Tuesday, April 17, 2007

Equitable Mortgage, Bonafide Purchaser, Laches, Corporate Entity Doctrine (Florida)

What follows below are some highlights of and commentary on a Florida equitable mortgage case decided by the Florida Supreme Court that also touched upon the issues of laches, bonafide purchaser, and the corporate entity doctrine. In the context of some foreclosure rescue transaction, these issues (in my view) may warrant some attention, thereby possibly making this case of some value to those who represent Florida homeowners who have done business with a foreclosure rescue operator.
Markell v. Hilpert
140 Fla. 842; 192 So. 392
(Fla. 1939)

This is a case where a financially strapped property owner was able to successfully assert that a deed which, on its face, conveyed absolute title, was to be construed as a mortgage.

The basic facts are as follows:

1) One Hilpert sold property (which the trial court found to be worth $100,000) to a certain Markell for $65,000. Contemporaneous with the sale was a buyback agreement (referred to in the case as a repurchase "option" at one point and a "purchase agreement" at another) entitling Hilpert to repurchase the property for $86,000 within two years.

2) (Unlike other sale buyback cases that I've written about) Hilpert relinquished complete and undisputed control and possession of the property to Markell, the real estate taxes were prorated at the closing of title, and the tenants then in possession of the property each obligated themselves to pay the rents monthly to Markell or his authorized agent, and not to the Hilperts.

3) About five years after the sale (and 3 years after Hilpert's buyback period expired), Markell transferred title to the property to a Markell family owned corporation.

4) About a year thereafter (and almost 6 years after the original transaction and almost 4 years after his buyback period expired), Hilpert filed suit against Markell and Markell family owned entities to declare his deed to Markell a mortgage and to establish his right of redemption.

5) The lower court ruled that the transaction between Hilpert and Markell constituted a loan and not a sale and that the deed executed by Hilpert to Markell constituted a mortgage; and that Markell family owned entities claiming title to the property received from Markell were not bonafide purchasers, "but their rights in the property were acquired subject to the equities of [Hilpert]."

In affirming the lower court, the Florida Supreme Court made some general statements articulating the relevant Florida law to be applied to this case and follow below (bold text is my emphasis).

One issue dealt with the appropriateness of the admission of oral evidence in showing that the deed should be treated as a mortgage. The court stated:
  • "In First National Bank v. Ashmead, 23 Fla. 379, 2 So. 657, this Court held that parol testimony was admissible in equity to show that a deed of conveyance absolute upon its face was intended as a mortgage, and where it is shown that such conveyance has been executed to secure the payment of money, equity will treat it as a mortgage."
  • "The Court looks beyond the terms of the instrument to the real transaction or what was intended to be effected by the parties, and any evidence, whether written or oral, tending to show this, is admissible."
  • "In the case of Howard v. Goodspeed, 101 Fla. 699, 135 So. 294, this Court reaffirmed the language in Elliott v. Connor, supra, viz.: "If there be a doubt as to the real purpose for which the deed was executed by Mrs. Connor and therefore uncertainty as to whether it is a conveyance or a mortgage, the instrument under the circumstances of this case should, pursuant to the statute, be deemed and held a mortgage.""
  • "The Court looks at substance rather than form, makes inquiry and hears evidence beyond the terms of the instrument to the very heart of the transaction so as to determine the intent of the parties and all admissible evidence bearing upon this broad equitable principle is received and considered by the Court, whether written or oral, as it is the intention of equity to promote justice and to prevent fraud and imposition."

With respect to the law to be applied in determining whether the deed was, in fact, an absolute conveyance or whether it was a mortgage, the court made these broad statements:
  • "It is necessary for a court to take into consideration all the facts and circumstances of the parties and if it is clear that the real purpose of the parties to an absolute conveyance of property was to secure the payment of money, the conveyance will be regarded as a mortgage. See Stovall v. Stokes, 94 Fla. 717, 115 So. 828; McKinney v. Gainey, 96 Fla. 547, 118 So. 917."
  • "It has been held by this Court that the relation of the parties at the time of its execution may be considered in determining whether a deed is a mortgage. "
  • "The conduct of the parties and the circumstances under which the instrument was executed may be considered. The circumstances of the parties and the conditions under which the deed was executed may become material."
  • "The value of the property conveyed should be considered in connection with the amount paid or expressed in the deed. The secret intention of either party as to the purpose of the instrument will not prevail. See First Natl. Bank v. Ashmead, 23 Fla. 379, 2 So. 657, 665; Holmberg v. Hardee, 90 Fla. 787, 813, 108 So. 211; Stovall v. Stokes, 94 Fla. 717, 115 So. 828; McKinney v. Gainey, 96 Fla. 547, 118 So. 917; Connor v. Connor, 59 Fla. 467, 52 So. 727; Walls v. Endel, 20 Fla. 86; DeBartlett v. DeWilson, 52 Fla. 497, 42 Sou. 189; Franklin v. Ayer, 22 Fla. 654."
In affirming the lower court's ruling that the deed was a mortgage, the Florida high court's opinion is somewhat lacking in the kind of analysis that was present in some of the other cases I've written about on this blog. The Florida high court simply considered the details of the negotiations that led up to the transaction between Hilpert and Markell, the disparity between the sale price and the value of the subject property, and simply ruled that there was sufficient evidence in the record to sustain the lower court's ruling and there was no indication that the lower court abused its discretion in so holding. It did so notwithstanding the fact that some of the key elements of an absolute conveyance were present (ie. real estate taxes were prorated at the closing of title; Hilpert relinquished full control and possession of the property to Markell; and Hilpert instructed his tenants to remit the monthly rent payments to Markell after the transaction was consummated).
Another issue that was dealt with in this case was the assertion that Hilpert was guilty of laches for bringing his action to declare an equitable mortgage almost four years after his 2 year buyback period expired, at which point he was out of possession of the premises for almost six years. The court simply stated that Markell hadn't done enough to prove laches (and by inference, concludes that the mere passage of time is not enough to prevail when asserting the defense of laches). The court makes reference to "[t]he case of Geter v. Simmons, 57 Fla. 423, 49 So. 131; Horne v. Turner C. & L. Co., 55 Fla. 690, 45 So. 1016; Booth v. Lenox, 45 Fla. 191, 34 So. 566 ..." in support of its decision that laches was not present in this case.

