Substance Over Form: “If It Walks Like a Duck, and Quacks Like a Duck”

Disguised Lending Scheme: “If It Walks Like a Duck…” Doctrine in Substance-over-Form Analysis

🏛️ I. Legal Framework

In evaluating whether a financial arrangement constitutes a sale or a loan, courts are bound to look beyond contractual labels and marketing language to determine the true nature of the transaction. This is especially critical in the context of alleged disguised lending schemes, which pose as asset sales but functionally operate as secured loans—often with intent to evade consumer protection laws like TILA, RESPA, state usury statutes, or homestead protections.

The guiding principle is clear:

“If it walks like a duck, swims like a duck, and quacks like a duck, it is a duck.”

Applied here:

If it imposes debt-like obligations, restricts ownership, mimics repayment terms, and includes the right to reacquire or reclaim title, it is a loan—no matter what it is called.

⚖️ II. Key Precedent: Substance Over Form in Lending Relationships

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Truth in Lending Act (TILA) – 15 U.S.C. § 1601 et seq.

TILA requires lenders to disclose key terms in any consumer credit transaction. Even when a transaction is labeled as a “sale,” courts and regulators apply economic reality tests to determine whether credit has been extended.

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Real Estate Settlement Procedures Act (RESPA) – 12 U.S.C. § 2601

RESPA prohibits certain abusive lending practices and imposes disclosure obligations. Schemes that artificially reclassify loans as property sales may violate RESPA’s anti-kickback and consumer protection provisions.

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Texas Constitution, Article XVI § 50 (Homestead Protections)

Texas law strictly limits how homestead property can be encumbered. A “sale” that retains possession, imposes monthly payments, and offers buyback rights functions as a disguised lien or mortgage—rendering it unconstitutional unless all procedural safeguards are met.

🧩 III. Common Characteristics of Disguised Loans

Courts across jurisdictions have identified the following red flags in evaluating disguised lending schemes: 

These features trigger substance-over-form analysis. If a homeowner retains equitable interest and is required to pay “rent” akin to loan installments, the transaction is not a true sale—it is a loan masquerading as something else.

🧑‍⚖️ IV. Judicial Treatment of Disguised Lending

✅ 

Johnson v. EasyKnock, LLC

(hypothetical or pending case)

Where a homeowner remained in the property post-“sale,” made ongoing payments, and faced eviction despite equitable interest, the court held the transaction was an equitable mortgage and subject to TILA and state lending laws.

✅ 

Bevill v. Jefferson County

, 803 F.2d 1288 (11th Cir. 1986)

Courts may pierce the form of financial instruments to determine their true function under law.

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Brown v. Slater

, 1997 WL 785528 (E.D. Pa. 1997)

A sale-leaseback was held to be a disguised mortgage where the homeowner retained all burdens and benefits of ownership.

📌 V. Conclusion: Legal Labels Do Not Change Legal Substance

Courts will not permit financial institutions to evade statutory protections through artful drafting. The law demands clarity in substance:

A contract that imposes loan obligations, secures performance with real property, and maintains equitable ownership is a loan, regardless of its label.

When assessing whether a transaction is subject to lending laws, “if it walks like a duck and quacks like a duck”—it is, in fact, a loan. Any other conclusion would reward deception and erode the very consumer protections courts are tasked with enforcing.