Use Of Devices To Circumvent Usury Statutes - Virginia

The Virginia Supreme Court has, on numerous occasions, indicated its refusal to recognize the form of transactions that are nothing more than devices used by money lenders to conceal usurious loans.

For example, in Patterson v. Shaver, 165 Va. 298 (Va. 1935), the court stated:

• A contract fair upon its face may be but a device to conceal a usurious transaction, but proof of this must appear by clear and cogent evidence.

[citation omitted]

The court in Van Dyke v. Commonwealth, 178 Va. 418, 17 S.E.2d 366 (1941) made the following observations in connection with analyzing a particular contract:

• Contracts of this character are scrutinized with care, and courts are alert to discover specious devices. The debtor often belongs to a class which needs protection, and his needs are sometimes so urgent as to extort from him any conditions which the creditor seeks to impose ...

• The cupidity of lenders, and the willingness of borrowers to concede whatever may be demanded or to promise whatever may be exacted in order to obtain temporary relief from financial embarrassment, as would naturally be expected, have resulted in a great variety of devices to evade the usury laws; and to frustrate such evasions the courts have been compelled to look beyond the form of a transaction to its substance, and they have laid it down as an inflexible rule that the mere form is immaterial, but that it is the substance which must be considered.

In Valley Acceptance Corp. v. Glasby, 230 Va. 422; 337 S.E.2d 291; (Va. 1985), after quoting the above language from Van Dyke (decided 44 years earlier), added the following:

• The need to scrutinize with care loans made to borrowers caught in financial distress continues to be a valid concern. Moreover, it remains necessary today, as in 1941, for courts to look beyond the mere form of a transaction and analyze its substance.

Further, in Chakales v. Djiovanides, 161 Va. 48 (Va. 1933), the court stated:

• The fact that a lender has to borrow from a third person the money loaned by him does not give the lender license to charge the borrower more than the highest lawful rate of interest for the loan of the money. If he does so, directly or indirectly, under whatever guise the charge in excess of lawful interest may be cloaked, the loan is usurious. Richeson v. Wood, 158 Va. 269, 163 S.E. 339, 82 A.L.R. 1189; Roanoke Mtg. Co. v. Henritze, 151 Va. 220, 144 S.E. 430.

In Heubusch v. Boone, 213 Va. 414; 192 S.E.2d 783; (Va. 1972), the court recognized their duty to determine, and be controlled by, the substance of a transaction, rather than its form:

• "In determining the fact of usury, courts are not bound by the form which the transaction took; on the contrary, it is not only the right but the duty of the court to probe behind the written contracts, and to examine all facts and circumstances which shed any light upon the true nature of the transaction." Massie v. Rubin, 270 F.2d 60, 62 (10th Cir. 1959).

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The following case is an example of the type of device that the Virginia Supreme Court has not allowed in circumventing the law on usury.

(In form, this case may not appear to be exactly on point with a contemporary foreclosure rescue transaction. However, I'll let the reader decide how close to the point it is.)

It involved a transaction where a loan of money was made to a property owner in urgent need thereof, and in exchange therefor, the lender received a secured note bearing the maximum interest rate allowed by law and, in addition, an option to buy the borrower's property (a three hundred acre farm) at a price well below fair value. The lower court ruled that the contract was unenforceable, and the Virginia high court affirmed, stating that the contract was unenforceable as being harsh, unconscionable and usurious. The court observed that "[i]f such a contract were sanctioned by this court, it would engraft a dangerous principle upon the law of usury."

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Carter v. Hook, 116 Va. 812; 83 S.E. 386 (Va. 1914)

The facts of this case are summarized as follows:

1) One, Hook, was under necessity to raise money of which he was in urgent need.

2) He went to Carter for the loan, and Carter loaned him $ 1,100, for which he agreed to execute his note bearing 6% interest, and to secure the payment thereof by deed of trust.

3) In addition to receiving a secured note for $1,100, Carter also received an option to buy 300 acres of Hook's property that, by Carter's own testimony, was worth between $8,000 - $10,000.

