More On Equitable Mortgage & Usury (Florida)

This Florida Supreme Court case involved the issue of usury in the context of a civil lawsuit brought to have two deeds declared to be mortgages.

Robbins v. Blanc, 105 Fla. 625; 142 So. 223; (Fla. 1932)

This case involved a property owner filing suit to have two deeds declared mortgages; and to have one mortgage declared usurious to the extent that only interest is to be forfeited (ie. civil usury); the other to be declared usurious to the extent that both principal and interest was to be forfeited (ie. criminal usury).

The sole question presented is whether or not the property owner must offer in his bill to repay the sum received as the actual principal of a loan, together with legal interest thereon, when he files a bill for redemption from a usurious mortgage given to secure a greater sum than the loan. In this case, the lower court sustained a demurrer interposed by appellees (lender / legal title holder), defendants in the lower court, to the bill of complaint by the appellant (property owner / borrower), complainant in the lower court. The Florida Supreme Court reversed. The bill alleges in substance that the "lender" was holding title to properties as security for two loans.
On one of these loans it was alleged that $ 7500.00 was received and it would be repaid by payment of $8,000.00 in six months and $4000.00 in twelve months.

On the other transaction it was alleged that $ 4400.00 was received from the "lender", and it would be repaid by paying $5500.00 within two years, with 8% per annum interest on said sum.
Excerpts from the court's decision follows:

• "To support a bill for redemption from a mortgage, it is only necessary that complainant offer to pay all amounts legally due on the debt secured, in order to sustain such bill. If by reason of violation of the usury laws a part of the amount lent has become forfeited or otherwise not recoverable in law, it is wholly unessential to enable complainant to obtain relief, that he offer to pay amounts which under the law are not payable by him or recoverable from him."

• "To hold otherwise would permit the usury laws to be defeated and frustrated in their object, by the simple device of the usurer in exacting a deed in lieu of a mortgage to secure and make certain the payment of amounts which would otherwise be forfeited, or be rendered not recoverable from the borrower."

• "When it is once established that a mortgage exists, the equitable right of redemption attaches to the transaction as an inseparable incident. The right to redeem is an incident to every mortgage, or deed which is in law to be regarded as a mortgage, because given to secure the payment of money, and such right of redemption belongs to the mortgagor and those claiming under him. This right cannot be extinguished except by due process of law. Stovall v. Stokes, 94 Fla. 717, 115 Sou. Rep. 828; Quinn Plumbing Co., Inc. v. New Miami Shores Corp., 100 Fla. 413, 129 Sou. Rep. 690, 73 A.L.R. 600."

• "He who seeks equity must do equity, so it is an essential part of a bill to redeem a mortgage that it offers in express terms to pay the amount due, with costs. Horn v. Indianapolis Nat. Bk., 125 Ind. 381, 25 N.E. 558, 21 A.S.R. 231, note 9 L.R.A. 676. But when the bill does this, it is sufficient and it is not necessary that the complainant allege his willingness or ability to pay more than under the law he is legally and justly liable to pay, according to the nature of the transaction."

• "The case at bar is not controlled by what was said in Taylor v. Rawlins, 90 Fla. 621, 106 Sou. Rep. 424, since no indebtedness can become judicially collectible against a borrower by a lender in excess of what is permissible to be collected under the usury laws, where it appears that usury has been exacted on the original loan or in suit. This is true regardless of the form or device by which the debt is secured, evidenced or to be stablished. Therefore the borrower in a case like the present is under no legal or equitable obligation to offer in his bill of complaint to return the full amount of the money he has obtained from the lender, where it is made to appear that the transaction in its inception was tainted with usury. In such cases the borrower is only under the obligation to offer to repay the lender what, if anything, the usury statutes preserve to him as a legally recoverable in a court of equity."

• "When a bill of complaint is filed to redeem as mortgages conveyances absolute on their face, and it is further alleged that the loan secured by such mortgages is usurious, so that the principal sum and interest, or the interest only, is subject to forfeiture and should be forfeited under the Florida usury statutes, and the complainant in his bill offers to pay any and all sums the court may find to be justly due and owing from him to defendant, on such terms and conditions as the court may find to be proper, and couples the same with a further general allegation of an offer to do complete equity, it is error to sustain a general demurrer to such bill."

• "In any case where a bill of complaint seeks to avoid the effect of usury in a transaction attacked by such bill, an offer by the complainant to do equity is sufficient, without profert in curia or prior tender of any particular sum by complainant. The rights of each of the parties in such cases can be, and should be, taken in account and protected by the court in considering the case if the usury alleged is duly established. But this can be adequately taken care of in the final decree which settles the accounts and adjudicates the rights between the parties."

• "It follows that it was wholly unnecessary in the instant case for the complainant to have offered to return the actual sum of money he had received or to pay back any particular sum, or to offer to pay lawful interest thereon, as a condition precedent to the filing of his bill of complaint, or as a requisite to his merely asking for relief from the consequences of the alleged usury described in such bill."

• "Where usury has been exacted in violation of the criminal law, as well as the civil, as seems to be charged here, although it is not in terms directly alleged in the bill that the defendant wilfully and knowingly charged and accepted from complainant a sum of money greater than the sum of money loaned and an additional sum of money equal to twenty-five per cent upon the principal sum loaned, the state, as well as the parties to the transaction, may have an interest in the enforcement of the penalty. Such a transaction to come within [the criminal usury statute], would have to be carried out "wilfully and knowingly" in direct and inexcusable violation of the law."

• "There is nothing contrary to equity and good conscience in strictly enforcing a statute which prohibits the doing of certain acts "wilfully and knowingly" in violation of its provisions. There is consequently no good reason why a complainant in a suit in equity involving a charge of criminal usury under our statute should be under any greater disability as an actor seeking relief than he would be if he were a defendant in the same case, where the same state of facts was made to appear. In either situation the position of the complainant is that of defense -- because the defense is against the exaction of the usury whether the person defends himself as complainant or defendant.""

• The order sustaining the demurrer to the bill of complaint is reversed and the cause remanded for further proceedings consistent with this opinion."

Robbins v. Blanc, 105 Fla. 625; 142 So. 223; (Fla. 1932)

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The following are excerpts relating generally to the usury issue and to the proposition that documents executed contemporaneously are to be read together in order to determine an give effect to the intention of the parties. The case is from a Federal appeals court involving issues of Florida law.

Conner Air Lines v. Aviation Credit Corp., 280 F.2d 895 (5th Cir. 1960)

• "Where there is an intent on the part of a lender to make a loan or to extend a maturity for a greater profit than is permitted by law, the transaction is tainted with usury even though it is cast in a form which was designed to give it a cloak of apparent legality. Courts do not permit the use of design or device to evade the purpose of the usury laws." Griffin v. Kelly, Fla., 92 So.2d 515; Beacham v. Carr, 122 Fla. 736; 166 So. 456.

• "Where other instruments are executed contemporaneously with a mortgage and as a part of the same transaction, the mortgage may be modified by the other instruments, and all documents are to be read together in order to determine and give effect to the intention of the parties." 59 C.J.S. Mortgages § 156, 208; Jackson v. Parker, 153 Fla. 622, 15 So.2d 451; Brumick v. Morris, 131 Fla. 46, 178 So. 564; Morrow v. Commonwealth Life Insurance Co., 118 Fla. 371, 159 So. 525.

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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

Equitable Mortgage Doctrine In Florida

What follows below are excerpts from a number of Florida court cases, presented in chronological order, addressing issues to be considered in applying the equitable mortgage doctrine in Florida. (Bold text is my emphasis).

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Lindsay v. Matthews, 17 Fla. 575 (Fla. 1880)

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The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

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1) "In Pierce vs. Robinson, 13 Cal. 116, Field, J., said:

• Parol evidence is admissible in equity to show that a deed absolute upon its face was intended as a mortgage, and the restriction of the evidence to cases of fraud, accident, or mistake, in the creation of the instrument, is unsound in principle and unsupported by authority. * *

• As the equity upon which the courts act arises from the real character of the transaction, it is of no consequence in what manner this character is established, whether by deed or other writing, or by parol. Whether the instrument, it not being apparent on its face, is to be regarded as a mortgage, depends upon the circumstances under which it was made, and the relations subsisting between the parties. Evidence of these circumstances and relations is admitted, not for the purpose of contradicting or varying the deed, but to establish an equity superior to its terms."

2) "This is the rule now quite universally held by the courts of equity. A very large number of cases are cited in Hare and Wallace's notes to Thornbrough vs. Baker, in Leading Cases in Equity, (4 Am. Ed.) page 1983, et seq., which sustain it. But this case does not rest upon parol evidence, to show the character of the conveyance. "Where the instruments are of even date on their face, and where, being in terms a conveyance and a contract to reconvey on payment of the money passing between them, they are, in legal contemplation, a mortgage." Harper's Appeal, 14 P. F. Smith 315."

