Equitable Mortgage & Usury In Arizona

(In my continued attempt at minor blog restructuring and housekeeping, I have reprinted this post, which originally appeared as part of a longer post in this blog in January, 2007.)

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. (my emphasis added).

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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 Arizona appeals 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).

The Arizona appeals court in Sal Leasing also cites to a decision in an equitable mortgage case by the Hawaii Supreme Court in Kawauchi v. Tabata, 49 Haw. 160, 413 P.2d 221 (Haw. 1966) in support of its decision. Arizona equitable mortgage delta