Real Estate Finance Law
Prof. Burton
Spring 2012
1. Basic Introduction and Notes
a. This class focuses very heavily on NC specific law. Most of the cases have to be downloaded directly from LEXIS or WestLaw rather than being found in the casebook.
b. The assignments in the casebook are used to illustrate general principles and concepts rather than teach the law as it will be applied in the class.
c. The syllabus lists only the cases that are to be read, not the notes that proceed and follow the case. Those should be read also because they explain the concepts that the case is illustrating. Those concepts need to be understood when reading the case or it will be almost impossible to understand.
d. STUDY TIP – it is critical to make a glossary of terms and concepts for this course. This outline contains the glossary as the very last section.
e. STUDY TIP – be sure to refresh your knowledge of Property (both 1 and 2) because there are many concepts from there that are included in this course and are assumed to be known by the student.
f. If a case has a page number after it then it will be found in the textbook. If there is a citation then the case must be downloaded from LEXIS or WestLaw.
2. Mortgage Transactions
a. Perry v. Queen (pg 278)
i. FACTS: Perry was a homeowner in financial trouble and behind on his mortgage. He contracted with Queen to bring his payments up to date. In the contract he was given about $11K and his house was used as security. Perry signed over a warranty deed along with an agreement to lease back the property for one-year with an option to repurchase with a balloon payment of $44K at that time or simply walk away. The house was valued at $94K with an outstanding mortgage to the bank of $26K. Perry was unable to make the balloon payment, and Queen moved to foreclose.
ii. PROCEDURAL POSTURE: This was a motion to dismiss in federal court due to lack subject matter jurisdiction by Queen. He claimed that this was not a mortgage and would not come under the federal TILA statute. His motion was denied when the court ruled this was an equitable mortgage.
iii. ISSUE: Was this transaction an equitable mortgage and subject to the Truth In Lending Act (TILA) disclosures or was it something else?
iv. RULE: Yes, this was an equitable mortgage and came with all of the legal protections under the law. TILA holds that two elements are necessary for a transaction to be considered a mortgage: (1) the transaction is secured by the principle dwelling, and (2) the annual percentage rate exceeds a particular amount or the fees payable by the consumer exceed 8% of the loan amount or $400. To show the first element requires (1) the homeowner was indebted to the lender, and (2) the conveyance was intended as security only.
v. RULE: The intent of the parties (element (2) supra) is determined using a variety of methods: 1) the relationship between the parties, 2) access to counsel for the borrower, 3) the sophistication of the two parties, 4) the amount of consideration given, and 5) whether the borrower maintains possession of the property. In this case, all five criteria were in Perry’s favor.
b. Downs v. Zielger (pg. 287)
i. FACTS: Ziegler bought some property from Downs and built an apartment building. He ran into financial difficulty and contracted with three doctors to refinance the property through them. In the refinancing, Ziegler assigned his rights to the property in exchange for the money to refinance. He could buy back the property at the end of the term for a fee of $10K plus expenditures made on his behalf (the loan payments). For some reason (not provided in the facts) the property was still foreclosed by Downs. Downs then tried to hold the doctors liable for a deficiency judgment after the sale of the property.
ii. ISSUE: Was the transfer of property between the doctor’s and Ziegler a mortgage or an investment? As investors, the doctors would be liable for the deficiency judgment and as a lender they would only hold a junior mortgage and not be liable.
iii. RULE: Any transfer of an interest in real property as security for performance of some act (e.g. payments), unless it is made in a trust, is a mortgage.
iv. The doctors were considered lenders so they were not liable for the deficiency judgment.
c. Eagle’s Nest v. Malt (319 SE 2d 685 (NC App. 1984))
i. FACTS: EN owned property in NC that was encumbered with a mortgage. They contracted with Malt to payoff the mortgage (he assumed it), and secured the deal with a deed to the property. EN and Malt also signed a lease back agreement ($200/month) with a repurchase option that EN could exercise until a specific date. EN gave notice of intent to repurchase but never followed through. They sued to convert the deal to an equitable mortgage and Malt countersued to be declared fee simple owner. During the lease period Malt paid all taxes and bills due.
ii. ISSUE: Does a lease back and repurchase option automatically qualify as an equitable mortgage in NC?
iii. RESULT: The paperwork in the agreement between EN and Malt did not obligate EN to pay anything. Because there was no obligation to make payments by EN there was no equitable mortgage. Because this was not an equitable mortgage there is not right of redemption. Malt is the fee simple owner of the property.