3) "The same court in Carr vs. Carr, 52 N.Y. 251, holds that

• in order to establish that a conveyance, absolute on its face, was intended as a mortgage, and to give it effect as such, it is not material that the conveyance should be made by the debtor, or by him in whom the equity of redemption is claimed to exist."

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First National Bank of Florida v. Ashmead, 23 Fla. 379; 2 So. 657; (Fla. 1887)

The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

• "Our statute provides that all instruments of writing made for the purpose of securing the payment of money, whether such instruments be from the debtor to the creditor, or from the debtor to some third person in trust for the creditor, shall be deemed mortgages, and be subject to the same rules of foreclosure, restrictions and forms as are or may be prescribed by law in relation to mortgages; and that a mortgage shall be held in our courts to be a specific lien on property for a specific object." McClellan's Digest, pp. 765, 766.

• "Independent of this statute, even parol evidence is admissible in equity to show that a deed of conveyance, absolute upon its face, was intended as a mortgage, and where it is shown that such a conveyance has been executed to secure the payment of money, equity will treat it as a mortgage."

• "The court looks beyond the terms of the instrument to the real transaction, or what was intended to be effected by the parties, and any evidence, whether written or oral, tending to show this, is admissible."

• "The admission of oral testimony for such purpose is not a violation of the rule which precludes such admission for the purpose of varying or contradicting the terms of a written instrument; that rule has reference to the language of which the instrument is the repository, but this permits an inquiry into the objects of the parties in executing and receiving the instrument, and equity exercises its jurisdiction to carry out such object and to prevent fraud and imposition, and to promote justice." Peugh vs. Davis, 96 U. S., 336; Pearce vs. Robinson, 13 Cal., 116.

• "Our statute and the decisions of this court upon it fully establish the rule in favor of such admissibility." Lindsay vs. Matthews, 17 Fla., 585; Shear vs. Robinson, 18 Fla., 379; Franklin vs. Ayer, 22 Fla., 654.

• "Parol evidence is admissible to connect papers, which, together, constitute a deed and defeasance or mortgage, and to show that an instrument bearing a subsequent date to the deed was either executed at the same time, or that its terms and substance were in fact agreed upon at the same time, and, though subsequently reduced to writing, constitute a part of the same transaction with the deed." Franklin vs. Ayer, supra; Jones on Mortgages, § 248.

• "When the instruments connect themselves and show that the purpose was to secure the payment of money, no parol proof is necessary, even if it can be said to be admissible." Franklin vs. Ayer, supra, and 31 Penn. St., 131, 295.

• "In Lindsay vs. Matthews, supra, where the deed was not from the debtor, it was held that the words "whether such instruments of writing be from the debtor to the creditor or from the debtor to some third person," in our statute, are descriptive of certain instruments embraced within the act, but that such words do not affect its application to any instrument conveying property for the purpose of securing the payment of money."

• "The doctrine of Carr vs. Carr, 52 N.Y., 251, is that whenever property is transferred, no matter in what form or by what conveyance as a security for a debt, the transferee takes merely as mortgagee, and has no other rights or remedies than the law accords to mortgages." See also Hooper's Appeal, 64 Penn. St., 315.

• "It is settled that in this State a mortgage does not convey the legal title of land out of the mortgagor, but only creates a specific lien on the property." McMahan vs. Russell, 17 Fla., 698; Berlack vs. Halle, 21 Fla., 236; Franklin vs. Ayer, et al., 22 Fla., 654. See also Brinkman vs. Jones, 44 Wis., 498.

• "This is no less true where the method of mortgaging is an absolute deed of conveyance, made either to the creditor or a third person, with the defeasance resting simply upon verbal proof or upon written evidence connecting itself with the deed or capable of being so connected by oral evidence, than it is as to an ordinary formal mortgage.""

• Any other view would practically ignore the statute."

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Equitable Building and Loan v. King, 48 Fla. 252; 37 So. 181; (Fla. 1904)

The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

• "[A] deed absolute made for the purpose or with the intention of securing the payment of money is to be deemed merely a mortgage, and under repeated decisions of this court it may be enforced as a mortgage for the debt it was intended to secure, though no mention of the debt is made in the instrument itself, and the evidence of the debt rests in other writings or in parol only."

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Hull v. Burr, 58 Fla. 432; 50 So. 754; (Fla. 1909)

The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

• "[I]n case of doubt the transaction will be held a mortgage."

• "Gross inadequacy of the consideration is another test which may be applied in determining whether a transaction was intended as a mortgage or an absolute or conditional sale, especially when coupled with the financial embarrassment of the grantor." See 1 Jones on Mortgages, § 329; 27 Cyc. 972 and 1014; Russell v. Southard, 12 Howard (U.S.) 139. We would also refer generally to the discussion and reasoning in Flagg v. Mann, 9 Fed. Cas. No. 4847, which case was approvingly cited by this court in Stockton v. National Bank of Jacksonville, 45 Fla. 590, text 900, 34 South. Rep. 897, text 900; Campbell v. Dearborn, 109 Mass. 130, text 138 et seq.; Hassam v. Barrett, 115 Mass, 256; Plummer v. Ilse, 41 Wash. 5, 82 Pac. Rep. 1009.

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Connor v. Connor, 59 Fla. 467; 52 So. 727; (Fla. 1910)

The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

• "Under the rules of the common law the right of redemption is inherent in every transaction having the essential features of a mortgage. this right is a highly favored equity and unless it is released to the mortgagee for a consideration, free from fraud and oppression, or in some way waived or lost or barred, it can be cut off only by foreclosure."

• "A deed absolute on its face may by parol evidence be shown to be a mortgage, and in cases of doubt the instrument should be held to be a mortgage. DeBartlett v. DeWilson, 52 Fla. 497, 42 south. Rep. 189; Hull v. Burr, 58 Fla. 432, 50 South Rep. 754; Franklin v. Ayer, 22 Fla. 654.""

• An instrument must be deemed and held a mortgage, whatever may be its form, if, taken alone or in connection with the surrounding facts and attendant circumstances, it appears to have been given for the purpose or with the intention of securing the payment of money, and the mere absence of terms of defeasance cannot determine whether it is a mortgage or not."

• "While an express provision that a contract to reconvey is not to be regarded as an evidence that the conveyance was intended as a mortgage may be of controlling force if it is consistent with the entire transaction, yet if it is not in harmony with all the facts and circumstances showing the intention of the parties, the express provision that it is intended to be a sale and not a mortgage does not determine the matter."

• "If an instrument is a mortgage when executed its character does not afterwards change for once a mortgage always a mortgage is a maxim of the law."

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Stovall v. Stokes, 94 Fla. 717; 115 So. 828; (Fla. 1927)

In holding that a deed was a mortgage, the Florida Supreme Court cited or quoted, with approval, decisions of the U.S. Supreme Court, its own prior precedent, and cases from other states, in setting forth considerations to be taken into account when deciding whether an absolute deed is a mortgage, or whether it is to be respected as an absolute conveyance.

1) Quoting from Alexander v. Rodriguez (aka Villa v. Rodriguez), 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406 (1870) (available online courtesy of Justia - US Supreme Court Center):

• "To give validity to a sale by a mortgagor to a mortgagee it must be shown that the conduct of the mortgagee was in all things fair and frank and that he paid for the property what it was worth ... He must take no advantage of the fears or poverty of the other party; that the mortgagor knowingly surrendered and never intended to reclaim is of no consequence, if there is vice in the transaction."

• "Where confidential relations exist between a debtor and a creditor and a conveyance is made by the debtor to the creditor it will be treated as a mortgage for the consideration of the deed as a debt; and this is the construction in equity of such a transaction. But the creditor may by affirmative proof rebut this presumptive case by showing that actual negotiations for sale took place and a valid and fair sale for adequate or reasonable price was made and that no advantage was taken of the needy circumstances of the debtor."

2) Quoting from Russell v. Southard, 53 U.S. 139, 12 How. 139, 13 L. Ed. 927 (1851) (case available online courtesy of Justia & Oyez - US Supreme Court Center):

• "It is the doctrine of this Court that when it is alleged and proved that a loan on security was really intended and the defendant sets up the loan as a payment of purchase money, and the conveyance as a sale, both fraud and vice in the consideration are sufficiently averred and proved to require a court of equity to hold the transaction to be a mortgage ... The fact that the real transaction between the parties was a borrowing and lending will, whenever, or however, it may appear, show that a deed absolute on its face was intended as a security for money; and whenever it can be ascertained to be a security for money it is only a mortgage, however artfully it may be disguised."

