Equitable Mortgage Defense In Eviction/Ejectment Actions - Part 9

This is Part 8 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

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The following cases, a couple of old ones, and a couple of recent ones, come from the State of Florida and apply the law of equitable mortgage in a way so that in no case will the right of possession to property by a mortgagee be recognized in a Florida court until due foreclosure is had according to the forms of the law providing for foreclosure of mortgages. Obtaining possession via a tenant eviction or ejectment action when the legal title was received as security for a loan is legally impermissable.

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Walls v. Endel, 20 Fla. 86; (Fla. 1883)
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This case involved an action for ejectment by a title holder of property. The person in possession alleged that it was the owner of the property who had conveyed absolute title to the current title holder as security for the payment of money and that, therefore, the deed should be treated as a mortgage. The lower court refused to allow evidence that the arrangement between the parties should be treated as a mortgage.

In reversing the lower court, the Florida Supreme Court stated:

• "[T]he result of these facts is that the deed was given to secure the payment of money, and is therefore, by the rules of equity, only a mortgage, and the statute we have cited declares it to be a specific lien, and that the holder cannot have possession without due foreclosure, decree and sale; while the judgment at law would give possession without foreclosure and sale ... [I]f the plaintiff has only a specific lien on the property, though it is in form a deed in fee, it is not only inequitable but contrary to the plain words of the statute that he should obtain possession otherwise than by due foreclosure of the mortgage interest."

The Florida high court also cites a Wisconsin Supreme Court case, Kent vs. Agard, 24 Wis. 378, another eviction case, in support of its decision, in which it was said:

• "[T]he plaintiff should have been allowed to show by parol that the absolute deed was intended as a mere security and was consequently only a mortgage. That this may be done in some form of action is not contested. And I see no reason why it may not be done in an action to recover the possession of real estate. When the facts are proved such deed is a mortgage only, both in law and in equity. The rights of the mortgagor and mortgagee are precisely the same as though the defeasance were contained in the deed itself. The only difference is in the manner of proving the defeasance."

It also cites Saunders vs. Stewart, 7 Nev. 200, a Nevada high court case, where it was observed:

• "The doctrine is that such evidence is not received to contradict an instrument of writing, but to prove an equity superior thereto."

Walls v. Endel, 20 Fla. 86 (Fla. 1883)

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Folks v. Chesser, 106 Fla. 837; 145 So. 602; (Fla. 1932)

The Florida high court made the following observations in connection with an equitable mortgagee's right of possession to be obtained only after a mortgage foreclosure is had.

• "Our statute enacts a recognized rule of equity, that all deeds of conveyance conveying or selling property for the purpose, or with the intention, of securing the payment of money, shall be deemed and held as mortgages, and shall be subject to the same rules of foreclosure and the same regulations and restrictions as are prescribed by law in relation to mortgages." See Sections 5724-5725 C.G.L. 3836-3837 R.G.S.

• "Under these statutes, in no case will the right of possession to property by a mortgagee be recognized in a court of justice in this State, until due foreclosure is had according to the forms of the law providing for foreclosure of mortgages."

Folks v. Chesser, 106 Fla. 837; 145 So. 602; (Fla. 1932)

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Blanco v. Novoa, 854 So. 2d 672; (Fla. App. Ct. 3rd Dist.) 2003

This case dealt with an eviction action. The trial court granted a motion that, in effect, treated the subject transaction as a landlord-tenant relationship. In reversing, the Florida appellate court ruled that the relationship between the parties was a mortgagor-mortgagee relationship and, as such, the appropriate cause of action to seek possession for non-payment is a foreclosure proceeding, not an eviction action.

The facts of the case follow:

Novoa and his niece, Blanco, took joint title to a condominium. Novoa purchased the property with his own funds. Shortly after the purchase, Blanco and Novoa entered into an agreement whereby Blanco would take possession of the property and pay $ 740 per month to Novoa, as well as all condominium assessments and property taxes.

According to the text of the case:

• "The parties used a standard landlord-tenant lease form in which the monthly payments to Novoa were called "rent", Blanco was called the "lessee" and Novoa the "lessor."

• "However, the agreement also contained a clause that obligated Novoa to sell the property and Blanco to purchase the property for $ 89,831.56 in five years. Blanco was in possession of the condominium and made payments from November 1, 2000 until October 1, 2002."

• "[A] Quit Claim Deed was recorded which purportedly gave Blanco's half interest in the condominium to Novoa. Blanco claims not to have signed the document."

