Equitable Mortgage Doctrine In Oregon

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

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Long v. Storms
50 Ore. App. 39; 622 P.2d 731
Or. Court of Appeals 1981

In this case, the title holder / money lender (Long) brought a forcible entry and detainer (FED) action in a limited jurisdiction court to recover possession of certain residential premises. The possessors (Storms) answered and counterclaimed, alleging that the warranty deed to the premises given to Long by Storms, should be declared an equitable mortgage, and that the loan transaction between the parties should be rescinded pursuant to the Truth in Lending Act, 15 U.S.C.S. § 1601 et seq.

Because defendants' answer and counterclaims raised an issue regarding the determination of title to real property, the case was transferred to circuit court, which had jurisdiction over such matters (This is another case where a limited jurisdiction court correctly recognized its lack of jurisdiction when transferring the matter to the appropriate forum, rather than granting a judgment of eviction when the equitable mortgage doctrine was asserted).

The circuit court ultimately ruled that the sale by Storms, followed by a 6 month leaseback with a buy back option was an absolute sale, and not a mortgage. On appeal, the Oregon Court of Appeals reversed the lower court decision and, in so doing, quoted from the Oregon Supreme Court in Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or 605, 217 P2d 219 (1950):

• Our decisions establish that if the intent appears that property was conveyed and received as security for the fulfillment of an obligation, the form of the instrument becomes immaterial and the true nature of the transaction may be shown by parol evidence. Neither fraud, mistake nor accident need be proven. The primary inquiry relates to the intention of the parties at the time the transaction was consum[m]ated. Harmon v. Grants Pass Banking & Trust Co., 60 Or 69, 118 P. 188. Mutual intent is to be determined, not alone by the instruments executed, but also by the attendant circumstances and the conditions under which the instruments were delivered. The issue can be resolved only after considering the situation of the parties, the price fixed relative to the value of the property and the conduct of the parties, both before and after the transaction, insofar as such conduct prospectively or retrospectively throws light upon the intent of the parties at the time of the transaction.

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The appellate court when on to set forth the circumstances that the Umpqua court pointed to as indicia that a mortgage was intended:

1. the fact that negotiations originated from an application for a loan,
2. the dire financial straits of the grantor,
3. the grantor's continued possession of the property,
4. the intimate business or social relationship of the parties,
5. failure of the grantee to carefully investigate the title of the grantor,
6. failure of the grantee to ascertain the value of the property,
7. inadequacy of consideration,
8. the lack of bargaining between the parties as to the value of the property with the controlling consideration being the profit inuring to the grantee,
9. the existence of a deed absolute in form, that is accompanied by an option to repurchase, which must be considered together, and with the court stating that the option does not of itself convert the transaction into a mortgage, but it is a circumstance to be considered in favor of the existence of a mortgage.

The appellate court when on to make the following observation in which it again quoted from Umpqua:

"We recognize that a deed, absolute on its face, is presumptively what it appears to be and that evidence must be clear and convincing to support a finding that the deed is in reality a mortgage. [citations omitted] Nevertheless, as pointed out by the Umpqua court,

• * * * while recognizing the rule requiring clear and convincing evidence, the authorities in this and other states have also approved the rule applying peculiarly in courts of equity.

• [R]egardless of the view that may be entertained as to the presumptive character of a deed with a stipulation for a reconveyance, or as to the standard of proof necessary to establish the instrument or instruments as a mortgage, the authorities are in general agreement in support of the proposition that where the question presented is whether the transaction is a mortgage or a conditional sale, as distinguished from the question whether an unconditional sale is involved, evidence of a doubtful import will be construed in favor of the theory that a mortgage was intended, so that in such case a deed with a provision for a reconveyance will be construed as a mortgage rather than as a conditional sale. 188 Or at 646."

