Court Opinion

ID: 9373931
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:35.914307+00
Date Added: 2024-06-11T17:16:49.507308
License: Public Domain

FILED
                                                                                    AUG 16 2022
                            NOT FOR PUBLICATION
                                                                               SUSAN M. SPRAUL, CLERK
                                                                                  U.S. BKCY. APP. PANEL
                                                                                  OF THE NINTH CIRCUIT

           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

In re:                                                BAP No. AZ-21-1216-BTL
DOUGLAS THORPE,
           Debtor.                                    Bk. No. 2:16-bk-13619-MCW

DOUGLAS THORPE,                                       Adv. No. 2:17-ap-00109-MCW
            Appellant,
v.                                                    MEMORANDUM∗
TJ 12, LLC,
            Appellee.

               Appeal from the United States Bankruptcy Court
                          for the District of Arizona
              Madeleine C. Wanslee, Bankruptcy Judge, Presiding

Before: BRAND, TAYLOR, and LAFFERTY, Bankruptcy Judges.

                                   INTRODUCTION

       Appellant Douglas Thorpe ("Doug")1 appeals a judgment denying his

request to recharacterize a property sale as an equitable mortgage, affirming

that the transfer of the property was an absolute sale and not intended as

       ∗  This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
        1 Because the Thorpe brothers share the same surname, we refer to them by their

first names. No disrespect is intended. Douglas prefers to be called Doug.
                                                1
security for repayment of a loan, and awarding the buyer its attorney's fees

and costs. Seeing no reversible error by the bankruptcy court, we AFFIRM.

                                    FACTS

      Doug has a bachelor's degree in mechanical engineering. He designs,

manufactures, and sells unmanned aircraft and drones. Troy McNaughton

manages TJ 12, LLC ("TJ 12") and is in the family business of acquiring,

improving, and renting or selling residential properties. He attended college

but did not graduate, and he is a former professional athlete. He is also a

licensed real estate agent.

      In 1992, Dr. Sherman Thorpe ("Dr. Thorpe"), Doug's father, bought a

residence in Mesa, Arizona ("Property"). Doug moved into the Property in

1995 and was responsible for the mortgage payments, maintenance, and

repairs. In July 1999, Dr. Thorpe transferred the Property into the Sherman

William Thorpe Living Trust dated October 26, 1988 ("Trust"). Doug's

brother, William Thorpe ("William"), is an attorney and is the successor

trustee of the Trust. The Trust provided, as did Dr. Thorpe's will, that Doug

would receive title to the Property upon Dr. Thorpe's death. Dr. Thorpe died

in December 1999, but title to the Property was never transferred to Doug.

      Doug fell behind on the mortgage payments and the secured lender

scheduled a trustee's sale of the Property. After a failed bankruptcy filing,

Doug unsuccessfully sought out an $11,000 loan from Amerifirst Financial,

Inc. ("Amerifirst") to cure the mortgage arrears and stop the looming

                                        2
foreclosure. Although Amerifirst could not provide the loan, the loan officer

told Doug that, with "50-60% equity" in the Property, it would not be difficult

to find an investor to provide him with a "short-term loan."

      Doug was then referred to McNaughton of TJ 12 for help. Although the

details of what Doug and McNaughton discussed during their meeting were

disputed, they agree that McNaughton asked Doug how much it would take

to pay off the mortgage on the Property. Doug thought the payoff amount

was $75,000, but it was later determined to be $95,000.

      On August 8, 2013, TJ 12 and William, as trustee of the Trust, entered

into a contract to sell the Property to TJ 12 for $96,000. The purchase price

was based solely on the amount necessary to pay off the existing mortgage.

William, as trustee of the Trust, executed a warranty deed and affidavit of

property value transferring title to the Property to TJ 12. William did not

negotiate any portion of the sale contract with McNaughton, and he had no

opinion as to the Property's value. William signed the sale contract only

because Doug asked him to.

