Friday, July 27, 2007

Equitable Mortgage Doctrine - Ohio

The following (relatively recent) case comes from an Ohio appellate court that applied the equitable mortgage doctrine to prevent a financially strapped homeowner from being evicted from his home. For those in Ohio working to void or set aside foreclosure rescue, sale leaseback, equity stripping arrangements may find some value in this case and, probably more importantly, you may find value from the cases of the Ohio Supreme Court cited therein.

The following summary of the Ohio appellate court is adapted from a post originally appearing here March 21, 2007.

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

The financially strapped property owner (Gross) in this case 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:

Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931); see Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation (Part 1 of this series),

Essex Property Servs., Inc. v. Wood, 246 N.J. Super. 487; 587 A.2d 1337; (N.J. Superior Ct. 1991); see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 5, and

Waters v. Randall, 47 Mass. 479 (Ma. 1843); see Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 6.)

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 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)

Thursday, July 26, 2007

Equitable Mortgage Cases - Wisconsin - Part 1

This equitable mortgage case comes from the Wisconsin Supreme Court which, in addition to touching on some general principles regarding the operation of the equitable mortgage doctrine as applied in Wisconsin, also contains a discussion of a related issue that may be of some value when working to void an equity stripping, foreclosure rescue transaction.
That related issue is the availability of "bona fide purchaser for value and without notice" status to subsequent purchasers and encumbrancers who acquire their interests in a home from a foreclosure rescue operator in an equity stripping transaction. More specifically, the issue is whether such status will be available to them when a foreclosure rescue victim (through counsel) attempts to void the interests in the property of the subsequent purchaser and encumbrancer by asserting the equitable mortgage doctrine, and further asserting that they, when acquiring their subsequent interests in the homeowner's property, had "actual notice" (to be distinguished from "actual knowledge") of the foreclosure rescue victim's rights and equities in the subject property.
All bold text is my emphasis.

44 Wis. 498

Abbreviated Summary of Key Facts of Case

Property owner Jones executed and delivered to a certain Shove a deed of land, absolute on its face; and Shove, at the same time executed and delivered to Jones a separate agreement under seal, witnessed and acknowledged, but not recorded, to reconvey the land to Jones on payment by the latter within four years of $ 2,300.

Some six years later, Shove conveyed his interest in the property to a third party, Brinkman. Throughout the entire period from Jones' deed to Shove and Shove's deed to Brinkman six years later, Jones was in continuous possession of the subject property. Subsequent to Brinkman's receipt of the deed to the property occupied by Jones, Brinkman commenced an action for ejectment against Jones. Brinkman prevailed in his ejectment action in the lower court; the Wisconsin Supreme Court reversed, ruling that the original transaction between Jones and Shove was a mortgage.


The following are excerpts from the case that address various issues in connection with the application of the equitable mortgage doctrine in Wisconsin.

Re: Use of Parol Evidence In Establishing an Equitable Mortgage

1) "This court held in Kent v. Agard, 24 Wis. 378, that, in an action of ejectment, the defendant might show by parol evidence that a deed absolute on its face, under which plaintiff claimed, was in fact given to secure a debt, and was therefore a mortgage; and, if the evidence established the fact, it was a defense to the plaintiff's action."

Re: Use of a Deed Absolute To Secure a Debt, with a Defeasance Either Contained in a Separate Instrument or Made By Parol

1) "In Magoon v. Callahan, 39 Wis. 141 at 141-45, and Sage v. McLaughlin, 34 Wis. 550 at 550-57, it was held that a mortgage in the shape of a deed absolute, with a defeasance in a separate writing, must be foreclosed in the same manner as a pure mortgage, and the premises be sold by order of the court, with like privilege of redemption to the mortgagor."

2) "These cases show that when the conveyance is shown to be a mortgage, no matter what its form, the title does not pass to the grantee, any more than it does where there is an ordinary mortgage. There is no good reason why the form should make any difference as to the rights of the parties."

3) "By a mortgage in its ordinary form, there is an absolute grant of the title to the lands, in terms, to the mortgagee, with a defeasance as a separate clause; the fact that this separate clause is in a separate paper, or by parol, does not in the least enlarge or change the nature of the grant."

4) "The law has definitely said that, no matter what the form of the deed or conveyance, if it be given and intended as a security for a debt due, or for money loaned, it shall be a mortgage, with all its attributes, and nothing more."

