Recharacterizing An Escrowed Contingent Deed, Required As Condition For Granting Forbearance Agreement, As An Equitable Mortgage: Applicable Illinois Law

Yesterday's post involved a court ruling (In re Primes, 9/26/14) that illustrated the application of Illinois law recharacterizing a deed as an equitable mortgage when a bank requires a defaulting homeowner to sign over a deed to be held in escrow as a condition for granting said homeowner a forbearance agreement. In such a case, the bank will be prevented from taking possession of the premises upon a subsequent default by the homeowner without first bringing a foreclosure action.

As noted in yesterday's post, while the principles that underlie the doctrine of equitable mortgage are the same, the line of cases reviewed by the court in this case (involving a forbearance agreement/payment work-out of an existing mortgage) was different from the line of cases often cited when the equitable mortgage doctrine is invoked in Illinois in the context of a sale leaseback foreclosure rescue scheme (compare the line of cases cited below with the line of cases cited in Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013), a sale leaseback foreclosure rescue case).

Following below is the court's articulation of the Illinois state law that it applied in this case to find that, where an escrowed contingent deed is required from a homeowner as a condition for granting a forbearance agreement, the arrangement will be treated as an equitable mortgage:

• A. Contingent Transfers of Property Interests and the Equitable Right of Redemption Under Illinois Law.
  
  1. Illinois Disfavors Attempts to Extinguish the Equitable Right of Redemption or Otherwise Evade Judicial Foreclosure.
  
  Illinois law generally requires judicial foreclosure to involuntarily terminate a mortgagor's interest in real property. 735 ILCS 5/15-1106. "The only method by which a mortgagee can enforce a mortgage to collect the mortgage debt, other than with the consent of the mortgagor, is by a filing a complaint to foreclose the mortgage and sell the mortgaged property." 10 Illinois Real Property Service §54:2 (John Francis Major & Steven J. Cone eds., 2014).
  
  Thus, for example, a lender must bring a mortgage foreclosure action and may not proceed with an action for forcible entry and detainer to enforce its rights under a purported deed given by the mortgagor if the court determines the deed to be an equitable mortgage. First Ill. Nat'l Bank v. Hans, 493 N.E.2d 1171, 1174 (Ill. App. Ct. 1986). While a mortgagor can voluntarily transfer or relinquish his or her interest in the real property, Illinois statutes and established case law generally require the purported transfer to be found void or recharacterized, particularly where the transfer is to a lender and contingent on a future default.
  
  First, Illinois law expressly prohibits and renders void agreements "contained in" or made "in connection with" a mortgage that are intended to circumvent judicial foreclosure. The Illinois Mortgage Foreclosure Law states that "[n]o real estate within this State may be sold by virtue of any power of sale contained in a mortgage or any other agreement, and all such mortgages may only be foreclosed in accordance with this Article." 735 ILCS 5/15-1405.
  
  As the Illinois Supreme Court has explained, the purpose of the statutory predecessor to the current section 1405 was "to prevent sales of the equity of redemption, and no scheme or device to evade the statute or circumvent it by providing for a sale depriving the debtor of his equity of redemption will be upheld." De Voigne v. Chicago Title & Trust Co., 136 N.E. 498, 501 (Ill. 1922). As discussed below, a review of the act as amended and the cases construing it reveals this to continue to be the rule.
  
  Illinois courts generally "take a dim view of any attempt to limit or extinguish the mortgagor's equitable right of redemption." Hans, 493 N.E.2d at 1174. In addition to the statutory restriction on powers of sale, Illinois law also invalidates an agreement made in advance to provide or convey a quit claim deed upon future default or to waive the equitable right of redemption where it is "part of" or "in connection with" an original mortgage. See, e.g., Hans, id. at 1174 (finding a purported assignment of rights under installment contract made in connection with and as security for a loan to be an equitable mortgage and an assignment provision purporting to require mortgagor to execute a quit claim deed in lieu of foreclosure to be "null and void"). From its review of Illinois decisions the Illinois Supreme Court has concluded that the cases have "consistently held that the law favors redemptions." Household Bank, FSB v. Lewis, 890 N.E.2d 934, 939 (Ill. 2008) (collecting cases).
  
  Further, Illinois law treats a purported transfer of deed as a mortgage if it is intended as security to secure a loan. Section 1207 of the Illinois Mortgage Foreclosure Law defines "mortgage" to include "without limitation ... every deed conveying real estate, although an absolute conveyance in its terms, which shall have been intended only as a security in the nature of a mortgage"). 735 ILCS 5/15-1207(c). See also 735 ILCS 5/15-1207(d), (e) (term "mortgage" also includes "equitable mortgages" and "instruments which would have been deemed instruments in the nature of a mortgage prior to the effective date of this amendatory Act of 1987"). As noted in Hans, "[e]xpress words are not necessary to create an equitable mortgage; the only requirement is that it clearly appear from the document that the parties intended that an identifiable parcel of property `be held, given or transferred as security' for the payment of a debt." 493 N.E.2d at 1174 (quoting Hibernian Banking Ass'n v. Davis, 129 N.E. 540 (Ill. 1920)).
  
  Where it is demonstrated that the consideration for the deed is a prior indebtedness and it is demonstrated that the indebtedness was not satisfied by the purported conveyance "it will be presumed that a mortgage was intended." Wiemer v. Havana Nat'l Bank, 335 N.E.2d 506, 511 (Ill. App. Ct. 1975) (citing Wallace v. Greenman, 152 N.E. 137 (1926)). The party asserting that a transfer occurred bears "the burden of proving otherwise." Id. This is because a purported transferee "cannot hold the land absolutely, and at the same time retain the right to enforce payment of the debt, on account of which it was made." Id. at 586 (quoting Sutphen v. Cushman, 35 Ill. 186 (Ill. 1864)).
  
