Ownership Interest Under Equitable Mortgage Defeats Interest Of Subsequent Buyer; Lack Of Knowledge Not Enough To Sustain Bona Fide Purchaser Status

A February 14, 2008 decision of the Michigan Court of Appeals provides an illustration of how the equitable mortgage doctrine and the bona fide purchaser doctrine operate in a given case.

The case, Vernier v. Sipe (No. 276037, Mich. Ct. App., February 14, 2008), involved an arrangement whereby a real property owner ("Defendant" or "equitable mortgagor") executed a deed which, on its face, purported to convey absolute legal title to real property to another ("original grantee" or "equitable mortgagee"). The undisputed purpose of the conveyance was to provide collateral for a loan.

The original grantee subsequently conveyed its interest in the property by quit claim deed to another, and after another conveyance, the property interest ended in the hands of the Plaintiff. The Plaintiff had no knowledge of the original arrangement between Defendant/equitable mortgagor and the original grantee/equitable mortgagee.

Given the facts of the case, the trial court originally hearing the case ruled that:

• the conveyance from the Defendant did not convey absolute legal title to the original grantee. Because the conveyance was intended to secure a debt, the conveyance was treated as an equitable mortgage;

• because the Plaintiff had no knowledge of the original arrangement between the Defendant and original grantee, the Plaintiff was a bona fide purchaser without notice of the interest. Therefore, according to the trial court, despite that the original arrangement was ruled to be an equitable mortgage, the Plaintiff's property interest, acquired as a bona fide purchaser without notice, defeats the property interest of the Defendant under the equitable mortgage.

On appeal, the Michigan Court of Appeals ruled as follows:

• affirmed the trial court ruling that the arrangement was an equitable mortgage, and

• reversed the trial court ruling that the Plaintiff was a bona fide purchaser without notice, despite the fact that Plaintiff had no knowledge of the original arrangement giving rise to the equitable mortgage.

Even though the Plaintiff had no knowledge of the existence of the arrangement ultimately held to be an equitable mortgage, the Michigan appeals court (given the specific facts of the case), ruled that the Plaintiff nevertheless "had notice" of the equitable mortgage arrangement, and consequently, was not entitled to bona fide purchaser status.

The court based its ruling on the fact that Plaintiff had failed to satisfy his obligation of exercising due diligence in inquiring as to the possible existence of rights of others in the subject property. Given the specific facts of the case, the court ruled that had the plaintiff satisfied his obligation to exercise said due diligence and made the appropriate inquiries, it would have discovered the rights of the Defendant/equitable mortgagor under the equitable mortgage arrangement.

Given that the specific facts of the case are a bit convoluted, anyone interested in finding out exactly what transpired will have to read the case. What follows below are the observations of the Michigan Court of Appeals regarding the bona fide purchaser doctrine in the context of an equitable mortgage, as applied under the law of the state of Michigan (Note: For ease of reading, I made a couple of minor alterations to the excerpts from the original text of the decision below. For the exact text as it appears in the case, please refer to the court decision itself).

• However, if the [equitable] mortgagee, i.e., Holtz, transfers the property to a bona fide purchaser for value, the interest of the equitable mortgagor, i.e., Sipe, is defeated. MCL 565.32; In re Van Duzer, [390 Mich. 571, 578; 213 N.W.2d 167 (1973)]; 1 Cameron, Michigan Real Property Law (3d ed), § 18.8, p 685.

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• A bona fide purchaser is one who has acquired a property interest for consideration and without notice of claims of interest in the property by a third party. Richards v Tibaldi, 272 Mich. App. 522, 539; 726 N.W.2d 770 (2006); 1 Cameron, Michigan Real Property Law (3d ed), § 11.20, pp 395-396. Notice may be actual or constructive and has been defined as follows:

"When a person has knowledge of such facts as would lead any honest man, using ordinary caution, to make further inquiries concerning the possible rights of another in real estate, and fails to make them, he is chargeable with notice of what such inquiries and the exercise of ordinary caution would have disclosed." [Richards, supra at 539, quoting Kastle v Clemons, 330 Mich. 28, 31; 46 N.W.2d 450 (1951).]

