Tuesday, February 20, 2007

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 5

This is Part 5 of a multi part post. Click here to read Part 4.
Superior Court of New Jersey, Essex County
246 N.J. Super. 487; 587 A.2d 1337;

In this post, I will touch on a 1991 New Jersey case in which a judge, sitting in what appears to be an appellate capacity, voided a judgment of possession in an eviction action against a tenant/homeowner who had transferred title to his home to a foreclosure rescue operator and subsequently leased back the home from the operator.

The judgment of possession was obtained in a summary dispossession (landlord-tenant; limited jurisdiction) action. The reviewing court found that the dominant realtionship between the foreclosure rescue operator and the "homeowner/tenant" was not one of a landlord and tenant. Accordingly, the reviewing court found that subject matter jurisdiction did not exist in the summary dispossession action and therefore, the judgment for possession in favor of the foreclosure rescue operator was vacated and the warrant for removal was recalled.

The recitation of the details of what happened between the foreclosure rescue operator and the homeowner are contained in the case, which can be accessed by clicking the link at the end of this post.


The court made the following observations regarding the facts of the case and the applicable law, as well as its conclusions on this matter (all text appearing in bold are my own emphasis and are not emphasized in the original text).

1) "I find it inescapable that originally the parties contemplated that their transaction was a method of temporary refinancing and that both parties contemplated that defendants would "re-purchase" the property. The relationship of landlord and tenant was incidental to that mutual and dominant contemplation."

2) "Testimony was presented on the return of the order to show cause on a single issue and without any opportunity to engage in discovery. The true consequences and evaluation of the parties' conduct shall have to await a plenary trial."

3) "My conclusion (i.e., temporary financing transaction rather than landlord-tenant relationship) results from several factors."

4) "Most significant is the common intention expressed by the parties; defendants wanted to save their home from foreclosure and plaintiff approached them to help them save it from foreclosure. There was no suggestion that plaintiff approached defendants in order to rent the home that defendants then owned to them."

5) "Secondly, the abundance of documents show that a transaction far more complicated than a lease was involved. Although a lease was one of the documents, it was subordinate to the intention of the parties, rather than the motivation or dominant factor in the transaction. It was a course on the road to their true destination."

6) "Additionally, it was not until after the first two years of the relationship that plaintiff proposed a lease that: (a) would not include the option to purchase, and (b) called for a security deposit. (Apparent violations of the landlord-tenant laws (such as the payment for renewal, see N.J.S.A. 2A:18-61.3(a)) are immaterial on the instant issue, especially since I have found that a landlord-tenant relationship was not the dominant one. At best for plaintiff, these apparent violations are further evidence of the subordinate nature of the tenancy.)"

7) "However, both factors indicate that plaintiff did not consider the initial transaction as creating essentially a tenancy. Consistent with these considerations is the fact that defendants refused to sign this last proposed lease."

8) "Substance must control the form. "If there is a large down-payment and a substantial equity build up, a court should not permit such a sales agreement to be transformed into a landlord-tenant lease in a case of default or breach." Meiser, Tenant-Landlord Law in New Jersey (ICLE 1978) at 119-121. Although the quote refers to installment sales agreements, it is equally applicable to a sale, leaseback, option-to-purchase transaction as well, inasmuch as the substance prevails."

9) "See also Cahayla v. Saikevich, 119 N.J.Super. 116, 290 A.2d 311 (Cty.Dist.Ct.1972) on this issue, as between tenants by the entirety and a tenant of one of them, and Plaza Road Co-op, Inc. v. Finn, 201 N.J.Super. 174, 492 A.2d 1072 (App.Div.1985) as to a co-op shareholder in possession not being subject to summary dispossess proceedings because the dominant relationship is not that of landlord and tenant. Id. at 181, 492 A.2d 1072."

