Minnesota Federal Court Finds Violations Of State "Foreclosure Rescue" Statutes; Invokes Equitable Mortgage Doctrine In Homeowners' Favor

A Minnesota Federal Court last week ruled that, in a sale leaseback transaction involving the home of a financially strapped homeowner and a foreclosure rescue operator, the rescue operator violated a number of provisions of the Minnesota statute regulating foreclosure rescue transactions, Chapter 325N.

Further, in denying the rescue operator's motion for summary judgment regarding alleged violations of certain Federal consumer lending laws on the basis that the foreclosure rescue, sale leaseback of the homeowner's home did not involve a mortgage or a consumer debt, the court ruled that the evidence presented supported a finding that the sale leaseback of the plaintiff's home was an equitable mortgage, rather than a true sale leaseback, and accordingly, the Federal consumer protection laws may be applicable.

(All bold text is my emphasis; most citations and some internal quotations are omitted.)

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Equitable Mortgage

In ruling that the evidence presented to it favored the finding of an equitable mortgage, the court was addressing the defendant / foreclosure rescue operator's motion for summary judgment (joined in by the mortgage lender providing the loan obtained in the course of stripping the equity from the home) involving the plaintiff / homeowners' claims of violations of the Federal Truth In Lending Act ("TILA") and the Home Ownership and Equity Protection Act ("HOEPA"), in which the homeowners claimed a continuing right to rescind the foreclosure rescue, sale leaseback, equity stripping transaction.

According to the court, the defendants / foreclosure rescue operator:

• argue that TILA only applies to a credit transaction,
• reason that since there was no debt instrument and no loan, neither TILA nor HOEPA apply,
• argue that the documents at issue here state explicitly that no security interest is being granted,
• point to a disclosure statement stating "the Contract for Deed is not intended a loan and a mortgage securing repayment of a debt to REES,"
• further argue that the Joneses themselves stated that they did not believe the Defendants loaned them any money. E. Jones Dep. p. 135; M. Jones Dep. p. 106. During her deposition, E. Jones was asked to review all related documents and was not able to identify anything that could be construed as a mortgage.

In denying the defendants' motion for summary judgment on the TILA and HOEPA claims, the court observed:

• Defendants, in seizing on these arguments, elevate form over substance. The true inquiry is whether the parties intended an outright sale or whether the "purpose and effect of the transaction is to give security on real property for a debt." Gagne, 159 N.W.2d at 899.

The court provided the following analysis of the Minnesota case law on equitable mortgage (citations omitted for ease of reading):

• Courts generally presume that a deed is a conveyance. However, Minnesota courts have adopted the doctrine of "equitable mortgage" "to prevent an overreaching by one party that would unfairly exploit the other party's financial position or relative lack of real estate dealings." Essentially, if "the real nature of the transaction between the parties is that of a loan, advanced upon the security of realty granted to the party making the loan, it may be treated as an equitable mortgage". The intent of the parties is paramount, and to overcome the presumption that a deed is a conveyance, it must be clear that both parties intended that the transaction result in a mortgage.

• In order to determine intent, courts may look to the documents relating to the transaction. The lack of terms such as "debt", "security", or "mortgage" are strong evidence indicating that the transaction is not a mortgage. However, the fact that documents do not express the existence of a loan is not conclusive, and the intention of the parties is to be ascertained by looking at "all the facts and circumstances surrounding a transaction." "In the final analysis, the question of whether the parties to a conveyance really intended it to be absolute or security for indebtedness is for the trier of fact."

[...]

• In addition to looking to the intent of the parties, courts will also consider the following factors in making a determination as to whether a conveyance should be construed as an equitable mortgage: 1) the disparity between the value of the property and the price paid; 2) the nature of the solicitation that gave rise to the transaction; 3) attempts to sell the property on the open market; 4) whether there was a negotiated sale price; and 5) whether there was continuous occupancy.

• The Court finds these factors all weigh in favor of a finding that the conveyance at issue should be construed as an equitable mortgage.

• In this case, the Property was appraised at $ 278,000 and purchased by REES-MAX for $214,000. Given this disparity, this factor weighs in favor of finding that the transaction was intended to operate as a mortgage. A typical buyer does not leave the closing table with $ 33,092.

Rescission (re: TILA claims)

The defendants also argued that because the homeowners have not met their burden of demonstrating that they could tender the value of the property within a reasonable period of time, they are not entitled to rescission. Among other things, the court said:

• Given the discretion within which the Court may condition the right to rescission, it is not necessary that the Joneses demonstrate they have the means to secure the necessary financing at this point in time.

Because of the foregoing, the Defendants' motion for summary judgment as to the TILA / HOEPA claims were denied.
.

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Violations of Chapter 325N, Minnesota Statutes.

Defendants sought summary judgment on all claims arising under state law. The Joneses sought partial summary judgment, that as a matter of law, Defendants Banken, REES-MAX and REES violated Minn. Stat. §§ 325N.04, .11, .12, and .17.