  2. The Doctrine of Equitable Mortgage and Related Principles Apply to Forbearance Agreements.
  
  The doctrine of equitable mortgage applies not only to purported transfers executed at the time money is lent, but also to deeds executed after the time the debt is created such as in the context of an amendment, a refinancing, a forbearance agreement or other work-out situation. "If there is an indebtedness or a liability between the parties, either a debt existing prior to the conveyance or from any other cause, and this debt is still left subsisting ... then the whole transaction amounts to a mortgage." Warner v. Gosnell, 132 N.E.2d 526, 529 (Ill. 1956) (emphasis added). See also Wynkoop v. Cowing, 21 Ill. 570 (Ill. 1859) ("[T]he unrestricted right of redemption will be extended to transactions between the parties, in the nature of security for the debt, subsequent to the original mortgage.").
  
  In such cases, the most important factor used in determining whether a purported deed was intended as a mortgage is whether there remains a debt for which the deed serves as security. The Illinois Supreme Court identifies the essential criterion to be
  
  
  the continued existence of a debt or liability between the parties, so that the conveyance is in reality intended as a security for the debt, or indemnity against the liability. If that liability is left as subsisting, and if the grantor is regarded as still owing, and bound to pay it at some future time, ... then the whole transaction amounts to a mortgage, whatever language the parties may have used, and whatever stipulations they may have inserted in the instruments.
  
  Schwartzentruber v. Stephens, 133 N.E.2d 33, 36 (Ill. 1956) (quotation marks omitted). (quoting Warner, 132 N.E.2d at 529). See also Illinois Trust Co. of Paris v. Bibo, 159 N.E. 254, 257 (Ill. 1927)).
  
  The continuing debt factor "furnishes a sufficient test in the great majority of cases" and it is only "when application of this test leaves a doubt [that it is] necessary to consider other circumstances surrounding the transaction." Wiemer, 335 N.E.2d at 511 (reversing trial court for its reliance on testimony about statements made at the time of the transaction, and finding that plaintiff had failed to overcome presumption that purported deed was a mortgage). These include "every fact or circumstance tending to illustrate the purpose and intent of the parties," such as: (i) the fact of an existing indebtedness in respect to which the deed was executed; (ii) the retention of the evidence of such indebtedness by the grantee in the deed; (iii) that the deed was procured by fraud or oppression or undue advantage; (iv) that there was a loan of money; and (v) the subsequent conduct of the parties in respect to the land. Schwartzentruber, 133 N.E.2d. at 36. The question of whether a document is a deed or a mortgage "depends upon the intentions of the parties in that regard at the time of its execution" and "its character at the time of such delivery becomes fixed as of that time." Id. at 35 (quoting Warner, 132 N.E.2d at 529) (emphasis added).
  
  More than a century ago, the Illinois Supreme Court determined that a conditional quit claim deed executed in connection with a forbearance agreement is a mortgage. Bearss v. Ford, 108 Ill. 16 (Ill. 1883). In Bearss, a landowner borrowed money, giving the lender two promissory notes secured by two deeds of trust in a certain parcel of land. Several years later, the landowner defaulted on required tax and interest payments due under the notes and his lender threatened to foreclose. The lender eventually agreed to accept instead the borrower's quit claim deed conveying the property to the lender subject to the proviso that if the landowner paid the taxes and repaid the amounts owing on the notes and trust deeds within one year with interest, the conveyance would be void and the lender would reconvey the property back to the landowner. In connection with this arrangement the parties also executed a one-year lease whereunder the debtor, to maintain possession of the land, paid to the lender monthly rent which rent was "to be deemed and applied as interest, under the conditions of" the quit claim deed. Bearss, 108 Ill. 16.[4]
  
  The court began its analysis with the acknowledgment of the well-established rule in the law of mortgages "which permits the showing of a deed plain and unambiguous in its terms, and absolute on its face, to be a mortgage or mere security for the loan of money." Id. The court then held that:
  
  
  in construing instruments of this kind, when the consideration is an existing mortgage indebtedness, [courts] are more inclined to treat them as mortgages than when given upon an original advance, and when so treated they will not be regarded as a substitute for the former security, unless the intention to that effect is manifest, and in such cases the original mortgage may be foreclosed notwithstanding the giving of the new one, hence the principle "once a mortgage always a mortgage," has become a leading fundamental doctrine of the law of mortgages. The most satisfactory, and as a general rule the controlling, test in cases of this kind is, does the giving of the new instrument operate as a satisfaction or extinguishment of the mortgage indebtedness? If it does not, such new instrument will be treated as an additional security for the debt, or, in other words, as an additional mortgage. . . .
  
  Id. (emphasis added).
  
  Thus under Illinois law a deed in escrow given in connection with a forbearance agreement is not presumed out of hand to be a true transfer. The primary question for determining whether to treat the purported conveyance as a true transfer or simply additional security is whether the original indebtedness was satisfied or extinguished.
  
  In Bearss, the court noted that the agreements did not expressly provide for satisfaction or extinguishment of the existing debt, that the original note and trust deeds were not surrendered and that the lease expressly recognized the continuing debt. It concluded that the "so-called quitclaim deed was a mere additional security, and not an absolute conveyance of the property." Id. the court noted that whether the parties intended for title to transfer automatically upon a future default without the need for judicial foreclosure was not dispositive, noting that the "parties may have intended, and doubtless did intend, that if the premises were not redeemed before the 1st of July, 1879, [the instrument should become an absolute deed] in order to avoid the expenses of a foreclosure. But it is evident that parties can not, by mere agreement, change the law of the land." Id. Rather, as the court emphasized:
  
  
  nothing is more firmly established in the law of mortgages than that it is not competent for the parties, even by express stipulation, to cut off the right of redemption, and to permit them to make such an instrument an absolute deed upon some future contingency, would simply be cutting off the right of redemption, which, as we have just seen, can not be done." Id.

