Thursday, March 22, 2007

Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 8

This is Part 8 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

In this installment, coverage of the equitable mortgage doctrine, generally, and its application in the context of lawsuits for ejectment/eviction, specifically, includes cases from the State of Washington.


Puget Sound Inv. Group, Inc. v. Bridges
92 Wn. App. 523, 963 P.2d 944
(1998)

This case is really not an equitable mortgage case. It deals, however, with the inappropriateness of bringing an action for unlawful detainer by a purchaser of real property at an IRS tax foreclosure (who received a quit claim deed) to remove the prior owner who remained in possession of said property ("tenant" holding under color of title) without first establishing the superiority of its title over that of the prior owner. Since the case involves an action for unlawful detainer involving two parties each having competing claims to title over the same property, I chose to include a brief discussion of the case here. The facts of this case are somewhat analogous to the typical foreclosure rescue situation involving a sale-leaseback with a buyback option, at least with respect to the competing ownership claims of the foreclosure rescue operator, as the record titleholder, and the financially strapped homeowner, who asserts title to the property under an equitable mortgage claim.

In affirming the lower court in ruling that it was not proper for an IRS tax sale purchaser of real estate to obtain possession from the prior owner, who remained in possession after the sale, through an action for unlawful detainer, the Washington appeals court made this observation of what unlawful detainer actions are all about:

  • "The unlawful detainer chapter, RCW 59.12, provides a summary proceeding for obtaining possession of real property, and gives the proceeding priority over other civil cases. The court's jurisdiction in unlawful detainer proceedings is limited to the right to possession of real property and a few related issues such as damages and rent due. Unlawful detainer actions offer a plaintiff the advantage of speedy relief, but do not provide a forum for litigating claims to title."
(citations omitted)

The court ultimately ruled that, because the person in possession claimed ownership under color of title based on his warranty deed, the tax sale purchaser must establish superior title over the prior owner before it may proceed with an unlawful detainer action. The court stated that "[t]he appropriate procedure is an action in ejectment and quiet title under RCW 7.28."


-----------------------

Where a financially strapped homeowner, who after signing away title to his/her home to a foreclosure rescue operator in exchange for a leaseback and option to buy (or a repurchase agreement under a contract for deed), finds him/herself being evicted in an unlawful detainer action, the homeowner's assertion of a claim of equitable mortgage should, in my view, put him/her in a similar position with respect to the color of title issue that would require an action for quiet title and ejectment. While Puget Sound Inv. Group, Inc. v. Bridges doesn't deal with an equitable mortgage situation, it seems that both a homeowner's ownership claim under the equitable mortgage doctrine and the foreclosure rescue operator's ownership claim as record owner are the types of competing claims of ownership that make the summary procedures of unlawful detainer unavailable to a foreclosure rescue operator, similar to the result in Puget Sound.

Puget Sound Inv. Group, Inc. v. Bridges, 92 Wn. App. 523, 963 P.2d 944 (1998)


--------------------------------

While I have already briefly written about the following cases in a prior post, see Equitable Mortgage Doctrine In Washington State, I will include them again here, inasmuch as they deal with actions by a "purported" owner of property to recover possession thereof from one in possession who asserts title to same under an equitable mortgage claim.


--------------------------------


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

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."

---------------------------

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."

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

Wednesday, March 21, 2007

Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 7

This is Part 7 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

In this installment, coverage of the equitable mortgage doctrine, generally, and its application in the context of lawsuits for ejectment/eviction, specifically, includes cases from Idaho, Ohio, Oregon, Alabama, and South Dakota.


--------------------------

Idaho

Dickens v. Heston
53 Idaho 91; 21 P.2d 905
(Id. 1933)

In this action for ejectment, the financially strapped property owner successfully asserted an equitable mortgage defense in the lower court against the title holder who, the court found, acquired said title as security for a debt. On appeal, the Idaho Supreme Court unanimously affirmed the lower court decision and listed the following factors as being some, but not necessarily all, the factors to be considered when determining whether instruments constitute a mortgage:

  • Existence of debt to be secured,
  • Satisfaction or survival of the debt
  • Previous negotiations of parties
  • Inadequacy of price
  • Financial condition of grantor
  • Intention of parties
Commenting specifically on the issue of inadequacy of price, the Idaho high court commented as follows (bold text is my emphasis):

"It is said in 41 C. J. 288, sec. 24, that:

