Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3

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

California

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

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

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

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

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

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

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

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

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

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

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

8- The California court observed as follows:

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

9- The court ultimately concluded as follows:

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

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

Case Law Citation:

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

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

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

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 2

(Part 2 of a multi part post)

Click here to read Part 1 of Equitable Mortgage Eviction Defense

This recent court case dealing with the equitable mortgage doctrine and evictions of homeowners in the context of foreclosure rescue situations where a Minnesota appellate court affirmed a lower court judgment of eviction of the homeowners.

Minnesota

In a Minnesota case, an eviction action was brought against two homeowners (husband and wife) after they defaulted on the leaseback agreement. In response, the homeowners filed a separate equity-stripping action (in front of a different judge) against the foreclosure rescue operator and related entities under Minn. Stat. §§ 325N.01-.18, alleging among other things, that the transaction was a prohibited equity stripping transaction and that the arrangement was an equitable mortgage, and not an absolute conveyance. The homeowners also filed an answer in the eviction proceeding noting the pendency of the chapter 325N action and moved for the district court to dismiss the eviction proceeding or to stay it pending resolution of the chapter 325N action. The district court denied that motion and awarded the foreclosure rescue operator an eviction judgment.

In affirming the lower court judgment of eviction, the appellate court addresed a couple of issues:

1) Subject Matter Jurisdiction

The homeowner cited old case law for the proposition that the eviction court did not have subject matter jurisdiction to hear the eviction action because, in essence, the relationship between the parties was not that of a conventional landlord-tenant, and the question of the validity of landlord's title was at issue. The appellate court rejected the argument on the grounds that, at the time the old cases were decided, the eviction courts were of limited jurisdiction and, accordingly, those courts lacked jurisdiction to hear a case like the one at bar.

The court hearing the eviction in this case was not of limited jurisdiction. Stated another way, because of the changes in the structure of the Minnesota judiciary over the years, the court in this case (unlike the courts in the old cases) had jurisdiction to hear both the eviction case and the case disputing the landlord's title and could have heard them together (the homeowner did not file counterclaims in the eviction action asserting violations of 325N / equitable mortgage; those claims were made in a separate action). On this basis, the claim of lack of subject matter jurisdiction in the eviction case failed.

2) Section 504B.121 Issue

Minnesota Section 504B.121, contained in the Minnesota Landlord Tenant law, in essence appears to allow a "tenant" to dispute the title of a "landlord" in a "foreclosure rescue" situation (the only exception to the rule that prohibits a tenant from disputing a landlord's title in an eviction action). The homeowners' request for either a dismissal or a stay of the eviction action pending the conclusion of the equity stripping / equitable mortgage action under Section 325N was rejected by the appellate court, not based on the substance of the statute, but on procedural grounds. The court said the following:

• "While the question of a stay or dismissal was presented to the district [lower] court, the record shows that Minn. Stat. § 504B.121 was not mentioned, either as the basis for a stay or a dismissal, or for any other reason. Therefore, we conclude that the impact of Minn. Stat. § 504B.121 on the question of whether the eviction court should have stayed the eviction proceeding is not properly before this court, and we decline to address it."

3) General Arguments

Additional arguments were made asserting that allowing an eviction proceeding to finish before a chapter 325N action is resolved is inconsistent with chapter 325N because allowing the eviction proceeding to go forward allows the landlord, who may, in the chapter 325N action, be found to lack title to the property, to obtain possession of the property and possibly convey it. Rather than try to summarize the court's response to this point, I will simply say that the appellate court found a way to reach the necessary rationale to support a rejection of this point. The link below will take you to the case and all the details.

Conclusion

This was apparently an extremely important case in Minnesota. In addition to the homeowners being represented by private counsel, they received additional support in the form of a "friend of the court" brief filed jointly by the State of Minnesota (through the Minnesota Attorney General's Office) and Mid-Minnesota Legal Assistance, the primary provider of general civil legal services to low-income and elderly people in 20 central Minnesota counties.

(Editor's Note: After reading this case about a half a dozen times, I still can't figure out how in the world the court could allow an eviction of the homeowner by the foreclosure rescue operator to go forward when the court was aware that the issue of the validity of the operator's title was an issue that was being litigated in another proceeding. The court mentioned that the homeowner could have sought an injunction from the judge in the other proceeding temporarily enjoining the eviction until the title issue was resolved. Why the court in this case didn't just grant a stay of eviction until the title issue was resolved is unbeknownst to me.)

Case Law Citation

Real Estate Equity Strategies, LLC v. Jones, 720 N.W.2d 352; (Mn. App. Ct. 2006) (Available online courtesy of Minnesota State Law Library).

(revised 2-6-07) emdefense Minnesota equitable mortgage sigma

Equitable Mortgage Cases - Wisconsin - Part 2

Hunter v. Maanum

78 Wis. 656; 48 N.W. 51

(Wi. 1891)

(revised 8-15-07; 1st & 2nd paragraph corrected 1-17-08 - corrections in red)

This case involved an action of unlawful detainer by a grantee (actually, it was a grantee's successor in interest) under a deed given to secure payment of a debt. As part of the conveyance to the (original) grantee, he and the grantor contemporaneously entered into a separate land contract under which the grantor could buy back the property conveyed upon payment of a certain sum in five equal installments with interest. The grantor made no payments; the grantee conveyed its interest to another - its successor in interest - and the successor thereafter initiated an action of unlawful detainer against grantor to obtain possession of the premises.

After a jury trial, the jury found in favor of the grantor (Editor's Note: the original version of this post inadvertently stated that the jury found in favor of the grantee; correction made 1-17-08) and, on appeal, the Wisconsin Supreme Court affirmed. The ruling was to the effect that (1) the transaction creating the relationship between plaintiff and defendant was an equitable mortgage; and (2) an action of unlawful detainer, under the statutes then in effect, could not be maintained unless the conventional relation of landlord and tenant existed at the time between the plaintiff and the defendant.

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In affirming, the court made the following statements and observations (bold text is my emphasis; excerpts broken up for ease of reading):

1) "The question, therefore, recurs whether the facts so submitted to and found by the jury authorized the maintenance of this action of unlawful detainer."

2) "There is no claim that the facts bring the case within the remedy given by sec. 3359, R. S. The contention is, however, that they do bring the case within the provisions of sec. 3358, R. S. 1 This court has repeatedly held that such an action cannot be maintained under that section unless the conventional relation of landlord and tenant exists at the time between the plaintiff and the defendant. Buel v. Buel, 76 Wis. 413, 45 N.W. 324; Menominee R. L. Co. v. Philbrook, ante, p. 142; and cases cited in the opinions."

3) "Such an action is a summary remedy given by statute, but was never intended as a substitute for ejectment or a bill in equity. "A justice of the peace has no jurisdiction to try the title to land. But the facts upon which the right of removal is based may be put in issue by the answer, and the issue so raised may be tried and determined in a justice's court. . . . Even where the facts show that the defendant has an interest in the premises which can only be fully protected in a court of equity, yet, if they are such as to disprove the conventional relation of landlord and tenant, they will be sufficient to defeat such action of unlawful detainer." 76 Wis. 413, 416, 417."

4) "The question to be determined, therefore, is whether the facts found by the jury in the portion of the charge quoted in the foregoing statement, were such as to create the conventional relation of landlord and tenant between the plaintiff and the defendant."

5) "Such facts were to the effect that the quitclaim deed was given to the plaintiff by the defendant and wife in pursuance of an arrangement and agreement that the defendant should retain an interest in the land with the privilege of selling the same, within the time named, for a price exceeding the amount due on the contract, and, in case of such sale, retain such excess; that, in case the plaintiff should sell during said period for an amount more than his due, then he should turn such excess over to the defendant; that if the defendant paid the amount due on the contract during said period, then the plaintiff should reconvey the land to the defendant."

