California Appeals Court Affirms $280K Damage Award For Homeowner In Sale-Leaseback Foreclosure Rescue Deal

A November, 2008 decision by a California appeals court affirmed a lower court ruling that awarded a homeowner facing foreclosure monetary and exemplary damages in the amount of $280,000 (plus the homeowner's legal fees) from one, Marshall, a real estate broker and foreclosure rescue operator to whom she sold her home in a sale-leaseback arrangement which violated the California Home Equity Sales Contract Act ("HESCA").(1)

The sole issue that Marshall argued, unsuccessfully, to the appeals court was that the statute did not apply to him. He asserted that the law only applies to what it defines as an "equity purchaser" and argued that he fell under the exceptions to an "equity purchaser" as set forth in section 1695.1, subdivision (a)(4) and (5).

With respect to the alleged violations of HESCA, the lower court found that Marshall violated section 1695.6, subdivisions (a), (b)(3), and (e), a finding that Marshall did not contest on appeal.
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The following is a synopsis of the facts of the case. For more of the specific details, and the court's reasoning in ruling that HESCA applied to Marshall and that he didn't fall within one of the exceptions in the statute, refer to the link below for the court decision.

• In August, 2004, the homeowner and Marshall entered into a sale-leaseback arrangement that included an option to repurchase. The sales price was $220,000; the leaseback called for a one year lease at $1,500 per month; the repurchase option called for a buyback price of $260,000 at any time between October 2004 and September 2005;

• Before closing, Marshall flipped the contract to a business associate, Lisa Sanderson, who then closed on the sale with the homeowner and obtain mortgage financing to pay off the existing loan on the home. Sanderson indicated on the loan application that she intended to occupy the property as her second home. Both Sanderson and Marshall admitted at trial that they knew this statement regarding Sanderson's intent to live on the property was false;(2)

• The homeowner found herself financially unable to fulfill the payments on the lease, and was financially unable to exercise her option to buy at the end of the lease;

• After expiration of the option, Marshall wrote to the homeowner and asked her if she would be willing to repurchase her property for $315,000. The homeowner said that she could not pay that much; Marshall then listed the property for sale for $369,950;

• In October, 2005, Marshall served the homeowner with a 60-day notice to terminate the tenancy. Spencer served a notice of rescission;

• In December, 2005, the homeowner filed her initial complaint against Marshall and others, alleging violations of HESCA; in January, 2006, an action for unlawful detainer to evict the homeowner was filed; in March, 2006, the trial court consolidated the unlawful detainer action with the homeowner's HESCA action; in November, 2006, the court ordered the trial bifurcated with a bench trial of the HESCA claims to be heard first;

• On August 16, 2007, after hearing the testimony and arguments, the trial court issued its statement of decision. The court rejected the argument that HESCA did not apply. The trial court noted that Marshall and Sanderson could not both be equity purchasers. It determined that Marshall, not Sanderson, was liable for the violations of HESCA because he was the person who structured the terms of the transaction and had the primary dealings with the homeowner regarding the property. The court found that Marshall violated section 1695.6, subdivisions (a), (b)(3), and (e).(3)

• The trial court awarded her monetary damages against Marshall in the amount of $280,000, representing the sum of actual damages of $70,000 and exemplary damages of $210,000.(4) Pursuant to a stipulation of the parties, the award was reduced by $27,300 for unpaid rent, for a net recovery of $252,700. Despite finding no liability for the purposes of a damages award against Sanderson and IRES, the court concluded that they were necessary parties to the action given the alternative remedies available and therefore it found the homeowner to be the prevailing party against all of defendants for the purpose of awarding attorney fees. Subsequently, the unlawful detainer complaint against the homeowner was dismissed.

• On November 24, 2008, the California Court of Appeals filed its decision affirming the trial court.

For more, see Spencer v. Marshall, 168 Cal. App. 4th 783; 85 Cal. Rptr. 3d 752; (Cal. App. 1st App Dist. Div. 2, 2008) (pdf file; go here for ".doc" file) (case available online courtesy of FindLaw.com - may require free registration).

(1) Section 1695 through 1695.17, California Civil Code.
(2) There were false statements on a mortgage loan application in a foreclosure rescue transaction??? How common is this???
(3) Included in the appellate court decision is the following quote from the trial court:

• “In sum, the evidence presented at trial shows that Marshall, through his contacts at DirectLender, was looking to find people in financial distress, in particular, homeowners in bankruptcy like Spencer. Despite Marshall's reluctance at trial to admit that at the time he entered into the transaction with Spencer he knew that a notice of default had been recorded against the property, the court has no doubt that Marshall was fully aware that he was buying Spencer's residence on the eve of foreclosure and that he used this circumstance to his own advantage to get a price well below market value. Moreover, even though Marshall knew that Spencer had come to him because she had been unable to qualify for a $ 220,000 loan, he misled her into believing that by selling the property to him and getting out of bankruptcy, she could then afford, with his help in obtaining financing, to buy back her home. At least as to their dealings with Spencer, defendants were in every respect the ‘archetypal predators’ that HESCA seeks to regulate.”

(4) The trial court set forth three possible remedies and Spencer chose monetary damages against Marshall. Other options that Spencer rejected were rescission of the purchase agreement and restoration of title to the property to Spencer, subject to an equitable mortgage to Innovative for the sum of $ 202,827.

An interesting note is that between August, 2004, when the homeowner and Marshall oringinally entered into the transaction, and August, 2007, when the trial court issued its ruling, the real estate market in California and elsewhere tanked. I suspect that this fact may have played a part in the homeowner's decision to grab the $280K monetary award, and pass up on getting back her home, subject to the $203K equitable mortgage that would have left her considerably less equity than the amount of the damage award.