• A purchaser of real estate has a duty to investigate the seller's title as follows:

"It is the duty of a purchaser of real estate to investigate the title of his vendor, and to take notice of any adverse rights or equities of third persons which he has the means of discovering, and as to which he is put on inquiry. If he makes all the inquiry which due diligence requires, and still fails to discover the outstanding right, he is excused, but, if he fails to use due diligence, he is chargeable, as a matter of law, with notice of the facts which the inquiry would have disclosed." [American Fed S&L Ass'n v Orenstein, 81 Mich. App. 249, 252; 265 N.W.2d 111 (1978), quoting Schweiss v Woodruff, 73 Mich. 473, 477-478; 41 NW 511 (1889).]

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To view the court decision, see Vernier v. Sipe (No. 276037, Mich. Ct. App., Per Curiam - Unpublished, February 14, 2008).

This is an UNPUBLISHED OPINION. In accordance with Michigan Court of Appeals rules, UNPUBLISHED OPINIONS are NOT PRECEDENTIALLY BINDING under the rules of STARE DECISIS. Michigan equitable mortgage alpha Michigan bona fide purchaser

Paris v. Green; Michigan Court Declares Deed A Mortgage (Again)

The Michigan Court of Appeals (in a 2005 case), citing to some pretty old cases (including two that over a century old), again ruled that a deed, given as security for a loan, is not an absolute conveyance; rather, it is to be treated as nothing more than a secured loan.

The differences between this case and the Michigan cases I posted on in the past, Moore v. Cycon Enterprises, Inc., (the subject of a January 2, 2007 post and also referred to in a December 17, 2006 post) and London v. Gregory (the subject of a January 3, 2007 post and also referred to in the December 17 post) is that this 2005 case did not involve a foreclosure rescue situation, nor did it involve a formal invocation of Michigan's equitable mortgage doctrine (the words "equitable mortgage" do not appear anywhere in the case).

Nevertheless, the appellate court's analysis was pretty much the same as it was in the other two cases, and like the other two cases, cites heavily to some pretty old Michigan case law (In my view, the significance of the old cases is that the Michigan law in this area, whether you call it the "equitable mortgage doctrine", or simply refer to the arrangement in question as a "deed (absolute in form) given as security for a loan", seems to be pretty well settled).

This case was the subject of a brief article captioned "Michigan Court Finds Deed is a Mortgage" (scroll down to the 3rd captioned article from top of page), on the electronic Mortgage Banking Newsletter from the Michigan law firm, Lipson, Neilson, Cole, Seltzer, & Garin, P.C.

What follows are some quotes from the case (citations omitted) demonstrating how the court identified the law to be applied, and how they applied it.

The court described Michigan law as follows:

• "It is a long-established rule that Michigan courts, when prompted by compelling evidence, will look beyond the face of a deed to resolve the question of whether the parties intended the deed as a transfer of ownership or as security for a loan."

• “The fair effect of the whole evidence, direct, circumstantial and presumptive, is to prove that the parties intended that between themselves the transaction should be an assignment [of the certificate of property purchase] as security for the valid existing debt . . . , and not an absolute sale . . . .”

• "The only question calling for serious consideration is whether the [homeowner] has sustained the burden of establishing that this warranty deed, on its face conveying the absolute title, was, between the parties, but a mortgage to secure a loan. It is well settled that such question is open to litigation, and the courts may so declare when the testimony impels to that conclusion. In passing upon the proof courts favor written evidence, rather than oral, but are required to consider together the writings, relations of the parties, surrounding facts and conditions generally, to arrive, if possible, at the real intent, understanding, and agreement of the contracting parties."

• "One factor in determining whether a transaction is a sale or mortgage is whether the “seller” retained possession of the property."

• "Another factor is the adequacy of consideration involved."

• “While inadequacy of consideration is not an infallible test, it is an indication that the parties did not consider the conveyance to be absolute, particularly where the bargaining positions of the parties are markedly unequal.”

• “Under Michigan law, it is well settled that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price for the property, is sufficient to establish a deed absolute on its face to be a mortgage.”

The appeals court then applied the foregoing statement of the law as follows:

• "There was an extreme disparity in the value of the real property—which was worth more than $40,000 in 1990—and the $15,000 the court found that plaintiff loaned to [homeowners]."

