Equitable Mortgage & Usury In Sale Buyback Deals In Florida

The following collection of Florida court cases address issues of equitable mortgage and/or usury in the context of real estate sale-buyback transactions; considerations are made whether to treat these transactions as disguised loans.

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Mears v. Mayblum
96 So.2d 223
(Fla.1957)

In this case, the Florida Supreme Court was asked to address a real estate transaction that involved a sale by one, Mears, of a partial (1/3) interest in real estate to a certain Mayblum, for $12,000, coupled with an agreement to "buy back" the interest for $15,000, payable by 11 monthly payments of $350, and a final payment of $11,150. The Florida high court held that the transaction was an equitable mortgage under the provisions of the Florida Statutes, Section 697.01 (and citing Markell v. Hilpert, 140 Fla. 842, 192 So. 392 (Fla. 1939) as authority).

Further, the court ruled that:

• "The circumstances surrounding the transaction between Mears and Mayblum and the instruments executed by these parties present an arrangement which we think was a "contrivance" to circumvent the statutes penalizing usury."

• "He [Mayblum] did violate Sec. 687.03 making it unlawful to charge interest of more than ten per cent [under the then-existing statute] per annum by any "contrivance or device," and should be penalized under Sec. 687.04 for the infraction."

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The usury statute that was violated in this case was Florida's civil usury statute, Section 687.03, which currently sets a maximum 18% per annum interest, and applies to advances up to $500,000. On loans in excess of $500,000, only the criminal usury statutes apply. See Sec. 687.071, below.

The current language of the Sec. 687.03 prohibits:

• "a rate of interest greater than the equivalent of 18 percent per annum simple interest, either directly or indirectly, by way of commission for advances, discounts, or exchange, or by any contract, contrivance, or device whatever whereby the debtor is required or obligated to pay a sum of money greater than the actual principal sum received, together with interest at the rate of the equivalent of 18 percent per annum simple interest." (my emphasis added)

The court in Mears v. Mayblum ruled that the sale and the contemporaneously executed buyback agreement on deferred payments was such a "contrivance".

The penalty for violating the civil usury statute is found in Section 687.04, which essentially says that, generally, (1) any right to interest is forfeited, (2) double the amount of any interest already paid shall be forfeited back to the debtor, and (3) only the actual principal sum of such usurious contract can be enforced, either at law or in equity.

In addition, Florida has two criminal usury statutes, both of which can be found in Section 687.071. The misdemeanor usury statute generally applies on interest willfully and knowingly charged in excess of 25% per annum but not exceeding 45% per annum, and is found at Sec. 687.071(2); the felony usury statute applies to interest willfully and knowingly charged in excess of 45% per annum, and is at Sec. 687.071(3).

The criminal usury statutes provide that, in addition to the penalties commonly associated with misdemeanors and felonies, "no extension of credit made in violation [thereof] shall be an enforceable debt in the courts of this state." Section 687.071(7).

The court in Mears v. Mayblum also indicated, in dicta, that "A person violating [the criminal usury] statute must forfeit the principal and interest and is subject to criminal prosecution"; however, since it ruled that the interest charged did not subject the arrangement to the criminal usury statute, it was unnecessary for the court to reach any determination as to the willfulness or the knowledge with which the loan in question was made.

How the Florida courts apply the criminal usury statutes in a foreclosure rescue transaction is anybody's guess. As soon as I stumble across a case, I'll post it. But a simple reading of the plain language of Florida's criminal usury statutes should leave foreclosure rescue operators with the queasy feeling that if they are making a profit of more than 25% on an annualized basis on one of their sale-leaseback-buyback deals, and the deal is deemed to be an equitable mortgage and/or a disguised loan, they could conceivably be facing the forfeiture of their entire investment and be forced to reconvey the title to property back to the financially strapped homeowner. And that's before the local prosecutor's office gets wind of the transaction.

