Equitable Mortgage Doctrine In California

The equitable mortgage doctrine has been an issue that has been litigated many times in the California case law. Because the cases generally tend to be very fact specific, each fact pattern is decided on a case by case basis.

Because there are quite a number of cases, and because my time constraints preclude me from reading and attempting to dissect these cases (and then try to write something about them in a semi-coherent way), I am simply going to put up links to a number of California Supreme Court cases for those who don't mind doing a little reading and research. These cases, and the cases cited therein, should provide a pretty good basis for understanding the equitable mortgage doctrine in California.


1) Hamud v. Hawthorne, Supreme Court of California, 52 Cal. 2d 78; 338 P.2d 387; 1959

The lower court invoked the equitable mortgage doctrine on behalf of the party asserting it and treated a deed as a mortgage. Upon review, the high court generally agreed that the facts were present to treat the deed in question as a mortgage. However, the high court reversed the lower court. Their reasoning essentially was based on laches and bad faith on the part of the party asserting the equitable mortgage claim. Therefore, they refused to allow equity to be asserted regarding the equitable mortgage claim when the party asserting it was guilty of laches and bad faith. The following quote from the case will give you an idea of how the court felt about the party claiming equitable mortgage (and did so with "unclean hands"):

• "[P]laintiffs appear to be opportunists who are trying to pervert equity to recover a title and possession voluntarily surrendered in 1951, for which they then received fair value, and which they now seek to reclaim, not to right a wrong suffered by them in 1951 but to procure from defendants a value which was apparently unknown to either party until 1955."

2) Beeler v. American Trust Co., Supreme Court of California, 24 Cal. 2d 1; 147 P.2d 583; 1944 (affirming a judgment holding that a deed absolute in form was in fact an equitable mortgage.)

3) Wilson v. Bailey, Supreme Court of California, 8 Cal. 2d 416; 65 P.2d 770; 1937

A party failed to assert an equitable mortgage claim in a case where the high court observed, in dicta, that such a claim would have been sustained, given the facts of the case, had the party asserted it. The interesting quote in this regard follows (bold text is my emphasis):

• "We have decided this appeal upon the issues as presented by the parties, although we are somewhat at a loss to understand why plaintiff did not seek to redeem said property as a deed absolute given merely as security, in which event she would have been entitled to redeem at any time until her right had been foreclosed by an action of foreclosure brought by the defendant."

• "There seems to be little doubt, in view of the written option agreement which was entered into simultaneously with the conveyance by the plaintiff to the defendant and the fact that the payment of rent was applied by the defendant to the debt owing from the plaintiff, that the conveyance from the plaintiff to the defendant was in fact a mortgage."

• "However, this issue was neither presented to the trial court, nor argued in the briefs of the parties, although there was a passing reference in the respondent's reply brief that "The whole transaction was intended not as an outright sale but as a conveyance for the purpose of securing to Bailey the indebtedness owed to him by Mrs. Wilson." In view of our holding that the option was in fact properly exercised by the plaintiff, it is not necessary for us to discuss the rights and remedies of the parties under a deed absolute which was in fact a mortgage."

4) Carlson v. Robinson, Supreme Court of California, 7 Cal. 2d 235; 60 P.2d 426; 1936 (affirming a judgment holding that a deed absolute in form was in fact an equitable mortgage)

One comment made in passing by the court was:

• "The courts have been watchful against all schemes of money lenders to deprive unfortunate debtors of their lands at less than their true value under the claim that the transaction is a purchase and not a loan, and the rule is well settled that a deed absolute in form, if intended as security for the payment of a debt, is a mortgage. (Civ. Code, secs. 2924, 2925; 17 Cal. Jur., sec. 41, p. 735 et seq.) The question is primarily one of fact, upon which the findings of the trial court, if supported by proper evidence, will not be disturbed, notwithstanding conflict in the testimony. (17 Cal. Jur., sec. 59, p. 758 et seq.)"

5) Goodfellow v. Goodfellow, Supreme Court of California, 219 Cal. 548; 27 P.2d 898; 1933 (affirming lower court ruling that a deed was an absolute conveyance and not given as security for a mortgage).

6) Wehle v. Price, Supreme Court of California, 202 Cal. 394; 260 P. 878; 1927 (affirming lower court ruling that a deed was an absolute conveyance and not given as security for a mortgage).

7) Boal v. Gassen, Supreme Court of California, Department One, 178 Cal. 132; 172 P. 588; 1918 (affirming lower court ruling that a deed was an absolute conveyance and not given as security for a mortgage).

