Equitable Mortgage Doctrine In Illinois - Part 1

While not to be misinterpreted as an exhaustive, thoroughly researched presentation on the Equitable Mortgage Doctrine in Illinois, this post will attempt to present a general review of how some Illinois courts have described and applied this doctrine. For ease of reading, all citations and internal quotations have been omitted.

Codification of the Equitable Mortgage Doctrine

Like many, if not most, other states, the Illinois legislature has codified this doctrine into its statute, which can be found in the Illinois Mortgage Act at § 765 ILCS 905/5.

Nave v. Heinzmann

344 Ill. App. 3d 815; 801 N.E.2d 121; (Ill. App. Ct., 5th Dist., 2003)

In this case, the Illinois appellate court ruled that, under the specific facts of this case, a contract to sell property containing a clause in the contract granting the seller a right to repurchase the property within six months after closing supported a reading that the transaction was actually a loan. Accordingly, the court denied the purported buyer's request for specific performance.

The court made the following observations regarding the existence and application of the equitable mortgage doctrine:

1- "Under the [Mortgage] Act, however, a contract for the transfer of a deed is to be considered as a mortgage and not as a land sale contract if the parties intended the land to function as security."

2- "The Act codifies the longstanding concept of equitable mortgage."

3- "The relevant factors in determining whether a deed that is absolute in form was intended to be a mortgage include:

• the relationship of the parties,
• the circumstances surrounding the transaction,
• the adequacy of the consideration, and
• the situation of the parties after the transaction."

4- "The declaration that a deed, which is otherwise absolute in form, is a mortgage does not require the existence of fraud, accident, or mistake."

5- "The question of whether a deed is a transaction in real estate or is to be taken as a mortgage depends on the intention of the parties at the time of the execution."

6- "Agreements to reconvey are an indication that the parties intended the transaction to be a mortgage and not a conveyance."

7- "The determinative question is the intent of the parties. Under the doctrine of equitable mortgage, in order for a court to convert a deed that is absolute on its face into a mortgage, the proof must be clear, satisfactory, and convincing. This proof can come from almost every conceivable fact that could legitimately aid that determination, and the decision in each case will depend on its own circumstances."

8- "Although no particular kind of evidence is required for this determination, it is essential for a mortgage that there be a debt relationship. In this case, a debt relationship was formed under a contract. The parties agreed that the defendants would be indebted to the plaintiff. The parties intended for the land to serve as security for what was in essence a loan under the contract. The record supports the trial court's finding that the parties intended to create a loan with the property being security.

Robinson v. Builders Supply & Lumber Co.

223 Ill. App. 3d 1007, 586 N.E.2d 316 (Ill. App. Ct. 1st Dist. 1991)

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This case involved a review of summary judgment motions made in the lower court and simply concluded that genuine issues of material fact existed in this case, making the lower court's disposition by summary judgment inappropriate. In reaching this conclusion, the court conducted an examination and analysis of the Illinois equitable mortgage doctrine and, in that regard, it made the following observations:

1- "Whether a deed is to be considered as an equitable mortgage depends on the parties' intentions. 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."

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2- "Indeed, our courts have recognized and considered a number of factors including the following:

• the existence of an indebtedness,
• the close relationship of the parties,
• prior unsuccessful attempts for loans,
• the circumstances surrounding the transaction,
• the disparity of the situations of the parties,
• the lack of legal assistance,
• the unusual type of sale,
• the inadequacy of consideration,
• the way the consideration was paid,
• the retention of written evidence of the debt,
• the belief that the debt remains unpaid,
• an agreement to repurchase,
• and the continued exercise of ownership privileges and responsibilities by the seller."

3- "Our courts have repeatedly considered the adequacy of consideration in determining whether to apply the equitable mortgage theory. Where the consideration is grossly inadequate, a mortgage is strongly indicated."

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Responding to the assertion that no debt in this transaction actually existed, the court made the following observations:

• "While a debt relatonship is essential to a mortgage, direct evidence is not necessary, and, in fact, no particular type of evidence is required. Although plaintiff never executed a note or other document which demonstrates the existence of a debt, a number of factors here might suggest a debt relationship. Plaintiff signed the deeds after she told Willens that she needed a loan, and Willens responded that Builders could assist her. Moreover, plaintiff stated that she never intended to sell her property and believed at all times that the transaction constituted a loan. Bruno acknowledged that she initially came to Willens to save her property. Although the documents do not appear to create indebtedness between the parties, the record suggests that the parties' primary intent was to effect a security agreement, rather than an outright sale of the properties."

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Flack v. McClure

206 Ill. App. 3d 976, 565 N.E.2d 131, 151 Ill. Dec. 860 (Ill. App. Ct., 1st Dist. 1990)

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There were several issues involved in this case. I've limited this presentation to the equitable mortgage issue. In this case, the property owner asserting equitable mortgage conveyed a deed to property to the grantee in exchange for $9,000. Both parties to the transaction acknowledged that the property was worth $80,000. In addition, the property owner engaged in the transaction without the benefit of an attorney; the grantee of the deed, however, did have legal representation. The property owner also remained in possession of the property after receipt of the $9,000 payment. The appellate court affirmed a lower court decision that the transaction was a mortgage, and not an absolute sale, notwithstanding the conveyance to the grantee evidenced by a deed.

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The court's examination and analysis of the Illinois equitable mortgage doctrine included the following observations:

1- "Every 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."

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2- "Whether a deed is to be taken as a mortgage depends on the intentions of the parties."

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3- "In order to convert a deed absolute on its face into a mortgage, the proof must be clear, satisfactory and convincing and can come from almost every conceivable fact that could legitimately aid that determination."

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4- "The burden of proof rests upon the party asserting a mortgage where a deed absolute was conveyed."

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5- "Since the question of whether to impose an equitable mortgage is based on fact, consideration of the trial testimony is essential. Deeds have been set aside where evidence showed a preexisting debt and the grantee retained a promissory note or other evidence of the debt where an agreement to reconvey was entered into at the same time or where the price paid was far below the fair value of the property."

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6- "In a bench trial it is within the province of the trial court to determine the credibility and weight of testimony, to resolve inconsistencies and conflicts and to render its decision accordingly. Though conflicts in evidence exist, a court can still find an equitable mortgage."

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7- "Six factors are to be considered by the trial judge to determine whether an equitable mortgage exists. Those factors include

• whether a debt exists,
• the relationship of the parties,
• whether legal assistance was available,
• the sophistication and circumstances of each party,
• the adequacy of the consideration and
• who retained possession of the property."

8- "The existence of a debt is the essential element to establish an equitable mortgage. But 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."

9- "The existence of a debt here does not appear to be in doubt. The court in McGill found an indication of a debt relationship in a defendant's attempt to collect and held that an agreement to reconvey has long been considered a significant factor in distinguishing a sale from a mortgage."

10- "Where the grantor is indebted to the grantee at the time of the conveyance, and the grantee retains the note evidencing the indebtedness, then the indebtedness was not satisfied by the conveyance, and, until the contrary is shown, it will be presumed that a mortgage is intended."

11- "The court should also consider whether or not the parties had the benefit of legal assistance at the time of the occurrence. The record indicates that plaintiff did not have advice of counsel when she accepted the $ 9,000, signed the note and relinquished the quitclaim deed to the defendants whereas the defendants were represented by counsel."

12- "Beelman and McGill identify a fifth factor: the adequacy of consideration. Where consideration is grossly inadequate, a mortgage is strongly indicated. Here, the defendants signed an $ 80,000 contract on the home at the same time they gave plaintiff $ 9,000. Defendants argue that, in light of the building's poor condition, "it is clear the actual value of the property was significantly less." However, in his deposition testimony, John McClure acknowledged that he still would have gone through with the $ 80,000 contract if he could have obtained a mortgage. Clearly, the $ 80,000 price was the agreement of the parties, and the defendant may not now argue that the value of the property was "significantly less."

13- "The final factor the McGill court considered is whether the grantor of the deed remained in possession of the property. In her analysis, the trial judge noted that plaintiff stayed in the home for a year after she gave the defendants the quitclaim deed. Plaintiff remained in the home until the defendants successfully obtained a court order requiring plaintiff to vacate the premises, and this occurred after the defendants had recorded the quitclaim deed and redeemed the property from the foreclosure sale."

14- "We find that the trial evidence clearly supports the finding of an equitable mortgage and that the trial court's decision was consistent with the manifest weight of the evidence. We find no error."

