Undoing A Sale Leaseback Foreclosure Rescue Ripoff: Screwed-Over Homeowner Entitled To Evidentiary Hearing Where Material Issues Of Fact Exist: Florida Appeals Court
A Florida court case a few years back involving an alleged sale leaseback foreclosure rescue scam serves as a reminder of the type of difficulty screwed-over homeowners face in any foreclosure-related litigation when attempting to assert their rights, only to have a trial judge dispose of their case by summary judgment and without the benefit of an evidentiary hearing.
Further, and perhaps more importantly, the case highlights the homeowners' need to be represented by counsel who is prepared to take the matter to an appeals court in the event of an unfavorable (and often, incorrect) ruling by the trial judge.
In this case, the homeowners owned a townhouse with a fair market value of $250,000. They could not keep up with their mortgage payments, and their lender foreclosed. The final judgment of foreclosure required the payment of $89,526, although their mortgage permitted them to reinstate for a payment of $32,290.
After a couple of weeks of contacts, the homeowners finally entered into a purported sale leaseback arrangement with a foreclosure rescue operator. The homeowners signed over title to their home for a deed-recited price of $32,300, with the operator contemporaneously cutting a check to the foreclosing lender for $32,290 to obtain a reinstatement of the mortgage.
As described in the opinion, the homeowners (the "Bernsteins") defaulted on their rent payments to the operator ("New Beginnings"), and the litigation between the two sides in this case began. From the Florida appellate court's opinion:
- New Beginnings filed a motion for partial summary judgment as to its count seeking a declaratory judgment that the effect of the transaction documents was a sale and leaseback and also as to its count seeking to evict the Bernsteins from the property for failure to pay rent. It argued that the transaction documents were clear and unambiguous on their face and that they contained no latent ambiguities.
Moreover, even if the court were to allow the Bernsteins to introduce parole evidence of their intent in signing the documents, the deposition transcript reflected that the Bernsteins knew they were selling their property with the option to repurchase it within twelve months.
In opposition to the motion, the Bernsteins argued that the transaction documents created a substantial question as to whether the transaction was a sale or a mortgage.
They alleged that communications with New Beginnings led them to believe that it would help them save their home through a refinance.
Additionally, they asserted that, when read together, the documents contained all of the hallmarks of a mortgagor-mortgagee relationship, specifically a wrap-around one year interest only balloon mortgage.
In support, they pointed to the various obligations imposed on the tenant in the lease agreement, including requirements that the Bernsteins maintain the interior and exterior of the house, and pay taxes, insurance, and homeowner's fees.
Moreover, there was no settlement statement in connection with the transaction, no title insurance, no tax or insurance prorations, and New Beginnings did not satisfy or assume the first mortgage. All indicia of ownership remained with the Bernsteins. New Beginnings did not even receive a set of keys from the Bernsteins.
The [trial] court granted partial summary judgment determining that the transaction was a sale and leaseback and that the Bernsteins had knowingly entered into the transaction.
In a rather short and sweet opinion setting forth its reasoning, the Florida appeals court reversed the trial judge's order, saying that, when taking the record in the light most favorable to the Bernsteins, material issues of fact remained.(1)
Accordingly, the case was not ripe for summary judgment, and the appeals court booted the case back to the trial judge for an evidentiary hearing on the merits.
For the ruling, see Bernstein v. New Beginnings Trustee, LLC, 988 So. 2d 90 (Fla. 4th DCA 2008).
Go here for a non-all-inclusive survey of Florida cases applying the doctrine of equitable mortgage to real estate conveyances that may have ostensibly been sale leaseback or other financing transactions.
Go here for a helpful resource from the National Consumer Law Center on how to approach undoing sale leaseback equity stripping foreclosure rescue scams (I suspect this resource may also come in handy for those underwater homeowners looking to undo a sale leaseback deals made in connection with short sale schemes offered by real estate operators of the type described in another of today's posts - and that have apparently become popular in recent years).
(1) From the court's opinion:
- The Bernsteins contend that the transaction documents establish a contractual relationship between the parties indistinguishable from a refinance wrap-around interest only one year balloon mortgage. They assert that the trial court incorrectly based its order on a patent/latent ambiguity analysis, instead of considering the facts and circumstances surrounding the transaction to discern the parties' intent.
New Beginnings counters that the transaction documents were unambiguous, and that the record did not show the Bernsteins misunderstood them or did not know what they were signing.
