The following selected Texas state court cases may shed some light on factors Texas court's look to when recharacterizing a sale leaseback transaction as an equitable mortgage.
In this case, property owner, Johnson, began to experience financial difficulties. His debts and obligations totaled nearly $120,000. Johnson fell behind in payments on a note secured by the premises to his ex-wife, in payments secured by the premises owed to the prior owner, and he found himself facing foreclosure. Johnson ultimately sold the premises to one, Cherry, for $120,000 at a time that it was valued at $320,000, and entered into a contemporaneous leaseback of same for $25,020 for one year with an option to repurchase the premises from Cherry for $132,000.
A trial jury determined that the deal was not a true sale, but rather an equitable mortgage. A state appeals court reversed, and the Texas Supreme Court, agreeing with the trial jury, reversed the appeals court.
A description of the surrounding facts and circumstances in this case, and the court's analysis of the applicable law, and its ruling follow below:
- During this period of financial straits, Johnson attempted to secure loans to help ease his indebtedness. Johnson was unable to obtain financing because of the property's homestead status. Johnson was introduced to F.G. Cherry who originally told Johnson that the Texas State Bank of Tatum could not lend him the necessary funds. Cherry, a feed store owner and a director of the Bank, allegedly told Johnson to contact him again if he was unable to find satisfactory financing elsewhere. Johnson again contacted Cherry as the foreclosure date neared, and Johnson claims Cherry "loaned" him money to cover his debts.
The following documents were executed by Johnson and Cherry in October 1981:
(1) a general warranty deed from Johnson to Cherry and the Bank covering 348 acres in Shelby County;
(2) a one-year lease agreement on the land from Cherry and the Bank to Johnson;
(3) an option from Cherry to Johnson to repurchase the land.
In return for the general warranty deed Johnson received $120,000 from Cherry, and Cherry assumed the $38,000 balance on the note to Johnson's former wife. The lease provided for two semi-annual payments of $12,510 each. Johnson could exercise his option on the acreage for $132,000 and reassumption of the note to his ex-wife. The option was open for six months following the conclusion of the leasehold and was conditioned upon Johnson making the two lease payments.
Johnson failed to make the second lease payment in October 1982 as required. In November 1982, Cherry and the Bank initiated eviction proceedings against Johnson. Johnson sued Cherry and the Bank, claiming that the transaction was a loan disguised as a sale and alleging usurious interest charges on the alleged loan. Cherry and the Bank claimed that the transaction was a sale.
The trial court instructed the jury that a "deed" means "an instrument in writing, duly executed and delivered, conveying real estate," and a "mortgage" is "an instrument in writing which does not dispose of the title to land, but only operates as security for a debt." The jury found that
(1) the instrument was a mortgage;
(2) $12,000 of the $132,000 repurchase price was a charge for lending money;
(3) $20,000 of the $25,020 lease payment was a charge for lending money; and
(4) attorney's fees should be awarded to Johnson.
The trial court rendered judgment that title to the 348 acres was vested in Johnson and awarded Johnson $9,612 with interest. The trial court sua sponte refused to enter a judgment for Cherry and the Bank for the money loaned. Cherry and the Bank appealed.
The court of appeals reversed the trial court's judgment and rendered judgment that Johnson take nothing. After reviewing the instruments signed by Johnson, the court of appeals held as a matter of law there was no debt owed by Johnson nor was Johnson under any obligation to repurchase the property. Without an enforceable obligation or debt, the deed could not be converted into a mortgage. The court refused to impute the existence of a debt based on Johnson's testimony and the jury findings. The court of appeals also disregarded the jury's usury findings since it held no loan or debt was established.
Johnson here contends his testimony that he and Cherry agreed the transaction was actually a mortgage is some evidence the transaction was a loan. Johnson further asserts that when there is some evidence of a loan or indebtedness combined with a finding of fact that the transaction was intended as a loan, the law should impute the existence of a debt, thereby creating a debtor/creditor relationship necessary to every mortgage.
The question of whether an instrument written as a deed is actually a deed or is in fact a mortgage is a question of fact. Wilbanks v. Wilbanks, 160 Tex. 317, 330 S.W.2d 607, 608 (1960); Wells v. Hilburn, 129 Tex. 11, 98 S.W.2d 177, 180 (1936). The true nature of the instrument is resolved by ascertaining the intent of the parties as disclosed by the contract or attending circumstances or both. Wilbanks, 330 S.W.2d at 608; Wells, 98 S.W.2d at 180. Even when the instrument appears on its face to be a deed absolute, parol evidence is admissible to show that the parties actually intended the instrument as a mortgage. Wilbanks; Bradshaw v. McDonald, 147 Tex. 455, 216 S.W.2d 972, 973 (1949). When there is a fact finding that the parties intended the transaction to be a loan, and that finding is supported by probative evidence, the law will impute the existence of a debt. Wells, 98 S.W.2d at 180; Brannon v. Gartman, 288 S.W. 817, 821 (Tex. Comm'n App.1926, holding approved). A mortgage of a homestead not expressly permitted by the Constitution is invalid. TEX. CONST. art. XVI, § 50.