  • "If the grantor was severely pressed for money at the time of the transfer, so as not to be able to exercise a perfectly free choice as to the disposition of his property, and raised the sum needed by conveying his property in fee with a right of repurchase, his necessitous condition, especially in connection with the inadequacy of the price, will go far to show that a mortgage was intended.""
"In Johansen v. Looney, 31 Idaho 754, 761, 176 P. 778, 780, this court said:

  • "Notwithstanding some apparent conflict in the above authorities, the holding is general that the transaction must be fairly made for a consideration not grossly inadequate, and that any fraudulent or oppressive conduct on the part of the mortgagee is sufficient to annul the absolute character of the transfer." ( Alexander v. Rodriguez (79 U.S. 323, 12 Wall. 323, 20 L. Ed. 406), Gassert v. Strong, (38 Mont. 18, 98 P. 497), Stoutz v. Rouse, (84 Ala. 309, 4 So. 170), Russell v. Southard, (53 U.S. 139, 12 HOW 139, 13 L. Ed. 927), Bradbury v. Davenport, (114 Cal. 593, 46 P. 1062, 55 Am. St. 92), Fort v. Colby, (165 Iowa 95, 144 N.W. 393), and Liskey v. Snyder, (56 W. Va. 610, 49 S.E. 515), supra; Keeline v. Clark, (132 Iowa 360, 106 N.W. 257.)"
"The following pertinent statement is made in Alexander v. Rodriguez, 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406, 411:

  • "The law upon the subject of the right to redeem where the mortgagor has conveyed to the mortgagee the equity of redemption, is well settled. It is characterized by a jealous and salutary policy. Principles almost as stern are applied as those which govern where a sale by a cestui qui trust to his trustee is drawn in question. To give validity to such a sale by a mortgagor it must be shown that the conduct of the mortgagee was, in all things, fair and frank, and that he paid for the property what it was worth. He must hold out no delusive hopes; he must exercise no undue influence; he must take no advantage of the fears or poverty of the other party. Any indirection or obliquity of conduct is fatal to his title. Every doubt will be resolved against him. Where confidential relations and the means of oppression exist, the scrutiny is severer than in cases of a different character. The form of the instruments employed is immaterial. That the mortgagor knowingly surrendered and never intended to reclaim is of no consequence. If there is vice in the transaction, the law, while it will secure to the mortgagee his debt, with interest, will compel him to give back that which he has taken with unclean hands. Public policy, sound morals, and the protection due to those whose property is thus involved, require that such should be the law."
"It cannot be successfully contended, in the light of the record before us, that Heston acted as a free man. He was in a situation, being without funds, where he was compelled, as expressed in the language of Dickens, to enter into the contract in question and make an absolute conveyance of his property, or nothing."


----------------------------

There is much more in this case than the above observations of the Idaho court. Further, the Idaho high court reaches its decision on the reliance both on its prior decisions, and also to high court decisions of other states (ie. Kansas, California, Illinois, Iowa, Michigan, Montana, Alabama, West Virginia, and Colorado), not to mention a couple of citations to U.S. Supreme Court cases, thereby representing a seemingly broad view of the equitable mortgage case law. To read the whole case, see:

Dickens v. Heston
, 53 Idaho 91; 21 P.2d 905; (Id. 1933)

Alexander v. Rodriguez (aka Villa v. Rodriguez), 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406, 411 (1870) (available online courtesy of Justia - US Supreme Court Center)

-------------------------
Ohio

Kaeser v. Gross
2002 Ohio 4050
(Ohio App. Ct., 1st Dist., 2002)

The financially strapped property owner (Gross) in this case also successfully asserted equitable mortgage in the lower court against a money lender (Kaeser) where Gross signed over his deed as part of a transaction where Kaeser provided him with some desperately needed funds.

