Minnesota Federal Court Finds Violations Of State "Foreclosure Rescue" Statutes; Invokes Equitable Mortgage Doctrine In Homeowners' Favor

A Minnesota Federal Court last week ruled that, in a sale leaseback transaction involving the home of a financially strapped homeowner and a foreclosure rescue operator, the rescue operator violated a number of provisions of the Minnesota statute regulating foreclosure rescue transactions, Chapter 325N.

Further, in denying the rescue operator's motion for summary judgment regarding alleged violations of certain Federal consumer lending laws on the basis that the foreclosure rescue, sale leaseback of the homeowner's home did not involve a mortgage or a consumer debt, the court ruled that the evidence presented supported a finding that the sale leaseback of the plaintiff's home was an equitable mortgage, rather than a true sale leaseback, and accordingly, the Federal consumer protection laws may be applicable.

(All bold text is my emphasis; most citations and some internal quotations are omitted.)

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Equitable Mortgage

In ruling that the evidence presented to it favored the finding of an equitable mortgage, the court was addressing the defendant / foreclosure rescue operator's motion for summary judgment (joined in by the mortgage lender providing the loan obtained in the course of stripping the equity from the home) involving the plaintiff / homeowners' claims of violations of the Federal Truth In Lending Act ("TILA") and the Home Ownership and Equity Protection Act ("HOEPA"), in which the homeowners claimed a continuing right to rescind the foreclosure rescue, sale leaseback, equity stripping transaction.

According to the court, the defendants / foreclosure rescue operator:

• argue that TILA only applies to a credit transaction,
• reason that since there was no debt instrument and no loan, neither TILA nor HOEPA apply,
• argue that the documents at issue here state explicitly that no security interest is being granted,
• point to a disclosure statement stating "the Contract for Deed is not intended a loan and a mortgage securing repayment of a debt to REES,"
• further argue that the Joneses themselves stated that they did not believe the Defendants loaned them any money. E. Jones Dep. p. 135; M. Jones Dep. p. 106. During her deposition, E. Jones was asked to review all related documents and was not able to identify anything that could be construed as a mortgage.

In denying the defendants' motion for summary judgment on the TILA and HOEPA claims, the court observed:

• Defendants, in seizing on these arguments, elevate form over substance. The true inquiry is whether the parties intended an outright sale or whether the "purpose and effect of the transaction is to give security on real property for a debt." Gagne, 159 N.W.2d at 899.

The court provided the following analysis of the Minnesota case law on equitable mortgage (citations omitted for ease of reading):

• Courts generally presume that a deed is a conveyance. However, Minnesota courts have adopted the doctrine of "equitable mortgage" "to prevent an overreaching by one party that would unfairly exploit the other party's financial position or relative lack of real estate dealings." Essentially, if "the real nature of the transaction between the parties is that of a loan, advanced upon the security of realty granted to the party making the loan, it may be treated as an equitable mortgage". The intent of the parties is paramount, and to overcome the presumption that a deed is a conveyance, it must be clear that both parties intended that the transaction result in a mortgage.

• In order to determine intent, courts may look to the documents relating to the transaction. The lack of terms such as "debt", "security", or "mortgage" are strong evidence indicating that the transaction is not a mortgage. However, the fact that documents do not express the existence of a loan is not conclusive, and the intention of the parties is to be ascertained by looking at "all the facts and circumstances surrounding a transaction." "In the final analysis, the question of whether the parties to a conveyance really intended it to be absolute or security for indebtedness is for the trier of fact."

[...]

• In addition to looking to the intent of the parties, courts will also consider the following factors in making a determination as to whether a conveyance should be construed as an equitable mortgage: 1) the disparity between the value of the property and the price paid; 2) the nature of the solicitation that gave rise to the transaction; 3) attempts to sell the property on the open market; 4) whether there was a negotiated sale price; and 5) whether there was continuous occupancy.

• The Court finds these factors all weigh in favor of a finding that the conveyance at issue should be construed as an equitable mortgage.

• In this case, the Property was appraised at $ 278,000 and purchased by REES-MAX for $214,000. Given this disparity, this factor weighs in favor of finding that the transaction was intended to operate as a mortgage. A typical buyer does not leave the closing table with $ 33,092.

Rescission (re: TILA claims)

The defendants also argued that because the homeowners have not met their burden of demonstrating that they could tender the value of the property within a reasonable period of time, they are not entitled to rescission. Among other things, the court said:

• Given the discretion within which the Court may condition the right to rescission, it is not necessary that the Joneses demonstrate they have the means to secure the necessary financing at this point in time.

Because of the foregoing, the Defendants' motion for summary judgment as to the TILA / HOEPA claims were denied.
.

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Violations of Chapter 325N, Minnesota Statutes.