At trial, Johnson testified he understood and intended the transaction to be a loan even though it was written as a sale. He stated that he was indebted to creditors for $118,516.84 of the $120,000 loaned. Johnson further testified that the option-to-repurchase price of $132,000 represented a $120,000 loan plus 10% interest. Cherry testified that the $12,000 represented a return on his money although the transaction was not a loan. Johnson also asserted that the $25,020 lease payment represented 9% interest on the $38,000 note to his ex-wife and 18% on the $120,000 loan.
A licensed real estate appraiser testified that Johnson's acreage with improvements was worth approximately $320,000 when Johnson conveyed the property to Cherry and that a lease on the property was worth at most $4,500 a year. The real estate appraiser also testified she suggested Johnson sell the property during his time of financial difficulties but that he declined her suggestion. Johnson's attorney prepared all the documents in dispute.
In determining there was no debt between Johnson and Cherry, and the deed therefore could not be converted into a mortgage, the court of appeals relied on an earlier court of appeals decision which has been expressly disapproved by this court and on a decision which had relied on the disapproved opinion.
In holding the deed was not actually a mortgage, the court of appeals quoted from McMurry v. Mercer, 73 S.W.2d 1087 (Tex.Civ.App.—Dallas 1934, writ ref'd). In McMurry, three brothers testified that separate deeds given by each to Mercer were actually mortgages. The jury found the deeds were intended as mortgages, but the trial court granted a judgment n.o.v. On appeal, the McMurry court initially stated that parol evidence was inadmissible to contradict the plain language of the deeds, the notes given in return for the deeds, and the option to repurchase agreements made by Mercer. Id. at 1089. Based on this premise, the court then determined that there was no evidence of a debt to support the brothers' contention that the transaction was a mortgage. The McMurry ruling that parol evidence was inadmissible was expressly disapproved by this court in Bradshaw v. McDonald, 216 S.W.2d at 976 (1949).
We also disapprove Rosinbaum v. Billingsley, 272 S.W.2d 591 (Tex.Civ.App. —Eastland 1954, writ ref'd n.r.e.), which cited McMurry as authority. In Rosinbaum, the court examined the disputed documents only and held that the contract was upon its face a sale and not a mortgage. The failure of McMurry, Rosinbaum and the court of appeals here is to recognize that testimony may constitute evidence of the parties' intention concerning the actual nature of the transaction and that the courts must look beyond the face of the deed to ascertain the parties' intent. See Wilbanks, 160 Tex. 317, 330 S.W.2d 607; Bradshaw, 147 Tex. 455, 216 S.W.2d 972.
We now address whether some evidence supports the jury's finding that Johnson and Cherry actually intended the deed as a mortgage. In addition to Johnson's testimony regarding his intentions, the evidence was that the repurchase price was exactly 10% more than the original price; the land was worth almost twice as much as the original "sale" price; the lease price equaled exactly 9% interest on the balance of the note to Johnson's ex-wife assumed by Cherry and 18% interest on the alleged purchase price; Johnson was indebted to other creditors for approximately $119,000 of the $120,000 he received from Cherry; Johnson was within one week of losing the land entirely; and Johnson had told a real estate agent he was not interested in listing his property for sale. Cherry testified that the transaction was intended as a deed and disputed some of Johnson's assertions. It is the province of the jury to weigh the inconsistent testimony and arrive at a conclusion. Texas Employers Insurance Ass'n v. Page, 553 S.W.2d 98, 102 (Tex. 1977). Johnson's testimony and the testimony of the other witnesses constitute some evidence upon which the jury could base its finding that the mortgage was disguised as a deed.
We find the reasoning of a recent court of appeals decision persuasive. In Bantuelle v. Williams, 667 S.W.2d 810 (Tex. App.—Dallas 1983, writ ref'd n.r.e.) the Williamses claimed that a deed signed by them and given to Bantuelle was actually a constitutionally prohibited mortgage on their homestead. The Williamses testified that they intended the transaction as a loan, Bantuelle granted them an option to repurchase for $1000 more than he paid, and the option was exercisable within sixty days of the alleged sale. The trial court, as trier of fact, found that the transaction was a loan. In affirming the trial court's judgment, the court of appeals stated that when there is a finding that the transaction was intended as a loan, the law will impute the existence of a debt, thereby creating the relationship of debtor and creditor. Id. at 818.
The court in Bantuelle explicitly recognized that if only the documents in an apparent fee simple conveyance are examined, no debtor/creditor relationship will be found. The testimony of the parties about their intentions regarding the nature of the transaction plus other evidence adduced from the circumstances surrounding the transaction as here, an option to repurchase, depressed sale price, and the parties' conversations with other witnesses, are relevant in ascertaining the true meaning the parties attributed to the contract.