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For an online article that discusses the equitable mortgage doctrine in Illinois, see:

When is a Sale-Leaseback an Equitable Mortgage?, by Gregory A. Thorpe and John C. Murray

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Click here for links to other general Online References On Sale Leaseback Recharacterization. Illinois equitable mortgage beta

Equitable Mortgage Doctrine In Illinois - Part 2

This post will address the following two points (one briefly, one not so briefly) regarding the application of the equitable mortgage doctrine in Illinois (Please note that all text appearing in bold, especially when quoting from the court cases are my own attempt to emphasize the text, and are not emphasized in that manner in the statute or court cases being quoted from):

• Whether the new Ilinois Mortgage Rescue Fraud Act (effective 1-1-07) preempts the equitable morgage doctrine, and

• The purported "bona fide purchaser" status of those third parties who purchase, or lend money on, a property from a foreclosure rescue operator ("operator") subsequent to the operator having gotten a homeowner to sign the ownership papers of said property to him/her.

Ilinois Mortgage Rescue Fraud Act

The Mortgage Fraud Rescue Act (765 ILCS 940) was passed by the Illinois legislature to strictly regulate foreclosure rescue transactions and to curb the abuses arising therefrom. After a quick reading of the Act, it appears quite clear that the new law has no effect at all on the future application of the equitable mortgage doctrine. More specifically, the new statute says the following at Section 55(b) of the Act

• "A consumer who suffers loss by reason of any violation of any provision of this Act may bring a civil action in accordance with the Consumer Fraud and Deceptive Business Practices Act to enforce that provision. All remedies and rights granted to a consumer by the Consumer Fraud and Deceptive Business Practices Act shall be available to the consumer bringing such an action. The remedies and rights provided for in this 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." (emphasis added)

A clear reading of the statute appears to indicate that the new statute not only does not preempt the equitable mortgage doctrine, but it specifically preserves it, as well as any other legal claims that may have already been available prior to its passage (ie. fraud, racketeering, conspiracy, etc.).

(It may very well be that equitable mortgage claims and claims of violations of the new law can be brought together, in one lawsuit, either as part of one cause of action or as alternative causes of actions).

Bona Fide Purchaser Issue

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There is, what appears to be, an incorrect belief among many people that if, after a financially strapped homeowner unwittingly signs over title to his/her home to an operator, the operator sells the property to a third party, who then causes the property to be mortgaged, the homeowner automatically loses all possibility of ever getting their home back. Stated another way, the belief is that the purported interests of the subsequent third party "purchasers" (the buyer and any mortgage lender financing the purchase) have priority over any interest that the victimized homeowner may claim inder the equitable mortgage doctrine.

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My assertion is that as long as the financially strapped homeowner retains possession of the home after the purported transfer to the operator, that possession generally imparts "notice to the world" of any interest the homeowner has in the home. Therefore, the subsequent purchaser and mortgagee of the property may not qualify for "bona fide purchaser" status, in which case their interests in the property would be subordinate to the interests of the homeowner. This is generally true even if the homeowner receives a "judicial declaration of equitable mortgage" after the sale and mortgage to the third parties. The judicial declaration, under "relation back" principles, generally will relate back to the date of the homeowner's purported transfer to the operator (which typically pre-dates the subsequent sale and mortgage to third parties).

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One case (a Federal district court case) I came across makes the following observations of the bona fide purchaser issue, emphasizing the "duty of inquiry" imposed on any party claiming to be a "bona fide purchaser" under Illinois law (the case involved a foreclosure rescue situation):

• "A person who takes property for valuable consideration without notice of another's adverse claim is regarded as a bona fide purchaser whose rights are superior to competing claims. Life Savings & Loan Association v. Bryant, 125 Ill. App. 3d 1012, 81 Ill. Dec. 577, 582, 467 N.E.2d 277 (1st Dist. 1984)."

• "A mortgagee of realty is afforded the same protections as a bona fide purchaser if the mortgagee secures the mortgage without knowledge or notice of adverse claims to its mortgage. Id."

• "Notice of a competing interest in the realty may be predicated upon actual or constructive knowledge, and may also be imputed if the circumstances impose a duty of inquiry upon the purchaser/mortgagee. Burnix oil Co. v. Floyd, 106 Ill. App. 2d 16, 23, 245 N.E.2d 539 (1st Dist. 1969)."

• "A person is charged with the duty of inquiry only upon gaining knowledge of facts inconsistent with the mortgagor's claim or those "facts which would make a prudent person suspicious." In re Ryan, 851 F.2d 502, 511 (1st Cir. 1988)."

• "Inquiry notice imputes knowledge of all those facts which a diligent inquiry would have revealed. In re Cutty's-Gurnee, Inc., 133 Bankr. 934, 950 (N.D. Ill. 1991)."

• "The most common example of inquiry notice charged to a mortgagee is when a person other than the vendor is in possession of the property. Life Sav. & Loan Ass'n v. Bryant, supra, 81 Ill. Dec. at 582, 467 N.E.2d 277."

• "However, inquiry notice is imputed whenever the cumulative facts or circumstances create a reasonable suspicion that the mortgagee's interests are subject to an adverse claim. See, e.g., In re Cutty's-Gurnee, Inc., supra, 133 Bankr. at 952-53."

• "Factors, besides possession, which can serve as red flags to place a party on inquiry notice include: the extensive involvement of the putative bona fide purchaser in the transaction; the precarious financial status of the plaintiff; the low purchase price of the property; and the ease at which minimal investigation would uncover the fraudulent nature of the transaction. Shacket v. Roger Smith Aircraft Sales, 651 F. Supp. 675, 691-92 (N.D. Ill. 1986)."

For more, see Newman v. 1st 1440 Invest., Inc., 1993 U.S. Dist. LEXIS 354 (USDC N.D. Ill.)

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In another case, the following observations were made in connection with whether a subsequent claimant had knowledge imputed to it of a prior equitable mortgage (pursuant to the "inquiry notice" principle) :

• "[t]he issue of notice and priority of an equitable lien must be addressed on a case-by-case basis according to the facts and equities. Specifically, the facts must be examined to determine whether the subsequent claimant held actual or inquiry notice of the prior equitable mortgage."

• "Actual notice is that knowledge the subsequent claimant had at the time he acquired his claim. Constructive notice is knowledge that the law imputes to a purchaser or lien claimant, regardless of the actual knowledge held at the time he acquired his claim."

• "There are two kinds of constructive notice: record notice and inquiry notice. Under the doctrine of record notice, when a mortgage is properly recorded, the public record provides constructive notice of this interest to the whole world."

• "Inquiry notice is the knowledge the law imputes to a lien claimant or purchaser of real property when such claimant is under a duty of inquiry. Inquiry notice imputes knowledge of all facts that a diligent inquiry would have brought to light. Miller v. Bullington, 381 Ill. 238, 44 N.E.2d 850 (1942)."

• "The lien claimant's duty of inquiry depends upon all the facts and circumstances.

• It is clear that where a physical inspection of the property would reveal an adverse interest or where there is a party in possession other than the record title owner, the subsequent lien claimant has a duty to inquire of the possessor as to his interest and is charged with knowledge of the facts discoverable from such an inquiry or inspection. Miller, 381 Ill. at 244, 44 N.E.2d at 853; Burnex Oil Co. v. Floyd, 106 Ill. App. 2d 16, 23, 245 N.E.2d 539, 544 (1st Dist. 1969); In re Ehrlich, 59 Bankr. 646, 650 (Bankr. N.D. Ill. 1986)."

• "Outside of these types of obvious inconsistencies, however, it is not so clear what facts will suffice to create a duty of further inquiry."

• The general rule is that where the court is satisfied that the subsequent purchaser acted in bad faith, and that he either had actual notice or might have had that notice had he not willfully or negligently shut his eyes against those lights which with proper observation would have led him to knowledge, he must suffer the consequences of his ignorance and be held to have had notice so as to taint his purchase with fraud in law. . . . The law will not allow him to shut his eyes when his ignorance is to benefit himself at the expense of another, when he would have had them open and inquiring had the consequences of his ignorance been detrimental to himself and advantageous to the other."
  German-American Bank v. Martin, 277 Ill. 629, 115 N.E. 721 (1917) (quoting Doyle v. Teas, 4 Scam. 202).

• "Whatever is notice enough to excite attention and put the party on his guard and call for inquiry is notice of everything to which such inquiry might have led, and every unusual circumstance is a ground of suspicion and prescribes inquiry. . . . One having notice of such facts as would put a prudent man on inquiry is chargeable with the knowledge of other facts which he might have discovered on diligent inquiry." Blake v. Blake, 260 Ill. 70, 102 N.E. 1007 (1913).