(my emphasis added)

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In concluding that the transaction in this case was an equitable mortgage (and thereby reversing the lower court), the Oregon appellate court pointed to the existence of a number of factors in making the following determination:

1. The undisputed evidence shows that defendants were financially distressed at the time of the transaction,
2. that the purported sale price was substantially less than the fair market value of the property,
3. that defendants remained in possession of the property,
4. that plaintiff did not obtain an appraisal on the property until after the purported conveyance, and
5. that there was no bargaining between the parties as to the consideration recited in the "deed." Instead, the controlling consideration was that plaintiff should realize a $ 1,000 profit plus costs.
6. Finally, the form of the transaction was a deed absolute in form accompanied by an option to repurchase. That plaintiff did not require defendants to fill out a credit application does not persuade us that the transaction was a sale, not a loan. Plaintiff knew that defendants were financially distressed and had been unable to obtain a loan. Further, he had defendants' house as security. The sum of these facts squares clearly with our conclusion that the transaction between the parties constituted a loan with a security interest.

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The court also went on to rule that the Federal Truth In Lending Act (TILA) applied in this case, thereby allowing for a rescission of the transaction and an award of attorneys' fees to Storms' legal counsel, to be imposed on and paid by Long.

Because the court arrived at the conclusion that the relationship between the parties was that of debtor-creditor, rather than landlord-tenant, Long's forcible entry and detainer action was dismissed.

Long v. Storms, 50 Ore. App. 39; 622 P.2d 731; (Or. Ct. App. 1981), as modified by Long v. Storms, 52 Or App 685, 629 P2d 827 (1981) (modification related to the attorney fee award under the TILA).

See also this short narrative on the equitable mortgage doctrine in Oregon appearing on the State of Oregon Division of Finance and Corporate Securities (DFCS) website - at http://www.dfcs.oregon.gov/.Oregon equitable mortgage doctrine theta

Oregon Regulators Taking A Close Look Into Portland-Based Foreclosure Rescue Operator Peddling Sale Leaseback Programs

A recent story in The Oregonian [see State regulators open civil investigation into Aspen Capital's mortgage affiliate] reports that the Oregon Department of Consumer and Business Services has commenced a civil investigation into the lending and foreclosure rescue activities of an affiliate of Aspen Capital for possible violations of consumer protection laws. The type of transactions being looked into include sale leaseback programs, an example of which was described in the following excerpt taken from a February 27, 2010 Oregonian story [see Foreclosure rescues by Aspen Capital affiliate -- a lender of last resort -- failed nearly half the time]:

• Tammy Campbell was distraught. She couldn't find a job and fell behind on her mortgage in 2004. The modest Portland home she bought for its archways and oak floors headed to foreclosure. That's when she got a flier in the mail from an Aspen affiliate. Campbell signed a contract to sell her home to another Aspen affiliate just days before the foreclosure sale.

• The $109,750 price was below market value, but it was enough to pay off her delinquent loan. The good part: The sale halted the foreclosure and Campbell stayed in her home, renting from an Aspen affiliate. The bad part: She no longer owned her home and her rent cost her more than her old monthly mortgage payment.

• According to the contract, Campbell paid $719 rent compared with $599 on her mortgage. Irving Potter, lawyer for Aspen Capital and its affiliates, said the company didn't consider whether Campbell could afford the rent. Instead, he said, the company set the rent to ensure an 8 percent annual return. Even though she no longer owned the home, Campbell was required by the contract to pay the maintenance and property taxes. Potter said the company ended up covering the taxes.

• The Aspen affiliate gave Campbell the option to buy her home back. The price would rise 10 percent a year. Under the contract, the company could put the home on the market if Campbell couldn't buy it back after two years. By buying the home for less than it was worth, the company would profit by selling at market value.

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Under Oregon case law, this type of transaction has been found by the courts to constitute an equitable mortgage(1), an arrangement where a loan transaction is disguised as a formal sale, combined with:

• a contemporaneous leaseback of the premises by the financially strapped property owner, and
• an option to repurchase granted to the property owner.

Disguising a loan transaction in this way is believed by some (erroneously, in many cases) to be a way to: (1) evade state usury statutes, (2) evade the property owner's right of redemption by obviating a foreclosure action - in a sale leaseback, the new owner need only evict the now-ex-homewoner to take possession of the premises, and (3) make off with a distressed property owner's equity by providing for contractual obligations so onerous that they are unconscionable and illusory, coupled with hair-trigger default provisions that result in the property's forefeiture to the operator.