8) Todd v. Todd, Supreme Court of California, Department One, 164 Cal. 255; 128 P. 413; 1912 (affirming lower court ruling that a deed absolute was a mortgage and not an absolute conveyance; the equitable mortgage claim survived a claim of laches.)

Note:

The linked cases above are to Findlaw.com, which provides free electronic access to California cases going back to 1934. Registration required.

For those who are unaware, the State of California offers free access to its Supreme Court and intermediate appellate decisions through Lexis going back to 1850. To go there, click California Courts: Opinions of the Supreme Court and the Courts of Appeal - For those unfamiliar with this website, once at this page, click "Searchable Opinions 1850 - Present" in the left hand column, then click "Continue", after reading and agreeing to the Terms of Service click the box to acknowledge same, then click "View Opinions", at which point you can enter the case citation in the appropriate search box and pull up the case.

For those of you who want to see additional California cases, including those of California's intermediate appellate, and you are unfamiliar with searching cases on the California/Lexis website, you might want to try this. Once you arrive at the page containing the Search Box titled "Search California Opinions", (A) click on the words "Click Here For Advanced Search" (located about 3/4s down the box); then (B) on the page containing the search box titled "Enter Search Terms", click the radio button titled "Terms and Connectors"; then enter the following search command in the box (include all parenthesis and forward slashes):

(deed or title or conveyance) w/6 absolute w/10 (mortgage or debt or loan)

Then, click the "Search" button. Your search should return around 365 cases (going back to 1850) containing the above search words, most of which will have something to do with the equitable mortgage doctrine (although many won't actually use the phrase "equitable mortgage"). One more tip: to help you sift through all these cases, click the word "Cite" in the upper left hand corner; this will give you a list of the cases and the text containing the search words. This may help you decide whether you want to see the "Full" version of the cited case, or go on to the next cited case. If you want to see the "Full" version of any case, just click the name of the case, which will link you to the full version.

An alternative to all this would be to just familiarize yourself with the website, and particularly, the instructions for the various search techniques and commands. For example, you can narrow your search solely to the California Supreme Court cases, or solely to the intermediate appellate court cases. You can also narrow your search by date (so you don't have to read all 365 cases going back to 1850).

For other posts on this blog addressing California cases, see:

• Exercising Options To Buy, Rights Of Intervening Interests, Notice, Bona Fide Purchaser, Duty Of Inquiry, & Other Stuff
• Equitable Mortgage Defense In Homeowner - Tenant Eviction - Pt. 3 Addendum
• Equitable Mortgage Defense In Homeowner - Tenant Eviction - Pt. 3

Go here for other posts on the equitable mortgage doctrine in California. California equitable mortgage valedictorian

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Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3 Addendum

This is an addendum to the post dealing with the equitable mortgage defense in California. Click here to see the prior post, Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3. Subsequent to that post, I came across a pretty old California Supreme Court case which, if it is still good, both provides additional support for the viability of the equitable mortgage defense in an eviction/ejectment action, and further, may constitute the law of the state regarding this defense in homeowner-tenant evictions in California.

Hyde v. Mangan, 88 Cal. 319, 26 P. 180; (1891)

This case was an action for ejectment. The defendant, Mangan, was the equitable owner of property which was purchased on a deferred sale contract, where the legal title owner, a railroad, was to keep legal title to the property until Mangan fully paid off the contract (within five years of the sale contract). Upon entering the contract, Mangan "entered into the possession of said property, and ever since said time have been in the open, notorious, and exclusive possession and occupancy thereof, having valuable improvements thereon, and claiming to own the same."

About 4 years later, Mangan borrowed money secured by the equitable interest in the property. As part of the loan agreement, Mangan assigned the equitable interest in the property as collateral for the loan to the lender.

Within the next 4 1/2 years, the ownership interest in the property assigned by defendant Mangan to the lender as collateral was assigned and reassigned until the interest ended up in the hands of the plaintiff, Hyde (the railroad had yet to receive full payment on the original sale to defendant Mangan). A week after receiving the assignment, plaintiff Hyde made full payment to the railroad company for the land, surrendered the contract, received a deed to the land from the railroad company, and subsequently began an ejectment action to remove defendant Mangan from the property.

The lower court, in ruling for the defendant Mangan in the ejectment action, found that:

• the assignment of the contract of sale to the original lender was a mortgage of defendants' Mangan interest in the land,
• the possession of defendants Mangan was sufficient to put plaintiff on inquiry as to their rights, and
• having failed to make such inquiry, Plaintiff was in no better position than if he had done so, and had been fully informed as to the defendants' claims and equities.

