Florida Foreclosure Rescue Conveyances With Buyback Right To Be Treated As Equitable Mortgages Unless Established Otherwise

The Florida legislature recently passed a statute regulating foreclosure rescue transactions. One key provision is contained in Florida Statute Sec. 501.1377(6) which creates a rebuttable presumption that any foreclosure rescue transaction involving a lease option or other repurchase agreement is an equitable mortgage. Below is the provision in its entirety (begins at line 345 of the bill):

• (6) REBUTTABLE PRESUMPTION.--Any foreclosure-rescue transaction involving a lease option or other repurchase agreement creates a rebuttable presumption, solely between the equity purchaser and the homeowner, that the transaction is a loan transaction and the conveyance from the homeowner to the equity purchaser is a mortgage under s. 697.01. Unless the lease option or other repurchase agreement, or a memorandum of the lease option or other repurchase agreement, is recorded in accordance with s. 695.01, the presumption created under this subsection shall not apply against creditors or subsequent purchasers for a valuable consideration and without notice.

[Editor's Note: The reference to "creditors or subsequent purchasers for a valuable consideration and without notice" is a reference to bona fide purchasers / encumbrancers.]
The following comments relate to how this rebuttable presumption could affect the following legal issues involved in foreclosure rescue conveyances: usury, bonafide purchaser, and tenant evictions.

Usury

Because the new statute creates the rebuttable presumption that the foreclosure rescue conveyance is a loan, it appears that usury claims by the financially distressed homeowner will be much easier to bring in a lawsuit against a foreclosure rescue operator since the statute clearly places the burden of demonstrating that the so-called "rescue" arrangement was a "true sale" (as opposed to a "financing/refinancing arrangement") on the foreclosure rescue operator. Put simply, the law treats the deal as a secured loan to the financially strapped homeowner unless established otherwise.

Accordingly, the operator is simply treated like any mortgage lender and the financially strapped homeowner is still presumed to be the true owner of the the home, notwithstanding any deed and leaseback agreement executed by the parties to the contrary.

Florida arguably has among the toughest usury statutes in the country. Florida's civil usury statute (where interest exceeds 18% per year) generally requires a forfeiture of the right to collect interest on the loan and requires the creditior to pay a penalty of double the amount of interest actualy reserved or collected (Fla. Statute Section 687.04).

Its criminal usury statutes (where interest exceeds 25% per annum) generally makes the entire amount of money advanced by the operator an unenforceable loan, and triggers those penalties commonly associated with misdemeanor (over 25% but not more than 45%) and felony (over 45%) crimes (Fla. Stat. Section 687.071).

Based on the Florida case law on equitable mortgages, the foreclosure rescue operator in Florida may be hard-pressed to sucessfully rebut the statute's presumption.(1)

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• (1) See Hull v. Burr, 58 Fla. 432; 50 So. 754 (Fla. 1909) - "In case of doubt the transaction will be held a mortgage"; Connor v. Connor, 59 Fla. 467; 52 So. 727 (Fla. 1910) - "A deed absolute on its face may by parol evidence be shown to be a mortgage, and in cases of doubt the instrument should be held to be a mortgage", citing DeBartlett v. DeWilson, 52 Fla. 497, 42 So. 189; Hull v. Burr, 58 Fla. 432, 50 So. 754; Franklin v. Ayer, 22 Fla. 654; McLendon v. Davis, 131 So. 2d 765; (Fla. App. Ct., 3rd Dist. 1961) - "In applying the rule in doubtful cases, the law will resolve the doubt as to the intent of the parties in the light of the advantage the creditor always has over the debtor whose property he holds, and will give the debtor the benefit of the doubt and hold his equity of redemption to be still existing. Certainly complete justice is done because the creditor's advances are secured by the debtor's property and the debtor has the opportunity of full redemption by payment." (my emphasis added).

• Because these cases instruct the courts to treat the transaction as a mortgage "in the case of doubt", it is arguable that the standard of proof necessary to overcome the equitable mortgage presumption in the new statute is higher than a mere "preponderance of the evidence", possibly requiring "proof by clear and convincing evidence."

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Bonafide Purchaser

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The new statute clearly states that the rebuttable presumption is created "solely between the equity purchaser and the homeowner" (at lines 347-348). In addition, the statute goes on to provide that the presumption is not applicable against those who do not have notice of the "rescue" arrangement ("the presumption created under this subsection shall not apply against creditors or subsequent purchasers for a valuable consideration and without notice" - at lines 353 to 355) - the so-called bonafide purchasers / encumbrancers.

