A recent ruling from a U.S District Court in Trenton, New Jersey, sitting in an appellate capacity in a bankruptcy matter, affirmed a decision by a U.S. Bankruptcy Court awarding damages of $690,000 (and an additional $34,000+ for the homeowners' legal fees and costs) to a homeowner-couple who were ripped off in a sale leaseback, foreclosure rescue scam.
Of that amount, approximately $294,000 of that amount was attributable to statutory damages for violations of a state consumer lending law: the New Jersey Homeowner Security Act ("HOSA"), and two federal consumer lending laws: the Truth in Lending Act ("TILA") and the Home Ownership and Equity Protection Act ("HOEPA").(1)
For those of you wondering how there can be violations of consumer "lending
" laws in a transaction that did not ostensibly involve a loan of any type (ie. the subject transaction involved a sale of the home, coupled with a contemporaneous leaseback of the premises with an option to repurchase the home within a certain time frame), the ripoff victims invoked the equitable mortgage doctrine
, which when suucessfully invoked in the context of a sale leaseback deal, will recharacterize the deal as a secured loan.(2)
In the following excerpt, the U.S. District Court addresses this equitable doctrine, as applied in the State of New Jersey (bold text
is my emphasis, not in the original text):
- The Court will affirm the Bankruptcy Court's determination that the transaction involved in the present case, although nominally structured as a sale/leaseback transaction, is in actuality an equitable mortgage. "`The whole doctrine of equitable liens or mortgages is founded upon that cardinal maxim of equity which regards as done that which has been agreed to be, and ought to have been, done. . . . The form which an agreement shall take in order to create an equitable lien or mortgage is quite immaterial, for equity looks at the final intent and purpose rather than at the form.'" In re Bridge, 18 F.3d 195, 200 (3d Cir. 1994) (quoting Rutherford Nat'l Bank v. H.R. Bogle & Co., 114 N.J.Eq. 571, 169 A. 180, 182 (N.J. Ch. 1933)). Thus, form is irrelevant, as:
'[t]he doctrine has been firmly established from an early day that when the character of a mortgage has attached at the commencement of the transaction, so that the instrument, whatever be its form, is regarded in equity as a mortgage, that character of mortgage must and will always continue. If the instrument is in its essence a mortgage, the parties cannot by any stipulations, however express and positive, render it anything but a mortgage, or deprive it of the essential attributes belonging to a mortgage in equity.'
Johnson v. Novastar Mortgage, Inc., 698 F.Supp.2d 463, 469 (D.N.J. 2010) (quoting Humble Oil & Refining Co. v. Doerr, 123 N.J.Super. 530, 303 A.2d 898, 906-07 (Ch. Div. 1973)). In fact, "New Jersey courts have repeatedly found that sale-leaseback arrangements made to avoid foreclosure are in fact equitable mortgages." Id.
- The Bankruptcy Court thus did not err in its determination that the transaction at issue is an equitable mortgage. The Bankruptcy Court based this determination on a number of factors:
(1) Cleveland Development's solicitation letter to the Plaintiffs contains ... telling terminology .... (2) The `Lease Agreement Buyback' provides for sale proceeds to be disbursed to the Plaintiff upon cancellation of the agreement. (3) The property had a value of over $800,000; however, the Defendant `purchased' it for only $555,232. (4) The O'Briens have the option to repurchase their home for $650,483.83. (5) The O'Briens were not represented by counsel in the transaction. (6) The O'Briens were in financial distress .... (7) The Plaintiffs' intent was that this transaction was a loan, secured by their home ....
O'Brien, 423 B.R at 491.
- Although Appellants claim that "at all times, Plaintiffs and Cleveland intended the transaction to be a sale/leaseback with an option to repurchase" (Appellants' Br. at 32), the Court agrees with the Bankruptcy Court that the evidence shows "the transaction was meant to refinance the mortgage allowing [Appellee] to keep his home." O'Brien, 423 B.R. at 492. It is of no matter that "the documents memorializing the transaction clearly memorialize the parties' intent to effectuate a sale of the Property to Cleveland, the subsequent lease of the Property by Cleveland to Plaintiffs, and the eventual repurchase of the Property by Plaintiffs." (Appellants' Br. at 32.)