  
  Illinois courts continue to "adhere[] to the principle ... that a mortgage remains a mortgage until the right of redemption is barred by one of the modes recognized by law and have repeatedly stated that the parties cannot by an express stipulation in the mortgage transform the instrument into an outright conveyance upon default, which would operate to deprive the mortgagor of his redemptive rights." Hans, 493 N.E.2d at 1174 (collecting cases).
  
  For example, in Wiemer v. Havana Nat'l Bank, the court found that a purported deed in connection with a workout agreement was in fact a mortgage. 335 N.E.2d 506 (Ill. App. Ct. 1975). There, a couple executed a trust deed in connection with a refinancing indebtedness secured by real property. The trust deed purported to transfer the real estate into a trust that named one of the debtors' pre-existing lenders as the trustee. The trust deed purported to grant the trustee the power to sell the property and also required the debtors to execute and deliver a quit claim deed. The trust deed further provided that "[a]fter all debts to the banks are paid in full, the trustee shall convey any unsold property to the [debtors]." Id. at 508. When the debtor refused to execute the quit claim deed and challenged the lender/trustee's right to attempt to sell the land, the lender brought an action to compel the debtors to perform and to remove the cloud on the title. On appeal, the reviewing court reversed the trial court's determination that upheld the trust deed was a conveyance, holding that, because the debt to the lender continued after the purported transfer and was not satisfied, the deed must be presumed to be a mortgage. Id. at 511. Further, the appellate court found the power of sale contained in the trust agreement to be void. Id.[5]
  
  Alpine Bank identifies several decisions of lower courts that have upheld the use of a contingent deed in lieu of foreclosure. However, none of these cases directly address the issue now before this court, let alone question the clear authority of the state's highest court. For example, in Joyce v. Fidelity Real Estate Growth Fund II, L.P., 993 N.E.2d 532, 540 (Ill. App. 2013), the appellate court was not asked to examine the nature or effect of the purported deed under Illinois law, but only whether as a matter of Massachusetts contract law there was a breach of the agreement and if so, whether that breach was sufficiently `material' to trigger the lender's right to record the deed.
  
  An earlier appellate decision cited by the bank, Klein v. Devries, concerned a bankruptcy plan provision providing for the debtor to deliver a quit claim deed to be held in escrow. 722 N.E.2d 784 (Ill. App. Ct. 1999). The court held that once the debtor entered into the reorganization plan, "he had no right to cure a default on the mortgage, [the debtor's] title to the property was altered from fee simple to fee simple defeasible." Id. at 787. That case is inapplicable here as it involves the Bankruptcy Code's general pre-emption of state law restrictions on the power to retain, transfer or sell property of the debtor through a plan. See 11 U.S.C. §1123(a)(5). See, e.g., In re Federal-Mogul Global Inc., 684 F.3d 355 (3rd Cir. 2012) (Section 1123(a)(5)(B) preempts anti-assignment clauses in insurance policies).
  
  Here, unlike Klein, the deed in escrow is not a provision of the Debtor's plan. Although the Chapter 13 plan in Ms. Primes' first bankruptcy contained a vague statement that Alpine "has agreed to rewrite the Debtor's mortgage loan," it did not expressly provide for the quit claim deed and her deed and Forbearance Agreement were signed well after the plan was confirmed and automatic stay lifted. (2010 Case, Chapter 13 Plan at §G, ECF No. 38.) In re Prairie Crossing, L.L.C., like Klein, considered issues arising under the Bankruptcy Code and not the effectiveness of a deed under Illinois law. No. 99 Civ. 3558 (N.D. Ill. 2000), 2000 WL 1468755 ("[d]ebtor cites no facts, whatsoever, to support the contention that it retains any interest in the property now that the period for fulfilling the contingency has expired." Id. at *5). Neither Klein nor Prairie Crossing contains any reference to the doctrine of equitable mortgage or to whether a contingent deed in lieu must be recharacterized under Illinois law as a mortgage and, therefore, do not furnish precedent for the issue now before this court. See, e.g., Legal Services Corp. v. Velazquez, 531 U.S. 533, 557 (2001) (Scalia, J., dissent) ("Judicial decisions do not stand as binding `precedent' for points that were not raised, not argued, and hence not analyzed.") (citing United States v. Verdugo-Urquidez, 494 U.S. 259, 272 (1990).
  
  The Flores decision mentioned by Alpine Bank also fails to suggest that Illinois law has changed regarding the Debtor's equitable right of redemption. Eastern Savings Bank, FSB v. Flores, 977 N.E.2d 242 (Ill. App. Ct. 2012), overruled on other grounds by BAC Home Loans Servicing, LP v. Mitchell, 6 N.E.3d 162 (Ill. Mar. 20, 2014). Whether a party can contractually waive service, the question considered by the appellate court in Flores, involves quite different statutes, different doctrines and different policies from those at issue here and cannot support disregarding the principles set down by Bearss and its prodigy as Alpine would now have this court do.[6]
  
  3. Illinois' Statutory Recognition of Deeds in Lieu of Foreclosure Does Not Supplant the Equitable Mortgage Doctrine.
  
  Alpine argues that 735 ILCS 5/15-1401 modifies doctrine of equitable mortgage for post-default transactions because the Illinois Mortgage Foreclosure Law now recognizes quit claim deeds. Section 15-1401, entitled "Deed in Lieu of Foreclosure," provides that a "mortgagor and mortgagee may agree on a termination of the mortgagor's interest in the mortgaged real estate after a default by a mortgagor." 735 ILCS 5/15-1401. Alpine argues that a forbearance agreement, providing as is the case here, for the automatic termination of the mortgagor's interest upon the occurrence of a future contingency is the type of "agreement" contemplated by the phrase "agree on a termination" found in the statute.
  