For more, see In re Cutty's-Gurnee, Inc., 133 B.R. 934 (USBC N.D. Ill. 1991)

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In a third case, decided by an Illinois appellate court, the following observation is made regarding possession of real estate and its effect on providing "notice to the world" of the rights of the possessor.

• The final question to be answered then is, exactly to what priority was the Bryants' interest restored upon negation of the subordination agreement in relation to the subsequently executed mortgage. The answer turns on whether Life, as Mortgagee, was a bona fide purchaser such that its interest was protected by the recording act. Metcalf v. Altenritter (1977), 53 Ill. App. 3d 904, 369 N.E.2d 498.

• A bona fide purchaser is one who takes without notice of a prior claim or encumbrance. (Guard ex dem. Robinson v. Rowan (1840), 3 Ill. (2 Scam.) 499.) A mortgagee of realty is regarded as a purchaser, and, if the mortgage is supported by consideration and is taken in good faith, the mortgagee will be protected against adverse claims of which it has no notice. (59 C.J.S. Mortgages sec. 232 (1949).)

• Where, however, the mortgagee, at the time of taking the mortgage, has knowledge or legal notice of a prior conveyance, it is not entitled to the protection of a bona fide purchaser. (Fidelity Trust & Savings Bank v. Williams (1936), 285 Ill. App. 131, 1 N.E.2d 739.) One who takes a mortgage upon property with knowledge, either actual or constructive, of an earlier although unrecorded conveyance of it, takes it subject thereto and will not be permitted by placing his mortgage first on the record to gain priority over the earlier lien. St. Boniface Building & Loan Association v. Demopoulos (1939), 302 Ill. App. 614, 24 N.E.2d 171.

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• "Illinois courts have uniformly held that the actual occupation of land is equivalent to the recording of the instrument under which the occupant claims interest in the property. (Bullard v. Turner (1934), 357 Ill. 279, 192 N.E. 223; Beals v. Cryer (1981), 99 Ill. App. 3d 842, 426 N.E.2d 253). The open and visible possession of land by the equitable owner is sufficient to charge a mortgagee with notice of the rights of such owner, and the mortgagee will take subject to the rights of the person in possession. Williams v. Spitzer (1903), 203 Ill. 505, 68 N.E. 49."

For more, see Life Savings & Loan Association v. Bryant, 125 Ill. App. 3d 1012, 81 Ill. Dec. 577, 467 N.E.2d 277 (1st Dist. 1984)

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Based on the foregoing judicial observations in these three cases, it appears clear that in the State of Illinois a subsequent claimant (either purchaser or mortgagee) of property that is purchased from a foreclosure rescue operator (where the homeowner who unwittingly signed over his title to the operator is still in possession) has a duty not only to physically inspect the property, but also, to inquire of the person in possession as to what rights to the property the possessor has. Failing that, the rights of subsequent buyers and mortgagees will be subject and subordinate to any rights the homeowner may have pursuant to the equitable mortgage doctrine.

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Conclusion

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Given that the observations made in these court decisions seem so fundamentally basic, my guess is that one can readily find the same or strikingly similar observations made by courts in applying the state law in most, if not all, of the other 49 states. For all the non-Illinois readers, I do not wish to create the impression that the foregoing presentation of the "bona fide purchaser" issue and the principle of the "duty to inquire" is somehow limited or unique to Illinois law.

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Finally, the reason I included two Federal court cases for this post is not because of any force as binding precedent that they may have (since they are Federal cases applying state law, they probably have no weight as precedent; see the Erie Doctrine). Setting aside the fact that I just happened to "stumble into them", the observations made in both cases are either based on, or are quotes, from decisions of the Illinois judiciary (decisions which probably are binding precedent in the state of Illinois). Accordingly, these cases represent a handy summary of what some earlier Illinois state court decisions have said regarding these issues. For anyone looking to quickly get up to speed on the issues discussed herein, the two Federal cases may provide an acceptable alternative for gaining a quick perspective of the issues involved in lieu of digging up all the Illinois cases cited therein, and then reading them.

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Addendum (2-4-10)

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Fidelity Trust & Savings Bank v. Williams (1936), 285 Ill. App. 131, 1 N.E.2d 739:

• The rule of law which seems to control in a like situation is that the retention of possession by the grantor of the property conveyed is notice of his or her interest in the property, and to those claiming under the grantee, and such rule is laid down in the case of Ford v. Marcall, 107 Ill. 136, wherein the court said: "The law is, as this court has declared in White v. White, 89 Ill. 460, that when the grantor of real estate remains in possession, all persons acquiring title from the grantee are chargeable with notice of all the claims of the grantor."

• This rule was followed and approved in the case of Ronan v. Bluhm, 173 Ill. 277, where the court said: "It is proper we should remark, in answer to the discussion upon the point, that as it is conceded by all parties that the said Thomas Ronan did not deliver possession of the premises in question to the grantee, Carbine, but remained in the open and exclusive occupancy thereof, appellee, Bluhm, is deemed, as matter of law, to have taken the conveyance from Carbine with full notice of all the rights and equities of said Ronan in the premises. Illinois Central Railroad Co. v. McCullough, 59 Ill. 166; White v. White, 89 id. 460; Ford v. Marcall, 107 id. 136." It is to be noted from what the court said in this opinion that Bluhm was deemed as a matter of law to have taken the conveyance from Carbine, the grantee of Ronan, with full notice as to all the rights and equities of Ronan in the premises.

• This rule has been passed upon by the courts of this State, and the law is again discussed and approved in the case of Rock Island & Peoria Ry. Co. v. Dimick, 144 Ill. 628. The court in this opinion said: "The law is well settled in this State, as generally elsewhere, when not changed by the recording acts, that open and exclusive possession of lands, under an apparent claim of ownership, is notice to those subsequently dealing with the title of whatever interest the possessor has in the premises, whether the interest be legal or equitable in its nature. Wade on Notice, sec. 273; Davis v. Hopkins, 15 Ill. 519; Truesdale v. Ford, 37 Ill. 210; Smith v. Jackson's Heirs, 76 Ill. 254; Partridge v. Chapman, 81 Ill. 137. It has been held also in this State, that if the grantor remains in possession after conveyance, purchasers from the grantee are affected with notice of the grantor's rights in the land. White v. White, 89 Ill. 460; Ford v. Marcall, 107 id. 136."

• In the case of Porter v. Clark, 23 Ill. App. 567, this rule was also approved, and in discussing the subject matter of the litigation, the court there stated what we regard as pertinent in its application to the instant case. This statement is: "If Porter, knowing as he did that Clark was in possession, had gone to him and inquired as to his rights, he would undoubtedly have been told that the purchase money had not been paid, and that he, Clark, claimed a vendor's lien on the land."

Illinois equitable mortgage beta Illinois bona fide purchaser alpha

Flack v. McClure, 206 Ill. App. 3d 976, 565 N.E.2d 131, 151 Ill. Dec. 860 (Ill. App. Ct. 1990)

The following is an unofficial copy of the non-copyrightable portion of the actual case cited above which is provided for the convenience of the readers of The Home Equity Theft Reporter. It is intended solely to provide a potential starting point for additional research regarding the issues involved in this case. It is intended for lawyers and law students only. If you find this case to be of some value to you in researching an issue, I urge you to obtain the official copy of this case from the usual sources of case law information.

OPINION:

PRESIDING JUSTICE LaPORTA delivered the opinion of the court:

Plaintiff brought suit July 3, 1985, against defendants for specific performance on a house sale. On September 10, 1985, the trial court granted plaintiff's motion to amend her complaint to include an additional claim for an equitable mortgage alleging the defendants had recorded a quitclaim deed given only as security for a $ 9,000 loan from defendants. A second amended complaint was filed by agreed order October 22, 1985. On February 21, 1986, the court granted defendant's motion to strike the equitable mortgage claim from the second amended complaint. On March 21, 1986, plaintiff filed a third amended complaint in compliance with the earlier order.

Defendant John McClure died March 2, 1987, and his death was spread of record December 4, 1987, four days before the trial began. The trial court appointed his wife and codefendant, Loretta McClure, special administrator for purpose of the trial. At the close of plaintiff's case, the trial court permitted plaintiff to amend her complaint to add an equitable mortgage claim to conform with the evidence presented. Following trial, the court ordered defendant to reconvey the property to plaintiff and imposed an equitable mortgage payable from plaintiff to defendant in the amount of $ 45,757.64.

Defendant appeals, citing as error by the trial judge (1) the admission at trial of the deposition testimony of John McClure, (2) the amendment of the complaint during trial to add an equitable mortgage claim, and (3) the manifest weight of the evidence was insufficient to support a finding that an equitable mortgage should be imposed.