On appeal to the California Supreme Court, plaintiff Hyde (now the appellant) "[r]elies upon two main propositions in this case, either of which, if maintained, he claims would entitle him to recover:

1. That he is the owner and holder of the legal title to the premises, and in an action of ejectment, the legal title must control;

2. If the assignment of the contract were to be held to be a mortgage, the debt for which it was given being barred, defendants are entitled to no consideration without offering to redeem."

With regard to these two propositions, the California high court responded as follows (bold text is my emphasis):

• "The first proposition, that "in an action of ejectment the legal title must control," is not the law of this state. The case of Willis v. Wozencraft, 22 Cal. 615, decides: "A mere equitable title to land, if it is of such a character as entitles the holder to possession in equity, is a sufficient defense under our system of practice to an action for the possession, brought even by the holder of the legal title. ( Central Pacific R. R. Co. v. Mudd, 59 Cal. 585; Whittier v. Stege, 61 Cal. 238; Hicks v. Lovell, 64 Cal. 17; 49 Am. Rep. 679.)"

• "As to the second proposition contended for by appellant, there is a line of authorities which supports such contention. (Hughes v. Davis, 40 Cal. 120; Bruck v. Tucker, 42 Cal. 352; Pico v. Gallardo, 52 Cal. 206.) This proposition of law as laid down in the cases just cited is based upon another principle of law, established for the first time in this state in Hughes v. Davis, 40 Cal. 120, and which has since been discarded by section 2925 of the Civil Code. This principle as announced by the court was, "that an absolute deed which is shown by parol evidence to have been intended as a mortgage conveys the legal title to the property." And our attention has not been directed to any authority since this principle ceased to be the law of this state which has held to the doctrine laid down in those cases; but upon the contrary, the later decisions of this court hold that under the general issue the defendant may be allowed to show that the deed by which the plaintiff claims title is a mortgage, and therefore gives him no title."

With regard to the issue of possession of the land by the defendant Mangan (now the respondent), the high court observed (bold text is my emphasis):

• "The plaintiff came into court in this action with full notice of all the rights and equities existing between the railroad company and the defendants, and between Brownstone and his assignees and the defendants; for the defendants were in the open, notorious, and exclusive possession of this land at all these times, and plaintiff made no inquiry to ascertain the rights or claims of defendants, and he is in no better position, and no more entitled to be regarded as a purchaser in good faith than if he had so inquired and ascertained the real facts of the case. ( Pell v. McElroy, 36 Cal. 268; Bank of Mendocino v. Baker, 82 Cal. 114; Scheerer v. Cuddy, 85 Cal. 273.) Neither could the plaintiff be recognized as a bona fide purchaser from his assignor, Erlanger, upon the additional ground that in the sale of equitable interests the principle of bona fide purchasers has no standing. (Taylor v. Weston, 77 Cal. 534.)"

With regard to plaintiff Hyde's payment of the balance of the contract to the railroad company in exchange for the deed, the court stated:

• "If we regard the plaintiff as the assignee of the railroad company, he then purchased the legal title subject to the equitable title of the defendants under the contract, and his legal rights in maintaining this action are identical with those of his assignor; and under the facts as disclosed by the record in this case, the railroad company could not prevail in this action."

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On the basis of this decision, it appears that a tenant who is being evicted (at least in California) has the right to challenge the title of the purported landlord seeking ejectment under the equitable mortgage doctrine and, if it can be established that the purported landlord's interest in the property is nothing more than a mortgage, the purported landlord should not prevail.

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While the issue I wanted to touch on here was the availability of the equitable mortgage defense in an eviction/ejectment action where the tenant is claiming to be the equitable owner of the property, a second issue was also touched on. That issue involves the principle that, when one is in open, notorious, and exclusive possession of property, a subsequent purchaser of the property is placed on full notice of all the rights and equities existing between the possessor and the "seller" of the property. Accordingly, a subsequent purchaser is not entitled to the rights of a bona fide purchaser when such purchaser fails to inquire as to the rights and equities the possessor may have, but rather, purchases subject to those rights and equities.

The issues of actual and constructive notice, possession as notice, the duty to inquire, and bona fide purchaser are issues I try to address further in Exercising Options To Buy, Rights Of Intervening Interests, Notice, Bona Fide Purchaser, Duty Of Inquiry, & Other Stuff.

