Court Opinion

ID: 9549699
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:23:31.538189+00
Date Added: 2024-06-11T15:20:46.480072
License: Public Domain

BERNSTEIN, Vice Chief Justice
(dissenting).
I cannot agree with the conclusion and reasoning of the majority that the transaction in issue was a sale. I do agree with the result reached by the Chief Justice, in his dissent, but again I cannot agree with his reasoning. Therefore, I am compelled to write a separate dissent setting out the criteria which I think must be considered in determining the question presented. The importance and magnitude of the issue presented requires me to set forth and discuss the doctrine of equitable mortgages.
There is no dispute in the facts of this case and therefore there is no necessity of setting them forth here, except to add one facet which apparently the majority disregarded. In order for Pendleton to give Merryweather the $200,000 needed, Pendleton applied to the Bank for a loan in that amount. The Bank, in allowing the loan, required that Merryweather’s stock be transferred to Pendleton as the owner and in such form be pledged to the Bank as security.
The doctrine of equitable mortgage was established very early by the Courts of Chancery. Y.B. 9 Edw. IV, 25, 34 (1470)1 It began when loaners of money tried to take away the equity of redemption by insisting upon an absolute deed as security for money loaned rather than a conveyance with a defeasance clause. Equity intervened and preserved the “grantor’s” redemption rights. The relief granted by the equity courts was attributive to the maxim, “Equity considers that as done which ought to be done.”
When a transaction is established to be a mortgage upon real property, the mortgagee, in order to terminate the equity of redemption which the mortgagor has in the property must comply with the Arizona statutory provisions regarding foreclosure by judicial sale.2 Often an attempt is made to avoid these requirements, as I believe is the case before us, by employing an abso*238lute deed with some type of collateral agreement, express or implied, that the “grantor” may regain the property upon complying with certain conditions. By proceeding in such a manner it is hoped that the “grant- or’s” common law equity of redemption as well as his six-months statutory right to redeem after foreclosure sale. 3 may be precluded ab initio. Tansil v. McCumber, 201 Iowa 20, 206 N.W. 680 (1925) ; Wiswell v. Simmons, 77 Kan. 622; 95 P. 407 (1908); Halbert v. Turner, 233 Ill. 531, 84 N.E. 704 (1908).
When such an absolute conveyance is employed by the parties the grantor has no legal remedy since the deed is absolute at law. Cohn v. Krauss, 67 N.E.2d 62 (Ohio. App.1943) ; Walsh, Mortgages 35 (1934) ; 5 Tiffany, Real Property 659, 660 (3d ed. 1939). However, in such a case equity will look to the substance of the transaction and give effect to the intention of the parties; if it is established that the parties intended the deed to be executed as security, an equitable mortgage will be declared. Britz v. Kinsvater, 87 Ariz. 385, 351 P.2d 986 (1960); DeWulf v. Bissell, 83 Ariz. 68, 316 P.2d 492 (1957); Rogers v. Greer, 70 Ariz. 264, 219 P.2d 760 (1950); Coffin v. Green, 21 Ariz. 54, 185 P. 361 (1919); see A.R.S. § 33-702 (1956).
The burden of proving a deed absolute on its face to be merely a form of security is upon the grantor, since he is usually the one seeking to establish the equitable mortgage.4 Britz v. Kinsvater, supra. Such proof consists in determining the intent of the parties. The intent of the parties is largely determined by considering all the circumstances relevant to the execution of the transaction. Britz v. Kinsvater, supra; Rogers v. Greer, supra; Farrell v. West, 57 Ariz. 332, 113 P.2d 866 (1941), modified on other grounds 57 Ariz. 490, 114 P.2d 910; Sullivan v. Woods, 5 Ariz. 196, 50 P. 113 (1897).
What must be present in order to create an equitable mortgage? There first must be a debt and this debt must continue and subsist after the conveyance. The debt need not exist as such at the time of the conveyance where it is intended that the relationship of debtor-creditor is to be established at its inception. The requirement “existence of a debt” thus can include a contemplated existence of a debt at the time of conveyance. Charter Gas Engine Co. v. Entrekin, 30 Ariz. 341, 246 P. 1038 (1926); Kolar v. Eckhardt, 119 Kan. 518, 240 P. 947 (1925); Tansil v. McCumber, supra. In order to determine whether a debt existed and continued and whether the *239transaction was, in fact, a mortgage, the court should consider the following factors persuasive: (1) the prior negotiations of the parties, to discern if such negotiations contemplated a mere security for a debt;3 (2) the distress of the maker ;5
6 (3) the fact that the amount advanced was about the amount that the “grantor” needed to pay an existing indebtedness;7 (4) the amount of the consideration paid in comparison to the actual value of the property in question;8 (5) a contemporaneous agreement to repurchase;9 and (6) the acts of the parties in relation to each other, i. e., whether their acts are ordinarily indicative of a vendor-purchaser relationship or that of a mortgagor and mortgagee.
While none of the above is conclusive of the issue, nevertheless, a combination of several will go a long way in showing that the deed was, in fact, intended as a mortgage. In this connection it is worthwhile' to note that in doubtful cases the courts likely will lean toward the conclusion that a security was meant rather than a sale, because this subserves the ends of abstract justice and averts serious consequences. Tansil v. McCumber, supra; Perry v. Southern Surety Co., 190 N.C. 284, 129 S.E. 721 (1925) ; Wiswell v. Simmons, 77 Kan. 622, 95 P. 407 (1908).
In. analyzing the undisputed facts in this case with the above factors in mind, we find that Merryweather in July 1954 became indebted to one Haggard for $180,000 payable in 30 days with Merryweather’s stock pledged as security. Finding himself in financial stress to pay off the loan, Merry-weather negotiated for a loan with Pendleton.10 This culminated in an agreement whereby Pendleton would loan Merry-*240weather $180,000 at 5% interest on Merry-weather’s stock. Before Merryweather was to accept this loan, his indebtedness to Haggard increased to $220,000. In late 1954 Merryweather attempted to get Pendleton to increase the proposed loan to $200,000. It was at this time that Pendleton indicated that he would “buy” the stock instead of loaning the money. Pendleton stated his reasons for this change was to avoid the trouble of foreclosure. At this point it is important to note that in order for Pendleton to advance $200,000 to Merryweather, Pendleton applied to the bank for a loan in that amount. The bank before loaning the money to Pendleton for this purpose required that Merryweather’s stock be transferred to Pendleton. On these terms of Pendleton, the parties entered into the transaction in question in January of 1955. Thereafter, Pendleton treated Merryweather in the same manner as when he was the owner of the stock and a director in the corporation. On Pendleton’s order all information of the corporation was made available to Merryweather as before, and during the year after the “purported sale” no money was paid to other stockholders for the reason that Merryweather should have the opportunity to share in the profits when he got his stock back. It thus is apparent that there is present all the factors needed and required in showing that the transaction was a mortgage.
First, the relation of the amount loaned to the actual value of the stock. By taking the value found by the trial court, though I do not agree with the court’s finding;11 and comparing it with the $200,000 Pendleton “paid for it,” it is found that the amount loaned was only 51%12 of the actual value. This factor alone should indicate a mortgage was intended. “In deciding whether a deed absolute on its face is a mortgage in equity subject to the right of redemption, the court is called on to decide a question of fact as to whether the transaction was a sale for a price or a pledging of the property as security for the repayment of the money advanced as a loan. The most important evidential fact is the relation of the amount advanced to the value of the property conveyed. A loan secured by a mortgage is usually about sixty per cent of the fair appraised value of the mortgaged property. Proof that the amount paid or advanced by the grantee is very considerably less than the fair market value of the property is * * * evidence that the transaction was a mortgage and not a sale * * Walsh, Mortgages, 38, 39 (1934).
Second, the transaction had its inception in an application for a loan, and after the transaction was consummated the parties’ *241acts in relation to each other and the corporation were the same as before except that on the books Merryweather was no longer a stockholder or director. The law of the corporation prevented a non-stockholder from being a director. Nevertheless, Merryweather was informed of the business of the directors. In Tansil v. McCumber, supra, the court quoted with approval the following:
“ ‘When the transaction had its inception in an application for a loan the courts are inclined to scrutinize it closely and to hold it a mortgage, unless it clearly appears the parties changed their minds afterwards.’ Williamson v. Frazee, 294 Mo. 320, 242 S. W. 958.”
It is apparent from the record on appeal that the parties did not change their minds after the loan negotiations, but entered into this specific type of transaction for the sole purpose of saving Pendleton the trouble of foreclosure and to comply with the requirements of the bank for Pendleton’s loan. Wiswell v. Simmons, supra.13
Based on the undisputed facts and the law as herein outlined, the only conclusion that can be reached is that an equitable mortgage existed between the parties. Any other conclusion, such as that reached by the majority, would give Pendleton more than he bargained for and take from Merry-weather all he had. In cases such as this our policy should be: There will he no fleecing a grantor out of his equity of redemption.
The judgment should be reversed and an equitable mortgage declared to exist.