• "Blanco had not made any of the payments required by the agreement since November 1, 2002. On December 19, 2002, Blanco filed a complaint seeking to cancel the Quit Claim Deed, monetary damages for fraud in the execution of a Quit Claim Deed to real property, and specific performance of the contract for sale of the unit."

• "Novoa counterclaimed for breach of contract and eviction in March, 2003. Novoa then filed a motion to require Blanco to post rent with the registry of the court or be defaulted on the counterclaim for eviction."

• "The trial court granted the motion and ordered Blanco to deposit $ 5,180.00 into the court registry within fifteen days of the order or waive any defenses to the eviction. The deadline was twice extended to accommodate this appeal."

• "The trial court construed the agreement between Blanco and Novoa to be a lease and consequently applied the law governing landlords and tenants. For a tenant to contest an eviction action, any defense other than payment requires the tenant to deposit accrued rent and any rent which accrues during the pendency of the proceeding into the court registry." See 83.60(2), Fla. Stat. (2003).

• "The trial court erred by requiring Blanco to deposit payments into the court registry because Novoa and Blanco were not simply landlord and tenant, respectively, they shared an equal interest in the property. The agreement provided for monthly payments equal to ten percent interest with the payment of fees and taxes consistent with those a mortgagor would make. Blanco would buy out Novoa's interest in the condominium at the end of five years with a final balloon payment."

• "The Quit Claim Deed, if genuine, would make them landlord and tenant. However, if it is a forgery, the two are joint tenants. To impose the obligation to pay rent into the registry of the court is to decide the validity of the Quit Claim Deed and provide the remedy before the case is properly adjudicated in court."

• "Under section 697.01, Florida Statutes (2003), "[a]ll conveyances, obligations conditioned or defeasible, bills of sale or other instruments of writing conveying or selling property . . . for the purpose or with the intention of securing the payment of money . . . shall be deemed and held mortgages . . . ." In deciding whether a conveyance should be declared a mortgage under the statute "depends on the particular facts, and as the statute provides, is a question of the parties' intent." Valk v. J.E.M. Distribs., 700 So. 2d 416, 419 (Fla. 2d DCA 1997). "[E]quity will look at and take into consideration all the facts and circumstances surrounding the transaction and will decree an instrument to be a deed or mortgage according to the real intentions of the parties." Id. (alteration in original)."

• "The substance and not the form is what is critical. Here, the trial court erred by determining that the words "lease" and "rent" controlled when the parties clearly acted not as landlord and tenant, but rather as mortgagor and mortgagee."

• "Thus, the remedy available to Novoa in this case is that of a foreclosure proceeding."

Blanco v. Novoa, 854 So. 2d 672; (Fla. App. Ct. 3rd Dist.) 2003

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Editor's Note:

The trial judge in this case apparently had difficulty in "seeing through" the "labels" that were used in the documents and allowed him/herself to be controlled by the "labels" in the legal documents used in the transaction (ie. "lease" and "rent"). The Florida appeals court decision in this case represents a good, clear illustration as to how trial judges should interpret these types of documents in the context of an equitable mortgage claim.

In this case, the label "rent" was used in an attempt to disguise what, in substance, were the "mortgage payments" on an equitable mortgage. The term "lease" was used in attempting to disguise a legal document that, in substance, was not a lease at all, but rather, was more akin to a "promissory note" secured by an equitable mortgage.

Both this case and the next case illustrate one of the practical problems that foreclosure rescue victims may face when having their cases heard in court. That is, they may have a tough time convincing a busy trial court judge to take the time and make the effort to carefully examine the true substance of a sale leaseback, foreclosure rescue transaction and to correctly declare said transaction as being an equitable mortgage. It may be easier for a judge to simply read the documents, rule based on the form of the transaction and, if the foreclosure rescue victim disagrees with the ruling, extend the victim an "invitation" to take it up with an appeals court.

(I suspect, however, that as more of these cases get "reported", some trial judges may end up feeling "pressured into" making a correct ruling from the "get-go".)

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Minalla v. Equinamics Corp., (Fla. App. Ct., 3rd Dist.) March 21, 2007

A Florida appellate court ruled last month that a Miami-area foreclosure rescue operator cannot evict a homeowner who signed away title to her home in a "sale-leaseback-buyback option" arrangement until a determination is made as to who the true owner of the property is and effectively ruling that the Florida Residential Landlord Tenant Act is not applicable to such a transaction unless and until such a determination favorable to the operator is made.

