New Jersey Sale Leaseback Of Home In Foreclosure Recharacterized As An Equitable Mortgage

In a recent court ruling in favor of a homeowner/couple who were awarded at least $690,000 after being screwed over by a foreclosure rescue operator in a sale leaseback, equity stripping scam, a New Jersey bankruptcy court found that the transaction violated Federal and state consumer protection statutes (among others) regulating the origination of home loans.(1) In this regard, the court made the following observations in applying the law in this case:

• In order for TILA, HOEPA or HOSA to apply, the Plaintiffs must first establish that the sale and lease-back transaction constitutes consumer credit. They attempt to do so by categorizing the transaction as an equitable mortgage. New Jersey courts of equity have long recognized the doctrine of equitable mortgage:

• The whole doctrine of equitable liens or mortgages is founded upon that cardinal maxim of equity which regards as done that which has been agreed to be, and ought to have been, done. To dedicate property, or to agree to do so, to a particular purpose or debt, is regarded in equity as creating an equitable lien thereon in favor of him for whom such dedication is made. This wholesome equitable principle is one of wide, if not universal, recognition and application. The form which an agreement shall take in order to create an equitable lien or mortgage is quite immaterial, for equity looks at the final intent and purpose rather than at the form. If an intent to give, charge, or pledge property, real or personal, as security for an obligation, appears, and the property or thing intended to be given, charged, or pledged is sufficiently described or identified, then the equitable lien or mortgage will follow as of course. Rutherford Nat. Bank v. H.R. Bogle & Co., 169 A. 180, 182 (N.J. Ch. 1933) (citations omitted); see also Humble Oil & Refining Co. v. Doerr, 303 A.2d 898, 909 (N.J. Super. Ct. Ch. Div. 1973) ("It is clear that equity looks to substance rather than form, and that a guarantor or surety who takes property or an interest therein as security for his guaranty is a mortgagee thereof in equity."); James Talcott, Inc. v. Roto Am. Corp., 302 A.2d 147, 157 (N.J. Super. Ct. Ch. Div. 1973) ("If a transaction resolves itself into a security, whatever may be its form and whatever name the parties choose to give it, it is, in equity, a mortgage.").

• Both parties cite to Brown v. Grant Holding LLC, 394 F.Supp. 2d 1090 (D. Minn. 2005). In Brown, the court applied a six-factor balancing test to determine whether a transaction similar to the Cleveland/O'Brien transaction was an equitable mortgage or a sale and leaseback agreement in light of a state law presumption that a deed is a conveyance. 394 F.Supp. 2d at 1097-99. Similar to the law in New Jersey, Minnesota law is that, "[t]o create an equitable mortgage, all circumstances must indicate that both parties intended the transaction to be a loan advanced on security of realty." Id. at 1097. In order to determine intent, the courts looked at: (1) the transaction documents and whether they used terms such as "debt," "security," or "mortgage;" (2) the value of the property versus the loan amount; (3) the "nature of the solicitation that gave rise to the transaction in question;" (4) whether the owner attempted to sell the property on the open market; (5) whether the sale price was negotiated by the parties; and (6) whether the foreclosee continued occupancy of the home after the transaction. Id. at 1097-99. While the court in Brown determined, after weighing these factors, that the transaction in question was not an equitable mortgage, this court finds that the intent of the parties in the present case was to effectuate a loan, secured by the O'Briens' home.

• Similar facts existed in Essex Property Services, Inc. v. Wood, 587 A.2d 1337 (N.J. Super. Ct. Law Div. 1991), where the court deemed it "inescapable that originally the parties contemplated that their transaction was a method of temporary refinancing and that both parties contemplated that defendants would `re-purchase' the property" and found that the "relationship of landlord and tenant was incidental to that mutual and dominant contemplation." 587 A.2d at 1339. In Essex Property, the home-owners were facing foreclosure when approached by the rescuer who offered to buy the property and lease it back to them with an option to buy it back in one year. Id. at 1338. The court recognized that this determination is fact sensitive, but relied primarily on the "common intention expressed by the parties" to determine that the transaction represented an equitable mortgage and not a lease. Id. at 1338-39. Here, as in Essex Property, the admitted intent of the parties was to rescue the Plaintiffs from mortgage foreclosure, not that the Plaintiffs become tenants and be dispossessed of ownership of their home. The court in Essex Property noted that the "transaction [was] far more complicated than a lease" and that "[a]lthough a lease was one of the documents, it was subordinate to the intention of the parties, rather than the motivation or dominant factor in the transaction." Id. at 1339. The same is true here.(2)

The finding by the court that the transaction constituted an equitable mortgage resulted in a monetary award to the homeowners for violations of TILA, HOEPA and HOSA that totaled at least $293,836.17.

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) The statutes involved here were the federal Truth In Lending Act ("TILA") as amended by the Home Ownership and Equity Protection Act ("HOEPA") as well as the New Jersey Home Ownership Security Act of 2002 ("HOSA").