Moore v. Cycon Enterprises, Inc., Case No. 1:04-CV-800, 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished) Personal Notes & Highlights
The folowing text represents personal notes and highlights of and selected quotes from the Federal court case Moore v. Cycon Enterprises, Inc., Case No. 1:04-CV-800, 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished) , where a Michigan Federal Court determined that a sale and leaseback transaction between a foreclosure rescue investor ("FRI") and financially strapped property owners was, in fact, a secured loan and not a "true sale & leaseback."
Because of this determination, the property owners were declared the true owners of the property and the foreclosure rescue operator was treated merely as a secured mortgage lender (and not the true owner).
Additionally, because of the transaction was declared to be a secured loan and not a sale, the Court determined that the foreclosure rescue investor ("FRI") violated the Federal Truth In Lending Act ("TILA"), the Home Ownership Equity and Protection Act of 1994 ("HOEPA"), and Michigan's usury statute (M.C.L. 438.31c).
For purposes of simplification, most of the actual citations to other cases as well as internal quotations have been omitted.
If there is anything contained herein that is of any interest to the reader, I refer you to the actual case, which is available on the Michigan Bar Association website (no registration necessary) or on the website of the U.S. District Court for the Western District of Michigan (PACER registration, login, and password required).
The heart of this case is the determination of whether the transaction between the property owners and the foreclosure rescue investor ("FRI") was a true sale and leaseback or whether it was in reality a loan.
In determining what Michigan law was with respect to declaring an arrangement to be an equitable mortgage, rather than respecting the form of a transaction as an actual sale of property coupled with a simulataneous leaseback of the property accompanied by a right to repurchase, the Federal judge in this case articulated the following comments, observations, and considerations:
1) "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."
2) "It is well settled that a court of equity can declare a deed absolute on its face to be a mortgage."
3) "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."
4) "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."
5) "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."
6) "Moreover, "[w]hile fraud or mistake are essential elements of a cause of action for reformation, rescission or cancellation of a written conveyance, they are not essential to a cause seeking to establish that a conveyance absolute in form is in fact a mortgage.""
7) "However, "one who asserts that an absolute conveyance is a mortgage bears a heavy burden of proof and he who invokes this equitable doctrine must furnish a preponderance of evidence whereby it is made 'very clear' to the fact finder that the parties did not contemplate an absolute sale.""
8) "Although there is no precise test for determining when an equitable mortgage should be imposed, the controlling factor is the intention of the parties."
9) "Such intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale."
10) "Proof of the grantor's adverse financial condition, along with inadequacy of the purchase price, is generally sufficient to establish that a deed absolute on its face is actually a mortgage."
11) Other factors indicating that a transaction is really a mortgage are the grantor's continued possession or improvement of the property and payment of taxes and insurance.
The Court's examination of the circumstances surrounding the transaction found the following:
a) The property owners "were in a difficult financial situation and were desperate to avoid losing their home and equity through foreclosure".
b) The foreclosure rescue investor ("FRI") knew that the property owners was in a difficult financial situation when they met.
c) The property owners were originally solicited for the purpose of providing refinancing and that in all conversations and meetings that were had leading up to and including the closing, the property owners believed that the transaction was a refinancing.
d) Documentation existed that contained indicators consistent with a refinancing transaction.
e) The court stated:
- "While the transaction was structured as a sale and a leaseback, the lease contained many features that are inconsistent with a residential lease, in that it imposed many of the obligations usually borne by the property owner upon the [property owners] as lessees. For example, the [property owners] were required to pay all real estate taxes, assessments, water charges, and personal property taxes; they were responsible for maintaining all insurances, including public liability insurance protecting [the foreclosure rescue investor] (as would be the case in a typical mortgage arrangement), and they were responsible for paying for repairs and maintenance. Thus, the obligations imposed on the [property owners] under the lease make the transaction look more like a home mortgage rather than a sale of a home."
