## Facts

- Toichi and Matsu Kawauchi owned commercial real property encumbered by first and second mortgages that were about to be foreclosed.
- Toichi Kawauchi was unable to refinance and was viewed as a poor credit risk; substantial funds were needed to prevent foreclosure.
- A court-appointed appraisal valued the property at about $160,000, but a foreclosure sale with an upset price of $150,000 drew no bidders.
- In 1958, the parties used an interim financing arrangement involving a promissory note and mortgage tied to a bank loan to obtain funds quickly.
- The Kawauchis then executed a deed conveying the property to a group of investors (the “doctors’ group”) for $90,000.
- Simultaneously, the doctors’ group leased the property back to the Kawauchis for three years at $650 per month and granted an option to repurchase within three years for $117,000.
- The Kawauchis did not exercise the option within the three-year period; the doctors’ group refused to extend the lease/option and terminated the lease.
- The Kawauchis sued seeking a declaration that the arrangement was actually a mortgage securing a usurious loan and sought an equitable right to redeem the property upon repayment.

## Issues

1. Whether a deed conveying property, coupled with a leaseback and a time-limited option to repurchase, should be recharacterized in equity as a mortgage securing a loan rather than a bona fide sale.
2. If the transaction were a mortgage, whether the rent and repurchase price constituted usurious interest.

## Decision

- The Supreme Court of Hawaiʻi affirmed the judgment for the defendants.
- The court held the 1958 transaction was a sale with a lease and a time-limited repurchase option, not an equitable mortgage.
- Because the transaction was not a loan, the plaintiffs had no equity of redemption and could not invoke usury laws.

## Legal Principles

- Courts look to the substance of a deed/lease/repurchase-option arrangement to determine whether it reflects a secured loan (equitable mortgage) or a true sale; the inquiry is fact-driven and focuses on intent shown by all circumstances.
- The presence of a below-market price, a leaseback, and an option to repurchase does not by itself convert a sale into a mortgage.
- A repurchase option that is limited in duration and framed as a privilege, rather than an unconditional right to reconvey upon repayment, supports characterization as a sale rather than a mortgage.
- Usury requires a loan or forbearance of money; if the transaction is a sale, usury statutes do not apply even if the economics resemble high-cost financing.
- Appellate review gives deference to trial-court factual findings when supported by the record, including findings bearing on the parties’ intent.

## Conclusion

The court treated the sale-leaseback with a three-year repurchase option as a genuine transfer of ownership rather than a disguised mortgage, defeating the plaintiffs’ claims for redemption and usury-based relief.


Kawauchi v. Tabata, 49 Haw. 160, 413 P.2d 221 (Haw. 1966)