. This is the earliest recorded case where the law court stated that the Chancellor would give relief. It was a case which involved an absolute conveyance, made, in fact, to secure a loan, but unenforceable as a mortgage at law because of the lack of a defeasance clause.

. A.R.S. § 33-721 (1956).

. A.R.S. § 12-1282 (1956).

. In Charter Gas Engine Co. v. Entrekin, 30 Ariz. 341, 246 P. 1038 (1926), where the “grantee” of an absolute deed with an option to purchase brought action to have the transaction established as an equitable mortgage.

. Tansil v. McCumber, supra; 41 C.J., Mortgages, § 100 (1927).

. Kemp v. Earp, 42 N.C. 167 (1850).

. In Tansil v. McOumber, the Iowa court found that it was the typical case of a debtor in distress applying to a money lender for assistance and the lender advancing enough money to pay off the debtor’s indebtedness. The court held that in such circumstances “The law implied a promise by [defendant] to pay back the amount so advanced with interest, and this established the relationship of debtor and creditor, as much so as if [plaintiff] had directly loaned the money to [defendant] and delivered it to him and the latter had in turn paid it on the mortgage.” [201 Iowa 20, 206 N.W. 685]

. Walsh, Mortgages, 38-40 (1934).

. Handrub v. Griffin, 127 Kan. 732, 275 P. 196 (1929). It is with this point that I most strongly disagree with the dissent of the Chief Justice, wherein he states: “The general rule .is that an absolute deed will be held to be a mortgage where it conveys an estate subject to defeasance.” It is not the general rule. Conditional sales, determinable fees and possibility of reverter all take the form of an absolute deed subject to defeasance. To hold that, prima facie, they are mortgages as the Chief Justice does would thwart our rules of property law and would conflict with A.R.S. § 33-702 (1956).

. See the majority opinion for the prior acts of the parties in connection with-the stock in issue.

. The jury found that the stock in question was worth $630,000.

. It would be 32% if related to the value found by the jury.

. This case is on all fours with the ease before us including the grantee’s admission that he thought by an absolute deed he would save himself the trouble and expense of foreclosure. The court seeing through the transaction declared that an equitable mortgage was created.