Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation

(Part 1 of a Multi Part Post)

I came across two (pretty old) court cases (from Florida & New York) which, "in essence," involved the assertion of "equitable mortgage" by a "tenant" as a defense against a "property owner" in an attempted eviction in a landlord-tenant action (the words "equitable mortgage" however, were not actually used in the cases).

(I caution the reader that I have not, in any way, researched this issue, but I've merely "stumbled over" these cases. I've read them, and am simply bringing them to your attention. In quoting from the text of these cases, I've omitted all citations and internal quotations for ease of reading.)

New York

In one case, a New York intermediate appellate court reviewed a case where (according to the court) "[s]ubstantially all the evidence offered by defendant [in asserting an equitable mortgage defense] was excluded by the [lower] court on the theory that being in possession under the lease he was not at liberty to dispute the title of his landlord."

The New York appellate court made the following observation on the foregoing point:

• "That elementary principle does not preclude a tenant when sued for rent from showing as a defense that since the execution of the lease he has acquired a title superior to that of his lessor or has acquired the lessor's title or that the title of his landlord has expired by its own limitations or has been in any manner extinguished subsequent to his entry under the lease or from setting up a title acquired by him since he became tenant, overreaching the title of his landlord, or in any way showing that the relation of landlord and tenant has ceased to exist (my emphasis). Some of the authorities asserting these propositions are here cited."

(citations omitted)

In reversing the lower court's decision, the appellate court stated:

• "It may be that if the evidence of defendant had been received it would fall short of establishing the [equitable mortgage] defense here outlined, but he should have been given the opportunity to establish such defense."

The court also commented:

• "It was not necessary that defendant should surrender possession and institute an action in equity to have his rights formally declared. If unjustly sued for rent he could show the changed character of his possession and assert his rights as a defense."

While this case may not be exactly on point in connection with the typical foreclosure rescue, "sale-leaseback-reconveyance" agreement, it shows the willingness of the court to rule that equitable issues raised by a "tenant" against a "landlord", where the landlord allegedly came about his title by reason of a deed given as security for a loan, are "fair game" in an eviction action.

In the foreclosure rescue context, it seems to me that the equitable argument of the financially strapped homeowner being evicted by a foreclosure rescue operator would simply be that the instrument (the purported "lease") that the operator is trying to enforce in attempting to evict the homeowner is not an agreement to pay rent, but rather, is an agreement to pay interest pursuant to, and a part of, a larger agreement that constitutes an equitable mortgage.

In effect, the homeowner in this scenario is simply arguing that there is no (and never was any) valid landlord-tenant relationship where eviction is appropriate. The relationship between the parties (as the argument would go) is that of a debtor and a secured creditor where the appropriate action to enforce payment would lie in a foreclosure action of the equitable mortgage by the foreclosure rescue operator (notwithstanding the fact that the instrument may actually be "labeled" or "titled" as a "lease").

Kibbe v. Crossman, 139 A.D. 338; 124 N.Y.S. 3; (NY App. Ct., 3rd Dept. 1910)

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Florida

The second case is a decision of the Florida Supreme Court involving the following facts:

1) An eviction action was brought by a "landlord" in a county court (court of limited jurisdiction) which had jurisdiction to hear landlord-tenant disputes, but did not have jurisdiction to hear actions involving the titles to, or boundaries of, real estate.

2) In response to the attempted eviction, the "tenant" pleaded that the dispute was one involving the title to real estate and that the county court did not have jurisdiction over the matter.

3) The following text represents excerpts from the "tenant's" plea, as extracted from the court case:

• "1. The said cause involves the question of the title to the real estate described in the writ in that the defendant claims to be the owner of the said real estate and of the improvements thereon; that he is not the tenant of the plaintiff, has no agreement with him for the payment of rent and is not indebted to him in any sum for rent of said property; that until very recently the plaintiff has not claimed to be the owner of said property but has claimed to be the holder of a mortgage indebtedness against the same and that inasmuch as said cause involves a controversy as to the title of said real estate the circuit court has under Section 11 of Article 5 of the Constitution of the State of Florida exclusive original jurisdiction of said cause."

• "2. That heretofore the defendant has instituted in the circuit court for Pinellas County, Florida, on the chancery side thereof a suit alleging that the plaintiff is the holder of a mortgage indebtedness against said property, that said mortgage indebtedness is usurious to such an extent that both principal and interest are forfeited and asking that a deed under which plaintiff hols (sic) be declared to be a mortgage and that plaintiff be ordered to reconvey and that defendant be decreed to hold said property free and clear from said indebtedness, that the plaintiff herein demurred to such bill of complaint primarily on the ground that this defendant did not offer to repay the principal of such indebtedness and the demurrer was sustained on that ground, no contention being made that the plaintiff herein was the actual owner of said property, that an appeal has been taken from the order sustaining said demurrer and is now pending in the Supreme Court of the State of Florida, that by virtue of such facts this court has no jurisdiction to try this cause."