Defendants sought summary judgment on all claims arising under state law. The Joneses sought partial summary judgment, that as a matter of law, Defendants Banken, REES-MAX and REES violated Minn. Stat. §§ 325N.04, .11, .12, and .17.

Chapter 325N of Minnesota State statutes regulates mortgage foreclosures as part of an overall consumer protection scheme. This Chapter is divided into two distinct sections: (1) §§ 325N.01 through .09 which regulate "foreclosure consultants", and (2) §§ 325N.10 through .18 which regulate "foreclosure purchasers."

1. Foreclosure Consultants, Minn. Stat. §§ 325N.01 through .09

Based upon the undisputed facts, the Court found that one of the defendants was a foreclosure consultant as defined by statute. However, the court found genuine issues of material fact regarding the alleged violation under one provision of this portion of Chapter 325N and, accordingly, denied summary judgment as to this particular violation. See Memorandum Opinion And Court Order (link below) for detail.

2. Foreclosure Purchasers, Minn. Stat. §§ 325N.10 through .18

The plaintiff / homeowner alleged several violations of this portion of Chapter 325N. After sorting through the disputed and undisputed facts, the court granted partial summary judgment to the plaintiff / homeowner, finding clear violations of the following provisions of the statute:

• Failure to comply with foreclosure purchase contract requirements - Minn. Stat. §§ 325N.11 and .12,
• Failure to verify a reasonable ability to pay - Minn. Stat. § 325N.17(a)(1),
• Violation of foreclosure purchaser in representing, directly or indirectly, that they are assisting the foreclosed homeowner to "save the house" or to assert a substantially similar claim - Minn. Stat. § 325N.17(d)(3),
• Violation of foreclosure purchaser in representing, directly or indirectly, that they are assisting the foreclosed homeowner to prevent a completed foreclosure if in fact the result of the transaction is that the foreclosed homeowner will not complete a redemption of the property - Minn. Stat. § 325N.17(d)(4).

The court denied summary judgment to the defendant / foreclosure rescue operator regarding its assertions related to Chapter 325N. See Memorandum Opinion And Court Order (link below) for detail.

Violation of Minnesota Prevention of Consumer Fraud Act

The plaintiff / homeowners asserted a claim pursuant to the Minnesota Prevention of Consumer Fraud Act. This statute prohibits the use of a fraudulent statement in connection with the sale of merchandise, which includes real estate. Minn. Stat. § 325F.69, Subd. 1. Defendants moved for summary judgment as to this claim.

A violation of sections 325N.10 to 325N.17 is considered to be a violation of § 325F.69. Minn. Stat. § 325N.18, subd. 1. As this Court has found Defendants have violated sections of Minn. Stat. § 325N, Defendants were denied summary judgment as to this claim.

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Side Note:

The plaintiff homeowners in this case had been the subject of an eviction from their home in an unlawful detainer action brought by the foreclosure rescue operator in state court, who was granted summary judgment. Apparently, the eviction was considered a big enough deal that the Minnesota Attorney General's Office and the legal services law firm, Mid-Minnesota Legal Assistance, filed amicus briefs in favor of the homeowner to reverse the judgment of eviction. The Minnesota intermediate appellate court was apparently unimpressed, as it affirmed the lower court judgment of eviction. See Real Estate Equity Strategies, LLC v. Jones, 720 N.W.2d 352; (Mn. App. Ct. 2006) (Available online courtesy of Minnesota State Law Library).

See also, Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 2.

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For last week's Memorandum Opinion And Order, see Jones vs. Rees-Max, LLC, et al. (Civil File No. 05-2384, D. Mn. Sept. 17, 2007).

For the following related court documents in this matter, drop me an e-mail at HomeEquityTheft@yahoo.com (please put "Jones v. Rees-Max" in message line) and I'll e-mail them to you; or you can go directly to the PACER Online Court Docket for this case and click the appropriate links for these or any other documents filed in this case (PACER registration required):

• Plaintiff's First Amended Complaint - Document #20 (37 pages - $2.40),
• Plaintiff's Memorandum Of Law In Support Of Partial Summary Judgment - Document #45 (28 pages - $2.24),
• Plaintiff's Memorandum Of Law In Opposition To Defandant's Summary Judgment Motion - Document #52 (18 pages - $1.44).

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In addition to alleging several violations of the Minnesota statute regulating foreclosure rescue transactions and the state Prevention of Consumer Fraud Act, the Plaintiff's Amended Complaint contains the following claims and alleged violations:

• Federal Truth In Lending Act ("TILA"), Federal Home Ownership Equity Protection Act ("HOEPA"), and Federal Reserve Board Regulation Z,
• Equitable Mortgage,
• Rescission Under TILA and HOEPA,
• Declaratory Judgment (to determine amount of tender needed to rescind transaction, and to declare the mortgage placed on the homeowners' property as part of the equity stripping transaction to be void and unenforceable),
• Unlawful Eviction.