      On August 23, 2013, Doug and TJ 12 entered into an "Option

Agreement" that allowed Doug to rent the Property, with an option to

purchase it for $119,196.50 at any time before September 1, 2014. Doug could

extend the purchase option for another year. Rent for the first year was $800

monthly, with payments to begin October 1, 2013. 2 If Doug did not exercise

      2
         The option price was based on what TJ 12 paid for the Property (plus closing
costs), plus $21,200, which included a $20,000 profit and $1,200 for the rent that would not
be paid until the start of the rent payments on October 1, 2013.
                                              3
the purchase option after year one, monthly rent for year two was $1,525,

which included estimated taxes and insurance of $160.

      The sale of the Property to TJ 12 closed on August 26, 2013. TJ 12 paid

off the existing mortgage and all closing costs.

      Doug fell behind on rent payments within a few months. By January

2015, he owed TJ 12 over $15,000 in rent. Doug never exercised the purchase

option. He was evicted from the Property in January 2019.

      During Doug's second chapter 13 3 bankruptcy case, he filed an

adversary complaint against TJ 12, seeking to recharacterize the sale

transaction as an equitable mortgage. On summary judgment, the bankruptcy

court ruled that Doug lacked standing to assert an equitable mortgage claim

because he never held legal title to the Property. Doug appealed to the BAP,

which reversed, ruling that not holding legal title was not dispositive for an

equitable mortgage claim. See Thorpe v. TJ 12, LLC (In re Thorpe), BAP No. AZ-

18-1330-LBF, 2019 WL 3778359 (9th Cir. BAP Aug. 9, 2019). On remand, the

bankruptcy court held a trial on whether the ostensible sale transaction for

the Property should be characterized as an equitable mortgage.

      At trial, Doug testified that the transfer of the Property to TJ 12 was not

a sale; it was a loan. In his mind, he was still the owner of the Property

despite the transfer. The transaction, which Doug said McNaughton

structured, was part of a deal that TJ 12 would pay off the mortgage on the

Property, that Doug would make payments to TJ 12 as cash flow permitted,

      3
          Unless specified otherwise, all chapter and section references are to the
                                                4
and that when Doug received an expected payout of $650,000 from a lawsuit

he had filed against the Department of Defense, he would pay TJ 12 back.

Unfortunately, the expected lawsuit proceeds never came. Doug said he

thought that the Property was worth between $200,000 and $218,000 in 2013,

so to think he would have sold it to TJ 12 for $96,000 was "absurd." Doug said

that if he had intended to sell, he would have asked his mother, a real estate

agent for 40 years, for an agent referral.

      McNaughton testified that TJ 12 intended only to purchase the

Property; there was never an intent to make a loan to the Trust with the

Property as collateral. McNaughton said he was not allowed inside the

Property to inspect it before the sale, but he estimated he would need to

invest $40,000 to $50,000 before he could resell it. Viewing only the outside,

McNaughton's opinion was that the Property was dated, had original

windows, the pool needed repairing, and because there was a tarp over part

of the roof, that there were roof issues. McNaughton assumed the inside of

the Property was in the same general condition as the outside. With the

upgrades, McNaughton estimated he could resell the Property for $150,000 to

$175,000. Thus, he believed it was worth no more than $100,000, if he was to

make his preferred $20,000 profit.

      To buy the Property, TJ 12 obtained a loan from Amerifirst for $91,000.

The loan accrued interest at 18% per annum and had monthly payments of

$1,365. McNaughton said he was willing to accept $800 a month from Doug

Bankruptcy Code, 11 U.S.C. §§ 101-1532.
                                          5
for the first year's rent, even though the Amerifirst loan payments were

$1,365, because TJ 12 was either going to sell the Property to Doug and make

$20,000 or fix and sell it for more to another party.

      McNaughton said he had done 20 lease-purchase option agreements

similar to the one here, but those agreements were with an existing tenant in

the property; he had never rented a property back to the previous owner after

purchasing it. McNaughton said he only did the lease-purchase option here

because Doug wanted to remain in the Property and was concerned that the

potential purchaser at the foreclosure sale would require him to move out.

      The bankruptcy court denied Doug's request to recharacterize the sale

transaction as an equitable mortgage. Analyzing the factors an Arizona court

considers for determining an equitable mortgage, the bankruptcy court found

that Doug had not established by clear and convincing evidence that the

parties intended to create a loan with the transfer of the Property intended to

secure repayment of that loan, instead of an absolute sale of the Property. The

bankruptcy court later entered a final judgment, which also awarded TJ 12 its

attorney's fees and costs. Doug timely appealed.