As additional support for its decision on the issue of laches, the Court cited the U.S. Supreme Court case in Russell v. Southard, 53 U.S. 139, 12 How. 139, 13 L. Ed. 927 (1851) (case available online courtesy of Justia & Oyez - US Supreme Court Center) which allowed for a suit for redemption after a lapse of almost twenty years from the time the loan involved became payable.
Based on the foregoing Florida and U.S. Supreme Court case law, the Florida Supreme Court in Markell v. Hilpert reminds us that the mere passage of time, standing alone, was not enough for Markell to sustain a defense of laches.


Editor's Note: For more on laches in Florida, generally, a recent decision of a Florida appeals court in Baker v. Baker, 920 So. 2d 689 (Fla. App. Ct. 2nd Dist., 2006), gives some insight as to the application of the doctrine of laches in Florida in the following passage from that case:
  • "Laches is based on an unreasonable delay in asserting a known right which causes undue prejudice to the party against whom the claim is asserted. Appalachian, Inc. v. Olson, 468 So. 2d 266, 269 (Fla. 2d DCA 1985). Delay, standing alone, is not enough. Brumby v. Brumby, 647 So. 2d 330, 331 (Fla. 4th DCA 1994) (holding that "mere delay in filing an enforcement suit for alimony, even if the former [spouse] had knowledge of the [other spouse's] whereabouts, is insufficient by itself to constitute laches or estoppel"). Susan was required to show resulting undue prejudice by "very clear and positive evidence." Smith v. Branch, 391 So. 2d 797, 798 (Fla. 2d DCA 1980). (emphasis and alterations in the original).
  • "The Florida Supreme Court has explained that "[t]he true test to apply laches is whether or not the delay has resulted in injury, embarrassment, or disadvantage to any person and particularly to the person against whom relief is sought." Stephenson v. Stephenson, 52 So. 2d 684, 686 (Fla. 1951) (quoting Lightsey v. Lightsey, 8 So. 2d 399, 400 (Fla. 1942)).
  • "[T]he delay required to render the defense of laches available must have been such as practically to preclude the court from arriving at a safe conclusion as to the truth of the
    matters in controversy, and thus make the doing of equity either doubtful or impossible, as through the loss or obscuration of evidence of the transaction in issue; or there must have occurred in the meantime a change in conditions that would render it inequitable to enforce the right asserted." Id. (internal quotation marks omitted).

The bonafide purchaser issue was also addressed in this case as it related to the Markell family owned corporation (51% by Markell, 30% by his daughter, 19% by his granddaughter) that ultimately ended up with title to Hilpert's property and was the titleholder at the time Hilpert brought his action to declare his deed to Markell a mortgage. The lower court held that the property and the Markell family owned corporation were owned substantially by Markell and that his relatives were only assisting him in his business undertakings.

In affirming the lower court ruling that bonafide purchaser status was not warranted for the Markell family corporation, the Florida Supreme Court stated:
  • "This Court is committed to the principle that a corporation cannot be formed for the purpose of accomplishing fraud, or other illegal acts, under the guise of the fiction that a corporation is a legal entity, separate and distinct from its members."
  • "When this is attempted, the fiction will be disregarded by the courts and the acts of the real parties dealt with as though no corporation had been formed."
  • "The modern doctrine confines the fiction of the corporate entity to the purpose for which it was adopted; the corporate entity doctrine has been repudiated in all cases where it has been insisted on as a protection to fraud or other illegal transactions. The courts will look beyond the corporate form to the purpose of it and to the officers who are identified with that purpose." See Biscayne Realty & Ins. Co. v. Ostend Realty Co., 109 Fla. 1, 148 So. 560.
The court's approach here was to look through the corporate shield to determine that the corporation was, in effect, Markell's alter ego and, accordingly, not entitled to the status of "bonafide purchaser".