In this case, Kaeser initiated a forcible detainer and eviction action in municipal court (limited jurisdiction court) against Gross. Gross filed an answer and a counterclaim in which he alleged that he was the true owner of the property. Due to the allegations in Gross's counterclaim, the case was transferred to the common pleas court (in transferring the case, it appears that the municipal court properly acknowledged its lack of jurisdiction to hear the equitable mortgage counterclaim, unlike the lower courts whose decisions were ultimately reversed in:

In unanimously affirming the common pleas court decision in favor of the financially strapped Gross, the Ohio intermediate appellate court made a number of observations, including this one (bold text is my emphasis):

  • "Ohio courts have consistently held that an instrument in the form of a deed may be construed in equity to be a mortgage if it is demonstrated that it was intended by the parties to convey the property involved as security for a debt or an obligation. n3 The Ohio Supreme Court in Wilson v. Giddings found the gross inadequacy of price and continued possession by the plaintiff to provide strong support for the determination that a plaintiff's conveyance of real estate to a defendant, although absolute in form, was not a sale absolute, but an equitable mortgage. n4

    n3 See Bank v. Johnson (1889), 47 Ohio St. 306, 24 N.E. 503; Patrick v. Littell (1880), 36 Ohio St. 79, 82; Wilson v. Giddings (1876), 28 Ohio St. 554.

    n4 28 Ohio St. at 566."

----------------------------------

At the end of this decision, the court concluded with this passing observation which, while probably constituting nothing more than dicta, will give you a flavor for what this case was about (in case you don't feel like reading the whole case):

  • "In closing, we note that, if ever there were a situation that cried out for a court to use its equitable powers, this was the case. Here, an employee, who was in legal and financial difficulties, asked his employer for help. He made an agreement whereby his home was held as collateral for the repayment of his debts. The employer, seemingly intent on keeping the employee's property, went to extreme lengths to keep the employee from repaying his debt, first, by adding new debts not encompassed by the original agreement and, later, by attempting to evict the employee from his home. Here, the trial court used its equitable powers to term the agreement a mortgage. By doing so, it prevented Kaeser from retaining ownership in a $ 40,000 home in exchange for lending Gross roughly $ 6,000, some of which Gross had already repaid. Such a result would have been fundamentally unfair. Consequently, we affirm the judgment of the trial court."
-------------------------------

I will conclude this portion of the post by observing that the three Ohio Supreme Court decisions cited above by the Ohio appellate court in this 2002 case all date back to the 1800's, which seems to be pretty consistent with the equitable mortgage cases that I've written about in the past (and that I'll be writing about in the future) with respect to one point. That is, the case law in respect to the equitable mortgage doctrine in the United States not only appears to be pretty well-settled, but it seems like it's been well-settled for well over 100 years (I'm confident that in Great Britain, which is generally considered to be the source of the common law throughout the U.S., the equitable mortgage doctrine has probably been well-settled for at least 250 years). Accordingly, one shouldn't shy away from relying on the legal principles set forth in these cases simply because the cases are old. To read the whole case, see:

Kaeser v. Gross, (Ohio App. Ct., 1st Dist., 2002 Ohio 4050; 2002)

--------------------------------

Oregon

Long v. Storms
50 Ore. App. 39; 622 P.2d 731
(Or. Court of Appeals, 1981)

In this case, the title holder / money lender (Long) brought a forcible entry and detainer (FED) action in a limited jurisdiction court to recover possession of certain residential premises. The possessors (Storms) answered and counterclaimed, alleging that the warranty deed to the premises given to Long by Storms, should be declared an equitable mortgage, and that the loan transaction between the parties should be rescinded pursuant to the Truth in Lending Act, 15 U.S.C.S. § 1601 et seq.

Because defendants' answer and counterclaims raised an issue regarding the determination of title to real property, the case was transferred to circuit court, which had jurisdiction over such matters (Another case where a limited jurisdiction court correctly recognized its lack of jurisdiction when transferring the matter to the appropriate forum).

The circuit court ultimately ruled that the sale by Storms, followed by a 6 month leaseback with a buy back option was an absolute sale, and not a mortgage.

On appeal, the Oregon Court of Appeals reversed the lower court decision and, in so doing, quoted from the Oregon Supreme Court in Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or 605, 217 P2d 219 (1950):
  • "Our decisions establish that if the intent appears that property was conveyed and received as security for the fulfillment of an obligation, the form of the instrument becomes immaterial and the true nature of the transaction may be shown by parol evidence. Neither fraud, mistake nor accident need be proven. The primary inquiry relates to the intention of the parties at the time the transaction was consum[m]ated. Harmon v. Grants Pass Banking & Trust Co., 60 Or 69, 118 P. 188. Mutual intent is to be determined, not alone by the instruments executed, but also by the attendant circumstances and the conditions under which the instruments were delivered. The issue can be resolved only after considering the situation of the parties, the price fixed relative to the value of the property and the conduct of the parties, both before and after the transaction, insofar as such conduct prospectively or retrospectively throws light upon the intent of the parties at the time of the transaction."
------------------------

