Wednesday, January 31, 2007

Usurious Loans Masquerading As Sale Leasebacks?

The following collection of cases (available online) involve potential or actual usurious loans that were disguised as sale leasebacks of personal property. While these cases arose in a context that is different from the typical foreclosure rescue "sale, leaseback, buyback, purchase option, etc." transaction (and I don't in any way suggest that there is anything "groundbreaking" or "precedent-setting" about these cases), the persuasiveness of the logic used in the following cases in analyzing and applying the prior case law of the respective states may provide some insight into how courts in those states determine when the form of a "purported sale leaseback" should be disregarded because the deal is nothing more than a contrivance used to evade usury laws (which may be an issue when the application of the equitable mortgage doctrine transforms a foreclosure rescue transaction into a secured loan), and when the form of the sale leaseback transaction should be respected as such.


B&S Mktg. Enters., LLC v. Consumer Protection Division, Md. Ct. of Sp. App., 153 Md. App. 130; 835 A.2d 215; 2003

This case involved transactions that involved purported "sale-leaseback-repurchase" agreements involving "home appliances" that were "sold" by financially strapped consumers to a lender for $100 ("regardless of the nature, condition, or actual value of the particular item"), and then "leased back" from the lender until the consumer could afford to "buy back" the appliance. What were dubbed "rental payments" were deemed "interest payments." And those payments were paid at the exorbitant annual interest rate of 730%.

In making its decision, the court in this case relies, in part, on several past decisions of the Maryland high court, and also makes references to court decisions from other jurisdictions that similarly held that, under the facts of those cases, it was proper to declare a transaction clothed as a sale-leaseback a usurious loan.


Sal Leasing Inc. v. State, 198 Ariz. 434; 10 P.3d 1221; (Ariz. App. Ct. 2000 )

The "lenders" in this case "engaged ostensibly in the purchase and lease of motor vehicles." Most of the consumers were in financial trouble and needed "Fast Cash." The transactions in question required a customer to transfer his or her vehicle to the "lender." The lender would then obtain a new vehicle title in its name. Simultaneously, the "lender" and the customer would enter into a lease agreement which allowed the customer to lease the vehicle for one year.

The lease fees amounted to 218% of the sale proceeds received by the lender's customers.

In ruling that the transactions were loans disguised as sale-leasebacks, the court made the following observations (citatations and internal quotations omitted):

  • I) "The mere fact that a transaction is characterized as a lease with an option to repurchase does not save it from the operation of the usury statute. Lease-purchase contracts . . . are often used as devices to disguise usurious loans.”
  • II) "In Merryweather v. Pendleton, the Arizona Supreme Court set forth six factors that should be analyzed to determine if a transaction structured as a sale with an option to repurchase is actually a security device for a loan:

  • (1) the prior negotiations of the parties;
    (2) the distress of the “grantor”;
    (3) the fact that the amount advanced was about the amount that the grantor needed to pay an existing indebtedness;
    (4) the amount of the consideration paid in comparison to the actual value of the property in question;
    (5) a contemporaneous agreement to repurchase; and
    (6) the subsequent acts of the parties, as a means of discerning the interpretation they themselves gave to the transaction."
  • III) "No one of these factors is conclusive, but a combination of several will go a long way in showing that an absolute conveyance was actually a security arrangement. In case of doubt, courts tend to hold an agreement to be a mortgage in order to protect all parties and prevent forfeiture of the pledged property."

The court applied the above "Merryweather factors" (which are strikingly similar to the factors used by courts in the equitable mortgage cases that have been referred to elsewhere in this blog) in their analysis of the case at bar and, using the Merryweather analysis, the court concluded that the transactions were, in reality, loans in which vehicle title transfers served as security devices, and not bona fide sales.

Among other cases cited by the court was the Arizona Supreme Court decision in De Wulf v. Bissell, 83 Ariz. 68, 316 P.2d 492 (1957), which affirmed a trial court’s holding that the sale and leaseback of real estate with an option to repurchase constituted a usurious loan. If you're in Arizona and involved in a foreclosure rescue sale leaseback arrangement, this may be an interesting case to take a look at. (You might also take a look at the Arizona high court decision in Britz v. Kinsvater, 87 Ariz. 385, 351 P.2d 986 (1960), which cites to De Wulf, and involves a usurious "sale-buyback" of an executory real estate contract).