The points that caught my eye about this case are that it involved addressing issues of bonafide purchaser and laches (albeit not in depth) in the context of an equitable mortgage case. It also makes reference to the "corporate entity doctrine", which, as the Court stated, "[c]onfines the fiction of the corporate entity to the purpose for which it was adopted; the corporate entity doctrine has been repudiated in all cases where it has been insisted on as a protection to fraud or other illegal transactions."
Bonafide Purchaser
The determination that Markell's corporation was not entltled to bonafide purchaser status in this case appears to have been a pretty easy one. I highlight this point only because it serves as a reminder that, while such a determination may not be as easy in some modern day foreclosure rescue transactions involving a sale with a contemporaneous repurchase option (or repurchase contract), it is a detemination that nevertheless must be made.

The scenario that contemplates such a bonafide purchaser determination is one where a foreclosure rescue operator, after getting financially strapped homeowners to sign over their homes, then sells or mortgages the property to a third party either at the time it receives the homeowners' title or at some point subsequent thereto. We will assume that the financially strapped homeowner was in physical possession of the home both before and after the subsequent sale or mortgaging by the operator to the third party.

The law in Florida (and probably most other states) appears to be pretty well settled and is to the effect that actual possession of the property serves as notice to subsequent purchasers and encumbrancers of all rights and equities that the person in possession may have. The following is a brief excerpt from the the Florida Supreme Court decision in Florida Land Holding Corp. v. McMillen, 135 Fla. 431, 186 So. 188 (Fla. 1938), which, quoting from an earlier Florida high court case, stated the following:

"This Court had before it a similar set of facts in the case of Marion Mortgage Co. v. Grennan, 106 Fla. 913, 143 So. 761, when this Court said:
  • "Actual possession is constructive notice to all the world or anyone having knowledge of said possession, of whatever rights the occupants have in the land. Such possession when open, visible and exclusive, will put upon inquiry those acquiring any title to or a lien upon the land so occupied to ascertain the nature of the rights the occupants really have in the premises. Carolina Portland Cement Company v. Roper, 68 Fla. 299, 67 So. 115; Tate v. Pensacola G.L. & Dev. Company, 37 Fla. 439, 20 So. 543; McAdams v. Wachab, 45, Fla. 482, 33 So. 702. This court also specifically held in the case of Crozier, et al., v. Ange, 85 Fla. 120, 95 So. 426, that 'where at the time property is mortgaged it is actually occupied by others than the mortgagor, the mortgagee is thereby put upon notice to inquire as to the rights of the occupants.'"

On the basis of the foregoing, it appears that a foreclosure rescue operator's subsequent mortgagee or third party purchaser (or said purchaser's mortgagee) is acquiring an interest in the subject property subject to all the rights and equities that the financially strapped, still-in-possession, homeowner may have (ie. equitable mortgage, usury, fraud, conspiracy, constructive trust, etc.), in the same way that Markell's corporations acquired its interest in the property subject to Hilpert's equities under an equitable mortgage claim.


The determination that Markell's assertion of the defense of laches against Hilpert for Hilpert's delay (almost four years after his buyback period expired) in bringing his equitable mortgage claim was without merit also appears to have been a pretty easy one. The court essentially stated that Markell wasn't able to show that laches was present, without further elaborating.

I highlight this point for a couple of reasons. First, in addition to current homeowners facing foreclosure who may still be in possession of their homes after doing business with an operator, there is undoubtedly a significant number of foreclosure rescue victims of transactions that date back more than a year or two who have ultimately been evicted from or have otherwise been made to vacate their homes and are no longer in possession thereof. I would suggest that Markell v. Hilpert serves as a reminder that these "no longer in possession" foreclosure rescue victims in Florida may still have viable causes of action against the operator. Further, it appears that this may be the case as long as the Florida homeowner has not been out of possession for more than seven years. See F.S. Section 95.12. And if, prior to the expiration of the statute of limitations, the rescue operators attempt to assert a defense of laches (which is equitable in nature), they had better be able to prove both that they (1) had "clean hands" when buying the property from the homeowner in the first place (ie. "One who seeks equity must do equity"), and (2) will be prejudiced if their laches defense is not sustained. Markell v. Hilpert shows that an almost four year delay in bringing an action, statnding alone, will not sustain a laches defense; laches as a defense was also unavailable in the U.S. Supreme Court decision in Russell v. Southard (which Markell v. Hilpert cited with approval) when there was evidence that the person asserting laches had somehow acted improperly.

Corporate Entity Doctrine

The reference in Markell v. Hilpert to the corporate entity doctrine, and its "[repudiation] in all cases where it has been insisted on as a protection to fraud or other illegal transactions" is a reminder that, in the context of a foreclosure rescue transaction, if fraud or other illegal conduct on the part of the operator can be shown to exist, the use of a corporate shield in an attempt to protect the operator's personal assets from the liability of a damages award may be vulnerable to attack.

Markell v. Hilpert 140 Fla. 842; 192 So. 392 (Fla. 1939). Florida equitable mortgage alpha Florida bona fide purchaser