- Rather, "`[t]he rule is firmly established that a deed absolute on its face intended only as security for a loan will be decreed to be operative as a mortgage. Equity will look beyond the written instrument and explore the character of the transaction and the contemporaneous intentions of the parties.'" James Talcott, Inc. v. Roto American Corp., 123 N.J.Super. 183, 202 (Ch. Div. 1973) (quoting Vreeland v. Dawson, 55 N.J.Super. 456, 465 (Ch. Div. 1959)).
- The Court joins the Bankruptcy Court in looking beyond the written instrument here to the actual character of the transaction. Furthermore, Appellants' arguments regarding the intent of the parties does not change the Court's decision. Rather, courts look to the "final intent" of the parties; in the present case the final intent was clearly that Appellees keep their home.
- Thus, this Court does not find clear error in the Bankruptcy Court's determination that the transaction at issue was an equitable mortgage.(3)
For the ruling of the District Court, see Cleveland v. O'Brien (aka O'Brien III), Civ. No. 10-3169 (GEB), (D. N.J., November 12, 2010), affirming:
- In re O'Brien (aka O'Brien I), 423 B.R. 477 (Bankr. D.N.J. 2010) (as to the approximately $690,000 in actual and statutory damages), and
- In re O'Brien (aka O'Brien II), unpublished (Bankr. D. N.J., 2010) (as to the homeowners' attorney fees of $33,932.50 for 81.5 hours of work and $627.50 in costs).
(1) Another chunk of the damages awarded to the homeowner-couple was attributable to violations of the New Jersey Consumer Fraud Act ("CFA"), for treble damages in the amount of $350,374.47 (representing the amount of home equity the couple was screwed out of, $116,791.49, and then multiplied by three as mandated by the CFA).
Asserting claims under state statutes prohibiting unfair and deceptive practices as was done in this case is not unusual in sale leaseback foreclosure rescue scam cases (see footnote 3 of this post). For an overview of such state statutes throughout the U.S., see CONSUMER PROTECTION IN THE STATES: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes.
(2) See generally:
(3) In footnote 7 of the ruling, the District Court makes the following additional observation on the application of the equitable mortgage doctrine in New Jersey in another recent case:
- The Court notes that the Bankruptcy Court's decision has recently been utilized by another Judge in this District in finding that a sale-leaseback transaction similar to the one at issue was actually an equitable mortgage. Johnson, 698 F.Supp. at 465. In Johnson v. Novastar Mortgage, Inc., the court persuasively used what it refers to as the "O'Brien factors" in determining that the sale-leaseback arrangement at issue was actually an equitable mortgage; specifically, the Court considered:
(1) Statements by the homeowner or representations by the purchaser indicating an intention that the homeowner continue ownership; (2) A substantial disparity between the value received by the homeowner and the actual value of the property; (3) Existence of an option to repurchase; (4) The homeowner's continued possession of the property; (5) The homeowner's continuing duty to bear ownership responsibilities, such as paying real estate taxes or performing property maintenance; (6) Disparity in bargaining power and sophistication, including the homeowner's lack of representation by counsel; (7) Evidence showing an irregular purchase process, including the fact that the property was not listed for sale or that the parties did not conduct an appraisal or investigate title; and (8) Financial distress of the homeowner, including the imminence of foreclosure and prior unsuccessful attempts to obtain loans.
Id. at 469-70.
While not determinative, Johnson's reliance on the Bankruptcy Court's decision is probative.
The court rulings referenced herein appear to add weight to the proposition that, whether it's through civil lawsuits brought by victims, suits brought by the state Attorney General's office, or criminal probes (by the FBI) and prosecutions (by the U.S. Attorney's office), the State of New Jersey is a hostile environment for sale leaseback peddlers looking to rip off financially strapped homeowners of their home equity with this type of foreclosure rescue scam. For more on this point, see NJ An Unfriendly Place For Sale Leaseback Peddlers As Judge Slams Another Operator With $225K In Triple Damages, $50K+ In Homeowners' Legal Fees, footnote 1.