Equitable Mortgage Doctrine In Washington State

This post touches on some general principals that I've extracted out of a number of decisions primarily by the Washington Supreme Court that were cited as considerations when determining whether a deed should, in equity, be deemed a mortgage.
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This information may be of some value to those involved in the legal issues surrounding "foreclosure rescue" transactions, particularly in the state of Washington. (court case links available courtesy of the Municipal Research & Services Center of Washington (MRSC)).
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Plummer v. Ilse

41 Wash. 5, 82 P. 1009

(Wa. 1905)

This case involved an action by a property owner to reform a deed as a mortgage and for redemption. After a bench trial, the lower court ruled against the property owner. The Washington Supreme Court reversed the lower court judgment and remanded the case with instructions to enter a decree adjudging the deed to be a mortgage. In doing so, the court made the following observations (bold text is my emphasis):

1) "In deciding whether it was a mortgage, the principal test to be applied is, whether the relation of the parties towards each other of debtor and creditor continued after the execution of the deed. 20 Am. & Eng. Ency. Law (2d ed.), 940. In McNamara v. Culver, 22 Kan. 661, the court, speaking through Brewer, J., now a member of the supreme Court of the United States, said:

• "The test is the existence or nonexistence of a debt. And equity looks behind the form to the fact. If the transaction was intended as a loan, if there remains a debt for which the conveyance is only a security, and the collection of which may be enforced independent of the security, equity will hold it a mortgage, no matter whether the transaction is evidenced by one or two instruments.""

2) "Once a mortgage, always a mortgage, is a well-established rule in equity. A deed intended as a mortgage will remain a mortgage until the equity of redemption is cut off, and the parties cannot by stipulation, however express or positive, render it anything else. 4 Current Law, 683; Pingrey, Mortgages, § 87; 1 Jones, Mortgages (6th ed.), § 340."

3) "The doctrine has been firmly established from an early day that when the character of a mortgage has attached at the commencement of the transaction, so that the instrument, whatever be its form, is regarded in equity as a mortgage, that character of mortgage must and will always continue. If the instrument is in its essence a mortgage, the parties cannot by any stipulations, however express and positive, render it anything but a mortgage, or deprive it of the essential attributes belonging to a mortgage in equity."

4) "The debtor or mortgagor cannot, in the inception of the instrument, as a part of or collateral to its execution, in any manner deprive himself of his equitable right to come in after a default in paying the money at the stipulated time, and to pay the debt and interest, and thereby to redeem the land from the lien and encumbrance of the mortgage; the equitable right of redemption, after a default is preserved, remains in full force, and will be protected and enforced by a court of equity, no matter what stipulations the parties may have made in the original transaction purporting to cut off this right." Pomeroy, Equity Jurisprudence (2d ed.), § 1193."

5) "If the transaction between the parties be in fact a mortgage, its character cannot be affected or changed by any agreement entered into at the time between them as to redemption or the other incidents of a mortgage. The right of redemption attaches as an inseparable incident created by law, and cannot be waived by agreement. A mortgage, moreover, depends for its vitality upon the law in force at the time of its execution. The doctrine universally applicable is, if once a mortgage, always a mortgage. Nor can it be made otherwise by any agreement of the parties made at the time of the execution of the deed, nor upon any contingency whatever. Equity will not admit of a mortgagor embarrassing or defeating his right to redeem the estate by any agreement which he may be induced to enter into in order to effect a loan."

6) "Equity regards it as impossible for contracting parties, in a single transaction, by the execution of one or more written instruments to create the relation of debtor and creditor or mortgagor and mortgagee, and at the same time to provide for a conditional sale, or the destruction of the mortgagor's right to redeem after default. The deed having been a mortgage in its inception, appellants are still possessed of their equitable right to redeem, unless such right has been terminated either by foreclosure or some subsequent and independent valid agreement between the parties, neither of which has occurred."

7) "In 2 Washburn, Real Property (6th ed.), § 990, the author uses the following language:

• "On the other hand, if the transaction of the parties actually constitutes a mortgage in terms, it will have that effect, though not so intended by them when it was done. Thus, where one made a deed, and the grantee gave back a bond to reconvey on certain conditions, it was held that, though not intended thereby to create a mortgage, it was one in fact."

8) "Where the transactions actually occurring between the parties are clearly of such a nature as to show a deed absolute in form to have been a mortgage, courts of equity will construe it as such, even though the parties may have apparently intended otherwise."

9) "The reason of this rule is that courts of equity are ever zealous to preserve to a mortgagor his equitable right of redemption, and to prevent him from entering into any agreement at the time of the execution of the original mortgage having the effect of nullifying such right. If the mortgage exists, the equity of redemption necessarily exists as incidental thereto. Therefore, in passing upon the facts found, we must, in applying these equitable principles, hold the deed to have been a mortgage, although there may have been some seeming intention on the part of one or both of the contracting parties that it should be otherwise considered."

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Plummer v. Ilse, 41 Wash. 5, 82 P. 1009 (Wa. 1905)

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Pittwood v. Spokane Savings & Loan Society

141 Wash. 229, 251 Pac. 283

(1926)

This case involved a title transfer from a property owner who was in default on his mortgage payments to the bank holding the mortgage, coupled with a leaseback and a buy back option. In ruling that the transaction with the bank was not a mortgage, but was in fact a true conveyance, the court made this observations (bold text is my emphasis):

1) "It is the settled law of this state, that the character of such transactions as we have recited is fixed at the time of their inception, and that whether a deed should be construed as a mortgage depends upon the intention of the parties. It is also settled that, when property is conveyed by a deed absolute in form, the presumption of law is that the transfer is what it appears to be, and that he who would assert that it was given as a mortgage must so show by clear and convincing evidence. Johnson v. National Bank of Commerce, 65 Wash. 261, 118 Pac. 21. This case has often been cited by us and its doctrine approved."