Re: The subsequent sale of the subject property by Shove (the equitable mortgagee) to Brinkman (a subsequent 3rd party purchaser) and the assertion by Brinkman that he was entitled to the status of a "bona fide purchaser without notice"

(In this case, Brinkman attempted to assert that, even if the original transaction between Jones and Shove was an equitable mortgage, he (Brinkman) was a bona fide purchaser without notice of Jones' title or interest when he purchased from Shove, thereby claiming to be the actual owner of the property occupied by Jones. The court indicated that whether Brinkman, as a subsequent purchaser of the premises occupied by Jones, was entitled to bona fide purchaser status turned on whether or not Brinkman had "actual notice" of Jones' rights and equities in the property. While not ruling on whether Brinkman had actual notice of Jones' rights and equities, the Wisconsin high court did rule that the lower court should have submitted the issue to the jury upon the questions, (a) whether Brinkman had knowledge of such a state of facts as made it his duty to make inquiry as to the claim of Jones before purchasing, and (b) whether, if he had prosecuted such inquiry with ordinary diligence, it would have led to actual notice of the claim which Jones made to the lands; and that the lower court erred in taking these questions from the jury.)

In reaching that ruling, the court made the following observations and statements of Wisconsin law on the issues of notice and bona fide purchaser:

1) "The actual notice required by the statute is not synonymous with actual knowledge. None of the cases, not even those cited from Massachusetts, hold that, in order to charge the purchaser with actual notice, it must be shown that he had actual knowledge of the precise claim of the person holding the unrecorded defeasance."

2) "We think the true rule is, that notice must be held to be actual when the subsequent purchaser has actual knowledge of such facts as would "put a prudent man upon inquiry, which, if prosecuted with ordinary diligence, would lead to actual notice of the right or title in conflict with that which he is about to purchase."

3) "Where the subsequent purchaser has knowledge of such facts, it becomes his duty to make inquiry, and he is guilty of bad faith if he neglects to do so, and consequently he will be charged with the actual notice he would have received if he had made the inquiry."

4) "[T]his court has held that actual, open and visible occupation, whether known to the purchaser or not, shall be deemed sufficient notice to the purchaser of the rights and equities of such occupant."

5) "This court has repeatedly decided that possession of a party claiming under an unrecorded deed was sufficient notice of his equities to a subsequent purchaser, even though such occupation was unknown to the purchaser. Wicke v. Lake, 21 Wis. 410; Ehle v. Brown, 31 Wis. 405; Warner v. Fountain, 28 Wis. 405; Wickes v. Lake, 25 Wis. 71. Actual knowledge of the record of a deed which is not entitled to record because not properly witnessed, is sufficient notice to a subsequent purchaser, of the equities of the grantee in such defective deed."


In the context of a foreclosure rescue, equity stripping transaction, and whether subsequent purchasers of property from a grantee of a deed given as security for a debt have actual notice of the rights and equities of a foreclosure rescue victim, some of the observations made by the court in this case (both those listed above as well as those contained in the case that I haven't listed above) may have some applicability.

Typically, the financially strapped homeowner remains in possession of the property when the home is signed away to the foreclosure rescue operator or a straw buyer, who then strips the equity out of the property by encumbering it with a new mortgage. It may be that the rights and equities of a foreclosure rescue victim in a transaction that a court declares to be an equitable mortgage may be superior (and, in effect, trump) the rights of both the subsequent purchaser and any subsequent encumbrancer involved in the rescue transaction. If the subsequent purchaser and subsequent encumbrancer are treated as being on actual notice of the rights and equities of the foreclosure rescue victim, they may find themselves and their interests in the subject property voided by a court of equity.


Go here for all posts on the equitable mortgage doctrine in Wisconsin. Wisconsin equitable mortgage zeta

Wednesday, July 25, 2007

Equitable Mortgage Doctrine In Virginia: Part 1

An equitable mortgage case that I recently came across may have some applicability in a foreclosure rescue, sale leaseback arrangement, and particularly, one in which a foreclosure rescue operator, or a straw buyer working with the operator, obtains a third party mortgage as part of the "rescue" transaction.

The three key issues decided in this case were, given the facts and surrounding circumstances of this case:

(a) will the existence of a debt be implied on the part of the party asserting the existence of an equitable mortgage and a corresponding right of redemption,

(b) will the party asserting equitable mortgage and the corresponding right of redemption be estopped from asserting a claim of equitable mortgage and the redemption right, and

(c) will a third party mortgage lender who gives a mortgage on the subject property, given subsequent to the transaction giving rise to the equitable mortgage, be considered an innocent purchaser for value without notice (bona fide purchaser).