6) "In accordance with numerous adjudications of this court, we must hold that the agreement thus found left in the defendant an equity of redemption in the land, and of course disproved the conventional relation of landlord and tenant."

7) "A few of these cases only are cited. Starks v. Redfield, 52 Wis. 349, 9 N.W. 168; Rockwell v. Humphrey, 57 Wis. 410, 15 N.W. 394; Schriber v. LeClair, 66 Wis. 579; and cases cited in the opinions."

8) "It is contended, in effect, that the absence from the arrangement of any express personal agreement on the part of the defendant to repay the money barred him of all equity of redemption in the premises. But that fact is not always conclusive, as shown by numerous authorities in the cases cited."

9) "Once a mortgage, always a mortgage, is the rule generally recognized in the cases. Ibid. When the facts and circumstances of the transaction are equivocal, the question whether it constitutes a pledge, security, mortgage, or a conditional sale is one of intention. Ibid. Whenever the relation of debtor and creditor is created by the transaction, or previously existed, and by express language or fair implication continues, and the possession is retained by the grantor, the transaction is usually held to be a pledge, security, or mortgage, especially if the value of the property conveyed is considerably in excess of the price allowed. Ibid."

10) "But the cases cited so fully discuss the questions here involved as to require nothing additional in this opinion. It is enough to say that the facts found negatived the existence of the conventional relation of landlord and tenant between the parties. Buel v. Buel, 76 Wis. 413, 45 N.W. 324; Menomonie R. L. Co. v. Philbrook, ante, p. 142."

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Go here for other posts on the claiming the equitable mortgage doctrine in actions seeking eviction of a homeowner who signed away a deed as collateral for a loan (ie. actions for ejectment, unlawful detainer).

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Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 8

This is Part 8 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

In this installment, coverage of the equitable mortgage doctrine, generally, and its application in the context of lawsuits for ejectment/eviction, specifically, includes cases from the State of Washington.

Puget Sound Inv. Group, Inc. v. Bridges
92 Wn. App. 523, 963 P.2d 944
(1998)

This case is really not an equitable mortgage case. It deals, however, with the inappropriateness of bringing an action for unlawful detainer by a purchaser of real property at an IRS tax foreclosure (who received a quit claim deed) to remove the prior owner who remained in possession of said property ("tenant" holding under color of title) without first establishing the superiority of its title over that of the prior owner. Since the case involves an action for unlawful detainer involving two parties each having competing claims to title over the same property, I chose to include a brief discussion of the case here. The facts of this case are somewhat analogous to the typical foreclosure rescue situation involving a sale-leaseback with a buyback option, at least with respect to the competing ownership claims of the foreclosure rescue operator, as the record titleholder, and the financially strapped homeowner, who asserts title to the property under an equitable mortgage claim.

In affirming the lower court in ruling that it was not proper for an IRS tax sale purchaser of real estate to obtain possession from the prior owner, who remained in possession after the sale, through an action for unlawful detainer, the Washington appeals court made this observation of what unlawful detainer actions are all about:

• "The unlawful detainer chapter, RCW 59.12, provides a summary proceeding for obtaining possession of real property, and gives the proceeding priority over other civil cases. The court's jurisdiction in unlawful detainer proceedings is limited to the right to possession of real property and a few related issues such as damages and rent due. Unlawful detainer actions offer a plaintiff the advantage of speedy relief, but do not provide a forum for litigating claims to title."

(citations omitted)

The court ultimately ruled that, because the person in possession claimed ownership under color of title based on his warranty deed, the tax sale purchaser must establish superior title over the prior owner before it may proceed with an unlawful detainer action. The court stated that "[t]he appropriate procedure is an action in ejectment and quiet title under RCW 7.28."

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Where a financially strapped homeowner, who after signing away title to his/her home to a foreclosure rescue operator in exchange for a leaseback and option to buy (or a repurchase agreement under a contract for deed), finds him/herself being evicted in an unlawful detainer action, the homeowner's assertion of a claim of equitable mortgage should, in my view, put him/her in a similar position with respect to the color of title issue that would require an action for quiet title and ejectment. While Puget Sound Inv. Group, Inc. v. Bridges doesn't deal with an equitable mortgage situation, it seems that both a homeowner's ownership claim under the equitable mortgage doctrine and the foreclosure rescue operator's ownership claim as record owner are the types of competing claims of ownership that make the summary procedures of unlawful detainer unavailable to a foreclosure rescue operator, similar to the result in Puget Sound.

Puget Sound Inv. Group, Inc. v. Bridges, 92 Wn. App. 523, 963 P.2d 944 (1998)

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While I have already briefly written about the following cases in a prior post, see Equitable Mortgage Doctrine In Washington State, I will include them again here, inasmuch as they deal with actions by a "purported" owner of property to recover possession thereof from one in possession who asserts title to same under an equitable mortgage claim.

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Mears v. Strobach, 12 Wash. 61; 40 P. 621 (Wa. 1895) (involves an action to recover possession of land.)

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The "tenant" being sued for eviction successfully made equitable mortgage claim against purported "owner"; in addition, notwithstanding testimony to the effect that the plaintiffs refused to make a loan and would only consent to advance the money upon an absolute conveyance to them of the property, "[the] testimony, interpreted in the light of the instruments actually executed, and of the other facts sufficiently proven by the evidence, fails to satisfy us that the transaction was not, after all, substantially one of lending and borrowing." The court further stated:

• "In our opinion, there was no intention on the part of either of the parties to do more than on the one part to secure the loan of the money and on the other to loan it and get proper security for re-payment with interest. This being so, the bare fact that they refused to loan the money and take a mortgage only tends to show that they thought they could evade the law, requiring the mortgage to be foreclosed before they could get possession of the property, by taking a deed, as they did, and giving a lease and an option to purchase to the grantors named in the deed."

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Snyder v. Parker, 19 Wash. 276, 53 P. 59 (Wa. 1898) (involves an action to recover possession of land. The "tenant" being sued for eviction successfully made equitable mortgage claim against purported "owner"; the deed held by the "owner" was given as security for a debt, and was not an absolute conveyance and, accordingly did not pass title. In ruling, the Washington high court remarked, "It is an elementary principle that in ejectment the plaintiff must recover on the strength of his own title. The instrument in suit having been found a mortgage, appellant should not recover possession under its terms."

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Pearson v. Gray, 90 Wn. App. 911, 954 P.2d 343 (Wa. App. Ct. 1998) One claiming ownership under equitable mortgage doctrine has standing to bring quiet title action; in addition, the trial court's order in favor of legal title holder in unlawful detainer action and writ of restitution reversed and remanded until a finding of ownership in the quiet title action is reached. The court observed, "The purpose of an action for unlawful detainer is to determine who has the right of possession. [...] [A]s issues of ownership in the quiet title action still remain unresolved, the finding in the unlawful detainer action and the grant of the writ of restitution are premature."

Go here for other posts on the equitable mortgage doctrine in Washington State. Washington State equitable mortgage whale emdefense

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 4

This is Part 4 of a multi part post. Click here to read Part 3.

In this post, I will touch on a 2001 Colorado Supreme Court case that dealt with the assertion of the "equitable mortgage" doctrine by a "tenant/equitable owner" in possession of property in connection with an eviction action brought by the purported "landlord/record owner" of the property. The deed under which such record ownership is claimed is alleged to be an equitable mortgage by the "tenant-equitable owner" in possession of the premises.