2) "In determining whether a deed was intended as a mortgage, all surrounding circumstances may be inquired into; such, for illustration, as

• the conduct of the parties,
• the value of the property as compared to the indebtedness which the deed is supposed to have liquidated, and
• whether the relationship of debtor and creditor continues to exist."

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The court in this case focused, in large part, on the value of the property involved relative to the amount that was paid for the property. It commented as follows (the appellant in this case was the property owner asserting that the deed was a mortgage):

• "Appellants further contend that the difference in the actual value of the property deeded and the amount of the indebtedness is so great as to show that the deed was intended as a mortgage, and not an absolute transfer of the title."

• "The authorities quite generally hold that, where the disparity between the amount of the indebtedness and the value of the property is so great as to necessarily lead to the conclusion that the deed was intended as security, the courts will, without hesitation, so declare."

• "The appellants cite a number of cases where this court has so held. For illustration, In the case of Collins v. Denny Clay Co., 41 Wash. 136, 82 Pac. 1012, the indebtedness was less than $8,000, and the value of the property conveyed was in excess of $20,000. In the case of Hoover v. Bouffleur, 74 Wash. 382, 133 Pac. 602, property worth $4,000, but subject to a $2,000 mortgage, was deeded in consideration of $250. In Beverly v. Davis, 79 Wash. 537, 140 Pac. 696, a somewhat similar condition existed."

• "In each of these cases, we held that the disparity was so great as to overcome all presumptions that the deed was what it purported on its face to be."

• "But such is not the situation here...[T]here was testimony, upon which the trial court greatly relied, to the effect that the mortgaged property was worth but a little more than the mortgage indebtedness. The trial court, who knew, of course, much more about the value than we can know, said that he believed the property was worth approximately $40,000 at the time the deed was given. The testimony further showed that the appellants, before giving the deed, tried to sell the property for $60,000 and were unable so to do.There was testimony to the effect that this property was not well located for warehouse purposes, that it had been vacant for a considerable time, that it was very much out of repair, and that property of that character in the city of Spokane had, during recent years, very considerably decreased in value. Under these circumstances, we cannot say that the property was actually worth, or could have been sold in the market for very materially more than, the indebtedness against it."

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In this case, the court believed that the property value was $40,000. At the time of the transfer to the bank:

• there was an indebtedness owed to the bank of $33,000, which was more than a year overdue,
• the interest (about $1,000) and taxes ($1,600) had accumulated,
• the mortgage security was unoccupied and in considerable disrepair, depreciating in value and was not bringing in any rents,
• immediate foreclosure was inevitable,
• the most the appellants could hope for was a year for redemption,
• a foreclosure would entail a very considerable additional expense for attorney's fees and costs, and would interfere more or less with a sale of the property

Unlike the cases cited above where there was a significant disparity in the value of the property and the price paid for its purchase, in this case the court found that there was no such disparity.

It appears that Pittwood, along with the cases cited therein and above noted, stand for the significance that Washington courts place on the value of the property being conveyed relative to the price paid when considering whether a deed, absolute on its face, should, in equity, be deemed a mortgage.

Pittwood v. Spokane Savings & Loan Society, 141 Wash. 229, 251 Pac. 283 (1926)

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Phillips v. Blaser

13 Wn.2d 439, 125 P. 2d 291

(Wa. 1942)

This case (decided 16 years after Pittwood) involved a property owner ("Phillips") who:

• Facing a tax foreclosure on his property for a delinquency of approximately $900, appoached a certain Wenzelburger for a loan of money to stop the sale,

• Wenzelburger claimed to be uninterested, but referred Phillips to Blaser (Wenzelburger's sister-in-law, who worked and lived in the Wenzelburger home),

• Phillips ultimately "sold" the property for approximately $300 to Blaser, said money being promptly paid (as partial payment) to the taxing authority, thereby averting the tax sale,

• Contemporaneously with the execution of the quitclaim deed, Blaser and Phillips entered into a written agreement for the sale of the section of land in question by Miss Blaser to Phillips for approximately $600 (twice as much as it just sold for), payable in one year. The agreement provided that, unless the payment was made within the one year period, the buy back contract would be void.

• Phillips, who at all times remained in possession of the land, exercised the right of leasing the land to a third party for farming; all parties in this case were aware of the lease.

• After the expiration of the one year buy back period, Blaser sold the property to a certain Edwards for $4,000 (Edwards was aware of Phillips possession of the premises, aware of the farming lease of the premises to the third party, and aware that Phillips was unwilling to sign a "correction deed" shortly before his (Edwards) purchase from Blaser).

• Ultimately, a successful action was instituted by Phillips to have his quitclaim deed and the contemporaneously executed contract construed as a mortgage, and his title to the section of land in question quieted.

In affirming the lower court decision, the Washington Supreme Court ruled as follows (bold text is my emphasis):

• "The evidence is clear and convincing that the Wenzelburgers and Miss Blaser made a loan to respondent Phillips, and that there was no intention on the part of the lenders and the borrower that the transaction be an absolute sale rather than an equitable mortgage. To hold otherwise would permit the exaction from Phillips of usurious interest or defeat his equity of redemption and force him to relinquish his rights in the real property without consideration, which would be unconscionable."

• "No other reasonable conclusion may be drawn from the facts in this case than that Wenzelburger and Miss Blaser endeavored to take advantage of the necessitous circumstances of respondent Phillips. The evidence is conclusive that the alleged consideration of $298.60 advanced to Phillips is grossly inadequate. While the section of land was idle for a number of years and Phillips had difficulty in obtaining a loan thereon of three hundred dollars to avert tax foreclosure, appellants had no difficulty in selling the same property to Edwards for cash in the amount of four thousand dollars."

