Friday, August 10, 2007

Equitable Mortgage Cases - Wisconsin - Part 2

78 Wis. 656; 48 N.W. 51
(Wi. 1891)

(revised 8-15-07; 1st & 2nd paragraph corrected 1-17-08 - corrections in red)

This case involved an action of unlawful detainer by a grantee (actually, it was a grantee's successor in interest) under a deed given to secure payment of a debt. As part of the conveyance to the (original) grantee, he and the grantor contemporaneously entered into a separate land contract under which the grantor could buy back the property conveyed upon payment of a certain sum in five equal installments with interest. The grantor made no payments; the grantee conveyed its interest to another - its successor in interest - and the successor thereafter initiated an action of unlawful detainer against grantor to obtain possession of the premises.

After a jury trial, the jury found in favor of the grantor (Editor's Note: the original version of this post inadvertently stated that the jury found in favor of the grantee; correction made 1-17-08) and, on appeal, the Wisconsin Supreme Court affirmed. The ruling was to the effect that (1) the transaction creating the relationship between plaintiff and defendant was an equitable mortgage; and (2) an action of unlawful detainer, under the statutes then in effect, could not be maintained unless the conventional relation of landlord and tenant existed at the time between the plaintiff and the defendant.


In affirming, the court made the following statements and observations (bold text is my emphasis; excerpts broken up for ease of reading):

1) "The question, therefore, recurs whether the facts so submitted to and found by the jury authorized the maintenance of this action of unlawful detainer."

2) "There is no claim that the facts bring the case within the remedy given by sec. 3359, R. S. The contention is, however, that they do bring the case within the provisions of sec. 3358, R. S. 1 This court has repeatedly held that such an action cannot be maintained under that section unless the conventional relation of landlord and tenant exists at the time between the plaintiff and the defendant. Buel v. Buel, 76 Wis. 413, 45 N.W. 324; Menominee R. L. Co. v. Philbrook, ante, p. 142; and cases cited in the opinions."

3) "Such an action is a summary remedy given by statute, but was never intended as a substitute for ejectment or a bill in equity. "A justice of the peace has no jurisdiction to try the title to land. But the facts upon which the right of removal is based may be put in issue by the answer, and the issue so raised may be tried and determined in a justice's court. . . . Even where the facts show that the defendant has an interest in the premises which can only be fully protected in a court of equity, yet, if they are such as to disprove the conventional relation of landlord and tenant, they will be sufficient to defeat such action of unlawful detainer." 76 Wis. 413, 416, 417."

4) "The question to be determined, therefore, is whether the facts found by the jury in the portion of the charge quoted in the foregoing statement, were such as to create the conventional relation of landlord and tenant between the plaintiff and the defendant."

5) "Such facts were to the effect that the quitclaim deed was given to the plaintiff by the defendant and wife in pursuance of an arrangement and agreement that the defendant should retain an interest in the land with the privilege of selling the same, within the time named, for a price exceeding the amount due on the contract, and, in case of such sale, retain such excess; that, in case the plaintiff should sell during said period for an amount more than his due, then he should turn such excess over to the defendant; that if the defendant paid the amount due on the contract during said period, then the plaintiff should reconvey the land to the defendant."

6) "In accordance with numerous adjudications of this court, we must hold that the agreement thus found left in the defendant an equity of redemption in the land, and of course disproved the conventional relation of landlord and tenant."

7) "A few of these cases only are cited. Starks v. Redfield, 52 Wis. 349, 9 N.W. 168; Rockwell v. Humphrey, 57 Wis. 410, 15 N.W. 394; Schriber v. LeClair, 66 Wis. 579; and cases cited in the opinions."

8) "It is contended, in effect, that the absence from the arrangement of any express personal agreement on the part of the defendant to repay the money barred him of all equity of redemption in the premises. But that fact is not always conclusive, as shown by numerous authorities in the cases cited."