On September 11, 1984, plaintiff signed a contract to sell her southside building to the defendants for $ 80,000. The defendants also signed the contract, and the closing was scheduled for October 16, 1984. We note that the real estate contract attached as an exhibit to the complaint recites, in pertinent part, "Purchaser has paid $ 1,000 * * * as earnest money to be applied on the purchase price * * *." The sale was never completed because the defendants were unable to secure the required $ 60,000 financing.

On the day the sales contract was signed, September 11, 1984, plaintiff asked the defendants for $ 9,000, saying she needed money to pay off a college tuition payment for her son. The defendants, represented by counsel, loaned plaintiff the money in exchange for a quitclaim deed. Plaintiff argues that the deed was given as security, but the defendant argues the deed was an absolute conveyance of the property.

The defendants were unable to get financing to proceed with the scheduled closing on October 16, 1984. The holder of the first mortgage foreclosed on the property, and in December 1984 the property was offered for sale by the Cook County sheriff. Ivory Bennett, a nonlitigant here, bought the property at the sheriff's sale for $ 35,000. In an effort to prevent the Bennett sale from being finalized, the defendants recorded the quitclaim deed and subsequently redeemed the property in June 1985, on the final day of the redemption period, by paying the sheriff's office $ 36,757.64.

In July 1985 plaintiff sued defendants seeking specific performance on the original sales contract. The pretrial judge granted plaintiff leave to amend her complaint to include a claim for an equitable mortgage. The same judge later granted defendant's motion to strike the equitable mortgage claim.

At trial before a different judge, plaintiff testified on direct examination and her cross-examination was begun on the first day of trial, December 8, 1987. At the end of the first day's testimony, defense counsel indicated that he would continue his cross-examination of plaintiff the following day. The court reporter's notes were lost for the second day of trial, December 9, 1987, and for that reason the balance of plaintiff's cross-examination testimony is not part of the record before us.

On May 10, 1988, before the trial resumed for a third day, the trial judge permitted plaintiff to amend her complaint again to include a claim for equitable mortgage. The trial resumed for a third day, July 22, 1988, and defendant Loretta McClure testified on direct examination. The trial was recessed thereafter to afford plaintiff an opportunity for further discovery. The trial resumed on September 5, 1989, the final day of trial. At that time, Loretta McClure was too ill to testify on cross-examination and was never cross-examined.

On the final day of trial, over defense objection, the court granted plaintiff's motion to admit the entire deposition testimony of the deceased, John McClure. The parties stipulated at trial that the defendants were unable to obtain a mortgage for the property and therefore did not complete the sales contract.

In her ruling at the conclusion of the trial, the trial judge found the equities were with the plaintiff, ordered defendant to reconvey the property to plaintiff and declared an equitable mortgage in the defendant's favor in the amount of $ 45,757.64 -- the cost of the redemption together with the $ 9,000 "loan." Defendant appeals from that order, citing three errors by the trial judge as issues here. Defendant contends the trial court improperly admitted John McClure's deposition into evidence, improperly permitted plaintiff to amend her complaint to include an equitable mortgage count, and erred when it found sufficient evidence to impose an equitable mortgage.

We first consider whether the trial judge erred in admitting the deposition testimony of deceased defendant John McClure. Supreme Court Rule 202 (107 Ill. 2d R. 202) distinguishes between discovery and evidence depositions. Rule 202 states: "The notice, order, or stipulation to take a deposition shall specify whether the deposition is to be a discovery deposition or an evidence deposition. In the absence of specification a deposition is a discovery deposition only. If both discovery and evidence depositions are desired of the same witness they shall be taken separately, unless the parties stipulate otherwise or the court orders otherwise upon notice and motion." 107 Ill. 2d R. 202.

Defendant contends McClure's deposition testimony was inadmissible, because (1) it was taken for discovery purposes only and (2) it was not signed by McClure. Plaintiff argues, however, that the deposition was admissible because notice to the defendants indicated that it would be for both discovery and evidentiary purposes. Plaintiff argues also that the defendant's attorney, through her conduct, agreed to the dual purpose when she remained silent when the plaintiff's attorney stated on the record the dual purpose of the deposition.

Defendant argues that conduct by an attorney is not enough to create a "stipulation" under the law. While a stipulation need not follow any particular form, it must be clear, certain and definite in its material provisions. ( Village of Schaumburg v. Franberg (1981), 99 Ill. App. 3d 1, 4, 424 N.E.2d 1239, 1242.) Defendant argues that if the decision is allowed to stand, any party would be able to take simultaneous discovery and evidence depositions on their own notice -- in essence rewriting Supreme Court Rule 202.

Plaintiff notes that notice to the defendants indicated the dual purpose of the deposition and that the dual purpose was repeated at the beginning of the deposition. A stipulation is like a contract, and the court will look to the actual intention of the parties. ( Scott v. Dreis & Krump Manufacturing Co. (1975), 26 Ill. App. 3d 971, 989, 326 N.E.2d 74, 86.) The agreement need not require a meeting of the minds. A subjective understanding is not requisite. Conduct can indicate the terms of the agreement. Steinberg v. Chicago Medical School (1977), 69 Ill. 2d 320, 330-31, 371 N.E.2d 634, 638-40.

Plaintiff relies on a case where a discovery deposition was allowed as an evidence deposition because the deponent lived in another State and was not expected to or able to travel for the trial. There the court found the opposing party had actual notice because the parties discussed in court the witness's inability to travel. ( In re Estate of Ragen (1981), 96 Ill. App. 3d 1035, 1046, 422 N.E.2d 179, 187.) Defendant distinguished Ragen by noting the fact there that the witness had always been unable to travel, whereas the parties in this case could not have known ahead of time that John McClure would not be available for trial.

Here, in admitting the deposition testimony, the trial judge stated that the comments published with the rules show the purpose behind Rule 202. The comments state in pertinent part: "[T]he federal practice of combining evidence and discovery depositions tends to impair and restrict discovery, encourage objections and motions and other disruptions of orderly procedure, and to afford a means of entrapment of the unwary and inexperienced." Ill. Ann. Stat., ch. 110A, par. 202, Historical & Practice Notes, at 261 (Smith-Hurd 1985).

The trial court found proper notice was given and that the dual purpose of the deposition was stated on the record, giving opposing counsel the opportunity to object. "Certainly counsel is aware of the evidentiary portion of this and could have taken whatever measures were necessary to protect her client in the event the deposition would be used as evidence, so I don't think under these circumstances that the reasons for Rule 202 have been disregarded." The trial court also found the deposition could be entered without a signature because the signature requirement was impossible to meet when McClure died before the deposition was transcribed. We find the court did not err in admitting the deposition testimony of John McClure.

We next consider whether the trial court erred in permitting plaintiff to amend her complaint to add a claim for equitable mortgage. The pretrial judge assigned to the case permitted an equitable mortgage claim to be added to the complaint but subsequently struck that claim from the complaint upon defendant's motion. At trial before a different judge, plaintiff was given leave to amend her complaint to add a claim for an equitable mortgage to conform to the proof plaintiff presented at trial.

Defendant cites Towns v. Yellow Cab Co. (1978), 73 Ill. 2d 113, 121, 382 N.E.2d 1217, for the proposition that a prior court order cannot be overturned unless there is a showing that the original order was incorrect or erroneous. However, in Towns, the supreme court urged the trial court to vacate or amend prior orders only after careful consideration, but went on to state that the trial judge is not bound by the order of a previous judge and can correct orders "which it considers to be erroneous." ( Towns, 73 Ill. 2d at 121.) In Towns, as in this case, the litigation went to a second judge for trial as a matter of procedure.

A 1980 appellate court case that gave extensive consideration to amending pleadings stated that courts should permit liberal amendments in the interest of justice. ( Pickett v. First American Savings & Loan Association (1980), 90 Ill. App. 3d 245, 249-50, 412 N.E.2d 1113, 1117-18.) The materiality of an amendment to conform to the evidence must be apparent, so that defendant is not prejudiced. Pickett, 90 Ill. App. 3d at 250.

