Equitable Mortgage Doctrine In Virginia: Part 1

An equitable mortgage case that I recently came across may have some applicability in a foreclosure rescue, sale leaseback arrangement, and particularly, one in which a foreclosure rescue operator, or a straw buyer working with the operator, obtains a third party mortgage as part of the "rescue" transaction.

The three key issues decided in this case were, given the facts and surrounding circumstances of this case:

(a) will the existence of a debt be implied on the part of the party asserting the existence of an equitable mortgage and a corresponding right of redemption,

(b) will the party asserting equitable mortgage and the corresponding right of redemption be estopped from asserting a claim of equitable mortgage and the redemption right, and

(c) will a third party mortgage lender who gives a mortgage on the subject property, given subsequent to the transaction giving rise to the equitable mortgage, be considered an innocent purchaser for value without notice (bona fide purchaser).

The court decided that under the facts of this case, yes, the debt could be implied and need not be expressed; and it also decided that, no, the financially strapped homeowner could not be estopped from claiming the existence of an equitable mortgage and the corresponding right of redemption, notwithstanding her own prior statements and acknowledgements to the contrary. Finally, the court ruled that the third party mortgage lender in this case was not an innocent innocent purchaser for value without notice. The lender's mortgage interest in the transaction was subordinate to the equitable mortgage, and accordingly, took nothing from the transaction relative to the financially strapped homeowner's equitable interest in the home.

An abreviated summary of the basic facts follow.

Tuggle v. Berkeley

101 Va. 83; 43 S.E. 199

(Va. 1903)

1) In this case, a widow, who lived in the subject home with six children, was in need of funds to pay delinquent taxes on real property that included her home and a garden lot.

2) In order to obtain money to prevent her interest in the realty from being subjected to the payment of delinquent taxes, she executed a deed to her son-in-law conveying her interest (a life estate) in the home and, in addition, a garden lot in exchange for him paying the delinquent taxes.

3) An agreement to reconvey was included in the deed providing for a reconveyance back to the widow upon payment of the amounts advanced for the taxes and the interest and costs thereon.

4) About five years thereafter, the son-in-law sold the garden lot.

5) During the five or six year period after taking the deed to the widow's home and the lot thereunder, the son-in-law placed a mortgage on the property to secure money he borrowed from a third party lender.

6) During this entire period, the widow had at all times remained in possession of the residence, and that she knew of and made no opposition to the sale of the 'garden lot,' and asserted no direct claim to any part of the proceeds.

7) Three letters of the widow to the son-in-law during this period, according to the court decision, "more or less plainly recognized [the son-in-law] as the owner of the 'home lot', and acknowledged herself to be his tenant, though she refers in these letters to the sale of the garden lot, saying she had hoped the money from that would have relieved him financially."

8) Six years after the initial transfer of the home, at the wish of both the third party lender and the son-in-law, the dwelling house and the lot upon which it is situated was advertised for sale as if it belonged to them.

9) Upon learning of this, the widow went to court and obtained an injunction restraining the sale of the property. Upon a subsequent hearing, the court perpetuated the injunction.

10) The son-in-law appeals.

The Questions Addressed By The Court

"1. Is the deed executed by the [widow] to [son-in-law] a mortgage, and as such subject to the equity of redemption, or is it simply the evidence of a conditional sale which has become absolute by a failure to comply with the conditions?"

"2. If it be construed as a mortgage, has [widow] lost the right to redeem by parting with her equity of redemption, or by such declarations or conduct as will estop her from asserting any interest in the property?

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(In considering the case, the Virginia Supreme Court made the following observations and statements of Virginia law - bold text is my emphasis.)

a) "It is true that both forms of sale are conditional, but the vital distinction between them is this:

- the equity of redemption is an inseparable incident of a mortgage, so much so that it cannot be defeated, restrained, evaded or in any other way impaired, even by agreement of parties, as long as the mortgage continues a security, though the mortgagee may become a purchaser of the equity of redemption, and thus combine the legal and equitable estates in his own person. Courts of equity, however, scrutinize transactions of this character with the utmost care, and ever stand ready to set them aside, and grant relief to the debtor whenever a gross inadequacy of price or any circumstances of oppression or mistake appear."

