Thursday, February 8, 2007

Equitable Mortgage Doctrine In Illinois - Part 1

While not to be misinterpreted as an exhaustive, thoroughly researched presentation on the Equitable Mortgage Doctrine in Illinois, this post will attempt to present a general review of how some Illinois courts have described and applied this doctrine. For ease of reading, all citations and internal quotations have been omitted.

Codification of the Equitable Mortgage Doctrine

Like many, if not most, other states, the Illinois legislature has codified this doctrine into its statute, which can be found in the Illinois Mortgage Act at § 765 ILCS 905/5.

344 Ill. App. 3d 815; 801 N.E.2d 121; (Ill. App. Ct., 5th Dist., 2003)

In this case, the Illinois appellate court ruled that, under the specific facts of this case, a contract to sell property containing a clause in the contract granting the seller a right to repurchase the property within six months after closing supported a reading that the transaction was actually a loan. Accordingly, the court denied the purported buyer's request for specific performance.

The court made the following observations regarding the existence and application of the equitable mortgage doctrine:

1- "Under the [Mortgage] Act, however, a contract for the transfer of a deed is to be considered as a mortgage and not as a land sale contract if the parties intended the land to function as security."

2- "The Act codifies the longstanding concept of equitable mortgage."

3- "The relevant factors in determining whether a deed that is absolute in form was intended to be a mortgage include:

  • the relationship of the parties,
  • the circumstances surrounding the transaction,
  • the adequacy of the consideration, and
  • the situation of the parties after the transaction."
4- "The declaration that a deed, which is otherwise absolute in form, is a mortgage does not require the existence of fraud, accident, or mistake."

5- "The question of whether a deed is a transaction in real estate or is to be taken as a mortgage depends on the intention of the parties at the time of the execution."

6- "Agreements to reconvey are an indication that the parties intended the transaction to be a mortgage and not a conveyance."

7- "The determinative question is the intent of the parties. Under the doctrine of equitable mortgage, in order for a court to convert a deed that is absolute on its face into a mortgage, the proof must be clear, satisfactory, and convincing. This proof can come from almost every conceivable fact that could legitimately aid that determination, and the decision in each case will depend on its own circumstances."

8- "Although no particular kind of evidence is required for this determination, it is essential for a mortgage that there be a debt relationship. In this case, a debt relationship was formed under a contract. The parties agreed that the defendants would be indebted to the plaintiff. The parties intended for the land to serve as security for what was in essence a loan under the contract. The record supports the trial court's finding that the parties intended to create a loan with the property being security.

223 Ill. App. 3d 1007, 586 N.E.2d 316 (Ill. App. Ct. 1st Dist. 1991)
This case involved a review of summary judgment motions made in the lower court and simply concluded that genuine issues of material fact existed in this case, making the lower court's disposition by summary judgment inappropriate. In reaching this conclusion, the court conducted an examination and analysis of the Illinois equitable mortgage doctrine and, in that regard, it made the following observations:

1- "Whether a deed is to be considered as an equitable mortgage depends on the parties' intentions. To convert an absolute deed into a mortgage, the proof must be clear, satisfactory and convincing and may come from almost every conceivable fact that could legitimately aid that determination."
2- "Indeed, our courts have recognized and considered a number of factors including the following:
  • the existence of an indebtedness,
  • the close relationship of the parties,
  • prior unsuccessful attempts for loans,
  • the circumstances surrounding the transaction,
  • the disparity of the situations of the parties,
  • the lack of legal assistance,
  • the unusual type of sale,
  • the inadequacy of consideration,
  • the way the consideration was paid,
  • the retention of written evidence of the debt,
  • the belief that the debt remains unpaid,
  • an agreement to repurchase,
  • and the continued exercise of ownership privileges and responsibilities by the seller."

3- "Our courts have repeatedly considered the adequacy of consideration in determining whether to apply the equitable mortgage theory. Where the consideration is grossly inadequate, a mortgage is strongly indicated."

Responding to the assertion that no debt in this transaction actually existed, the court made the following observations:
  • "While a debt relatonship is essential to a mortgage, direct evidence is not necessary, and, in fact, no particular type of evidence is required. Although plaintiff never executed a note or other document which demonstrates the existence of a debt, a number of factors here might suggest a debt relationship. Plaintiff signed the deeds after she told Willens that she needed a loan, and Willens responded that Builders could assist her. Moreover, plaintiff stated that she never intended to sell her property and believed at all times that the transaction constituted a loan. Bruno acknowledged that she initially came to Willens to save her property. Although the documents do not appear to create indebtedness between the parties, the record suggests that the parties' primary intent was to effect a security agreement, rather than an outright sale of the properties."