Go here for the entire Florida Chapter 687 - Interest And Usury - Lending Practices

Mears v. Mayblum, 96 So.2d 223 (Fla.1957)

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Bermil Corp. v. Sawyer
353 So. 2d 579
(Fla. App. Ct. 3d Dist. 1978)

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This case involved a financially strapped shopping center owner who, in order to raise desperately needed cash, sold a 40% interest in the equity in his shopping center for $60,000 with the option to repurchase same in one year for $100,000. At the time of the sale of the 40% interest, the value of the equity in the center was estimated at between $500,000 and $750,000, thereby making the value of the 40% interest conveyed for $60,000 at somewhere between $200,000 and $300,000.

After a lengthy and complex trial, the jury returned a verdict which, among other things, found that the sale-option transaction was, in reality, a device to clothe a usurious transaction.

In reviewing the decision as it related to the sale-option transaction, the Florida appellate court began by stating the following (bold text is my emphasis):

• "In order to establish a usurious transaction, certain elements must first be present. Firstly, there must be a loan, either expressed or implied, and an understanding between the parties that the money lent shall be returned. Secondly, it must appear that a greater rate of interest than is allowed by law has been or is about to be paid, or was agreed to be paid. Thirdly, there must exist an intent to wilfully and knowingly take more than the legal rate of interest for the use of the money loaned." Sharp v. Dixon, 252 So.2d 805 (Fla.4th DCA 1971).

The appellants / purchasers of the 40% interest asserted on appeal that:

• "[t]he "option to repurchase," given in conjunction with the sale, was not an unconditional, enforceable covenant and as such, they, as lenders, could not compel [the seller], as the borrower, to exercise the option and pay the usurious amount of interest. The option to repurchase being conditional, appellants argue that as a matter of law, the requisite intent to extract a usurious rate of interest at the inception of the transaction was absent and thus, no prima facie case of usury could be established."

The Florida court, citing a Hawaii Supreme Court decision in Kawauchi v. Tabata, 49 Haw. 160, 413 P.2d 221 (1966), made this observation about the Hawaii case:

• "In that case, the court opined that in a transaction whereby a vendee purchases property for an amount much less than that property's value, and contemporaneously executes with the vendor an option to repurchase said property, then notwithstanding the fact that the option is not obligatory on the part of the vendor, a court might, upon a proper allegation of usury, disregard the form of the transaction and look to its substance."

Relying on the logic in Kawauchi, the Florida court ruled as follows:

• "[w]hile the option to repurchase was not mandatory, the relative disparity between the sale price of a 40% interest in the shopping center and its true value dictated the exercise of the option. Thus, while the option, in and of itself, was not legally enforceable by the purchaser (appellants), it was economically binding, satisfying to our satisfaction, the "intent to extract usurious interest" requirement as required by the Sharp case, supra. As such, we cannot accept appellants' argument that [they] did not have the intent needed, as a matter of law, to find them guilty of usury."

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Two points that deserve highlighting, in my view, are these:

• First, the court found that the necessary intent to collect usurious interest was present in this case by simply looking to the fact that there was a significant disparity between the $60,000 price for the 40% interest and the value of that interest, estimated at between $200,000 and $300,000. That disparity, according to the court, made the exercise of the repurchase option "economically binding" upon the seller/borrower, even though the repurchase option was not actually "legally binding" on him.

• Second, while there is no specific reference to either the equitable mortgage doctrine or Florida Statute Section 697.01 (which is the Florida legislature's codification of the equitable mortgage doctrine), it is arguable that the court's determination that the transaction was a disguised loan represents an implicit determination that the transaction was an equitable mortgage. After all, the equitable mortgage doctrine stands for the proposition that an absolute conveyance of property, made in connection with securing a loan, shall be deemed a mortgage. An absolute conveyance of property in exchange for a loan is exactly what happened here. Further, the Hawaii high court decision in Kawauchi cited herein was an equitable mortgage case.

Bermil Corp. v. Sawyer, 353 So. 2d 579 (Fla. App. Ct. 3d Dist. 1978).