The appellate court when on to set forth the circumstances that the Umpqua court pointed to as indicia that a mortgage was intended:
  • the fact that negotiations originated from an application for a loan,
  • the dire financial straits of the grantor,
  • the grantor's continued possession of the property,
  • the intimate business or social relationship of the parties,
  • failure of the grantee to carefully investigate the title of the grantor,
  • failure of the grantee to ascertain the value of the property,
  • inadequacy of consideration,
  • the lack of bargaining between the parties as to the value of the property with the controlling consideration being the profit inuring to the grantee,
  • the existence of a deed absolute in form, that is accompanied by an option to repurchase, which must be considered together, and with the court stating that the option does not of itself convert the transaction into a mortgage, but it is a circumstance to be considered in favor of the existence of a mortgage.
The appellate court when on to make an observation after which it again quoted from Umpqua

"We recognize that a deed, absolute on its face, is presumptively what it appears to be and that evidence must be clear and convincing to support a finding that the deed is in reality a mortgage." [citations omitted] "Nevertheless, as pointed out by the Umpqua court,
  • "* * * while recognizing the rule requiring clear and convincing evidence, the authorities in this and other states have also approved the rule applying peculiarly in courts of equity."

    "'[R]egardless of the view that may be entertained as to the presumptive character of a deed with a stipulation for a reconveyance, or as to the standard of proof necessary to establish the instrument or instruments as a mortgage, the authorities are in general agreement in support of the proposition that where the question presented is whether the transaction is a mortgage or a conditional sale, as distinguished from the question whether an unconditional sale is involved, evidence of a doubtful import will be construed in favor of the theory that a mortgage was intended, so that in such case a deed with a provision for a reconveyance will be construed as a mortgage rather than as a conditional sale.'" 188 Or at 646."
--------------------------

In concluding that the transaction was an equitable mortgage (thereby reversing the lower court), the Oregon appellate court pointed to the existence of a number of factors in making the following determination:

  • "The undisputed evidence shows that defendants were financially distressed at the time of the transaction,
  • that the purported sale price was substantially less than the fair market value of the property,
  • that defendants remained in possession of the property,
  • that plaintiff did not obtain an appraisal on the property until after the purported conveyance, and
  • that there was no bargaining between the parties as to the consideration recited in the "deed." Instead, the controlling consideration was that plaintiff should realize a $ 1,000 profit plus costs.
  • Finally, the form of the transaction was a deed absolute in form accompanied by an option to repurchase. That plaintiff did not require defendants to fill out a credit application does not persuade us that the transaction was a sale, not a loan. Plaintiff knew that defendants were financially distressed and had been unable to obtain a loan. Further, he had defendants' house as security. The sum of these facts squares clearly with our conclusion that the transaction between the parties constituted a loan with a security interest."
------------------------

The court also went on to rule that the Federal Truth In Lending Act (TILA) applied in this case, thereby allowing for a rescission of the transaction and an award of attorneys' fees to Storms' legal counsel, to be imposed on and paid by Long.

Because the court arrived at the conclusion that the relationship between the parties was that of debtor-creditor, rather than landlord-tenant, Long's forcible entry and detainer action was dismissed.

Long v. Storms, 50 Ore. App. 39; 622 P.2d 731; (Or. Ct. App. 1981), as modified by
Long v. Storms, 52 Or App 685, 629 P2d 827 (1981) (modification related to the attorney fee award under the TILA).

For a prior post on another Oregon case involving an equitable mortgage claim, see Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77, (Or. Ct. App. 2005) Highlights

---------------------------------

Alabama


In this case, an individual, Robertson, approached Mobile Building & Loan Association (Loan Association) for a loan of $2,000 to purchase lots upon which he agreed to make $600 of repairs and improvements. Robertson had already negotiated the purchase and had entered into a contract with the seller. The transaction was structured as a sale by the owner of the lots to the Loan Association with a contemporaneous lease to Robertson with an option to buy. Upon completion of the repairs and the improvements by Robertson, the transaction was consummated, with Robertson taking possession of the premises pursuant to its lease from the Loan Association.

Ultimately, a dispute arose between the parties resulting in Robertson ceasing his lease payments, and the Loan Association commencing an action at law for the breach of the lease. Robertson countered by filing a bill for an injunction against the suit at law, and to have the contract declared a mortgage and for the redemption of the premises.