                                JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A) & (O). We have jurisdiction under 28 U.S.C. § 158.

                                     ISSUE

      Did the bankruptcy court err in denying Doug's request to

recharacterize the sale of the Property as an equitable mortgage?

                                        6
                           STANDARDS OF REVIEW

      We review the bankruptcy court's conclusions of law de novo and its

findings of fact for clear error. Nichols v. Birdsell, 491 F.3d 987, 989 (9th Cir.

2007). The bankruptcy court's finding that a transaction was an absolute sale

or an equitable mortgage will be upheld unless it is clearly erroneous. See

Stephens v. Arrow Lumber Co., 354 F.2d 732, 734 (9th Cir. 1966); In re S.F. Indus.

Park, Inc., 307 F. Supp. 271, 274 (N.D. Cal. 1969). A bankruptcy court's factual

determination is clearly erroneous if it is illogical, implausible, or without

support in the record. Retz v. Samson, 606 F.3d 1189, 1196 (9th Cir. 2010).

                                  DISCUSSION

A.    Arizona law governing equitable mortgage

      "The equitable mortgage doctrine is a device used to prevent an

avaricious lender from taking advantage of a distressed borrower." Shelton v.

Cunningham, 508 P.2d 55, 58 (Ariz. 1973) (en banc). Under Arizona law, a

deed purporting to be an absolute conveyance on its face will be deemed an

equitable mortgage where clear and convincing evidence demonstrates that

the intent of the parties was a security transaction. Id. This is true whether the

conveyance is of chattel or of real property. Weston v. Denny, 480 P.2d 24, 26

(Ariz. Ct. App. 1971) (extending to real property Merryweather v. Pendleton,

372 P.2d 335 (Ariz. 1962), Arizona's seminal equitable chattel mortgage case);

accord Shelton, 508 P.2d at 58. The parties' intent is established from the

surrounding facts and circumstances. Bostwick v. Jasin, 821 P.2d 282, 284

(Ariz. Ct. App. 1991).

                                          7
      In evaluating whether a transaction was for security purposes or an

absolute sale and discerning the parties' intent, Arizona courts consider six

non-exclusive factors: (1) the parties' prior negotiations; (2) distress of the

grantor; (3) whether the amount advanced was about the amount the grantor

needed to pay an existing indebtedness; (4) the amount of consideration paid

in comparison to the actual value of the property; (5) existence of a

contemporaneous agreement to repurchase; and (6) the subsequent acts of the

parties. Merryweather, 372 P.2d at 340-41; Weston, 480 P.2d at 26. No one factor

is dispositive, "but a combination of several will go a long way in showing

that an absolute conveyance was actually a security arrangement."

Merryweather, 372 P.2d at 341. If there is any doubt, courts tend to hold that

the agreement is a mortgage because this protects all parties and prevents

forfeiture of the pledged property. Id. (citations omitted). Two additional

factors considered by Arizona courts for an equitable mortgage include

(7) the relative sophistication of the parties, and (8) whether one of parties is

in the business of lending money. Shelton, 508 P.2d at 58 (adding these two

factors to the six Merryweather factors).

B.    The bankruptcy court did not err in finding that the transaction was
      an absolute sale.

      The bankruptcy court found that only two of the eight factors indicated

that the transaction was a secured loan. The court found that, at best, Doug

had hoped this would be only a short-term situation, and that when he

received the lawsuit proceeds, he would be able to exercise the option and

                                         8
purchase the sold Property. Such a hope, or Doug's unilateral desire for this

to have been a short-term situation, however, did not change what was an

absolute sale with an option agreement as the documents depicted.

        Doug contends that all eight factors indicated that the transaction was a

secured loan, and that the bankruptcy court misapplied the facts to the law to

erroneously conclude it was an absolute sale. We review his arguments in

turn.