• "The evidence is overwhelming that appellants not only endeavored to defeat the equity of redemption to which respondent mortgagor is entitled as of right, but that in doing this they imposed the payment of an usurious interest rate upon him."

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In support of this ruling, the Washington high court reviewed its decisions cited in Pittwood, which follow below:

• "In Collins v. Denny Clay Co., 41 Wash. 136, 82 Pac. 1012, we held, in harmony with the weight of authority, that a mortgagor cannot through any device bargain away his right of redemption at the time of giving the mortgage; that, while a mortgagor may release his equity of redemption to the mortgagee by subsequent agreement, the courts look upon such agreements with distrust, and, if it appears that the mortgagee took advantage of the necessities of the mortgagor, or that the consideration for such release of the mortgagor's equity of redemption is grossly inadequate, the release will be disregarded and the original relationship of the parties held to continue. "

• "In Hoover v. Bouffleur, 74 Wash. 382, 133 Pac. 602, plaintiff, who owned real property, valued in excess of four thousand dollars, which was subject to a mortgage in the amount of two thousand dollars in arrears, attempted, as in the case at bar, to borrow two hundred and fifty dollars to meet overdue installments on the mortgage. Defendant lender testified that he refused to make a loan upon the property but that he informed plaintiff that he would buy the property, advance the two hundred and fifty dollars, and give plaintiff an option to repurchase the property within three months upon payment of three hundred and twenty-five dollars. A deed was executed by the plaintiff conveying the property to defendant subject to the unpaid balance of the mortgage and then an option to repurchase the property was executed. In the case at bar, Phillips executed a quitclaim deed to Blaser and signed a contract in which he promised to buy the land. There was no mention of an option to repurchase. Appellant in that case relied, as appellants in the case at bar rely, upon certain well-settled principles of law. That is, the integrity of a deed is such that, to overcome its terms, testimony must be clear and convincing; that the mere option to purchase will not in itself make a deed a mortgage."

• "See, also, Beverly v. Davis, 79 Wash. 537, 140 Pac. 696, to the effect that a deed with a mere option to repurchase will be construed as a mortgage where there was an existing disparity between the value of the land and the amount of the indebtedness. "

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What appears to be of some importance in this case is that, while there is language in Johnson v. National Bank of Commerce, 65 Wash. 261, 118 Pac. 21 (also cited in Pittwood) that was cited by the appellants that appears to favorably support their position that the form of the transaction should be sustained, the court here quotes from its decision in Hoover which, in my view, essentially, operates as a receding from, or modification or clarification of, the language in Johnson. Some of the Hoover language (where the court appears to recede from Johnson) follows below:

• "[I]t was not our intention to hold [in Johnson] that the intent of the parties must necessarily appear upon the face of the collateral paper. To do so would kill that true spirit of equity with which a court should approach cases of this kind. "

• "Viewing the case at bar from all its angles and taking it by its four corners, we have no doubt that the transaction was conceived and carried out with purpose to evade the law designed to prevent the taking of usury. The record shows what seems to be a studied effort on the part of the defendant to bring himself within certain expressions of this court as he has gathered them from our written opinions. "

• "The statements [in Johnson] were pertinent at the time they were employed, but an examination of the cases will show that they were applied as governing rules where there was no such lack of consideration as would shock the conscience, or the case was so wanting in equity or the equities were so balanced as to compel us to look to the instruments alone for guidance. It is certain that we never intended to mark a path around the statutes designed to protect the necessitous borrower from the exactions of those who are disposed to take unlawful return for a loan or forbearance of money."

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One last (possibly) notable point here is that, while the court didn't go into any legal analysis on this issue, it also affirmed the part of the lower court ruling deciding that Edwards (the third party purchaser from appellant, Blaser) was not a bona fide purchaser and, accordingly, the equitable mortgage was valid as against him as well and his deed was properly voided. The court simply stated the following on this point:

• "The trial court correctly found that the original transaction was an arrangement to secure repayment of money borrowed instead of a sale, that the subsequent purchaser (Edwards) from the equitable mortgagee (Blaser) was not a purchaser in good faith, and then proceeded to place the parties in status quo."

This case makes mention that Edwards was aware of Phillips continued possession of the property after the sale to the appellant, Blaser, and was also aware of the farming lease that Phillips entered into with a third party (Presumably, Edwards made no attempt to ascertain what other rights or equities Phillips, as a person in possession, may have had in the property, which may have revealed the existence of the equitable mortgage between Phillips and Blaser. The court's decision was silent as to this point).

Phillips v. Blaser, 13 Wn.2d 439, 125 P. 2d 291 (Wa. 1942)

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Some Other Washington State Cases

Mears v. Strobach, 12 Wash. 61; 40 P. 621 (Wa. 1895) (involves an action to recover possession of land.)

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The "tenant" being sued for eviction successfully made equitable mortgage claim against purported "owner"; in addition, notwithstanding testimony to the effect that the plaintiffs refused to make a loan and would only consent to advance the money upon an absolute conveyance to them of the property, "[the] testimony, interpreted in the light of the instruments actually executed, and of the other facts sufficiently proven by the evidence, fails to satisfy us that the transaction was not, after all, substantially one of lending and borrowing." The court further stated:

• "In our opinion, there was no intention on the part of either of the parties to do more than on the one part to secure the loan of the money and on the other to loan it and get proper security for re-payment with interest. This being so, the bare fact that they refused to loan the money and take a mortgage only tends to show that they thought they could evade the law, requiring the mortgage to be foreclosed before they could get possession of the property, by taking a deed, as they did, and giving a lease and an option to purchase to the grantors named in the deed."

