New Jersey Federal Court Holds Sale-Leaseback Transaction Can Create Equitable Mortgage

On March 15, the U.S. District Court for the District of New Jersey held that a sale-leaseback transaction can create an equitable mortgage under New Jersey law, thus granting the equitable mortgagor standing to sue as a consumer under the Truth in Lending Act (TILA). Johnson v. NovaStar Mortgage, Inc., Civ. No. 09-1799 (D.N.J. Mar. 15, 2010). In this case, the plaintiff was involved in an alleged foreclosure rescue scam involving two sale-leaseback transactions, wherein the plaintiff first "sold" her home to her daughter, who obtained a loan to fund the purchase, and then "sold" her home to a third-party investor, who also obtained a loan to fund the purchase. After the plaintiff stopped making payments in connection with the second loan transaction, the defendant lender initiated foreclosure proceedings against the third-party investor, who then evicted the plaintiff. The plaintiff brought suit against the defendant lender for violation of, among other laws, TILA. The lender moved to dismiss for lack of standing, arguing that the plaintiff was not a "consumer," as required by TILA, because the lender did not engage in a consumer credit business transaction with her, and for failure to state a claim. In determining whether the plaintiff was involved in a consumer credit business transaction with the defendant, and thus whether the plaintiff had standing to sue the lender, the court looked at the two alleged transactions in light of New Jersey’s doctrine of “equitable mortgage.” The court noted that New Jersey courts have found in the past that sale-leaseback arrangements made to avoid foreclosure are equitable mortgages. Relying on In re O’Brien, 2010 Bankr. LEXIS 171, 2010 WL 251660, the court considered a number of factors to conclude that (i) the plaintiff sufficiently alleged that both sale-leaseback arrangements in this case were equitable mortgages, and (ii) the lender was the plaintiff’s equitable mortgagee. As such, the court held that the plaintiff sufficiently alleged that she engaged in a consumer credit business transaction with the defendant, and that she has standing under TILA. With regard to the lender’s motion to dismiss for failure to state a claim, the court held that the plaintiff’s TILA damages claim was untimely because it was brought outside the one year statute of limitations; however, the plaintiff’s TILA rescission claim was timely because it was brought within the three year statute of limitations.