3) Citing its own prior precedent in Conner v. Conner, 59 Fla. 467, 52 Sou. 727, the Florida high court stated:

• "A deed absolute on its face may by parol evidence be shown to be a mortgage, and in cases of doubt the instrument should be held to be a mortgage. DeBartlett v. Wilson, 52 Fla. 497, 42 South. Rep. 189; Hull v. Burr, 58 Fla. 432, 50 South. Rep. 754; Franklin v. Ayer, 22 Fla. 654 ... An instrument must be deemed and held a mortgage, whatever may be its form, if, taken alone or in connection with the surrounding facts and attendant circumstances, it appears to have been given for the purpose or with the intention of securing the payment of money, and the mere absence of terms of defeasance cannot determine whether it is a mortgage or not."

4) Quoting from Skeels v. Blanchard, the Supreme Court of Vermont, 81 Atlantic 913:

• "When it is once established that a mortgage exists, the equitable right of redemption attaches to the transaction as an inseparable incident. No contemporaneous understanding, however formally expressed or artfully concealed, will be permitted to deprive the debtor of this right. It can be defeated only by a subsequent agreement upon a further consideration."

5) Quoting from Lynch v. Lynch, a California appellate court case, reported 135 Pacific 1101:

• "Inadequacy of consideration, where shown, is an element which is always given great weight by courts of equity in determining whether a transaction involving the transfer of valuable property by one to another is unconscientious or constructively fraudulent or perhaps as tending to prove actual fraud. Indeed, it has always been looked upon by such courts as sufficient to create a strong suspicion that the transaction has not been characterized by good faith in the party securing benefits thereby and to cast upon him the burden of making it perfectly clear that it was in all respects honest and fair and just to the grantor. And where to the circumstances of inadequacy of consideration is added the circumstance that the parties to the transaction stand in a confidential relation toward each other or are so connected in blood as that the presumption arises that such a relation exists between them ( Nobles v. Hutton, 7 Cal. App. 14, 23, 93 Pac. 289, and cases therein cited), a case for the invalidation of the contract or transaction is, in the eyes of a court of equity, well-nigh complete."

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McKinney v. Gainey, 96 Fla. 547; 118 So. 917; (Fla. 1928)

• "The question, whether a deed which is absolute in form is to be taken as a mortgage, depends upon the intention of the parties in regard to it at the time of execution. This may be ascertained from the paper itself, or the instrument in connection with contemporaneous writings or agreements concerning the subject matter, or by the aid of extraneous evidence which will determine the question. Holmberg v. Hardee, 108 So. R. 211; 27 Cyc. 1007. The attitude of the parties relative to the conveyance after its execution may also be considered." Holmberg v. Hardee supra.

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Howard v. Goodspeed, 101 Fla. 699, 135 So. 294 (Fla. 1931)

(This case added to the compilation on 12-16-07)

In this case, the property conveyed by the owner thereof in exchange for a loan was:

• not real estate conveyed by a deed, absolute in form (which is typically the situation in most of these equitable mortgage cases), but rather,
• a mortgage note by the holder thereof and which was conveyed by an assignment of mortgage, absolute in form.

The decision in this case supports the proposition that when a conveyance of property, absolute in form, is made in exchange for money intended to be a loan, the analysis of whether the transaction is a "true sale" or a "loan" is the same, irrespective that the property conveyed is something other than real property.

In ruling that the arrangement in this case was a loan, and not a true sale, the court made these observations (bold text is my emphasis):

• There would seem to be no doubt that an assignment of mortgage, though absolute in form, if given for the purpose or with the intention of securing the payment of money, is governed by the same regulations, restraints and powers as are recognized in relation to deeds of conveyance, bills of sale and other instruments of writing given for the purpose or with the intention of securing the payment of money. Section 5724 C.G.L., 3836 R.G.S., Hull v. Burr, 50 So. 754, 58 Fla. 432.

• An assignment of mortgage, absolute in form, may be shown by parol evidence not to be a sale, but only collateral security for a loan of money, to the same extent that a deed of conveyance, absolute in form, may be shown by parol evidence not to have been a conveyance, but security only for the repayment of a sum of money. Jones on Mortgages (8th Ed.) par. 407, page 508. Upon a like principle transfer of a life insurance policy as security for a debt has been treated as subject to redemption. Pittman vs. Milton, 69 Fla. 304; 68 So. 658.

• The rule is well established that where a conveyance of property is absolute upon its face, the burden of showing that it was, when executed, intended to be a mortgage to secure the payment of money is upon the grantor. Elliott v. Conner, 63 Fla. 408, 58 So. 241.

• But as said in that case:
  "If there be a doubt as to the real purpose for which the deed was executed by Mrs. Connor, and therefore uncertainty as to whether it is a conveyance or a mortgage, the instrument under the circumstances of this case should pursuant to the statute be deemed and held a mortgage, since the payment of all of C. E. Connor's indebtedness to Elliott would apparently do complete justice to Elliott, and Mrs. Conner should have the benefit of her own property after the indebtedness she desired to secure is paid in full."

• In the case of Pittman v. Milton, supra, it was stated in the twelfth head note:
  "If there be a reasonable doubt as to whether a transfer of property is a mortgage or an absolute assignment, the doubt should be resolved in favor of its being a mortgage, when there was an existing debt."

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Pineapple Orange Co. v. White, 113 Fla. 774, 152 So. 863 (Fla. 1934)

(This case added to the compilation on 12-16-07)

Among other points, the court in this case addressed the following:

1. In a situation where, if after analyzing all the facts and circumstances that surround a transaction, there is still doubt as to whether an absolute conveyance in exchange for money is a true sale, or merely a secured loan, the courts will lean toward recharacterizing the transaction as a secured loan, and
2. Regarding the use of parol evidence to recharacterize the form of a transaction, (a) parol evidence is clearly inadmissible to contradict the terms of the writings, if to do so would destroy their necessary character as a mortgage, and (b) parol evidence is always admissible to contradict the terms of the writings, if to do so would result in the determination that the actual character of the instruments constitute a mortgage.

The court made the following observations in this regard (bold text is my emphasis):

To determine the controlling question in this case we must look to the contract and gather the intent of the parties at the time same was made. Mr. Pomeroy in his work on Equity Jurisprudence, 3rd Ed., Section 1195, says:

• "Whether any particular transaction does thus amount to a mortgage or to a sale with a contract of repurchase, must, to a large extent, depend upon its own special circumstances; for the question finally turns, in all cases, upon the real intention of the parties as shown upon the face of the writings, or as disclosed by extrinsic evidence. A general criterion, however, has been established by an overwhelming concensus of authorities, which furnishes a sufficient test in the great majority of cases; and whenever the application of this test still leaves a doubt the American courts, from obvious motives of policy, have generally leaned in favor of the mortgage. This criterion is the continued existence of a debt or liability between the parties, so that the conveyance is in reality intended as a security for the debt or indemnity against the liability. If there is an indebtedness or liability between the parties, either a debt existing prior to the conveyance, or a debt arising from a loan made at the time of the conveyance, or from any other cause, and this debt is still left subsisting, not being discharged or satisfied by the conveyance, but the grantor is regarded as still owing and bound to pay it at some future time, so that the payment stipulated for in the agreement to reconvey is in reality the payment of this existing debt, then the whole transaction amounts to a mortgage, whatever language the parties may have used, and whatever stipulations they may have inserted in the instruments. On the contrary, if no such relation whatsoever of debtor and creditor is left subsisting, then the transaction is not a mortgage, but a mere sale and contract of repurchase. The writings may show on their face that the relation of debtor and creditor still continues, and that its existence and consequences are contemplated by the parties; or they may entirely fail to show any such fact and may consist simply of an absolute conveyance and of a naked agreement to reconvey. While in the former case parol evidence is clearly inadmissible to contradict the terms of the writings, and to destroy their necessary character as a mortgage, in the latter case extrinsic parol evidence is always admissible to show the real situation of the parties, the existence of a debt, their intention to secure payment of that debt, and the actual character of the instruments as constituting a mortgage." See also Holmberg, et al., v. Hardee, et al., 90 Fla. 787, 108 Sou. 211.