The Colorado court concluded that the issue of whether ownership affects possession should be decide first. If it does, then the issue of actual ownership should be decided second, after which the possession issue should be decided last.

Colorado

Beeghly v. Mack, 20 P.3d 610; (Colo. 2001)

1) A typical foreclosure rescue transaction was entered into in which a certain Mack, owning real property in trust, contracted with a certain Beeghly, whereby Beeghly took title ownership of the real property and subsequently leased back the property to Mack's trust. The purpose of the transaction was to forestall an imminent foreclosure of the trust property.

2) Approximatley nine months later (Mack had already stopped making the "rental payments" to Beeghly due to a dispute), Beeghly initiated an unlawful detainer action against Mack seeking, among other things, possession of the property.

3) Mack responded by denying that Beeghly was the beneficial owner of the property. On that same date, Mack and the Trust also filed an amended answer, asserting counter-claims such as quiet title, declaratory judgment, breach of contract, unjust enrichment, and breach of fiduciary duty.

4) In addition, Mack and the Trust filed a motion to continue the trial of the issue of possession of the property.

5) The continuance was granted conditioned upon the collective payment of a bond (in accordance with a Colorado bond statute, section 13-40-114. ) by Mack and the Trust, which was never paid.

6) Beeghly then filed a motion for default judgment for possession based on the failure of Mack and the Trust to post the bond; the trial court ultimately granted the motion for default judgment, holding that Beeghly was entitled to possession since Mack and the Trust failed to post the bond.

7) The trial court also denied Mack's and the Trust's request for a stay of the possession order.

8) Mack and the Trust then brought a C.A.R. 21 petition with the Colorado Supreme Court requesting that the Supreme Court issue a rule to show cause why an order should not be issued vacating the trial court order granting the motion for default judgment.

9) The Colorado Supreme Court, in its opinion, addressed two issues:

• the correctness of granting a default judgment for failure to post bond, and
• the equitable mortgage issue.

10) On the first issue, the high court ruled that the lower court decision was incorrect, and provided an analysis of the Colorado law that concluded that the law requires a bond only to obtain a delay in the proceedings and that, upon failure to post the bond, the court proceedings are simply to continue to trial. The fact that the defendant is granted his request for a delay in a trial, conditioned upon posting a bond, and then fails to post the required bond, is not grounds for a default.

11) On the second issue, the equitable mortgage claim in a forcible entry and detainer ("FED") case, the Colorado high court made the following observations:

• "Generally speaking, in an FED action, the issue of ownership must first be determined before possession can be resolved. Lindsay v. Dist. Court, 694 P.2d 843, 846 (Colo. 1985)."
• "In Lindsay, we opined that although the case began as an FED action, it ultimately placed in issue the entire transaction between the two parties, and thus became a suit in equity to determine whether the petitioners were tenants subject to eviction, or owners subject to foreclosure. Id."
• "The Lindsay case differed procedurally from this case, in that two separate law suits were filed, one an unlawful detainer action in county court, and the other an action challenging the validity of the agreement between the parties in district court. Lindsay, 694 P.2d at 844-45."
• "However, the issues raised were similar to those presented in this case, specifically whether ownership must be determined prior to a ruling on possession being made."
• "In Lindsay, ownership of the property directly affected entitlement to possession, and as such, a determination of ownership was first required in order to properly assess which party was entitled to possession."
• "However, there may be circumstances where the issues of ownership may not affect the right to possession, and thus, possession can be determined independent of resolving ownership."
• In Lindsay, without determining whether there was an actual FED action pending in the district court, we ultimately held that the district court action could properly resolve all issues in dispute between the parties, including who was rightfully entitled to possession. Id. at 846.
• Thus, notwithstanding the classification of a lawsuit between parties, when the issue of ownership is validly raised in an FED action, and directly affects the right to possession, ownership must be determined prior to a ruling on possession. Lindsay, 694 P.2d 843.

12) The Colorado Supreme Court ruled as follows:

• "Under the rule set forth in Lindsay, possession in this case cannot be decided without the trial court first determining whether ownership affects possession, and if so, resolving the issues of ownership."
• "Accordingly, we remand this case to the trial court for a determination as to whether Mack and the Trust have raised meritorious claims regarding ownership."
• "Once the trial court has determined whether the ownership issues raised are relevant to a determination of the possession interests in dispute through a full and fair hearing, the trial court can then decide entitlement to possession."

13) In conclusion, the court stated:

• 'Moreover, in accordance with Lindsay, the trial court must consider the ownership issues raised by the parties, and determine if those issues affect possession prior to deciding who is actually entitled to possession."
• "Accordingly, we make the rule to show cause absolute and remand this case to the trial court to first determine whether, under the circumstances presented in this case, ownership must be resolved before possession, and to then resolve possession on the merits."

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My only thoughts on this case is that it seems intuitive that the issue of whether ownership affects possession is the first issue that should be decided in any eviction case where a party in possession is claiming to be the equitable owner pursuant to the equitable mortgage doctrine. If so, then the actual ownership should be determined before finally, the possession issue is addressed.

This approach appears to be consistent with that of the California court decision referenced in Part 3 of this post, where, in reversing a lower court's judgment of eviction, the court essentially said that the purported equitable owner of property claiming title pursuant to the equitable mortgage doctrine was entitled to have the issue of ownership of the subject property resolved by the trial court before resolving the issue of possession.

Apparently, however, not all courts seem to see it this intuitively. See Part 2 of this post where a Minnesota intermediate appellate court saw it a bit differently.

Other Citations

Lindsay v. Dist. Court, 694 P.2d 843 (Colo. 1985). emdefense Colorado equitable mortgage quizzz

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 6

This is Part 6 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

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In this episode of a (possibly never-ending) multi-part series, I will be touching on an old Massachusetts case that I stumbled into where the court had the opportunity to address the equitable mortgage defense asserted by an "alleged" tenant who claimed to be the true owner of the premises and who claimed that the purported "owner" attempting to evict him was, in essence, an equitable mortgagee who was a grantee of a deed given as security for a debt.
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Waters v. Randall

47 Mass. 479

(Ma. 1843)
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This 160+ year old case is certainly an oldie but goodie. While I had some reluctance in reporting on this case because of its age, I thought better of it and decided to mention the case here and let the Massachusetts legal experts decide if the case has any current viability (bold text is my emphasis).

This is an action, brought by a certain Waters, to recover possession of two parcels of property from a certain Randall. Because the action was deemed, in equity, to be a foreclosure action, and the court in which the action was brought did not have jurisdiction to hear foreclosure actions, the case against Randall was dismissed.

The facts of the case and the court's observations follow:

Indebteded to Waters, Randall quit-claimed his title to two parcels of property to Waters for the purpose of securing the existing indebtedness. Contemporaneously with the quit-claim, Randall gave Waters a bond to evidence the existing debt to Waters. By agreement, Randall maintained possession of the parcels, and upon repayment of either all or part of the debt, Waters agreed to reconvey that portion of the parcels with a value equal to the amount of debt repaid.

In defense against the action to recover possession, Randall claimed to be the true owner of the property and, given that, in equity, the action was an action to foreclose a mortgage, the court in which the action was brought did not have jurisdiction to hear the matter.

The court stated that:

• "The bond, given at the time of making the deed, is an instrument of defeasance, and the land is therefore held in mortgage; and the stipulations in the bond do not affect or alter the character of the conveyance."