4) The option price for Hook's property was set at $3,600.

5) The option contract provided that the $ 1,100 with all interest that had accrued thereon should be deducted from the $ 3,600 to be paid for the land, if the option to purchase was exercised within one year from the date of the contract.

6) Within the twelve months he notified Hook that he desired to purchase the property and tendered to him $ 3,600, less the $ 1,100 with interest to date.

7) Hook refused to convey and Carter brought an action for specific performance.

8) Hook alleged a gross and unconscionable inadequacy in price for the property, and inequitable conduct in that, because Carter knew of Hook's "dire pecuniary necessities," Carter took advantage thereof, and harshly and unconscionably oppressed him and caused him to both bind himself to pay interest at the rate of 166.10 per cent, and to also bind himself to agree to sell him the tract of land for $ 3,600.

9) The lower court ruled in favor of Hook, determining that the contract with Carter was unenforceable and accordingly, dismissed Carter's action. Carter appealed.

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In affirming the lower court in ruling that the contract was unenforceable, the Virginia high court first commented that the "option for the purchase of a valuable tract of land [was one] to which Hook's necessities, but not his will, consented."

It then made the following analysis of the usury law and gave its conclusion in the case (bold text is my emphasis):

• Usury is defined in the 2nd edition of Black's Law Dictionary as being, "A premium or compensation paid or stipulated to be paid for the use of money borrowed or returned, beyond the rate of interest established by law." Wherever, therefore, by the terms of a contract, money is loaned and the lender is paid or stipulates to be paid a valuable consideration in excess of the rate allowed by law, the contract is usurious.

• In Stribbling v. Bank of the Valley, 5 Rand. 132, it was held that "When a proposition is made for a loan of money, and the lender will only consent to lend a part of the money wanted on condition that the borrower shall receive stock at a price much above the market value, to make up the deficiency, and the bargain is made on these terms, such contract is usurious."

• That case came again before the Court of Appeals in 7 Leigh 26, where it was held that where there was a sale of stock at an exorbitant price, coupled with a loan of money, arising out of a proposition to borrow money, the sale and the loan constituting one entire contract, inseparably connected with each other, and the one made dependent upon the other, the transaction was usurious.

• The principle of the cases just cited is precisely applicable to the one under consideration. In those cases the loan was made on condition that the borrower should purchase stock owned by the lender at a price much above the market value; while in the case before us the loan was made upon condition that the borrower should sell a farm to the lender at about forty per cent. of its actual value. If such a contract were sanctioned by this court, it would engraft a dangerous principle upon the law of usury. It would enable the lender to say, "You have a horse, a jewel, or a farm, which I crave, and in return for this loan you must pay me six per cent. interest, as allowed by law, and give me an option upon that which I covet."

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In my view, there are arguably enough similarities between the transaction in this case and the typical foreclosure rescue transaction to assert that, in many cases, the latter transaction is a disguised (and possibly usurious) loan based on this case. The differences in the transactions are, arguably, not substantive. They center simply on the specific labels one gives to the legal documents used to consummate each transaction (ie. deed vs. option to buy/repurchase), and a utilization of a simple reversal in the mechanics of the transaction.

In Carter v. Hook, it's the property owner who got to hold absolute title to the property while the lender received an option to buy with terms so favorable that its exercise was a foregone conclusion. In the typical foreclosure rescue transaction, it's the lender (ie. foreclosure rescue operator) who gets to hold (acquire) absolute title to the property, and does so at extremely favorable terms while the property owner gets the option to buy/repurchase (typically with an accompanying leaseback agreement) with terms so unfavorable that either default (on the leaseback) or expiration (on the option to buy / repurchase) is a foregone conclusion. In effect, the property owner's option to repurchase is no option at all, unfair and lacking in good faith, arguably a mere sham.

In either case, however, if the substance of these transactions were to be disregarded, and the transactions were to be sanctioned by the court based on its form, the financially strapped property owner will more often than not end up being an "ex-property owner," stripped of any equity he/she may have had.

