Opinion ID: 1489893
Heading Depth: 1
Heading Rank: 2

Heading: Was this transaction a loan in disguise?

Text: Holden maintains that the trial justice should have found that her transfer of title to defendant, coupled with her option to repurchase the property, was a loan and therefore subject to and in violation of the Rhode Island usury laws. See G.L. 1956 § 6-26-2. When determining whether a transaction is a loan or other business transaction, we focus on the substance over the form of the transaction and examine all the facts and circumstances that reveal the true nature of the transaction. See Lancia v. Grossman's of Rhode Island, Inc., 100 R.I. 407, 411-12, 216 A.2d 517, 520 (1966) (holding extension of time to pay debt in exchange for note and mortgage was a business transaction rather than a loan); Nazarian v. Lincoln Finance Corp., 77 R.I. 497, 503, 78 A.2d 7, 9 (1951) (upholding trial justice's factual determination that transaction was a loan rather than a conditional sale); Daniels v. Mowry, 1 R.I. 151, 164 (1842) (It is the intent of parties that taints a contract with usury, and not the mere words in which that contract is expressed.). Ultimately, the existence of a loan is a question of fact. West Pico Furniture Co. of Los Angeles v. Pacific Finance Loans, 2 Cal.3d 594, 86 Cal.Rptr. 793, 469 P.2d 665, 671 (1970) (Whether a particular transaction is a usurious loan or a sale is a question of fact.). The factual inquiry pertains to whether the parties intended to create a debtor-creditor relationship. Kjar v. Brimley, 27 Utah 2d 411, 497 P.2d 23, 26 (1972); see also Koch v. Wasson, 161 N.W.2d 173, 177 (Iowa 1968) (concluding transaction to be a loan when parties treated transaction as giving rise to a debtor-creditor relationship). In the present case, the trial justice made factual findings that the parties intended to enter into a business transaction for profit, and did not intend their dealings to be a loan. It is well settled that this Court will overturn a trial justice's findings of fact only when they are clearly wrong or when the trial justice overlooked or misconceived material evidence. Board of Governors for Higher Education v. Infinity Construction Services, Inc., 795 A.2d 1127, 1129 (R.I.2002) (citing Retirement Board of the Employees' Retirement System of Providence v. City Council of Providence, 660 A.2d 721, 724 (R.I.1995)). Unfortunately, our burden here is made a bit heavier because Holden has not provided us with a transcript of her own testimony. The decision to pursue an appeal without ordering the full transcript of the Superior Court proceeding is risky business. 731 Airport Associates, LP v. H & M Realty Associates, LLC, 799 A.2d 279, 282 (R.I.2002). [7] After careful review of the record provided, it is our opinion that the trial justice was not clearly wrong when he decided the transaction was not a loan. He gave reasons for his findings. He found that the parties did not intend a loan because Salvadore considered the arrangement to be a business deal, he did not lend her any money, and Holden did not believe that she retained any interest in the property or owe any debt to Salvadore. Further, Holden had the potential to realize a profit of about $50,000 to $60,000, the agreement was signed by both parties, Holden was represented by counsel, [8] and the agreement specified that it was a joint effort representing the entire agreement between the parties. The trial justice also considered it a salient fact that Holden filed for bankruptcy protection, but that she did not list the transaction as a loan or list an interest in the property as an asset of her estate. These facts plainly support the trial justice's conclusion that the parties did not intend to or believe that they entered into a loan agreement. To support her argument, however, Holden, relies on a number of cases in which courts have considered the question of whether a sale subject to an option to repurchase is in substance a usurious loan. In these cases, the intention of the parties at the time of the transaction guides the various courts' determinations as to whether the transaction was a loan or a sale with an option to repurchase. See, e.g., Kawauchi v. Tabata, 49 Haw. 160, 413 P.2d 221, 227-28 (1966) (holding trial court erred when it found that transaction intended by parties was a sale and option to repurchase rather than a loan); Robinson v. Durston, 83 Nev. 337, 432 P.2d 75, 76 (1967) (upholding trial court's determination that sale with option to repurchase was truly a loan in disguise); Cannon v. Seattle Title Trust Co., 142 Wash. 213, 252 P. 699, 701 (1927) (holding whether transaction was a usurious loan or sale with option to repurchase was a question of fact for the jury). The common thread in these cases, the absence of which distinguishes them from the case at bar, is the existence of a debtor-creditor relationship between the holder of title and the holder of the option. See Robinson, 432 P.2d at 83-84 (holding transaction had all indicia of loan in which property was conveyed as security); Cannon, 252 P. at 701 (reciting the proposition that the real inquiry is whether there had been a borrowing and lending at a greater rate of interest than the law allows). The debtor-creditor relationship may be in the form of personal liability of the debtor to pay a sum of money to the creditor. See Kawauchi, 413 P.2d at 228-29 (examining cases where personal liability is essential element of a mortgage). Alternatively, in some jurisdictions, it may also be in the form of a large margin between the debt or sum advanced and the value of the land conveyed. See id. at 230 (quoting Campbell v. Dearborn, 109 Mass. 130, 144 (1872)). In Kawauchi, 413 P.2d at 223, the plaintiff brought an action seeking to declare a transaction to be a mortgage securing a usurious loan. To avoid a foreclosure sale, the plaintiff deeded property valued at $160,000 to the defendant in exchange for $90,000 to pay off the mortgage plus a lease and option to repurchase the property for $117,000. Id. at 224, 225-26. The court held the transaction to be, in substance, a loan because the sum that the defendant paid for the property was inadequate in relation to the value of the property. Id. at 230-31. In other words, the law may imply a promise to repay a debt under particular circumstances of any case, where it is clear that the lender relies on the property for his security being satisfied that he is protected by its high value in relation to amount loaned. Robinson, 432 P.2d at 83. When we examine the substance of the transaction between Holden and Salvadore, it is clear that the parties did not intend to enter into a debtor and creditor relationship. Holden was not personally indebted to Salvadore for any amount of money and Salvadore obtained no right to compel Holden to pay him any sum of money whatsoever. Furthermore, unlike the cases cited above, the putative debtor did not own or transfer any deed to property to the putative lender. Here, Holden already had lost her home to foreclosure. She did not deed the property to Salvadore; rather, he purchased the property from the mortgagee. It is most significant that Holden, unlike the plaintiff in Kawauchi, did not relinquish title to her property in exchange for the use of a sum of money that was significantly less than the property's value. All Holden relinquished to Salvadore was her right, as the highest bidder, to purchase the property and take the title in her own name. In exchange, Holden secured the option to buy the property from Salvadore, or in the alternative, an opportunity to make a profit from a third-party sale. In the circumstances presented to us, we see no evidence of an actual debt or a transfer of property for inadequate consideration that would have served as security for a debt. Therefore, we are confident in holding that the trial justice was not clearly wrong when he concluded that the transaction between these parties was not a loan.