• "Plaintiff also acknowledged that [homeowners] paid the taxes and insurance on the house at all times."

• "The disparity in value between the consideration and the value of the property, [homeowners'] retention of possession, the lack of documentation about a sales agreement, plaintiff’s initial admission that the deed merely represented security for a loan, [homeowners'] payment of house taxes and insurance, and the unrebutted testimony that [homeowners] paid more than $22,000 to or on behalf of plaintiff all support the conclusion that the transaction was a mortgage and not a sale."

• "Because [homeowners] will retain title to the property, [homeowners] will prevail in this action and will be entitled to case evaluation sanctions after entry of the judgment in the trial court. MCR 2.403(O)(2)(b)." [re: appropriate award of attorneys fees to homeowners' legal counsel].

Case Law Citation:

Paris v. Green, No. 249740, Mi. App. Ct., 2005 Mich. App. LEXIS 90, January 20, 2005 (unpublished) (made available online courtesy of the Michigan Bar Association). Michigan equitable mortgage alpha

London v. Gregory, No. 216473, Mi. App. Ct., 2001, (2001 Mich. App. LEXIS 1700) Decided February 23, 2001 Personal Case Notes & Case Highlights

The folowing text represents personal notes and highlights of and selected quotes from the Michigan Court of Appeals case London v. Gregory, Case No. 1216473, LEXIS 1700 (Michigan Court of Appeals, 2001) (unpublished) , where a Michigan Appeals Court determined that a sale and leaseback transaction between a foreclosure rescue investor ("FRI") and a financially strapped property owner was, in fact, a loan of money and not a "true sale & leaseback."

Because of this determination, the property owners were declared the true owners of the property and the foreclosure rescue operator was treated merely as a secured mortgage lender (and not the true owner).

For purposes of simplification, most of the actual citations to other cases as well as internal quotations have been omitted. If there is anything contained herein that is of any interest to the reader, I refer you to the actual case, link available above.

PART I
The court's recitation of the facts of this case follows:

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1) The Homeowner owned a piece of real property for which the mortgage was about to be foreclosed.

2) Two days before foreclosure was to occur and the equity of redemption period was to expire, the homeowner and the foreclosure rescue investor (hereinafter called "FRI") entered an agreement wherein the homeowner transferred her interest in the property to the FRI by warranty deed.

3) The FRI then redeemed the property for $ 38,231.69, making her the fee owner, and at the same time, executed an eighteen-month lease agreement with homeowner.

4) The agreement provided that homeowner remain in possession of the property and pay $ 400 a month in rent to the FRI.

5) The agreement also granted homeowner an option to purchase the property for $ 48,239.77 at the end of the lease, with closing to take place on or before December 17, 1997. However, the purchase option was only available if all rent payments were made on a timely basis.

6) Of the eighteen scheduled rent payments, homeowner made one, which was late.

7) On December 16, 1997, the FRI sent the homeowner a thirty-day notice to quit and initiated an action for summary proceedings in district court (the trial court) to evict homeowner.

8) However, the trial court found that the deed from homeowner to the FRI was not a conveyance of property, but rather, an equitable mortgage.

9) An order was entered denying the FRI's request for possession of the property and ruling that the warranty deed and rental agreement created an equitable mortgage.

10) The first appeals court denied the FRI's appeal, affirming the trial court's finding of an equitable mortgage.

11) The first appeals court found no error in the district court's refusal to take testimony regarding the FRI's intent because the information before it, including affidavits of each party, was sufficient to determine the intent of the parties.

12) The first appeals court also found that the deed and rental agreement was not an absolute conveyance, but rather, a mortgage.

13) The FRI then went to a second appeals court, the Michigan Court of Appeals and argued that the first appeals court both erred in refusing to compel the trial court hearing this case to consider testimony on the issue of intent and erred by ruling, as a matter of law, that the conveyance of property was an equitable mortgage.

PART II
The court's recitation of what constitutes Michigan law on equitable mortgages follows:

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1) "The power of a court of equity to decree an equitable mortgage under proper circumstances and to construe an instrument in the form of an absolute conveyance as security for the payment of a debt, or the performance of some other obligation, is well established."

2) "When determining whether to grant equitable relief, the court protects the necessitous by looking through form to the substance of the transaction."