Go here for all posts on the equitable mortgage doctrine in Virginia. Virginia equitable mortgage yak

Equitable Mortgage Doctrine In Virginia: Part 3

For whatever its worth, what follows are some excerpts from a number of decisions from the Virginia Supreme Court in which it wrestles with the equitable mortgage doctrine and how it is applied in Virginia.

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In a couple of cases, I've attempted to summarize the facts of the cases where the Virginia Supreme Court reached the conclusion that an absolute conveyance of title to property should be treated , in equity, as a mortgage.

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(Go here for Equitable Mortgage Doctrine In Virginia - Part 2).

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Earp v. Boothe, 65 Va. 368 (Va. 1874)

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(In ruling that the subject transaction between two individuals was a mortgage, and not a conditional sale, the court made the following observations - bold text is my emphasis; text broken up for ease of reading.)

1) "In the case of Robertson v. Campbell & Wheeler, 6 Va. 421, 2 Call 421, Pendleton, J., said:

• "It is often a nice and difficult question to draw the line between mortgages and conditional sales. But the great desideratum which this court has made the ground of their decision, is, whether the purpose of the parties was to treat of a purchase, the value of the commodity contemplated, and the price fixed; or whether the object was a loan of money, and a security or pledge for the repayment intended.""

2) "This rule, laid down by Judge Pendleton, has been adopted in several cases decided by this court. See King v. Newman, 16 Va. 40, 2 Munf. 40; Moss v. Green, 37 Va. 251, 10 Leigh 251; 2 Rob. Prac. (old ed.) 51, and cases there cited."

3) "Tried by these criteria and the authorities above cited, it is plain, that, (except as to the small tract of thirty or forty acres, ...) the transaction between the parties must be treated, as to the main tract, as a mortgage, and not as a conditional sale."

4) "As to this part of the land, there was no negotiation as to the price. Nothing was said as to its value. The negotiation was for a loan of money; and it is so treated by the plaintiff [purchaser] in his bill. [...] The defendant, in his answer, says that he applied to plaintiff to borrow the money to pay [a third party] for the land purchased of him; and that the only terms upon which the plaintiff [purchaser] would agree to lend respondent [seller], was upon the terms set forth in the covenant filed with the bill."

5) "It is thus clear that the transaction between the parties was a borrowing and lending of money, and not for a sale of the land, except as to the small quantity above referred to."

6) "The only object of the negotiation was a loan of money, and security for its repayment. In such cases the contract will be treated as a mortgage, and not a sale."

7) "Such is the unwillingness of courts of equity to sustain forfeitures and limit the right of redemption, that it will never be done, in a case where it appears that the first object of the party was to borrow money and not to sell property."

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Snavely v. Pickle, 70 Va. 27, 29 Gratt. 27 (Va. 1877)

1) "The general rule, that parol evidence is inadmissible to contradict or substantially vary the legal import of a written instrument, in its application to particular cases, is subject to many qualifications or exceptions, real or apparent, now as well established as the rule itself."

2) "Some of the more prominent of these are stated and explained by Judge Allen in a well considered opinion delivered in the case of Towner v. Lucas' Ex'r, 13 Gratt. 705; and amongst the rest, he mentions the exception, if exception it be, that parties to a deed may, by oral evidence, prove that a deed, absolute on its face, was intended to be a mortgage or security for a debt. Whether this be a real exception, or merely apparent and reconcilable with the general rule, as the judge seems to think it is, on whatever ground it rests, it is certainly well established."

3) "There is a well defined distinction between a mortgage and a conditional or defeasible sale, but it is often very difficult to determine whether a particular transaction amounts to the one or the other; and, after all, each case must be decided upon its own circumstances, and in doubtful cases the courts incline to construe the transaction to be a mortgage rather than a conditional sale." Russell v. Southard, 53 U.S. 139; Earp v. Boothe, 24 Gratt. 368, 374, et seq.