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Gross v. Hammond, 123 Fla. 471; 167 So. 373 (Fla. 1936)

The transaction involved in this case was a "friendly foreclosure" where it was agreed in advance of a foreclosure sale, that the foreclosing mortgagee would reconvey title to the owner-mortgagor once the sale was complete. The transaction was treated, in essence, as a conveyance of title by a grantor in default on an existing mortgage to the grantee-mortgagee, with a concurrent agreement that upon the payment of the amount of the mortgage debt, the grantee-mortgagee in that deed would reconvey the property to the grantor. In ruling that the transaction was to be treated as a mortgage, the court quoted from its prior decision in Stovall v. Stokes, 94 Fla. 717, 115 Sou. 282:

• "A deed absolute on its face may by parol evidence be shown to be a mortgage, and in cases of doubt the instrument should be held to be a mortgage."

• "An instrument must be deemed and held a mortgage, whatever may be its form, if, taken alone or in connection with the surrounding facts and attendant circumstances, it appears to have been given for the purpose or with the intention of securing the payment of money, and the mere absence of terms of defeasance cannot determine whether it is a mortgage or not."

• "When it is once established that a mortgage exists the equitable right of redemption attaches to the transaction as an inseparable incident. No contemporaneous understanding, however, formally expressed or artfully concealed, will be permitted to deprive the debtor of this right. It can be defeated only by a subsequent agreement upon a further consideration."

• "The right of a mortgagee to become the purchaser of the equity is unquestioned, but the relations of the parties are such that the transaction will be carefully scrutinized."

• "A conveyance of mortgaged premises by the mortgagor to the mortgagee will be regarded as a mere change in the form of the security, unless it clearly and unequivocally appears that both parties intended that it should operate as a bar to the equity of the redemption."

• "The rule which requires more than a preponderance of evidence to establish an absolute deed as a mortgage cannot be applied to a deed covering premises already mortgaged by the grantor to the grantee without overruling a long established rule pertaining to the equity of redemption."

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Brumick v. Morris, 178 So. 564 (Fla. 1938)

The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

• "An important, if not a controlling guide in determining the intention of the parties is the purpose sought to be accomplished by them. Purpose is usually an unerring indication of intention."

• "Under our statute, an attempted agreement between the parties that an instrument shall not operate as a mortgage but as an absolute conveyance, when wholly inconsistent with the surrounding facts and attendant circumstances, does not make absolute a conveyance given 'for the purpose or with the intention of securing the payment of money,' whatever may be the form of the conveyance, and the mere absence of defeasance does not alone determine the matter. Pittman v. Milton, 69 Fla. 304, 68 South. Rep. 658; Connor v. Connor, 59 Fla. 467, 52 South. Rep. 727; Willy-Gabbett Co. v. Williams, 53 Fla. 872, 42 South. Rep. 910; Hull v. Burr, 58 Fla. 432, 50 South. Rep. 754. If, in view of all the circumstances, the transaction resolves itself into security for payment of money, it is a mortgage." Elliott v. Connor, 63 Fla. 408, 58 South. Rep. 241, 11 C.J. 406.

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Marcus v. Hill, 142 Fla. 306; 195 So. 170; (Fla. 1939)

The Florida high court made these observations relating to the application of the equitable mortgage doctrine in Florida:

• "This Court has construed the above statute many times and in effect has held that an instrument given for the purpose or with the intention of securing the payment of money is a mortgage, Equitable Building & Loan Assn. v. King, 48 Fla. 252, 37 So. 181; Bartlett v. De Wilson, 52 Fla. 497, 42 So. 189; Elliott v. Connor, 63 Fla. 408, 58 So. 241; Tilman v. Niemira, 113 Fla. 774, 152 So. 863, and if an instrument is a mortgage when executed its character does not change, for once a mortgage always a mortgage is a maxim of law." Connor v. Connor, 59 Fla. 467, 52 So. 727; Elliot v. Connor, supra; Pittman v. Milton, 69 Fla. 304, 68 So. 658; Stovall v. Stokes, 94 Fla. 717, 115 So. 828.

• "Thus, it only becomes necessary for us to ascertain from the evidence the intention of the parties at the time the deed absolute in form was executed and delivered to defendant. In doing so the Court may take into consideration the paper itself, or the instrument in connection with contemporaneous writings or agreements concerning the subject matter, or by the aid of extraneous evidence which will determine the decision of the question. The attitude of the parties relative to the conveyance after its execution may also be considered." Holmberg v. Hardee, 90 Fla. 787, 108 So. 211; Stovall v. Stokes, supra; Brumick v. Morris, 131 Fla. 46, 178 So. 564.

• "The rule is well settled that where a conveyance of property is absolute on its face, the burden of showing that it was when executed intended to be a mortgage is upon the grantor." Elliott v. Connor, 63 Fla. 408, 58 So. 241; Mitchell v. Mason, 65 Fla. 208, 61 So. 579; Stovall v. Stokes, 94 Fla. 717, 115 So. 828; Howard v. Godspead, 101 Fla. 699, 135 So. 294; Brumick v. Morris, 131 Fla. 46, 178 So. 564.

• "However, only a preponderance of evidence is required to establish that an absolute deed of mortgaged premises to a mortgagee is a mortgage, Stovall v. Stokes, supra, and
  in cases of doubt as to whether the parties intended the transaction to be an absolute conveyance or a mortgage the instrument will be held a mortgage." Connor v. Connor, 59 Fla. 467, 52 So. 727; Hull v. Burr, 58 Fla. 432, 50 So. 754; Stovall v. Stokes, supra.

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Rosenthal v. Le May, 72 So. 2d 289 (Fla. 1954)

• "Whether a transaction is in fact a sale or a mortgage depends upon the intention of both parties as shown by all the surrounding circumstances." Holmberg v. Hardee, 90 Fla. 787, 108 So. 211.

• "In making this determination the attitude of the parties relative to the conveyance after its execution may be considered, Holmberg v. Hardee, supra, and an express writing that a transaction is a sale is not controlling unless consistent with the entire picture. Compare Connor v. Connor, 59 Fla. 467, 52 So. 727, where we held a deed to be a mortgage notwithstanding express writings otherwise, with Brumick v. Morris, 131 Fla. 46, 178 So. 564, where we held the transaction a sale in accordance with language of written instruments."

• "Inadequacy of price also may be considered but the presence of that factor does not per se constitute a ground to avoid the transaction." Chaires v. Brady, 10 Fla. 133. "An owner has a right to make a conditional sale at a reduced price and where his intention to do that is clear such action is binding upon him." See Brumick v. Morris, supra.

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McLendon v. Davis, 131 So. 2d 765; (Fla. App. Ct., 3rd Dist. 1961)

• "Ultimately the issue to be determined is the intention of the parties. This is done by considering the entire transaction and the circumstances, not merely the agreement and instrument of conveyance itself." Connor v. Connor, 59 Fla. 467, 52 So. 727; Gross v. Hammond, 123 Fla. 471, 167 So. 373; Markell v. Hilpert, 140 Fla. 842, 192 So. 392. See Holmberg v. Hardee, 90 Fla. 787, 108 So. 211; Rosenthal v. LeMay, Fla.1954, 72 So.2d 289, 44 A.L.R.2d 336; Thomas v. Thomas, Fla.1957, 96 So.2d 771;

• "[a]nd in cases of doubt, the deed should be construed to be a mortgage." Connor v. Connor, supra; Stovall v. Stokes, 94 Fla. 717, 115 So. 828; Marcus v. Hull, 142 Fla. 306, 195 So. 170; and Thomas v. Thomas, supra.

• "An element that must be considered is the distressed circumstances of the appellant as well as the existing relationship of debtor and creditor." See Stovall v. Stokes, supra. "In addition, the inadequacy of price is a relative circumstance." See Markell v. Hilpert, supra.

• "In applying the rule in doubtful cases, the law will resolve the doubt as to the intent of the parties in the light of the advantage the creditor always has over the debtor whose property he holds, and will give the debtor the benefit of the doubt and hold his equity of redemption to be still existing. Certainly complete justice is done because the creditor's advances are secured by the debtor's property and the debtor has the opportunity of full redemption by payment."