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Oregrund Ltd. P'ship v. Sheive
873 So. 2d 451
(Fla. App. Ct. 5th Dist. 2004)

This case involved an appeal by a financially strapped property owner appealing a lower court decision dismissing its complaint with prejudice. The complaint asserted various counts based on usury, the related relief of quiet title and civil theft, as well as a count for equitable mortgage under Section 697.01 or to cancel a deed. In reversing the lower court and reinstating the complaint, the court reviewed the usury law, both the statute and the case law, in the State of Florida.

It also identified the four essential elements of a usurious transaction in Florida; and it analyzed the allegations in the case as pleaded by the property owner and analyzed the presence of the usury elements in the case, assuming as true all the well pleaded allegations in the complaint.

In the end, the court concluded that the allegations in the complaint were sufficient to plead a cause of action in usury, and for the related relief of quiet title and civil theft; and found nothing in the record to justify the dismissal of the count which alternately pleaded for a declaration of the deed to be a mortgage, section 697.01, or for cancellation of the deed.

The allegations in the case were as follows:

1) A property owner, wanting to borrow $600,000, conveyed a 50% interest in the equity in property to investors for $600,000. At the time, the value of the equity in the property was estimated at between $3.4 million and $4 million. Accordingly, the value of the 50% interest conveyed for $600,000 was somewhere between $1.7 million and $2 million.

2) Contemporaneously with the sale, the property owner was given a right to repurchase the 50% interest for $1.2 million, if exercised in one year; and $1.8 million, if exercised in two years.

3) The property owner had the sole responsibility to pay the mortgage, taxes and other expenses on the tract while the investors owned a one-half interest in the tract.

4) Eight months into the transaction, the property owner had (more) financial problems. At that point, the parties made a modification of the existing agreement whereby the property owner signed away the remaining 50% interest and, in exchange, the investors assisted the property owner in obtaining an additional $150, 000 in borrowed funds from the holder of the existing first mortgage. It was also agreed that the option to purchase for $1.8 million by the end of year 2 would be extended indefinitely. At the time of this transfer, the estimated value of the entire equity interest in the tract exceeded $3 million.

5) Within nine months of the second transaction, the property owner was still in financial trouble, was not in the financial position to exercise its repurchase option and had gone in default on the existing mortgage. At that point, the investors terminated the option and the property owner lost the title to the property.

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In reversing the lower court's dismissal of the property owner's complaint and reinstating it, the appellate court reviewed the Florida usury law and made a number of points. The court's review of a number of aspects of the Florida usury law follow:

• "A review of the above statutes reveals that for loans under $500,000, a usurious contract is present if an interest rate exceeds 18%. Sections 687.02(1), 687.03(1). But for loans exceeding $500,000 the operative statute is section 687.071. That statute provides that loans which have effective interest rates of 25% or more, but less than 45%, and loans exceeding an effective interest rate of 45%, are criminal offenses. Sections 687.071(2) and (3)."

• "[E]xcluded from the usury statutes are transactions in which a portion of the investment is at speculative risk. Hurley v. Slingerland, 461 So. 2d 282, 283 (Fla. 4th DCA 1985); Diversified Enterprises, Inc. v. West, 141 So. 2d 27 (Fla. 2d DCA 1962). This principle has been statutorily validated when the venture exceeds $500,000. See Bailey v. Harrington, 462 So. 2d 861 (Fla. 3d DCA 1985)."

• "There are four essential elements of a usurious transaction: (1) an express or implied loan; (2) a repayment requirement; (3) an agreement to pay interest in excess of the legal rate; and (4) a corrupt intent to take more than the legal rate for the money loaned. Party Yards, Inc. v. Templeton, 751 So. 2d 121, 123 (Fla. 5th DCA 2000); Kraft v. Mason, 668 So. 2d 679 (Fla. 4th DCA 1996); Bermil Corp. v. Sawyer, 353 So. 2d 579 (Fla. 3d DCA 1978). One does not have to specifically charge interest for there to be usury. See American Acceptance Corp. v. Schoenthaler, 391 F. 2d 64 (5th Cir. 1968)(Florida law).