9) "Once a mortgage, always a mortgage, is the rule generally recognized in the cases. Ibid. When the facts and circumstances of the transaction are equivocal, the question whether it constitutes a pledge, security, mortgage, or a conditional sale is one of intention. Ibid. Whenever the relation of debtor and creditor is created by the transaction, or previously existed, and by express language or fair implication continues, and the possession is retained by the grantor, the transaction is usually held to be a pledge, security, or mortgage, especially if the value of the property conveyed is considerably in excess of the price allowed. Ibid."

10) "But the cases cited so fully discuss the questions here involved as to require nothing additional in this opinion. It is enough to say that the facts found negatived the existence of the conventional relation of landlord and tenant between the parties. Buel v. Buel, 76 Wis. 413, 45 N.W. 324; Menomonie R. L. Co. v. Philbrook, ante, p. 142."


Go here for other posts on the claiming the equitable mortgage doctrine in actions seeking eviction of a homeowner who signed away a deed as collateral for a loan (ie. actions for ejectment, unlawful detainer).

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

Tuesday, August 7, 2007

Georgia Appellate Court Recharacterizes Sale Leasebacks As Usurious Loans

A Georgia Court of Appeals found that transactions entered into by a finance business with the consumer public that were structured as sale leasebacks of personal property were loans that violated the applicable statutes, and not true sales of property.

The case, Clay v. Oxendine, 285 Ga. App. 50; 645 S.E.2d 553, (Ga. App. Ct., 1st Div., 3-27-07), involved a business with a history of being in the consumer finance business who began engaging in "sale/leaseback" transactions with consumers needing funds, whereby their consumer customers purportedly sold personal property items that they owned to the business, then immediately leased the items back from the business. Following an investigation, the State of Georgia concluded that the "sale/leaseback" transactions were nothing more than disguised, illegal payday loans.

Contrary to the assertions of the illegal payday lender that the form of the transaction, along with all the related paperwork that their customers were required to sign to get the needed funds, should be respected, the Georgia appellate court cited the following quote from Pope v. Marshall, 78 Ga. 635, 4 SE 116 (Ga. 1887), a Georgia Supreme Court decision, for the applicable principle of law that governed in this case:

  • "[W]hether a given transaction is a purchase ... or a loan of money ... depends, not upon the form of words used in contracting, but upon the real intent and understanding of the parties. No disguise of language can avail for covering up usury, or glossing over an usurious contract. The theory that a contract will be usurious or not, according to the kind of paper bag it is put up in, or according to the more or less ingenious phrases made use of in negotiating it, is altogether erroneous. The law intends that a search for usury shall penetrate to the substance."

The Georgia appeals court went on to say, "[W]e do not consider appellants' claims in a vacuum, but rather must look at the totality of the circumstances in analyzing whether appellants' "sale/leaseback" arrangement was a sham transaction to disguise an illegal payday loan scheme."

(Note: Unlike Clay v. Oxendine, which involved personal property, Pope v. Marshall involved a usurious loan secured by real property, possibly indicating that the "substance over form" doctrine, when applied to recharacterize a sale leaseback transaction as a secured loan, operates in the same manner without regard to whether the subject property being sold and leased back is personal property or real property.)


Being that this is another fact-heavy case, I have to pass on going into any specific details of the case, other than to say:

(a) The Georgia appellate court affirmed the trial court decision in ruling that the form of the transaction in this case was to be disregarded, finding that the State of Georgia (the plaintiff-appellee) proved its case that the purpose of the sale leasebacks were simply to disguise loans that bore a rate of interest in excess of the maximum allowed by law.