4) "[W]henever and as soon as a mortgage is created by the act of parties, equity at once annexes inseparably a right of redemption, independent of and paramount to the will of the parties. It is not meant, however, that after a mortgage has been once created, the mortgagee may not become the purchaser from the mortgagor of his equity of redemption. He may become such purchaser, thus combining the legal and equitable estates, and his purchase will be valid, if, under the jealous scrutiny of a court of equity, it is shown to be for an adequate consideration, that no undue advantage has been taken of the necessities of the mortgagor, and that it is in all respects fair."

5) "It is essential to a mortgage, that there should be a debt to be secured. It may be antecedent to, or created contemporaneously with the mortgage."

6) "The absence of a written obligation is sometimes adverted to as tending to show that a conditional or defeasible sale, and not a mortgage, was intended. This circumstance is certainly entitled to some weight, but alone has no great significance."

7) "The negotiations between the parties have always been much looked to and regarded as important in determining whether they contemplated a mortgage or sale." Earp v. Boothe, supra.

8) "There is another circumstance in this case which has always been regarded as very potent to show that a mortgage was intended and not a sale; and that is, the great disproportion between the value of the land and the amount of money advanced." Russell v. Southard, supra; 2 Minor's Institutes, 306, and cases there cited.

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(Note for Statute of Limitations fans: This case contains a discussion on the time limitation within which an action to redeem an equitable mortgage may be brought (ie. statute of limitations, laches). In this case, the party that successfully asserted that the subject transaction was an equitable mortgage was also successful in overcoming the fact that there was a 30+ year period that passed between the time of the equitable mortgage transaction and the time this case was heard and decided.

Inasmuch as this is an 1877 case, it could very well be that there may be current statutes governing the time within which a redemption can be attempted, thereby making the discussion in the case obsolete. But, then again, maybe not. The discussion is in the case, for anyone interested.)

Go here for other posts on this blog citing Russell v. Southard, 53 U.S. 139 (1851).

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Edwards v. Wall, 79 Va. 321 (Va. 1884)

"It is well settled that a conveyance of land, absolute on its face, may be shown in equity by extrinsic and parol evidence to be, in reality, a mortgage as between the original parties and those deriving title under the grantee, who are not bona fide purchasers for value and without notice. But the presumption, of course, always is that the deed is what on its face it purports to be, and to repel this presumption the evidence must be clear, unequivocal, and convincing." 3 Pom. Eq. 175, § 1196; Phelps v. Seely, 22 Gratt. 573; Snavely v. Pickle, et als., 29 Gratt. 27, and cases cited.

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Tuggle v. Berkeley, 101 Va. 83, 43 S.E. 199 (Va. 1903)

See Equitable Mortgage Doctrine In Virginia - Part 1 for a separate post on this case.

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Bachrach v. Bachrach, 111 Va. 232, 68 S.E. 985 (Va. 1910)

(Note: This case involves a house that the homeowner lost in a foreclosure sale. The ownership of the home went to the winning bidder - the homeowner's brother-in-law.

However, the homeowner claimed that her brother-in-law purchased the house and lot for her under a prior agreement that he would do so, advance the purchase price for her and take the legal title to himself to secure the repayment of the sum so advanced. The third party purchaser denied that there was any such agreement, and claimed that he purchased and paid for the property for himself.

Under the facts of this case, the lower court ruled, and the Virginia Supreme Court affirmed, that there was an arrangement in advance of the public sale, and accordingly, the third party purchaser's interest in the house that he purchased was ruled to be a mortgage.)

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With respect to the equitable mortgage doctrine, the court stated - bold text is my emphasis:

1) "It is well settled in equity, that although a deed is absolute on its face it may be shown by oral evidence that it was intended as a mortgage, and that such evidence is not restricted to cases of fraud, accident or mistake." See Snavely v. Pickle, 70 Va. 27, 29 Gratt. 27; Note to Thornbrough v. Baker, White & Tudor's Lead. Case. in Eq. (4th ed.), Vol. 2, Pt. 2, 1983-1985, and cases cited.