The lower court found that the transaction was in effect a mortgage, and that the stipulation for rent was a mere device to obtain more than lawful interest on the money loaned.

In affirming the lower court decision that the transaction between Robertson and the Loan Association was a mortgage, it based its decision on the following rationale:
  • "Every conveyance of land, without regard to its form, which is in fact a security for an antecedent debt, or for a contemporaneous loan, in the contemplation of a court of equity is a mortgage. It inures and operates as a mortgage only, conferring on the parties reciprocal rights and remedies. The grantee may resort to a court of equity to have it so declared, and for its foreclosure, as well as the debtor for redemption."-- Bryan v. Cowart, 21 Ala. 92; Hughes v. Edwards, 9 Wheat. 489 [6 L. Ed. 142].
  • "When it is ascertained that the parties intend security for a debt, the court intervenes, and without regard to any agreement existing between them,--rather upon a general policy the parties can not contravene,--attaches, as an inseparable incident, the right of redemption upon the payment of the debt."-- Eiland v. Radford, 7 Ala. 724 [42 Am. Dec. 610]; Wiliamson v. Culpepper, 16 Ala. 211 [50 Am. Dec. 175]; Locke's Ex'r v. Palmer, 26 Ala. 312; Skinner v. Miller, 5 Litt. 84; Walling v. Aikin, McMul. Eq. 1.
  • "This is the well-defined legal consequence, when the fact is established, that security for a debt is what was intended, and this is the concurring intention at the time of the contract, which is to be deduced from the facts and circumstances attending the transaction."
  • "There may be no independent evidence of the debt,--no bond, bill, or note, taken for its payment; it may rest wholly on implication from the nature, facts and circumstances of the transaction; it is sufficient that its existence is the fair, just implication."-- Conway v. Alexander, 7 Cranch 218 [3 L. Ed. 321]; Robinson v. Farrelly, 16 Ala. 472; Locke's Ex'r v. Palmer, 26 Ala. 312; Russell v. Southard, 12 How. 139 [13 L. Ed. 927]."
  • "Indeed, when the purpose of the creditor is to avoid the appearance of a mortgage, it is not to be expected that he would defeat it by the introduction of an express covenant for the payment of the debt, or any other independent security, disclosing its existence."
  • "In the numerous cases of this character, which have been before this court, there was no other evidence of the debt, than an absence in the conveyance of any words showing that it rested in the mere option of the grantor, whether he would perform the condition, and the inferences from the nature, facts and circumstances of the transaction. There can be no doubt, that the absence of independent evidence of the debt is a circumstance favoring an absolute or conditional sale, or other contract, in which it is optionary whether there shall or shall not be payment. It is but a circumstance, dependent for its weight upon other facts and circumstances, with which It may be connected.-- Conway v. Alexander, supra; Russell v. Southard, supra; Brown v. Dewey, 1 Sandf. Ch. 56."
  • "Though there is no express promise to pay, yet, when from all the facts and circumstances it is fairly collected that the relation of debtor and creditor exists, and the amount which ought to be paid is ascertained, the law implies the promise, and an action of assumpsit will lie ( Russell v. Southard, supra, and authorities cited on page 152 [12 How. 139, 13 L. Ed. 927]); thus affording the creditor, in all events, security, and a remedy for the debt."
------------------------------

In light of the fact that the Alabama high court found it unnecessary to have an express promise to pay, and considering that the bylaws of the Loan Association indicated that one purpose for its existence was to loan money to its members, it affirmed the lower court decision declaring the arrangement a mortgage, and agreed with the lower court that the characterization of the periodic payments as "rent" was a disguise in order to evade the statute against usury. It concluded its opinion with the following statement:
  • "The stipulation for the payment of rent was intended as compensation for the use of the money loaned. It is the only compensation contemplated, and the only compensation that, according to the contract, the borrower was bound to make. It is in excess of lawful interest, and is usurious. Whatever color or disguise ingenuity may throw over a loan for illegal interest, the courts are bound to disregard, or the statute against usury will be practically abrogated.-- Evans v. Negley, 13 Serge. & Rawle 218; Miller v. Bates, 35 Ala. 580."
Mobile Bldg. & Loan Asso. v. Robertson, 65 Ala. 382; (Ala. 1880)

