Failure To Allege Charging Of Excessive Interest In Sale Leaseback, Foreclosure Rescue Suit Fatal To Usury Claim

In a recent ruling awarding a six-figure judgment to a New Jersey homeowner/couple who were swindled in an equity stripping, foreclosure rescue ripoff, a Federal bankruptcy judge recharacterized a sale leaseback as an equitable mortgage, and granted relief on most of the Plaintiff/homeowners' claims. However, he refused to grant relief on a claim that the equitable mortgage violated the state usury statute. The judge's reason, according to the written ruling, follows:

• Plaintiffs' pre-trial brief raises for the first time the allegation that this transaction violates the state criminal usury law. N.J. STAT. ANN. §2C:21-19. By Plaintiffs' calculation the annual interest rate could be as high as 227% . Charging interest over 30% per annum [in New Jersey] is a crime. They ask the court to treat their contract with Cleveland as illegal and refuse to enforce it. As a remedy they seek a return of their property and damages. This theory was not plead in the complaint and the court will not grant any relief based on the alleged violation of the state criminal usury statute.

The judge's refusal to grant relief on the homeowners' usury claim was based strictly on procedural grounds, and, given their success on other claims in the suit, may not have affected the total award they could have reasonably expected to obtain anyway. However, the ruling nevertheless serves as a reminder that, in any attempt to undo this type of deal by asserting that the arrangement was an equitable mortgage (ie. a loan disguised as a sale leaseback), it's a good idea to plead in the complaint that, if applicable, the state usury statute was violated(1).

For the ruling, see In re O'Brien (aka O'Brien v. Cleveland), Case No. 03-17448, Adversary Proceeding Case No. 08-1676; (USBC, D. N.J., January 22, 2010).

(1) Especially in states where certain violations of usury statutes render the debt unenforceable. For example, in Florida, willfully and knowingly charging interest on a loan in excess of 45% is a felony criminal offense and could ostensibly obliterate the foreclosure rescue operator's entire investment in the deal. Sec. 687.071(3), 687.071(7), Florida Statutes.