Virginia Federal Court Says Sale Leaseback May Be An Equitable Mortgage; Denies Motion To Dismiss TILA Claims

In a lawsuit filed by a financially strapped homeowner against a foreclosure rescue operator to void a sale leaseback of a home that was entered into with the operator, a Virginia Federal Court recently refused to dismiss the homeowners claims under the Federal Truth In Lending Act ("TILA") and related statutes.

The operator filed a motion to dismiss the TILA claims (among other claims) on the grounds that the sale leaseback did not involve a consumer debt or formal mortgage agreement. The court observed that the State of Virginia recognizes the "equitable mortgage" doctrine, and that the substance of the foreclosure rescue, sale leaseback transaction could well be considered an equitable mortgage under Virginia law. The court made the following observation on the equitable mortgage doctrine in Virginia (citations omitted for ease of reading):

• In Virginia, a deed absolute on its face is presumed absolute unless the party challenging the presumption can prove by clear, unequivocal and convincing evidence that it is something other than what it appears to be. Accordingly, the court may find that an instrument appearing to convey fee simple title is actually an equitable mortgage in which the grantee holds a mortgagee's interest and must reconvey the property to the grantor when the grantor repays the underlying debt. To determine whether a conveyance should be construed as an equitable mortgage, the court first considers whether a borrower-lender relationship exists between the parties. Stated simply, there must be some debt owed by the grantor to the grantee which is secured by title to the property. Once a borrower-lender relationship is established the court may take account of four additional factors: (1) the intentions of the parties; (2) the adequacy of consideration; (3) the retention of possession by the grantor; (4) and satisfaction or survival of the debt.

If the sale leaseback is recharacterized as an "equitable mortgage", the transaction could be subject to the TILA and related claims. Accordingly, the court denied the foreclosure rescue operator's motion to dismiss the homeowner's TILA claims, and is allowing the case to proceed.

The homeowner is represented by the firm Bullock & Cooper, Virginia Beach, Virginia.

For a copy of the decision, see Opinion & Order - Clemons v. Home Savers, LLC.

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Addendum - 9-28-07 (11:54 am)

The Federal Court's decision recognizing the existence of the equitable mortgage doctrine in Virginia is not inconsistent with the recent Minnesota Federal Court's Memorandum Opinion & Order in Jones vs. Rees-Max, LLC, et al. (Civil File No. 05-2384, D. Mn. Sept. 17, 2007). In that case, the court denied the foreclosure rescue operator's motion for summary judgment on TILA and related claims, recognizing the existence of the equitable mortgage doctrine under Minnesota law. Further, it observed that the evidence presented with respect to certain factors weighed in favor of finding the foreclosure rescue, sale leaseback transaction to be an equitable mortgage, and not a true sale leaseback. See Minnesota Federal Court Finds Violations Of State "Foreclosure Rescue" Statutes; Invokes Equitable Mortgage Doctrine In Homeowners' Favor.

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