See also Moorer v. Tensaw Land & Timber Co., 246 Ala. 223; 20 So. 2d 105; (Ala. 1944) (in which, in an action for ejectment, defendant successfully asserted equitable mortgage in preventing its eviction from property. Observations made by the Alabama Supreme Court in connection therewith were (bold text is my emphasis):
  • "It is well settled that two writings connected by reference one to the other, or simultaneously made, with respect to the same subject matter and proved to be parts of an entire transaction constitute but a single contract as if embodied in one instrument." Sewall v. Henry, 9 Ala. 24; Byrne v. Marshall, 44 Ala. 355; Collins v. Whigham, 58 Ala. 438; Drennen v. Satterfield, 119 Ala. 84, 24 So. 723; Weeden v. Asbury, 223 Ala. 687, 138 So. 267; Frasch v. City of Prichard, 224 Ala. 410, 140 So. 394; Albert v. Nixon, 229 Ala. 273, 156 So. 775.
  • "When such situation exists, it does not require equity to declare that to be the result, but the one contract consisting of the two writings is so treated at law as well as in equity."
  • "A mortgage is sometimes said to be a conveyance by a debtor to a creditor of real or personal property, with a defeasance clause whereby the conveyance will be void and the debtor entitled to repossess the property if the debt is discharged by a day named." Mervine v. White, 50 Ala. 388; Sewall v. Henry, 9 Ala. 24.
  • "It is wholly immaterial between the parties whether the defeasance clause is incorporated in the same instrument or in a separate instrument contemporaneously executed." 41 Corpus Juris 318, note 93; 41 Corpus Juris 610, section 578.
  • "The defeasance clause may be in the form of an agreement for a reconveyance of the property to the grantor or for the revesting of title in him on paying the debt." 41 Corpus Juris 317.
  • "A written instrument may be an equitable mortgage, either when there are no words of conveyance passing the legal title in praesenti ( O'Neal v. Seixas, 85 Ala. 80, 4 So. 745), or when it makes a present conveyance without the mortgage features expressed in it, but only in a parol agreement. Cases heretofore cited."
Moorer v. Tensaw Land & Timber Co., 246 Ala. 223; 20 So. 2d 105; (Ala. 1944)

-------------------------------------

South Dakota


Myers v. Eich
2006 SD 69; 720 N.W.2d 76
(S.D. 2006)

This case involved a transaction between the parties which included a warranty deed to Myers (the lender) and a contemporaneous contract for deed back to the Eichs (the borrower) in exchange for $ 125,000 advanced to the Eichs in order for them to redeem their property from a recent foreclosure.

Ultimately, the Eichs defaulted, at which point Myers brought a forcible entry and detainer action, alleging that he was the fee simple owner of the property and the Eichs were leasing the premises from him. The Eichs counterclaimed for a declaration that they owned the shop property because the arrangement was actually an equitable mortgage and Myers was required to proceed by a foreclosure action. The lower court agreed with Myers that there was no equitable mortgage, but on appeal, the South Dakota Supreme Court reversed.

In reaching its decision, the South Dakota high court made these initial observations:
  • "Equity requires that the transaction be treated according to its substance and effect, not its form." Star Enterprise v. Thomas, 783 F. Supp. 1564, 1568 (DRI 1992); see also Brenneman Mech. & Elec., Inc. v. First Nat'l Bank of Logansport, 495 N.E.2d 233, 239 (IndCtApp 1986); Humble Oil & Refining Co. v. Doerr, 123 N.J. Super. 530, 303 A.2d 898, 905-06 (NJSuperCtChDv 1973).
  • "A purported absolute conveyance may be recharacterized as a mortgage, depending on the surrounding circumstances and the parties' intent." Adrian, 2002 SD 10, P11, 639 N.W.2d at 533; Abberton v. Stephens, 747 S.W.2d 334, 336 (MoCtApp 1988); Brenneman Mech. & Elec., Inc., 495 N.E.2d at 239.
  • "One who asserts that an absolute deed is in fact an equitable mortgage must establish by clear and convincing evidence that such deed was intended as security for a debt." Adrian, 2002 SD 10, P11, 639 N.W.2d at 533 (citing Commercial & Sav. Bank v. Cassem, 33 SD 294, 145 NW 551, 552 (1914)).
  • "Although "[o]ne of the essential elements of a mortgage is debt to be secured," whether a document was intended as security for a debt depends on the intent of the parties at the inception of the relationship." Abberton, 747 S.W.2d at 336 (examine the parties' intent when conveyance was executed); American Nat'l Bank v. Groft, 56 SD 460, 229 NW 376, 379 (1930) ("the broad rule is that whether such transaction is a sale upon a condition or a mortgage depends upon the actual intention of the parties at the time"); 59 CJS Mortgages § 36.
  • "To ascertain the parties' intent at the inception of a transaction, we identify certain elements that, if present, favor a finding that a conveyance, absolute on its face, constitutes an equitable mortgage:
(1) pre-existing debt not extinguished with conveyance;

(2) conveyance made with agreement to re-convey;

(3) property value considerably more than the debt;

(4) property in original transaction not appraised and no discussion of its value in relation to sale price; and

(5) dealings between the parties akin to that of creditor-debtor."