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3) "The controlling factor in determining whether a deed absolute on its face should be deemed a mortgage is the intention of the parties."

4) "Such intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale. Under Michigan law, it is well settled that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price for the property, is sufficient to establish a deed absolute on its face to be a mortgage."

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Part III
The Michigan Court of Appeals Analysis & Decision

1) The court reviewed two prior Michigan court cases involving fact patterns similar to the fact pattern in this case.

In the first case, the FRI helped the homeowner, in financial distress, in saving her home from foreclosure. The homeowner essentially conveyed the property by warranty deed to the FRI for no consideration, while he redeemed it out of foreclosure. The transaction resulted in the homeowner conveying her equity, worth over $ 30,000, for less than $ 4,000. Under their "agreement," the FRI leased the property to the now former homeowner with an exclusive option to repurchase the property during the term of the lease. The now former homeowner eventually defaulted in her monthly rental payments and was thereupon evicted from the home.

The Michigan Court of Appeals found that, "while financial embarrassment of the [homeowner] and inadequacy of consideration do not provide an infallible test, they are an indication that the parties did not consider the conveyance to be absolute."

This Court held that the transaction in this first case constituted a mortgage to secure a loan.
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In the second case, the homeowners were in financial straits and the mortgages on their home were in the process of foreclosure. The FRI, who coincidentally was the same FRI as in the first case above, entered into an agreement with the homeowners whereby, in exchange for a warranty deed to the property, the homeowners obtained a two-year lease with an option to repurchase the property at any time during the term of the lease. The FRI ultimately expended only $ 2,300 to redeem and obtain a deed to property worth $ 25,000.

The Michigan Court of Appeals "found the inadequacy of consideration for the purported conveyance blatant, and giving great weight to this inadequacy of consideration, and the fact that the plaintiffs were financially embarrassed, determined that the deed, absolute in form, was a mortgage."
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2) Applying the principles in the two cases described above to the facts and circumstances surrounding this case, the Michigan Court of Appeals found that the deed and rental agreement with an option to repurchase was a mortgage.

The Michigan Court of Appeals' considerations in reaching this decision follow:

• a) "[Homeowner] was having financial problems at the time of the disputed transaction, as her property was two days away from foreclosure."
  
  b) "About to lose her home, [homeowner] entered into an agreement with [the FRI] whereby [homeowner] was able to lease the property for eighteen months with the option to purchase at the end of the lease."
  
  c) "In exchange for the opportunity to keep her home, [homeowner] conveyed the property to [the FRI] by warranty deed for $ 1."
  
  d) "[The FRI], as the fee owner of the property, was then able to redeem the property for $38,231.69."
  
  e) "Through this cash outlay, [the FRI] obtained a deed to property worth approximately $ 120,000."
  

3) "These facts demonstrate an inadequacy of consideration."

4) "Moreover, [the homeowner] entered into this agreement two days before foreclosure was to occur and without the assistance of counsel."

5) "The bargaining position of the parties was anything but equal."

6) "In addition, the fact that [the homeowner] remained in possession of the property after granting plaintiff the deed further evidences that this was not an outright conveyance."

7) "[The homeowner] thought this arrangement was a loan that would enable her to redeem her property and extend the debt for eighteen months."

8) "Although it was not [the FRI's] intent to make a loan, it was not [the homeowner's] intent to sell her home."

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For all these reasons, the Michigan Court of Appeals held that the transaction at issue in this case was an equitable mortgage.

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Part IV
The foreclosure rescue investor unsuccessfully argued the following points to support his claim that the transactions were not loans, but rather, true sales

1) The FRI argues that the transaction was not a loan because:

• a) no loan application was taken,
  b) the defendant's financial condition was never discussed,
  c) a loan of money to the homeowner was never discussed,
  d) the FRI was not in the business of mortgage lending.
  

2) Moreover, the FRI claims it was error for the first appeals court not to hear testimony on the issue of intent.

In spite of these facts that the FRI argued to the court, the court declared that the transaction was nothing more than a loan of money from the FRI to the homeowner and not a sale of the home with a subsequent leaseback.

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(One point worth highlighting in this case was that the Michigan Court of Appeals found it unnecessary to to hear the testimony of the parties involved in its determination as to what the parties' intent was in entering into this transaction.)