The court went on to explain their reasoning:

• "The law has always contemplated with jealousy any attempt to evade its provisions in respect to the right of redemption of estates conveyed for security. And while, by reason of a breach of the condition of the deed, the estate becomes absolute in the mortgagee, in law, yet equity has always preserved to the mortgagor a right of redemption of the mortgaged premises. The provision in the present case between the parties was, that Randall should continue in possession, so long as he saved Waters harmless from his liabilities."

• "And on the other hand, when Waters should be compelled to meet and discharge any of such liabilities, then, by said agreement, he might take immediate possession of the estates, according to the estimated value, to such an extent as should be equal to the debt or liability so paid or cancelled by him; or, in other words, so fast as he pays money for Randall, which is not forthwith repaid, he may take possession of so much of the mortgaged property as shall be equal to such advance, agreeably to their estimate of value. And so, when an amount equal to the whole value shall have been advanced for Randall, then Waters will be entitled to the whole estate."

• "But this stipulation does not change the nature of the instrument, but is a mere provision for his obtaining possession of the mortgaged premises; and while the estate thus becomes absolute in him at law, it is merely the commencement of his foreclosure in equity."

• "If it were otherwise, a new description of conveyance would be created, to be treated as a mortgage, or not, at the option of the money lender; for here is no obligation on his part to take the estate, and cancel the debts and liabilities, but only a right so to do; and in this manner the statute of mortgages would be broken in upon at pleasure, and new evasions of the laws against usury would spring into being."

• "And though the transaction in the present case may have been made in perfect fairness, as it regards the full value of the premises mortgaged, so that the tenant would not be injured by the demandant's becoming the present absolute owner of the estates, at the agreed prices, yet we cannot treat it in any other light than a mortgage."

• "And though mortgages are made with a power also, on the part of the mortgagee, to sell the mortgaged premises -- like the case of Eaton v. Whiting, 3 Pick. 484; and though a separate deed of defeasance, made at the same time with the absolute deed, may afterwards, upon sufficient consideration, be cancelled as between the parties, in such manner as to give an absolute title to the mortgagee -- the rights of third parties not having intervened -- as was decided in the cases of Trull v. Skinner, 17 Pick. 213, and Harrison v. Phillips Academy, 12 Mass. 456; yet I believe no case can be found, in which it has been determined that the mortgagee can, by force of any agreement made at the time of creating the mortgage, entitle himself, at his own election, to hold the estate free from condition, and cutting off the right in equity of the mortgagor to redeem."

• "Such an agreement would not be enforced as against a mortgagor; nor is it to be confounded with a sale upon condition. Under these views, we are of opinion that the relation of these parties is that of mortgagee and mortgagor, and consequently that this court has no jurisdiction of the suit. The same must therefore stand dismissed, with costs for the tenant."

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In this case, the property owner (Randall) maintained possession of the premises after the quit-claim, and it appears that the amount of Randall's debt approximated, if not exceeded, the value of the parcels conveyed. In spite of the lack of disparity between the value of the property conveyed and the amount of the debt owed, the court seemed to have no problem deciding that the bond given by Randall contemporaneously with the deed operated as an instrument of defeasance and, accordingly, treated the arrangement as a secured loan (mortgage) transaction, not an absolute sale.

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Unlike other cases I've written about, there was no fraud involved here, nor were there any inequitable advantages taken of pressing wants, and no sale for a consideration that was found to be manifestly inadequate by the court. The court in this case actually observed that "[t]he transaction in the present case may have been made in perfect fairness, as it regards the full value of the premises mortgaged...". Nevertheless, it appears that the bond given by Randall contemporaneously with the deed, being found to operate as an instrument of defeasance, was enough to cause the entire arrangement to be deemed a mortgage.

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Question:

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In the context of a foreclosure rescue transaction (involving sale with a lease buy-back arrangement), would a Massachusetts court similarly treat the lease, coupled with either an "option to buy" or a "repurchase contract with delayed closing", as instruments of defeasance?

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Inasmuch as the court in Waters v. Randall expressed strong concerns about money lenders' activities, generally, in connection with:

• "any attempt to evade [statutory] provisions in respect to the right of redemption of estates conveyed for security", and
• "new evasions of the laws against usury [that] would spring into being",

seeking to treat leasebacks, options to buy, and repurchase agreements with delayed closings as instruments of defeasance is something that may be worth thinking about if one represents financially strapped homeowners who have entered into foreclosure rescue deals. emdefense Massachusetts equitable mortgage saturn

Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation

(Part 1 of a Multi Part Post)

I came across two (pretty old) court cases (from Florida & New York) which, "in essence," involved the assertion of "equitable mortgage" by a "tenant" as a defense against a "property owner" in an attempted eviction in a landlord-tenant action (the words "equitable mortgage" however, were not actually used in the cases).

(I caution the reader that I have not, in any way, researched this issue, but I've merely "stumbled over" these cases. I've read them, and am simply bringing them to your attention. In quoting from the text of these cases, I've omitted all citations and internal quotations for ease of reading.)

New York

In one case, a New York intermediate appellate court reviewed a case where (according to the court) "[s]ubstantially all the evidence offered by defendant [in asserting an equitable mortgage defense] was excluded by the [lower] court on the theory that being in possession under the lease he was not at liberty to dispute the title of his landlord."

The New York appellate court made the following observation on the foregoing point:

• "That elementary principle does not preclude a tenant when sued for rent from showing as a defense that since the execution of the lease he has acquired a title superior to that of his lessor or has acquired the lessor's title or that the title of his landlord has expired by its own limitations or has been in any manner extinguished subsequent to his entry under the lease or from setting up a title acquired by him since he became tenant, overreaching the title of his landlord, or in any way showing that the relation of landlord and tenant has ceased to exist (my emphasis). Some of the authorities asserting these propositions are here cited."

(citations omitted)

In reversing the lower court's decision, the appellate court stated:

• "It may be that if the evidence of defendant had been received it would fall short of establishing the [equitable mortgage] defense here outlined, but he should have been given the opportunity to establish such defense."

The court also commented:

• "It was not necessary that defendant should surrender possession and institute an action in equity to have his rights formally declared. If unjustly sued for rent he could show the changed character of his possession and assert his rights as a defense."

While this case may not be exactly on point in connection with the typical foreclosure rescue, "sale-leaseback-reconveyance" agreement, it shows the willingness of the court to rule that equitable issues raised by a "tenant" against a "landlord", where the landlord allegedly came about his title by reason of a deed given as security for a loan, are "fair game" in an eviction action.

In the foreclosure rescue context, it seems to me that the equitable argument of the financially strapped homeowner being evicted by a foreclosure rescue operator would simply be that the instrument (the purported "lease") that the operator is trying to enforce in attempting to evict the homeowner is not an agreement to pay rent, but rather, is an agreement to pay interest pursuant to, and a part of, a larger agreement that constitutes an equitable mortgage.

In effect, the homeowner in this scenario is simply arguing that there is no (and never was any) valid landlord-tenant relationship where eviction is appropriate. The relationship between the parties (as the argument would go) is that of a debtor and a secured creditor where the appropriate action to enforce payment would lie in a foreclosure action of the equitable mortgage by the foreclosure rescue operator (notwithstanding the fact that the instrument may actually be "labeled" or "titled" as a "lease").

Kibbe v. Crossman, 139 A.D. 338; 124 N.Y.S. 3; (NY App. Ct., 3rd Dept. 1910)

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Florida

The second case is a decision of the Florida Supreme Court involving the following facts:

1) An eviction action was brought by a "landlord" in a county court (court of limited jurisdiction) which had jurisdiction to hear landlord-tenant disputes, but did not have jurisdiction to hear actions involving the titles to, or boundaries of, real estate.

