Equitable Mortgages are a judicial remedy which may be invoked by a court
when circumstances dictate. The principles followed by a court in applying this
remedy are as follows:
a. Where the facts surrounding a transaction evidence that the parties intended the property be held or transferred to secure an obligation.
b. Where a legal mortgage fails for want of legal formality, for instance, where money is advanced upon a verbal agreement to secure the debt by a mortgage on real property, but the agreement, for one reason or another, never culminates in a signed writing.
A recent New York decision presents an excellent, real-life example of where and when an Equitable Mortgage can be a good judicial tool to correct an injustice. In Allen v. Union Fed and LTIC (204 F. Supp. 2d 543) (NY 2002), an opportunistic husband and wife legal team claimed a $272,000 mortgage they executed was void because the signature and acknowledgement page was missing from the recorded instrument. Being clever lawyers who could profit from the lost signature page, they decided to file a lawsuit against the lender to void the mortgage after the loan proceeds were disbursed to them. This lawsuit helps explain why there is a touch of reality in many lawyer jokes.
The legal team of Scott and Jessica Allen obtained a $272,000 mortgage on their marital home in Manorville, New York. At closing, the following disbursements were made from the loan proceeds: $167,369.55 to Bank of America to pay off the first mortgage; $39,319.93 to Champion Mortgage to pay off the second mortgage; $1,117.00 to Discover Card; $7,175.00 to MBNA; $1,112.00 to Radio Shack; and $32,000.00 payable directly to the Allens. Because the signature and acknowledgement page of the mortgage was missing, the mortgage was never recorded. All the other mortgage closing documents were correctly executed. The Allen’s signature was on the HUD-1, the Note and the other related mortgage closing documents. The original disbursement checks were available showing that the HUD-1 payments were actually made.
The Allens alleged that the mortgage was void and that they were somehow “duped” by the lender. Lawyers Title paid Countrywide, the new mortgage holder, in excess of $300,000 to settle the claim and then filed a counterclaim against the Allens seeking an Equitable Mortgage. Lawyers Title moved quickly for Summary Judgement which motion was granted by the court.
It was clear to the court that the Allens applied for the loan and received its full benefit. There was no question the parties intended to secure the loan with a mortgage on the Allen’s property. The testimony of the Allens was without credibility. This is particularly so in light of the fact that the Allens are both attorneys who could not possibly have been “duped”, as they alleged. The court held that Lawyers Title was entitled to imposition of an Equitable Mortgage on the subject premises.
The Allens’ attempt to void the mortgage may cost them much more than just the imposition of an Equitable Mortgage. The trial court believed the Allens were involved in criminal activity and sent a referral to the United States Attorney’s Office for the Eastern District of New York. Mrs. Allen was indicted in a state court based upon her conduct in this transaction.
In claim cases where an insured mortgage has been lost, or not recorded because of a failure to meet a recording requirement and the borrower is uncooperative in correcting the problem, one judicial remedy is to file an action for an Equitable Mortgage accompanied by a Lis Pendens. In cases where the mortgage may be forged but part of proceeds were still used to pay off liens on the property, we can assert an equitable lien against the property based on unjust enrichment vis-à-vis the innocent co-owner. In an argument based on unjust enrichment, we need not prove the consent or agreement of the borrower. Instead, we just need to prove that the forged mortgage proceeds paid off liens on the property, the elimination of which adds equity for the benefit of the owners including the innocent co-owner.