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Barr v. Schlarb, 314 So. 2d 609; (Fla. App. Ct., 1st Dist. 1975)

In discussing Florida's equitable mortgage statute, Section 697.01, the court observed:

• "Florida courts have liberally interpreted the foregoing statute. ( Torreyson v. Dutton, Sup.Ct. Fla.1940, 145 Fla. 169, 198 So. 796) When in doubt, courts have leaned in favor of construing the deed as a mortgage and have taken into consideration the entire transaction and circumstances in addition to the agreement and instrument of conveyance itself. ( McLendon v. Davis, Fla.App.3rd 1961, 131 So.2d 765) Although it is the grantor who has the initial burden of proof in showing that a conveyance of property that is absolute on its face was intended to be a mortgage when executed ( Howard v. Goodspeed, Sup.Ct. Fla.1931, 101 Fla. 699, 135 So. 294), the grantor satisfies this burden by meeting the preponderance of evidence test. (Marcus v. Hull, 1940, 142 Fla. 306, 195 So. 170) "

(This excerpt added 4-25-07) Florida equitable mortgage alpha

Equitable Mortgage, Bonafide Purchaser, Laches, Corporate Entity Doctrine (Florida)

What follows below are some highlights of and commentary on a Florida equitable mortgage case decided by the Florida Supreme Court that also touched upon the issues of laches, bonafide purchaser, and the corporate entity doctrine. In the context of some foreclosure rescue transaction, these issues (in my view) may warrant some attention, thereby possibly making this case of some value to those who represent Florida homeowners who have done business with a foreclosure rescue operator.
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Markell v. Hilpert
140 Fla. 842; 192 So. 392
(Fla. 1939)

This is a case where a financially strapped property owner was able to successfully assert that a deed which, on its face, conveyed absolute title, was to be construed as a mortgage.

The basic facts are as follows:

1) One Hilpert sold property (which the trial court found to be worth $100,000) to a certain Markell for $65,000. Contemporaneous with the sale was a buyback agreement (referred to in the case as a repurchase "option" at one point and a "purchase agreement" at another) entitling Hilpert to repurchase the property for $86,000 within two years.

2) (Unlike other sale buyback cases that I've written about) Hilpert relinquished complete and undisputed control and possession of the property to Markell, the real estate taxes were prorated at the closing of title, and the tenants then in possession of the property each obligated themselves to pay the rents monthly to Markell or his authorized agent, and not to the Hilperts.

3) About five years after the sale (and 3 years after Hilpert's buyback period expired), Markell transferred title to the property to a Markell family owned corporation.

4) About a year thereafter (and almost 6 years after the original transaction and almost 4 years after his buyback period expired), Hilpert filed suit against Markell and Markell family owned entities to declare his deed to Markell a mortgage and to establish his right of redemption.

5) The lower court ruled that the transaction between Hilpert and Markell constituted a loan and not a sale and that the deed executed by Hilpert to Markell constituted a mortgage; and that Markell family owned entities claiming title to the property received from Markell were not bonafide purchasers, "but their rights in the property were acquired subject to the equities of [Hilpert]."
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In affirming the lower court, the Florida Supreme Court made some general statements articulating the relevant Florida law to be applied to this case and follow below (bold text is my emphasis).

One issue dealt with the appropriateness of the admission of oral evidence in showing that the deed should be treated as a mortgage. The court stated:

• "In First National Bank v. Ashmead, 23 Fla. 379, 2 So. 657, this Court held that parol testimony was admissible in equity to show that a deed of conveyance absolute upon its face was intended as a mortgage, and where it is shown that such conveyance has been executed to secure the payment of money, equity will treat it as a mortgage."

• "The Court looks beyond the terms of the instrument to the real transaction or what was intended to be effected by the parties, and any evidence, whether written or oral, tending to show this, is admissible."

• "In the case of Howard v. Goodspeed, 101 Fla. 699, 135 So. 294, this Court reaffirmed the language in Elliott v. Connor, supra, viz.: "If there be a doubt as to the real purpose for which the deed was executed by Mrs. Connor and therefore uncertainty as to whether it is a conveyance or a mortgage, the instrument under the circumstances of this case should, pursuant to the statute, be deemed and held a mortgage.""

• "The Court looks at substance rather than form, makes inquiry and hears evidence beyond the terms of the instrument to the very heart of the transaction so as to determine the intent of the parties and all admissible evidence bearing upon this broad equitable principle is received and considered by the Court, whether written or oral, as it is the intention of equity to promote justice and to prevent fraud and imposition."

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With respect to the law to be applied in determining whether the deed was, in fact, an absolute conveyance or whether it was a mortgage, the court made these broad statements:

• "It is necessary for a court to take into consideration all the facts and circumstances of the parties and if it is clear that the real purpose of the parties to an absolute conveyance of property was to secure the payment of money, the conveyance will be regarded as a mortgage. See Stovall v. Stokes, 94 Fla. 717, 115 So. 828; McKinney v. Gainey, 96 Fla. 547, 118 So. 917."

• "It has been held by this Court that the relation of the parties at the time of its execution may be considered in determining whether a deed is a mortgage. "

• "The conduct of the parties and the circumstances under which the instrument was executed may be considered. The circumstances of the parties and the conditions under which the deed was executed may become material."

• "The value of the property conveyed should be considered in connection with the amount paid or expressed in the deed. The secret intention of either party as to the purpose of the instrument will not prevail. See First Natl. Bank v. Ashmead, 23 Fla. 379, 2 So. 657, 665; Holmberg v. Hardee, 90 Fla. 787, 813, 108 So. 211; Stovall v. Stokes, 94 Fla. 717, 115 So. 828; McKinney v. Gainey, 96 Fla. 547, 118 So. 917; Connor v. Connor, 59 Fla. 467, 52 So. 727; Walls v. Endel, 20 Fla. 86; DeBartlett v. DeWilson, 52 Fla. 497, 42 Sou. 189; Franklin v. Ayer, 22 Fla. 654."

In affirming the lower court's ruling that the deed was a mortgage, the Florida high court's opinion is somewhat lacking in the kind of analysis that was present in some of the other cases I've written about on this blog. The Florida high court simply considered the details of the negotiations that led up to the transaction between Hilpert and Markell, the disparity between the sale price and the value of the subject property, and simply ruled that there was sufficient evidence in the record to sustain the lower court's ruling and there was no indication that the lower court abused its discretion in so holding. It did so notwithstanding the fact that some of the key elements of an absolute conveyance were present (ie. real estate taxes were prorated at the closing of title; Hilpert relinquished full control and possession of the property to Markell; and Hilpert instructed his tenants to remit the monthly rent payments to Markell after the transaction was consummated).
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Another issue that was dealt with in this case was the assertion that Hilpert was guilty of laches for bringing his action to declare an equitable mortgage almost four years after his 2 year buyback period expired, at which point he was out of possession of the premises for almost six years. The court simply stated that Markell hadn't done enough to prove laches (and by inference, concludes that the mere passage of time is not enough to prevail when asserting the defense of laches). The court makes reference to "[t]he case of Geter v. Simmons, 57 Fla. 423, 49 So. 131; Horne v. Turner C. & L. Co., 55 Fla. 690, 45 So. 1016; Booth v. Lenox, 45 Fla. 191, 34 So. 566 ..." in support of its decision that laches was not present in this case.

As additional support for its decision on the issue of laches, the Court cited the U.S. Supreme Court case in Russell v. Southard, 53 U.S. 139, 12 How. 139, 13 L. Ed. 927 (1851) (case available online courtesy of Justia & Oyez - US Supreme Court Center) which allowed for a suit for redemption after a lapse of almost twenty years from the time the loan involved became payable.
Based on the foregoing Florida and U.S. Supreme Court case law, the Florida Supreme Court in Markell v. Hilpert reminds us that the mere passage of time, standing alone, was not enough for Markell to sustain a defense of laches.

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Editor's Note: For more on laches in Florida, generally, a recent decision of a Florida appeals court in Baker v. Baker, 920 So. 2d 689 (Fla. App. Ct. 2nd Dist., 2006), gives some insight as to the application of the doctrine of laches in Florida in the following passage from that case:

• "Laches is based on an unreasonable delay in asserting a known right which causes undue prejudice to the party against whom the claim is asserted. Appalachian, Inc. v. Olson, 468 So. 2d 266, 269 (Fla. 2d DCA 1985). Delay, standing alone, is not enough. Brumby v. Brumby, 647 So. 2d 330, 331 (Fla. 4th DCA 1994) (holding that "mere delay in filing an enforcement suit for alimony, even if the former [spouse] had knowledge of the [other spouse's] whereabouts, is insufficient by itself to constitute laches or estoppel"). Susan was required to show resulting undue prejudice by "very clear and positive evidence." Smith v. Branch, 391 So. 2d 797, 798 (Fla. 2d DCA 1980). (emphasis and alterations in the original).

• "The Florida Supreme Court has explained that "[t]he true test to apply laches is whether or not the delay has resulted in injury, embarrassment, or disadvantage to any person and particularly to the person against whom relief is sought." Stephenson v. Stephenson, 52 So. 2d 684, 686 (Fla. 1951) (quoting Lightsey v. Lightsey, 8 So. 2d 399, 400 (Fla. 1942)).

• "[T]he delay required to render the defense of laches available must have been such as practically to preclude the court from arriving at a safe conclusion as to the truth of the
  matters in controversy, and thus make the doing of equity either doubtful or impossible, as through the loss or obscuration of evidence of the transaction in issue; or there must have occurred in the meantime a change in conditions that would render it inequitable to enforce the right asserted." Id. (internal quotation marks omitted).