Plaintiff relies on Pickett and argues that no prejudice has been done to defendant here since throughout the trial sufficient evidence was adduced to establish a basis for the imposition of an equitable mortgage. The amendment was allowed at the close of plaintiff's case to conform to the trial evidence. The first two days of trial occurred in December 1987. The amendment was permitted May 10, 1988. From May 10, 1988, to July 22, 1988, the third day of trial, the defendant had adequate time to prepare a defense to the equitable mortgage claim. In addition, trial was recessed the afternoon of July 22, 1988, to permit plaintiff additional time for discovery, and the final day of trial took place on September 5, 1989, 16 months after plaintiff was allowed to amend her complaint to include the equitable mortgage claim. Clearly the defendant had adequate time to prepare a defense to the equitable mortgage claim. She was not prejudiced when the amendment was permitted. Consistent with the holdings in Towns and Pickett, we find the trial court did not err in permitting plaintiff to amend her complaint.

Finally, we consider whether the evidence was sufficient to support the imposition of an equitable mortgage. "Every 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." (Ill. Rev. Stat. 1983, ch. 95, par. 55.) Whether a deed is to be taken as a mortgage depends on the intentions of the parties. ( Beelman v. Beelman (1984), 121 Ill. App. 3d 684, 690, 460 N.E.2d 55, 59.) In order to convert a deed absolute on its face into a mortgage, the proof must be clear, satisfactory and convincing and can come from almost every conceivable fact that could legitimately aid that determination. ( McGill v. Biggs (1982), 105 Ill. App. 3d 706, 708, 434 N.E.2d 772, 773.) The burden of proof rests upon the party asserting a mortgage where a deed absolute was conveyed. Havana National Bank v. Wiemer (1975), 32 Ill. App. 3d 578, 585, 335 N.E.2d 506, 512.

Since the question of whether to impose an equitable mortgage is based on fact, consideration of the trial testimony is essential. Deeds have been set aside where evidence showed a preexisting debt and the grantee retained a promissory note or other evidence of the debt where an agreement to reconvey was entered into at the same time or where the price paid was far below the fair value of the property. Wilkinson v. Johnson (1963), 29 Ill. 2d 392, 404, 194 N.E.2d 328, 335.

At trial, plaintiff testified that she intended the $ 9,000 to be an advance on their $ 80,000 contract. She testified that defendant John McClure assured her the quitclaim deed would not be recorded but would be held as security. She testified she relinquished the quitclaim deed "to show that I was an honest person. I really appreciated him giving me an advance of the $ 9,000 so that my kid could go to school."

Plaintiff testified that later defendant Loretta McClure assured her the closing would occur prior to the sheriff's sale. Plaintiff stated: "She told me not to worry, that God would help me, and that everything would be taken care of." Evidence admitted at trial included the sales contract and a letter signed by plaintiff dated September 12, 1984, that acknowledged receipt of a $ 9,000 cashier's check from defendant John McClure. The letter did not indicate the purpose of the $ 9,000 payment but it did identify plaintiff as the owner of the four-flat building.

Plaintiff also testified that before the redemption period ended, the McClures indicated they were no longer interested in purchasing the property and she subsequently located a second buyer who was willing to pay $ 75,000. Plaintiff testified that she asked for a return of the quitclaim deed from the defendants, promising to give them $ 9,000 after the June 7, 1985, closing. Plaintiff testified that the defendants told her they would not give her the deed until she repaid them $ 9,000. The second sale was never consummated.

John McClure's deposition testimony was admitted over defendants' objection. In his deposition, he testified he gave plaintiff $ 9,000 in exchange for the quitclaim deed. The deposition includes the following questions and answers between plaintiff's counsel and John McClure: "At the time Miss Flack-Bargyh gave you the deed, did you feel you owned the property?" "Yes, I think so." "Did you feel that if Miss Flack-Bargyh gave you $ 9,000 in return, paid you the $ 9,000 back, that you would be legally obligated to return her deed?" "Sure."

Later in the deposition he testified: "At the time we found we could not get the mortgage, if she gave me that $ 9,000 back, I would give her the quitclaim deed back." Still later in the same deposition, the following colloquy took place between plaintiff's attorney and John McClure: "It was your intention for you to give the quitclaim deed back if she gave you your $ 9,000?" "That's correct." "At all times?" "That's correct."

John McClure testified in his deposition that he knew of the impending sheriff's sale and told plaintiff that he believed they could close on the deal before the sheriff's sale. He also testified that his attorney sent someone to the sheriff's sale to bid on the property.

Defendant Loretta McClure testified at trial that the quitclaim deed is what plaintiff offered for the $ 9,000 given to her on the mortgage. She further testified that she and her husband chose to redeem the property on the final day of the redemption period because "that's the only hope we had of receiving the money that was given -- that she had asked for for the mortgage." (Emphasis added.)

The trial court in its findings at the close of trial made reference to John McClure's testimony only, noting that he conceded that the quitclaim deed was taken as security. Defendant argues that plaintiff's entire case is premised on John McClure's testimony and therefore has no support without its admission. Plaintiff argues that John McClure's testimony simply corroborates Loretta McClure's testimony. We find that Loretta McClure's testimony showed evidence that the deed was not given as an absolute conveyance but rather as a security interest for the $ 9,000. She specifically identified the transaction as money given "for the mortgage."

In a bench trial it is within the province of the trial court to determine the credibility and weight of testimony, to resolve inconsistencies and conflicts and to render its decision accordingly. ( Silas v. Robinson (1985), 131 Ill. App. 3d 1058, 1061, 477 N.E.2d 4, 6-7.) Though conflicts in evidence exist, a court can still find an equitable mortgage. Burroughs v. Burroughs (1973), 11 Ill. App. 3d 176, 177, 296 N.E.2d 350, 351.

Six factors are to be considered by the trial judge to determine whether an equitable mortgage exists. Those factors include whether a debt exists, the relationship of the parties, whether legal assistance was available, the sophistication and circumstances of each party, the adequacy of the consideration and who retained possession of the property. McGill, 105 Ill. App. 3d at 708; Beelman, 121 Ill. App. 3d at 689.

The existence of a debt is the essential element to establish an equitable mortgage. ( Metcalf v. Altenritter (1977), 53 Ill. App. 3d 904, 909, 369 N.E.2d 498, 502.) But 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. Davidson v. Iwanowski (1950), 341 Ill. App. 152, 166, 93 N.E.2d 139, 145-46.

The existence of a debt here does not appear to be in doubt. The court in McGill found an indication of a debt relationship in a defendant's attempt to collect and held that an agreement to reconvey has long been considered a significant factor in distinguishing a sale from a mortgage. ( McGill, 105 Ill. App. 3d at 709-10.) Both defendants testified they tried to get the $ 9,000 back. John McClure said more than once that he would have returned the deed had plaintiff returned the 9,000. In addition, plaintiff signed a note which the defendants retained. Where the grantor is indebted to the grantee at the time of the conveyance, and the grantee retains the note evidencing the indebtedness, then the indebtedness was not satisfied by the conveyance, and, until the contrary is shown, it will be presumed that a mortgage is intended. Havana National Bank, 32 Ill. App. 3d at 584.

Beelman and McGill also hold that a court could consider the prior relationship of the parties, if any. The record does not indicate that the parties had any prior relationship, business or otherwise. The court should also consider whether or not the parties had the benefit of legal assistance at the time of the occurrence. The record indicates that plaintiff did not have advice of counsel when she accepted the $ 9,000, signed the note and relinquished the quitclaim deed to the defendants whereas the defendants were represented by counsel.

Beelman and McGill also considered the sophistication and circumstances of each party. Here, we do not know the defendants' financial situation except that they were unable to obtain the necessary financing to close the real estate purchase on the scheduled closing date, October 16, 1984. The record shows plaintiff had a school tuition payment due and was behind on her mortgage payments to the point that her property was about to be foreclosed by the mortgage holder. The record discloses nothing about the sophistication of plaintiff or defendants.

Beelman and McGill identify a fifth factor: the adequacy of consideration. Where consideration is grossly inadequate, a mortgage is strongly indicated. ( McGill, 105 Ill. App. 3d at 708.) Here, the defendants signed an $ 80,000 contract on the home at the same time they gave plaintiff $ 9,000. Defendants argue that, in light of the building's poor condition, "it is clear the actual value of the property was significantly less." However, in his deposition testimony, John McClure acknowledged that he still would have gone through with the $ 80,000 contract if he could have obtained a mortgage. Clearly, the $ 80,000 price was the agreement of the parties, and the defendant may not now argue that the value of the property was "significantly less."

The final factor the McGill court considered is whether the grantor of the deed remained in possession of the property. ( McGill, 105 Ill. App. 3d at 709-10.) In her analysis, the trial judge noted that plaintiff stayed in the home for a year after she gave the defendants the quitclaim deed. Plaintiff remained in the home until the defendants successfully obtained a court order requiring plaintiff to vacate the premises, and this occurred after the defendants had recorded the quitclaim deed and redeemed the property from the foreclosure sale. We find that the trial evidence clearly supports the finding of an equitable mortgage and that the trial court's decision was consistent with the manifest weight of the evidence. We find no error.