(b) In support of its decision, the Georgia appeals court cited cases from other jurisdictions where lenders were found to have used sale leasebacks to disguise loans bearing interest in excess of the maximum allowed by law:

(Other cases involving use of a sale leaseback in an attempt to disguise usurious loans, see Usurious Loans Masquerading As Sale Leasebacks? )

Piercing The Corporate Veil

In this case, the court also found the corporate officers individually liable for the corporate transactions, thereby piercing the corporate veil. The following excerpt sets forth the court's view of Georgia law in this regard:

"The concept of piercing the corporate veil is applied in Georgia to remedy injustices which arise where a party has over extended his privilege in the use of a corporate entity in order to defeat justice, perpetuate fraud or to evade contractual or tort responsibility." (Citation and punctuation omitted.) Amason v. Whitehead, 186 Ga. App. 320, 321-322 (367 SE2d 107) (1988).
  • A corporation possesses a legal existence separate and apart from that of its officers and shareholders so that the operation of a corporate business does not render officers and shareholders personally liable for corporate acts. A corporate officer who takes part in the commission of a tort by the corporation is personally liable therefor, but an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein (or if he disregarded the corporate form so as to authorize piercing of the corporate veil).
(Citation and punctuation omitted.) Lawton v. Temple-Warren Ford, Inc., 203 Ga. App. 222, 223 (b) (416 SE2d 527) (1992). See also Kilsheimer v. State, 250 Ga. 549 (299 SE2d 733) (1983). "An officer of a corporation cannot assert that criminal acts, in form corporate acts, were not his acts merely because carried out by him through the instrumentality of the corporation which he controlled and dominated in all respects and which he employed for that purpose." Parish v. State, 178 Ga. App. 177, 178 (1) (342 SE2d 360) (1986).

The significance of the "piercing the corporate veil" doctrine in this case, in my view, is that it is a reminder that those (including foreclosure rescue operators) engaging in usurious transactions purporting to be sale leasebacks cannot expect to shelter themselves and their assets from personal liability by hiding behind their "corporate veils" in cases of illegal or fraudulent conduct.

See also Equitable Mortgage, Bonafide Purchaser, Laches, Corporate Entity Doctrine (Florida), involving the case, Markell v. Hilpert 140 Fla. 842; 192 So. 392 (Fla. 1939). In that case, the Florida Supreme Court addressed the "corporate entity doctrine" in the context of a successful equitable mortgage claim by a financially strapped property owner and it expressly "[repudiated it] in all cases where it has been insisted on as a protection to fraud or other illegal transactions." Georgia equitable mortgage epsilon

Monday, August 6, 2007

Federal Appeals Court Upholds Equitable Mortgage Doctrine In Georgia Case

(revised 8-8-07)
In an opinion issued about two weeks ago, the U.S. Court of Appeals for the Eleventh Circuit affirmed lower court rulings that the contemporaneous execution of a warranty deed to a tract of land and a contract giving the grantee an option to purchase the land within a time certain was not a true sale, but rather, it created a mortgage in which the grantor-seller remained as the true owner of the property and the grantee-buyer was treated as a mortgage lender.
493 F.3d 1336
(11th Cir. 2007)
The following is a summary of the facts of the case. (Like most equitable mortgage cases, the case is relatively "fact heavy").

1) The subject property involved was a ranch that was co-owned (50-50) by two owners, Banks and Cox.

2) Cox decided to buy out Banks' 50% interest pursuant to the terms of a previously executed buy-sell agreement for $875,000 ($350,000 to be applied to Banks' share of an existing $700,000 mortgage encumbering the ranch, plus $525,000 for Banks' equity in the ranch).

3) An attempt by Cox to obtain the necessary financing of over $1.2 million ($700,000 payoff of the entire existing mortgage, plus Banks' equity ($525,000) resulted in local bank agreeing to lend the money provided Cox could get someone to guarantee the loan that was acceptable to the bank.

4) Cox turned to Christopher, Cox' insurance agent and a long-time friend who just also happened to be an experienced real estate investor, to guarantee the loan.

5) The bank then changed its mind about the deal and instead, stated that if it were to make the loan, it would have to be to Christopher, alone.

6) Christopher wanted to help Cox, but was not about to sign a $1.225 million loan on behalf of his friend.