10) "The rationale was spelled out in Carr v. Johnson, 211 N.J.Super. 341, 511 A.2d 1208 (App.Div.1986) as follows:

  • The Legislature did not intend for the Special Civil Part (as successor to the County District Court) to determine disputed land titles and complex equitable issues in the context of a landlord-tenant dispossess action, 18 N.J.Practice, supra, § 1560 at 296, since it is a summary proceeding in which discovery is not permitted. . . . [W]hile such a court "... may hear equitable defenses and entertain equitable concepts, it is beyond the power of that court to grant permanent injunctive or other equitable relief to these parties as may appear just and appropriate under the circumstances presented." Morrocco v. Felton, 112 N.J.Super. 226, 230-231 [270 A.2d 739] (Law Div.1970). . . .
  • Because these limitations are imposed, N.J.S.A. 2A:18-60 provides for transfer of such cases from a court of limited jurisdiction to the Superior Court.
    . . . .

  • The issues here were complex enough to require pretrial discovery to develop evidence concerning the relationship between these parties such as the amount of money paid by Carrie, the reasons for those payments, their relationship to the amount of taxes and full revelation of the circumstances leading up to the conveyance to Mary. [at 347, 511 A.2d 1208]"

11) "Carr also observed that the court should make the transfer sua sponte pursuant to R. 1:13-4(a) in an appropriate case where the defendant does not move under the statute. Id. at 349, 511 A.2d 1208."

12) "The substance, the essential nature, the dominant purpose of this transaction, has been spelled out above. Legal title being in plaintiff while defendants were in possession was incidental to the transaction. It was subordinate to the actual intent and contemplation of the parties and was intended to have been temporary. Inter se, the parties did not expect title to be "really" in plaintiff. Certainly plaintiff would have no right to the summary dispossession of defendants without "real" title."

13) "Although the transaction took a substantially different (but likewise complex) form from that in Humble Oil & Refining Co. v. Doerr, 123 N.J.Super. 530, 303 A.2d 898 (Ch.Div.1973), one of the findings there applies here as well: "In this sense the lease transaction was an equitable mortgage. . . ." Id. at 551, 303 A.2d 898.

14) That being so, the judgment for possession is hereby voided and the warrant of removal is hereby recalled. I will sua sponte prepare an order for the transfer of this action to the Law Division (with its consequent equitable powers) so that the parties may expand the pleadings and engage in discovery.

15) The determination of the consequences of the transaction and a thorough exploration of the payments involved are not appropriate in a summary action; it is appropriate for the Law Division. The transfer and enlargement of the pleadings will deny a possibility of conflicting decisions, will eliminate a needless duplication of judicial efforts, and will promote a savings of time, cost and effort. Morrocco v. Felton, 112 N.J.Super. 226, 233, 270 A.2d 739 (Law Div.1970); R. 1:1-2."

16) Notwithstanding resolution of the issue above, I consider it appropriate to note one additional factor which appeared in this matter; the purported settlement of the eviction action culminating in a judgment for possession.

17) As noted above, the eviction action was "settled" by the parties. It is a strong public policy in New Jersey to encourage the settlement of claims. Pascarella v. Bruck, 190 N.J.Super. 118, 124-125, 462 A.2d 186 (App.Div.1983). Consequent with that public policy, the courts should enforce settlements absent a demonstration of fraud or other compelling circumstances. As noted in Jannarone v. W.T. Co., 65 N.J.Super. 472, 477, 168 A.2d 72 (App.Div.1961), enforcement is subject to the discretion of the court.

18) The compelling circumstance requiring the exercise of my discretion in avoiding the settlement is that by consequence otherwise, enforcement would appear to confer jurisdiction where it did not exist. Jurisdiction not existing ab initio, the parties cannot vitalize it by consent.

19) In any event, based on the testimony on the return date of the order and the affidavits and exhibits submitted on the application for the order, I also find that defendants signed the stipulation of settlement for the same reason that they entered into the subject transaction--they had their "backs up against the wall." They had to sign or they would be evicted--the same as in the foreclosure action. Economic necessity is often the parent of ruinous concessions. See Humble Oil, supra, 123 N.J.Super. at 547, 303 A.2d 898. This defense to the settlement, and the whole equitable concept, may be appropriate for exploration in the Law Division; they certainly are not appropriate for a summary dispossess action. n1