For all of the foregoing reasons, we affirm the judgment of the trial court.
Judgment affirmed.

McNAMARA and EGAN, JJ., concur.

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Robinson v. Builders Supply & Lumber Co., 223 Ill. App. 3d 1007, 586 N.E.2d 316 (1st Dist. 1991)

The following is an unofficial copy of the non-copyrightable portion of the actual case cited above which is provided for the convenience of the readers of The Home Equity Theft Reporter. It is intended solely to provide a potential starting point for additional research regarding the issues involved in this case. It is intended for lawyers and law students only. If you find this case to be of some value to you in researching an issue, I urge you to obtain the official copy of this case from the usual sources of case law information.

JUDGES: McNAMARA, RAKOWSKI, LaPORTA

OPINION BY: McNAMARA

OPINION:

MODIFIED ON DENIAL OF REHEARING

JUSTICE McNAMARA delivered the opinion of the court:

This appeal arises from two consolidated cases. In the first, plaintiff, Rosemary Robinson, brought an action against Builders Supply & Lumber Company ("Builders") and others seeking Builders Supply & Lumber Company ("Builders") and others seeking specific performance of an agreement pertaining to a single family residence and a multi-unit building in Maywood, Illinois. In the second case, First Federal Savings Bank of Proviso ("First Federal") sought to foreclose on the single-family residence after Builders defaulted on a note secured by a mortgage on that property. After a hearing, the circuit court of Cook County denied plaintiff's motion for summary judgment against First Federal, and granted Builders's counter-motion for summary judgment and entered judgment of foreclosure for First Federal.

The relevant facts adduced from the pleadings, depositions, documents, and affidavits are as follows: Plaintiff and her husband owned a building at 840-852 South 17th Avenue, Maywood, ("the building") and a house at 818 South 21st Avenue, Maywood, Illinois ("the house"), each held in joint tenancy with right of survivorship. Upon her husband's death in 1979, title to both properties passed to plaintiff. She and her husband had resided in the house since the late 1960's and she continues to occupy the house. The building contains nine apartments and four stores, including "Robinson's Cafe," which plaintiff and her husband operated prior to his death. Plaintiff's affidavit, filed in May 1989, stated that she was 70 years-old, had completed two years of high school, had worked as a bar maid and cook prior to her husband's death and that she had "never conducted any business affairs." She failed to pay the 1978 taxes on the building and National Indemnity Corporation ("National Indemnity") purchased the 1978 and 1980 taxes. In May 1982, plaintiff entered into an agreement with National Indemnity, which gave her an option to repurchase the building for $ 30,398.44 by November 30, 1982, after which time she would lose her interest in the building. National Indemnity hired attorney David Z. Feurer to get the taxes on the building reduced and plaintiff agreed to assume National Indemnity's $ 1,500 obligation to Feurer if he sucessfully reduced the taxes and if plaintiff subsequently repurchased the building pursuant to the agreement. In June 1982, plaintiff unsuccessfully applied for a commercial loan to repurchase the building from National Indemnity. She also tried to borrow the money from friends. At the time, she "did not think of trying to get a loan using the House as collateral." In October 1982, an acquaintance suggested that Joseph Willens, president of Builders, could assist her. When Willens, then 83 years old, contacted plaintiff, she told him that she needed $ 40,000 to redeem her building. According to her, Willens agreed to lend her "thirty some thousand dollars plus interest and to give her 30 months to repay it."

Plaintiff and Builders subsequently entered into an agreement, the intent and terms of which are disputed. On November 30, 1982, at Builders's office plaintiff signed the documents presented to her without a reading or an understanding of them. On that date, plaintiff executed two deeds, conveying the house and building to Builders in the presence of Willens, Anthony Bruno, Builders's attorney, along with another employee of Builders. No closing documents were executed nor was an attorney present on plaintiff's behalf. Willens told Feurer about the transaction, and Feurer advised plaintiff by letter dated November 30, 1982, that he disapproved of the agreement. In the letter Feurer explained that plaintiff had transferred ownership of the house and building to Builders and that she retained an option to repurchase the property by 24 monthly payments of $ 1,700 each. Plaintiff denied that Feurer assisted or represented her in her efforts to repurchase the properties from National Indemnity and stated that she never spoke to Feurer about the transaction with Builders.

On December 9, 1982, Builders and plaintiff entered into an installment contract for warranty deed to the house with an option to repurchase the building. She did not read the agreement before signing it, stating that she "did not understand the document, but thought that it was necessary for the agreement I had made with Builders for a loan of $ 40,000." Plaintiff understood that Builders would pay National Indemnity $ 34,726.50 to buy back the taxes on the building, and that this loan from Builders would be repaid over 24 months in $ 1,700 monthly installments, totalling $ 40,800. The monthly payments were to come from the net rentals of the building.

Anthony Bruno, attorney for Builders, testified at his deposition that Builders was in the business of buying, rehabilitating and reselling distressed properties. Typically, after purchasing a distressed property, Builders would obtain a mortgage on it sufficient to cover the purchase price and the estimated cost of repairs. According to Bruno, Builders was also in the business of lending money.

Bruno testified that plaintiff came to Builders in order "to save her building," and "to achieve redemption in some fashion so that the building wouldn't go to tax purchasers." He stated that the parties agreed that "the most convenient way to handle this transaction" was for Builders to buy the building and house from plaintiff for $ 40,000, and allow her to "eventually repurchase the property for an agreed upon price." Bruno drafted the legal documents, including the two warranty deeds and the installment agreement for warranty deed. The agreement required plaintiff to pay $ 2,156.62 monthly for 30 months, totalling $ 50,354.24, in order to repurchase the property. Bruno stated that both Willens and plaintiff anticipated at the time of signing that the net rentals would be sufficient to cover the monthly payments and that she would not need to make any monthly payment. Bruno also stated that the agreement required plaintiff to pay monthly any advances by Builders for reasonable expenses.

The parties dispute the amount of consideration paid by Builders. Builders claims that "the purchase price" for the property was $ 50,354.24, consisting of three elements: $ 34,726.50 paid to National Indemnity; $ 3,354.24, paid to Frank M. Spatz to clear a lien on the property; and $ 12,273.50 paid to plaintiff by cashier's check. Plaintiff stated that she never received a cashier's check from Builders. She also stated that she gave Builders $ 2,000 to cover in part the money owed Spatz. The record contains copies of the following "purchaser's receipts" for cashier's checks drawn by Willens: $ 11,500 to Rosemary Robinson, dated November 30, 1982; $ 12,273.50 to Rosemary Robinson, dated December 2, 1982; (Builders for some reason not clear in the record issued two checks to plaintiff) $ 32,000 to Chicago Title & Trust Company (CT&T) dated November 30, 1982; $ 2,726.50 to CT&T, dated December 2, 1982; and $ 34,726.50 to Chicago Title, dated December 10, 1982. Bruno testified regarding the alleged payment to plaintiff that he did not remember:


"who, what or where relative to the funds, other than a general memory that she was in financial trouble at the time and that she wanted money for various reasons. And apparently this was --she wanted this money for whatever reasons, and she got it. I don't know."


Bruno explained that several cashier's checks were drawn for CT&T because the transaction was delayed and the figures changed.

On December 2, 1982, Builders applied to First Federal for a $ 40,000 loan to be secured with a mortgage on plaintiff's house. The application valued the house at $ 52,000. Builders executed the note on December 13, 1982, and the mortgage was recorded on December 29, 1982. In February 1983, Builders sought to cancel the agreement because of problems in clearing title. Feurer objected and demanded that Builders disburse the funds.

Builders subsequently collected rents, paid real estate taxes and operating expenses for the building. Additionally, Builders leased the restaurant to plaintiff and made mortgage payments on the house. In July 1983, Builders evicted plaintiff from the restaurant for non-payment of rent, and obtained a $ 2,100 judgment against her. Bruno stated that it became clear by August 1983 that the income from the building failed to meet the operating expenses and "various non-operating expenditures" that Builders incurred. The record contains a statement prepared by Builders, dated August 26, 1983, which indicated that operating expenses exceeded rentals by $ 501.14 and that plaintiff owed $ 19,173.78 under the contract from the period from December 1982 to date. The record contains a corresponding document dated September 1983. Neither document details the expenses. Plaintiff stated that she was not notified of any shortages until January 1984. Builders's 1983 tax return indicates that the rental payments exceeded operating expenses by $ 7,804. On November 25, and December 23, 1983, Feurer by letters requested a complete accounting of all income and expenses incurred. Builders did not respond. In January 1984, Builders paid back taxes on the building for 1979 and 1981 in the amount of $ 25,422.93.