7) Instead, Christopher came up with the following arrangement, to which all parties agree:
(a) Christopher arranged with the existing mortgage lender to assume the existing mortgage ($700,000), (b) Christopher agreed to provide the cash necessary to buy out Banks ($525,000), (c) Christopher received a a warranty deed executed by Cox, as grantor, in favor of Christopher, as grantee, and (d) Christopher and Cox executed an option contract.

8) The contract gave Cox the option to purchase the property within 365 days. According to the contract (as stated in the case):
  • "The purchase price would amount to the sum of the following, with interest at the rate of 9.25% per annum: the costs Christopher incurred in connection with the February 16 closing; the amount he paid to Banks; his mortgage payments to AgSouth; any expenditures he may have made to maintain the Ranch; and a $ 100,000 "kicker." Unless Cox exercised the option, however, he would owe Christopher nothing."
9) At the time Cox was considering to buy out Banks, the property was being appraised at $2,445,700.
10) The court described what happened after the buyout transaction closed as follows:
  • "Christopher did not take possession of the Ranch after the closing. Instead, Cox continued to reside there rent-free, paid the property taxes, and kept the property insured. And Cox immediately set about the task of finding a purchaser for the Ranch -- at a price sufficient to adequately compensate him for his equity in the farm and cover what Christopher would be due under the option contract. Several residential developers expressed an interest in the property; some extended offers to purchase it. The offers came to naught, however. On March 5, 2001, after two extensions, Cox's option to purchase the property expired."
11) Over the next couple of months, Christopher engaged the services of a real estate agent, who found two potential buyers for the ranch; meanwhile, Cox filed for Chapter 11 bankruptcy protection.

12) Cox filed an adversary proceeding against Christopher in which he (Cox), in effect, asserted that he was the true owner of the ranch and that the transaction with Christopher did not convey any title to Christopher, but rather, was a mortgage.

13) Prior to a bench trial, the Bankruptcy Court ordered the ranch sold, and ultimately, was sold at auction for $ 2.8 million. According to the court:
  • "The proceeds of the sale were used to (1) satisfy the balance due on the [existing mortgage], (2) reimburse Christopher for the monies he had paid [the mortgage lender] and Banks, and (3) pay Christopher the $ 100,000 "kicker," interest (at 9.25% per annum) on the funds he had advanced, and his attorney's fees."
14) The question at the bench trial was who was entitled to the balance of the $2.8 million proceeds on the sale of the ranch. The answer turned on whether the transaction was a true sale to Christopher, or whether the deal was nothing more than an equitable mortgage, in which case Cox would have been deemed the true owner of the ranch and, accordingly, entitled to the balance of the $2.8 million.

15) After the bench trial, the bankruptcy judge ruled that, according to Georgia law, the transaction was a mortgage, making Cox the true owner of the ranch, and therefore, the true owner of the balance of the proceeds.

16) On initial appeal, the U.S. District Court affirmed the Bankruptcy Court decision. The 11th Circuit Court of Appeals subsequently affirmed the decisions of the lower courts.


In asserting his position that the transaction was not an equitable mortgage, but rather, a true sale, Christopher based his assertion, in large part, on the fact that there was no debtor-creditor relationship between him and his long-time friend Cox. The court's analysis of the applicable law is reflected in the following excerpts from the 11th Circuit's decision (bold text is my emphasis).

I) "Georgia law has long recognized that the determinative factor in distinguishing a mortgage from an absolute conveyance is the intent of the parties. See Monroe v. Foster, 49 Ga. 514, 519 (Ga. 1873) ("If . . . it appear that the loan of money and security for its repayment was, in truth, the purpose and intent of the parties, it will be treated as such, notwithstanding very strong language may be used at the time to give it a different appearance."); see also Restatement (Third) of Prop.: Mortgages § 3.2 (1997). The intent of the parties in a given scenario is a question of fact. Spence, 49 Ga. at 139 ("The question of intention is one of fact, to be decided from all the circumstances.")."