• "Courts look to the substance of the transaction to determine whether a transaction is usurious. Party Yards; Key v. Amendola, 129 So. 2d 170 (Fla. 2d DCA 1961). That is, a finding of usury depends on the intent and understanding of the parties. Indian Lake Estates, Inc. v. Special Investments, Inc., 154 So. 2d 883 (Fla. 2d DCA 1963). A key issue is the liability of the borrower under the contract’s terms, or what may be demanded of a borrower, rather than what is demanded of him. First Mortgage."

• "A transaction that is either entirely or partially in the form of a sale, may be usurious when the intent is to make a loan of money for a greater profit than allowed by statute. See, e.g., Griffin v. Kelly, 92 So. 2d 515 (Fla. 1957); American Acceptance. (Florida law). See also Hembree v. Bradley, 528 So. 2d 116 (Fla. 1st DCA 1988)(contract may have been a loan disguised as contract for purchase and sale of property). The value of the property as compared with the sum paid is an important factor in determining whether the transaction is a sale or a loan. See, e.g., Kawauchi v. Tabata, 413 P.2d 221 (Hawaii 1966)."

• "A sale-option transaction may be considered a loan when the loan is unconditional and compels the vendor to repurchase the property for an amount that, if the loan was disguised as a sale, the "return" or profit would be usurious. Bermil Corp. v. Sawyer, 353 So. 2d 579 (Fla. 3d DCA 1978) (option to repurchase not mandatory, but relative disparity between sale price and true value dictated option be exercised)."

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In ruling to reverse the lower court's dismissal of the complaint, the court began by addressing the investors' assertion that the investment was speculative and was thereby not covered by the usury statutes. The court stated:

• "On its face, it cannot be concluded, as a matter of law, that appellees’ $600,000.00 investment was at speculative risk because of the value of the property interest they held."

(After all the dust settled, according to the complaint, the property owner signed away the entire 100% of the property's equity valued well in excess of $3 million for $600,000).

Analysis of the Elements of Usury

The court proceeded to make the following analysis in determining whether elements of usury could be proved in this case.

• "Whether There was an Express or Implied Loan. The facts of this case illustrate that, based on the intent of the parties’ and the circumstances of the transactions, it could be established that a loan was made to appellants, who were also given an option to repurchase the tract in lieu of a mortgage. See Party Yards; Kraft; Bermil."

• "Whether There Was a Repayment Obligation. Although there was no specific written obligation for appellants to repurchase the property, we reject appellees’ argument that this precludes a finding that no repayment or repurchase requirement existed in this case. Instead, we agree with the third district in its holding in Bermil, where it found that the economic facts surrounding the transaction were such that repayment was required. The form of the transaction can be disregarded even though the repurchase option is technically conditional. Bermil. As in Bermil, a fact-finder could determine that the transactions in this case were economically binding on appellants to repurchase due to the gross disparity between the $600,000.00 proceeds given to appellants and the value of the property interest appellants conveyed to appellees. Initially, appellants conveyed a property interest to appellees that exceeded $1.7 million in value. Appellants were initially allowed to repurchase the one-half interest for $1.2 million in the first year or $1.8 million in the second. After the Amendment, appellants’ property interest exceeded $3 million in exchange for a "$600,000 investment." The value of the property interest appellees received initially was almost three times their "investment" and after the Amendment, five times the amount of their loan. These values could support the conclusion that appellants were obligated to repurchase the property or suffer a tremendous economic loss."

• Whether There was an Agreement For a Return Greater Than Legal Rate. Appellees argue that the Amended Option is open indefinitely, and thus a "due" date cannot be determined, which is necessary in order to calculate an interest rate. Any interest rate calculated would vary and could be reduced to nonusurious rates, depending on the number of years the "loan" was outstanding and the price for which the tract sold. They conclude usury cannot be established unless a specific rate of interest has been charged. They are incorrect. As to the latter argument, one does not have to specifically charge interest for there to be usury. American Acceptance.

