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.

NY Lawyers Land Legal Fee Of $1 Million In Pro Bono Case

I stumbled across a recent New York Law Journal article (appearing in New York Lawyer) that reports on a case heard by a New York Federal Court where the lawyers representing a group of waiters, busboys and captains who worked in a restaurant in New York's Chinatown successfully challenged an unfair labor practice engaged in by their employer. While the attorneys (Skadden, Arps, Slate, Meagher & Flom and the Urban Justice Center) reportedly took on the case on behalf of their clients on a pro bono basis (ie. no legal fees charged to the restaurant employees), a federal judge nevertheless awarded the employees' attorneys a legal fee of $957,710; with liability for the payment thereof being imposed on the restaurant who engaged in the unfair labor practice.

For more, see NY BigLaw Leader Scores $1 Million Fee in Pro Bono Case.

For a copy of the Federal Court decision, see Heng Chan v. Sung Yue Tung Corp.

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I make mention of this case because, in the context of foreclosure rescue litigation, I have no doubt that there are some people who wonder how a financially strapped homeowner, someone who can't afford to make his/her mortgage payments, can possibly be able to afford an attorney to sue a foreclosure rescue operator in order to get his/her home back. The reason that there are a growing number of homeowners bringing lawsuits against foreclosure rescue operators is because their attorneys, like the attorneys who represented the waiters, busboys, and captains in the New York labor law case, are suing for violations of statutes that allow a judge to award a successful plaintiff's attorney a legal fee, and impose the obligation for its payment on the party who violated the law.

Examples of such laws are:

1) The Federal Truth In Lending Act (see, for example, Moore vs. Cycon Enterprises, where a Michigan Federal Court ruled that a foreclosure rescue operator violated that law in a purported sale leaseback arrangement with a financially strapped homeowner).

2) State consumer protection and/or unfair and deceptive trade practices statutes (see, for example, Eicher v. Mid America Financial Investment Corp., where the Nebraska Supreme Court affirmed an attorney fee award of $378,000 to the lawyers representing a group of foreclosure rescue victims, and imposed the obligation for its payment on the foreclosure rescue operator, who was found to have violated the Nebraska Consumer Protection Act).

3) In addition, there is at least one state that allows for a similar award of attorney fees by a court for violation of the state usury laws involving consumer loans and credit sales (see, for example, Smith v. Eisen, where an Arkansas appellate court ruled that a homeowner was entitled to an award of her attorney's fees to be paid by a pawn shop owner; in this case, the court found that a sale of a home with a contemporaneously executed buyback arrangement between the homeowner and a local pawn shop owner was nothing more than a usurious loan secured by an equitable mortgage).

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I am also compelled to mention one other case reported on this blog in the past. In this case, the Washington, D.C. law firm Hogan and Hartson LLP obtained a substantial jury verdict, including $3.3 million in punitive damages, against a foreclosure rescue operator in the Washington, D.C. metropolitan area for violating the D.C. Consumer Protection Act (see Hogan & Hartson Wins $3.3 Million Verdict in Pre-Foreclosure Scam Case). While the news release does not discuss attorney fee awards (and presumably the D.C. statutes allows for an attorney fee award on top of the damages award), it is not unreasonable to believe that the law firm will, at a bare minimum, share in a part of the $3.3 million punitive damage award. Assume a cut of between 20% and 40%, and you can do the math yourself.

Whether you are a financially strapped homeowner, an experienced or aspiring foreclosure rescue operator, or an attorney thinking of representing either, I hope the foregoing has given you some insight as to:

1) How foreclosure rescue victims can go about retaining the services of an attorney for the purpose of undoing a foreclosure rescue arrangement and either getting back their homes, or otherwise salvaging the equity in their homes, and

2) who will end up footing the bill for the foreclosure rescue victim's legal fees in a successful litigation.

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Go here for other posts referencing Moore vs. Cycon Enterprises.

Go here for other posts referencing Eicher vs. Mid America Financial Investment Corp.

Go here for other posts referencing Smith vs. Eisen.

Go here for other posts referencing Hogan & Hartson. equitable mortgage yak