2) In response to the attempted eviction, the "tenant" pleaded that the dispute was one involving the title to real estate and that the county court did not have jurisdiction over the matter.

3) The following text represents excerpts from the "tenant's" plea, as extracted from the court case:

• "1. The said cause involves the question of the title to the real estate described in the writ in that the defendant claims to be the owner of the said real estate and of the improvements thereon; that he is not the tenant of the plaintiff, has no agreement with him for the payment of rent and is not indebted to him in any sum for rent of said property; that until very recently the plaintiff has not claimed to be the owner of said property but has claimed to be the holder of a mortgage indebtedness against the same and that inasmuch as said cause involves a controversy as to the title of said real estate the circuit court has under Section 11 of Article 5 of the Constitution of the State of Florida exclusive original jurisdiction of said cause."

• "2. That heretofore the defendant has instituted in the circuit court for Pinellas County, Florida, on the chancery side thereof a suit alleging that the plaintiff is the holder of a mortgage indebtedness against said property, that said mortgage indebtedness is usurious to such an extent that both principal and interest are forfeited and asking that a deed under which plaintiff hols (sic) be declared to be a mortgage and that plaintiff be ordered to reconvey and that defendant be decreed to hold said property free and clear from said indebtedness, that the plaintiff herein demurred to such bill of complaint primarily on the ground that this defendant did not offer to repay the principal of such indebtedness and the demurrer was sustained on that ground, no contention being made that the plaintiff herein was the actual owner of said property, that an appeal has been taken from the order sustaining said demurrer and is now pending in the Supreme Court of the State of Florida, that by virtue of such facts this court has no jurisdiction to try this cause."

4) The County Judge disregarded the plea to the jurisdiction, and the circuit court (a higher court) subsequently issued a writ of prohibition upon the County Judge, thereby halting the eviction action.

5) The Florida high court addressed the matter by first reciting a portion of the then-existing unlawful detention proceedings statute, then went on with the following statements:

• "The above statutory provision as to procedure in cases of landlord and tenant, does not preclude the defendant in possession from pleading to the jurisdiction of the court on the ground that he claims title to the real estate, of which subject the County Judge has (n)o jurisdiction to try or determine."

• "When in proceedings in the County Judge's court to recover the possession of land as from a tenant, a pleading is filed which puts in issue the title or boundaries of the land in controversy, it becomes the duty of the County Judge to dismiss the cause for want of jurisdiction."

• "Prohibition is the defendant's remedy where the County Judge does not dismiss an action for unlawful possession of lands when a plea tenders an issue as to the title of the land."

Based on this, it appears to me that, in the foreclosure rescue context, a homeowner finding himself sued for eviction can temporarily stave off eviction merely by asserting the equitable mortgage doctrine. Stated another way, once this doctrine is asserted, it doesn't seem like a court can properly issue a judgment for eviction until the issue of title to the property is first tried. Further, where a court of limited jurisdiction is hearing the eviction action and has no jursdiction over disputes involving title to property, the judge is duty bound (at least according to this case) to dismiss the action, at which point, the case can be refiled in an appropriate court having proper jurisdiction.

One point that I want to highlight is that in both this case and the New York case, the tenants asserting the equitable mortgage doctrine lost their cases in the initial court that heard the matter. It was necessary to file and litigate an appeal (and incur the cost attendant with such an appeal) to arrive at the correct decision (For anyone representing a homeowner in this situation, I hope you win it on the first "go round").

Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931)

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Re: Subject Matter Jurisdiction

The Florida case dealt with the issue of the court's jurisdiction over the subject matter. Regarding the issue of subject matter jurisdiction generally (and I'm only thinking out loud here), I pose the following questions:

1) What happens if a homeowner in a foreclosure rescue deal is evicted from his home, does nothing about it for a while (whether it be a few months or a few years), and then goes back into court (through counsel) and files an action for a declaratory judgment, wherein an "equitable mortgage" declaration is sought regarding the "sale-leaseback-reconveyance" arrangement?

2) Does a statute of limitations apply to an "equitable action" such as this? If so, how long do you get to bring an action?

3) If successful in obtaining an equitable mortgage declaration regarding the initial sale-leaseback transaction, does this then make the judgment or order of eviction (wherein the homeowner was forced out of his home by order of the court) "void" for lack of subject matter jurisdiction? (after all, if the deal was actually an equitable mortgage all along and not a true sale, then there shouldn't have been any eviction in the first place).

When a judgment is "void" (as opposed to being merely "voidable"), it generally is void from its inception. Typically, when a judgment is void, then everything that happens after the issuance of the void judgment is also void (ie. subsequent sale by foreclosure rescue operator to third party strangers and mortgage lenders financing the third party sale). Claims of the "bona fide purchaser for value, without notice" status may not prevail when the subsequent purchaser's interest in the property purchased devolved from a void judgment. Further, unless I'm mistaken, claims that a judgment is "void" for lack of subject matter jurisdiction may be brought at any time (no statute of limitations applicable, no laches). Finally, I think that the doctrines of res judicata, law of the case, estoppel, etc. may be inapplicable in a matter involving a void judgment.

Obviously, the answers to the foregoing questions will depend, at a minimum, on the specific laws of your home state. Depending on what those laws say, it may be that there are many victimized (and devastated) homeowners throughout the country that have lost their homes in foreclosure rescue deals that still have viable causes of action, not only against the foreclosure rescue operator personally, but also against the property that they had "stolen" from them. If they do, in fact, have valid claims against the property, it may then be that they are entitled to the return of their homes (or possibly damages against the operator), in which case the subsequent buyer and any mortgage lender financing the purchase, may end up being the victims (and, in essence, left "holding the bag"). Of course, if the subsequent third party buyer and mortgage lender insured their purported interests in the property by obtaining a title insurance policy, it may then be that they have a valid claim for indemnification from their title insurer. It would then be up to the title underwriter to go after the rescue operator to recoup its paid out insurance claims. As a practical matter, if the homeowner in this scenario does, in fact, have a legitimate case, it may very well be that some form of financial settlement involving all the parties, including the title insurer, can be reached (After all, the cost of "unwinding" these transactions and "cleaning up the mess" through protracted litigation could become rather expensive and time consuming).

For Part 2, see Equitable Mortgage Defense In Foreclosure Rescue Eviction Action - Part 2

(revised 2-5-07; 10:26 pm) emdefense Florida equitable mortgage alpha New York equitable mortgage puzzling

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 5

This is Part 5 of a multi part post. Click here to read Part 4.

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Essex Property Servs., Inc. v. Wood

Superior Court of New Jersey, Essex County

246 N.J. Super. 487; 587 A.2d 1337;

1991

In this post, I will touch on a 1991 New Jersey case in which a judge, sitting in what appears to be an appellate capacity, voided a judgment of possession in an eviction action against a tenant/homeowner who had transferred title to his home to a foreclosure rescue operator and subsequently leased back the home from the operator.

The judgment of possession was obtained in a summary dispossession (landlord-tenant; limited jurisdiction) action. The reviewing court found that the dominant realtionship between the foreclosure rescue operator and the "homeowner/tenant" was not one of a landlord and tenant. Accordingly, the reviewing court found that subject matter jurisdiction did not exist in the summary dispossession action and therefore, the judgment for possession in favor of the foreclosure rescue operator was vacated and the warrant for removal was recalled.

The recitation of the details of what happened between the foreclosure rescue operator and the homeowner are contained in the case, which can be accessed by clicking the link at the end of this post.

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The court made the following observations regarding the facts of the case and the applicable law, as well as its conclusions on this matter (all text appearing in bold are my own emphasis and are not emphasized in the original text).