  This argument does not stand up to close inspection. The term "deed in lieu of foreclosure" as commonly used involves the immediate transfer of the mortgaged property, often in full satisfaction of the debt, by the mortgage in distress. The term involves the procedure whereby a mortgagor/debtor reconveys his equity of redemption in the defaulted property to the mortgagee/creditor in consideration of the creditor's promise to forbear from suing on the debt or foreclosing the security is known as a deed absolute in lieu of foreclosure. R.R. Powell & P.J. Rohan, Powell on Real Property § 37.44 (2014).
  
  Alpine does not identify authority to suggest that Section 15-1401 was intended to permit and make enforceable `contingent' deeds in lieu of foreclosure or that the statute was otherwise intended to modify the doctrine of equitable mortgage. To the contrary, Illinois courts have repeatedly concluded that the Illinois Mortgage Foreclosure Law enacted in 1987 "was intended by its drafters to integrate into one statute as much of the law of mortgage foreclosure as possible" and to "codif[y] the prior statutory law and case law on the subject." Olney Trust Bank v. Pitts, 558 N.E.2d 398, 402 (Ill. App.1990) (internal citation omitted). While the 1987 amendment to the statute for the first time explicitly references deeds in lieu of foreclosure, id., the use of such instruments have long been treated by Illinois common law. See, e.g., Richardson v. Hockenhull, 85 Ill. 124 (Ill. 1877).
  
  Generally, the "premise behind deeds in lieu of foreclosure [was] to allow a borrower to transfer title to the lender in exchange for a release of his or her obligations under the note and mortgage" and the "IMFL does not alter that which had been implicit in prior practice." Olney, 558 N.E.2d at 402. Neither the terms of the 1987 amendments nor their subsequent construction by the courts suggest that the practice or applicable doctrine has been altered. If Section 15-1401 makes any change from prior practice, it is to make "it absolutely clear that a deed in lieu of foreclosure releases all mortgagors from personal liability" except as otherwise provided in the statute. Id. Alpine offers no authority to suggest that the 1987 amendments to the statute were intended to vitiate the doctrine of equitable mortgages as long articulated by Illinois courts or the common law equitable doctrines prohibiting contractual limitations on a mortgagor's equitable right of redemption.

For the ruling, see In re Primes, Bankr. No. 13-B-83310 (Bankr. N.D. Ill., Western Div. September 26, 2014).

Illinois Court Applies Equitable Mortgage Doctrine To Reject Bank's Attempt To Improperly Circumvent Judicial Foreclosure By Requiring Escrowed Contingent Deed To Be Recorded Upon Future Default As Condition To Grant Homeowner Forbearance Agreement

A recent court ruling by a U.S. Bankruptcy Court in Rockford, Illinois (In re Primes, 9/26/14) illustrates how the doctrine of equitable mortgage applies in the context of a transaction involving a financially distressed homeowner facing the loss of her home, and the lender currently holding the mortgage and threatening foreclosure.

More specifically, and given the particular facts of this case, it illustrates how a bank requiring the defaulting homeowner to sign over a deed to be held in escrow in connection with obtaining a forbearance agreement will be prevented from taking possession of the premises upon a subsequent default by the homeowner without first bringing a foreclosure action. In such a case, the bank is prohibited from obtaining possession of the premises by simply recording the escrowed deed and booting the homeowner through a forcible detainer (eviction) action. Such a scheme was looked at by the court as nothing more than the bank's attempt to improperly extinguish the homeowner's equitable right of redemption to evade judicial foreclosure.

An oversimplified summary of the fact follows (the reader is referred to the court's opinion for a full recitation of all the minutiae):

1. After the homeowner defaulted on her payments on her home mortgage, the bank commenced a foreclosure proceeding.
   .
2. The homeowner filed for Chapter 13 bankruptcy to halt the foreclosure action, and subsequent thereto, reached a forbearance agreement with the bank that called for regular monthly payments and a balloon payment.
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3. In addition, the bank required the homeowner to sign over a quit claim deed (which purported on its face to be in lieu of foreclosure) to the bank as security for homeowner's performance of her obligations pursuant to the forbearance agreement.
   .
4. The bank agreed to hold the deed in escrow, but that in the event of homeowner's default, the bank was authorized to record the deed and take possession of the home.
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5. As part of the agreement, the bank dismissed the ongoing foreclosure action.
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6. After approximately two years of monthly payments on the forbearance agreement (and shortly after the bankruptcy case was closed and the Chapter 13 trustee was discharged), the homeowner defaulted again.
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7. The bank sent notice to the homeowner that if the payment default was not timely cured, it would record the deed held in escrow.The homeowner failed to cure; the bank then recorded the deed.
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8. The homeowner then filed a second Chapter 13 case, (a) proposing to make up the back payments to reinstate the forbearance agreement, and (b) claiming that she was still the owner of the home, despite the deed she signed over to the bank a couple of years earlier.

The court described the legal issue to be addressed as follows ("Alpine" is Alpine Bank & Trust Co., the mortgage lender, Mrs. Primes is the Debtor/homeowner):

• Alpine argues that the pre-petition recording of the quit claim deed transferred ownership in the Mila Ave. property to the bank. Alpine thus contends that as of the petition date the Debtor had no interest in her residence and no right to redeem the property, and, therefore, the property is not necessary for her reorganization. See, e.g., Colon v. Option One Mortgage Corp., 319 F.3d 912 (7th Cir. 2003) (automatic stay may be lifted because at the time debtor filed her plan under Chapter 13 she "had no right to redeem").
  