II) "Christopher contends that, under Georgia law, a transaction cannot be deemed a mortgage unless it creates a creditor-debtor relationship between the parties -- that absent a right to recourse by the purported lender against the purported debtor, the conveyance is what it is on its face, a conditional sale. Historically, the explicit creation of a creditor-debtor relationship, while an important factor to be considered, has not been dispositive. See Conway's Ex'rs and Devisees, 11 U.S. (7 Cranch) at 237."

III) "Christopher argues that the Georgia Supreme Court identified the explicit creation of such a relationship as a requirement for a conveyance to be construed as a mortgage in Haire v. Cook, 237 Ga. 639, 229 S.E.2d 436 (Ga. 1976), and Tingle v. Tingle, 227 Ga. 97, 179 S.E.2d 51 (Ga. 1971)."

IV) "It is true that both Haire, and Tingle place great weight on the purported lender's lack of recourse against the purported debtor, and both cases contain language that supports Christopher's contention."

See Haire, 229 S. E. 2d at 439 ("[T]here is no evidence that the grantee had the right to demand repayment and no evidence that either plaintiff agreed to be obligated to repay the debt. . . . Thus the deed cannot be considered to be a mortgage.");

Tingle, 179 S. E. 2d at 55 ("For a security transaction to exist there must be the relationship of debtor and creditor.")

V) "We agree, however, with the distinctions pointed out by the district court in affirming the bankruptcy court's decision. In neither Tingle nor Haire did the supreme court fully consider all the circumstances surrounding the transaction, as required by Spence. Instead, both courts looked only to the face of the conveyances and finding no indication of an intent to create a mortgage there, the courts concluded that the transactions in question were sales."

VI) "Also, in both Haire and Tingle, there was not, as there is here, a great disparity between the consideration paid for the property and the property's value."

VII) "As the bankruptcy court noted, "reliance on [a recourse obligation] as a defining element of a loan transaction overlooks the fact that numerous secured real estate loan transactions are nonrecourse loans[.]" Express creation of a recourse obligation -- or the absence thereof -- is undoubtedly an important factor to consider, but it cannot not the determinative factor. Instead, a court must look at the intent of the parties in light of all the circumstances surrounding the transaction. Spence, 49 Ga. at 139."

VIII) "We conclude that the bankruptcy court properly held, and the district court properly affirmed, that parties may create a mortgage although the instruments they use suggest that a conveyance of title rather than the creation of a lien."

"A lien may be created even when there is no provision for the payment of the debt. Having reached this conclusion, we now consider whether the bankruptcy court clearly erred in finding that Christopher and Cox intended a mortgage."

IX) "Whether Cox and Christopher intended to create a mortgage is a question of fact. Spence v. Steadman, 49 Ga. 133, 139 (Ga. 1873). In finding that they intended the transaction to create a mortgage, the bankruptcy court relied on numerous subsidiary facts established at the adversarial hearing. Perhaps the most powerful among these was the value of the Cox tract at the time of the February 16, 2000 closing as compared to the value of the consideration paid by Christopher. At the closing, Christopher received title -- subject to Cox's repurchase option -- to a tract that had been valued three months earlier at nearly $ 2.5 million. Christopher assumed the outstanding AgSouth mortgage, which had an unpaid principal balance of around $ 700,000, and paid Banks $ 500,000 for Banks's share of the property's equity. Christopher did not make any payment to Cox for his share of that equity. In other words, Christopher received title to the Cox tract in exchange for consideration equal to about half the property's value: $ 1.2 versus $ 2.5 million."

X) "A gross disparity between the sale price and the actual value of the land is evidence of the parties' intent to create a security interest -- a mortgage -- rather than a sale. See Russell v. Southard, 53 U.S. (12 How.) 139, 147-48, 13 L. Ed. 927 (1851) (holding that extraneous evidence is admissible to inform courts of all material facts surrounding the delivery of the deed, and concluding that "it is of great importance to inquire whether the consideration was adequate to induce a sale"); Conway's Ex'rs and Devisees, 11 U.S. at 241 ("A conditional sale . . . at a price bearing no proportion to the value of the property would bring suspicion on the whole transaction. The excessive inadequacy of price would, in itself, in the opinion of some of the judges, furnish irresistible proof that a sale could not have been intended."); Monroe v. Foster, 49 Ga. 514, 519 (Ga. 1873).