2) "The presumption is that a deed absolute on its face is what it purports to be, and while oral evidence is admissible to show that it is a mortgage, it must be clear and convincing." Snavely v. Pickle, supra; 3 Pom. Eq. Jur. (3rd ed.), sec. 1196.

3) "Whether such an instrument is to be regarded as a mortgage depends upon the circumstances under which it was made, the relations and negotiations between the parties."

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Batchelder v. Randolph, 112 Va. 296; 71 S.E. 533; (Va. 1911)

In this case, the court lower decreed that a certain deed, absolute upon its face, was a mortgage. The Virginia high court affirmed the lower court ruling.

With respect to the equitable mortgage doctrine, the court stated:

• "In Bachrach v. Bachrach, 111 Va. 232, 68 S.E. 985, it is said: "A deed, although absolute on its face, may be shown by oral evidence to have been intended as a mortgage; and such evidence is not restricted to cases of fraud, accident or mistake. The presumption, however, is that a deed absolute on its face is what it purports to be, and the oral evidence offered for the purpose of showing that it is a mortgage must be clear and convincing. Whether it is to be regarded as a mortgage depends upon the circumstances under which it was made, and the relations and negotiations between the parties.""

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The facts of the case are as follows:

1) Randolph & wife owned three tracts of land.

2) They executed a deed of trust on one tract to one, Batchelder, to secure a debt for $350 in 1885.

3) Fifteen years later (in 1900), they found themselves unable to keep up the payments on the one tract and, further, were seven years in arrears on the real estate taxes and were in danger of losing the one tract.

4) Batchelder agreed to pay up all the back taxes and "take up" the $350 note on the one tract in exchange for a transaction involving all three tracts.

5) Batchelder and his attorney subsequently brought to Randolph & wife, a deed conveying all three tracts to Batchelder for $807.66, which was signed by them. It appears that Randoplh & wife believed the paper being presented was another deed of trust, securing the debt for Batchelder's advances for the real estate taxes and the existing $350 note.

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The following factors were cited as weighing in favor of the 1900 deed by husband and wife to Batchelder to be a mortgage:

a) A witness present at the time of the deed signing testified that she heard wife ask Batchelder if he had the "deed of trust" for her to sign, to which he replied, "Yes, madam" - thereby indicating that the Randolph & wife were of the belief that they were signing a security agreement, and not conveying absolute title.

(Batchelder's attorney, a notary public, on the contrary, testified that he was present and heard no such conversation; and that if he had heard it he would not have certified the acknowledgment without being careful to explain the nature of the transaction to the parties signing the deed.)

b) There was proof that the land, at the time of the sale, was worth not less than $ 1,500 or $ 2,000, and that it has greatly increased in value, and at the time of the lower court decree was worth from $10,000 to $15,000 (ie. "great disproportion between the value of the land and the amount of money advanced" - see Snavely v. Pickle, 70 Va. 27, 29 Gratt. 27 (Va. 1877)),

c) the consideration named in the deed is within a few cents of the amount of the debt due under the deed of trust, together with the taxes and interest delinquent upon the land,

d) Randolph & wife remained in undisturbed possession of the property,

e) they exercised all the rights of ownership with respect to it, not only occupying it, but selling timber from it,

f) offering to sell and negotiating for the sale, with the knowledge of Batchelder, the grantee, of portions of the land, and

g) Randolph was shown to have been in very feeble health at the time of the transaction with Batchelder.

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Eggleston v. Eggleston, 127 Va. 334, 103 S.E. 603 (Va. 1920)

1) "The presumption in cases of this kind is that a conveyance is what it purports to be upon its face, and in order to prove that a deed absolute in form is in fact merely a mortgage, clear and convincing proof is required."

2) "But it is equally well settled that what appears to be an absolute conveyance may in equity be shown by sufficient parol evidence to be only a security for a debt. This proposition, as Judge Whittle said in Holladay v. Willis, 101 Va. 274, 278, 43 S.E. 616, 617, "is too well settled to require either discussion or citation of authority to sustain it.""