When there is a finding supported by some probative evidence that a disputed transaction, although written as a deed, is actually a mortgage, the law will impute the existence of an enforceable debt, thereby creating the debtor/creditor relationship necessary to every mortgage. Based on the evidence at trial and on the jury's findings, we impute a debt owed by Johnson to Cherry and the mortgage on Johnson's homestead is null and void.
The next question is whether this court should grant a judgment to Cherry and the Bank in the amount loaned to Johnson. The trial court refused sua sponte to exercise its equitable powers do so. Johnson asserts that because Cherry and the Bank did not plead that they were entitled to a money judgment nor request the trial court to exercise its equitable power to award the judgment, they may not now invoke the equitable powers of this court. Cherry and the Bank argue that they should be granted a judgment and lien against the property and that Johnson should have pleaded that he was willing to repay the money loaned to him. We agree with Cherry.
Restoration or an offer to restore consideration received by one seeking to cancel a deed is a condition precedent to maintaining a suit for cancellation of an instrument. Texas Co. v. State, 154 Tex. 494, 281 S.W.2d 83, 91 (1955). Cf. Wells v. Hillborn, 98 S.W.2d at 180-81. The equitable power of the court exists to do fairness and is flexible and adaptable to particular exigencies, "so that relief will be granted when, in view of all the circumstances, to deny it would permit one party to suffer a gross wrong at the hands of the other." See Warren v. Osborne, 154 S.W.2d 944, 946 (Tex.Civ.App.—Texarkana 1941, writ ref'd). In his testimony at trial Johnson admitted that he was indebted to Cherry and the Bank for the $120,000 loan and for paying the $38,000 balance owed to his former wife. During oral argument, Johnson's attorney stated that Johnson was willing to acknowledge a lien in favor of Cherry.
We are persuaded by the reasoning of another decision involving a suit to convert a deed into a mortgage. See Sudderth v. Howard, 560 S.W.2d 511 (Tex.Civ.App.— Amarillo 1978, writ ref'd n.r.e.). In Sudderth, as here, the plaintiff was successful in establishing that the transaction was a mortgage. The unsuccessful defendant had failed to plead that he was entitled to a judgment equal to the amount of the loan plus interest. In affirming the trial court's award to the defendant, the court stated that Sudderth:persuaded the jury that the transaction was not intended as a sale, thereby securing a cancellation of their deed. It is axiomatic that he who seeks equity must do equity, and one seeking cancellation of an instrument cannot repudiate it and retain the benefits therefrom; he should offer or tender a restoration and the court can accomplish that result by its judgment.
Id. at 516.
An offer by Johnson to repay the loan was a condition precedent to his suit to convert the deed into a mortgage. Although Johnson failed to offer repayment, Cherry did not complain of Johnson's error until he was before the court of appeals. But equity regards that which should be done as done. In order for equity to convert the deed into a mortgage, equity must also award judgment equal to the amount owed to Cherry. Johnson is indebted to Cherry for the $120,000 loaned, for the $38,000 note to his ex-wife which Cherry has paid in full, and for interest. We, therefore, remand this cause to the trial court for a determination of the amount Johnson must reimburse Cherry. We further create a lien in favor of Cherry against Johnson's 148 acres in Shelby County not covered under the homestead exemption. See TEX. CONST. art. XVI, § 50; TEX.PROP.CODE ANN. § 41.001-.002 (Vernon Supp.1986).
Accordingly, we reverse the judgment of the court of appeals, render judgment vesting title to the property in Johnson and remand the cause to the trial court to determine the amounts Johnson must reimburse Cherry and the bank for monies advanced and for interest thereon.
In this case, the Texas appeals court affirmed a trial court judgment rendered after a bench trial finding that a purported 2007 sale of a property owner's ("Gonzalez") homestead to a mortgage company ("RBS"), coupled with a contemporaneous agreement to repurchase said premises was not a true sale, but was a financing transaction, stating the deed was not delivered with the intent to sell or transfer the property, but rather to secure a loan on the property. The appeals court articulated the applicable Texas law below:
- Generally, title to transferred property vests upon execution and delivery of the deed. Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257, 261 (Tex. 1974). Proof that the deed has been filed of record gives rise to a presumption that the grantor delivered the deed with the intent to convey the property according to the terms of the deed. Id. at 261-62 (citing Thornton v. Rains, 157 Tex. 65, 68, 299 S.W.2d 287, 288 (1957)).
This presumption may be overcome by showing (1) that the deed was delivered or recorded for a different purpose, (2) that fraud, accident, or mistake accompanied the delivery or recording, or (3) that the grantor had no intention of divesting himself of title. Id. at 262 (citing Thornton, 157 Tex. at 68, 299 S.W.2d at 288).