        1.   Prior negotiations of the parties

        The bankruptcy court found that this factor was not indicative of an

equitable mortgage or that the parties intended a secured loan. This was their

first transaction. Doug initially sought a loan from Amerifirst in an amount

sufficient to reinstate the mortgage, but the loan was declined. He then met

with McNaughton and requested a similar loan from TJ 12. McNaughton

testified that he told Doug that TJ 12 was not interested in providing a loan,

and that he did not start providing loans to individuals until 2014, one year

after the transaction with Doug.

        The evidence was conflicting on whether or not Doug told

McNaughton that he owned the Property or that the Trust did. In any case,

McNaughton knew that William, as trustee of the Trust, had to execute the

documents for the transfer, which William did on Doug's request. The parties

agreed that McNaughton structured the transaction as a sale, but Doug was

the one who insisted on the purchase option.

                                         9
      Ultimately, the bankruptcy court found that, while Doug may have

initially sought a small loan to reinstate the mortgage and avoid the pending

foreclosure, McNaughton did not agree to provide a loan. The court found

McNaughton's testimony regarding the transaction and whether he was

willing to provide a loan believable and consistent with his prior and then-

existing business practices. The court also found it inconceivable that Doug

would enter into a transaction to borrow $96,000 when he needed far less

than that to reinstate the mortgage.

      Doug argues that if a purported seller was seeking a loan, the first

Merryweather factor supports a finding of an equitable mortgage, and that the

bankruptcy court erred in ruling otherwise. He cites SAL Leasing, Inc. v. State

ex rel. Napolitano, 10 P.3d 1221 (Ariz. Ct. App. 2000). In that case, it was

undisputed that a majority of SAL Leasing's customers came in seeking a

loan, but SAL Leasing would only agree to sale/lease-back transactions. It

was also acknowledged that at the time customers came in, they thought they

were obtaining a loan. Id. at 1227. Here, there is no evidence of a history of

transactions by TJ 12 similar to this one. There is also no evidence that TJ 12's

customers, at least at the time of this transaction in August 2013 or before,

came in assuming they were getting a loan.

      Even if this factor could support a finding of an equitable mortgage like

Doug argues, it was not illogical or implausible for the bankruptcy court to

find that it did not. There was evidence demonstrating that Doug knew the

transaction with TJ 12 was not a loan.

                                         10
      Doug also contends that the bankruptcy court set forth a series of

irrelevant and convoluted arguments to find that the first factor was not

indicative of an equitable mortgage. While the court made some observations

about Doug's ability or desire to obtain a short-term loan, and some of its

analysis as to the first factor perhaps belonged in its analysis of other factors,

none of this rises to the level of error. Merryweather and Shelton do not

mandate that the court engage in a precise "check the box" approach, and the

bankruptcy court's more fluid approach here was not error.

      2.    Distress of the grantor

      TJ 12 had argued that the "grantor" in this case was the Trust, which

held legal title to the Property, and not Doug, who held only a beneficial

interest. TJ 12 argued that without any evidence of the Trust's financial

distress, there was nothing to support a finding that the transaction between

the Trust and TJ 12 was really a secured loan.

      Noting that it was unclear whether the court looks to the financial

distress of the party holding legal title, or to the party holding the beneficial

interest under a trust, the bankruptcy court ultimately decided that this factor

was not clearly indicative of an equitable mortgage. Doug argues that the

bankruptcy court erred by diminishing his distress because he was not the

legal title holder. He relies on the Panel's prior decision to argue that his

beneficiary status made no difference here, particularly since he directed that

the Property be transferred to TJ 12. We tend to agree. Further, in Shelton,

which was decided 11 years after Merryweather, the Arizona Supreme Court

                                        11
did not limit this second factor to the distress of the "grantor," but noted that

an equitable mortgage will be imposed to prevent an avaricious lender from

taking advantage of a distressed "borrower." 508 P.2d at 58. Here, the

"borrower" – assuming for the moment that the transaction was a secured

loan – was Doug, since he was responsible for the monthly "rent" in order to

stay in the Property.

        Nonetheless, this was just one of eight factors the bankruptcy court had

to consider. Even if we assigned error to its decision on this factor, it would

not compel us to reverse and impose an equitable mortgage given the court's

supported findings that nearly all of the other factors indicated this was a

sale.

