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Zaman v. Felton

Supreme Court of New Jersey
98 A.3d 503 (2014)
ELI5:

Rule of Law:

A sale of property combined with a leaseback and an option to repurchase may be recharacterized as an equitable mortgage if, in substance, the transaction was intended as security for a loan. Courts must apply an eight-factor test to determine the true nature of such a transaction.


Facts:

  • In 2007, Barbara Felton faced foreclosure on her unfinished, uninhabitable home, which sat on fifteen acres of land.
  • Tahir Zaman, a licensed real estate agent who purchased distressed properties as a side business, was introduced to Felton.
  • On June 16, 2007, Felton and Zaman signed a standard contract for Felton to sell the property to Zaman for $200,000.
  • During their meeting, Zaman verbally agreed to allow Felton to remain on the property as a tenant with an option to buy it back.
  • At the closing on June 23, 2007, where neither party was represented by an attorney, they executed two additional agreements: a lease for Felton to rent the property for $1,000 per month, and an option for Felton to repurchase it within three months for $237,000.
  • Zaman paid off Felton's existing mortgage and other obligations from the $200,000 purchase price, giving Felton the remaining balance of $85,960.
  • Felton continued to occupy the property for seventeen months without paying rent and did not exercise her option to repurchase.

Procedural Posture:

  • Tahir Zaman filed a complaint against Barbara Felton in the Law Division, seeking possession of real property and damages.
  • Felton filed a counterclaim asserting numerous claims, including fraud and the existence of an equitable mortgage.
  • The trial court held a bifurcated trial, with a jury deciding the fraud issue and the judge deciding all other issues.
  • The jury found that Zaman had proven Felton knowingly agreed to sell the property to him.
  • Following a bench trial, the trial court judge rejected all of Felton’s remaining claims, including her equitable mortgage argument.
  • Felton, as appellant, appealed to the Appellate Division, which affirmed the trial court's judgment in favor of Zaman, the appellee.
  • The Supreme Court of New Jersey granted Felton's petition for certification.

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Issue:

Does a transaction structured as a sale of residential property, accompanied by a lease and an option for the seller to repurchase, constitute an equitable mortgage when the seller was facing imminent foreclosure?


Opinions:

Majority - Justice Patterson

Yes, a transaction structured as a sale can constitute an equitable mortgage. To determine whether a purported sale-leaseback is in substance an equitable mortgage, courts must analyze the transaction using a multi-factor test. The court formally adopted the eight-factor test from O'Brien v. Cleveland, which examines the totality of the circumstances to discern the parties' true intent. These factors include: (1) statements indicating the seller's intent to retain ownership; (2) a substantial disparity between the sale price and the property's actual value; (3) the existence of a repurchase option; (4) the seller's continued possession; (5) the seller's continued responsibility for ownership duties like taxes; (6) a disparity in bargaining power; (7) an irregular purchase process; and (8) the seller's financial distress. The Court held that the jury's finding that Felton 'knowingly sold' the property was a separate issue and did not preclude a judicial finding that the transaction as a whole created an equitable mortgage. The case was remanded for the trial court to apply this new standard.



Analysis:

This decision formally establishes a clear, multi-factor test in New Jersey for identifying equitable mortgages, particularly in the context of sale-leaseback transactions used as foreclosure rescue schemes. By adopting the O'Brien test, the Court provides lower courts with a structured framework to look beyond the form of a transaction to its substance. This precedent strengthens protections for financially distressed homeowners, as it allows courts to recharacterize predatory arrangements disguised as sales into loans, thereby granting sellers the protections afforded to mortgagors, such as the right of redemption. The decision signals that courts will apply heightened scrutiny to sale-leaseback agreements involving vulnerable sellers.

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