206 Ill. App. 3d 976, 565 N.E.2d 131, 151 Ill. Dec. 860 (Ill. App. Ct., 1st Dist. 1990)
There were several issues involved in this case. I've limited this presentation to the equitable mortgage issue. In this case, the property owner asserting equitable mortgage conveyed a deed to property to the grantee in exchange for $9,000. Both parties to the transaction acknowledged that the property was worth $80,000. In addition, the property owner engaged in the transaction without the benefit of an attorney; the grantee of the deed, however, did have legal representation. The property owner also remained in possession of the property after receipt of the $9,000 payment. The appellate court affirmed a lower court decision that the transaction was a mortgage, and not an absolute sale, notwithstanding the conveyance to the grantee evidenced by a deed.
The court's examination and analysis of the Illinois equitable mortgage doctrine included the following observations:

1- "Every deed conveying real estate, which shall appear to have been intended only as a security in the nature of a mortgage, though it be an absolute conveyance in terms, shall be considered as a mortgage."
2- "Whether a deed is to be taken as a mortgage depends on the intentions of the parties."
3- "In order to convert a deed absolute on its face into a mortgage, the proof must be clear, satisfactory and convincing and can come from almost every conceivable fact that could legitimately aid that determination."
4- "The burden of proof rests upon the party asserting a mortgage where a deed absolute was conveyed."
5- "Since the question of whether to impose an equitable mortgage is based on fact, consideration of the trial testimony is essential. Deeds have been set aside where evidence showed a preexisting debt and the grantee retained a promissory note or other evidence of the debt where an agreement to reconvey was entered into at the same time or where the price paid was far below the fair value of the property."
6- "In a bench trial it is within the province of the trial court to determine the credibility and weight of testimony, to resolve inconsistencies and conflicts and to render its decision accordingly. Though conflicts in evidence exist, a court can still find an equitable mortgage."
7- "Six factors are to be considered by the trial judge to determine whether an equitable mortgage exists. Those factors include
  • whether a debt exists,
  • the relationship of the parties,
  • whether legal assistance was available,
  • the sophistication and circumstances of each party,
  • the adequacy of the consideration and
  • who retained possession of the property."

8- "The existence of a debt is the essential element to establish an equitable mortgage. But the fact that the mortgage was made for a future debt or that there was no fixed time for repayment does not affect the status of an instrument as a mortgage."

9- "The existence of a debt here does not appear to be in doubt. The court in McGill found an indication of a debt relationship in a defendant's attempt to collect and held that an agreement to reconvey has long been considered a significant factor in distinguishing a sale from a mortgage."

10- "Where the grantor is indebted to the grantee at the time of the conveyance, and the grantee retains the note evidencing the indebtedness, then the indebtedness was not satisfied by the conveyance, and, until the contrary is shown, it will be presumed that a mortgage is intended."

11- "The court should also consider whether or not the parties had the benefit of legal assistance at the time of the occurrence. The record indicates that plaintiff did not have advice of counsel when she accepted the $ 9,000, signed the note and relinquished the quitclaim deed to the defendants whereas the defendants were represented by counsel."

12- "Beelman and McGill identify a fifth factor: the adequacy of consideration. Where consideration is grossly inadequate, a mortgage is strongly indicated. Here, the defendants signed an $ 80,000 contract on the home at the same time they gave plaintiff $ 9,000. Defendants argue that, in light of the building's poor condition, "it is clear the actual value of the property was significantly less." However, in his deposition testimony, John McClure acknowledged that he still would have gone through with the $ 80,000 contract if he could have obtained a mortgage. Clearly, the $ 80,000 price was the agreement of the parties, and the defendant may not now argue that the value of the property was "significantly less."

13- "The final factor the McGill court considered is whether the grantor of the deed remained in possession of the property. In her analysis, the trial judge noted that plaintiff stayed in the home for a year after she gave the defendants the quitclaim deed. Plaintiff remained in the home until the defendants successfully obtained a court order requiring plaintiff to vacate the premises, and this occurred after the defendants had recorded the quitclaim deed and redeemed the property from the foreclosure sale."

14- "We find that the trial evidence clearly supports the finding of an equitable mortgage and that the trial court's decision was consistent with the manifest weight of the evidence. We find no error."


For an online article that discusses the equitable mortgage doctrine in Illinois, see:

When is a Sale-Leaseback an Equitable Mortgage?, by Gregory A. Thorpe and John C. Murray
Click here for links to other general Online References On Sale Leaseback Recharacterization. Illinois equitable mortgage beta

Tuesday, February 6, 2007

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3

This is Part 3 of a multi part post. Click here to read Part 2.


In an unlawful detainer (tenant eviction) proceeding, a California Appellate Court ruled that a property owner, who lost his property in foreclosure and then "rented" it back from the subsequent purchaser, had a triable issue of fact as to whether a landlord-tenant relationship existed between him and the subsequent purchaser which forms the basis of unlawful detainer. (According to property owner, the rental agreement was a "sham" to shield a usurious mortgage of the property to which the subsequent purchaser held title only to secure payment for the loan.) The court reversed a judgment of eviction and remanded the case to the lower court for consideration of whether the transaction between the parties was really a usurious loan secured by a mortgage.