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The bonafide purchaser issue was also addressed in this case as it related to the Markell family owned corporation (51% by Markell, 30% by his daughter, 19% by his granddaughter) that ultimately ended up with title to Hilpert's property and was the titleholder at the time Hilpert brought his action to declare his deed to Markell a mortgage. The lower court held that the property and the Markell family owned corporation were owned substantially by Markell and that his relatives were only assisting him in his business undertakings.

In affirming the lower court ruling that bonafide purchaser status was not warranted for the Markell family corporation, the Florida Supreme Court stated:

• "This Court is committed to the principle that a corporation cannot be formed for the purpose of accomplishing fraud, or other illegal acts, under the guise of the fiction that a corporation is a legal entity, separate and distinct from its members."

• "When this is attempted, the fiction will be disregarded by the courts and the acts of the real parties dealt with as though no corporation had been formed."

• "The modern doctrine confines the fiction of the corporate entity to the purpose for which it was adopted; the corporate entity doctrine has been repudiated in all cases where it has been insisted on as a protection to fraud or other illegal transactions. The courts will look beyond the corporate form to the purpose of it and to the officers who are identified with that purpose." See Biscayne Realty & Ins. Co. v. Ostend Realty Co., 109 Fla. 1, 148 So. 560.

The court's approach here was to look through the corporate shield to determine that the corporation was, in effect, Markell's alter ego and, accordingly, not entitled to the status of "bonafide purchaser".

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The points that caught my eye about this case are that it involved addressing issues of bonafide purchaser and laches (albeit not in depth) in the context of an equitable mortgage case. It also makes reference to the "corporate entity doctrine", which, as the Court stated, "[c]onfines the fiction of the corporate entity to the purpose for which it was adopted; the corporate entity doctrine has been repudiated in all cases where it has been insisted on as a protection to fraud or other illegal transactions."

Bonafide Purchaser

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The determination that Markell's corporation was not entltled to bonafide purchaser status in this case appears to have been a pretty easy one. I highlight this point only because it serves as a reminder that, while such a determination may not be as easy in some modern day foreclosure rescue transactions involving a sale with a contemporaneous repurchase option (or repurchase contract), it is a detemination that nevertheless must be made.

The scenario that contemplates such a bonafide purchaser determination is one where a foreclosure rescue operator, after getting financially strapped homeowners to sign over their homes, then sells or mortgages the property to a third party either at the time it receives the homeowners' title or at some point subsequent thereto. We will assume that the financially strapped homeowner was in physical possession of the home both before and after the subsequent sale or mortgaging by the operator to the third party.

The law in Florida (and probably most other states) appears to be pretty well settled and is to the effect that actual possession of the property serves as notice to subsequent purchasers and encumbrancers of all rights and equities that the person in possession may have. The following is a brief excerpt from the the Florida Supreme Court decision in Florida Land Holding Corp. v. McMillen, 135 Fla. 431, 186 So. 188 (Fla. 1938), which, quoting from an earlier Florida high court case, stated the following:

"This Court had before it a similar set of facts in the case of Marion Mortgage Co. v. Grennan, 106 Fla. 913, 143 So. 761, when this Court said:

• "Actual possession is constructive notice to all the world or anyone having knowledge of said possession, of whatever rights the occupants have in the land. Such possession when open, visible and exclusive, will put upon inquiry those acquiring any title to or a lien upon the land so occupied to ascertain the nature of the rights the occupants really have in the premises. Carolina Portland Cement Company v. Roper, 68 Fla. 299, 67 So. 115; Tate v. Pensacola G.L. & Dev. Company, 37 Fla. 439, 20 So. 543; McAdams v. Wachab, 45, Fla. 482, 33 So. 702. This court also specifically held in the case of Crozier, et al., v. Ange, 85 Fla. 120, 95 So. 426, that 'where at the time property is mortgaged it is actually occupied by others than the mortgagor, the mortgagee is thereby put upon notice to inquire as to the rights of the occupants.'"

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On the basis of the foregoing, it appears that a foreclosure rescue operator's subsequent mortgagee or third party purchaser (or said purchaser's mortgagee) is acquiring an interest in the subject property subject to all the rights and equities that the financially strapped, still-in-possession, homeowner may have (ie. equitable mortgage, usury, fraud, conspiracy, constructive trust, etc.), in the same way that Markell's corporations acquired its interest in the property subject to Hilpert's equities under an equitable mortgage claim.

Laches

The determination that Markell's assertion of the defense of laches against Hilpert for Hilpert's delay (almost four years after his buyback period expired) in bringing his equitable mortgage claim was without merit also appears to have been a pretty easy one. The court essentially stated that Markell wasn't able to show that laches was present, without further elaborating.

I highlight this point for a couple of reasons. First, in addition to current homeowners facing foreclosure who may still be in possession of their homes after doing business with an operator, there is undoubtedly a significant number of foreclosure rescue victims of transactions that date back more than a year or two who have ultimately been evicted from or have otherwise been made to vacate their homes and are no longer in possession thereof. I would suggest that Markell v. Hilpert serves as a reminder that these "no longer in possession" foreclosure rescue victims in Florida may still have viable causes of action against the operator. Further, it appears that this may be the case as long as the Florida homeowner has not been out of possession for more than seven years. See F.S. Section 95.12. And if, prior to the expiration of the statute of limitations, the rescue operators attempt to assert a defense of laches (which is equitable in nature), they had better be able to prove both that they (1) had "clean hands" when buying the property from the homeowner in the first place (ie. "One who seeks equity must do equity"), and (2) will be prejudiced if their laches defense is not sustained. Markell v. Hilpert shows that an almost four year delay in bringing an action, statnding alone, will not sustain a laches defense; laches as a defense was also unavailable in the U.S. Supreme Court decision in Russell v. Southard (which Markell v. Hilpert cited with approval) when there was evidence that the person asserting laches had somehow acted improperly.

Corporate Entity Doctrine

The reference in Markell v. Hilpert to the corporate entity doctrine, and its "[repudiation] in all cases where it has been insisted on as a protection to fraud or other illegal transactions" is a reminder that, in the context of a foreclosure rescue transaction, if fraud or other illegal conduct on the part of the operator can be shown to exist, the use of a corporate shield in an attempt to protect the operator's personal assets from the liability of a damages award may be vulnerable to attack.

Markell v. Hilpert 140 Fla. 842; 192 So. 392 (Fla. 1939). Florida equitable mortgage alpha Florida bona fide purchaser

Equitable Mortgage & Usury In Sale Buyback Deals In Florida

The following collection of Florida court cases address issues of equitable mortgage and/or usury in the context of real estate sale-buyback transactions; considerations are made whether to treat these transactions as disguised loans.

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Mears v. Mayblum
96 So.2d 223
(Fla.1957)

In this case, the Florida Supreme Court was asked to address a real estate transaction that involved a sale by one, Mears, of a partial (1/3) interest in real estate to a certain Mayblum, for $12,000, coupled with an agreement to "buy back" the interest for $15,000, payable by 11 monthly payments of $350, and a final payment of $11,150. The Florida high court held that the transaction was an equitable mortgage under the provisions of the Florida Statutes, Section 697.01 (and citing Markell v. Hilpert, 140 Fla. 842, 192 So. 392 (Fla. 1939) as authority).

Further, the court ruled that:

• "The circumstances surrounding the transaction between Mears and Mayblum and the instruments executed by these parties present an arrangement which we think was a "contrivance" to circumvent the statutes penalizing usury."

• "He [Mayblum] did violate Sec. 687.03 making it unlawful to charge interest of more than ten per cent [under the then-existing statute] per annum by any "contrivance or device," and should be penalized under Sec. 687.04 for the infraction."

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The usury statute that was violated in this case was Florida's civil usury statute, Section 687.03, which currently sets a maximum 18% per annum interest, and applies to advances up to $500,000. On loans in excess of $500,000, only the criminal usury statutes apply. See Sec. 687.071, below.

The current language of the Sec. 687.03 prohibits:

• "a rate of interest greater than the equivalent of 18 percent per annum simple interest, either directly or indirectly, by way of commission for advances, discounts, or exchange, or by any contract, contrivance, or device whatever whereby the debtor is required or obligated to pay a sum of money greater than the actual principal sum received, together with interest at the rate of the equivalent of 18 percent per annum simple interest." (my emphasis added)

The court in Mears v. Mayblum ruled that the sale and the contemporaneously executed buyback agreement on deferred payments was such a "contrivance".

