Equitable Mortgage Doctrine In South Dakota

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

Myers v. Eich
2006 SD 69; 720 N.W.2d 76
(S.D. 2006)

This case, decided by the South Dakota Supreme Court, involved a transaction between the parties which included a warranty deed to Myers (the lender) and a contemporaneous contract for deed back to the Eichs (the borrower) in exchange for $125,000 advanced to the Eichs in order for them to redeem their property from a recent foreclosure.

Ultimately, the Eichs defaulted, at which point Myers brought a forcible entry and detainer action, alleging that he was the fee simple owner of the property and the Eichs were leasing the premises from him. The Eichs counterclaimed for a declaration that they owned the shop property because the arrangement was actually an equitable mortgage and Myers was required to proceed by a foreclosure action. The lower court agreed with Myers that there was no equitable mortgage, but on appeal, the South Dakota Supreme Court reversed.

In reaching its decision, the South Dakota high court made these initial observations:

• Equity requires that the transaction be treated according to its substance and effect, not its form. Star Enterprise v. Thomas, 783 F. Supp. 1564, 1568 (DRI 1992); see also Brenneman Mech. & Elec., Inc. v. First Nat'l Bank of Logansport, 495 N.E.2d 233, 239 (IndCtApp 1986); Humble Oil & Refining Co. v. Doerr, 123 N.J. Super. 530, 303 A.2d 898, 905-06 (NJ Super Ct Ch Dv 1973).

• A purported absolute conveyance may be recharacterized as a mortgage, depending on the surrounding circumstances and the parties' intent. Adrian, 2002 SD 10, P11, 639 N.W.2d at 533; Abberton v. Stephens, 747 S.W.2d 334, 336 (MoCtApp 1988); Brenneman Mech. & Elec., Inc., 495 N.E.2d at 239.

• One who asserts that an absolute deed is in fact an equitable mortgage must establish by clear and convincing evidence that such deed was intended as security for a debt. Adrian, 2002 SD 10, P11, 639 N.W.2d at 533 (citing Commercial & Sav. Bank v. Cassem, 33 SD 294, 145 NW 551, 552 (1914)).

• Although "[o]ne of the essential elements of a mortgage is debt to be secured," whether a document was intended as security for a debt depends on the intent of the parties at the inception of the relationship. Abberton, 747 S.W.2d at 336 (examine the parties' intent when conveyance was executed); American Nat'l Bank v. Groft, 56 SD 460, 229 NW 376, 379 (1930) ("the broad rule is that whether such transaction is a sale upon a condition or a mortgage depends upon the actual intention of the parties at the time"); 59 CJS Mortgages § 36.

• To ascertain the parties' intent at the inception of a transaction, we identify certain elements that, if present, favor a finding that a conveyance, absolute on its face, constitutes an equitable mortgage: (1) pre-existing debt not extinguished with conveyance; (2) conveyance made with agreement to re-convey; (3) property value considerably more than the debt; (4) property in original transaction not appraised and no discussion of its value in relation to sale price; and (5) dealings between the parties akin to that of creditor-debtor."

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In reversing the lower court decision and ruling in favor of Eich (the borrower / equitable mortgagor) and declaring the arrangement an equitable mortgage (with Myers as equitable mortgagee), the court made these statements:

• Their relationship did not begin because the Eichs were attempting to sell their property, but because they needed money to redeem their property. Myers, a licensed real estate broker, provided them with the necessary money and then dictated the terms of their arrangement. The Eichs agreed to his conditions.

• The fact that the conveyance and contract for deed were executed on the same day creates a strong doubt on whether this transaction was intended to be a sale.

• The circumstances surrounding this case present a multitude of additional factors tending to prove an equitable mortgage.

• First, there is no evidence that Myers ever planned to be the owner of the transferred property after he advanced the $125,000. In fact, the Eichs at all times retained possession of the premises and continued to be the sole operators of the truck repair business on the shop property. Steckelberg v. Randolph, 404 N.W.2d 144, 149 (Iowa 1987) retaining possession of transferred property is "inconsistent with theory of absolute conveyance").

• Second, before the transaction, no discussions were had with respect to the value of the property in relation to the consideration provided and Myers did not have the property appraised. Instead, Myers advanced the exact amount the Eichs needed to redeem their property from First Bank of South Dakota and then charged a $10,000 fee for the transaction. See F. Gregorie & Son, 257 S.E.2d at 703-04 (citing 59 CJS Mortgages §§ 40-41).

• Third, the home and shop properties were valued at approximately $200,000. It defies logic to conclude that the Eichs sold both properties for $ 125,000, and then also agreed to pay an additional $ 10,000 as a fee. Pittwood, 251 P at 286 ("where the disparity between the amount of the indebtedness and the value of the property is so great as to necessarily lead to the conclusion that the deed was intended as security, the courts will, without hesitation, so declare").

• Further evidence that a sale was not intended is the declaration in the letter from Myers to the Eichs summarizing their arrangement. He specifically stated that the conveyance was intended to provide security for the transaction, and he did not suggest that the $ 125,000 was consideration for a purported sale.

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In connection with allowing the use of parol evidence by the Eichs in order to make their case, the court, quoting from their decision in Adrian v. McKinnie, 2002 SD 10, 639 N.W.2d 529 (which, in turn, quoted from their decision in Wilson v. McWilliams, 16 SD 96, 91 NW 453 (1902)) stated:

• [w]here there is a deed, and contract to re-convey, and oral evidence has been introduced tending to show that the transaction was one of security, and leaving upon the mind a well-founded doubt as to the nature of the transaction, then courts of equity incline to construe the transaction as a mortgage. (my emphasis added)

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In concluding its opinion, the court made a comment regarding the fact that the mere existence of a lease in this arrangement doesn't mean that it should be recognized as such and then quoted from its Wilson decision:

"It has long ago been recognized in South Dakota that

• [p]arties seeking to take an undue advantage of mortgagors situated as the plaintiff was in this case almost invariably seek to cover up the transaction by inducing the party to whom the loan was really made to take a lease of the property; hence the mere fact of leasing should have but little weight with a court of equity, which seeks to discover the real transaction." Wilson, 16 SD 96, 91 NW at 457; see also Adrian, 2002 SD 10, P16 n.2, 639 N.W.2d at 535 n.2.

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The South Dakota high court arrives at its decision in reliance on both its prior decisions and court decisions from various other jurisdictions (ten other states, by my count). Accordingly, this decision also appears to seemingly reflect a broad based view of the equitable mortgage doctrine.

Myers v. Eich, 2006 SD 69; 720 N.W.2d 76; (S.D. 2006). South Dakota equitable mortgage kappa