Story Case

Walter Davis owned a farm in Indiana consisting of one hundred acres, and worth $200 an acre. Davis lived upon the farm with his family in a residence, built in 1910, and costing $5,000. In August, 1914, a fire destroyed his residence and a splendid barn, leaving Davis financially embarrassed. He solicited Henry Kamp for a loan of $5,000 with which to rebuild his home, offering to give a mortgage upon the farm for this amount. Kamp refused to make such a deal, but offered to make a conditional purchase of forty acres for $5,000. Davis could not secure the money elsewhere, and, therefore, entered into the following contract with Kamp: Davis sold to Kamp forty acres, at $125, with the option of buying it back at the end of one year at the same price with seven per cent interest. If he did not exercise his option at the end of this time, the forty acres belonged to Kamp in fee.

Davis confidently expected to repay the entire sum from the sale of his large apple crop in the fall. However, he was disappointed in this, because of the lack of market, and failed to pay Kamp any money before the expiration of the year. Two months later, how ever, in October, 1915, Davis offered Kamp $5,000 for the return of the forty acres. Kamp refused, saying that the land was his. Davis maintained that the original transaction was, in fact, a mortgage, and, therefore, he had one year more than the contract provided in which to redeem the property. Is this correct law?

Ruling Court Case. Conway Vs. Alexander, Volume 11, United States Reports, Page 218

Robert Alexander owned four hundred acres of land. He made the following agreement with Lyles: In consideration of $3,200, paid by Lyles to him, he conveyed the property to trustees in trust, to hold until July 1, 1890. If Alexander repaid $3,200 to Lyles on or before July 1, 1890, the trustees should re-convey the property to Alexander; if he failed to pay this money the trustees should convey the property in fee to Lyles. There was no mention made about a loan to Alexander, and it appeared, in fact, that Lyles was quite unwilling to loan Alexander anything, since he had the reputation of being slow to pay, and apt to go to law to resist payment.

Alexander failed to pay any money to Lyles, and after July 1,1890, the trustees conveyed the property to Lyles. The latter took possession under this deed, and later, sold the property at an advance to Conway.

Subsequently to this, Alexander died, and the plaintiff in this case, Walter Alexander, brings this suit to redeem, alleging that the deed to trustees was only a mortgage.

Chief Justice Marshall delivered the opinion of the court: "To deny the power of two individuals, capable of acting for themselves, to make a contract for the purchase and sale of lands, defeasible by the payment of money at a future day, or, in other words, to make a sale with reservation to the vendor of a right to repurchase the land at a fixed price, and at a specified time, would be to transfer to the Court of Chancery the guardianship of adults as well as of infants.

Such contracts are not prohibited either by the letter or by the policy of the law. But the policy of the law does prohibit the conversion of a real mortgage into a sale. And as lenders of money are less under the pressure of circumstances which control the perfect and free exercise of the judgment than borrowers, lenders often seek to avail themselves of this advantage to secure inequitable advantage. For this reason, the leaning of courts has been against them, and doubtful cases have generally been decided to be mortgages. But as a conditional sale, if really intended, is valid, the inquiry in every case must be, whether the contract in the special case is a security for the repayment of money, or an actual sale.

In this case, the form of the deed is not, in itself, conclusive either way. It is, however, significant that Alexander did not in any way bind himself to repay the $3,200 advanced. If Lyles had sued him at law for the $3,200, Alexander could have effectively replied that he did not owe any debt.

. Besides the fact that Alexander did not bind himself to repay the sum advanced to him, it is worth while to note that there was no talk of negotiating a loan, nor was Lyles a lender of money; so that the contention here that he meant to loan the money, but to evade the consequences which equity would attach to a loan so secured, namely the equity of redemption, falls to the ground. Nor is there anything to show that Alexander thought he retained an interest in the land, for he made no reference to said land in his will, though he specifically mentioned other lands devised by him.