The penalty for violating the civil usury statute is found in Section 687.04, which essentially says that, generally, (1) any right to interest is forfeited, (2) double the amount of any interest already paid shall be forfeited back to the debtor, and (3) only the actual principal sum of such usurious contract can be enforced, either at law or in equity.

In addition, Florida has two criminal usury statutes, both of which can be found in Section 687.071. The misdemeanor usury statute generally applies on interest willfully and knowingly charged in excess of 25% per annum but not exceeding 45% per annum, and is found at Sec. 687.071(2); the felony usury statute applies to interest willfully and knowingly charged in excess of 45% per annum, and is at Sec. 687.071(3).

The criminal usury statutes provide that, in addition to the penalties commonly associated with misdemeanors and felonies, "no extension of credit made in violation [thereof] shall be an enforceable debt in the courts of this state." Section 687.071(7).

The court in Mears v. Mayblum also indicated, in dicta, that "A person violating [the criminal usury] statute must forfeit the principal and interest and is subject to criminal prosecution"; however, since it ruled that the interest charged did not subject the arrangement to the criminal usury statute, it was unnecessary for the court to reach any determination as to the willfulness or the knowledge with which the loan in question was made.

How the Florida courts apply the criminal usury statutes in a foreclosure rescue transaction is anybody's guess. As soon as I stumble across a case, I'll post it. But a simple reading of the plain language of Florida's criminal usury statutes should leave foreclosure rescue operators with the queasy feeling that if they are making a profit of more than 25% on an annualized basis on one of their sale-leaseback-buyback deals, and the deal is deemed to be an equitable mortgage and/or a disguised loan, they could conceivably be facing the forfeiture of their entire investment and be forced to reconvey the title to property back to the financially strapped homeowner. And that's before the local prosecutor's office gets wind of the transaction.

Go here for the entire Florida Chapter 687 - Interest And Usury - Lending Practices

Mears v. Mayblum, 96 So.2d 223 (Fla.1957)

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Bermil Corp. v. Sawyer
353 So. 2d 579
(Fla. App. Ct. 3d Dist. 1978)

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This case involved a financially strapped shopping center owner who, in order to raise desperately needed cash, sold a 40% interest in the equity in his shopping center for $60,000 with the option to repurchase same in one year for $100,000. At the time of the sale of the 40% interest, the value of the equity in the center was estimated at between $500,000 and $750,000, thereby making the value of the 40% interest conveyed for $60,000 at somewhere between $200,000 and $300,000.

After a lengthy and complex trial, the jury returned a verdict which, among other things, found that the sale-option transaction was, in reality, a device to clothe a usurious transaction.

In reviewing the decision as it related to the sale-option transaction, the Florida appellate court began by stating the following (bold text is my emphasis):

• "In order to establish a usurious transaction, certain elements must first be present. Firstly, there must be a loan, either expressed or implied, and an understanding between the parties that the money lent shall be returned. Secondly, it must appear that a greater rate of interest than is allowed by law has been or is about to be paid, or was agreed to be paid. Thirdly, there must exist an intent to wilfully and knowingly take more than the legal rate of interest for the use of the money loaned." Sharp v. Dixon, 252 So.2d 805 (Fla.4th DCA 1971).

The appellants / purchasers of the 40% interest asserted on appeal that:

• "[t]he "option to repurchase," given in conjunction with the sale, was not an unconditional, enforceable covenant and as such, they, as lenders, could not compel [the seller], as the borrower, to exercise the option and pay the usurious amount of interest. The option to repurchase being conditional, appellants argue that as a matter of law, the requisite intent to extract a usurious rate of interest at the inception of the transaction was absent and thus, no prima facie case of usury could be established."

The Florida court, citing a Hawaii Supreme Court decision in Kawauchi v. Tabata, 49 Haw. 160, 413 P.2d 221 (1966), made this observation about the Hawaii case:

• "In that case, the court opined that in a transaction whereby a vendee purchases property for an amount much less than that property's value, and contemporaneously executes with the vendor an option to repurchase said property, then notwithstanding the fact that the option is not obligatory on the part of the vendor, a court might, upon a proper allegation of usury, disregard the form of the transaction and look to its substance."

Relying on the logic in Kawauchi, the Florida court ruled as follows:

• "[w]hile the option to repurchase was not mandatory, the relative disparity between the sale price of a 40% interest in the shopping center and its true value dictated the exercise of the option. Thus, while the option, in and of itself, was not legally enforceable by the purchaser (appellants), it was economically binding, satisfying to our satisfaction, the "intent to extract usurious interest" requirement as required by the Sharp case, supra. As such, we cannot accept appellants' argument that [they] did not have the intent needed, as a matter of law, to find them guilty of usury."

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Two points that deserve highlighting, in my view, are these:

• First, the court found that the necessary intent to collect usurious interest was present in this case by simply looking to the fact that there was a significant disparity between the $60,000 price for the 40% interest and the value of that interest, estimated at between $200,000 and $300,000. That disparity, according to the court, made the exercise of the repurchase option "economically binding" upon the seller/borrower, even though the repurchase option was not actually "legally binding" on him.

• Second, while there is no specific reference to either the equitable mortgage doctrine or Florida Statute Section 697.01 (which is the Florida legislature's codification of the equitable mortgage doctrine), it is arguable that the court's determination that the transaction was a disguised loan represents an implicit determination that the transaction was an equitable mortgage. After all, the equitable mortgage doctrine stands for the proposition that an absolute conveyance of property, made in connection with securing a loan, shall be deemed a mortgage. An absolute conveyance of property in exchange for a loan is exactly what happened here. Further, the Hawaii high court decision in Kawauchi cited herein was an equitable mortgage case.

Bermil Corp. v. Sawyer, 353 So. 2d 579 (Fla. App. Ct. 3d Dist. 1978).

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Oregrund Ltd. P'ship v. Sheive
873 So. 2d 451
(Fla. App. Ct. 5th Dist. 2004)

This case involved an appeal by a financially strapped property owner appealing a lower court decision dismissing its complaint with prejudice. The complaint asserted various counts based on usury, the related relief of quiet title and civil theft, as well as a count for equitable mortgage under Section 697.01 or to cancel a deed. In reversing the lower court and reinstating the complaint, the court reviewed the usury law, both the statute and the case law, in the State of Florida.

It also identified the four essential elements of a usurious transaction in Florida; and it analyzed the allegations in the case as pleaded by the property owner and analyzed the presence of the usury elements in the case, assuming as true all the well pleaded allegations in the complaint.

In the end, the court concluded that the allegations in the complaint were sufficient to plead a cause of action in usury, and for the related relief of quiet title and civil theft; and found nothing in the record to justify the dismissal of the count which alternately pleaded for a declaration of the deed to be a mortgage, section 697.01, or for cancellation of the deed.

The allegations in the case were as follows:

1) A property owner, wanting to borrow $600,000, conveyed a 50% interest in the equity in property to investors for $600,000. At the time, the value of the equity in the property was estimated at between $3.4 million and $4 million. Accordingly, the value of the 50% interest conveyed for $600,000 was somewhere between $1.7 million and $2 million.

2) Contemporaneously with the sale, the property owner was given a right to repurchase the 50% interest for $1.2 million, if exercised in one year; and $1.8 million, if exercised in two years.

3) The property owner had the sole responsibility to pay the mortgage, taxes and other expenses on the tract while the investors owned a one-half interest in the tract.

4) Eight months into the transaction, the property owner had (more) financial problems. At that point, the parties made a modification of the existing agreement whereby the property owner signed away the remaining 50% interest and, in exchange, the investors assisted the property owner in obtaining an additional $150, 000 in borrowed funds from the holder of the existing first mortgage. It was also agreed that the option to purchase for $1.8 million by the end of year 2 would be extended indefinitely. At the time of this transfer, the estimated value of the entire equity interest in the tract exceeded $3 million.

5) Within nine months of the second transaction, the property owner was still in financial trouble, was not in the financial position to exercise its repurchase option and had gone in default on the existing mortgage. At that point, the investors terminated the option and the property owner lost the title to the property.

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In reversing the lower court's dismissal of the property owner's complaint and reinstating it, the appellate court reviewed the Florida usury law and made a number of points. The court's review of a number of aspects of the Florida usury law follow:

• "A review of the above statutes reveals that for loans under $500,000, a usurious contract is present if an interest rate exceeds 18%. Sections 687.02(1), 687.03(1). But for loans exceeding $500,000 the operative statute is section 687.071. That statute provides that loans which have effective interest rates of 25% or more, but less than 45%, and loans exceeding an effective interest rate of 45%, are criminal offenses. Sections 687.071(2) and (3)."