  • n1 I hasten to add that although the above transaction came to the court dressed in one particular type of package, the judges sitting in summary actions for possession must be vigilant to note the many varieties in which these matters may be presented. Another may be a mortgage to plaintiff coupled with a lease, or an infinite variety otherwise. The common thread is that defendant formerly owned the property, or perhaps gave a sizeable downpayment on an option to purchase, or the like. They are usually designed (at least by a plaintiff) to give the appearance that the parties intended the landlord-tenant relationship to be the dominant relationship.
  • These "packages" are apparently proliferating because of advertised promotions, for example, to buy real estate with no money down or the like, coupled with the current recession. All of the "angels" offering to help financially beleaguered owners do not necessarily have "tarnished halos"; some may possibly act from beneficient motives. However, the unravelling of some of these transactions, and the determination of the equitable considerations, is not appropriate in summary dispossession actions, in my opinion.
Vacating the judgment of possession in this case on the basis of the court's lack of jurisdiction was the same approach taken by the state Supreme Court in the Florida case referenced in Part 1 of this post.
One common thread that runs through all the cases I've posted on in Parts 1 through 4 of this post in which the property owner has prevailed in his/her equitable mortgage claim against the investor/"equitable mortgagee" is that the property owner seems to lose his case in the first forum to hear the matter; winning these cases appears to require being prepared to win on appeal.
For example:
Regarding the cases that hinge on the right of the tenant/homeowner to have the issue of his equitable title (claimed under the equitable mortgage doctrine) resolved before having to deal with eviction proceedings (see the New York case in Part 1; the California case in Part 3; or the Colorado case in Part 4), it appears that the judges initially hearing these cases had considerable difficulty in adopting a seemingly intuitive approach in deciding the cases. Personally, there doesn't seem to be anything more intuitive than determining the title to the property first before deciding whether to evict the party in possession who is making a legitimately arguable claim to the title thereof.
Regarding the cases that hinge on a court of limited jurisdiction (ie. landlord-tenant court, housing court, county court, etc.) lacking subject matter jurisdiction to resolve issues dealing with titles to, or boundaries of, real estate (as in the New Jersey case above, or the Florida case in Part 1), the courts initially hearing these cases have ostensibly had great difficulty in understanding (or possibly accepting) their jurisdictional limitations. By issuing a judgment of possession, eviction, etc. in spite of the fact that the party in possession is claiming the defense of equitable title to the premises under the equitable mortgage doctrine, the limited jurisdiction court, in essence, is deciding the equitable mortgage issue against the party in possession when it lacks the jurisdiction to do so. emdefense New Jersey equitable mortgage revolution

Monday, February 19, 2007

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 4

This is Part 4 of a multi part post. Click here to read Part 3.

In this post, I will touch on a 2001 Colorado Supreme Court case that dealt with the assertion of the "equitable mortgage" doctrine by a "tenant/equitable owner" in possession of property in connection with an eviction action brought by the purported "landlord/record owner" of the property. The deed under which such record ownership is claimed is alleged to be an equitable mortgage by the "tenant-equitable owner" in possession of the premises.

The Colorado court concluded that the issue of whether ownership affects possession should be decide first. If it does, then the issue of actual ownership should be decided second, after which the possession issue should be decided last.


Beeghly v. Mack, 20 P.3d 610; (Colo. 2001)

1) A typical foreclosure rescue transaction was entered into in which a certain Mack, owning real property in trust, contracted with a certain Beeghly, whereby Beeghly took title ownership of the real property and subsequently leased back the property to Mack's trust. The purpose of the transaction was to forestall an imminent foreclosure of the trust property.

2) Approximatley nine months later (Mack had already stopped making the "rental payments" to Beeghly due to a dispute), Beeghly initiated an unlawful detainer action against Mack seeking, among other things, possession of the property.

3) Mack responded by denying that Beeghly was the beneficial owner of the property. On that same date, Mack and the Trust also filed an amended answer, asserting counter-claims such as quiet title, declaratory judgment, breach of contract, unjust enrichment, and breach of fiduciary duty.

4) In addition, Mack and the Trust filed a motion to continue the trial of the issue of possession of the property.

5) The continuance was granted conditioned upon the collective payment of a bond (in accordance with a Colorado bond statute, section 13-40-114. ) by Mack and the Trust, which was never paid.

6) Beeghly then filed a motion for default judgment for possession based on the failure of Mack and the Trust to post the bond; the trial court ultimately granted the motion for default judgment, holding that Beeghly was entitled to possession since Mack and the Trust failed to post the bond.