Inasmuch as these types of transactions have been under attack by several other states(2) as being in violation of state consumer protection laws, it would be interesting to see where Oregon regulators come out on this issue.(3)

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(1) The Oregon Supreme Court, in Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or 605, 217 P2d 219 (1950), pointed to the following factors as indicia that a mortgage, as opposed to a true sale, was intended:

• the fact that negotiations originated from an application for a loan,
• the dire financial straits of the grantor,
• the grantor's continued possession of the property,
• the intimate business or social relationship of the parties,
• failure of the grantee to carefully investigate the title of the grantor,
• failure of the grantee to ascertain the value of the property,
• inadequacy of consideration, and
• the lack of bargaining between the parties as to the value of the property with the controlling consideration being the profit inuring to the grantee.

Further indication of intent to create a mortgage is present is: when a deed absolute in form, is accompanied by an option to repurchase, the instruments must be considered together. The option does not of itself convert the transaction into a mortgage, but it is a circumstance to be considered in favor of the existence of a mortgage.

See also these Oregon Court of Appeals rulings which applied these guideposts in evaluating a real estate transaction and concluding that it was an equitable mortgage, and not true sale:

• Long v. Storms, 50 Or App 39 (1981) (ruled that, as an equitable mortgage, the arrangement was subject to the Federal Truth In Lending Act),
• Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77 (Or. Ct. of App. 2005).

This short narrative on the equitable mortgage doctrine in Oregon, appearing on the State of Oregon Division of Finance and Corporate Securities (DFCS) website, also addresses the equitable mortgage doctrine in Oregon.

(2) In Massachusetts, the state Attorney General's office sued and reached a settlement in a case involving 26 real estate transactions that allegedly: (1) involved unfair and deceptive acts and practices under the Massachusetts Consumer Protection Act, and (2) constituted violations of specific state and federal laws and regulations designed to protect consumers from deceptive and unconscionable lending practices. Among the AG's allegations was that the sale leaseback arrangements constituted usurious equitable mortgages. See:

• Commonwealth of Massachusetts v. Sohmer - Amended Complaint,
• Motion to Approve Settlement Agreement,
• Settlement Agreement,
• Massachusetts AG press release: Bankruptcy Court Approves Settlement Between Attorney General’s Office and Ten Mortgage Lenders and Servicers Involved in Foreclosure Rescue Transactions.

In Arizona, Attorney General Terry Goddard successfully sued an alleged foreclosure rescue operation believed to have defrauded a couple of hundred Arizonans of their homes in violation of, among other statutes, the Arizona Consumer Fraud Act, and alleged that the sale leasebacks were equitable mortgages. See:

• AG press release: Terry Goddard Files Lawsuit to Stop Foreclosure Rescue Operation,
• Lawsuit: State of Arizona v. Winer, et al.,
• Consent Judgment - State of Arizona v. Winer, et al.,
• AG press release: Goddard Wins $1.37 Million for Consumers in Two Mortgage Fraud Cases,
• 400 Sale Leasebacks Are Disguised Equitable Mortgages, Says AZ AG In Invoking State Consumer Fraud Act, TILA In Suit Against Foreclosure Rescue Firm.

The Arizona Attorney General also scored a victory in an earlier case (see Arizona Foreclosure Rescue Operator Ordered To Pay $1.2M In Home Sale, Leaseback Program) in which a foreclosure rescue operator, in lending money to more than 60 homeowners facing foreclosure or in need of money, designed its loans, which it called reverse sales, to evade laws protecting mortgage borrowers by structuring them as an outright sale of the property by the borrower, who then rented back the home with an option to repurchase it. If homeowners were late on a rental payment or unable to repay the loan and funding fee within two years, they could lose their homes and any equity in them. For the Arizona AG press release, see Court Orders Realty Firm to Pay $1.2 Million for Violating Fraud, Banking Laws.

In Washington, the state Attorney General’s Office successfully sued a notorious foreclosure rescue operator, and obtained a court order directing the operator to pay more than $3.2 million to victims he wronged plus $179,000 in penalties for violating the state's Consumer Protection Act. See:

• AG press release: Pay time for notorious foreclosure rescue scammer (Attorney General announces major victory in state’s case with Washington man who promised help but took homes),
• Trial Judge's Findings of Fact and Conclusions of Law – Feb. 6, 2009,
• Lawsuit: State of Washington v. Kaiser, et al.