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Snyder v. Parker, 19 Wash. 276, 53 P. 59 (Wa. 1898) (involves an action to recover possession of land. The "tenant" being sued for eviction successfully made equitable mortgage claim against purported "owner"; the deed held by the "owner" was given as security for a debt, and was not an absolute conveyance and, accordingly did not pass title. In ruling, the Washington high court remarked, "It is an elementary principle that in ejectment the plaintiff must recover on the strength of his own title. The instrument in suit having been found a mortgage, appellant should not recover possession under its terms."

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Ross v. Howard, 31 Wash. 393, 72 P. 74 (Wa. 1903) (parol evidence may be used to establish a deed as a mortgage. The court observed, "[I]t is the settled rule of this court that an absolute deed of conveyance, whether in form a warranty or quit-claim, may be shown by parol evidence to be a mortgage." citing Wiss v. Stewart, 16 Wash. 376 (47 P. 736); Anderson v. Stadlmann, 17 Wash. 433 (49 P. 1070); Ross v. Howard, 25 Wash. 1 (64 P. 794)."

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Collins v. Denny Clay Co., 41 Wash. 136, 82 Pac. 1012 (1905) Discussed and quoted at some length a then-54 year old U.S. Supreme Court decision regarding cases such as these. The Washington Supreme Court's discussion of said case follows below (bold text is my emphasis):

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..."In Russell v. Southard, 12 How. 139, 13 L. Ed. 927, the disparity between the value of the property and the amount of the mortgage debt was not so great as in this case; the agreement relied on was just as binding and just as explicit as in the case at bar, and in other respects the equities in favor of the mortgagor were not as strong as those found here. In respect to the adequacy of the consideration, the court in that case, speaking through Mr. Justice Curtis, said:

• "In examining this question it is of great importance to inquire whether the consideration was adequate to induce a sale. When no fraud is practiced, and no inequitable advantages taken of pressing wants, owners of property do not sell it for a consideration manifestly inadequate, and, therefore, in the cases on this subject great stress is justly laid upon the fact that what is alleged to have been the price bore no proportion to the value of the thing said to have been sold."

Again, speaking of the written memorandum, the [Russell] court said:

• "In respect to the written memorandum, it was clearly intended to manifest a conditional sale. Very uncommon pains are taken to do this. Indeed, so much anxiety is manifested on this point, as to make it apparent that the draftsman considered he had a somewhat difficult task to perform. But it is not to be forgotten that the same language which truly describes a real sale, may also be employed to cut off the right of redemption, in case of a loan on security; that it is the duty of the court to watch vigilantly these exercises of skill, lest they should be effectual to accomplish what equity forbids; and that, in doubtful cases, the court leans to the conclusion that the reality was a mortgage and not a sale;"

citing a number of cases. Again [quoting from Russell]:

• "It is true, Russell must have given his assent to this form of the memorandum; but the distress for money under which he then was, places him in the same condition as other borrowers, in numerous cases reported in the books, who have submitted to the dictation of the lender under the pressure of their wants; and a court of equity does not consider a consent, thus obtained, to be sufficient to fix the rights of parties. 'Necessitous men,' says the Lord Chancellor in Vernon v. Bethell, 2 Eden 113, are not, truly speaking, free men; but, to answer a present emergency, will submit to any terms that the crafty may impose upon them."

• "The memorandum does not contain any promise by Russell to repay the money, and no personal security was taken; but it is settled that this circumstance does not make the conveyance less effectual as a mortgage;"

citing cases.

• "And consequently it is not only entirely consistent with the conclusion that a mortgage was intended, but in a case where it was the design of one of the parties to clothe the transaction with the form of a sale, in order to cut off the right of redemption, it is not to be expected that the party would, by taking personal security, effectually defeat his own attempt to avoid the appearance of a loan."

The above is a leading case on the question under consideration, and has been followed and approved in a multitude of cases in both the state and federal courts. See, 5 Rose's Notes, U.S.Reports, p. 77, and cases cited. The conclusion of the trial court that the stock stood as security only is amply sustained by the authorities."

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(For the full text of the Russell case, see Russell v. Southard, 53 U.S. 139, 12 How. 139, 13 L. Ed. 927 (1851)).

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Hoover v. Bouffleur, 74 Wash. 382, 133 Pac. 602 (Wa. 1913) Responding to the contention that the transaction was strictly a sale with a buyback option, the court stated,

• "Although appellant was careful to refrain from the use of the words "loan" and "mortgage," and to impress upon the plaintiffs that he was buying the property, it is our duty to go beyond his spoken words and review and consider every material circumstance."

• "The fact that the property was worth at least $4,000, and the amount paid by the defendant, or substantially all of it, was paid upon the mortgage thus reducing that encumbrance for the benefit of the defendant if a sale was indeed contemplated, when coupled with the option agreement or defeasance, are circumstances which in our judgment make it the imperative duty of a court of equity to declare the deed executed by respondents to be a mortgage. Otherwise we would be put to the stress of holding that respondents had sold a piece of property worth $2,000 for a cash payment of $7.50 and three months rent."

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Beverly v. Davis, 79 Wash. 537, 140 Pac. 696 (1914) (involved a successful action to have a transaction, evidenced by a deed and option, declared a mortgage.)

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It was argued in this case that since there was no debt involved, there could be no mortgage. The court stated:

• "While the existence of a written promise to repay the money advanced is of great evidentiary value in arriving at the intention of the parties, yet the absence of such a promise is not conclusive that no personal debt exists. If the circumstances show a loan, an implied promise to re-pay springs from that fact alone. Kirkpatrick v. Post, 55 N. J. Eq. 591, 32 Atl. 267."

