Georgia Appellate Court Recharacterizes Sale Leasebacks As Usurious Loans
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.,
Contrary to the assertions of the illegal payday lender that the form of the transaction, along with all the related paperwork that their customers were required to sign to get the needed funds, should be respected, the Georgia appellate court cited the following quote from Pope v. Marshall, 78 Ga. 635, 4 SE 116 (Ga. 1887), a Georgia Supreme Court decision, for the applicable principle of law that governed in this case:
- "[W]hether a given transaction is a purchase ... or a loan of money ... depends, not upon the form of words used in contracting, but upon the real intent and understanding of the parties. No disguise of language can avail for covering up usury, or glossing over an usurious contract. The theory that a contract will be usurious or not, according to the kind of paper bag it is put up in, or according to the more or less ingenious phrases made use of in negotiating it, is altogether erroneous. The law intends that a search for usury shall penetrate to the substance."
The Georgia appeals court went on to say, "[W]e do not consider appellants' claims in a vacuum, but rather must look at the totality of the circumstances in analyzing whether appellants' "sale/leaseback" arrangement was a sham transaction to disguise an illegal payday loan scheme."
(Note: Unlike Clay v. Oxendine, which involved personal property, Pope v. Marshall involved a usurious loan secured by real property, possibly indicating that the "substance over form" doctrine, when applied to recharacterize a sale leaseback transaction as a secured loan, operates in the same manner without regard to whether the subject property being sold and leased back is personal property or real property.)
Being that this is another fact-heavy case, I have to pass on going into any specific details of the case, other than to say:
(a) 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.
(b) In support of its decision, the Georgia appeals court cited cases from other jurisdictions where lenders were found to have used sale leasebacks to disguise loans bearing interest in excess of the maximum allowed by law:
- Alaska - Moran v. Kenai Towing & Salvage, 523 P2d 1237 (Alaska 1974) (real estate)
- Arizona - SAL Leasing v. State ex rel. Napolitano, 10 P3d 1221 (Ariz. Ct. App. 2000) (sale leaseback of automobiles)
- Washington, D.C. - Browner v. Dist. of Columbia, 549 A2d 1107 (D.C. 1988) (real estate)
(Other cases involving use of a sale leaseback in an attempt to disguise usurious loans, see Usurious Loans Masquerading As Sale Leasebacks? )
Piercing The Corporate Veil
In this case, the court also found the corporate officers individually liable for the corporate transactions, thereby piercing the corporate veil. The following excerpt sets forth the court's view of Georgia law in this regard:
"The concept of piercing the corporate veil is applied in Georgia to remedy injustices which arise where a party has over extended his privilege in the use of a corporate entity in order to defeat justice, perpetuate fraud or to evade contractual or tort responsibility." (Citation and punctuation omitted.) Amason v. Whitehead, 186 Ga. App. 320, 321-322 (367 SE2d 107) (1988).- A corporation possesses a legal existence separate and apart from that of its officers and shareholders so that the operation of a corporate business does not render officers and shareholders personally liable for corporate acts. A corporate officer who takes part in the commission of a tort by the corporation is personally liable therefor, but an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein (or if he disregarded the corporate form so as to authorize piercing of the corporate veil).
The significance of the "piercing the corporate veil" doctrine in this case, in my view, is that it is a reminder that those (including foreclosure rescue operators) engaging in usurious transactions purporting to be sale leasebacks cannot expect to shelter themselves and their assets from personal liability by hiding behind their "corporate veils" in cases of illegal or fraudulent conduct.
See also Equitable Mortgage, Bonafide Purchaser, Laches, Corporate Entity Doctrine (Florida), involving the case, Markell v. Hilpert 140 Fla. 842; 192 So. 392 (Fla. 1939). In that case, the Florida Supreme Court addressed the "corporate entity doctrine" in the context of a successful equitable mortgage claim by a financially strapped property owner and it expressly "[repudiated it] in all cases where it has been insisted on as a protection to fraud or other illegal transactions." Georgia equitable mortgage epsilon
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