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