The case involved a situation where, at some point after a financially strapped homeowner signed away the title to her home to a foreclosure rescue operator, the operator attempted to evict her. The homeowner asserted the defense that she was the true owner. The lower court ruled that, pursuant to the applicable provisions of the Florida Residential Landlord Tenant Act, she had to pay into the court registry the rent that was called for in the leaseback of her home while the court proceedings were pending. According to the appellate court, which subsequently reversed the lower court's decision (bold text is my emphasis):

• "[The homeowner] alleges she was tricked into conveying her home to Equinamics in a transaction which is impressed with characteristics of a sale, but in reality is a disguised loan secured by her home. If this is accurate, then Equinamics is not an owner of [the homeowner's] residence but rather a lender who must proceed to oust [her] via a foreclosure action."

The court then made this observation:

• "Based upon the facts of this case, it is apparent that the transaction by which Equinamics received title to the Minalla residence was not an ordinary real estate transaction. Likewise, the circumstances under which Minalla continued to remain on the property after she executed the special warranty deed to Equimanics was not possessed of the trappings of a usual landlord tenant relationship."

Ultimately, in reversing the lower court ruling to the contrary, the appellate court ruled as follows:

• "[T]here is a factual dispute in this case concerning who is the true owner of the property. Because the trial court's order requiring payments by Minalla of monies into the registry was made without conducting an evidentiary hearing concerning the nature of the transaction and who is the true owner of the residence, the court erred in imposing the payment requirement upon her."

(The homeowner is being represented by attorney James A. Bonfiglio, Boynton Beach, Florida.)

Minalla v. Equinamics Corp., (Fla. App. Ct., 3rd Dist.) March 21, 2007 (Court decision made available online courtesy of the Florida Third District Court of Appeal).

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Editor's Note:

To Florida attorneys, I again feel compelled to repeat an observation that I made elsewhere on this blog (at the end of Equitable Mortgage & Usury In Sale Buyback Deals In Florida) in connection with the binding effect of Florida appellate decisions on the Florida trial courts. That is, that unless the Florida Supreme Court rules otherwise, and absent a conflicting decision from a Florida appeals court from another district, the ruling in Minalla that the trial court erred in treating the transaction as a landlord-tenant arrangement "without conducting an evidentiary hearing concerning the nature of the transaction and who is the true owner of the residence" is binding not only on trial courts located within the Third District Court of Appeal, but is binding on all trial courts throughout the State of Florida.

(See the comment to this effect in the Florida Supreme Court case in Pardo v. State, 596 So. 2d 665 (Fla. 1992). ("[T]he district court erred in commenting that decisions of other district courts of appeal were not binding on the trial court. This Court has stated that the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by this Court. Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts." [citations and internal quotations omitted]).

I will hasten to add that the Florida Supreme Court has already addressed the "landlord-tenant" vs. "mortgagee-mortgagor" issue that exists in an eviction/ejectment action when an equitable mortgage claim or defense is raised. See Walls v. Endel, supra, and Folks v. Chesser, supra. However, I realize that there may be some judges and attorneys who may be reluctant to rely on cases that are approximately 125 years old (Walls) and 75 years old (Folks).

For those who choose to disregard the above-cited Florida Supreme Court decisions, you can cite the brand new appellate decision in Minalla as to the "landlord-tenant" vs. "mortgagee-mortgagor" issue; and then cite Pardo (and the cases cited therein) as to the binding effect of a decision of one Florida appellate court on all trial courts throughout Florida.

With all this being said, I hope that (some) Florida trial judges will be less likely to disregard the substance of these sale-leaseback-repurchase option, foreclosure rescue deals, and make rulings consistent with all of the aforementioned cases.

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With regard to the binding effect that Florida's intermediate appellate court decisions have on the Federal Courts deciding issues of Florida state law, see Binding Effect Of State Court Decisions On Federal Courts On State Law Issues.

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General Jurisdiction Courts vs. Limited Jurisdiction Courts

In the above cases, the jurisdiction of the lower courts to hear tenant eviction/ejectment actions was not raised as an issue. It appears that the lower courts in these cases were all courts of general jurisdiction, and accordingly, had jurisdiction to hear both the eviction/ejectment actions and the equitable mortgage issue, which affects the title to property.

In a case where the equitable mortgage issue was raised as a defense in an eviction action where the lower Florida court hearing the case was a court of limited jurisdiction (a "County Court", as opposed to a "Circuit Court"), and in which the court had no jurisdiction to make rulings affecting the title to property, see Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931), and the comments on that case at Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation. emdefense Florida equitable mortgage alpha