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These case notes and highlights have been provided as a service to the readers of The Home Equity Theft Reporter. Michigan equitable mortgage alpha

Moore v. Cycon Enterprises, Inc., Case No. 1:04-CV-800, 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished) Personal Notes & Highlights

The folowing text represents personal notes and highlights of and selected quotes from the Federal court case Moore v. Cycon Enterprises, Inc., Case No. 1:04-CV-800, 2006 U.S. Dist. LEXIS 57452 (W.D. Mi. 2006) (unpublished) , where a Michigan Federal Court determined that a sale and leaseback transaction between a foreclosure rescue investor ("FRI") and financially strapped property owners was, in fact, a secured loan and not a "true sale & leaseback."

Because of this determination, the property owners were declared the true owners of the property and the foreclosure rescue operator was treated merely as a secured mortgage lender (and not the true owner).

Additionally, because of the transaction was declared to be a secured loan and not a sale, the Court determined that the foreclosure rescue investor ("FRI") violated the Federal Truth In Lending Act ("TILA"), the Home Ownership Equity and Protection Act of 1994 ("HOEPA"), and Michigan's usury statute (M.C.L. 438.31c).

For purposes of simplification, most of the actual citations to other cases as well as internal quotations have been omitted.

If there is anything contained herein that is of any interest to the reader, I refer you to the actual case, which is available on the Michigan Bar Association website (no registration necessary) or on the website of the U.S. District Court for the Western District of Michigan (PACER registration, login, and password required).

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Sale Versus "Equitable Mortgage"

The heart of this case is the determination of whether the transaction between the property owners and the foreclosure rescue investor ("FRI") was a true sale and leaseback or whether it was in reality a loan.

In determining what Michigan law was with respect to declaring an arrangement to be an equitable mortgage, rather than respecting the form of a transaction as an actual sale of property coupled with a simulataneous leaseback of the property accompanied by a right to repurchase, the Federal judge in this case articulated the following comments, observations, and considerations:

1) "The power of a court of equity to decree an equitable mortgage under proper circumstances and to construe an instrument in the form of an absolute conveyance as security for the payment of a debt, or the performance of some other obligation, is well established."

2) "It is well settled that a court of equity can declare a deed absolute on its face to be a mortgage."

3) "In Wilcox v. Moore, 354 Mich. 499, 93 N.W.2d 288 (1958), the Michigan Supreme Court, in discussing the doctrine, observed:

• Suffice to say that its purpose is to protect the necessitous borrower from extortion. In the accomplishment of this purpose a court must look squarely at the real nature of the transaction, thus avoiding, so far as lies within its power, the betrayal of justice by the cloak of words, the contrivances of form, or the paper tigers of the crafty. We are interested not in form or color but in nature and substance.
  
  Id. at 504, 93 N.W.2d at 291."

4) "Because a court is concerned with the true intention of the parties based upon the surrounding circumstances in considering whether a transaction is an equitable mortgage, traditional legal principles, such as the parol evidence rule, do not apply."

5) "One of the many exceptions to the parol evidence rule is that parol evidence may be admitted to prove that a written conveyance absolute in its terms was intended by the parties to operate only as a mortgage."

6) "Moreover, "[w]hile fraud or mistake are essential elements of a cause of action for reformation, rescission or cancellation of a written conveyance, they are not essential to a cause seeking to establish that a conveyance absolute in form is in fact a mortgage.""

7) "However, "one who asserts that an absolute conveyance is a mortgage bears a heavy burden of proof and he who invokes this equitable doctrine must furnish a preponderance of evidence whereby it is made 'very clear' to the fact finder that the parties did not contemplate an absolute sale.""

8) "Although there is no precise test for determining when an equitable mortgage should be imposed, the controlling factor is the intention of the parties."

9) "Such intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale."

10) "Proof of the grantor's adverse financial condition, along with inadequacy of the purchase price, is generally sufficient to establish that a deed absolute on its face is actually a mortgage."

11) Other factors indicating that a transaction is really a mortgage are the grantor's continued possession or improvement of the property and payment of taxes and insurance.