The intent of the grantor in delivering the deed is determined by examining all the facts and circumstances preceding, attending, and following the execution of the instrument. Id. Moreover, it is well-settled that a deed absolute on its face may be construed as a mortgage if the evidence, including parol evidence, shows that such was the intention of the parties. Johnson v. Cherry, 726 S.W.2d 4, 6 (Tex. 1987); Bantuelle v. Williams, 667 S.W.2d 810, 815-16 (Tex. App.-Dallas 1983, writ ref'd n.r.e.) (citing Wilbanks v. Wilbanks, 160 Tex. 317, 319, 330 S.W.2d 607, 608 (1960); Barrera v. Gonzalez, 341 S.W.2d 703, 704 (Tex. Civ. App.-San Antonio 1960, writ ref'd n.r.e.)). The circumstances preceding, surrounding, and subsequent to the transaction may all be viewed in determining whether a transaction was truly intended as a fee simple transfer, or merely as a loan or a mortgage. Bantuelle, 667 S.W.2d at 816; see Johnson, 726 S.W.2d at 6 (true nature of instrument is resolved by ascertaining intent of parties as disclosed by contract, attending circumstances or both).
- Although the parties primarily assert their interpretations of the May 2007 agreement, we consider other facts and circumstances. See Stephens County Museum, 517 S.W.2d at 262; Bantuelle, 667 S.W.2d at 816.
Salazar testified that RBS acquired the property for about $7500 in taxes when it was worth about $40,000. Gonzalez testified that, when he contacted RBS, he had $60,000-70,000 of construction costs in the house, the appraisal district valued the property at $71,000, and he would not have sold the property for $7,500. This significant disparity in the value of the property and the amount RBS allegedly paid for it indicates the transaction was a loan rather than a sale. See Wilbanks, 330 S.W.2d at 609.
RBS maintained that while it was the owner of the property, Gonzalez and his family did not live in the house at any time and photographs showed the house was uninhabitable. Salazar testified that from May 2007 until February 1, 2008, RBS acted as the owner and had sole possession and control of the property. Gonzalez asserted that his actions were consistent with a loan rather than a sale of the property. He testified that throughout the construction, he and his children lived in the house and photographs confirmed such. Moreover, during that period, Gonzalez did substantial construction work on the house and bought and installed substantial materials for which he paid. The question of Gonzalez's occupancy and possession, particularly during the construction by RBS, was extensively contested with both parties presenting several witnesses who testified in support of their respective positions.
Retention of possession by Gonzalez is a circumstance indicating a mortgage and not a sale. See Napper v. Johnson, 464 S.W.2d 496, 498 (Tex. Civ. App.-Waco 1971, writ ref'd n.r.e.).
An oversimplified summary of this case follows. It involved the use of a forcible detainer action to boot the successor-in-interest to a property owner who, years earlier, had entered into a sale leaseback-repurchase option transaction with a third party. The reader is referred to the entire ruling for the examination, analysis, and application of Texas law as applied to the facts of this case.
- The relationship between the opposite sides in this case evolved out of a sale and contemporaneous leaseback of real estate coupled with an option to repurchase that was consummated over ten years before the current action commenced.
- The case itself involves the use of a forcible retainer action filed by the buyer/lessor ("Vela") to boot the successor-in-interest ("Gallegos") of the original seller/lessee of the subject premises.
- The initial ruling in the eviction action, which Vela had filed and lost in a justice court, was subsequently appealed in a county court ("The appellate jurisdiction of the county court is confined to the jurisdictional limits of the justice court").
- While the forcible retainer appellate proceeding was pending in county court, Gallegos filed a separate suit to quiet title in a court of general jurisdiction (ie. district court) alleging that the warranty deed and note agreement used to effect the sale leaseback of the premises (for the reasons which Gallegos alleged, and which are set forth in more detail in the court's opinion) were void and illegal.
- Gallegos then filed a motion to dismiss the county court appellate proceeding on grounds that the county court lacked jurisdiction because the title dispute in the district court had to be resolved before the issue of possession in the county court could be addressed.
- The county court denied the motion to dismiss and granted Vela a writ of possession.
- Gallegos filed a petition for writ of mandamus and motion for emergency stay with the Texas appeals court. The motion for emergency stay was granted, thereby temporarily slamming the brakes on the eviction until the court considered the merits of Gallegos claims that the county court lacked jurisdiction to issue a writ of eviction,
From the court ruling:
- In short, there is no leasehold that is independent of the claimed right to title that would buttress Vela's claim of superior possession rights in the property. As part of the same transaction, the lease would also be necessarily void under Gallegos's claims. Vela's claims for possession cannot be separated into claims based on his alleged disparate positions as both lessor and owner of the property. Thus, we agree with Gallegos that the right to immediate possession of the property necessarily required a resolution of the title dispute.
Accordingly, the forcible detainer suit and the title suit could not proceed concomitantly. See, e.g., Dass, Inc., 206 S.W.3d at 200-01; Rice, 51 S.W.3d at 709; see also Chinyere, 2012 WL 2923189, at **4-6.
Because the right to immediate possession of the property necessarily required resolution of the title dispute, the county court had no jurisdiction to enter a judgment regarding the right to possession. See Rice, 51 S.W.3d at 709. The trial court's order of September 19, 2013, denying Gallegos's plea and granting a writ of possession in favor of Vela, was void. See id. We sustain Gallegos's first issue. Having sustained her first issue, we need not address her second issue regarding the deficiency of the notice of the hearing on possession. See TEX. R. APP. P. 47.4.
