absolute in its terms was intended by the parties to operate only as a mortgage.”).