Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3 Addendum

This is an addendum to the post dealing with the equitable mortgage defense in California. Click here to see the prior post, Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3. Subsequent to that post, I came across a pretty old California Supreme Court case which, if it is still good, both provides additional support for the viability of the equitable mortgage defense in an eviction/ejectment action, and further, may constitute the law of the state regarding this defense in homeowner-tenant evictions in California.

Hyde v. Mangan, 88 Cal. 319, 26 P. 180; (1891)

This case was an action for ejectment. The defendant, Mangan, was the equitable owner of property which was purchased on a deferred sale contract, where the legal title owner, a railroad, was to keep legal title to the property until Mangan fully paid off the contract (within five years of the sale contract). Upon entering the contract, Mangan "entered into the possession of said property, and ever since said time have been in the open, notorious, and exclusive possession and occupancy thereof, having valuable improvements thereon, and claiming to own the same."

About 4 years later, Mangan borrowed money secured by the equitable interest in the property. As part of the loan agreement, Mangan assigned the equitable interest in the property as collateral for the loan to the lender.

Within the next 4 1/2 years, the ownership interest in the property assigned by defendant Mangan to the lender as collateral was assigned and reassigned until the interest ended up in the hands of the plaintiff, Hyde (the railroad had yet to receive full payment on the original sale to defendant Mangan). A week after receiving the assignment, plaintiff Hyde made full payment to the railroad company for the land, surrendered the contract, received a deed to the land from the railroad company, and subsequently began an ejectment action to remove defendant Mangan from the property.

The lower court, in ruling for the defendant Mangan in the ejectment action, found that:

• the assignment of the contract of sale to the original lender was a mortgage of defendants' Mangan interest in the land,
• the possession of defendants Mangan was sufficient to put plaintiff on inquiry as to their rights, and
• having failed to make such inquiry, Plaintiff was in no better position than if he had done so, and had been fully informed as to the defendants' claims and equities.

On appeal to the California Supreme Court, plaintiff Hyde (now the appellant) "[r]elies upon two main propositions in this case, either of which, if maintained, he claims would entitle him to recover:

1. That he is the owner and holder of the legal title to the premises, and in an action of ejectment, the legal title must control;

2. If the assignment of the contract were to be held to be a mortgage, the debt for which it was given being barred, defendants are entitled to no consideration without offering to redeem."

With regard to these two propositions, the California high court responded as follows (bold text is my emphasis):

• "The first proposition, that "in an action of ejectment the legal title must control," is not the law of this state. The case of Willis v. Wozencraft, 22 Cal. 615, decides: "A mere equitable title to land, if it is of such a character as entitles the holder to possession in equity, is a sufficient defense under our system of practice to an action for the possession, brought even by the holder of the legal title. ( Central Pacific R. R. Co. v. Mudd, 59 Cal. 585; Whittier v. Stege, 61 Cal. 238; Hicks v. Lovell, 64 Cal. 17; 49 Am. Rep. 679.)"

• "As to the second proposition contended for by appellant, there is a line of authorities which supports such contention. (Hughes v. Davis, 40 Cal. 120; Bruck v. Tucker, 42 Cal. 352; Pico v. Gallardo, 52 Cal. 206.) This proposition of law as laid down in the cases just cited is based upon another principle of law, established for the first time in this state in Hughes v. Davis, 40 Cal. 120, and which has since been discarded by section 2925 of the Civil Code. This principle as announced by the court was, "that an absolute deed which is shown by parol evidence to have been intended as a mortgage conveys the legal title to the property." And our attention has not been directed to any authority since this principle ceased to be the law of this state which has held to the doctrine laid down in those cases; but upon the contrary, the later decisions of this court hold that under the general issue the defendant may be allowed to show that the deed by which the plaintiff claims title is a mortgage, and therefore gives him no title."

With regard to the issue of possession of the land by the defendant Mangan (now the respondent), the high court observed (bold text is my emphasis):

• "The plaintiff came into court in this action with full notice of all the rights and equities existing between the railroad company and the defendants, and between Brownstone and his assignees and the defendants; for the defendants were in the open, notorious, and exclusive possession of this land at all these times, and plaintiff made no inquiry to ascertain the rights or claims of defendants, and he is in no better position, and no more entitled to be regarded as a purchaser in good faith than if he had so inquired and ascertained the real facts of the case. ( Pell v. McElroy, 36 Cal. 268; Bank of Mendocino v. Baker, 82 Cal. 114; Scheerer v. Cuddy, 85 Cal. 273.) Neither could the plaintiff be recognized as a bona fide purchaser from his assignor, Erlanger, upon the additional ground that in the sale of equitable interests the principle of bona fide purchasers has no standing. (Taylor v. Weston, 77 Cal. 534.)"

With regard to plaintiff Hyde's payment of the balance of the contract to the railroad company in exchange for the deed, the court stated:

• "If we regard the plaintiff as the assignee of the railroad company, he then purchased the legal title subject to the equitable title of the defendants under the contract, and his legal rights in maintaining this action are identical with those of his assignor; and under the facts as disclosed by the record in this case, the railroad company could not prevail in this action."

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On the basis of this decision, it appears that a tenant who is being evicted (at least in California) has the right to challenge the title of the purported landlord seeking ejectment under the equitable mortgage doctrine and, if it can be established that the purported landlord's interest in the property is nothing more than a mortgage, the purported landlord should not prevail.

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While the issue I wanted to touch on here was the availability of the equitable mortgage defense in an eviction/ejectment action where the tenant is claiming to be the equitable owner of the property, a second issue was also touched on. That issue involves the principle that, when one is in open, notorious, and exclusive possession of property, a subsequent purchaser of the property is placed on full notice of all the rights and equities existing between the possessor and the "seller" of the property. Accordingly, a subsequent purchaser is not entitled to the rights of a bona fide purchaser when such purchaser fails to inquire as to the rights and equities the possessor may have, but rather, purchases subject to those rights and equities.

The issues of actual and constructive notice, possession as notice, the duty to inquire, and bona fide purchaser are issues I try to address further in Exercising Options To Buy, Rights Of Intervening Interests, Notice, Bona Fide Purchaser, Duty Of Inquiry, & Other Stuff.

For the next post in the series, see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 4.

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