The court decided that under the facts of this case, yes, the debt could be implied and need not be expressed; and it also decided that, no, the financially strapped homeowner could not be estopped from claiming the existence of an equitable mortgage and the corresponding right of redemption, notwithstanding her own prior statements and acknowledgements to the contrary. Finally, the court ruled that the third party mortgage lender in this case was not an innocent innocent purchaser for value without notice. The lender's mortgage interest in the transaction was subordinate to the equitable mortgage, and accordingly, took nothing from the transaction relative to the financially strapped homeowner's equitable interest in the home.

An abreviated summary of the basic facts follow.

101 Va. 83; 43 S.E. 199
(Va. 1903)

1) In this case, a widow, who lived in the subject home with six children, was in need of funds to pay delinquent taxes on real property that included her home and a garden lot.

2) In order to obtain money to prevent her interest in the realty from being subjected to the payment of delinquent taxes, she executed a deed to her son-in-law conveying her interest (a life estate) in the home and, in addition, a garden lot in exchange for him paying the delinquent taxes.

3) An agreement to reconvey was included in the deed providing for a reconveyance back to the widow upon payment of the amounts advanced for the taxes and the interest and costs thereon.

4) About five years thereafter, the son-in-law sold the garden lot.

5) During the five or six year period after taking the deed to the widow's home and the lot thereunder, the son-in-law placed a mortgage on the property to secure money he borrowed from a third party lender.

6) During this entire period, the widow had at all times remained in possession of the residence, and that she knew of and made no opposition to the sale of the 'garden lot,' and asserted no direct claim to any part of the proceeds.

7) Three letters of the widow to the son-in-law during this period, according to the court decision, "more or less plainly recognized [the son-in-law] as the owner of the 'home lot', and acknowledged herself to be his tenant, though she refers in these letters to the sale of the garden lot, saying she had hoped the money from that would have relieved him financially."

8) Six years after the initial transfer of the home, at the wish of both the third party lender and the son-in-law, the dwelling house and the lot upon which it is situated was advertised for sale as if it belonged to them.

9) Upon learning of this, the widow went to court and obtained an injunction restraining the sale of the property. Upon a subsequent hearing, the court perpetuated the injunction.

10) The son-in-law appeals.

The Questions Addressed By The Court

"1. Is the deed executed by the [widow] to [son-in-law] a mortgage, and as such subject to the equity of redemption, or is it simply the evidence of a conditional sale which has become absolute by a failure to comply with the conditions?"

"2. If it be construed as a mortgage, has [widow] lost the right to redeem by parting with her equity of redemption, or by such declarations or conduct as will estop her from asserting any interest in the property?


(In considering the case, the Virginia Supreme Court made the following observations and statements of Virginia law - bold text is my emphasis.)

a) "It is true that both forms of sale are conditional, but the vital distinction between them is this:

- the equity of redemption is an inseparable incident of a mortgage, so much so that it cannot be defeated, restrained, evaded or in any other way impaired, even by agreement of parties, as long as the mortgage continues a security, though the mortgagee may become a purchaser of the equity of redemption, and thus combine the legal and equitable estates in his own person. Courts of equity, however, scrutinize transactions of this character with the utmost care, and ever stand ready to set them aside, and grant relief to the debtor whenever a gross inadequacy of price or any circumstances of oppression or mistake appear."

- "On the other hand, in the case of a conditional sale, the non-performance of the condition renders it absolute, both at law and in equity."

b) "In order to determine the true construction of such deed, it is well settled that parol evidence is admissible, and that a deed absolute on its face may be by such evidence converted into a mortgage. See 1 Jones on Mortgages, p. 223, sec. 301. It is a well established rule of equity that in cases of doubt such instruments are construed as mortgages. All the authorities agree as to that."