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Parker v. Speedy Re-Finance, 23 Wn. App. 64, 596 P.2d 1061 (Wa. App. Ct. 1979) (property owners successfuly asserted equitable mortgage claim, contains brief discussion on bona fide purchaser issue)

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Pearson v. Gray, 90 Wn. App. 911, 954 P.2d 343 (Wa. App. Ct. 1998) (one claiming ownership under equitable mortgage doctrine has standing to bring quiet title action; in addition, the trial court's order in favor of legal title holder in unlawful detainer action and writ of restitution reversed and remanded until a finding of ownership in the quiet title action is reached. The court observed, "The purpose of an action for unlawful detainer is to determine who has the right of possession. [...] [A]s issues of ownership in the quiet title action still remain unresolved, the finding in the unlawful detainer action and the grant of the writ of restitution are premature."

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Hernandez v. Carpenter, 130 Wn. App. 1035, 2005 Wash. App. LEXIS 3391 (Wa. App. Ct. 2005) (a procedural decison; fact pattern involved a sale by a financially strapped property owner who had signed over title to his property to an "investor" and received a leaseback of the property and a buy back option) (case available online courtesy of Findlaw.com)

See prior post on Hernandez case.

Go here for other posts on the equitable mortgage doctrine in Washington State. Washington State equitable mortgage whale

Voiding A Title Transfer In A Foreclosure Rescue Transaction

Past posts dealing with attempts to void a title transfer by a financially strapped homeowner to a foreclosure rescue operator have usually focused on invoking state law claims of "equitable mortgage" to have a deed, absolute in form, be declared a mortgage. Such cases have generally involved a leaseback of the home to the homeowner coupled with a buy back option. In many (if not most) states, the homeowner need not prove fraud when making equitable mortgage claims.

In this post, I want to touch on another approach to voiding a transfer by a homeowner. This approach is one where a "buyer" (or "grantee") acquires title to property through the use of fraud or deception and generally will apply in any case where fraud or deception is used to acquire title to property (not limited to foreclosure rescue transactions).

My approach in this post will be to refer to online sources of information, including my prior posts, to bring attention to several stories where claiming fraud and deception was used in an attempt to void a title transfer.

Nebraska case

In a February 01, 2007 post, I discussed a case where the Nebraska Supreme Court ruled that 12 homeowners who were victimized by a foreclosure rescue operator were entitled to their homes back. In that case, the homeowners' action was based on allegations of fraud, civil conspiracy, unjust enrichment, rescission, and violations of Nebraska’s Consumer Protection Act and Uniform Deceptive Trade Practices Act.

The case turned, not on what was contained in the written agreements between the parties, but rather, it turned on the court testimony of the parties. The homeowners all testified that the operators offered to loan them money to stop foreclosure so that they (the homeowners) could keep their homes, but never disclosed that the operators were actually taking title to the homes. The operators testified to the contrary, asserting that the terms of the transaction were fully explained to each plaintiff, that each plaintiff understood that he or she was conveying title to the home to defendants, and that the written agreements all unambiguously reflected a sale and not a loan. In ruling in favor of the homeowners, the court made a specific finding that the homeowners' testimony was credible and that of the operators was not.

This case also reminds us that the rule that "one who signs a contract is bound by its terms" does not apply where the execution of the instrument was induced by fraud. This point can't be emphasized enough because there are too many people who think that the written contract will always take precedence over what is said orally, and on this basis, will do or say anything they can to "steamroll" financially strapped homeowners into unwittingly signing away their homes.

For the original post, which contains links to online media reports, see Foreclosure Rescue Operator Ordered To Return Homes To A Dozen Victims.

For the actual reported court case, see Eicher v. Mid America Financial Investment Corp.. 270 Neb. 370, 702 N.W.2d 792 (2005) (made available online by Findlaw.com)

In addition to the above, and procedural issues outside the scope of this blog, the court case includes a discussion of Nebraska law that allowed for:

• a finding of a civil conspiracy, in spite of the fact that the only bad actors involved were two individual operators and their corporation that they used to do business (ie. there was no intricate, far-reaching conspiracy here involving corrupt appraisers, mortgage brokers, title closers, straw buyers, straw home repair companies, and others), and

• a $378,000 fee award (imposed on the foreclosure rescue operator) to the private attorneys successfully representing the homeowners; said award was based on an attorney fee provision contained in the state Consumer Protection Act; and also involved the application of a "contingency fee" or "lodestar" multiplier that increased the "lodestar amount" (the base attorney fee) by 30 percent.

Rhode Island case

In a November 24, 2006 post, I reported on a media reports on a case where the Rhode Island Attorney General reached a settlement in a civil lawsuit brought against a foreclosure rescue operator for violations of the state Unfair Trade Practices and Consumer Protection Act in connection with 16 properties acquired homes from financially distressed homeowners under the guise of a foreclosure rescue 'buy back' program. The settlement required that the operators return at least two of the homes back to their owners, cease their foreclosure rescue activities, and prohibited a sale or transfer of the remaining homes enrolled in the 'buy back' program (the media reports did not disclose the ultimate resolution of the remaining properties).

For the online reports on this case, see:

• Foreclosure “rescue” program shut down by R.I. judge,
• AG Lynch takes action against unscrupulous scam costing Rhode Island residents their homes,
• Ex-homeowner testifies: "I didn't want to sell. . .' (A Central Falls foreclosure company is under attack by the attorney general's office for alleged deceptive trade practices)

For the original post, see Rhode Island Attorney General Settles Suit With 'Rescue' Company; Judge Orders Return of Homes, Operations Shut Down.

California case

In a January 20, 2007 post, I reported on a Northern California case where a woman was victimized in a foreclosure rescue transaction. While the matter wasn't resolved at the time of the original media report and may still be in litigation, the article reported that the civil lawsuit brought by the victimized homeowner alleged the following against one or more of the defendants:

• violations of California's Home Equity Sales Contract Act,
• violations of California's Mortgage Foreclosure Consultants Act,
• fraud,
• civil conspiracy to commit fraud and unfair business practices,
• intentional infliction of emotional distress, and
• undue influence.