(3) For other reports on sale leaseback, foreclosure rescue programs that have been found to violate the state's consumer protection laws, see: State Consumer Fraud Act Yields Triple Damages Award For Homeowners In Bogus Sale Leaseback Equity Stripping Racket, footnote 1. Oregon equitable mortgage doctrine theta

Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77, (Or. Ct. App. 2005) Highlights

In a 2005 case, the Oregon Court of Appeals, in Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77, (Or. Ct. of App. 2005), invoked the "equitable mortgage" doctrine in a case involving a title transfer of realty from a property owner to an investor, coupled with a simultaneous execution of a "leaseback" agreement. The court refused to respect the form of the transaction as a true sale and, instead, looked to the substance of the transaction in reaching its determination that the transaction was nothing more than a secured loan.

Some of the points & observations made by the court regarding the state of Oregon's equitable mortgage doctrine, in the context of "a deed, absolute in form, given as security for a debt", follow:

• "There is a presumption that a deed absolute on its face is "what it purports to be unless and until proved otherwise by clear and convincing evidence.""

• "The same rule is applicable to a sale and leaseback transaction."

• "If, however, it appears that the parties' intent was to convey and receive the property as security for the fulfillment of an obligation, then the form of the instrument becomes immaterial and the true nature of the transaction may be shown by parol evidence."

• "That question is determined based on a consideration of the whole transaction, by "the mutual intention of the parties at the time the transaction was consummated.""

• "Factors that may be considered in determining the intent of the parties include:

(1) the situation of the parties including their business and social relationship, (2) price fixed in relation to the actual value of the property conveyed, (3) surrender of possession by grantor, (4) payment of taxes, (5) payment of rent, (6) liability by grantor to pay interest, (7) financial circumstances of the grantor, and (8) conduct of the parties before and after the transaction."

• "When a deed absolute in form is accompanied by an option to repurchase, the option does not of itself convert the transaction into a mortgage but weighs in favor of the existence of a mortgage."

In applying the above recited Oregon case law to the specific fact of this case, the Oregon court made the following observations:

• "[The buyer and the property owner both] testified that they intended to structure the transaction as an outright sale, and the trial court found them both to be credible. As we have noted, however, the parties' intent as to the structure of the transaction is not determinative if, despite its outward appearance, factors indicate that the transaction should have the effect of an equitable mortgage."

• "[T]hese are the factors that weigh in favor of our conclusion that the transaction was, in fact, a security agreement:

(1) "At the relevant time, [the property owners] were experiencing serious financial difficulty."

(2) "[The buyer and the property owner] were close personal friends, and [buyer] was strongly motivated to help [property owner] through the financial crisis and to help [property owner] succeed."

(3) "The purchase price for the subject property was only half the property's market value."

(4) "The general terms of the agreement were reached in a single telephone conversation between [buyer] and [property owner] and without the benefit of an appraisal."

(5) "The broker listing the property received no commission for the sale."

(6) "[Property owner] retained possession of the property and continued in operation and had an obligation under the lease agreement to pay taxes and make lease payments of $ 6,000 per month."

(7) "The lease amount was below the property's actual market lease value and was determined based on a 12 percent rate of return on [buyer's] investment."

(8) "The sale was conditioned on [property owner's] option to repurchase the property during the lease on terms favorable to [property owner], including a repurchase price the same as plaintiff's purchase price of $ 600,000, substantially below the property's market value."

(9) "The parties contemplated that [property owner] would continue to list the subject property for sale and that the proceeds of any sale in excess of $ 600,000 would be shared between [property owner] and [buyer]."

(Editor's Note: For ease of reading, citations to court precedents and some internal quotations have been omitted.)

The foregoing points are presented by The Home Equity Theft Reporter solely to give the reader a "quick look" at some points that were considered when the court reached its decision. If there is anything contained herein that is of any value to you, I urge you to obtain and read the entire case; link to the full text of the case is available by clicking below:

Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77 (Or. Ct. of App. 2005). Oregon equitable mortgage doctrine theta