Pursuant to section 697.01(1), Florida Statutes, written instruments conveying or selling property for the purpose or with the intention of securing the payment of money are deemed to be mortgages. Deciding whether a conveyance should be declared a mortgage under the statute depends on the facts and circumstances surrounding the transaction and the parties' intent. Blanco v. Novoa, 854 So.2d 672, 674 (Fla. 3d DCA 2003) (citing Valk v. J.E.M. Distribs., 700 So.2d 416, 419 (Fla. 2d DCA 1997)). As the Valk court further explained:
"In resolving this factual issue, courts will look beyond the terms of the documents themselves in order to determine the real intent of the parties at the time of the transaction." "[E]quity will look at and take into consideration all the facts and circumstances surrounding the transaction and will decree an instrument to be a deed or mortgage according to the real intentions of the parties."
700 So.2d at 419 (citations omitted). See also Oregrund Ltd. P'ship v. Sheive, 873 So.2d 451 (Fla. 5th DCA 2004); Barr v. Schlarb, 314 So.2d 609, 610-11 (Fla. 1st DCA 1975) (noting that while there is a strong presumption in favor of the correctness of deeds and other official documents, "where the parties so intend, an instrument may be construed to be a mortgage although appearing to be otherwise on its face").
It is the substance and not the form that is critical. Blanco, 854 So.2d at 674. Florida courts have liberally interpreted section 697.01(1) and, when in doubt, "have leaned in favor of construing the deed as a mortgage and have taken into consideration the entire transaction and circumstances in addition to the agreement and instrument of conveyance itself." Barr, 314 So.2d at 611.
Under very similar facts, the Third District held in Minalla v. Equinamics Corp., 954 So.2d 645 (Fla. 3d DCA 2007), that an evidentiary hearing is required to determine whether a transaction constitutes a valid sale and lease or a mortgage. Minalla executed a deed conveying her residence to Equinamics in return for a one-year lease back of the residence with an option to repurchase. Just as the Bernsteins did, she also executed an assignment of escrow, bill of sale, and name affidavit in connection with the transaction. However, there was no settlement statement, title insurance, or tax or insurance proration. The first mortgage on the property remained undisturbed, and Minalla made payments on the mortgage. Additionally, she maintained the interior and exterior of the home, the structure, the electrical, plumbing, and all major appliances.
Subsequently, when Equinamics attempted to evict Minalla for nonpayment of rent, she brought an action against Equinamics alleging that she was tricked into entering the transaction, which was not a sale but rather a disguised loan secured by her home. The trial court ordered her to pay rent into the court registry, which Minalla appealed.
The Third District observed that this was not an ordinary real estate transaction or usual landlord-tenant relationship. The court further noted that there was a factual dispute concerning who was the true owner of the property. Because the order requiring payments into the court registry was made without conducting an evidentiary hearing concerning the nature of the transaction and who was the true owner of the residence, the Third District concluded that the trial court erred in imposing the payment requirement.
Like Minalla, the transaction in this case is not an ordinary real estate transaction or landlord-tenant relationship. Material issues of fact remain.
Taking the record in the light most favorable to the Bernsteins, New Beginnings approached the Bernsteins and led them to believe that it would help them save their home through a refinance. Ultimately, the Bernsteins signed the transaction documents two days before the foreclosure sale, having exhausted all avenues of financing. The lease agreement provided that New Beginnings was to use the rental payments to pay the existing mortgage on behalf of the Bernsteins. The mortgage remained in the Bernsteins' name, and New Beginnings did not assume the mortgage. It is not clear from this record that the mortgage holder even knew that the property had been transferred.
Moreover, there was no settlement statement in connection with the transaction, no title insurance, and no tax or insurance prorations. At the same time, the Bernsteins were required to maintain the interior and exterior of the house, and pay taxes, insurance, and homeowner's fees. All indicia of ownership remained with the Bernsteins.
Based on the facts of this case, it is apparent that the transaction by which New Beginnings received title to the Bernsteins' residence was clearly not an ordinary real estate transaction. Likewise, the circumstances under which the Bernsteins continued to remain on the property after they executed the warranty deed to New Beginnings was not possessed of the trappings of a usual landlord-tenant relationship. Minalla, 954 So.2d at 647.
New Beginnings claims that all of the documents and the Bernsteins' deposition testimony prove that they knew exactly what the documents stated and agreed that they were not under duress. Aside from the fact that the documents themselves refer to the sale as a "distress" sale, the terms and conditions set forth are not consistent with a sale and leaseback. They may have known that they were executing the documents, but their legal effect depends upon the totality of the facts and circumstances. Despite the labels on the documents, it is the substance of the transaction and the real intent of the parties that controls.
We therefore reverse both orders and remand for an evidentiary hearing on the merits. We do not address the remaining issues raised by the Bernsteins, as those do not involve non-final issues appealable pursuant to Florida Rule of Appellate Procedure 9.130.