The statute, however, seems to be silent as to how it applies to those (other than the equity purchaser and the homeowner) acquiring an interest in the property who have notice of the "rescue" arrangement, and who consequently would not be entitled to bonafide purchaser / encumbrancer status. Why is this important?
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Actual Possession as "Notice To The World"
In a typical foreclosure rescue conveyance (one involving a sale with a concurrent leaseback, coupled with a right to reaquire the home in the future), the financially strapped homeowner never relinquishes actual possession of the property. Florida law (and the law of many other states as well) is that actual possession of the property serves as notice to subsequent purchasers and encumbrancers of all rights and equities that the occupant in possession may have.
The Florida Supreme Court, in the case of Marion Mortgage Co. v. Grennan, 106 Fla. 913, 143 So. 761 (cited in Florida Land Holding Corp. v. McMillen, 135 Fla. 431, 186 So. 188 (Fla. 1938)), stated the following with respect to possession and notice:

• Actual possession is constructive notice to all the world or anyone having knowledge of said possession, of whatever rights the occupants have in the land. Such possession when open, visible and exclusive, will put upon inquiry those acquiring any title to or a lien upon the land so occupied to ascertain the nature of the rights the occupants really have in the premises. Carolina Portland Cement Company v. Roper, 68 Fla. 299, 67 So. 115; Tate v. Pensacola G.L. & Dev. Company, 37 Fla. 439, 20 So. 543; McAdams v. Wachab, 45, Fla. 482, 33 So. 702. This court also specifically held in the case of Crozier, et al., v. Ange, 85 Fla. 120, 95 So. 426, that 'where at the time property is mortgaged it is actually occupied by others than the mortgagor, the mortgagee is thereby put upon notice to inquire as to the rights of the occupants.' 19 R.C.L. 421, Sections 201 and 202.

The Florida high court reiterated its position in Blackburn v. Venice Inlet Co., 38 So.2d 43, 46 (Fla. 1948) (cited in Waldorff Ins. v. Eglin Nat. Bank, 453 So.2d 1383 (Fla.App. 1 Dist. 1984)), where it stated:

• It is settled law in Florida that actual possession is constructive notice to all the world, or anyone having knowledge of said possession of whatever right the occupants have in the land. Such possession, when open, visible and exclusive, will put upon inquiry those acquiring any title to or a lien upon the land so occupied to ascertain the nature of the rights the occupants really have in the premises.

It appears that the new statute may contain an ambiguity with respect to its apparent silence as to whether it applies to "non-bonafide" purchasers and encumbrancers. Assuming the Florida courts, by applying the appropriate rules of statutory construction, rule that the new statute does, in fact, apply to those "non-bonafide" purchasers / encumbrancers (upon whom notice of the "rescue" arrangement is imputed), and given that actual possession by the occupying homeowners imputes said notice on them, one can reasonably conclude that the rights of those acquiring an ownership or security interest in the home during or subsequent to the foreclosure rescue conveyance (ie. the foreclosure rescue operator, straw buyer, mortgage lender providing financing, etc.) will be inferior to the rights of the occupying homeowner under the statutorily "presumed" equitable mortgage (provided that the subsequent purchasers / encumbrancers fail to make proper dilgent inquiries as to the rights and equities of said occupying homeowner as required by Florida case law).

If this is the case, the inferior interests of those "non-bonafide" purchasers / encumbrancers would arguably be subject to being voided by the homeowner. (As an aside, it might be a good idea for any homeowner entering into a foreclosure rescue conveyance to record with the county office that handles the recording of deeds and mortgages, at a minimum, an affidavit / memorandum that places the world on notice of the foreclosure rescue conveyance, and the existence of any (purported) lease, occupancy agreement, and/or right or option to reacquire the home in the future.)

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Tenant Evictions In Foreclosure Rescue Conveyances
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Given that the new statute creates a rebuttable presumption that the foreclosure rescue conveyance involving a "lease option or other repurchase agreement" is an equitable mortgage, it appears that foreclosure rescue operators will be unable to evict a homeowner who fails to comply with his/her obligations under the "rescue" arrangement (ie. the leaseback or other occupancy agreement) unless and until it can overcome the statute's presumption by demonstrating that the arrangement was not an equitable mortgage, but rather, a true sale. After all, the presumption that the arrangement is an equitable mortgage means that the homeowner, even after making the foreclosure rescue conveyance, is still the true owner, and the foreclosure rescue operator is only a secured lender and not a landlord, notwithstanding that it may technically be holding the paperwork showing it has legal title to the home.

In addition, it also appears that those seeking to evict homeowners involved in a foreclosure rescue conveyance will no longer be able to accomplish such evictions through a summary proceeding under Chapter 83 of the Florida Statutes since the Florida County Courts hearing these proceedings are of limited jurisdiction(2) and, accordingly, don't have the jurisdiction to determine whether the foreclosure rescue operator can overcome the presumption that the "rescue' arrangement was an equitable mortgage.

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• (2) see Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931) - County Judge to dismiss the cause for want of jurisdiction when, in proceedings in the County Judge's court to recover the possession of land as from a tenant, the title or boundaries of the land in controversy are at issue.

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To get possession in these cases, it appears that the foreclosure rescue operator may first have to seek a declaratory judgment from a Florida Circuit Court declaring that:

1. the "rescue" arrangement was a "true sale" and not an equitable mortgage (thereby overcoming the statute's newly created rebuttable presumption), and
2. the operator is, in fact, the true owner of the home and the (now-former) homeowner is only a tenant.

Failing that, the foreclosure rescue operator, as a lender (equitable mortgagee) may find itself having to proceed ousting the homeowner via a foreclosure action (just like any other mortgage lender).

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