Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3

This is Part 3 of a multi part post. Click here to read Part 2.

California

In an unlawful detainer (tenant eviction) proceeding, a California Appellate Court ruled that a property owner, who lost his property in foreclosure and then "rented" it back from the subsequent purchaser, had a triable issue of fact as to whether a landlord-tenant relationship existed between him and the subsequent purchaser which forms the basis of unlawful detainer. (According to property owner, the rental agreement was a "sham" to shield a usurious mortgage of the property to which the subsequent purchaser held title only to secure payment for the loan.) The court reversed a judgment of eviction and remanded the case to the lower court for consideration of whether the transaction between the parties was really a usurious loan secured by a mortgage.

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There are several issues involved in this case unrelated to the equitable mortgage issue. I've tried to isolate the equitable mortgage issue in this case and list the facts below. The basic facts of this case relating to the issue of whether a deed merely constituted security for a loan, and whether a purported rental agreement was a shield to disguise a usurious mortgage, follow below (while this case was not a typical foreclosure rescue situation, the logic and rationale stated therein appears to be equally applicable to such a situation):

1- Property Owner owned and operated a 317-acre ranch that included a prune processing and packing plant.

2- Property Owner lost the property in a foreclosure sale in April, 2003

3- Within a month (May 2003), a "Subsequent Buyer" of the foreclosed property entered into an agreement entitled "Month-to-Month Rental Agreement and Security Agreement" with Property Owner.

4- In October, 2004, Subsequent Buyer filed an unlawful detainer action against Property Owner (in order to evict Property Owner and gain possession of the property).

5- In responding to Subsequent Buyer's summary judgment motion, "[Property Owner] opposed the motion, arguing, among other things, there was a triable issue of fact as to whether the "transaction" was "not that of landlord tenant, but was of a loan of funds with the rental agreement being used to disguise a possible usurious transaction."

6- Property Owner then filed a declaration in opposition to the motion for summary judgment wherein he stated that prior to the foreclosure sale, he and Subsequent Buyer agreed that he (Subsequent Buyer) would "be present at the foreclosure sale and bid funds to obtain the property" and that [Subsequent Buyer] would hold title "only as security . . . and that the property would be returned to [Property Owner] upon full repayment of the loan."

Also, Property Owner stated that he entered into the subsequent rental agreement only because Subsequent Buyer said he "only needed this agreement for both our protection" and never stated anything that this agreement was in any way changing their original loan agreement.

7- Property Owner contends it should be permitted to use the declaration to prove that the transaction was intended as a mortgage. In support of this argument, property owner cites Civil Code section 2925 and existing case law. Civil Code section 2925 provides as follows:

• "The fact that a transfer was made subject to defeasance on a condition, may, for the purpose of showing such transfer to be a mortgage, be proved (except as against a subsequent purchaser or encumbrancer for value and without notice), though the fact does not appear by the terms of the instrument."

8- The California court observed as follows:

• "Given the alleged relationship between the parties, [Property Owner] was allowed to introduce parol evidence to show what it believed was the true nature of the transaction in an attempt to prove the rental agreement was really a shield for a usurious mortgage. (See Workmon Constr. Co. v. Weirick (1963) 223 Cal.App.2d 487, 490, 36 Cal. Rptr. 17 [cases since 1867 have held that a court "can declare a deed absolute on its face to be a mortgage executed as security for the payment of a debt, and that parol evidence is admissible to show the real nature of the transaction without regard to the mode or form in which the instruments in writing were executed"]."

9- The court ultimately concluded as follows:

• "We therefore conclude that [Property Owner] was allowed to assert, in essence, that it was not a tenant under the lease agreement because the rental agreement was really a shield for a usurious mortgage."

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In this case (unlike the Minnesota case in Part 2), there is an indication at the end of the case that the property owner in this case posted an appeal bond, so presumably, he never actually lost possession of the property during the appeals litigation. In the Minnesota case, the property owner did not post bond and ultimately, vacated the premises in anticipation of execution of the judgment of eviction before the appeals litigation reached completion.

Case Law Citation:

North State Land Management v. Calprune, (Cal. App. Ct. 3rd Dist. 2006 unpublished)

For addendum to this post, see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3 Addendum

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Go here for other posts on the equitable mortgage doctrine in California. California equitable mortgage valedictorian emdefense.