Chapter 325N of Minnesota State statutes regulates mortgage foreclosures as part of an overall consumer protection scheme. This Chapter is divided into two distinct sections: (1) §§ 325N.01 through .09 which regulate "foreclosure consultants", and (2) §§ 325N.10 through .18 which regulate "foreclosure purchasers."

1. Foreclosure Consultants, Minn. Stat. §§ 325N.01 through .09

Based upon the undisputed facts, the Court found that one of the defendants was a foreclosure consultant as defined by statute. However, the court found genuine issues of material fact regarding the alleged violation under one provision of this portion of Chapter 325N and, accordingly, denied summary judgment as to this particular violation. See Memorandum Opinion And Court Order (link below) for detail.

2. Foreclosure Purchasers, Minn. Stat. §§ 325N.10 through .18

The plaintiff / homeowner alleged several violations of this portion of Chapter 325N. After sorting through the disputed and undisputed facts, the court granted partial summary judgment to the plaintiff / homeowner, finding clear violations of the following provisions of the statute:

• Failure to comply with foreclosure purchase contract requirements - Minn. Stat. §§ 325N.11 and .12,
• Failure to verify a reasonable ability to pay - Minn. Stat. § 325N.17(a)(1),
• Violation of foreclosure purchaser in representing, directly or indirectly, that they are assisting the foreclosed homeowner to "save the house" or to assert a substantially similar claim - Minn. Stat. § 325N.17(d)(3),
• Violation of foreclosure purchaser in representing, directly or indirectly, that they are assisting the foreclosed homeowner to prevent a completed foreclosure if in fact the result of the transaction is that the foreclosed homeowner will not complete a redemption of the property - Minn. Stat. § 325N.17(d)(4).

The court denied summary judgment to the defendant / foreclosure rescue operator regarding its assertions related to Chapter 325N. See Memorandum Opinion And Court Order (link below) for detail.

Violation of Minnesota Prevention of Consumer Fraud Act

The plaintiff / homeowners asserted a claim pursuant to the Minnesota Prevention of Consumer Fraud Act. This statute prohibits the use of a fraudulent statement in connection with the sale of merchandise, which includes real estate. Minn. Stat. § 325F.69, Subd. 1. Defendants moved for summary judgment as to this claim.

A violation of sections 325N.10 to 325N.17 is considered to be a violation of § 325F.69. Minn. Stat. § 325N.18, subd. 1. As this Court has found Defendants have violated sections of Minn. Stat. § 325N, Defendants were denied summary judgment as to this claim.

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Side Note:

The plaintiff homeowners in this case had been the subject of an eviction from their home in an unlawful detainer action brought by the foreclosure rescue operator in state court, who was granted summary judgment. Apparently, the eviction was considered a big enough deal that the Minnesota Attorney General's Office and the legal services law firm, Mid-Minnesota Legal Assistance, filed amicus briefs in favor of the homeowner to reverse the judgment of eviction. The Minnesota intermediate appellate court was apparently unimpressed, as it affirmed the lower court judgment of eviction. See Real Estate Equity Strategies, LLC v. Jones, 720 N.W.2d 352; (Mn. App. Ct. 2006) (Available online courtesy of Minnesota State Law Library).

See also, Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 2.

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For last week's Memorandum Opinion And Order, see Jones vs. Rees-Max, LLC, et al. (Civil File No. 05-2384, D. Mn. Sept. 17, 2007).

For the following related court documents in this matter, drop me an e-mail at HomeEquityTheft@yahoo.com (please put "Jones v. Rees-Max" in message line) and I'll e-mail them to you; or you can go directly to the PACER Online Court Docket for this case and click the appropriate links for these or any other documents filed in this case (PACER registration required):

• Plaintiff's First Amended Complaint - Document #20 (37 pages - $2.40),
• Plaintiff's Memorandum Of Law In Support Of Partial Summary Judgment - Document #45 (28 pages - $2.24),
• Plaintiff's Memorandum Of Law In Opposition To Defandant's Summary Judgment Motion - Document #52 (18 pages - $1.44).

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In addition to alleging several violations of the Minnesota statute regulating foreclosure rescue transactions and the state Prevention of Consumer Fraud Act, the Plaintiff's Amended Complaint contains the following claims and alleged violations:

• Federal Truth In Lending Act ("TILA"), Federal Home Ownership Equity Protection Act ("HOEPA"), and Federal Reserve Board Regulation Z,
• Equitable Mortgage,
• Rescission Under TILA and HOEPA,
• Declaratory Judgment (to determine amount of tender needed to rescind transaction, and to declare the mortgage placed on the homeowners' property as part of the equity stripping transaction to be void and unenforceable),
• Unlawful Eviction.

Representing the homeowner in the Federal action were attorneys Kristine K. Nogosek and Robert B. Bauer, with the firm Severson Sheldon Dougherty & Molenda, PA., Apple Valley, Minnesota. Minnesota equitable mortgage sigma