The Court, having examined and fully considered the petition for writ of mandamus, the response, the reply, and the applicable law, is of the opinion that Gallegos has met her burden to obtain mandamus relief. Accordingly, the stay previously imposed by this Court is lifted. See TEX. R. APP. P. 52.10(b) ("Unless vacated or modified, an order granting temporary relief is effective until the case is finally decided."). We conditionally grant Gallegos's petition for writ of mandamus. We are confident that the trial court will withdraw its order. The writ will issue only if the trial court fails to comply with this opinion.
- Before considering the evidence to determine whether or not it raised an issue of fact for the jury, we shall dispose of respondent's contention that a deed absolute on its face may not be declared a mortgage if the debt secured by it is that of a person other than the grantor.
We have been cited no cases and have discovered none which to our minds support that contention. It is well settled that a mortgage may be given to secure the debt of a third person, 36 Amer.Jur., Mortgages, Sec. 61, and it is equally well settled that a deed absolute on its face may be shown by parol evidence to have been intended as a mortgage given to secure a debt owing to the grantee by the grantor. Bradshaw v. McDonald, 147 Tex. 455, 216 S.W.2d 972.
Had the instrument under review here been in the form of a mortgage, its validity could not be questioned. If it can be shown by parol evidence to have been intended as a mortgage, it must be given the same effect as if it were a mortgage in form.
- We recognize the general rule that parol agreements may not be allowed to destroy, impair or vary the effect of the plain recitals in a deed. But there are a few well recognized exceptions to this general rule. We are here concerned with only one of them. It is settled that parol evidence may be received to show that a purported deed was in fact intended as a mortgage. Silliman v. Oliver, 233 S.W. 867, writ refused; Duty v. Graham, 12 Tex. 427; Mann v. Falcon,25 Tex. 271; McKeen v. James, 87 Tex. 193; Loving v. Milliken,59 Tex. 423; Carter v. Carter, 5 Tex. 93; Harrison v. Hogue,136 S.W. 118, writ denied; Williamson v. Huffman, 47 S.W. 276, writ denied; 41 C.J. 328, Sec. 94.
Therefore, parol evidence was admissible to show that the real purpose of the parties involved in this transaction was merely to create a lien, and having shown such purpose no greater effect will be given the instrument than that designed by the parties.
The fact that the grantor filed the instrument for record is not conclusive that he intended the same to become operative as a conveyance. At most it was only prima facie evidence of such intent, which presumption might be rebutted as it was in this case. Koppelmann v. Koppleman, 94 Tex. 40, 57 S.W. 570; McCartney v. McCartney, 93 Tex. 359,55 S.W. 310; Ford v. Hackel, 124 Tex. 402, 77 S.W.2d 1043.
Among other issues, this case addressed the use of parol evidence in establishing an equitable mortgage.
- Dictum in Sisk v. Random, 123 Tex. 326, 70 S.W.2d 689, suggests a distinction between an absolute deed as a mortgage generally and as a mortgage or "pretended sale" of a homestead, under a construction of Article 16, Section 50 of the Texas Constitution.
This distinction is not warranted. The rule determining the admissibility of parol evidence is the same in both instances, only the result may be different where a homestead is involved.
Instead of being enforced as a mortgage, the instrument will be declared void if violative of the constitutional prohibition against mortgaging a homestead. The Constitution does not change the rules of evidence for determining whether a "pretended sale" is a mortgage; it only declares the vitiating effect of a transaction which is shown by ordinary rules of evidence to be in fact a mortgage of a homestead. Cf. Brannon v. Gartman, Texas Com. App., 288 S.W. 817. As has been observed, the exact question at bar was directly before this court in the recent case of Austin v. Austin, 143 Tex. 29, 182 S.W.2d 355.
- The evidence showed that Mr. and Mrs. Williams' homestead was valued at approximately $25,000 to $30,000 and was subject to a mortgage of about $15,000.
Instead of making the mortgage payments, Mrs. Williams had used the money to play bingo and had fallen behind in the payments. Norma McDowell, an acquaintance of Mrs. Williams, saw the house listed on the foreclosure list and told Mrs. Williams she knew people who would loan her money and gave her Bantuelle's card. Mrs. Williams called Bantuelle and they met to discuss the transaction. How many times they talked and exactly what they discussed was hotly contested.
On the day before the house was to be sold at public auction, Bantuelle, Mrs. Williams, and Mr. Williams, who was unaware of the foreclosure proceedings, met in Norma McDowell's office. At this time Mr. Williams learned that foreclosure was imminent and, after a heated discussion, the documents were signed.
The Williamses testified that the transaction was never intended by them to be a sale, Bantuelle never represented it as a sale, they signed the documents because Bantuelle told them they had to in order to get the money, and the only money they received was a $1,342.52 cashier's check made out to the mortgage company.