f) The property owners were charged over $ 23,000 in loan origination charges and did not receive any money for their equity as a result of the transaction in question. The judge observed that "If, in fact, the transaction was a sale, there would be no reason to charge such fees."
g) While there was a question as to whether the purchase price was grossly inadequate (there was no definitive finding as to what the subject property's fair market value was at the time of the transaction), the property owners (based on the lowest appraisal submitted to the court) "parted with their property for substantially less than would have been the case in a true sale."
h) While it may be true that the foreclosure rescue investor in this case actually paid the real estate taxes and property insurance, the Court obsereved that "it is also true ... that the lease obligated the [property owners] to pay the taxes and insurance and to maintain and repair the property. The performance of such obligations normally indicates an ownership interest. The fact that the [property owners] failed to pay for such things simply shows that they breached their obligations, which, under either a lease or a mortgage, would constitute a default."
The Court's Conclusions
Based upon the foregoing considerations, the Court's conclusions and comments follow:
- 1) "[The property owners] have established by clear evidence that the transaction was not intended to be an absolute sale, but rather was a financing arrangement."
2) "[T]here is no dispute that the [property owners] were in a precarious financial position and needed financing in order to save their property from foreclosure."
3) "[I]t was always understood that the transaction was considered a refinancing and the evidence shows that [the foreclosure rescue investor] understood the deal to be a mortgage.
4) "[T]here is no evidence that the [property owners] ever contemplated selling their property."
- 5) "Bolstering this point even further is the fact that the [property owners] paid over $ 23,000 in loan-related fees ..."
6) "In addition, even though there was not a gross disparity between the fair market value of the property and the amount the [property owners] received ($ 190,262 for the mortgage payoff), they nonetheless gave up approximately $ 41,000 in equity, which is not insubstantial by any measure."
7) "Finally, the fact that the [property owners] remained liable for property taxes, insurance, and maintenance and repair charges, as they had been prior to the transaction, is further evidence showing that the transaction was in fact a mortgage."
Re: Violations of the Federal Truth in Lending Act ("TILA"), Home Ownership and Equity Protection Act of 1994 ("HOEPA"), and Michigan Usury Statute (M.C.L. 438.31c)
The property owners also made claims for violations of the Federal "TILA", "HOEPA", and the state usury statute on the grounds that:
- 1) the transaction was actually a loan and a consumer transaction for purposes of the TILA,
2) the transaction was a "high rate" mortgage within the meaning of HOEPA
3) because the the property owners would have had to pay the foreclosure rescue investor $ 2,515 plus a lump sum of $ 224,120 in order to repurchase their property in the first thirty days, the FRI charged the property owners interest in the amount of $ 36,372.85 on a loan in the principal amount of $ 190,262.15, in violation of the rate allowed by the Michigan usury statute (M.C.L. 438.31c).
The FRI's sole argument with respect to these claims is that the transaction was a sale and leaseback, and not a loan. Because the Court already concluded that the transaction was actually an equitable mortgage, and the FRI offers no other reason why the property owners are not entitled to prevail on these claims, the Court concluded that the property owners have established that the FRI violated these laws and that the property owners were entitled to relief.
The Foreclosure Rescue Investor's Arguments that the Transaction Should Be Respected As A True Sale and a Subsequent Leaseback Rather Than as a Secured Loan
The Court stated the following:
"[The foreclosure rescue investor] 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 property owners intended to sell their property to FRI and lease it back from FRI;
(2) the [property owners] 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 [property owners] and [the FRI] as well as evidence of the [property owners'] intentions regarding the transaction; and
(4) the integration clause in the lease precludes the [property owners] from introducing evidence of their intentions regarding the lease."
The Court observed that while the FRI's "arguments would no doubt be fine, and certainly persuasive, grounds for summary judgment in a typical contract case, the [the property owners] have invoked Michigan's "equitable mortgage" doctrine in this case, as to which such arguments are not necessarily applicable."
The foregoing is presented by The Home Equity Theft Reporter. Michigan equitable mortgage alpha