- "On the other hand, in the case of a conditional sale, the non-performance of the condition renders it absolute, both at law and in equity."

b) "In order to determine the true construction of such deed, it is well settled that parol evidence is admissible, and that a deed absolute on its face may be by such evidence converted into a mortgage. See 1 Jones on Mortgages, p. 223, sec. 301. It is a well established rule of equity that in cases of doubt such instruments are construed as mortgages. All the authorities agree as to that."

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(The court proceeds to address the first of the two questions set forth above.)

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c) "Keeping in mind these preliminary propositions, let us address ourselves to the first question. Is the deed in this case a mortgage, or does it evidence simply a conditional sale?"

d) "Mr. Minor, in Vol. 2 of his Institutes (4th ed.), p. 338, says: 'The marks whereby a mortgage is discriminated from a conditional sale are these: (1) that no price or an inadequate one is set on the property (2) that the grantor remains in possession (3) that there is a covenant or promise obliging the grantor to pay the money.'"

e) "As a legal proposition, too, it cannot be disputed that it is essential to a mortgage that there should be a debt to be secured, and there can be no debt without a promise to pay, either express or implied.

f) "As to the first two marks of a mortgage, it seems that the conditions are adequately met in this case. The price set upon the property is certainly inadequate, as the plaintiff's interest in the 'garden lot' alone, calculated by the tables, was worth more than the consideration in the deed, and it is not disputed that she has never been deprived of the possession of the property.

g) It is strenuously contended, though, by counsel for [son-in-law], that the [widow] must fail on the last proposition, that there was no debt, that there is no covenant or promise to pay by the grantor. Looking to the face of the deed alone this is certainly true, there is no express promise to pay the debt. In Snavely v. Pickle and Others, 29 Gratt. 27, at pp. 34-'5, it is said by the court, 'that whilst it is essential to a mortgage that there should be a debt to be secured, it (the debt) may be antecedent to or created contemporaneously with the mortgage.'

h) "The question then is, Will a court of equity, in the interest of a wise and humane and just exercise of its jurisdiction, imply a promise to pay this debt on the part of the grantor in the deed, or will it become narrow and technical in order that the grantee may claim an absolute title to property worth double what he paid for it? Mr. Minor says, 'a promise is implied if it can be otherwise shown to be a mortgage,' see 2 Minor's Insts. 338; and on pp. 333-'4, he says: 'An action lies on a mortgage to recover the money thereby sought to be secured unless it be stipulated that recourse shall be to the subject mortgaged alone.'"

i) "In view of these authorities, and following what I conceive to be the dictates of justice, I must hold that this last and necessary requisite is not lacking, and that the deed in question is a mortgage."

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(The court then proceeds to address the second of the two questions set forth above.)

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j) "After all, then, the only real question in the case seems to be the second one stated, to-wit: Has [widow] parted with her equity of redemption, or is she estopped from asserting her right to it now, by long acquiescence in the construction put on the deed by [son-in-law], or by her admissions contained in the letters referred to."

k) "A release of the equity of redemption will not be inferred from equivocal circumstances or loose expressions. It must appear by a writing importing in terms a transfer of the mortgagor's interest, or such facts must be shown as will estop him afterwards to assert any interest. See 1st Jones on Mortgages, sec. 340, p. 249."

l) "The first branch of this proposition has no application to the case at bar, as it is not pretended that [widow] sold her equity of redemption, but it is contended that she is estopped by consenting to the sale of the garden lot, and failing to claim any part of the proceeds, and by her acquiescence in the construction placed upon the deed by [son-in-law].

It is proper to say that the expressions in those letters can hardly be termed loose or equivocal. They constitute a pretty plain acknowledgment of absolute title in [son-in-law], and in them she made no mention of any promise on the part of [son-in-law] to reconvey her life interest, provided she consented to the sale of the garden lot. Is she, then, estopped by her words and actions from making a claim now?

Let us first consider the personality of the contending parties, their situation, their relations to each other, and all the circumstances surrounding them, and in the light of these facts we shall be better enabled to determine this question.