Bantuelle testified that he bought the Williamses' house in a conditional sales transaction for $2,342.52, he gave them a cashier's check made out to the mortgage company, and he gave Mrs. Williams $1,000 in $100 bills without Mr. Williams' knowledge. The Williamses have remained in possession of the property at all times.
Construing the deed as a mortgage, the court found: the Williamses had fallen behind in their payments; they had sought out Bantuelle; they desired a loan; there was no independent evidence of a desire to sell; Bantuelle agreed to make a loan; Bantuelle gave the Williams a check for $1,342.52 made out to Fort Worth Mortgage Company; $2,342.52 was to be repaid in sixty days; Bantuelle demanded and received a mortgage, pledge, or hypothecation of the borrowers' property; Bantuelle did not desire to exercise possessory rights until default; the transaction had no independent substance except as a mortgage; and the transaction was a loan transaction. These findings by the court, supported by the evidence, form a basis for judgment in favor of the Williamses that they secured a loan with a deed to their homestead in violation of article XVI of the Texas Constitution.***
The court found that the Williamses only desired a loan and were only seeking a loan, that they were in "necessitous circumstances," that they were without bargaining power and that the transaction had no independent substance save as a mortgage, and that the court found it to be such regardless of the documentary form into which the transaction was cast by way of subterfuge.
The court further found that it accepted the Williamses' testimony that the $1,000 had never been paid because of the strong support it received from circumstantial evidence which included the lack of business records.
After reviewing the evidence, the appeals court made the following conclusion recharacterizing the sale as a loan:
- The undisputed evidence was that the Williamses were delinquent on the first lien by $1,342.52, that a cashier's check in this exact amount was given to the Williamses by Bantuelle, that a deed was prepared by Bantuelle and was signed by the Williamses, that the Williamses had sixty days to "repurchase" the property for $2,342.52, and that they remained in possession of the property at all times.
That $1,342.52 was given to the Williamses and $2,342.52 was to be repaid in sixty days is clear and convincing evidence that this transaction was a loan and not a sale.
- Bantuelle's fifth, seventh, and eighth points of error all attack the trial court's finding that the loan was usurious. He first argues that usury could not have existed in this case as a matter of law because the documents did not reflect that the Williamses had an absolute obligation to repay the loan.
In order to prevail on a claim of usury a party must show that there was 1) a loan of money, 2) an absolute obligation that the principal be repaid, and 3) an exaction of a greater compensation than allowed by law for the use of the money by the borrower. Holley v. Watts, 629 S.W.2d 694, 696 (Tex.1982). It is this second requirement that is of concern here because the documents on their face do not reflect an absolute obligation to repay the money borrowed. Under the documents executed, the Williamses could either exercise their option and redeem their property or not exercise it and incur no further liability.***
The evidence conclusively established that Bantuelle gave the Williamses a check for $1,342.52 to reinstate the past due mortgage payments. As previously stated, the documents do not reflect and express promise by the Williamses to repay the amount advanced; however, since the court accepted the Williamses' testimony that the transaction was a loan, the law will impute the existence of a debt owed by the Williamses to Bantuelle, thus creating the relationship of debtor and creditor. Wells v. Hilburn, 129 Tex. 11, 98 S.W.2d 177, 180 (1936); Brannon v. Gartman, 288 S.W. 817, 821 (Tex.Comm'n App.1926, holding approved). This relationship necessarily carries with it the obligation to repay the loan.
Bantuelle also argues that the Williamses did not meet their burden of proving that the transaction was a subterfuge to conceal the charging of usurious interest. Home Savings Ass'n v. Crow, 514 S.W.2d 160, 166 (Tex.Civ.App.—Dallas 1974), aff'd 522 S.W.2d 457 (Tex.1975). He further contends that the claim of usury was based on an oral contract which under law would not sustain a claim of usury, and that the court erred in basing its finding of usury on circumstantial evidence which improperly placed the burden of proof on Bantuelle. We cannot agree with these arguments.
We must look beyond the form of the transaction to its substance in determining the existence or nonexistence of usury. Gonzales County Savings and Loan Ass'n v. Freeman, 534 S.W.2d 903, 906 (Tex.1976); quoted in Stedman v. Georgetown Savings and Loan Ass'n., 595 S.W.2d 486, 488-89 (Tex.1979).
Interest exists if the transaction includes compensation for the use, forbearance, or detention of money "regardless of the label placed upon it or the artfulness with which it is concealed." Skeen v. Slavik, 555 S.W.2d 516, 521 (Tex.Civ.App.—Dallas 1977, writ ref'd n.r.e.). Accordingly, we hold that when it is clear that $1,342.52 was loaned but the documents reflect that $2,342.52 must be repaid in sixty days to save the plaintiff's home, this is evidence that the transaction was a subterfuge to conceal the charging of usurious interest.
As to Bantuelle's argument that the court improperly placed the burden of proof on him to prove himself innocent of usury, we have also previously held that this was not done. The findings of the court, of which Bantuelle complains, relate to the issue of credibility and not to the burden of proof and, therefore, do not present error.
