The doctrine of equitable mortgage is a long-standing form of security interest in Iowa. Although there may be an absence of a mortgage instrument or a recording, state courts often find the existence of a mortgage if clear, convincing, and satisfactory evidence indicates the parties intended to form a debtor/creditor relationship. This case involved a land transaction and whether it was more properly viewed as a sale and leaseback, with option to purchase, or as an equitable mortgage.
Typically, a short-term contract for the sale of land contains a provision detailing the seller’s rights upon the buyer’s default, and creditors have available certain remedies upon a debtor’s default. For instance, the creditor may take action to foreclose the mortgage and cut off the debtor’s interest in the property after passage of a statutorily required period of time in which the debtor may “redeem” the property.
In this case, the debtor claimed the trial court erred when it found the transfer of a home was a sale of land, rather than a secured transaction. The debtor further argued that the transaction constituted an equitable mortgage and, as such, she could reclaim the property by paying off the mortgage. After several failed attempts to obtain financing for the payment of past debts, the debtor entered into a transaction with the creditor. The creditor put down $40,000 on the home, valued for tax purposes at $90,000. The debtor then deeded the property to the creditor and the creditor agreed to sell the home back to debtor for $50,000 plus interest, to be paid in full within two years. The debtor then rented the property from creditor for $520 per month, to be put toward the repurchase price of the home. When the debtor fell behind on the monthly rental payments, she attempted to pay off the balance of the $50,000 to repurchase the home. The creditor refused to allow her to exercise the option.
The outcome of the case turned on the language in the written agreement between the parties. The court determined that this agreement was a secured transaction, thus, the appellant had a right to exercise her option to reclaim the home. The court opined that when a conveyance is absolute and accompanied by a written agreement allowing the grantee to reconvey the land to the grantor under specific conditions, it becomes an equitable mortgage. If clear, convincing, and satisfactory evidence points toward a mortgage, then the courts favor a secured transaction over a conditional sale. This type of evidence may be found by looking to the intent of the parties to the transaction, the consideration for the transfer, and who retains possession. Here, the intent of the parties that this was a loan transaction was clear. Not only was the payment of $40,000 to appellant inadequate consideration, the appellant retained possession of the property the entire time. Tullis v. Weeks, No. 7-600/06-1744, 2007 Iowa App. LEXIS 1095 (Iowa Ct. App., Oct. 12, 2007).