London v. Gregory, No. 216473, Mi. App. Ct., 2001, (2001 Mich. App. LEXIS 1700) Decided February 23, 2001 Personal Case Notes & Case Highlights

The folowing text represents personal notes and highlights of and selected quotes from the Michigan Court of Appeals case London v. Gregory, Case No. 1216473, LEXIS 1700 (Michigan Court of Appeals, 2001) (unpublished) , where a Michigan Appeals Court determined that a sale and leaseback transaction between a foreclosure rescue investor ("FRI") and a financially strapped property owner was, in fact, a loan of money and not a "true sale & leaseback."

Because of this determination, the property owners were declared the true owners of the property and the foreclosure rescue operator was treated merely as a secured mortgage lender (and not the true owner).

For purposes of simplification, most of the actual citations to other cases as well as internal quotations have been omitted. If there is anything contained herein that is of any interest to the reader, I refer you to the actual case, link available above.

PART I
The court's recitation of the facts of this case follows:

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1) The Homeowner owned a piece of real property for which the mortgage was about to be foreclosed.

2) Two days before foreclosure was to occur and the equity of redemption period was to expire, the homeowner and the foreclosure rescue investor (hereinafter called "FRI") entered an agreement wherein the homeowner transferred her interest in the property to the FRI by warranty deed.

3) The FRI then redeemed the property for $ 38,231.69, making her the fee owner, and at the same time, executed an eighteen-month lease agreement with homeowner.

4) The agreement provided that homeowner remain in possession of the property and pay $ 400 a month in rent to the FRI.

5) The agreement also granted homeowner an option to purchase the property for $ 48,239.77 at the end of the lease, with closing to take place on or before December 17, 1997. However, the purchase option was only available if all rent payments were made on a timely basis.

6) Of the eighteen scheduled rent payments, homeowner made one, which was late.

7) On December 16, 1997, the FRI sent the homeowner a thirty-day notice to quit and initiated an action for summary proceedings in district court (the trial court) to evict homeowner.

8) However, the trial court found that the deed from homeowner to the FRI was not a conveyance of property, but rather, an equitable mortgage.

9) An order was entered denying the FRI's request for possession of the property and ruling that the warranty deed and rental agreement created an equitable mortgage.

10) The first appeals court denied the FRI's appeal, affirming the trial court's finding of an equitable mortgage.

11) The first appeals court found no error in the district court's refusal to take testimony regarding the FRI's intent because the information before it, including affidavits of each party, was sufficient to determine the intent of the parties.

12) The first appeals court also found that the deed and rental agreement was not an absolute conveyance, but rather, a mortgage.

13) The FRI then went to a second appeals court, the Michigan Court of Appeals and argued that the first appeals court both erred in refusing to compel the trial court hearing this case to consider testimony on the issue of intent and erred by ruling, as a matter of law, that the conveyance of property was an equitable mortgage.

PART II
The court's recitation of what constitutes Michigan law on equitable mortgages follows:

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1) "The power of a court of equity to decree an equitable mortgage under proper circumstances and to construe an instrument in the form of an absolute conveyance as security for the payment of a debt, or the performance of some other obligation, is well established."

2) "When determining whether to grant equitable relief, the court protects the necessitous by looking through form to the substance of the transaction."

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3) "The controlling factor in determining whether a deed absolute on its face should be deemed a mortgage is the intention of the parties."

4) "Such intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale. Under Michigan law, it is well settled that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price for the property, is sufficient to establish a deed absolute on its face to be a mortgage."

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Part III
The Michigan Court of Appeals Analysis & Decision

1) The court reviewed two prior Michigan court cases involving fact patterns similar to the fact pattern in this case.

In the first case, the FRI helped the homeowner, in financial distress, in saving her home from foreclosure. The homeowner essentially conveyed the property by warranty deed to the FRI for no consideration, while he redeemed it out of foreclosure. The transaction resulted in the homeowner conveying her equity, worth over $ 30,000, for less than $ 4,000. Under their "agreement," the FRI leased the property to the now former homeowner with an exclusive option to repurchase the property during the term of the lease. The now former homeowner eventually defaulted in her monthly rental payments and was thereupon evicted from the home.

The Michigan Court of Appeals found that, "while financial embarrassment of the [homeowner] and inadequacy of consideration do not provide an infallible test, they are an indication that the parties did not consider the conveyance to be absolute."

This Court held that the transaction in this first case constituted a mortgage to secure a loan.
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In the second case, the homeowners were in financial straits and the mortgages on their home were in the process of foreclosure. The FRI, who coincidentally was the same FRI as in the first case above, entered into an agreement with the homeowners whereby, in exchange for a warranty deed to the property, the homeowners obtained a two-year lease with an option to repurchase the property at any time during the term of the lease. The FRI ultimately expended only $ 2,300 to redeem and obtain a deed to property worth $ 25,000.

The Michigan Court of Appeals "found the inadequacy of consideration for the purported conveyance blatant, and giving great weight to this inadequacy of consideration, and the fact that the plaintiffs were financially embarrassed, determined that the deed, absolute in form, was a mortgage."
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2) Applying the principles in the two cases described above to the facts and circumstances surrounding this case, the Michigan Court of Appeals found that the deed and rental agreement with an option to repurchase was a mortgage.

The Michigan Court of Appeals' considerations in reaching this decision follow:

• a) "[Homeowner] was having financial problems at the time of the disputed transaction, as her property was two days away from foreclosure."
  
  b) "About to lose her home, [homeowner] entered into an agreement with [the FRI] whereby [homeowner] was able to lease the property for eighteen months with the option to purchase at the end of the lease."
  
  c) "In exchange for the opportunity to keep her home, [homeowner] conveyed the property to [the FRI] by warranty deed for $ 1."
  
  d) "[The FRI], as the fee owner of the property, was then able to redeem the property for $38,231.69."
  
  e) "Through this cash outlay, [the FRI] obtained a deed to property worth approximately $ 120,000."
  

3) "These facts demonstrate an inadequacy of consideration."

4) "Moreover, [the homeowner] entered into this agreement two days before foreclosure was to occur and without the assistance of counsel."

5) "The bargaining position of the parties was anything but equal."

6) "In addition, the fact that [the homeowner] remained in possession of the property after granting plaintiff the deed further evidences that this was not an outright conveyance."

7) "[The homeowner] thought this arrangement was a loan that would enable her to redeem her property and extend the debt for eighteen months."

8) "Although it was not [the FRI's] intent to make a loan, it was not [the homeowner's] intent to sell her home."

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For all these reasons, the Michigan Court of Appeals held that the transaction at issue in this case was an equitable mortgage.

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Part IV
The foreclosure rescue investor unsuccessfully argued the following points to support his claim that the transactions were not loans, but rather, true sales

1) The FRI argues that the transaction was not a loan because:

• a) no loan application was taken,
  b) the defendant's financial condition was never discussed,
  c) a loan of money to the homeowner was never discussed,
  d) the FRI was not in the business of mortgage lending.
  

2) Moreover, the FRI claims it was error for the first appeals court not to hear testimony on the issue of intent.

In spite of these facts that the FRI argued to the court, the court declared that the transaction was nothing more than a loan of money from the FRI to the homeowner and not a sale of the home with a subsequent leaseback.

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(One point worth highlighting in this case was that the Michigan Court of Appeals found it unnecessary to to hear the testimony of the parties involved in its determination as to what the parties' intent was in entering into this transaction.)

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These case notes and highlights have been provided as a service to the readers of The Home Equity Theft Reporter. Michigan equitable mortgage alpha