  Ms. Primes argues in response that under Illinois law the quit claim deed given in connection with the Forbearance Agreement must be treated as an equitable mortgage, that the bank's recording of the deed without judicial foreclosure is ineffective to transfer her ownership interest, and that she is entitled to cure her default and satisfy the bank's secured claim through her Chapter 13 plan.
  
  Under the facts presented, the court finds the Debtor's argument to be correct under Illinois law.

As the basis for its conclusion, the court goes through an extensive analysis of the Illinois law (refer to the court's opinion for its full analysis of the law), and its application of the law to the facts of the case. Interesting to note that, while the underlying principles are the same, the case law reviewed by the court was a different line of cases than the line of cases often cited when the equitable mortgage doctrine is invoked in Illinois in the context of a sale leaseback foreclosure rescue scheme (compare the line of cases cited in In re Primes with the line of cases cited in Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013), a sale leaseback foreclosure rescue case).

After its analysis of the applicable Illinois law, the court reached its conclusion, making these findings and observations:

• The doctrine of equitable mortgage applies not only to purported transfers executed at the time money is lent, but also to deeds executed after the time the debt is created such as in the context of an amendment, a refinancing, a forbearance agreement or other work-out situation.
  
  
  ***
  
  Applying the principles discussed above to the facts in this case, it is clear that the execution, delivery and recording of the Debtor's quit claim deed was ineffective to transfer title in her Rockford, Illinois property from Ms. Primes to Alpine Bank. Instead, the Debtor still owned the Mila Ave. property as of the petition date. Alpine Bank holds only a secured claim which could be modified through a plan pursuant to and in accordance with Chapter 13 of the Bankruptcy Code.
  
  The evidence establishes that the parties did not intend for the quit claim deed to immediately transfer title to the Mila Ave. property from the Debtor to Alpine Bank on July 13, 2011. The Forbearance Agreement provided that the deed would be held in escrow and not recorded until after a future default in the Debtor's payment obligations. Additionally, at least for some period after July 13, 2011, the Debtor continued to make and Alpine Bank continued to accept payments. Alpine instead simply held the deed for the contingency of a later default. The bank's officer admitted at trial that it was not his bank's understanding that it was receiving the property at the time the Debtor deliver the deed; rather the instrument was security to secure the loan. Therefore, the deed here is not a deed in lieu of foreclosure as contemplated by 735 ILCS 5/15-1401.
  
  Further, it is clear from the language of the Forbearance Agreement and the bank's actions that Alpine Bank did not intend that the recording of the quit claim deed would extinguish or satisfy the debt owed by the Debtor to the bank. The Agreement expressly states that the "recording of the Deed will not extinguish the debt of Borrower to Bank." The Agreement also provides that the debt would not be reduced until the further step of a sale of the property to a third party. The Agreement states that "[u]pon the sale of the Property, Bank shall provide a credit to Borrower against the indebtedness which is due at that time" and that any "deficiency which remains after the sale of the Property shall be due and payable in full to Bank from Borrower." Again, as the bank's officer admitted, the quit claim deed was security for its loan that it only recorded after the Debtor missed several payment installments.
  
  Alpine cannot have it both ways. As stated in Sutphen v. Cushman, the bank cannot argue that it holds the property absolutely and at the same time retain the right to enforce payment of the full debt. 35 Ill. 186 (Ill. 1864). At most, the parties intended to agree upon a mechanism that they believed would allow Alpine Bank to obtain title to the property upon a future default without the need for judicial foreclosure and without requiring future cooperation of the Debtor. But as stated by the Illinois Supreme Court in Bearss, parties cannot "by mere agreement . . . even by express stipulation" agree in advance to "cut off the right of redemption" in such a manner. 108 Ill.16.
  
  Even were this court able — which it is not — to set aside Bearss and the well-established law of Illinois and, as Alpine now proposes, adopt the approach taken by the courts in Ringling Joint Venture II and Guam Hakubotan, Inc., it does not appear that result here would change. In marked contrast with those decisions, the instant case involves an individual debtor's residential property in a consumer transaction with an unsophisticated borrower. There is no evidence that the Forbearance Agreement was drafted at the insistence of the Debtor or that she signed it in bad faith. Indeed the Debtor testified without dispute that she intended to make payments under the agreement at the time she signed it, that she did initially make payments and only fell behind after she broke her wrist and was out of work for several months.
  
  Accordingly, the Debtor held title to the property as of the date of the petition.

For the court ruling, see In re Primes, Bankr. No. 13-B-83310 (Bankr. N.D. Ill., Western Div. September 26, 2014).

See also, “Deed in Lieu”: Deed That Is Not Really In Lieu Of Foreclosure Will Likely Not Be Treated As a Deed.

Recent State Appeals Court Ruling Reviews Application Of Equitable Mortgage Doctrine In Illinois To Foreclosure Rescue Sale Leaseback Scheme

A sale leaseback equity stripping, foreclosure rescue scheme was at the center of a 2013 case addressed by an Illinois appeals court in Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013).While the appeals court addressed a number of issues, this post will focus solely on the scammed homeowner's assertion, made in a quiet title claim against a straw buyer purchaser and the mortgage lender that financed the transaction, that the deal was an equitable mortgage. (Note that the rest of the court's ruling on other issues arising in connection with the subject transaction may make for interesting reading for those in the business of undoing these ripoffs.)

In this case, after a bench trial, the trial court granted a directed finding in favor of the lender and against the screwed over homeowner on the quiet title claim, finding that the homeowner did not establish a prima facie case for equitable mortgage.