1) "I find it inescapable that originally the parties contemplated that their transaction was a method of temporary refinancing and that both parties contemplated that defendants would "re-purchase" the property. The relationship of landlord and tenant was incidental to that mutual and dominant contemplation."

2) "Testimony was presented on the return of the order to show cause on a single issue and without any opportunity to engage in discovery. The true consequences and evaluation of the parties' conduct shall have to await a plenary trial."

3) "My conclusion (i.e., temporary financing transaction rather than landlord-tenant relationship) results from several factors."

4) "Most significant is the common intention expressed by the parties; defendants wanted to save their home from foreclosure and plaintiff approached them to help them save it from foreclosure. There was no suggestion that plaintiff approached defendants in order to rent the home that defendants then owned to them."

5) "Secondly, the abundance of documents show that a transaction far more complicated than a lease was involved. Although a lease was one of the documents, it was subordinate to the intention of the parties, rather than the motivation or dominant factor in the transaction. It was a course on the road to their true destination."

6) "Additionally, it was not until after the first two years of the relationship that plaintiff proposed a lease that: (a) would not include the option to purchase, and (b) called for a security deposit. (Apparent violations of the landlord-tenant laws (such as the payment for renewal, see N.J.S.A. 2A:18-61.3(a)) are immaterial on the instant issue, especially since I have found that a landlord-tenant relationship was not the dominant one. At best for plaintiff, these apparent violations are further evidence of the subordinate nature of the tenancy.)"

7) "However, both factors indicate that plaintiff did not consider the initial transaction as creating essentially a tenancy. Consistent with these considerations is the fact that defendants refused to sign this last proposed lease."

8) "Substance must control the form. "If there is a large down-payment and a substantial equity build up, a court should not permit such a sales agreement to be transformed into a landlord-tenant lease in a case of default or breach." Meiser, Tenant-Landlord Law in New Jersey (ICLE 1978) at 119-121. Although the quote refers to installment sales agreements, it is equally applicable to a sale, leaseback, option-to-purchase transaction as well, inasmuch as the substance prevails."

9) "See also Cahayla v. Saikevich, 119 N.J.Super. 116, 290 A.2d 311 (Cty.Dist.Ct.1972) on this issue, as between tenants by the entirety and a tenant of one of them, and Plaza Road Co-op, Inc. v. Finn, 201 N.J.Super. 174, 492 A.2d 1072 (App.Div.1985) as to a co-op shareholder in possession not being subject to summary dispossess proceedings because the dominant relationship is not that of landlord and tenant. Id. at 181, 492 A.2d 1072."

10) "The rationale was spelled out in Carr v. Johnson, 211 N.J.Super. 341, 511 A.2d 1208 (App.Div.1986) as follows:

• The Legislature did not intend for the Special Civil Part (as successor to the County District Court) to determine disputed land titles and complex equitable issues in the context of a landlord-tenant dispossess action, 18 N.J.Practice, supra, § 1560 at 296, since it is a summary proceeding in which discovery is not permitted. . . . [W]hile such a court "... may hear equitable defenses and entertain equitable concepts, it is beyond the power of that court to grant permanent injunctive or other equitable relief to these parties as may appear just and appropriate under the circumstances presented." Morrocco v. Felton, 112 N.J.Super. 226, 230-231 [270 A.2d 739] (Law Div.1970). . . .
  
• Because these limitations are imposed, N.J.S.A. 2A:18-60 provides for transfer of such cases from a court of limited jurisdiction to the Superior Court.
  . . . .

• The issues here were complex enough to require pretrial discovery to develop evidence concerning the relationship between these parties such as the amount of money paid by Carrie, the reasons for those payments, their relationship to the amount of taxes and full revelation of the circumstances leading up to the conveyance to Mary. [at 347, 511 A.2d 1208]"

11) "Carr also observed that the court should make the transfer sua sponte pursuant to R. 1:13-4(a) in an appropriate case where the defendant does not move under the statute. Id. at 349, 511 A.2d 1208."

12) "The substance, the essential nature, the dominant purpose of this transaction, has been spelled out above. Legal title being in plaintiff while defendants were in possession was incidental to the transaction. It was subordinate to the actual intent and contemplation of the parties and was intended to have been temporary. Inter se, the parties did not expect title to be "really" in plaintiff. Certainly plaintiff would have no right to the summary dispossession of defendants without "real" title."

13) "Although the transaction took a substantially different (but likewise complex) form from that in Humble Oil & Refining Co. v. Doerr, 123 N.J.Super. 530, 303 A.2d 898 (Ch.Div.1973), one of the findings there applies here as well: "In this sense the lease transaction was an equitable mortgage. . . ." Id. at 551, 303 A.2d 898.

14) That being so, the judgment for possession is hereby voided and the warrant of removal is hereby recalled. I will sua sponte prepare an order for the transfer of this action to the Law Division (with its consequent equitable powers) so that the parties may expand the pleadings and engage in discovery.

15) The determination of the consequences of the transaction and a thorough exploration of the payments involved are not appropriate in a summary action; it is appropriate for the Law Division. The transfer and enlargement of the pleadings will deny a possibility of conflicting decisions, will eliminate a needless duplication of judicial efforts, and will promote a savings of time, cost and effort. Morrocco v. Felton, 112 N.J.Super. 226, 233, 270 A.2d 739 (Law Div.1970); R. 1:1-2."

16) Notwithstanding resolution of the issue above, I consider it appropriate to note one additional factor which appeared in this matter; the purported settlement of the eviction action culminating in a judgment for possession.

17) As noted above, the eviction action was "settled" by the parties. It is a strong public policy in New Jersey to encourage the settlement of claims. Pascarella v. Bruck, 190 N.J.Super. 118, 124-125, 462 A.2d 186 (App.Div.1983). Consequent with that public policy, the courts should enforce settlements absent a demonstration of fraud or other compelling circumstances. As noted in Jannarone v. W.T. Co., 65 N.J.Super. 472, 477, 168 A.2d 72 (App.Div.1961), enforcement is subject to the discretion of the court.

18) The compelling circumstance requiring the exercise of my discretion in avoiding the settlement is that by consequence otherwise, enforcement would appear to confer jurisdiction where it did not exist. Jurisdiction not existing ab initio, the parties cannot vitalize it by consent.

19) In any event, based on the testimony on the return date of the order and the affidavits and exhibits submitted on the application for the order, I also find that defendants signed the stipulation of settlement for the same reason that they entered into the subject transaction--they had their "backs up against the wall." They had to sign or they would be evicted--the same as in the foreclosure action. Economic necessity is often the parent of ruinous concessions. See Humble Oil, supra, 123 N.J.Super. at 547, 303 A.2d 898. This defense to the settlement, and the whole equitable concept, may be appropriate for exploration in the Law Division; they certainly are not appropriate for a summary dispossess action. n1

• n1 I hasten to add that although the above transaction came to the court dressed in one particular type of package, the judges sitting in summary actions for possession must be vigilant to note the many varieties in which these matters may be presented. Another may be a mortgage to plaintiff coupled with a lease, or an infinite variety otherwise. The common thread is that defendant formerly owned the property, or perhaps gave a sizeable downpayment on an option to purchase, or the like. They are usually designed (at least by a plaintiff) to give the appearance that the parties intended the landlord-tenant relationship to be the dominant relationship.
  
• These "packages" are apparently proliferating because of advertised promotions, for example, to buy real estate with no money down or the like, coupled with the current recession. All of the "angels" offering to help financially beleaguered owners do not necessarily have "tarnished halos"; some may possibly act from beneficient motives. However, the unravelling of some of these transactions, and the determination of the equitable considerations, is not appropriate in summary dispossession actions, in my opinion.