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The Court's examination of the circumstances surrounding the transaction found the following:

a) The property owners "were in a difficult financial situation and were desperate to avoid losing their home and equity through foreclosure".

b) The foreclosure rescue investor ("FRI") knew that the property owners was in a difficult financial situation when they met.

c) The property owners were originally solicited for the purpose of providing refinancing and that in all conversations and meetings that were had leading up to and including the closing, the property owners believed that the transaction was a refinancing.

d) Documentation existed that contained indicators consistent with a refinancing transaction.

e) The court stated:

• "While the transaction was structured as a sale and a leaseback, the lease contained many features that are inconsistent with a residential lease, in that it imposed many of the obligations usually borne by the property owner upon the [property owners] as lessees. For example, the [property owners] were required to pay all real estate taxes, assessments, water charges, and personal property taxes; they were responsible for maintaining all insurances, including public liability insurance protecting [the foreclosure rescue investor] (as would be the case in a typical mortgage arrangement), and they were responsible for paying for repairs and maintenance. Thus, the obligations imposed on the [property owners] under the lease make the transaction look more like a home mortgage rather than a sale of a home."
  

f) The property owners were charged over $ 23,000 in loan origination charges and did not receive any money for their equity as a result of the transaction in question. The judge observed that "If, in fact, the transaction was a sale, there would be no reason to charge such fees."

g) While there was a question as to whether the purchase price was grossly inadequate (there was no definitive finding as to what the subject property's fair market value was at the time of the transaction), the property owners (based on the lowest appraisal submitted to the court) "parted with their property for substantially less than would have been the case in a true sale."

h) While it may be true that the foreclosure rescue investor in this case actually paid the real estate taxes and property insurance, the Court obsereved that "it is also true ... that the lease obligated the [property owners] to pay the taxes and insurance and to maintain and repair the property. The performance of such obligations normally indicates an ownership interest. The fact that the [property owners] failed to pay for such things simply shows that they breached their obligations, which, under either a lease or a mortgage, would constitute a default."

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The Court's Conclusions

Based upon the foregoing considerations, the Court's conclusions and comments follow:

• 1) "[The property owners] have established by clear evidence that the transaction was not intended to be an absolute sale, but rather was a financing arrangement."
  
  2) "[T]here is no dispute that the [property owners] were in a precarious financial position and needed financing in order to save their property from foreclosure."
  
  3) "[I]t was always understood that the transaction was considered a refinancing and the evidence shows that [the foreclosure rescue investor] understood the deal to be a mortgage.
  
  4) "[T]here is no evidence that the [property owners] ever contemplated selling their property."
• 5) "Bolstering this point even further is the fact that the [property owners] paid over $ 23,000 in loan-related fees ..."
  
  6) "In addition, even though there was not a gross disparity between the fair market value of the property and the amount the [property owners] received ($ 190,262 for the mortgage payoff), they nonetheless gave up approximately $ 41,000 in equity, which is not insubstantial by any measure."
  
  7) "Finally, the fact that the [property owners] remained liable for property taxes, insurance, and maintenance and repair charges, as they had been prior to the transaction, is further evidence showing that the transaction was in fact a mortgage."
  .

Re: Violations of the Federal Truth in Lending Act ("TILA"), Home Ownership and Equity Protection Act of 1994 ("HOEPA"), and Michigan Usury Statute (M.C.L. 438.31c)

The property owners also made claims for violations of the Federal "TILA", "HOEPA", and the state usury statute on the grounds that:

• 1) the transaction was actually a loan and a consumer transaction for purposes of the TILA,
  
  2) the transaction was a "high rate" mortgage within the meaning of HOEPA
  
  3) because the the property owners would have had to pay the foreclosure rescue investor $ 2,515 plus a lump sum of $ 224,120 in order to repurchase their property in the first thirty days, the FRI charged the property owners interest in the amount of $ 36,372.85 on a loan in the principal amount of $ 190,262.15, in violation of the rate allowed by the Michigan usury statute (M.C.L. 438.31c).
  

The FRI's sole argument with respect to these claims is that the transaction was a sale and leaseback, and not a loan. Because the Court already concluded that the transaction was actually an equitable mortgage, and the FRI offers no other reason why the property owners are not entitled to prevail on these claims, the Court concluded that the property owners have established that the FRI violated these laws and that the property owners were entitled to relief.

