Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 6

This is Part 6 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

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In this episode of a (possibly never-ending) multi-part series, I will be touching on an old Massachusetts case that I stumbled into where the court had the opportunity to address the equitable mortgage defense asserted by an "alleged" tenant who claimed to be the true owner of the premises and who claimed that the purported "owner" attempting to evict him was, in essence, an equitable mortgagee who was a grantee of a deed given as security for a debt.
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Waters v. Randall

47 Mass. 479

(Ma. 1843)
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This 160+ year old case is certainly an oldie but goodie. While I had some reluctance in reporting on this case because of its age, I thought better of it and decided to mention the case here and let the Massachusetts legal experts decide if the case has any current viability (bold text is my emphasis).

This is an action, brought by a certain Waters, to recover possession of two parcels of property from a certain Randall. Because the action was deemed, in equity, to be a foreclosure action, and the court in which the action was brought did not have jurisdiction to hear foreclosure actions, the case against Randall was dismissed.

The facts of the case and the court's observations follow:

Indebteded to Waters, Randall quit-claimed his title to two parcels of property to Waters for the purpose of securing the existing indebtedness. Contemporaneously with the quit-claim, Randall gave Waters a bond to evidence the existing debt to Waters. By agreement, Randall maintained possession of the parcels, and upon repayment of either all or part of the debt, Waters agreed to reconvey that portion of the parcels with a value equal to the amount of debt repaid.

In defense against the action to recover possession, Randall claimed to be the true owner of the property and, given that, in equity, the action was an action to foreclose a mortgage, the court in which the action was brought did not have jurisdiction to hear the matter.

The court stated that:

• "The bond, given at the time of making the deed, is an instrument of defeasance, and the land is therefore held in mortgage; and the stipulations in the bond do not affect or alter the character of the conveyance."

The court went on to explain their reasoning:

• "The law has always contemplated with jealousy any attempt to evade its provisions in respect to the right of redemption of estates conveyed for security. And while, by reason of a breach of the condition of the deed, the estate becomes absolute in the mortgagee, in law, yet equity has always preserved to the mortgagor a right of redemption of the mortgaged premises. The provision in the present case between the parties was, that Randall should continue in possession, so long as he saved Waters harmless from his liabilities."

• "And on the other hand, when Waters should be compelled to meet and discharge any of such liabilities, then, by said agreement, he might take immediate possession of the estates, according to the estimated value, to such an extent as should be equal to the debt or liability so paid or cancelled by him; or, in other words, so fast as he pays money for Randall, which is not forthwith repaid, he may take possession of so much of the mortgaged property as shall be equal to such advance, agreeably to their estimate of value. And so, when an amount equal to the whole value shall have been advanced for Randall, then Waters will be entitled to the whole estate."

• "But this stipulation does not change the nature of the instrument, but is a mere provision for his obtaining possession of the mortgaged premises; and while the estate thus becomes absolute in him at law, it is merely the commencement of his foreclosure in equity."

• "If it were otherwise, a new description of conveyance would be created, to be treated as a mortgage, or not, at the option of the money lender; for here is no obligation on his part to take the estate, and cancel the debts and liabilities, but only a right so to do; and in this manner the statute of mortgages would be broken in upon at pleasure, and new evasions of the laws against usury would spring into being."

• "And though the transaction in the present case may have been made in perfect fairness, as it regards the full value of the premises mortgaged, so that the tenant would not be injured by the demandant's becoming the present absolute owner of the estates, at the agreed prices, yet we cannot treat it in any other light than a mortgage."

• "And though mortgages are made with a power also, on the part of the mortgagee, to sell the mortgaged premises -- like the case of Eaton v. Whiting, 3 Pick. 484; and though a separate deed of defeasance, made at the same time with the absolute deed, may afterwards, upon sufficient consideration, be cancelled as between the parties, in such manner as to give an absolute title to the mortgagee -- the rights of third parties not having intervened -- as was decided in the cases of Trull v. Skinner, 17 Pick. 213, and Harrison v. Phillips Academy, 12 Mass. 456; yet I believe no case can be found, in which it has been determined that the mortgagee can, by force of any agreement made at the time of creating the mortgage, entitle himself, at his own election, to hold the estate free from condition, and cutting off the right in equity of the mortgagor to redeem."

• "Such an agreement would not be enforced as against a mortgagor; nor is it to be confounded with a sale upon condition. Under these views, we are of opinion that the relation of these parties is that of mortgagee and mortgagor, and consequently that this court has no jurisdiction of the suit. The same must therefore stand dismissed, with costs for the tenant."

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In this case, the property owner (Randall) maintained possession of the premises after the quit-claim, and it appears that the amount of Randall's debt approximated, if not exceeded, the value of the parcels conveyed. In spite of the lack of disparity between the value of the property conveyed and the amount of the debt owed, the court seemed to have no problem deciding that the bond given by Randall contemporaneously with the deed operated as an instrument of defeasance and, accordingly, treated the arrangement as a secured loan (mortgage) transaction, not an absolute sale.

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Unlike other cases I've written about, there was no fraud involved here, nor were there any inequitable advantages taken of pressing wants, and no sale for a consideration that was found to be manifestly inadequate by the court. The court in this case actually observed that "[t]he transaction in the present case may have been made in perfect fairness, as it regards the full value of the premises mortgaged...". Nevertheless, it appears that the bond given by Randall contemporaneously with the deed, being found to operate as an instrument of defeasance, was enough to cause the entire arrangement to be deemed a mortgage.

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Question:

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In the context of a foreclosure rescue transaction (involving sale with a lease buy-back arrangement), would a Massachusetts court similarly treat the lease, coupled with either an "option to buy" or a "repurchase contract with delayed closing", as instruments of defeasance?

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Inasmuch as the court in Waters v. Randall expressed strong concerns about money lenders' activities, generally, in connection with:

• "any attempt to evade [statutory] provisions in respect to the right of redemption of estates conveyed for security", and
• "new evasions of the laws against usury [that] would spring into being",

seeking to treat leasebacks, options to buy, and repurchase agreements with delayed closings as instruments of defeasance is something that may be worth thinking about if one represents financially strapped homeowners who have entered into foreclosure rescue deals. emdefense Massachusetts equitable mortgage saturn