The evidence is that the plaintiff, at the time of these transactions, was a widow with a large family, many of them girls whom she was striving to support by keeping a boarding-house. That she was not a business woman, and was not possessed of enough worldly wisdom to care for her own interests, is manifest from all the facts and circumstances. We should rather infer from the evidence that she was an unselfish woman, unsuspicious, gentle, and confiding in her nature. With her very best efforts she found her home gradually slipping away from her grasp, and knew that she must have help or go under. The words and actions of such a woman under such circumstances cannot be judged by any fixed standard or known rules of conduct applicable to men. To do so would be running counter to all experience, and a violation of truth and justice. It does not appear that [son-in-law] was a man of means, or that he sought to entrap or over-reach her in any way, but he was a business man, well acquainted with the world and its ways, and capable of taking care of himself. She was in debt; she was distressed, and in her trouble she confided in him and gave up all she had to secure him. She doubtless thought that the home would be safe anyway. When he informed her that it must be sold she did not reproach him, she did not remind him of the promise she said he had made; she simply and plaintively said, 'Wait awhile, until I can make arrangements to buy. I must have some place to live, and for my children to come to when not at work.'

He plainly asserted title to the home, and she as plainly admitted it. Must the court hold her to the admission? Did this man and this woman meet on equal terms? Surely, if any evidence of [widow's] utter incapacity to take care of her own interests were wanted, it can be found in her actions immediately after the execution of the deed to [son-in-law].

Although the terms of the deed plainly gave her the right to a reconveyance of the property upon the payment of the debt ($ 600) and interest, she immediately assented to an arrangement by which [son-in-law] was to receive $ 240 a year for the use of the $ 600, or nearly seven times the interest due under the deed. Is it conceivable that she at that time understood her rights, and knew what she was doing? If the decision now is in her favor, [son-in-law] will have received back every cent of his money with interest, and she will keep the home which was provided for her by the foresight and love of her father and husband. If it be against her, she will lose her home without having received anything whatever for it, and [son-in-law] will have received in money and property double the amount loaned, and perhaps more.

In cases of this kind, the courts, both State and Federal, have followed the dictates of humanity and refused to hold parties responsible for admissions made under such circumstances.

Two notable instances of this are to be found in a decision of our Court of Appeals -- Snavely v. Pickle, 29 Gratt. 27, at pp. 34-'5, and a decision of the U.S. Supreme Court, Villa v. Rodriguez, 12 Wall. 323, 20 L. Ed. 406. In both cases the deeds were absolute on their face, but the court on parol testimony construed them to be mortgages. In the latter case the court says: 'Principles almost as stern are applied as those which govern where a sale by a cestui que trust to his trustee is drawn in question. He must hold out no delusive hopes; every doubt must be solved against him.' There are some striking similarities between that case and this. In that case it was a brother dealing with his widowed sister and her children. He had loaned her money on a mortgage, and subsequently procured from them an absolute deed to property worth double the amount of his loan, telling her that he was doing this to save the property, and that he would do right by them. He then leased the property to a third party, and gave him an option to buy at some future time. This third party made valuable improvements on the land, but the court took it from him, and allowed the brother the money he had loaned with interest and gave back the property to the widow and the children, notwithstanding every evidence of previous disclaimer by them. It is not at all probable that either of the parties in the case at bar has been actuated by any unworthy motive. Each has most probably acted under a misapprehension of his or her respective rights in the premises. It is strange that, in the face of this deed, [son-in-law] should always have claimed absolute title to the property, and it is hardly less strange that from the very first [widow] should have seemingly acquiesced in that claim. Probably at that time neither was very particular. They were dwelling harmoniously together as one family, and in a measure seemed to hold all things in common, and neither held the other up to strict rules of business, if, indeed, they understood them. It seems certain, moreover, that when the [widow] wrote those letters she did not understand her rights. She could hardly have known the true value of her life interest in the garden lot, which the defendant, [son-in-law], sold for $ 2,000, as it is a matter of difficult calculation, the principles of which are known almost exclusively to lawyers, and she ought not to be held to strict accountability for the expressions used in her letters, or for her apparent acquiescence in [son-in-law's] construction of the deed. She can claim also that she was the victim of delusive hopes held out to her in the declaration of [son-in-law]; that he only wanted to preserve a home to her and the family during her life, and who can say that she had not reposed in confidence on that promise? If she did, then she is not to be charged with conscious acquiescence. For these reasons, the court is of opinion that the plaintiff, [widow], is now entitled to claim the benefit of her equity of redemption in the property conveyed, and that an account should be taken between the said plaintiff and the defendant, [son-in-law], in which she shall be charged with the money advanced for her or paid by [son-in-law], with interest, and shall receive credit for the value of her life interest in the garden lot, calculated according to the established rule as of the date of the sale thereof, and also for board furnished the defendant and his wife, and any payments otherwise made. As it is manifest from the evidence that upon such a settlement nothing will be due to the defendant, [son-in-law], from the plaintiff, the injunction heretofore awarded in this case will be made perpetual as to the interests of the [widow] and Robbie B. Berkeley, leaving the [third party lender] free to subject to the payment of its debt such interests as the defendant, [son-in-law], may have in the property. It follows, of course, that the deed from [widow] to the defendant, [son-in-law], being construed as a mortgage to which the equity of redemption attaches, and being duly recorded, the defendant, the [third party lender], was affected with notice of the equities of the [widow], and cannot be considered as an innocent purchaser for value without notice, and took nothing under the deed from [son-in-law] save such interest as he had in the property." See also Peugh v. Davis, 96 U.S. 332, 24 L. Ed. 775; 2 Minor's Inst. (4th ed.), p. 337; and 1 Jones on Mortgages, secs. 265, 266, 274 and 275.