Bantuelle also argues that the Williamses' allegations of usury cannot be sustained because there are no writings that reflect a loan. Matador Sales Co. v. Wells Co., 583 S.W.2d 679, 681 (Tex.Civ.App.— Houston [14th Dist.] 1979, no writ). He contends that a claim of usury under TEX. REV.CIV.STAT.ANN. art. 5069-1.06 (Vernon Supp.1982-1983), cannot be based on an oral agreement to pay usurious interest. This argument is not applicable to the situation here because the option to repurchase determines the sum to be repaid. This option clearly states that the sum of $2,342.52 is to be repaid in sixty days. Thus Bantuelle's contention that the usury claim is predicated upon an oral agreement is without foundation.
- This case involved a sale of property for $15,000, with a contemporaneous leaseback coupled with a six-month repurchase option for $15,750.
- The property value was estimated at between $50,000 and $60,000.
- The property owner was seeking a loan to pay off his existing mortgage, which was in default and in foreclosure.
- He found someone to provide the needed funds, but that party insisted that the deal be cast in the form of a sale leaseback.
- With the exception of approximately $1,300, the proceeds of the deal went to pay off the existing mortgage in default ($13,000+), the balance was paid for unpaid taxes and transaction costs.
- Throughout the entire term of the deal, the property owner retained possession of the premises.
- The record further discloses that a Mrs. Burns was renting the property from plaintiffs for $50. per month; that on August 28, 1969 lawyer Pritchard notified Mrs. Burns to pay the rent thereafter to defendant Johnson; that she paid to Johnson one month, and thereafter resumed paying rent to plaintiffs. Defendant Johnson, though he has a deed to the property since February 1969 did nothing to collect rent or exercise any possessory rights until August 28, 1969. This is strange conduct if he really considered he bought the property back in February. This is logical conduct if defendant only held a mortgage to the property. Retention of possession by plaintiff is a circumstance indicating a mortgage and not a sale. Wood v. DeWinter, Tex. Civ.App. (NWH) 280 S.W. 303; Ruffier v. Womack, 30 Tex. 332; Hubby v. Harris, 68 Tex. 91, 3 S.W. 558; Bemrod v. Heinzelman, Tex.Civ.App., Er.Dism., 263 S.W. 951.
Finally the record reflects the property is worth $50,000. to $60,000. This is circumstantial evidence that defendant should have known that the transaction was intended to operate as a mortgage. Temple Nat. Bk. v. Warner, 92 Tex. 226, 47 S.W. 515; Moorhead v. Ellison, Er.Ref., 56 Tex. Civ.App. 444, 120 S.W. 1049; Norton v. Lea, Tex.Civ.App. (NWH) 170 S.W. 267; Wood v. DeWinter, supra. See also: Bradshaw v. McDonald, 147 Tex. 455, 216 S.W. 2d 972; Wilbanks v. Wilbanks, Tex., 330 S.W.2d 607; Thigpen v. Locke, Tex. 363 S.W.2d 247; Maxey v. Citizens National Bank, Tex.Civ.App. (NWH), 432 S.W.2d 722.
From the record as a whole we think the finding that defendant did not know or should not have known plaintiffs intended the instrument to operate as a mortgage is against the great weight and preponderance of the evidence. Plaintiffs' contention is sustained. In re Kings Estate, 150 Tex. 662, 244 S.W.2d 660.
The appeals court reviewed a trial jury's finding that a deed, coupled with an option to repurchase, was not intended as a sale, and judgment cancelling the deed. The salient facts are as follows:
- Homer Sudderth and Shirley Sudderth owned three hundred twenty acres of land situated in Yoakum County. One hundred twenty acres were encumbered and the remaining two hundred acres were designated as the homestead.
- The Internal Revenue Service had posted a notice to sell the farm on 2 July 1975 to enforce the collection of a tax lien for almost $6,000 owed by the Sudderths for unpaid income taxes.
- Through a banker to whom he applied for a loan, Homer Sudderth was introduced to Freddie Howard. After some discussion between Sudderth and Howard, an attorney was consulted. Thereafter, Sudderth and Howard executed on 27 June 1975 a written contract whereby Sudderth agreed to sell, and Howard agreed to buy, the 200 acres for $17,400 cash.
- Howard escrowed a sum approximating the amount of the tax lien, and Internal Revenue Service did not proceed with its sale. On 25 July 1975, Homer Sudderth and his wife, Shirley Sudderth, executed a deed conveying their 200-acre homestead to Freddie Howard and his wife, Billie L. Howard, for a stated consideration of $17,400 cash, which was paid.
- On the same date, Homer Sudderth and Freddie Howard executed a written instrument granting Sudderth a first option, to be exercised by written notice given thirty days before 15 December 1975, to repurchase the property for a purchase price of $20,010 cash, plus any accrued taxes, on or before 15 December 1975.
- Sudderth gave Howard written notice dated 11 November 1975 that he intended to exercise, and was ready to perform the terms of, the option to repurchase the 200 acres for the purchase price stated in the agreement.