For the original online article, see Mortgage fraud cases multiply, hit more homeowners (Homeowner sues pastor, others)

For the original post, see Northern California Woman's Unwitting Sale Of Home Leads To Lawsuit

Florida case

There is a 2006 Florida appellate court case involving a homeowner in financial difficulty who signed over his home to another. In exchange, financing was to be arranged by the new title owner and/or a related party in order to refinance the existing mortgage on the home. Further, the homeowner claimed that there was an oral understanding whereby the now former homeowner would have the title to his home deeded back to him upon either his satisfaction or assumption of the newly arranged financing (the new title owner denied the existence of any such oral agreement). When the time came to deed back the home, the new title owner refused to do so.

The homeowner filed an action alleging, among other claims, claims for:

• fraud in the inducement, and
• constructive trust.

The trial court dismissed these claims.

The Florida appellate court, in reversing and remanding the case back to the lower court for further proceedings, held that Florida's Statute of Frauds does not bar claims for equitable relief such as this and, accordingly, directed the lower court to allow the case to continue and allow the homeowner the chance to provide oral evidence to support his claim that there was an oral agreement between the parties to deed back the home to him upon him either satisfying or assuming the new financing.

The key point in this case is that it reminds us that (at least in Florida, and probably most other places, and not unlike the Nebraska case above) when dealing with the sale of real estate, the rule that "contracts must be in writing" and that oral evidence cannot be used to affect the written contract is not an absolute rule; there are exceptions. One of the exceptions is where there is a lawsuit filed that makes a request for equitable relief, as there was in this case. Here, the homeowner alleged that fraud was involved in getting him to sign over the title to his home and sought the imposition of a constructive trust on the property involved.

In such a case, the court is required to consider any oral testimony provided by the parties and any other witnesses when determining whether to void a transaction for fraud or impose a constructive trust on the property involved.

More specifically, the court quoted from a decision of the Florida Supreme Court, saying:

• "The rule is well established in Florida and elsewhere to the effect that when a person acquires title to property through the influence of a confidential relationship or otherwise obtains an advantage which he should not in good conscience be permitted to retain, a court of equity will prevent the abuse of the confidence and grant relief on the broad principle that one should not be permitted to be unjustly enriched under such circumstances at the expense of another." (quoting from Williams v. Grogan, 100 So.2d 407, 410 (Fla. 1958))

• "The Court proceeded to explain that the court of equity will grant relief in such instances by imposing a constructive trust "which is created by operation of law" and "is not within the statute of frauds and may be proved by parol evidence." Id."

To see the entire 2006 Florida appellate court case, see Guest v. Claycomb, 932 So. 2d 567 (Fla. App. Ct. 5th Dist. 2006) (case available online courtesy of Florida's Fifth District Court of Appeal)

Washington State case

The decision in this case dealt with the procedural aspects of a case that happened to involve a financially strapped property owner who had signed over title to his property to an "investor" and received a leaseback of the property and a buy back option. It doesn't address the substantive issues that were claimed, but since it contains information that may be of some value to somebody involved in a foreclosure rescue situation, I've chosen to include something about this case here.

The property owner sued the investor to void the transaction on lack of capacity, fraud, negligent misrepresentation and usury. A couple of the claims were dismissed by the trial court, and the remainder were the subject of a bench trial, where the court ruled against the homeowner.

After the court's oral ruling, the homeowner filed a "Memorandum in Favor of Plaintiff's Version of Proposed Findings", which pointed out that the court's oral ruling was not binding and requested the court consider the alternative theories of lack of consideration, equitable mortgage, and unconscionable adhesion contract based on the evidence presented at trial. The lower court refused to consider the homeowners' request to amend and proceeded to enter written findings of fact and conclusions of law and a judgment quieting title to the investor and evicting the property owner.

In reversing and remanding the case back to the lower court for further proceedings, the Washington Court of Appeals concluded that the trial court abused its discretion in refusing to consider the property owners' CR 15(b) motion to amend the pleadings and the alternative theories of lack of consideration, equitable mortgage, and adhesion.

To read the case, see Hernandez v. Carpenter, 130 Wn. App. 1035, 2005 Wash. App. LEXIS 3391 (2005) (case available online courtesy of Findlaw.com).

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Equitable Mortgage Doctrine In California

The equitable mortgage doctrine has been an issue that has been litigated many times in the California case law. Because the cases generally tend to be very fact specific, each fact pattern is decided on a case by case basis.

Because there are quite a number of cases, and because my time constraints preclude me from reading and attempting to dissect these cases (and then try to write something about them in a semi-coherent way), I am simply going to put up links to a number of California Supreme Court cases for those who don't mind doing a little reading and research. These cases, and the cases cited therein, should provide a pretty good basis for understanding the equitable mortgage doctrine in California.


1) Hamud v. Hawthorne, Supreme Court of California, 52 Cal. 2d 78; 338 P.2d 387; 1959

The lower court invoked the equitable mortgage doctrine on behalf of the party asserting it and treated a deed as a mortgage. Upon review, the high court generally agreed that the facts were present to treat the deed in question as a mortgage. However, the high court reversed the lower court. Their reasoning essentially was based on laches and bad faith on the part of the party asserting the equitable mortgage claim. Therefore, they refused to allow equity to be asserted regarding the equitable mortgage claim when the party asserting it was guilty of laches and bad faith. The following quote from the case will give you an idea of how the court felt about the party claiming equitable mortgage (and did so with "unclean hands"):

• "[P]laintiffs appear to be opportunists who are trying to pervert equity to recover a title and possession voluntarily surrendered in 1951, for which they then received fair value, and which they now seek to reclaim, not to right a wrong suffered by them in 1951 but to procure from defendants a value which was apparently unknown to either party until 1955."

2) Beeler v. American Trust Co., Supreme Court of California, 24 Cal. 2d 1; 147 P.2d 583; 1944 (affirming a judgment holding that a deed absolute in form was in fact an equitable mortgage.)