4) The County Judge disregarded the plea to the jurisdiction, and the circuit court (a higher court) subsequently issued a writ of prohibition upon the County Judge, thereby halting the eviction action.

5) The Florida high court addressed the matter by first reciting a portion of the then-existing unlawful detention proceedings statute, then went on with the following statements:

• "The above statutory provision as to procedure in cases of landlord and tenant, does not preclude the defendant in possession from pleading to the jurisdiction of the court on the ground that he claims title to the real estate, of which subject the County Judge has (n)o jurisdiction to try or determine."

• "When in proceedings in the County Judge's court to recover the possession of land as from a tenant, a pleading is filed which puts in issue the title or boundaries of the land in controversy, it becomes the duty of the County Judge to dismiss the cause for want of jurisdiction."

• "Prohibition is the defendant's remedy where the County Judge does not dismiss an action for unlawful possession of lands when a plea tenders an issue as to the title of the land."

Based on this, it appears to me that, in the foreclosure rescue context, a homeowner finding himself sued for eviction can temporarily stave off eviction merely by asserting the equitable mortgage doctrine. Stated another way, once this doctrine is asserted, it doesn't seem like a court can properly issue a judgment for eviction until the issue of title to the property is first tried. Further, where a court of limited jurisdiction is hearing the eviction action and has no jursdiction over disputes involving title to property, the judge is duty bound (at least according to this case) to dismiss the action, at which point, the case can be refiled in an appropriate court having proper jurisdiction.

One point that I want to highlight is that in both this case and the New York case, the tenants asserting the equitable mortgage doctrine lost their cases in the initial court that heard the matter. It was necessary to file and litigate an appeal (and incur the cost attendant with such an appeal) to arrive at the correct decision (For anyone representing a homeowner in this situation, I hope you win it on the first "go round").

Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931)

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Re: Subject Matter Jurisdiction

The Florida case dealt with the issue of the court's jurisdiction over the subject matter. Regarding the issue of subject matter jurisdiction generally (and I'm only thinking out loud here), I pose the following questions:

1) What happens if a homeowner in a foreclosure rescue deal is evicted from his home, does nothing about it for a while (whether it be a few months or a few years), and then goes back into court (through counsel) and files an action for a declaratory judgment, wherein an "equitable mortgage" declaration is sought regarding the "sale-leaseback-reconveyance" arrangement?

2) Does a statute of limitations apply to an "equitable action" such as this? If so, how long do you get to bring an action?

3) If successful in obtaining an equitable mortgage declaration regarding the initial sale-leaseback transaction, does this then make the judgment or order of eviction (wherein the homeowner was forced out of his home by order of the court) "void" for lack of subject matter jurisdiction? (after all, if the deal was actually an equitable mortgage all along and not a true sale, then there shouldn't have been any eviction in the first place).

When a judgment is "void" (as opposed to being merely "voidable"), it generally is void from its inception. Typically, when a judgment is void, then everything that happens after the issuance of the void judgment is also void (ie. subsequent sale by foreclosure rescue operator to third party strangers and mortgage lenders financing the third party sale). Claims of the "bona fide purchaser for value, without notice" status may not prevail when the subsequent purchaser's interest in the property purchased devolved from a void judgment. Further, unless I'm mistaken, claims that a judgment is "void" for lack of subject matter jurisdiction may be brought at any time (no statute of limitations applicable, no laches). Finally, I think that the doctrines of res judicata, law of the case, estoppel, etc. may be inapplicable in a matter involving a void judgment.

Obviously, the answers to the foregoing questions will depend, at a minimum, on the specific laws of your home state. Depending on what those laws say, it may be that there are many victimized (and devastated) homeowners throughout the country that have lost their homes in foreclosure rescue deals that still have viable causes of action, not only against the foreclosure rescue operator personally, but also against the property that they had "stolen" from them. If they do, in fact, have valid claims against the property, it may then be that they are entitled to the return of their homes (or possibly damages against the operator), in which case the subsequent buyer and any mortgage lender financing the purchase, may end up being the victims (and, in essence, left "holding the bag"). Of course, if the subsequent third party buyer and mortgage lender insured their purported interests in the property by obtaining a title insurance policy, it may then be that they have a valid claim for indemnification from their title insurer. It would then be up to the title underwriter to go after the rescue operator to recoup its paid out insurance claims. As a practical matter, if the homeowner in this scenario does, in fact, have a legitimate case, it may very well be that some form of financial settlement involving all the parties, including the title insurer, can be reached (After all, the cost of "unwinding" these transactions and "cleaning up the mess" through protracted litigation could become rather expensive and time consuming).

For Part 2, see Equitable Mortgage Defense In Foreclosure Rescue Eviction Action - Part 2

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