- On 16 December 1975, Howard notified Sudderth in writing that his tenancy on the land had terminated and demanded delivery of possession on or before thirty days after that date. Commenced 22 December 1975, this suit was filed by the Sudderths against the Howards. The Sudderths alleged that the 25 July 1975 transaction actually was a loan of $17,400 to them with an interest charge of $2,610, which totals the $20,010 repurchase price stated in the option, under the subterfuge of a sale and repurchase option to evade the homestead and usury laws.
- depressed sale price (significant disparity between sale price and property value),
- repurchase option agreed to contemporaneously with the deed purporting to convey title,
- financially distressed property owner (home threatened with forced sale for non-payment of income taxes, other pressing personal living expenses),
- retained possession of the premises by property owner,
- initial contact with the purported buyer evolved from property owner's trip to the bank in search of a loan; the banker from whom the loan was sought referred the property owner to the individual who eventually advanced the desperately needed funds,
- property owners expressed no desire to sell and relinquish possession of the premises (Mr. Sudderth actually expressed his intention to keep the premises in his written notice to Howard informing that he intended to exercise, and was ready to perform the terms of, the option to repurchase the 200 acres for the purchase price stated in the agreement).
- At the jury trial, the evidence was conflicting on the nature of the transaction. Sudderth testified that he entered into the transaction, not to sell his place but to consummate a loan after being told that it was the only way he could get a loan.
He said that if he were willing to sell, he would have asked $60,000. There was evidence that $17,400 was the sum the Sudderths needed for their pressing debts and living expenses.
It is recorded that Internal Revenue Service would not agree to postpone its sale if the contract contained a repurchase option; that Howard, wanting a fifteen percent "increase" or, according to the attorney, "interest" on his money, admitted the option was a part of the transaction from the beginning; and that the only condition on which the Sudderths would sign a deed was if there was an option to repurchase.
Mrs. Sudderth stated that she never discussed selling the land, but a loan was discussed and, when she entered into the transaction, she was under the impression that they were getting a loan. She would not have signed the deed, she said, if she had known it was not a loan.
There was testimony that the recited purchase price, which computes to $87 an acre, was not a fair price when compared to the $150 to $160 per acre worth assigned to the land by Howard and the $250 to $500 per acre value given by other witnesses.
Apparently, there was no discussion of the conditions usual to a transfer of ownership and possession, and the Sudderths planted a wheat crop on the land after the transaction was consummated.
Contrastively, there was testimony that Sudderth was told by an attorney that he could not borrow money on his homestead; and that Howard was not interested in loaning money, but was willing to buy the land for $17,400 which, according to Howard, was the amount Sudderth wanted for the land. The contract prepared a month before the deed and option made no mention of an option to repurchase. The deed was absolute on its face and the option to repurchase did not obligate Sudderth to exercise it.
The attorney who prepared the instruments and closed the transaction testified that no one ever represented, suggested, implied or in any way inferred that the transaction was anything other than a bona fide sale. Although Mrs. Sudderth was under the impression that the transaction was a loan, she acknowledged that she knew she was signing a deed and not a mortgage, and that she knew the difference between them.
Only one issue was submitted to the jury and, in answer thereto, the jury found that the 25 July 1975 transaction was not intended as a sale of the land. Accepting the verdict, the trial court rendered judgment setting aside the deed, granting the Howards recovery from the Sudderths of the sum of $17,400 with interest thereon at the rate of nine percent per annum, and denying all relief not specifically granted.
- With their first cross-point, the Howards attack the jury's finding for lack of any evidence and factually sufficient evidence to support it. The evidence, a summary of which is stated above, has been reviewed under the prescribed standards. There is, of course, some evidence in support of the finding and we cannot say, with due regard for the jury's prerogatives, that the evidence in support of the finding is so weak, or the contrary evidence is so overwhelming, that the finding should be set aside. The first cross-point is overruled.
Footnote: Note that in a recent New Jersey case (Zaman v. Felton, Docket a-60-12 (N.J. Sept.9, 2014)), that state's highest court adopted the following eight factors that it described "as a comprehensive and practical standard to guide trial courts as they determine whether a particular transaction, or series of transactions, gives rise to an equitable mortgage":
- Statements by the homeowner or representations by the purchaser indicating an intention that the homeowner continue ownership;
- A substantial disparity between the value received by the homeowner and the actual value of the property;
- Existence of an option to repurchase;
- The homeowner s continued possession of the property;
- The homeowner s continuing duty to bear ownership responsibilities, such as paying real estate taxes or performing property maintenance;
- Disparity in bargaining power and sophistication, including the homeowner's lack of representation by counsel;
- Evidence showing an irregular purchase process, including the fact that the property was not listed for sale or that the parties did not conduct an appraisal or investigate title;
- Financial distress of the homeowner, including the imminence of foreclosure and prior unsuccessful attempts to obtain loans.
- [T]he court considers not only the form of the transaction itself but circumstances that can motivate a party to disguise a mortgage secured by a property as a sale of land and indications that both parties intend the seller to retain the land notwithstanding the purported sale.