Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 2

(Part 2 of a multi part post)

Click here to read Part 1 of Equitable Mortgage Eviction Defense

This recent court case dealing with the equitable mortgage doctrine and evictions of homeowners in the context of foreclosure rescue situations where a Minnesota appellate court affirmed a lower court judgment of eviction of the homeowners.

Minnesota

In a Minnesota case, an eviction action was brought against two homeowners (husband and wife) after they defaulted on the leaseback agreement. In response, the homeowners filed a separate equity-stripping action (in front of a different judge) against the foreclosure rescue operator and related entities under Minn. Stat. §§ 325N.01-.18, alleging among other things, that the transaction was a prohibited equity stripping transaction and that the arrangement was an equitable mortgage, and not an absolute conveyance. The homeowners also filed an answer in the eviction proceeding noting the pendency of the chapter 325N action and moved for the district court to dismiss the eviction proceeding or to stay it pending resolution of the chapter 325N action. The district court denied that motion and awarded the foreclosure rescue operator an eviction judgment.

In affirming the lower court judgment of eviction, the appellate court addresed a couple of issues:

1) Subject Matter Jurisdiction

The homeowner cited old case law for the proposition that the eviction court did not have subject matter jurisdiction to hear the eviction action because, in essence, the relationship between the parties was not that of a conventional landlord-tenant, and the question of the validity of landlord's title was at issue. The appellate court rejected the argument on the grounds that, at the time the old cases were decided, the eviction courts were of limited jurisdiction and, accordingly, those courts lacked jurisdiction to hear a case like the one at bar.

The court hearing the eviction in this case was not of limited jurisdiction. Stated another way, because of the changes in the structure of the Minnesota judiciary over the years, the court in this case (unlike the courts in the old cases) had jurisdiction to hear both the eviction case and the case disputing the landlord's title and could have heard them together (the homeowner did not file counterclaims in the eviction action asserting violations of 325N / equitable mortgage; those claims were made in a separate action). On this basis, the claim of lack of subject matter jurisdiction in the eviction case failed.

2) Section 504B.121 Issue

Minnesota Section 504B.121, contained in the Minnesota Landlord Tenant law, in essence appears to allow a "tenant" to dispute the title of a "landlord" in a "foreclosure rescue" situation (the only exception to the rule that prohibits a tenant from disputing a landlord's title in an eviction action). The homeowners' request for either a dismissal or a stay of the eviction action pending the conclusion of the equity stripping / equitable mortgage action under Section 325N was rejected by the appellate court, not based on the substance of the statute, but on procedural grounds. The court said the following:

• "While the question of a stay or dismissal was presented to the district [lower] court, the record shows that Minn. Stat. § 504B.121 was not mentioned, either as the basis for a stay or a dismissal, or for any other reason. Therefore, we conclude that the impact of Minn. Stat. § 504B.121 on the question of whether the eviction court should have stayed the eviction proceeding is not properly before this court, and we decline to address it."

3) General Arguments

Additional arguments were made asserting that allowing an eviction proceeding to finish before a chapter 325N action is resolved is inconsistent with chapter 325N because allowing the eviction proceeding to go forward allows the landlord, who may, in the chapter 325N action, be found to lack title to the property, to obtain possession of the property and possibly convey it. Rather than try to summarize the court's response to this point, I will simply say that the appellate court found a way to reach the necessary rationale to support a rejection of this point. The link below will take you to the case and all the details.

Conclusion

This was apparently an extremely important case in Minnesota. In addition to the homeowners being represented by private counsel, they received additional support in the form of a "friend of the court" brief filed jointly by the State of Minnesota (through the Minnesota Attorney General's Office) and Mid-Minnesota Legal Assistance, the primary provider of general civil legal services to low-income and elderly people in 20 central Minnesota counties.

(Editor's Note: After reading this case about a half a dozen times, I still can't figure out how in the world the court could allow an eviction of the homeowner by the foreclosure rescue operator to go forward when the court was aware that the issue of the validity of the operator's title was an issue that was being litigated in another proceeding. The court mentioned that the homeowner could have sought an injunction from the judge in the other proceeding temporarily enjoining the eviction until the title issue was resolved. Why the court in this case didn't just grant a stay of eviction until the title issue was resolved is unbeknownst to me.)

Case Law Citation

Real Estate Equity Strategies, LLC v. Jones, 720 N.W.2d 352; (Mn. App. Ct. 2006) (Available online courtesy of Minnesota State Law Library).

(revised 2-6-07) emdefense Minnesota equitable mortgage sigma