XI) "In Russell, for example, the Supreme Court found that the consideration paid as part of the absolute deed transaction -- less than $ 5,000 for land valued at several thousand dollars more -- was "grossly inadequate" in that "there was no real proportion between the alleged price and the value of the property said to have been sold." Russell, 53 U.S. at 149. Similarly, in this case the consideration paid for the Ranch -- scarcely half its actual value -- was grossly inadequate, indicating that a sale was not really intended."

XII) "The absence of proportionality between the property's value and the consideration Christopher paid is not the only factor the bankruptcy court relied on to find that the parties intended to create a mortgage."

XIII) "The court also noted that Christopher and Cox did not negotiate the value of the property. The
price was set by the amount Cox required under his buy-sell agreement with Banks. Christopher paid the exact amount Cox needed to avoid being compelled to sell the Ranch. The absence of negotiations, coupled with the congruence between the price paid and the amount Cox needed to remain on the Ranch, indicate that Christopher intended the money he provided as a loan to Cox and not as the purchase price for the tract."

XIV) "Likewise, the terms of the repurchase option indicate that the parties intended the transaction to create a mortgage. To exercise his option to re-purchase the tract, Cox had to pay Christopher a $ 100,000 "kicker" and interest at 9.25% on Christopher's total initial outlay. These terms, in the bankruptcy court's view, indicated that Christopher viewed the transaction as an investment opportunity -- a loan."

XV) "In its order affirming the bankruptcy court's decision, the district court noted an additional factor supporting the finding that Christopher and Cox intended to create a mortgage. Following the closing, Cox continued to occupy the Ranch -- and pay the real estate taxes and the insurance premiums on the policies covering the property -- without paying Christopher any rent. Thus, Christopher and Cox continued to act as though Cox owned the property."

XVI) "In light of the foregoing facts, the bankruptcy court's finding that Christopher and Cox intended to create a mortgage was not clearly erroneous. The district court's decision upholding the bankruptcy court's determination is therefore AFFIRMED."


One point to highlight in this case is the fact that the court ruled that, under Georgia law, the debtor-creditor relationship that is required to exist when establishing the existence of an equitable mortgage need not be explicit. The debtor-creditor relationship can be found to exist by implication, provided that all the surrounding facts and circumstances so imply. Further, the decision also affirmed the lower court rulings that there need not be any personal liability on the debt on the part of the property owner asserting the equitable mortgage doctrine in establishing the existence of an equitable mortgage.

This is a key point for those who represent homeowners who find themselves entangled in foreclosure rescue, sale leaseback transactions, where there typically is (a) no formal evidence of indebtedness explicitly creating a debtor-creditor relationship, and (b) no personal liability on the part of the homeowner.
Christopher v. Cox (in re Cox) Case #04-15891, (11th Cir., July 27, 2007); affirming Christopher v. Cox (in re Cox), Case #1:04-CV-1189-RWS, (N.D. Ga. 2004)

The District Court order above has a more detailed analysis than the 11th Circuit decision of the following case law that was applied in this case:
Other cases (not intended to be an all-inclusive list) that support the proposition that the debtor-creditor relationship required in establishing an equitable mortgage need not be explicit and may be implied are:

Postscript for Those In Foreclosure Rescue Litigation in Alabama and Florida Federal Courts

While Christopher v. Cox involved the application of the Georgia equitable mortgage doctrine, the 11th Circuit's partial reliance on the U.S. Supreme Court decisions in Conway’s Executors and Devisees v. Alexander (1812) and Russell v. Southard (1851) may be an indication that those decisions may carry weight in litigating foreclosure rescue cases in the lower Federal courts (Bankruptcy and District Courts) in Florida and Alabama, appeals from which also go to the 11th Circuit. Georgia equitable mortgage epsilon