There are several issues involved in this case unrelated to the equitable mortgage issue. I've tried to isolate the equitable mortgage issue in this case and list the facts below. The basic facts of this case relating to the issue of whether a deed merely constituted security for a loan, and whether a purported rental agreement was a shield to disguise a usurious mortgage, follow below (while this case was not a typical foreclosure rescue situation, the logic and rationale stated therein appears to be equally applicable to such a situation):

1- Property Owner owned and operated a 317-acre ranch that included a prune processing and packing plant.

2- Property Owner lost the property in a foreclosure sale in April, 2003

3- Within a month (May 2003), a "Subsequent Buyer" of the foreclosed property entered into an agreement entitled "Month-to-Month Rental Agreement and Security Agreement" with Property Owner.

4- In October, 2004, Subsequent Buyer filed an unlawful detainer action against Property Owner (in order to evict Property Owner and gain possession of the property).

5- In responding to Subsequent Buyer's summary judgment motion, "[Property Owner] opposed the motion, arguing, among other things, there was a triable issue of fact as to whether the "transaction" was "not that of landlord tenant, but was of a loan of funds with the rental agreement being used to disguise a possible usurious transaction."

6- Property Owner then filed a declaration in opposition to the motion for summary judgment wherein he stated that prior to the foreclosure sale, he and Subsequent Buyer agreed that he (Subsequent Buyer) would "be present at the foreclosure sale and bid funds to obtain the property" and that [Subsequent Buyer] would hold title "only as security . . . and that the property would be returned to [Property Owner] upon full repayment of the loan."

Also, Property Owner stated that he entered into the subsequent rental agreement only because Subsequent Buyer said he "only needed this agreement for both our protection" and never stated anything that this agreement was in any way changing their original loan agreement.

7- Property Owner contends it should be permitted to use the declaration to prove that the transaction was intended as a mortgage. In support of this argument, property owner cites Civil Code section 2925 and existing case law. Civil Code section 2925 provides as follows:

  • "The fact that a transfer was made subject to defeasance on a condition, may, for the purpose of showing such transfer to be a mortgage, be proved (except as against a subsequent purchaser or encumbrancer for value and without notice), though the fact does not appear by the terms of the instrument."

8- The California court observed as follows:

  • "Given the alleged relationship between the parties, [Property Owner] was allowed to introduce parol evidence to show what it believed was the true nature of the transaction in an attempt to prove the rental agreement was really a shield for a usurious mortgage. (See Workmon Constr. Co. v. Weirick (1963) 223 Cal.App.2d 487, 490, 36 Cal. Rptr. 17 [cases since 1867 have held that a court "can declare a deed absolute on its face to be a mortgage executed as security for the payment of a debt, and that parol evidence is admissible to show the real nature of the transaction without regard to the mode or form in which the instruments in writing were executed"]."

9- The court ultimately concluded as follows:

  • "We therefore conclude that [Property Owner] was allowed to assert, in essence, that it was not a tenant under the lease agreement because the rental agreement was really a shield for a usurious mortgage."


In this case (unlike the Minnesota case in Part 2), there is an indication at the end of the case that the property owner in this case posted an appeal bond, so presumably, he never actually lost possession of the property during the appeals litigation. In the Minnesota case, the property owner did not post bond and ultimately, vacated the premises in anticipation of execution of the judgment of eviction before the appeals litigation reached completion.

Case Law Citation:

North State Land Management v. Calprune, (Cal. App. Ct. 3rd Dist. 2006 unpublished)

For addendum to this post, see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3 Addendum


Go here for other posts on the equitable mortgage doctrine in California. California equitable mortgage valedictorian emdefense.

Monday, February 5, 2007

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.


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.


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

Online References On Federal Truth In Lending Law

Truth In Lending.
  1. Links to Selected Court Decisions (Truth In Lending and various other consumer protection statues),
  2. Truth In Lending Right of Recission,

Online References On Sale Leaseback Recharacterization

Online Articles On Recharacterization Issues In Sale Leaseback & Loan Participation Transactions (Ownership Issues, Title Insurance Problems)


Sale Leaseback & Loan Participation

Court Clobbers Foreclosure Rescue Plan, Lipson, Neilson, Cole, Seltzer & Garin, P.C.

Michigan Court Finds Deed is a Mortgage, (scroll down to the 3rd captioned article from top of linked page) Lipson, Neilson, Cole, Seltzer & Garin, P.C.

Michigan Appellate Court Sends Warning to 'Foreclosure Consultants', by Albert Rush and John C. Murray

When is a Sale-Leaseback an Equitable Mortgage?, by Gregory A. Thorpe and John C. Murray

Sale-Leasebacks: Things May Not Be What They Seem, by John C. Murray

Recharacterization Issues in Sale-Leaseback Transactions, by John C. Murray

Loan Participations: Recharacterization Issues, by John C. Murray

Recharaterzation Issues In Participating and "Equity Kicker" Mortgages, by John C. Murray

Clogging Revisited, by John C. Murray

To pay or not to pay: Claiming damages for recharacterization of sale leaseback transactions under owner's title insurance policies, by Thomas C. Homburger and Brian P. Gallagher
revised 2-23-07