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Vacating the judgment of possession in this case on the basis of the court's lack of jurisdiction was the same approach taken by the state Supreme Court in the Florida case referenced in Part 1 of this post.

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One common thread that runs through all the cases I've posted on in Parts 1 through 4 of this post in which the property owner has prevailed in his/her equitable mortgage claim against the investor/"equitable mortgagee" is that the property owner seems to lose his case in the first forum to hear the matter; winning these cases appears to require being prepared to win on appeal.

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For example:

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Regarding the cases that hinge on the right of the tenant/homeowner to have the issue of his equitable title (claimed under the equitable mortgage doctrine) resolved before having to deal with eviction proceedings (see the New York case in Part 1; the California case in Part 3; or the Colorado case in Part 4), it appears that the judges initially hearing these cases had considerable difficulty in adopting a seemingly intuitive approach in deciding the cases. Personally, there doesn't seem to be anything more intuitive than determining the title to the property first before deciding whether to evict the party in possession who is making a legitimately arguable claim to the title thereof.

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Regarding the cases that hinge on a court of limited jurisdiction (ie. landlord-tenant court, housing court, county court, etc.) lacking subject matter jurisdiction to resolve issues dealing with titles to, or boundaries of, real estate (as in the New Jersey case above, or the Florida case in Part 1), the courts initially hearing these cases have ostensibly had great difficulty in understanding (or possibly accepting) their jurisdictional limitations. By issuing a judgment of possession, eviction, etc. in spite of the fact that the party in possession is claiming the defense of equitable title to the premises under the equitable mortgage doctrine, the limited jurisdiction court, in essence, is deciding the equitable mortgage issue against the party in possession when it lacks the jurisdiction to do so. emdefense New Jersey equitable mortgage revolution

Equitable Mortgage Defense In Eviction/Ejectment Actions - Part 9

This is Part 8 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

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The following cases, a couple of old ones, and a couple of recent ones, come from the State of Florida and apply the law of equitable mortgage in a way so that in no case will the right of possession to property by a mortgagee be recognized in a Florida court until due foreclosure is had according to the forms of the law providing for foreclosure of mortgages. Obtaining possession via a tenant eviction or ejectment action when the legal title was received as security for a loan is legally impermissable.

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Walls v. Endel, 20 Fla. 86; (Fla. 1883)
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This case involved an action for ejectment by a title holder of property. The person in possession alleged that it was the owner of the property who had conveyed absolute title to the current title holder as security for the payment of money and that, therefore, the deed should be treated as a mortgage. The lower court refused to allow evidence that the arrangement between the parties should be treated as a mortgage.

In reversing the lower court, the Florida Supreme Court stated:

• "[T]he result of these facts is that the deed was given to secure the payment of money, and is therefore, by the rules of equity, only a mortgage, and the statute we have cited declares it to be a specific lien, and that the holder cannot have possession without due foreclosure, decree and sale; while the judgment at law would give possession without foreclosure and sale ... [I]f the plaintiff has only a specific lien on the property, though it is in form a deed in fee, it is not only inequitable but contrary to the plain words of the statute that he should obtain possession otherwise than by due foreclosure of the mortgage interest."

The Florida high court also cites a Wisconsin Supreme Court case, Kent vs. Agard, 24 Wis. 378, another eviction case, in support of its decision, in which it was said:

• "[T]he plaintiff should have been allowed to show by parol that the absolute deed was intended as a mere security and was consequently only a mortgage. That this may be done in some form of action is not contested. And I see no reason why it may not be done in an action to recover the possession of real estate. When the facts are proved such deed is a mortgage only, both in law and in equity. The rights of the mortgagor and mortgagee are precisely the same as though the defeasance were contained in the deed itself. The only difference is in the manner of proving the defeasance."

It also cites Saunders vs. Stewart, 7 Nev. 200, a Nevada high court case, where it was observed:

• "The doctrine is that such evidence is not received to contradict an instrument of writing, but to prove an equity superior thereto."

Walls v. Endel, 20 Fla. 86 (Fla. 1883)

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Folks v. Chesser, 106 Fla. 837; 145 So. 602; (Fla. 1932)

The Florida high court made the following observations in connection with an equitable mortgagee's right of possession to be obtained only after a mortgage foreclosure is had.

• "Our statute enacts a recognized rule of equity, that all deeds of conveyance conveying or selling property for the purpose, or with the intention, of securing the payment of money, shall be deemed and held as mortgages, and shall be subject to the same rules of foreclosure and the same regulations and restrictions as are prescribed by law in relation to mortgages." See Sections 5724-5725 C.G.L. 3836-3837 R.G.S.

• "Under these statutes, in no case will the right of possession to property by a mortgagee be recognized in a court of justice in this State, until due foreclosure is had according to the forms of the law providing for foreclosure of mortgages."

Folks v. Chesser, 106 Fla. 837; 145 So. 602; (Fla. 1932)

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Blanco v. Novoa, 854 So. 2d 672; (Fla. App. Ct. 3rd Dist.) 2003

This case dealt with an eviction action. The trial court granted a motion that, in effect, treated the subject transaction as a landlord-tenant relationship. In reversing, the Florida appellate court ruled that the relationship between the parties was a mortgagor-mortgagee relationship and, as such, the appropriate cause of action to seek possession for non-payment is a foreclosure proceeding, not an eviction action.

The facts of the case follow:

Novoa and his niece, Blanco, took joint title to a condominium. Novoa purchased the property with his own funds. Shortly after the purchase, Blanco and Novoa entered into an agreement whereby Blanco would take possession of the property and pay $ 740 per month to Novoa, as well as all condominium assessments and property taxes.

According to the text of the case:

• "The parties used a standard landlord-tenant lease form in which the monthly payments to Novoa were called "rent", Blanco was called the "lessee" and Novoa the "lessor."

• "However, the agreement also contained a clause that obligated Novoa to sell the property and Blanco to purchase the property for $ 89,831.56 in five years. Blanco was in possession of the condominium and made payments from November 1, 2000 until October 1, 2002."

• "[A] Quit Claim Deed was recorded which purportedly gave Blanco's half interest in the condominium to Novoa. Blanco claims not to have signed the document."

• "Blanco had not made any of the payments required by the agreement since November 1, 2002. On December 19, 2002, Blanco filed a complaint seeking to cancel the Quit Claim Deed, monetary damages for fraud in the execution of a Quit Claim Deed to real property, and specific performance of the contract for sale of the unit."

• "Novoa counterclaimed for breach of contract and eviction in March, 2003. Novoa then filed a motion to require Blanco to post rent with the registry of the court or be defaulted on the counterclaim for eviction."

• "The trial court granted the motion and ordered Blanco to deposit $ 5,180.00 into the court registry within fifteen days of the order or waive any defenses to the eviction. The deadline was twice extended to accommodate this appeal."

• "The trial court construed the agreement between Blanco and Novoa to be a lease and consequently applied the law governing landlords and tenants. For a tenant to contest an eviction action, any defense other than payment requires the tenant to deposit accrued rent and any rent which accrues during the pendency of the proceeding into the court registry." See 83.60(2), Fla. Stat. (2003).

• "The trial court erred by requiring Blanco to deposit payments into the court registry because Novoa and Blanco were not simply landlord and tenant, respectively, they shared an equal interest in the property. The agreement provided for monthly payments equal to ten percent interest with the payment of fees and taxes consistent with those a mortgagor would make. Blanco would buy out Novoa's interest in the condominium at the end of five years with a final balloon payment."