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Magee v. Key, 168 Va. 361, 191 S.E. 520 (Va. 1937)

See Equitable Mortgage Doctrine In Virginia - Part 2 for separate post on this case.

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Pretlow v. Hopkins, 182 Va. 826, 30 S.E.2d 557 (Va. 1944)

1) "The doctrine that a conveyance of land, absolute on its face, may in equity be shown by extrinsic parol evidence to be a mortgage is, of course, too well settled to require either discussion or the citation of authority to sustain it. But it is equally well settled that the presumption in such cases always is that the deed is what on its face it purports to be; and, in order to repel that presumption, the evidence must be clear, unequivocal and convincing." 3 Pom. Eq., sec. 1196; Phelps v. Seely, 22 Gratt. 573; Snavely v. Pickle, 29 Gratt. 27; Edwards v. Wall, 79 Va. 321." Holladay v. Willis, 101 Va. 274, 278, 43 S.E. 616.

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Johnson v. Johnson, 183 Va. 892; 33 S.E.2d 784; 1945

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Below is the court's recitation of some of the principles of the equitable mortgage doctrine in Virginia. In this case, after an examination of all the detailed facts of the case, the court ruled that a deed, absolute on its face, with contemporaneous agreement or option for re-purchase by grantors, was a mortgage.

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The court made the following observations regarding the equitable mortgage doctrine in Virginia (bold text is my emphasis):

1) "Whether the transaction was a conditional sale or mortgage must be determined upon a consideration of the written instruments, read in the light of the circumstances which surrounded the contracting parties and their disclosed intentions, acts and conduct prior to, at the time of, and subsequent to the execution thereof."

2) "Before discussing the evidence it may be well to advert to certain well settled principles. In Virginia, and in most of the courts of this country, it is allowable "to prove by parol that a conveyance, absolute on its face, was in fact intended only as a security for money; that is, as a mortgage, with the inevitable concomitant of an equity of redemption"". Minor's Institutes, Vol. 2 (4th Ed.) page 336.

3) "It is essential to a mortgage that there be a debt to be secured and an equity of redemption. The character of the transaction is fixed by the intent of the parties at the time the transaction is entered into. The burden of proof normally rests upon the party who alleges that a deed, absolute on its face, is in fact a mortgage, and the evidence in support thereof must be clear, credible and convincing." Snavely v. Pickle, 29 Gratt. (70 Va.) 34; Tuggle v. Berkeley, 101 Va. 83, 43 S.E. 199; Eggleston v. Eggleston, 127 Va. 334, 103 S.E. 603; Magee v. Key, 168 Va. 361, 191 S.E. 520; Pretlow v. Hopkins, 182 Va. 826, 30 S.E.2d 557 ; Annotation L.R.A. 1916B, page 18 et seq.; 90 A.L.R., page 953 et seq.; 36 Am. Jur., Mortgages, Section 136 et seq.

4) "Dean Ribble succinctly states the general rule in his admirable revision of Minor on Real Property (2d ed.) Vol. 1, Sec. 580, as follows:

• "As a conditional sale has no equity of redemption incident to it, the attempt is not unfrequently made to give what is really in purpose and intent a mortgage, the aspect of a conditional sale; and as the terms in which they are conceived are very similar, it is usually requisite to resort to parol evidence, extrinsic to the deed creating the estate, to determine the true character of the transaction. If, upon the whole investigation, it shall appear that a security for money was intended, it is a mortgage, whatever may be its terms; and it will be remembered that to a mortgage the right of redemption is inseparably annexed. And if, on the other hand, it shall, upon the whole, appear that it was a conditional sale, the performance of the condition punctually at the time can not be dispensed with. But doubtful cases are generally declared to be mortgages.""

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5) "The presumption arising where the grantee [the buyer] is in possession that the deed constitutes a sale is a mere presumption and may be repelled by circumstances sufficient to satisfy the mind that a mortgage was intended." Snavely v. Pickle, supra.

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Go here for all posts on the equitable mortgage doctrine in Virginia. Virginia equitable mortgage yak