Opinion ID: 1824042
Heading Depth: 1
Heading Rank: 5

Heading: Gust

Text: The Reiersons contend Gust is distinguishable because it involved a valid mortgage that had lapsed and terminated under the collateral real estate mortgage law. According to the Reiersons, unlike Gust, no equitable mortgage can be created here since there was no valid mortgage to begin with. We do not believe this distinction prohibits application of the equitable lien concept to these facts. The terms equitable mortgage and equitable lien are closely related concepts and are often used interchangeably by courts. See, e.g., Garnett State Sav. Bank v. Tush, 232 Kan. 447, 657 P.2d 508, 514 (1983); Trondson v. Janikula, 458 N.W.2d 679, 682 (Minn.1990); O'Connor v. Lewis, 238 Mont. 270, 776 P.2d 1228, 1231 (1989). Technically, an equitable lien is the more inclusive term and provides a remedy for a debt by subjecting property to payment of a claim. Hargrove v. Gerill Corp., 124 Ill.App.3d 924, 80 Ill.Dec. 243, 248, 464 N.E.2d 1226, 1231 (1984). On the other hand, an equitable mortgage requires an affirmative pledge of property as security for a debt and arises when money is loaned or credit given in reliance on the security of the debtor's property, but the property is pledged in such a manner as not to be enforceable as a mortgage at law. Hargrove, 464 N.E.2d at 1230, 1231. In effect, the equitable lien concept subsumes the more narrowly tailored equitable mortgage doctrine. The legal invalidity or unenforceability of a mortgage is the exact situation calling for application of the equitable mortgage doctrine. See G. Osborne, Handbook on the Law of Mortgages § 22, at p. 32 (2d ed. 1970) (Equitable mortgages are ... security transactions which fail to satisfy the requirements of legal mortgages but nevertheless are treated as mortgages in equity.) For example, in Standorf v. Shockley, 16 N.D. 73, 111 N.W. 622 (1907), this Court construed a chattel mortgage, actually intended as security on real property, as an equitable mortgage enforceable between the parties and others having notice. The legal invalidity or unenforceability of the mortgage in this case provides no basis for distinguishing Gust or for prohibiting the granting of an equitable lien or mortgage. Here, the trial court reasoned the bank is both precluded from foreclosing because the mortgage on the homestead property is unenforceable, and forbidden from pursuing a money judgment against the Reiersons because of the anti-deficiency judgment statutes. As a result, the court concluded, the bank is left without a remedy and the Reiersons are unjustifiably enriched, thereby making imposition of the conditional equitable lien appropriate. Contrary to the Reiersons' argument the bank should not be allowed any equitable remedy because it failed to comply with § 47-18-05.1(1), we do not view the bank as having unclean hands in this case. Although the homestead exemption waiver clause was not printed in a conspicuous manner, the mortgage did contain the exact waiver language required by the statute. The record does not suggest the bank made a deliberate effort to mislead the Reiersons into mortgaging their homestead property. But we also disagree with the bank's argument the trial court erred in failing to grant the entire remedy applied in Gust: a presently enforceable equitable lien. In Gust at 917, 920, this Court recognized the statute authorizing collateral real estate mortgages was intended by the Legislature to benefit both lenders and borrowers by allowing more flexibility in their lending relationships. Given the dual purpose of the statute, an inadvertent lapse of the mortgage, we reasoned, should not result in a windfall to the borrower and an unjustified loss to the lender. But in this case, § 47-18-05.1(1) has no dual purpose of benefiting both lenders and borrowers. Instead, like the farm debtor protection legislation in Waltz, § 47-18-05.1(1) was intended to benefit only borrowers by requiring individuals giving up homestead exemption rights to be aware they are doing so through a knowing waiver of those rights. Unlike the situation in Gust, granting a presently enforceable lien here would benefit only the bank at the expense of the borrower, the intended beneficiary of § 47-18-05.1(1). The bank presented evidence the equitable remedy provided by the trial court, an equitable lien subject to the Reiersons' homestead exemption so long as they reside on the property as a homestead, has a present value as a remainder interest of only $6,578.38. According to the bank, there is a prior mortgage on the property that has been assigned to a friendly party. The bank recognizes the present value of its interest may rise if the prior mortgage is paid in full, but argues it could be entirely eliminated if the prior mortgage is foreclosed. The bank asserts its equitable remedy is valueless because it depends on actions taken by parties friendly to the Reiersons. Notwithstanding the trial court's assurance if an agreement were made between the Reiersons and the first mortgagee to destroy the equitable lien, the court could prevent the scenario with its equitable powers, the bank argues its equitable remedy is, in fact, inequitable. When a trial court exercises its discretion after weighing the equities of a case, we will not interfere on appeal absent a showing of an abuse of discretion. Matter of Estate of Rohrich, 496 N.W.2d 566, 573 (N.D.1993). We have often said [e]quity follows the letter and the spirit of the law and courts of equity are bound by and must follow and apply the principles of substantive law. Langenes v. Bullinger, 328 N.W.2d 241, 246 (N.D.1982). Granting the bank's request for a presently enforceable equitable lien against the property, as the trial court recognized, would render § 47-18-05.1(1) meaningless in this case. The trial court fashioned a reasonable equitable remedy under these circumstances which balances equitable notions of fairness with the strong public policy underlying homestead exemption rights. We conclude the trial court did not abuse its discretion in granting the bank an equitable lien on the homestead property subject to the Reiersons' homestead exemption so long as they reside on the property as a homestead.