----------------------------

In reversing the lower court decision and ruling in favor of Eich (the borrower / equitable mortgagor) and declaring the arrangement an equitable mortgage (with Myers as equitable mortgagee), the court made these statements:
  • "Their relationship did not begin because the Eichs were attempting to sell their property, but because they needed money to redeem their property. Myers, a licensed real estate broker, provided them with the necessary money and then dictated the terms of their arrangement. The Eichs agreed to his conditions."
  • "The fact that the conveyance and contract for deed were executed on the same day creates a strong doubt on whether this transaction was intended to be a sale."
  • "The circumstances surrounding this case present a multitude of additional factors tending to prove an equitable mortgage."
  • "First, there is no evidence that Myers ever planned to be the owner of the transferred property after he advanced the $ 125,000. In fact, the Eichs at all times retained possession of the premises and continued to be the sole operators of the truck repair business on the shop property." Steckelberg v. Randolph, 404 N.W.2d 144, 149 (Iowa 1987) retaining possession of transferred property is "inconsistent with theory of absolute conveyance").
  • "Second, before the transaction, no discussions were had with respect to the value of the property in relation to the consideration provided and Myers did not have the property appraised. Instead, Myers advanced the exact amount the Eichs needed to redeem their property from First Bank of South Dakota and then charged a $ 10,000 fee for the transaction." See F. Gregorie & Son, 257 S.E.2d at 703-04 (citing 59 CJS Mortgages §§ 40-41).
  • "Third, the home and shop properties were valued at approximately $ 200,000. It defies logic to conclude that the Eichs sold both properties for $ 125,000, and then also agreed to pay an additional $ 10,000 as a fee." Pittwood, 251 P at 286 ("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").
  • "Further evidence that a sale was not intended is the declaration in the letter from Myers to the Eichs summarizing their arrangement. He specifically stated that the conveyance was intended to provide security for the transaction, and he did not suggest that the $ 125,000 was consideration for a purported sale."
----------------------------

In connection with allowing the use of parol evidence by the Eichs in order to make their case, the court, quoting from their decision in Adrian v. McKinnie, 2002 SD 10, 639 N.W.2d 529 (which, in turn, quoted from their decision in Wilson v. McWilliams, 16 SD 96, 91 NW 453 (1902)) stated:
  • "[w]here there is a deed, and contract to re-convey, and oral evidence has been introduced tending to show that the transaction was one of security, and leaving upon the mind a well-founded doubt as to the nature of the transaction, then courts of equity incline to construe the transaction as a mortgage."
------------------------------

In concluding its opinion, the court made a comment regarding the fact that the mere existence of a lease in this arrangement doesn't mean that it should be recognized as such and then quoted from its Wilson decision:

"It has long ago been recognized in South Dakota that
  • "[p]arties seeking to take an undue advantage of mortgagors situated as the plaintiff was in this case almost invariably seek to cover up the transaction by inducing the party to whom the loan was really made to take a lease of the property; hence the mere fact of leasing should have but little weight with a court of equity, which seeks to discover the real transaction.""
Wilson, 16 SD 96, 91 NW at 457; see also Adrian, 2002 SD 10, P16 n.2, 639 N.W.2d at 535 n.2..
---------------------------
The South Dakota high court, much like the Idaho high court in Dickens v. Heston, above, arrives at its decision in reliance on both its prior decisions and court decisions from various other jurisdictions (ten other states, by my count). Accordingly, this decision also appears to seemingly reflect a broad based view of the equitable mortgage doctrine.
.
Myers v. Eich, 2006 SD 69; 720 N.W.2d 76; (S.D. 2006)

For a prior post on this case, see South Dakota Supremes Say "No Sale" In Equitable Mortgage Cases. emdefense other states equitable mortgage doctrine