Last week, the Court of Appeals of Iowa ruled that a transaction taking the form of a sale of a home by a financially strapped homeowner coupled with a contemporaneously executed leaseback of the home with an option to buy was to be disregarded and, rather, was to be treated as an equitable mortgage.
The facts of the case are as follows:
A) Tullis's father died testate and left a house he owned at 2728 Sheridan Avenue in Des Moines to Tullis. It was the house Tullis had lived in her entire life. The house was valued for tax purposes at $90,000. Tullis found herself in need of money to pay real estate taxes and attorney fees, among other things. In early 2004 Tullis attempted to obtain a loan with the house as security from Iowa Mortgage. Tullis had not been employed for two years, and as a consequence was unable to obtain a loan from Iowa Mortgage. Christy Frank, an employee of Iowa Mortgage who was working with Tullis, said she would help Tullis make other arrangements. Frank contacted her fiance, Andrew Weeks, to help Tullis get the money she needed.
B) Weeks was able to provide Tullis with $40,000. An agreement was reached which included:
- a deed from the estate conveying the property to Weeks for $40,000,
- an agreement signed April 9, 2004, whereby Weeks agreed to sell the real estate to Tullis on contract for $50,000 with a two-year balloon payment required, interest at 10.5%, (the interest rate is actually substantially higher than this because Tullis obtained only $40,000 but is paying interest on $50,000) and a further provision that the loan must be paid in full on the 1st day of May, 2006,
- a lease of the property entered into on May 24, 2004, from Weeks to Tullis to commence April 1, 2004, and run through April 2006 for $520 a month, which included an option for Tullis to repurchase the house. The rent Tullis was to pay was to be credited against the payment to repurchase the property if the option was exercised. The April 9th agreement was made an addendum to the lease.
D) On August 31, 2005, Tullis filed a petition to quiet title and enforce her option claiming (1) specific performance, (2) deed as security, and (3) fraudulent practice. The case went to trial and the district court, among other things, found the deed to the property given to Weeks by Tullis's father's estate did not create a deed of security and was not a mortgage.
In reviewing (and ultimately reversing) the decision of the lower court, the Iowa Court of Appeals set forth the principles of the equitable mortgage doctrine as it exists in Iowa. It then applied those principles to the facts of this case (Text broken up for ease of reading).
1) A conveyance absolute on its face may, by proper evidence, be shown to be but a mortgage. Steckelberg v. Randolph, 404 N.W.2d 144, 148-149 (Iowa 1987); Trucks v. Lindsey, 18 Iowa 504, 504 (1865).
2) It is a well-established rule that, where a conveyance absolute upon its face is accompanied by a contract or agreement, by which the grantee undertakes to reconvey the land to the grantor on specified conditions, and the terms of such agreement or the circumstances under which it was made render it doubtful whether a mortgage or conditional sale was intended, the courts will hold it to be a mortgage. Collins v. Isaacson, 261 Iowa 1236, 1243, 158 N.W.2d 14, 18 (1968); Greene v. Bride & Son Constr. Co., 252 Iowa 220, 224-25, 106 N.W.2d 603, 606-07 (1960); Brown v. Hermance, 233 Iowa 510, 514-15, 10 N.W.2d 66, 68 (1943); Fort v. Colby, 165 Iowa 95, 102, 144 N.W. 393, 395 (1913).
3) It is proper to show by parole evidence a warranty deed was in fact intended as security only, and upon payment of the debt the debtor is decreed to be the legal, as well as the equitable, owner of the property. Collins, 261 Iowa at 1243, 158 N.W.2d at 18.
4) If a deed is to be construed as a security instrument, the supportive evidence must be clear, satisfactory, and convincing. See Lovlie v. Plumb, 250 N.W.2d 56, 59 (Iowa 1977); North v. Manning Trust & Sav. Bank, 169 N.W.2d 780, 784 (Iowa 1969).
5) In arriving at the intention of the parties courts look behind the form of the instruments to the real relationship between the parties. Collins, 261 Iowa at 1243, 158 N.W.2d at 18.
6) The instruments will be read in the light of the surrounding circumstances and the practical construction the parties themselves placed thereon. Id.; Guttenfelder v. Iebsen, 230 Iowa 1080, 1084, 300 N.W. 299, 301-02 (1941).
7) If it is unclear whether a mortgage or absolute deed was intended, we resolve the doubt in favor of an equitable mortgage. Greene, 252 Iowa at 226-27, 106 N.W.2d at 607; Fort, 165 Iowa at 102, 144 N.W. at 395.
8) We are reluctant to recognize as an absolute conveyance an agreement between the parties that continues or creates an obligor-obligee relationship. Steckelberg, 404 N.W.2d at 148-49; see also Koch v. Wasson, 161 N.W.2d 173, 177 (Iowa 1968) (citing Guttenfelder, 230 Iowa at 1084, 300 N.W. at 301).
9) With these principles in mind we look at the following factors:
- intent of the parties to the transaction,
- consideration for transfer, and
- retention of possession.
In determining intent of the parties, courts look behind the form of an instrument to ascertain the actual relationship between participants. Furthermore, a document will be read in light of surrounding circumstances and given such practical construction as is placed thereon by the concerned parties. Lovlie, 250 N.W.2d at 59; see also Collins, 261 Iowa at 1243, 158 N.W.2d at 18; Fort, 165 Iowa at 102, 144 N.W. at 395.
It is clear Tullis's intent was to convey title to her home to Weeks as a security arrangement rather than an absolute conveyance. Weeks was aware that she was seeking such an arrangement and not a sale of her property. Frank, who referred Tullis to Weeks, testified the agreement Tullis and Weeks made, "was more of a mortgage than a rental agreement."
Weeks advanced Tullis $40,000 for a property valued at $90,000. The inadequacy of consideration is a strong circumstance tending to show the transaction was intended to be a mortgage. Koch, 161 N.W.2d at 176-80; Greene, 252 Iowa at 226, 106 N.W.2d at 607.
RETENTION OF POSSESSION
Tullis retained possession of the property. Retention of possession by the grantor is considered a circumstance consistent with the claim of creditor-debtor relationship and inconsistent with the theory of absolute conveyance. Koch, 161 N.W.2d at 176-180; Guttenfelder, 230 Iowa at 1084, 300 N.W. at 301. Resolving all doubts in favor of finding a mortgage, the only conclusion we can reach is that the transaction between Weeks and Tullis created an equitable mortgage. See Brown, 233 Iowa at 514-15, 10 N.W.2d at 68.
An equitable redemption right attaches necessarily and conclusively to any grant given as security. Also, equity forbids an irredeemable mortgage. Lovlie, 250 N.W.2d at 59; see also Koch, 161 N.W.2d at 176. The equity right of redemption is the right of the mortgagor to pay what is owed to the mortgagee and take the property. Koch, 161 N.W.2d at 178-80; Swartz v. State, 243 Iowa 128, 134, 49 N.W.2d 475, 478 (1951).
Based on the analysis of the foregoing factors, the Iowa Court of Appeals ruled that the transaction was an equitable mortgage, thereby reversing the decision of the lower court, and remanded to the lower court to determine the amount owed and, when such amount is determined, to establish a reasonable period for Tullis to redeem.
Representing the homeowner in this case was Laura Lockard, of Iowa Legal Aid, Des Moines, Iowa.
Tullis v. Weeks, Iowa App. Ct., 2007 October 12, 2007.
For another recent case applying the Iowa law on the equitable mortgage doctrine, see in re Litwiller, Bankr. N.D. Ia. (2006), a Federal Bankruptcy case decided in Iowa.
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