Koenig v. Van Reken
279 N.W.2d 590, 89 Mich. App. 102 (1979)
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Rule of Law:
A deed absolute on its face may be deemed an equitable mortgage when the grantor's financial distress and the inadequacy of the purchase price indicate the parties intended the transaction to be a loan secured by the property, rather than an absolute sale.
Facts:
- In 1970, Helen Koenig owned a home with a market value of $60,000, encumbered by mortgages totaling approximately $26,000.
- Koenig fell behind on real estate taxes and one of her mortgages went into foreclosure proceedings.
- Stanley Van Reken approached Koenig and proposed to 'service' the mortgages and pay the delinquent taxes for a fee.
- On June 16, 1970, Koenig, without legal representation, signed three documents prepared by Van Reken: a warranty deed conveying the property to him, an agreement giving her an option to repurchase, and a lease agreement.
- The deed stated a consideration of $28,600, which Koenig alleges she never received.
- The agreement required Koenig to lease the home from Van Reken for $300 per month for three years, with an option to repurchase it for $32,318.79.
- Koenig made payments under the lease for nearly two years, totaling $5,800.
- In February 1972, after Koenig defaulted on a monthly payment, Van Reken evicted her from the home.
Procedural Posture:
- Helen Koenig (plaintiff) brought suit against the Van Rekens (defendants) in Oakland County Circuit Court, a state trial court.
- Koenig sought to have a warranty deed declared an equitable mortgage and later added a count for unjust enrichment.
- The defendants filed a motion for summary judgment, arguing that the plaintiff's complaint failed to state a claim upon which relief could be granted.
- The trial court granted the defendants' motion for summary judgment, dismissing Koenig's case.
- Koenig (appellant) appealed the dismissal of the equitable mortgage count to the Michigan Court of Appeals.
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Issue:
Does a deed, absolute on its face, create an equitable mortgage when the grantor is in financial distress, the consideration is inadequate, and the transaction includes a lease-back with an option to repurchase, even if there is no explicit pre-existing debt owed by the grantor to the grantee?
Opinions:
Majority - V. J. Brennan, P.J.
Yes. A deed absolute on its face can be deemed an equitable mortgage under these circumstances. The controlling factor is the intention of the parties, which is determined by looking at the substance of the transaction rather than its form. Courts of equity will gather intent from the surrounding circumstances, including the parties' conduct, their relative economic positions, and the property's value compared to the price fixed in the alleged sale. The court reasoned that the adverse financial condition of the grantor, coupled with the inadequacy of the purchase price, is sufficient under Michigan law to establish that a deed was intended as a mortgage. Here, Koenig was in financial distress and conveyed her equity, worth over $30,000, for less than $4,000. This gross inadequacy, along with the lease-back arrangement that circumvented her right of redemption, strongly indicates the transaction was a loan secured by the property, not an absolute sale.
Analysis:
This decision reaffirms the power of equity courts to look beyond the form of a transaction to its substance, particularly to protect vulnerable individuals in financial distress from predatory arrangements disguised as sales. It clarifies that a formal, pre-existing debt is not a strict requirement for finding an equitable mortgage; the court can infer a loan from circumstances like a significant disparity between the property's value and the 'sale' price. This precedent strengthens protections for homeowners facing foreclosure who might enter into unconventional 'sale-leaseback' agreements, ensuring these transactions can be scrutinized as secured loans.
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