Real Estate Transactions

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Real Estate Transactions

• Mortgage Substitutes
• Absolute Deed/Conditional Sale pgs. 260-283

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Foundational Concepts

• Terminology review
• Debt in personam
• Secured debt/ unsecured debt
• Lien in rem
• Mortgage
• Security interest
• Collateral
• Foreclosure
• Oversecured/undersecured
• Equity
• Redemption
• Equity of redemption
• Statutory right of redemption

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Anti-Clogging Rule

• Cannot clog a borrowers equity of redemption
• What does this mean?

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What is the Anti- Clogging Rule?
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Anti- Clogging Rule

• Equity of Redemption Cannot be clogged, and at
  the inception of the transaction, cannot be
  surrendered or cut off by agreement or even by
  dancing merrily.
• Any attempt to clog a borrowers right to redeem
  is invalid.

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Modern lenders Try to Avoid the Hassle of
Foreclosure

• Example Pepe La Pew doesnt feel like he should
  be bound by mortgage law so, he decides to lend
  100k to Bugs Bunny secured by a mortgage against
  Burrowacre
• Burrowacre is Bugs bunny hole.

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Modern lenders Try to Avoid the Hassle of
Foreclosure

• The agreement provides In the event that Bugs
  defaults, Pepe shall have the option to purchase
  Burrowacre for 1.
• Is Pepes option enforceable?

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Modern lenders Try to Avoid the Hassle of
Foreclosure

• No! Pepe cannot enforce that option against
  Bugs!!
• That would be a contemporaneous option to
  purchase land in a mortgage and would thus be
  an impermissible clog on Bugs equity of
  redemption.
• Why not allow parties to contract freely to clog
  the equity of redemption?

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Modern lenders Try to Avoid the Hassle of
Foreclosure

• If parties could contract away their land right
  in a credit transaction, the lender is in a
  position to overreach and place the borrower into
  a K of adhesion.
• Paternalistic approach if a borrower loses his
  equity in his home or land to forfeiture (thereby
  resulting in a windfall to the lender), that can
  have high costs for society (family homes, small
  businesses etc.)

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Examples of Invalid Clogs on Equity of Redemption

• Can anyone think of examples?

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Examples of Invalid Clogs on Equity of Redemption

• Option in the mortgage allowing ME to purchase
  for nominal amount in event of MRs default
• Clause prohibiting MR to exercise redemption
  right
• Deed placed in escrow (from MR to ME) to be
  delivered to ME upon default of MR

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Example

• Assume that Rush Llimbaugh owns a 200-acre parcel
  of land (Rudeacre), appraised at 325,000 in
  1999. During 1999, Rush built a recording studio,
  from which he produced a talk radio program
  intended to advance his socialist political
  agenda.

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Example

• Rush borrowed 300,000 from John Stewart in order
  to finance the studio. Rush signed a promissory
  note to Stewart as well as a deed of trust
  covering Rudeacre. The deed of trust contained a
  provision that stated as follows "Throughout the
  term of this contract, Stewart shall have the
  option to purchase Rudeacre for an amount equal
  to the then-outstanding balance due under the
  note secured by this Deed of Trust."

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Example

• During January 2001, the state announced a plan
  to build a new highway adjacent to Rudeacre. Once
  the highway is completed, Rudeacre will be become
  suitable for commercial development. In June
  2001, Stewart sent Limbaugh a letter, purporting
  to exercise his option under the Deed of Trust in
  exchange for satisfaction of the then-existing
  balance due under the note, which was 284,000.
  When Limbaugh refused to deliver a deed, Stewart
  sued for specific performance. Should the court
  grant specific performance for Stewart on these
  facts? Why or why not? What arguments would you
  raise on behalf of Stewart? On behalf of
  Limbaugh? Lets start with Limbaugh.

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Limbaughs Arguments Against Enforceability

• Traditional Rule contemporaneous deed of trust
  treated as per se clog on equity of redemption
• Rationale ME can avoid the hassle of foreclosure
  in the event of MRs default
• Limbaughs payments would reduce the option price
  meaning that more of Limbaughs equity is at risk
  if option is exercised after default

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Stewarts Arguments For Enforceability

• Because the option is not conditioned upon
  default, it is not tied to clogging equity of
  redemption in fact was unrelated to redemption,
  but was business term of deal.
• Stewart will argue that the equity kicker was
  justifiable based upon, for example
• High risk characteristics of loaning to Limbaugh
  (higher risk justifies higher return) and/or
• Agreement featured lower interest rate than it
  would have had the kicker been absent

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Question

• If a court adopts the view in 3.1 (c) does this
  mean that Stewart should be able to get specific
  performance?

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Example

• Wells owned Whiteacre, a 50-acre winter milk farm
  recently appraised at 250,000. In September, due
  to a bureaucratic snafu, Wells did not receive
  his regular semiannual check under the federal
  Milk Support Program (MSP). As a result, Wells
  has missed the past four payments (2,500 each)
  on the mortgage note covering Whiteacre. On
  January 15, the mortgagee, First Bank, threatened
  to accelerate the debt and foreclose on Whiteacre
  unless Wells made the four missing payments
  within 15 days. At that time, the balance due
  under the mortgage was 60,000.

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Example Contd

• When she heard of Wells' plight, Jellum called
  Wells and made the following proposal "I'll pay
  the Bank 60,000 to satisfy the mortgage. In
  exchange, you'll give me a deed to Whiteacre.
  I'll give you four months to pay me 60,000, plus
  interest at a 10 annual rate. If you pay me back
  within four months, I'll deed Whiteacre back to
  you. If not, I keep it, and you owe me nothing.
  In the meantime, you can stay on the land and
  keep running your business."

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Example Contd

• Wells accepted Jellums proposal, certain that
  the snafu with his MSP payments had been
  resolved. Jellum paid off the Bank mortgage and
  took a deed to Whiteacre. Unfortunately, Wells
  did not receive his MSP payment in March. As a
  result, Wells was unable to pay 60,000 to Jellum
  within the four month period of their agreement.
  After that four months had expired, Jellum filed
  an action to eject Wells (thereby effectively
  destroying her chances of obtaining tenure).
  After finally straightening out the MSP payment
  problems, Wells then tendered a check to Jellum
  for 62,000 (reflecting all accrued interest),
  but Jellum refused to accept it.

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Question

• If Wells attempts to offer evidence that this
  transaction was an equitable mortgage, should the
  court exclude that evidence as a violation of the
  parol evidence rule? As a violation of the
  Statute of Frauds? Why or why not?

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Question

• What facts should Wells present in order to
  support his claim that this agreement is an
  equitable mortgage?
• What facts should Jellum present in order to
  obtain ejectment of Wells?

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Flack v. McClure

• Court quitclaim deed mortgage because
• McClures admitted that quitclaim was intended to
  secure repayment of the 9k.
• Flack in financial distress
• Consideration of 9k grossly inadequate compared
  to 80k purchase price
• Flack remained in possession
• No legal advice for Flack
• Holding McClures must go through the process of
  foreclosure on the property, otherwise
  unauthorized clog on the equity of redemption.

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Questions

• If the terms of the quitclaim deed were complete
  and unambiguous, why didnt the parol evidence
  rule prevent proving it was something else?
• Since contracts for interests in land are
  required to be in writing why was not the
  statute of frauds violated in the Flack case?

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End of Assignment Two!

• Please prepare assignment Three, Installment Land
  Sale Contracts, pgs. 283-334.