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The Foreclosure Rescue Investor's Arguments that the Transaction Should Be Respected As A True Sale and a Subsequent Leaseback Rather Than as a Secured Loan

The Court stated the following:

"[The foreclosure rescue investor] has offered a number of arguments supporting its position that the transaction was clearly an absolute sale and a leaseback, including:

• (1) the unambiguous terms of the closing documents establish that the property owners intended to sell their property to FRI and lease it back from FRI;
  
  (2) the [property owners] failed to read the closing documents and are therefore bound by the terms of those documents;
  
  (3) the parol evidence rule precludes the consideration of evidence of prior discussions between the [property owners] and [the FRI] as well as evidence of the [property owners'] intentions regarding the transaction; and
  
  (4) the integration clause in the lease precludes the [property owners] from introducing evidence of their intentions regarding the lease."
  

The Court observed that while the FRI's "arguments would no doubt be fine, and certainly persuasive, grounds for summary judgment in a typical contract case, the [the property owners] have invoked Michigan's "equitable mortgage" doctrine in this case, as to which such arguments are not necessarily applicable."

The foregoing is presented by The Home Equity Theft Reporter. Michigan equitable mortgage alpha

London v. Gregory, No. 216473, Mi. App. Ct., 2001, (2001 Mich. App. LEXIS 1700) Decided February 23, 2001

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. 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.

(Note: This case, London v. Gregory, is available online on the Michigan Bar Association website , revised 1-23-07)

JUDGES: Before: Whitbeck, P.J., and Murphy and Cooper, JJ.
OPINION: PER CURIAM.

Plaintiff appeals by leave granted from a circuit court order denying plaintiff's appeal and affirming the district court's ruling that the deed granted from defendant to plaintiff constituted an equitable mortgage rather than a conveyance of real property. We affirm.

Defendant owned a piece of real property for which the mortgage was about to be foreclosed. Two days before foreclosure was to occur and the equity of redemption period was to expire, defendant and plaintiff entered an agreement wherein defendant transferred her interest in the property to plaintiff by warranty deed. Plaintiff then redeemed the property for $ 38,231.69, making her the fee owner, and at the same time, executed an eighteen-month lease agreement with defendant. The agreement provided that defendant remain in possession of the property and pay $ 400 a month in rent to plaintiff. The agreement also granted defendant an option to purchase the property for $ 48,239.77 at the end of the lease, with closing to take place on or before December 17, 1997. However, the purchase option was only available if all rent payments were made on a timely basis.

Of the eighteen scheduled rent payments, defendant made one, which was late. On December 16, 1997, plaintiff sent defendant a thirty-day notice to quit and initiated an action for summary proceedings in district court to evict defendant. However, the district court found that the deed from defendant to plaintiff was not a conveyance of property, but rather, an equitable mortgage. An order was entered denying plaintiff's request for possession of the property and ruling that the warranty deed and rental agreement created an equitable mortgage. The circuit court denied plaintiff's appeal, affirming the district court's finding of an equitable mortgage. The circuit court found no error in the district court's refusal to take testimony regarding plaintiff's intent because the information before it, including affidavits of each party, was sufficient to determine the intent of the parties. The circuit court also found that the deed and rental agreement was not an absolute conveyance, but rather, a mortgage.

Plaintiff now argues that the circuit court both erred in refusing to compel the district court to consider testimony on the issue of intent and erred by ruling, as a matter of law, that the conveyance of property was an equitable mortgage. We disagree. This Court reviews equitable determinations de novo and the findings of fact in support of those equitable decisions for clear error. LaFond v Rumler, 226 Mich App 447, 450; 574 NW2d 40 (1997); Grant v Van Reken, 71 Mich App 121, 125; 246 NW2d 348 (1976). A trial court's findings are clearly erroneous if we are left with a definite and firm conviction that a mistake has been made. LaFond, supra.

"The power of a court of equity to decree an equitable mortgage under proper circumstances and to construe an instrument in the form of an absolute conveyance as security for the payment of a debt, or the performance of some other obligation, is well established." Judd v Carnegie, 324 Mich 583, 587; 37 NW2d 558 (1949); see also, Grant, supra at 125. We agree with the lower courts that the subject transaction constituted a mortgage to secure the repayment of a loan. We also agree that testimony on the intent of the parties was not necessary to reach that decision.

