Problem 3 April 1: Lambert pays Wells $160K Wells executes a deed of Greenacre to Lambert Wells remains in possession of the home Agreement: if Wells repays $168K to Lambert on or before August 1, he will deed home back to her August 1: Wells doesn t repay September 1: When Wells tries to pay Lambert, he brings unlawful detainer action to eject Wells from Greenacre and obtain possession How should the court rule? Absolute Deed or Equitable Mortgage? Did Lambert really buy ownership of the land (was this a sale ), or was he just using title to the land to secure Wells s obligation to repay the money? If it is the latter, and this fact is proven by clear and convincing evidence, then Lambert s deed is deemed in equity to be a mortgage He would have to foreclose (by judicial foreclosure, since the deed would not have a power of sale in it) What info is relevant in making this judgment? Relevant Restatement factors [p. 301] Statements of parties ( This is a loan. ) Substantial disparity between value received by Grantor and the fair market value of the land Grantor (Wells) remained in possession of the land even after deed was executed/delivered to Lambert Grantor (Wells) paid taxes or made improvements after delivery of deed to Lambert Nature of the parties and their relationship prior to/after the deed Case law factors: Was Wells in financial distress at the time of deed? Did Wells have legal counsel? Variation 1 (Easy Mortgage Case) Facts: Prior to April 1 (date of deed to Lambert), Lambert held a mortgage loan on Greenacre Wells was in default on that mortgage loan, and that unpaid balance was $160,000 Fair market value of land = $300,000 In this situation, court should recharacterize the deed as an equitable mortgage and require Lambert to foreclose 1
In Variation 1, the argument to re-characterize the deed as an equitable mortgage is compelling Prior to April 1, Wells was legally required to pay back the money to Lambert After April 1, while Wells may not be legally required to pay $168K to Lambert (at least in form), she is practically obligated to repay if she wants to protect her equity (why would Wells rationally sell the land for $160,000 if it was worth $300,000?) In financial distress and facing foreclosure, Wells may have agreed only as a means to protect her equity in Greenacre [Perry, p. 292, where the grantor delivered absolute deed in the context of a foreclosure rescue ] Variation 2 (Easy Sale Case) Facts: Pre-April 1, Wells/Lambert had no contractual relationship Wells/Lambert enter Lease for April 1-August 1 Fair market value of the land = $160,000 or less In this situation, court should treat this as a bona fide sale and conclude that Lambert owns Greenacre While Wells remained in possession, her possession is consistent with being a bona fide tenant Here, Wells doesn t have (and never had) any legal obligation to Lambert ( no debt, no mortgage ) Variation 3 Prior to April 1, Wells owed $160K to Bank, which held a blanket lien on her restaurant, and she was in default To get money to pay Bank and save her restaurant, she sells Greenacre to Lambert for $160,000, deeds him the land Under agreement, she has option to repurchase land for $170,000 on or before August 1 Wells can remain in possession until August 1 (and thereafter if she exercises repurchase option) Is this a bona fide sale/lease/option transaction, or should it be recharacterized as a mortgage? Lambert signs installment contract to buy a flat-screen TV (12 payments @ $350 each) from Tiger John Cleek K: Tiger John retains title to the TV until all payments are made by Lambert Lambert makes the first 11 payments, but he misses the 12th payment Can Tiger John take back the TV, terminate the contract, and keep all of Lambert s past payments as damages for breach? 2
UCC: Security Interest 1-201(b)(35) defines a security interest as an interest in personal property... which secures payment or performance of an obligation. 1-201(b)(35) also provides that... [t]he retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer... is limited in effect to reservation of a security interest. UCC Installment Sale Contracts Under the UCC, Tiger John would be deemed to have only a security interest in the TV, which he could enforce only by UCC foreclosure procedures Balance of debt = $350 (12th payment) + any costs of collection incurred by Tiger John Before sale, Lambert can redeem TV from the security interest by paying off remaining balance of the debt If sale price >> balance of debt, any surplus must be returned to Lambert [ 9-610, 9-615, 9-623] Sometimes, an owner of land sells it to buyer by installment land contract or contract for deed Buyer agrees to pay price in monthly installments over time (even 40-50 years!) While Buyer typically takes immediate possession of the land, Seller is typically not obligated to deliver a deed to Buyer until Buyer has paid all installments ILK typically provides that if Buyer defaults, Seller retains title to land AND may retain all of Buyer s prior payments under the ILK as liquidated damages for Buyer s breach! Russell v. Richards Richards sold land to Buyer via ILK Buyer later resold to Russell (who paid Buyer $11,188 in cash, took over the monthly payments, and assumed the balance due on ILK = $37,938) Russell made payments for next 6 years, reducing ILK balance to $26,504 ($10,782 principal reduction) Russell then defaulted (FMV of land = $82,735) Richards declared forfeiture of ILK, kept all past payments by Russell as liquidated damages 3
Court: contract enforced as written; Russell forfeited her interest; this does not shock the conscience Result: Russell loses her equity in the land, i.e., The $10,782 in principal payments that she made over the 6 years of her ownership The $11,188 down payment she made 6 years ago when she bought from Buyer The $34,754 in market appreciation to the land that occurred over the life of the contract Why isn t this magnitude of loss sufficiently shocking to the conscience? $11,188 down payment? Court says it was not appropriate to consider that payment, b/c it was made to original Buyer, not Richards [p. 312] But downpayment reflected, in part, prior payments that original Buyer had made to Richards! $33,746 in market appreciation? Court: this only belonged to Russell if she performed (her equity was contingent), but she didn t perform, so it wasn t hers to lose [p. 312] Held: trial court appropriately considered Russell s loss of $10,782 that she paid on K, but that loss isn t a shocking amount Vendor (Seller) Contract Vendee (Buyer)! Vendee agrees to pay contract price in installments! Vendor does not deliver deed (title) until Vendee pays final installment The Purchase Money Mortgage Compared Purchase Money Mortgagee (Seller) Deed (Title) Note and Mortgage Purchase Money Mortgagor (Buyer) Contrast: If Deal Had Been Structured as a Purchase Money Mortgage After default, Richards (as PM mortgagee) would have had to foreclose the mortgage If land sold for $82,735 at foreclosure: Richards would ve gotten $26,500 (balance of debt), plus any accrued but unpaid interest and costs of collection (e.g., attorneys fees) Balance ($56,000+) would have gone to Russell (her equity, not contingent upon her full performance) 4
Watkins v. Eads [p. 329] Any attempt to use title to land as security for a debt should have the same legal effect; thus, ILK should have to be enforced as a mortgage Cf. Restatement of Mortgages: A contract for deed creates a mortgage. [ 3.4(b)] Note: many installment land contracts don t contain a power of sale, so in states following the Watkins approach, Seller would have to bring judicial foreclosure action Petersen v. Hartell [p. 315] Seller, Buyer entered ILK for small plot of raw land Price = $9,162, payable in $50 installments [possible terms of this contract: 40 years @ 6%] Buyer made a total of 58 monthly payments ($2,900 total) but missed 7 payments When Seller declared default, Buyer tendered a check for $250 for back payments, but Seller refused to accept it and purported to terminate ILK Buyer then tendered the full unpaid balance of ILK into court, and sued for specific performance 5