Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 4

This is Part 4 of a multi part post. Click here to read Part 3.

In this post, I will touch on a 2001 Colorado Supreme Court case that dealt with the assertion of the "equitable mortgage" doctrine by a "tenant/equitable owner" in possession of property in connection with an eviction action brought by the purported "landlord/record owner" of the property. The deed under which such record ownership is claimed is alleged to be an equitable mortgage by the "tenant-equitable owner" in possession of the premises.

The Colorado court concluded that the issue of whether ownership affects possession should be decide first. If it does, then the issue of actual ownership should be decided second, after which the possession issue should be decided last.

Colorado

Beeghly v. Mack, 20 P.3d 610; (Colo. 2001)

1) A typical foreclosure rescue transaction was entered into in which a certain Mack, owning real property in trust, contracted with a certain Beeghly, whereby Beeghly took title ownership of the real property and subsequently leased back the property to Mack's trust. The purpose of the transaction was to forestall an imminent foreclosure of the trust property.

2) Approximatley nine months later (Mack had already stopped making the "rental payments" to Beeghly due to a dispute), Beeghly initiated an unlawful detainer action against Mack seeking, among other things, possession of the property.

3) Mack responded by denying that Beeghly was the beneficial owner of the property. On that same date, Mack and the Trust also filed an amended answer, asserting counter-claims such as quiet title, declaratory judgment, breach of contract, unjust enrichment, and breach of fiduciary duty.

4) In addition, Mack and the Trust filed a motion to continue the trial of the issue of possession of the property.

5) The continuance was granted conditioned upon the collective payment of a bond (in accordance with a Colorado bond statute, section 13-40-114. ) by Mack and the Trust, which was never paid.

6) Beeghly then filed a motion for default judgment for possession based on the failure of Mack and the Trust to post the bond; the trial court ultimately granted the motion for default judgment, holding that Beeghly was entitled to possession since Mack and the Trust failed to post the bond.

7) The trial court also denied Mack's and the Trust's request for a stay of the possession order.

8) Mack and the Trust then brought a C.A.R. 21 petition with the Colorado Supreme Court requesting that the Supreme Court issue a rule to show cause why an order should not be issued vacating the trial court order granting the motion for default judgment.

9) The Colorado Supreme Court, in its opinion, addressed two issues:

• the correctness of granting a default judgment for failure to post bond, and
• the equitable mortgage issue.

10) On the first issue, the high court ruled that the lower court decision was incorrect, and provided an analysis of the Colorado law that concluded that the law requires a bond only to obtain a delay in the proceedings and that, upon failure to post the bond, the court proceedings are simply to continue to trial. The fact that the defendant is granted his request for a delay in a trial, conditioned upon posting a bond, and then fails to post the required bond, is not grounds for a default.

11) On the second issue, the equitable mortgage claim in a forcible entry and detainer ("FED") case, the Colorado high court made the following observations:

• "Generally speaking, in an FED action, the issue of ownership must first be determined before possession can be resolved. Lindsay v. Dist. Court, 694 P.2d 843, 846 (Colo. 1985)."
• "In Lindsay, we opined that although the case began as an FED action, it ultimately placed in issue the entire transaction between the two parties, and thus became a suit in equity to determine whether the petitioners were tenants subject to eviction, or owners subject to foreclosure. Id."
• "The Lindsay case differed procedurally from this case, in that two separate law suits were filed, one an unlawful detainer action in county court, and the other an action challenging the validity of the agreement between the parties in district court. Lindsay, 694 P.2d at 844-45."
• "However, the issues raised were similar to those presented in this case, specifically whether ownership must be determined prior to a ruling on possession being made."
• "In Lindsay, ownership of the property directly affected entitlement to possession, and as such, a determination of ownership was first required in order to properly assess which party was entitled to possession."
• "However, there may be circumstances where the issues of ownership may not affect the right to possession, and thus, possession can be determined independent of resolving ownership."
• In Lindsay, without determining whether there was an actual FED action pending in the district court, we ultimately held that the district court action could properly resolve all issues in dispute between the parties, including who was rightfully entitled to possession. Id. at 846.
• Thus, notwithstanding the classification of a lawsuit between parties, when the issue of ownership is validly raised in an FED action, and directly affects the right to possession, ownership must be determined prior to a ruling on possession. Lindsay, 694 P.2d 843.

12) The Colorado Supreme Court ruled as follows:

• "Under the rule set forth in Lindsay, possession in this case cannot be decided without the trial court first determining whether ownership affects possession, and if so, resolving the issues of ownership."
• "Accordingly, we remand this case to the trial court for a determination as to whether Mack and the Trust have raised meritorious claims regarding ownership."
• "Once the trial court has determined whether the ownership issues raised are relevant to a determination of the possession interests in dispute through a full and fair hearing, the trial court can then decide entitlement to possession."

13) In conclusion, the court stated:

• 'Moreover, in accordance with Lindsay, the trial court must consider the ownership issues raised by the parties, and determine if those issues affect possession prior to deciding who is actually entitled to possession."
• "Accordingly, we make the rule to show cause absolute and remand this case to the trial court to first determine whether, under the circumstances presented in this case, ownership must be resolved before possession, and to then resolve possession on the merits."

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My only thoughts on this case is that it seems intuitive that the issue of whether ownership affects possession is the first issue that should be decided in any eviction case where a party in possession is claiming to be the equitable owner pursuant to the equitable mortgage doctrine. If so, then the actual ownership should be determined before finally, the possession issue is addressed.

This approach appears to be consistent with that of the California court decision referenced in Part 3 of this post, where, in reversing a lower court's judgment of eviction, the court essentially said that the purported equitable owner of property claiming title pursuant to the equitable mortgage doctrine was entitled to have the issue of ownership of the subject property resolved by the trial court before resolving the issue of possession.

Apparently, however, not all courts seem to see it this intuitively. See Part 2 of this post where a Minnesota intermediate appellate court saw it a bit differently.

Other Citations

Lindsay v. Dist. Court, 694 P.2d 843 (Colo. 1985). emdefense Colorado equitable mortgage quizzz