For the next post in the series, see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 4.

Go here for other posts on the equitable mortgage doctrine in California. California equitable mortgage valedictorian emdefense

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3

This is Part 3 of a multi part post. Click here to read Part 2.

California

In an unlawful detainer (tenant eviction) proceeding, a California Appellate Court ruled that a property owner, who lost his property in foreclosure and then "rented" it back from the subsequent purchaser, had a triable issue of fact as to whether a landlord-tenant relationship existed between him and the subsequent purchaser which forms the basis of unlawful detainer. (According to property owner, the rental agreement was a "sham" to shield a usurious mortgage of the property to which the subsequent purchaser held title only to secure payment for the loan.) The court reversed a judgment of eviction and remanded the case to the lower court for consideration of whether the transaction between the parties was really a usurious loan secured by a mortgage.

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There are several issues involved in this case unrelated to the equitable mortgage issue. I've tried to isolate the equitable mortgage issue in this case and list the facts below. The basic facts of this case relating to the issue of whether a deed merely constituted security for a loan, and whether a purported rental agreement was a shield to disguise a usurious mortgage, follow below (while this case was not a typical foreclosure rescue situation, the logic and rationale stated therein appears to be equally applicable to such a situation):

1- Property Owner owned and operated a 317-acre ranch that included a prune processing and packing plant.

2- Property Owner lost the property in a foreclosure sale in April, 2003

3- Within a month (May 2003), a "Subsequent Buyer" of the foreclosed property entered into an agreement entitled "Month-to-Month Rental Agreement and Security Agreement" with Property Owner.

4- In October, 2004, Subsequent Buyer filed an unlawful detainer action against Property Owner (in order to evict Property Owner and gain possession of the property).

5- In responding to Subsequent Buyer's summary judgment motion, "[Property Owner] opposed the motion, arguing, among other things, there was a triable issue of fact as to whether the "transaction" was "not that of landlord tenant, but was of a loan of funds with the rental agreement being used to disguise a possible usurious transaction."

6- Property Owner then filed a declaration in opposition to the motion for summary judgment wherein he stated that prior to the foreclosure sale, he and Subsequent Buyer agreed that he (Subsequent Buyer) would "be present at the foreclosure sale and bid funds to obtain the property" and that [Subsequent Buyer] would hold title "only as security . . . and that the property would be returned to [Property Owner] upon full repayment of the loan."

Also, Property Owner stated that he entered into the subsequent rental agreement only because Subsequent Buyer said he "only needed this agreement for both our protection" and never stated anything that this agreement was in any way changing their original loan agreement.

7- Property Owner contends it should be permitted to use the declaration to prove that the transaction was intended as a mortgage. In support of this argument, property owner cites Civil Code section 2925 and existing case law. Civil Code section 2925 provides as follows:

• "The fact that a transfer was made subject to defeasance on a condition, may, for the purpose of showing such transfer to be a mortgage, be proved (except as against a subsequent purchaser or encumbrancer for value and without notice), though the fact does not appear by the terms of the instrument."

8- The California court observed as follows:

• "Given the alleged relationship between the parties, [Property Owner] was allowed to introduce parol evidence to show what it believed was the true nature of the transaction in an attempt to prove the rental agreement was really a shield for a usurious mortgage. (See Workmon Constr. Co. v. Weirick (1963) 223 Cal.App.2d 487, 490, 36 Cal. Rptr. 17 [cases since 1867 have held that a court "can declare a deed absolute on its face to be a mortgage executed as security for the payment of a debt, and that parol evidence is admissible to show the real nature of the transaction without regard to the mode or form in which the instruments in writing were executed"]."

9- The court ultimately concluded as follows:

• "We therefore conclude that [Property Owner] was allowed to assert, in essence, that it was not a tenant under the lease agreement because the rental agreement was really a shield for a usurious mortgage."

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In this case (unlike the Minnesota case in Part 2), there is an indication at the end of the case that the property owner in this case posted an appeal bond, so presumably, he never actually lost possession of the property during the appeals litigation. In the Minnesota case, the property owner did not post bond and ultimately, vacated the premises in anticipation of execution of the judgment of eviction before the appeals litigation reached completion.

Case Law Citation:

North State Land Management v. Calprune, (Cal. App. Ct. 3rd Dist. 2006 unpublished)

For addendum to this post, see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3 Addendum

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Go here for other posts on the equitable mortgage doctrine in California. California equitable mortgage valedictorian emdefense.