In reversing this aspect of the trial court's ruling, the appeals court reviewed the Illinois case law on the doctrine of equitable mortgage, and applied the principles embodied therein to the facts of the case, ultimately finding that the homeowner had, in fact, made a prima facie case for equitable mortgage.

From the appeals court's opinion ("Kendra" is the straw buyer who took title to the home in question; "Chase Bank" is the original lender that financed the scheme; "BONY" is Bank of New York, Chase Bank's successor-in-interest via a mortgage assignment; "Helen" is the screwed-over homeowner; "Jackson" is the foreclosure rescue operator who orchestrated the scheme; "Gaston" is the attorney who purportedly provided legal representation to homeowner/Helen, and to whom Helen was referred by Jackson, the scheme's orchestrator):

• ¶ 38 Count II of the second amended complaint sought to quiet title to the property on the basis that Kendra had only acquired an "equitable mortgage" on the property, rather than an outright purchase of the property; that Kendra's subsequent attempt to encumber the property with the mortgage interests was void; and that Chase Bank, as predecessor-in-interest to BONY, had notice that its mortgage interest was subject to Helen's claims in the instant case.
  
  ¶ 39 The Illinois Mortgage Act defines a "constructive mortgage" as "[e]very deed conveying real estate, which shall appear to have been intended only as a security in the nature of a mortgage, though it be an absolute conveyance in terms, shall be considered as a mortgage." 765 ILCS 905/5 (West 2010). "To convert an absolute deed into a mortgage, the proof must be clear, satisfactory and convincing and may come from `almost every conceivable fact that could legitimately aid that determination.'" Robinson v. Builders Supply & Lumber Co., 223 Ill.App.3d 1007, 1014, 166 Ill.Dec. 358, 586 N.E.2d 316, 320 (1991) (quoting McGill v. Biggs, 105 Ill.App.3d 706, 708, 61 Ill.Dec. 417, 434 N.E.2d 772, 773 (1982)); 765 ILCS 940/55(b) (West 2010) ("[t]he remedies and rights provided for in [the Mortgage Rescue Fraud Act] are not exclusive, but cumulative, and all other applicable claims, including, but not limited to, those brought under the doctrine of equitable mortgage, are specifically preserved").
  
  In determining whether an equitable mortgage exists, courts consider several factors, including a debt relationship; close relationship of the parties; prior unsuccessful attempts for loan; the lack of legal assistance; the inadequacy of consideration; an agreement to repurchase; and the continued exercise of ownership privileges and responsibilities by the seller. Gandy v. Kimbrough, 406 Ill.App.3d 867, 876-77, 346 Ill.Dec. 771, 941 N.E.2d 329, 336-37 (2010). "The parties' intentions are the key consideration and the proof of these factors must be clear, satisfactory and convincing if they are to overcome a written instrument." (Internal quotation marks omitted.) Id. at 877, 346 Ill.Dec. 771, 941 N.E.2d at 337.
  
  Further, the existence of a debt relationship is essential to establish an equitable mortgage. Nave v. Heinzmann, 344 Ill.App.3d 815, 823, 279 Ill.Dec. 829, 801 N.E.2d 121, 127 (2003) (citing McGill, 105 Ill.App.3d at 708, 61 Ill.Dec. 417, 434 N.E.2d at 774); Flack v. McClure, 206 Ill.App.3d 976, 985, 151 Ill.Dec. 860, 565 N.E.2d 131, 136 (1990).
  
  ¶ 40 Helen argues that the evidence established that the conveyance of her property was an equitable mortgage, whereby the warranty deed was executed as security in exchange for a loan to save her home from foreclosure, rather than an outright sale. In response, BONY mainly argues that the evidence failed to establish the essential element of a debt relationship between Helen and Kendra.

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After a review of the trial record, the appeals court reached the following conclusion that Helen made a prima facie case for equitable mortgage, articulating its legal and factual basis in support thereof:

• ¶ 45 Based on our review of the record, we find that Helen has made a prima facie showing of the essential elements of an equitable mortgage.
  
  First, although Helen had never made any payments to Kendra or Jackson with regard to the property, we find a number of factors in the evidence to suggest the existence of a debt relationship. While a debt relationship is essential to establish an equitable mortgage, direct evidence is not necessary to prove the relationship and no particular type of evidence is required. Robinson, 223 Ill.App.3d at 1017, 166 Ill. Dec. 358, 586 N.E.2d at 322; McGill, 105 Ill.App.3d at 708, 61 Ill.Dec. 417, 434 N.E.2d at 774. Further, "the fact that the mortgage was made for a future debt or that there was no fixed time for repayment does not affect the status of an instrument as a mortgage." Flack, 206 Ill.App.3d at 985, 151 Ill.Dec. 860, 565 N.E.2d at 136.
  
  ¶ 46 It is undisputed that Helen's home was in the process of being foreclosed at the time she met Jackson. Helen presented evidence that the solicitation flyer sent to her by Jackson offered to save her home from foreclosure. Helen testified that she, in hopes of avoiding foreclosure, signed documents which Jackson presented to her under the belief that he would add his name to the title of her property, that she would make no payments on her loan for a year, and that she would regain sole ownership of her home after a year.
  