        3.   Amount advanced was about the amount grantor needed to pay
             an existing indebtedness

        The bankruptcy court found that this factor "may" support a finding

that the parties intended a secured loan. While the court found that the

$96,000 TJ 12 paid to acquire the Property paid off the existing debt owed to

the secured lender, this amount far exceeded the $11,000 to $14,000 Doug said

he was seeking to reinstate the mortgage and avoid the pending foreclosure.

        Though Doug agrees that this factor weighed in his favor, he takes issue

with the bankruptcy court's "equivocating" analysis, which he says focused

on the $11,000 to $14,000 he was originally seeking as opposed to the $96,000

received. He argues that the correct legal standard is whether the funds were

used to pay an existing indebtedness. He argues that this factor

                                        12
unequivocally supported the finding of an equitable mortgage, and to the

extent the bankruptcy court found something less, it erred. While we disagree

with Doug's statement of the legal standard, we agree that this factor

supported the finding of an equitable mortgage. Regardless of what amount

of money Doug was originally seeking, the fact is that what TJ 12 advanced

was the amount needed to pay off the existing mortgage.

      4.    Amount of consideration paid in comparison to actual value of
            the property

      TJ 12's appraisal of the Property done in 2018 included a retrospective

value and indicated that it had a market value of $178,000 as of August 26,

2013, subject to certain qualifications. Doug offered a similar appraisal

valuing the Property at $195,000.

      Doug argued that the $96,000 TJ 12 paid was considerably less than the

Property's value and supported an equitable mortgage, regardless of whether

one considered TJ 12's appraisal of $178,000 or Doug's testimony that it was

worth as much as $218,000. McNaughton, who was in the business of buying

distressed properties to flip or to hold as rentals, testified that the purchase

price of just under $100,000 was not considerably below fair market value

given his calculation that he could resell the Property for $150,000 to $175,000

after he invested $40,000 to $50,000 in upgrades.

      The bankruptcy court found that McNaughton's testimony was both

believable and consistent with TJ 12's appraisal. The court also found that

Doug's appraisal of $195,000 did not evidence that the amount TJ 12 paid for

                                        13
the Property was disproportionate consideration. Based on these findings, the

court concluded that the consideration TJ 12 paid to acquire the Property, and

the amount proposed to sell the Property to the Doug if he exercised the

option, were not substantially less than or disproportionate to the Property's

fair market value. This was especially true when considered from an

investor's perspective and the inherent risks involved in buying, fixing, and

flipping real property. Consequently, this factor was not indicative of an

equitable mortgage or that the parties intended a secured loan.

      Doug argues that the bankruptcy court erred by applying a "flipper"

standard to this factor. Instead of comparing the purchase price to the

Property's fair market value, argues Doug, the court wrongfully utilized what

a flipper would be willing to pay for it in a distressed sale, if the flipper

intended to remodel it and make a comfortable profit. While Doug makes an

interesting argument, Merryweather and its progeny have not implied that a

real estate investor should not be able to purchase a distressed property for

less than its "actual value" so as to be able to make a profit upon resale. And

he cites no authority holding otherwise. Accordingly, we conclude that the

bankruptcy court did not err in applying a "flipper" standard to this factor, or

clearly err in finding that this factor was not indicative of an equitable

mortgage.

      5.    Contemporaneous agreement to repurchase

      The bankruptcy court found that the Option Agreement was a

contemporaneous agreement to repurchase the Property, and that this factor

                                         14
supported a finding that the parties intended a secured loan and not a sale. TJ

12 argues that the Option Agreement was not a contemporaneous agreement

to repurchase because it was not an option for the grantor – the Trust – to

"repurchase" the Property, but instead was an option for Doug to "purchase"

it in the first instance. The bankruptcy court rejected this argument, finding

that there was no legal distinction between an agreement to repurchase by a

trust holding legal title and a beneficiary under the trust holding equitable

title. Assuming TJ 12 can even make this argument absent a cross-appeal, we

do not disagree with the court's ruling on this factor.

      6.    Subsequent acts of the parties

      The bankruptcy court found that the subsequent acts of the parties

indicated that they believed and acted as if the transaction was an absolute

sale of the Property with an option to repurchase. The court focused on TJ

12's act of paying all taxes and insurance, especially during the first year, and

charging rent at a rate far below the debt service.