On January 11, 1984, Builders served plaintiff with a notice of its intent to cancel the agreement within 30 days, and subsequently presented a formal notice of default dated February 15, 1984. Bruno stated that he had not informed plaintiff that she was in default prior to this time, nor did he know whether Builders or Willens did. On February 2, 1984, Builders sold the building for $ 100,000, and in May 1984 filed an action against plaintiff to evict her from the house. Builders subsequently defaulted on its loan and in May 1988 First Federal filed an action to foreclose on the mortgage.

On June 24, 1984, plaintiff filed a complaint against Builders and others, including First Federal, seeking specific performance of the agreement, damages for breach of contract arising from the sale of the building, a declaration that the deeds were equitable mortgages, and other relief. The circuit court of Cook County consolidated these cases in July 1988.

Plaintiff subsequently filed a motion for summary judgment against First Federal for a ruling in her favor on whether her transaction with Builders was a sale or equitable mortgage, alleging that no material factual issues existed. Builders filed a counter-motion for summary judgment on the same issue. After a hearing on the cross-motions for summary judgment, the court denied plaintiff's request for summary judgment and granted Builders's motion. The court ruled as follows:
.

"As to [plaintiff's] motion for summary judgment as against [First Federal], this court must rule that summary judgment must be denied. No way was an equitable mortgage created. There was no indebtedness between the parties, and there are triable issues of fact involved.

* * *

As to the motion for summary judgment prayed for by [Builders], the court finds that as to them there are no triable issues of fact, there was no equitable mortgage, this court of necessity must state that there was an absolute deed passed, there was a default. Motion for summary judgment as to [Builders] will be granted."

The court also entered judgment of foreclosure on behalf of First Federal.

On appeal, plaintiff contends that the trial court improperly denied summary judgment on whether the Builders transaction constituted an equitable mortgage and improperly granted Builders summary judgment on the same issue. In addition, plaintiff claims that the trial court erred in granting summary judgment for Builders on the issues of the alleged default and her right to an accounting on the agreement. Thus plaintiff requests this court to reverse the trial court's order in its entirety.

The purpose of summary judgment is to determine the presence or absence of triable issues of fact and in determining whether the moving party is entitled to summary judgment, the pleadings, depositions, admissions and affidavits should be strictly construed against the movant and liberally in favor of the opponent. ( Vincent DiVito, Inc. v. Vollmar Clay Products Co. (1989), 179 Ill. App. 3d 325, 534 N.E.2d 575.) Summary judgment is proper when the parties agree on relevant facts and the record presents purely questions of law. ( J.M. Beals Enterprises, Inc. v. Industrial Hard Chrome, Ltd. (1990), 194 Ill. App. 3d 744, 551 N.E.2d 340.) When the facts allow for more than one conclusion, including one unfavorable to the movant, motion for summary judgment should be denied. (Vincent DiVito, Inc. v. Vollmar Clay Products Co.) Moreover, summary judgment is a drastic means of disposing of litigation and should be granted only when "the right to it is clear and free from doubt." ( Allstate Insurance Co. v. Tucker (1989), 178 Ill. App. 3d 809, 812, 533 N.E.2d 1004, 1007.) Upon review, we conclude that genuine issues of material fact existed which precluded summary judgment in Builders' favor on whether its transaction with plaintiff constituted an equitable mortgage and whether she defaulted under the agreement.

We note initially that under Illinois law a deed absolute on its face may be considered an equitable mortgage under certain circumstances. The relevant statute provides:


"Every 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 a mortgage."

Ill. Rev. Stat. 1989, ch. 95, par. 55.

Whether a deed is to be considered as an equitable mortgage depends on the parties' intentions. ( Beelman v. Beelman (1984), 121 Ill. App. 3d 684, 460 N.E.2d 55.) 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." ( McGill v. Biggs (1982), 105 Ill. App. 3d 706, 708, 434 N.E.2d 772, 773.) Indeed, our courts have recognized and considered a number of factors including the following:


"the existence of an indebtedness, the close relationship of the parties, prior unsuccessful attempts for loans, the circumstances surrounding the transaction, the disparity of the situations of the parties, the lack of legal assistance, the unusual type of sale, the inadequacy of consideration, the way the consideration was paid, the retention of written evidence of the debt, the belief that the debt remains unpaid, an agreement to repurchase, and the continued exercise of ownership privileges and responsibilities by the seller (citations omitted)." McGill v. Biggs, 105 Ill. App. 3d at 708, 434 N.E.2d at 774.


Our courts have repeatedly considered the adequacy of consideration in determining whether to apply the equitable mortgage theory. ( Wilkinson v. Johnson (1963), 29 Ill. 2d 392, 194 N.E.2d 328; McDonnell v. Holden (1933), 352 Ill. 362, 185 N.E. 572; Flack v. McClure (1990), 206 Ill. App. 3d 976, 565 N.E.2d 131; Beelman v. Beelman; McGill v. Biggs.) Where the consideration is grossly inadequate, a mortgage is strongly indicated. (McGill v. Biggs; Burroughs v. Burroughs (1971), 1 Ill. App. 3d 697, 274 N.E.2d 376.) In Flack v. McClure, defendant loaned plaintiff $ 9,000 in exchange for a quitclaim deed to her home. At the same time, plaintiff signed a contract to sell her home to defendants for $ 80,000, which sale was never completed due to defendant's inability to acquire financing. This court rejected defendant's argument that the deed was an absolute conveyance of the property, emphasizing in part the inadequacy of the consideration. The court also rejected defendant's claim that the value of the property was significantly less than $ 80,000 due to its "poor condition." Flack v. McClure, 206 Ill. App. 3d at 986, 565 N.E.2d at 137.

This court in McGill v. Biggs also focused on the inadequacy of the consideration in finding an equitable mortgage. In McGill, the grantor of a quitclaim deed argued that he conveyed the deed to secure a loan to pay funeral expenses. The trial court found the evidence sufficient to show that the parties intended to create a debt arrangement and that the deed was a mortgage. In affirming, this court emphasized the inadequacy of the consideration, noting that it was less than ten percent of the value of the property. Specifically, the property was valued at $ 15,000 and plaintiff signed what he believed was a contract to pay defendant a total of $ 1,725 over 15 months. The court also considered: that consideration was paid to plaintiff's creditor, rather than plaintiff; and that the property was never advertised or offered for sale.

In this case, we find that the record lacks sufficiently conclusive evidence on the adequacy of consideration, specifically the amount Builders paid and the value of the properties, and, as such, creates a genuine issue of material fact. Builders argues that it paid the sum of $ 50,354.24 for the properties: $ 34,726.50 to National Indemnity; $ 3,354.24 to Spatz for his lien on the building and $ 12,273.50 to plaintiff. The record, however, fails to support Builders's contention. There is no dispute that Builders paid nearly $ 35,000 to National Indemnity. The parties dispute, however, whether Builders paid plaintiff. She testified that she never received any money from Builders, and the record does not sustain Builders's claim that it paid her. Bruno testified that he did not recall whether plaintiff was paid. Moreover, the two purchaser's receipts for cashier's checks in Robinson's name fail to conclusively prove that Builders paid plaintiff, especially given plaintiff's conflicting testimony and Bruno's lack of knowledge or recall as to whether she was paid. Further, although Builders alleges that it paid $ 3,354.24 to Spatz for the lien and claims that such amount was part of the "purchase price," plaintiff states that she gave Builders a $ 2,000 check toward this amount on November 30, 1982.

If plaintiff received no money from Builders and, in fact, paid Builders $ 2,000 toward the lien, as she testified, then the amount of consideration paid totals approximately $ 36,000, not $ 50,354 as Builders claims.

Moreover, although Builders valued the house at $ 52,000 on its mortgage application, the record lacks sufficient evidence of the building's value to address the adequacy of consideration. The record is devoid of any actual valuation of the building and the only evidence suggesting its value is the fact that Builders sold the building for $ 100,000 in January 1984. Builders maintains that the building's dilapidated condition diminished its value. Builders also maintains that it received only $ 46,000 from the sale after deducting for operating losses and capital expenditures, and suggests that this figure represents the value. Although the closing statement indicates that the amount due to Builders was reduced by approximately $ 50,000 for a loan and the 1982-84 property taxes, we believe that the sales price is more indicative of the value than the amount of cash Builders received from the sale. In the absence of evidence showing the building's value, we cannot conclude that, as a matter of law, the consideration was adequate. Construing the evidence presented strictly against Builders, we believe that genuine issues of material fact existed relative to the adequacy of consideration.

