Rent-to-own lawsuits rise in federal, state courts

Katrina Carter and Quentin Lintner are continuing to fight for their piece of the American dream even after the Indiana Court of Appeals closed the door on their attempt to get restitution from the company that put them in an uninhabitable home under a rent-to-own contract.

Represented by Indiana Legal Services, the couple has filed a petition to transfer with the Indiana Supreme Court. Their lawsuit, Rainbow Realty Group, Inc. and/or Cress Trust v. Katrina Carter and Quentin Lintner, 49A02-1707-CC-1473, is one of a handful of complaints against rent-to-own companies and is the first to reach the appellate level.

The Lintners entered into a rent-to-own agreement with Rainbow Realty and moved into a home that did not have plumbing, electricity or operable doors and windows. They fell behind in their rent and got evicted, but the Marion Superior Court found Rainbow’s agreement was unenforceable and contrary to the Landlord Tenant Act.

The Court of Appeals reversed, concluding the agreement did not violate the act because it was not a lease.

Judith Fox, clinical professor at Notre Dame Law School, was stunned by the appellate decision. The panel, Fox said, opened a loophole by ruling an agreement that does not explicitly say the property reverts to the owner is not a rental agreement. Now the door is open for “unscrupulous people” to get around the obligations of the Landlord Tenant Act.

“I really think it’s one of the worst decisions I’ve ever seen in my life,” Fox said.

The city of Indianapolis, the Neighborhood Christian Legal Clinic and Prosperity Indiana jointly submitted an amicus brief in support of transfer. They echoed the plaintiffs’ argument that the purchase agreement constituted a lease for the first 24 months, and Rainbow did not comply with law requiring the property to be habitable.

Indeed, the amici asserted, “Even if alternatives to Rainbow Realty’s program did not exist, low-income families would still be better off without the program.”

In its response opposing transfer, Rainbow argued the Court of Appeals was correct in finding the agreement was not a lease. Rather, Rainbow said, it was a purchase agreement. It did not have a provision for the property to revert at the end of any occupancy period, and the reference to the initial 24 months of payments as rent was a “financing arrangement in lieu of a down payment.”

Rainbow’s attorney, Karl Mulvaney, partner at Bingham Greenebaum Doll, declined to comment on the case.

The Fair Housing Center of Central Indiana has filed a couple of federal lawsuits against rent-to-own businesses. Amy Nelson, FHCCI executive director, noted filing lawsuits may be seen as controversial, “but at the end of the day … I could potentially change rent-to-own transactions for the entire country if I’m successful.”

Making a counterclaim

Even so, success might not come easily.

The Fair Housing Center of Central Indiana filed an 81-page complaint against Marshall Welton and the limited liability companies that he manages which do business under the trade name Casas Baratas Aqui. Filed in the Southern Indiana District Court in April 2018, the complaint drew the ire of the defendants who have hit back with a counterclaim.

Wooden McLaughlin partner Douglas King, who is representing Welton and the other defendants, explained the counterclaim helps to give the other side of the story. “(Welton) really does a lot to help people,” King said. The “plaintiffs’ 81 pages goes out of its way to make him look like bad guy, but he’s not.”

The FHCCI and several Indianapolis residents allege Welton launched a scheme in 2015 that exploited the stockpile of abandoned houses in the Circle City and the growing demand from the city’s Latino families. They assert that under the Casas Baratas name — “cheap houses” in English — Welton enticed Latino home seekers “into predatory rent-to-buy deals.”

Customers of Casas Baratas first are required to execute a one-year lease agreement with a purchase option, according to the complaint. The lease is written in English and contains several provisions that are voided by Indiana law, such as requiring the tenant to pay the real estate taxes and comply with building and health codes while disclaiming Welton is responsible for repairs and improvements.

Under the purchase option, the complaint says, the customer has to pay a down payment of typically 10 percent of the purchase price of the home. The installment is due when the customer signs the lease. Tenants who pay the full down payment by the end of the lease can execute a land contract although, according to the complaint, very few land contracts have actually been executed.

The named plaintiffs executed their rent-to-buy agreements in less than 30 minutes and were put in houses that the complaint describes as “unfit for human habitation.” Problems included pipes that burst when the water was turned on, broken windows, mold in the carpet, gas leaks, broken cabinets and nonfunctioning lights and outlets.

When customers complained, they were told they were responsible for fixing the problems, according to the complaint. Additionally, one plaintiff was told “people who complain need to be careful since they are ‘illegal.’”

Welton and the other defendants in their counterclaim allege they have suffered damages because FHCCI wrongfully induced the tenants to breach their contracts. The Fair Housing Center encouraged the tenants to join the lawsuit, telling them they would not have to pay rent or the purchase option fee or have to worry about being evicted.

Also, the defendants claim FHCCI made defamatory statements that accused the defendants of criminal conduct and misconduct in the trade and profession.

King said FHCCI’s allegations are not true. Welton, he said, does not set people up to fail but instead hosts seminars to provide credit counseling to his customers. In addition, King said, Welton has granted innumerable extensions of time and almost never asks for the full 10 percent down payment from his customers.

“We don’t think there’s anything inherently wrong with rent-to-own or rent-to-buy,” King said. “It’s a way to make affordable housing available to people who can’t get traditional lending.”

Statehouse solution

Chase Haller, housing attorney at the Neighborhood Christian Legal Clinic, is not convinced that a favorable ruling from the Indiana Supreme Court for the Lintners would provide much of a remedy. He believes the Legislature will have to act because the courts will struggle to deal with the bigger issue.

In particular, the Legislature could require that more be done at the origination of the transaction to protect consumers, Haller said. Disclosures could make renters aware they have a right to get an appraisal and an inspection of the property so defects can be fixed before they take possession.

Indiana law does include some protections for consumers, such as through the First Lien Mortgage Lending Act, which Haller described as “unusually powerful.” The act, overseen by the Indiana Department of Financial Institutions, regulates rent-to-own and land contract companies that extend credit for their customers and is designed, in part, to prevent these businesses from giving credit without determining the customer’s ability to pay.

The act is a tool that Indiana consumers have but is apparently little used. “I don’t blame the DFI for not being more involved because it requires complaints,” Haller said. “I don’t think regular homeowners know the companies they’re dealing with are even violating the statute.”

The Indiana Attorney General’s Office is charged with enforcing the Home Loan Protection Act, another tool, Haller said, that helps consumers. However, the Attorney General’s Office did not respond to an inquiry into how many complaints it has received under the HLPA.

As for the Supreme Court, Fox maintains that a favorable ruling would help by making clear the lease periods in rent-to-buy contracts are covered by the Landlord Tenant Act, which includes provisions that the property must be safe and livable.

“So at the very least, it would prevent these places from leasing these properties that are completely uninhabitable,” Fox said.•