Aple Auto Cash Express, Inc. v. State ex rel. Oklahoma Department of Consumer Credit, 2003 OK 89, 78 P.3d 1231 (Ok. 2003)

The question presented in this case is whether a company's purchase of customers' vehicles at a reduced price and the subsequent leaseback to the customers as rent-to-own vehicles should be respected as such or whether such transactions be treated as loans. The Oklahoma Supreme Court held that the transactions were nothing more than disguised loans, rather than bona fide sales or rental agreements, and should be regulated as such.

This case also involved doing business with financially strapped customers needing "Fast Cash." While there was considerable discussion about the applicability of specific statutes, the Oklahoma high court stated that

  • "[t]he crux of the dispute is not about statutory construction...Rather, it is about how Aple's sale and lease-back transactions should be construed; and whether the transactions, when taken as a whole, fall within the parameters of the Rental Act or whether the transactions were actually disguised consumer loans, governed by the Consumer Credit Code."

In ruling that the transactions were disguised loans, the court relied, in part, on the Arizona decision in Sal Leasing, above.


In re Steven & Vicki Foster d/b/a Cash On Wheels Action (Before the Office of Consumer Credit Commissioner of the State of Texas)

While this case is a decision of an administrative agency of the State of Texas (and without value as binding precedent), I bring it to the readers' attention and include it in this collection of cases for two reasons:

1) The case involves a "sale repurchase agreement" similar to the facts in Sal Leasing and Aple Auto Cash Express, above, in which the customer "sells" his or her automobile to Cash on Wheels for cash and simultaneously "repurchases" the same automobile on credit for a great deal more than they just received for it. The issue in the case is whether these transactions are "sales" or "loans disguised as sales" (in fact, the decision in this case cites to both of these cases),

2) The case contains the following reference to Texas sale leaseback cases involving real estate transactions (which may have value as precedent for those in Texas in the context of a foreclosure rescue, sale leaseback transaction):

  • "While the facts of the following Texas cases are not as close to the facts of this case as are the facts of the out-of-state cases discussed above, the same legal principles apply under Texas case law. See, for example, Johnson v. Cherry, 726 S.W.2d 4 (Tex. 1987), Bantuelle v. Williams, 667 S.W.2d 810 (Tex.App. -- Dallas 1983, writ ref'd n.r.e.), and Sudderth v. Howard, 560 S.W.2d 511 (Tex.Civ.App. -- Amarillo 1978, writ ref'd n.r.e.). These cases hold that in Texas, the intent of the parties, rather than the name the parties call the transaction by, will govern. In these cases, the courts held that transactions which the parties called sales of real estate in the legal papers associated with the transactions were, in fact, intended by the parties to be mortgage loans rather than sales. In each case the Texas courts enforced the transaction as a loan rather than as a sale in keeping with the court's findings regarding the intent of the parties."


A Georgia Court of Appeals found that transactions entered into by a finance business with the consumer public that were structured as sale leasebacks of personal property were loans that violated the applicable statutes, and not true sales of property.

The case, Clay v. Oxendine, 285 Ga. App. 50; 645 S.E.2d 553, (Ga. App. Ct., 1st Div., 3-27-07), involved a business with a history of being in the consumer finance business who began engaging in "sale/leaseback" transactions with consumers needing funds, whereby their consumer customers purportedly sold personal property items that they owned to the business, then immediately leased the items back from the business. Following an investigation, the State of Georgia concluded that the "sale/leaseback" transactions were nothing more than disguised, illegal payday loans.

The Georgia appellate court affirmed the trial court decision in ruling that the form of the transaction in this case was to be disregarded, finding that the State of Georgia (the plaintiff-appellee) proved its case that the purpose of the sale leasebacks were simply to disguise loans that bore a rate of interest in excess of the maximum allowed by law.

In support of its decision, the Georgia appeals court cited cases from other jurisdictions where lenders used sale leasebacks to disguise loans bearing interest in excess of the maximum allowed by law:

For the expanded version of this post describing the Georgia case, see Georgia Appellate Court Recharacterizes Sale Leasebacks As Usurious Loans.


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