Equitable Mortgage Doctrine In Oregon

This post is a reprint of a longer post which originally appeared in this blog in March, 2007.

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Long v. Storms
50 Ore. App. 39; 622 P.2d 731
Or. Court of Appeals 1981

In this case, the title holder / money lender (Long) brought a forcible entry and detainer (FED) action in a limited jurisdiction court to recover possession of certain residential premises. The possessors (Storms) answered and counterclaimed, alleging that the warranty deed to the premises given to Long by Storms, should be declared an equitable mortgage, and that the loan transaction between the parties should be rescinded pursuant to the Truth in Lending Act, 15 U.S.C.S. § 1601 et seq.

Because defendants' answer and counterclaims raised an issue regarding the determination of title to real property, the case was transferred to circuit court, which had jurisdiction over such matters (This is another case where a limited jurisdiction court correctly recognized its lack of jurisdiction when transferring the matter to the appropriate forum, rather than granting a judgment of eviction when the equitable mortgage doctrine was asserted).

The circuit court ultimately ruled that the sale by Storms, followed by a 6 month leaseback with a buy back option was an absolute sale, and not a mortgage. On appeal, the Oregon Court of Appeals reversed the lower court decision and, in so doing, quoted from the Oregon Supreme Court in Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or 605, 217 P2d 219 (1950):

• Our decisions establish that if the intent appears that property was conveyed and received as security for the fulfillment of an obligation, the form of the instrument becomes immaterial and the true nature of the transaction may be shown by parol evidence. Neither fraud, mistake nor accident need be proven. The primary inquiry relates to the intention of the parties at the time the transaction was consum[m]ated. Harmon v. Grants Pass Banking & Trust Co., 60 Or 69, 118 P. 188. Mutual intent is to be determined, not alone by the instruments executed, but also by the attendant circumstances and the conditions under which the instruments were delivered. The issue can be resolved only after considering the situation of the parties, the price fixed relative to the value of the property and the conduct of the parties, both before and after the transaction, insofar as such conduct prospectively or retrospectively throws light upon the intent of the parties at the time of the transaction.

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The appellate court when on to set forth the circumstances that the Umpqua court pointed to as indicia that a mortgage was intended:

1. the fact that negotiations originated from an application for a loan,
2. the dire financial straits of the grantor,
3. the grantor's continued possession of the property,
4. the intimate business or social relationship of the parties,
5. failure of the grantee to carefully investigate the title of the grantor,
6. failure of the grantee to ascertain the value of the property,
7. inadequacy of consideration,
8. the lack of bargaining between the parties as to the value of the property with the controlling consideration being the profit inuring to the grantee,
9. the existence of a deed absolute in form, that is accompanied by an option to repurchase, which must be considered together, and with the court stating that the option does not of itself convert the transaction into a mortgage, but it is a circumstance to be considered in favor of the existence of a mortgage.

The appellate court when on to make the following observation in which it again quoted from Umpqua:

"We recognize that a deed, absolute on its face, is presumptively what it appears to be and that evidence must be clear and convincing to support a finding that the deed is in reality a mortgage. [citations omitted] Nevertheless, as pointed out by the Umpqua court,

• * * * while recognizing the rule requiring clear and convincing evidence, the authorities in this and other states have also approved the rule applying peculiarly in courts of equity.

• [R]egardless of the view that may be entertained as to the presumptive character of a deed with a stipulation for a reconveyance, or as to the standard of proof necessary to establish the instrument or instruments as a mortgage, the authorities are in general agreement in support of the proposition that where the question presented is whether the transaction is a mortgage or a conditional sale, as distinguished from the question whether an unconditional sale is involved, evidence of a doubtful import will be construed in favor of the theory that a mortgage was intended, so that in such case a deed with a provision for a reconveyance will be construed as a mortgage rather than as a conditional sale. 188 Or at 646."

(my emphasis added)

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In concluding that the transaction in this case was an equitable mortgage (and thereby reversing the lower court), the Oregon appellate court pointed to the existence of a number of factors in making the following determination:

1. The undisputed evidence shows that defendants were financially distressed at the time of the transaction,
2. that the purported sale price was substantially less than the fair market value of the property,
3. that defendants remained in possession of the property,
4. that plaintiff did not obtain an appraisal on the property until after the purported conveyance, and
5. that there was no bargaining between the parties as to the consideration recited in the "deed." Instead, the controlling consideration was that plaintiff should realize a $ 1,000 profit plus costs.
6. Finally, the form of the transaction was a deed absolute in form accompanied by an option to repurchase. That plaintiff did not require defendants to fill out a credit application does not persuade us that the transaction was a sale, not a loan. Plaintiff knew that defendants were financially distressed and had been unable to obtain a loan. Further, he had defendants' house as security. The sum of these facts squares clearly with our conclusion that the transaction between the parties constituted a loan with a security interest.

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The court also went on to rule that the Federal Truth In Lending Act (TILA) applied in this case, thereby allowing for a rescission of the transaction and an award of attorneys' fees to Storms' legal counsel, to be imposed on and paid by Long.

Because the court arrived at the conclusion that the relationship between the parties was that of debtor-creditor, rather than landlord-tenant, Long's forcible entry and detainer action was dismissed.

Long v. Storms, 50 Ore. App. 39; 622 P.2d 731; (Or. Ct. App. 1981), as modified by Long v. Storms, 52 Or App 685, 629 P2d 827 (1981) (modification related to the attorney fee award under the TILA).

See also this short narrative on the equitable mortgage doctrine in Oregon appearing on the State of Oregon Division of Finance and Corporate Securities (DFCS) website - at http://www.dfcs.oregon.gov/.Oregon equitable mortgage doctrine theta