(The court proceeds to address the first of the two questions set forth above.)


c) "Keeping in mind these preliminary propositions, let us address ourselves to the first question. Is the deed in this case a mortgage, or does it evidence simply a conditional sale?"

d) "Mr. Minor, in Vol. 2 of his Institutes (4th ed.), p. 338, says: 'The marks whereby a mortgage is discriminated from a conditional sale are these: (1) that no price or an inadequate one is set on the property (2) that the grantor remains in possession (3) that there is a covenant or promise obliging the grantor to pay the money.'"

e) "As a legal proposition, too, it cannot be disputed that it is essential to a mortgage that there should be a debt to be secured, and there can be no debt without a promise to pay, either express or implied.

f) "As to the first two marks of a mortgage, it seems that the conditions are adequately met in this case. The price set upon the property is certainly inadequate, as the plaintiff's interest in the 'garden lot' alone, calculated by the tables, was worth more than the consideration in the deed, and it is not disputed that she has never been deprived of the possession of the property.

g) It is strenuously contended, though, by counsel for [son-in-law], that the [widow] must fail on the last proposition, that there was no debt, that there is no covenant or promise to pay by the grantor. Looking to the face of the deed alone this is certainly true, there is no express promise to pay the debt. In Snavely v. Pickle and Others, 29 Gratt. 27, at pp. 34-'5, it is said by the court, 'that whilst it is essential to a mortgage that there should be a debt to be secured, it (the debt) may be antecedent to or created contemporaneously with the mortgage.'

h) "The question then is, Will a court of equity, in the interest of a wise and humane and just exercise of its jurisdiction, imply a promise to pay this debt on the part of the grantor in the deed, or will it become narrow and technical in order that the grantee may claim an absolute title to property worth double what he paid for it? Mr. Minor says, 'a promise is implied if it can be otherwise shown to be a mortgage,' see 2 Minor's Insts. 338; and on pp. 333-'4, he says: 'An action lies on a mortgage to recover the money thereby sought to be secured unless it be stipulated that recourse shall be to the subject mortgaged alone.'"

i) "In view of these authorities, and following what I conceive to be the dictates of justice, I must hold that this last and necessary requisite is not lacking, and that the deed in question is a mortgage."

(The court then proceeds to address the second of the two questions set forth above.)


j) "After all, then, the only real question in the case seems to be the second one stated, to-wit: Has [widow] parted with her equity of redemption, or is she estopped from asserting her right to it now, by long acquiescence in the construction put on the deed by [son-in-law], or by her admissions contained in the letters referred to."

k) "A release of the equity of redemption will not be inferred from equivocal circumstances or loose expressions. It must appear by a writing importing in terms a transfer of the mortgagor's interest, or such facts must be shown as will estop him afterwards to assert any interest. See 1st Jones on Mortgages, sec. 340, p. 249."

l) "The first branch of this proposition has no application to the case at bar, as it is not pretended that [widow] sold her equity of redemption, but it is contended that she is estopped by consenting to the sale of the garden lot, and failing to claim any part of the proceeds, and by her acquiescence in the construction placed upon the deed by [son-in-law].

It is proper to say that the expressions in those letters can hardly be termed loose or equivocal. They constitute a pretty plain acknowledgment of absolute title in [son-in-law], and in them she made no mention of any promise on the part of [son-in-law] to reconvey her life interest, provided she consented to the sale of the garden lot. Is she, then, estopped by her words and actions from making a claim now?

Let us first consider the personality of the contending parties, their situation, their relations to each other, and all the circumstances surrounding them, and in the light of these facts we shall be better enabled to determine this question.

The evidence is that the plaintiff, at the time of these transactions, was a widow with a large family, many of them girls whom she was striving to support by keeping a boarding-house. That she was not a business woman, and was not possessed of enough worldly wisdom to care for her own interests, is manifest from all the facts and circumstances. We should rather infer from the evidence that she was an unselfish woman, unsuspicious, gentle, and confiding in her nature. With her very best efforts she found her home gradually slipping away from her grasp, and knew that she must have help or go under. The words and actions of such a woman under such circumstances cannot be judged by any fixed standard or known rules of conduct applicable to men. To do so would be running counter to all experience, and a violation of truth and justice. It does not appear that [son-in-law] was a man of means, or that he sought to entrap or over-reach her in any way, but he was a business man, well acquainted with the world and its ways, and capable of taking care of himself. She was in debt; she was distressed, and in her trouble she confided in him and gave up all she had to secure him. She doubtless thought that the home would be safe anyway. When he informed her that it must be sold she did not reproach him, she did not remind him of the promise she said he had made; she simply and plaintively said, 'Wait awhile, until I can make arrangements to buy. I must have some place to live, and for my children to come to when not at work.'

He plainly asserted title to the home, and she as plainly admitted it. Must the court hold her to the admission? Did this man and this woman meet on equal terms? Surely, if any evidence of [widow's] utter incapacity to take care of her own interests were wanted, it can be found in her actions immediately after the execution of the deed to [son-in-law].