7) The trial court also denied Mack's and the Trust's request for a stay of the possession order.

8) Mack and the Trust then brought a C.A.R. 21 petition with the Colorado Supreme Court requesting that the Supreme Court issue a rule to show cause why an order should not be issued vacating the trial court order granting the motion for default judgment.

9) The Colorado Supreme Court, in its opinion, addressed two issues:
  • the correctness of granting a default judgment for failure to post bond, and
  • the equitable mortgage issue.

10) On the first issue, the high court ruled that the lower court decision was incorrect, and provided an analysis of the Colorado law that concluded that the law requires a bond only to obtain a delay in the proceedings and that, upon failure to post the bond, the court proceedings are simply to continue to trial. The fact that the defendant is granted his request for a delay in a trial, conditioned upon posting a bond, and then fails to post the required bond, is not grounds for a default.

11) On the second issue, the equitable mortgage claim in a forcible entry and detainer ("FED") case, the Colorado high court made the following observations:

  • "Generally speaking, in an FED action, the issue of ownership must first be determined before possession can be resolved. Lindsay v. Dist. Court, 694 P.2d 843, 846 (Colo. 1985)."
  • "In Lindsay, we opined that although the case began as an FED action, it ultimately placed in issue the entire transaction between the two parties, and thus became a suit in equity to determine whether the petitioners were tenants subject to eviction, or owners subject to foreclosure. Id."
  • "The Lindsay case differed procedurally from this case, in that two separate law suits were filed, one an unlawful detainer action in county court, and the other an action challenging the validity of the agreement between the parties in district court. Lindsay, 694 P.2d at 844-45."
  • "However, the issues raised were similar to those presented in this case, specifically whether ownership must be determined prior to a ruling on possession being made."
  • "In Lindsay, ownership of the property directly affected entitlement to possession, and as such, a determination of ownership was first required in order to properly assess which party was entitled to possession."
  • "However, there may be circumstances where the issues of ownership may not affect the right to possession, and thus, possession can be determined independent of resolving ownership."
  • In Lindsay, without determining whether there was an actual FED action pending in the district court, we ultimately held that the district court action could properly resolve all issues in dispute between the parties, including who was rightfully entitled to possession. Id. at 846.
  • Thus, notwithstanding the classification of a lawsuit between parties, when the issue of ownership is validly raised in an FED action, and directly affects the right to possession, ownership must be determined prior to a ruling on possession. Lindsay, 694 P.2d 843.

12) The Colorado Supreme Court ruled as follows:

  • "Under the rule set forth in Lindsay, possession in this case cannot be decided without the trial court first determining whether ownership affects possession, and if so, resolving the issues of ownership."
  • "Accordingly, we remand this case to the trial court for a determination as to whether Mack and the Trust have raised meritorious claims regarding ownership."
  • "Once the trial court has determined whether the ownership issues raised are relevant to a determination of the possession interests in dispute through a full and fair hearing, the trial court can then decide entitlement to possession."

13) In conclusion, the court stated:

  • 'Moreover, in accordance with Lindsay, the trial court must consider the ownership issues raised by the parties, and determine if those issues affect possession prior to deciding who is actually entitled to possession."
  • "Accordingly, we make the rule to show cause absolute and remand this case to the trial court to first determine whether, under the circumstances presented in this case, ownership must be resolved before possession, and to then resolve possession on the merits."


My only thoughts on this case is that it seems intuitive that the issue of whether ownership affects possession is the first issue that should be decided in any eviction case where a party in possession is claiming to be the equitable owner pursuant to the equitable mortgage doctrine. If so, then the actual ownership should be determined before finally, the possession issue is addressed.

This approach appears to be consistent with that of the California court decision referenced in Part 3 of this post, where, in reversing a lower court's judgment of eviction, the court essentially said that the purported equitable owner of property claiming title pursuant to the equitable mortgage doctrine was entitled to have the issue of ownership of the subject property resolved by the trial court before resolving the issue of possession.

Apparently, however, not all courts seem to see it this intuitively. See Part 2 of this post where a Minnesota intermediate appellate court saw it a bit differently.

Other Citations

Lindsay v. Dist. Court, 694 P.2d 843 (Colo. 1985). emdefense Colorado equitable mortgage quizzz