3) Wilson v. Bailey, Supreme Court of California, 8 Cal. 2d 416; 65 P.2d 770; 1937

A party failed to assert an equitable mortgage claim in a case where the high court observed, in dicta, that such a claim would have been sustained, given the facts of the case, had the party asserted it. The interesting quote in this regard follows (bold text is my emphasis):

• "We have decided this appeal upon the issues as presented by the parties, although we are somewhat at a loss to understand why plaintiff did not seek to redeem said property as a deed absolute given merely as security, in which event she would have been entitled to redeem at any time until her right had been foreclosed by an action of foreclosure brought by the defendant."

• "There seems to be little doubt, in view of the written option agreement which was entered into simultaneously with the conveyance by the plaintiff to the defendant and the fact that the payment of rent was applied by the defendant to the debt owing from the plaintiff, that the conveyance from the plaintiff to the defendant was in fact a mortgage."

• "However, this issue was neither presented to the trial court, nor argued in the briefs of the parties, although there was a passing reference in the respondent's reply brief that "The whole transaction was intended not as an outright sale but as a conveyance for the purpose of securing to Bailey the indebtedness owed to him by Mrs. Wilson." In view of our holding that the option was in fact properly exercised by the plaintiff, it is not necessary for us to discuss the rights and remedies of the parties under a deed absolute which was in fact a mortgage."

4) Carlson v. Robinson, Supreme Court of California, 7 Cal. 2d 235; 60 P.2d 426; 1936 (affirming a judgment holding that a deed absolute in form was in fact an equitable mortgage)

One comment made in passing by the court was:

• "The courts have been watchful against all schemes of money lenders to deprive unfortunate debtors of their lands at less than their true value under the claim that the transaction is a purchase and not a loan, and the rule is well settled that a deed absolute in form, if intended as security for the payment of a debt, is a mortgage. (Civ. Code, secs. 2924, 2925; 17 Cal. Jur., sec. 41, p. 735 et seq.) The question is primarily one of fact, upon which the findings of the trial court, if supported by proper evidence, will not be disturbed, notwithstanding conflict in the testimony. (17 Cal. Jur., sec. 59, p. 758 et seq.)"

5) Goodfellow v. Goodfellow, Supreme Court of California, 219 Cal. 548; 27 P.2d 898; 1933 (affirming lower court ruling that a deed was an absolute conveyance and not given as security for a mortgage).

6) Wehle v. Price, Supreme Court of California, 202 Cal. 394; 260 P. 878; 1927 (affirming lower court ruling that a deed was an absolute conveyance and not given as security for a mortgage).

7) Boal v. Gassen, Supreme Court of California, Department One, 178 Cal. 132; 172 P. 588; 1918 (affirming lower court ruling that a deed was an absolute conveyance and not given as security for a mortgage).

8) Todd v. Todd, Supreme Court of California, Department One, 164 Cal. 255; 128 P. 413; 1912 (affirming lower court ruling that a deed absolute was a mortgage and not an absolute conveyance; the equitable mortgage claim survived a claim of laches.)

Note:

The linked cases above are to Findlaw.com, which provides free electronic access to California cases going back to 1934. Registration required.

For those who are unaware, the State of California offers free access to its Supreme Court and intermediate appellate decisions through Lexis going back to 1850. To go there, click California Courts: Opinions of the Supreme Court and the Courts of Appeal - For those unfamiliar with this website, once at this page, click "Searchable Opinions 1850 - Present" in the left hand column, then click "Continue", after reading and agreeing to the Terms of Service click the box to acknowledge same, then click "View Opinions", at which point you can enter the case citation in the appropriate search box and pull up the case.

For those of you who want to see additional California cases, including those of California's intermediate appellate, and you are unfamiliar with searching cases on the California/Lexis website, you might want to try this. Once you arrive at the page containing the Search Box titled "Search California Opinions", (A) click on the words "Click Here For Advanced Search" (located about 3/4s down the box); then (B) on the page containing the search box titled "Enter Search Terms", click the radio button titled "Terms and Connectors"; then enter the following search command in the box (include all parenthesis and forward slashes):

(deed or title or conveyance) w/6 absolute w/10 (mortgage or debt or loan)

Then, click the "Search" button. Your search should return around 365 cases (going back to 1850) containing the above search words, most of which will have something to do with the equitable mortgage doctrine (although many won't actually use the phrase "equitable mortgage"). One more tip: to help you sift through all these cases, click the word "Cite" in the upper left hand corner; this will give you a list of the cases and the text containing the search words. This may help you decide whether you want to see the "Full" version of the cited case, or go on to the next cited case. If you want to see the "Full" version of any case, just click the name of the case, which will link you to the full version.

An alternative to all this would be to just familiarize yourself with the website, and particularly, the instructions for the various search techniques and commands. For example, you can narrow your search solely to the California Supreme Court cases, or solely to the intermediate appellate court cases. You can also narrow your search by date (so you don't have to read all 365 cases going back to 1850).

For other posts on this blog addressing California cases, see:

• Exercising Options To Buy, Rights Of Intervening Interests, Notice, Bona Fide Purchaser, Duty Of Inquiry, & Other Stuff
• Equitable Mortgage Defense In Homeowner - Tenant Eviction - Pt. 3 Addendum
• Equitable Mortgage Defense In Homeowner - Tenant Eviction - Pt. 3

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

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Equity Stripping News Articles

This post provides a list of a number of links to news articles available on the Internet on foreclosure rescue transactions involving an equity stripping of the home equity of the financially distressed homeowner by the foreclosure rescue operator.

