Tennessee Federal Court Invokes Equitable Mortgage Doctrine In Denying Motion To Dismiss Foreclosure Rescue Litigation

(Substantially all of this post is a reprint from a post appearing in January, 2007 on the companion blog to this blog, The Home Equity Theft Reporter. I'm in the process of doing some long-needed housekeeping on this blog and felt that this post should have a presence here.)

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In a February, 2006 opinion, a Tennessee Federal Court invoked the "equitable mortgage" doctrine in denying a foreclosure rescue operator's motion to dismiss a lawsuit in a case involving a transaction between the rescue operator and a homeowner in financial straits attempting to save his home from a forced sale.

The court, in Perry v. Queen, relied on a 1996 Tennessee Court of Appeals case which set forth a number of factors that Tennessee courts consider in determining the homeowner's intent in conveying title to his/her home to another in a sale leaseback transaction, including the following:

• the relationship between the parties;
• whether the parties had access to legal counsel;
• the sophistication and circumstances of the parties;
• the adequacy of consideration; and
• whether the grantor retained possession of the property.

The Federal Court made the following observations in reaching its decision:

• The disparity between the parties as to their sophistication and the circumstances under which they were operating is particularly relevant. Courts view [property owners] who are lacking in sophistication or who are laboring under stressful circumstances as more likely to have intended their conveyances to serve as security devices, as opposed to as transfers of their land,

• [t]he relatively low amount of consideration paid by the [foreclosure rescue investor] in exchange for the [property owner's] warranty deed here furthers a determination that the [property owner] intended the deed to serve as security for the loan. Where consideration received by the [property owner] is much less than the value of his property, there is an inference that a security device, as opposed to an outright sale, was intended,

• [t]he fact that [the property owner] retained physical possession of his house after he gave the [foreclosure rescue investor] the warranty deed. Where a [property owner] continues to occupy the premises, there is an inference that a security device was intended,

• The last of the relevant Hensley factors directs the court to consider whether the parties to the transaction in question were represented by legal counsel. [W]hile the [property owner] did not have access to legal advice at the time the deal was executed, the [foreclosure rescue investor] did. [L]ike the other factors, this one also leads the court to a determination that the [property owner] intended his deed to serve as a security device.

Representing the homeowner in this case was Sharmila L. Murthy, a consumer lawyer with the Nashville office of the Legal Aid Society of Middle Tennessee and the Cumberlands, Nashville, TN.

Click here for list of other equitable mortgage blog posts.

Case Law Citations:

Perry v. Queen, (M.D. Tn. Civil No. 3:05-0599) 2006 U.S. Dist. LEXIS 17120, February 27, 2006 (unpublished).

Hensley v. Britt, 1996 Tenn. App. LEXIS 793, No. 01A01-9607-CH-00296, 1996 WL 709375 (Tenn. Ct. App. Dec. 11, 1996) (made available courtesy of the Tennessee Administrative Office of the Courts). Tennessee equitable mortgage gamma