Although the terms of the deed plainly gave her the right to a reconveyance of the property upon the payment of the debt ($ 600) and interest, she immediately assented to an arrangement by which [son-in-law] was to receive $ 240 a year for the use of the $ 600, or nearly seven times the interest due under the deed. Is it conceivable that she at that time understood her rights, and knew what she was doing? If the decision now is in her favor, [son-in-law] will have received back every cent of his money with interest, and she will keep the home which was provided for her by the foresight and love of her father and husband. If it be against her, she will lose her home without having received anything whatever for it, and [son-in-law] will have received in money and property double the amount loaned, and perhaps more.

In cases of this kind, the courts, both State and Federal, have followed the dictates of humanity and refused to hold parties responsible for admissions made under such circumstances.

Two notable instances of this are to be found in a decision of our Court of Appeals -- Snavely v. Pickle, 29 Gratt. 27, at pp. 34-'5, and a decision of the U.S. Supreme Court, Villa v. Rodriguez, 12 Wall. 323, 20 L. Ed. 406. In both cases the deeds were absolute on their face, but the court on parol testimony construed them to be mortgages. In the latter case the court says: 'Principles almost as stern are applied as those which govern where a sale by a cestui que trust to his trustee is drawn in question. He must hold out no delusive hopes; every doubt must be solved against him.' There are some striking similarities between that case and this. In that case it was a brother dealing with his widowed sister and her children. He had loaned her money on a mortgage, and subsequently procured from them an absolute deed to property worth double the amount of his loan, telling her that he was doing this to save the property, and that he would do right by them. He then leased the property to a third party, and gave him an option to buy at some future time. This third party made valuable improvements on the land, but the court took it from him, and allowed the brother the money he had loaned with interest and gave back the property to the widow and the children, notwithstanding every evidence of previous disclaimer by them. It is not at all probable that either of the parties in the case at bar has been actuated by any unworthy motive. Each has most probably acted under a misapprehension of his or her respective rights in the premises. It is strange that, in the face of this deed, [son-in-law] should always have claimed absolute title to the property, and it is hardly less strange that from the very first [widow] should have seemingly acquiesced in that claim. Probably at that time neither was very particular. They were dwelling harmoniously together as one family, and in a measure seemed to hold all things in common, and neither held the other up to strict rules of business, if, indeed, they understood them. It seems certain, moreover, that when the [widow] wrote those letters she did not understand her rights. She could hardly have known the true value of her life interest in the garden lot, which the defendant, [son-in-law], sold for $ 2,000, as it is a matter of difficult calculation, the principles of which are known almost exclusively to lawyers, and she ought not to be held to strict accountability for the expressions used in her letters, or for her apparent acquiescence in [son-in-law's] construction of the deed. She can claim also that she was the victim of delusive hopes held out to her in the declaration of [son-in-law]; that he only wanted to preserve a home to her and the family during her life, and who can say that she had not reposed in confidence on that promise? If she did, then she is not to be charged with conscious acquiescence. For these reasons, the court is of opinion that the plaintiff, [widow], is now entitled to claim the benefit of her equity of redemption in the property conveyed, and that an account should be taken between the said plaintiff and the defendant, [son-in-law], in which she shall be charged with the money advanced for her or paid by [son-in-law], with interest, and shall receive credit for the value of her life interest in the garden lot, calculated according to the established rule as of the date of the sale thereof, and also for board furnished the defendant and his wife, and any payments otherwise made. As it is manifest from the evidence that upon such a settlement nothing will be due to the defendant, [son-in-law], from the plaintiff, the injunction heretofore awarded in this case will be made perpetual as to the interests of the [widow] and Robbie B. Berkeley, leaving the [third party lender] free to subject to the payment of its debt such interests as the defendant, [son-in-law], may have in the property. It follows, of course, that the deed from [widow] to the defendant, [son-in-law], being construed as a mortgage to which the equity of redemption attaches, and being duly recorded, the defendant, the [third party lender], was affected with notice of the equities of the [widow], and cannot be considered as an innocent purchaser for value without notice, and took nothing under the deed from [son-in-law] save such interest as he had in the property." See also Peugh v. Davis, 96 U.S. 332, 24 L. Ed. 775; 2 Minor's Inst. (4th ed.), p. 337; and 1 Jones on Mortgages, secs. 265, 266, 274 and 275.


