Equitable liens

     Sometimes a writing purporting in form to reflect or effectuate an absolute transfer of ownership to property may be found to be in substance a security instrument. In the real property context, such a writing generally will be referred to as an equitable mortgage.

     Imagine a property owner in financial difficulty who gives another person a grant deed purporting to convey absolute title in exchange for money. In form, this transaction appears to be a sale of real estate. Assume, however, that the grantor retains possession of the property and continues to exercise all the incidents of ownership, such as paying property taxes and undertaking repairs. Moreover, the grantor is making monthly payments to the grantee.  In such a case the parties may have intended a secured loan but agreed to cast the transaction in the form of a sale.  If the grantee later fails to cooperate in fulfilling the intention of the parties, the grantor may ask a court to construe the transaction as a secured loan and declare the grant deed to be an equitable mortgage.  If the court agrees with the grantor's characterization of the transaction, it will will treat the grantee as if it were a mortgagee of real property.  The grantor may make such a request, for example, if the grantee refuses to reconvey title to the property to the grantor upon completion of payments of what the grantor contends was a loan, or if, following the grantor's default in payments, the grantee simply retains the property rather than initiating judicial foreclosure of the debtor's equity.  For a few examples of cases in which a court was asked to declare an equitable mortgage, see a portion of the opinion in Guam Hakubotan, Inc. v. Furusawa Investment Corp.  

     In some cases the sale of the real property may be accompanied by a leaseback of the property from the buyer to the seller.  In such cases there may really have been an intent to convey title in exchange for a price, accompanied by the lease, and hence no grounds for asserting an equitable mortgage.

     One also looks through form to substance in the context of personal property security, although the Commercial Code does not describe the analagous situation - - a bill of sale purporting to reflect an absolute transfer of title to personal property - - as an equitable mortgage. See Official Comment 3 to U.C.C. 9-203.

     The term equitable mortgage (or equitable lien) is sometimes used in an entirely different context. Suppose that a debtor and creditor orally agree to the grant of security but fail to authenticate a record reflecting that agreement.   The creditor might in such circumstance contend for the imposition of an equitable lien.  However, absent cases in which the creditor has possession or control of the collateral, Article 9 rejects the enforceability of the oral agreement  U.C.C. 9-203(b).  Similarly, in the real property context, courts will generally decline to find a mortgage in the absence of a writing creating the mortgage, although, as discussed above, the writing may take the form of a deed absolute or some other document or combination of documents.