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Zaman v. Felton - 219 N.J. 199, 98 A.3d 503 (2014)


Courts apply principles of equity to look beyond the plain terms of an agreement between the parties, and thereby determine whether the agreement is in effect a mortgage. In that inquiry, the court focuses on the characteristics of the transaction at its inception: The doctrine has been firmly established from an early day that when the character of a mortgage has attached at the commencement of the transaction, so that the instrument, whatever be its form, is regarded in equity as a mortgage, that character of mortgage must and will always continue. If the instrument is in its essence a mortgage, the parties cannot by any stipulations, however express and positive, render it anything but a mortgage, or deprive it of the essential attributes belonging to a mortgage in equity.


Defendant Barbara Felton, an experienced buyer and seller of real estate, faced imminent foreclosure proceedings with respect to an unfinished home when she defaulted on a $105,000 construction mortgage. Felton was aware that no certificate of occupancy was issued with respect to the house, and the house was uninhabitable. Thereafter, Felton executed a written land sale agreement with Tahir Zaman. The parties then entered into separate agreements: (i) a lease agreement under which Felton agreed to pay $1,000 per month in rent, and (ii) an agreement that gave Felton the option to repurchase the property within three months for $237,000. Felton signed the deed, an affidavit of title, and the buy-back agreement. The parties did not execute any mortgage documents. For the next 17 months, Felton occupied the property but did not pay rent in accordance with the lease agreement, nor did she exercise her contractual right to repurchase the property. Zaman then filed this complaint, claiming that he was the purchaser in an enforceable land sale agreement. Felton filed a counterclaim based on fraud, slander of title, violations of the Consumer Fraud Act (CFA), violations of the Fair Foreclosure Act (FFA), N.J.S.A. §§ 2A:50-53 to -68, and violations of the federal Truth in Lending Act (TILA), 15 U.S.C.S. §§ 1601 - 667. Felton claimed that the parties' transactions collectively comprised an equitable mortgage and that the transactions were voidable. The trial court dismissed all of Felton’s claims, and held that the property was knowingly sold by Felton. The trial court further declined to find an equitable mortgage or a valid claim under the CFA. The decision was affirmed by the appellate court.


  1. Was the property knowingly sold by Felton?
  2. Did the lower courts err in finding that no equitable mortgage existed?


1) Yes. 2) Yes.


The Supreme Court of New Jersey affirmed the jury’s determination that Felton knowingly sold her property to Zaman. However, the Court reversed the appellate court’s opinion that affirmed the trial court’s dismissal of the Felton’s claim that the parties’ agreements gave rise to an equitable mortgage. The Court remanded the case to the trial court for application of the eight-factor standard for the determination of an equitable mortgage set forth by the United States Bankruptcy Court in O’Brien v. Cleveland. The Court noted that in the event that the trial court concludes that an equitable mortgage was created by the parties, several claims would have to be reconsidered or addressed if not adjudicated by the trial court.

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