In the court's analysis of the facts and circumstances in this case that caused it to reach the decision that it did in favor of the financially strapped homeowner's assertion that the transaction with her son-in-law was a mortgage entitling her to a right of redemption, the court appeared to give strong consideration to more than the three factors that it originally set forth. It appeared to give great weight to the fact that the widow (a) was not experienced in business, (b) "was an unselfish woman, unsuspicious, gentle, and confiding in her nature", (c) was in debt, distressed, and "found her home gradually slipping away from her grasp, and knew that she must have help or go under", and (d) in her trouble she confided in another in her attempt to obtain help in saving the family home and gave up all she had to secure that help. Additionally and by contrast, it observed that the son-in-law, while not appearing to be a man of means, "was a business man, well acquainted with the world and its ways ..."

It seems to me that you can extract the surrounding facts and circumstances faced by the financially distressed widow with six children in this case and apply them to practically any current day foreclosure rescue situation.

Further, in the typical, current day foreclosure rescue, sale leaseback arrangement, in addition to it involving a financially strapped homeowner desperate and willing to sign anything in order to save the family home, the purchase price paid by the rescue operator is commonly grossly inadequate and the homeowner usually retains possession of the home after the transaction is consummated. Further, while the sale leaseback does not involve any expressed indebtedness owed by the homeowner to the operator, this case makes clear that the existence of the debt required in order to find that an equitable mortgage exists can be implied and need not be evidenced by any formal promissory note or other formal evidence of indebtedness. (There are court rulings from other states that hold similarly.)

In conclusion, a quick note on the issue of "innocent purchaser for value without notice" as it relates to a mortgage holder (or any other lienholder, for that matter) who acquires its lienholder's interest in a home subject to a foreclosure rescue transaction. This decision may have some value in connection with the element of many foreclosure rescue transactions where the foreclsoure rescue operator, or a straw buyer working with the operator, takes title to the home facing foreclosure and, as part of the transaction, a third party mortgage is obtained to finance the transaction. This case may give support to the proposition that, given that the financially strapped homeowner typically retains actual possession of the home after the transaction is consummated, such actual possession may constitute "actual notice" to the third party lender that may disqualify said lender from the legal protections that are given to bona fide purchasers for value and without notice the way it appears to have disqualified the lender in this case.

One more quick note. This case supports the proposition that in Virginia, like in many other states, mistake, fraud, deception, oppression, or other acts of overreaching need not be proved by the homeowner asserting the equitable mortgage doctrine and the corresponding right of redemption. In fact, in this case, the court specifically observed that "It does not appear that [son-in-law] ... sought to entrap or over-reach [widow] in any way ..." Based on this, a reasonable inference is that proof of mistake, fraud, deception, oppression or other acts of overreaching on the part of a foreclosure rescue operator could make a financially strapped homeowner's claim of equitable mortgage even stronger.

(modified 10-6-07)
Go here for Equitable Mortgage Doctrine In Virginia - Part 2.
Go here for all posts on the equitable mortgage doctrine in Virginia. Virginia equitable mortgage yak

Tuesday, July 24, 2007

Equitable Mortgage Doctrine Cases - Alabama

To establish the existence of an equitable mortgage, the cases typically require the existence of a debt on the part of the property owner asserting the equitable mortgage claim; said debt to exist after the transaction allegedly giving rise to the equitable mortgage is consummated.

In the first case below, there was no formal evidence of indebtedness owed by the equitable mortgagor / property owner after the subject transaction with the equitable mortgagee.

The main question in this case was:

*** To succeed in esatblishing the existence of an equitable mortgage, does the required debt have to be expressed, or can it be implied by all the facts and circumstances in the case?

The Alabama Supreme Court in this case held that the debt need not be expressed, but can be implied. Further, upon concluding that the arrangement (a realty purchase by a bank from a third party, coupled with a contemporaneous lease with option to buy to the end user - true owner) was an equitable mortgage, the court ruled that the subject transaction was a usurious disguise for the imposition of illegal interest.

The second case below applies some of the established legal principles that apply to the equitable mortgage doctrine in Alabama decided in the context of an ejectment action against the equitable mortgagor / property owner.


Originally posted - March 21, 2007

65 Ala. 382
(Ala. 1880)

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 (bold text is my emphasis):

1) "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].

2) "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.

3) "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."

4) "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]."

5) "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."

6) "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."

7) "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):

1) "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.

2) "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."

3) "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.

4) "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.

5) "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.

6) "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)