We also find Flack v. McClure, decided by this court subsequent to the trial court's decision in this case, instructive. In Flack, in addition to considering the adequacy of the consideration as discussed above, this court identified five other factors in deciding that an equitable mortgage existed. These included: the existence of a debt; the relationship between the parties; the availability of legal counsel; the sophistication and circumstances of the parties; and whether the grantor of the deed remained in possession of the property. Relevant here are plaintiff's desperate circumstances and her relative lack of sophistication. Builders claims that 83 year-old Willens was 20 years older than plaintiff and, like plaintiff, never completed high school. We decline, however, to equate Willens's level of sophistication and business experience with that of plaintiff, given that Builders for sixty years was in the business of buying and rehabilitating distressed properties. Moreover, Bruno represented Builders throughout the transaction while plaintiff did not have an attorney prior to or at the time she conveyed the deeds. We also find it significant under Flack that plaintiff has remained in possession of the house throughout the proceedings.

Builders asserts that the trial court properly found that no indebtedness existed between the parties, relying primarily on Wilkinson v. Johnson (1963), 29 Ill. 2d 392, 194 N.E.2d 328; Stamberg v. Hiller (1963), 41 Ill. App. 2d 229, 190 N.E.2d 627; and Anderson v. Combs (1961), 32 Ill. App. 2d 81, 177 N.E.2d 245. While a debt relatonship is essential to a mortgage, direct evidence is not necessary (McGill v. Biggs), and, in fact, no particular type of evidence is required. (Burroughs v. Burroughs.) Although plaintiff never executed a note or other document which demonstrates the existence of a debt, a number of factors here might suggest a debt relationship. Plaintiff signed the deeds after she told Willens that she needed a loan, and Willens responded that Builders could assist her. Moreover, plaintiff stated that she never intended to sell her property and believed at all times that the transaction constituted a loan. Bruno acknowledged that she initially came to Willens to save her property. Although the documents do not appear to create indebtedness between the parties, the record suggests that the parties' primary intent was to effect a security agreement, rather than an outright sale of the properties.

We also conclude that genuine issues of material fact exist as to whether plaintiff defaulted under the agreement. Builders maintains that she defaulted by failing to make any monthly payments under the agreement and failing to reimburse Builders for its rehabilitation costs. However, it is undisputed that when the parties entered the agreement, they expected that the net rentals would cover the required monthly payments. It is also noteworthy that the agreement did not specify any mechanism by which Builders would notify plaintiff of shortfalls in the monthly payments. Despite Builders's claim that it was "clear" by August 1983 that expenditures from the building exceeded the net rentals, it is not clear if and when Builders so informed plaintiff. Builders apparently prepared statements in August and September 1983, which show money due and expenses owed Builders. However, plaintiff stated that she never received such statements and was not informed until January 1984 that she owed Builders money under the agreement, and this was acknowledged by Bruno. Although Builders's 1983 tax return indicated that net rentals exceeded operating costs by more than $ 7,000, Builders claims that it paid more than $ 50,000 in expenditures and unpaid taxes for the building during this period. It should be noted that Builders' failed to provide plaintiff an accounting prior to its termination of the agreement. It contends that it "effectively" gave her an accounting by producing its records for this lawsuit. The absence of an accounting prior to termination is troubling given that both parties intended plaintiff's payments to come from the net rentals and anticipated that the net rentals would be sufficient to cover the amount required under the agreement.

In summary, we conclude that genuine issues of material fact existed in this case, making disposition by summary judgment inappropriate. We therefore affirm the trial court's order denying summary judgment to plaintiff and reverse that portion of the trial court's order which granted Builders summary judgment and remand with directions to the trial court to conduct a trial on the issues. We decline to address First Federal's argument that even if the conveyances consituted equitable mortgages, First Federal was a bona fide purchaser without notice and therefore entitled to foreclosure, leaving such issue for the circuit court. We therefore reverse that portion of the order which entered summary judgment of foreclosure for First Federal.

Affirmed in part; reversed in part and remanded with directions.

RAKOWSKI, J., and LaPORTA, J., concur.

This case has been provided as a service to the readers of The Home Equity Theft Reporter. Illinois equitable mortgage beta

Equitable Mortgage Doctrine In Idaho

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

Dickens v. Heston

53 Idaho 91; 21 P.2d 905

(Id. 1933)

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In this action for ejectment, the financially strapped property owner successfully asserted an equitable mortgage defense in the lower court against the title holder who, the court found, acquired said title as security for a debt. On appeal, the Idaho Supreme Court unanimously affirmed the lower court decision and listed the following factors as being some, but not necessarily all, the factors to be considered when determining whether instruments constitute a mortgage:

1. Existence of debt to be secured
2. Satisfaction or survival of the debt
3. Previous negotiations of parties
4. Inadequacy of price
5. Financial condition of grantor
6. Intention of parties

Commenting specifically on the issue of inadequacy of price, the Idaho high court commented as follows (bold text is my emphasis):

"It is said in 41 C. J. 288, sec. 24, that:

• If the grantor was severely pressed for money at the time of the transfer, so as not to be able to exercise a perfectly free choice as to the disposition of his property, and raised the sum needed by conveying his property in fee with a right of repurchase, his necessitous condition, especially in connection with the inadequacy of the price, will go far to show that a mortgage was intended."

"In Johansen v. Looney, 31 Idaho 754, 761, 176 P. 778, 780, this court said:

• Notwithstanding some apparent conflict in the above authorities, the holding is general that the transaction must be fairly made for a consideration not grossly inadequate, and that any fraudulent or oppressive conduct on the part of the mortgagee is sufficient to annul the absolute character of the transfer. ( Alexander v. Rodriguez (79 U.S. 323, 12 Wall. 323, 20 L. Ed. 406), Gassert v. Strong, (38 Mont. 18, 98 P. 497), Stoutz v. Rouse, (84 Ala. 309, 4 So. 170), Russell v. Southard, (53 U.S. 139, 12 HOW 139, 13 L. Ed. 927), Bradbury v. Davenport, (114 Cal. 593, 46 P. 1062, 55 Am. St. 92), Fort v. Colby, (165 Iowa 95, 144 N.W. 393), and Liskey v. Snyder, (56 W. Va. 610, 49 S.E. 515), supra; Keeline v. Clark, (132 Iowa 360, 106 N.W. 257.)"

"The following pertinent statement is made in Alexander v. Rodriguez, 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406, 411:

• The law upon the subject of the right to redeem where the mortgagor has conveyed to the mortgagee the equity of redemption, is well settled. It is characterized by a jealous and salutary policy. Principles almost as stern are applied as those which govern where a sale by a cestui qui trust to his trustee is drawn in question. To give validity to such a sale by a mortgagor it must be shown that the conduct of the mortgagee was, in all things, fair and frank, and that he paid for the property what it was worth. He must hold out no delusive hopes; he must exercise no undue influence; he must take no advantage of the fears or poverty of the other party. Any indirection or obliquity of conduct is fatal to his title. Every doubt will be resolved against him. Where confidential relations and the means of oppression exist, the scrutiny is severer than in cases of a different character. The form of the instruments employed is immaterial. That the mortgagor knowingly surrendered and never intended to reclaim is of no consequence. If there is vice in the transaction, the law, while it will secure to the mortgagee his debt, with interest, will compel him to give back that which he has taken with unclean hands. Public policy, sound morals, and the protection due to those whose property is thus involved, require that such should be the law."

"It cannot be successfully contended, in the light of the record before us, that Heston acted as a free man. He was in a situation, being without funds, where he was compelled, as expressed in the language of Dickens, to enter into the contract in question and make an absolute conveyance of his property, or nothing."

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There is much more in this case than the above observations of the Idaho court. Further, the Idaho high court reaches its decision on the reliance both on its prior decisions, and also to high court decisions of other states (ie. Kansas, California, Illinois, Iowa, Michigan, Montana, Alabama, West Virginia, and Colorado), not to mention a couple of citations to U.S. Supreme Court cases, thereby representing a seemingly broad view of the equitable mortgage case law. To read the whole case, see:

Dickens v. Heston, 53 Idaho 91; 21 P.2d 905; (Id. 1933)

Alexander v. Rodriguez (aka Villa v. Rodriguez), 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406, 411 (1870) (available online courtesy of Justia - US Supreme Court Center). Idaho equitable mortgage doctrine beta