      Doug argues that the bankruptcy court erred by placing great weight

on TJ 12's payment of taxes and insurance after the transfer. He focuses on the

second year of the Option Agreement, when the rent was increased to $1,525

to include taxes and insurance of $160. Doug argues, because he was paying

for these expenses and TJ 12 was acting essentially as an escrow agent in

turning those funds over to the lender, this was indicative of a mortgage. We

disagree. Doug fails to acknowledge that TJ 12 paid the taxes and insurance

out-of-pocket for the first year. And TJ 12 charging higher rent in year two to

                                       15
include those expenses is not necessarily indicative of a mortgage. It could

also indicate a sale and a landlord's desire to charge a sufficient amount of

rent to cover the taxes and insurance for its rental property.

      Doug also argues that the bankruptcy court incorrectly considered

things that were not the subsequent acts of the parties. The court observed

that no reasonable businessperson would borrow funds at a cost of 18% and

then charge monthly rent for the first year that was less than the costs of

those funds. In the court's opinion, this fact weighed heavily against a loan

and indicated that the transaction was a sale. Doug argues that TJ 12's

motivations at the time of the transaction are not "subsequent acts" of the

parties. Whether or not TJ 12's act of accepting only $800 a month for 12

months after the transfer was a subsequent act, the fact remains that TJ 12

was taking in far less than the Property's monthly costs, which indicates that

the parties intended a sale, because no lender would take such a loss.

McNaughton said TJ 12 willingly took a loss for that first year because a

profit on the Property was anticipated either when it was sold to Doug for the

option price or to a third party after necessary upgrades. Even if the

bankruptcy court should have analyzed this fact somewhere else in its

decision, it did not err by considering it. Clearly, this fact goes to the parties'

intent. In any case, there were other subsequent acts sufficient to support the

court's finding that this factor weighed in favor of a sale.

      Doug argues that the bankruptcy court also erred by failing to consider

the post-transaction text messages from McNaughton, which Doug argues

                                         16
demonstrate that the parties intended a secured loan and not an absolute sale.

In early 2016, Doug and McNaughton exchanged a series of text messages

regarding the Property and Doug's rent default. McNaughton texted the

following to Doug: "Yes, we need to get paid off. You can sell the house or get

us paid off. Either way, we need our money out ASAP. It was supposed to be

a year or less, and we are going on almost three years. Cannot go any longer."

In another text McNaughton stated: "As long as we have the loan paid off by

June 1st, we will be good."

      While Doug argued that these text messages were proof the transaction

was really a secured loan, McNaughton explained that when he made the

comment about the "loan" needing to be "paid off," he was referring to TJ 12's

loan for the Property and not any purported loan to Doug. And when

McNaughton told Doug that he could "sell the house," he was referring to

Doug's repeated assertions about finding a buyer for the Property, maybe

even Doug's sister, who later did sign a purchase agreement but the deal fell

through.

      Whether the bankruptcy court considered the text messages is not clear.

In any case, its choice to believe McNaughton's testimony over Doug's on the

issue of their intent does not constitute reversible error. See Anderson v. City of

Bessemer City, 470 U.S. 564, 574 (1985) ("Where there are two permissible

views of the evidence, the factfinder's choice between them cannot be clearly

erroneous.").

                                        17
      Lastly, Doug makes much of the fact that the Option Agreement

provided that he, as opposed to TJ 12, was responsible for any repairs to the

Property. He argues that if this was a true landlord-tenant relationship, such

a clause would be contrary to Arizona law and suggests an equitable

mortgage. While Doug's recitation of Arizona landlord-tenant law may be

correct, the arrangement here was not a straight tenancy; it was a lease-

purchase (or rent-to-own) arrangement. In that case, the parties might agree

that the tenant pay for repairs since the tenant may ultimately own the

property.

      In summary, we see no clear error in the bankruptcy court's finding that

the parties' subsequent acts revealed that they believed and acted as if the

transaction was an absolute sale and not a secured loan.

      7.    Relative sophistication of the parties

      The bankruptcy court did not find a vast difference between the

sophistication of the parties. Doug argues that the court erred by not finding

that he was relatively less sophisticated than TJ 12 given McNaughton's

superior knowledge and experience in real estate transactions. But the test is

not necessarily how much each party knows about real estate transactions.