• "[E]xcluded from the usury statutes are transactions in which a portion of the investment is at speculative risk. Hurley v. Slingerland, 461 So. 2d 282, 283 (Fla. 4th DCA 1985); Diversified Enterprises, Inc. v. West, 141 So. 2d 27 (Fla. 2d DCA 1962). This principle has been statutorily validated when the venture exceeds $500,000. See Bailey v. Harrington, 462 So. 2d 861 (Fla. 3d DCA 1985)."

• "There are four essential elements of a usurious transaction: (1) an express or implied loan; (2) a repayment requirement; (3) an agreement to pay interest in excess of the legal rate; and (4) a corrupt intent to take more than the legal rate for the money loaned. Party Yards, Inc. v. Templeton, 751 So. 2d 121, 123 (Fla. 5th DCA 2000); Kraft v. Mason, 668 So. 2d 679 (Fla. 4th DCA 1996); Bermil Corp. v. Sawyer, 353 So. 2d 579 (Fla. 3d DCA 1978). One does not have to specifically charge interest for there to be usury. See American Acceptance Corp. v. Schoenthaler, 391 F. 2d 64 (5th Cir. 1968)(Florida law).

• "Courts look to the substance of the transaction to determine whether a transaction is usurious. Party Yards; Key v. Amendola, 129 So. 2d 170 (Fla. 2d DCA 1961). That is, a finding of usury depends on the intent and understanding of the parties. Indian Lake Estates, Inc. v. Special Investments, Inc., 154 So. 2d 883 (Fla. 2d DCA 1963). A key issue is the liability of the borrower under the contract’s terms, or what may be demanded of a borrower, rather than what is demanded of him. First Mortgage."

• "A transaction that is either entirely or partially in the form of a sale, may be usurious when the intent is to make a loan of money for a greater profit than allowed by statute. See, e.g., Griffin v. Kelly, 92 So. 2d 515 (Fla. 1957); American Acceptance. (Florida law). See also Hembree v. Bradley, 528 So. 2d 116 (Fla. 1st DCA 1988)(contract may have been a loan disguised as contract for purchase and sale of property). The value of the property as compared with the sum paid is an important factor in determining whether the transaction is a sale or a loan. See, e.g., Kawauchi v. Tabata, 413 P.2d 221 (Hawaii 1966)."

• "A sale-option transaction may be considered a loan when the loan is unconditional and compels the vendor to repurchase the property for an amount that, if the loan was disguised as a sale, the "return" or profit would be usurious. Bermil Corp. v. Sawyer, 353 So. 2d 579 (Fla. 3d DCA 1978) (option to repurchase not mandatory, but relative disparity between sale price and true value dictated option be exercised)."

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In ruling to reverse the lower court's dismissal of the complaint, the court began by addressing the investors' assertion that the investment was speculative and was thereby not covered by the usury statutes. The court stated:

• "On its face, it cannot be concluded, as a matter of law, that appellees’ $600,000.00 investment was at speculative risk because of the value of the property interest they held."

(After all the dust settled, according to the complaint, the property owner signed away the entire 100% of the property's equity valued well in excess of $3 million for $600,000).

Analysis of the Elements of Usury

The court proceeded to make the following analysis in determining whether elements of usury could be proved in this case.

• "Whether There was an Express or Implied Loan. The facts of this case illustrate that, based on the intent of the parties’ and the circumstances of the transactions, it could be established that a loan was made to appellants, who were also given an option to repurchase the tract in lieu of a mortgage. See Party Yards; Kraft; Bermil."

• "Whether There Was a Repayment Obligation. Although there was no specific written obligation for appellants to repurchase the property, we reject appellees’ argument that this precludes a finding that no repayment or repurchase requirement existed in this case. Instead, we agree with the third district in its holding in Bermil, where it found that the economic facts surrounding the transaction were such that repayment was required. The form of the transaction can be disregarded even though the repurchase option is technically conditional. Bermil. As in Bermil, a fact-finder could determine that the transactions in this case were economically binding on appellants to repurchase due to the gross disparity between the $600,000.00 proceeds given to appellants and the value of the property interest appellants conveyed to appellees. Initially, appellants conveyed a property interest to appellees that exceeded $1.7 million in value. Appellants were initially allowed to repurchase the one-half interest for $1.2 million in the first year or $1.8 million in the second. After the Amendment, appellants’ property interest exceeded $3 million in exchange for a "$600,000 investment." The value of the property interest appellees received initially was almost three times their "investment" and after the Amendment, five times the amount of their loan. These values could support the conclusion that appellants were obligated to repurchase the property or suffer a tremendous economic loss."

• Whether There was an Agreement For a Return Greater Than Legal Rate. Appellees argue that the Amended Option is open indefinitely, and thus a "due" date cannot be determined, which is necessary in order to calculate an interest rate. Any interest rate calculated would vary and could be reduced to nonusurious rates, depending on the number of years the "loan" was outstanding and the price for which the tract sold. They conclude usury cannot be established unless a specific rate of interest has been charged. They are incorrect. As to the latter argument, one does not have to specifically charge interest for there to be usury. American Acceptance.

• Moreover, the usurious nature of a transaction is established at the inception of the transaction. See Home Credit Co. v. R.B. Brown, 148 So. 2d 257 (Fla. 1963); Short v. Skate, 90 So. 2d 604 (Fla. 1956); Carter v. Leon Loan & Finance Co., 146 So. 664 (Fla. 1927); Maxwell v. Jacksonville Loan & Improvement Co., 34 So. 255 (Fla. 1903); First Mortgage; Key v. Amendola, 129 So. 2d 170 (Fla. 2d DCA 1961); Coral Gables First National Bank of Contractors of Florida, Inc., 119 So. 2d 741 (Fla. 3d DCA 1960). The exception to this rule is where an old contract is abandoned and a new one, which has been entered into free from the vice of the old, occurs. Carter.

• Pursuant to the initial option, appellees would have received double the amount of their investment, $1.2 million, within one year, and triple the amount, $1.8 million, within two years. This equates to an interest rate which is calculable and which exceeds the permissible amount in section 687.071.

• Nor did the execution of the Amendment alter the usurious nature of this transaction. It is well settled that when a usurious contract is renewed by a new or substituted contract, usury follows and becomes a part of the second contract. Short; Carter; Coral Gables. Moreover, delay in enforcement of a usurious contract does not purge it of its vices. Short; Carter; Coral Gables.

• In this case, it cannot be concluded as a matter of law that a new contract was freely entered into by the parties. An Amendment to the land trust was executed by appellees, in which they deleted the requirement that the option be exercised in two years in exchange for appellants transferring the remaining one-half interest in the tract to them. If the original transaction was usurious, the taint was not removed with the Amendment.

• Whether Appellees Acted With Corrupt Intent. Corrupt intent is established if the evidence indicates the lender knowingly charged or received excessive interest considering all the circumstances surrounding the transaction. Party Yards. The Agreement for Sale, the Option and the Amendment, are sufficient to support the claim that appellees knowingly intended to receive an interest rate which exceeded the permissible statutory rate.

Oregrund Ltd. P'ship v. Sheive, 873 So. 2d 451; (Fla. App. Ct. 5th Dist 2004)
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Postscript

One of the issues in this case addressed whether or not there was a "repayment obligation" involved in the sale-option transaction. Such a repayment obligation is a necessary element in determining that a transaction is a loan, either in the context of a usury case or in the context of an equitable mortgage case. For those of you who are Florida attorneys, I want to point out that Oregrund Ltd. P'ship v. Sheive is at least the second Florida appeals court that has ruled that the "repayment obligation" requirement in a sale-option transaction is satisfied where the disparity between the option's "buyback price" and the value of the property is such that it makes the exercise of the option "economically binding", notwithstanding the fact that, according to the option's terms, the exercise thereof is not technically "legally binding". (See also Bermil Corp. v. Sawyer 353 So. 2d 579, Fla. App. Ct. 3d Dist. 1978).

I want to briefly point out to the Florida attorneys that, unless the Florida Supreme Court says otherwise and unless there are rulings that conflict with these rulings in any of the other three Florida appellate districts (1st, 2nd, and 4th DCAs), these rulings on the "economically binding" issue appear to be binding not only on the trial courts that are located within the 3rd and 5th appellate districts, but are binding on the trial courts throughout the entire state of Florida.

See 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 briefly mention this point because there may be some Florida attorneys, including some trial judges, who incorrectly believe that a trial court is only bound by the decisions of the Florida appellate court for the district in which the trial court is located; and are not bound by the decisions of any other Florida appellate court. This rule is in contrast to the Federal rule, where a Federal trial court is only bound by the decisions of the Federal appeals court in which the trial court is located.)

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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. Florida equitable mortgage alpha