• Moreover, the usurious nature of a transaction is established at the inception of the transaction. See Home Credit Co. v. R.B. Brown, 148 So. 2d 257 (Fla. 1963); Short v. Skate, 90 So. 2d 604 (Fla. 1956); Carter v. Leon Loan & Finance Co., 146 So. 664 (Fla. 1927); Maxwell v. Jacksonville Loan & Improvement Co., 34 So. 255 (Fla. 1903); First Mortgage; Key v. Amendola, 129 So. 2d 170 (Fla. 2d DCA 1961); Coral Gables First National Bank of Contractors of Florida, Inc., 119 So. 2d 741 (Fla. 3d DCA 1960). The exception to this rule is where an old contract is abandoned and a new one, which has been entered into free from the vice of the old, occurs. Carter.

• Pursuant to the initial option, appellees would have received double the amount of their investment, $1.2 million, within one year, and triple the amount, $1.8 million, within two years. This equates to an interest rate which is calculable and which exceeds the permissible amount in section 687.071.

• Nor did the execution of the Amendment alter the usurious nature of this transaction. It is well settled that when a usurious contract is renewed by a new or substituted contract, usury follows and becomes a part of the second contract. Short; Carter; Coral Gables. Moreover, delay in enforcement of a usurious contract does not purge it of its vices. Short; Carter; Coral Gables.

• In this case, it cannot be concluded as a matter of law that a new contract was freely entered into by the parties. An Amendment to the land trust was executed by appellees, in which they deleted the requirement that the option be exercised in two years in exchange for appellants transferring the remaining one-half interest in the tract to them. If the original transaction was usurious, the taint was not removed with the Amendment.

• Whether Appellees Acted With Corrupt Intent. Corrupt intent is established if the evidence indicates the lender knowingly charged or received excessive interest considering all the circumstances surrounding the transaction. Party Yards. The Agreement for Sale, the Option and the Amendment, are sufficient to support the claim that appellees knowingly intended to receive an interest rate which exceeded the permissible statutory rate.

Oregrund Ltd. P'ship v. Sheive, 873 So. 2d 451; (Fla. App. Ct. 5th Dist 2004)
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Postscript

One of the issues in this case addressed whether or not there was a "repayment obligation" involved in the sale-option transaction. Such a repayment obligation is a necessary element in determining that a transaction is a loan, either in the context of a usury case or in the context of an equitable mortgage case. For those of you who are Florida attorneys, I want to point out that Oregrund Ltd. P'ship v. Sheive is at least the second Florida appeals court that has ruled that the "repayment obligation" requirement in a sale-option transaction is satisfied where the disparity between the option's "buyback price" and the value of the property is such that it makes the exercise of the option "economically binding", notwithstanding the fact that, according to the option's terms, the exercise thereof is not technically "legally binding". (See also Bermil Corp. v. Sawyer 353 So. 2d 579, Fla. App. Ct. 3d Dist. 1978).

I want to briefly point out to the Florida attorneys that, unless the Florida Supreme Court says otherwise and unless there are rulings that conflict with these rulings in any of the other three Florida appellate districts (1st, 2nd, and 4th DCAs), these rulings on the "economically binding" issue appear to be binding not only on the trial courts that are located within the 3rd and 5th appellate districts, but are binding on the trial courts throughout the entire state of Florida.

See Pardo v. State, 596 So. 2d 665 (Fla. 1992). ("[T]he district court erred in commenting that decisions of other district courts of appeal were not binding on the trial court. This Court has stated that the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by this Court. Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts." [citations and internal quotations omitted])

(I briefly mention this point because there may be some Florida attorneys, including some trial judges, who incorrectly believe that a trial court is only bound by the decisions of the Florida appellate court for the district in which the trial court is located; and are not bound by the decisions of any other Florida appellate court. This rule is in contrast to the Federal rule, where a Federal trial court is only bound by the decisions of the Federal appeals court in which the trial court is located.)

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With regard to the binding effect that Florida's intermediate appellate court decisions have on the Federal Courts deciding issues of Florida state law, see Binding Effect Of State Court Decisions On Federal Courts On State Law Issues. Florida equitable mortgage alpha