Opinion ID: 2618359
Heading Depth: 1
Heading Rank: 1

Heading: the doctrine of equitable conversion

Text: The Banks and Buyer assert that Attorney's mortgage is null and void because it was executed after the land sale contract. They contend that once the land sale contract was agreed upon by the parties, an equitable conversion occurred and equitable title passed to Buyer. The mortgage, they say, was invalid because Seller did not have the power to grant the mortgage. The doctrine of equitable conversion, long recognized by Oklahoma, is a fiction resting upon the fundamental rule of equity that equity regards that as done which ought to be done. First Sec. Bank v. Rogers, 91 Idaho 654, 657, 429 P.2d 386, 389 (1967); see also Asher v. Hull, 207 Okl. 478, 250 P.2d 866, 870 (1952); Dick v. Vogt, 196 Okl. 66, 162 P.2d 325, 331 (1945). Under the doctrine, an equitable conversion may take place when a contract for sale becomes binding on the contracting parties. Rogers, 91 Idaho at 657, 429 P.2d at 389. The theoretical basis for the doctrine is founded on the concept that at the time the contract for sale is entered into by the parties, the purchaser becomes the true owner of the realty, with the seller retaining the right to possession and legal title as security for the payment price. Powell, 6A Powell on Real Property § 925[6] (Supp. 1991). But it is important to remember that this doctrine is purely a creature of equity and is not favored in law. Tiffany, 1 The Law of Real Property § 299 (1939). As a consequence, the effect of a contract for the purchase of land is very different at law and in equity. At law the estate remains in the estate of the vendor and the money that of the vendee, while in equity the estate from the signing of the contract is the real property of the vendee... . In re Houghton, 147 N.J. Super. 477, 371 A.2d 735, 739 (1977). The doctrine of equitable conversion divides the bundle of property rights between the seller and the purchaser. The purchaser is regarded as the owner and generally has the right to possession of the realty. The seller's position is analogous to that of the mortgagee who retains legal title as security for the purchase price. Security Bank v. Chiapuzio, 304 Or. 438, 747 P.2d 335, 337 n. 1 (1987). In other words, the buyer's interest is converted to realty and the seller's interest is converted to personalty. See generally 18 C.J.S. Conversion § 5; Rogers, 91 Idaho at 657, 429 P.2d at 389. When a contract of sale vests an equitable estate in the buyer, certain ownership features are created: Such ownership includes the right to sue to quiet title; to sue for trespass to the land and for other injury and waste; and as between vendor and vendee, the loss of improvements destroyed shall be borne by the vendee. Asher v. Hull, 250 P.2d at 870. (Citations omitted) On the other hand, the contract is still executory to the extent the obligation to pay and the one to convey are mutually dependent, and the full equitable title and right to obtain legal title does not vest in the purchaser until he has complied with his obligation to pay... . Id. Until the purchaser has paid the full amount of the contract price, the seller continues to have a real property interest in the land. This interest is not only mortgagable to third parties, but is also subject to other liens. Chiapuzio, 747 P.2d at 337 n. 1. These third-party mortgagees and creditors have a valid claim to the realty, subject to the prior claim of the purchaser. Id. The claims of third-party creditors extend to the seller's remaining interest in the land and operates to bind the land to the extent of the unpaid purchase price. Rogers, 91 Idaho at 657, 429 P.2d at 389. Although the value of the seller's interest decreases with each payment, the character of the interest does not change until the contract is completed, because the purchaser's interest is subject to destruction by failure to make the necessary payments. Chiapuzio, supra ; see also Bourke v. Krick, 304 F.2d 501, 504 (4th Cir.1962) (applying Maryland law). Being grounded in equity, the doctrine of equitable conversion has limited application, and will not be applied to defeat or alter the claims of third parties not in privity with the contracting parties. Chiapuzio, 747 P.2d at 337 n. 1; Security State Bank v. Luebke, 303 Or. 418, 737 P.2d 586, 589 (1987). [1] The reasoning behind this restriction was explained in In re Houghton, 147 N.J. Super. 477, 371 A.2d 735, 738 (1977) quoting In re DeStuers, 199 Misc. 777, 99 N.Y.S.2d 739, 749 (Surr.Ct. 1950): The fiction of conversion adjusts rights and imposes equities, but it cannot change facts or work inequity... [T]his amiable pretense must be confined by the impulses which inspire it to the persons in privity with the transaction. There is no equitable need for its extension to others. Strangers have nothing to do with the reason for its being and nothing to do with its operation. In the best defined case of equitable conversion the legal owner of the lands retains as to persons not in equitable relations to himself all the rights and duties which belong to his seisin. In the present case, both the Banks and Buyer assert that the doctrine of equitable conversion should apply to defeat the mortgage of Attorney. We first inquire as to whether the Banks may invoke the doctrine. The answer must be in the negative. The doctrine will not be applied so as to alter the claims of third parties not in privity with the contracting parties. Chiapuzio, 747 P.2d at 337 n. 1. Obviously, Seller had the right to mortgage the realty, even though it was subject to a land sale contract. The contract for sale, being executory, did not transfer all of the property rights of Seller, and Seller had a mortgagable interest in the property. In seeking to nullify the mortgage, the Banks attempt to use the equitable doctrine to their benefit. However, they were not in privity with Buyer or Seller. As to the Banks, we will not apply the doctrine. The trial court erred in holding that the mortgage was null and void. The next question is whether the doctrine applies with regard to Buyer. We find that it does. [2] It is for this situation that the courts of equity developed the doctrine to prevent inequities from occurring between the parties of a land sale contract. See Tiffany, at 528-30. Under the doctrine the mortgage of Attorney was taken subject to the rights of Buyer. See Tiffany, at 531. As stated in Chiapuzio, the seller's right is mortgagable subject to the rights of the purchaser. Here, the mortgage was executed after the contract for sale and thus does not affect the rights of Buyer. It merely attached to those rights which remained with the Seller. See Tiffany, at 534. The rights of the Attorney under the subsequent mortgage do not defeat or decrease the rights of Buyer under the prior land sale contract. Carefree Homes v. Production Credit Ass'n, 81 Wis.2d 541, 260 N.W.2d 759, 761 (1978). The trial court was correct in holding that Buyer's rights in the property were not affected by the subsequent mortgage.