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In the court's analysis of the facts and circumstances in this case that caused it to reach the decision that it did in favor of the financially strapped homeowner's assertion that the transaction with her son-in-law was a mortgage entitling her to a right of redemption, the court appeared to give strong consideration to more than the three factors that it originally set forth. It appeared to give great weight to the fact that the widow (a) was not experienced in business, (b) "was an unselfish woman, unsuspicious, gentle, and confiding in her nature", (c) was in debt, distressed, and "found her home gradually slipping away from her grasp, and knew that she must have help or go under", and (d) in her trouble she confided in another in her attempt to obtain help in saving the family home and gave up all she had to secure that help. Additionally and by contrast, it observed that the son-in-law, while not appearing to be a man of means, "was a business man, well acquainted with the world and its ways ..."

It seems to me that you can extract the surrounding facts and circumstances faced by the financially distressed widow with six children in this case and apply them to practically any current day foreclosure rescue situation.

Further, in the typical, current day foreclosure rescue, sale leaseback arrangement, in addition to it involving a financially strapped homeowner desperate and willing to sign anything in order to save the family home, the purchase price paid by the rescue operator is commonly grossly inadequate and the homeowner usually retains possession of the home after the transaction is consummated. Further, while the sale leaseback does not involve any expressed indebtedness owed by the homeowner to the operator, this case makes clear that the existence of the debt required in order to find that an equitable mortgage exists can be implied and need not be evidenced by any formal promissory note or other formal evidence of indebtedness. (There are court rulings from other states that hold similarly.)

In conclusion, a quick note on the issue of "innocent purchaser for value without notice" as it relates to a mortgage holder (or any other lienholder, for that matter) who acquires its lienholder's interest in a home subject to a foreclosure rescue transaction. This decision may have some value in connection with the element of many foreclosure rescue transactions where the foreclsoure rescue operator, or a straw buyer working with the operator, takes title to the home facing foreclosure and, as part of the transaction, a third party mortgage is obtained to finance the transaction. This case may give support to the proposition that, given that the financially strapped homeowner typically retains actual possession of the home after the transaction is consummated, such actual possession may constitute "actual notice" to the third party lender that may disqualify said lender from the legal protections that are given to bona fide purchasers for value and without notice the way it appears to have disqualified the lender in this case.

One more quick note. This case supports the proposition that in Virginia, like in many other states, mistake, fraud, deception, oppression, or other acts of overreaching need not be proved by the homeowner asserting the equitable mortgage doctrine and the corresponding right of redemption. In fact, in this case, the court specifically observed that "It does not appear that [son-in-law] ... sought to entrap or over-reach [widow] in any way ..." Based on this, a reasonable inference is that proof of mistake, fraud, deception, oppression or other acts of overreaching on the part of a foreclosure rescue operator could make a financially strapped homeowner's claim of equitable mortgage even stronger.

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(modified 10-6-07)
Go here for Equitable Mortgage Doctrine In Virginia - Part 2.
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