  Helen testified that she never intended to relinquish complete ownership of her home. Helen also presented evidence that Kendra was an employee of Jackson, that he provided a "lump sum of money" to Kendra for the purpose of paying the first six months of mortgage debt acquired by Kendra on the property, and that Kendra received a salary from Jackson for her help in each real estate "deal." Kendra's testimony revealed that she did not plan to keep, rehabilitate, or resell the property she acquired, testifying that the property would be reconveyed to the original owner after a period of six months. Kendra also testified that Helen was to live rent free in the home for six months after the conveyance at issue, and that she had a discussion with Helen regarding the amount of monthly rent to be paid by Helen at the end of the six-month period. See Robinson, 223 Ill.App.3d at 1017, 166 Ill.Dec. 358, 586 N.E.2d at 322 (factors suggesting a debt relationship even though the documents did not appear to create indebtedness between the parties included plaintiff's need of a loan and desire to save her property; her lack of intent to sell her property; her belief that the transaction constituted a loan); McGill, 105 Ill.App.3d at 708-09, 61 Ill.Dec. 417, 434 N.E.2d at 774 (defendant's attempt at collection and own characterization of an agreement to reconvey the property suggested the existence of a debt relationship). Thus, we find that, in the first step of the directed finding analysis, Helen presented sufficient evidence of a debt relationship which constitutes an essential element of an equitable mortgage.
  
  ¶ 47 Second, the adequacy of consideration is another factor used to determine the existence of an equitable mortgage. Robinson, 223 Ill.App.3d at 1014, 166 Ill.Dec. 358, 586 N.E.2d at 320. "Where consideration is grossly inadequate, a mortgage is strongly indicated." Flack, 206 Ill.App.3d at 986, 151 Ill.Dec. 860, 565 N.E.2d at 137.
  
  ¶ 48 At trial, Helen presented an HUD-1 settlement statement (exhibit K) which listed the purchase price of the property as $145,000, and listed approximately $17,965 as the payoff amount and taxes owed on Helen's home. Helen also presented copies of two checks (exhibits I and J), which were made payable to her in the amounts of $117,959.50 and $3,199.19. Helen's testimony revealed that, following the real estate transaction, she only received $3,000 from Jackson. It is undisputed by the parties that both of these checks were deposited into the bank account of W2X, the company operated by Jackson. Kendra's testimony shows that Helen was expected to pay at least $700 in monthly rent, after the six-month period, toward Kendra's newly acquired mortgage on the property. Helen presented evidence, through bank representative Colon's testimony, that Kendra's mortgage loans on the property amounted to 95% of the value of the property. In granting BONY's motion for a directed finding, the trial court remarked that "this case really comes down to two exhibits, [exhibits I and J]," and the "purported real estate contract." The trial court noted that neither the purchase price of $145,000 nor the debts that were satisfied as a result of the closing could be deemed as unconscionable.
  
  ¶ 49 However, we find that Helen presented sufficient evidence of the inadequacy of consideration. Although Helen's initial debt in the amount of approximately $17,965 was satisfied at closing, Helen only received $3,000 of the remainder of the $145,000 purchase price and was expected to contribute approximately $700 monthly rent toward Kendra's mortgage loans. In essence, Helen only received approximately $20,965 in benefits, while the payback amount required of Helen far exceeded that amount.
  
  Thus, we find that, in the first step of the directed finding analysis, Helen presented sufficient evidence of the inadequacy of consideration which is an essential element of an equitable mortgage. See Gandy, 406 Ill.App.3d at 878, 346 Ill.Dec. 771, 941 N.E.2d at 329, 337-38 (finding a vast disparity of consideration where surrogate buyer paid a purchase price of $90,000, with a net payout to homeowner of the property of $71,000; homeowner sent $22,900 back to surrogate buyer; and surrogate buyer resold property to a third party for a contract price of $170,000).
  
  ¶ 50 Other relevant factors that courts may consider in determining the existence of an equitable mortgage include any prior attempts to obtain a loan; the lack of legal assistance; an agreement to repurchase; and the continued exercise of ownership privileges and responsibilities by the seller. Id. at 876-77, 346 Ill.Dec. 771, 941 N.E.2d at 336-37. At trial, Helen testified that she had not made any prior attempts to obtain a refinance loan to stop foreclosure on her home, and that, after meeting Jackson, she only spoke with Attorney Gaston on one occasion.
  
  Evidence was presented that Helen was an elderly homeowner with an eighth grade education at the time she signed the documents, and that Kendra was a 21-year-old college student who did not intend to keep, rehabilitate or resell Helen's property. Both Helen and Kendra testified that they believed the property would be deeded back to Helen after a certain period of time. Evidence was presented that the relationship between Helen and Kendra was limited to the real estate transaction, which was orchestrated by Jackson. Helen also presented evidence that she continued to live in the home after the transaction took place, but that Kendra, as the new title owner of the property, visited Helen to inquire whether the house needed repairs. Evidence was presented at trial that Kendra never engaged in negotiations over the purchase price of the property, did not meet Helen prior to signing the real estate contract, and did not discuss with Helen the terms for regaining ownership of her home. See id. at 877-78, 346 Ill.Dec. 771, 941 N.E.2d at 337-38 (finding the existence of an equitable mortgage where the parties' relationship was limited to the real estate transaction which was brought together by a third party; an attorney nominally represented the seller; a debt relationship existed; the sophistication of the parties was limited; and consideration was inadequate); see also Robinson, 223 Ill. App.3d at 1016-17, 166 Ill.Dec. 358, 586 N.E.2d at 322-23 (relevant factors include the plaintiff's desperate circumstances, lack of sophistication, and lack of legal representation, and the existence of a debt relationship).
  
  Therefore, we find that, in the first step of the directed finding analysis, Helen presented a prima facie case to suggest that the parties intended the real estate transaction to be an equitable mortgage, rather than an outright sale. Accordingly, we hold that the trial court erred in granting BONY's motion for a directed finding as a matter of law on count II.
  
  In light of this holding, we reject Helen's argument that BONY failed to establish its affirmative defense of bona fide purchaser, where BONY, as a result of the trial court's granting of its motion for a directed finding, had not yet had the opportunity to present its evidence.