Again, the price to Alexander, which was the consideration of the deed to the trustees, was not excessively inadequate. If lands were sold at $15 per acre conditionally, which, in fact, were worth $45 or $60 per acre, this might furnish strong or even conclusive proof that only a security for money could be intended. This, then, is a case where there was no previous debt, no loan in contemplation, no stipulation for the repayment of the money advanced, and no proposition or conversation about making a mortgage. One party certainly considered himself as making a purchase and the other appears to have considered himself as making a conditional sale. True, there are some facts which almost balance these. Alexander was in jail at the time, and much pressed for want of money, and this circumstance might have influence in a doubtful case. Further, the very fact that the sale was conditional seems to imply an expectation to redeem. But the facts that, at the time set for repurchase, Alexander was out of jail, and rich in other property, and that the difference between $3,200, the sum involved, and $3,600, estimated by some to be the real value of the property at that date, was comparatively small, argue the other way." Bill of Walter Alexander is dismissed.

Ruling Law. Story Case Answer

A mortgage at early Common Law, was a pledge of lands to secure the repayment of money, in the nature of a conditional sale of the property. A deed was executed by the mortgagor to the mortgagee in regular form, with the condition that if the debt was not paid within a stated time, the land should belong absolutely to the mortgagee. Mortgages were frequently made by people who were pressed for money, and who, therefore, would enter into the transaction with serious ultimate sacrifices. Consequently, the courts, early in the seventeenth century, invented the equity of redemption. It was held that a condition of forfeiture was in the nature of a penalty, against which there should be some relief. The law was, therefore, established that, although the condition was not strictly performed by which the estate was forfeited, if the debtor paid the borrowed money within a reasonable time, he should be entitled to call on the mortgagee for a reconveyance of the land.

After this relief was given to the mortgagor, it was soon realized that some protection must be given to the mortgagee; otherwise title to property would be clouded with the possible rights of mortgagors to come in and redeem. Therefore, "the right to foreclose" was invented. If the mortgagor failed to exercise his equity of redemption within a reasonable time after the debt became due, the mortgagee could bring suit calling on the mortgagor to pay the money, or forever be foreclosed from exercising his redemption. This is now regulated by statute in all states, usually providing for a sale of the property at the expiration of a year, and payment of all moneys to the mortgagor above the amount of the debt with interest.

After the equity of redemption was created, money lenders and conveyancers tried to find methods for evading the right to redeem, and restore the advantages formerly enjoyed. Various restrictions upon the equity of redemption were imposed in the mortgage contracts, but these were invariably ignored by the courts, on the ground that the equity of redemption was an inseparable incident to every mortgage, and all restraints upon it should be relieved against, as terms extorted by the mortgagee from the necessities of the borrower. The power of sale in the mortgagee or trustee was early incorporated in the mortgage contracts, and although the validity of this stipulation was at first doubted, today it is recognized as valid. Statutes in the various states now prescribed the manner of conducting such sales, requiring them to be made at a public place at auction, and only after proper notice of sale has been made.

A method frequently attempted today for evading the equity of redemption is that of making the mortgage a conditional sale. The courts have no objection to a conditional sale of land, but if the parties intended a mortgage in fact, the courts will not permit the form in which the conveyance is couched to defeat the equity of redemption. The test is merely to ascertain the actual intention of the parties, and this is determined by considering all the facts surrounding the case. In doubtful cases, the courts will consider the transaction a mortgage instead of a conditional sale.

Thus, if the mortgagor originally applied for a loan, being in embarrassed circumstances, and the lender refused to make a mortgage, but offered to buy the property or a part of it from the owner, with the right on his part to repurchase within a given time, the transaction will generally be considered a mortgage with the equity of redemption in the mortgagor. This is invariably true if the price paid was disproportionate to the value, if the original owner does not relinquish possession, and pays interest on the money. These circumstances indicate a debtor and creditor arrangement, resulting in a mortgage and not a conditional sale. Such were the facts in the Story Case. Davis was in need of money; he applied for a loan. This was refused, but a sale proposed and in form entered into. The price paid was not the full value and Davis did not surrender possession, but paid interest; therefore, the transaction amounted to a mortgage, and Davis can exercise his right to redeem.