Plaintiff argues that this was not a loan because no loan application was taken nor was defendant's financial condition discussed. Plaintiff further argues that a loan was never discussed and plaintiff was not in the business of mortgage lending. Moreover, plaintiff claims it was error for the district court not to hear testimony on the issue of intent. When determining whether to grant equitable relief, the court "protects the necessitous by looking through form to the substance of the transaction." Koenig v Van Reken, 89 Mich App 102, 106; 279 NW2d 590 (1979). The controlling factor in determining whether a deed absolute on its face should be deemed a mortgage is the intention of the parties. Id. However, contrary to plaintiff's arguments that the parties' testimony was required for this determination,

• such intention may be gathered from the circumstances attending the transaction including the conduct and relative economic positions of the parties and the value of the property in relation to the price fixed in the alleged sale. Under Michigan law, it is well settled that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price for the property, is sufficient to establish a deed absolute on its face to be a mortgage. [Id. (citations omitted).]
  

The facts of Koenig are remarkably similar to those of the instant case. In Koenig, the defendants helped the plaintiff, in financial distress, in saving her home from foreclosure. The plaintiff essentially conveyed the property by warranty deed to defendant Stanley Van Reken for no consideration, while he redeemed it out of foreclosure. The transaction resulted in the plaintiff conveying her equity, worth over $ 30,000, for less than $ 4,000. Id. at 107. Under their "agreement," the defendant leased the property to the plaintiff with an exclusive option to repurchase the property during the term of the lease. The plaintiff eventually defaulted in her monthly rental payments and was thereupon evicted from the home. Id. at 105. This Court found that, "while financial embarrassment of the grantor and inadequacy of consideration do not provide an infallible test, they are an indication that the parties did not consider the conveyance to be absolute." Id. at 107. This Court held that the transaction constituted a mortgage to secure a loan. Id.

Grant, supra, is also similar to this case. The plaintiffs were in financial straits and the mortgages on their home were in the process of foreclosure. Id. at 127. The defendant, Stanley Van Reken, the same defendant as in Koenig, entered into an agreement with the plaintiffs whereby, in exchange for a warranty deed to the property, the plaintiffs obtained a two-year lease with an option to repurchase the property at any time during the term of the lease. Id. at 123. The defendant ultimately expended only $ 2,300 to redeem and obtain a deed to property worth $ 25,000. Id. at 127. This Court found the inadequacy of consideration for the purported conveyance blatant, and giving great weight to this inadequacy of consideration, and the fact that the plaintiffs were financially embarrassed, determined that the deed, absolute in form, was a mortgage. Id.

Applying the principles in these cases to the facts and circumstances surrounding the instant transaction, we find that this deed and rental agreement with an option to repurchase was a mortgage. Defendant was having financial problems at the time of the disputed transaction, as her property was two days away from foreclosure. About to lose her home, defendant entered into an agreement with plaintiff whereby defendant was able to lease the property for eighteen months with the option to purchase at the end of the lease. In exchange for the opportunity to keep her home, defendant conveyed the property to plaintiff by warranty deed for $ 1. Plaintiff, as the fee owner of the property, was then able to redeem the property for $ 38,231.69. Through this cash outlay, plaintiff obtained a deed to property worth approximately $ 120,000.

These facts demonstrate an inadequacy of consideration. Moreover, defendant entered into this agreement two days before foreclosure was to occur and without the assistance of counsel. See Koenig, supra at 105; Grant, supra at 127. The bargaining position of the parties was anything but equal. See Grant, supra at 128. In addition, the fact that defendant remained in possession of the property after granting plaintiff the deed further evidences that this was not an outright conveyance. Defendant thought this arrangement was a loan that would enable her to redeem her property and extend the debt for eighteen months. Although it was not plaintiff's intent to make a loan, it was not defendant's intent to sell her home. For all these reasons, we hold that the transaction at issue in this case was an equitable mortgage. Accordingly, we find no error in the rulings of the district or circuit courts.

Affirmed.

/s/ William C. Whitbeck
/s/ William B. Murphy
/s/ Jessica R. Cooper

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