Representing the homeowner in the Federal action were attorneys Kristine K. Nogosek and Robert B. Bauer, with the firm Severson Sheldon Dougherty & Molenda, PA., Apple Valley, Minnesota. Minnesota equitable mortgage sigma

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 2

(Part 2 of a multi part post)

Click here to read Part 1 of Equitable Mortgage Eviction Defense

This recent court case dealing with the equitable mortgage doctrine and evictions of homeowners in the context of foreclosure rescue situations where a Minnesota appellate court affirmed a lower court judgment of eviction of the homeowners.

Minnesota

In a Minnesota case, an eviction action was brought against two homeowners (husband and wife) after they defaulted on the leaseback agreement. In response, the homeowners filed a separate equity-stripping action (in front of a different judge) against the foreclosure rescue operator and related entities under Minn. Stat. §§ 325N.01-.18, alleging among other things, that the transaction was a prohibited equity stripping transaction and that the arrangement was an equitable mortgage, and not an absolute conveyance. The homeowners also filed an answer in the eviction proceeding noting the pendency of the chapter 325N action and moved for the district court to dismiss the eviction proceeding or to stay it pending resolution of the chapter 325N action. The district court denied that motion and awarded the foreclosure rescue operator an eviction judgment.

In affirming the lower court judgment of eviction, the appellate court addresed a couple of issues:

1) Subject Matter Jurisdiction

The homeowner cited old case law for the proposition that the eviction court did not have subject matter jurisdiction to hear the eviction action because, in essence, the relationship between the parties was not that of a conventional landlord-tenant, and the question of the validity of landlord's title was at issue. The appellate court rejected the argument on the grounds that, at the time the old cases were decided, the eviction courts were of limited jurisdiction and, accordingly, those courts lacked jurisdiction to hear a case like the one at bar.

The court hearing the eviction in this case was not of limited jurisdiction. Stated another way, because of the changes in the structure of the Minnesota judiciary over the years, the court in this case (unlike the courts in the old cases) had jurisdiction to hear both the eviction case and the case disputing the landlord's title and could have heard them together (the homeowner did not file counterclaims in the eviction action asserting violations of 325N / equitable mortgage; those claims were made in a separate action). On this basis, the claim of lack of subject matter jurisdiction in the eviction case failed.

2) Section 504B.121 Issue

Minnesota Section 504B.121, contained in the Minnesota Landlord Tenant law, in essence appears to allow a "tenant" to dispute the title of a "landlord" in a "foreclosure rescue" situation (the only exception to the rule that prohibits a tenant from disputing a landlord's title in an eviction action). The homeowners' request for either a dismissal or a stay of the eviction action pending the conclusion of the equity stripping / equitable mortgage action under Section 325N was rejected by the appellate court, not based on the substance of the statute, but on procedural grounds. The court said the following:

• "While the question of a stay or dismissal was presented to the district [lower] court, the record shows that Minn. Stat. § 504B.121 was not mentioned, either as the basis for a stay or a dismissal, or for any other reason. Therefore, we conclude that the impact of Minn. Stat. § 504B.121 on the question of whether the eviction court should have stayed the eviction proceeding is not properly before this court, and we decline to address it."

3) General Arguments

Additional arguments were made asserting that allowing an eviction proceeding to finish before a chapter 325N action is resolved is inconsistent with chapter 325N because allowing the eviction proceeding to go forward allows the landlord, who may, in the chapter 325N action, be found to lack title to the property, to obtain possession of the property and possibly convey it. Rather than try to summarize the court's response to this point, I will simply say that the appellate court found a way to reach the necessary rationale to support a rejection of this point. The link below will take you to the case and all the details.

Conclusion

This was apparently an extremely important case in Minnesota. In addition to the homeowners being represented by private counsel, they received additional support in the form of a "friend of the court" brief filed jointly by the State of Minnesota (through the Minnesota Attorney General's Office) and Mid-Minnesota Legal Assistance, the primary provider of general civil legal services to low-income and elderly people in 20 central Minnesota counties.

(Editor's Note: After reading this case about a half a dozen times, I still can't figure out how in the world the court could allow an eviction of the homeowner by the foreclosure rescue operator to go forward when the court was aware that the issue of the validity of the operator's title was an issue that was being litigated in another proceeding. The court mentioned that the homeowner could have sought an injunction from the judge in the other proceeding temporarily enjoining the eviction until the title issue was resolved. Why the court in this case didn't just grant a stay of eviction until the title issue was resolved is unbeknownst to me.)

Case Law Citation

Real Estate Equity Strategies, LLC v. Jones, 720 N.W.2d 352; (Mn. App. Ct. 2006) (Available online courtesy of Minnesota State Law Library).

(revised 2-6-07) emdefense Minnesota equitable mortgage sigma