d. Winborne v. Guy (22 SE 2d 220 (NC 1942))
i. FACTS: Winborne is executor of the estate of J Guy who died and left a life estate to his wife and kids of the house and property. There was a provision that if the wife desired to sell the property it would require the permission of their kids (both mutual and step children were involved). There was also a clause that if the house was sold that a debt to one son (WW Guy – party to the suit) was to be paid from the proceeds. It appears that the son paid off the mortgage on the house that was originally held by Atwell (not part of this suit). The remainder of the life estate was intestate. The property was sold by the heirs of the widow after she died intestate, and now WW Guy is trying to get paid for the debt.
ii. ISSUE: Was this conveyance an equitable mortgage or a traditional lien? If this debt is an mortgage then the proper route is a foreclosure. If it is not a mortgage then it is a lien that would be heard before the clerk of the court.
iii. RESULT: Although this was not done in a traditional mortgage it is considered an equitable mortgage in a court of equity. Therefore the proper route is a foreclosure in the court. The will of J Guy acknowledged the debt and equity suggests that he get paid back. An equitable mortgage will allow that happen most readily.
iv. RULE: A court of equity will look at the entire transaction and principles of equity and fairness rather than the actual language of the contract or conveyance. An equitable mortgage will be found when fairness demands it.
e. Installment Land Contracts
i. These are common owner financing mortgage alternatives in which the sellers keeps fee simple while the buyer is making payments according to the agreed upon schedule.
ii. In almost all ILC agreements there will be a provision for forfeiture of the property back to the original seller in the event of a default by the purchaser. This is a rather harsh provision especially if the purchaser has been making payments over many years. The seller would get to keep the payments already made and also be back in possession of the property.
iii. Courts have taken various routes in dealing with forfeiture clauses
1. Some states enforce the forfeiture provisions strictly (e.g. Montana). There is freedom to co
e property would be considered rent. Dayvault sold his interest to Mills who sold their interest to Boyd. Watts defaulted several times during the contract but family members helped him cure. After a significantly long period in default, Boyd moved to cancel the contract, declare all payments rent, and quiet title in their name. Trial court gave a directed verdict to Boyd; Appellate court reversed declaring the ILC to be an option contract instead – Watts given six months right of redemption. NC SC heard the case.
2. ISSUE: Does NC recognize an automatic right of redemption when a default has occurred?
3. RESULT: The trial court decision was reinstated and the title was quieted in Boyd’s name. It was not an option contract and the forfeiture provision was valid.
4. RULE: NC allows a forfeiture provision in ILCs.
ix. Cascade Security Bank v. Butler (pg. 337)
1. FACTS: The Butlers became contract buyers (vendees) of a judgment debt on real property. The debt, owned by a third party not part of this suit, went into arrears, and the Bank moved to sell the property to collect the debt. The Butlers tried to stop the sale of the property claiming it was personality. Personality cannot be used to satisfy a judgment lien so they claimed the land should be protected from the Bank.
2. ISSUE: Is the interest in the contract personality or real property?
3. RULE: Yes, an interest in real property is always real property when there is privity of estate. The lien goes with the land regardless of who has interests from other sources.
4. RESULT: Butler’s wanted the doctrine of equitable conversion to be used to declare their interest personality. This jurisdiction declined to do that. Some other jurisdictions allow this. It is statute specific in most cases.
x. Equitable Trust Co. v. Imbesi (pg. 348)
1. FACTS: Imbesi borrowed $60K from ETC and assigned a life insurance policy as security along with a covenant not to sell a specific piece of property. This lien on the property was properly recorded. About a year later he got another mortgage from another bank using this property as security and this was also properly recorded. Imbesi defaulted on the second loan and the bank moved to foreclose the property. ETC is suing to prevent the foreclosure to protect their interest in the property.
2. ISSUE: Does a covenant not to sell real property create a valid lien on the property?
3. RESULT: No. A lien is an affirmative grant of an interest in real property.
4. RESULT: ETC is a sophisticated lender and should know how to properly create a valid lien on real property. If they choose to use an unacceptable form then it’s their own fault. There is no equitable mortgage held by ETC on this property.
5. DISCUSSION: The court made an emphasis on the level of sophistication of the parties involved in the contract. It left open the door to unsophisticated participants. In that case there would be two elements to determine if an equitable mortgage existed:
a. The intent of the parties
b. The behavior of the contract
