Zaman v. Felton

Barbara Felton (defendant) defaulted on her construction mortgage and faced foreclosure. She then made a set of agreements with Tahir Zaman (plaintiff): she sold him the property for $200,000, signed a lease to keep living there as his tenant, and got a three-month option to buy it back for $237,000. At closing Zaman paid Felton about $85,000-the difference between the price and her outstanding debts. The sale agreement did not mention the lease or buy-back option. Felton later tried to return the $85,000 to undo the deal, but Zaman refused; she stayed on the property without paying rent. Zaman sued for possession, and Felton countersued for a declaration that the whole arrangement was one transaction amounting to an equitable mortgage. The trial court and appellate court found no equitable mortgage; Felton appealed.

Whether a court deciding if a purported land sale and leaseback is in substance an equitable mortgage must apply an eight-factor framework examining both the form of the transaction and the surrounding circumstances of the parties.