Equitable Mortgage Cases - Wisconsin - Part 1
Abbreviated Summary of Key Facts of Case
Property owner Jones executed and delivered to a certain Shove a deed of land, absolute on its face; and Shove, at the same time executed and delivered to Jones a separate agreement under seal, witnessed and acknowledged, but not recorded, to reconvey the land to Jones on payment by the latter within four years of $ 2,300.Some six years later, Shove conveyed his interest in the property to a third party, Brinkman. Throughout the entire period from Jones' deed to Shove and Shove's deed to Brinkman six years later, Jones was in continuous possession of the subject property. Subsequent to Brinkman's receipt of the deed to the property occupied by Jones, Brinkman commenced an action for ejectment against Jones. Brinkman prevailed in his ejectment action in the lower court; the Wisconsin Supreme Court reversed, ruling that the original transaction between Jones and Shove was a mortgage.
The following are excerpts from the case that address various issues in connection with the application of the equitable mortgage doctrine in Wisconsin.
1) "This court held in Kent v. Agard, 24 Wis. 378, that, in an action of ejectment, the defendant might show by parol evidence that a deed absolute on its face, under which plaintiff claimed, was in fact given to secure a debt, and was therefore a mortgage; and, if the evidence established the fact, it was a defense to the plaintiff's action."
1) "In Magoon v. Callahan, 39 Wis. 141 at 141-45, and Sage v. McLaughlin, 34 Wis. 550 at 550-57, it was held that a mortgage in the shape of a deed absolute, with a defeasance in a separate writing, must be foreclosed in the same manner as a pure mortgage, and the premises be sold by order of the court, with like privilege of redemption to the mortgagor."
2) "These cases show that when the conveyance is shown to be a mortgage, no matter what its form, the title does not pass to the grantee, any more than it does where there is an ordinary mortgage. There is no good reason why the form should make any difference as to the rights of the parties."
3) "By a mortgage in its ordinary form, there is an absolute grant of the title to the lands, in terms, to the mortgagee, with a defeasance as a separate clause; the fact that this separate clause is in a separate paper, or by parol, does not in the least enlarge or change the nature of the grant."
4) "The law has definitely said that, no matter what the form of the deed or conveyance, if it be given and intended as a security for a debt due, or for money loaned, it shall be a mortgage, with all its attributes, and nothing more."
(In this case, Brinkman attempted to assert that, even if the original transaction between Jones and Shove was an equitable mortgage, he (Brinkman) was a bona fide purchaser without notice of Jones' title or interest when he purchased from Shove, thereby claiming to be the actual owner of the property occupied by Jones. The court indicated that whether Brinkman, as a subsequent purchaser of the premises occupied by Jones, was entitled to bona fide purchaser status turned on whether or not Brinkman had "actual notice" of Jones' rights and equities in the property. While not ruling on whether Brinkman had actual notice of Jones' rights and equities, the Wisconsin high court did rule that the lower court should have submitted the issue to the jury upon the questions, (a) whether Brinkman had knowledge of such a state of facts as made it his duty to make inquiry as to the claim of Jones before purchasing, and (b) whether, if he had prosecuted such inquiry with ordinary diligence, it would have led to actual notice of the claim which Jones made to the lands; and that the lower court erred in taking these questions from the jury.)
In reaching that ruling, the court made the following observations and statements of Wisconsin law on the issues of notice and bona fide purchaser:
1) "The actual notice required by the statute is not synonymous with actual knowledge. None of the cases, not even those cited from Massachusetts, hold that, in order to charge the purchaser with actual notice, it must be shown that he had actual knowledge of the precise claim of the person holding the unrecorded defeasance."
2) "We think the true rule is, that notice must be held to be actual when the subsequent purchaser has actual knowledge of such facts as would "put a prudent man upon inquiry, which, if prosecuted with ordinary diligence, would lead to actual notice of the right or title in conflict with that which he is about to purchase."
3) "Where the subsequent purchaser has knowledge of such facts, it becomes his duty to make inquiry, and he is guilty of bad faith if he neglects to do so, and consequently he will be charged with the actual notice he would have received if he had made the inquiry."
4) "[T]his court has held that actual, open and visible occupation, whether known to the purchaser or not, shall be deemed sufficient notice to the purchaser of the rights and equities of such occupant."
5) "This court has repeatedly decided that possession of a party claiming under an unrecorded deed was sufficient notice of his equities to a subsequent purchaser, even though such occupation was unknown to the purchaser. Wicke v. Lake, 21 Wis. 410; Ehle v. Brown, 31 Wis. 405; Warner v. Fountain, 28 Wis. 405; Wickes v. Lake, 25 Wis. 71. Actual knowledge of the record of a deed which is not entitled to record because not properly witnessed, is sufficient notice to a subsequent purchaser, of the equities of the grantee in such defective deed."
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In the context of a foreclosure rescue, equity stripping transaction, and whether subsequent purchasers of property from a grantee of a deed given as security for a debt have actual notice of the rights and equities of a foreclosure rescue victim, some of the observations made by the court in this case (both those listed above as well as those contained in the case that I haven't listed above) may have some applicability.
Typically, the financially strapped homeowner remains in possession of the property when the home is signed away to the foreclosure rescue operator or a straw buyer, who then strips the equity out of the property by encumbering it with a new mortgage. It may be that the rights and equities of a foreclosure rescue victim in a transaction that a court declares to be an equitable mortgage may be superior (and, in effect, trump) the rights of both the subsequent purchaser and any subsequent encumbrancer involved in the rescue transaction. If the subsequent purchaser and subsequent encumbrancer are treated as being on actual notice of the rights and equities of the foreclosure rescue victim, they may find themselves and their interests in the subject property voided by a court of equity.
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