Rather, the court can also consider the parties' intelligence, education level,

and bargaining power. See Shelton, 508 P.2d at 58.

      The bankruptcy court observed that Doug is college educated and

intelligent. It was he who insisted on the purchase option for the Property,

yet now claimed that he had no intention of selling the Property and did not

                                        18
understand the plain meaning of the documents he instructed William to

execute, all of which the court found unequivocally indicated this was a sale.

The court found that Doug's demand that a purchase option be included as

part of the deal did not indicate a lack of sophistication; rather, it reflected an

understanding of the transaction and the sophistication to orchestrate it to his

benefit.

      On this record, the bankruptcy court's finding that there was essentially

no difference in the relative sophistication of the parties, and that this factor

did not support a basis to recharacterize the transaction as a secured loan,

was not clearly erroneous.

      8.    Whether one of the parties is in the business of lending
            money

      Four days before the sale of the Property closed in August 2013,

Amerifirst assigned its interest in the note and deed of trust to Arizona

Instant Funding, LLC ("AIF"), an Arizona limited liability company managed

by Sound, LLC. Sound, LLC was founded in 2009 by McNaughton's parents

and brother-in-law, who co-owns TJ 12 with McNaughton. McNaughton

testified that he had no ownership interest in AIF, but he was a member of

Sound, LLC as of 2013. McNaughton admitted arranging for AIF to take over

the loan on the Property before the transaction closed.

      Prior to September 2014, neither McNaughton nor any of his entities

had the required license for originating loans on residential homes; hence, the

need for Amerifirst's involvement in the transaction. In September 2014,

                                        19
McNaughton formed Sound Capital, LLC, which had a license for originating

loans on residential homes. Conversely, McNaughton's "Linked In" webpage

stated that he became active in the hard money loan business in 2012, not

2014. McNaughton testified that this was an error; he did not begin providing

residential loans until 2014, which was one year after the Property

transaction. Further, he provides loans only to real estate investors, never to a

homeowner or on owner-occupied homes. McNaughton testified that in the

four years prior to acquiring the Property, he or his entities had flipped over

120 properties and made no loans.

      The bankruptcy court heard all of this evidence and found that

McNaughton was not in the business of making loans through his entities

when the subject transaction took place in August 2013. Rather, the evidence

showed that he was not involved in such business until the year following the

transaction. Consequently, this factor did not support a basis to recharacterize

the transaction as a secured loan.

      Doug argues that the bankruptcy court failed to acknowledge certain

facts that proved McNaughton was in the business of lending money at the

time of the transaction in August 2013. For example, McNaughton became a

member of Sound, LLC in 2013. Doug says it was in January of 2013, but the

testimony he cites does not support this. In addition, Doug notes that Sound,

LLC is the manager of assignee AIF, and that McNaughton admitted

arranging for AIF to take over the loan on the Property before the transaction

closed. However, McNaughton testified that he had no ownership interest in

                                       20
AIF, and that Sound, LLC had no ownership interest in AIF, it only managed

it. He also testified that his "Linked In" webpage indicating that he had been

in the hard money loan business since 2012 was an error. In any case,

McNaughton's part in arranging for AIF to take over the loan before the

transaction closed does not prove conclusively that he was in the business of

lending money. On this record, we cannot say that the bankruptcy court's

finding as to this factor was clearly erroneous.

      Doug further argues that the bankruptcy court erred by suggesting

McNaughton had to be in the business of "making" or "originating" loans in

August 2013 for this factor to be satisfied, not just in the business of "lending

money." Nothing suggests that the bankruptcy court made a distinction

between being in the business of "making loans" and being in the business of

"lending money" as Doug contends, or that this made any difference in its

decision.

                                CONCLUSION

      At best, three of the eight factors supported Doug's position that the

sale transaction should be recharacterized as an equitable mortgage. As a

result, we conclude that the bankruptcy court did not err in finding that Doug

had not met his burden to establish by clear and convincing evidence that the

parties intended for the transaction to be a secured loan as opposed to an

absolute sale. Accordingly, we AFFIRM.

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