For the ruling, see Hatchett v. W2X, Inc., 993 NE 2d 944 (Ill. App., 1st Dist., 1st Div. 2013).

Recharacterizing Sale Leasebacks As Equitable Mortgages In Texas

The following selected Texas state court cases may shed some light on factors Texas courts have looked to when recharacterizing a sale leaseback transaction as an equitable mortgage.

Johnson v. Cherry 

726 S.W.2d 4

(Tex. 1987):

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.[1]
  
  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.[2] 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.

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RBS Mortgage, LLC v. Gonzalez

No. 04-11-00681-CV

(Tex. App. San Antonio [4th Dist.] 2013)

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).

-------------------

The analysis of two of the key factors (disparity in value of the premises and the amount paid for it; and retention of possession by the selling property owner) leading the appeals court to affirm the trial court's judgment follow ("Salazar" is a principal with RBS who negotiated the terms of the deal on its behalf; "Gonzalez" is the property owner):

• 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.).

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In re: Gallegos

No. 13-13-00504-CV

(Tex. App. 13th Dist., Corpus Christi, Edinburg, 2013):

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.

1. 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.
   .
2. 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.
   .
3. 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").
   .
4. 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.
   .
5. 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.
   .
6. The county court denied the motion to dismiss and granted Vela a writ of possession.
   .
7. 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,

After an examination and analysis of the applicable law in Texas on mandamus ("Mandamus is proper if a trial court issues an order beyond its jurisdiction"), forcible detainer ("[T]he county court is deprived of jurisdiction if resolution of a title dispute is a prerequisite to the determination of the right to immediate possession"), equitable mortgage (see Johnson v. Cherry, 726 SW2d 4 (Tex. 1987) ), the state appeals court ruled in favor of Gallegos, concluding that, under this set of facts, the forcible detainer suit and the title suit could not proceed concomitantly. The issuance of the writ of possession went beyond the county court's jurisdiction, and consequently, the appeals court granted Gallegos' petition for writ of mandamus.

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.
  
  V. CONCLUSION
  
  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.

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Wilbanks v. Wilbanks

160 Tex. 317, 330 S.W.2d 607

(1960)

Among other issues, this case addressed the use of parol evidence in establishing an equitable mortgage, and addressed whether an equitable mortgage can be declared if the debt secured thereby is that of someone other than the grantor/property owner.

• 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.

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Austin v. Austin,

143 Tex. 29, 182 S.W.2d 355

(Tex. 1944)

Among other issues, this case addressed the use of parol evidence in establishing an equitable mortgage, and addressed the fact that the recording of a deed absolute on its face only creates a presumption that an absolute conveyance was intended, and that despite the recitals contained in the deed, said presumption may be rebutted in the appropriate cases on a proper showing.

• 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.

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Bradshaw v. McDonald

147 Tex. 455, 216 S.W.2d 972

(1949)

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.

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Bantuelle v. Williams

667 S.W.2d 810

(Tex. App.—Dallas 1983, writ ref'd n.r.e.):

The appeals court summarized the trial court's finding of facts as follows:

• 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.

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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.

-----------------------------------------------

The appeals court addressed and affirmed the trial court's finding of usury as follows:

• 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.

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Napper v. Johnson

464 S.W.2d 496

(Tex. Civ. App.-Waco 1971, writ ref'd n.r.e.)

A brief summary of this case is 'bulleted' below:

• 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.

In finding that the sale leaseback was a disguised loan, the court made these observations in connection with the retained possession by the financially distressed property owner throughout the term of the transaction, and the significant disparity between the sale price of the property ($15,000) and its true value ($50,000-$60,000) ("Johnson" is the purported buyer/lessor and "Pritchard" is Johnson's attorney):

• 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.

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Sudderth v. Howard 

560 S.W.2d 511

(Tex.Civ.App.— Amarillo 1978, writ ref'd n.r.e.)

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:

1. 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.
   .
2. 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.
   .
3. 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.
   .
4. 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.
   .
5. 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.
   .
6. 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.
   .
7. 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.

Based on the evidence presented at trial, the trial jury found that the transaction was a loan and not a sale. While their is no detailed elaboration on the specific reasons, the following characteristics common to a recharacterization of a sale to a loan/equitable mortgage (see Footnote, below) appear to be present here:

• 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).

The appellate court describes the nature of the evidence presented at trial:

• 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 regard to the jury's finding that the deed was really a loan transaction in disguise, the appeals court issued simply issued a one paragraph ruling refusing to set aside the jury's finding:

• 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.

With regard to the Sudderths contention that they were entitled to judgment decreeing forfeiture of the $17,400 principal and recovery of twice the $2,610 interest charged or contracted for, plus attorney's fees, because the transaction was, as a matter of law, usurious, the trial court denied their claim and, on primarily procedural grounds set forth in the ruling, the appeals court also declined to set aside that portion of the jury's finding.

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Footnote: Note that in a recent New Jersey case (Zaman v. Felton, 219 N.J. 199, 98 A.3d 503 (2014) (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":

1. Statements by the homeowner or representations by the purchaser indicating an intention that the homeowner continue ownership;
2. A substantial disparity between the value received by the homeowner and the actual value of the property;
3. Existence of an option to repurchase;
4. The homeowner s continued possession of the property;
5. The homeowner s continuing duty to bear ownership responsibilities, such as paying real estate taxes or performing property maintenance;
6. Disparity in bargaining power and sophistication, including the homeowner's lack of representation by counsel;
7. 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;
8. Financial distress of the homeowner, including the imminence of foreclosure and prior unsuccessful attempts to obtain loans.

In adopting these factors, the court made this observation:

• [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.