• "The Quit Claim Deed, if genuine, would make them landlord and tenant. However, if it is a forgery, the two are joint tenants. To impose the obligation to pay rent into the registry of the court is to decide the validity of the Quit Claim Deed and provide the remedy before the case is properly adjudicated in court."

• "Under section 697.01, Florida Statutes (2003), "[a]ll conveyances, obligations conditioned or defeasible, bills of sale or other instruments of writing conveying or selling property . . . for the purpose or with the intention of securing the payment of money . . . shall be deemed and held mortgages . . . ." In deciding whether a conveyance should be declared a mortgage under the statute "depends on the particular facts, and as the statute provides, is a question of the parties' intent." Valk v. J.E.M. Distribs., 700 So. 2d 416, 419 (Fla. 2d DCA 1997). "[E]quity will look at and take into consideration all the facts and circumstances surrounding the transaction and will decree an instrument to be a deed or mortgage according to the real intentions of the parties." Id. (alteration in original)."

• "The substance and not the form is what is critical. Here, the trial court erred by determining that the words "lease" and "rent" controlled when the parties clearly acted not as landlord and tenant, but rather as mortgagor and mortgagee."

• "Thus, the remedy available to Novoa in this case is that of a foreclosure proceeding."

Blanco v. Novoa, 854 So. 2d 672; (Fla. App. Ct. 3rd Dist.) 2003

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Editor's Note:

The trial judge in this case apparently had difficulty in "seeing through" the "labels" that were used in the documents and allowed him/herself to be controlled by the "labels" in the legal documents used in the transaction (ie. "lease" and "rent"). The Florida appeals court decision in this case represents a good, clear illustration as to how trial judges should interpret these types of documents in the context of an equitable mortgage claim.

In this case, the label "rent" was used in an attempt to disguise what, in substance, were the "mortgage payments" on an equitable mortgage. The term "lease" was used in attempting to disguise a legal document that, in substance, was not a lease at all, but rather, was more akin to a "promissory note" secured by an equitable mortgage.

Both this case and the next case illustrate one of the practical problems that foreclosure rescue victims may face when having their cases heard in court. That is, they may have a tough time convincing a busy trial court judge to take the time and make the effort to carefully examine the true substance of a sale leaseback, foreclosure rescue transaction and to correctly declare said transaction as being an equitable mortgage. It may be easier for a judge to simply read the documents, rule based on the form of the transaction and, if the foreclosure rescue victim disagrees with the ruling, extend the victim an "invitation" to take it up with an appeals court.

(I suspect, however, that as more of these cases get "reported", some trial judges may end up feeling "pressured into" making a correct ruling from the "get-go".)

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Minalla v. Equinamics Corp., (Fla. App. Ct., 3rd Dist.) March 21, 2007

A Florida appellate court ruled last month that a Miami-area foreclosure rescue operator cannot evict a homeowner who signed away title to her home in a "sale-leaseback-buyback option" arrangement until a determination is made as to who the true owner of the property is and effectively ruling that the Florida Residential Landlord Tenant Act is not applicable to such a transaction unless and until such a determination favorable to the operator is made.

The case involved a situation where, at some point after a financially strapped homeowner signed away the title to her home to a foreclosure rescue operator, the operator attempted to evict her. The homeowner asserted the defense that she was the true owner. The lower court ruled that, pursuant to the applicable provisions of the Florida Residential Landlord Tenant Act, she had to pay into the court registry the rent that was called for in the leaseback of her home while the court proceedings were pending. According to the appellate court, which subsequently reversed the lower court's decision (bold text is my emphasis):

• "[The homeowner] alleges she was tricked into conveying her home to Equinamics in a transaction which is impressed with characteristics of a sale, but in reality is a disguised loan secured by her home. If this is accurate, then Equinamics is not an owner of [the homeowner's] residence but rather a lender who must proceed to oust [her] via a foreclosure action."

The court then made this observation:

• "Based upon the facts of this case, it is apparent that the transaction by which Equinamics received title to the Minalla residence was not an ordinary real estate transaction. Likewise, the circumstances under which Minalla continued to remain on the property after she executed the special warranty deed to Equimanics was not possessed of the trappings of a usual landlord tenant relationship."

Ultimately, in reversing the lower court ruling to the contrary, the appellate court ruled as follows:

• "[T]here is a factual dispute in this case concerning who is the true owner of the property. Because the trial court's order requiring payments by Minalla of monies into the registry was made without conducting an evidentiary hearing concerning the nature of the transaction and who is the true owner of the residence, the court erred in imposing the payment requirement upon her."

(The homeowner is being represented by attorney James A. Bonfiglio, Boynton Beach, Florida.)

Minalla v. Equinamics Corp., (Fla. App. Ct., 3rd Dist.) March 21, 2007 (Court decision made available online courtesy of the Florida Third District Court of Appeal).

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Editor's Note:

To Florida attorneys, I again feel compelled to repeat an observation that I made elsewhere on this blog (at the end of Equitable Mortgage & Usury In Sale Buyback Deals In Florida) in connection with the binding effect of Florida appellate decisions on the Florida trial courts. That is, that unless the Florida Supreme Court rules otherwise, and absent a conflicting decision from a Florida appeals court from another district, the ruling in Minalla that the trial court erred in treating the transaction as a landlord-tenant arrangement "without conducting an evidentiary hearing concerning the nature of the transaction and who is the true owner of the residence" is binding not only on trial courts located within the Third District Court of Appeal, but is binding on all trial courts throughout the State of Florida.

(See the comment to this effect in the Florida Supreme Court case in Pardo v. State, 596 So. 2d 665 (Fla. 1992). ("[T]he district court erred in commenting that decisions of other district courts of appeal were not binding on the trial court. This Court has stated that the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by this Court. Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts." [citations and internal quotations omitted]).

I will hasten to add that the Florida Supreme Court has already addressed the "landlord-tenant" vs. "mortgagee-mortgagor" issue that exists in an eviction/ejectment action when an equitable mortgage claim or defense is raised. See Walls v. Endel, supra, and Folks v. Chesser, supra. However, I realize that there may be some judges and attorneys who may be reluctant to rely on cases that are approximately 125 years old (Walls) and 75 years old (Folks).

For those who choose to disregard the above-cited Florida Supreme Court decisions, you can cite the brand new appellate decision in Minalla as to the "landlord-tenant" vs. "mortgagee-mortgagor" issue; and then cite Pardo (and the cases cited therein) as to the binding effect of a decision of one Florida appellate court on all trial courts throughout Florida.

With all this being said, I hope that (some) Florida trial judges will be less likely to disregard the substance of these sale-leaseback-repurchase option, foreclosure rescue deals, and make rulings consistent with all of the aforementioned cases.

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With regard to the binding effect that Florida's intermediate appellate court decisions have on the Federal Courts deciding issues of Florida state law, see Binding Effect Of State Court Decisions On Federal Courts On State Law Issues.

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General Jurisdiction Courts vs. Limited Jurisdiction Courts

In the above cases, the jurisdiction of the lower courts to hear tenant eviction/ejectment actions was not raised as an issue. It appears that the lower courts in these cases were all courts of general jurisdiction, and accordingly, had jurisdiction to hear both the eviction/ejectment actions and the equitable mortgage issue, which affects the title to property.

In a case where the equitable mortgage issue was raised as a defense in an eviction action where the lower Florida court hearing the case was a court of limited jurisdiction (a "County Court", as opposed to a "Circuit Court"), and in which the court had no jurisdiction to make rulings affecting the title to property, see Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931), and the comments on that case at Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation. emdefense Florida equitable mortgage alpha