There are times when the "home rescuer", either after or simultaneously with taking title to the property of a financially strapped homeowner, proceeds to "strip the equity" from the property either:

(A) by getting a mortgage on the property for more than what is currently owed and where the rescuer pockets the difference, or

(B) by selling the property to a third party (who may finance the purchase with a mortgage) and where, again, the rescuer pockets the excess proceeds,

in either case, while the homeowner maintains possession of the home, both before and after the equity stripping.

The following links are to online news articles that reported on incidents where the equity stripping described above took place.

1) Homeowner gets hard lesson in foreclosure rescue plans (Texas)

2) Madigan Sues Another Mortgage Foreclosure "Rescuer" (Illinois)

3) Attorney General Abbott Files Emergency Action Halting Bogus Foreclosure Rescue Operation (Texas)

4) Three Defendants Added To Federal Indictment In Foreclosure Scam Targeting Homeowners In Default (California)

5) Mortgage fraud cases multiply, hit more homeowners (California)

6) False Hopes - Inland homeowners facing foreclosure encounter scams under guise of refinancing (California)

7) State sues mortgage companies in homeowners scam (Illinois)

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Equity Skimming Foreclosure Rescue Scams

This post provides a list of a number of links to articles available on the Internet on foreclosure rescue scams involving the equity skimming of homes by the foreclosure rescue operator.

The Equity Skimmers

The "equity skimmers" are those who convince the homeowner to sign over their home, promising them that they will pay off the existing mortgage, and then proceed to either (A) rent out the property and pocket the rental proceeds and tenant security deposits, or (B) resell the property on an installment payment "land contract" (aka installment sale contract, contract for deed, etc.) and pocket the monthly payments received from his/her buyer. In either case, the operator fails making the existing house payments until the mortgage lender ultimately takes ownership of the property after a foreclosure sale.

See, for example:

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1) Lyndhurst, N.J., Men Get Sentenced for Defrauding Homeowners in Mortgage Scam (New Jersey)

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2) Cox Takes Legal Action Against Company Engaged in Home Equity Stripping (Michigan)

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3) Court Records: Men Failed To Pay For 22 Homes Over 12 Years (Indiana) Click here for Call For 6 TV report

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4) Long Island Couple Lose Home, "Skimmer" Convicted (New York)

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5) Accused Equity Skimmer Commits Suicide; Attorney's Law License Suspended

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Combination of Equity Skimming with Charging Upfront Fee

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Some operators have actually combined a form of "equity skimming" with the "upfront fee" approach where the operator both charges a homeowner facing foreclosure an upfront fee, and they also convince the homeowner to remit monthly payments to them under the false pretense that those monies are being applied to a "payment plan" designed to cure or reinstate a defaulted mortgage (without the need to actually talk the homeowner into signing over the title to their home). In some of the cases listed below, the operators actually filed multiple, false bankruptcy petitions in the Federal Bankruptcy Court for the purpose of stalling the ultimate foreclosure sale so that the operator can continue collecting the monthly payments from the homeowners for as long as possible.

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See, for example:

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1) Detroit Man Gets 3 Years in Foreclosure Scam (Michigan), which also involved the abuse of the Federal Bankruptcy Court system.

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2) Press Release - U.S. Attorney, (S.D. California), another bankruptcy fraud case.

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3) Springboro Man Indicted In "Operation Truth Or Consequences" National Action Bankruptcy Fraud (Ohio), also involved bankruptcy fraud.

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4) Mortgage Scam Puts Dozens of Dallas Homeowners on the Streets (Texas)

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Upfront Fee Foreclosure Rescue Scams

This post provides a list of a number of links to articles available on the Internet on foreclosure rescue scams involving the payment of upfront fees by the financially distressed homeowner to the foreclosure rescue operator.

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Upfront Fee Foreclosure Rescue Operators

The "upfront fee" operators, often calling themselves "mortgage consultants", "mortgage workout specialists", and others who use self-styled titles, promise to provide "consulting services" to homeowners facing foreclosure in dealing with mortgage lenders in exchange for fees that are paid at the outset of the relationship.

See, for example:

1) Madigan, Lawmakers Take On Mortgage Foreclosure "Rescuers", (Illinois) which, among other things, describes one case where an operator charged financially distressed homeowners between $350 and $900 for services in negotiating with their mortgage lender.

2) Owner of “My House Saver” Ordered to Make Refunds at Attorney General Request (Indiana)

3) AG Cooper shuts down foreclosure fraudsters (North Carolina) Click here for WCNC-TV news report

4) Former appraiser convicted of defrauding 30 people (Utah)

5) Womans court appearance in Debt Consildation case (Pennsylvania)

6) Get Gephardt: Equity Skimming Crooks Sentenced (Utah) Click here for Channel 2 TV Report

7) $250,000 Fine Levied Against Fraudulent Foreclosure "Rescue" Business (Illinois)

Combination of Upfront Fee and Equity Skimmer Operator

Some operators have actually combined the "upfront fee" approach with a form of "equity skimming" where, in addition to taking an upfront fee, they convince the homeowner to remit monthly payments to them under the false pretense that those monies are being applied to a "payment plan" designed to cure or reinstate the defaulted mortgage (without the need to actually talk the homeowner into signing over the title to their home). In some of the cases listed below, the operators actually filed multiple, false bankruptcy petitions in the Federal Bankruptcy Court for the purpose of stalling the ultimate foreclosure sale so that the operator can continue collecting the monthly payments from the homeowners for as long as possible.

See, for example:

1) Detroit Man Gets 3 Years in Foreclosure Scam (Michigan), which also involved the abuse of the Federal Bankruptcy Court system.

2) Press Release - U.S. Attorney, (S.D. California), another bankruptcy fraud case.

3) Springboro Man Indicted In "Operation Truth Or Consequences" National Action Bankruptcy Fraud (Ohio), also involved bankruptcy fraud.

4) Mortgage Scam Puts Dozens of Dallas Homeowners on the Streets (Texas)
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